As filed with the Securities and Exchange Commission on September 17, 1997
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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<TABLE>
<S> <C>
Virginia CRESTAR BANK, as Depositor 53-0116200
(State or other to CRESTAR STUDENT LOAN TRUST 1997-1 (I.R.S. Employer
jurisdiction of (Exact name of registrant as specified in its charter) Identification No.)
incorporation or
organization)
919 East Main Street
Richmond, Virginia 23219
(804) 782-5000
(Address, including zip code, and telephone number,
including area code, of registrant's
principal executive offices)
W. Clark McGhee Copies to: And to: And to:
Senior Vice President Randolph F. Totten David M. Reicher Paul F. Sefcovic
6802 Paragon Place Hunton & Williams Foley & Lardner Squire, Sanders & Dempsey L.L.P.
Richmond, VA 23230-7172 951 East Byrd Street Firstar Center 41 S. High St., Suite 1300
(804) 287-9501 Richmond, VA 23219-4074 777 E. Wisconsin Ave. Columbus, OH 43215
(804) 287-9428 (telecopy) (804) 788-8281 Milwaukee, WI (614) 365-2738
(Name, address, including (804) 788-8218 (telecopy) (414) 297-5763 (614) 365-2499 (telecopy)
zip code and telephone number, (414) 297-4900 (telecopy)
including area code, of agent
for service)
Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this Registration Statement.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<CAPTION>
================================================================================================================================
Proposed Proposed
Maximum Maximum
Title of Securities Amount to be Offering Price Aggregate Amount of
Being Registered Registered(1)(2) Per Unit* Offering Price* Registration Fee
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Student Loan
Asset Backed Notes $1,000,000 100% $1,000,000 $303.03
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(1) Estimated solely for calculating the registration fee.
(2) Also registered are secondary market sales of Notes that may be
effected by Crestar Securities Corporation, an affiliate of the Registrant.
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</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 17, 1997
PROSPECTUS
[$------------]
Crestar Student Loan Trust 1997-1
STUDENT LOAN ASSET BACKED NOTES
------------
Crestar Bank
Transferor
Crestar Student Loan Trust 1997-1, a Delaware business trust (the
"Trust"), will issue [$_________] aggregate principal amount of its Student Loan
Asset Backed Notes in the classes and original principal amounts set forth below
(collectively, the "Notes"). The assets of the Trust will include a pool of
guaranteed or insured education loans to students and parents of students
acquired by Star Bank, National Association, as eligible lender trustee on
behalf of the Trust (the "Eligible Lender Trustee"), from Crestar Bank (the
"Transferor") (the "Financed Student Loans"), collections and other payments
with respect to the Financed Student Loans and monies on deposit in certain
trust accounts to be established (including the Collection Account, the Reserve
Account, the Note Distribution Account, the Expense Account and the Quarterly
Advance Account). The Notes will be collateralized by the assets of the Trust.
____________ (Continued on following page)
Prospective investors should consider the factors set forth
under "Risk Factors" beginning on page 23.
------------
THE NOTES REPRESENT OBLIGATIONS OF THE TRUST ONLY AND DO NOT REPRESENT INTERESTS
IN OR OBLIGATIONS OF THE TRANSFEROR, THE MASTER SERVICER, THE SERVICERS,
THE ElIGIBLE LENDER TRUSTEE, THE INDENTURE TRUSTEE OR ANY OF THEIR
RESPECTIVE AFFILIATES OR SUBSIDIARIES. THE NOTES ARE NOT DEPOSITS OF A
BANK. THE NOTES ARE NOT GUARANTEED OR INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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Class Final
Interest Price to Underwriting Proceeds to Maturity
Rate Public Discount(1) Transferor(2) Date (4)
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<S> <C>
[$_________] Senior T-Bill Rate Class A-1 Notes .... (3) 100% % % [_______, 20__]
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[$_________] Senior T-Bill Rate Class A-2 Notes .... (3) 100% % % [_______, 20__]
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[$________] Subordinate LIBOR Rate Class B Notes .... (3) 100% % % [_______, 20__]
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Total................................................. [$___________] $ $
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</TABLE>
(1) The Transferor has agreed to indemnify the Underwriters against certain
liabilities under the Securities Act of 1933, as amended.
(2) Before deducting expenses, estimated to be [$__________].
(3) Following the initial Interest Periods, the Class Interest Rates for
the Class A-1 Notes and the Class A-2 Notes will equal, subject to
certain limitations described herein, Floating Rate (T-Bill) plus
[____%] and [____%], respectively, and the Class Interest Rate for the
Class B Notes will equal, subject to certain limitations described
herein, One-Month LIBOR plus [____%].
(4) Payment in full of the Notes could occur earlier than their respective
final maturity dates as described herein.
------------
The Notes are offered by the Underwriters when, as and if issued by the
Trust, delivered to and accepted by the Underwriters and subject to approval of
certain legal matters by counsel for the Underwriters. The Underwriters reserve
the right to withdraw, cancel or modify such offer and to reject orders in whole
or in part. It is expected that delivery of the Notes will be made in book-entry
form through the Same Day Funds Settlement System of The Depository Trust
Company and also Cedel Bank, societe anonyme or the Euroclear System on or about
[November __, 1997]. ------------
Smith Barney Inc.
Morgan Stanley Dean Witter Crestar Securities Corporation
The date of this Prospectus is [_________, 1997]
<PAGE>
(Cover continued from previous page)
The Notes will be available for purchase in denominations of $50,000
and integral multiples of $1,000 in excess thereof in book-entry form only.
Interest on and principal of the Notes will be payable quarterly on or about the
25th day of each January, April, July and October, commencing April 27, 1998
(each, a "Distribution Date"). No distribution in respect of principal of the
Class B Notes will be payable until each Class of Class A Notes is paid in full.
See generally "Description of the Notes -- The Notes." Interest will accrue (i)
on the Class A-1 Notes at the rate of [___%] per annum and on the Class A-2
Notes at the rate of [___%] per annum through [________, 1997], and (ii) on the
Class B Notes at the rate of [___%] per annum through [________, 1997].
Thereafter, interest on the Notes will accrue, subject to certain limitations
described herein, for each Interest Payment Period at the per annum rates set
forth on the cover page hereof.
Payment in full of the Notes could occur earlier than their respective
final maturity dates from payments on the Financed Student Loans as described
herein. In addition, the Notes will be repaid (i) on any Distribution Date on
which the Transferor exercises its option to purchase the Financed Student
Loans, exercisable when the outstanding Pool Balance is reduced to 10% or less
of the Initial Pool Balance, (ii) on or after the Distribution Date occurring in
[October 2006], if the Financed Student Loans are sold pursuant to the auction
procedures described under "Description of the Transfer and Servicing Agreements
- -- Termination," and (iii) under certain circumstances as described in
"Description of the Transfer and Servicing Agreements -- Insolvency Event," upon
the insolvency of the Transferor and subsequent termination of the Trust
pursuant to the Trust Agreement (as defined in "Summary of Terms -- The Trust").
There is currently no secondary market for the Notes. Smith Barney
Inc., Morgan Stanley & Co. Incorporated and Crestar Securities Corporation
intend to make a secondary market for the Notes, but none of them has any
obligation to do so. There can be no assurance that a secondary market for the
Notes will develop or, if one does develop that it will continue. The Notes will
not be listed on any national securities exchange.
After the initial distribution of the Notes by the Underwriters, the
Prospectus may be used by Crestar Securities Corporation, an affiliate of the
Transferor, in connection with offers and sales relating to market making
transactions in the Notes. Crestar Securities Corporation may act as principal
or agent in such transactions. Such sales will be made at prices related to
prevailing market prices at the time of sale. Certain information in this
Prospectus will be updated from time to time as described in "Incorporation of
Certain Documents by Reference."
The Transferor has not authorized any offer of Notes to the public in
the United Kingdom within the meaning of the Public Offers of Securities
Regulations 1995 (the "U.K. Regulations"). The Notes may not lawfully be offered
or sold to persons in the United Kingdom except in circumstances which do not
result in an offer to the public in the United Kingdom within the meaning of the
U.K. Regulations or otherwise are in compliance with all applicable provisions
of the U.K. Regulations.
------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES
OFFERED HEREBY INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES
SEE "UNDERWRITING."
Until 90 days after the date hereof, all dealers effecting transactions
in the Notes, whether or not participating in this distribution, may be required
to deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
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<PAGE>
AVAILABLE INFORMATION
The Transferor, as depositor of the Trust (the "Depositor"), 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 Notes offered hereby. This Prospectus, which forms part of
the Registration Statement, does not contain all the information contained
therein. For further information, reference is made to the Registration
Statement which may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington D.C. 20549;
and at the Commission's regional offices at Seven World Trade Center, Suite
1300, New York, New York 10048; and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and copies of all or any part thereof may be obtained
from the Public Reference Branch of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549 upon the payment of certain fees prescribed by the
Commission. In addition, the Registration Statement may be accessed
electronically through the Commission's Electronic Data Gathering, Analysis and
Retrieval system at the Commission's site on the World Wide Web located at
http://www.sec.gov.
REPORTS TO NOTEHOLDERS
Unless and until Definitive Notes are issued, quarterly and annual
unaudited reports containing information concerning the Financed Student Loans
will be prepared by Crestar Bank, in its capacity as administrator for the Trust
(the "Administrator") and sent on behalf of the Trust only to Cede & Co.
("Cede"), as nominee of The Depository Trust Company ("DTC") and registered
holder of the Notes but will not be sent to any beneficial holder of the Notes.
Such reports will not constitute financial statements prepared in accordance
with generally accepted accounting principles. See "Description of the Notes --
Book-Entry Registration" and "-- Reports to Noteholders." The Trust will file
with the Commission such periodic reports as are required under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations of the Commission thereunder. The Trust intends to suspend the
filing of such reports under the Exchange Act when and if the filing of such
reports is no longer statutorily required.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Administrator, on behalf
of the Trust, pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Prospectus and prior to the termination of the
offering of the Notes shall be deemed to be incorporated by reference into this
Prospectus and to be a part hereof. After the initial distribution of the Notes
by the Underwriters and in connection with market making transactions by Crestar
Securities Corporation, this Prospectus will be distributed together with, and
should be read in conjunction with, an accompanying supplement to the
Prospectus. Such supplement will contain the reports described above and
generally will include the information contained in the quarterly statements
furnished to Noteholders. See "Description of the Notes -- Reports to
Noteholders" and "Description of the Transfer and Servicing Agreements --
Statements to Indenture Trustee." Any statement contained herein or in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Administrator will provide without charge to each person to whom a
copy of this Prospectus is delivered, on the written or oral request of any such
person, a copy of any or all of the documents incorporated herein by reference,
except the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Written requests for such copies
should be directed to Mr. Eugene S. Putnam, Jr., Senior Vice President -
Investor Relations, Crestar Financial Corporation, 919 East Main Street, P.O.
Box 26665, Richmond, VA 23261-6665 or "[email protected]" on the
Internet. Telephone requests for such copies should be directed to (804)
782-7821.
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<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by the Related
Documents. Certain capitalized terms used in this Prospectus are defined
elsewhere herein on the pages indicated in the "Index of Principal Terms"
beginning on page 100 of this Prospectus.
Issuer .......................................... Crestar Student Loan Trust
1997-1 (the "Trust") is a
statutory business trust
established under the laws of
the State of Delaware.
Securities Offered............................... Senior T-Bill Rate Class A-1
Asset Backed Notes (the "Class
A-1 Notes") in the aggregate
principal amount of
[$_________], Senior T- Bill
Rate Class A-2 Asset Backed
Notes (the "Class A-2 Notes",
and together with the Class
A-1 Notes, the "Class A
Notes") in the aggregate
principal amount of
[$_________] and Subordinate
LIBOR Rate Class B Asset
Backed Notes (the "Class B
Notes" and, together with the
Class A Notes, the "Notes") in
the aggregate principal amount
of [$________]. The original
principal amount of each class
(a "Class") of Notes is
referred to as its "Original
Amount."
The holders of the Class A-1
Notes and the Class A-2 Notes
are referred to as the "Class
A-1 Noteholders" and the
"Class A-2 Noteholders,"
respectively, and collectively
as the "Class A Noteholders."
The holders of the Class B
Notes are referred to as the
"Class B Noteholders."
The Notes will be issued in
minimum denominations of
$50,000 and integral multiples
of $1,000 in excess thereof.
Persons acquiring beneficial
ownership interests in the
Notes will hold their
interests in the Notes through
DTC in the United States or
Cedel Bank, societe anonyme
("Cedel") or the Euroclear
System ("Euroclear") in
Europe. See "Description of
the Notes -- Book-Entry
Registration."
The Trust will issue the Notes
pursuant to an Indenture,
dated as of November 1, 1997,
and a First Terms Supplement,
dated as of November 1, 1997,
authorizing the Notes (as
amended and supplemented from
time to time, the "Terms
Supplement" and, together with
the Indenture, as amended and
supplemented from time to
time, the "Indenture") between
the Trust and the Indenture
Trustee.
The Certificates................................. The Trust will issue $1,000
aggregate principal amount of
Crestar Student Loan Trust
1997-1 Asset Backed
Certificates (the
"Certificates") in a
transaction exempt from the
registration requirements of
the Securities Act. The
Certificates are not being
offered hereby. The rights of
Certificateholders in the
assets of the Trust to receive
payments will be fully
subordinated to the rights of
the Noteholders. See
"Formation of the Trust."
Transferor ...................................... Crestar Bank, a Virginia
banking corporation (the
"Transferor"), will contribute
the Financed Student Loans to
the Trust pursuant to the
Transfer and Servicing
Agreement (as amended and
supplemented from time to
time, the "Transfer and
Servicing Agreement") among
the Trust, the Transferor and
the Eligible Lender Trustee.
-4-
<PAGE>
Master Servicer and Servicers.................... The Transferor will act as
Master Servicer with respect
to the Financed Student Loans
(in such capacity, the "Master
Servicer"). The Financed
Student Loans will be serviced
by Pennsylvania Higher
Education Assistance Agency,
an agency of the Commonwealth
of Pennsylvania ("PHEAA"), or
such other parties as may be
approved by the Master
Servicer. The Transferor,
PHEAA, and each other party
who may, from time to time, be
servicing the Financed Student
Loans are referred to herein
as a "Servicer" and
collectively as the
"Servicers."
Eligible Lender Trustee ......................... Star Bank, National
Association, a national
banking association, will act
as eligible lender trustee
under the Trust Agreement and
holder of legal title to the
Financed Student Loans on
behalf of the Trust (the
"Eligible Lender Trustee").
See "Formation of the Trust --
Eligible Lender Trustee."
Indenture Trustee ............................... Bankers Trust Company, a New
York banking corporation (the
"Indenture Trustee"), will act
as trustee under the
Indenture.
Administrator ................................... Crestar Bank will act as
Administrator on behalf of the
Trust pursuant to an
Administration Agreement (as
amended and supplemented from
time to time, the
"Administration Agreement"),
among the Administrator, the
Eligible Lender Trustee and
the Indenture Trustee.
Distribution Dates .............................. Interest on and principal of
each Class of Notes will be
payable quarterly on the 25th
of each January, April, July
and October or if any such day
is not a Business Day, the
next succeeding Business Day,
commencing April 27, 1998
(each, a "Distribution Date").
See "Description of the
Transfer and Servicing
Agreements -- Distributions."
Record Date ..................................... Payments in respect of the
Notes will be payable to
holders of record of the Notes
("Noteholders") as of the
second Business Day preceding
the related Distribution Date
(each a "Record Date").
Collection Period................................ "Collection Period" means,
initially, the period
beginning [______, 1997] and
ending on March 31, 1998, and
thereafter, the Collection
Period means the calendar
quarter immediately following
the end of the previous
Collection Period.
-5-
<PAGE>
Interest ........................................ Each Class of Notes will bear
interest during each period
(an "Interest Payment Period")
beginning on the most recent
Distribution Date (or the
Closing Date with respect to
the initial Interest Payment
Period) through and including
the day preceding the
following Distribution Date at
the rates per annum for such
Class (the "Class Interest
Rate") described below. Within
each Interest Payment Period,
unless the Net Loan Rate for
such Interest Payment Period
is a lower interest rate, each
Class of Notes will bear
interest during each period
commencing on a Rate
Adjustment Date for such Class
(or the Closing Date with
respect to the initial
Interest Period) and ending on
and including the day before
the next Rate Adjustment Date
for such Class (an "Interest
Period"), at a Class Interest
Rate determined as follows (a
"Formula Interest Rate"):
(i) In the case of the
Class A-1 Notes and the
Class A-2 Notes, the
Formula Interest Rate for
each Interest Period after
the initial Interest Period
will be Floating Rate
(T-Bill) as of the T-Bill
Rate Determination Date
(i.e., the first day of
each calendar week on which
the United States Treasury
auctions 91-day Treasury
Bills, which currently is
the United States
Treasury's first business
day of each week) for such
Interest Period plus the
applicable Margin for such
Class, but in no event
greater than 18% per annum.
Interest on each Class of
Class A Notes will be
calculated on the basis of
the actual number of days
elapsed in each Interest
Period divided by 365 or
366, as applicable.
"Floating Rate (T-Bill)"
for any Interest Period
will be determined as
described under
"Description of the Notes
-- Determination of
Floating Rate (T-Bill)."
The "Margin" will be
[____%] for the Class A-1
Notes and [____%] for the
Class A-2 Notes. For the
initial Interest Period
(commencing on the Closing
Date), the Formula Interest
Rate for the Class A-1
Notes will be [___%] per
annum and for the Class A-2
Notes will be [___%] per
annum. The "Rate Adjustment
Date" for the Class A Notes
(which, except for the
initial Interest Period,
also will be the first day
of an Interest Period for
the Class A Notes) will be
the first day following
each T-Bill Rate
Determination Date.
(ii) In the case of the
Class B Notes, the Formula
Interest Rate for each
Interest Period after the
initial Interest Period
will be One-Month LIBOR as
of the LIBOR Determination
Date for such Interest
Period plus the applicable
Margin for such Class, but
in no event greater than
18% per annum. Interest on
the Class B Notes will be
calculated on the basis of
the actual number of days
elapsed in each Interest
Period divided by 360.
"One-Month LIBOR" for any
Interest Period will be
determined as described
under "Description of the
Notes -- Determination of
LIBOR." The "Margin" will
be [____%] for the Class B
Notes. For the initial
Interest Period (commencing
on the Closing Date), the
Formula Interest Rate for
the Class B Notes will be
[___%] per annum. The "Rate
Adjustment Date" for the
Class B Notes (which,
except for the initial
Interest Period, also will
be the first day of an
Interest Period for the
Class B Notes) will be the
25th day of each month,
except that the Rate
Adjustment Date occurring
in January, April, July or
October will be the
Distribution Dates
occurring in such months.
-6-
<PAGE>
See "Description of the Notes
-- The Notes -- Distributions
of Interest."
Notwithstanding the foregoing,
if the average of the Formula
Interest Rates with respect to
any Class for any Interest
Payment Period (calculated by
dividing the sum of the
Formula Interest Rates for
such Class in effect on each
day during such Interest
Payment Period by the number
of days in such Interest
Payment Period) is greater
than the Net Loan Rate (as
defined in "-- Net Loan Rate"
below), then the Class
Interest Rate for such
Interest Payment Period will
be the Net Loan Rate. See
"Description of the Notes --
The Notes -- Distributions of
Interest." The Class Interest
Rate for each Class for an
Interest Payment Period will
be determined on the
"Distribution Determination
Date," which is the Business
Day immediately preceding a
Distribution Date.
If the Class Interest Rate for
any Class of Notes for any
Interest Payment Period is
based on the Net Loan Rate,
the excess of (a) the amount
of interest such Class of
Notes would have accrued in
respect of the related
Interest Payment Period had
interest been calculated based
on the applicable Formula
Interest Rate, over (b) the
amount of interest such Class
of Notes actually accrued in
respect of such Interest
Payment Period based on the
Net Loan Rate (such excess,
together with the unpaid
portion of any such excess
from prior Interest Payment
Periods and interest accrued
thereon calculated based on
the Formula Interest Rate
applicable to such Class of
Notes is referred to as the
"Noteholders' Interest
Carryover") will be paid on
the dates and in the priority
set forth herein under "--
Assets of the Trust --
Collection Account; Note
Distribution Account;
Certificate Distribution
Account; and Expense Account."
Any amount of Noteholders'
Interest Carryover with
respect to a Class of Notes
remaining after the earlier of
the Distribution Date on which
the outstanding principal
amount of such Class of Notes
has been reduced to zero and
the distribution of all
Available Funds on the Final
Maturity Date of such Class of
Notes, will never become due
and payable and will be
discharged as to the
applicable Class of Notes on
such date. The ratings of the
Notes do not address the
likelihood of the payment of
the amount of any Noteholders'
Interest Carryover. Any
reference herein or in the
Indenture or the Transfer and
Servicing Agreement to
"principal" or "interest" does
not include within the meaning
of such words Noteholders'
Interest Carryover or any
interest accrued thereon.
-7-
<PAGE>
Net Loan Rate ................................... For any Interest Payment
Period, the "Net Loan Rate"
will equal the weighted
average Effective Interest
Rate for the Collection Period
immediately preceding the last
day of such Interest Payment
Period, less the Program
Operating Expense Percentage
(or less [_____%] per annum
during the period from the
Closing Date through March 31,
1998).
The "Effective Interest Rate"
means, for any Financed
Student Loan and any
Collection Period, the per
annum rate at which such
Financed Student Loan accrues
interest during such
Collection Period after giving
effect to all applicable
Consolidation Loan Fees,
Interest Subsidy Payments and
Special Allowance Payments due
with respect to such Financed
Student Loan.
The "Program Operating Expense
Percentage" is the fraction
(expressed as a percentage and
calculated as of the end of
each calendar quarter by the
Administrator) the numerator
of which is the annualized
operating expenses of the
Trust for the calendar month
then ended, including, without
limitation, the Transaction
Fees, and the denominator of
which is the Pool Balance as
of the last day of such
calendar quarter.
-8-
<PAGE>
Principal ....................................... Principal of the Notes will be
payable quarterly on each
Distribution Date first to the
Class A-1 Notes until paid in
full; then to the Class A-2
Notes until paid in full; and
finally to the Class B Notes.
Consequently, no principal
will be paid on the Class B
Notes until the Class A Notes
have been paid in full, and no
principal will be paid on the
Class A-2 Notes until the
Class A-1 Notes have been paid
in full. Notwithstanding the
foregoing, upon the occurrence
of an Event of Default with
respect to payment of the
Notes, principal will be paid
to each Class of Class A Notes
pro rata, based upon the
outstanding principal amount
of each such Class of Class A
Notes. See "Description of the
Transfer and Servicing
Agreements -- Distributions."
The amount of principal
available to be paid on a
Distribution Date will be
equal to the Noteholders'
Principal Distribution Amount
for such Distribution Date,
less any portion thereof being
used to pay Transaction Fees,
overdue Transaction Fees,
Consolidation Loan Fees,
overdue Consolidation Loan
Fees and interest on the Notes
on such Distribution Date. See
"Description of the Transfer
and Servicing Agreements --
Distributions." The
Noteholders' Principal
Distribution Amount generally
will be equal to the amount of
principal paid with respect to
the Financed Student Loans
(plus any Realized Losses
thereon), proceeds realized
upon the sale of Financed
Student Loans by the Trust and
Adjustment Payments (reduced
by the amount of any Issuer
Consolidation Payments). In
addition, until the Parity
Percentage equals [_____%],
accelerated principal payments
will be made in respect of the
Notes from collections of
interest and certain amounts
available therefor in the
Reserve Account.
As of any date of
determination, the "Parity
Percentage" will be the
fraction expressed as a
percentage, the numerator of
which is the sum of (i) the
then Pool Balance and (ii) all
amounts on deposit (including
any accrued interest thereon)
in the Collection Account and
the Reserve Account and the
denominator of which is the
sum of the aggregate
outstanding principal balance
of the Notes, accrued and
unpaid interest thereon plus
accrued and unpaid Transaction
Fees and Consolidation Loan
Fees.
-9-
<PAGE>
Final Maturity Dates............................. The Final Maturity Dates with
respect to each Class of Notes
are as follows:
<TABLE>
<CAPTION>
Class of Notes Final Maturity Date
<S> <C>
Class A-1 Notes [_______, 20__]
Class A-2 Notes [_______, 20__]
Class B Notes [_______, 20__]
</TABLE>
The actual maturity of one or
more Classes of Notes could
occur sooner than such dates
as a result of a variety of
factors, including (i) as a
result of payments on the
Financed Student Loans; (ii)
the exercise by the Transferor
of its option to repurchase
the Financed Student Loans
when the aggregate principal
balance is reduced to 10% or
less of the Initial Pool
Balance; (iii) if the
Indenture Trustee is
successful in offering any
Financed Student Loans
remaining in the Trust for
sale on or after [October
2006] as described under
"Description of the Transfer
and Servicing Agreements --
Termination"; or (iv) under
certain circumstances upon the
insolvency of the Transferor
and subsequent termination of
the Trust pursuant to the
Trust Agreement as described
under "Description of the
Transfer and Servicing
Agreements -- Insolvency
Event." See "Maturity and
Prepayment Considerations."
Servicing Fee ................................... The Master Servicer will
receive a quarterly fee (the
"Servicing Fee") with respect
to each Collection Period in
an amount equal to [____%] per
annum of the average of the
Pool Balance as of the last
day of the Collection Period
and the last day of the
immediately preceding
Collection Period (or the
Cut-off Date with respect to
the initial Collection
Period). The Servicing Fee
will be payable quarterly in
advance, out of Available
Funds and amounts on deposit
in the Reserve Account, on
each Distribution Date (or in
the case of the initial
Servicing Fee, on the Closing
Date) based on the
Administrator's good faith
estimate of the Servicing Fee
that will accrue during the
Collection Period in which
such Distribution Date occurs
(or in the case of the initial
Servicing Fee, the Collection
Period immediately succeeding
the Closing Date) plus (or
minus) the difference (or
excess) of the actual
Servicing Fee accrued for the
Collection Period immediately
preceding such Distribution
Date and the amount paid as an
estimated Servicing Fee for
such Collection Period on the
immediately preceding
Distribution Date (or the
Closing Date with respect to
the first Distribution Date).
Administration Fee .............................. The Administrator will receive
a fee (the "Administration
Fee"), payable quarterly in
advance on each Distribution
Date, in an amount equal to
[____%] per annum of the
principal amount of the Notes
outstanding on such
Distribution Date (following
any principal reductions of
the Notes on such Distribution
Date).
-10-
<PAGE>
The Trust ....................................... The Trust is a Delaware
statutory business trust
established by a Trust
Agreement dated as of November
1, 1997 (as amended and
supplemented from time to
time, the "Trust Agreement"),
between the Transferor, as
depositor, the Eligible Lender
Trustee and [________], as
Delaware trustee. The
activities of the Trust and
the Eligible Lender Trustee
are limited by the terms of
the Trust Agreement to issuing
one or more classes of its
certificates and notes,
acquiring, owning, selling and
managing the Financed Student
Loans and the other assets of
the Trust as described herein,
collecting and making payments
thereon and other activities
related thereto.
Assets of the Trust ............................. The assets of the Trust will
include the following:
-11-
<PAGE>
A. Financed Student Loans ................. The Financed Student Loans
will consist of certain
education loans to students
and parents of students
("Student Loans") enrolled in
accredited institutions of
higher education and will
include rights to receive
payments made with respect to
such Financed Student Loans
and the proceeds thereof. On
[___________, 1997] (the
"Closing Date"), the
Transferor will transfer and
contribute Student Loans (the
"Initial Financed Student
Loans") having an aggregate
principal balance plus accrued
interest thereon to be
capitalized upon repayment of
approximately [$____] million
and [$____] million,
respectively (the "Initial
Pool Balance"), as of
[________, 1997] (the "Cut-off
Date") to the Eligible Lender
Trustee on behalf of the
Trust, pursuant to the
Transfer and Servicing
Agreement. Following the
Closing Date and during the
Exchange Period (described
below), it is anticipated
that, subject to certain
conditions described herein,
the Transferor will transfer
to the Eligible Lender Trustee
on behalf of the Trust,
certain Serial Loans and
Consolidation Loans owned by
the Transferor (the "Exchanged
Financed Student Loans") in
exchange for certain Financed
Student Loans owned by the
Trust. See "Description of the
Transfer and Servicing
Agreements -- Exchange Period
and Exchanged Financed Student
Loans."
Certain of the Financed
Student Loans have been or
will be originated by the
Transferor and the remainder
of the Financed Student Loans
have been or will be
originated by independent
third parties and subsequently
sold to the Transferor. The
Financed Student Loans
constituting the assets of the
Trust include some or all of
the following types of Student
Loans: (1) loans made under
the federal government's
Federal Family Education Loan
Program (the "FFEL Program"),
including (i) Parental Loans
for Undergraduate Students
("PLUS Loans"), (ii) Stafford
Loans, (iii) Unsubsidized
Stafford Loans, (iv)
Supplemental Loans for
Students ("SLS Loans"), and
(v) Consolidation Loans
(collectively, the "FFELP
Loans"), and (2) loans (the
"HEAL Loans") made under the
federal government's Health
Education Assistance Loan
Program (the "HEAL Program").
FFELP Loans and HEAL Loans
included in the Financed
Student Loans are sometimes
referred to herein as
"Financed FFELP Loans" and
"Financed HEAL Loans,"
respectively.
The Financed FFELP Loans are
guaranteed to the extent
described herein as to the
payment of principal and
interest by various guarantee
agencies under the FFEL
Program (each such entity, a
"Guarantor" or "Guarantee
Agency," and collectively, the
"Guarantors" or the "Guarantee
Agencies"), which are in each
case reinsured to the extent
described herein by the
Secretary of the United States
Department of Education (the
"Secretary of Education" or
the "Department of
Education"). Payment of
principal and interest with
respect to the Financed FFELP
Loans is guaranteed against
default, death, bankruptcy,
disability, school closure or
false certification by the
school with respect to the
applicable borrower by a
Guarantor pursuant to a
guarantee agreement between
the applicable Guarantor and
the Eligible Lender Trustee
(such agreements, each as
amended or supplemented from
time to time, the "Guarantee
Agreements"). Of the Financed
Student Loans included in the
Initial Pool Balance,
approximately [71.81%] are
guaranteed by Educational
Credit Management Corporation,
a Minnesota non-profit
corporation ("ECMC", formerly
known as Transitional Guaranty
Agency, Inc.), approximately
-12-
<PAGE>
[15.02%] are guaranteed by
Pennsylvania Higher Education
Assistance Agency, an agency
of the Commonwealth of
Pennsylvania ("PHEAA"),
approximately [9.78%] are HEAL
Loans, and the remaining
[3.39%] are guaranteed by one
of the following Guarantee
Agencies: United Student Aid
Funds, Inc., a Delaware
non-profit corporation
("USAF"), the Florida
Department of Education, an
agency of the State of
Florida, New York Higher
Education Services
Corporation, an agency of the
State of New York, and Texas
Guaranteed Student Loan
Program , a Texas nonprofit
corporation. See "Description
of the Guarantee Agencies."
Of the Financed FFELP Loans
included in the Initial Pool
Balance, approximately [___%]
are guaranteed as to the
payment of 100% of principal
and interest by a Guarantee
Agency and approximately
[___%] are guaranteed as to
the payment of 98% of
principal and interest by a
Guarantee Agency. Pursuant to
the FFEL Program, the
Guarantee Agencies each have
reinsurance contracts with the
Department of Education,
pursuant to which the
Department of Education
reimburses the Guarantee
Agencies for such portions of
guarantee claims paid by the
Guarantee Agencies as is
provided in the Higher
Education Act of 1965, as
amended (such Act, together
with all rules and regulations
promulgated thereunder by the
Department of Education and/or
the Guarantors, the "Higher
Education Act"). In addition,
the Department of Education is
obligated to make certain
interest and other subsidy
payments to the holders of
such Financed FFELP Loans. See
"Description of the FFEL
Program" for a more complete
description of the provisions
of the Higher Education Act
that provide for such
programs. The obligations of
the Guarantee Agencies to the
holders of loans, such as the
Eligible Lender Trustee, are
payable from the general funds
available to each such
Guarantee Agency, including
reserve funds maintained by
the Guarantee Agencies as
required by the Higher
Education Act. Certain delays
in receiving reimbursement
could occur if a Guarantee
Agency fails to meet its
obligations. In addition,
failure to properly originate
or service a FFELP Loan can
cause a FFELP Loan to lose its
guarantee and/or its
eligibility for federal
interest payments and
subsidies. See "Risk Factors
-- Risk That Failure to Comply
with Student Loan Origination
and Servicing Procedures for
Financed Student Loans May
Result in the Department of
Education's Refusal to Make
Certain Payments to Guarantors
and the Eligible Lender
Trustee, the Guarantors'
Refusal to Make Guarantee
Payments to the Eligible
Lender Trustee and the
Department of HHS's Refusal to
Make Insurance Payments to the
Eligible Lender Trustee" and "
-- Risk That Financial Status
of Guarantors Will Affect
Their Ability to Make
Guarantee Payments".
Of the Financed Student Loans
included in the Initial Pool
Balance, approximately [9.78%]
are HEAL Loans insured as to
payment of 100% of principal
and interest by the Secretary
of the United States
Department of Health and Human
Services (the "Secretary of
HHS" or the "Department of
HHS") to the extent described
herein. The Department of HHS
insures such payment against
default, death, bankruptcy or
disability with respect to the
applicable borrower pursuant
to a HEAL Insurance Contract
between the Department of HHS
and the Eligible Lender
Trustee (such HEAL Insurance
Contract, as amended or
supplemented from time to
time, the "HEAL Insurance
Contract"). See "Description
of the HEAL Program."
-13-
<PAGE>
Certain incentive programs
currently or hereafter made
available by the Transferor to
borrowers may also be made
available by the Master
Servicer to borrowers with
Financed FFELP Loans. See
"Risk Factors- Risk Resulting
From Changes in Repayment
Terms of Financed Student
Loans Pursuant to Incentive
Programs" and "The Financed
Student Loan Pool -- Incentive
Programs."
During the period (the
"Exchange Period") from the
Closing Date until December
31, 2002, if a borrower on a
Financed Student Loan who is
also a borrower under one or
more Student Loans (whether or
not all such loans are in the
Trust) elects to consolidate
such loans with the proceeds
of a Consolidation Loan or a
consolidation loan under the
HEAL Program (a "HEAL
Consolidation Loan") to be
made by the Transferor, the
Eligible Lender Trustee, at
the option of the Transferor
and subject to certain
conditions, will be obligated
to transfer to the Transferor
the Financed Student Loan
being consolidated by the
Transferor in exchange for the
related Consolidation Loan or
HEAL Consolidation Loan to be
made by the Transferor. See
"Description of the Transfer
and Servicing Agreements --
Exchange Period and Exchanged
Financed Student Loans." In
addition, during the Exchange
Period, the Eligible Lender
Trustee, at the option of the
Transferor and subject to
certain conditions, will be
obligated to exchange with the
Transferor existing Financed
Student Loans owned by the
Trust for Student Loans owned
by the Transferor that are
serial to existing Financed
Student Loans owned by the
Trust, provided that certain
conditions described herein
are satisfied. Each such
transfer of an Exchanged
Financed Student Loan will be
made pursuant to a transfer
agreement (each a "Transfer
Agreement") among the
Transferor, the Trust and the
Eligible Lender Trustee. See
"Description of the Transfer
and Servicing Agreements --
Exchange Period and Exchanged
Financed Student Loans."
Any Consolidation Loan or HEAL
Consolidation Loan made with
respect to a Financed Student
Loan after the Closing Date,
whether made by the Transferor
or another lender, will result
in a prepayment to the Trust
of such Financed Student Loan
unless such Consolidation Loan
or HEAL Consolidation Loan is
transferred to the Eligible
Lender Trustee as an Exchanged
Financed Student Loan, as
described above, or unless the
proceeds of such Consolidation
Loan or HEAL Consolidation
Loan are used as Issuer
Consolidation Payments. See
"Description of the Transfer
and Servicing Agreements --
Exchange Period and Exchanged
Financed Student Loans."
With respect to certain of the
Financed Student Loans, during
the period (the "Deferral
Phase") in which the related
borrower is in school and for
certain authorized periods
under the FFEL Program or the
HEAL Program, as the case may
be, the borrower is not
required to make payments on
his or her Financed Student
Loan. With respect to such
Financed FFELP Loans
constituting Stafford Loans
and certain Consolidation
Loans, the Department will
make all interest payments
during the related Deferral
Phase. For all other Financed
-14-
<PAGE>
Student Loans (other than
certain PLUS Loans), interest
will not be paid during the
related Deferral Phase but,
instead, will accrue and be
capitalized and added to the
principal balance of such
Financed Student Loan. The
Trust will consist of Financed
Student Loans that are in the
Deferral Phase as well as
Financed Student Loans for
which the related borrower is
currently required to make
payments of principal and
interest (the "Repayment
Phase"). See "The Financed
Student Loan Pool --
Distribution of the Initial
Financed Student Loans by
Borrower Payment Status as of
the Cut-off Date."
The "Pool Balance" at any time
represents the aggregate
principal balance of the
Financed Student Loans at the
end of the preceding
Collection Period (including
accrued interest thereon for
such Collection Period to the
extent such interest will be
capitalized), plus other
accrued interest thereon due
from borrowers, and accrued
Interest Subsidy Payments and
Special Allowance Payments, if
any, as of the end of the
preceding Collection Period,
after giving effect to the
following, without
duplication: (i) all payments
in respect of principal
received by the Trust during
such Collection Period from or
on behalf of borrowers and
Guarantors and, with respect
to certain payments on the
Financed Student Loans, the
Department of Education and
the Department of HHS
(collectively, "Obligor"),
(ii) the principal portion of
all Purchase Amounts received
by the Trust for such
Collection Period from the
Transferor or the Master
Servicer and (iii) any
Exchanged Financed Student
Loans conveyed to the Trust
and any Financed Student Loans
conveyed by the Trust in
exchange for such Exchanged
Financed Student Loan, during
such Collection Period, as
described above.
-15-
<PAGE>
B. Collection Account; Note
Distribution Account;
Certificate Distribution
Account; and Expense
Account ................................ Each Servicer will be required
to remit all collections
received with respect to the
Financed Student Loans for
which it is acting as primary
servicer (other than Financed
Student Loans that have been
repurchased by the Transferor
pursuant to the Transfer and
Servicing Agreement) to an
account in the name of the
Indenture Trustee (the
"Collection Account"). The
Eligible Lender Trustee will
be required to remit Interest
Subsidy Payments and Special
Allowance Payments it receives
to the Collection Account. See
"Description of the Transfer
and Servicing Agreements --
Payments on Financed Student
Loans."
On each Distribution
Determination Date, the
Administrator will advise the
Indenture Trustee in writing
of the applicable Noteholders'
Interest Distribution Amount,
the Noteholders' Principal
Distribution Amount and all
amounts payable to the holders
of the Certificates (the
"Certificateholders") on the
related Distribution Date.
Further, on each Distribution
Determination Date relating to
a Distribution Date the
Administrator will advise the
Indenture Trustee in writing
of the estimated fees payable
to the Master Servicer, the
Administrator, the Indenture
Trustee and the Eligible
Lender Trustee (the "Servicing
Fee," the "Administration
Fee," the "Indenture Trustee
Fee" and the "Eligible Lender
Trustee Fee," respectively,
and, collectively, the
"Transaction Fees") for the
Collection Period in which
such Distribution Date occurs.
