PROSPECTUS SUPPLEMENT
(To Prospectus dated March 12, 1998)
$410,000,000
[MONEY STORE LOGO]
CLASSNOTES TRUST 1997-I
SERIES 1998-1
ClassNotes Trust 1997-I (the "Trust") is offering an aggregate of
$410,000,000 of Series 1998-1 Asset Backed Notes (the "Series 1998-1 Notes" or
the "Auction Rate Notes" and, together with other Series and Classes of Notes
which have been issued or may, from time to time, be issued by the Trust, the
"Notes") in the four classes (each, a "Class") and the original principal
amounts set forth below. The Series 1998-1 Notes are secured primarily by a pool
of student loans, as further described herein and in the attached Prospectus,
purchased by or contributed to The York Bank and Trust Company, as eligible
lender trustee on behalf of the Trust (the "Eligible Lender Trustee"), from
Trans-World Insurance Company, doing business as Educaid, and ClassNotes Inc.
(each a "Seller" and together, the "Sellers") (such loans, together with any
Additional Student Loans (as defined in the attached Prospectus) purchased from
the Sellers by, or contributed by the Sellers to, the Eligible Lender Trustee on
behalf of the Trust, the "Financed Student Loans"), collections and other
payments with respect to the (COVER CONTINUED ON NEXT PAGE)
SEE "RISK FACTORS" BEGINNING ON PAGE S-27 HEREIN AND ON PAGE 35 IN THE ATTACHED
PROSPECTUS FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS WHICH SHOULD BE
CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SERIES 1998-1 NOTES OFFERED
HEREBY.
THE SERIES 1998-1 NOTES REPRESENT INTERESTS ONLY IN THE TRUST AND
DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE MONEY
STORE INC., THE SELLERS, THE ELIGIBLE LENDER TRUSTEE, THE
INDENTURE TRUSTEE OR ANY OF THEIR RESPECTIVE
AFFILIATES OR SUBSIDIARIES. NO GOVERNMENTAL
AGENCY HAS PASSED UPON THE ACCURACY OF THE
INFORMATION CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS.
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
SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=============================================================================================================================
Price to Underwriting Proceeds to the
Public Discount(1) Sellers(2)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$100,000,000 Auction Rate Class A-7 Notes 100% 0.25% 99.75%
- -----------------------------------------------------------------------------------------------------------------------------
$100,000,000 Auction Rate Class A-8 Notes 100% 0.25% 99.75%
- -----------------------------------------------------------------------------------------------------------------------------
$100,000,000 Auction Rate Class A-9 Notes 100% 0.25% 99.75%
=============================================================================================================================
$110,000,000Auction Rate Class A-10 Notes 100% 0.25% 99.75%
=============================================================================================================================
$410,000,000 $1,025,000 $408,975,000
Total...................................
=============================================================================================================================
(1) The Representative has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933, as amended.
(2) Before deducting expenses, estimated at $200,000.
</TABLE>
The Series 1998-1 Notes are offered by the Underwriters (as defined
herein) subject to prior sale, when, as and if issued to and accepted by the
Underwriters, 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 Series 1998-1 Notes will be made in book-entry form only through
the Same Day Funds Settlement System of The Depository Trust Company on or about
March 17, 1998.
SALOMON SMITH BARNEY
FIRST UNION CAPITAL MARKETS CORP.
PRUDENTIAL SECURITIES INCORPORATED
The date of this Prospectus Supplement is March 16, 1998
(COVER CONTINUED FROM PREVIOUS PAGE)
Financed Student Loans, monies on deposit in certain trust accounts, and a
surety bond with respect to the Series 1998-1 Notes (the "Note Surety Bond") to
be issued by:
Ambac
The initial interest rate (the "Class Interest Rate") for each Class of
Series 1998-1 Notes will be determined as set forth herein. Thereafter, the
Class Interest Rate for each Class of Series 1998-1 Notes for each Interest
Period will, subject to certain limitations, equal the lesser of (x) the rate
determined from time to time for such Classes of Auction Rate Notes pursuant to
the Auction Procedures described in Appendix I of the attached Prospectus (the
"Auction Rate") and (y) the Net Loan Rate. In no event will the Class Interest
Rate for any Class of Auction Rate Notes exceed 16.0% per annum. Interest on
each Class of Auction Rate Notes will be payable on the first Business Day
following the expiration of each Interest Period for such Class, commencing in
April, 1998. Principal on each Class of Series 1998-1 Notes will be payable on
the first Business Day following the expiration of the first Interest Period for
such Class ending in each month. However, no principal payments with respect to
any Class of Series 1998-1 Notes will be made until each Class of Notes issued
by the Trust, regardless of when issued, with an earlier Final Maturity Date is
paid in full.
Interest on the outstanding principal amount of each Class of Series 1998-1
Notes will accrue during the period (each, an "Interest Period") initially
beginning on the Closing Date and ending (i) with respect to the Class A-7
Notes, on April 15, 1998, the first Auction Date for the Class A-7 Notes, (ii)
with respect to the Class A-8 Notes, on April 22, 1998, the first Auction Date
for the Class A-8 Notes, (iii) with respect to the Class A-9 Notes, on April 29,
1998, the first Auction Date for the Class A-9 Notes, and (iv) with respect to
the Class A-10 Notes, on May 6, 1998, the first Auction Date for the Class A-10
Notes. After the respective initial Interest Period, each Interest Period for
the Auction Rate Notes will consist of 28 days, subject to adjustment as
described in the Auction Procedures.
The Final Maturity Dates for the Class A-7 , Class A-8, Class A-9 and Class
A-10 Notes are May 1, 2020, June 1, 2020, July 1, 2020 and August 1, 2020
respectively. However, payment in full of the Series 1998-1 Notes could occur
earlier than such dates as described in the attached Prospectus.
There is currently no secondary market for the Series 1998-1 Notes. Smith
Barney Inc., First Union Capital Markets Corp. and Prudential Securities
Incorpoated. (collectively, the "Underwriters") intend to make a secondary
market for the Series 1998-1 Notes, but have no obligation to do so. There can
be no assurance that a secondary market for the Series 1998-1 Notes will develop
or, if one does develop, that it will continue.
The Series 1998-1 Notes offered by this Prospectus Supplement constitute a
separate series of Notes being offered pursuant to the Prospectus dated March
12, 1998, of which this Prospectus Supplement is a part and which accompanies
this Prospectus Supplement. The Prospectus contains important information
regarding this offering which is not contained herein and prospective investors
are urged to read the Prospectus and this Prospectus Supplement in full.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SERIES 1998-1
NOTES, INCLUDING PURCHASES OF THE SERIES 1998-1 NOTES TO STABILIZE THEIR MARKET
PRICE AND PURCHASES OF THE SERIES 1998-1 NOTES TO COVER SOME OR ALL OF A SHORT
POSITION IN THE SERIES 1998-1 NOTES MAINTAINED BY THE UNDERWRITERS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
(END OF COVER PAGE)
------------------------------
UNTIL 90 DAYS AFTER THE DATE HEREOF, ALL DEALERS EFFECTING TRANSACTIONS IN
THE SERIES 1998-1 NOTES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY
BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
SUMMARY OF TERMS OF THE SERIES 1998-1 NOTES
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND THE
ATTACHED PROSPECTUS. CAPITALIZED TERMS NOT OTHERWISE DEFINED HEREIN HAVE THE
MEANINGS ASSIGNED TO SUCH TERMS IN THE PROSPECTUS. SEE THE "INDEX OF PRINCIPAL
TERMS" IN THE PROSPECTUS.
Issuer...........................................ClassNotes Trust 1997-I (the
"Trust") is a business
trust established under
the laws of the
Commonwealth of
Pennsylvania by a Trust
Agreement dated March 20,
1997 (as amended or
supplemented from time to
time the "Trust
Agreement") between the
Sellers, as depositors,
and the Eligible Lender
Trustee. The Trust's
principal offices are in
York, Pennsylvania in care
of The York Bank and Trust
Company as Eligible Lender
Trustee.
Securities Offered...............................Series 1998-1 Asset Backed
Notes (the "Series 1998-1
Notes" or the "Auction
Rate Notes") to be issued
in the following classes
and initial principal
amounts (each a "Class"):
$100,000,000 Auction Rate Class A-7 Notes
$100,000,000 Auction Rate Class A-8 Notes
$100,000,000 Auction Rate Class A-9 Notes
$110,000,000 Auction Rate Class A-10 Notes
The Trust will issue the
Series 1998-1 Notes
pursuant to the Indenture
dated as of March 21, 1997
(as amended and
supplemented from time to
time, the "Master
Indenture") and a Third
Terms Supplement dated as
of March 17, 1998
authorizing such Notes (as
amended from time to time,
the "Terms Supplement"
and, together with the
Master Indenture, the
"Indenture") between the
Trust and the Indenture
Trustee.
The Auction Rate Notes will be
issued in minimum
denominations of $50,000
and integral multiples of
$50,000 in excess thereof.
On each Note Distribution
Date for which the Auction
Rate Notes are receiving a
payment of principal, such
principal will be
distributed as set forth
herein under "Description
of the Transfer and
Servicing Agreements--
Distributions."
Sellers..........................................Trans-World Insurance Company,
an Arizona insurance
company doing business as
Educaid ("Educaid") with
respect to the Federal
Loans and ClassNotes Inc.,
a Delaware corporation
("ClassNotes"), with
respect to the Private
Loans. Each of Educaid and
ClassNotes is referred to
herein as a "Seller" and
collectively as the
"Sellers." Each Seller is
a wholly-owned subsidiary
of The Money Store Inc.
("The Money Store" or the
"Representative"). On
March 4, 1998, The Money
Store announced that it
had signed a definitive
merger agreement with
First Union Corporation
pursuant to which First
Union Corporation would
acquire The Money Store.
See "The Sellers and The
Money Store."
Master Servicers and Servicers...................Each Seller will act as Master
Servicer with respect to
the Financed Student Loans
sold or contributed by it
to the Trust (in such
capacity, the "Master
Servicer"). Educaid
generally will service the
Financed Student Loans
originated by it during
the Deferral Phase (which
loans will be Federal
Loans). It is expected
that Pennsylvania Higher
Education Assistance
Agency ("PHEAA"), an
agency of the Commonwealth
of Pennsylvania, primarily
will service the Financed
Student Loans originated
by Educaid during the
Repayment Phase. Certain
of the Financed Student
Loans originated by
Educaid also may be
serviced during the
Repayment Phase by AFSA
Data Corporation ("AFSA")
and Great Lakes Higher
Education Servicing
Corporation ("GLHESC"), or
such other parties as may
be approved by the Surety
Provider. Financed Student
Loans originated by third
parties and subsequently
purchased by Educaid, will
be serviced during both
the Deferral Phase and the
Repayment Phase by a party
approved by the Surety
Provider. It is expected
that PHEAA will service
all Financed Student Loans
originated or purchased by
ClassNotes (which loans
will be Private Loans).
Each party who may, from
time to time, be servicing
the Financed Student Loans
is referred to herein as a
"Servicer" and
collectively, as the
"Servicers." See
"Servicers" herein.
Eligible Lender Trustee..........................The York Bank and Trust
Company, a Pennsylvania
bank and trust company,
will act as the eligible
lender trustee under the
Trust Agreement and will
hold legal title to the
Financed Student Loans on
behalf of the Trust (the
"Eligible Lender
Trustee"). The Eligible
Lender Trustee has its
chief executive office in
York, Pennsylvania. The
office of the Eligible
Lender Trustee for
purposes of administering
the Trust is located at
107 West Market Street,
York, Pennsylvania 17401.
Indenture Trustee................................Bankers Trust Company, a New
York banking corporation
(the "Indenture Trustee"),
will act as trustee under
the Indenture.
Auction Agent....................................Bankers Trust Company will act
as auction agent (in such
capacity, the "Auction
Agent") under the Auction
Agent Agreement with
respect to each Class of
Auction Rate Notes.
Broker-Dealer....................................Smith Barney Inc. will act as
broker-dealer under the
Broker-Dealer Agreement
(in such capacity, the
"Broker-Dealer") with
respect to each Class of
Auction Rate Notes.
Administrator....................................Trans-World Insurance Company,
d/b/a Educaid will act as
administrator (the
"Administrator") on behalf
of the Trust pursuant to
an Administration
Agreement (as amended and
supplemented from time to
time, the "Administration
Agreement"), between the
Administrator, the
Eligible Lender Trustee
and the Indenture Trustee.
Surety Provider..................................Ambac Assurance Corporation, a
Wisconsin-domiciled stock
insurance company ("Ambac"
or the "Surety Provider")
will act as provider of
the Note Surety Bond
issued with respect to the
Series 1998-1 Notes.
Initial Class Interest Rates....................5.67% per annum with respect to
the Class A-7 Notes until
April 15, 1998, the first
Auction Date for such
Class;
5.67% per annum with respect
to the Class A-8 Notes
until April 22, 1998, the
first Auction Date for
such Class;
5.67% per annum with respect to
the Class A-9 Notes until
April 29, 1998, the first
Auction Date for such
Class; and
5.67% per annum with respect to
the Class A-10 Notes until
May 6, 1998, the first
Auction Date for such
Class.
After the initial Interest
Period for the Auction
Rate Notes, each Interest
Period relating to the
Auction Rate Notes will
consist of 28 days,
subject to adjustment as
set forth in the Auction
Procedures described in
Appendix I to the attached
Prospectus. After the
initial Interest Period
for the Auction Rate
Notes, the Class Interest
Rate for each such Class
will be reset pursuant to
the Auction Procedures
described in Appendix I to
the attached Prospectus
(but in no event exceeding
16.0% per annum). See
"Description of the
Securities--the Notes--
Distributions of Interest"
herein. Interest on each
Class of Series 1998-1
Notes will be payable on
the first Business Day
following the expiration
of each Interest Period
for such Class of Notes.
The date on which a Class
of Notes is entitled to
receive a distribution is
referred to as the "Note
Distribution Date" for
such Class. Distributions
will be made to holders of
record of the related
Class of Series 1998-1
Notes as of the second
Business Day prior to the
related Note Distribution
Date (such day, the "Note
Record Date"). Interest
will be calculated on the
Series 1998-1 Notes on the
basis of the actual number
of days elapsed in each
Interest Period divided by
360.
If the Class Interest Rate
for any Class of Series
1998-1 Notes for any
Interest Period is based
on the Net Loan Rate (as
defined below under "--Net
Loan Rate"), the excess of
(a) the amount of interest
such Class of Series
1998-1 Notes would have
accrued in respect of the
related Interest Period
had interest been
calculated based on the
applicable Auction Rate,
over (b) the amount of
interest on such Class of
Series 1998-1 Notes
actually accrued in
respect of such Interest
Period based on the Net
Loan Rate (such excess,
together with the unpaid
portion of any such excess
from prior Interest
Periods (and interest
accrued thereon calculated
based on One-Month LIBOR),
is referred to as the
"Noteholders' Interest
Carryover") will be paid
on the dates and in the
priority set forth herein
under "--Collection
Account; Note Distribution
Account; Certificate
Distribution Account; and
Expense Account." The
rating of the Series
1998-1 Notes does not
address the likelihood of
the payment of the amount
of any Noteholders'
Interest Carryover.
Principal........................................Principal will be payable to
the Class of Series 1998-1
Notes with the earliest
Final Maturity Date, on
the first Note
Distribution Date in each
month for such Class in an
amount equal to the
Noteholders' Principal
Distribution Amount for
such Note Distribution
Date. However, no
principal payments with
respect to any Class of
Series 1998-1 Notes will
be made until each Class
of Notes issued by the
Trust, regardless of when
issued, with an earlier
Final Maturity Date is
paid in full. See
"Description of the
Transfer and Servicing
Agreements--
Distributions" herein and
in the attached
Prospectus.
The Trust may issue, from time
to time, several Series
and Classes of Notes. See
"-- Previously Issued
Securities" for
information relating to
Classes of Notes issued
previously by the Trust.
The payment priorities of
each Series and Class will
be described in the
applicable Prospectus
Supplement. Such
priorities may provide
that some or all payments
of principal will be
distributed to the Classes
of Notes in order of their
Final Maturity Date or
such other priority as may
be set forth in a
Prospectus Supplement,
regardless of Series and
regardless of when issued.
A Series of Notes may
contain one or more
Classes with an earlier
Final Maturity Date than
one or more of the Classes
of Series 1998-1 Notes. In
such event, the Classes of
Series 1998-1 Notes will
receive no payments of
principal until each of
the Notes with an earlier
Final Maturity Date,
regardless of when issued,
has been paid in full. See
"Risk Factors--Repayment
of Principal" in the
attached Prospectus.
Payment in full of any Class
of Series 1998-1 Notes is
likely to occur sooner
than its Final Maturity
Date as a result of a
variety of factors,
including the sale by the
Trust of Financed Student
Loans and borrowers
leaving school and
commencing repayment of
their Financed Student
Loans. Additionally, with
the consent of the Surety
Provider, Additional
Principal Payments may be
made on the Series 1998-1
Notes. See "The Financed
Student Loan
Pool--Maturity and
Prepayment Assumptions" in
the attached Prospectus.
On the Final Maturity Date of
each Class of Series
1998-1 Notes, the Surety
Provider will be required
to provide for payment to
the Trust pursuant to the
related Note Surety Bond
of an amount equal to the
excess, if any, of the
unpaid principal balance
of such Class of Series
1998-1 Notes on such Final
Maturity Date over amounts
on deposit in the Note
Distribution Account,
after taking into account
the required application
of funds in the remaining
Trust Accounts, including
but not limited to the
Reserve Account, pursuant
to the Sale and Servicing
Agreement, to the payment
of principal on such Class
of Series 1998-1 Notes on
such Final Maturity Date,
subject to the exceptions
described herein under
"Description of the Note
Surety Bond --Note Surety
Bond." Any such amount
will be distributed to
holders of such Class of
Series 1998-1 Notes on the
related Final Maturity
Date. If, however, no
required payments are made
under a Note Surety Bond
in respect of a Class of
Series 1998-1 Notes, an
Event of Default will then
have occurred under such
Class of Series 1998-1
Notes and holders of such
Class would likely incur
losses. In addition, the
maturity of many of the
Financed Student Loans may
extend beyond the Final
Maturity Date of certain
Classes of Series 1998-1
Notes.
The Certificates.................................The Trust has previously
issued the Series 1997-1
Auction Rate Asset Backed
Certificates, Class 1 and
Series 1997-2 Auction Rate
Asset Backed Certificates,
Class 2 (collectively, the
"Certificates") pursuant
to the Trust Agreement.
The Certificates represent
undivided participation
interests in the Trust.
TMS Student Holdings,
Inc., a wholly-owned
subsidiary of The Money
Store ("Student
Holdings"), has purchased
a 1.0% interest in each
Class of Certificates. See
"Formation of the
Trust--The Trust" in the
attached Prospectus. The
Certificates are not being
offered hereby and any
information contained
herein concerning the
Certificates is presented
only to permit a better
understanding of the
Series 1998-1 Notes.
A. INTEREST.....................................Each Class of Certificates
bears interest at a per
annum rate (the
"Certificate Rate")
determined pursuant to the
Auction Procedures
described in Appendix I to
the attached Prospectus.
Each Interest Period for each
Class of Certificates
consists of 28 days,
subject to adjustment as
set forth in the Auction
Procedures described in
Appendix I to the attached
Prospectus. Interest on
each Class of Certificates
will be payable on the
first Business Day
following the expiration
of each Interest Period
for such Class (each, a
"Certificate Distribution
Date") to holders of
record of the Certificates
(the "Certificateholders"
and, together with the
Noteholders, the
"Securityholders") as of
the second Business Day
preceding the related
Certificate Distribution
Date (such day, the
"Certificate Record
Date"). Interest 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 Certificate Rate
with respect to a Class of
Certificates for an
Interest Period is greater
than the Net Loan Rate,
then the Certificate Rate
for such Certificates for
such Interest Period will
be such Net Loan Rate.
However, in no event will
the Certificate Rate
exceed 16.0% per annum.
As used herein, the term
"Distribution Date" refers
to either a Note
Distribution Date or a
Certificate Distribution
Date, as the context
requires.
If the Certificate Rate for
the Certificates for any
Certificate Distribution
Date is based on the Net
Loan Rate, the excess of
(a) the amount of interest
on the Certificates that
would have accrued in
respect of the related
Interest Period had
interest been calculated
based on the applicable
Auction Rate, over (b) the
amount of interest on the
Certificates actually
accrued in respect of such
Interest Period based on
the Net Loan Rate (such
excess, together with the
unpaid portion of any such
excess from prior Interest
Periods (and interest
accrued thereon calculated
based on One-Month LIBOR),
is referred to as the
"Certificateholders'
Interest Carryover") will
be paid on the dates and
in the priority set forth
herein under "--
Collection Account; Note
Distribution Account;
Certificate Distribution
Account; and Expense
Account." The rating of
the Certificates does not
address the likelihood of
the payment of any
Certificateholders'
Interest Carryover.
B. PRINCIPAL..................................Principal of the Certificates
will be payable on the
first Certificate
Distribution Date in each
month on and after the
date on which each Series
and Class of Notes has
been paid in full in an
amount equal to the
Certificateholders'
Principal Distribution
Amount for such
Certificate Distribution
Date. See "Description of
the Transfer and Servicing
Agreements--Distributions"
herein and in the attached
Prospectus.
C. SUBORDINATION OF THE
CERTIFICATES..............................The rights of Certificateholders
in the assets of the Trust
(other than with respect
to the Certificate Surety
Bond) to receive payments
of principal will be
subordinated to the rights
of the Noteholders to the
extent described herein.
See "Description of the
Transfer and Servicing
Agreement--Credit
Enhancement--Subordination
of the Certificates."
Final Maturity Date..............................May 1, 2020 with respect to
the Class A-7 Notes;
June 1, 2020 with respect to
the Class A-8 Notes;
July 1, 2020 with respect to
the Class A-9 Notes; and
August 1, 2020 with respect to
the Class A-10 Notes.
Cut-off Date....................................February 27, 1998 with respect
to the Financed Student
Loans being pledged to the
Indenture Trustee on the
Closing Date.
Closing Date.....................................March 17, 1998.
Servicing Fee....................................The Master Servicers will
receive, subject to the
limitations set forth
herein and in the
Prospectus under the
heading "Summary of
Terms--Assets of the
Trust--Transfer and
Servicing Agreements," a
monthly fee (the
"Servicing Fee") equal to
(a) with respect to
Federal Loans, the sum of
(i) 0.35% per annum of the
aggregate principal
balance of such Financed
Student Loans in the
Deferral Phase as of the
last day of the preceding
calendar month, (ii) 1.00%
per annum of the aggregate
principal balance of such
Financed Student Loans
(other than Consolidation
Loans) in the Repayment
Phase as of the last day
of the preceding calendar
month, (iii) with respect
to each Consolidation
Loan, the greater of 0.65%
per annum of the principal
balance of each such
Consolidation Loan as of
the last day of the
preceding calendar month
and $3.00 per
Consolidation Loan, and
(iv) a one-time fixed fee
equal to $15 for each such
Financed Student Loan for
which a guarantee claim
was filed, in each case
subject to certain
adjustments, together with
other administrative fees
and similar charges, and
(b) with respect to
Private Loans, the sum of
(i) 0.7% per annum of the
aggregate principal
balance of such Financed
Student Loans in the
deferral phase as of the
last day of the preceding
calendar month, (ii) 1.00%
per annum of the aggregate
principal balance of such
Financed Student Loans in
the repayment phase as of
the last day of the
preceding calendar month,
and (iii) a one-time fixed
fee equal to $27.50 for
each such Financed Student
Loan for which a guarantee
claim was filed, in each
case subject to certain
adjustments, together with
other administrative fees
and similar charges. The
Servicing Fee will be
allocated monthly out of
Available Funds and
amounts on deposit in the
Reserve Account and will
be payable quarterly on
the first Note
Distribution Date
occurring in June,
September, December and
March (or, if in any such
month a Certificate
Distribution Date occurs
prior to such First Note
Distribution Date, on such
Certificate Distribution
Date).
Notwithstanding the foregoing,
if the fee payable to the
Master Servicers as
described above for any
month would exceed 1.05%
per annum of the Pool
Balance as of the last day
of the preceding calendar
month (the "Capped
Amount"), then the
"Servicing Fee" for such
month will instead be the
Capped Amount for such
month. The remaining
amount in excess of such
Servicing Fee, together
with any such excess
amounts from prior months
that remain unpaid (the
"Servicing Fee
Carryover"), will be
payable to the Master
Servicers on the dates and
in the priority set forth
below under "--Collection
Account; Note Distribution
Account; Certificate
Distribution Account; and
Expense Account."
Administration Fee...............................0.015% per annum of the
outstanding principal
amount of the Notes and
the Certificates.
Net Loan Rate....................................For any Interest Period, the
Net Loan Rate will equal
the weighted average
Effective Interest Rate
for the Collection Period
immediately preceding such
Interest Period, less
1.60% per annum.
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 Interest
Subsidy Payments and
Special Allowance Payments
due with respect to such
Financed Student Loan.
Pool Characteristics.............................A description of the Financed
Student Loans is attached
as Annex A (such
description includes
the Financed Student Loans
expected to be pledged to
the Indenture Trustee on
the Closing Date, along
with all Financed Student
Loans previously pledged
to the Indenture Trustee
in connection with the
issuance by the Trust of
all previously issued
Series of Notes and
Certificates that are
secured by the Financed
Student Loans). Such
description includes (i)
the actual characteristics
as of February 27, 1998 of
the Financed Student Loans
that received their final
disbursement on or before
such date and (ii) the
expected characteristics
as of March 16, 1998 of
the Financed Student Loans
that received their final
disbursement after
February 27, 1998 but
prior to the Closing Date
(each of February 27, 1998
and March 16, 1998 is
referred to as a
"Statistical Calculation
Date"). While the actual
characteristics of the
Financed Student Loans
actually pledged to the
Indenture Trustee on the
Closing Date may vary
somewhat from the
characteristics described
herein, The Money Store
does not believe that such
characteristics will vary
materially.
Pool Balance.....................................$821,878,388, as of the
applicable Statistical
Calculation Date.
Additionally, as of the
applicable Statistical
Calculation Date,
approximately $14,311,960
of accrued interest has
been capitalized by the
Seller and will be added
to the principal balance
of the Financed Student
Loans. These amounts
include the Financed
Student Loans expected to
be pledged to the
Indenture Trustee on the
Closing Date, along with
all Financed Student Loans
previously pledged to the
Indenture Trustee in
connection with the
issuance by the Trust of
all previously issued
Series of Notes that are
secured by the Financed
Student Loans.
Pre-Funding Account..............................Approximately $90,000,000 will
be deposited in the Pre-
Funding Account (the
"Pre-Funded Amount") in the
name of the Indenture
Trustee on behalf of the
Trust on the Closing Date.
The Representative expects
that approximately
$60,000,000 of the
Pre-Funded Amount will be
released from the
Pre-Funding Account on
March 31, 1998 in
connection with the Sellers
anticipated contribution of
Financed Student Loans on
such date. The balance of
the Pre-Funded Amount will
remain in the Pre-Funding
Account during the period
(the "Funding Period") from
Closing Date until the
first to occur of (i) the
Note Distribution Date on
which the amount on deposit
in the Pre-Funding Account
is less than $200,000, (ii)
an Event of Default
occurring under the
Indenture, a Servicer
Default occurring under the
Sale and Servicing
Agreement or an
Administrator Default
occurring under the Sale
and Servicing Agreement or
the Administration
Agreement, (iii) certain
events of insolvency
occurring with respect to
the Sellers or (iv) the
close of business on June
16, 1998, or such later
date as may be agreed to by
the Surety Provider. The
Pre-Funded Amount will be
reduced from time to time
by the amount thereof used
in connection with the
Trust obtaining additional
Financed Student Loans
during the Funding Period
in accordance with the Sale
and Servicing Agreement
(each, an "Additional
Funding"). Any Pre-Funded
Amount remaining at the end
of the Funding Period will
be distributed to holders
of the Class of Notes with
the earliest Final Maturity
Date as a payment of
principal (and, if such
Class has been paid in
full, to the holders of the
Class of Notes with the
next earliest Final
Maturity Date). See
"Description of the
Transfer and Servicing
Agreements--Additional
Fundings" herein and in the
attached Prospectus.