On each Distribution Date, the
Indenture Trustee will
transfer from the Collection
Account, in the following
priority and from the
Available Funds for the
Collection Period immediately
preceding the month of such
Distribution Date (or (y) with
respect to the first
Distribution Date, from the
Closing Date through and
including the Collection
Period immediately preceding
such Distribution Date, and
(z) with respect to clause
(i)(A) below, the Indenture
Trustee will transfer on the
25th day of each month (or if
such day is not a Business
Day, the next succeeding
Business Day) from the
Available Funds for the
calendar month immediately
preceding such day, the amount
described in (i)(A) below),
the required amounts from the
Available Funds for the
Collection Period immediately
preceding the month of each
such Distribution Date:
(i) to a separate account
held with and in the name
of the Indenture Trustee
(the "Expense Account"),
(A) an amount equal to the
Consolidation Loan Fees
with respect to the
calendar month most
recently ended and any
overdue Consolidation Loan
Fees from prior months, and
(B) an amount up to the
estimated Transaction Fees
for the Collection Period
commencing in the month of
such Distribution Date and
all overdue Transaction
Fees from prior Collection
Periods (plus (or minus)
the difference (or excess)
of the actual Transaction
Fees for the immediately
preceding Collection Period
and the Transaction Fees
deposited into the Expense
Account on the preceding
Distribution Date),
(ii) to a separate account
held with and in the name
of the Indenture Trustee
for the benefit of the
Noteholders (the "Note
Distribution Account"), an
amount up to the
Noteholders' Interest
Distribution Amount,
-16-
<PAGE>
(iii) to the Note
Distribution Account, an
amount up to the
Noteholders' Principal
Distribution Amount,
(iv) to a supplemental
account held with and in
the name of the Eligible
Lender Trustee for the
benefit of the
Certificateholders (the
"Certificate Distribution
Account"), an amount up to
the Certificateholders'
Interest Distribution
Amount, and
(v) after the Notes have
been paid in full, to the
Certificateholders'
Distribution Account, an
amount up to the
Certificateholders'
Principal Distribution
Amount.
On each Distribution Date (and
with respect to clause (i)
below on the 25th day of each
month, or if such day is not a
Business Day, the next
succeeding Business Day),
following the transfer to the
Expense Account described in
the preceding paragraph, the
Indenture Trustee will
distribute from the Expense
Account (in addition to any
amounts transferred from the
Reserve Account as described
herein) the following amounts
in the following order of
priority:
(i) to the Department of
Education, the
Consolidation Loan Fees for
the immediately preceding
calendar month, together
with any overdue
Consolidation Loan Fees for
any prior months,
(ii) to the Master
Servicer, the estimated
Servicing Fee for the
Collection Period
commencing in the month of
such Distribution Date and
all overdue Servicing Fees,
(iii) to the Administrator,
the estimated
Administration Fee for the
Collection Period
commencing in the month of
such Distribution Date and
all overdue Administration
Fees,
(iv) to the Indenture
Trustee, the estimated
Indenture Trustee Fee for
the Collection Period
commencing in the month of
such Distribution Date and
all overdue Indenture
Trustee Fees, and
(v) to the Eligible Lender
Trustee, the estimated
Eligible Lender Trustee Fee
for the Collection Period
commencing in the month of
such Distribution Date and
all overdue Eligible Lender
Trustee Fees.
On each Distribution Date,
following the transfer to the
Note Distribution Account, the
Indenture Trustee will
distribute to the Noteholders
as of the related Record Date
the amounts transferred to the
Note Distribution Account as
set forth above (in addition
to any amounts transferred
from the Reserve Account and
the Quarterly Advance Account
and any Parity Percentage
Payments transferred from the
Collection Account, each as
described below) in the
following order of priority:
(i) first, to each Class of
Class A Noteholders, the
Class A Noteholders'
Interest Distribution
Amount (pro rata based upon
the portion thereof
allocable to each such
Class);
-17-
<PAGE>
(ii) second, to the Class
B Noteholders, the Class B
Noteholders' Interest
Distribution Amount:
(iii) third, to the Class
A-1 Noteholders, the
Noteholders' Principal
Distribution Amount until
the principal balance of
the Class A-1 Notes has
been reduced to zero;
(iv) fourth, after the
principal balance of the
Class A-1 Notes has been
reduced to zero, to the
Class A-2 Noteholders, the
Noteholders' Principal
Distribution Amount until
the principal balance of
the Class A-2 Notes has
been reduced to zero; and
(v) fifth, after the
principal balance of each
Class of Class A Notes has
been reduced to zero, to
the Class B Noteholders,
the Noteholders' Principal
Distribution Amount until
the principal balance of
the Class B Notes has been
reduced to zero.
On each Distribution Date,
after making all required
transfers to the Expense
Account and the Note
Distribution Account, and, if
applicable, the Certificate
Distribution Account, the
Indenture Trustee will
transfer any amounts remaining
in the Collection Account
(other than amounts
representing payments received
during such month) in the
following order of priority:
(i) to the Reserve Account,
the amount, if any,
necessary to increase the
balance thereof to the
Specified Reserve Account
Balance,
(ii) to the Note
Distribution Account, the
amount, if any, which when
applied as a payment of
principal on such
Distribution Date to the
Class of Notes then
receiving payments of
principal is necessary for
the Parity Percentage to
equal [_____%] on such
Distribution Date (the
amount so transferred to
the Note Distribution
Account is the "Parity
Percentage Payment"),
(iii) to the Note
Distribution Account, the
amount of any outstanding
Noteholders' Interest
Carryover, and
(iv) to the Transferor, any
amounts remaining in the
Collection Account after
such transfers (other than
amounts representing
payments received during
such current month).
Notwithstanding the foregoing,
if (x) on any Distribution
Date following all
distributions to be made on
such Distribution Date, the
principal amount of the Class
A Notes would exceed the sum
of the Pool Balance at the end
of the immediately preceding
Collection Period plus the
aggregate balance on deposit
in the Trust Accounts on such
Distribution Date following
such distributions, or (y) an
Event of Default has occurred
with respect to payment of the
Notes, after paying
Transaction Fees, overdue
Transaction Fees,
Consolidation Loan Fees and
overdue Consolidation Loan
Fees, distributions will be
made in the following
priority:
-18-
<PAGE>
(i) first, to each Class of
Class A Noteholders, the
Noteholders' Interest
Distribution Amount
applicable to each such
Class, pro rata based upon
the portion thereof
allocable to each such
Class;
(ii) second, in the case of
clause (x) above, to the
Class A-1 Noteholders, the
Noteholders' Principal
Distribution Amount, until
the principal balance of
the Class A-1 Notes has
been reduced to zero, and
then to the Class A-2
Noteholders, the
Noteholders' Principal
Distribution Amount until
the principal balance of
the Class A-2 Notes has
been reduced to zero, or in
the case of clause (y)
above, to each Class of
Class A Noteholders, the
Noteholders' Principal
Distribution Amount
applicable to such
Distribution Date, pro rata
based upon the principal
balance of each Class of
Class A Notes until the
principal balance of each
Class of Class A Notes has
been paid in full;
(iii) third, to the Class B
Noteholders, the
Noteholders' Interest
Distribution Amount
applicable to the Class B
Notes;
(iv) fourth, after the
principal balance of each
of the Class A Notes has
been paid in full, to the
Class B Noteholders, the
Noteholders' Principal
Distribution Amount until
the principal balance of
the Class B Notes has been
paid in full;
(v) fifth, to the Class A-1
Noteholders and the Class
A-2 Noteholders, the
Noteholders' Interest
Carryover applicable to the
respective Class of Class A
Notes, pro rata based upon
the portion thereof
allocable to each such
Class;
(vi) sixth, to the Class B
Noteholders, the
Noteholders' Interest
Carryover applicable to the
Class B Notes; and
(vii) seventh, to the
Certificateholders, the
Certificateholders'
Interest Distribution
Amount and then the
Certificateholders'
Principal Distribution
Amount.
All principal payments of
Notes of any Class shall be
made pro rata within that
Class. In connection with each
principal payment of Notes of
any Class, the Indenture
Trustee shall compute the
Principal Factor for that
Class. The "Principal Factor"
shall be a seven-digit decimal
indicating the principal
balance of each Note of a
Class as of a Distribution
Date (after giving effect to
any payments made on that
date) as a fraction of the
original principal amount of
such Note. The principal
balance of any Note can be
determined by multiplying the
original principal amount of
such Note by the Principal
Factor applicable to that
class of Notes.
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C. Reserve Account..................... Pursuant to the Transfer and
Servicing Agreement, an
account in the name of the
Indenture Trustee (the
"Reserve Account") will be
established with and
maintained by the Indenture
Trustee and will be an asset
of the Trust. On the Closing
Date, the Transferor will make
an initial deposit into the
Reserve Account of cash or
Eligible Investments (as
defined in "Description of the
Transfer and Servicing
Agreements -- Accounts") equal
to [$________] (the "Reserve
Account Deposit"). The Reserve
Account Deposit will be
augmented on each Distribution
Date by the deposit into the
Reserve Account of any
Available Funds remaining
after making all prior
distributions on such date.
See "Description of the
Transfer and Servicing
Agreements -- Distributions."
Amounts, if any, on deposit in
the Reserve Account will be
available on each Distribution
Date to cover any shortfalls
in payments of the Transaction
Fees, the Consolidation Loan
Fees and the Noteholders'
Interest Distribution Amount
for such applicable
Distribution Date for which
Available Funds are
insufficient to make such
payments and distributions.
Additionally, on the Final
Maturity Date for a Class of
Notes, amounts in the Reserve
Account will be available to
reduce the principal balance
of such Class of Notes to zero
to the extent that Available
Funds are insufficient to make
such payment.
Amounts, if any, in the
Reserve Account on any
Distribution Date (after
giving effect to all
distributions to be made or
allocated on such Distribution
Date) in excess of the then
applicable Specified Reserve
Account Balance generally will
be distributed to the
Transferor. The "Specified
Reserve Account Balance" with
respect to any Distribution
Date will equal the greater of
(i) [____%] of the sum of the
outstanding principal balance
of the Notes on such
Distribution Date, after
giving effect to all payments
to be made on such date, or
(ii) [$_______;] provided,
however, that such balance
shall not exceed the sum of
the aggregate outstanding
principal amount of the Notes.
See "Description of the
Transfer and Servicing
Agreements -- Credit
Enhancement -- Reserve
Account."
The funding and maintenance of
the Reserve Account is
intended to enhance the
likelihood of timely payment
to the Noteholders of the
Noteholders' Distribution
Amount. In certain
circumstances, however, the
Reserve Account could be
depleted and shortfalls in
distributions to the
Noteholders could result.
D. Eligible Investments .............. Pursuant to the Transfer and
Servicing Agreement, funds on
deposit in the Trust Accounts
will be invested in "Eligible
Investments." See "Description
of the Transfer and Servicing
Agreements -- Accounts."
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E. Transfer and Servicing
Agreement ......................... Under the Transfer and
Servicing Agreement, the
Transferor will contribute the
Initial Financed Student Loans
to the Trust on the Closing
Date, and may contribute the
Exchanged Financed Student
Loans to the Trust during the
Exchange Period. The Eligible
Lender Trustee will hold legal
title to all Financed Student
Loans contributed to the
Trust. In addition, the Master
Servicer will be responsible
for servicing, managing,
maintaining custody of and
making collections on the
Financed Student Loans. The
obligations of the Transferor
and the Master Servicer under
the Transfer and Servicing
Agreement include the
following:
The Transferor and the Master
Servicer will be obligated to
purchase any Financed Student
Loan if the interests of the
Noteholders therein are
materially adversely affected
by a breach of any
representation, warranty or
covenant (including the Master
Servicer's covenant to service
all the Financed Student Loans
in accordance with applicable
laws, restrictions and
guidelines) made by the
Transferor or the Master
Servicer, as the case may be,
with respect to the Financed
Student Loans, if the breach
has not been cured within 120
days following the discovery
by or notice to the Transferor
or the Master Servicer, as the
case may be, of the breach (it
being understood that any such
breach that does not adversely
affect any Guarantor's
obligation to guarantee
payment of such Financed FFELP
Loan or the Department of
HHS's obligation to insure
payment of any Financed HEAL
Loan will not be considered to
have a material adverse effect
for this purpose). In
addition, the Transferor or
the Master Servicer, as the
case may be, will be obligated
to reimburse the Trust for (i)
any accrued interest amounts
not insured by the Department
of HHS with respect to
Financed HEAL Loans due to,
and (ii) any accrued interest
amounts not guaranteed by a
Guarantor with respect to
Financed FFELP Loans due to,
or any lost Interest Subsidy
Payments or Special Allowance
Payments as a result of, a
breach of the Transferor's
representations and warranties
or the Master Servicer's
covenants, as the case may be;
provided, however, that such
reimbursements shall not
exceed the amount that would
have been paid if not for such
breach.
Pursuant to the Transfer and
Servicing Agreement, the
Master Servicer will be
responsible for, among other
things, preparing and filing
with the Department of HHS,
the Department of Education
and the Guarantors all
appropriate claims forms and
other documents and filings on
behalf of the Eligible Lender
Trustee to claim (i) the
Insurance Payments from the
Department of HHS in respect
of the Financed HEAL Loans
entitled thereto, and (ii) the
Interest Subsidy Payments and
Special Allowance Payments
from the Department of
Education and the Guarantee
Payments from the Guarantors,
in respect of the Financed
FFELP Loans entitled thereto,
and preparing and providing
periodic and annual statements
to the Eligible Lender Trustee
and the Indenture Trustee with
respect to distributions to
Noteholders and
Certificateholders.
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Quarterly Advances .............................. If the Master Servicer has
applied for an Insurance
Payment from the Department of
HHS, a Guarantee Payment from
a Guarantor or an Interest
Subsidy Payment or a Special
Allowance Payment from the
Department, and the Master
Servicer has not received the
related payment prior to the
end of the Collection Period
immediately preceding the
Distribution Date on which
such amount would be required
to be distributed as a payment
of interest, the Master
Servicer may, no later than
the Distribution Determination
Date relating to such
Distribution Date, deposit
into an account in the name of
the Indenture Trustee (the
"Quarterly Advance Account")
an amount up to the amount of
such payments applied for but
not received (such deposits by
the Master Servicer are
referred to herein as
"Quarterly Advances").
Quarterly Advances will be
distributed to the Noteholders
or Certificateholders on the
upcoming Distribution Date.
Quarterly Advances are
recoverable by the Master
Servicer (i) first, from the
source for which such
Quarterly Advance was made and
(ii) second, from collections
received generally on or with
respect to the Financed
Student Loans. The Master
Servicer will have no
obligation, legal or
otherwise, to make any
Quarterly Advance, and the
making of or decision to make
a particular Quarterly Advance
will not create any obligation
on the Master Servicer, legal
or otherwise, to make any
future Quarterly Advances.
Auction of Trust Assets ......................... Any Financed Student Loans
remaining in the Trust as of
[________, 2006] will be
offered for sale by the
Indenture Trustee on or prior
to the [October 2006]
Distribution Date. The
Transferor, its affiliates and
unrelated third parties may
offer bids to purchase such
Financed Student Loans on or
prior to such Distribution
Date. If at least two bids are
received, the Indenture
Trustee will accept the
highest bid equal to or in
excess of the greater of (x)
the aggregate Purchase Amounts
of such Financed Student Loans
as of the end of the
Collection Period immediately
preceding such Distribution
Date or (y) an amount that
would be sufficient to (i)
reduce the outstanding
principal amount of the Notes
on such Distribution Date to
zero and (ii) pay to
Noteholders the Noteholders'
Interest Distribution amount
payable on such Distribution
Date (the "Minimum Purchase
Price"). If at least two bids
are not received or the
highest bid is not equal to or
in excess of the Minimum
Purchase Price, the Indenture
Trustee will not consummate
such sale. The 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
for sale of 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 [October 2006]
Distribution Date or any
subsequent Distribution Date.
There will be no continuing
liability on the part of the
Trust or the Noteholders to
the purchaser of the Financed
Student Loans in connection
with such auction sale. See
"Description of the Transfer
and Servicing Agreements --
Termination".
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<PAGE>
Optional Purchase ............................... The Transferor may repurchase
all remaining Financed Student
Loans, and thus effect the
early retirement of the Notes
and the Certificates, on any
Distribution Date on or after
the Distribution Date on which
the Pool Balance is equal to
10% or less of the Initial
Pool Balance, at a price equal
to, for each Financed Student
Loan, the outstanding
principal balance of such
Financed Student Loan as of
the end of the preceding
Collection Period, together
with all accrued interest
thereon and certain
unamortized premiums, if any.
See "Description of the
Transfer and Servicing
Agreements -- Termination."
The "Initial Pool Balance"
will equal approximately
[$___________].
Federal Income Tax The Notes will evidence debt
Considerations obligations under the Internal
Revenue Code of 1986, as
amended (the "Code"), and
interest paid or accrued
thereon will be taxable to
Noteholders. It is not
expected that the Notes will
be issued with original issue
discount. By acceptance of its
Note, each Noteholder will be
deemed to have agreed to treat
its Note as a debt instrument
for purposes of federal and
state income tax, franchise
tax and any other tax measured
in whole or in part by income.
See "Federal Income Tax
Consequences" for additional
information concerning the
application of Federal laws
with respect to the Notes and
the Trust.
ERISA Considerations Fiduciaries of employee
benefit plans and certain
other retirement plans and
arrangements that are subject
to ERISA or corresponding
provisions of the Code,
including individual
retirement accounts and
annuities, Keogh plan and
collective investment funds in
which such plans, accounts,
annuities or arrangements are
invested (any of the
foregoing, a "Plan"), persons
acting on behalf of a Plan, or
persons using the assets of a
Plan ("Plan Investors"),
should review carefully with
their legal advisors whether
the purchase or holding of the
Notes could either give rise
to a transaction that is
prohibited under ERISA or the
Code or cause the Financed
Student Loans or the other
assets of the Trust to be
treated as plan assets for
purpose of regulations of the
Department of Labor set forth
in 29 C.F.R. 2510.3-101 (the
"Plan Asset Regulations").
It is expected that the Notes
will be treated as debt
obligations without
significant equity features
for purposes of the Plan Asset
Regulations. Accordingly, a
Plan that acquires a Note
should not be treated as
having acquired a direct
interest in the assets of the
Trust for purposes of the Plan
Asset Regulations. However,
there can be no complete
assurance that the Notes will
be treated as debt obligations
without significant equity
features for purposes of the
Plan Asset Regulations.
Furthermore, regardless
whether the Notes are treated
as debt or equity for ERISA
purposes, the acquisition or
holding of the Notes by or on
behalf of a Plan still could
be considered to give rise to
a prohibited transaction under
certain circumstances.
Although certain exceptions
from the application of the
prohibited transaction rules
and the Plan Asset Regulations
exist, there can be no
assurance that any such
exception will apply with
respect to the acquisition of
a Note. See "ERISA
Considerations" herein.
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<PAGE>
Registration of Notes............................ The Notes will be represented
by global certificates
registered in the name of
Cede, as nominee of DTC or
another nominee. The
Noteholders will not be
entitled to receive definitive
certificates representing such
Holders' interests, except in
certain circumstances. See
"Description of the Notes --
Book-Entry Registration."
Rating of the Securities ........................ It is a condition to the
issuance and sale of each of
the Class A Notes that they be
rated "AAA" by Standard &
Poor's Ratings Services, a
division of The McGraw-Hill
Companies ("Standard &
Poor's"), and "Aaa" by Moody's
Investors Service, Inc.
("Moody's"), and it is a
condition to the issuance and
sale of each of the Class B
Notes that they be rated at
least "A" by Standard & Poor's
and at least "A2" by Moody's.
Each of Standard & Poor's and
Moody's is also referred to
herein as a "Rating Agency"
and collectively as the
"Rating Agencies." A
securities rating is not a
recommendation to buy, sell or
hold securities and may be
subject to revision or
withdrawal at any time by the
assigning rating agency. See
"Risk Factors -- Risk of
Change of Ratings on the
Notes."
The Rating Agencies do not
evaluate, and the ratings of
the Notes do not address, the
likelihood of prepayments on
the Notes or the likelihood of
payment of the Noteholders'
Interest Carryover.
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<PAGE>
RISK FACTORS
Prospective purchasers of the Notes should consider carefully the following
discussion of certain risk factors associated with an investment in the Notes.
Risk Resulting From Limited Assets of the Trust
The Trust does not have, nor is it permitted to have, any significant
assets or sources of funds other than the Financed Student Loans (and the
related Guarantee Agreements and HEAL Insurance Contract to the extent assigned
to the Trust by the Transferor ("Assigned Rights")), the Collection Account, the
Note Distribution Account, the Reserve Account and the Quarterly Advance
Account. The Notes represent obligations solely of the Trust and its assets, and
will not be insured or guaranteed by the Transferor, the Master Servicer, the
Guarantors, the Eligible Lender Trustee, any of their affiliates, the Department
of HHS or the Department of Education. Consequently, holders of the Notes must
rely for repayment upon proceeds realized upon the sale of, or payments with
respect to, the Financed Student Loans and, if and to the extent available under
the circumstances described herein, amounts on deposit in the Reserve Account.
Amounts to be deposited in the Reserve Account are limited in amount and will be
reduced, subject to a specified minimum, as the Pool Balance is reduced. If the
Reserve Account is exhausted, the Trust will depend solely on payments with
respect to the Financed Student Loans to make payments on the Notes. See
"Description of the Transfer and Servicing Agreements -- Distributions" and "--
Credit Enhancement."
Risk of Loss to Noteholders of Class B Notes Resulting From Subordination of the
Class B Notes
The rights of the Class B Noteholders to receive payments of interest and
principal will be subordinated to those of the Class A Noteholders as described
herein. If amounts otherwise allocable to the Class B Notes are used to fund
payments on the Class A Notes, distributions with respect to the Class B Notes
may be delayed or reduced. Notwithstanding the foregoing, distributions to the
Class B Noteholders of amounts representing the Class B Noteholders' Interest
Distribution Amount will not be subordinated to the payment of any Noteholders'
Interest Carryover that may exist from time to time. The Class B Noteholders are
also subordinated to the Class A Noteholders as to granting consents and the
direction of remedies upon defaults under the Transfer and Servicing Agreements
and the Indenture. See "Description of the Notes -- The Indenture" and
"Description of the Transfer and Servicing Agreements -- Distributions," "--
Credit Enhancement -- Subordination of the Class B Notes," "-- Master Servicer
Default; Administrator Default," "-- Rights Upon Servicer Default and
Administrator Default" and "-- Waiver of Past Defaults."
Risk That Failure to Comply with Student Loan Origination and Servicing
Procedures for Financed Student Loans May Result in the Department of
Education's Refusal to Make Certain Payments to Guarantors and the Eligible
Lender Trustee, the Guarantors' Refusal to Make Guarantee Payments to the
Eligible Lender Trustee, and the Department of HHS's Refusal to Make Insurance
Payments to the Eligible Lender Trustee
The Higher Education Act, including the implementing regulations
thereunder, requires lenders and their assignees making and servicing FFELP
Loans, and Guarantors guaranteeing FFELP Loans, to follow specified procedures,
including due diligence procedures, to ensure that the FFELP Loans are properly
originated, disbursed and collected. The HEAL Act, including the implementing
regulations thereunder, requires lenders and their assignees making and
servicing HEAL Loans to follow specified procedures, including due diligence
procedures, to ensure that the HEAL Loans are properly originated, disbursed and
collected. Certain of those procedures, which are specifically set forth in the
Higher Education Act and the HEAL Act, are summarized herein. See "Description
of the FFEL Program," "Description of the HEAL Program" and "Description of the
Transfer and Servicing Agreements -- Servicing Procedures." Generally, those
procedures require that completed loan applications be processed, a
determination of whether an applicant is an eligible borrower attending an
eligible institution under the Higher Education Act or the HEAL Act 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 by the lender in a specified manner. After the
loan is made, the lender must establish repayment terms with the borrower,
properly administer deferments and forbearances and credit the borrower for
payments made. If a borrower becomes delinquent in repaying a loan, a lender
must perform certain collection procedures (primarily telephone calls, demand
letters, skiptracing procedures and requesting assistance from the applicable
Guarantor) which vary depending upon the length of time a loan is delinquent.
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The Master Servicer will agree in the Transfer and Servicing Agreement to
perform (or provide for third party servicers to perform) servicing and
collection procedures on behalf of the Trust in compliance with these
procedures. However, the failure by the Transferor or the other originators to
follow or to have followed these procedures relating to the origination of
Financed Student Loans or of the Servicers to follow or to have followed certain
servicing procedures for the Financed Student Loans, as described below, may
result in (i) the Department of Education's refusal to make reinsurance payments
to the Guarantors or to make Interest Subsidy Payments and Special Allowance
Payments to the Eligible Lender Trustee with respect to the Financed FFELP
Loans, (ii) the Guarantors' inability or refusal to honor their obligations to
make payments under the Guarantee Agreements ("Guarantee Payments") with respect
to Financed FFELP Loans, and (iii) the Department of HHS's refusal to honor its
obligations to make payments ("Insurance Payments") under the HEAL Insurance
Contract with respect to Financed HEAL Loans. Loss of any such Guarantee
Payments, Interest Subsidy Payments, Special Allowance Payments or Insurance
Payments with respect to the Financed Student Loans could adversely affect the
amount of Available Funds for any Collection Period and the Trust's ability to
pay principal and interest on the Notes. See "Description of the FFEL Program,"
"Description of the HEAL Program" and "Description of the Transfer and Servicing
Agreements -- Servicing Procedures."
Risk of Inability of Transferor and Master Servicer to Honor their Obligations
to Purchase Financed Student Loans
Under certain circumstances, pursuant to the Transfer and Servicing
Agreement, the Transferor is obligated to purchase, or the Master Servicer is
obligated to purchase, any Financed Student Loan if a breach of the
representations, warranties or covenants of the Transferor or the Master
Servicer, as the case may be, with respect to such Financed Student Loan has a
material adverse effect on the interests of the Noteholders therein and such
breach is not cured within any applicable cure period (it being understood that
any such breach that does not affect any Guarantor's obligation to guarantee
payment of such Financed Student Loans or the Department of HHS's obligation to
insure payment of any Financed HEAL Loan will not be considered to have such a
material adverse effect). In addition, under certain circumstances pursuant to
the Transfer and Servicing Agreement, the Transferor or the Master Servicer, as
the case may be, is obligated to reimburse the Trust for (i) any accrued
interest amounts not insured by the Department of HHS with respect to Financed
HEAL Loans due to, and (ii) any accrued interest amounts not guaranteed by a
Guarantor due to, or any lost Interest Subsidy Payments or Special Allowance
Payments as a result of, a breach of the Transferor's representations and
warranties or the Master Servicer's covenants, as the case may be, with respect
to a Financed Student Loan. If the Transferor is obligated to purchase a
Financed Student Loan as a result of the Transferor's or a third party's failure
to originate such Financed Student Loan in compliance with the Higher Education
Act or the HEAL Act, as the case may be, it will be obligated to purchase such
Financed Student Loans from the Eligible Lender Trustee at a price equal to the
applicable Purchase Amount. If the Master Servicer is obligated to purchase a
Financed Student Loan as a result of a failure to service such Financed Student
Loan in accordance with the Higher Education Act and the applicable Guarantee
Agreement, or the HEAL Act and the HEAL Insurance Contract, as the case may be,
it will be obligated to purchase such Financed Student Loan from the Eligible
Lender Trustee at a price equal to the applicable Purchase Amount. See
"Description of the Transfer and Servicing Agreements -- Conveyance of Financed
Student Loans: Representations and Warranties" and "-- Servicer Covenants."
There can be no assurance, however, that the Transferor or the Master Servicer
will have the financial resources to do so. The failure of the Transferor to so
purchase or the Master Servicer to so purchase a Financed Student Loan would
constitute a breach of the Transfer and Servicing Agreement, enforceable by the
Eligible Lender Trustee on behalf of the Trust or by the Indenture Trustee on
behalf of the Noteholders, but would not constitute an Event of Default under
the Indenture or permit the exercise of remedies thereunder.
Risk of Offset by Guarantors or the Department of Education Against Federal
Benefit Payments Due to Shared Lender Identification Number
Due to Department of Education policy limiting the granting of new lender
identification numbers, the Trust Agreement will allow the Eligible Lender
Trustee to use the Department of Education lender identification number that it
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<PAGE>
uses for the Financed Student Loans (under the Trust) for other Student Loans
held by the Eligible Lender Trustee as trustee under other indentures, if any,
securing obligations of the Transferor or obligations of subsidiaries of the
Transferor, or for trusts established by the Transferor or subsidiaries of the
Transferor. In that event, the billings submitted to the Department of Education
for Interest Subsidy Payments and Special Allowance Payments on Financed Student
Loans in the Trust would be consolidated with the billings for such payments for
Student Loans under such other indentures and trusts using the same lender
identification number and payments on such billings would be made by the
Department of Education to the Eligible Lender Trustee in lump sum form. Such
lump sum payments would then be allocated by the Eligible Lender Trustee among
the various indentures and trusts using the same lender identification number.
In addition, such sharing of the lender identification number may result in
the receipt of Guarantee Payments by Guarantors in lump sum form. In that event,
such payments would be allocated by the Eligible Lender Trustee among the trusts
and indentures in a manner similar to the allocation process for Interest
Subsidy Payments and Special Allowance Payments.
The Department of Education regards the Eligible Lender Trustee as the
party primarily responsible to the Department of Education for any liabilities
owed to the Department of Education or Guarantors resulting from the Eligible
Lender Trustee's activities in the FFEL Program. As a result, if the Department
of Education or a Guarantor were to determine that the Eligible Lender Trustee
owes a liability to the Department of Education or a Guarantor on any FFELP Loan
for which the Eligible Lender Trustee is or was legal titleholder, including
loans held in the Trust or other trusts, the Department of Education or
Guarantor might seek to collect that liability by offset against payments due
the Eligible Lender Trustee under the Trust. If the Department of Education or a
Guarantor determines such a liability exists in connection with a trust using
the shared lender identification number, the Department of Education or the
Guarantor would be likely to collect that liability by offsetting against
amounts due the Eligible Lender Trustee under the shared lender identification
number, including amounts owed in connection with the Trust. Such offsetting of
payments due to the Eligible Lender Trustee with respect to the Trust could
adversely affect the amount of Available Funds for any Collection Period and the
Trust's ability to pay interest and principal on the Notes.
In addition, other trusts or indentures using the shared lender
identification number may in a given quarter incur origination fees that exceed
the Interest Subsidy Payments and Special Allowance Payments payable by the
Department of Education on the loans in such other trusts and indentures,
resulting in the payment from the Department of Education received by the
Eligible Lender Trustee under such shared lender identification number for that
quarter equalling an amount that is less than the amount owed by the Department
of Education on the Financed Student Loans in the Trust for that quarter.
The Trust Agreement for the Trust and the indentures or trust agreements
under which the Trustee may separately hold Student Loans which share the lender
identification number to be used by the Trust (the separate trusts created
thereunder being collectively referred to herein as the "Transferor Trusts") may
require a Transferor Trust (including the Trust) to indemnify the other
Transferor Trusts for a shortfall or an offset by the Department of Education or
a Guarantor arising from the Financed FFELP Loans held by the Eligible Lender
Trustee on such Transferor Trust's behalf. To the extent that the Trust is
required to indemnify other Transferor Trusts with respect to an offset by the
Department of Education or a Guarantor arising from Financed FFELP Loans held by
the Eligible Lender Trustee for the Trust, such indemnification obligation could
adversely affect the amount of Available Funds for any Collection Period and the
Trust's ability to pay principal and interest on the Notes. Also, to the extent
that the Trust may be entitled to indemnification with respect to an offset by
the Department of Education or a Guarantor arising from Financed FFELP Loans
held by the Eligible Lender Trustee for a Transferor Trust other
than the Trust, there can be no assurance that the amount of funds available to
the Trust with respect to such right of indemnification may be adequate to
compensate the Trust and Noteholders for any previous reduction in the Available
Funds for a Collection Period.
Although the Department of HHS does not currently limit lender
identification numbers with respect to HEAL Loans, the Trust Agreement will
provide for the sharing of lender identification numbers with respect to the
Financed HEAL Loans in a similar manner to the sharing of lender identification
numbers for the Financed FFELP Loans.
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Risk Resulting From Limited Liquidity of the Notes
The Notes will not be listed on any national security exchange. While Smith
Barney Inc., Morgan Stanley & Co. Incorporated and Crestar Securities
Corporation intend to make a secondary market for the Notes, they are not
obligated to do so. There can be no assurance that a secondary market for the
Notes will develop or, if a secondary market does develop, that it will provide
Noteholders with liquidity of investment or that it will continue for the life
of the Notes. As a result, investors must be prepared to bear the risk of
holding the Notes for as long as the Notes are outstanding.
Risk Resulting from Principal Balance of Notes Exceeding Initial Pool Balance of
the Financed Student Loans
On the Closing Date, the aggregate initial principal amount of the Notes
will be greater than the Initial Pool Balance of the Financed Student Loans as
of the Cut-off Date. As a result, if an Event of Default should occur under the
Indenture or an Insolvency Event should occur and the Financed Student Loans
were liquidated at a time when the outstanding principal amount of the Notes
exceeded the sum of the Pool Balance and the amounts in the other Trust
Accounts, such Financed Student Loans would likely have to be liquidated at a
premium for the Class B Noteholders and, in some circumstances, the Class A
Noteholders, not to suffer a loss. Because the actual rate and timing of any
accelerated payments of principal, if any, will depend on a number of factors
including the rate and timing of the payments on the Financed Student Loans,
there can be no assurance of the actual rate or timing of such accelerated
payments of principal or when the aggregate principal amount of the Notes will
be equal to or less than the sum of the Pool Balance and the amounts in the
other Trust Accounts.
Risk of Reduction in Amounts Paid on the Notes Resulting From Variability of
Actual Cash Flows
Amounts received with respect to the Financed Student Loans for a
particular Collection Period may vary in both timing and amount from the
payments actually due on the Financed Student Loans as of such Collection Period
for a variety of economic, social and other factors, including both individual
factors such as additional periods of deferment or forbearance prior to or after
a borrower's commencement of repayment, and general factors, such as a general
economic downturn which could increase the amount of defaulted Financed Student
Loans. Failures by borrowers to pay timely the principal and interest on the
Financed Student Loans will affect the amount of Available Funds, which may
reduce the amount of principal and interest paid to the Noteholders.
Risk of Inability of Indenture Trustee to Liquidate Financed Student Loans
If an Event of Default occurs under the Indenture, subject to certain
conditions, the Indenture Trustee is authorized, with the consent of the
Noteholders holding 66-2/3% of the outstanding principal balance of the
Directing Notes, to sell the Financed Student Loans (the "Directing Notes" means
the Class A Notes while any such Notes are outstanding, and, when no Class A
Notes remain outstanding, the Class B Notes). There can be no assurance,
however, that the Indenture Trustee will be able to find a purchaser for the
Financed Student Loans in a timely manner or that the market value of such
Financed Student Loans would, at any time, be equal to the aggregate outstanding
principal amount of the Notes and accrued interest thereon. If the net proceeds
of any such sale, together with amounts then on deposit in the Reserve Account,
do not exceed the aggregate outstanding principal amount of Notes and accrued
interest thereon, the Noteholders will suffer a loss. In addition, the amount of
principal required to be distributed to Noteholders under the Indenture is
generally limited to amounts available to be so distributed. Therefore, the
failure to pay principal on the Notes may not result in the occurrence of an
Event of Default until the Final Maturity Date of the Notes. See "Description of
the Transfer and Servicing Agreements -- Credit Enhancement."
Risk That Financial Status of Guarantors Will Affect Their Ability to Make
Guarantee Payments
The Higher Education Act requires all FFELP Loans to be unsecured. As a
result, the only security for payment of the Financed FFELP Loans are the
Guarantee Agreements between the Eligible Lender Trustee and the Guarantors. A
deterioration in the financial status of the Guarantors and their ability to
honor guarantee claims with respect to the Financed FFELP Loans could result in
a delay in making or a failure to make Guarantee Payments to the Eligible Lender
Trustee. Failures by borrowers of FFELP Loans generally to pay timely the
principal and interest due on such Student Loans could obligate the Guarantors
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to make payments thereon, which could adversely affect the solvency of the
Guarantors and their ability to meet their guarantee obligations (including with
respect to the Financed Student Loans). Loss of any such Guarantee Payments
could adversely affect the amount of Available Funds for any Collection Period
and the Trust's ability to pay principal of and interest on the Notes. Moreover,
to the extent that the Department of Education pays reimbursement claims
submitted by a Guarantor for any fiscal year exceeding certain specified levels
(see "Description of the Guarantee Agencies -- Effect of Annual Claims Rate"),
the Department of Education's obligation to reimburse the Guarantor for losses
will be reduced on a sliding scale from 100% (98% for loans made on or after
October l, 1993) to a minimum of 80% (78% for loans made on or after October l,
1993), except that death, disability, bankruptcy, closed school and false
certification claims are reimbursed 100% by the Department of Education.
Pursuant to Section 432(o) of the Higher Education Act, if the Department
of Education has determined that a Guarantor is unable to meet its insurance
obligations, the holders of loans guaranteed by such Guarantor may submit claims
directly to the Department of Education and the Department of Education is
required to pay the full Guarantee Payment due with respect thereto in
accordance with guarantee claim processing standards no more stringent than
those applied by the Guarantor. However, the Department of Education's
obligation to pay guarantee claims directly in this fashion is contingent upon
the Department of Education making the determination referred to above. There
can be no assurance that the Department of Education would ever make such a
determination with respect to a Guarantor or, if such a determination was made,
that such determination or the ultimate payment of such guarantee claims would
be made in a timely manner. See "Description of the FFEL Program" and
"Description of the Guarantee Agencies."
Risk That Changes in Law Relating to the HEAL Program and the FFEL Program Could
Adversely Affect the Noteholders
There can be no assurance that the HEAL Act, 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 herein and the loans made
thereunder, including the Financed Student Loans or the Guarantee Agencies. The
FFEL Program has been the subject of numerous amendments and proposed amendments
to the Higher Education Act, including amendments designed to reduce the federal
budget deficit. Amendments to the Higher Education Act in the past several years
have reduced the portion of loans covered by Guarantee Payments and the portion
of Guarantee Payments covered by reinsurance, reduced certain administrative
expense allowances paid by the Department of Education to Guarantee Agencies,
reduced the premiums and default collections that Guarantee Agencies are
entitled to receive and/or retain, and given the Department of Education broad
powers over Guarantee Agencies and their reserves, including the authority to
require a Guarantee Agency to pay a portion or all reserve funds to the
Department of Education in certain circumstances.
Several proposals have been made by Congress and the Administration to
amend the Higher Education Act, including proposals that would significantly
alter the FFEL Program and the roles of its participants. It is impossible to
predict whether any such proposals will be adopted as legislation or, if so,
what impact such legislation may have on the Eligible Lender Trustee's receipt
of revenues with respect to Financed Student Loans.
The Competing Federal Direct Student Loan Program May Result in Higher Servicer
Costs Because of Reduced Economies of Scale; a Smaller Secondary Market and
Reduced Value for Financed Student Loans; and Higher Prepayments of Financed
Student Loans Through Consolidations
The Higher Education Act provides for a Federal Direct Student Loan
Program. This program, established in academic year 1994-1995, has a statutory
target volume of 60% of student loan demand in academic year 1998- 1999, which
could result in reductions in the volume of loans made under the FFEL Program.
If the Federal Direct Student Loan Program expands, the Master Servicer and the
Servicers may experience increased costs due to reduced economies of scale to
the extent the volume of new loans serviced by them is reduced. Such cost
increases could affect the ability of the Master Servicer and the Servicers to
satisfy their obligations to service the Financed Student Loans. Such volume
reductions could also reduce revenues received by the Guarantee Agencies
available to pay claims on defaulted FFELP Loans. Finally, the level of
competition currently in existence in the secondary market for loans made under
the FFEL Program and HEAL Program could be reduced, resulting in fewer potential
buyers of the FFELP Loans and HEAL Loans and lower prices available in the
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secondary market for those loans. Further, the Department of Education has
implemented a direct consolidation loan program, which program may further
reduce the volume of loans made under the FFEL Program and the HEAL Program and
is expected to result in prepayments of Financed Student Loans. See "Description
of the FFEL Program.".
Reinvestment Risk to Noteholders From Prepayments of the Notes
Financed Student Loans may be prepaid by borrowers at any time without
penalty. (For this purpose the term "prepayments" includes prepayments in full
or in part (including pursuant to Consolidation Loans or Serial Loans) and
liquidations due to default (including receipt of Guarantee Payments and
Insurance Payments).) The rate of prepayments on the Financed Student Loans may
be influenced by a variety of economic, social and other factors affecting
borrowers, including interest rates, the availability of alternative financing
and the general job market for graduates of institutions of higher education. In
addition, under certain circumstances, the Transferor will be obligated to
purchase, or the Master Servicer will be obligated to purchase, Financed Student
Loans from the Trust pursuant to the Transfer and Servicing Agreement as a
result of breaches of their respective representations, warranties or covenants.
See "Description of the Transfer and Servicing Agreements -- Conveyance of
Financed Student Loans; Representations and Warranties" and "-- Master Servicer
Covenants." Moreover, to the extent borrowers of Financed Student Loans elect to
borrow money through Consolidation Loans with respect to such Financed Student
Loans from the Transferor or from another lender, or to the extent the Trust
sells a Financed Student Loan to serialize the ownership of such Financed
Student Loan and other loans of the same borrower (each, a "Serial Loan"), the
Noteholders will receive as a prepayment of principal the aggregate principal
amount of such Financed Student Loans. The effect of such prepayments may be
mitigated during the Exchange Period if the Transferor makes such Consolidation
Loans or Serial Loans and elects to transfer such Consolidation Loans or Serial
Loans, as applicable, to the Eligible Lender Trustee on behalf of the Trust. See
"Description of Transfer and Servicing Agreements -- Exchange Period and
Exchanged Financed Student Loans". There can be no assurance that borrowers with
Financed Student Loans will not seek to obtain Consolidation Loans with respect
to such Financed Student Loans or when Serial Loans will be sold and no
assurance that if such loans are obtained from or sold to, the Transferor, that
the Transferor will elect to exchange them into the Trust as Exchanged Financed
Student Loans during the Exchange Period. In addition, there is no assurance
that the Transferor rather than another lender will make any particular
Consolidation Loan with respect to borrowers with Financed Student Loans during
the Exchange Period. See "Maturity and Prepayment Considerations," "Description
of the FFEL Program -- Loan Terms -- Repayment" and "Description of the HEAL
Program -- Terms of HEAL Loans."
To the extent such prepayments of the Financed Student Loans result in a
prepayment of the Notes prior to their expected Final Maturity Dates, the
holders of the Notes may not be able to reinvest such funds at the same yield as
the yield on the Notes. The rate of payment on the Financed Student Loans cannot
be predicted, and any reinvestment risks resulting from a faster or slower
incidence of prepayment of Financed Student Loans will be borne entirely by the
holders of the Notes. The effect of such prepayments initially will be to
increase the rate of payment on the Class A-1 Notes and, therefore, increase the
reinvestment risk with respect to the Class A-1 Notes. After the Class A-1 Notes
have been paid in full, the entire amount of such prepayments will be applied to
the payment of the principal balance of the Class A-2 Notes until they are paid
in full, and then to the payment of the principal balance of the Class B Notes.
See "Description of the Transfer and Servicing Agreements -- Distributions". As
a result, the reinvestment risk resulting from such prepayments will be borne
entirely by the holders of the Class A-2 Notes after the principal balance of
the Class A-1 Notes has been paid in full, and by the holders of the Class B
Notes after the principal balance of the Class A-2 Notes has been paid in full.
Risk That Average Life of Notes May Be Lengthened As a Result of Extension of
Payments on the Financed Student Loans
Scheduled payments with respect to, and maturities of, the Financed Student
Loans may be extended, including pursuant to the applicable Deferment Period,
certain other grace periods authorized by the Higher Education Act and the HEAL
Act ("Grace Periods") and, under certain circumstances, periods of forbearance
("Forbearance Periods") or as a result of the conveyance of Exchanged Financed
Student Loans to the Eligible Lender Trustee on behalf of the Trust during the
Exchange Period, as described herein, which may lengthen the remaining term of
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the Financed Student Loans and the average life of the Notes. See "Maturity and
Prepayment Considerations," "Description of the FFEL Program -- Loan Terms --
Repayment" and "Description of the HEAL Program -- Terms of HEAL Loans." See
also "Description of the Transfer and Servicing Agreements -- Insolvency Event"
regarding the sale of the Financed Student Loans if a Transferor Insolvency
Event occurs and "-- Termination" regarding the Transferor's option to purchase
the Financed Student Loans and the auction of the Financed Student Loans on or
after the [October 2006] Distribution Date.
Risk Resulting From Differences between Classes of Notes with Respect to Receipt
of Payments on the Financed Student Loans
The Classes of Notes receiving principal earlier bear relatively greater
risk than each Class receiving principal later of (i) principal repayments with
respect to the Financed Student Loans (whether as a result of voluntary
prepayments, Consolidation Loans not transferred to the Eligible Lender Trustee
as Exchanged Financed Student Loans or liquidations due to default or breach),
or (ii) Financed Student Loans being sold by the Trust. Thus, the holders of the
Class A-1 Notes bear the greatest risk of such principal prepayments, with the
holders of the Class A-2 Notes and the Class B Notes bearing the next most
significant risk of such principal prepayments. On the other hand, holders of
Notes receiving principal later would bear a greater risk of loss of principal
than do holders of Notes receiving principal earlier in the event of a shortfall
in Available Funds and amounts on deposit in the Reserve Account.
Risk That Interest Rate on Financed Student Loans May Be Insufficient to Cover
Interest on Class B Notes at the Class Interest Rate Due to Rate-Index
Difference
The interest rate for the Class B Notes will be based generally on
One-Month LIBOR. The Financed Student Loans, however, generally bear interest at
an effective rate (taking into account Special Allowance Payments, if any, the
"Loan Rates") equal to the average bond equivalent rates of weekly auctions of
91-day Treasury bills for each quarter (the "91-day T-Bill Rate") (or, in
certain circumstances, 52-week Treasury bills) plus margins specified for such
Financed Student Loans under "Description of the FFEL Program -- Loan Terms --
Interest Rates" and "Description of the HEAL Program -- Interest." As a result
of these differences between the indices used to determine the Loan Rates and
the interest rates on the Class B Notes, there could be periods of time when the
Loan Rates are inadequate to cover the interest on the Class B Notes (calculated
on the basis of One-Month LIBOR) and Transaction Expenses. If in respect of any
Distribution Date, there does not exist a positive spread between (a) the Net
Loan Rate and (b) the interest rate on the Class B Notes (calculated on the
basis of One-Month LIBOR), the interest rate on the Class B Notes for such
Distribution Date will be the Net Loan Rate. See "Description of the Notes --
The Notes -- Distributions of Interest." Any Noteholders' Interest Carryover
arising as a result of the applicable interest rate for any Class of Notes being
determined on the basis of the Net Loan Rate will be paid on the following
Distribution Date or on any succeeding Distribution Date to the extent funds are
allocated and available therefor after making any required prior distributions
and deposits with respect to such date. Payment of such amounts, however, will
not be covered by amounts on deposit in the Reserve Account (other than amounts
in excess of the Specified Reserve Account Balance). Any amount of Noteholders'
Interest Carryover, including any accrued and unpaid interest thereon, with
respect to a Class of Notes remaining after the earlier of the Distribution Date
on which the outstanding principal amount of such Class of Notes has been
reduced to zero and the distribution of all Available Funds on the Final
Maturity Date for such Class, will never become due and payable and will be
discharged as to the applicable Class of Notes on such date. See "Description of
Transfer and Servicing Agreements -- Distributions."
Insolvency Risk of Transferor
The Transferor intends that the transfer of the Financed Student Loans by
it to the Eligible Lender Trustee on behalf of the Trust under the Transfer and
Servicing Agreement constitutes a valid contribution and assignment of such
Financed Student Loans. However, a court could treat the transfer of the
Financed Student Loans to the Eligible Lender Trustee as an assignment of
collateral as security for the benefit of the Trust. If the transfer of the
Financed Student Loans to the Eligible Lender Trustee is deemed to create a
security interest therein, a tax or government lien on property of the
Transferor arising before the Financed Student Loans came into existence may
have priority over the Eligible Lender Trustee's interest in such Financed
Student Loans and, if the Federal Deposit Insurance Corporation (the "FDIC")
were appointed receiver or conservator of the Transferor, the FDIC's
administrative expenses may also have priority over the Eligible Lender
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Trustee's interest in such Financed Student Loans. If the Transferor becomes
insolvent, the Federal Deposit Insurance Act ("FDIA"), as amended by the
Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA")
sets forth certain powers which the FDIC could exercise if it were appointed as
receiver or conservator of the Transferor. 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
Transferor, would not interfere with the timely transfer to the Trust of
collections with respect to the Financed Student Loans.
To the extent that the transfer of the Financed Student Loans is deemed to
create a security interest, and that interest was validly perfected before the
Transferor's insolvency and was not taken in contemplation of insolvency or with
the intent to hinder, delay or defraud the Transferor or its creditors, based
upon opinions and statements of policy issued by the general counsel of the FDIC
addressing the enforceability against the FDIC, as conservator or receiver for a
depository institution, of a security interest in collateral granted by such
depository institution, such security interest should not be subject to
avoidance and payments to the Trust with respect to the Financed Student Loans
should not be subject to recovery by the FDIC as receiver or conservator of the
Transferor. 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. In
addition, if the FDIC were to require the Indenture Trustee or the Eligible
Lender Trustee to establish its right to such payments by submitting to and
completing the administrative claims procedure under the FDIA, as amended by the
FIRREA, delays in payments on the Notes and possible reductions in the amount of
those payments could occur.
Defeat or Lack of Perfected Security Interest in Financed Student Loans
The Transferor intends that the transfer of the Financed Student Loans by
it to the Eligible Lender Trustee on behalf of the Trust will constitute a valid
contribution and assignment of such Financed Student Loans. Notwithstanding the
foregoing, if the transfer of the Financed Student Loans is deemed to be an
assignment of collateral as security for the benefit of the Trust, a security
interest in the FFELP Loans created on behalf of the Eligible Lender Trustee
may, pursuant to the provisions of 20 U.S.C. ss.1087-2(d)(3), be perfected by
the filing of notice of such security interest in the manner provided by the
applicable state law version Uniform Commercial Code ("UCC") for perfection of a
security interest in accounts. A financing statement or statements covering the
Financed Student Loans will be filed under the UCC to protect the interest of
the Eligible Lender Trustee in the event the transfer by the Transferor is
deemed to be subject to the UCC.
If the transfer of the Financed Student Loans is deemed to be an assignment
as security for the benefit of the Trust, there are certain limited
circumstances under the UCC in which prior or subsequent transferees of Financed
Student Loans could have an interest in such Financed Student Loans with
priority over the Eligible Lender Trustee's interest. A tax or other government
lien on property of the Transferor arising prior to the time a Financed Student
Loans came into existence may also have priority over the interest of the
Eligible Lender Trustee in such Financed Student Loan. Under the Transfer and
Servicing Agreement, however, the Transferor will warrant that it has caused the
Financed Student Loans to be transferred to the Eligible Lender Trustee on
behalf of the Trust free and clear of any lien of any third party. In addition,
the Transferor will covenant that it will not sell, pledge, assign, transfer or
grant any lien on any Financed Student Loan (or any interest therein) other than
to the Eligible Lender Trustee on behalf of the Trust.
Pursuant to the Transfer and Servicing Agreement, each Servicer as
custodian on behalf of the Trust will have custody of the promissory notes
evidencing the Financed Student Loans serviced by it following the conveyance of
the Financed Student Loans to the Eligible Lender Trustee and the pledge thereof
to the Indenture Trustee. Although the accounts of the Transferor will be marked
to indicate the conveyance and the Transferor will cause UCC financing
statements to be filed with the appropriate authorities, the Financed Student
Loans will not be physically segregated in the Servicer's offices. If, through
inadvertence or otherwise, any of the Financed Student Loans were sold to
another party, or a security interest therein were granted to another party,
that purchased (or took such security interest in) any of such Financed Student
Loans in the ordinary course of its business and took possession of such
Financed Student Loans, then the purchaser (or secured party) would acquire an
interest in the Financed Student Loans superior to the interest of the Eligible
Lender Trustee and the Indenture Trustee if the purchaser (or secured party)
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acquired (or took a security interest in) the Financed Student Loans for new
value and without actual knowledge of the Eligible Lender Trustee's and the
Indenture Trustee's respective interests. See "Description of the Transfer and
Servicing Agreements -- Conveyance of Financed Student Loans; Representations
and Warranties" and "-- Servicer Covenants."
Risk Resulting From Changes in Repayment Terms of Financed Student Loans
Pursuant to Incentive Programs
The Transferor currently makes available and may hereafter make available
certain incentive programs to borrowers. See "The Financed Student Loan Pool --
Incentive Programs". Under these programs, the Transferor retains the option to
terminate or change the terms of the incentives with respect to any or all of
the borrower's loans, including loans originated prior to the termination or
change which have been assigned to the Trust. It cannot be predicted with
certainty which borrowers will qualify or decide to participate in these
programs. The effect of these incentive programs may be to reduce the yield on
the Financed Student Loans.
Risk of Change of Ratings on the Notes
It is a condition to the issuance and sale of each Class of Notes that such
Classes receive the respective ratings from each of the Rating Agencies
described in "Rating." A rating is not a recommendation to purchase, hold or
sell the Notes, inasmuch as such rating does not comment as to market price or
suitability for a particular investor. The ratings of the Notes address the
likelihood of the ultimate payment of principal of and interest on the Notes
pursuant to their terms. However, the Rating Agencies do not evaluate, and the
ratings of the Notes do not address, the likelihood of prepayments on the Notes
or the likelihood of payment of any Noteholders' Interest Carryover. There can
be no assurance that a rating will remain for any given period of time or that a
rating will not be lowered or withdrawn entirely by a Rating Agency if in its
judgment circumstances in the future so warrant.
Failure to Comply with 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 state laws are, in large
part, preempted by the Higher Education Act and the HEAL Act. However, the form
of promissory notes required by the Department of Education for FFELP Loans
provides that holders of such promissory notes evidencing certain loans made to
borrowers attending for-profit schools are subject to any defenses that the
borrower may have against the school. For a discussion of the Trust's rights if
the Financed Student Loans were not originated or serviced in compliance in all
material respects with applicable laws, see "Description of the Transfer and
Servicing Agreements -- Conveyance of Financed Student Loans; Representations
and Warranties" and "-- Master Servicer Covenants."
Effect of Book-Entry Registration
The Notes will each be initially represented by one or more certificates
registered in the name of Cede, the nominee for DTC, and will not be registered
in the names of the holders of such Notes or their nominees. Because of this,
unless and until Definitive Notes are issued, holders of the Notes will not be
recognized by the Indenture Trustee or the Eligible Lender Trustee as
"Noteholders" (as such terms are used in the Indenture). Hence, until Definitive
Notes are issued, holders of the Notes will only be able to exercise the rights
of Noteholders indirectly through DTC and its respective participating
organizations. See "Description of the Notes --Book-Entry Registration" and "--
Definitive Notes."
FORMATION OF THE TRUST
The Trust
Crestar Student Loan Trust 1997-1 is a statutory business trust that will
be formed on [_________, 1997], under the laws of the State of Delaware for the
transactions described in this Prospectus. The Trust will not engage in any
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activity other than (i) acquiring, holding, selling and managing the Financed
Student Loans and the other assets of the Trust and proceeds therefrom, (ii)
issuing one or more classes of its certificates and notes, (iii) making payments
thereon and (iv) engaging in other activities that are necessary, suitable or
convenient to accomplish the foregoing or are incidental thereto or connected
therewith. For so long as the Transferor is a Certificateholder, the Trust's
activities will be limited to activities that are part of, or incidental to, the
business of banking as well.
The Trust will be initially capitalized with equity equal to $l,000 on the
date of its formation, representing the initial principal balance of the
Certificates issued on such date. Approximately 4.9% of such Certificates will
be sold to the Transferor and the remaining Certificates were offered for sale
in transactions exempt from the registration requirements of the Securities Act.
The equity of the Trust, together with the proceeds from the sale of the Notes,
will be used by the Eligible Lender Trustee in connection with its acquisition,
on behalf of the Trust, of the Initial Financed Student Loans from the
Transferor pursuant to the Transfer and Servicing Agreement. A portion of the
net proceeds received from the transfer of the Initial Financed Student Loans
will be used by the Transferor to make a Reserve Account Deposit in the amount
of [$_________]. Upon the consummation of such transaction, the property of the
Trust will consist of (a) the 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 after the applicable Cut-off Date or
Subsequent Cut-off Date, and (c) all moneys and investments on deposit in the
Collection Account, the Certificate Distribution Account, the Note Distribution
Account, the Expense Account, the Quarterly Advance Account and the Reserve
Account. The Notes will be collateralized by the property of the Trust. The
Collection Account, the Note Distribution Account, the Expense Account, the
Reserve Account and the Quarterly Advance Account will be maintained with and in
the name of the Indenture Trustee. To facilitate servicing and to minimize
administrative burden and expense, the related Servicer will be appointed
custodian of the promissory notes representing the Financed Student Loans by the
Eligible Lender Trustee.
The Trust's principal offices are in Cincinnati, Ohio, in care of Star
Bank, National Association, as Eligible Lender Trustee, at the address listed
below.
Eligible Lender Trustee
Star Bank, National Association, the Eligible Lender Trustee for the Trust
under the Trust Agreement, is a national banking association organized under the
laws of the United States with its chief executive office in Cincinnati, Ohio.
The office of the Eligible Lender Trustee for purposes of administering the
Trust is located at 425 Walnut Street, Cincinnati, Ohio 45201. The Eligible
Lender Trustee will acquire on behalf of the Trust legal title to all the
Financed Student Loans acquired pursuant to the Transfer and Servicing
Agreement. The Eligible Lender Trustee on behalf of the Trust will enter into a
Guarantee Agreement with each of the Guarantors with respect to such Financed
FFELP Loans and a HEAL Insurance Contract with the Department of HHS with
respect to such Financed HEAL Loans. The Eligible Lender Trustee qualifies as an
eligible lender and owner of Financed Student Loans for all purposes under the
Higher Education Act and the Guarantee Agreements with respect to such Financed
FFELP Loans and under the HEAL Act and the HEAL Insurance Contract with respect
to such Financed HEAL Loans. Failure of the Financed Student Loans to be owned
by an eligible lender would result in the loss of Guarantee Payments, Interest
Subsidy Payments and Special Allowance Payments with respect to Financed FFELP
Loans and the loss of Insurance Payments with respect to Financed HEAL Loans.
See "Description of the FFEL Program" and "Description of the HEAL Program."
The Transferor or its affiliates may maintain from time to time other
banking relationships with Star Bank, National Association, the Eligible Lender
Trustee, and its affiliates.
USE OF PROCEEDS
The net proceeds from the sale of the Notes will be paid to the Transferor
on the Closing Date as consideration for the Initial Financed Student Loans
being conveyed on such date. The Transferor will use such proceeds to make the
initial Reserve Account Deposit, deposits into certain other Trust Accounts and
for general corporate purposes.
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THE TRANSFEROR
The Transferor is a Virginia banking corporation that offers a broad range
of banking services, including various types of deposit accounts and
instruments, commercial and consumer loans, trust and investment management,
bank credit cards, and international banking to customers throughout Virginia,
Maryland and Washington, D.C. Services are also provided through non-bank
subsidiaries. Securities brokerage and investment banking services are offered
by Crestar Securities Corporation.
The Transferor and its predecessors have been originating and purchasing
FFELP Loans since 1965 and HEAL Loans since 1995. As of [_______, 1997], the
Transferor had Student Loans under its management in an aggregate principal
amount of approximately [$___ million].
The Transferor is a wholly owned indirect subsidiary of Crestar
Financial Corporation, a bank holding company organized under the laws of the
Commonwealth of Virginia and registered under the Bank Holding Company Act of
1956, as amended (the "BHCA"). As of June 30, 1997, Crestar Financial
Corporation had $22.8 billion in total assets, $15.9 billion in total deposits
and $1.9 billion in total shareholders' equity.
Crestar Financial Corporation is supervised and examined by the Board
of Governors of the Federal Reserve System under the BHCA. The BHCA requires
Federal Reserve approval for bank acquisitions and regulates non-banking
activities of bank holding companies. Crestar Bank is regulated by the State
Corporation Commission of Virginia and the Federal Reserve Bank of Richmond.
The principal executive office of the Transferor are located at Crestar
Center, 919 East Main Street, Richmond, Virginia 23219. Its telephone number is
(804) 782-5171.
THE NOTES ARE NEITHER OBLIGATIONS OF NOR GUARANTEED BY CRESTAR FINANCIAL
CORPORATION OR ANY OF CRESTAR FINANCIAL CORPORATION'S SUBSIDIARIES (INCLUDING
THE TRANSFEROR).
THE SERVICERS
General
The Transferor will act as Master Servicer with respect to the Financed
Student Loans. The Financed Student Loans will be serviced by PHEAA, or such
other parties as may be approved by the Master Servicer from time to time
(subject to confirmation of the ratings on the outstanding Notes). Pursuant to
sub-servicing agreements, PHEAA has agreed to service, and perform all other
related tasks with respect to, the Financed Student Loans in compliance with
applicable standards and procedures. The sub-servicing agreements currently
provide that PHEAA will service the Financed HEAL Loans until such loans are
paid off and the Financed FFELP Loans through a term ending [_______, 20__], at
which time the Master Servicer expects to either negotiate an extended term with
PHEAA or contract with a new sub-servicer. See "Description of the Transfer and
Servicing Agreements -- Servicing Procedures."
Pennsylvania Higher Education Assistance Agency
PHEAA is a body corporate and politic constituting a public corporation and
government instrumentality created pursuant to an act of the Pennsylvania
Legislature. PHEAA has approximately 2,300 employees. PHEAA's headquarters is
located in Harrisburg, Pennsylvania, with six regional offices located
throughout Pennsylvania and additional offices located in California, Delaware
and West Virginia.
Under its enabling legislation, PHEAA is authorized to issue bonds or
notes, with the approval of the Governor of the Commonwealth of Pennsylvania,
for the purpose of purchasing, making, or guaranteeing loans to students or
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parents, or to lending institutions or post secondary institutions to make
student or parent loans. PHEAA's enabling legislation also authorizes PHEAA to
undertake the origination of loans and the servicing of loans made by PHEAA and
others.
PHEAA has no power to pledge the credit or taxing power of the Commonwealth
of Pennsylvania or to make PHEAA debts payable out of any moneys except those of
PHEAA. Neither the faith and credit nor the taxing power of the Commonwealth of
Pennsylvania is pledged to the payment of any of PHEAA's obligations.
As of March 31, 1997 PHEAA has outstanding debt and/or credit facilities
(under which the entire aggregate amount of funds available had not been drawn)
in the amount (including amounts drawn or available under such credit
facilities) of approximately $2.2 billion. As of March 31, 1997, PHEAA owned
approximately $1.6 billion outstanding principal amount of student loans
financed with the proceeds of its long-term debt, and had funds available for
acquisition of student loans in the amount of approximately $465 million.
PHEAA has been guaranteeing student loans since 1964. PHEAA has guaranteed
a total of approximately $16.5 billion principal amount of Stafford Loans and
approximately $1.6 billion principal amount of PLUS Loans and SLS Loans under
the Higher Education Act. In addition to guaranteeing loans under the Higher
Education Act, PHEAA also operates certain guarantee programs for which its
receives no federal reinsurance. PHEAA has outstanding guarantee obligations of
such loans in the amount of approximately $42 million as of March 31, 1997.
PHEAA's two principal servicing products are its full servicing operation
(in which it performs all student loan servicing functions on behalf of its
customers) and its remote servicing operation (in which it provides only data
processing services to its customers that have their own servicing operations).
As of March 31,1997, PHEAA was servicing under its full service program
approximately 1.3 million student loan accounts representing approximately $11.1
billion outstanding principal amount for more than 320 customers and under its
remote servicing operation, approximately 700,000 student loans representing
approximately $3.5 billion outstanding principal amount for four customers.
Information relating to PHEAA set forth in this Prospectus has been
provided by PHEAA, and neither such information nor information included in the
reports referred to herein has been verified by, or is guaranteed as to accuracy
or completeness by, the Transferor or the Underwriters. Such information should
not be construed as a representation by the Transferor or the Underwriters. No
representation is made by the Transferor or the Underwriters as to the accuracy
or adequacy of such information or the absence of material adverse changes in
such information subsequent to the dates thereof. PHEAA has agreed that it will
provide a copy of its most recent audited financial statements to Noteholders
upon receipt of a written request directed to Mr. Tim Guenther, Chief Financial
Officer Financial Management, 1200 North Seventh Street, Harrisburg,
Pennsylvania 17102.
THE FINANCED STUDENT LOAN POOL
The Initial Financed Student Loans were, and the Exchanged Financed Student
Loans will be, selected from the Transferor's portfolio of FFELP Loans and HEAL
Loans by several criteria, including the following: each Financed Student Loan
(i) was or will be originated in the United States or its territories or
possessions under and in accordance with the FFEL Program or the HEAL Program,
as the case may be, to or on behalf of a student who has graduated or is
expected to graduate from an accredited institution of higher education within
the meaning of the Higher Education Act or the HEAL Act, (ii) contains terms in
accordance with those required by the FFEL Program, the Guarantee Agreements,
the HEAL Program, the HEAL Insurance Contract and other applicable requirements,
and (iii) is not more than 90 days past due as of the Cut-off Date or, in the
case of an Exchanged Financed Student Loan, as of the subsequent cut-off date
set forth in the related Transfer Agreement (each, a "Subsequent Cut-Off Date").
No selection procedures believed by the Transferor to be adverse to the
Noteholders will be used in selecting the Financed Student Loans.
Each Financed Student Loan is required (i) to be insured by the Department
of HHS as to principal and interest to the extent provided under the HEAL Act,
or (ii) to be guaranteed as to principal and interest by a Guarantor and
reinsured by the Department of Education to the extent provided under the Higher
Education Act and eligible for
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Special Allowance Payments and, with respect to each Financed Student Loan that
is a Stafford Loan, Interest Subsidy Payments paid by the Department of
Education.
Except for the criteria described above and under "Description of the
Transfer and Servicing Agreements -- Exchange Period and Exchanged Financed
Student Loans", however, there will be no required characteristics of the
Exchanged Financed Student Loans and no limitations on the amount of Exchanged
Financed Student Loans that may be included in the Trust. Therefore, following
the transfer of Exchanged Financed 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
and of the borrowers thereof, the distribution by interest rate and the
distribution by principal balance described in the following tables, will vary
from those of the Initial Financed Student Loans as of the Cut-Off Date.
Each of the Financed Student Loans provides 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 outstanding
late fees, if collected, then to interest accrued to the date of payment and the
balance is applied to reduce the unpaid principal balance. Accordingly, if a
borrower pays a regular installment before its scheduled due date, the portion
of the payment allocable to interest for the period since the preceding payment
was made will be less than it would have been had the payment been made as
scheduled, and the portion of the payment applied to reduce the unpaid principal
balance will be correspondingly greater. Conversely, if a borrower pays a
monthly installment after its scheduled due date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be greater than it would have been had the payment been made as scheduled, and
the portion of the payment applied to reduce the unpaid principal balance will
be correspondingly less. In either case, subject to any applicable Deferment
Periods or Forbearance Periods, the borrower pays a regular installment until
the final scheduled payment date, at which time the amount of the final
installment is increased or decreased as necessary to repay the then outstanding
principal balance of such Financed Student Loan.
Set forth below in the following tables is a description of certain
additional characteristics of the Initial Financed Student Loans as of the
Cut-Off Date. Such characteristics are based on a preliminary pool of Initial
Financed Student Loans with an outstanding principal balance as of the Cut-off
Date of [$___________]. While the statistical distribution of the
characteristics for the final pool of Initial Financed Student Loans will vary
somewhat from the statistical distribution of such characteristics for the
preliminary pool presented below, the Transferor does not believe that the
characteristics of the final pool will differ materially.
Composition of the Initial Financed Student Loans as of the Cut-off Date
Aggregate Outstanding Principal Balance........................................
Number of Borrowers............................................................
Average Outstanding Principal Balance Per Borrower.............................
Number of Loans................................................................
Average Outstanding Principal Balance Per Loan.................................
Weighted Average Annual Borrower Interest Rate.................................
Weighted Average Remaining Term (months) (does not include the months
remaining for the in-school, grace, deferment or forbearance periods)........
Weighted Average Remaining Term (months) (including the months remaining for
the in-school, grace, deferment or forbearance periods)......................
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Distribution of the Initial Financed Student Loans by Loan Type as of the
Cut-Off Date
Percent of
Loans by
Number of Outstanding Outstanding
Loan Type Loans Balance Balance
- --------- --------- ----------- -----------
Stafford-Subsidized............
Stafford-Unsubsidized..........
Consolidation..................
PLUS...........................
SLS............................
HEAL...........................
Total.....................
Distribution of the Initial Financed Student Loans by Borrower Interest Rate as
of the Cut-Off Date
Percent of
Loans by
Number of Outstanding Outstanding
Interest Rate (1) Loans Balance Balance
- ----------------- ----- ------- -------
Less than 7.50%................
7.50% to 7.99%.................
8.00% to 8.49%.................
8.50% to 8.99%.................
9.00% to 9.49%.................
9.50% or greater...............
Total.....................
- ----------------------
(1) Determined using the interest rates applicable to the Initial Financed
Student Loans as of the Cut-off Date. However, because certain of the
Initial Financed Student Loans bear interest at variable rates 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
Cut-off Date. See "Description of the FFEL Program" and "Description of the
HEAL Program".
Distribution of the Initial Financed Student Loans by Range of Outstanding
Principal Balances as of the Cut-Off Date
Percent of
Loans by
Number of Outstanding Outstanding
Principal Balance Borrowers Balance Balance
- ----------------- --------- ----------- -----------
Less than $1,000...............
$1,000-$1,999..................
$2,000-$2,999..................
$3,000-$3,999..................
$4,000-$4,999..................
$5,000-$5,999..................
$6,000-$6,999..................
$7,000-$7,999..................
$8,000-$8,999..................
$9,000-$9,999..................
$10,000-$10,999................
$11,000-$11,999................
$12,000-$12,999................
$13,000-$13,999................
$14,000-$14,999................
$15,000 or greater.............
Total.....................
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Distribution of the Initial Financed Student Loans by Borrower Payment Status as
of the Cut-Off Date
Percent of
Loans by
Number of Outstanding Outstanding
Borrower Payment Status Loans Balance Balance
- ----------------------- -------- ----------- -----------
Claim..........................
Deferment......................
Forbearance....................
Grace..........................
In School......................
Repayment......................
Total.....................
Distribution of Initial Financed Student Loans in Repayment Status by Remaining
Term as of the Cut-Off Date
Outstanding Percent By
Number Principal Outstanding
Remaining Term Of Loans Balance Balance
- -------------- -------- ----------- -----------
1 to 12 Months $ %
13 to 24 Months
25 to 36 Months
37 to 48 Months
49 to 60 Months
61 to 72 Months
73 to 84 Months
85 to 96 Months
97 to 108 Months
109 to 120 Months
121 to 180 Months
181 to 240 Months
241 to 300 Months
Over 300 Months
Total
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Geographic Distribution of the Initial Financed Student Loans as of the Cut-Off
Date
Percent of
Loans by
Number of Outstanding Outstanding
Location (1) Loans Balance Balance
- ------------ --------- ----------- -----------
Virginia.......................
Florida........................
Maryland.......................
District of Columbia...........
Others (2).....................
TOTAL.....................
(1) Based on the current permanent billing addresses of the borrowers of the
Initial Financed Student Loans shown on the Servicer's records.
(2) Consist of locations that include [__] other states, various other U.S.
territories, possessions and commonwealths, foreign countries, overseas
military establishments, and unknown locations, none of the aggregate
principal balance of the Student Loans relating to which exceed 5.00% of
the Initial Pool Balance.
To the extent such states with a greater concentration of loans experience
adverse economic or other conditions to a greater degree than other areas of the
country, the ability of such borrowers to repay their Financed Student Loans may
be impacted to a larger extent than if such borrowers were dispersed more
geographically. The Transferor is not aware of any material adverse conditions
that are unique to such states.
Distribution of the Initial Financed Student Loans by Insurance or Guarantee
Level as of the Cut-Off Date
Percent of
Loans by
Number of Outstanding Outstanding
Guarantee or Insurance Level Loans Balance Balance
- ---------------------------- --------- ----------- -----------
FFELP Loan Guaranteed 100%.....
FFELP Loan Guaranteed 98%......
HEAL Loan Insured 100%.........
Total.....................
Distribution of the Initial Financed Student Loans by Guarantor or by HEAL as of
the Cut-Off Date
<TABLE>
<CAPTION>
Percent of
Loans by
Number of Outstanding Outstanding
Guarantors Loans Balance Balance
- ---------- --------- ----------- -----------
<S> <C>
Educational Credit Management Corporation.........
Pennsylvania Higher Education Assistance Agency...
HEAL Loans........................................
Other Guarantors(1)...............................
Total........................................
</TABLE>
- ----------------------
(1) Aggregating less than 5.00% of the Initial Financed Student Loans as of the
Cut-off Date.
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Distribution of the Initial Financed Student Loans by School Types as of the
Cut-Off Date
Outstanding Percent of Loans
Number of Principal by Outstanding
School Type Loans Balance Balance
----------- --------- ----------- ----------------
Under 4 Year $ %
4 and 5 Year
Proprietary
Consolidation
Other/Unknown
Total
Incentive Programs
The Transferor currently makes available and may hereafter make available
certain incentive programs to borrowers, including the Crestar Bank Top
Performer Program (the "TP Program"). The TP Program generally applies to all
Stafford Loans, Unsubsidized Stafford Loans and PLUS Loans with a first
disbursement made by the Transferor on or after November 1, 1996 ("TP Loans").
Under the TP Program, if the borrower makes 36 consecutive monthly payments of a
TP Loan on time, the applicable interest rate on such TP Loan is reduced by
1.00% per annum for Stafford Loans and Unsubsidized Stafford Loans and 0.5% per
annum for PLUS Loans. Although no TP Loans are included in the Initial Financed
Student Loans, TP Loans may be included in the Exchanged Financed Student Loans.
Program Descriptions and Summaries
The description and summaries of the Higher Education Act, the FFEL
Program, the Guarantee Agreements, the HEAL Act, the HEAL Program, the HEAL
Insurance Contract, and the other statutes, regulations and documents referred
to in this Prospectus do not purport to be comprehensive, and are qualified in
their entirety by reference to each such statute, regulation or document. There
can be no assurance that future amendments or modifications will not materially
change any of the terms or provisions of the programs described in this
Prospectus or of the statutes and regulations implementing these programs. See
"Risk Factors -- Risk That Changes in Law Relating to the HEAL Program and the
FFEL Program Could Adversely Affect the Noteholders."
MATURITY AND PREPAYMENT CONSIDERATIONS
Maturity and Prepayment Assumptions
The rate of payment of principal of the Notes and the yield on the Notes
will be affected by (i) prepayments of the Financed Student Loans that may occur
as described below, (ii) the sale by the Trust of Financed Student Loans and
(iii) Parity Percentage Payments. All the Financed Student Loans are prepayable
in whole or in part by the borrowers at any time without penalty (including by
means of Consolidation Loans or HEAL Consolidation Loans as discussed below) and
may be prepaid as a result of a borrower default, death, disability or
bankruptcy and subsequent liquidation or collection of Guarantee Payments or
Insurance 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
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at prevailing interest rates which fall significantly below the interest rates
applicable to the Financed Student Loans. However, because many of the Financed
Student Loans bear interest at a rate that either actually or effectively is
floating, it is impossible to determine whether changes in prevailing interest
rates will be similar to or vary from changes in the interest rates on the
Financed Student Loans. To the extent borrowers of Financed Student Loans elect
to borrow Consolidation Loans or HEAL Consolidation Loans that are not
transferred to the Eligible Lender Trustee as Exchanged Financed Student Loans
or the proceeds of such Consolidation Loans or HEAL Consolidation Loans are not
used to make Issuer Consolidation Payments, or the Trust sells Serial Loans,
such Financed Student Loans will be prepaid. See "Description of the FFEL
Program -- Consolidation Loans" and "Description of the HEAL Program." In
addition, the Transferor is obligated to purchase any Financed Student Loan
pursuant to the Transfer 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 Transfer 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 and adversely
affects the interests of the Noteholders in that Financed Student Loan and is
not cured within the applicable cure period (it being understood that any such
breach that does not affect any Guarantor's obligation to guarantee payment of
such Financed FFELP Loan or the Department of HHS' obligation to insure payment
of any Financed HEAL Loan will not be considered to have a material adverse
effect for this purpose). See "Description of the Transfer and Servicing
Agreements -- Conveyance of Financed Student Loans; Representations and
Warranties" and "-- Master Servicer Covenants." See also "Description of the
Transfer and Servicing Agreements -- Termination" regarding the Transferor's
option to purchase the Financed Student Loans when the aggregate Pool Balance is
less than or equal to 10% of the Initial Pool Balance and "-- Insolvency Event"
regarding the sale of Financed Student Loans if a Transferor Insolvency Event
occurs.
Scheduled payments with respect to, and maturities of, the Financed Student
Loans may be extended, including pursuit to Grace Periods, Deferment Periods
and, under certain circumstances, Forbearance Periods. 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 Financed Student Loans, 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.
The rate of prepayment on the Financed Student Loans cannot be predicted,
and any reinvestment risks resulting from a faster or slower incidence of
prepayment of Financed Student Loans or a faster or slower incidence of sales by
the Trust will be borne entirely by the Noteholders. Such reinvestment risks may
include the risk that interest rates and the relevant spreads above particular
interest rate bases are lower at the time Noteholders receive payments from the
Trust than such interest rates and such spreads would otherwise have been had
such prepayments not been made or had such prepayments been made at a different
time.
Weighted Average Life of the Notes
The following information is given solely to illustrate the effect of
prepayments on the Financed Student Loans on the weighted average life of the
Notes under the assumptions stated below and is not a prediction of the
prepayment rate that might actually be experienced by the Financed Student Loans
held in the Trust.
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average life of the Notes will be primarily
a function of the rate at which payments are made on the Financed Student Loans
held in the Trust. Payments on such Financed Student Loans may be in the form of
scheduled amortization of principal or prepayments (including, without
limitation, Guarantee Payments and Insurance Payments).
The Constant Prepayment Rate prepayment model ("CPR") represents an assumed
constant rate of prepayment of Financed Student Loans held in the Trust
outstanding as of the beginning of each quarter expressed as a per annum
percentage. There can be no assurance that such Financed Student Loans will
experience prepayments at a constant prepayment rate or otherwise in the manner
assumed by the prepayment model.
The weighted average lives in the following table were determined assuming
that (i) scheduled payments of principal on the Financed Student Loans are
received in a timely manner and prepayments are made at the percentages of the
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prepayment model set forth in the table; (ii) the initial principal balance of
the Financed Student Loans is [$________] and such Financed Student Loans have
the characteristics described under "The Financed Student Loan Pool;" (iii)
payments are made on the Notes on the first day of each quarter commencing in
[_________] 1997; and (iv) the Notes are issued on [_________,] 1997. No
representation is made that these assumptions will be correct, including the
assumption that the Financed Student Loans held in the Trust will not experience
delinquencies or unanticipated losses.
In making an investment decision with respect to the Notes, investors
should consider a variety of possible prepayment scenarios, including the
limited scenarios described in the table below.
Weighted Average Life of the Notes at the Respective CPRs Set Forth Below:
Weighted Average Life (years)
---------------------------------------------------
0% CPR 3% CPR 5% CPR 7% CPR 10%CPR
------ ------ ------ ------ ------
Class A-1 Notes.....
Class A-2 Notes.....
Class B Notes.......
DESCRIPTION OF THE FFEL PROGRAM
General
The Higher Education Act sets forth provisions establishing the FFEL
Program, pursuant to which state agencies or private nonprofit corporations
administering student loan insurance programs (referred to as "guarantee
agencies") are reimbursed for losses sustained in the operation of their
programs, and holders of certain loans made under such programs are paid
subsidies for owning such loans.
The Higher Education Act currently authorizes certain student loans to be
covered under the FFEL Program if they are contracted for and paid to the
student prior to September 30, 2002, unless a student has received a loan under
the FFEL Program prior to such date, in which case that student may receive a
student loan covered by the FFEL Program until September 30, 2006. Congress has
extended similar authorization dates in prior versions of the Higher Education
Act; however, there can be no assurance that the current authorization dates
will again be extended or that the other provisions of the Higher Education Act
will be continued in their present form.