Capitalized Interest Account.....................As of February 27, 1998,
approximately $2,828,000
was on deposit in the
Capitalized Interest
Account. On the Closing
Date approximately
$1,000,000 will be
deposited in the
Capitalized Interest
Account in the name of the
Indenture Trustee on
behalf of the Trust on the
Closing Date. The amount
deposited therein will be
used by the Indenture
Trustee on each Note
Distribution Date and
Certificate Distribution
Date to make interest
payments to Noteholders
and Certificateholders to
the extent funds on
deposit in the Note
Distribution Account and
Certificate Distribution
Account, respectively, are
insufficient for such
purpose. Amounts on
deposit in the Capitalized
Interest Account may be
augmented from time to
time by optional deposits
therein as described in
the Sale and Servicing
Agreement. Any amounts
remaining in the
Capitalized Interest
Account after the period
set forth in the Terms
Supplement will be
transferred to the Reserve
Account or, with the
consent of the Surety
Provider, applied as an
Additional Principal
Payment as described below
under "--Collection
Account; Note Distribution
Account; Certificate
Distribution Account; and
Expense Account." See also
"Description of the
Transfer and Servicing
Agreements--Capitalized
Interest Account and
Capitalized Pre-Funding
Account" in the attached
Prospectus.
Collection Account; Note Distribution
Account; Certificate Distribution
Account; and Expense Account ....................Each Master Servicer will be
required to remit all
collections received with
respect to the Financed
Student Loans for which it
is acting as primary
servicer (i) within one
Business Day after it has
received an aggregate of
$30,000 during any month
and (ii) on the last
Business Day of each
month, all other
collections received
during such month to an
account in the name of the
Indenture Trustee (the
"Collection Account").
Each Master Servicer shall
cause each other Servicer
to remit to the Collection
Account, within one
Business Day of receipt
thereof, all collections
received with respect to
the Financed Student Loans
for which it is acting as
primary servicer. A
"Business Day" is any day
other than a Saturday, a
Sunday, or a day on which
banking institutions or
trust companies in
California, New York, New
Jersey or Pennsylvania are
authorized or obligated by
law to be closed. The
Eligible Lender Trustee
will be required to remit
Interest Subsidy Payments,
Special Allowance Payments
and insurance payments
from the Secretary it
receives within two
Business Days of receipt
thereof to the Collection
Account. See "Description
of the Transfer and
Servicing
Agreements--Payments on
Financed Student Loans" in
the attached Prospectus.
Four Business Days prior to
each Note Distribution
Date or Certificate
Distribution Date, as
applicable (each, a
"Determination Date"), the
Administrator will advise
the Indenture Trustee in
writing of the applicable
Noteholders' Interest
Distribution Amount or
Certificateholders'
Interest Distribution
Amount. Additionally, no
later than 16 days prior
to the first Note
Distribution Date
occurring in each month
for the Class of Series
1998-1 Notes then entitled
to receive payments of
principal (or, after all
Notes, including but not
limited to the Series
1998-1 Notes, have been
paid in full, no later
than 16 days prior to the
first Certificate
Distribution Date
occurring in each month)
the Administrator will
advise the Indenture
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 the
Determination Date
relating to the first
Certificate Distribution
Date occurring each month
(or for each month in
which a Note Distribution
Date occurs earlier than
the Certificate
Distribution Date, on the
Determination Date
relating to such earlier
Note Distribution Date),
the Administrator will
advise the Indenture
Trustee in writing of the
fees due to the Master
Servicers, the
Administrator, the Auction
Agent, the Indenture
Trustee, the Eligible
Lender Trustee and the
Surety Provider (the
"Servicing Fee,"
"Administration Fee,"
"Auction Agent Fee,"
"Indenture Trustee Fee,"
"Eligible Lender Trustee
Fee" and "Surety Provider
Fee," respectively, and,
collectively, the
"Transaction Fees") for
the preceding month.
On each Note Distribution
Date, the Indenture
Trustee will transfer from
the Collection Account to
a separate account held
with and in the name of
the Indenture Trustee for
the benefit of the
Noteholders (the "Note
Distribution Account"),
from payments received on
or with respect to the
Financed Student Loans
during the Collection
Period immediately
preceding the month of
such Note Distribution
Date an amount up to the
related Noteholders'
Interest Distribution
Amount. "Collection
Period" means, initially,
the period beginning on
March 1, 1998 and ending
on March 31, 1998, and
thereafter, the Collection
Period means the calendar
month immediately
following the end of the
previous Collection
Period. For the Class of
Series 1998-1 Notes with
the earliest Final
Maturity Date, on the
first Note Distribution
Date for such Class
occurring in each month
for which there are no
outstanding Notes with an
earlier Final Maturity
Date, after making the
transfer set forth in the
second prior sentence, the
Indenture Trustee will
transfer from the
Collection Account to the
Note Distribution Account
from payments received on
or with respect to the
Financed Student Loans
during the Collection
Period in the month second
preceding the month of the
related Note Distribution
Date, together with any
Additional Principal
Payments to be made at the
election of the Master
Servicers as described
below, an amount up to the
Noteholders' Principal
Distribution Amount;
provided, however, that
for each month in which
the first Note
Distribution Date occurs
prior to the first
Certificate Distribution
Date in such month, prior
to transferring amounts to
the Note Distribution
Account, the Indenture
Trustee will transfer to a
separate account held with
and in the name of the
Indenture Trustee (the
"Expense Account"), from
payments received on or
with respect to the
Financed Student Loans
during the immediately
preceding Collection
Period, an amount up to
the Transaction Fees for
the month preceding such
Note Distribution Date and
all overdue Transaction
Fees from prior months.
On each Certificate
Distribution Date, the
Indenture Trustee will
transfer from the
Collection Account, from
payments received on or
with respect to the
Financed Student Loans
during the immediately
preceding Collection
Period, (i) to the Expense
Account, an amount up to
the excess, if any, of the
Transaction Fees for the
month preceding such
Certificate Distribution
Date and all overdue
Transaction Fees from
prior months over the
amount, if any, previously
transferred to the Expense
Account during the month
of such Certificate
Distribution Date and (ii)
by wire transfer no later
than 11:00 a.m., New York
time, to a separate
account held with and in
the name of the Eligible
Lender Trustee for the
benefit of the
Certificateholders (the
"Certificate Distribution
Account" and, together
with the Note Distribution
Account, the "Distribution
Accounts"), an amount up
to the related
Certificateholders'
Interest Distribution
Amount. Additionally,
after each Class of Notes
has been paid in full, on
the first Certificate
Distribution Date
occurring in each month
with respect to the Class
of Certificates with the
earliest Final Maturity
Date, the Indenture
Trustee will transfer from
the Collection Account to
the Eligible Lender
Trustee, by wire transfer
no later than 11:00 a.m.,
New York time, for deposit
in the Certificate
Distribution Account, from
payments received on or
with respect to the
Financed Student Loans
during the Collection
Period immediately
preceding the month prior
to such Certificate
Distribution Date, an
amount up to the
applicable
Certificateholders'
Principal Distribution
Amount.
On the first Note
Distribution Date
occurring in June,
September, December and
March, or in the case of
clause (iii) below, on the
first Note Distribution
Date occurring in each
month (or if in any such
month a Certificate
Distribution Date occurs
prior to such first Note
Distribution Date, on such
Certificate Distribution
Date), 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
Master Servicers, the
Servicing Fee and all
overdue Servicing Fees,
(ii) to the Administrator,
the Administration Fee and
all overdue Administration
Fees, (iii) to the Auction
Agent, the Auction Agent
Fee and all overdue
Auction Agent Fees, (iv)
to the Indenture Trustee,
the Indenture Trustee Fee
and all overdue Indenture
Trustee Fees, (v) to the
Eligible Lender Trustee,
the Eligible Lender
Trustee Fee and all
overdue Eligible Lender
Trustee Fees and (vi) to
the Surety Provider, the
Surety Provider Fee and
all overdue Surety
Provider Fees.
On each Note Distribution
Date, the Indenture
Trustee will distribute to
the Noteholders as of the
related Note Record Date
all amounts transferred to
the Note Distribution
Account as set forth above
(in addition to any
amounts transferred from
the Capitalized Interest
Account, the Pre-Funding
Account, the Capitalized
Pre-Funding Account, the
Reserve Account and the
Monthly Advance Account
and amounts drawn under
the applicable Note Surety
Bond, each as described
herein). On each
Certificate Distribution
Date, the Eligible Lender
Trustee will distribute to
the Certificateholders as
of the related Certificate
Record Date all amounts
transferred to the
Certificate Distribution
Account as set forth above
(in addition to any
amounts transferred from
the Capitalized Interest
Account, the Reserve
Account and the Monthly
Advance Account, and
amounts drawn under the
Certificate Surety Bond,
each as described herein).
Notwithstanding the foregoing,
principal payments will be
made to the Auction Rate
Notes only in amounts
equal to $50,000 and
integral multiples in
excess thereof. If the
amount in the Note
Distribution Account
otherwise required to be
applied as a payment of
principal on the Auction
Rate Notes either (i) is
less than $50,000 or (ii)
exceeds an even multiple
of $50,000, then, in the
case of (i), such entire
amount or, in the case of
(ii), such excess amount,
will not be paid as
principal on the upcoming
Note Distribution Date,
but will be retained in
the Note Distribution
Account, until the amount
therein available for
payment of principal
(including any amounts
transferred from the
Reserve Account) equals
$50,000.
On the last Note Distribution
Date occurring in April,
July, October and January
(or if in any such month a
Certificate Distribution
Date occurs after such
last Note Distribution
Date, on such Certificate
Distribution Date), after
making all required
transfers to the Note
Distribution Account and,
if applicable, the
Certificate Distribution
Account and the Expense
Account, the Indenture
Trustee will transfer any
amounts remaining in the
Collection Account (other
than amounts representing
payments received during
such month or payments of
or with respect to
principal received in the
immediately preceding
month) in the following
order of priority: (i) to
the Surety Provider, the
amount, if any, necessary
to reimburse the Surety
Provider for prior Note
Surety Bond Payments and
Certificate Surety Bond
Payments (which will
generally be equal to the
aggregate amount of draws
under the Note Surety
Bonds and Certificate
Surety Bonds on prior Note
or Certificate
Distribution Dates, as
applicable), together with
interest thereon, (ii) to
the Reserve Account, the
amount, if any, necessary
to increase the balance
thereof to the Specified
Reserve Account Balance,
(iii) to the Master
Servicers, the aggregate
unpaid amount of the
Servicing Fee Carryover,
if any, (iv) to the Note
Distribution Account, the
aggregate unpaid amount of
Noteholders' Interest
Carryover, if any, and (v)
to the Certificate
Distribution Account, the
aggregate unpaid amount of
Certificateholders'
Interest Carryover, if
any. Any amounts remaining
in the Collection Account
after such transfers
(other than amounts
representing payments
received during such
current month or payments
of or with respect to
principal received in the
immediately preceding
month) will be transferred
to the Reserve Account
generally for distribution
to Student Holdings or its
designee. Amounts
transferred to the Note
Distribution Account or
the Certificate
Distribution Account
pursuant to clauses (iv)
and (v) above,
respectively, will be paid
to the applicable Class of
Notes or Certificates on
the next Note Distribution
Date or Certificate
Distribution Date relating
to such Class of Notes or
Certificates.
Notwithstanding the
foregoing, with the
consent of the Surety
Provider, amounts
otherwise required to be
deposited into the Reserve
Account pursuant to clause
(ii) above may, instead,
be applied as a payment of
principal on the next
applicable Note
Distribution Date relating
to the Class of Notes with
the earliest Final
Maturity Date (or, after
all the Notes have been
paid in full, on the next
Certificate Distribution
Date). Amounts so applied
as principal payments are
referred to herein as
"Additional Principal
Payments."
Notwithstanding the foregoing,
if there has been an Event
of Default with respect to
payment of the Notes, the
Certificateholders will
not be entitled to any
payments of principal or
interest until each
outstanding Class of Notes
has been paid in full.
Reserve Account..................................
No
funds will be deposited in
the Reserve Account on the
Closing Date. The Reserve
Account will be augmented
on the last Note
Distribution Date occurring
in April, July, October and
January, (or, if in any
such month a Certificate
Distribution Date occurs
after such last Note
Distribution Date, on such
Certificate Distribution
Date) by the deposit into
the Reserve Account of any
Available Funds remaining
after making all prior
distributions on such date.
The maximum amount required
to be on deposit in the
Reserve Account at any time
(the "Specified Reserve
Account Balance") will be
as set forth in the Terms
Supplement; provided,
however, that the Specified
Reserve Account Balance
may, with the consent of
the Surety Provider, be
reduced or eliminated. See
"Description of the
Transferor and Servicing
Agreements--Credit
Enhancement--Reserve
Account" in the attached
Prospectus.
Additional Principal Payments........................After the amount on
deposit in the Reserve
Account equals the greater
of (i) 1% of the then
outstanding principal
balance of the Notes and
the Certificates and (ii)
$1,500,000 (or $15,000,000
for the period commencing
on the Closing Date and
ending on January 15,
2000) (but in no event an
amount greater than the
then outstanding principal
balance of the Notes and
the Certificates), amounts
otherwise required to be
deposited into the Reserve
Account may, at the option
of the Master Servicers,
be applied as Additional
Principal Payments on the
next Note Distribution
Date relating to the Class
of Notes with the earliest
Final Maturity Date (and,
after all the Notes have
been paid in full, to the
Class of Certificates with
the earliest Final
Maturity Date). With the
consent of the Surety
Provider, Available Funds
otherwise required to be
deposited in the Reserve
Account may be applied as
Additional Principal
Payments. Notwithstanding
the depletion of the
Reserve Account and
shortfalls in Available
Funds, the Surety Provider
will be obligated to make
Note Surety Bond Payments
on each Note Distribution
Date to cover any
shortfalls with respect to
the Noteholders' Interest
Distribution Amount (but
will have no obligation
with respect to any
Noteholders' Interest
Carryover) and, solely for
the benefit of
Certificateholders, to
make Certificate Surety
Bond Payments on each
Certificate Distribution
Date to cover any
shortfalls with respect to
the Certificateholders'
Interest Distribution
Amount (but will have no
obligation with respect to
any Certificateholders'
Interest Carryover) after
application of such
Available Funds and any
amounts on deposit in the
Reserve Account.
Monthly Advances.................................If a Master Servicer has
applied for a Guarantee
Payment from a Guarantor
or an Interest Subsidy
Payment or a Special
Allowance Payment from the
Department, and such
Master Servicer has not
received the related
payment prior to the end
of the Collection Period
immediately preceding the
Note Distribution Date or
Certificate Distribution
Date on which such amount
would be required to be
distributed as a payment
of interest, the
Representative may, no
later than the
Determination Date
relating to such Note
Distribution Date or
Certificate Distribution
Date, as the case may be,
deposit into an account in
the name of the Indenture
Trustee (the "Monthly
Advance Account") an
amount up to the amount of
such payments with respect
to interest applied for
but not received (such
deposits by the
Representative are
referred to herein as
"Monthly Advances").
Monthly Advances will be
distributed to the
Noteholders or
Certificateholders on the
upcoming Note Distribution
Date or Certificate
Distribution Date, as the
case may be. Monthly
Advances are recoverable
by the Representative from
the source for which such
Monthly Advance was made.
Optional Purchase................................The Sellers may, with the
consent of the Surety
Provider, repurchase all
remaining Financed Student
Loans from the Trust, and
thus effect the early
retirement of the Notes
and Certificates, on any
Certificate Distribution
Date on or after which the
Pool Balance is equal to
10% or less of the
Aggregate Pool Balance of
the Trust, 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. See "Description
of the Transfer and
Servicing
Agreements--Termination"
in the Prospectus. The
"Aggregate Pool Balance"
of the Trust will equal
the Pool Balance of the
Trust as of the Cut-Off
Date of each Series of
Notes issued by the Trust
plus the principal balance
of each Additional Student
Loan pledged to the
Indenture Trustee on
behalf of the Issuer on
each Transfer Date through
the last Funding Period.
Surety Bond......................................A surety bond to be issued
by the Surety Provider
will be obtained in
connection with the Series
1998-1 Notes (the "Series
1998-1 Note Surety Bond")
in favor of the Eligible
Lender Trustee on behalf
of the Trust, will be
pledged to the Indenture
Trustee and will provide
for coverage of timely
payment of all interest
and ultimate payment of
all principal on each
Class of Series 1998-1
Notes. "Note Surety Bond
Payment" means, with
respect to any Class of
Series 1998-1 Notes (A) on
each Note Distribution
Date the amount equal to
the excess, if any, of the
Noteholders' Interest
Distribution Amount for
the applicable Class of
Series 1998-1 Notes over
the amount on deposit in
the Note Distribution
Account, after taking into
account the required
application of funds in
the remaining Trust
Accounts (but excluding
any amounts on deposit in
the Monthly Advance
Account if an automatic
stay has been imposed with
respect to the
Representative under
Section 362(a) of the
United States Bankruptcy
Code of 1978 as amended,
11 U.S.C. ss.ss. 101 ET
seq.), including but not
limited to the Reserve
Account, pursuant to the
Sale and Servicing
Agreement, to the payment
of the Noteholders'
Interest Distribution
Amount on such Note
Distribution Date (an
"Interest Deficiency") and
(B) the amount equal to
the excess, if any, of the
unpaid principal balance
of Series 1998-1 Notes of
a Class on the Final
Maturity Date for such
Class over amounts on
deposit in the Note
Distribution Account,
after taking into account
the required application
of funds in the remaining
Trust Accounts, including
but not limited to the
Reserve Account, pursuant
to the Sale and Servicing
Agreement, to the payment
of principal of such Class
of Notes on such Final
Maturity Date (a
"Principal Deficiency");
provided, however, that
"Note Surety Bond
Payments" shall not
include, any Noteholders'
Interest Carryover or any
portion of any Interest
Deficiency or Principal
Deficiency arising as a
result of (i) any tax
liability, including any
tax liability imposed on
or assessed with respect
to the Trust, the Trust
assets, any Noteholder, or
any Certificateholder, or
(ii) any tax withholding
requirement including any
such requirement
applicable to Trust income
or Trust distributions.
See "Description of the
Surety Bonds."
In connection with the sale
of each Class of
Certificates, a separate
surety bond (each a
"Certificate Surety
Bond"), each of which is
noncancelable, was
obtained in favor of the
Eligible Lender Trustee
solely on behalf of the
applicable
Certificateholders and
provides for coverage of
timely payment of all
interest and ultimate
payment of all principal,
due on the applicable
Class of Certificates. The
Noteholders will have no
right to or claim on any
Certificate Surety Bond or
any amounts payable or
paid thereunder.
"Certificate Surety Bond
Payment" means, (A) on
each Certificate
Distribution Date the
amount equal to the
excess, if any, of the
Certificateholders'
Interest Distribution
Amount for the applicable
Class of Certificates over
the amount on deposit in
the Certificate
Distribution Account
allocable to such Class of
Certificates, after taking
into account the required
application of funds in
the remaining Trust
Accounts (but excluding
any amounts on deposit in
the Monthly Advance
Account if an automatic
stay has been imposed with
respect to the
Representative under
Section 362(a) of the
United States Bankruptcy
Code of 1978, as amended
11 U.S.C. ss.ss. 101 et
seq.), including but not
limited to the Reserve
Account, pursuant to the
Sale and Servicing
Agreement, to the payment
of the Certificateholders'
Interest Distribution
Amount for such Class of
Certificates on such
Certificate Distribution
Date (an "Interest
Deficiency") and (B) the
amount equal to the
excess, if any, of the
unpaid principal balance
of such Class of
Certificates on the Final
Maturity Date for such
Class of Certificates over
amounts on deposit in the
Certificate Distribution
Account, after taking into
account the required
application of funds in
the remaining Trust
Accounts, including but
not limited to the Reserve
Account, pursuant to the
Sale and Servicing
Agreement, to the payment
of principal of the
Certificates on such
Certificate Final Maturity
Date (a "Principal
Deficiency"); provided,
however that "Certificate
Surety Bond Payment" shall
not include any
Certificateholders'
Interest Carryover or any
portion of any Interest
Deficiency or Principal
deficiency arising as a
result of (i) any tax
liability, including any
tax liability imposed on
or assessed with respect
to the Trust, the Trust
assets, any Noteholder, or
any Certificateholder, or
(ii) any tax withholding
requirement, including any
such requirement
applicable to Trust income
or Trust distributions.
See "Description of the
Transfer and Servicing
Agreements -
Distributions" herein. See
also "Description of the
Surety Bonds."
Principal Balance of Securities
Exceeds Aggregate Principal
Balance of Initial Financed Student
Loans, Pre-Funded Amount and other
Trust Assets.....................................On the Closing Date, the
aggregate initial
principal balance of the
Series 1998-1 Notes and
the aggregate outstanding
principal balance of all
other Series of Notes and
Classes of Certificates
issued by the Trust will
be approximately 100.11%
of the sum of the
aggregate principal
balance of the Financed
Student Loans as of the
respective Cut-off Dates,
the Pre-Funded Amount and
other Trust assets as of
the Closing Date. Each
Financed Student Loan
contributed to the Trust
on the Closing Date will
be acquired by the Trust
for an amount equal to
approximately 106.36% of
the principal balance
thereof (including any
accrued interest thereon
expected to be capitalized
upon repayment) as of the
Cut-off Date. Each
Additional Student Loan
will be acquired by the
Trust for an amount equal
to 100% of the principal
balance thereof (including
any accrued interest
thereon expected to be
capitalized upon
repayment) as of the
related Subsequent 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 and the Certificates
exceeded the sum of the
Pool Balance, the
Pre-Funded Amount and
other Trust assets, such
Financed Student Loans
would likely have to be
liquidated at a premium
for Certificateholders
and, in some
circumstances, Noteholders
not to suffer a loss.
Tax Considerations...............................In the opinion of special
federal and special
Pennsylvania tax counsel
for the Trust, the Series
1998-1 Notes will be
characterized as debt for
federal and Pennsylvania
state income tax purposes,
although there is no
specific authority with
respect to the
characterization for
federal or Pennsylvania
income tax purposes of
securities having the same
terms as the Series 1998-1
Notes.
In the opinion of special
federal tax counsel for
the Trust, for federal
income tax purposes the
Trust will not be
characterized as an
association (or a publicly
traded partnership)
taxable as a corporation.
In the opinion of special
Pennsylvania tax counsel
for the Trust, the Trust
will not be taxable as a
corporation for purposes
of Pennsylvania corporate
net income taxes if it is
taxed as a partnership for
federal income tax
purposes. However, there
are no cases or rulings on
similar transactions
involving a trust that
issues debt and equity
interests with terms
similar to those of the
Series 1998-1 Notes and
the Certificates. The
Trust will be subject to
the Pennsylvania Capital
Stock/Foreign Franchise
Tax for taxable years
beginning on or after
January 1, 1998. However,
it is anticipated by the
Administrator that all of
the assets of the Trust
will be of the type
classified as exempt
assets for purposes of the
single factor
apportionment method of
calculating the Capital
Stock/Foreign Franchise
Tax under a Statement of
Policy recently
promulgated by the
Pennsylvania Department of
Revenue. As a result, the
Trust will be eligible to
reduce any such tax
otherwise due based on the
proportion of taxable
assets to total assets of
the Trust. If 100% of the
Trust's assets are exempt
assets, only a statutory
minimum tax of $300
annually will be due.
See "Certain Tax Consequences"
herein and in the attached
Prospectus for additional
information concerning the
application of federal and
Pennsylvania state tax
laws with respect to the
Series 1998-1 Notes.
ERISA Considerations.............................Assuming that each Class of
Series 1998-1 Notes should
be treated as indebtedness
without substantial equity
features under the Plan
Asset Regulations issued
by the Department of
Labor, the Series 1998-1
Notes are eligible for
purchase by or on behalf
of employee benefit plans,
retirement arrangements,
individual retirement
accounts and Keogh Plans,
subject to the
considerations discussed
under "ERISA
Considerations--The Notes"
herein and in the attached
Prospectus.
Rating of the Securities.........................It is a condition to the
issuance and sale of each
Class of Series 1998-1
Notes that they be rated
"AAA" by Standard & Poor's
Ratings Services, a
division of The
McGraw-Hill Companies,
Inc. ("Standard &
Poor's"), and "Aaa" by
Moody's Investors Service,
Inc. ("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.
Registration of the Notes........................The Series 1998-1 Notes will
be represented by global
certificates registered in
the name of Cede & Co.
("Cede"), as the nominee
of The Depository Trust
Company ("DTC"). No
Noteholder will be
entitled to receive
physical certificates
("Definitive Notes")
representing a Note,
except in the event that
Definitive Notes are
issued under the limited
circumstances described
herein. All references
herein to "Noteholders" or
"Holders" will reflect the
rights of the beneficial
owners of Notes, as such
rights may be exercised
through DTC and
Participants except as
otherwise specified
herein. See "Risk
Factors--Book-Entry
Registration" in the
Prospectus and
"Description of the
Securities--Book-Entry
Registration" herein.
<PAGE>
PREVIOUSLY ISSUED SECURITIES
Set forth below is certain information concerning each Class of Notes
and Certificates issued previously by the Trust and outstanding as of February
27, 1998. The Financed Student Loans and other assets pledged to the Indenture
Trustee will serve as collateral for such outstanding Notes and Certificates as
well as the Series 1998-1 Notes being offered by means of this Prospectus
Supplement and the attached Prospectus.
<TABLE>
<CAPTION>
Outstanding
Original Principal Final
Principal Amount (As of Maturity
Series Class Date Issued Amount February 27, 1998) Date
<S> <C> <C> <C> <C> <C>
1997-1 Class A-1 Notes March 21, 1997 $ 93,000,000 $76,900,000 April 1, 2016
1997-1 Class A-2 Notes March 21, 1997 $ 93,000,000 $93,000,000 April 1, 2017
1997-1 Class A-3 Notes March 21, 1997 $ 95,000,000 $95,000,000 April 1, 2018
1997-1 Class 1 Certificates March 21, 1997 $ 18,000,000 $18,000,000 April 1, 2025
1997-2 Class A-4 Notes December 24, 1997 $150,000,000 $147,950,000 January 1, 2004
1997-2 Class A-5 Notes December 24, 1997 $ 57,500,000 $57,500,000 April 1, 2019
1997-2 Class A-6 Notes December 24, 1997 $ 57,500,000 $57,500,000 April 1, 2020
1997-2 Class 2 Certificates December 24, 1997 $ 15,000,000 $15,000,000 April 1, 2026
</TABLE>
<PAGE>
RISK FACTORS
Prospective Noteholders should consider, in addition to the factors
described under "Risk Factors" in the Prospectus, the following factors.
RECENT DEVELOPMENTS. On December 3, 1997 in connection with the
offering by the Representative of certain Subordinated Notes, Moody's confirmed
its ratings of Ba1 for the Representative's outstanding senior notes and Ba2 for
the Representative's $1.72 Mandatory Convertible Preferred Stock (the "Preferred
Shares"), but changed its outlook from stable to negative. Moody's stated that
continued increases in effective leverage and delinquencies will put additional
downward pressure on its ratings. On March 4, 1998, Moody's placed its ratings
of the Representative's senior notes and Preferred Shares on review for possible
upgrade.
In addition, on December 15, 1997, Standard & Poor's placed its rating
of the Representative's outstanding senior notes, subordinated notes and $1.72
Mandatory convertible Preferred Stock on CreditWatch with negative implications.
While citing industry issues and specific concerns with certain of the
Representative's product lines, Standard & Poor's stated that the placement on
CreditWatch with negative implications implied that the ratings could remain the
same or be lowered pending a detailed review with the Representative during the
first quarter of 1998. On March 4, 1998, Standard & Poor's revised its outlook
from negative implications to positive implications.
As of the date of this Prospectus Supplement, neither Moody's,
Standard & Poor's, nor any other rating agency has downgraded the ratings of the
Representative's securities, although no assurance can be given that any such
downgrading will not occur in the future.