Various amendments to the Higher Education Act have revised the FFEL
Program from time to time. These amendments include, but are not limited to, the
Balanced Budget Act of 1997 (the "1997 Amendments"), the Higher Education
Technical Amendments Act of 1993 (the "1993 Technical Amendments"), the Omnibus
Budget Reconciliation Act of 1993 (the "1993 Amendments"), the Higher Education
Amendments of 1992 (the "1992 Amendments"), which reauthorized the FFEL Program,
the Omnibus Budget Reconciliation Act of 1990, the Omnibus Budget Reconciliation
Act of 1989 (the "1989 Amendments"), the Omnibus Budget Reconciliation Act of
1987, the Higher Education Technical Amendments Act of 1987 (the "1987
Amendments"), the Higher Education Amendments of 1986 (the "1986 Amendments"),
which reauthorized the FFEL Program, the Consolidated Omnibus Budget
Reconciliation Act of 1985, the Postsecondary Student Assistance Amendments of
1981 (the "1981 Amendments") and the Education Amendments of 1980 (the "1980
Amendments").
There can be no assurance that relevant federal laws, including the Higher
Education Act, will not be changed in a manner that may adversely impact the
receipt of funds by the Guarantee Agencies or by the Transferor or the Eligible
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Lender Trustee with respect to Financed FFELP Loans. Proposals have been made by
Congress and the Administration which, if enacted into law, would amend the
Higher Education Act and make various changes to the FFEL Program, including
changes that would reduce various payments to Guarantee Agencies and restructure
guarantee agencies' operations and programs and revise terms of student loans
and payments to Lenders. There is no certainty that any of the proposals will be
enacted into law in their current form or at all, and the Transferor cannot
predict at this time how such legislation, if enacted, would affect the
Servicer's business or operations, or the Transferor.
This is only a summary of certain provisions of the Higher Education Act.
Reference is made to the text of the Higher Education Act for full and complete
statements of its provisions.
Loan Terms
General
Four types of loans are currently available under the FFEL Program:
Stafford Loans, Unsubsidized Stafford Loans, Plus Loans and Consolidation Loans.
These loan types vary as to eligibility requirements, interest rates, repayment
periods, loan limits and eligibility for interest subsidies and Special
Allowance Payments. Some of these loan types have had other names in the past.
References herein to the various loan types include, where appropriate,
predecessors to such loan types.
The primary loan under the FFEL Program is the Stafford Loan. Students who
are not eligible for Stafford Loans based on their economic circumstances may be
able to obtain Unsubsidized Stafford Loans. Parents of students may be able to
obtain Plus Loans. Consolidation Loans are available to borrowers with existing
loans made under the FFEL Program and certain other federal programs to
consolidate repayment of such existing loans. For periods of enrollment
beginning prior to July 1, 1994, SLS Loans were available to students with costs
of education that were not met by other sources and that exceeded the Stafford
or Unsubsidized Stafford Loan limits.
Eligibility
General. A student is eligible for loans made under the FFEL Program only
if he or she: (i) has been accepted for enrollment or is enrolled in good
standing at an eligible institution of higher education (which term includes
certain vocational schools), (ii) is carrying or planning to carry at least
one-half the normal full-time workload for the course of study the student is
pursuing as determined by the institution (which, in the case of a loan to cover
the cost of a period of enrollment beginning on or after July 1, 1987, must
either lead to a recognized educational credential or be necessary for
enrollment in a course of study that leads to such a credential), (iii) has
agreed to notify promptly the holder of the loan concerning any change of
address, (iv) (if presently enrolled) is maintaining satisfactory progress in
the course of study he or she is pursuing, (v) does not owe a refund on, and is
not (except as specifically permitted under the Higher Education Act) in default
under, any loan or grant made under the Higher Education Act, (vi) has filed
with the eligible institution a statement of educational purpose, (vii) meets
certain citizenship requirements, and (viii) (except in the case of a graduate
or professional student) has received a preliminary determination of eligibility
or ineligibility for a Pell Grant.
Stafford Loans. Stafford Loans generally are made only to student borrowers
who meet certain needs tests. The educational institution must provide the
lender with a statement evidencing a determination of need for a loan, and the
amount of such need, calculated by subtracting from the estimated cost of
attendance the sum of the expected family contribution with respect to the
student plus the estimated financial assistance available to such student. The
amounts of the expected family contribution, estimated available financial
assistance, and estimated costs of attendance are to be computed in accordance
with standards set forth in the Higher Education Act.
Unsubsidized Stafford Loans. A student borrower meeting the requirements
set forth under "General" above is eligible for an Unsubsidized Stafford Loan
without regard to need. Unsubsidized Stafford Loans were not available before
October 1, 1992.
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Plus Loans. Plus Loans are made only to borrowers who are parents (and,
under certain circumstances, spouses of remarried parents) of dependent
undergraduate students. For Plus Loans made on or after July 1, 1993, the parent
borrower must not have an adverse credit history (as determined pursuant to
criteria established by the Department of Education). Prior to the 1986
Amendments, the Higher Education Act did not distinguish between Plus Loans and
SLS Loans. Student borrowers were eligible for Plus Loans; however, parents of
graduate and professional students were ineligible.
SLS Loans. Eligible borrowers for SLS Loans were limited to (a) graduate or
professional students, (b) independent undergraduate students, and (c) under
certain circumstances, dependent undergraduate students, if such students'
parents were unable to obtain a Plus Loan and were also unable to provide such
students' expected family contribution. Prior to the 1987 Amendments, a
dependent undergraduate student was not eligible under any circumstances. Except
as described in clause (c), eligibility was determined without regard to need.
Consolidation Loans. To be eligible for a Consolidation Loan a borrower
must (a) have outstanding indebtedness on student loans made under the FFEL
Program and/or certain other federal student loan programs, and (b) be in
repayment status or in a Grace Period, or be a defaulted borrower who has made
arrangements to repay the defaulted loan(s) satisfactory to the holder of the
defaulted loan(s). A married couple who agree to be jointly liable on a
Consolidation Loan for which the application is received on or after January 1,
1993 may be treated as an individual for purposes of obtaining a Consolidation
Loan. For Consolidation Loans disbursed prior to July 1, 1994 the Borrower was
required to have outstanding student loan indebtedness of at least $7,500. Prior
to the adoption of the 1993 Technical Amendments, Plus Loans could not be
included in the Consolidation Loan. For Consolidation Loans for which the
applications were received prior to January 1, 1993, the minimum student loan
indebtedness was $5,000 and the borrower could not be delinquent more than 90
days in the payment of such indebtedness.
Interest Rates
The Higher Education Act establishes maximum interest rates for each of the
various types of loans. These rates vary not only among loan types, but also
within loan types depending upon when the loan was made or when the borrower
first obtained a loan under the FFEL Program. The Higher Education Act allows
lesser rates of interest to be charged. Many lenders, including the Transferor,
have offered repayment incentives or other programs that involve reduced
interest rates on certain loans made under the FFEL Program.
Stafford Loans. For a Stafford Loan made prior to July 1, 1994, the
applicable interest rate for a borrower who, on the date the promissory note was
signed, did not have an outstanding balance on a previous loan which was made,
insured or guaranteed under the FFEL Program (a "New Borrower"):
(a) is 7% per annum for a loan covering a period of instruction
beginning before January 1, 1981;
(b) is 9% per annum for a loan covering a period of instruction
beginning on or after January 1, 1981, but before September
13, 1983;
(c) is 8% per annum for a loan covering a period of instruction
beginning on or after September 13, 1983, but before July 1,
1988;
(d) for a loan made prior to October 1, 1992, covering a period of
instruction beginning on or after July 1, 1988, is 8% per
annum for the period from the disbursement of the loan to the
date which is four years after the loan enters repayment, and
thereafter shall be adjusted annually, and for any 12-month
period commencing on a July 1 shall be equal to the bond
equivalent rate of 91-day U.S. Treasury bills auctioned at the
final auction prior to the preceding June 1, plus 3.25% per
annum (but not to exceed 10% per annum); or
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(e) for a loan made on or after October 1, 1992 shall be adjusted
annually, and for any 12- month period commencing on a July 1
shall be equal to the bond equivalent rate of 91- day U.S.
Treasury bills auctioned at the final auction prior to the
preceding June 1, plus 3.1% per annum (but not to exceed 9%
per annum).
For a Stafford Loan made prior to July 1, 1994, the applicable interest rate for
a borrower who, on the date the promissory note evidencing the loan was signed,
had an outstanding balance on a previous loan made, insured or guaranteed under
the FFEL Program (a "Repeat Borrower"):
(f) for a loan made prior to July 23, 1992 is the applicable
interest rate on the previous loan or, if such previous loan
is not a Stafford Loan, 8% per annum; or
(g) for a loan made on or after July 23, 1992 shall be adjusted
annually, and for any twelve month period commencing on a July
1 shall be equal to the bond equivalent rate of 91-day U.S.
Treasury bills auctioned at the final auction prior to the
preceding June 1, plus 3.1% per annum but not to exceed:
(i) 7% per annum in the case of a Stafford Loan made to a
borrower who has a loan described in clause (a)
above;
(ii) 8% per annum in the case of (A) a Stafford Loan made
to a borrower who has a loan described in clause (c)
above, (B) a Stafford Loan which has not been in
repayment for four years and which was made to a
borrower who has a loan described in clause (d) above
or (C) a Stafford Loan for which the first
disbursement was made prior to December 20, 1993 to a
borrower whose previous loans do not include a
Stafford Loan or an Unsubsidized Stafford Loan;
(iii) 9% per annum in the case of (A) a Stafford Loan made
to a borrower who has a loan described in clauses (b)
or (e) above or (B) a Stafford Loan for which the
first disbursement was made on or after December 20,
1993 to a borrower whose previous loans do not
include a Stafford Loan or an Unsubsidized Stafford
Loan; and
(iv) 10% per annum in the case of a Stafford Loan which
has been in repayment for four years or more and
which was made to a borrower who has a loan described
in clause (d) above.
The interest rate on all Stafford Loans made on or after July 1, 1994,
regardless of whether the borrower is a New Borrower or a Repeat Borrower, is
the rate described in clause (g) above, except that such rate shall not exceed
8.25% per annum. For any Stafford Loan made on or after July 1, 1995, the
interest rate is further reduced prior to the time the loan enters repayment and
during any Deferment Periods (as such term is defined below under "Repayment").
During such periods, the formula described in clause (g) above is applied,
except that 2.5% is substituted for 3.1%, and the rate shall not exceed 8.25%
per annum.
For loans made on or after July 1, 1998, the applicable rate will
continue to be adjusted annually, but for any 12-month period commencing on a
July 1 will be equal to the bond equivalent rate of securities with a comparable
maturity (as established by the Secretary of Education), plus 1% per annum, but
not to exceed 8.25% per annum. There can be no assurance that the interest rate
provisions for such loans will not be further amended, either before or after
the rate described herein becomes effective.
Unsubsidized Stafford Loans. Unsubsidized Stafford Loans are subject
to the same interest rate provisions as Stafford Loans.
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Plus Loans. The applicable interest rate on a Plus Loan:
(a) made on or after January 1, 1981, but before October 1, 1981 is
9% per annum;
(b) made on or after October 1, 1981, but before November 1, 1982 is
14% per annum;
(c) made on or after November 1, 1982, but before July 1, 1987 is 12%
per annum;
(d) made on or after July 1, 1987 and before October 1, 1992 shall be
adjusted annually, and for any 12-month period beginning on July
1 shall be equal to the bond equivalent rate of 52-week U.S.
Treasury bills auctioned at the final auction prior to the
preceding June 1, plus 3.25% per annum (but not to exceed 12% per
annum); or
(e) made on or after October 1, 1992 shall be adjusted annually, and
for any 12-month period beginning on July 1 shall be equal to the
bond equivalent rate of 52-week U.S. Treasury bills auctioned at
the final auction prior to the preceding June 1, plus 3.1% per
annum (but not to exceed 10% per annum).
The applicable interest rate for Plus Loans made on or after July 1,
1994 is the same as that described in clause (e) above, except that such rate
shall not exceed 9% per annum. For Plus Loans made on or after July 1, 1998, the
applicable rate will continue to be adjusted annually, but for any 12-month
period commencing on a July 1 will be equal to the bond equivalent rate of
securities with a comparable maturity (as established by the Secretary of
Education), plus 2.1% per annum, but not to exceed 9% per annum.
If requested by the borrower, an eligible lender may consolidate SLS or
Plus Loans of the same borrower held by the lender under a single repayment
schedule. The repayment period for each included loan shall be based on the
commencement of repayment of the most recent loan. The consolidated loan shall
bear interest at a rate equal to the weighted average of the rates of the
included loans. Such a consolidation shall not be treated as the making of a new
loan. In addition, at the request of the borrower, a lender may refinance an
existing fixed rate SLS or Plus Loan (including an SLS or Plus Loan held by a
different lender who has refused so to refinance such loan) at a variable
interest rate. In such a case, proceeds of the new loan are used to discharge
the original loan.
SLS Loans. The applicable interest rates on SLS Loans made prior to
October 1, 1992 are identical to the applicable interest rates on Plus Loans
made at the same time. For SLS Loans made on or after October 1, 1992, the
applicable interest rate is the same as the applicable interest rate on Plus
Loans, except that the ceiling is 11% per annum instead of 10% per annum.
Consolidation Loans. A Consolidation Loan made prior to July 1, 1994
bears interest at a rate equal to the weighted average of the interest rates on
the loans retired, rounded to the nearest whole percent, but not less than 9%
per annum. A Consolidation Loan made on or after July 1, 1994 bears interest at
a rate equal to the weighted average of the interest rates on the loans retired,
rounded upward to the nearest whole percent, but with no minimum rate. For a
discussion of required payments that reduce the return on Consolidation Loans,
see "Fees - - Rebate Fees on Consolidation Loans" below.
Loan Limits
Each type of loan (other than Consolidation Loans, which are limited
only by the amount of eligible loans to be consolidated) is subject to limits as
to the maximum principal amount, both with respect to a given year and in the
aggregate. All of the loans are limited to the difference between the cost of
attendance and the other aid available to the student. Stafford Loans are also
subject to limits based upon the needs analysis as described above under
"Eligibility -- Stafford Loans" above. Additional limits are described below.
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Stafford and Unsubsidized Stafford Loans. Except as described in the
next paragraph, Stafford and Unsubsidized Stafford Loans are generally treated
as one loan type for loan limit purposes. A student who has not successfully
completed the first year of a program of undergraduate education may borrow up
to $2,625 in an academic year. A student who has successfully completed such
first year, but who has not successfully completed the second year may borrow up
to $3,500 per academic year. An undergraduate student who has successfully
completed the first and second year, but who has not successfully completed the
remainder of a program of undergraduate education, may borrow up to $5,500 per
academic year. For students enrolled in programs of less than an academic year
in length, the limits are generally reduced in proportion to the amount by which
such programs are less than one year in length. A graduate or professional
student may borrow up to $8,500 in an academic year. The maximum aggregate
amount of Stafford and Unsubsidized Stafford Loans (including that portion of a
Consolidation Loan used to repay such loans) which an undergraduate student may
have outstanding is $23,000. The maximum aggregate amount for a graduate and
professional student, including loans for undergraduate education, is $65,500.
The Secretary is authorized to increase the limits applicable to graduate and
professional students who are pursuing programs which the Secretary determines
to be exceptionally expensive.
Under the 1993 Amendments, at the same time that SLS Loans were
eliminated, the loan limits for Unsubsidized Stafford Loans to independent
students, or dependent students whose parents cannot borrow a Plus Loan, were
increased by amounts equal to the prior SLS Loan limits (as described below
under "SLS Loans").
Prior to the enactment of the 1992 Amendments, an undergraduate student
who had not successfully completed the first and second year of a program of
undergraduate education could borrow Stafford Loans in amounts up to $2,625 in
an academic year. An undergraduate student who had successfully completed such
first and second year, but who had not successfully completed the remainder of a
program of undergraduate education could borrow up to $4,000 per academic year.
The maximum for graduate and professional students was $7,500 per academic year.
The maximum aggregate amount of Stafford Loans which a borrower could have
outstanding (including that portion of a Consolidation Loan used to repay such
loans) was $17,250. The maximum aggregate amount for a graduate or professional
student, including loans for undergraduate education, was $54,750. Prior to the
enactment of the 1986 Amendments, the annual limits were generally lower.
Plus Loans. For Plus Loans made on or after July 1, 1993, the amounts
of Plus Loans are limited only by the student's unmet need. Prior to that time
Plus Loans were subject to limits similar to those to which SLS Loans were then
subject (see "SLS Loans" below), applied with respect to each student on behalf
of whom the parent borrowed.
SLS Loans. A student who had not successfully completed the first and
second year of a program of undergraduate education could borrow an SLS Loan in
an amount of up to $4,000. A student who had successfully completed such first
and second year, but who had not successfully completed the remainder of a
program of undergraduate education could borrow up to $5,000 per year. Graduate
and professional students could borrow up to $10,000 per year. SLS Loans were
subject to an aggregate maximum of $23,000 ($73,000 for graduate and
professional students). Prior to the 1992 Amendments, SLS Loans were available
in amounts of $4,000 per academic year, up to a $20,000 aggregate maximum. Prior
to the 1986 Amendments, a graduate or professional student could borrow $3,000
of SLS Loans per academic year, up to a $15,000 maximum, and an independent
undergraduate student could borrow $2,500 of SLS Loans per academic year minus
the amount of all other FFEL Program loans to such student for such academic
year, up to a maximum amount of all FFEL Program loans to that student of
$12,500. The 1989 Amendments limited the amount of SLS Loans for students
enrolled in programs of less than an academic year in length (similar to the
limits described above under "Stafford Loans"), and such limits were continued
by the 1992 Amendments.
Repayment
Loans made under the FFEL Program (other than Consolidation Loans) must
provide for repayment of principal in periodic installments over a period of not
less than five nor more than ten years. A Consolidation Loan must be repaid
during a period agreed to by the borrower and lender, subject to maximum
repayment periods which vary depending upon the principal amount of the
borrower's outstanding student loans (but no longer than 30 years). For
Consolidation Loans for which the application was received prior to January 1,
1993, the repayment period could not exceed 25 years. The repayment period
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commences (a) not more than twelve months after the borrower ceases to pursue at
least a half-time course of study with respect to Stafford Loans for which the
applicable rate of interest is 7% per annum, (b) not more than six months after
the borrower ceases to pursue at least a half-time course of study with respect
to other Stafford Loans and Unsubsidized Stafford Loans (the six month or twelve
month periods are the "Grace Periods") and (c) on the date of final disbursement
of the loan in the case of SLS, Plus and Consolidation Loans, except that the
borrower of an SLS Loan who also has a Stafford or Unsubsidized Stafford Loan
may defer repayment of the SLS Loan to coincide with the commencement of
repayment of the Stafford or Unsubsidized Stafford Loan. During periods in which
repayment of principal is required, payments of principal and interest must in
general be made at a rate of not less than the greater of $600 per year or the
interest that accrues during the year, except that a borrower and lender may
agree at any time before or during the repayment period that repayment may be at
a lesser rate. A borrower may agree, with concurrence of the lender, to repay
the loan in less than five years with the right subsequently to extend his
minimum repayment period to five years. Borrowers are entitled to accelerate,
without penalty, the repayment of all or any part of the loan.
In addition, the 1992 Amendments required lenders of Consolidation
Loans to establish graduated or income-sensitive repayment schedules and
required lenders of Stafford and SLS Loans to offer borrowers the option of
repaying in accordance with graduated or income-sensitive repayment schedules.
The Transferor may implement graduated repayment schedules and income-sensitive
repayment schedules. Use of income-sensitive repayment schedules may extend the
ten-year maximum term for up to five years. In addition, if the repayment
schedule on a loan that has been converted to a variable interest rate does not
provide for adjustments to the amount of the monthly installment payments, the
ten-year maximum term may be extended for up to three years.
No principal repayments need be made during certain periods of
deferment prescribed by the Higher Education Act ("Deferment Periods"). For
loans to a borrower who first obtained a loan which was disbursed before July 1,
1993, deferments are available (i) during a period not exceeding three years
while the borrower is a member of the Armed Forces, an officer in the
Commissioned Corps of the Public Health Service or, with respect to a borrower
who first obtained a student loan disbursed on or after July 1, 1987, or a
student loan to cover the cost of instruction for a period of enrollment
beginning on or after July 1, 1987, an active duty member of the National
Oceanic and Atmospheric Administration Corps, (ii) during a period not in excess
of three years while the borrower is a volunteer under the Peace Corps Act,
(iii) during a period not in excess of three years while the borrower is a
full-time volunteer under the Domestic Volunteer Act of 1973, (iv) during a
period not exceeding three years while the borrower is in service, comparable to
the service referred to in clauses (ii) and (iii), as a full-time volunteer for
an organization which is exempt from taxation under Section 501(c)(3) of the
Code, (v) during a period not exceeding two years while the borrower is serving
an internship, the successful completion of which is required to receive
professional recognition required to begin professional practice or service, or
a qualified internship or residency program, (vi) during a period not exceeding
three years while the borrower is temporarily totally disabled, as established
by sworn affidavit of a qualified physician, or while the borrower is unable to
secure employment by reason of the care required by a dependent who is so
disabled, (vii) during a period not to exceed twenty-four months while the
borrower is seeking and unable to find full-time employment, (viii) during any
period that the borrower is pursuing a full-time course of study at an eligible
institution (or, with respect to a borrower who first obtained a student loan
disbursed on or after July 1, 1987, or a student loan to cover the cost of
instruction for a period of enrollment beginning on or after July 1, 1987, is
pursuing at least a half-time course of study for which the borrower has
obtained a loan under the FFEL Program), or is pursuing a course of study
pursuant to a graduate fellowship program or a rehabilitation training program
for disabled individuals approved by the Secretary of Education, (ix) during a
period, not in excess of 6 months, while the borrower is on parental leave, and
(x) only with respect to a borrower who first obtained a student loan disbursed
on or after July 1, 1987, or a student loan to cover the cost of instruction for
a period of enrollment beginning on or after July 1, 1987, (A) during a period
not in excess of three years while the borrower is a full-time teacher in a
public or nonprofit private elementary or secondary school in a "teacher
shortage area" (as prescribed by the Secretary of Education), and (B) during a
period not in excess of 12 months for mothers, with preschool age children, who
are entering or re-entering the work force and who are compensated at a rate not
exceeding $1 per hour in excess of the federal minimum wage. For loans to a
borrower who first obtains a loan on or after July 1, 1993, deferments are
available (a) during any period that the borrower is pursuing at least a
half-time course of study at an eligible institution or a course of study
pursuant to a graduate fellowship program or rehabilitation training program
approved by the Secretary, (b) during a period not exceeding three years while
the borrower is seeking and unable to find full-time employment, and (c) during
a period not in excess of three years for any reason which the lender
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determines, in accordance with regulations under the Higher Education Act, has
caused or will cause the borrower economic hardship. Economic hardship includes
working full time and earning an amount not in excess of the greater of the
minimum wage or the poverty line for a family of two. Additional categories of
economic hardship are based on the relationship between a borrower's educational
debt burden and his or her income. Prior to the 1992 Amendments, only the
Deferment Periods described above in clauses (vi) and (vii) (with respect to the
parent borrower) and the Deferment Period described in clause (viii) (with
respect to the parent borrower or a student on whose behalf the parent borrowed)
were available to Plus Loan borrowers, and only the Deferment Periods described
above in clauses (vi), (vii) and (viii) were available to Consolidation Loan
borrowers. Prior to the 1986 Amendments, Plus Loan borrowers were not entitled
to Deferment Periods. Deferment Periods extend the ten year maximum term.
The Higher Education Act also provides for periods of forbearance
during which the borrower, in case of temporary financial hardship, may defer
any payments (a "Forbearance Period"). A borrower is entitled to forbearance for
a period not to exceed three years while the borrower's debt burden under Title
IV of the Higher Education Act (which includes the FFEL Program) equals or
exceeds 20% of the borrower's gross income, and also is entitled to forbearance
while he or she is serving in a qualifying medical or dental internship program
or in a "national service position" under the National and Community Service
Trust Act of 1993. In addition, mandatory administrative forbearances are
provided when exceptional circumstances such as a local or national emergency or
military mobilization exist; or when the geographical area in which the borrower
or endorser resides has been designated a disaster area by the President of the
United States or Mexico, the Prime Minister of Canada, or by the governor of a
state. In other circumstances, forbearance is at the lender's option. Such
forbearance also extends the ten year maximum term.
As described under "Contracts with Guarantee Agencies -- Federal
Interest Subsidy Payments" below, the Secretary of Education makes interest
payments on behalf of the borrower of certain eligible loans while the borrower
is in school and during Grace and Deferment Periods. Interest that accrues
during periods of forbearance and, if the loan is not eligible for Interest
Subsidy Payments, while the borrower is in school and during the Grace and
Deferment Periods, may be paid monthly or quarterly or capitalized (added to the
principal balance) not more frequently than quarterly.
Disbursement
Loans made under the FFEL Program (except Consolidation Loans)
generally must be disbursed in two or more installments, none of which may
exceed 50% of the total principal amount of the loan.
Fees
Guarantee Fee. A Guarantee Agency is authorized to charge a premium, or
guarantee fee, of up to 1% of the principal amount of the loan, which must be
deducted proportionately from each installment payment of the proceeds of the
loan to the borrower. Guarantee fees may not currently be charged to borrowers
of Consolidation Loans. However, lenders may be charged an insurance fee to
cover the costs of increased or extended liability with respect to Consolidation
Loans. For loans made prior to July 1, 1994, the maximum guarantee fee was 3% of
the principal amount of the loan, but no such guarantee fee was authorized to be
charged with respect to Unsubsidized Stafford Loans.
Origination Fee. An eligible lender is authorized to charge the
borrower of a Stafford or Plus Loan an origination fee in an amount not to
exceed 3% of the principal amount of the loan, and is required to charge the
borrower of an Unsubsidized Stafford Loan an origination fee in the amount of 3%
of the principal amount of the loan. These fees must be deducted proportionately
from each installment payment of the loan proceeds prior to payment to the
borrower and are not retained by the eligible lender, but must be passed on to
the Secretary of Education. For loans made prior to July 1, 1994, the maximum
authorized fee for Stafford, Plus and SLS Loans was 5%, and the required fee for
Unsubsidized Stafford Loans was 6.5%, of the principal amount of the loan.
Lender Origination Fee. The lender of any loan under the FFEL Program
made on or after October 1, 1993 is required to pay to the Secretary of
Education a fee equal to 0.5% of the principal amount of such loan.
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Rebate Fee on Consolidation Loans. The holder of any Consolidation Loan
made on or after October 1, 1993 is required to pay to the Secretary of
Education a monthly fee equal to .0875% (1.05% per annum) of the principal
amount of, and accrued interest on, such Consolidation Loan.
Loan Guarantees
Under the FFEL Program, Guarantee Agencies are required to guarantee
the payment of not less than 100% of the principal amount of loans made prior to
October 1, 1993 and covered by their respective guarantee programs. For a
description of the requirements for loans to be covered by such guarantees, see
"Description of the Guarantee Agencies". The 1993 Amendments reduced the minimum
percentage of the principal amount of loans which a Guarantee Agency must pay to
98%, effective with respect to loans made on or after October 1, 1993. The
Department of Education has taken the position that a Guarantee Agency may not
pay more than 98% of the principal amount of and accrued interest on such a
loan. Under certain circumstances, guarantees may be assumed by the Secretary of
Education or another Guarantee Agency. See "Contracts with Guarantee Agencies"
below.
Contracts with Guarantee Agencies
Under the FFEL Program, the Secretary of Education is authorized to
enter into guaranty and interest subsidy agreements with Guarantee Agencies. The
FFEL Program provides for reimbursements to Guarantee Agencies for default
claims paid by Guarantee Agencies, support payments to Guarantee Agencies for
administrative and other expenses, advances for a Guarantee Agency's reserve
funds, and Interest Subsidy Payments and Special Allowance Payments to the
holders of qualifying student loans made pursuant to the FFEL Program.
The 1992 Amendments gave the Secretary of Education certain oversight
powers over Guarantee Agencies. Guarantee Agencies are required to maintain
their reserves at certain levels based on the amount of outstanding loans that
they have guaranteed. If a Guarantee Agency falls below the required level in
two consecutive years, or its claims rate exceeds 9% in any year, or if the
Secretary determines that the agency's administrative or financial condition
jeopardizes its ability to meet its obligations, the Secretary can require the
Guarantee Agency to submit and implement a plan by which it will correct such
problem(s). If a Guarantee Agency fails to timely submit an acceptable plan or
fails to improve its condition, or if the Secretary determines that the
Guarantee Agency is in danger of financial collapse, the Secretary may terminate
the Guarantee Agency's reimbursement contract. The 1993 Amendments broadened the
circumstances under which the Secretary may terminate such reimbursement
contracts, to include a determination that such action is necessary to protect
the federal fiscal interest or to ensure continued availability of student loans
or a smooth transition to direct lending (See "Direct Loans" below).
The 1992 Amendments also added provisions authorizing the Secretary of
Education to assume the guarantee obligations of a Guarantee Agency. The Higher
Education Act now provides that, if the Secretary terminates a Guarantee
Agency's agreements under the FFEL Program, the Secretary shall assume
responsibility for all functions of the Guarantee Agency under its program. To
that end, the Secretary is authorized to, among other options, transfer the
guarantees to another Guarantee Agency or assume the guarantees. It also
provides that in the event the Secretary has determined that a Guarantee Agency
is unable to meet its guarantee obligations, holders of loans guaranteed by such
Guarantee Agency may submit claims directly to the Secretary for payment, unless
the Secretary has provided for the assumption of such guarantees by another
Guarantee Agency.
Federal Reimbursement
A Guarantee Agency's right to receive federal reimbursements for
various guarantee claims paid by such Guarantee Agency is governed by the Higher
Education Act and various contracts entered into between Guarantee Agencies and
the Secretary of Education. See "Description of the Guarantee Agencies --
Federal Agreements". Under the Higher Education Act and the Federal
Reimbursement Contracts, the Secretary of Education currently agrees to
reimburse a Guarantee Agency for the amounts expended by the Guarantee Agency in
the discharge of its guarantee obligation (i.e., the unpaid principal balance of
and accrued interest on loans guaranteed by the Guarantee Agency, which loans
are referred to herein as "guaranteed loans") as a result of the default of the
borrower. With respect to loans made prior to October 1, 1993, the Secretary
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currently agrees to reimburse the Guarantee Agency for up to 100% of the amounts
so expended. The 1993 Amendments provide for reimbursement of a maximum of 98%
of the amount expended with respect to guaranteed loans made on or after October
1, 1993. Depending on the claims rate experience of a Guarantee Agency, such
100% (or 98%) reimbursement may be reduced as discussed in the formula described
below. The Secretary of Education also agrees to repay 100% of the unpaid
principal plus applicable accrued interest expended by a Guarantee Agency in
discharging its guarantee obligation as a result of the bankruptcy, death, or
total and permanent disability of a borrower (or in the case of a Plus Loan, the
death of the student on behalf of whom the loan was borrowed), or in certain
circumstances, as a result of school closures, which reimbursements are not to
be included in the calculations of the Guarantee Agency's Claims Rate experience
for the purpose of federal reimbursement under the Federal Reimbursement
Contracts.
The formula for computing the percentage of federal reimbursement under
the Federal Reimbursement Contracts is not accumulated over a period of years
but is measured by the amount of federal reimbursement payments in any one
federal fiscal year as a percentage of the original principal amount of loans
under the FFEL Program guaranteed by the Guarantee Agency and in repayment at
the end of the preceding fiscal year. Under the formula, federal reimbursement
payments to a Guarantee Agency in any one fiscal year not exceeding 5% of the
original principal amount of loans in repayment at the end of the preceding
fiscal year are to be paid by the Secretary of Education at 100% (or 98% for
loans made on or after October 1, 1993). Beginning at any time during any fiscal
year that federal reimbursement payments exceed 5%, and until such time as they
may exceed 9%, of the original principal amount of loans in repayment at the end
of the preceding fiscal year, then reimbursement payments on claims submitted
during that period are to be paid at 90% (or 88% for loans made on or after
October 1, 1993). Beginning at any time during any fiscal year that federal
reimbursement payments exceed 9% of the original principal amount of loans in
repayment at the end of the preceding fiscal year, then such payments for the
balance of that fiscal year will be paid at 80% (or 78% for loans made on or
after October 1, 1993). The original principal amount of loans in repayment for
purposes of computing reimbursement payments to a Guarantee Agency means the
original principal amount of all loans guaranteed by such Guarantee Agency less:
(1) guarantee payments on such loans, (2) the original principal amount of such
loans that have been fully repaid, and (3) the original principal amount of such
loans for which the first principal installment payment has not become due or
such first installment need not be paid because of a Deferment Period.
Under present practice, after the Secretary of Education reimburses a
Guarantee Agency for a default claim paid on guaranteed loan, the Guarantee
Agency continues to seek repayment from the borrower. The Guarantee Agency
returns to the Secretary of Education payments that it receives from a borrower
after deducting and retaining (i) a percentage amount equal to the complement of
the reimbursement percentage in effect at the time the loan was reimbursed, and
(ii) an amount equal to 27% (or 18 1/2% in the case of a payment from the
proceeds of a Consolidation Loan) of such payments for certain administrative
costs. The Secretary of Education may, however, require the assignment to the
Secretary of defaulted guaranteed loans, in which event no further collections
activity need be undertaken by the Guarantee Agency, and no amount of any
recoveries shall be paid to the Guarantee Agency. Prior to the 1993 Amendments,
the percentage of collections which Guarantee Agencies could retain (as
described in clause (ii) above) was 30%.
A Guarantee Agency may enter into an addendum to its Interest Subsidy
Agreement (as hereinafter defined), which addendum provides for the Guarantee
Agency to refer to the Secretary of Education certain defaulted guaranteed
loans. Such loans are then reported to the Internal Revenue Service to "offset"
any tax refunds which may be due any defaulted borrower. To the extent that the
Guarantee Agency has originally received less than 100% reimbursement from the
Secretary of Education with respect to such a referred loan, the Guarantee
Agency will not recover any amounts subsequently collected by the federal
government which are attributable to that portion of the defaulted loan for
which the Guarantee Agency has not been reimbursed.
Rehabilitation of Defaulted Loans
Under Section 428F of the Higher Education Act, the Secretary of
Education is authorized to enter into an agreement with a Guarantee Agency
pursuant to which the Guarantee Agency shall sell defaulted loans that are
eligible for rehabilitation to an eligible lender. The Guarantee Agency shall
repay the Secretary of Education an amount equal to 81.5% of the then current
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principal balance of such loan, multiplied by the reimbursement percentage in
effect at the time the loan was reimbursed. The amount of such repayment shall
be deducted from the amount of federal reimbursement payments for the fiscal
year in which such repayment occurs, for purposes of determining the
reimbursement rate for that fiscal year.
For a loan to be eligible for rehabilitation, the Guarantee Agency must
have received consecutive payments for 12 months of amounts owed on such loan.
Upon rehabilitation, a loan is eligible for all the benefits under the Higher
Education Act for which it would have been eligible had no default occurred
(except that a borrower's loan may only be rehabilitated once).
Eligibility for Federal Reimbursement
To be eligible for federal reimbursement payments, guaranteed loans
must be made by an eligible lender under the applicable Guarantee Agency's
Guarantee Program, which must meet requirements prescribed by the rules and
regulations promulgated under the Higher Education Act, including the borrower
eligibility, loan amount, disbursement, interest rate, repayment period and
guarantee fee provisions described herein and the other requirements set forth
in Section 428(b) of the Higher Education Act.
Under the Higher Education Act, a guaranteed loan must be delinquent
for 180 days if it is repayable in monthly installments or 240 days if it is
payable in less frequent installments before a lender may obtain payment on a
guarantee from the Guarantee Agency. The Guarantee Agency must pay the lender
for the defaulted loan prior to submitting a claim to the Secretary of Education
for reimbursement. The Guarantee Agency must submit a reimbursement claim to the
Secretary of Education within 45 days after it has paid the lender's default
claim. As a prerequisite to entitlement to payment on the guarantee by the
Guarantee Agency, and in turn payment of reimbursement by the Secretary of
Education, the lender must have exercised reasonable care and diligence in
making, servicing and collecting the Guaranteed Loan.
Federal Interest Subsidy Payments
"Interest Subsidy Payments" are interest payments paid with respect to
an eligible loan during the period prior to the time that the loan enters
repayment and during Grace and Deferment Periods. The Secretary of Education and
the Guarantee Agencies entered into the Interest Subsidy Agreements as described
in "Description of the Guarantee Agencies -- Federal Agreements", whereby the
Secretary of Education agrees to pay Interest Subsidy Payments to the holders of
eligible guaranteed loans for the benefit of students meeting certain
requirements, subject to the holders' compliance with all requirements of the
Higher Education Act. Only Stafford Loans, and Consolidation Loans for which the
application was received on or after January 1, 1993, are eligible for Interest
Subsidy Payments. Consolidation Loans made after August 10, 1993 are eligible
for Interest Subsidy Payments only if all loans consolidated thereby are
Stafford Loans. In addition, to be eligible for Interest Subsidy Payments,
guaranteed loans must be made by an eligible lender under the applicable
Guarantee Agency's Guarantee Program, and must meet requirements prescribed by
the rules and regulations promulgated under the Higher Education Act, including
the borrower eligibility, loan amount, disbursement, interest rate, repayment
period and guarantee fee provisions described herein and the other requirements
set forth in Section 428(b) of the Higher Education Act.
The Secretary of Education makes Interest Subsidy Payments quarterly on
behalf of the borrower to the holder of a guaranteed loan in a total amount
equal to the interest which accrues on the unpaid principal amount prior to the
commencement of the repayment period of the loan or during any Deferment Period.
A borrower may elect to forego Interest Subsidy Payments, in which case the
borrower is required to make interest payments.
Federal Administrative Expense Allowances
Prior to the adoption of the 1993 Amendments, each Guarantee Agency was
entitled to receive from the Secretary of Education an administrative cost
allowance equal to 1% of the total principal amount of the loans (other than
Consolidation Loans) guaranteed by the Guarantee Agency in any fiscal year, for
the purposes of administrative costs of pre-claims assistance for default
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prevention and collection of defaulted guaranteed loans, administrative costs of
promoting commercial lender participation, administrative costs of monitoring
the enrollment and repayment status of students, and for other such costs
related to the Guarantee Agency's Guarantee Program. The 1993 Amendments
repealed such entitlement, effective October 1, 1993. The 1993 Amendments,
however, authorize payments for transition support (including administrative
costs) to Guarantee Agencies, in connection with the transition to direct
lending. See "Direct Loans" below. The Omnibus Rescissions and Appropriations
Act of 1996 provided for the payment to Guarantee Agencies of an administrative
expense allowance for the fiscal year ending September 30, 1995 equal to 1% of
the agency's new guarantee volume, and for the fiscal year ending September 30,
1996 equal to 0.85% of the agency's new guarantee volume. There are no
assurances that Congress will require such payments or that the Secretary of
Education will determine to continue to make any such payments in future years.
Federal Advances
Pursuant to agreements entered into between the Guarantee Agencies and
the Secretary of Education under Sections 422 and 422(c) of the Higher Education
Act, the Secretary of Education was authorized to advance moneys from time to
time to the Guarantee Agencies for the purpose of establishing and strengthening
the Guarantee Agencies' reserves. Section 422(c) currently authorizes the
Secretary of Education to make advances to Guarantee Agencies in various
circumstances, on terms and conditions satisfactory to the Secretary, including
if the Secretary is seeking to terminate the Guarantee Agency's reimbursement
contract or assume the Guarantee Agency's functions, to assist the Guarantee
Agency in meeting its immediate cash needs or to ensure the uninterrupted
payment of claims.
Federal Special Allowance Payments
The Higher Education Act provides for the payment by the Secretary of
Education of additional subsidies, called Special Allowance Payments, to holders
of qualifying student loans. The amount of the Special Allowance Payments, which
are made on a quarterly basis, is computed by reference to the average of the
bond equivalent rates of the 91-day Treasury bills auctioned during the
preceding quarter (the "91-day T-Bill Rate"). The quarterly rate for Special
Allowance Payments for Student Loans made on or after October 1, 1981, and
generally before November 16, 1986 is computed by subtracting the applicable
interest rate on such loans from the 91-day T-Bill Rate, adding 3.5% to the
resulting per centum, and dividing the resulting per centum by four. For loans
disbursed on or after November 16, 1986, or loans to cover the costs of
instruction for periods of enrollment beginning on or after November 16, 1986,
the 1986 Amendments and 1987 Amendments substituted 3.25% for 3.5% in the
foregoing formula. For loans disbursed on or after October 1, 1992, the 1992
Amendments substituted 3.1% for 3.5% in such formula. For Stafford and
Unsubsidized Stafford Loans made on or after July 1, 1995, the 1993 Amendments
substitute 2.5% for 3.1% in such formula prior to the time such loans enter
repayment and during any Deferment Periods. For loans made on or after July 1,
1998, the special allowance formula is to be revised similarly to the manner in
which the applicable interest rate formula is revised, as described above under
"Loan Terms -- Interest Rates -- Stafford Loans".
For Plus and SLS Loans which bear interest at rates adjusted annually,
Special Allowance Payments are made only in years during which the interest rate
ceiling on such loans operates to reduce the rate that would otherwise apply
based upon the applicable formula. See "Loan Terms -- Interest Rates -- Plus
Loans" and "-- SLS Loans" above. Under the 1993 Amendments, Special Allowance
Payments are paid with respect to Plus Loans made on or after July 1, 1994 only
if the rate that would otherwise apply exceeds 10% per annum, notwithstanding
that the interest rate ceiling on such loans is 9% per annum.
The Balanced Budget and Deficit Control Act of 1985, as amended (known
as the "Gramm-Rudman Law") requires the President to issue a sequester order for
any federal fiscal year in which the projected budget exceeds the target for
that year. A sequester order for any fiscal year would apply to loans made on or
after October 1 of that fiscal year. The sequester order would change the
formula for calculating Special Allowance Payments for the first four Special
Allowance Payment periods relating to loans originally disbursed during that
fiscal year. The special allowance formula would be reduced to the 91-day T-Bill
Rate plus 3.0% (for loans with a special allowance formula of the 91-day T-Bill
Rate plus 3.1%).
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The Higher Education Act provides that if Special Allowance Payments or
Interest Subsidy Payments have not been made within 30 days after the Secretary
of Education receives an accurate, timely and complete request therefor, the
special allowance payable to such holder shall be increased by an amount equal
to the daily interest accruing on the special allowance and Interest Subsidy
Payments due the holder.
Special Allowance Payments and Interest Subsidy Payments are reduced by
the amount which the lender is authorized or required to charge as an
origination fee, as described above under "Loan Terms -- Fees -- Origination
Fee". In addition, the amount of the lender origination fee described above
under "Loan Terms -- Fees -- Lender Origination Fees" is collected by offset to
Special Allowance Payments and Interest Subsidy Payments.
Federal Student Loan Insurance Fund
The Higher Education Act authorizes the establishment of a Student Loan
Insurance Fund by the Federal government for making the federal insurance and
the federal reimbursement payments on defaulted student loans to Guarantee
Agencies. If moneys in the fund are insufficient to make the federal payments on
defaults of such loans, the Secretary of Education is authorized, to the extent
provided in advance by appropriation acts, to issue to the Secretary of the
Treasury obligations containing terms and conditions prescribed by the Secretary
of Education and approved by the Secretary of the Treasury, bearing interest at
a rate determined by the Secretary of the Treasury. The Secretary of the
Treasury is authorized and directed by the Higher Education Act to purchase such
obligations.
Direct Loans
The 1993 Amendments authorized a program of "direct loans", to be
originated by schools with funds provided by the Secretary of Education. Under
the direct loan program, the Secretary of Education is directed to enter into
agreements with schools, or origination agents in lieu of schools, to disburse
loans with funds provided by the Secretary. Participation in the program by
schools is voluntary. The goals set forth in the 1993 Amendments call for the
direct loan program to constitute 5% of the total volume of loans made under the
FFEL Program and the direct loan program for academic year 1994-1995, 40% for
academic year 1995-1996, 50% for academic years 1996-1997 and 1997-1998 and 60%
for academic year 1998-1999. No provision is made for the size of the direct
loan program thereafter. Based upon information released by the General
Accounting Office, participation by schools in the direct loan program has not
been sufficient to meet the goals for the 1995-1996 or 1996-1997 academic years.
The loan terms are generally the same under the direct loan program as
under the FFEL Program, though more flexible repayment provisions are available
under the direct loan program. At the discretion of the Secretary of Education,
students attending schools that participate in the direct loan program (and
their parents) may still be eligible for participation in the FFEL Program,
though no borrower could obtain loans under both programs.
It is difficult to predict the impact of the direct lending program.
There is no way to accurately predict the number of schools that will
participate in future years, or, if the Secretary authorizes students attending
participating schools to continue to be eligible for FFEL Program loans, how
many students will seek loans under the direct loan program instead of the FFEL
Program. In addition, it is impossible to predict whether future legislation
will eliminate, limit or expand the direct loan program or the FFEL Program.
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DESCRIPTION OF THE GUARANTEE AGENCIES
General
Of the Financed Student Loans included in the Initial Pool Balance,
approximately [71.81%] are guaranteed by Educational Credit Management
Corporation, a Minnesota non-profit corporation ("ECMC", formerly known as
Transitional Guaranty Agency, Inc.), approximately [15.02%] are guaranteed by
Pennsylvania Higher Education Assistance Agency, an agency of the Commonwealth
of Pennsylvania ("PHEAA"), approximately [9.78%] are HEAL Loans, and the
remaining [3.39%] are guaranteed by one of the following Guarantee Agencies:
United Student Aid Funds, Inc., a Delaware non-profit corporation ("USAF"), the
Florida Department of Education, an agency of the State of Florida, New York
Higher Education Services Corporation, an agency of the State of New York, and
Texas Guaranteed Student Loan Program, a Texas nonprofit corporation.
A Guarantee Agency guarantees loans made to students or parents of
students by lending institutions such as banks, credit unions, savings and loan
associations, certain schools, pension funds and insurance companies. A
Guarantee Agency generally purchases defaulted student loans which it has
guaranteed from its cash and reserves (generally referred to herein as its
"Guarantee Fund"). A lender may submit a default claim to the Guarantee Agency
after the student loan has been delinquent for at least 180 days. Under the
Guarantee Agencies' current procedures, assuming that the defaulted student loan
complies with the Guarantee Agency's loan procedures manual or regulations, the
Guarantee Agency pays the lender for a default claim within 90 days of the
lender's filing the claim with the Guarantee Agency. The Guarantee Agency will
pay the lender interest accrued on the loan for up to 360 days after
delinquency. The Guarantee Agency must file a reimbursement claim with the
Department of Education within 45 days after the Guarantee Agency has paid the
lender for the default claim.
In general, a Guarantee Agency's Guarantee Fund has been funded
principally by administrative cost allowances paid by the Secretary of
Education, guarantee fees paid by lenders (the cost of which may be passed on to
borrowers), investment income on moneys in the Guarantee Fund, and a portion of
the moneys collected from borrowers on Guaranteed Loans that have been
reimbursed by the Secretary of Education to cover the Guarantee Agency's
administrative expenses. ECMC's funding of its Guarantee Fund has differed (and
may continue to differ) from other Guarantors. See "-- Educational Credit
Management Corporation" below.
Various changes to the Higher Education Act have adversely affected the
receipt of revenues by the Guarantee Agencies and their ability to maintain
their Guarantee Funds at previous levels, and may adversely affect their ability
to meet their guarantee obligations. These changes include the reduction in
reinsurance payments from the Secretary of Education because of reduced
reimbursement percentages; the reduction in maximum permitted guarantee fees
from 3% to 1% for loans made on or after July 1, 1994; the reduction and
possible elimination of administrative expense allowances from the Secretary of
Education; the reduction in supplemental preclaims assistance payments from the
Secretary of Education; and the reduction in retention by a Guarantee Agency of
collections on defaulted loans from 30% to 27%. Additionally, the adequacy of a
Guarantee Agency's Guarantee Fund to meet its guarantee obligations with respect
to existing student loans depends, in significant part, on its ability to
collect revenues generated by new loan guarantees. The Federal Direct Student
Loan Program may adversely affect the volume of new loan guarantees. Pending
legislation and future legislation may make additional changes to the Higher
Education Act that would significantly affect the revenues received by Guarantee
Agencies and the structure of the guarantee agency program. For a more complete
description of provisions of the Higher Education Act that relate to payments
described in this paragraph or affect the funding of a Guarantee Fund, see
"Description of the FFEL Program".
The Higher Education Act gives the Secretary of Education various
oversight powers over Guarantee Agencies. These include requiring a Guarantee
Agency to maintain its Guarantee Fund at a certain required level and taking
various actions relating to a Guarantee Agency if its administrative and
financial condition jeopardizes its ability to meet its obligations. These
actions include, among others, providing advances to the Guarantee Agency,
terminating the Guarantee Agency's Federal Reimbursement Contracts, assuming
responsibility for all functions of the Guarantee Agency, and transferring the
Guarantee Agency's guarantees to another guarantee agency or assuming such
guarantees. The Higher Education Act provides that a Guarantee Agency's
Guarantee Fund shall be considered to be the property of the United States to be
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used in the operation of the FFEL Program or the Federal Direct Student Loan
Program, and, under certain circumstances, the Secretary of Education may demand
payment of amounts in the Guarantee Fund. The 1997 Amendments direct the
Secretary of Education to demand payment on September 1, 2002 of a total of one
billion dollars from all the Guarantee Agencies participating in the FFEL
Program. The amounts to be demanded of each Guarantee Agency shall be determined
in accordance with formulas included in the Higher Education Act. Each Guarantee
Agency will be required to deposit funds in a restricted account in
installments, beginning in the federal fiscal year ended September 30, 1998, to
provide for such payment. The Secretary of Education has not yet made any
determination of the amounts required to be so transferred by the Guarantee
Agencies. There can be no assurance that relevant federal laws, including the
Higher Education Act, will not be further changed in a manner that may adversely
affect the ability of a Guarantee Agency to meet its guarantee obligations. See
"Description of the FFEL Program".
There are no assurances as to the Secretary of Education's actions if a
Guarantee Agency encounters administrative or financial difficulties or that the
Secretary of Education will not demand that a Guarantee Agency transfer
additional portions or all of its Guarantee Fund to the Secretary of Education.
Information relating to the particular Guarantee Agencies set forth in
this Prospectus has been provided by the respective Guarantee Agencies, and
neither such information nor information included in the reports referred to
herein has been verified by, or is guaranteed as to accuracy or completeness by,
the Transferor or the Underwriters. Such information should not be construed as
a representation by the Transferor or the Underwriters. No representation is
made by the Transferor or the Underwriters as to the accuracy or adequacy of
such information or the absence of material adverse changes in such information
subsequent to the dates thereof.
Federal Agreements
Each Guarantee Agency and the Secretary of Education have entered into
Federal Reimbursement Contracts pursuant to Section 428(c) of the Higher
Education Act (which include, for older Guarantee Agencies, a supplemental
contract pursuant to former Section 428A of the Higher Education Act), which
provide for the Guarantee Agency to receive 80% to 100% reimbursement of
insurance payments that the Guarantee Agency makes to eligible lenders with
respect to loans guaranteed by the Guarantee Agency prior to the termination of
the Federal Reimbursement Contracts or the expiration of the authority of the
Higher Education Act. The 1993 Amendments reduced the reimbursement percentages
referred to above with respect to claims on most loans made on or after October
1, 1993. See "Effect of Annual Claims Rate" below. The Federal Reimbursement
Contracts provide for termination under certain circumstances and also provide
for certain actions short of termination by the Secretary of Education to
protect the federal interest. See "Description of the FFEL Program -- Contracts
with Guarantee Agencies -- Federal Reimbursement".
In addition to guarantee benefits, qualified Student Loans acquired
under the Program benefit from certain federal subsidies. Each Guarantee Agency
and the Secretary of Education have entered into an interest subsidy agreement
under Section 428(b) of the Higher Education Act (as amended, the "Interest
Subsidy Agreement"), which entitles the holders of eligible loans guaranteed by
the Guarantee Agency to receive Interest Subsidy Payments from the Secretary of
Education on behalf of certain students while the student is in school, during a
six to twelve month Grace Period after the student leaves school, and during
certain Deferment Periods, subject to the holders' compliance with all
requirements of the Higher Education Act. See "Description of the FFEL Program
- -- Contracts with Guarantee Agencies -- Federal Interest Subsidy Payments" for a
more detailed description of the Interest Subsidy Payments.
United States Courts of Appeals have held that the federal government,
through subsequent legislation, has the right unilaterally to amend the
contracts between the Secretary of Education and the Guarantee Agencies
described herein. Amendments to the Higher Education Act in 1986, 1987, 1992 and
1993, respectively (i) abrogated certain rights of guarantee agencies under
contracts with the Secretary of Education relating to the repayment of certain
advances from the Secretary of Education, (ii) authorized the Secretary of
Education to withhold reimbursement payments otherwise due to certain guarantee
agencies until specified amounts of such guarantee agencies' reserves had been
eliminated, (iii) added new reserve level requirements for guarantee agencies
and authorized the Secretary of Education to terminate the Federal Reimbursement
Contracts under circumstances that did not previously warrant such termination,
and (iv) expanded the Secretary of Education's authority to terminate such
contracts and to seize guarantee agencies' reserves. There can be no assurance
that future legislation will not further adversely affect the rights of the
Guarantee Agencies, or holders of loans guaranteed by a Guarantee Agency under
such contracts.
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Effect of Annual Claims Rate
A Guarantee Agency's ability to meet its obligation to pay default
claims on Financed Eligible Loans will depend on the adequacy of its Guarantee
Fund and, under the current federal reinsurance arrangement, the default
experience of all lenders under the Guarantee Agency's Guarantee Program. A high
default experience among lenders participating in a Guarantee Agency's Guarantee
Program may cause the Guarantee Agency's Claims Rate (as defined below) for its
Guarantee Program to exceed the 5% and 9% levels described below, and result in
the Secretary of Education reimbursing the Guarantee Agency at lower percentages
of default claims payments made by the Guarantee Agency.
Each Guarantee Agency is currently entitled to receive reimbursement
payments under the Federal Reimbursement Contracts in amounts that vary
depending on the Claims Rate experience of the Guarantee Agency. The "Claims
Rate" is computed by dividing total default claims since the previous September
30 by the total original principal amount of the Guarantee Agency's guaranteed
loans in repayment on such September 30. On October 1 of each year the Claims
Rate begins at zero, regardless of the experience in preceding years. For loans
made prior to October 1, 1993, if the Claims Rate remains equal to or below 5%
within a given federal fiscal year (October 1 through September 30), the
Secretary of Education is currently obligated to provide 100% reimbursement; if
and when the Claims Rate exceeds 5% and until such time, if any, as it exceeds
9% during the fiscal year, the reimbursement rate is at 90%; if and when the
Claims Rate exceeds 9% during the fiscal year, the reimbursement rate for the
remainder of the fiscal year is at 80%. For loans made prior to October 1, 1993,
each Guarantee Agency is currently entitled to at least 80% reimbursement from
the Secretary of Education on default claims that it purchases, regardless of
its Claims Rate. The reimbursement percentages for loans made on or after
October 1, 1993 are reduced from 100%, 90% and 80% to 98%, 88% and 78%,
respectively. See "Description of the FFEL Program".
The Claims Rates for PHEAA for each of the last five federal fiscal
years is set forth in the table under "Certain Historical Information for
Guarantee Agencies -- Claims Rate" below.
Educational Credit Management Corporation
ECMC was organized in 1994 under the name Transitional Guaranty Agency,
Inc. On March 17, 1994, ECMC entered into various Guarantee Agency agreements
with the Department of Education (as amended or supplemented, the
"ECMC\Department Agreements"). In accordance with the ECMC\Department
Agreements, the Department of Education has instructed ECMC to perform various
functions. The primary functions in fiscal years 1995 and 1996 were to collect
and monitor payments from borrowers making payments on loans under Chapter 13 of
the Bankruptcy Code. These loans were transferred from the Department of
Education and from other Guarantee Agencies. The Department of Education also
transferred guarantees representing predefault and postdefault inactive accounts
for ECMC to service these accounts if the need should arise.
Pursuant to the Department of Education's request, ECMC developed the
operational capability to issue new guarantees and to service existing active
loan guarantees. On March 15, 1996, the Department of Education designated ECMC
as the Guarantee Agency for the Commonwealth of Virginia, effective July 1,
1996. ECMC replaced the Virginia State Education Assistance Authority ("SEAA")
and assumed responsibility for all outstanding loan guarantees of SEAA.
Pursuant to the ECMC\Department Agreements, ECMC's financial structure
differs in many respects from other Guarantee Agencies. The ECMC\Department
Agreements provide that at the end of each federal fiscal year, ECMC is required
to calculate the amount of its reserve funds and the amount of its expenses
during the fiscal year using a formula prescribed by the Department of
Education. Using that formula, if the amount of reserve funds exceed 60 percent
of expenses (as defined by the Department of Education), ECMC is required to
return the excess to the Department of Education, unless directed otherwise by
the Department of Education.
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ECMC has agreed that it will provide a copy of its most recent audited
financial statements to Noteholders upon receipt of a written request directed
to Mr. Robert McGowan, Vice President, Educational Credit Management
Corporation, 101 East Fifth Street, Suite 2400, Saint Paul, Minnesota 55101.
Pennsylvania Higher Education Assistance Agency
Certain information regarding PHEAA and its operations is included
under "The Servicers -- Pennsylvania Higher Education Assistance Agency."
Certain Historical Information for Guarantee Agencies
Set forth below is certain historical information with respect to PHEAA
and with respect to all guarantors of loans under the Federal Family Education
Loan Program. Information is not provided for ECMC because it only commenced
guaranteeing loans on July 1, 1996. Except as otherwise indicated below, the
information regarding each Guarantee Agency has been obtained from the
Department of Education's Federal Fiscal Year 1993 Loan Programs Data Book (the
"DOE Data Book"). No independent verification of such information has been or
will be made by the Transferor or the Underwriters.
Guarantee Volume. The following table sets forth the approximate
aggregate principal amount of loans under the FFEL Program that have first
become committed to be guaranteed by PHEAA and by all guarantors of such loans
in each of the five federal fiscal years 1992 through 1996:*
Stafford, Unsubsidized Stafford, SLS,
PLUS and Consolidated Loans
Federal Guaranteed
Fiscal Dollars in Millions All
Year PHEAA Guarantors
---- ----- ----------
1992 $1,410.4 $16,114.0
1993 1,857.1 19,356.6
1994 2,003.4 **
1995 2,221.5 **
1996 2,227.7 **
- ----------
* The information set forth in the table above has been obtained from
PHEAA and, as to All Guarantors, the DOE Data Book.
** Not available.
Reserve Ratio. Each Guarantee Agency's reserve ratio is determined by
dividing its cumulative cash reserves by the original principal amount of the
outstanding loans it has agreed to guarantee. The term "cumulative cash
reserves" refers to cash reserves plus (i) sources of funds (including insurance
premiums, state appropriations, federal advances, federal reinsurance payments,
administrative cost allowances, collections on claims paid and investment
earnings) minus (ii) uses of funds (including claims paid to lenders, operating
expenses, lender fees, the Department 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 Guarantee Agency minus (i) the original principal amount of
loans cancelled, claims paid, loans paid in full and loan guarantees transferred
from such Guarantee Agency to other guarantors, plus (ii) the original principal
amount of loan guarantees transferred to such Guarantee Agency from other
guarantors. The following table sets forth PHEAA's cumulative cash reserves and
its corresponding reserve ratios and the national average reserve ratio for all
guarantors for the five federal fiscal years 1992 through 1996.*
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PHEAA
---------------------- National
Federal Cumulative Average
Fiscal Cash Reserve Reserve
Year Reserves** Ratio Ratio
---- ---------- ----- -----
1992 $ 85.9 1.1% 1.5%
1993 100.9 1.1 1.7
1994 133.6 1.3 1.4
1995 166.3 1.5 1.7
1996 210.6 1.6 1.8
- ----------
* The information set forth in the table above has been obtained from
PHEAA and, as to the national average, the DOE Data Book (with respect
to fiscal years 1992 and 1993) and from the Department of Education
(with respect to fiscal years 1994, 1995 and 1996). According to the
Department of Education, available cash reserves may not always be an
accurate barometer of a guarantor's financial health.
** Dollars in millions.
Recovery Rates. A Guarantee Agency's recovery rate is determined by
dividing the amount recovered from borrowers by such Guarantee Agency by the
aggregate amount of default claims paid by such Guarantee Agency during the
applicable federal fiscal year with respect to borrowers. The table below sets
forth the recovery rates for PHEAA and the national average recovery rates for
all guarantors with respect to Stafford Loans (the only type of Student Loan for
which the DOE Data Book discloses recovery rates) for the five Federal Fiscal
Years 1992 through 1996.* PHEAA's recovery rates have exceeded the national
average recovery rate in each of the five federal fiscal years shown in the
Recovery Rate table below. The Transferor's management does not believe that
recovery rates provide an accurate indication of a guarantor's financial health.
Federal Recovery Rate
Fiscal ------------- National
Year PHEAA Average
---- ----- -------
1992 46.5% 35.1%
1993 48.2 38.0
1994 52.9 39.2
1995 53.3 40.7
1996 55.0 43.1**
- ----------
* The information set forth in the table above has been obtained from
PHEAA and, as to the national average, the Department of Education.
** 1996 national average does not include all guarantor data, as all
guarantors have not been processed.
Loan Loss Reserve. The DOE Data Book does not disclose whether any
guarantor has established a segregated loan loss reserve with respect to its
student loan guarantee obligations. Accordingly, to the extent that a guarantor
has not established such a segregated loan loss reserve, if a guarantor receives
less than full reimbursement of its guarantee obligations from the Department of
Education, the guarantor would be forced to look to its existing assets to
satisfy any such guarantee obligations not so reimbursed.
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Claims Rate. The following table sets forth the Claims Rate of PHEAA
and the national average for all guarantors for the last five federal fiscal
years 1992 through 1996:*
Federal Claims Rate
Fiscal ----------- National
Year PHEAA Average
---- ----- -------
1992 2.84% 4.15%
1993 2.32 3.83
1994 2.18 3.44
1995 1.97 3.21
1996 1.58 3.25
- ----------
* The information set forth in the table above has been obtained from
PHEAA and, as to the national average, the Department of Education.
PHEAA's Claims Rate have been lower than the national average Claims
Rate in each of the five federal fiscal years shown in the Claims Rate table
above. Management of PHEAA has indicated to the Transferor that they are
currently unaware of any trends or conditions which would cause their Claims
Rate to exceed 5% and thereby result in less than maximum reimbursement for
reinsurance claims to the Department of Education. Notwithstanding the above, no
assurance can be made that any such trends will continue or not deteriorate, or
that any Guarantee Agency will receive full reimbursement for reinsurance claims
(or the full 98% maximum reimbursement for loans first disbursed on or after
October 1, 1993).
DESCRIPTION OF THE HEAL PROGRAM
Eligible Borrower
An eligible borrower under the HEAL Program is a student who (i) meets
certain citizen, national or resident requirements, (ii) has been accepted for
enrollment at a school of medicine, osteopathy, dentistry, veterinary medicine,
optometry, podiatry, pharmacy, public health or chiropractic, or a graduate
program in health administration or clinical psychology (an "eligible
institution") or, if attending an eligible institution, is in good standing at
that institution, but, in the case of a medical, dental or osteopathic student,
including only the last four years of an accelerated, integrated program of
study, (iii) is or will be a full-time student at the eligible institution, (iv)
has agreed that all funds received under the loan will be used solely for
tuition and other reasonable educational expenses and the insurance premium
charged on the loan, (v) requires the loan to pursue the course of study at the
institution, and (vi) if a pharmacy student, has satisfactorily completed three
years of training. Certain individuals who meet the same citizen, national or
resident requirements and have previously received a loan insured under the HEAL
Program while a full-time student at an eligible institution may also receive a
loan during the period before principal must be paid on the loan to repay
interest due on the previous loans under the HEAL Program.
Eligible Lender
An eligible institution may apply to the Secretary of HHS to become a
lender under the HEAL Program. An eligible lender is an agency or
instrumentality of a state, a bank, savings and loan association, credit union
or insurance company which is subject to examination and supervision in its
capacity as a lender by an agency of the United States or of the state in which
it has its principal place of business, and a pension fund approved by the
Secretary of HHS. If the Secretary of HHS approves the lender's application, the
Secretary of HHS and the lender enter into an insurance contract whereby the
Secretary of HHS agrees to insure each eligible HEAL Loan held by the lender
against the borrower's default, death, total and permanent disability, or
bankruptcy.
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An approved eligible lender can have either a standard insurance
contract or a comprehensive insurance contract with the Secretary of HHS. A
lender with a standard insurance contract must submit to the Secretary of HHS a
borrower's application for each loan that the lender determines to be eligible
for insurance. The Secretary of HHS notifies the lender whether or not the loan
is insurable, the amount of the insurance and the expiration of the loan
commitment. A lender with a comprehensive insurance contract may disburse a loan
without submitting an individual borrower's application to the Secretary of HHS
for initial approval. All eligible loans made by a lender with a comprehensive
insurance contract before a specified date are automatically insured up to the
aggregate amount stated in the insurance contract. The Secretary of HHS may
limit, suspend or terminate the lender's eligibility under the HEAL Program if
the lender violates any provision of the HEAL Act, or agreements with the
Secretary of HHS concerning the HEAL Program. The Transferor and the Eligible
Lender Trustee are each a currently approved holder of a Comprehensive Insurance
Contract with the Secretary of HHS.
Insurance Benefits
The insurance provided by the Secretary of HHS covers 100% of the
lender's losses on both unpaid principal and interest except to the extent that
a borrower may have a defense on the loan (other than infancy). HEAL insurance
is not unconditional. The Secretary of HHS insures HEAL Loans on the implied
representation of the lender that all the requirements for the initial
insurability have been met. HEAL insurance is further conditioned upon
compliance by all holders of the loan with all laws, regulations and other
requirements. The insurance coverage on a loan under the HEAL Program ceases to
be effective after a 60-day default by the lender in the payment of the
insurance premium charged by the Secretary of HHS.
Authorized Amounts of HEAL Loans
An eligible student borrower may borrow an amount for an academic year
equal to the difference between the student's estimated cost of education for
that period and the amount of other financial aid the student will receive for
that period. An eligible non-student borrower may borrow in an amount that is no
greater than the sum of the HEAL insurance premium plus the interest that is
expected to accrue and must be paid on the borrower's HEAL Loan during the
period for which the new loan is intended. The total amount of HEAL Loans made
to any borrower which may be covered by federal insurance may not exceed $20,000
in any academic year for a student enrolled in a school of, or in the field of,
medicine, osteopathy, dentistry, veterinary medicine, optometry or podiatry, up
to a maximum aggregate of $80,000, and $12,500 in any academic year for a
borrower enrolled in a school of, or in the field, of pharmacy, public health,
or chiropractic, or a graduate program in health administration or clinical
psychology, up to an aggregate maximum of $50,000.
Terms of HEAL Loans
A loan made under the HEAL Program must be made without security,
except that in certain limited instances an endorsement may be required. The
borrower may prepay the whole or any part of the loan at any time without
penalty.
The principal amount of the HEAL Loan must be repaid in installments
over a period of not less than 10 years or more than 25 years, beginning not
earlier than nine months nor later than twelve months (the "Grace Period") after
the date on which (i) the borrower ceases to be a participant in an accredited
internship or residency program of not more than four years in duration, or the
borrower completes the fourth year of an accredited internship or residency
program of more than four years in duration (for loans made on or after October
22, 1985), or the borrower ceases to carry, at an eligible institution, the
normal full-time academic workload, or (ii) the borrower, who is a graduate
student of an eligible institution, ceases to be a participant in a fellowship
training program not in excess of two years or a participant in a full-time
educational activity not in excess of two years, which is directly related to
the health profession for which the borrower prepared at an eligible
institution, as determined by the Secretary of HHS, and which may be engaged in
by the borrower during such a two-year period which begins within twelve months
after the completion of the borrower's participation in a program described in
clause (i) of this sentence or prior to the completion of the borrower's
participation in such program (for loans made on or after October 22, 1985),
except during periods of deferment
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(described below). The repayment period of the loan may not exceed 33 years from
the date of execution of the note or written agreement evidencing it. Principal
and interest need not be paid, but interest accrues, during any period (i)
during which the borrower is pursuing a full-time course of study at an eligible
institution (or at an eligible institution under the [Stafford Loan Program]),
(ii) not in excess of four years during which the borrower is a participant in
an accredited internship or residency program, (iii) not in excess of three
years during which the borrower is a member of the Armed Forces of the United
States, (iv) not in excess of three years during which the borrower is in
service as a volunteer under the Peace Corps Act (22 USCA ss.2501 et seq.) or is
a member of the National Health Service Corps, (v) not in excess of three years
during which the borrower is in service as a full-time volunteer under Title I
of the Domestic Volunteer Service Act of 1973, (vi) not in excess of two years
which is described in clause (ii) of the first sentence of this paragraph, and
(vii) in addition to all other deferments for which the borrower is eligible
under clauses (i) through (vi) of this sentence during which the borrower is a
member of the Armed Forces on active duty during the Persian Gulf conflict. The
periods described in (i) through (vii) are "Deferment Periods." In certain
circumstances a Deferment Period may not be included in determining the 25- and
33-year maximum repayment periods referred to above.
At least 30 and not more than 60 days before the commencement of the
repayment period, the borrower must contact the lender to establish the precise
term of repayment. The note must offer, in accordance with criteria prescribed
by regulation of the Secretary of HHS, a graduated repayment schedule. The
borrower may choose to repay under the graduated repayment schedule or a
repayment schedule which provides for substantially equal installment payments.
The Secretary of HHS has not promulgated regulations which set the criteria for
a graduated repayment schedule.
Unless agreed otherwise, in writing, the total of the payments by a
borrower during any year of the repayment period with respect to all loans of
the borrower under the HEAL Program should be at least equal to the annual
interest on the outstanding principal, except during Deferment Periods.
Interest
At the lender's option, the interest rate on the HEAL Loan may be
calculated on a fixed rate or on a variable rate basis. Whichever method is
selected, that method must continue over the life of the loan, except where the
loan is consolidated with another HEAL Loan. Interest that is calculated on a
fixed rate basis is determined for the life of the loan during the calendar
quarter in which the loan is disbursed. It may not exceed the maximum rate
determined for that quarter by the Secretary of HHS. Interest that is calculated
on a variable rate basis varies every calendar quarter throughout the life of
the loan as the market price of U.S. Treasury bills changes. For any quarter, it
may not exceed the maximum rate determined by the Secretary of HHS. For each
calendar quarter, the Secretary of HHS determines the general maximum annual
HEAL interest rate by (i) determining the average of the bond equivalent rates
reported for the 91-day U.S. Treasury bills auctioned for the preceding calendar
quarter, (ii) adding 3 percentage points, and (iii) rounding that figure to the
next higher one-eighth of one percent. Pursuant to the insurance agreements
under which the Financed HEAL Loans originally were made, however, the maximum
amount under clause (ii) of the preceding sentence is 2.00 percentage points
during in-school periods, Grace Periods and Deferment Periods, and 2.70
percentage points during the Repayment Phase.
As a general rule, unpaid accrued interest may be compounded
semi-annually and added to principal. However, if a borrower postpones payment
of interest before the beginning of the repayment period or during Deferment
Periods or the lender permits postponement during forbearance, the lender may
refrain from semi-annual compounding of interest and add accrued interest to
principal only at the time repayment of principal begins or resumes. A lender
may do so only if this practice does not result in interest being compounded
more frequently than semi-annually. Interest begins to accrue when a loan is
disbursed. However, a borrower may postpone payment of interest before the
beginning of the repayment period or during the Deferment Periods or a lender
may permit postponement during the forbearance. In these cases, payment of
interest must begin or resume on the date on which repayment of principal begins
or resumes. If payment of interest is postponed, it may be added to the
principal for purposes of calculating a repayment schedule.
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Insurance Premium
The Secretary of HHS charges each lender an insurance premium to
provide the insurance on HEAL Loans at the time of disbursement. The HEAL Act
authorizes the Secretary of HHS to charge an insurance premium based on the
default rate of the educational institution and the borrower obtaining a
co-signer on the loan or securing the debt with only the borrower's signature
payable in advance. Presently, the insurance premium varies between 3% and 8%.
The lender may pass along the cost of the insurance premium to the borrower by
billing for it separately or deducting the amount from disbursed loan proceeds.
Premiums are not refundable by the Secretary of HHS and need not be refunded by
the lender to the borrower. Eligible lenders and eligible institutions may also
be assessed additional risk based premiums based on the eligible entities
default rate. The risk-based premium to be assessed shall range from 6 percent
of the principal amount of the loan to 10 percent of the principal amount of the
loan.
Consolidation of HEAL Loans
If a lender or holder holds two or more HEAL Loans made to the same
borrower, the lender or holder and the borrower may agree to consolidate the
loans into a single HEAL Loan obligation evidenced by one promissory note if the
consolidation will not result in terms less favorable to the borrower than if no
consolidation had occurred and certain other requirements are satisfied.
Payments by Secretary of HHS
The Secretary of HHS insures each lender for the losses which the
lender may incur on insured loans in the event that a borrower dies, becomes
permanently and totally disabled, files for bankruptcy or defaults on the loans.
If a borrower dies or becomes disabled, the Secretary of HHS discharges the
borrower's liability on the loan by repaying the amount owed. If the borrower
defaults after a substantial collection effort, the Secretary of HHS pays the
amount of the loss to the lender, and the borrower's loan is assigned to the
Secretary of HHS.
Due Diligence
A lender must follow certain procedures in making HEAL Loans, and must
exercise due diligence in the collection of a HEAL Loan with respect to both a
borrower and any endorser, in accordance with regulations of the Secretary of
HHS. If these procedures are not followed or such due diligence is not
exercised, the lender's ability to realize the benefits of the insurance
described above may be adversely affected.
Claims
"Default" means the persistent failure of the borrower to make a
payment when due, or to comply with other terms of the note or other written
agreement evidencing a loan under circumstances where the Secretary of HHS finds
it reasonable to conclude that the borrower no longer intends to honor the
obligation to repay. In the case of a loan repayable (or on which interest is
payable) in monthly installments, this failure must have persisted for 120 days.
In the case of a loan repayable (or on which interest is payable) in less
frequent installments, this failure must have persisted for 180 days. Upon the
occurrence of a default, the Secretary of HHS shall require the eligible lender
or holder to commence and prosecute an action for default. If, for a particular
loan, an automatic stay is imposed on collection activities by a Bankruptcy
Court, and the lender receives written notification of the automatic stay prior
to initiating legal proceedings against the borrower, the 120 or 180-day period
does not include any period prior to the end of the automatic stay. Unless a
lender has notified the Secretary of HHS that it has filed suit against a
defaulted borrower, it must file a default claim with the Secretary of HHS
within 30 days after a loan has been determined to be in default. A lender must
file a death claim with the Secretary of HHS within 30 days after the lender
determines that a borrower is dead. A lender must file a disability claim with
the Secretary of HHS within 30 days after it is notified that the Secretary of
HHS had determined a borrower to be totally and permanently disabled. A lender
must file a bankruptcy claim with the Secretary of HHS within 10 days of the
initial date of receipt of court notice or written notice from the borrower's
attorney that the borrower has filed for bankruptcy under chapters 11 or 13 of
the Bankruptcy Code, or has filed a complaint to determine the dischargeability
of the HEAL Loan under chapter 7 of the Bankruptcy Code.
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General
The Secretary of HHS may enter into a special contract with a borrower
who has obtained a degree from an eligible institution. Under the contract, the
borrower agrees to serve for a continuous period of (i) not less than 12 months
for each 12-month period the Secretary of HHS assumes such obligations, or (ii)
24 months, whichever is greater in a health manpower shortage area as a member
of the National Health Service Corps or as a private practitioner. In return,
the Secretary of HHS will pay an amount, not to exceed $10,000 per 12-month
period, to the holder of the borrower's HEAL Loan to be applied toward interest
and principal.
Insurance Fund
The federal government has established pursuant to the HEAL Act a
student loan insurance fund which is available without fiscal year limitation to
the Secretary of HHS for making payments in connection with the collection or
default of loans insured under the HEAL Program. If moneys in the fund are
insufficient to make the payments on collection or default of insured loans, the
Secretary of HHS is authorized, to the extent provided in advance by
appropriation acts, to issue through the Secretary of the Treasury obligations
containing terms and conditions prescribed by the Secretary of HHS and approved
by the Secretary of the Treasury, bearing interest at a rate determined by the
Secretary of the Treasury. The Secretary of the Treasury is authorized and
directed to purchase such obligation by the HEAL Act.
Collection/Litigation
The use of litigation by the lender could affect the cost of collection
on defaulted HEAL Loans.
DESCRIPTION OF THE NOTES
General
The Notes will be issued pursuant to the terms of the Indenture, 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
Notes and the Indenture. The summary does not purport to be complete and is
qualified in its entirety by reference to the provisions of the Notes, the
Indenture and the Terms Supplement, which provisions are incorporated by
reference herein.
The Notes will initially be represented by one or more Notes registered
in the name of the nominee of DTC (together with any successor depository
selected by the Administrator, the "Depository") except as set forth below. The
Notes will be available for purchase in denominations of $50,000 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. 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 "-- Book-Entry
Registration" and "-- Definitive Notes."
The Notes
Distributions of Interest. Interest will accrue during each Interest
Period on the principal balance of each Class of Notes at a rate per annum equal
to the related Class Interest Rate (calculated as provided below) and will be
payable quarterly on each Distribution Date to the Noteholders as of the related
Record Date. Interest distributions due on any Class of Notes for any
Distribution Date but not distributed on such Distribution Date will be due on
the next Distribution Date increased by an amount equal to interest on such
amount at the applicable Class Interest Rate for the period from
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the Distribution Date for which such interest was first due until the
Distribution Date such interest is paid. Interest payments on the Notes will
generally be funded from Available Funds, Quarterly Advances and amounts, if
any, on deposit in the Reserve Account remaining after the deposit of the
Transaction Fees and Consolidation Loan Fees in the Expense Account. Interest
will be paid pro rata to the holders of each such Class of Notes outstanding.
See "Description of the Transfer and Servicing Agreements -- Distributions" and
"-- Credit Enhancement."
Within each Interest Payment Period, unless the Net Loan Rate for such
Interest Payment Period is a lower interest rate, each Class of Notes will bear
interest during each Interest Period for such Class at the Formula Interest
Rate. For the initial Interest Period (commencing on the Closing Date) for each
Class of Notes, the Formula Interest Rate for each such Class shall be as stated
on the inside cover page of this Prospectus. The Formula Interest Rate for each
Interest Period after the initial Interest Period for each Class of Notes will
equal (i) in the case of the Class A Notes, the Floating Rate (T-Bill) as of the
T-Bill Rate Determination Date for such Interest Period plus the applicable
Margin for such Class, and (ii) in the case of the Class B Notes, One-Month
LIBOR as of the LIBOR Determination Date for such Interest Period plus the
applicable Margin for such Class. Interest on each Class of Class A Notes will
be calculated on the basis of the actual number of days elapsed in each Interest
Period divided by 365 or 366, as applicable, and interest on the Class B Notes
will be calculated on the basis of the actual number of days elapsed in each
Interest Period divided by 360.
Notwithstanding the foregoing, if the average of the Formula Interest
Rates with respect to any Class for any Interest Payment Period (calculated by
dividing the sum of the Formula Interest Rates for such Class in effect on each
day during such Interest Payment Period by the number of days in such Interest
Payment Period) is greater than the Net Loan Rate, then the Class Interest Rate
for such Interest Period will be the Net Loan Rate. The Net Loan Rate for any
Interest Period within an Interest Payment Period will not be determined until
the Distribution Determination Date for such Interest Payment Period (which is
the last Business Day of such Interest Payment Period), and thus, the Class
Interest Rate with respect to any Class of Notes will not be finally determined
until the end of an Interest Payment Period. In no event, however, will the
Class Interest Rate for any Class of Notes exceed 18.0% per annum.