On January 29, 1998 the Representative announced that it had ceased
originating loans in its non-prime auto finance division as part of an overall
corporate strategy to focus on more profitable areas of lending. The
Representative will continue to service its existing auto loan portfolio.
REPAYMENT OF PRINCIPAL. Payments of principal will be distributed to
the Classes of Notes in order of their Final Maturity Date, regardless of Series
(and, after all Notes have been paid in full, the Certificates in order of their
Final Maturity Date). A subsequently issued Series of Notes may contain one or
more Classes of Notes with an earlier Final Maturity Date than one or more
Classes of Notes of a previously issued Series. Also a subsequently issued Class
of Certificates may have an earlier Final Maturity Date than one or more
previously issued Classes of Certificates. In such event, the Classes of Notes
or Certificates of the earlier issued Classes will receive no payments of
principal until each of the subsequently issued Notes or Certificates, as a the
case may be, with an earlier Final Stated Maturity have been paid in full.
CERTAIN DIFFERENCES BETWEEN CLASSES OF NOTES AND CERTIFICATES. Because
the Classes of Notes with a later Final Maturity Date will receive no payment of
principal until the Classes of Notes with an earlier Final Maturity Date have
been paid in full, the Classes of Notes with an earlier Final Maturity Date bear
relatively greater risk than each Class with a later Final Maturity Date of an
increased rate of (i) principal repayments with respect to the Financed Student
Loans (whether as a result of voluntary prepayments, Consolidation Loans or
liquidations due to default or breach), or (ii) Financed Student Loans entering
the Repayment Phase. In addition, the Class of Notes with the earliest Final
Maturity Date will generally bear the risk of principal prepayments as a result
of any remaining Pre-Funded Amount at the end of each Funding Period. On the
other hand, absent the Surety Bonds, Certificateholders (particularly those with
a later Final Maturity Date) and, to a lesser extent, holders of Notes with a
later Final Maturity Date would bear a greater risk of loss of principal than do
holders of Notes with an earlier Final Maturity Date in the event of a shortfall
in Available Funds and amounts on deposit in the Reserve Account because the
Certificates do not receive principal distributions until each Class of Notes is
paid in full and no Class of Notes or Certificates will receive principal
payments until each Class of Notes or Certificates, as the case may be, with an
earlier Final Maturity Date is paid in full.
FINANCIAL STATUS OF GUARANTORS. The Private Loans will not be
reinsured by the Department, the Secretary or any other governmental agency.
Therefore, the failure of a Guarantor of a Private Loan to make a required
Guarantee Payment could adversely affect the amount of Available Funds for any
Collection Period.
PROPOSED LEGISLATION. The Higher Education Act currently provides that
Stafford loans and PLUS loans with a first disbursement made on or after July 1,
1998 will bear interest at a variable rate equal to the bond equivalent rate of
the securities with a comparable maturity as established by the Secretary, plus
1.0% with respect to the Stafford loans and 2.1% for the PLUS loans. Each of the
rates is capped: 8.25% for the Stafford loans and 9% for the PLUS loans. See
"The Student Loan Financing Business--Types of Federal Loans Under the Program"
in the Prospectus. However, it is unclear whether such rate calculation will be
implemented and it is uncertain at this time what substitute rate calculation,
if any, might be adopted. Educaid's operations may be materially affected
depending on the yield to the lender following institution of the new rate
calculation. Because the Funding Period ends prior to July 1, 1998, such
legislation will not apply to the Financed Student Loans contributed to the
Trust in connection with the issuance of the Series 1998-1 Notes.
THE SELLERS AND THE MONEY STORE
Each of the Sellers is a wholly-owned subsidiary of The Money Store
Inc., a New Jersey corporation ("The Money Store"). The Money Store is a
financial services company engaged, through its subsidiaries, in the business of
originating, purchasing, selling and servicing consumer and commercial loans of
specified types and offering related services. Loans originated by The Money
Store and its subsidiaries primarily consist of home equity loans, loans (the
"SBA Loans") guaranteed in part by the United States Small Business
Administration (the "SBA") and government guaranteed student loans.
Since 1967, The Money Store and its subsidiaries have been active in
the development of the residential home equity lending industry in the United
States. In 1979, The Money Store and its subsidiaries began to originate SBA
Loans and, based upon statistics compiled by the SBA, The Money Store believes
that during each of the last 15 SBA fiscal years it originated a greater
principal amount of SBA Loans than any other originator of such loans in the
United States. In 1984, The Money Store and Educaid entered the government
guaranteed student loan origination market. In 1995, ClassNotes entered the
private student loan origination market.
For the years ended December 31, 1996 and December 31, 1997, The Money
Store and its subsidiaries originated or purchased approximately $5.7 billion of
loans and $7.8 billion of loans, respectively. Of those loans, approximately 73%
and 76%, respectively, by principal amount were home equity loans, approximately
11% and 9%, respectively, by principal amount were SBA Loans, approximately 8%
and 7%, respectively, by principal amount were student loans and approximately
8% and 7%, respectively, by principal amount were auto loans. On January 29,
1998 the Representative announced that it had ceased originating loans in its
non-prime auto finance division as part of an overall corporate strategy to
focus on more profitable areas of lending. The Representative will continue to
service its existing auto loan portfolio. The business strategy of The Money
Store has been to identify and pursue niche lending opportunities which
management believes have had widespread unsatisfied demand.
On March 4, 1998, The Money Store announced that it had signed a
definitive merger agreement with First Union Corporation pursuant to which First
Union Corporation would acquire The Money Store. Under the terms of the merger
agreement, First Union Corporation will pay $34.00 per share in First Union
Corporation common stock for each share of The Money Store's common stock. First
Union Corporation also will issue shares of First Union Corporation common stock
in exchange for The Money Store's outstanding convertible preferred stock. The
total purchase price is approximately $2.1 billion. First Union Corporation's
acquisition of The Money Store is expected to be completed in the third quarter
of 1998, subject to approval by The Money Store's shareholders and regulatory
agencies and other conditions of closing. First Union Corporation is a provider
of financial services to retail and commercial customers throughout the United
States. At December 31, 1997, First Union Corporation had assets of $157
billion. First Union Corporation operates full-service banking offices in
Connecticut, Delaware, Florida, Georgia, Maryland, New Jersey, New York, North
Carolina, Pennsylvania, South Carolina, Tennessee and Washington D.C.
At December 31, 1997, The Money Store and its subsidiaries operated
out of 211 locations and were doing business in 50 states, the District of
Columbia, the Commonwealth of Puerto Rico and the United Kingdom.
Educaid's executive offices are located at 3301 C Street, Suite 100-A,
Sacramento, California 95816. Its telephone number is (916) 446-2000.
ClassNotes' executive offices are located at 3301 C Street, Suite 200,
Sacramento, California 95816. Its telephone number is (916) 554-8550.
SERVICERS
PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY
Pennsylvania Higher Education Assistance Agency ("PHEAA") is a public
corporation and a government instrumentality of the Commonwealth of
Pennsylvania. PHEAA was founded in 1964 and is located in Harrisburg,
Pennsylvania. In addition to servicing student loans, PHEAA guarantees loans
under the federal Title IV programs, administers certain state scholarship and
financial aid programs, and issues tax-exempt and taxable notes to finance its
direct lending and secondary market purchases of student loan portfolios. As of
December 31, 1997, PHEAA had total assets of approximately $2.6 billion. As of
that date, PHEAA serviced approximately 2.0 million student loan borrower
accounts, with an aggregate principal balance of over $11.8 billion. PHEAA is
one of the largest servicers of education loans in the nation. PHEAA has
approximately 2,300 employees. The information included herein relating to PHEAA
has been obtained from it and is not guaranteed as to accuracy or completeness
by the Sellers or The Money Store and is not to be construed as a representation
by the Sellers or The Money Store.
Pursuant to the Sub-Servicing Agreement and except as otherwise
expressly assumed by the Administrator, PHEAA has agreed to service, and perform
all other related tasks with respect to, substantially all of the Financed
Student Loans originated by the Sellers and acquired by the Eligible Lender
Trustee on behalf of the Trust generally after they have entered the Repayment
Phase. PHEAA is required to perform all services and duties customary to the
servicing of such Financed Student Loans in the same manner as the Master
Servicers have serviced Financed Student Loans and otherwise in compliance with
all applicable standards and procedures. See "Description of the Transfer and
Servicing Agreements--Servicing Procedures" in the attached Prospectus.
The above information relating to PHEAA has been obtained from PHEAA
and neither the Sellers nor The Money Store has conducted any independent
verification of such information. 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 Department, 1200 North Seventh Street, Harrisburg, Pennsylvania
17102.
AFSA DATA CORPORATION
AFSA Data Corporation ("AFSA") is a wholly-owned subsidiary of Fleet
Holding Corporation, which is a wholly-owned subsidiary of Fleet Financial
Group. AFSA has three servicing centers located in Utica, New York; Long Beach,
California and Lombard, Illinois. AFSA has been providing student loan portfolio
management services to the higher education communities since 1967. AFSA also
services loans for the federal government. As of February 27, 1998, AFSA had
total assets of approximately $36 million. As of that date, AFSA serviced
approximately 5.6 million student loan borrower accounts, with an aggregate
principal balance of approximately $34.5 billion. AFSA has approximately 1,400
employees. The information included herein relating to AFSA has been obtained
from it and is not guaranteed as to accuracy or completeness by the Sellers or
The Money Store and is not to be construed as a representation by the Sellers or
The Money Store.
Pursuant to a sub-servicing agreement and except as otherwise
expressly assumed by the Administrator, AFSA has agreed to service, and perform
all other related tasks with respect to, certain of the Financed Student Loans
originated by the Sellers and acquired by the Eligible Lender Trustee on behalf
of the Trust generally after they have entered the Repayment Phase. AFSA is
required to perform all services and duties customary to the servicing of such
Financed Student Loans in the same manner as the Master Servicers have serviced
Financed Student Loans and otherwise in compliance with all applicable standards
and procedures. See "Description of the Transfer and Servicing Agreements -
Servicing Procedures" in the attached Prospectus.
The above information relating to AFSA has been obtained from AFSA and
neither the Sellers nor The Money Store has conducted any independent
verification of such information. AFSA 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. Steven Allen, Vice President and Controller,
AFSA Data Corporation, 2277 E. 220th Street, Long Beach, California 90810-1690.
<PAGE>
GREAT LAKES HIGHER EDUCATION SERVICING CORPORATION
The Great Lakes Higher Education Servicing Corporation ("GLHESC") is a
private not-for-profit, non-stock Wisconsin corporation founded in 1996. Prior
to 1996, its student loan servicing operations were part of the Great Lakes
Higher Education Servicing Corporation. GLHESC has one servicing center located
in Madison, Wisconsin. GLHESC has been providing student loan portfolio
management services to the higher education communities since its incorporation
in 1996, and before then, beginning in 1967, as part of the Great Lakes Higher
Education Servicing Corporation. As of September 30, 1997, GLHESC had total net
assets of approximately $17.5 million. As of February 27, 1998, GLHESC serviced
approximately 839,400 student loan borrower accounts, with an aggregate
principal balance of approximately $5.8 billion. GLHESC has approximately 338
employees. The information included herein relating to GLHESC has been obtained
from it and is not guaranteed as to accuracy or completeness by the Sellers or
The Money Store and is not to be construed as a representation by the Sellers or
The Money Store.
Pursuant to a sub-servicing agreement and except as otherwise
expressly assumed by the Administrator, GLHESC has agreed to service, and
perform all other related tasks with respect to, certain of the Financed Student
Loans originated by the Sellers and acquired by the Eligible Lender Trustee on
behalf of the Trust generally after they have entered the Repayment Phase.
GLHESC is required to perform all services and duties customary to the servicing
of such Financed Student Loans in the same manner as the Master Servicers have
serviced Financed Student Loans and otherwise in compliance with all applicable
standards and procedures. See "Description of the Transfer and Servicing
Agreements - Servicing Procedures" in the attached Prospectus.
The above information relating to GLHESC has been obtained from GLHESC
and neither the Sellers nor the Money Store has conducted any independent
verification of such information. Great Lakes 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. Paul J. Thornburgh, CFO, Great Lakes Higher
Education Servicing Corporation, 2401 International Lane, Madison, Wisconsin
53704.
<PAGE>
DESCRIPTION OF THE SECURITIES
GENERAL
The Series 1998-1 Notes will be issued pursuant to the terms of the
Master Indenture and the Terms Supplement and the Certificates have been issued
pursuant to the terms of the Trust Agreement. The following summary describes
certain terms of the Notes, the Certificates, the Master Indenture, the Terms
Supplement and the Trust Agreement. The summary does not purport to be complete
and is qualified in its entirety by reference to the provisions of the Series
1998-1 Notes, the Certificates, the Master Indenture, the Terms Supplement, the
Trust Agreement and the attached Prospectus.
Each Class of Series 1998-1 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 Auction Rate Notes will be available for purchase in
minimum denominations of $50,000 and integral multiples of $50,000 in excess
thereof. The Series 1998-1 Notes will be available in book-entry form only.
DTC's nominee will be Cede. Accordingly, Cede is expected to be the holder of
record of the Securities. 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 Securities" herein and in the attached Prospectus.
THE SERIES 1998-1 NOTES
DISTRIBUTIONS OF INTEREST. Interest will accrue on the principal
balance of each Class of Series 1998-1 Notes at a rate per annum (calculated as
provided below) equal to the related Class Interest Rate. Interest on each Class
of Series 1998-1 Notes will accrue initially from and including the Closing Date
until (i) with respect to the Class A-7 Notes, April 15, 1998, the first Auction
Date for the Class A-7 Notes; (ii) with respect to the Class A-8 Notes, April
22, 1998, the first Auction Date for the Class A-8 Notes; (iii) with respect to
the Class A-9 Notes, April 29, 1998, the first Auction Date for the Class A-9
Notes and (iv) with respect to the Class A-10 Notes, May 6, 1998, the first
Auction Date for the Class A-10 Notes. Thereafter, interest will accrue with
respect to the Auction Rate Notes, for periods (each, an "Interest Period")
consisting of 28 days, subject to adjustment as described in Appendix I to the
attached Prospectus. Interest on each Class of Series 1998-1 Notes will be
payable on the related Note Distribution Date. Interest distributions due on any
Class of Series 1998-1 Notes for any Note Distribution Date but not distributed
on such Note Distribution Date will be due on the next Note Distribution Date
for such Class, increased by an amount equal to interest on such amount at the
applicable Class Interest Rate for the period from the Note Distribution Date
for which such interest was first due until the Note Distribution Date such
interest is paid. Interest payments on the Series 1998-1 Notes will generally be
funded from Available Funds, Monthly Advances and amounts, if any, on deposit in
the Reserve Account (and, when applicable, amounts on deposit in the Capitalized
Interest Account and the Capitalized Pre-Funding Account) remaining after the
deposit of the Transaction Fees in the Expense Account. Interest will be paid
pro rata to the holders of each Class of Notes outstanding. See "Description of
the Transfer and Servicing Agreements--Distributions" and "--Credit
Enhancement." If insufficient funds are available to pay the Noteholders'
Interest Distribution Amount on a Note Distribution Date, such shortfall will be
paid from draws on the Note Surety Bonds to the extent described herein under
"Description of the Surety Bonds--Note Surety Bonds" herein.
Until the date of an Auction Period adjustment, if any, the interest
rate on each Class of Auction Rate Notes for each Interest Period will be the
Class Interest Rate based on an Auction Period, subject to adjustment as
described herein and in the Prospectus. The Class Interest Rate on each Class of
Auction Rate Notes for each Auction Period will be the lesser of (i) the Net
Loan Rate in effect for such Auction Period and (ii) the Auction Rate in effect
for such Auction Period, as determined by the Auction Agent pursuant to the
Auction Procedures described in Appendix I to the attached Prospectus; provided
that if on any Rate Determination Date, an Auction for a Class of Auction Rate
Notes is not held for any reason, then the Class Interest Rate for such Class of
Auction Rate Notes will be the Net Loan Rate. However, no Class Interest Rate
for the Auction Rate Notes will exceed 16.0% per annum.
AUCTION PERIOD ADJUSTMENT. The Administrator may, from time to time,
change the length of one or more Auction Periods to conform with then current
market practice or accommodate other economic or financial factors that may
affect or be relevant to the length of the Auction Period or any Class Interest
Rate (an "Auction Period Adjustment"). An Auction Period Adjustment will not
cause an Auction Period to be less than 7 days nor more than one year and will
not be allowed unless certain conditions described in the Auction Procedures in
Appendix I to the attached Prospectus are satisfied. If an Auction Period
Adjustment is made, the intervals between Note Distribution Dates will be
adjusted accordingly.
NOTEHOLDERS' INTEREST CARRYOVER. If, with respect to any Class of
Series 1998-1 Notes, for any Interest Period the Auction Rate exceeds the Net
Loan Rate, the applicable Class Interest Rate for such Interest Period will be
the Net Loan Rate, and the excess of the amount of interest on such Class of
Series 1998-1 Notes that would have accrued at a rate equal to the Auction Rate
or the LIBOR Rate, as applicable over the amount of interest on such Class
actually accrued at the Net Loan Rate will accrue as the Noteholders' Interest
Carryover with respect to such Class of Series 1998-1 Notes. Such determination
of the Noteholders' Interest Carryover will be made separately for each Class of
Series 1998-1 Notes. The Noteholders' Interest Carryover on any Class of Series
1998-1 Notes will bear interest at a rate equal to One-Month LIBOR from the Note
Distribution Date for the Interest Period for which the Noteholders' Interest
Carryover was calculated until paid.
Any Noteholders' Interest Carryover that may exist on any related Note
Distribution Date will be paid as described herein under "Description of the
Transfer and Servicing Agreements--Distributions."
DISTRIBUTIONS OF PRINCIPAL. Principal payments will be made to the
Class of Notes with the earliest Final Maturity Date, regardless of Series and
regardless of when issued, on each Note Distribution Date for such Class in an
amount equal to the Noteholders' Principal Distribution Amount for such Note
Distribution Date (provided, however, that for the Series 1998-1 Notes principal
payments will be made only in amounts equal to $50,000 and integral multiples in
excess thereof), until the principal balance of the Notes of such Class is
reduced to zero. Principal payments on a Class of Notes will generally be
derived from Available Funds and amounts, if any, on deposit in the Reserve
Account remaining after the Indenture Trustee has deposited in the Expense
Account the Transaction Fees for the month preceding such Note Distribution Date
and all overdue Transaction Fees from prior months, deposited in the Note
Distribution Account the Noteholders Interest Distribution Amount, and, unless
there has been an Event of Default under a Series of Notes, deposited in the
Certificateholder Distribution Account, the Certificateholders Interest
Distribution Amount. Additionally, with the consent of the Surety Provider,
amounts otherwise required to be deposited into the Reserve Account may be
applied as Additional Principal Payments. See "Description of the Transfer and
Servicing Agreements--Distributions" and "--Credit Enhancement" herein. If such
sources are insufficient to pay the Noteholders' Principal Distribution Amount
for such Note Distribution Date, such shortfall will be added to the principal
payable to the Noteholders on subsequent Note Distribution Dates.
Principal payments on the Notes will be applied on each applicable
Note Distribution Date, first, to the principal balance of the Class of Notes
with the earliest Final Maturity Date, regardless of Series and regardless of
when issued, until such principal balance is reduced to zero and then to the
principal balance of each other Class of Notes, in order of Final Maturity Date,
until the principal balance of each Class is reduced to zero. The aggregate
outstanding principal amount of each Class of Notes will be payable in full on
its Final Maturity Date. The actual date on which the aggregate outstanding
principal and accrued interest of any Class of Notes are paid may be earlier
than its respective Final Maturity Date, based on a variety of factors,
including those described in the attached Prospectus under "Risk
Factors--Maturity and Prepayment Assumptions" and "The Financed Student Loan
Pool--Maturity and Prepayment Assumptions."
On the Final Maturity Date relating to a Class of Notes, the Surety
Provider will be required to provide for payment to the Trust pursuant to the
applicable Note Surety Bond of an amount equal to the excess, if any, of the
unpaid principal balance of the Notes of such Class on such Final Maturity Date
over amounts on deposit in the Note Distribution Account, after taking into
account the required application of funds in the remaining Trust Accounts,
including but not limited to the Reserve Account, pursuant to the Sale and
Servicing Agreement, to the payment of principal of such Class of Notes on such
final Note Distribution Date, subject to the exceptions described hereunder
"Description of the Surety Bonds--Note Surety Bonds." Any such amount will be
distributed to holders of the applicable Class of Notes on the related Final
Maturity Date.
MANDATORY REDEMPTION. The Class of Notes with the earliest Final
Maturity Date will be redeemed in part on the applicable Note Distribution Date
on or immediately following the last day of each Funding Period, in the event
that any amount remains on deposit in the Pre-Funding Account after giving
effect to all Additional Fundings on or prior to such date, in an aggregate
principal amount equal to the amount then on deposit in the Pre-Funding Account.
THE CERTIFICATES
DISTRIBUTIONS OF INTEREST. On each Certificate Distribution Date, the
applicable Certificateholders will be entitled to distributions in an amount
equal to the amount of interest accrued during the related Interest Period on
the principal amount of the Certificates at the applicable Certificate Rate.
Each Interest Period for the Certificates will consist of 28 days, subject to
adjustment as described in Appendix I to the attached Prospectus. Interest
distributions due for the Certificates on any Certificate Distribution Date but
not distributed on such Certificate Distribution Date will be due on the next
Certificate Distribution Date for such Class increased by an amount equal to
interest on such amount at the applicable Certificate Rate for the period from
the Certificate Distribution Date for which such interest was first due until
the Certificate Distribution Date such interest is paid. Interest distributions
with respect to the Certificates will generally be funded from Available Funds,
Monthly Advances and the amounts, if any, on deposit in the Reserve Account
remaining after the Indenture Trustee has transferred to the Expense Account an
amount, up to the excess, if any, of the Transaction Fees for the month
preceding such Certificate Distribution Date and all overdue Transaction Fees
for the month preceding such Certificate Distribution Date over the amount, if
any, previously transferred to the Expense Account during the month of such
Certificate Distribution Date, provided, however, that Certificateholders of a
Class of Certificates will not be entitled to any distributions if there has
been an Event of Default under any Series of Notes until each Class of Notes and
each Class of Certificates with an earlier Final Maturity Date has been paid in
full. See "Description of the Transfer and Servicing Agreements--Distributions"
and "--Credit Enhancement--Reserve Account."
Until the date of an Auction Period Adjustment, if any, the interest
rate on any Class of Certificates for each applicable Interest Period will be
the Certificate Rate based on an Auction Period, subject to adjustment as
described herein. The Certificate Rate on the Certificates for each Auction
Period will be the lesser of (i) the Net Loan Rate in effect for such Auction
Period and (ii) the Auction Rate in effect for such Auction Period, as
determined by the Auction Agent generally pursuant to the Auction Procedures
described in Appendix I to the attached Prospectus; provided that if on any Rate
Determination Date, an Auction for the Certificates is not held for any reason,
then the Certificate Rate for the Certificates will be the Net Loan Rate.
However, the Certificate Rate will not exceed 16.0% per annum, and will be
subject to other limitations described herein.
AUCTION PERIOD ADJUSTMENT. With respect to any Class of Certificates,
the Administrator may, from time to time, change the length of one or more
Auction Periods to conform with then current market practice or to accommodate
other economic or financial factors that may affect or be relevant to the length
of the Auction Period or any Certificate Rate. An Auction Period Adjustment with
respect to any Class of Certificates will not cause an Auction Period to be less
than 7 days nor more than one year and will not be allowed unless certain
conditions described in the Auction Procedures in Appendix I to the attached
Prospectus are satisfied.
CERTIFICATEHOLDERS' INTEREST CARRYOVER. If for any Interest Period
with respect to any Class of Certificates, the Auction Rate exceeds the Net Loan
Rate, the applicable Certificate Rate for such Interest Period and such Class of
Certificates will be the Net Loan Rate, and the excess of the amount of interest
on such Class of Certificates that would have accrued at a rate equal to the
Auction Rate, over the amount of interest actually accrued at the Net Loan Rate
will accrue as the Certificateholders' Interest Carryover for such Class of
Certificates. The Certificateholders' Interest Carryover on each Class of
Certificates will bear interest at a rate equal to One-Month LIBOR from the
Certificate Distribution Date for the Interest Period for which such
Certificateholders' Interest Carryover Amount was calculated until paid.
Any Certificateholders' Interest Carryover that may exist on any
Certificateholders' Distribution Date will be paid as described herein under
"Description of the Transfer and Servicing Agreement--Distributions."
DISTRIBUTIONS OF PRINCIPAL. Each Class of Certificateholders will be
entitled to distributions on each Certificate Distribution Date on and after
which each Class of Notes and each Class of Certificates with an earlier Final
Maturity Date has been paid in full in an amount generally equal to the
Principal Distribution Amount for such Certificate Distribution Date (provided,
however, that principal payments will be made only in amounts equal to $50,000
and integral multiples in excess thereof). Distributions with respect to
principal payments on the Certificates for such Certificate Distribution Date
will generally be funded from the portion of Available Funds and amounts, if
any, on deposit in the Reserve Account remaining after the transfer by the
Indenture Trustee to the Expense Account of the Transaction Fees and the
transfer to the Certificate Distribution Account of the Certificateholder
Interest Distribution Amount. Additionally, with the consent of the Surety
Provider, amounts otherwise required to be deposited into the Reserve Account
may be applied as Additional Principal Payments. See "Description of the
Transfer and Servicing Agreements--Distributions" and "--Credit
Enhancement--Reserve Account." If such sources are insufficient to pay the
Certificateholders' Principal Distribution Amount for such Certificate
Distribution Date, such shortfall will be added to the principal payable to the
applicable Class of Certificateholders on subsequent Certificate Distribution
Dates.
The aggregate outstanding principal amount of each Class of
Certificates will be payable in full on its Final Maturity Date. The actual date
on which the aggregate outstanding principal and accrued interest of each Class
of Certificates will be paid may be earlier than the applicable Certificate
Final Maturity Date, however, based on a variety of factors, including those
described in the attached Prospectus under "Risk FactorsCMaturity and Prepayment
Assumptions" and "The Financed Student Loan PoolCMaturity and Prepayment
Assumptions."
On the Final Maturity Date for each Class of Certificates, the Surety
Provider will be required to provide for payment to the Trust pursuant to the
applicable Certificate Surety Bond of an amount equal to the excess, if any, of
the unpaid principal balance of such Class of Certificates on such Final
Maturity Date over amounts on deposit in the Certificate Distribution Account,
after taking into account the required application of funds in the remaining
Trust Accounts, including but not limited to the Reserve Account, pursuant to
the Sale and Servicing Agreement, to be applied to the payment of principal on
such Class of Certificates on such Final Maturity Dates, subject to certain
exceptions. Any such amount will be distributed to holders of such Class of
Certificates on the Final Maturity Date for such Class of Certificates.
SUBORDINATION OF THE CERTIFICATES. No distributions in respect of
principal on any Class of Certificates will be made until the Certificate
Distribution Date on or after which each Class of Notes and each Class of
Certificates which has an earlier Final Maturity Date has been paid in full.
DETERMINATION OF LIBOR
Pursuant to the Auction Agent Agreement, the Auction Agent will
determine One-Month LIBOR for purposes of calculating the Noteholders' Interest
Carryover and the Certificateholders' Auction Rate 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. Interest due for any
Interest Period will be determined based on the actual number of days in such
Interest Period over a 360-day year.
"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 Auction
Agent 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 Auction Agent, 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 transaction in
Eurodollar deposits in the international Eurocurrency market, (ii) not
controlling, controlled by or under common control with the Administrator or The
Money Store and (iii) having an established place of business in London.