Noteholders' Interest Carryover. If the Class Interest Rate for any
Class of Notes for any Interest Payment Period is based on the Net Loan Rate,
the excess of (a) the amount of interest on such Class of Notes that would have
accrued in respect of the related Interest Payment Period had interest been
calculated based on the applicable Formula Interest Rate over (b) the amount of
interest such Class of Notes actually accrued in respect of such Interest
Payment Period based on the Net Loan Rate (such excess, together with the unpaid
portion of any such excess from prior Interest Payment Periods (and interest
accrued thereon calculated based on the Formula Interest Rate applicable to such
Class of Notes is referred to as the "Noteholders' Interest Carryover") will be
paid on the dates and in the priority as described herein under "Description of
the Transfer and Servicing Agreements -- Distributions." Any amount of
Noteholders' Interest Carryover with respect to a Class of Notes remaining after
the earlier of the Distribution Date on which the outstanding principal amount
of such Class of Notes has been reduced to zero and the distribution of all
Available Funds on the Final Maturity Date of such Class of Notes, will never
become due and payable and will be discharged as to the applicable Class of
Notes on such date. The ratings of the Notes do not address the likelihood of
the payment of the amount of any Noteholders' Interest Carryover. Any reference
herein or in the Indenture or the Transfer and Servicing Agreement to
"principal" or "interest" does not include within the meaning of such words
Noteholders' Interest Carryover or any interest accrued thereon.
Distributions of Principal. Principal of the Notes will be payable
quarterly, on each Distribution Date, generally in the order of priority
described in "The Transfer and Servicing Agreements -- Distributions." Principal
payments on a Class of Notes will generally be derived from Available Funds
remaining after the Indenture Trustee has deposited in the Expense Account the
Transaction Fees, the Consolidation Loan Fees, overdue Transaction Fees and
overdue Consolidation Loan Fees and deposited in the Note Distribution Account
the Noteholders' Interest Distribution Amount. Additionally, until the Parity
Percentage equals [_____%], amounts otherwise required to be distributed to the
Transferor will be applied as additional principal payments. See "Description of
the Transfer and Servicing Agreements -- Distributions" and "-Credit
Enhancement." If such sources are insufficient to pay the Noteholders' Principal
Distribution Amount for such Distribution Date, such shortfall will be added to
the principal payable to the Noteholders on subsequent Distribution Dates and
(except with respect to the Final Maturity Date of a Class of Notes) such
shortfall will not constitute an Event of Default. Additionally, on the Final
Maturity Date for a Class of Notes amounts in the Reserve
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Account will be available to reduce the principal balance of such Class of Notes
to zero to the extent Available Funds are insufficient to make such payment.
Notwithstanding the foregoing, if an Event of Default has occurred with respect
to payment of the Notes, principal will be paid to each Class of Class A Notes
pro rata, based upon the outstanding principal amount of each Class of Class A
Notes. No distribution in respect of principal of Class B Notes will be made
until each of the Class A Notes has been paid in full. See "Description of the
Transfer and Servicing Agreements -- Distributions."
The aggregate outstanding principal amount of each Class of Notes will
be payable in full on the Distribution Date identified in the Summary of Terms
under "Final Maturity Date" (the "Final Maturity Date"). The actual date on
which the aggregate outstanding principal of and accrued interest on any Class
of Notes are paid may be earlier than its respective Final Maturity Date, based
on a variety of factors, including those described above under "Risk Factors --
Reinvestment Risk to Noteholders from Prepayments of Notes" and "Maturity and
Prepayment Considerations."
Determination of Floating Rate (T-Bill)
Pursuant to the Transfer and Servicing Agreement, for each Interest
Period after the initial Interest Period, the Master Servicer will determine
Floating Rate (T-Bill) for purposes of calculating the Formula Interest Rate on
the Class A Notes and the Noteholder' Interest Carryover as of T-Bill Rate
Determination Date for each such Interest Period. The "T-Bill Rate Determination
Date" is the first day of each calendar week on which the United States Treasury
auctions 91-day Treasury Bills, which currently is the United States Treasury's
first business day of each week). The "Rate Adjustment Date" for the Class A
Notes (which, except for the initial Interest Period, also will be the first day
of an Interest Period for the Class A Notes) will be the first day following
each T-Bill Rate Determination Date. Following the initial Interest Period, each
Interest Period thereafter shall commence on a Rate Adjustment Date for the
Class A Notes (i.e., the day immediately following each T-Bill Rate
Determination Date) and shall continue through and include the day immediately
preceding the next Rate Adjustment Date for the Class A Notes.
The Master Servicer shall calculate Floating Rate (T-Bill) on each
T-Bill Rate Determination Date. "Floating Rate (T-Bill)" shall mean that rate of
interest per annum equal to the Bond Equivalent Yield - 91-Day T- Bill on the
91-day United States Treasury Bills sold at the auction of such Bills occurring
on the T-Bill Rate Determination Date. "Bond Equivalent Yield - 91-Day T-Bill"
shall mean a yield (expressed as a percentage) calculated in accordance with the
following formula and rounded to the nearest one-hundredth of one percent:
Bond Equivalent Yield = Q x N x 100
---------------
360 - (91 x Q)
where "Q" refers to the per annum rate for the security quoted on a bank
discount basis and expressed as a decimal and "N" refers to 365 or 366, as the
case may be. The Master Servicer is to report the Formula Interest Rate for the
Class A Notes to the Indenture Trustee in writing no later than the Business Day
following the applicable T-Bill Rate Determination Date.
If the Master Servicer fails or refuses to determine the interest rate
for the Class A Notes, such interest rate shall be determined by the Indenture
Trustee or a securities dealer appointed by the Indenture Trustee and capable,
in the reasonable judgment of the Indenture Trustee, of making such a
determination in accordance with the Indenture and written notice of such
determination shall be given by such securities dealer to the Indenture Trustee.
If the results of the auctions of 91-day Treasury Bills cease to be
reported by the United States Treasury, or no such auction is held in a
particular week, then the Floating Rate (T-Bill) in effect as a result of the
last such publication or report by the United States Treasury will remain in
effect until such time, if any, as the results of auctions of 91-day Treasury
Bills shall again be reported by the United States Treasury or such auction is
held, as the case may be.
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Determination of LIBOR
Pursuant to the Transfer and Servicing Agreement, for each Interest
Period after the initial Interest Period, the Master Servicer will determine
One-Month LIBOR for purposes of calculating the Formula Interest Rate due on the
Class B Notes and the Noteholders' Interest Carryover for each given Interest
Period on the second Business Day prior to the commencement of each Interest
Period (each, a "LIBOR Determination Date"). For purposes of calculating
One-Month LIBOR, a Business Day is any day on which banks in London and New York
City are open for the transaction of business. The "Rate Adjustment Date" for
the Class B Notes (which, except for the initial Interest Period, also will be
the first day of an Interest Period for the Class B Notes) will be the 25th day
of each month, except that the Rate Adjustment Date occurring in January, April,
July or October will be the Distribution Date occurring in such month. Following
the initial Interest Period, each Interest Period thereafter shall commence on a
Rate Adjustment Date for the Class B Notes and shall continue through and
include the day immediately preceding the next Rate Adjustment Date for the
Class B Notes.
"One-Month LIBOR" means the London interbank offered rate for deposits
in U.S. dollars having a maturity of one month 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 Master
Servicer 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 Master Servicer, at approximately 11:00 a.m., New York City time, on such
LIBOR Determination Date for loans in the 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, One-Month LIBOR in effect for the
applicable LIBOR Reset Period will be One-Month LIBOR in effect for the previous
LIBOR Reset Period.
"Telerate Page 3750" means the display page so designated on the Dow
Jones Telerate Service (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices).
"Reference Bank" means a leading bank (i) engaged in transactions in
Eurodollar deposits in the international Eurocurrency market, (ii) not
controlling, controlled by or under common control with the Administrator or the
Transferor and (iii) having an established place of business in London.
The Indenture
Modification of the Indenture. With the consent of the holders of a
majority of the aggregate principal amount of Directing Notes then outstanding
(or, with respect to any change affecting only certain Classes of Notes, the
holders of a majority of the aggregate principal amount of Notes of such Class),
the Indenture Trustee and the Trust may execute a supplemental indenture to add
provisions to, or change in any manner or eliminate any provisions of, the
Indenture with respect to the Notes, or to modify (except as provided below) in
any manner the rights of the Noteholders.
Without the consent of the holder of each outstanding Note affected
thereby, however, no supplemental indenture will (i) change the date of payment
of any installment of principal of or interest on any Note or reduce the
principal amount thereof or the interest rate thereon, change the provisions of
the Indenture relating to the application of collections on, or the proceeds of
the sale of, the assets of the Trust to payment of principal of or interest on
the Notes, or change any place of payment where, or the coin or currency in
which, any Note or any interest thereon is payable, (ii) impair the right to
institute suit for the enforcement of certain provisions of the Indenture
regarding payment, (iii) reduce the percentage of the aggregate amount of the
outstanding Notes of any Class the consent of the holders of which is required
for any such supplemental indenture or the consent of the holders of which is
required for any waiver of compliance with certain provisions of the Indenture
or certain defaults thereunder and their consequences as provided for in the
Indenture, (iv) modify or alter certain provisions of the Indenture regarding
the determination of Notes that are considered "outstanding" for consent,
waivers and other matters, (v) reduce the percentage of the aggregate
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outstanding amount of the Notes the consent of the holders of which is required
to direct the Eligible Lender Trustee on behalf of the Trust to sell or
liquidate the Financed Student Loans, (vi) decrease the percentage of the
aggregate principal amount of the Notes required to amend the sections of the
Indenture which specify the applicable percentage of aggregate principal amount
of the Notes necessary to amend the Indenture or certain other related
agreements, (vii) modify any of the provisions of the Indenture in such manner
as to affect the calculation of the amount of any payment of interest on any
Note or (viii) permit the creation of any lien ranking prior to or on a parity
with the lien of the Indenture with respect to any of the collateral for the
Notes or, except as otherwise permitted or contemplated in the Indenture,
terminate the lien of the Indenture on any such collateral or deprive the holder
of any Note of the security afforded by the lien of the Indenture.
The Trust and the Indenture Trustee may also enter into supplemental
indentures, but without obtaining the consent of Noteholders, for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Indenture or modifying in any manner the rights of Noteholders
so long as such action will not, in the opinion of counsel satisfactory to the
Indenture Trustee, materially and adversely affect the interest of any
Noteholder. Any such amendment or supplemental indenture shall be deemed not to
materially and adversely affect any Noteholder if there is delivered to the
Indenture Trustee written notification from each Rating Agency that initially
rated the Notes to the effect that such amendment or supplement will not cause
that Rating Agency to reduce the then current rating assigned to the Notes.
Events of Default; Rights Upon Event of Default. An "Event of Default"
with respect to the Notes is defined in the Indenture as consisting of the
following (except as described in the remaining sentences of this paragraph):
(i) a default for five business days or more in the payment of any Noteholders'
Interest Distribution Amount after the same becomes due and payable; (ii) a
default for five business days in the payment of principal of any Note when the
same becomes due and payable; (iii) a default in the observance or performance
of any covenant or agreement of the Trust made in the Indenture or the Transfer
and Servicing Agreement and the continuation of any such default for a period of
30 days after notice thereof is given to the Trust by the Indenture Trustee or
to the Trust and the Indenture Trustee by the holders of at least 25% in
aggregate principal amount of the Directing Notes then outstanding; (iv) any
representation or warranty made by the Trust in the Indenture or in any
certificate delivered pursuant thereto or in connection therewith having been
incorrect in a material respect as of the time made, and such breach not having
been cured within 30 days after notice thereof is given to the Trust by the
Indenture Trustee or to the Trust and the Indenture Trustee by the holders of at
least 25% in aggregate principal amount of the Directing Notes then outstanding;
or (v) certain events of bankruptcy, insolvency, receivership or liquidation of
the Trust. However, the amount of principal required to be distributed to
Noteholders on any Distribution Date is limited to the amount of Available Funds
after payment of the Transaction Fees, overdue Transaction Fees, the
Consolidation Loan Fees, overdue Consolidation Loan Fees and the Noteholders'
Interest Distribution Amount. Any such principal shortfalls on any Distribution
Date will be carried over as a Noteholders' Principal Carryover Shortfall to be
paid on succeeding Distribution Dates. Therefore, the failure to pay principal
on any Class of Notes may not result in the occurrence of an Event of Default
until the Final Maturity Date of such Class of Notes. In addition, the failure
to pay the aggregate amount of Noteholders' Interest Carryover as a result of
insufficient Available Funds will not result in the occurrence of an Event of
Default.
If an Event of Default should occur and be continuing with respect to
any Class of Notes, the Indenture Trustee or holders of a majority in aggregate
principal amount of the Directing Notes then outstanding may declare all
outstanding Notes to be immediately due and payable, by notice to the Trust or
notice to the Indenture Trustee if given by the Noteholders. Such declaration
may be rescinded by the holders of a majority in aggregate principal amount of
the Directing Notes then outstanding at any time prior to the entry of judgment
in a court of competent jurisdiction for the payment of such amount if (i) the
Trust has paid to the Indenture Trustee a sum equal to all amounts then due with
respect to the Notes (without giving effect to such acceleration) and due to the
Indenture Trustee and (ii) all Events of Default (other than nonpayment of
amounts due solely as a result of such acceleration) have been cured or waived.
If the Notes have been declared to be due and payable following an
Event of Default with respect thereto, the Indenture Trustee may, in its
discretion, require the Eligible Lender Trustee to sell the Financed Student
Loans or elect to have the Eligible Lender Trustee maintain possession of the
Financed Student Loans and continue to apply collections
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with respect to such Financed Student Loans as if there had been no declaration
of acceleration. In addition, the Indenture Trustee is prohibited from directing
the Eligible Lender Trustee to sell the Financed Student Loans following an
Event of Default, other than a default for five days or more in the payment of
any principal or a default for five days or more in the payment of any interest
on any Note, unless (i) the holders of 100% of the aggregate amount of the
Directing Notes outstanding consent to such sale, (ii) the proceeds of such sale
are sufficient to pay in full the principal of and the accrued interest on the
Notes outstanding at the date of such sale or (iii) the Indenture Trustee
determines that the collections on the Financed Student Loans and other assets
of the Trust would not be sufficient on an ongoing basis to make all payments on
the Notes as such payments would have become due if such obligations had not
been declared due and payable, and the Indenture Trustee obtains the consent of
the holders of 66-2/3% of the aggregate principal amount of the Directing Notes
then outstanding.
Subject to the provisions of the Indenture relating to the duties of
the Indenture Trustee, if an Event of Default should occur and be continuing
with respect to the Notes, the Indenture Trustee will be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of Notes, if the Indenture Trustee reasonably
believes it will not be adequately indemnified against the costs, expenses and
liabilities which might be incurred by it in complying with such request.
Subject to such provisions for indemnification and certain limitations contained
in the Indenture, the holders of a majority in aggregate principal amount of the
outstanding Directing Notes will have the right to direct the time, method and
place of conducting any proceeding or any remedy available to the Indenture
Trustee and the holders of a majority in aggregate principal amount of the
Directing Notes then outstanding, may, in certain cases, waive any default with
respect thereto, except a default in the payment of principal or interest or a
default in respect of a covenant or provision of the Indenture that cannot be
modified without the waiver or consent of all the holders of the outstanding
Directing Notes.
No holder of any Note will have the right to institute any proceeding
with respect to the Indenture, unless (i) such holder previously has given to
the Indenture Trustee written notice of a continuing Event of Default, (ii) the
holders of not less than 25% in principal amount of the outstanding Directing
Notes have requested in writing that the Indenture Trustee institute such
proceeding in its own name as Indenture Trustee, (iii) such holder or holders
have offered the Indenture Trustee reasonable indemnity, (iv) the Indenture
Trustee has for 60 days after notice failed to institute such proceeding and (v)
no direction inconsistent with such written request has been given to the
Indenture Trustee during such 60-day period by the holders of a majority in
aggregate principal amount of the outstanding Directing Notes.
In addition, the Indenture Trustee and the Noteholders will covenant
that they will not, prior to the date which is one year and a day after the
termination of the Indenture, institute against the Trust any bankruptcy,
reorganization or other proceeding under any Federal or state bankruptcy or
similar law in connection with any obligations relating to the Notes, the
Indenture or the Related Documents (as defined below).
If an Event of Default should occur, payment of the Notes could occur,
if at all, later than their respective Final Maturity Dates.
Certain Covenants. The Trust may not consolidate with or merge into any
other entity, unless (i) the entity formed by or surviving such consolidation or
merger is organized under the laws of the United States, or any state, and such
entity expressly assumes the Trust's obligation to make due and punctual
payments upon the Notes and the performance or observance of every agreement and
covenant of the Trust under the Indenture and any supplemental indenture, (ii)
no Event of Default has occurred and is continuing immediately after such merger
or consolidation, (iii) the Trust has received an opinion of counsel to the
effect that such consolidation or merger would have no material adverse federal
or [______] state tax consequence to the Trust or to any Certificateholder or
Noteholder, (iv) any action as is necessary to maintain the lien and security
interest created by the Indenture shall have been taken and (v) the Trust shall
have delivered to the Indenture Trustee an officer's certificate of the
Administrator and an opinion of counsel each stating that such consolidation or
merger and any supplemental indenture relating thereto comply with the terms of
the Indenture and that all conditions precedent provided for in the Indenture to
such transaction have been complied with (including any Exchange Act filings) in
all material respects.
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Except as otherwise permitted by the Indenture, the Transfer and
Servicing Agreement and related documents (the "Related Documents"), the Trust
may not convey or transfer all or substantially all its properties or assets,
including the assets securing the Notes, unless the conditions specified in (i)
through (v) above with respect to a permitted merger or consolidation are
substantially met, plus the acquiror must agree (a) that all right, title and
interest in the property and assets so conveyed or transferred are subordinate
to the rights of the Noteholders, (b) to indemnify the Trust (unless otherwise
provided in a supplemental indenture) and (c) to make all filings with the
Commission required by the Exchange Act in connection with the Notes.
The Trust will not, among other things, (i) except as expressly
permitted by the Related Documents, sell, transfer, exchange or otherwise
dispose of any of the assets of the Trust, (ii) claim any credit on or make any
deduction from the principal and interest payable in respect of any Notes (other
than amounts withheld under the Code or applicable state law) or assert any
claim against any present or former holder of Notes because of the payment of
taxes levied or assessed upon the Trust, (iii) except as contemplated by the
Related Documents, dissolve or liquidate in whole or in part, (iv) permit the
validity or effectiveness of the Indenture or any supplemental indenture to be
impaired, or permit the lien of the Indenture and any supplemental indenture to
be amended, hypothecated, subordinated, terminated or discharged, or permit any
person to be released from any covenants or obligations with respect to any
Notes under the Indenture except as may be expressly permitted thereby, (v)
permit any lien, charge, excise, claim, security interest, mortgage or other
encumbrance (other than the lien of the Indenture and any supplemental
indenture) 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 (other than certain tax and other liens arising by operation of law,
except as expressly permitted by the Related Documents) or (vi) permit the lien
of the Indenture and any supplemental indenture not to constitute a valid first
priority (other than with respect to such tax or other lien) security interest
in the assets securing the Notes.
The Trust may not engage in any activity other than financing,
purchasing, owning, selling, servicing and managing the Financed Student Loans
and activities incidental thereto.
The Trust will not issue, incur, assume or guarantee or otherwise
become liable for any indebtedness other than the Notes or otherwise in
accordance with the Related Documents.
Annual Compliance Statement and Other Notices. The Administrator, on
behalf of the Trust, will be required to file annually, commencing in 1999, with
the Indenture Trustee a written statement as to the fulfillment of the Trust's
obligations under the Indenture. The Trust is required to give the Indenture
Trustee written notice of each Event of Default among other notices. The
Indenture Trustee will notify Noteholders of known defaults under the Indenture
within 90 days after their occurrence.
Satisfaction and Discharge of Indenture. The Indenture will be
discharged with respect to the collateral securing the Notes upon the delivery
to the Indenture Trustee for cancellation of all the Notes or, with certain
limitations, upon deposit with the Indenture Trustee of funds sufficient for the
payment in full of all the Notes.
The Indenture Trustee. Bankers Trust Company, a New York banking
corporation, will be the Indenture Trustee under the Indenture.
Bankers Trust Company, the Indenture Trustee, may serve from time to
time as trustee under indentures or trust agreements with the Transferor or its
affiliates relating to other issues of their securities. In addition, the
Transferor or its affiliates may have other banking relationships with Bankers
Trust Company and its affiliates.
Book-Entry Registration
The description which follows of the procedures and record keeping with
respect to beneficial ownership interests in the Notes, payment of principal of
and interest on the Notes to DTC Participants, Cedel Participants and Euroclear
Participants or to purchasers of the Notes, confirmation and transfer of
beneficial ownership interests in the Notes, and other securities-related
transactions by and between DTC, Cedel, Euroclear, DTC Participants, Cedel
Participants, Euroclear Participants and Note Owners, is based solely on
information furnished by DTC, Cedel and
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Euroclear and has not been independently verified by the Transferor or the
Underwriters. The inclusion of this information is not, and should not be
construed as, a representation by the Transferor or the Underwriters as to its
accuracy or completeness or otherwise.
Noteholders may hold their certificates through DTC (in the United
States) or Cedel or Euroclear (in Europe) if they are participants of such
systems, or indirectly through organizations that are participants in such
systems.
Cede, as nominee for DTC, will hold the global Notes. Cedel and
Euroclear will hold omnibus positions on behalf of the Cedel Participants and
the Euroclear Participants, respectively, through customers securities accounts
in Cedel's and Euroclear's names on the books of their respective depositories
(collectively, the "Depositories") which in turn will hold such positions in
customers' securities accounts in the Depositories' names on the books of DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities for its Participants ("DTC Participants") and facilitates the
clearance and settlement among DTC Participants of securities transactions, such
as transfers and pledges, in deposited securities through electronic book-entry
changes in DTC Participants' accounts, thereby eliminating the need for physical
movement of securities certificates. DTC Participants include securities brokers
and dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to the DTC system is also available to others
such as securities brokers and dealers, banks, and trust companies that clear
through or maintain a custodial relationship with a DTC Participant, either
directly or indirectly ("Indirect Participants"). The rules applicable to DTC
and its DTC Participants are on file with the Commission.
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between Cedel Participants and Euroclear Participants will
occur in the ordinary way in accordance with their applicable rules and
operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its Depository; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depository to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Cedel Participants and Euroclear
Participants may not deliver instructions directly to the Depositories.
Because of time-zone differences, credits of securities in Cedel or
Euroclear as a result of a transaction with a DTC Participant will be made
during the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant Cedel
Participant or Euroclear Participant on such business day. Cash received in
Cedel or Euroclear as a result of sales of securities by or through a Cedel
Participant or a Euroclear Participant to a DTC Participant will be received
with value on the DTC settlement date but will be available in the relevant
Cedel or Euroclear cash account only as of the business day following settlement
in DTC.
Day traders that use Cedel or Euroclear and that purchase the globally
offered Notes from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades may fail on the sale side
unless affirmative actions are taken. Participants should consult with their
clearing system to confirm that adequate steps have been taken to assure
settlement.
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Purchases of Notes under the DTC system must be made by or through DTC
Participants, which will receive a credit for the Notes on DTC's records. The
ownership interest of each actual owner of a Note (a "Note Owner") is in turn to
be recorded on the DTC Participants' and Indirect Participants' records. Note
Owners will not receive written confirmation from DTC of their purchase, but
Note Owners are expected to receive written confirmations providing details of
the transaction, as well as periodic statements of their holdings, from the DTC
Participant or Indirect Participant through which the Note Owner entered into
the transaction. Transfers of ownership interests in the Notes are to be
accomplished by entries made on the books of DTC Participants acting on behalf
of Note Owners. Note Owners will not receive certificates representing their
ownership interest in Notes, except in the event that use of the book-entry
system for the Notes is discontinued.
To facilitate subsequent transfers, all Notes deposited by DTC
Participants with DTC are registered in the name of DTC's nominee, Cede. The
deposit of Notes with DTC and their registration in the name of Cede effects no
change in beneficial ownership. DTC has no knowledge of the actual Note Owners
of the Notes; DTC's records reflect only the identity of the DTC Participants to
whose accounts such Notes are credited, which may or may not be the Note Owners.
The DTC Participants will remain responsible for keeping account of their
holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to DTC
Participants, by DTC Participants to Indirect Participants, and by DTC
Participants and Indirect Participants to Note Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Neither DTC nor Cede will consent or vote with respect to Notes. Under
its usual procedures, DTC mails an omnibus proxy to the issuer as soon as
possible after the record date, which assigns Cede's consenting or voting rights
to those DTC Participants to whose accounts the Notes are credited on the record
date (identified in a listing attached thereto).
Principal and interest payments on the Notes will be made to DTC. DTC's
practice is to credit DTC Participants' accounts on the applicable Distribution
Date in accordance with their respective holdings shown on DTC's records unless
DTC has reason to believe that it will not receive payment on such Distribution
Date. Payments by DTC Participants to Note Owners will be governed by standing
instructions and customary practices, as is the case with securities held for
the accounts of customers in bearer form or registered in "street name" and will
be the responsibility of such DTC Participant and not of DTC, the Indenture
Trustee or the Transferor, subject to any statutory or regulatory requirements
as may be in effect from time to time. Payment of principal and interest to DTC
is the responsibility of the Indenture Trustee, disbursement of such payments to
DTC Participants shall be the responsibility of DTC, and disbursement of such
payments to Note Owners shall be the responsibility of DTC Participants and
Indirect Participants.
DTC may discontinue providing its services as securities depository
with respect to the Notes at any time by giving reasonable notice to the
Transferor or the Indenture Trustee. Under such circumstances, in the event that
a successor securities depository is not obtained, Definitive Notes are required
to be printed and delivered. The Administrator may decide to discontinue use of
the system of book-entry transfers through DTC (or a successor securities
depository). In that event, Definitive Notes will be delivered to Noteholders.
See "-- Definitive Notes."
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 32
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations and may include the underwriters of any Series of Notes. Indirect
access to Cedel is also available to others, such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Cedel Participant, either directly or indirectly.
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The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in any of 32
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in 25 countries generally similar to the
arrangements for cross-market transfers with DTC described above. The Euroclear
System is operated by Morgan Guaranty Trust Company of New York, Brussels,
Belgium office (the "Euroclear Operator" or "Euroclear"), under contract with
Euroclear Clearance System, Societe Cooperative, 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 Board establishes policy for the Euroclear System. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries and may include the
underwriters of any Series of Notes. Indirect access to the Euroclear System is
also available to other firms that maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System (collectively, the
"Terms and Conditions"). The Terms and Conditions govern transfers of securities
and cash within the Euroclear System, withdrawal of securities and cash from the
Euroclear System, and receipts of payments with respect to securities in the
Euroclear System. All securities in the Euroclear System are held on a fundable
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.
The Euroclear Operator has advised as follows: Under Belgian law,
investors that are credited with securities on the records of the Euroclear
Operator have a co-property right in the fungible pool of interests in
securities on deposit with the Euroclear Operator in an amount equal to the
amount of interests in securities credited to their accounts. In the event of
the insolvency of the Euroclear Operator, Euroclear Participants would have a
right under Belgian law to the return of the amount and type of interests in
securities credited to their accounts with the Euroclear Operator. If the
Euroclear Operator did not have a sufficient amount of interests in securities
on deposit of a particular type to cover the claims of all Euroclear
Participants credited with such interests in securities on the Euroclear
Operator's records, all Euroclear Participants having an amount of interests in
securities of such type credited to their accounts with the Euroclear Operator
would have the right under Belgian law to the return of their pro-rata share of
the amount of interests in securities actually on deposit. Under Belgian law,
the Euroclear Operator is required to pass on the benefits of ownership in any
interests in securities on deposit with it (such as dividends, voting rights and
other entitlements) to any person credited with such interests in securities on
its records.
Distributions with respect to Notes held through Cedel or Euroclear
will be credited to the cash accounts of Cedel Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depository. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Federal Income Tax Consequences." Cedel or the Euroclear Operator, as the
case may be, will take any other action permitted to be taken by a Noteholder
under the Agreement on behalf of a Cedel Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to its
Depository's ability to effect such actions on its behalf through DTC.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Notes among participants of DTC,
Cedel and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
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Definitive Notes
Notes will be issued in fully registered, certificated form (the
"Definitive Notes") to Note Owners or their nominees rather than to DTC or its
nominee, only if (i) the Administrator advises the Indenture Trustee for such
Series in writing that DTC is no longer willing or able to discharge properly
its responsibilities as Depository with respect to such Series of Notes, and the
Administrator is unable to locate a qualified successor, (ii) the Administrator,
at its option, advises the Trustee in writing that it elects to terminate the
book-entry system through DTC or successor securities depository or (iii) after
the occurrence of an Event of Default, Master Servicer Default or Administrator
Default Noteholders representing not less than 50% of the outstanding principal
balance of the Directing Notes advise the Indenture Trustee and DTC through DTC
Participants in writing that the continuation of a book-entry system through DTC
(or a successor thereto) is no longer in the best interest of the Noteholders.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will cause DTC to notify all DTC
Participants of the availability through DTC of Definitive Notes. Upon surrender
by DTC of the definitive certificate representing the Notes and instructions for
registration, the Indenture Trustee will issue the Notes as Definitive Notes,
and thereafter the Indenture Trustee will recognize the holders of such
Definitive Notes as holders under the Indenture ("Holders").
Distribution of principal and interest on the Notes will be made by the
Indenture Trustee directly to Holders of Definitive Notes in accordance with the
procedures set forth herein and in the Agreement. Interest payments and any
principal payments on each Distribution Date will be made to Holders in whose
names the Definitive Notes were registered at the close of business on the
related Record Date. The final payment on any Note (whether Definitive Notes or
the Notes registered in the name of Cede representing the Notes), will he made
only upon presentation and surrender of such Note at the office or agency
specified in the notice of final distribution to Noteholders. The Indenture
Trustee will provide such notice to registered Noteholders prior to the
Distribution Date on which it expects such final distributions to occur.
Definitive Notes will be transferable and exchangeable at the offices
of the transfer agent and registrar for the Notes, which shall initially be the
Indenture Trustee. No service charges will be imposed for any registration of
transfer or exchange, but the Transfer Agent and Registrar may require payment
of a sum sufficient to cover any tax or other governmental charge imposed in
connection therewith.
List of Noteholders
A Noteholder may, by written request to the Indenture Trustee, obtain
access to the list of all Noteholders maintained by the Indenture Trustee for
the purpose of communicating with other Noteholders with respect to their rights
under the Indenture or the Notes. The Indenture Trustee may elect not to afford
the requesting Noteholders access to the list of Noteholders if it agrees to
mail the desired communication or proxy, on behalf and at the expense of the
requesting Noteholders, to all Noteholders.
Reports to Noteholders
On each Distribution Date, the Indenture Trustee will provide to the
applicable Noteholders of record as of the related Record Date, a statement
setting forth substantially the same information as is required to be provided
on the report provided to the Indenture Trustee and the Trust described under
"Description of Transfer and Servicing Agreements -- Statements to Indenture
Trustee."
Within the prescribed period of time for tax reporting purposes after
the end of each calendar year during the term of the Indenture, the Indenture
Trustee will mail to each person who at any time during such calendar year was a
Noteholder and received any payment thereon, a statement containing certain
information for the purposes of such Noteholder's preparation of federal income
tax returns. See "Federal Income Tax Consequences."
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DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
General
The following is a summary of the material terms of the Transfer and
Servicing Agreement, pursuant to which the Eligible Lender Trustee on behalf of
the Trust will obtain, the Master Servicer will service and the Administrator
will perform certain administrative functions with respect to the Financed
Students Loans; the Administration Agreement, pursuant to which the
Administrator will undertake certain other administrative duties with respect to
the Trust and the Financed Student Loans; and the Trust Agreement, pursuant to
which the Trust has been created and the Certificates have been issued
(collectively, the "Transfer and Servicing Agreements"). The summary does not
purport to be complete and is qualified in its entirety by reference to the
provisions of the Transfer and Servicing Agreements. Each of such Transfer and
Servicing Agreements will be substantially in the form filed as an exhibit to
the Registration Statement of which this Prospectus is a part.
Conveyance of Initial Financed Student Loans; Representations and Warranties
On the Closing Date, the Transferor will contribute and assign to the
Eligible Lender Trustee on behalf of the Trust, without recourse, its entire
interest in the Initial Financed Student Loans described in the Transfer and
Servicing Agreement, all collections received and to be received with respect
thereto for the period after the Cut-off Date and all the Assigned Rights
pursuant to the Transfer and Servicing Agreement. Each Financed Student Loan
will be identified in schedules appearing as an exhibit to the Transfer and
Servicing Agreement. The Eligible Lender Trustee will, concurrently with such
contribution and assignment, execute, authenticate and deliver the Notes, which
will be authenticated by the Indenture Trustee.
In the Transfer and Servicing Agreement, the Transferor will make
certain representations and warranties with respect to the Financed Student
Loans to the Trust for the benefit of the Certificateholders and the
Noteholders, including, among other things, that (i) each Financed Student Loan,
at the time of transfer to the Trust, is free and clear of all security
interests, liens, charges and encumbrances and no offsets, defenses or
counterclaims have been asserted or, to the Transferor's knowledge, threatened;
(ii) the information provided with respect to the Financed Student Loans is true
and correct in all material respects as of the Cut-off Date (or in the case of
an Exchanged Financed Student Loan, as of its Subsequent Cut-off Date); and
(iii) each Financed Student Loan, at the time it was originated, complied and,
at the Closing Date (or in the case of an Exchanged Financed Student Loan, as of
its Subsequent Cut-off Date), complies in all material respects with applicable
federal and state laws (including, without limitation, the Higher Education Act,
the HEAL Act, consumer credit, truth-in-lending, equal credit opportunity and
disclosure laws) and applicable restrictions imposed by (A) the FFEL Program or
under any Guarantee Agreement with respect to FFELP Loans and (B) the HEAL
Program or under the HEAL Insurance Contract with respect to HEAL Loans.
Following the discovery by or notice to the Transferor of a breach of
any such representation or warranty with respect to any Financed Student Loan
that materially and adversely affects the interests of the Noteholders in such
Financed Student Loan (it being understood that any such breach that does not
affect any Guarantor's obligation to guarantee payment of such Financed FFELP
Loan or the Department of HHS's obligation to insure payment of any Financed
HEAL Loan will not be considered to have a material adverse effect for this
purpose), the Transferor will, unless such breach is cured within 120 days,
purchase such Financed Student Loan from the Eligible Lender Trustee, as of the
first day following the end of such 120-day period that is the last day of a
Collection Period, at a price equal to the applicable Purchase Amount (as
defined below). In addition, the Transferor will reimburse the Trust (i) for any
accrued interest amounts that the Department of HHS refuses to pay with respect
to Financed HEAL Loans due to, and (ii) for any accrued interest amounts that a
Guarantor refuses to pay pursuant to its Guarantee Agreement, or for any
Interest Subsidy Payments and Special Allowance Payments that are lost or that
must be repaid to the Department of Education with respect to Financed FFELP
Loans, as a result of a breach of any such representation or warranty by the
Transferor. The purchase and reimbursement obligations of the Transferor will
constitute, together with the right to receive certain amounts from the Reserve
Account, the sole remedy available to or on behalf of the Trust, the
Certificateholders or the Noteholders for any such uncured breach. The
Transferor's purchase and reimbursement
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obligations are contractual obligations pursuant to the Transfer and Servicing
Agreement that may be enforced against the Transferor, but the breach of which
will not constitute an Event of Default.
"Purchase Amount" means, as to any Financed Student Loan on any date of
determination, the amount required to prepay in full the outstanding principal
balance of such Financed Student Loan as of the last day of the most recently
completed Collection Period, including all accrued but unpaid interest thereon
(including interest to be capitalized) through the last day of the Collection
Period in which such Financed Student Loan is being purchased.
Exchange Period and Exchanged Financed Student Loans
During the period (the "Exchange Period") from the Closing Date until
December 31, 2002, if a borrower on a Financed Student Loan who is also a
borrower under one or more Student Loans (whether or not all such loans are in
the Trust) elects to consolidate such loans with the proceeds of a Consolidation
Loan or a HEAL Consolidation Loan to be made by the Transferor, the Eligible
Lender Trustee, at the option of the Transferor and subject to certain
conditions, will be obligated to transfer to the Transferor the Financed Student
Loans being consolidated by the Transferor in exchange for the related
Consolidation Loan or HEAL Consolidation Loan to be made by the Transferor (each
an "Exchanged Consolidation Loan" and collectively, the "Exchanged Consolidation
Loans"). In addition, during the Exchange Period, the Eligible Lender Trustee,
at the option of the Transferor and subject to certain conditions, will be
obligated to exchange with the Transferor existing Financed Student Loans owned
by the Trust for one or more Student Loans owned by the Transferor that are
serial (i.e., made to the same borrower under the same loan program and
guaranteed by the same Guarantor or insured by the Department of HHS) to an
existing Financed Student Loan owned by the Trust (each such loan exchanged into
the Trust, an "Exchanged Serial Loan" and together with the Exchanged
Consolidation Loans, the "Exchanged Financed Student Loans") provided that each
Exchanged Serial Loan meets certain criteria including that (i) the Exchanged
Serial Loan was originated under the same loan program as the Financed Student
Loan for which it is being exchanged and entitles the holder thereof to receive
interest based on the same interest rate index as the Financed Student Loan for
which it is being exchanged, (ii) the Exchanged Serial Loan will not, at any
level of such interest rate index, have an interest rate that is less than the
Financed Student Loan for which it is being exchanged and (iii) the average
principal balance per borrower of the Exchanged Serial Loans being transferred
into the Trust on each Exchange Date and the existing Financed Student Loans to
which they are serial is within 10% (plus or minus) of the average principal
balance per borrower of the Financed Student Loans being transferred to the
Transferor on such Exchange Date and the existing Student Loans owned by the
Transferor to which they are serial, if any.
In addition, if on any date (each, an "Exchange Date") that any
Exchanged Financed Student Loans are being exchanged into the Trust, the
outstanding principal balance as of the related Subsequent Cut-off Date of all
the Exchanged Financed Student Loans being exchanged into the Trust on such
Exchange Date is less than the outstanding principal balance of all the Financed
Student Loans for which they are being exchanged plus any Issuer Consolidation
Payments being made on such Exchange Date, an amount (an "Adjustment Payment")
equal to such difference will be required to be deposited by the Transferor into
the Collection Account on such Exchange Date.
If on any Exchange Date the aggregate outstanding principal balance as
of the related Subsequent Cutoff Date of all the Exchanged Financed Student
Loans that are Consolidation Loans or HEAL Consolidation Loans being exchanged
into the Trust on such Exchange Date is greater than the outstanding principal
balance of all the Financed Student Loans for which they are being exchanged, an
amount up to the amount of such excess (the "Issuer Consolidation Payments")
will be remitted to the Transferor from Consolidation Prepayments on deposit in
the Collection Account. "Consolidation Prepayments" means, for any Exchange
Date, the amount of principal then on deposit in the Collection Account
representing payments received as a result of Financed Student Loans being
repaid with the proceeds of Consolidation Loans or HEAL Consolidation Loans
(provided, however, if an Exchange Date occurs during the month of a
Distribution Date, Consolidation Prepayments will not include amounts received
during the month of such Distribution Date).
An acquisition of Exchanged Financed Student Loans will be prohibited
at any time that an Event of Default under the Indenture, a Master Servicer
Default under the Transfer and Servicing Agreement or an Administrator Default
under the Administration Agreement is continuing.
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Accounts
The Indenture Trustee will establish and maintain the Collection
Account, the Note Distribution Account, the Expense Account, the Reserve Account
and the Quarterly Advance Account. The Eligible Lender Trustee will establish
and maintain the Certificate Distribution Account and the Certificate Quarterly
Advance Account in the name of the Eligible Lender Trustee on behalf of the
Certificateholders. The foregoing accounts are referred to collectively as the
"Trust Accounts" in the name of the Indenture Trustee on behalf of the
Noteholders or the Eligible Lender Trustee on behalf of the Certificateholders.
Funds in the Trust Accounts will be invested as provided in the
Transfer and Servicing Agreement in Eligible Investments. "Eligible Investments"
are generally limited to investments acceptable to the Rating Agencies as being
consistent with the rating of the Notes. If the amount required to be withdrawn
from the Reserve Account to cover shortfalls in the amount of Available Funds
exceeds the amount of cash in the Reserve Account, a temporary shortfall in the
amounts distributed to the Noteholders could result. This could, in turn,
increase the average life of the Notes. 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.
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.
An "Eligible Institution" is generally a depository institution organized under
the federal or any state banking laws whose deposits are insured by the Federal
Deposit Insurance Corporation and whose unsecured long-term debt obligations or
short-term debt ratings are acceptable to Standard & Poor's and Moody's.
Servicing Procedures
Pursuant to the Transfer and Servicing Agreement, the Master Servicer
has agreed to service, and perform all other related tasks with respect to, all
the Financed Student Loans acquired from time to time. The Master Servicer is
required pursuant to the Transfer and Servicing Agreement to perform all
services and duties customary to the servicing of Financed Student Loans
(including all collection practices), and to do so with reasonable care and in
compliance with all standards and procedures provided for in the Higher
Education Act, the Guarantee Agreements, the Heal Act, the HEAL Insurance
Contract and all other applicable federal and state laws.
Without limiting the foregoing, the duties of the Master Servicer under
the Transfer and Servicing Agreement include, but are not limited to, collecting
and depositing into the Collection Account all payments with respect to the
Financed Student Loans, including claiming and obtaining any Insurance Payments
with respect to Financed HEAL Loans, and, with respect to Financed FFELP Loans,
any Guarantee Payments, Interest Subsidy Payments and Special Allowance
Payments; responding to inquiries from borrowers on the Financed Student Loans;
and investigating delinquencies and sending out statements, payment coupons and
tax reporting information to borrowers. In addition, the Master Servicer will
keep ongoing records with respect to such Financed Student Loans and collections
thereon and will furnish monthly and annual statements to the Administrator with
respect to such information, in accordance with the customary standards and as
otherwise required in the Transfer and Servicing Agreement.
The Master Servicer may enter into sub-servicing agreements with
sub-servicers pursuant to which some or all of the Financed Student Loans may be
serviced on behalf of the Master Servicer. No such sub-servicing arrangement
will relieve the Master Servicer of its duties and obligations under the
Transfer and Servicing Agreement.
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Payments on Financed Student Loans
The Master Servicer shall cause each Servicer to deposit in the
Collection Account, no less frequently than [________] all payments on Financed
Student Loans for which such Servicer is acting as primary servicer (from
whatever source) and all proceeds of such Financed Student Loans collected by it
during each Collection Period.
Master Servicer Covenants
In the Transfer and Servicing Agreement, the Master Servicer covenants
that: (a) it will duly satisfy or cause to be duly satisfied all obligations on
its part to be fulfilled under or in connection with the Financed Student Loans,
maintain in effect all qualifications required to service the Financed Student
Loans and comply in all material respects with all requirements of law in
connection with servicing the Financed Student Loans, the failure to comply with
which would have a materially adverse effect on the Noteholders; (b) it will not
permit any rescission or cancellation of a Financed Student Loan except as
ordered by a court of competent jurisdiction or other government authority or as
otherwise consented to by the Eligible Lender Trustee and the Indenture Trustee;
(c) it will do nothing to impair the rights of the Noteholders in the Financed
Student Loans; and (d) it will not reschedule, revise, defer or otherwise
compromise with respect to payments due on any Financed Student Loan except
pursuant to any applicable Deferment or Forbearance Periods or otherwise in
accordance with its guidelines with respect to the servicing of the Financed
Student Loans; provided, however, that the Master Servicer may not agree to any
decrease of the interest rate on, or the principal amount payable with respect
to, any Financed Student Loan except as otherwise permitted by the Higher
Education Act or any Guarantee Agreement with respect to Financed FFELP Loans
and by the Heal Act and the HEAL Insurance Contract with respect to Financed
HEAL Loans. Notwithstanding the foregoing, the Master Servicer may, in its sole
discretion, without having to obtain the consent or approval of any other party,
waive amounts owing under a Financed Student Loan up to and including $50.00).
Under the terms of the Transfer and Servicing Agreement, if the Master
Servicer discovers, or receives written notice, that any covenant of the Master
Servicer set forth above has not been complied with in all material respects and
such noncompliance has not been cured within 120 days thereafter and has a
materially adverse effect on the interest of the Noteholders in any Financed
Student Loan (it being understood that any such breach that does not affect any
Guarantor's obligation to guarantee payment of any Financed FFELP Loan or the
Department of HHS's obligation to insure payment of any Financed HEAL 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 120-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.
Notwithstanding the above, if the Master Servicer is obligated to purchase a
Financed Student Loan as a result of a failure to service such Financed Student
Loan in accordance with the Higher Education Act and the applicable Guarantee
Agreement with respect to a Financed FFELP Loan or in accordance with the Heal
Act and the HEAL Insurance Contract with respect to a Financed HEAL Loan, the
Purchase Amount will not exceed the amount the related Guarantor or the
Department of HHS, as the case may be, would be obligated to pay if not for such
breach. In addition, the Master Servicer will reimburse the Trust (i) for any
accrued interest amounts that the Department of HHS refuses to pay with respect
to Financed HEAL Loans due to, and (ii) for any accrued interest amounts that a
Guarantor refuses to pay pursuant to its Guarantee Agreement, or for any
Interest Subsidy Payments and Special Allowance Payments that are lost or that
must be repaid to the Department of Education with respect to a Financed FFELP
Loan as a result of, a breach of any such covenant of the Master Servicer;
provided, however, that such reimbursements shall not exceed the amount the
Guarantor or the Department of HHS, as the case may be, would have paid if not
for such breach.
Servicing Compensation
The Master Servicer will be entitled to receive the Servicing Fee. The
Servicing Fee will be payable quarterly in advance, out of Available Funds and
amounts on deposit in the Reserve Account, on each Distribution Date (or in the
case of the initial
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Servicing Fee, on the Closing Date) based on the Administrator's good faith
estimate of the Servicing Fee that will accrue during the Collection Period in
which such Distribution Date occurs (or in the case of the initial Servicing
Fee, the Collection Period immediately succeeding the Closing Date) plus (or
minus) the difference (or excess) of the actual Servicing Fee accrued for the
Collection immediately preceding such Distribution Date and the amount paid as
an estimated Servicing Fee for such Collection Period on the immediately
preceding Distribution Date (or the Closing Date with respect to the first
Distribution Date).
The Servicing Fee will compensate the Master Servicer and each other
Servicer for performing the functions of a third party servicer of student loans
as an agent for their beneficial owner, including collecting and posting all
payments, responding to inquiries of borrowers on the Financed Student Loans,
investigating delinquencies, pursuing, filing and collecting any Guarantee
Payments and Insurance Payments, including litigation costs, accounting for
collections and furnishing monthly and annual statements to the Administrator.
The 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 before the [__th day] of each
January, April, July and October, commencing April 1998, the Administrator will
provide the Indenture Trustee and the Eligible Lender Trustee a report setting
forth by component the Available Funds for the immediately preceding Collection
Period.
For purposes hereof, the term "Available Funds" means the excess of (A)
the sum, without duplication, of the following amounts with respect to the
related Collection Period: (i) all collections received by the Master Servicer
or any Servicer on the Financed Student Loans (including any Guarantee Payments
and Insurance Payments received with respect to the Financed Student Loans
during such Collection Period); (ii) any payments, including without limitation,
Interest Subsidy Payments and Special Allowance Payments received by the
Eligible Lender Trustee during such Collection Period with respect to the
Financed Student Loans; (iii) all proceeds from any sales of Financed Student
Loans by the Trust during such Collection Period; (iv) any payments of or with
respect to interest received by the Master Servicer or a Servicer during such
Collection Period with respect to a Financed Student Loan for which a Realized
Loss was previously allocated; (v) the aggregate Purchase Amounts received for
those Financed Student Loans purchased by the Transferor or purchased by the
Master Servicer under an obligation which arose during the related Collection
Period; (vi) the aggregate amounts, if any, received from the Transferor or the
Master Servicer as reimbursement of non-guaranteed or uninsured interest
amounts, or lost Interest Subsidy Payments and Special Allowance Payments with
respect to the Financed Student Loans pursuant to the Transfer and Servicing
Agreement; (vii) all Adjustment Payments, if any, received from the Transferor
during such Collection Period; and (viii) Investment Earnings for such
Collection Period over (B) the Issuer Consolidation Payments for such Collection
Period; provided, however, that Available Funds will exclude all payments and
proceeds of any Financed Student Loans the Purchase Amount of which has been
included in Available Funds for a prior Collection Period (which payments and
proceeds shall be paid to the Transferor), and amounts used to reimburse the
Master Servicer for Quarterly Advances pursuant to the terms of the Transfer and
Servicing Agreement.
Distributions from Collection Account. On each Distribution
Determination Date, the Administrator will advise the Indenture Trustee and the
Eligible Lender Trustee in writing of the applicable Noteholders' Interest
Distribution Amount and Certificateholders' Interest Distribution Amount.
Additionally, on each Distribution Determination Date the Administrator will
advise the Indenture Trustee and the Eligible Lender Trustee in writing of the
applicable Noteholders' Principal Distribution Amount (or, after all the Notes
have been paid in full, the Certificateholders' Principal Distribution Amount).
Further, on each Distribution Determination Date relating to a Distribution Date
the Administrator will advise the Indenture Trustee in writing of the estimated
Transaction Fees payable for the Collection Period in which such Distribution
Date occurs.
On each Distribution Date, the Indenture Trustee will transfer from the
Collection Account, in the following priority and from Available Funds for the
Collection Period immediately preceding the month of such Distribution Date (or
(y) with respect to the first Distribution Date, from the Closing Date through
and including the Collection Period immediately preceding such Distribution
Date, and (z) with respect to clause (i)(A) below, the Indenture Trustee will
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transfer on the 25th day of each month (or if such day is not a Business Day, on
the next succeeding Business Day) from Available Funds for the calendar month
immediately preceding such day, the amount described in clause (i)(A) below):
(i) to the Expense Account (A) an amount equal to the Consolidation
Loan Fees with respect to the calendar month most recently ended and
all overdue Consolidation Loan Fees from prior months, and (B) an
amount up to the estimated Transaction Fees for the Collection Period
in which such Distribution Date occurs and all overdue Transaction Fees
from prior Collection Periods (plus (or minus) the difference (or
excess) of the actual Transaction Fees for the immediately preceding
Collection Period and the Transaction Fees deposited into the Expense
Account on the preceding Distribution Date),
(ii) to the Note Distribution Account, an amount up to the Noteholders'
Interest Distribution Amount,
(iii) to the Note Distribution Account, an amount up to the
Noteholders' Principal Distribution Amount,
(iv) to the Certificate Distribution Account, an amount up to the
Certificateholders' Interest Distribution Amount, and
(v) after the Notes have been paid in full, to the Certificate
Distribution Account, an amount up to the Certificateholders' Principal
Distribution Amount.
On each Distribution Date (and with respect to clause (i) below on the
25th day of each month, or if such day is not a Business Day, the next
succeeding Business Day) following the transfer to the Expense Account described
in the preceding paragraph, the Indenture Trustee will distribute from the
Expense Account (in addition to any amounts transferred from the Reserve Account
as described herein) the following amounts in the following order of priority:
(i) to the Department of Education, the Consolidation Loan Fees for the
immediately preceding calendar month together with any overdue
Consolidation Loan Fees for any prior months,
(ii) to the Master Servicer, the estimated Servicing Fee for the
Collection Period in which such Distribution Date occurs and all
overdue Servicing Fees,
(iii) to the Administrator, the estimated Administration Fee for the
Collection Period in which such Distribution Date occurs and all
overdue Administration Fees,
(iv) to the Indenture Trustee, the estimated Indenture Trustee Fee for
the Collection Period in which such Distribution Date occurs and all
overdue Indenture Trustee Fees, and
(v) to the Eligible Lender Trustee, the estimated Eligible Lender
Trustee Fee for the Collection Period in which such Distribution Date
occurs and all overdue Eligible Lender Trustee Fees.
On each Distribution Date, following the transfer to the Note
Distribution Account, the Indenture Trustee will distribute to the Noteholders
as of the related Record Date the amounts transferred to the Note Distribution
Account as set forth above (in addition to any amounts transferred from the
Reserve Account and the Quarterly Advance Account and any Parity Percentage
Payments transferred from the Collection Account, each as described below) in
the following order of priority:
(i) first, to each Class of Class A Noteholders, the Class A
Noteholders' Interest Distribution Amount (pro rata based upon the
portion thereof allocable to each such Class),
(ii) second, to the Class B Noteholders, the Class B Noteholders'
Interest Distribution Amount,
(iii) third, to the Class A-1 Noteholders, the Noteholders' Principal
Distribution Amount until the Outstanding Amount of the Class A-1 Notes
has been paid in full,
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(iv) fourth, after the principal balance of the Class A-1 Notes has
been reduced to zero, to the Class A-2 Noteholders, the Noteholders'
Principal Distribution Amount until the Outstanding Amount of the Class
A-2 Notes has been paid in full, and
(v) fifth, after the principal balance of each Class of Class A Notes
has been reduced to zero, to the Class B Noteholders, the remaining
Noteholders' Principal Distribution Amount until the principal balance
of the Class B Notes has been reduced to zero.
On each Distribution Date, after making all required transfers to the
Expense Account, the Note Distribution Account and, if applicable, the
Certificate Distribution Account, the Indenture Trustee will transfer any
amounts remaining in the Collection Account (other than amounts representing
payments received during such month) in the following order of priority:
(i) to the Reserve Account, the amount, if any, necessary to increase
the balance thereof to the Specified Reserve Account Balance,
(ii) to the Note Distribution Account, Parity Percentage Payments to
the extent then required, and
(iii) to the Note Distribution Account, the amount of any outstanding
Noteholders' Interest Carryover. Any amounts remaining in the
Collection Account after such transfers on a Distribution Date (other
than amounts representing payments received during such current month)
will be distributed to the Transferor.
Notwithstanding the foregoing, if (x) on any Distribution Date
following all distributions to be made on such Distribution Date, the principal
amount of the Class A Notes would exceed the sum of the Pool Balance at the end
of the immediately preceding Collection Period plus the aggregate balance on
deposit in the Trust Accounts on such Distribution Date following such
distributions, or (y) an Event of Default has occurred with respect to payment
of the Notes, after paying Transaction Fees, overdue Transaction Fees,
Consolidation Loan Fees and overdue Consolidation Loan Fees, distributions will
be made in the following priority:
(i) first, to each Class of Class A Noteholders, the Noteholders'
Interest Distribution Amount applicable to each such Class pro rata
based upon the portion thereof allocable to each such Class,
(ii) second, in the case of clause (x) above, to the Class A-1
Noteholders, the Noteholders' Principal Distribution Amount, until the
principal balance of the Class A-1 Notes has been reduced to zero, and
then to the Class A-2 Noteholders, the Noteholders' Principal
Distribution Amount until the principal balance of the Class A-2 Notes
has been reduced to zero, or in the case of clause (y) above, to each
Class of Class A Noteholders, the Noteholders' Principal Distribution
Amount applicable to such Distribution Date, pro rata based upon the
principal balance of each Class of Class A Notes until the principal
balance of each Class of Class A Notes has been paid in full,
(iii) third, to the Class B Noteholders, the Noteholders Interest
Distribution Amount applicable to the Class B Notes,
(iv) fourth, after the principal balance of each of the Class A Notes
has been paid in full, to the Class B Noteholders, the Noteholders'
Principal Distribution Amount until the principal balance of the Class
B Notes has been paid in full,
(v) fifth, to the Class A Noteholders, the Noteholders' Interest
Carryover applicable to the respective Class of Class A Notes, pro rata
based upon the portion thereof allocable to each such Class,
(vi) sixth, to the Class B Noteholders, the Noteholders' Interest
Carryover applicable to the Class B Notes, and
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(vii) seventh, to the Certificateholders, the Certificateholders'
Interest Distribution Amount and then the Certificateholders' Principal
Distribution Amount.
All principal payments of Notes of any Class shall be made pro rata
within that Class. In connection with each principal payment of Notes of any
Class, the Administrator shall compute the Principal Factor for that Class. The
"Principal Factor" shall be a number, carried to a seven-digit decimal,
indicating the principal balance of each Note of a Class as of a Distribution
Date (after giving effect to any payments made on that date) as a fraction of
the original principal amount of such Note. The Principal Factor for each Class
of Notes shall be initially 1.0000000 and will thereafter decline to reflect the
reduction in the principal balance of the Notes of that Class after any payment
of principal. The principal balance of any Note can be determined by multiplying
the original principal amount of such Note by the Principal Factor applicable to
that Class of Notes.
"Certificate Balance" equals the original principal balance of each
Class of Certificates issued reduced by all amounts allocable to principal
previously distributed to Certificateholders.
"Certificateholders' Distribution Amount" means, as to any Class of
Certificates, with respect to any Distribution Date, the Certificateholders'
Interest Distribution Amount for such Distribution Date plus, for each
Distribution Date on and after which the Notes have been paid in full, the
Certificateholders' Principal Distribution Amount for such Distribution Date.
"Certificateholders' Interest Shortfall" means, as to any Class of
Certificates, with respect to any Distribution Date, the excess, if any, of (i)
the sum of the related Certificateholders' Interest Distribution Amount on the
preceding Distribution Date and any outstanding Certificateholders' Interest
Shortfall on such preceding Distribution Date over (ii) the amount of interest
actually distributed to the Certificateholders of such Class on such preceding
Distribution Date, plus interest on the amount of such excess interest due to
the Certificateholders of such Class, to the extent permitted by law, at the
related Certificate Rate from such preceding Distribution Date to the current
Distribution Date.
"Certificateholders' Interest Distribution Amount" means, as to any
Class of Certificates, with respect to any Distribution Date relating to such
Certificates, the sum of (i) the amount of interest accrued at One Month LIBOR
plus 1.50% per annum for each related Interest Period since the last
Distribution Date (or, in the case of the first Distribution Date, the Closing
Date) on the outstanding principal amount of such Certificates on the
immediately preceding Distribution Date, after giving effect to all
distributions of principal to Certificateholders of such Class on such
Distribution Date (or, in the case of the first Distribution Date, on the
Closing Date) and (ii) the Certificateholders' Interest Carryover Shortfall
relating to such Certificates for such Distribution Date.
"Certificateholders' Principal Carryover Shortfall" means, as of the
close of any Distribution Date relating to a Class of Certificates on or after
which the Notes have been paid in full, the excess, if any, of (i) the sum of
the Certificateholders' Principal Distribution Amount on such Distribution Date
and any outstanding Certificateholders' Principal Carryover Shortfall for the
preceding Distribution Date over (ii) the amount of principal actually
distributed to the Certificateholders on such Distribution Date.
"Certificateholders' Principal Distribution Amount" means, on each
Distribution Date occurring after the principal balance of each Class of Notes
has been paid in full, the sum of (i) the Principal Distribution Amount for the
three Collection Periods preceding such Distribution Date, and (ii) the
Certificateholders' Principal Carryover Shortfall as of the close of the
preceding Distribution Date; provided, however, that the Certificateholders'
Principal Distribution Amount will in no event exceed the outstanding principal
balance of the applicable class of Certificates. Further, on the first
Distribution Date occurring on or after the Distribution Date on which the
principal balance of the last outstanding Class of Notes is paid in full, the
Certificateholders' Principal Distribution Amount also will include the excess,
if any, of the amount of principal available to be distributed on such
Distribution Date over the amount of principal paid on the Notes on such date.
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"Consolidation Loan Fees" means, as to any calendar month, an amount
accrued during such month equal to 1.05% per annum of the average outstanding
principal balance of the Consolidation Loans owned by the Trust during such
month.
"Noteholders' Distribution Amount" means, as to any Class of Notes,
with respect to any Distribution Date, the sum of the related Noteholders'
Interest Distribution Amount and the Noteholders' Principal Distribution Amount
for such Distribution Date.
"Noteholders' Interest Shortfall" means, as to any Class of Notes, with
respect to any Distribution Date, the excess of (i) the sum of the related
Noteholders' Interest Distribution Amount on the preceding Distribution Date and
any Noteholders' Interest Shortfall on such preceding Distribution Date over
(ii) the amount of interest actually allocated to such Noteholders on such
preceding Distribution Date, plus interest on the amount of such excess interest
due to the Noteholders, to the extent permitted by law, at the related Class
Interest Rate from such preceding Distribution Date to the current Distribution
Date.
"Noteholders' Interest Distribution Amount" means, as to any Class of
Notes, with respect to any Distribution Date, the sum of (i) the amount of
interest accrued at the respective Class Interest Rate for each Interest Period
since the last Distribution Date for such Class of Notes (or, in the case of the
first Distribution Date, the Closing Date) on the outstanding principal balance
of such Class of Notes on the immediately preceding Distribution Date after
giving effect to all principal distributions to holders of Notes of such Class
on such date (or, in the case of the first Distribution Date, on the Closing
Date) and (ii) the Noteholders' Interest Shortfall for such Class for such
Distribution Date; provided, however, that the Noteholders' Interest
Distribution Amount will not include any Noteholders' Interest Carryover.
"Noteholders' Principal Carryover Shortfall" means, as of the close of
any Distribution Date, the excess of (i) the sum of the Noteholders' Principal
Distribution Amount on such Distribution Date and any outstanding Noteholders'
Principal Carryover Shortfall for the preceding Distribution Date over (ii) the
amount of principal actually allocated to the Noteholders on such Distribution
Date.
"Noteholders' Principal Distribution Amount" means, as to any
Distribution Date, the sum of (i) the Principal Distribution Amount for the
Collection Period immediately preceding the month of such Distribution Date,
(ii) any Parity Percentage Payments to be made on such Distribution Date, (iii)
the Noteholders' Principal Carryover Shortfall as of the close of the preceding
Distribution Date and (iv) the amount, if any, remaining on deposit in the Note
Distribution Account following the preceding Distribution Date; provided,
however, that the Noteholders' Principal Distribution Amount allocable to a
Class of Notes will not exceed the outstanding principal balance of such Class
of Notes. In addition, with respect to each Class of Notes, on the related Final
Maturity Date the Noteholders' Principal Distribution Amount will include the
amount required to reduce the outstanding principal balance of such Notes to
zero.
"Principal Distribution Amount" means, with respect to any Collection
Period, the excess of (A) the sum of the following amounts: (i) that portion of
all collections received by the Master Servicer or any Servicer on the Financed
Student Loans that is allocable to principal (including the portion of any
Guarantee Payments or Insurance Payments received that is allocable to principal
of the Financed Student Loans); (ii) the portion of the proceeds allocable to
principal from the sale of Financed Student Loans by the Trust during such
Collection Period; (iii) all Realized Losses incurred during such Collection
Period; (iv) to the extent attributable to principal, the Purchase Amount
received with respect to each Financed Student Loan purchased by the Transferor
or purchased by the Master Servicer or under an obligation which arose during
the related Collection Period and (v) the Adjustment Payments, if any, received
from the Transferor during such Collection Period; over (B) the Issuer
Consolidation Payments for such Collection Period; provided, however, that the
Principal Distribution Amount will exclude all payments and proceeds of any
Financed Student Loans, the Purchase Amount of which has been included in
Available Funds for a prior Collection Period.
With respect to each Financed FFELP Loan submitted to a Guarantor for a
Guarantee Payment, a "Realized Loss" means the excess, if any, of (i) the unpaid
principal balance of such Financed FFELP Loan on the date it was first submitted
to a Guarantor for a Guarantee Payment over (ii) all amounts received on or with
respect to principal on such
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Financed FFELP Loan up through the earlier to occur of (A) the date a related
Guarantee Payment is made or (B) the last day of the Collection Period occurring
12 months after the date the claim for such Guarantee Payment is first denied.
With respect to each Financed HEAL Loan submitted to the Department of
HHS for an Insurance Payment, a "Realized Loss" means the excess, if any, of (i)
the unpaid principal balance of such Financed HEAL Loan on the date it was first
submitted to the Department of HHS for an Insurance Payment over (ii) all
amounts received on or with respect to principal on such Financed HEAL Loan up
through the earlier to occur of (A) the date a related Insurance Payment is made
or (B) the last day of the Collection Period occurring 12 months after the date
the claim for such Insurance Payment is first denied.
Quarterly Advances
If the Master Servicer has applied for an Insurance Payment from the
Department of HHS, a Guarantee Payment from a Guarantor or an Interest Subsidy
Payment or a Special Allowance Payment from the Department of Education, and the
Master Servicer has not received the related payment prior to the end of the
Collection Period immediately preceding the Distribution Date on which such
amount would be required to be distributed as a payment of interest, the Master
Servicer may, no later than the Distribution Determination Date relating to such
Distribution Date, deposit into the Quarterly Advance Account an amount up to
the amount of such payments applied for but not received (such deposits by the
Master Servicer are referred to herein as "Quarterly Advances"). On each related
Distribution Date, the Indenture Trustee will distribute from the Quarterly
Advance Account to the Noteholders the Quarterly Advance for such Distribution
Date. Such Quarterly Advances are recoverable by the Master Servicer (i) first,
from the source for which such Quarterly Advance was made and (ii) second, from
payments received generally on or with respect to the Financed Student Loans.
The Master Servicer will have no obligation, legal or otherwise, to make any
Quarterly Advance, and a determination by the Master Servicer to make a
Quarterly Advance will not create any obligation of the Master Servicer, legal
or otherwise, to make any future Quarterly Advances.
Credit Enhancement
Reserve Account. Pursuant to the Transfer and Servicing Agreement, the
Reserve Account will be created on or prior to the Closing Date and the
Transferor will deposit to the Reserve Account cash or Eligible Investments in
an amount equal to the Reserve Account Deposit. The initial Reserve Account
Deposit is [$___]. The Reserve Account will be augmented 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 making all prior distributions on such
date as described above under the heading "-- Distributions - - Distributions
from the Collection Account". As described below, subject to certain
limitations, amounts on deposit in the Reserve Account will be released to the
Transferor to the extent that the amount on deposit in the Reserve Account
exceeds the Specified Reserve Account Balance.
If the amount, if any, 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, subject to certain limitations, the Administrator will instruct the
Indenture Trustee to distribute the amount of the excess, after payment of any
unpaid Noteholders' Interest Carryover or to purchase Financed Student Loans for
which there has been an uncured breach of certain representations and
warranties, to the Transferor. Upon any distribution to the Transferor of
amounts from the Reserve Account, the Noteholders will not have any rights in,
or claims to, such amounts.
The Reserve Account is intended to enhance the likelihood of timely
receipt by the Noteholders of the full amount of interest due them, the ultimate
receipt by the Noteholders of the full amount of principal and to decrease the
likelihood that the Noteholders will experience losses. In certain
circumstances, however, the Reserve Account could be depleted. If the amount
required to be withdrawn from the Reserve Account to cover shortfalls in the
amount of Available Funds exceeds the amount of cash in the Reserve Account, a
temporary shortfall in the amount of principal and interest distributed to the
Noteholders could result. This could, in turn, increase the average life of the
Notes. Moreover, amounts on deposit in the Reserve Account (other than amounts
in excess of the Specified Reserve Account Balance) will not be available to
cover any aggregate unpaid Noteholders' Interest Carryover.
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Subordination of the Class B Notes. The rights of the holders of the
Class B Notes to receive distributions with respect to interest and principal
will be subordinated to such rights of the holders of the Class A Notes to the
extent described herein. This subordination is intended to enhance the
likelihood of regular receipt by holders of the Class A Notes of the full amount
of the Noteholders' Interest Distribution Amount and, after distribution of the
Class B Interest Distribution Amount, the Noteholders' Principal Distribution
Amount. See "-- Distributions".
Statements to Indenture Trustee
On each Distribution Determination Date immediately preceding a
Distribution Date, the Master Servicer or the Administrator will provide to the
Indenture Trustee (for the Indenture Trustee to forward on each succeeding
Distribution Date to each Noteholder) a statement which will include the
following information with respect to such Distribution Date or for the
preceding Collection Period or Collection Periods, to the extent applicable:
(i) the Principal Factor for each Class of Notes;
(ii) the amount of the distribution allocable to principal of
each Class of Notes;
(iii) the amount of the distribution allocable to interest on
each Class of Notes, together with the interest rates applicable with
respect thereto (indicating whether such interest rates are based on
Floating Rate (T-Bill) or on the Net Loan Rate with respect to each
class of the Class A Notes and One- Month LIBOR or on the Net Loan Rate
with respect to the Class B Notes, and specifying what each such
interest rate would have been if it had been calculated using the
alternate basis);
(iv) the amount of the distribution, if any, allocable to any
Noteholders' Interest Carryover together with the outstanding amount,
if any, thereof after giving effect to any such distribution;
(v) the Pool Balance as of the close of business on the last
day of the preceding Collection Period;
(vi) the aggregate outstanding principal balance of each Class
of Notes as of such Distribution Date, after giving effect to payments
allocated to principal reported under clause (ii) above;
(vii) the amount of the Servicing Fee to be allocated to the
Master Servicer, the amount of the Administration Fee to be allocated
to the Administrator, the amount of the Indenture Trustee Fee to be
allocated to the Indenture Trustee and the amount of the Eligible
Lender Trustee Fee to be allocated to the Eligible Lender Trustee,
respectively, with respect to the upcoming Distribution Date;
(viii) the amount of the aggregate Realized Losses, if any,
for the preceding Collection Period and the aggregate amount, if any,
received (stated separately for interest and principal) with respect to
Financed Student Loans for which Realized Losses were allocated
previously;
(ix) the amount of the distribution attributable to amounts in
the Reserve Account, the amount of any other withdrawals from the
Reserve Account for such Distribution Date, the balance of the Reserve
Account on such Distribution Date, after giving effect to changes
therein on such Distribution Date, the then applicable Parity
Percentage and the amount of the distribution, if any, attributable to
Parity Percentage Payments;
(x) the aggregate amount, if any, paid for Financed Student
Loans purchased from the Trust during the preceding Collection Period;
(xi) during the Exchange Period only, the aggregate Issuer
Consolidation Payments and Adjustment Payments, stated separately, for
the preceding Collection Period; and
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(xii) the number and principal amount of Financed Student
Loans, as of the preceding Collection Period, that are (A) 30 to 60
days delinquent, (B) 61 to 90 days delinquent, (C) 91 to 120 days
delinquent, (D) more than 120 days delinquent and (E) for which claims
have been filed with the appropriate Guarantor or the Department of HHS
and which are awaiting payment.
Evidence as to Compliance
The Transfer and Servicing Agreement will provide that a firm of
independent public accountants will furnish to the Eligible Lender Trustee 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 Master Servicer
during the preceding calendar year (or, in the case of the first such
certificate, the period from the Closing Date to December 31, 1998) with certain
provisions of the Transfer and Servicing Agreement relating to the servicing of
the Financed Student Loans.
The Transfer 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 Eligible Lender Trustee and
the Indenture Trustee annually a statement (based on the examination of certain
documents and records and on such accounting and auditing procedures considered
appropriate under the circumstances) as to compliance by the Administrator
during the preceding calendar year (or, in the case of the first such
certificate, the period from the Closing Date to December 31, 1998) with certain
provisions of the Transfer and Servicing Agreement and the Administration
Agreement relating to the administration of the Trust and the Financed Student
Loans.
The Transfer and Servicing Agreement will also provide for delivery to
the Eligible Lender Trustee 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 in all material respects all
its obligations under the Transfer and Servicing Agreement and the
Administration Agreement, respectively, throughout the preceding calendar year
(or, in the case of the first such certificate, the period from the Closing Date
to December 31, 1998) or, if there has been a default in the fulfillment of any
such obligation, specifying each such default known to such officer and the
nature and status thereof. Each of the Master Servicer and the Administrator has
agreed to give the Indenture Trustee and the Eligible Lender Trustee notice of
certain Servicer Defaults and Administrator Defaults, respectively, under the
Transfer and Servicing Agreement.
Copies of such statements and certificates may be obtained by
Noteholders by a request in writing addressed to the Indenture Trustee at Four
Albany Street, New York, New York, 10006, Attention: Corporate Trust and Agent
Group, Structural Finance; facsimile: (212) 250-6439.
Certain Matters Regarding the Master Servicer
The Transfer and Servicing Agreement will provide that the Master
Servicer may not resign from its obligations and duties as Master Servicer
thereunder, except upon determination that the Master Servicer's performance of
such duties is no longer permissible under applicable law or shall violate any
final order of a court or administrative agency with jurisdiction over the
Master Servicer or its properties. No such resignation will become effective
until the Indenture Trustee or a successor servicer has assumed the Master
Servicer's servicing obligations and duties under the Transfer and Servicing
Agreement.
The Transfer and Servicing Agreement will further provide that neither
the Transferor, the Master Servicer nor any of its directors, officers,
employees or agents will be under any liability to the Trust, the Noteholders,
the Certificateholders, the Indenture Trustee or the Eligible Lender Trustee,
except as provided under the Transfer and Servicing Agreement or the
Administration Agreement for taking any action or for refraining from taking any
action pursuant to the Transfer and Servicing Agreement, or for errors in
judgment; provided however, that neither the Transferor, 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 their respective duties
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thereunder. In addition, the Transfer and Servicing Agreement will provide that
the Transferor and the Master Servicer shall not be under any obligation to
appear in, prosecute, or defend any legal action that is not incidental to its
duties in accordance with the Transfer and Servicing Agreement and that, in its
opinion, may cause it to incur any expense or liability.
The Transfer and Servicing Agreement will provide that the Master
Servicer will be permitted to perform its services thereunder through any of its
affiliates, provided that the Master Servicer shall continue to be responsible
for all performance of such services.
Under the circumstances and subject to conditions specified in the
Transfer 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 will be the successor of the Master
Servicer under the Transfer and Servicing Agreement. Successors (other than the
Crestar Financial Corporation or a Crestar Subsidiary (as defined below)) must
execute an agreement expressly assuming the Master Servicer's obligations under
the Transfer and Servicing Agreement.
Nothing in the Transfer and Servicing Agreements prohibits or restricts
the merger of Crestar Bank with the Crestar Financial Corporation or certain
subsidiaries of Crestar Financial Corporation (each a "Crestar Subsidiary"), the
consolidation of Crestar Bank and Crestar Financial Corporation or any Crestar
Subsidiary, or the sale of all or substantially all of the assets of Crestar
Bank to Crestar Financial Corporation or another Crestar Subsidiary. In such
event, no consent of the Noteholders or Certificateholders will be required.
Master Servicer Default; Administrator Default
"Master Servicer Default" under the Transfer and Servicing Agreement
will consist of: (i) any failure by the Master Servicer to deliver to the
Indenture Trustee for deposit in any of the Trust Accounts at the time required
for such deposit any collections, Guarantee Payments, Insurance Payments or
other amounts received by the Master Servicer with respect to the Financed
Student Loans, which failure continues unremedied for three Business Days after
written notice from the Indenture Trustee, the Administrator or the Eligible
Lender Trustee is received by the Master Servicer or after discovery by the
Master Servicer; (ii) any failure by the Master Servicer duly to observe or
perform in any material respect any other covenant or agreement of the Master
Servicer in the Transfer and Servicing Agreement which failure materially and
adversely affects the rights of Noteholders and which continues unremedied for
60 days after the giving of written notice of such failure (A) to the Master
Servicer by the Indenture Trustee, the Eligible Lender Trustee or the
Administrator or (B) to the Master Servicer and to the Indenture Trustee and the
Eligible Lender Trustee by holders of Directing Notes evidencing not less than
25% in principal amount of the outstanding Directing Notes; (iii) 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 (iv) any
limitation, suspension or termination by the Department of Education or the
Department of HHS of the Master Servicer's eligibility to service Student Loans
which materially and adversely affects the Master Servicer's ability to service
Financed Student Loans.
"Administrator Default" under the Transfer and Servicing Agreement or
the Administration Agreement will consist of (i) any failure by the
Administrator to direct the Indenture Trustee or the Eligible Lender Trustee, as
applicable, to make any required distributions from any of the Trust Accounts,
which failure 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 of such failure by the Administrator; (ii) any
failure by the Administrator duly to observe or perform in any material respect
any other covenant or agreement in the Administration Agreement or the Transfer
and Servicing Agreement which failure materially and adversely affects the
rights of Noteholders, and which continues unremedied for 60 days after the
giving of written notice of such failure (A) to the Administrator by the
Indenture Trustee or the Eligible Lender Trustee or (B) to the Administrator and
to the Indenture Trustee and the Eligible Lender Trustee by holders of Directing
Notes evidencing not less than 25% in principal amount of the outstanding
Directing Notes; and (iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities, or similar proceedings with
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respect to the Administrator and certain actions by the Administrator indicating
its insolvency or inability to pay its obligations.
Rights Upon Servicer Default and Administrator Default
As long as a Servicer Default under the Transfer and Servicing
Agreement or an Administrator Default under the Transfer and Servicing Agreement
or the Administration Agreement remains unremedied, the Indenture Trustee or
holders of Directing Notes evidencing not less than 25% in principal amount of
then outstanding Directing Notes may terminate all the rights and obligations of
the Master Servicer under the Transfer and Servicing Agreement, or the
Administrator under the Transfer and Servicing Agreement and the Administration
Agreement, as the case may be, whereupon a successor servicer or administrator
appointed by the Indenture Trustee or the Indenture Trustee will succeed to all
the responsibilities, duties and liabilities of the Master Servicer under the
Transfer and Servicing Agreement, or the Administrator under the Transfer and
Servicing Agreement and the Administration Agreement, as the case may be, and
will be entitled to similar compensation arrangements. If a successor Master
Servicer or Administrator, as the case may be, has not been appointed at the
time when the predecessor Master Servicer or Administrator has ceased to act as
Master Servicer or Administrator, then the Indenture Trustee shall automatically
be appointed successor Master Servicer or Administrator. Notwithstanding the
above, the Indenture Trustee shall, if it shall be unwilling or legally unable
so to act, appoint or petition a court of competent jurisdiction to appoint, any
established institution whose regular business shall include the servicing of
student loans, as the successor to the Master Servicer or Administrator, as the
case may be, under this Agreement. If a successor Master Servicer or
Administrator, as the case may be, has not been appointed at the time when the
predecessor Master Servicer or Administrator has ceased to act as Master
Servicer or Administrator, then the Indenture Trustee shall automatically be
appointed as successor Master Servicer or Administrator.
Waiver of Past Defaults
The holders of Directing Notes evidencing at least a majority in
principal amount of the then outstanding Directing Notes may, on behalf of all
Noteholders and Certificateholders, waive any default by the Master Servicer in
the performance of its obligations under the Transfer and Servicing Agreement,
or any default by the Administrator of its obligations under the Transfer and
Servicing Agreement and the Administration Agreement, as the case may be, and
their respective consequences, except a default in making any required payments
from any of the Trust Accounts or giving instructions regarding the same in
accordance with the Transfer and Servicing Agreement. No such waiver will impair
the Noteholders' or the Certificateholders' rights with respect to subsequent
defaults.
Amendment
The Transfer and Servicing Agreements may be amended by the parties
thereto, with the consent of the Indenture Trustee, for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of the Transfer and Servicing Agreements or of modifying in any manner the
rights of Noteholders or Certificateholders; provided, however, that no such
amendment may (i) increase or reduce in any manner the amount of, or accelerate
or delay the timing of, collections of payments with respect to the Financed
Student Loans or distributions that are required to be made for the benefit of
the Noteholders or the Certificateholders, or (ii) reduce the aforesaid
percentage of the Notes or Certificates which are required to consent to any
such amendment, without the consent of the holders of all the outstanding Notes
and Certificates affected thereby.
Insolvency Event
If any of certain events of insolvency or receivership, readjustment of
debt, marshaling of assets and liabilities, or similar proceedings with respect
to the Transferor or certain actions by the Transferor indicating its insolvency
or inability to pay its obligations (each, an "Insolvency Event") occurs, the
Financed Student Loans will be liquidated and the Trust will be terminated.