BOOK-ENTRY REGISTRATION
Persons acquiring beneficial ownership interests in any Class of
Series 1998-1 Notes ("Note Owners") may hold their interests through The
Depository Trust Company ("DTC"). The Series 1998-1 Notes will be registered in
the name of Cede & Co. ("Cede") as nominee for DTC. Accordingly, Cede is
expected to be the holder of record of the Series 1998-1 Notes. Unless and until
Definitive Notes are issued under the limited circumstances described herein, no
Note Owner will be entitled to receive a Note representing such person's
interest in the Series 1998-1 Notes. All references herein to action by
Noteholders shall 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 shall refer to
distributions, notices, reports and statements to DTC or Cede, as the case may
be, as the registered holder of the Series 1998-1 Notes, for distribution to
Note Owners in accordance with DTC procedures.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC and a "clearing agency"
registered pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and to facilitate the clearance and settlement
of securities transactions between Participants through electronic book-entries,
thereby eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations. Indirect access to the DTC system also is available to others such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
("Indirect Participants").
Note Owners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, the Series 1998-1 Notes may do so only through Participants and Indirect
Participants. In addition, Note Owners will receive all distributions of
principal and interest from the Indenture Trustee or the Eligible Lender
Trustee, as applicable (the "Applicable Trustee"), through Participants and
Indirect Participants. Under a book-entry format, Note Owners may experience
some delay in their receipt of payments, since such payments will be forwarded
by the Applicable Trustee to Cede, as nominee for DTC. DTC will forward such
payments to its Participants, which thereafter will forward them to Indirect
Participants or Note Owners. It is anticipated that the only "Noteholder" will
be Cede, as nominee for DTC. Note Owners will not be recognized by the Indenture
Trustee as Noteholders, as such term is used in the Indenture, and Note Owners
will be permitted to exercise the rights of Noteholders only indirectly through
DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of Securities among Participants on whose behalf it acts with respect to the
Securities and to receive and transmit distributions of principal of, and
interest on, the Securities. Participants and Indirect Participants with which
Note Owners have accounts with respect to the Securities similarly are required
to make book-entry transfers and receive and transmit such payments on behalf of
their respective Note Owners. Accordingly, although Note Owners will not possess
Securities, the Rules provide a mechanism by which Participants will receive
payments and will be able to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Note Owner
to pledge Securities to persons or entities that do not participate in the DTC
system, or to otherwise act with respect to such Securities, may be limited due
to the lack of a physical note for such Securities.
DTC has advised the Administrator that it will take any action
permitted to be taken by a Securityholder under the Indenture or the Trust
Agreement, as the case may be, only at the direction of one or more Participants
to whose accounts with DTC the Securities are credited. DTC may take conflicting
actions with respect to other undivided interests to the extent that such
actions are taken on behalf of Participants whose holdings include such
undivided interests.
Except as required by law, neither the Administrator nor the
Applicable Trustee will have any liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests of the
Securities held by Cede, as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
DEFINITIVE SECURITIES
The Series 1998-1 Notes will be issued in fully registered,
certificated form ("Definitive Notes" or "Definitive Securities") to Note Owners
or their nominees, rather than to DTC or its nominee, only if (i) the
Administrator advises the Applicable Trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as depository with
respect to the Securities and the Administrator is unable to locate a qualified
successor, (ii) the Administrator, at its option, elects to terminate the
book-entry system through DTC or (iii) after the occurrence of an Event of
Default, a Servicer Default or an Administrator Default, Securityholders
representing at least a majority of the outstanding principal amount of the
Notes, advise the Applicable Trustee through DTC in writing that the
continuation of a book-entry system through DTC (or a successor thereto) with
respect to such Notes is no longer in the best interest of the Note Owners.
Upon the occurrence of any event described in the immediately
preceding paragraph, the Applicable Trustee will be required to notify all
applicable Note Owners through Participants of the availability of Definitive
Securities. Upon surrender by DTC of the definitive security representing the
corresponding Securities and receipt of instructions for re-registration, the
Applicable Trustee will reissue such Securities as Definitive Securities to such
Note Owners.
Distributions of principal of, and interest on, such Definitive
Securities will thereafter be made by the Applicable Trustee in accordance with
the procedures set forth in the Indenture or the Trust Agreement, as the case
may be, directly to holders of Definitive Securities in whose names the
Definitive Securities were registered at the close of business on the Record
Date. Such distributions will be made by check mailed to the address of such
holder as it appears on the register maintained by the Applicable Trustee. The
final payment on any such Definitive Security, however, will be made only upon
presentation and surrender of such Definitive Security at the office or agency
specified in the notice of final distribution to Securityholders.
Definitive Securities will be transferable and exchangeable at the
offices of the Applicable Trustee or of a registrar named in a notice delivered
to holders of Definitive Securities. No service charge will be imposed for any
registration of transfer or exchange, but the Applicable Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
LIST OF SECURITYHOLDERS
Three or more Noteholders or one or more holders of Notes evidencing
not less than 25% of the aggregate outstanding principal balance of the Notes
may, by written request to the Indenture Trustee, obtain access to the list of
all Noteholders maintained by the Indenture Trustee for the purpose of
communicating with other Noteholders with respect to their rights under the
Indenture or the Notes. The Indenture Trustee may elect not to afford the
requesting Noteholders access to the list of Noteholders if it agrees to mail
the desired communication or proxy, on behalf and at the expense of the
requesting Noteholders, to all Noteholders.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
GENERAL
In addition to the provisions of the Sale and Servicing Agreement,
pursuant to which the Eligible Lender Trustee on behalf of the Trust will obtain
the Financed Student Loans, the Master Servicers 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, the Financed Student Loans and the Trust Agreement, pursuant to which
the Trust was created and the Certificates were issued (collectively, the
"Transfer Agreement") summarized elsewhere in this Prospectus Supplement and in
the Prospectus, set forth below is a summary of certain other provisions
thereof.
ACCOUNTS
The Indenture Trustee has established and will maintain the Collection
Account, the Pre-Funding Account, the Capitalized Interest Account, the Note
Distribution Account, the Expense Account, the Reserve Account and the Monthly
Advance Account. The Eligible Lender Trustee has established and maintain the
Certificate Distribution 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 and the Certificateholders.
Funds in the Trust Accounts will be invested as provided in the Sale
and Servicing Agreement in Eligible Investments. "Eligible Investments" are
generally limited to investments acceptable to the Surety Provider and the
Rating Agencies as being consistent with the rating of the Notes. Eligible
Investments are limited to obligations or securities that mature not later than
the Business Day immediately preceding the day on which funds in the applicable
Trust Account may be required to be withdrawn. 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 or to the
Certificateholders could result. This could, in turn, increase the average life
of the Notes and the Certificates. 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 and will be treated as
collections of interest on the Financed Student Loans.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in such account, so long as any of the
securities of such depository institution have a credit rating from each Rating
Agency in one of its generic rating categories which signifies investment grade.
"Eligible Institution" means 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), (i) which has a
long-term unsecured debt rating and/or a short-term unsecured debt rating
acceptable to Moody's, Standard & Poor's and the Surety Provider and (ii) whose
deposits are insured by the Federal Deposit Insurance Corporation.
ADDITIONAL FUNDINGS
The Representative expects that approximately $60,000,000 of the
Pre-Funded Amount will be released from the Pre-Funding Account on March 31,
1998 in connection with the Sellers' anticipated contribution of Financed
Student Loans on such date. Thereafter, the Trust will distribute funds on
deposit in the Pre-Funding Account from time to time during the Funding Period
in an amount equal to the aggregate principal balance (plus certain premiums)
and accrued interest thereon of the additional Financed Student Loans (the
"Additional Student Loans") conveyed by the Sellers to the Trust during the
Funding Period (the expenditures referred to above being referred to herein as
"Additional Fundings"). The Sellers expect that the amount of the Additional
Fundings will approximate 100% of the Pre-Funded Amount by the last day of the
Funding Period; however, there can be no assurance that a sufficient amount of
Additional Fundings will be made during such time. Additional Student Loans may
include Federal Loans and/or Private Loans in such amounts as may be determined
by the Sellers and satisfying any conditions imposed by the Surety Provider.
Pursuant to the Sale and Servicing Agreement, during the Funding
Period, the Sellers may convey to the Eligible Lender Trustee on behalf of the
Trust, Additional Student Loans having an aggregate principal balance up to the
amount then on deposit in the Pre-Funding Account. The obligation to accept any
Additional Student Loan by the Eligible Lender Trustee on behalf of the Trust is
subject to the following conditions, among others: (i) such Additional Student
Loan must satisfy all applicable origination requirements and all other
requirements specified in the Sale and Servicing Agreement and the Insurance and
Indemnity Agreement dated as of March 21, 1997 (the "Insurance Agreement") among
the Sellers, The Money Store, the Indenture Trustee, the Trust and the Surety
Provider, and (ii) the Sellers will not select such Additional Student Loan in a
manner that it believes is adverse to the interests of the Securityholders or
the Surety Provider. On such dates as may from time to time be designated by the
Sellers during a Funding Period (each, a "Transfer Date"), the Sellers may sell
or contribute and assign, without recourse, to the Eligible Lender Trustee on
behalf of the Trust, their entire interest in Additional Student Loans (each, a
"Subsequent Cut-off Date"). Subject to the satisfaction of the foregoing
conditions, the Sellers will convey the Additional Student Loans to the Eligible
Lender Trustee on behalf of the Trust on each such Transfer Date pursuant to the
Sale and Servicing Agreement and the applicable Transfer Agreement (a "Transfer
Agreement") executed by the Sellers, on such Transfer Date. Each such Transfer
Agreement will include as an exhibit a schedule identifying each Additional
Student Loan transferred on such Transfer Date. Upon such conveyance of
Additional Student Loans to the Eligible Lender Trustee on behalf of the Trust,
the Pool Balance will increase in an amount equal to the aggregate principal
balances of the Additional Student Loans and an amount equal to the aggregate
principal balance of such Additional Student Loans (plus certain premiums) and
accrued interest thereon will be withdrawn from the Pre-Funding Account on such
date and ultimately be transferred to the Sellers.
Any amounts remaining in the Pre-Funding Account at the end of the
Funding Period will be distributed on the next applicable Note Distribution Date
to the holders of the Class of Notes with the earliest Final Maturity Date.
CAPITALIZED INTEREST ACCOUNT
As of February 27, 1998 $2,828,000 was on deposit in the Capitalized
Interest Account. On the Closing Date, the Seller will make a cash deposit of
approximately $1,000,000 in the Capitalized Interest Account in the name of the
Indenture Trustee on behalf of the Trust. The amount deposited therein will be
used on each Note Distribution Date and Certificate Distribution Date to make
interest payments to Noteholders and Certificateholders to the extent amounts
deposited in the Note Distribution Account or the Certificate Distribution
Account, as the case may be, plus amounts in the Reserve Account, are
insufficient for such purpose. Amounts on deposit in the Capitalized Interest
Account may be augmented from time to time by optional deposits therein as
described in the Sale and Servicing Agreement. Any amounts remaining in the
Capitalized Interest Account after the period set forth in the Terms Supplement
will be transferred to the Reserve Account or, with the consent of the Surety
Provider, applied as an Additional Principal Payment.
All funds in the Capitalized Interest Account and Capitalized
Pre-Funding Account are required to be held (i) uninvested, up to the limits
insured by the Federal Deposit Insurance Corporation, or (ii) invested in
Eligible Investments. Any investment earnings on funds in the Capitalized
Interest Account and the Capitalized Pre-Funding Account will be applied to
payment of interest on the Notes and the Certificates.
PAYMENTS ON FINANCED STUDENT LOANS
Each Master Servicer will deposit all payments on Financed Student
Loans for which it is acting as primary servicer (from whatever source) and all
proceeds of such Financed Student Loans collected by it during each Collection
Period into the Collection Account (i) within one Business Day after it has
received an aggregate of $30,000 during any month and (ii) on the last Business
Day of each month, all other collections received during such month. Each Master
Servicer shall cause each other Servicer to deposit in the Collection Account,
within one Business Day of receipt thereof, all payments on Financed Student
Loans for which it is acting as primary servicer (from whatever source) and all
proceeds of such Financed Student Loans collected by it during each Collection
Period. The Eligible Lender Trustee will deposit all Interest Subsidy Payments,
all Special Allowance Payments and all insurance payments from the Secretary
with respect to the Financed Student Loans received by it during each Collection
Period into the Collection Account within two Business Days of receipt thereof.
SERVICING COMPENSATION
The Master Servicers will receive, subject to the limitations set
forth herein and in the Prospectus under the heading "Summary of Terms--Assets
of the Trust--Transfer and Servicing Agreements," a monthly fee (the "Servicing
Fee") (a) with respect to Federal Loans, the sum of (i) 0.35% per annum of the
aggregate principal balance of such Financed Student Loans in the Deferral Phase
as of the last day of the preceding calendar month, (ii) 1.00% per annum of the
aggregate principal balance of such Financed Student Loans (other than
Consolidation Loans) in the Repayment Phase as of the last day of the preceding
calendar month, (iii) with respect to each Consolidation Loan, the greater of
0.65% per annum of the principal balance of each such Consolidation Loan as of
the last day of the preceding calendar month and $3.00 per Consolidation Loan,
and (iv) a one-time fixed fee equal to $15 for each such Financed Student Loan
for which a guarantee claim was filed, in each case subject to certain
adjustments, together with other administrative fees and similar charges, and
(b) with respect to Private Loans, the sum of (i) 0.7% per annum of the
aggregate principal balance of such Financed Student Loans in the deferral phase
as of the last day of the preceding calendar month, (ii) 1.00% per annum of the
aggregate principal balance of such Financed Student Loans in the repayment
phase as of the last day of the preceding calendar month, and (iii) a one-time
fixed fee equal to $27.50 for each such Financed Student Loan for which a
guarantee claim was filed, in each case subject to certain adjustments, together
with other administrative fees and similar charges. To the extent a Master
Servicer engages a sub-servicer, including but not limited to, PHEAA, AFSA or
GLHESC, such Master Servicer will direct a portion of the Servicing Fee to the
applicable sub-servicer as compensation for its services. The Servicing Fee
(together with any portion of the Servicing Fee that remains unpaid from prior
Note Distribution Dates) will be allocated monthly out of Available Funds and
amounts on deposit in the Reserve Account and will be payable quarterly on the
first Note Distribution Date occurring in March, June, September and December
(or, if in any such month a Certificate Distribution Date occurs prior to such
first Note Distribution Date, on such Certificate Distribution Date).
Notwithstanding the foregoing, in the event that the fee payable to
the Master Servicers as defined above for any month would exceed 1.05% per annum
of the Pool Balance as of the last day of the preceding calendar month (the
"Capped Amount"), then the "Servicing Fee" for such month will instead be the
Capped Amount for such month. The remaining amount in excess of such Servicing
Fee, together with any such excess amounts from prior months that remain unpaid
(the "Servicing Fee Carryover"), will be payable to the Master Servicers on each
succeeding Distribution Date out of Available Funds remaining, if any, after
payment or allocation on the dates and in the priority set forth below under
"Distributions--Distributions from Collection Account."
The Servicing Fee and the Servicing Fee Carryover will compensate the
Master Servicers 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 any insurance payments from the Secretary, accounting for
collections and furnishing monthly and annual statements to the Administrator.
The Servicing Fee and the Servicing Fee Carryover also will reimburse the Master
Servicers 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 16th day of each
month, 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 sum of the
following amounts with respect to the related Collection Period: (i) all
collections received by the Master Servicers or any Servicer on the Financed
Student Loans (including any Guarantee Payments received with respect to the
Financed Student Loans); (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 of 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 Servicers or a Servicer during such
Collection Period with respect to a Financed Student Loan for which a Realized
Loss was previously allocated; (v) that portion of amounts released from the
Pre-Funding Account at the end of a Funding Period to be applied as a payment of
principal; (vi) amounts released from the Capitalized Interest Account and the
Capitalized Pre-Funding Account to cover shortfalls in interest; (vii) the
aggregate Purchase Amounts received for those Financed Student Loans repurchased
by the Sellers or purchased by the Master Servicers or by or on behalf of The
Money Store under an obligation which arose during the related Collection
Period; (viii) the aggregate amounts, if any, received from the Sellers, The
Money Store or the Master Servicers as reimbursement of non-guaranteed interest
amounts, or lost Interest Subsidiary Payments and Special Allowance Payments,
with respect to the Financed Student Loans pursuant to the Sale and Servicing
Agreement and (ix) Investments Earnings 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.
DISTRIBUTIONS FROM COLLECTION ACCOUNT. On each Determination Date, the
Administrator will advise the Indenture Trustee in writing of the applicable
Noteholders' Interest Distribution Amount or Certificateholders' Interest
Distribution Amount. Additionally, no later than 16 days prior to the first Note
Distribution Date occurring in each month for the Class of Series 1998-1 Notes
then entitled to receive payments of principal (or, after all Notes, including
but not limited to the Series 1998-1 Notes, have been paid in full, no later
than 16 days prior to the first Certificate Distribution Date occurring in each
month) the Administrator will advise the Indenture 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 the Determination Date relating to the first Certificate
Distribution Date occurring each month (or for each month in which a Note
Distribution Date occurs earlier than the Certificate Distribution Date, on the
Determination Date relating to such earlier Note Distribution Date), the
Administrator will advise the Indenture Trustee in writing of the Servicing Fee,
Administration Fee, Auction Agent Fee, Indenture Trustee Fee, Eligible Lender
Trustee Fee and Surety Provider Fee (collectively, the "Transaction Fees") for
the preceding month.
On each Note Distribution Date, the Indenture Trustee will transfer
from the Collection Account to the Note Distribution Account, from payments
received on or with respect to the Financed Student Loans during the Collection
Period immediately preceding the month of such Note Distribution Date, an amount
up to the related Noteholders' Interest Distribution Amount. For the Class of
Series 1998-1 Notes with the earliest Final Maturity Date, on the first Note
Distribution Date for such Class occurring in each month for which there are no
outstanding Notes with an earlier Final Maturity Date, after making the transfer
set forth in the prior sentence, the Indenture Trustee will transfer from the
Collection Account to the Note Distribution Account from payments received on or
with respect to the Financed Student Loans in the month second preceding the
month of the related Note Distribution Date, together with any Additional
Principal Payments to be made at the election of the Master Servicers as
described below, an amount up to the Noteholders' Principal Distribution Amount;
provided, however, that for each month in which the first Note Distribution Date
occurs prior to the Certificate Distribution Date in such month, prior to
transferring amounts to the Note Distribution Account, the Indenture Trustee
will transfer to the Expense Account, from payments received on or with respect
to the Financed Student Loans during the immediately preceding Collection
Period, an amount up to the Transaction Fees for the month preceding such Note
Distribution Date and all overdue Transaction Fees from prior months.
On each Certificate Distribution Date, the Indenture Trustee will
transfer from the Collection Account, from payments received on or with respect
to the Financed Student Loans during the immediately preceding Collection
Period, (i) to the Expense Account, an amount up to the excess, if any, of the
Transaction Fees for the month preceding such Certificate Distribution Date and
all overdue Transaction Fees from prior months over the amount, if any,
previously transferred to the Expense Account during the month of such
Certificate Distribution Date and (ii) by wire transfer no later than 11:00
a.m., New York time, to the Certificate Distribution Account, an amount up to
the related Certificateholders' Interest Distribution Amount. Additionally,
after each Class of Notes has been paid in full, on the first Certificate
Distribution Date occurring in each month, with respect to the Class of
Certificates with the earliest Final Maturity Date the Indenture Trustee will
transfer from the Collection Account to the Eligible Lender Trustee, by wire
transfer no later than 11:00 a.m., New York time, for deposit in the Certificate
Distribution Account, from payments received on or with respect to the Financed
Student Loans during the Collection Period immediately preceding the month prior
to such Certificate Distribution Date, an amount up to the applicable
Certificateholders' Principal Distribution Amount.
On the first Note Distribution Date occurring in June, September,
December and March, or in the case of clause (iii) below, on the first Note
Distribution Date occurring in each month (or if in any such month a Certificate
Distribution Date occurs prior to such first Note Distribution Date, on such
Certificate Distribution Date), the Indenture Trustee will distribute from the
Expense Account (in addition to any amounts transferred from the Reserve
Account) the following amounts in the following order of priority: (i) to the
Master Servicers, the Servicing Fee and all overdue Servicing Fees, (ii) to the
Administrator, the Administration Fee and all overdue Administration Fees, (iii)
to the Auction Agent, the Auction Agent Fee and all overdue Auction Agent Fees,
(iv) to the Indenture Trustee, the Indenture Trustee Fee and all overdue
Indenture Trustee Fees, (v) to the Eligible Lender Trustee, the Eligible Lender
Trustee Fee and all overdue Eligible Lender Trustee Fees and (vi) to the Surety
Provider, the Surety Provider Fee and all overdue Surety Provider Fees.
On each Note Distribution Date, the Indenture Trustee will distribute
to the Noteholders of the applicable Class of Series 1998-1 Notes as of the
related Note Record Date all amounts transferred to the Note Distribution
Account as set forth above (in addition to any amounts transferred from the
Capitalized Interest Account, the Capitalized Pre-Funding Account, the
Pre-Funding Account, the Reserve Account and the Monthly Advance Account and
amounts drawn under the applicable Note Surety Bond). On each Certificate
Distribution Date, the Eligible Lender Trustee will distribute to the
Certificateholders as of the related Certificate Record Date all amounts
transferred to the Certificate Distribution Account as set forth above (in
addition to any amounts transferred from the Capitalized Interest Account, the
Reserve Account and the Monthly Advance Account and amounts drawn under the
Certificate Surety Bond).
Notwithstanding the foregoing, principal payments will be made to the
Auction Rate Notes and the Certificates only in amounts equal to $50,000 and
integral multiples in excess thereof. If the amount in the Note Distribution
Account or the Certificate Distribution Account otherwise required to be applied
as a payment of principal either (i) is less than $50,000 or (ii) exceeds an
even multiple of $50,000, then, in the case of (i), such entire amount or, in
the case of (ii), such excess amount, will not be paid as principal on the
upcoming Note Distribution Date or Certificate Distribution Date, as the case
may be, but will be retained in the Note Distribution Account or the Certificate
Distribution Account, as the case may be, until the amount therein available for
payment of principal (including any amounts transferred from the Reserve
Account) equals $50,000.
With respect to the Class of Auction Rate Notes entitled to receive
payments of principal (or, after each Class of Notes has been paid in full, the
Class of Certificates entitled to receive principal) the actual Notes or
Certificates of such Class, as the case may be, that will receive payments of
principal on each applicable Note Distribution Date or Certificate Distribution
Date will be selected no later than 15 days prior to the related Note
Distribution Date or Certificate Distribution Date, as the case may be, by the
Indenture Trustee (with respect to the Notes) or the Eligible Lender Trustee
(with respect to the Certificates) by lot in such manner as the Indenture
Trustee or the Eligible Lender Trustee, as the case may be, in its discretion
may determine and which may provide for the selection for payment of principal
in minimum denominations of $50,000, and integral multiples in excess thereof.
Notice of the specific Auction Rate Notes or Certificates, as the case
may be, to receive payments of principal is to be given by the Indenture Trustee
or the Eligible Lender Trustee, as the case may be, by first-class mail, postage
prepaid, mailed not less than 15 days but no more than 30 days before the
applicable Note Distribution Date or Certificate Distribution Date at the
address of the applicable Securityholder appearing on the registration books.
Any defect in or failure to give such mailed notice shall not affect the
validity of proceedings for the payment of any other Notes or Certificates not
affected by such failure or defect. All notices of payment are to state: (i) the
applicable Note Distribution Date or Certificate Distribution Date; (ii) the
amount of principal to be paid, and (iii) the Class of the Auction Rate Notes or
Class of Certificates to be paid.
On the last Note Distribution Date occurring in April, July, October
and January (or if in any such month a Certificate Distribution Date occurs
after such last Note Distribution Date, on such Certificate Distribution Date),
after making all required transfers to the Note Distribution Account and, if
applicable, the Certificate Distribution Account and the Expense Account, the
Indenture Trustee will transfer any amounts remaining in the Collection Account
(other than amounts representing payments received during such month or payments
of or with respect to principal received in the immediately preceding month) in
the following order of priority: (i) to the Surety Provider, the amount, if any,
necessary to reimburse the Surety Provider for prior Note and Certificate Surety
Bond Payments (which will generally be equal to the aggregate amount of draws
under the Note Surety Bonds and Certificate Surety Bond on prior Note or
Certificate Distribution Dates, as applicable), together with interest thereon,
(ii) to the Reserve Account, the amount, if any, necessary to increase the
balance thereof to the Specified Reserve Account Balance, (iii) to the Master
Servicers, the aggregate unpaid amount of the Servicing Fee Carryover, if any,
(iv) to the Note Distribution Account, the aggregate unpaid amount of
Noteholders' Interest Carryover, if any, and (v) to the Certificate Distribution
Account, the aggregate unpaid amount of Certificateholders' Interest Carryover,
if any. Any amounts remaining in the Collection Account after such transfers
(other than amounts representing payments received during such current month or
payments of or with respect to principal received in the immediately preceding
month) will be transferred to the Reserve Account generally for distribution to
Student Holdings or its designee. Amounts transferred to the Note Distribution
Account or the Certificate Distribution Account pursuant to clauses (iv) and (v)
above, respectively, will be paid to the applicable Class of Notes or
Certificates on the next Note Distribution Date or Certificate Distribution Date
relating to such Class of Notes or Certificates. Notwithstanding the foregoing,
with the consent of the Surety Provider, amounts otherwise required to be
deposited into the Reserve Account pursuant to clause (ii) above may, instead,
be applied as a payment of principal on the next Note Distribution Date relating
to the Class of Notes with the earliest Final Maturity Date (or, after all the
Notes have been paid in full, on the next Certificate Distribution Date).
Amounts so applied as principal payments are referred to herein as "Additional
Principal Payments."
Notwithstanding the foregoing, if there has been an Event of Default
with respect to payment of the Notes, the Certificateholders will not be
entitled to any payments of principal or interest until each outstanding Class
of Notes has been paid in full.
"Certificate Balance" equals, as to any Class of Certificates, the
original principal balance of such Class of Certificates issued reduced by all
amounts allocable to principal previously distributed to Certificateholders of
such Class.
"Certificateholders' Distribution Amount" means, as to any Class of
Certificates, with respect to any Certificate Distribution Date relating to such
Certificates, the Certificateholders' Interest Distribution Amount for such
Certificate Distribution Date plus, for the first Certificate Distribution Date
occurring in each month on and after which the Notes and any Certificates which
have an earlier Final Maturity Date have been paid in full, the
Certificateholders' Principal Distribution Amount for such Certificate
Distribution Date.
"Certificateholders' Interest Carryover Shortfall" means, as to any
Class of Certificates, with respect to any Certificate Distribution Date
relating to such Certificates, the excess, if any, of (i) the sum of the
Certificateholders' Interest Distribution Amount on the preceding Certificate
Distribution Date relating to such Certificates and any outstanding
Certificateholders' Interest Carryover Shortfall relating to such Certificates
on such preceding Certificate Distribution Date over (ii) the amount of interest
actually distributed to such Certificateholders on such preceding Certificate
Distribution Date, plus interest on the amount of such excess interest due to
such Certificateholders, to the extent permitted by law, at the related
Certificate Rate from such preceding Certificate Distribution Date to the
current Certificate Distribution Date.
"Certificateholders' Interest Distribution Amount" means, as to any
Class of Certificates, with respect to any Certificate Distribution Date
relating to such Certificates, the sum of (i) the amount of interest accrued at
the related Certificate Rate for the related Interest Period on the outstanding
principal amount of such Certificates on the immediately preceding Certificate
Distribution Date, after giving effect to all distributions of principal to such
Certificateholders on such Certificate Distribution Date (or, in the case of the
first Certificate Distribution Date, on the initial Closing Date) and (ii) the
Certificateholders' Interest Carryover Shortfall relating to such Certificates
for such Certificate Distribution Date; PROVIDED, HOWEVER, that the
Certificateholders' Interest Distribution Amount will not include any
Certificateholders' Interest Carryover.
"Certificateholders' Principal Carryover Shortfall" means, for any
Class of Certificates as of the close of any Certificate Distribution Date on or
after which the Notes and each Class of Certificates with an earlier Final
Maturity Date have been paid in full, the excess, if any, of (i) the sum of the
Certificateholders' Principal Distribution Amount on such Certificate
Distribution Date and any outstanding Certificateholders' Principal Carryover
Shortfall for the preceding Certificate Distribution Date over (ii) the amount
of principal actually distributed to such Certificateholders on such Certificate
Distribution Date.
"Certificateholders' Principal Distribution Amount" means, as to the
outstanding Class of Certificates with the earliest Final Maturity Date and on
the first Certificate Distribution Date occurring in each month on and after
which the principal balance of the Notes has been paid in full, the sum of (a)
the Principal Distribution Amount for the Collection Period in the month second
preceding such Certificate Distribution Date, (b) any Additional Principal
Payments to be made on such Certificate Distribution Date and (c) the
Certificateholders' Principal Carryover Shortfall as of the close of the
preceding Certificate Distribution Date; PROVIDED, HOWEVER, that the
Certificateholders' Principal Distribution Amount will in no event exceed the
outstanding principal balance of such Class of Certificates. Further, on the
first Certificate Distribution Date occurring after the Note Distribution Date
on which the principal balance of the Class of Notes with the last Final
Maturity Date 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 Note Distribution Date over the amount of
principal paid on the Notes on such date. In addition, with respect to each
Class of Certificates, on the related Final Maturity Date the
Certificateholders' Principal Distribution Amount will include the amount
required to reduce the outstanding principal balance of such Certificates to
zero.
"Noteholders' Distribution Amount" means, as to any Class of Series
1998-1 Notes, with respect to any Distribution Date relating to such Notes, the
sum of related Noteholders' Interest Distribution Amount and the Noteholders'
Principal Distribution Amount for such Note Distribution Date.
"Noteholders' Interest Carryover Shortfall" means, as to any Class of
Series 1998-1 Notes, with respect to any Note Distribution Date relating to such
Notes, the excess of (i) the sum of the related Noteholders' Interest
Distribution Amount on the preceding Note Distribution Date relating to such
Notes and any Noteholders' Interest Carryover Shortfall on such preceding Note
Distribution Date over (ii) the amount of interest actually allocated to such
Noteholders on such preceding Note Distribution Date, plus interest on the
amount of such excess interest due to such Noteholders, to the extent permitted
by law, at the related Class Interest Rate from such preceding Note Distribution
Date to the current Note Distribution Date.
"Noteholders' Interest Distribution Amount" means, as to any Class of
Series 1998-1 Notes, with respect to any Note Distribution Date, the sum of (i)
the amount of interest accrued at the respective Class Interest Rate for each
related Interest Period since the last Note Distribution Date relating to such
Notes (or, in the case of the first Note Distribution Date following the
issuance the Series 1998-1 Notes, the initial Closing Date) on the outstanding
principal balance of such Class of Notes on the immediately preceding Note
Distribution Date relating to such Notes after giving effect to all principal
distributions to holders of Notes of such Class on such date (or, in the case of
the first Note Distribution Date for the Series 1998-1 Notes, on the initial
Closing Date) and (ii) the Noteholders' Interest Carryover Shortfall for such
Class for such Note 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 Note Distribution Date relating to a Class of Notes, the excess of (i) the
sum of the Noteholders' Principal Distribution Amount on such Note Distribution
Date and any outstanding Noteholders' Principal Carryover Shortfall for the
preceding Note Distribution Date over (ii) the amount of principal actually
allocated to the Noteholders on such Note Distribution Date.
"Noteholders' Principal Distribution Amount" means, as to the Class of
Notes with the earliest Final Maturity Date on each applicable Note Distribution
Date, the sum of (i) the Principal Distribution Amount from the Collection
Period in the month second preceding the month of the related Note Distribution
Date, (ii) any Additional Principal Payments to be made on such Note
Distribution Date and (iii) the Noteholders' Principal Carryover Shortfall as of
the close of the preceding Note Distribution Date relating to such Notes;
PROVIDED, HOWEVER, that the Noteholders' Principal Distribution Amount 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 sum of the following amounts: (i) that portion of all collections
received by the Master Servicers or any Servicer on the Financed Student Loans
that is allocable to principal (including the portion of any Guarantee 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 the related Collection Period; (iv) to the extent attributable
to principal, the Purchase Amount received with respect to each Financed Student
Loan repurchased by the Sellers or purchased by the Master Servicers or The
Money Store under an obligation which arose during the related Collection
Period; and (v) amounts, if any, transferred from the Pre-Funding Account at the
end of the applicable Funding 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 Student 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 Student 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 Financed Student 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 7 months after the date the claim
for such Guarantee Payment is first denied.
MONTHLY ADVANCES
If a Master Servicer has applied for a Guarantee Payment from a
Guarantor or an Interest Subsidy Payment or a Special Allowance Payment from the
Department, and such Master Servicer has not received the related payment prior
to the end of the Collection Period immediately preceding the Note Distribution
Date or Certificate Distribution Date on which such amount would be required to
be distributed as a payment of interest, the Representative may, no later than
the Determination Date relating to such Note Distribution Date or Certificate
Distribution Date, as the case may be, deposit into the Monthly Advance Account
an amount up to the amount of such payments with respect to interest applied for
but not received (such deposits by the Representative are referred to herein as
"Monthly Advances"). On each related Note Distribution Date, the Indenture
Trustee will distribute from the Monthly Advance Account to the applicable
Noteholders the Monthly Advance for such Note Distribution Date. On each related
Certificate Distribution Date, the Indenture Trustee will transfer from the
Monthly Advance Account to the Eligible Lender Trustee, by wire transfer no
later than 11:00 a.m. New York time, for distribution to the Certificateholders,
the Monthly Advance for such Certificate Distribution Date. Such Monthly
Advances are recoverable by the Representative from the source for which such
Monthly Advance was made.
CREDIT ENHANCEMENT
RESERVE ACCOUNT. Pursuant to the Sale and Servicing Agreement, a
Reserve Account was created on the Closing Date, but no funds will deposited
therein on the Closing Date. The Reserve Account will be augmented on the last
Note Distribution Date occurring in April, July, October and January (or, if in
any such month a Certificate Distribution Date occurs after such Note
Distribution Date, on such Certificate 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";
provided, however, that with the consent of the Surety Provider such Available
Funds may be applied as an Additional Principal Payment. Also, if amounts were
transferred from the Reserve Account to cover a Realized Loss on a Financed
Student Loan, any subsequent payments of principal received on or with respect
to such Financed Student Loan will be deposited into the Reserve Account or
applied as an Additional Principal Payment. As described below, subject to
certain limitations, amounts on deposit in the Reserve Account will be released
to Student Holdings the extent that the amount on deposit in the Reserve Account
exceeds the Specified Reserve Account Balance. With the consent of the Surety
Provider, the Specified Reserve Account Balance may be reduced or eliminated.
If the amount, if any, on deposit in the Reserve Account on any Note
or Certificate Distribution Date (after giving effect to all deposits or
withdrawals therefrom on such Note or Certificate 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 Excess Servicing Fee, Noteholders'
Interest Carryover, Certificateholders' Interest Carryover, and, if applicable,
certain amounts owing to the Surety Provider under the Insurance Agreement or to
purchase Financed Student Loans for which there has been an uncured breach of
certain representations and warranties, to Student Holdings. Upon any
distribution to Student Holdings of amounts from the Reserve Account, neither
the Noteholders nor the Certificateholders will have any rights in, or claims
to, such amounts.
The Reserve Account is intended to enhance the likelihood of timely
receipt by the Noteholders and the Certificateholders of the full amount of
principal and interest due them and to decrease the likelihood that the
Noteholders or the Certificateholders will experience losses. In certain
circumstances, however, the Reserve Account could be depleted. Further, as
described above, amounts otherwise required to be deposited into the Reserve
Account may, with the consent of the Surety Provider, be applied as Additional
Principal Payments. 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 or the Certificateholders could
result. This could, in turn, increase the average life of the Notes and the
Certificates. 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 Servicing Fee Carryovers, Noteholders'
Interest Carryover or Certificateholders' Interest Carryover.
SUBORDINATION OF THE CERTIFICATES. The rights of the holders of the
Certificates to receive distributions with respect to interest and principal
will be subordinated to such rights of the holders of the Notes to the extent
described herein. This subordination is intended to enhance the likelihood of
regular receipt by holders of the Notes of the full amount of the Noteholders'
Interest Distribution Amount and, after distribution of the Certificateholders'
Interest Distribution Amount for all Classes of Certificates, the Noteholders'
Principal Distribution Amount.
SURETY BONDS. The Note Surety Bond, issued by the Surety Provider,
will be obtained by the Sellers in favor of the Eligible Lender Trustee solely
on behalf of the Noteholders of the Series 1998-1 Notes. The Note Surety Bond
will, except as provided below, provide for coverage of timely payment of all
interest and ultimate payment of all principal due on the Series 1998-1 Notes;
PROVIDED, HOWEVER, that the Note Surety Bond will not ensure payment of any
Noteholders' Interest Carryover. See "Description of the Note Surety Bond--Note
Surety Bond."
STATEMENTS TO INDENTURE TRUSTEE AND TRUST
On each Determination Date preceding a Note Distribution Date and
Certificate Distribution Date, the Master Servicers or the Administrator will
provide to the Indenture Trustee for the Indenture Trustee to forward on each
succeeding Note Distribution Date to each Noteholder of the applicable Class,
and to the Eligible Lender Trustee for the Eligible Lender Trustee to forward on
such succeeding Certificate Distribution Date to each Certificateholder, a
statement, which will include the following information with respect to such
Note Distribution Date and Certificate Distribution Date or the preceding
Collection Period, to the extent applicable (provided, however, that with
respect to each Note Distribution Date other than the first Note Distribution
Date occurring in each month, such statement need only contain the information
set forth in clauses (ii), (iii), (v), and (vii) below):
(i) the amount of the distribution allocable to
principal of each Class of Notes or the Certificates, as the
case may be;
(ii) the amount of the distribution allocable to interest on
each Class of Notes and the Certificates, together with the interest rates
applicable with respect thereto (indicating whether such interest rates are
based on the Auction Rate or on the Net Loan Rate, with respect to each Class of
Notes and the Certificates, and specifying what each such interest rate would
have been if it had been calculated using the alternate basis);
(iii) the amount of the distribution, if any, allocable to any
Noteholders' Interest Carryover and any Certificateholders' Interest Carryover,
together with the outstanding amount, if any, of each thereof after giving
effect to any such distribution;
(iv) the Pool Balance as of the close of business on the last
day of the preceding Collection Period;
(v) the aggregate outstanding principal balance of each Class
of Notes and Class of Certificates as of such Note Distribution Date or
Certificate Distribution Date, after giving effect to payments allocated to
principal reported under clause (i) above;
(vi) the amount of the Servicing Fee and any Servicing Fee
Carryover allocated to the Master Servicers, the amount of the Administration
Fee allocated to the Administrator, the amount of the Auction Agent Fee
allocated to the Auction Agent, the amount of the Indenture Trustee Fee
allocated to the Indenture Trustee, the amount of the Eligible Lender Trustee
Fee allocated to the Eligible Lender Trustee and the amount of the Surety
Provider Fee allocated to the Surety Provider, respectively, with respect to
such Collection Period, and the amount, if any, of the Servicing Fee Carryover
remaining unpaid after giving effect to any such payment;
(vii) the amount of the distribution, if any, payable to the
Surety Provider as reimbursement for any unpaid Surety Bond Payments;
(viii) the amount of the aggregate Realized Losses, if any,
for such 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 Note Distribution Date or Certificate Distribution Date, the
balance of the Reserve Account on such Note Distribution Date or Certificate
Distribution Date, after giving effect to changes therein on such Note
Distribution Date or Certificate Distribution Date and the then applicable
Parity Percentage;
(x) for Note Distribution Dates during the Funding Period, the
portion, if any, of the distribution attributable to amounts on deposit in the
Pre-Funding Account and the remaining Pre-Funded Amount on such Note
Distribution Date, after giving effect to changes therein during the related
Collection Period;
(xi) for the Note Distribution Dates during the Funding
Period, the aggregate amount, if any, paid by the Eligible Lender Trustee on
behalf of the Trust to purchase Additional Financed Student Loans during the
preceding Collection Period;
(xii) for the first Note Distribution Date on or following the
end of the Funding Period, the amount of any remaining Pre-Funded Amount that
has not been used to make Additional Fundings and is being paid out to
Noteholders;
(xiii) the aggregate amount, if any, paid for Financed Student
Loans purchased from the Trust during the preceding Collection Period; and
(xiv) the number and principal amount of Financed Student
Loans, as of the preceding Collection Period, that are (i) 30 to 60 days
delinquent, (ii) 61 to 90 days delinquent, (iii) 91 to 120 days delinquent, (iv)
more than 120 days delinquent and (v) for which claims have been filed with the
appropriate Guarantor and which are awaiting payment.
EVIDENCE AS TO COMPLIANCE
The Sale 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 Servicers
during the preceding twelve months with all applicable standards under the Sale
and Servicing Agreement relating to the servicing of the Financed Student Loans.
The Sale and Servicing Agreement will further provide that a firm of
independent public accountants (which may be the same firm referred to in the
immediately preceding paragraph) will furnish to the 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 twelve months with all applicable standards under the Sale
and Servicing Agreement and the Administration Agreement relating to the
administration of the Trust and the Financed Student Loans.
The Sale and Servicing Agreement will also provide for delivery to the
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 Servicers or the Administrator, as the case
may be, stating that, to his knowledge, the Master Servicers or the
Administrator, as the case may be, has fulfilled its obligations under the Sale
and Servicing Agreement throughout the preceding twelve months or, if there has
been a default in the fulfillment of any such obligation, describing each such
default. Each of the Master Servicers and the Administrator has agreed to give
the Indenture Trustee and the Eligible Lender Trustee notice of certain Servicer
Defaults and Administrator Defaults, respectively, under the Sale and Servicing
Agreement.
Copies of such statements and certificates may be obtained by
Securityholders by a request in writing addressed to the Applicable Trustee.
LIABILITY OF STUDENT HOLDINGS
Under the Trust Agreement, Student Holdings will agree to be liable
directly to an injured party for the entire amount of any losses, claims,
damages or liabilities (other than those incurred by a Noteholder or a
Certificateholder in the capacity of an investor) arising out of or based on the
arrangement created by the Trust Agreement as though such arrangement created a
partnership under the Pennsylvania Revised Uniform Limited Partnership Act in
which Student Holdings were a general partner.
TERMINATION
The obligations of the Master Servicers, the Sellers, the
Administrator, the Auction Agent, 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. In order to avoid excessive administrative expense, the
Sellers are permitted at their option and with the consent of the Surety
Provider to repurchase from the Eligible Lender Trustee, as of the end of any
Collection Period immediately preceding a Note Distribution Date or Certificate
Distribution Date, if the then outstanding Pool Balance is 10% or less of the
Aggregate 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 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 Sellers.
ADMINISTRATOR
Educaid, in its capacity as Administrator, will enter 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 Note Distribution Date and Certificate 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 an administration fee equal to 0.015% per annum of the outstanding
principal amount of the Notes and the Certificates (the "Administration Fee").
DESCRIPTION OF THE NOTE SURETY BOND
The following summary describes certain provisions of the Note Surety
Bond. The summary does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all provisions of the Note Surety
Bond.
NOTE SURETY BOND
The Note Surety Bond, issued by the Surety Provider, will be obtained
by the Sellers in favor of the Eligible Lender Trustee on behalf of the Trust
and will be pledged to the Indenture Trustee pursuant to the Indenture. The Note
Surety Bond will, except as provided below, provide for coverage of timely
payment of all interest, and ultimate payment of all principal, due on the
related Class of Series 1998-1 Notes. In particular, funds may be drawn under
the Note Surety Bond on any Note Distribution Date and paid to Noteholders of
the applicable Class in an amount equal to the applicable Note Surety Bond
Payment for such Note Distribution Date. The Surety Provider will be required to
make Note Surety Bond Payments to the Indenture Trustee as paying agent on the
later of such Note Distribution Date or the Business Day following the day on
which the Surety Provider receives a drawing request under the Note Surety Bond
from the Indenture Trustee as paying agent, stating the amount of a Note Surety
Bond Payment that is due.
"Note Surety Bond Payment" means, with respect to any Class of Series
1998-1 Notes (A) on each Note Distribution Date the amount equal to the excess,
if any, of the Noteholders' Interest Distribution Amount for the applicable
Class of Series 1998-1 Notes over the amount on deposit in the Note Distribution
Account, after taking into account the required application of funds in the
remaining Trust Accounts (but excluding any amounts on deposit in the Monthly
Advance Account if an automatic stay has been imposed with respect to the
Representative under Section 362(a) of the United States Bankruptcy Code of
1978, as amended 11 U.S.C. ss. 101 ET SEQ.), including but not limited to the
Reserve Account, pursuant to the Sale and Servicing Agreement, to the payment of
the Noteholders' Interest Distribution Amount on such Note Distribution Date (an
"Interest Deficiency") and (B) the amount equal to the excess, if any, of the
unpaid principal balance of Series 1998-1 Notes of a Class on the Final Maturity
Date for such Class over amounts on deposit in the Note Distribution Account,
after taking into account the required application of funds in the remaining
Trust Accounts, including but not limited to the Reserve Account, pursuant to
the Sale and Servicing Agreement to the payment of principal of such Class of
Series 1998-1 Notes on such Final Maturity Date (a "Principal Deficiency");
provided, however, that "Note Surety Bond Payments" shall not include any
Noteholders' Interest Carryover or any portion of any Interest Deficiency or
Principal Deficiency arising as a result of (i) any tax liability, including any
tax liability imposed on or assessed with respect to the Trust, the Trust
assets, any Noteholder, or any Certificateholder, or (ii) any tax withholding
requirement including any such requirement applicable to Trust income or Trust
distributions.
The Note Surety Bond is irrevocable and noncancelable.
SURETY PROVIDER
The Surety Provider is a Wisconsin-domiciled stock insurance
corporation regulated by the Office of the Commissioner of Insurance of the
State of Wisconsin and licensed to do business in 50 states, the District of
Columbia, the Commonwealth of Puerto Rico and Guam. The Surety Provider
primarily insures newly-issued municipal and structured finance obligations. The
Surety Provider is a wholly-owned subsidiary of Ambac Financial Group, Inc.
(formerly AMBAC Inc.), a 100% publicly-held company. Moody's, Standard & Poor's
and Fitch IBCA Inc. have each assigned a triple-A claims-paying ability rating
to the Surety Provider.
The consolidated financial statements of the Surety Provider and its
subsidiaries as of December 31, 1996 and December 31, 1995 and for the three
years ended December 31, 1996 prepared in accordance with generally accepted
accounting principles, included in the Current Report on Form 8-K of Ambac
Financial Group, Inc. (which was filed with the Securities and Exchange
Commission (the "Commission") on March 12, 1997; Commission File No. 1-10777)
and the consolidated financial statements of the Surety Provider and its
subsidiaries as of September 30, 1997 and for the periods ending September 30,
1997 and September 30, 1996, included in the Quarterly Report on Form 10-Q of
Ambac Financial Group, Inc. for the period ended September 30, 1997 (which was
filed with the commission on November 14, 1997) are hereby incorporated by
reference into this Prospectus Supplement and shall be deemed to be a part
hereof. Any statement contained in a document incorporated herein by reference
shall be modified or superseded for the purposes of this Prospectus Supplement
to the extent that a statement contained herein by reference herein also
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus Supplement.
The following table sets forth the capitalization of the Surety
Provider as of December 31, 1994, December 31, 1995, December 31, 1996 and
September 30, 1997, respectively in conformity with generally accepted
accounting principles.
<PAGE>
<TABLE>
<CAPTION>
AMBAC ASSURANCE CORPORATION
CONSOLIDATED CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997
1994 1995 1996 (UNAUDITED)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Unearned premiums............................... $ 840 $ 906 $ 995 $1,047
Other liabilities............................... 136 295 259 311
----- ----- ----- ------
Total liabilities............................... 976 1,201 1,254 1,358
----- ----- ----- -----
Stockholder's equity
Common Stock.................................. 82 82 82 $ 82
Additional paid-in capital.................... 444 481 515 521
Unrealized gains (losses) on investments,
net of tax ............................... (46) 87 66 89
Retained earnings........................... 782 907 992 1,130
----- ----- ----- ------
Total stockholder's equity...................... 1,262 1,557 1,655 $1,822
------ ------ ------ ------
Total liabilities and stockholder's equity...... $2,238 $2,758 $2,909 $3,180
====== ====== ====== ======
</TABLE>
For additional financial information concerning the Surety Provider,
see the audited financial statements of the Surety Provider incorporated by
reference herein. Copies of the financial statements of the Surety Provider
incorporated hereby by reference and copies of the Surety Provider's annual
statement for the year ended December 31, 1997 prepared in accordance with
statutory accounting standards are available, without charge, from the Surety
Provider. The address of the Surety Provider's administrative offices and its
telephone number are One State Street Plaza, 17th Floor, New York, New York
10004 and (212) 668-0340.
The Surety Provider makes no representation regarding the Series
1998-1 Notes or the advisability of investing in the Series 1998-1 Notes and
makes no representation regarding, nor has it participated in the preparation
of, this Prospectus Supplement other than the information supplied by the Surety
Provider and presented under the heading "Description of the Note Surety Bond"
and in the financial statements incorporated herein by reference.
Each rating of the Surety Provider should be evaluated independently.
The ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Surety Provider and its ability to pay claims on its
policies of insurance. Any further explanation as to the significance of the
above rating may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
Series 1998-1 Notes, and such ratings may be subject to revision or withdrawal
at any time by the rating agencies. Any downward revision or withdrawal of any
of the above ratings may have an adverse effect on the market price of the
Series 1998-1 Notes. The Surety Provider does not guaranty the market price of
the Series 1998-1 Notes nor does it guaranty that the ratings on the Series
1998-1 Notes will not be revised or withdrawn.
The financial statements included in, or as exhibits to the following
documents which have been filed with the Securities and Exchange Commission by
the Surety Provider, are hereby incorporated by reference in this Prospectus
Supplement:
(a) The consolidated financial statements of the Surety
Provider and its subsidiaries as of December 31, 1996 and December 31,
1995 and for each of the three years in the period ended December 31,
1996, which report appears in the Form 8-K of Ambac Financial Group,
Inc. , (formerly AMBAC Inc.) dated March 12, 1997; and
(b) The consolidated financial statements of the Surety
Provider and its subsidiaries as of September 30, 1997 and for each of
the nine month periods ending September 30, 1997 and September 30, 1996
included in the Quarterly Report on Form 10-Q of Ambac Financial Group,
Inc. for the period ended September 30, 1997.
All financial statements of the Surety Provider and its subsidiaries
which are included in the documents filed by Ambac Financial Group, Inc.
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, subsequent to the date of this Prospectus Supplement and prior
to the termination of the offering of the Series 1998-1 Notes shall be deemed to
be incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
CERTAIN TAX CONSEQUENCES
CERTAIN PENNSYLVANIA TAX CONSEQUENCES WITH RESPECT TO THE SERIES 1998-1 NOTES
The Trust has been provided with an opinion of Rhoads & Sinon LLP,
special Pennsylvania tax counsel for the Trust ("Pennsylvania Tax Counsel")
regarding certain Pennsylvania tax matters as discussed below. An opinion of
counsel is not binding on the Pennsylvania Department of Revenue and no ruling
on any of the Pennsylvania tax issues discussed below will be sought from the
Pennsylvania Department of Revenue.
There is no authority in Pennsylvania addressing the question of
whether the Series 1998-1 Notes will be treated as debt or equity for
Pennsylvania tax purposes. Nonetheless, subject to the foregoing uncertainty,
Pennsylvania Tax Counsel has advised the Trust that, assuming the Series 1998-1
Notes are classified as debt for federal income tax purposes, the Series 1998-1
Notes will be treated as debt for Pennsylvania corporate tax purposes. Assuming
the Series 1998-1 Notes are treated as debt for Pennsylvania corporate tax
purposes, corporate Noteholders not otherwise subject to tax in Pennsylvania
would not become subject to Corporate Net Income or Franchise Taxes in
Pennsylvania solely because of a Noteholder's ownership of Series 1998-1 Notes.
For Pennsylvania tax purposes, the Trust will be treated as a Pennsylvania
business trust. See "----- Pennsylvania Tax Characteristics or the Trust" below.
Corporate Noteholders otherwise subject to tax in Pennsylvania will be
required to include the interest on the Notes as well as any gains on the
disposition of the Series 1998-1 Notes in the computation of the Pennsylvania
Corporate Net Income Tax and Capital Stock/Foreign Franchise Tax.
Certain Noteholders otherwise subject to tax in certain Pennsylvania
counties which impose the tax on intangible personal property authorized by the
Act of June 17, 1913, P.L. 507 ss. 1, as amended, 72 P.S. ss. 4821, will be
subject to such Intangible Personal Property Tax on the Series 1998-1 Notes.
PENNSYLVANIA TAX CHARACTERISTICS OF THE TRUST
The Trust Agreement contemplates that the Trust will qualify as a
Pennsylvania Business Trust pursuant to 15 Pa. C.S. ss. 9501(a). Under existing
law, as a Pennsylvania Business Trust, if the Trust is classified as a
partnership for federal income tax purposes the Trust will not be subject to
Pennsylvania Corporate Net Income Tax, Personal Income Tax or Corporate Loans
Tax. Prior to January 1, 1998, the Trust is not subject to the Capital
Stock/Foreign Franchise Tax because it is not taxable as a corporation for
federal income tax purposes. As a result of a change in legislation, beginning
on or after January 1, 1998, business trusts are subject to Pennsylvania Capital
Stock/Foreign Franchise Tax. However, the Pennsylvania Department of Revenue
published a Statement of Policy on November 15, 1997 (the "Statement of Policy")
classifying student loans for postsecondary educational purposes and certain
related assets held by an entity created for the purposes of the securitization
of student loans as exempt assets for purposes of the single factor
apportionment method of calculating this tax. The Statement of Policy is
effective for taxable years beginning on or after January 1, 1998. The
Administrator anticipates that all of the assets of the Trust will be student
loan notes for postsecondary educational purposes and other assets of the types
classified as exempt under the Statement of Policy. As a result, under the
single factor apportionment method of calculation of the Capital Stock/Foreign
Franchise Tax, the Trust will be eligible to reduce any such tax otherwise due
by multiplying the computed capital stock value by a fraction representing the
proportion of taxable assets of the Trust to its total assets. If 100% of the
Trust's assets are exempt assets pursuant to the Statement of Policy, the
fraction will be zero and only a statutory minimum tax of $300 annually will be
due. As is the case with laws and regulations generally, there can be no
assurance that the current position of the Pennsylvania Department of Revenue
set forth in the Statement of Policy will not be changed in the future.
Assuming that the Trust is created in York County, Pennsylvania, a
county which does not presently impose the Intangible Personal Property Tax
authorized by the Act of June 17, 1913, P.L. 507 ss. 1, as amended, 72 P.S. ss.
4821, the Trust will not be subject to such Intangible Personal Property Tax on
the Financed Student Loans or on other intangible personal property held by the
Trust.
Although the matter is not free from doubt, Pennsylvania Tax Counsel
is of the opinion, under existing law, that the Trust will not be classified as
a partnership for Pennsylvania corporate tax purposes. However, if the Trust
were to be classified as a partnership or its equivalent for Pennsylvania
corporate tax purposes, the Trust itself would not be subject to any of the
foregoing taxes, other than the Capital Stock/Foreign Franchise Tax, but the
Pennsylvania taxing authorities may take the position that the
Certificateholders not otherwise subject to tax in Pennsylvania have acquired a
taxable nexus in Pennsylvania by virtue of their ownership of the Certificates.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and/or Section 4975 of the Code prohibit a pension,
profit-sharing or other employee benefit plan or retirement arrangement, as well
as individual retirement accounts and certain types of Keogh Plans (each a
"Plan") from engaging in certain transactions with persons that are "parties in
interest" under ERISA or "disqualified persons" under the Code with respect to
such Plan. A violation of these "prohibited transaction" rules may result in an
excise tax or other penalties and liabilities under ERISA and the Code for such
persons.