Promptly after the occurrence of any Insolvency Event, notice thereof is
required to be given to Noteholders and Certificateholders; provided, however,
that any failure to give such required notice will not prevent or delay
termination of the Trust. Upon termination of the Trust, the Eligible Lender
Trustee will direct the Indenture Trustee promptly to sell the assets of the
Trust (other than the Trust Accounts) in a commercially reasonable manner
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and on commercially reasonable terms. The proceeds from any such sale,
disposition or liquidation of the Financed Student Loans will be treated as
collections thereon and deposited in the Collection Account. If the proceeds
from the liquidation of the Financed Student Loans and any amounts on deposit in
the Reserve Account are not sufficient to pay the Notes in full, the amount of
principal returned to the Noteholders will be reduced and the Noteholders will
incur a loss.
Payment of Notes
Upon the payment in full of all outstanding Notes and the satisfaction
and discharge of the Indenture, the Eligible Lender Trustee will succeed to all
the rights of the Indenture Trustee, and the Certificateholders will succeed to
all the rights of the Noteholders, under the Transfer and Servicing Agreement,
except as otherwise provided therein.
Termination
The obligations of the Master Servicer, the Transferor, the
Administrator, the Eligible Lender Trustee and the Indenture Trustee pursuant to
the Transfer and Servicing Agreements will terminate upon (i) the maturity or
other liquidation of the last Financed Student Loan and the disposition of any
amount received upon liquidation of any remaining Financed Student Loans and
(ii) the payment to the Noteholders and the Certificateholders of all amounts
required to be paid to them pursuant to the Transfer and Servicing Agreements.
To avoid excessive administrative expense, the Transferor is permitted at its
option to repurchase from the Eligible Lender Trustee, as of the end of any
Collection Period immediately preceding a Distribution Date, if the then
outstanding Pool Balance is 10% or less of the Initial Pool Balance, all
remaining Financed 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 Notes and the Certificates concurrently therewith. Upon
termination of the Trust, all right, title and interest in the Financed Student
Loans and other funds of the Trust, after giving effect to any final
distributions to Noteholders and Certificateholders therefrom, will be conveyed
and transferred to the Transferor.
Any Financed Student Loans remaining in the Trust as of the end of
[_____, 2006] will be offered for sale by the Indenture Trustee on or prior to
the [October 2006] Distribution Date. The Transferor, its affiliates and
unrelated third parties may offer bids to purchase such Financed Student Loans
on or prior to such Distribution Date. If at least two bids are received, the
Indenture Trustee will accept the highest bid equal to or in excess of the
greater of (x) the aggregate Purchase Amounts of such Financed Student Loans as
of the end of the Collection Period immediately preceding such Distribution Date
or (y) an amount that would be sufficient to (i) reduce the outstanding
principal amount of the Notes on such Distribution Date to zero and (ii) pay to
the Noteholders the Noteholders' Interest Distribution Amount payable on such
Distribution Date (the "Minimum Purchase Price"). If at least two bids are not
received or the highest bid is not equal to or in excess of the Minimum Purchase
Price, the Indenture Trustee will not consummate such sale. The 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 [October 2006] Distribution Date or any
subsequent Distribution Date.
Administrator
Crestar Bank, in its capacity as Administrator, has entered into the
Administration Agreement with the Trust and the Indenture Trustee, pursuant to
which the Administrator will agree, to the extent provided therein, (i) to
direct the Indenture Trustee to make the required distributions from the Trust
Accounts on each Distribution Date, (ii) to prepare (based on the reports
received from the Master Servicer) and provide periodic and annual statements to
the Eligible Lender Trustee and the Indenture Trustee with respect to
distributions to Noteholders and Certificateholders and any related Federal
income tax reporting information and (iii) to provide the notices and to perform
other administrative obligations required by the Indenture and the Trust
Agreement. As compensation for the performance of the Administrator's
obligations under the Administration Agreement and as reimbursement for its
expenses related thereto, the Administrator will be entitled to the
Administration Fee. Affiliates of the Administrator may assist it in performing
its obligations under the Administration Agreement.
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FEDERAL INCOME TAX CONSEQUENCES
General
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership, and disposition of the Notes is based
on the advice of Hunton & Williams, special tax counsel to the Trust ("Special
Tax Counsel"). The summary is based upon the provisions of the Code, the
regulations promulgated thereunder, and the judicial and administrative rulings
and decisions now in effect, all of which are subject to change or possible
differing interpretations. The statutory provisions, regulations, and
interpretations on which this summary is based are subject to change, and such a
change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances, nor with certain categories of investors subject to special
treatment under the federal income tax laws. This summary focuses primarily on
investors who will hold Notes as "capital assets" (generally held for
investment) within the meaning of Section 1221 of the Code, but much of the
discussion is applicable to other investors as well. The summary does not
purport to address the anticipated state income tax consequences to investors of
owning and disposing of the Notes. Consequently, potential purchasers of Notes
are advised to consult their own tax advisors concerning the federal, state or
local tax consequences to them of the purchase, holding, and disposition of the
Notes.
There are no regulations, published rulings or judicial decisions
involving the characterization for federal income tax purposes of securities
with terms substantially the same as the Notes. However, Special Tax Counsel to
the Trust will advise the Trust that, based upon the facts as they exist at
closing, in Special Tax Counsel's opinion, the Notes will be treated for federal
income tax purposes as indebtedness and not as an ownership interest in the
Financed Student Loans or other assets of the Trust, or as an equity interest in
the Trust or in a separate association taxable as a corporation. That opinion
will be based on existing law, but there can be no assurance that the law will
not change or that contrary positions will not be taken by the Internal Revenue
Service (the "Service").
In addition, if the Service were to make and prevail upon the
contention that the Notes did not constitute indebtedness for federal income tax
purposes, the Notes could be treated as equity interests in the Trust. In that
event, the Trust should be treated as a partnership that is not a publicly
traded partnership taxable as a corporation.
Interest Income
Payments received by Noteholders on the Notes generally should be
accorded the same tax treatment under the Code as payments received on other
taxable corporate bonds. It is not expected that the Notes will be issued with
original issue discount. Accordingly, Noteholders will include in income
interest paid or accrued on the Notes in accordance with such Noteholder's usual
method of accounting.
Market Discount and Acquisition Premium
A subsequent purchaser of a Note at a discount from its adjusted issue
price will acquire such Note with market discount. The purchaser generally will
be required to recognize the market discount (in addition to original issue
discount, if any, remaining with respect to the Note) as ordinary income. A Note
will not be considered to have market discount if the amount of such market
discount is de minimis, i.e., less than the product of (i) 0.25% of the
remaining principal amount of such Note and (ii) the weighted average maturity
of such Note remaining after the date of purchase. Regardless of whether the
subsequent purchaser of a Note with more than a de minimis amount of market
discount is a cash-basis or accrual-basis taxpayer, market discount generally
will be taken into income as principal payments are received, in an amount equal
to the lesser of (i) the amount of the principal payment received or (ii) the
amount of market discount that has "accrued" (as described below), but that has
not yet been included in income. The purchaser may make an election, which
generally will apply to all market discount instruments held or acquired by the
purchaser in the
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<PAGE>
taxable year of election or thereafter, to recognize market discount currently
on an uncapped accrual basis (as described below). Revenue Procedure 92-67 sets
forth the manner in which such an election may be made.
Until the Treasury promulgates applicable regulations, the purchaser of
a Note with market discount generally may elect to accrue the market discount
either: (i) on the basis of a constant interest rate; or (ii) in the ratio of
original issue discount, if any, accrued for the relevant period to the total
remaining original issue discount at the beginning of such period. The Service
indicated in Revenue Procedure 92-67 the manner in which an election may be made
to accrue market discount on a Note on the basis of a constant interest rate. If
that computation method is elected, the pricing prepayment assumption used in
pricing the Notes must be used to calculate the accrual of market discount.
A holder who acquires a Note with market discount generally will be
required to treat a portion of any gain on the sale or exchange of such Note as
ordinary income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market discount
previously reported as ordinary income under one of the methods described above.
Moreover, a holder who acquires a Note with market discount generally must defer
interest deductions attributable to any indebtedness incurred or continued to
purchase or carry such Note to the extent they exceed income on such Note, up to
the amount of any accrued but unrecognized market discount. Any such deferred
interest expense, in general, is allowed as a deduction not later than the year
in which the related market discount income is recognized. If the holder of a
Note makes an election to recognize market discount currently, the interest
deferral rule will not apply.
Treasury regulations implementing the market discount rules have not
yet been issued, and uncertainty exists with respect to many aspects of those
rules. Due to the substantial lack of regulatory guidance with respect to the
market discount rules, it is unclear how those rules will affect any secondary
market that develops for the Notes. Prospective purchasers of Notes should
consult with their own tax advisors regarding the application of the market
discount rules to the Notes.
Gain or Loss on Disposition
If a Note is sold, the holder thereof will recognize gain or loss equal
to the difference between the amount realized on the sale and his adjusted basis
in such Note. A holder's adjusted basis in a Note generally will equal the cost
to such holder of the Note, increased by any market discount and original issue
discount, if any, previously includible in such holder's gross income with
respect to the Note, and reduced by payments on the Note previously received by
such holder. Except to the extent that the market discount rules apply and
except as provided below, any gain or loss on the sale or other disposition of a
Note generally will be capital gain or loss. Such gain or loss will be long-term
gain or loss if the Note is held as a capital asset for the long-term capital
gain holding period.
If the holder of a Note is a bank, thrift, or similar institution
described in section 582 of the Code, any gain or loss on the sale or exchange
of such Note will be treated as ordinary income or loss. In addition, a portion
of the gain, if any, from the sale of a Note that might otherwise be capital
gain may be treated as ordinary income to the extent that such Note is held as
part of a "conversion transaction" within the meaning of section 1258 of the
Code. A conversion transaction generally is one in which the taxpayer has taken
two or more positions in Notes or similar property that reduce or eliminate
market risk, if substantially all of the taxpayer's return is attributable to
the time value of the taxpayer's net investment in such transaction. The amount
of gain realized in a conversion transaction that is recharacterized as ordinary
income generally will not exceed the amount of interest that would have accrued
on the taxpayer's net investment at 120% of the appropriate "applicable federal
rate" (which rate is computed and published monthly by the Service) at the time
the taxpayer entered into the conversion transaction, subject to appropriate
reduction for prior inclusion of interest and other ordinary income from the
transaction.
The highest marginal individual income tax bracket is 36%, and a 10%
surtax is imposed on taxpayers whose taxable income exceeds $250,000 (resulting
in a 39.6% marginal rate). The alternative minimum tax rate for individuals is
26% with respect to alternative minimum tax income up to $175,000 and 28% with
respect to alternative minimum tax income over $175,000. The recently enacted
Taxpayer Relief Act of 1997 (the "Relief Act") established a three-tier rate
structure with respect to the net capital gain of individuals. Under the Relief
Act, the highest marginal federal tax
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rate on net capital gains for individuals with respect to assets held for 18
months or less is 28%, as under prior law. However, the Relief Act reduces the
highest marginal federal tax rate with respect to net capital gain on assets
held by individuals for more than 18 months from 28% to 20%, and, for taxable
years beginning after, and for assets acquired after, December 31, 2000 and with
respect to assets held for more than 5 years, to 18%. Accordingly, there can be
a significant marginal tax rate differential between net capital gains and
ordinary income for individuals. The highest marginal corporate tax rate is 35%
for corporate taxable income over $10 million, and the marginal tax rate on
corporate net capital gains is 35%, although the distinction between capital
gains and ordinary income remains relevant for other purposes. Investors should
note that the deductibility of capital losses is subject to certain limitations.
Backup Withholding
A Note may, under certain circumstances, be subject to "backup
withholding" at the rate of 31% with respect to "reportable payments," which
include interest payments and principal payments to the extent of accrued OID as
well as to distributions of proceeds from a sale of the Notes. The withholding
generally applies if the holder of a Note (i) fails to furnish the Trustee with
his taxpayer identification number ("TIN"); (ii) furnishes the Trustee an
incorrect TIN; (iii) fails to report properly interest, dividends, or other
"reportable payments" as defined in the Code; or (iv) under certain
circumstances, fails to provide the Trustee or such holder's securities broker
with a certified statement, signed under penalty of perjury, that the TIN is its
correct number and that the holder is not subject to backup withholding. Backup
withholding will not apply, however, with respect to payments made to certain
Noteholders, including certain exempt recipients (such as exempt organizations)
and Nonresidents (as defined below) complying with the requisite certification
procedures. Holders of the Notes should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
The Trustee will report to the Noteholders and to the Service each
calendar year the amount of any "reportable payments" during such year and the
amount of tax withheld, if any, with respect to payments on the Notes within a
reasonable time after the end of each calendar year.
Foreign Holders
Under the Code, interest income accrued with respect to Notes held by
holders who are nonresident alien individuals, foreign corporations, foreign
partnerships or certain foreign estates and trusts ("Nonresidents") or holders
holding on behalf of a Nonresident generally will be treated as "portfolio
interest" and therefore will not be subject to any United States tax provided
that (i) such interest income is not effectively connected with a trade or
business in the United States of the holder and (ii) the Trustee (or other
person who would otherwise be required to withhold tax from such payments) is
provided with an appropriate statement that the beneficial owner of a Note is a
Nonresident. If a Nonresident holder of a Note does not provide the Trustee (or
other person who would otherwise be required to withhold tax) with the required
certification of Nonresident status, payments on the Note that are attributable
to accrued interest may be subject to either a 30% withholding tax or 31% backup
withholding. See "--Backup Withholding" above. Any market discount or capital
gain recognized on the redemption or disposition of a Note by a Nonresident
generally will not be subject to withholding tax unless the Nonresident is an
individual who is present in the United States for 183 days or more during the
taxable year in which the Note is redeemed or disposed of.
Interest income accrued on and market discount and capital gains
recognized with respect to Notes held by Nonresidents will be subject to regular
United States income tax if such income is effectively connected with the
conduct of a United States business by the holder. Any such income, however,
will not be subject to withholding tax as long as the holder of the Note has
provided the Issuer (or other person who would otherwise be required to withhold
tax) with a properly completed IRS Form 4224 for the taxable year in which the
withholding otherwise would occur.
Reporting and Tax Administration
Reports will be made by the tax administrator of the Notes, at least
annually to holders of record of the Notes (other than those with respect to
whom reporting is not required) and to the Service as may be required by
statute,
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regulation, or administrative ruling with respect to (i) interest income and
original issue discount, if any, accrued on such Notes; and (ii) information
necessary to compute the accrual of any market discount on such Notes.
Certain U.S. Federal Income Tax Documentation Requirements
A Note Owner of Notes holding securities through Cedel or Euroclear (or
through DTC if the holder has an address outside the U.S.) will be subject to
the 30% U.S. withholding tax (or, in certain cases, the 31% backup withholding
tax) that generally applies to payments of interest (including original issue
discount) on registered debt issued by U.S. Persons (as defined below), unless
(i) each clearing system, bank or other financial institution that holds
customer's securities in the ordinary course of its trade or business in the
chain of intermediaries between such Note Owner and the U.S. entity required to
withhold tax complies with applicable certification requirements and (ii) such
Note Owner takes one of the following steps to obtain an exemption or reduced
tax rate:
Exemption for non-U.S. Persons (Form W-8). Note Owners of Notes that
are non-U.S. Persons can obtain a complete exemption from the U.S. withholding
tax and the backup withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown in Form W-8 changes, a new form W-8
must be filed within 30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income in effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
U.S. withholding tax and the backup withholding tax by filing Form 4224
(Exemption from Withholding of Tax on Income Effectively Connected with the
Conduct of a Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are Note Owners of Notes residing
in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) with respect to
U.S. withholding tax and an exemption from the backup withholding tax by filing
Form 1001 (Ownership, Exemption or Reduced Rate Note). If the treaty provides
only for a reduced rate, the U.S. withholding tax will be imposed at that rate
unless the filer alternatively files Form W-8. Form 1001 may be filed by the
Note Owner of the Note or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons generally are not
subject to the U.S. withholding and can obtain a complete exemption from the
backup withholding tax by filing Form W-9 (Payer's Request for Taxpayer
Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Note Owner of a Note
(or in the case of a Form 1001 or a Form 4224 filer, its agent), files by
submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate the income
of which is includable in gross income for United States tax purposes,
regardless of its source, or (iv) a trust if a court within the United States is
able to exercise primary jurisdiction over the administration of the trust and
one or more U.S. fiduciaries have the authority to control all substantial
decisions of the trust. This summary does not deal with all aspects of U.S.
federal income tax withholding that may be relevant to foreign holders of the
globally offered Notes. Investors are advised to consult their own tax advisers
for specific tax advice concerning their holding and disposing of the globally
offered Notes.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
HOLDERS OF THE NOTES AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT
TO MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE NOTES.
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STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described under
"Certain Federal Income Tax Consequences" above, potential investors should
consider the state income tax consequences of the acquisition, ownership, and
disposition of the Notes. State income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state. Therefore, potential investors
should consult their own tax advisors with respect to the various state tax
consequences of an investment in the Notes.
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans and certain other retirement
plans and arrangements that are subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") or corresponding provisions of the
Code, including individual retirement accounts and annuities, Keogh plans and
collective investment funds in which such plans, accounts, annuities or
arrangements are invested (any of the foregoing, a "Plan"), persons acting on
behalf of a Plan, or persons using the assets of a Plan ("Plan Investors"),
should review carefully with their legal advisors whether the purchase or
holding of the Notes could either give rise to a transaction that is prohibited
under ERISA or the Code or cause the Financed Student Loans or other assets of
the Trust to be treated as plan assets for purposes of regulations of the
Department of Labor set forth in 29 C.F.R. 2510.3-101 (the "Plan Asset
Regulations"). Prospective investors should be aware that, although certain
exceptions from the application of the prohibited transaction rules and the Plan
Asset Regulations exist, there can be no assurance that any such exception will
apply with respect to the acquisition of a Note.
Under the Plan Asset Regulations, if the Notes are treated as having
substantial equity features, the purchaser of a Note could be treated as having
acquired a direct interest in the Financed Student Loans and other Trust assets
securing the Notes. In that event, the purchase, holding, or resale of the Notes
could result in a transaction that is prohibited under ERISA or the Code. It is
expected that the Notes will be treated as debt obligations without significant
equity features for purposes of the Plan Asset Regulations. Accordingly, a Plan
that acquires a Note should not be treated as having acquired a direct interest
in the Trust assets. However, there can be no complete assurance that the Notes
will be treated as debt obligations without significant equity features for
purposes of the Plan Asset Regulations.
Regardless whether the Notes are treated as debt or equity for purposes
of ERISA, the acquisition or holding of the Notes by or on behalf of a Plan
could still be considered to give rise to a prohibited transaction if the
parties to the issuance transaction, or any of their respective affiliates is or
becomes a party in interest or a disqualified person with respect to such Plan.
However, one or more exemptions may be available with respect to certain
prohibited transaction rules of ERISA that might apply in connection with the
initial purchase, holding and resale of the Notes, depending in part upon the
type of Plan fiduciary making the decision to acquire Notes and the
circumstances under which such decision is made. Those exemptions include, but
are not limited to: (i) Prohibited Transaction Class Exemption 95-60, regarding
investments by insurance company pooled accounts; (ii) PTCE 91-38, regarding
investments by bank collective investment funds; (iii) PTCE 90-1, regarding
investments by insurance company pooled separate accounts; or (iv) PTCE 84-14,
regarding transactions negotiated by qualified professional asset managers.
Before purchasing Notes, a Plan subject to the fiduciary responsibility
provisions of ERISA or described in Section 4975(e)(1) (and not exempt under
Section 4975(g)) of the Code should consult with its counsel to determine
whether the conditions of any exemption would be met. A purchaser of a Note
should be aware, however, that even if the conditions specified in one or more
exemptions are met, the scope of the relief provided by an exemption might not
cover all acts that might be construed as prohibited transactions.
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UNDERWRITING
Subject to the terms and conditions set forth in an Underwriting
Agreement dated [_________, 1997] (the "Underwriting Agreement"), among the
Transferor, Smith Barney Inc., Morgan Stanley & Co. Incorporated and Crestar
Securities Corporation (the "Underwriters"), the Transferor has agreed to sell
to the Underwriters, and each Underwriter has severally agreed to purchase from
the Transferor, the principal balance of each Class of Notes set forth below its
name on the following chart:
<TABLE>
<CAPTION>
Principal Balance
---------------------------------------------------------------------------
Morgan Stanley Crestar Securities
Class of Notes Smith Barney Inc. & Co. Incorporated Corporation Total
- -------------- ----------------- ------------------ ----------- -----
<S> <C>
Class A-1 Notes............
Class A-2 Notes............
Class B Notes..............
Total.............
</TABLE>
In the Underwriting Agreement, the Underwriters have severally agreed,
subject to the terms and conditions set forth therein, to purchase all of the
Notes offered hereby, if any Notes are purchased. In the event of a default by
any Underwriter, the Underwriting Agreement provides that, in certain
circumstances, purchase commitments of the non-defaulting Underwriter may be
increased or purchase commitments of all Underwriters may be terminated. The
Transferor has been advised by the Underwriters that the Underwriters propose
initially to offer the Notes to the public at the public offering price with
respect to each Class set forth on the cover page of this Prospectus. After the
initial public offering, the public offering price may be changed.
The Underwriting Agreement provides that the Transferor 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.
After the initial distribution of the Notes by the Underwriters, the
Prospectus may be used by Crestar Securities Corporation, an affiliate of the
Transferor and the Master Servicer, in connection with offers and sales relating
to market making transactions in the Notes. Crestar Securities Corporation may
act as principal or agent in such transactions. Such sales will be made at
prices related to prevailing market prices at the time of sale.
The Underwriters may engage in over-allotment, stabilizing
transactions, syndicate covering transactions and penalty bids in accordance
with Regulation M under the Exchange Act. Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specific maximum. Syndicate covering
transactions involve purchases of the Notes in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Underwriters 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.
Each Underwriter has represented and agreed that (a) it has not offered
or sold, and 'will not offer or sell Notes to persons in the United Kingdom
except to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the purposes of
their businesses or otherwise in circumstances which have not resulted, and will
not result in an offer to the public in the United Kingdom within the meaning of
the U.K. Regulations, (b) it has complied and 'will comply with all applicable
provisions of the Financial Services Act of 1986 of Great Britain with respect
to anything done by it in relation to the Notes in, from or otherwise involving
the United Kingdom and (c) it has only issued or passed on and will only issue
or pass on in the United Kingdom any document in connection with the issue of
the Notes to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986, as amended, (Investment Advertisement) (Exemptions)
Order 1996, as amended, or is a person to whom the document may otherwise
lawfully be issued or passed on.
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Crestar Securities Corporation is an affiliate of the Transferor and a
wholly owned indirect subsidiary of the Crestar Financial Corporation.
Smith Barney Inc. has provided from time to time, and may provide in
the future, investment or commercial banking services to the Transferor and its
affiliates, for which Smith Barney Inc. or its affiliates have received or will
receive customary fees and commissions.
LEGAL MATTERS
Certain legal matters relating to the Transferor, the Master Servicer
and the Administrator will be passed upon by Foley & Lardner and Hunton &
Williams. Certain legal matters relating to the validity of the issuance of the
Notes will be passed upon for the Trust by Hunton & Williams. Foley & Lardner
and Hunton & Williams each has performed legal services for the Transferor and
it is expected that they will continue to perform such services in the future.
Certain federal income tax and other matters will be passed upon for the Trust
by Hunton & Williams. Certain legal matters will be passed upon for the
Underwriters by Squire, Sanders & Dempsey L.L.P.
FINANCIAL INFORMATION
The Transferor has determined that its financial statements are not
material to the offering made hereby. The Trust will engage in no activities
other than as described herein. Accordingly, no financial statements with
respect to the Trust are included in this Prospectus.
RATING
It is a condition to the issuance and sale of each Class of the Class A
Notes that they each be rated "AAA" by Standard & Poor's and "Aaa" by Moody's.
It is a condition to the issuance of the Class B Notes that they be rated at
least "A" by Standard & Poor's and at least "A2" by Moody's. Each of Standard &
Poor's and Moody's is also referred to herein as a "Rating Agency" and
collectively, as the "Rating Agencies." A securities rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating agency. The ratings of the Notes
address the likelihood of the ultimate payment of principal of and interest on
the Notes pursuant to their terms. The Rating Agencies do not evaluate, and the
ratings on the Notes do not address, the likelihood of prepayments on the Notes
or the likelihood of payment of the Noteholders' Interest Carryover.
INDEX OF PRINCIPAL TERMS
Set forth below is a list of the defined terms used in this Prospectus
and the pages on which the definitions of such terms may be found herein.
Page
----
1980 Amendments......................................... 43
1981 Amendments......................................... 43
1986 Amendments......................................... 43
1987 Amendments......................................... 43
1989 Amendments......................................... 43
1992 Amendments......................................... 43
1993 Amendments......................................... 43
1993 Technical Amendments............................... 43
1997 Amendments......................................... 43
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Page
----
91-day T-Bill Rate..................................... 29,54
Adjustment Payment..................................... 79
Administration Agreement............................... 5
Administration Fee..................................... 9,14
Administrator.......................................... 3
Administrator Default.................................. 90
Assigned Rights........................................ 23
Available Funds........................................ 82
BHCA................................................... 34
Bond Equivalent Yield - 91-day T-Bill.................. 68
Cede................................................... 3
Cedel.................................................. 4
Cedel Participants..................................... 75
Certificate Balance.................................... 85
Certificate Distribution Account....................... 15
Certificateholders..................................... 14
Certificateholders' Distribution Amount................ 85
Certificateholders' Principal Carryover Shortfall...... 85
Certificateholders' Principal Distribution Amount...... 85
Certificates........................................... 4
Claims Rates........................................... 58
Class.................................................. 4
Class A Noteholders.................................... 4
Class A Notes.......................................... 4
Class A-1 Noteholders.................................. 4
Class A-1 Notes........................................ 4
Class A-2 Noteholders.................................. 4
Class A-2 Notes........................................ 4
Class B Noteholders.................................... 4
Class B Notes.......................................... 4
Class Interest Rate.................................... 5
Closing Date........................................... 10
Code................................................... 21
Collection Account..................................... 14
Collection Period...................................... 5
Commission............................................. 3
Consolidation Loan Fees................................ 85
Consolidation Prepayments.............................. 79
Cooperative............................................ 75
CPR.................................................... 42
Crestar Subsidiary..................................... 90
Cut-off Date........................................... 10
Default................................................ 65
Deferment Periods...................................... 49,63
Deferral Phase......................................... 13
Definitive Notes....................................... 76
Department of Education................................ 11
Department of HHS...................................... 11
Depositor.............................................. 3
Depositories........................................... 73
Depository............................................. 66
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Page
----
Directing Notes....................................... 26
Distribution Date..................................... 2,5
Distribution Determination Date....................... 7
DOE Data Book......................................... 59
DTC................................................... 3
DTC Participants...................................... 73
ECMC.................................................. 11,56
ECMC\Department Agreements............................ 58
Effective Interest Rate............................... 7
Eligible Deposit Account.............................. 80
Eligible Institution.................................. 80
Eligible Investments.................................. 19,79
Eligible Lender Trustee............................... 1,5
Eligible Lender Trustee Fee........................... 14
ERISA................................................. 97
Euroclear............................................. 4,75
Euroclear Operator.................................... 75
Euroclear Participants................................ 75
Event of Default...................................... 70
Exchange Act.......................................... 3
Exchange Date......................................... 79
Exchange Period....................................... 12,78
Exchanged Consolidation Loans......................... 78
Exchanged Financed Student Loans...................... 10,79
Exchanged Serial Loan................................. 79
Expense Account....................................... 14
FDIA.................................................. 30
FDIC.................................................. 30
FFEL Program.......................................... 10
FFELP Loans........................................... 10
Final Maturity Date................................... 68
Financed FFELP Loans.................................. 10
Financed HEAL Loans................................... 10
Financed Student Loans................................ 1
FIRREA................................................ 30
Floating Rate (T-Bill)................................ 6
Forbearance Period.................................... 49
Forbearance Periods................................... 29
Formula Interest Rate................................. 6
Grace Period.......................................... 63
Grace Periods......................................... 29,48
Guarantee Agencies.................................... 10
Guarantee Agency...................................... 10
Guarantee Agreements.................................. 11
Guarantee Fund........................................ 56
Guarantee Payments.................................... 24
Guarantor............................................. 10
Guarantors............................................ 10
HEAL Consolidation Loan............................... 12
HEAL Insurance Contract............................... 12
HEAL Loans............................................ 10
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Page
----
HEAL Program......................................... 10
Higher Education Act................................. 11
Holders.............................................. 76
Indenture............................................ 4
Indenture Trustee.................................... 5
Indenture Trustee Fee................................ 14
Index Maturity....................................... 69
Indirect Participants................................ 73
Initial Financed Student Loans....................... 10
Initial Pool Balance................................. 10
Insolvency Event..................................... 92
Insurance Payments................................... 24
Interest Payment Period.............................. 5
Interest Period...................................... 6
Interest Subsidy Agreement........................... 57
Interest Subsidy Payments............................ 53
Investment Earnings.................................. 79
Issuer Consolidation Payments........................ 79
LIBOR Determination Date............................. 69
Loan Rates........................................... 29
Margin............................................... 6
Master Servicer...................................... 5
Master Servicer Default.............................. 90
Minimum Purchase Price............................... 20,92
Moody's.............................................. 22
Net Loan Rate........................................ 7
New Borrower......................................... 45
Nonresidents......................................... 96
Note Distribution Account............................ 15
Note Owner........................................... 74
Noteholders.......................................... 5
Noteholders' Distribution Amount..................... 85
Noteholders' Interest Carryover...................... 7,67
Noteholders' Interest Distribution Amount............ 86
Noteholders' Interest Shortfall...................... 86
Noteholders' Principal Carryover Shortfall........... 86
Noteholders' Principal Distribution Amount........... 86
Notes................................................ 1,4
Obligor.............................................. 13
One-Month LIBOR...................................... 6,69
Original Amount...................................... 4
Parity Percentage.................................... 8
Parity Percentage Payment............................ 16
Participants......................................... 66
PHEAA................................................ 5,11,56
Plan................................................. 21,98
Plan Asset Regulations............................... 21,98
Plan Investors....................................... 21,98
PLUS Loans........................................... 10
Pool Balance......................................... 13
Principal Distribution Amount........................ 86
-100-
<PAGE>
Page
____
Principal Factor.................................... 18,84
Program Operating Expense Percentage................ 8
Purchase Amount..................................... 78
Quarterly Advance Account........................... 20
Quarterly Advances.................................. 20,87
Rate Adjustment Date................................ 66,68,69
Rating Agencies..................................... 22,100
Rating Agency....................................... 22,100
Realized Loss....................................... 86,87
Record Date......................................... 5
Reference Bank...................................... 69
Registration Statement.............................. 3
Related Documents................................... 72
Relief Act.......................................... 95
Repayment........................................... 46
Repayment Phase..................................... 13
Repeat Borrower..................................... 45
Reserve Account..................................... 18
Reserve Account Deposit............................. 18
Secretary of Education.............................. 11
Secretary of HHS.................................... 12
Securities Act...................................... 3
Serial Loan......................................... 28
Service............................................. 93
Servicer............................................ 5
Servicers........................................... 5
Servicing Fee....................................... 9,14
SLS Loans........................................... 10
Special Allowance Payments.......................... 54
Special Tax Counsel................................. 93
Specified Reserve Account Balance................... 18
Stafford Loans...................................... 48
Standard & Poor's................................... 22
Student Loans....................................... 10
Subsequent Cut-off Date............................. 35
T-Bill Rate Determination Date...................... 68
Telerate Page 3750.................................. 69
Terms and Conditions................................ 75
Terms Supplement.................................... 4
TIN................................................. 95
TP Loans............................................ 40
TP Program.......................................... 40
Transaction Fees.................................... 14
Transfer Agreement.................................. 12
Transfer and Servicing Agreement.................... 5
Transfer and Servicing Agreements................... 77
Transferor.......................................... 1,5
Transferor Trusts................................... 25
Trust............................................... 1,4
Trust Accounts...................................... 79
Trust Agreement..................................... 9
-101-
<PAGE>
Page
----
U.K. Regulations................................... 2
U.S. Person........................................ 97
UCC................................................ 31
Underwriters....................................... 98
Underwriting Agreement............................. 98
USAF............................................... 11, 56
-102-
<PAGE>
==============================================================================
No dealer, salesman or other individual has been authorized to give any
information or to make any representations other than those contained in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Transferor or the Underwriters.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the Notes offered hereby nor an offer of
such Notes to any person in any state or other jurisdiction in which such offer
would be unlawful. The delivery of this Prospectus at any time does not imply
that information herein is correct as of any time subsequent to its date.
--------------
TABLE OF CONTENTS
Available Information....................... 3
Reports to Noteholders...................... 3
Incorporation of Certain Documents by
Reference................................. 3
Summary of Terms............................ 4
Risk Factors................................ 23
Formation of the Trust...................... 32
Use of Proceeds............................. 33
The Transferor.............................. 33
The Servicers............................... 34
The Financed Student Loan Pool.............. 35
Maturity and Prepayment Considerations. .. 41
Description of the FFEL Program............. 42
Description of the Guarantee Agencies....... 56
Description of the HEAL Program............. 62
Description of the Notes.................... 66
Description of the Transfer and Servicing
Agreements................................ 77
Federal Income Tax Consequences............. 93
State Tax Considerations ................... 97
ERISA Considerations........................ 97
Underwriting................................ 98
Legal Matters............................... 100
Financial Information....................... 100
Rating...................................... 100
Index of Principal Terms.................... 100
======================================================
[$ ]
---------
Crestar Student Loan
Trust 1997-1
STUDENT LOAN
ASSET BACKED NOTES
[$ ]
---------
Senior T-Bill Rate Class A-1 Notes
[$ ]
---------
Senior T-Bill Rate Class A-2 Notes
[$ ]
---------
Subordinate LIBOR Rate Class B Notes
-------------
PROSPECTUS
-------------
Smith Barney Inc.
Morgan Stanley Dean Witter
Crestar Securities Corporation
[ ,1997]
--------
======================================================
-103-
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses in connection with
the offering of $1,000,000 of the Student Loan Asset Backed Notes being
registered under this Registration Statement, other than underwriting discounts
and commission:
SEC Registration.................................................$ 303.03
Printing and Engraving............................................ *
Legal Fees and Expenses........................................... *
Accounting Fees and Expenses...................................... *
Trustee Fees and Expenses......................................... *
Blue Sky Fees and Expenses........................................ *
Rating Agency Fees................................................ *
Miscellaneous..................................................... *
TOTAL.............................................$ *
* To be provided by amendment
Item 15. Indemnification of Directors and Officers.
Registrant's Articles of Incorporation implement the provisions of the
Virginia State Corporation Act ("VSCA"), which provide for the indemnification
of Registrant's directors and officers in a variety of circumstances, which may
include indemnification for liabilities under the Securities Act of 1933. Under
Sections 13.1-697 and 13.1-702 of the VSCA, a Virginia corporation generally is
authorized to indemnify its directors and officers in civil and criminal actions
if they acted in good faith and believed their conduct to be in the best
interests of the corporation and, in the case of criminal actions, had no
reasonable cause to believe that the conduct was unlawful. Registrant's Articles
of Incorporation require indemnification of directors and officers with respect
to certain liabilities, expenses and other amounts imposed upon them by reason
of having been a director or officer, except in the case of willful misconduct
or a knowing violation of criminal law. In addition, the VSCA and Registrant's
Articles of Incorporation eliminate the liability of a director or officer in a
stockholder or derivative proceeding. This elimination of liability will not
apply in the event of willful misconduct or a knowing violation of the criminal
law or any federal or state securities law. Sections 13.1-692 and 13.1-696 to
- -704 of the VSCA are incorporated herein by reference.
Reference is made to the Underwriting Agreement filed as an exhibit hereto
for provisions relating to the indemnification of directors, officers and
controlling persons of the Registrant against certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
Crestar Financial Corporation, the parent of the Registrant, carries an
insurance policy providing directors' and officers' liability insurance for any
liability its directors or officers or the directors or officers of any of its
subsidiaries, including the Registrant, may incur in their capacities as such.
II - 1
<PAGE>
Item 16. Exhibits.
All financial statements, schedules and historical financial information
have been omitted as they are not applicable.
1.1 Form of Underwriting Agreement*
3.1 Articles of Incorporation of Registrant*
3.2 By-Laws of Registrant*
3.3 Trust Agreement among the Registrant, Star Bank, National Association
and _____________________*
4.1 Form of Indenture between the Trust and the Indenture Trustee*
4.2 Form of First Terms Supplement to Indenture between the Trust and the
Indenture Trustee*
4.4 Form of Transfer and Servicing Agreement among the Trust, the Master
Servicer and the Eligible Lender Trustee*
4.5 Form of Administration Agreement among the Administrator, the Eligible
Lender Trustee and the Indentrue Trustee*
4.6 Guarantee Agreement with the Educational Credit Management Corporation*
4.7 Guarantee Agreement with the Pennsylvania Higher Education Assistance
Agency*
4.8 Contract of Insurance with the U.S. Department of Health and Human
Services*
5.1 Opinion of Hunton & Williams*
8.1 Opinion of Hunton & Williams with respect to tax matters*
23.1 Consent of Hunton & Williams is contained in their opinions filed as
Exhibits 5.1 and 8.1*
24.1 Power of Attorney of certain officers and directors of the Registrant*
25.1 T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of
Bankers Trust Company*
* To be filed by amendment
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events
arising after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in
the information set forth in the Registration Statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
Registration Statement or any material change of such information
in the Registration Statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the information required to be included in the
post-effective amendment by those paragraphs is contained in
periodic reports filed by the Registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are
included by reference in the Registration Statement.
II - 2
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II - 3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Richmond, Commonwealth of Virginia, on September 17,
1997.
CRESTAR BANK
By: /s/ W. Clark McGhee
------------------------------
W. Clark McGhee
Senior Vice President
II - 4
<PAGE>
Each person whose signature appears below constitutes and appoints W.
Clark McGhee, Linda F. Rigsby and Randolph F. Totten his true and lawful
attorneys-in-fact and agents, each acting alone, with full powers of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, each acting alone, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C>
/s/ Richard G. Tilghman Principal Executive Officer) September 17, 1997
- ------------------------------------ Chairman of the Board & Chief
Richard G. Tilghman Executive Officer and Director
(Principal Executive Officer)
/s/ James M. Wells, III President, Chief Operating Officer September 17, 1997
- ------------------------------------- and Director
James M. Wells, III
/s/ Richard F. Katchuk Principal Financial Officer) September 17, 1997
- ------------------------------------- Corporate Executive Vice President
Richard F. Katchuk and Chief Financial Officer
(Principal Financial Officer)
/s/ James D. Barr Principal Accounting Officer) September 17, 1997
- ------------------------------------- Group Executive Vice President -
James D. Barr Controller & Treasurer
(Principal Accounting Officer)
Director September __, 1997
- -------------------------------------
J. Carter Fox
/s/ Bonnie Guiton Hill Director September 17, 1997
- -------------------------------------
Bonnie Guiton Hill
/s/ Charles R. Longsworth Director September 17, 1997
- -------------------------------------
Charles R. Longsworth
/s/ Patrick J. Maher Director September 17, 1997
- -------------------------------------
Patrick J. Maher
Director September __, 1997
- -------------------------------------
Frank E. McCarthy
/s/ Paul D. Miller Director September 17, 1997
- -------------------------------------
Paul D. Miller
II - 5
<PAGE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
/s/ G. Gilmer Minor III Director September 17, 1997
- -------------------------------------
G. Gilmer Minor III
/s/ Gordon F. Rainey, Jr. Director September 17, 1997
- -------------------------------------
Gordon F. Rainey, Jr.
Director September __, 1997
- -------------------------------------
Frank S. Royal
/s/ Alfred H. Smith, Jr. Director September 17, 1997
- -------------------------------------
Alfred H. Smith, Jr.
/s/ Jeffrey R. Springer Director September 17, 1997
- -------------------------------------
Jeffrey R. Springer
/s/ Eugene P. Trani Director September 17, 1997
- -------------------------------------
Eugene P. Trani
Director September __, 1997
- -------------------------------------
L. Dudley Walker
/s/ Robert C. Wilburn Director September 17, 1997
- -------------------------------------
Robert C. Wilburn
/s/ Karen Hastie Williams Director September 17, 1997
- -------------------------------------
Karen Hastie Williams
</TABLE>
II - 6