Certain transactions involving the purchase, holding or transfer of
the Series 1998-1 Notes might be deemed to constitute prohibited transactions
under ERISA and the Code if assets of the Trust were deemed to be assets of a
Plan. Under a regulation issued by the United States Department of Labor (the
"Plan Assets Regulation"), the assets of the Trust would be treated as plan
assets of a Plan for the purposes of ERISA and the Code only if the Plan
acquires an "Equity Interest" in the Trust and none of the exceptions contained
in the Plan Assets Regulation is applicable. An equity interest is defined under
the Plan Assets Regulation as an interest other than an instrument which is
treated as indebtedness under applicable local law and which has no substantial
equity features. Assuming that a Class of Series 1998-1 Notes is treated as
indebtedness without substantial equity features for purposes of the Plan Assets
Regulation then such Class of Series 1998-1 Notes will be eligible for purchase
by Plans. Without regard to whether the Series 1998-1 Notes are treated as an
"equity interest" for such purposes, the acquisition or holding of Series 1998-
1 Notes by or on behalf of a Plan could be considered to give rise to a
prohibited transaction if the Trust or any of its affiliates is or becomes a
party in interest or disqualified person with respect to such Plan, or in the
event that a Series 1998-1 Note is purchased in the secondary market and such
purchase constitutes a sale or exchange between a Plan and a party in interest
or disqualified person with respect to such Plan. There can be no assurance that
the Trust or any of its affiliates will not be or become a party in interest or
a disqualified person with respect to a Plan that acquires Series 1998-1 Notes.
However, one or more of the following prohibited transaction class exemptions
may apply to the acquisition, holding and transfer of the Series 1998-1 Notes:
Prohibited Transaction Class Exemption ("PTCE") 84-14 (regarding investments by
qualified professional asset managers), PTCE 90-1 (relating to investments by
insurance company pooled separate accounts), PTCE 91-38 (regarding investments
by bank collective investment funds), PTCE 95-60 (regarding investments by
insurance company general accounts) and PTCE 96-23 (regarding investments by
in-house asset managers).
Employee benefit plans that are governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA) are not subject to ERISA requirements.
A Plan fiduciary considering the purchase of Series 1998-1 Notes
should consult its tax and/or legal advisors regarding whether the assets of the
Trust would be considered Plan assets, the possibility of exemptive relief from
the prohibited transaction rules and other issues and their potential
consequences.
EXPERTS
The consolidated financial statements of Ambac Assurance Corporation
as of December 31, 1996 and 1995 and for each of the years in the three-year
period ended December 31, 1996 are incorporated by reference herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters relating to the Sellers, the Master Servicers
and the Administrator will be passed upon by Eric R. Elwin, Esq., Corporate
Counsel of the Sellers, and Squire, Sanders & Dempsey L.L.P., Phoenix, Arizona,
and certain legal matters relating to the validity of the issuance of the Series
1998-1 Notes and the Certificates will be passed upon for the Underwriters by
Stroock & Stroock & Lavan LLP, New York, New York. Stroock & Stroock & Lavan
LLP, has performed legal services for the Sellers and The Money Store Inc. and
it is expected that it will continue to perform such services in the future.
Certain federal income tax and other matters will be passed upon for the Trust
by Stroock & Stroock & Lavan LLP, and certain state income tax and other matters
will be passed upon for the Trust by Rhoads & Sinon LLP, Harrisburg,
Pennsylvania.
UNDERWRITING
Subject to the terms and conditions set forth in the Auction Rate
Underwriting Agreement for the sale of the Auction Rate Notes, dated March 16,
1998 among Smith Barney Inc., on behalf of the several Underwriters, the
Trust, the Sellers and the Representative (the "Auction Rate Underwriting
Agreement") the Sellers have agreed to cause the Trust to sell to the
Underwriters, and each of the Underwriters has severally agreed to purchase, the
principal amount of the Series 1998-1 Notes set forth opposite its name:
<TABLE>
<CAPTION>
CLASS A-7 Class A-8 Class A-9 Class A-10 Total
<S> <C> <C> <C> <C> <C>
Smith Barney Inc. $ 50,000,000 $ 50,000,000 $ 50,000,000 $ 55,000,000 $205,000,000
First Union Capital Markets Corp. $ 45,000,000 $ 45,000,000 $ 45,000,000 $ 49,500,000 $184,500,000
Prudential Securities Incorporated $ 5,000,000 $ 5,000,000 $ 5,000,000 $ 5,500,000 $ 20,500,000
Total $100,000,000 $100,000,000 $100,000,000 $110,000,000 $410,000,000
=========== =========== ============ ============ ============
</TABLE>
The Series 1998-1 Notes initially, will be offered by the respective
Underwriters to the public at the offering prices set forth on the cover page of
this Prospectus Supplement. After the initial public offering, the offering
price and other selling terms may be varied by the Underwriters. The
Underwriters and any dealers that participate with the Underwriters in the
distribution of the Series 1998-1 Notes may be deemed to be underwriters and any
commissions received by them and any profit on the resale of the Series 1998-1
Notes by them may be deemed to be underwriting discounts and commissions under
the Securities Act of 1933, as amended.
In connection with the offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the market price of
the Series 1998-1 Notes. Such transactions may include stabilization
transactions effected in accordance with Rule 104 of Regulation M, pursuant to
which such person may bid for or purchase Series 1998-1 Notes for the purpose of
stabilizing their market price. The Underwriters also may create a short
position for the account of the Underwriters by selling more Series 1998-1 Notes
in connection with the offering than it is committed to purchase, and in such
case may purchase Series 1998-1 Notes in the open market following completion of
the offering to cover all or a portion of such short position. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Series 1998-1 Notes at a level above that which might otherwise
prevail in the open market. None of the transactions described in this paragraph
is required, and, if they are undertaken, they may be discontinued at any time.
The Representative has agreed to indemnify the Underwriters against
certain liabilities including liabilities under the Securities Act of 1933, as
amended.
The Underwriters may provide investment banking services for the
Representative for which they will receive additional compensation.
First Union Capital Markets Corp. is an affiliate of First Union
Corporation. On March 4, 1998, the Representative announced that it had signed a
definitive merger agreement with First Union Corporation pursuant to which First
Union Corporation would acquire the Representative. See "The Sellers and The
Money Store" herein.
<PAGE>
INDEX OF PRINCIPAL TERMS
Additional Funding........................................S-13
Additional Fundings.......................................S-40
Additional Principal Payments.........................S-19, 46
Additional Student Loans..................................S-40
Administration Agreement...................................S-6
Administration Fee....................................S-15, 53
Administrator..............................................S-6
AFSA...................................................S-5, 30
Aggregate Pool Balance....................................S-21
Ambac......................................................S-6
Applicable Trustee........................................S-37
Auction Agent..............................................S-6
Auction Agent Fee.........................................S-15
Auction Period Adjustment.................................S-33
Auction Rate...............................................S-2
Auction Rate Notes......................................S-2, 4
Auction Rate Underwriting Agreement.......................S-59
Available Funds...........................................S-43
Broker-Dealer..............................................S-6
Business Day..............................................S-14
Capped Amount.........................................S-12, 42
Cede..................................................S-25, 37
Certificate Balance.......................................S-46
Certificate Distribution Account..........................S-16
Certificate Distribution Date..............................S-9
Certificate Record Date....................................S-9
Certificate Surety Bond...................................S-22
Certificate Surety Bond Payment.......................S-22, 23
Certificateholders' Distribution Amount...................S-46
Certificateholders' Interest Carryover....................S-10
Certificateholders' Interest Carryover Shortfall..........S-46
Certificateholders' Interest Distribution Amount..........S-46
Certificateholders' Principal Carryover Shortfall.........S-46
Certificateholders' Principal Distribution Amount.........S-47
Class...................................................S-1, 4
Class Interest Rate........................................S-2
ClassNotes.................................................S-5
clearing agency...........................................S-37
clearing corporation......................................S-37
Collection Account........................................S-14
Collection Period.........................................S-16
Commission................................................S-54
CSAC.......................................................S-6
cumulative cash reserves...................................S-2
Definitive Notes..........................................S-25
Definitive Securities.....................................S-38
Depository................................................S-32
Determination Date........................................S-15
disqualified persons......................................S-57
Distribution Accounts.....................................S-17
Distribution Date.........................................S-9
DOE Data Book..............................................S-1
DTC...................................................S-25, 37
ECMC.......................................................S-1
Educaid....................................................S-4
Effective Interest Rate...................................S-12
Eligible Deposit Account..................................S-40
Eligible Institution......................................S-40
Eligible Investments......................................S-39
Eligible Lender Trustee.................................S-1, 5
Eligible Lender Trustee Fee...............................S-15
Equity Interest...........................................S-58
ERISA.....................................................S-57
Expense Account...........................................S-16
Federal Guarantors.........................................S-1
Financed Student Loans.....................................S-1
FOSFA......................................................S-6
Funding Period............................................S-13
GLHESC..............................................S-5, 31, 6
Holders...................................................S-25
Indenture..................................................S-4
Indenture Trustee..........................................S-6
Indenture Trustee Fee.....................................S-15
Index Maturity............................................S-36
Indirect Participants.....................................S-37
Insurance Agreement.......................................S-40
Interest Deficiency...............................S-21, 22, 53
Interest Period........................................S-2, 32
Investment Earnings.......................................S-40
LIBOR Determination Date..................................S-36
LIBOR Rate................................................S-33
Master Indenture...........................................S-4
Master Servicer............................................S-5
Monthly Advance Account...................................S-20
Monthly Advances......................................S-20, 48
Moody's...................................................S-25
NJHEAA.....................................................S-6
Note Distribution Account.................................S-15
Note Distribution Date.....................................S-7
Note Record Date...........................................S-7
Note Surety Bond..........................................S-50
Note Surety Bond Payment..............................S-21, 53
Note Surety Bond Payments.............................S-22, 53
Noteholder................................................S-37
Noteholders...............................................S-25
Noteholders' Distribution Amount..........................S-47
Noteholders' Interest Carryover............................S-7
Noteholders' Interest Carryover Shortfall.................S-47
Noteholders' Interest Distribution Amount.................S-47
Noteholders' Principal Carryover Shortfall................S-47
Noteholders' Principal Distribution Amount................S-48
Notes......................................................S-1
NSLP.......................................................S-6
NYSHESC...................................................S-6
One-Month LIBOR...........................................S-36
Participants..............................................S-32
parties in interest.......................................S-57
Pennsylvania Tax Counsel..................................S-56
PHEAA..................................................S-5, 29
Plan......................................................S-57
Plan Assets Regulation....................................S-58
Pre-Funded Amount.........................................S-13
Principal Deficiency..............................S-22, 23, 53
Principal Distribution Amount.............................S-48
prohibited transaction....................................S-57
PTCE......................................................S-58
Rating Agencies...........................................S-25
Rating Agency.............................................S-25
Realized Loss.............................................S-48
Reference Bank............................................S-37
Representative.............................................S-5
Rules.....................................................S-38
SBA.......................................................S-28
SBA Loans.................................................S-28
Securityholders............................................S-9
Seller.....................................................S-5
Sellers....................................................S-1
Series 1998-1 Note Surety Bond.............................S-2
Series 1998-1 Notes.................................S-1, 4, 33
Servicer...................................................S-5
Servicing Fee.........................................S-11, 42
Servicing Fee Carryover...............................S-12, 42
Specified Reserve Account Balance.........................S-19
Standard & Poor's.........................................S-25
Statement of Policy.......................................S-57
Student Holdings...........................................S-9
Subsequent Cut-off Date...................................S-40
Surety Bonds..........................................S-22, 34
Surety Provider Fee.......................................S-15
Telerate Page 3750........................................S-37
Terms Supplement...........................................S-4
TGSLC......................................................S-6
The Money Store........................................S-5, 28
Transaction Fees......................................S-15, 43
Transfer Agreement........................................S-39
Transfer Date.............................................S-40
Trust...................................................S-1, 4
Trust Accounts............................................S-39
Trust Agreement............................................S-4
Underwriters...............................................S-2
USAF.......................................................S-6
<PAGE>
ANNEX A
CERTAIN CHARACTERISTICS OF THE
FINANCED STUDENT LOANS
Composition of the Financed Student Loans*
Aggregate Outstanding Principal Balance...................... $821,878,388
Number of Borrowers.......................................... 158,433
Average Outstanding Principal Balance Per Borrower........... $ 5,188
Number of Loans.............................................. 231,319
Average Outstanding Principal Balance Per Loan............... $ 3,553
Weighted Average Annual Interest Rate........................ 7.84%
Weighted Average Remaining Term (months) (does not include
the months remaining for the in-school, grace, deferment or
forbearance periods)....................................... 111
Weighted Average Remaining Term (months) (including the months
remaining for the in-school, grace, deferment or
forbearance periods).......................................... 126
<TABLE>
<CAPTION>
Distribution of the Financed Student Loans by Loan Type
Percent of
Loans by
Number of Outstanding Outstanding
Loan Types Loans Balance Balance
<S> <C> <C> <C>
Consolidation 1,566 $ 27,741,997 3.38%
PAL 1,805 14,138,073 1.72
PLUS 13,369 55,956,934 6.81
Stafford - Subsidized 135,830 460,919,175 56.08
Stafford - Unsubsidized 78,749 263,122,229 32.01
--------------------- --------------------- -----------
Total 231,319 $821,878,388 100.0%
===================== ====================== ==============
- -----------
* The composition of the Financed Student Loans as set forth in this Annex A
consists of (i) the actual characteristics as of February 27, 1998 of the
Financed Student Loans that received their final disbursement on or before such
date and (ii) the expected characteristics as of March 16, 1998 of the Financed
Student Loans that received their final disbursement after February 27, 1998,
but prior to the Closing Date. While the actual characteristics of the Financed
Student Loans actually pledged to the Indenture Trustee on the Closing Date may
vary somewhat from the characteristics described herein, The Money Store does
not believe that such characteristics will vary materially.
</TABLE>
Composition of the Financed Student Loans
Distribution of the Financed Student Loans by Interest Rate
Percent of
Loans by
Number of Outstanding Outstanding
Interest Rate Loans Balance Balance
Less than 7.50% 17 $ 122,154 0.01%
7.50% to 8.49% 214,982 730,513,367 88.88
8.50% to 9.49% 16,319 91,234,987 11.10
9.50% to greater 1 7,880 *
---------------- ------------------- ----------------
Total 231,319 $821,878,388 100%
================ ==================== ================
- -----------
* less than 0.01%.
<TABLE>
<CAPTION>
Distribution of the Financed Student Loans by Outstanding Balance
Percent of
Loans by
Number of Outstanding Outstanding
Outstanding Balance Loans Balance Balance
<S> <C> <C> <C>
Less than $1,000 24,981 $ 14,970,366 1.82%
$1,000-$1,999 42,054 61,501,640 7.48
$2,000-$2,999 61,485 156,043,505 18.99
$3,000-$3,999 29,834 103,271,729 12.57
$4,000-$4,999 16,614 71,006,375 8.64
$5,000-$5,999 30,348 163,943,458 19.95
$6,000-$6,999 3,038 19,537,314 2.38
$7,000-$7,999 2,653 19,767,247 2.41
$8,000-$8,999 11,476 97,272,606 11.84
$9,000-$9,999 1,150 10,873,763 1.32
$10,000-$10,999 4,246 42,863,885 5.22
$11,000-$11,999 493 5,660,411 0.69
$12,000-$12,999 366 4,532,466 0.55
$13,000-$13,999 371 4,988,392 0.61
$14,000-$14,999 403 5,791,195 0.70
$15,000 or greater 1,807 39,854,037 4.85
--------------------- -------------------- -----------------
Total 231,319 $821,878,388 100.00%
===================== ====================== ==================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Distribution of the Financed Student Loans by Borrower Payment Status
Percent of
Loans by
Number of Outstanding Outstanding
Borrower Payment Status Loans Balance Balance
<S> <C> <C> <C>
Claims 377 $ 654,467 0.08%
Deferment 1,421 2,632,606 0.32
Forbearance 3,327 6,459,965 0.79
Grace 5,522 11,905,357 1.45
In School 187,091 669,124,674 81.41
Repayment
First Year Repayment 32,679 129,378,684 15.74
Second Year Repayment 626 1,427,260 0.17
Third Year Repayment 81 148,123 0.02
Fourth Year Repayment 195 147,252 0.02
--------------------- ------------------------ ----------------
Total 231,319 $ 821,878,388 100.00%
===================== ======================== ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Composition of the Financed Student Loans
Geographic Distribution of the Financed Student Loans
Percent of
Loans by
Number of Outstanding Outstanding
Location (1) Loans Balance Balance
<S> <C> <C> <C>
Alabama 296 $ 1,146,629 0.14%
Alaska 149 627,678 0.08
Arizona 2,236 7,440,702 0.91
Arkansas 408 1,537,328 0.19
California 49,602 198,392,422 24.14
Colorado 672 2,726,414 0.33
Connecticut 943 4,272,885 0.52
Delaware 165 660,086 0.08
District of Columbia 166 697,028 0.08
Florida 45,387 150,759,942 18.34
Foreign 379 1,927,999 0.23
Georgia 3,024 8,660,958 1.05
Guam 19 114,421 0.01
Hawaii 404 1,545,504 0.19
Idaho 187 676,320 0.08
Illinois 2,272 8,425,553 1.03
Indiana 1,527 4,038,297 0.49
Iowa 615 2,566,577 0.31
Kansas 1,350 4,499,440 0.55
Kentucky 378 1,336,762 0.16
Louisiana 1,299 4,149,635 0.50
Maine 268 1,033,954 0.13
Maryland 3,509 12,621,403 1.54
Massachusetts 3,416 10,447,720 1.27
Michigan 638 2,569,676 0.31
Military Atlantic 16 62,902 0.01
Military Europe 81 360,145 0.04
Military Pacific 11 29,599 (2)
Minnesota 1,026 3,171,397 0.39
Mississippi 565 1,504,026 0.18
Missouri 3,283 12,399,690 1.51
Montana 161 545,351 0.07
Nebraska 3,135 13,045,223 1.59
Nevada 188 756,616 0.09
New Hampshire 381 1,479,207 0.18
New Jersey 24,269 75,749,695 9.22
New Mexico 360 1,389,291 0.17
New York 13,608 54,774,739 6.66
North Carolina 8,366 24,553,929 2.99
North Dakota 47 157,911 0.02
Ohio 2,763 9,441,740 1.15
Oklahoma 491 1,862,574 0.23
Oregon 4,541 16,029,287 1.95
Pennsylvania 3,580 12,776,075 1.55
Puerto Rico 171 946,046 0.12
Rhode Island 210 1,008,937 0.12
South Carolina 839 3,320,052 0.40
South Dakota 68 220,511 0.03
Tennessee 527 1,774,298 0.22
Texas 30,269 111,088,707 13.52
Utah 174 731,124 0.09
Vermont 186 703,237 0.09
Virginia 9,572 27,649,111 3.36
Virgin Islands 69 240,871 0.03
Washington 2,103 7,714,356 0.94
West Virginia 308 1,130,605 0.14
Wisconsin 472 1,692,656 0.21
Wyoming 61 309,597 0.04
Other 109 383,549 0.05
--------------------- ----------------------- --------------------
Total 231,319 $821,878,388 100.00%
===================== ======================= =====================
- ------------------
(1) Based on the permanent billing addresses of the borrowers of the
Financed Student Loans shown on the Servicer's records.
(2) Less than 0.01%.
</TABLE>
Distribution of the Financed Student Loans by Date of Disbursement
Percent of
Loans by
Number of Outstanding Outstanding
Disbursement Date Loans Balance Balance
Pre-October 1993 18 $ 46,364 0.01%
October 1, 1993 and
thereafter 231,301 821,832,024 99.99
--------------------- --------------------- ---------------
Total 231,319 $821,878,388 100.00%
===================== ===================== ===============
<PAGE>
<TABLE>
<CAPTION>
Composition of the Financed Student Loans
Distribution of the Financed Student Loans by Guarantor
Percent of Loans
by Outstanding
Number of Outstanding g Balance
Guarantors Loans Balance
<S> <C> <C> <C>
American Student Assistance Guarantor 1,666 $ 2,910,735 0.35%
Arizona Educational Loan Program 544 2,201,058 0.27
California Student Aid Commission ("CSAC") 43,243 159,081,012 19.36
Connecticut Student Loan Foundation 33 137,577 0.02
Educational Credit Management Corporation 5,318 14,010,504 1.70
Florida Office of Student Financial Assistance ("FOSFA") 35,277 108,040,733 13.15
Georgia Higher Education Assistance Corporation 2,187 5,625,143 0.68
Great Lakes Higher Education Servicing Corporation ("GLHESC") 1,749 4,542,489 0.55
HICA 1,805 14,138,073 1.72
Illinois Student Assistance Commission 595 1,734,544 0.21
Kentucky Higher Education Assistance Authority 81 282,491 0.03
Michigan Higher Education Assistance Authority 4 17,125 *
Missouri Student Loan Program 1,289 3,507,396 0.43
Nebraska Student Loan Program ("NSLP") 4,803 19,187,936 2.33
New Jersey Higher Education Assistance Authority
("NJHEAA") 23,498 69,763,002 8.49
New York State Higher Education Services Corp.
("NYSHESC") 12,599 45,933,036 5.59
Northwest Education Loan Association 5,060 17,569,772 2.14
Oregon State Scholarship Commission 33 82,737 0.01
Student Loan Guarantee Foundation of Arkansas, Inc. 249 862,413 0.10
Pennsylvania Higher Education Assistance Authority
("PHEAA") 4,058 35,174,754 4.28
Texas Guaranteed Student Loan Corporation ("TGSLC") 29,625 103,260,020 12.56
United Student Aid Funds ("USAF") 56,723 212,341,803 25.84
Other 880 1,474,036 0.18
------------------ ---------------- -------------------
Total 231,319 $821,878,388 100.00%
================== ================== ===================
- --------------------
* Less than 0.01%
</TABLE>
<PAGE>
ANNEX B
CERTAIN INFORMATION RELATING
TO THE GUARANTORS
GUARANTORS FOR THE FEDERAL LOANS
Set forth below is certain historical information with respect to each
Guarantor of Federal Loans listed in Annex A above that is expected to guaranty
4% or more of the Financed Student Loans as of March 17, 1998 (the "Federal
Guarantors"). Substantially all of the obligations and operations of VSEAA have
been fully transferred to ECMC. Except as otherwise indicated below, the
information regarding each Federal Guarantor has been obtained from the
Department of Education's Loan Programs Data Books (each a "DOE Data Book"). No
independent verification has been or will be made by the Sellers or The Money
Store Inc. of such information.
GUARANTEE VOLUME. For the Federal Fiscal Year ending September 30,
1993, of all the guarantors of student loans in the United States, CSAC, FOSFA,
NJHEAA, NYSHESC, PHEAA, TGSLC and USAF ranked 3rd, 9th, 21st, 4th, 2nd, 5th and
1st, respectively, as measured by volume of Federal Loans (excluding
Consolidation Loans). The following table sets forth the approximate aggregate
principal amount of federally reinsured education loans (excluding refinanced
PLUS and SLS Loans) that have first become committed to be guaranteed by each of
the Federal Guarantors and by all guarantors of Federal Loans in each of the
five Federal Fiscal Years 1992 through 1996.*
<TABLE>
<CAPTION>
STAFFORD, UNSUBSIDIZED STAFFORD, SLS, PLUS AND
CONSOLIDATED LOANS GUARANTEED
DOLLARS IN MILLIONS
FEDERAL ALL
FISCAL YEAR CSAC FOSFA NJHEAA NYSHESC PHEAA TGSLC USAF GUARANTORS
----------- ---- ----- ------ ------- ----- ----- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1992 $ 1,333.7 $314.1 $ 268.0 $1,186.0 $1,410.2 $ 718.6 $3,372.1 $16,113.7
1993 1,507.4 437.9 289.3 1,338.2 1,707.0 876.8 4,087.6 19,355.6
1994 2,077.6 531.6 369.5 1,761.7 1,977.2 1,239.0 5,474.3 25,070.4
1995 1,805.6 523.6 314.7 1,670.1 2,221.5 1,339.6 6,326.3 24,213.0
1996 1,695.0 561.6 220.8 1,582.8 2,149.9 1,740.4 7,015.8 23,813.3
- ---------------------
1 As of 6/30/96.
* The information set forth in the table above has been obtained from the
Federal Fiscal Year 1993 DOE Data Book (with respect to fiscal years 1992 and
1993) and from the Federal Fiscal Year 1994-Fiscal Year 1996 DOE Data Book
(with respect to fiscal years 1994, 1995 and 1996).
</TABLE>
RESERVE RATIO. Each Federal Guarantor's reserve ratio is determined by
dividing its cumulative cash reserves by the original principal amount of the
outstanding loans it has agreed to guarantee. The term "cumulative cash
reserves" refers to cash reserves plus (i) sources of funds (including insurance
premiums, state appropriations, federal advances, federal reinsurance payments,
administrative cost allowances, collections on claims paid and investment
earnings) minus (ii) uses of funds (including claims paid to lenders, operating
expenses, lender fees, the Department's share of collections on claims paid,
returned advances and reinsurance fees). The "original principal amount of
outstanding loans" consists of the original principal amount of loans guaranteed
by such Federal Guarantor minus (i) the original principal amount of loans
canceled, claims paid, loans paid in full and loan guarantees transferred from
such Federal Guarantor to other guarantors, plus (ii) the original principal
amount of loan guarantees transferred to such Federal Guarantor from other
guarantors. The following table sets forth each Federal Guarantor's cumulative
cash reserves and their corresponding reserve ratios and the national average
reserve ratio for all guarantors for the five Federal Fiscal Years 1992 through
1996:*
<TABLE>
<CAPTION>
CSAC FOSFA NJHEAA NYSHESC
Federal Cumulative Cumulative Cumulative Cumulative
Fiscal Cash Reserve Cash Reserve Cash Reserve Cash Reserve
Year Reserves** Ratio Reserves** Ratio Reserves** Ratio Reserves** Ratio
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1992 $ 183.4 2.5% 27.8 1.6% $ 28.7 1.1% $ 71.3 0.8%
1993 185.5 2.3 44.1 2.2 18.3 0.7 71.4 0.7
1994 192.7 2.1 64.8 3.0 42.0 1.5 97.0 1.0
1995 237.0 2.3 66.6 2.6 40.2 1.5 115.2 1.1
1996 265.7 2.5 74.7 2.7 40.4 1.5 170.0 1.5
PHEAA TGSLC USAF
National
Federal Cumulative Cumulative Cumulative Average
Fiscal Cash Reserve Cash Reserve Cash Reserve Reserve
Year Reserves** Ratio Reserves** Ratio Reserves** Ratio Ratio
1992 $162.6 2.1% $ 41.8 1.0% $ 100.1 1.0% 1.5%
1993 113.4 1.3 55.7 1.1 169.9 1.3 1.7
1994 133.6 1.4 39.0 0.9 215.8 1.2 1.4
1995 166.3 1.5 73.9 1.4 377.9 1.5 1.6
1996 210.6 1.7 76.0 0.9 423.9 1.5 1.7
- -----------------
* The information set forth in the table above has been obtained from the
Federal Fiscal Year 1993 DOE Data Book (with respect to fiscal years 1992 and
1993) and from the Federal Fiscal Year 1994 - Fiscal Year 1996 DOE Data Book
(with respect to fiscal years 1994, 1995 and 1996). The cash reserves and the
reserve ratio increased substantially between Federal Fiscal Years 1992 and
1993. As described in the Federal Fiscal Year 1993 DOE Data Book, this
difference was caused, in part, because default costs were decreasing, while
insurance premiums, administrative costs allowances, and investment income were
increasing. According to the Department, available cash reserves may not always
be an accurate barometer of a guarantor's financial health.
** Dollars in millions.
</TABLE>
<PAGE>
RECOVERY RATES. A Federal Guarantor's recovery rate, which provides a
measure of the effectiveness of the collection efforts against defaulting
borrowers after the guarantee claim has been satisfied, is determined by
dividing the amount recovered from borrowers by such Federal Guarantor by the
aggregate amount of default claims paid by such Federal Guarantor during the
applicable Federal Fiscal Year with respect to borrowers. The table below sets
forth the recovery rates for each Federal Guarantor and the national average
recovery rates for all guarantors with respect to Stafford Loans for the five
Federal Fiscal Years 1992 through 1996:*
<TABLE>
<CAPTION>
RECOVERY RATE
Federal National
Fiscal Year CSAC FOSFA NJHEAA NYSHESC PHEAA TGSLC USAF AVERAGE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1992 32.2% 33.1% 54.3% 38.9% 46.51% 19.9% 28.1% 35.1%
1993 33.3 39.0 56.0 44.1 49.6 27.6 30.7 38.1
1994 33.59 41.79 56.11 41.87 52.90 34.29 29.28 39.38
1995 35.60 43.03 58.54 43.87 53.29 34.29 34.90 40.67
1996 37.61 45.50 60.54 46.20 55.03 41.39 39.21 43.20(1)
- ----------------
* The information set forth in the table above has been obtained from the
respective Federal Guarantor.
1 1996 national average does not include all guarantor data, as all guarantors
have not been processed.
</TABLE>
LOAN LOSS RESERVE. The DOE Data Book does not disclose whether any
Federal Guarantor has established a segregated loan loss reserve with respect to
its student loan guarantee obligations. Accordingly, to the extent that a
Federal Guarantor has not established such a segregated loan loss reserve, in
the event that a Federal Guarantor receives less than full reimbursement of its
guarantee obligations from the Department, the Federal Guarantor would be forced
to look to its existing assets to satisfy any such guarantee obligations not so
reimbursed.
RECENT LEGISLATION AFFECTING THE PROGRAM. The Balanced Budget Act of
1997 requires for FFELP guarantors to return to the Secretary $1.0 billion in
reserves by September 1, 2002 in accordance with statutory criteria. This
legislation also revised the minimum reserve levels required by the Act to
require a permanent minimum reserve level of 0.5% of the total attributable
amount of all outstanding loans guaranteed by the Guarantor.
CLAIMS RATE. For at least one of the five Federal Fiscal Years 1992
through 1996, CSAC, FOSFA, TGSLC and USAF experienced a claims rate in excess of
5%. For each Federal Fiscal Year that such Federal Guarantors' claims rate
exceeded 5%, the claims of such Federal Guarantors were not fully reimbursed by
the Department. No assurance can be made that any of the Federal Guarantors will
receive full reimbursement for reinsurance claims (or the full 98% maximum
reimbursement for loans first disbursed on or after October 1, 1993). The
following table sets forth the claims rate of each Federal Guarantor and the
national average for all guarantors of Federal Loans for the last five Federal
Fiscal Years 1992 through 1996:*
<PAGE>
<TABLE>
<CAPTION>
CLAIMS RATE
Federal NATIONAL
FISCAL YEAR CSAC FOSFA NJHEAA NYSHESC PHEAA TGSLC USAF AVERAGE
------- ------ ------ ------- ----- ------- ---- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1992 5.93% 4.93% 2.01 % 3.71% 2.84% 8.85% 5.00% 4.15%
1993 5.38 4.49 2.11 2.89 2.32 4.99 7.30 3.83
1994 4.12 3.88 2.27 2.81 2.2 5.21 4.99 3.44
1995 3.41 3.05 1.86 3.24 1.97 4.97 4.69 3.21
1996 4.45 4.17 2.24 2.86 1.58 3.90 4.65 3.25
- ---------------
* The information set forth in the table above has been obtained from the
respective Federal Guarantors.
</TABLE>
<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 SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE SELLERS, THE MONEY STORE INC. OR THE UNDERWRITERS. THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO 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 SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AT ANY TIME DOES NOT IMPLY
THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
Summary of Terms of the Series 1998-1 Notes ...... S- 4
Risk Factors...................................... S-27
The Sellers and The Money Store S-28
Servicers......................................... S-29
Description of the Securities..................... S-32
Description of the Transfer and
Servicing Agreements.............................. S-39
Description of the Surety Bonds................... S-52
Certain Tax Consequences.......................... S-56
Erisa Considerations.............................. S-57
Experts........................................... S-58
Legal Matters..................................... S-58
Underwriting ..................................... S-59
Index of Principal Terms.......................... S-61
Annex A - Certain Characteristics of
the Financed Student Loans...................... A-1
Annex B - Certain Information Relating
to the Guarantors............................... B-1
PROSPECTUS
Prospectus Supplement............................. 5
Available Information............................. 5
Reports to Securityholders........................ 5
Incorporation of Certain
Documents of Reference............................ 6
Summary of Terms ................................. 7
Risk Factors ..................................... 34
Formation of the Trusts .......................... 44
Use of Proceeds .................................. 45
The Sellers and the Money Store 45
The Servicers .................................... 46
The Student Loan Financing
Business ......................................... 46
The Financed Student Loan Pool.................... 67
Description of the Securities..................... 73
Description of the Transfer and
Servicing Agreements ............................. 89
Certain Legal Aspects of the
Financed Student Loans ........................... 111
Certain Tax Consequences ......................... 117
ERISA Considerations ............................. 119
Plan of Distribution.............................. 119
Legal Matters .................................... 119
Experts .......................................... 119
Financial Information ............................ 119
Rating............................................ 120
Index of Principal Terms ......................... 121
Appendix I - Auction Procedures
$410,000,000
[MONEY STORE LOGO]
CLASSNOTES TRUST 1997-I
ASSET BACKED NOTES
SERIES 1998-1
$100,000,000 AUCTION RATE CLASS A-7 NOTES
$100,000,000 AUCTION RATE CLASS A-8 NOTES
$100,000,000 AUCTION RATE CLASS A-9 NOTES
$110,000,000 AUCTION RATE CLASS A-10 NOTES
_________________________
PROSPECTUS SUPPLEMENT
__________________________
SALOMON SMITH BARNEY
FIRST UNION CAPITAL MARKETS CORP.
PRUDENTIAL SECURITIES INC.
March 16, 1998
<PAGE>
PROSPECTUS
STUDENT LOAN ASSET BACKED NOTES
(ISSUABLE IN SERIES)
TRANS-WORLD INSURANCE COMPANY
D/B/A EDUCAID, A WHOLLY-OWNED SUBSIDIARY OF THE MONEY STORE INC.
SELLER
CLASSNOTES INC.,
A WHOLLY-OWNED SUBSIDIARY OF THE MONEY STORE INC.
SELLER
THE MONEY STORE INC.
REPRESENTATIVE
This Prospectus relates to Student Loan Asset Backed Notes (the
"Notes") to be issued by one or more master trusts (each, a "Trust") in one or
more series (each, a "Series") and one or more classes (each, a "Class") on
terms determined at the time of sale and described in the related prospectus
supplement (each, a "Prospectus Supplement"). In conjunction with the offering
of Notes, a Trust may offer one or more Classes of Asset Backed Certificates
(the "Certificates" and together with the Notes, the "Securities") in one or
more transactions exempt from the registration requirements of the Securities
Act of 1933, as Amended (the "Securities Act"). The assets of a Trust will
include primarily (a) a pool of student loans as more fully described herein and
in the related Prospectus Supplement purchased and to be purchased by, or to be
contributed to, the eligible lender trustee set forth in the related Prospectus
Supplement on behalf of the related Trust (the "Eligible Lender Trustee"), from
Trans-World Insurance Company, doing business as Educaid ("Educaid" or a
"Seller") and/or ClassNotes Inc. ("ClassNotes" or a "Seller" and, together with
Educaid, the "Sellers") (such loans, together with any Additional Student Loans
(as defined herein) purchased from a Seller from time to time by, or contributed
by a Seller from time to time to, the Eligible Lender Trustee on behalf of such
Trust, the "Financed Student Loans"), (b) collections and other payments with
respect to the Financed Student Loans, (c) monies on deposit in certain trust
accounts to be established as set forth in the related Prospectus Supplement,
(d) if specified in the related Prospectus Supplement, one or more surety bonds
with respect to each Series of Notes (each, a "Note Surety Bond") and, solely
for the benefit of the Certificateholders, one or more surety bonds with respect
to each Class of Certificates (each, a "Certificate Surety Bond") and (e)
letters of credit, insurance policies, guarantees of The Money Store Inc. or
other forms of credit support as described herein and in the related Prospectus
Supplement. Each Series of Notes issued by a Trust, regardless of when issued,
will be collateralized by the assets of such Trust (other than the Certificate
Surety Bonds and the Note Surety Bonds, if any, relating to other Series of
Notes issued by a Trust and such other assets or forms of credit enhancement as
may be described in the related Prospectus Supplement). The interests of the
Certificateholders in the assets of the related Trust will be subordinated to
payments of principal due on the Notes issued by such Trust to the extent
described herein and in the related Prospectus Supplement. Funds on deposit in a
Pre-Funding Account established for a Trust will be used from time to time
during each Funding Period to make Additional Fundings with respect to the
Financed Student Loans. Certain of the Financed Student Loans will have been
originated by the Sellers and the remainder of the Financed Student Loans will
have been originated by independent third parties and subsequently sold to the
Sellers.
The per annum rate of interest for a Class of Notes for each Interest
Period will, subject to certain limitations described herein or in the
applicable Prospectus Supplement, equal the rate determined from time to time
for such Class pursuant to (i) the auction procedures described herein (such
Notes being referred to herein as "Auction Rate Notes"), (ii) the London
interbank offered rate for one-month U.S. dollar deposits ("LIBOR") plus the
amount set forth in the related Prospectus Supplement (such Notes being referred
to herein as "LIBOR Rate Notes"), (iii) the average bond equivalent rates of
weekly auctions of 91-day Treasury bills for each quarter (the "T-Bill Rate")
plus the amount set forth in the related Prospectus Supplement (such Notes being
referred to herein as "T-Bill Rate Notes") or (iv) such other procedures as may
be described in the applicable Prospectus Supplement. Interest on each Class of
Notes will be payable either (i) quarterly on the first Business Day following
the expiration of the first Interest Period for such Class ending in the months
set forth in the related Prospectus Supplement, (ii) monthly or weekly on the
first Business Day following the expiration of each related Interest Period, or
(iii) on such other dates and for such other periods as may be set forth in the
related Prospectus Supplement. However, if provided in a Prospectus Supplement,
interest accrued on a Class of Notes may, instead of being paid currently, be
capitalized and added to the outstanding principal amount thereof until the date
or event specified in such Prospectus Supplement (such Notes are referred to
herein as "Accrual Notes"). The date on which a Class of Notes is entitled to
receive a distribution (or, for Accrual Notes, have accrued interest added to
principal) is referred to as the "Note Distribution Date" for such Class.
Additionally, if set forth in a Prospectus Supplement, for certain Note
Distribution Dates certain payments received on or with respect to the Financed
Student Loans as payments of interest may be applied as principal payments to
some or all of certain Classes of Notes, without penalty or premium. The unpaid
principal of each Class of Notes is payable upon the related Final Maturity
Date.
The per annum rate of interest for the Certificates for each Interest
Period will, subject to certain limitations described herein, equal the rate
determined from time to time pursuant to (i) the auction procedures described
herein (such Certificates being referred to herein as the "Auction Rate
Certificates" and, together with the Auction Rate Notes, the "Auction Rate
Securities"), (ii) LIBOR plus an applicable margin, (iii) the T-Bill Rate plus
an applicable margin, or (iv) such other procedures as may be set forth at the
time of issuance of a Class of Certificates. Principal and interest on a Class
of Certificates will be payable on the first Business Day following the
expiration of each Interest Period for the Certificates of such Class or on such
other dates as may be set forth at the time of issuance of a Class of
Certificates (each, a "Certificate Distribution Date"); provided, however, that
except as otherwise set forth in a Prospectus Supplement, no principal payments
with respect to a Class of Certificates will be made until each Series of Notes
of the related Trust is paid in full.
After the respective initial Interest Period, each Interest Period for
each Class of Auction Rate Notes, will consist of between 7 days to one year,
subject to adjustment as described herein or in the related Prospectus
Supplement. Each Interest Period for each Class of LIBOR Rate Notes will, unless
otherwise set forth in a Prospectus Supplement, consist of the period beginning
on the 15th day of each month and ending on the 14th day of the following month.
Each Interest Period for each Class of T-Bill Rate Notes will, unless otherwise
set forth in a Prospectus Supplement, consist of the period beginning on the
15th day of each month and ending on the 14th day of the following month. Each
Interest Period for each Class of Notes for which the interest rate is
determined in some other manner will be as set forth in the related Prospectus
Supplement. Each Interest Period for a Class of Certificates will be determined
at the time of issuance of each such Class.
On each date on which a Series of Notes is issued, (each, a "Closing
Date"), if set forth in the related Prospectus Supplement, a monoline insurance
company may issue a Note Surety Bond, and on each Closing Date on which a Class
of Certificates is issued a monoline insurance company may issue a Certificate
Surety Bond, each such Surety Bond to be available under the terms described
herein and in the related Prospectus Supplement. Noteholders will have no
interest in or benefit from the Certificate Surety Bonds and Certificateholders
will have no interest in or benefit from the Note Surety Bonds.
The Final Maturity Date for each Class of Notes will be the Note
Distribution Date identified in the related Prospectus Supplement but, in no
instance, later than the Final Maturity Date for the Certificates of the related
Trust. On the Final Maturity Date applicable to a Class of Notes or the
Certificates, to the extent funds are not available to reduce the principal
balance of such Notes or Certificates to zero (including amounts transferred
from the Reserve Account as described herein) the applicable Surety Bond or
other forms of credit enhancement described in the applicable Prospectus
Supplement, if available for such Class of Notes or the Certificates, will be
drawn upon as described herein or in the related Prospectus Supplement. However,
payment in full of the Notes and the Certificates could occur earlier than such
dates as described herein or in the related Prospectus Supplement. In addition,
the Notes and Certificates will be repaid on any Note Distribution Date or
Certificate Distribution Date, as applicable, on which the Sellers exercise
their option to purchase the Financed Student Loans from the related trust,
exercisable when the aggregate principal balance of the Financed Student Loans
in a Trust is reduced to 10% or less of the Aggregate Pool Balance of such
Trust.
By purchasing a Class of Auction Rate Notes or Certificates, whether
in an Auction or otherwise, each prospective purchaser will be deemed to have
agreed: (i) to participate in Auctions on the terms described herein and in the
related Prospectus Supplement; and (ii) so long as the beneficial ownership of
the Auction Rate Notes or Auction Rate Certificates is maintained in book-entry
form to sell, transfer or otherwise dispose of the Auction Rate Notes or Auction
Rate Certificates only pursuant to a Bid or a Sell Order in an Auction, or to or
through a Broker-Dealer (as defined herein), provided that in the case of all
transfers other than those pursuant to an Auction, the owner of the Auction Rate
Notes or Auction Rate Certificates so transferred, its Participant or
Broker-Dealer advises the Auction Agent of such transfer.
It is expected that certain of the Financed Student Loans will be
guaranteed by private, non-profit corporations or state agencies, and are and
will be reinsured by the United States Department of Education (the
"Department") subject to the limitations described herein or in the related
Prospectus Supplement (such Financed Student Loans, the "Federal Loans"). It is
also expected that (i) certain of the Financed Student Loans, while guaranteed,
may not be reinsured by the Department (such Financed Student Loans, the
"Private Loans") and (ii) certain Financed Student Loans may be insured, subject
to the limitations described herein or in the related Prospectus Supplement, by
the Secretary of Health and Human Services (the "Secretary") (such Financed
Student Loans, the "HEAL Loans"). The obligation of the Secretary to insure HEAL
Loans is, subject to compliance with the Public Health Service Act, supported by
the full faith and credit of the United States.
SEE "RISK FACTORS" ON PAGE 35 HEREIN FOR A DESCRIPTION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
SECURITIES. IN ADDITION, SEE "RISK FACTORS" FOR CERTAIN FACTORS THAT SHOULD BE
CONSIDERED IN EVALUATING THE FINANCED STUDENT LOANS AS TO THE LIKELIHOOD OF
REALIZED LOSSES.
THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES DO NOT REPRESENT AN OBLIGATION OF OR AN INTEREST IN THE
ELIGIBLE LENDER TRUSTEE, THE INDENTURE TRUSTEE OR THE SELLERS OR, EXCEPT FOR THE
MONEY STORE GUARANTY DESCRIBED HEREIN OR IN A PROSPECTUS SUPPLEMENT, ANY OF
THEIR RESPECTIVE AFFILIATES, OTHER THAN THE TRUST, AND, EXCEPT FOR ANY SURETY
BONDS, THE SECURITIES ARE NOT INSURED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR ANY OTHER PERSON OR ENTITY, INCLUDING THE SELLERS, THE TRUST,
THE ELIGIBLE LENDER TRUSTEE, THE INDENTURE TRUSTEE OR ANY AFFILIATE OF ANY OF
THE FOREGOING.
Offers of the Notes may be made through one or more different methods,
including offerings through underwriters, as more fully described under "Plan of
Distribution" herein and in the related Prospectus Supplement. The intention of
any underwriter to make a secondary market in the Notes will be set forth in the
related Prospectus Supplement. There can be no assurance that a secondary market
for the Notes will develop, or if it does develop, that it will continue. This
Prospectus may not be used to consummate sales of a Series of Notes unless
accompanied by a Prospectus Supplement.
-------------------------------
The date of this Prospectus is March 11, 1997.
<PAGE>
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES COVERED BY SUCH PROSPECTUS
SUPPLEMENT, WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE
REQUIRED TO DELIVER SUCH PROSPECTUS SUPPLEMENT AND THIS PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS AND PROSPECTUS
SUPPLEMENT WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Notes to be offered
hereunder, among other things, will set forth with respect to such Series of
Notes: (i) the aggregate principal amount, Class Interest Rate or Rates or other
applicable rate or rates (or the manner of determining such rate or rates) and
authorized denominations of each Class of such Series of Notes; (ii) the length
of each Interest Period and the frequency of Note Distribution Dates for each
Class of such Series of Notes; (iii) certain information concerning the Financed
Student Loans to be included in the related Trust and insurance policies, third
party guarantees, guarantees of the Money Store or other forms of credit
enhancement or maturity protection, if any; (iv) the original principal amount
and current principal amount of each previously issued Class of Notes and
Certificates of the related Trust, along with the applicable Final Maturity Date
of each such Class, and (v) additional information with respect to the plan of
sale of such Notes.
AVAILABLE INFORMATION
The Representative has filed a Registration Statement under the
Securities Act of 1933, as amended (the "1933 Act"), with the Securities an
Exchange Commission (the "Commission") with respect to the Securities. The
Registration Statement and amendments thereof and to the exhibits thereto, as
well as such reports and other information, are available for inspection without
charge at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549; 7 World Trade Center, 13th Floor,
New York, New York 10048; and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of the Registration
Statement and amendments thereof and exhibits thereto may be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates. The Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of such site is http://www.sec.gov.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Securities offered
hereby and thereby nor an offer of the Securities 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.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the Securities and each Trust
will be provided to the Securityholders. See "Description of the
Securities--Reports to Securityholders." Unless otherwise set forth in the
related Prospectus Supplement, each Series of Notes and each Class of
Certificates will be issued in book-entry form and registered in the name of
Cede & Co., the nominee of The Depository Trust Company. All reports will be
provided to Cede, which in turn will provide such reports to its Participants
and Indirect Participants (as defined herein). Such Participants and Indirect
Participants will then forward such reports to the beneficial owners of
Securities. See "Description of the Securities--Book-Entry Registration."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by or on behalf of the Trust referred to in the
accompanying Prospectus Supplement with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), subsequent to the date of this Prospectus and prior to the
termination of the offering of the Notes issued by such Trust shall be deemed to
be incorporated by reference in this Prospectus and to be a part of this
Prospectus from the date of the filing of such documents. With respect to any
Class of Notes that is supported by a guaranty of The Money Store, The Money
Store's Annual Report on Form 10-K for the year ended December 31, 1995, and
Quarterly Reports on Form 10-Q for the periods ended March 31, June 30 and
September 30, 1996, which have been filed with the Commission, are hereby
incorporated by reference in this Prospectus and the related Prospectus
Supplement. With respect to any Class of Notes that is supported by a guaranty
of The Money Store, all documents filed by The Money Store pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of this Prospectus and prior to the termination of the
offering of the Notes shall be deemed to be incorporated by reference into this
Prospectus and the related Prospectus Supplement and to be a part hereof from
the respective dates of filing such documents. 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 the accompanying Prospectus
Supplement) or in any other 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 part of this Prospectus. The
Representative will provide without charge to each person to whom a copy of the
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). Requests for such copies should be directed to
The Money Store Inc., 3301 C Street, Suite 100-M, Sacramento, California 95816,
Attention: Investor Relations, Telephone: (916) 446-5000.
<PAGE>
SUMMARY OF TERMS
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE RELATED
PROSPECTUS SUPPLEMENT PREPARED IN CONNECTION WITH THE OFFERING OF A SERIES OF
NOTES (EACH, A "PROSPECTUS SUPPLEMENT") BY A TRUST. CERTAIN CAPITALIZED TERMS
USED IN THIS PROSPECTUS ARE DEFINED ELSEWHERE HEREIN ON THE PAGES INDICATED IN
THE "INDEX OF PRINCIPAL TERMS."
Issuer..............................One or more master trusts to be established
from time to time as set forth in the
related Prospectus Supplement (each, a
"Trust").
Securities Offered..................Asset Backed Notes (the "Notes") issuable
in one or more series (each, a "Series")
and one or more classes (each a
"Class"), one or more of which may be
Accrual Notes, planned amortization
Notes, principal only Notes, interest
only Notes, senior Notes or subordinate
Notes. The Notes will be available for
purchase in the denominations set forth
in the related Prospectus Supplement.
Unless otherwise specified in the
related Prospectus Supplement, the Notes
will be available in book-entry form
only. If the Notes are available in
book-entry form only, Noteholders will
not be entitled to receive a Definitive
Security except in the event that
Definitive Securities are issued in the
limited circumstances described herein.
See "Description of the
Securities--Definitive Securities."
Other Securities....................In conjunction with the offering of the
Notes, a Trust may offer one or more
Classes of Certificates (the
"Certificates" and together with the
Notes, the "Securities") in one or more
transactions exempt from the
registration requirements of the
Securities Act of 1933, as amended (the
"Securities Act"). Certain of the
originators of the Financed Student
Loans may receive, as part of the
consideration for such Financed Student
Loans, certificates in the related Trust
representing the right to receive
certain payments of interest (such
certificates are referred to herein as
the "Originators' Interests").
Neither the Certificates nor the
Originators' Interests are being offered
hereby and any information relating
thereto in this Prospectus and any
Prospectus Supplement is provided solely
because of its potential relevance to a
prospective purchaser of Notes.
Sellers.............................Trans-World Insurance Company, an Arizona
corporation doing business as Educaid
("Educaid" or a "Seller") and ClassNotes
Inc., a Delaware corporation
("ClassNotes" or a "Seller" and,
together with Educaid, the "Sellers").
Each Seller is a wholly-owned
subsidiary of The Money Store Inc., a
New Jersey corporation ("The Money
Store" or the "Representative"). The
Money Store is a financial services
company headquartered in Sacramento,
California and Union, New Jersey.
Master Servicers
and Servicers.....................Each Seller or an affiliate thereof
identified in the related Prospectus
Supplement will act as Master Servicer
with respect to the Financed Student
Loans sold or contributed by it to the
related Trust (in such capacity, the
"Master Servicer") and generally will
service the Financed Student Loans
originated by it during the Deferral
Phase. Pennsylvania Higher Education
Assistance Agency, an agency of the
Commonwealth of Pennsylvania ("PHEAA"),
AFSA Data Corporation, Great Lakes
Higher Education Corporation and/or
UNIPAC Service Corporation, or such
other entities as may be set forth in
the related Prospectus Supplement,
generally will service the Financed
Student Loans originated by the Sellers
during the Repayment Phase. With respect
to those Financed Student Loans
originated by third parties and
subsequently purchased by the Sellers
(the "Purchased Loans"), either the
originators of the Purchased Loans, the
applicable Seller or another party will
service such Purchased Loans during both
the Deferral Phase and the Repayment
Phase. Each party who may, from time to
time, be servicing the Financed Student
Loans is referred to herein as a
"Servicer" and collectively as the
"Servicers."
Eligible Lender Trustee..............The eligible lender trustee on behalf of a
Trust will be the entity named in the
applicable Prospectus Supplement and
will act as eligible lender trustee
under the applicable Trust Agreement and
hold legal title to the Financed Student
Loans on behalf of the related Trust
(the "Eligible Lender Trustee"). See
"Formation of the Trust--Eligible Lender
Trustee."
Indenture Trustee....................Bankers Trust Company, a New York banking
corporation, or such other entity as may
be named in the applicable Prospectus
Supplement, will act as trustee under
the Indenture (the "Indenture Trustee").
Auction Agent.......................Bankers Trust Company, or such other entity
as may be named in the Prospectus
Supplement, will act as auction agent
(in such capacity, the "Auction Agent")
under the Auction Agent Agreement with
respect to each Class of Auction Rate
Notes and Auction Rate Certificates.
Administrator........................Educaid or ClassNotes will act as
administrator (the "Administrator") on
behalf of a Trust pursuant to an
Administration Agreement (as amended and
supplemented from time to time, the
"Administration Agreement"), between the
applicable Administrator, the Eligible
Lender Trustee and Indenture Trustee.
Surety Provider......................If a Certificate Surety Bond or Note Surety
Bond is issued with respect to a Class
of Certificates or Notes, the monoline
insurance company which issued such
Certificate Surety Bond or Note Surety
Bond will be named in the related
Prospectus Supplement (the "Surety
Provider").
The Trusts...........................The Trust for a Series of Securities will
be established as set forth in the
related Prospectus Supplement by a Trust
Agreement (each as amended and
supplemented from time to time, a "Trust
Agreement"), between the applicable
Sellers, as depositor, and the Eligible
Lender Trustee. The activities of the
Trust and the Eligible Lender Trustee
will be limited by the terms of the
Trust Agreement to acquiring, owning,
selling and managing the Financed
Student Loans and the other assets of
the related Trust as described herein or
in the related Prospectus Supplement,
issuing the Securities and the
Originators' Interests, collecting and
making payments thereon and other
activities related thereto. Each Trust
will be treated as a partnership for
Federal income tax purposes. TMS Student
Holdings, Inc. ("Student Holdings"), a
wholly-owned subsidiary of The Money
Store, or such other entities as may be
named in a Prospectus Supplement, will
hold 1% of the Certificates and each of
the Originators' Interests, and will
serve as general partner of each Trust.
No Trust other than the initial Trust
will offer a Series of Notes pursuant to
this Prospectus and a related Prospectus
Supplement until a post-effective
amendment to the Registration Statement,
of which this Prospectus forms a part,
is filed with, and is declared effective
by, the Commission.
Subsequent Issuances................Each Trust may issue, from time to time,
several Series and Classes of
Securities. The payment priorities of
each Series and Class will be described
in the applicable Prospectus Supplement.
Such priorities may provide that some or
all payments of principal will be
distributed to the Classes of Securities
in order of their Final Maturity Date or
such other priority as may be set forth
in a Prospectus Supplement, regardless
of Series and regardless of when issued.
A Series of Notes may contain one or
more Classes of Notes with an earlier
Final Maturity Date or higher payment
priority than one or more Classes of
Notes of a previously issued or
subsequently issued Series. Also, a
Class of Certificates may have an
earlier Final Maturity Date or higher
payment priority than one or more
previously issued or subsequently issued
Classes of Certificates. In such event,
the Classes of Notes or Certificates
with the later Final Maturity Date or
lower payment priority will receive
limited or no payments of principal
until each of the Notes or Certificates,
as the case may be, with an earlier
Final Maturity Date or higher payment
priority, regardless of when issued,
have been paid in full or to the extent
described in a Prospectus Supplement.
Also, upon each issuance of Securities,
and during the related Funding Periods,
the related Trust will acquire Financed
Student Loans from the applicable
Sellers. Each Financed Student Loan
acquired by a Trust will serve as
collateral for each Series of Notes of
such Trust outstanding, or to be
outstanding in the future. See "Risk
Factors - Changing Assets of the Trusts"
and "Repayment of Principal" herein.
Assets of a Trust...................The assets of a Trust may include some or
all of the following, along with such
other assets as may be set forth in the
related Prospectus Supplement:
A. FINANCED STUDENT
LOANS........................The "Financed Student Loans" will consist
of loans to, or on behalf of, students
enrolled in accredited institutions of
higher education or in private primary
or secondary schools and will include
rights to receive payments made with
respect to such Financed Student Loans
and the proceeds thereof. On the Initial
Closing Date and on each additional
Closing Date, the related Seller will
sell or contribute Financed Student
Loans to the Eligible Lender Trustee on
behalf of the related Trust pursuant to
a Sale and Servicing Agreement (as
amended and supplemented from time to
time, the "Sale and Servicing
Agreement"), among the related Sellers,
the Master Servicer, the Administrator,
The Money Store and the related Eligible
Lender Trustee.
Certain of the Financed Student Loans will
have been originated by the related
Seller and the remainder of the Financed
Student Loans will have been originated
by independent third parties and
subsequently sold to such Seller. The
Financed Student Loans constituting the
assets of a Trust may vary from time to
time and may include some or all of the
following: (A) (i) Supplemental Loans
for Students ("SLS Loans"), (ii)
Parental Loans for Undergraduate
Students ("PLUS Loans"), (iii) Stafford
Loans (formerly known as Guaranteed
Student Loans), (iv) Unsubsidized
Stafford Loans and (v) Consolidation
Loans, all of which loans (collectively,
the "Federal Loans") are part of the
federal government's Federal Family
Education Loan Program (the "Federal
Program") (B) Health Education
Assistance Loans ("HEAL Loans") for
graduate students, which loans are part
of the program established under the
Public Health Service Act, as most
recently amended by the Health
Professions Education Extension
Amendments of 1992 (collectively, the
"Public Health Service Act"), and (C)
student loans (the "Private Loans")
originated under programs established by
banks, insurance companies, private
non-profit corporations, the Sellers,
and other non-governmental entities.
It is expected that the Private Loans
primarily will be originated under one
or more of the following programs: (A)
the Option 4 Loan Program (the "Option 4
Program") established by United Student
Aid Funds, Inc., a private non-profit
corporation located in Indianapolis,
Indiana, (B) the TERI Alternative Loansm
program for undergraduate and graduate
study (the "TERI Alternative Program")
and the Professional Education Plan
program for graduate and professional
study (the "PEP Program") established by
The Education Resources Institute, a
Massachusetts non-profit corporation
("TERI"), (C) the Parent Loans for
Elementary and Secondary Education (the
"PLEASE Program") established by TERI
and (D) the Private Academic Loan
Program (the "PAL Program") established
by HEMAR Insurance Company of America
("HICA"). The Private Loans may, to a
lesser extent, be originated under other
programs that will be identified in the
related Prospectus Supplement. The
various programs under which the Private
Loans may be originated are referred to
herein collectively as the "Private Loan
Programs." The Financed Student Loans
will be selected from the student loans
originated and purchased by the related
Seller based on the criteria specified
in the related Sale and Servicing
Agreement and described herein.
The payment of principal and interest on
all SLS Loans, PLUS Loans, Stafford
Loans, Unsubsidized Stafford Loans and
Consolidation Loans is guaranteed by
private, non-profit corporations or
state agencies and is reinsured by the
United States Department of Education
(the "Department"). The payment of
principal and interest on all HEAL Loans
is insured by the Secretary of Health
and Human Services (the "Secretary").
The payment of principal and interest on
all Private Loans is guaranteed by non-
governmental agencies or private
entities and is not reinsured by the
Department, the Secretary or any other
governmental agency. Each entity
guaranteeing payment of principal and
interest on a Financed Student Loan is
referred to herein as a "Guarantor."
Each Prospectus Supplement will identify
each Guarantor of more than 2% of the
Financed Student Loans then included in
the related Trust, or expected to be
included as of the related Closing Date.
With respect to Federal Loans originated
prior to October 1, 1993, the entire
principal amount of such loans and
accrued interest are fully guaranteed;
with respect to Federal Loans originated
on or after October 1, 1993, only 98% of
the principal amount of such loans and
accrued interest are guaranteed. Such
Guarantors are, in turn, reinsured by
the Department up to a maximum of 100%,
for such loans first disbursed prior to
October 1, 1993, and up to 98% for such
loans first disbursed on or after
October 1, 1993. The federal guarantee
of Federal Loans is contingent upon
compliance with a variety of
regulations, as further described
herein. With respect to HEAL Loans,
insurance by the Secretary is contingent
upon compliance with relevant provisions
of the Public Health Service Act as
further described herein.
With respect to substantially all of the
Federal Loans and the HEAL Loans, during
the period in which the related borrower
is in school and for certain authorized
periods as described in the Higher
Education Act or the Public Health
Service Act, respectively (the "Deferral
Phase"), the borrower is not required to
make payments on his or her Financed
Student Loan. With respect to Federal
Loans constituting Stafford Loans, the
Department will make all interest
payments during the related Deferral
Phase. For all other Federal Loans
(other than certain PLUS Loans) and HEAL
Loans, interest will not be paid during
the related Deferral Phase but, instead,
will be capitalized and added to the
principal balance of such Financed
Student Loan. With respect to the
Private Loans, monthly payments of
principal and interest generally will be
required to be made shortly after the
loan is disbursed. However, certain of
the Private Loans may contain provisions
permitting the obligor to pay only
interest while in school (and during
certain other periods) and defer
commencement of principal payments until
after graduation or withdrawal from
school. It is expected that 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 required to make
payments of principal and interest (the
"Repayment Phase"). The proportions of
such Financed Student Loans will vary
through the life of the related Trust.
The "Pool Balance" for the related Trust 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), after
giving effect to the following, without
duplication: (i) all payments in respect
of principal received by the related
Trust during such Collection Period from
or on behalf of borrowers and Guarantors
and, with respect to certain payments on
certain Financed Student Loans, the
Department or the Secretary
(collectively, "Obligors"), (ii) the
principal portion of all Purchase
Amounts received by the related Trust
for such Collection Period from the
Sellers, The Money Store or the Master
Servicer, and (iii) the principal
portion of all Additional Fundings made
from the Pre-Funding Account with
respect to such Collection Period.
"Collection Period" means, initially, the
period set forth in the related
Prospectus Supplement and thereafter,
the Collection Period means the calendar
month immediately following the end of
the previous Collection Period, unless
provided otherwise in the Prospectus
Supplement.
B. PRE-FUNDING ACCOUNT..........A Trust may include an account maintained
in the name of the related Indenture
Trustee (the "Pre-Funding Account") into
which will be deposited out of the net
proceeds of the sale of each Series of
Notes the amount set forth in the
related Prospectus Supplement. Subject
to the following sentence, such amount
(the "Pre-Funded Amount") will remain in
the Pre-Funding Account during the
period of time specified in the related
Prospectus Supplement (the "Funding
Period"). The Pre-Funded Amount will be
reduced from time to time by the amount
thereof used in connection with the
related Trust obtaining additional
Financed Student Loans during the
related Funding Period in accordance
with the Sale and Servicing Agreement
(each, an "Additional Funding"). The
Sellers expect that the amount of the
Additional Fundings will approximate
100% of each Pre-Funded Amount by the
last day of the Collection Period
preceding the Note Distribution Date
identified in the related Prospectus
Supplement. Any Pre-Funded Amount
remaining at the end of a Funding Period
will be distributed as set forth in the
related Prospectus Supplement. See
"Description of the Transfer and
Servicing Agreements--Additional
Fundings."
C. CAPITALIZED INTEREST ACCOUNT..On each Closing Date, to the extent set
forth in the related Prospectus
Supplement, the Sellers may make a cash
deposit in an account (the "Capitalized
Interest Account") in the name of the
Indenture Trustee on behalf of the
related Trust. The amount deposited
therein will generally be used by the
Indenture Trustee on each Note
Distribution Date and Certificate
Distribution Date for the related Trust
to make interest payments to Noteholders
and Certificateholders to the extent
funds on deposit in the Note
Distribution Account and Certificate
Distribution Account, respectively, are
insufficient for such purpose. Any
amounts remaining in the Capitalized
Interest Account after the period set
forth in the applicable Terms Supplement
will be applied as set forth in the
related Prospectus Supplement. See "-
-Collection Account; Note Distribution
Account; Certificate Distribution
Account; and Expense Account." Herein.
D. CAPITALIZED PRE-FUNDING ACCOUNT..On each Closing Date, to the extent set
forth in the related Prospectus
Supplement, the Sellers may make a cash
deposit in an account (the "Capitalized
Pre-Funding Account") in the name of the
Indenture Trustee on behalf of the
related Trust. On each Note Distribution
Date during certain Funding Periods as
set forth in a Prospectus Supplement,
the Indenture Trustee generally will
transfer from the Capitalized
Pre-Funding Account to the Note
Distribution Account an amount equal to
the pro rata portion (based upon
outstanding principal amount) of the
applicable Class of Notes of certain
amounts on deposit in the Pre-Funding
Account as of the first day of the prior
Collection Period, such amount being
referred to herein as the "Capitalized
Pre-Funding Requirement." Any amounts
remaining in the Capitalized Pre-Funding
Account on the last Note Distribution
Date of a Funding Period and not used
for such purposes will be distributed as
set forth in the related Prospectus
Supplement.
E. COLLECTION ACCOUNT; NOTE DISTRIBUTION
ACCOUNT; CERTIFICATE DISTRIBUTION
ACCOUNT; AND EXPENSE ACCOUNT ...Each Master Servicer will be required to
remit all collections received with
respect to the Financed Student Loans
for which it is acting as primary
servicer, and each Master Servicer shall
cause each other Servicer to remit all
collections received with respect to the
Financed Student Loans for which such
other Servicer is acting as primary
servicer, in the manner and at the times
set forth in the related Prospectus
Supplement to an account (the
"Collection Account") in the name of the
Indenture Trustee on behalf of the
related Trust. The Eligible Lender
Trustee will be required to remit
Interest Subsidy Payments, Special
Allowance Payments and insurance
payments from the Secretary it receives
to the Collection Account at the time
set forth in the related Prospectus
Supplement. See "Description of the
Transfer and Servicing
Agreements--Payments on Financed Student
Loans."
On each "Determination Date" (as defined in
the related Prospectus Supplement), the
Administrator will advise the Indenture
Trustee in writing of the applicable
Noteholders' Interest Distribution
Amount or Certificateholders' Interest
Distribution Amount. Additionally, at
the respective times set forth in the
related Prospectus Supplement, the
Administrator will advise the Indenture
Trustee in writing of the applicable
Noteholders' Principal Distribution
Amount (or, if applicable, the
Certificateholders' Principal
Distribution Amount) and the fees due to
the Master Servicer, the Administrator,
the Auction Agent, the Indenture
Trustee, the Eligible Lender Trustee,
the Surety Provider, if applicable, or
any other provider of credit enhancement
or such other fees as may be set forth
in a Prospectus Supplement (the
"Servicing Fee," "Administration Fee,"
"Auction Agent Fee," "Indenture Trustee
Fee," "Eligible Lender Trustee Fee,"
"Surety Provider Fee" and "Other Fees"
respectively, and, collectively, the
"Transaction Fees") for the preceding
month.
On each Note Distribution Date described in
the related Prospectus Supplement (other
than those relating to Accrual Notes
during the period such Notes are
capitalizing interest (the "Accrual
Period")), the Indenture Trustee will
transfer from the applicable Collection
Account to a separate account held with
and in the name of the Indenture Trustee
for the benefit of the Noteholders of
the related Trust (the "Note
Distribution Account"), from payments
received on or with respect to the
Financed Student Loans, as described in
the related Prospectus Supplement, an
amount up to the related Noteholders'
Interest Distribution Amount. For each
Note Distribution Date described in the
related Prospectus Supplement relating
to a Class of Accrual Notes during the
related Accrual Period, the related
Noteholders' Interest Distribution
Amount will be capitalized and added to
the principal amount of such Notes. As
will be set forth in the related
Prospectus Supplement, on certain Note
Distribution Dates relating to Classes
of Notes then entitled to receive
payments of principal, after making the
transfers set forth above, the Indenture
Trustee will transfer from the
Collection Account to the Note
Distribution Account from payments
received on or with respect to the
Financed Student Loans, as described in
the related Prospectus Supplement,
together with any "Additional Principal
Payments" (to the extent set forth in
the related Prospectus Supplement)
permitted to be made as set forth below
and in the applicable Prospectus
Supplement, an amount up to the
Noteholders' Principal Distribution
Amount; provided, however, that, if set
forth in a Prospectus Supplement, for
each month in which the first Note
Distribution Date occurs prior to the
Certificate Distribution Date in such
month, prior to transferring amounts to
the Note Distribution Account, the
Indenture Trustee will transfer to a
separate account held with and in the
name of the Indenture Trustee (the
"Expense Account"), from payments
received on or with respect to the
Financed Student Loans as set forth in
the related Prospectus Supplement, an
amount up to the Transaction Fees for
the month preceding such Note
Distribution Date and all overdue
Transaction Fees from prior months.
On each Certificate Distribution Date, the
Indenture Trustee will transfer from the
applicable Collection Account, from
payments received on or with respect to
the Financed Student Loans during the
periods set forth in a Prospectus
Supplement, (i) to the Expense Account,
the amount, if any, described in such
Prospectus Supplement and (ii) to a
separate account held with and in the
name of the Eligible Lender Trustee for
the benefit of the Certificateholders of
the applicable Trust (the "Certificate
Distribution Account" and, together with
the Note Distribution Account, the
"Distribution Accounts"), an amount up
to the related Certificateholders'
Interest Distribution Amount.
Additionally, on each Certificate
Distribution Date relating to the Class
of Certificates then entitled to receive
payments of principal, the Indenture
Trustee will transfer from the
Collection Account to the Eligible
Lender Trustee, an amount up to the
applicable Certificateholders' Principal
Distribution Amount.
On the Note Distribution Dates set forth in
the related Prospectus Supplement, the
Indenture Trustee will distribute from
the Expense Account (in addition to any
amounts transferred from the Reserve
Account as described herein) amounts to
pay the Transaction Fees in the
priorities and in the amounts set forth
in the related Prospectus Supplement.
On each Note Distribution Date, the
Indenture Trustee will distribute to the
Noteholders of the applicable Class as
of the related Note Record Date all
amounts transferred to the Note
Distribution Account as set forth above
and in the related Prospectus Supplement
(in addition to any other amounts
described in the related Prospectus
Supplement). On each Certificate
Distribution Date, the Eligible Lender
Trustee will distribute to the
Certificateholders of the applicable
Class as of the related Certificate
Record Date all amounts transferred to
the Certificate Distribution Account as
set forth above and in the related
Prospectus Supplement (in addition to
any other amounts described in the
related Prospectus Supplement).
Notwithstanding the foregoing, if set forth
in a Prospectus Supplement, principal
payments will be made to each Class of
Notes and the Certificates only in the
denominations set forth in such
Prospectus Supplement. If the amount in
the Note Distribution Account or the
Certificate Distribution Account
otherwise required to be applied as a
payment of principal either (i) is less
than the specified denomination or (ii)
exceeds an even multiple of such
specified denomination, then, in the
case of (i), such entire amount or, in
the case of (ii), such excess amount,
will not be paid as principal on the
upcoming Note Distribution Date or
Certificate Distribution Date, as the
case may be, but will be retained in the
Note Distribution Account or the
Certificate Distribution Account, as the
case may be, until the amount therein
available for payment of principal
(including any amounts transferred from
the Reserve Account) equals such
specified denomination.
On the Note Distribution Date or
Certificate Distribution Date specified
in the related Prospectus Supplement,
after making all required transfers to
the Note Distribution Account and, if
applicable, the Certificate Distribution
Account and the Expense Account, the
Indenture Trustee will transfer any
amounts remaining in the Collection
Account (other than amounts representing
payments received during such month or
payments of or with respect to principal
received in the immediately preceding
month) as set forth in the related
Prospectus Supplement.
Notwithstanding the foregoing, if there has
been an Event of Default with respect to
payment of the Notes, the related
Certificateholders will not be entitled
to any payments of principal or interest
until each outstanding Class of Notes
has been paid in full.
F. RESERVE ACCOUNT.................Pursuant to the related Sale and Servicing
Agreement, with respect to each Trust an
account (the "Reserve Account") may be
established with and maintained by the
Indenture Trustee or such other party as
may be set forth in a Prospectus
Supplement. In connection with the sale
of each Series of Notes, the related
Sellers may be required to make a
deposit into the related Reserve Account
on the related Closing Date of cash or
Eligible Investments equal to the amount
set forth in the related Prospectus
Supplement (the "Reserve Account
Deposit"). The Reserve Account Deposit
may be augmented on certain Note
Distribution Dates or Certificate
Distribution Dates as set forth in a
Prospectus Supplement. If set forth in
the related Prospectus Supplement,
certain amounts otherwise required to be
deposited into a Reserve Account may be
applied as Additional Principal Payments
on certain Classes of Securities. See
"Description of the Transfer and
Servicing Agreements--Distributions".
Amounts, if any, on deposit in a Reserve
Account generally will be available on
each Note or Certificate Distribution
Date to cover any shortfalls in payments
of the Transaction Fees, the
Noteholders' Distribution Amount and the
Certificateholders' Distribution Amount
for such applicable Note or Certificate
Distribution Date for which Available
Funds are insufficient to make such
payments and distributions. Amounts, if
any, on deposit in a Reserve Account
(other than amounts in excess of the
Specified Reserve Account Balance)
generally will not be available to cover
any unpaid Servicing Fee Carryover,
Noteholders' Interest Carryover or
Certificateholders' Interest Carryover
unless provided otherwise in the related
Prospectus Supplement.
Amounts, if any, in a Reserve Account on
any Note or Certificate Distribution
Date (after giving effect to all
distributions to be made or allocated on
such Note or Certificate Distribution
Date) in excess of the then applicable
Specified Reserve Account Balance
generally will be distributed to the
holders of the Originators' Interests
and then released to Student Holdings or
such other party as may be set forth in
a Prospectus Supplement. The "Specified
Reserve Account Balance" with respect to
any Note or Certificate Distribution
Date will be as set forth in the
applicable Terms Supplement and in no
event will such balance exceed the sum
of the aggregate outstanding principal
amount of the Notes and the Certificate
Balance of the related Trust. See
"Description of the Transfer and
Servicing Agreements-Credit
Enhancement--Reserve Account". If set
forth in a Prospectus Supplement, the
Specified Reserve Account Balance may
increase, decrease or be eliminated
based upon the occurrence of certain
events or with the consent of the Surety
Provider, if any, or other providers of
credit enhancement.
The funding and maintenance of a Reserve
Account is intended to enhance the
likelihood of timely payment to the
Noteholders of the Noteholders'
Distribution Amount and to the
Certificateholders of the
Certificateholders' Distribution Amount.
In certain circumstances, however, a
Reserve Account could be depleted and
shortfalls in distributions to the
Noteholders or the Certificateholders
could result. Further, as described
above and as set forth in the related
Prospectus Supplement, amounts otherwise
required to be deposited into a Reserve
Account may be applied as Additional
Principal Payments. Unless provided
otherwise in the related Prospectus
Supplement, notwithstanding the
depletion of the Reserve Account and
shortfalls in Available Funds, the
applicable Surety Provider, if any,
generally will be obligated to make Note
Surety Bond payments on each Note
Distribution Date to cover any
shortfalls with respect to the
Noteholders' Interest Distribution
Amount (but will have no obligation with
respect to any Noteholders Interest
Carryover) and, solely for the benefit
of Certificateholders, to make
Certificate Surety Bond Payments on each
Certificate Distribution Date to cover
any shortfalls with respect to the
Certificateholders' Interest
Distribution Amount (but will have no
obligation with respect to any
Certificateholders' Interest Carryover)
after application of such Available
Funds and any amounts on deposit in the
Reserve Account. See "Description of the
Surety Bonds--Certificate Surety Bond."
G. CREDIT ENHANCEMENT..............One or more surety bonds may be obtained in
connection with each Series of Notes
(each, a "Note Surety Bond") in favor of
the Eligible Lender Trustee on behalf of
the related Trust. If obtained, the Note
Surety Bond will be pledged to the
related Indenture Trustee and will
provide for coverage of timely payment
of all interest and ultimate payment of
all principal on each Class of Notes of
such Series, or such other amounts as
may be described in a Prospectus
Supplement. The holders of a Series of
Notes will have no right to or claim on
any Note Surety Bond relating to a
different Series of Notes or any amounts
paid or payable thereunder. The
Certificateholders will have no right to
or claim on any Note Surety Bond or any
amounts payable or paid thereunder. The
amount required to be paid under each
Note Surety Bond (the "Note Surety Bond
Payment") will be described in the
applicable Prospectus Supplement.
In connection with the sale of each Class
of Certificates, a separate surety bond
(each, a "Certificate Surety Bond" and,
together with the Note Surety Bonds, the
"Surety Bonds"), may be obtained in
favor of the related Eligible Lender
Trustee solely on behalf of the
Certificateholders of such Class and
will provide for coverage of timely
payment of all interest and ultimate
payment of all principal, due on such
Certificates, or such other amounts as
may be described in a Prospectus
Supplement. The Noteholders will have no
right to or claim on any Certificate
Surety Bond or any amounts payable or
paid thereunder. The amount required to
be paid under each Certificate Surety
Bond (the "Certificate Surety Bond
Payment") will be described in the
applicable Prospectus Supplement. See
"Description of the Transfer and
Servicing Agreements--Distributions."
If and to the extent specified in the
related Prospectus Supplement,
enhancement with respect to a Series or
any Class of Securities may also include
overcollateralization, a letter of
credit, one or more Classes of
subordinate Securities, derivative
products, third party guarantees
(including but not limited to the
guaranty of The Money Store described
below) or other forms of credit
enhancement (collectively,
"Enhancement"). The Enhancement with
respect to any Series or Class of
Securities may be structured to provide
protection against delinquencies and/or
losses on the Financed Student Loans,
against changes in interest rates, or
other risks, to the extent and under the
conditions specified in the related
Prospectus Supplement. Any form of
Enhancement will have certain
limitations and exclusions from coverage
thereunder, which will be described in
the related Prospectus Supplement.
If so specified in a Prospectus Supplement,
and in order to provide additional
credit enhancement, The Money Store may
provide a guaranty of amounts due on
certain Classes of Securities. The
amount and formula for calculating such
guaranty shall be as set forth in a
Prospectus Supplement.
H. TRANSFER AND SERVICING
AGREEMENTS...................Under a Sale and Servicing Agreement, the
Sellers will sell or contribute from
time to time Financed Student Loans to a
Trust, with the Eligible Lender Trustee
holding legal title thereto. In
addition, each Master Servicer will
agree with the related Trust to be
responsible for servicing, managing,
maintaining custody of and making
collections on the Financed Student
Loans. The obligations of the Sellers
and each Master Servicer under a Sale
and Servicing Agreement may include the
following, as such obligations may be
modified as set forth in a Prospectus
Supplement:
The applicable Seller and the Master
Servicer will be obligated to purchase
(which obligations, unless otherwise
limited in a Prospectus Supplement, also
will be obligations of The Money Store),
any Financed Student Loan if the
interests of the Noteholders, the
Certificateholders or a Surety Provider,
if any, therein are materially adversely
affected by a breach of any
representation, warranty or covenant
(including a Master Servicer's covenant
to service all the Financed Student
Loans in accordance with applicable
laws, restrictions and guidelines) made
by a Seller or the Master Servicer, as
the case may be, with respect to the
Financed Student Loan, if the breach has
not been cured following the discovery
by or notice to the related Seller or
the Master Servicer, as the case may be,
of the breach (it being understood that
any such breach that does not affect any
Guarantor's or the Secretary's
obligation to guarantee payment of such
Financed Student Loan will not be
considered to have a material adverse
effect for this purpose). If a Seller is
obligated to purchase a Financed Student
Loan as a result of such Seller's or a
third party's failure to originate such
Financed Student Loan in accordance with
the Higher Education Act, the Public
Health Service Act or a Private Loan
Program, as the case may be, and the
applicable Guarantee Agreement, it will
reimburse the applicable Trust for the
remaining principal balance of such
Financed Student Loan (plus certain
unamortized premiums) and any accrued
but unpaid interest thereon (including
interest to be capitalized). 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, the Public Health Service
Act or a Private Loan Program, as the
case may be, and the applicable
Guarantee Agreement, it will reimburse
the applicable Trust only up to the
amount the related Guarantor or the
Secretary would be obligated to pay if
not for such breach. In addition, with
respect to Federal Loans, a Seller or
the Master Servicer, as the case may be,
will be obligated to reimburse the
applicable Trust for 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
such Seller'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.
The Master Servicer will receive, subject
to the limitations set forth in the
following paragraph, a monthly fee (the
"Servicing Fee") equal to the amount set
forth in the related Prospectus
Supplement. The Servicing Fee applicable
to each Trust generally will be
allocated monthly out of Available Funds
and amounts on deposit in the Reserve
Account applicable to each Trust and
will be payable at the time set forth in
the related Prospectus Supplement.
Notwithstanding the foregoing, if the fee
payable to the Master Servicer as
described above for any month would
exceed the percentage set forth in the
related Prospectus Supplement of the
Pool Balance of the applicable Trust as
of the last day of the preceding
calendar month (the "Capped Amount"),
then the "Servicing Fee" for such month
will instead be the Capped Amount for
such month. The remaining amount in
excess of such Servicing Fee, together
with any such excess amounts from prior
months that remain unpaid (the
"Servicing Fee Carryover"), will be
payable to the Master Servicer on the
dates and in the priority set forth in
the related Prospectus Supplement.
Pursuant to a Sale and Servicing Agreement,
the Master Servicer (or such other party
as may be set forth in a Prospectus
Supplement) will agree with each Trust
to be responsible for, among other
things, preparing and filing with the
Department, the Secretary and the
Guarantors all appropriate claims forms
and other documents and filings on
behalf of the Eligible Lender Trustee in
order to claim the Interest Subsidy
Payments and Special Allowance Payments
from the Department, the applicable
insurance from the Secretary and the
Guarantee Payments from the Guarantors,
in respect of the Financed Student 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.
The Notes...........................Each Trust will issue one or more Series of
Notes pursuant to an Indenture (as
amended and supplemented from time to
time, the "Master Indenture") and a
related Terms Supplement authorizing
such Series, (each as amended from time
to time, a "Terms Supplement" and,
together with the Master Indenture and
each other Terms Supplement, the
"Indenture") between the related Trust
and an Indenture Trustee. Each Series of
Notes issued by a Trust, regardless of
when issued, will be secured by the
assets of the related Trust other than
Certificate Surety Bonds and Note Surety
Bonds relating to other Series of Notes
issued by such Trust, and such other
assets or forms of credit enhancement as
may be described in the related
Prospectus Supplement.
Each Class of Notes within a Series will
evidence the interests specified in the
related Prospectus Supplement, which may
(i) include the right to receive
distributions allocable only to
principal, only to interest or to any
combination thereof; (ii) include the
right to receive distributions only of
prepayments of principal throughout the
lives of the Notes or during specified
periods; (iii) be subordinated in its
right to receive distributions of
schedules payments of principal,
prepayments of principal, interest or
any combination thereof to one or more
other Classes of Notes of the related
Trust throughout the lives of the Notes
or during specified periods or may be
subordinated with respect to certain
losses or delinquencies; (iv) include
the right to receive such distributions
only after the occurrence of events
specified in the Prospectus Supplement;
(v) include the right to receive
distributions in accordance with a
schedule or formula or on the basis of
collections from designated portions of
the assets in the related Trust; (vi)
include, as to Notes entitled to
distributions allocable to interest, the
right to receive interest at a fixed
rate or an adjustable rate; and (vii)
include, as to Notes entitled to
distributions allocable to interest, the
right to distributions allocable to
interest only after the occurrence of
events specified in the related
Prospectus Supplement.
A. INTEREST...................... Each Class of Notes will bear interest at
the rate per annum (the "Class Interest
Rate") set forth in the related
Prospectus Supplement until (i) with
respect to Auction Rate Notes, the first
Auction Date for such Class, at which
time the related Class Interest Rate
will be reset pursuant to the Auction
Procedures described in Appendix I, (ii)
with respect to LIBOR Rate Notes, the
date set forth in the related Prospectus
Supplement at which time the related
Class Interest Rate will be reset based
upon One-Month LIBOR, or (iii) with
respect to T-Bill Rate Notes, the date
set forth in the related Prospectus
Supplement at which time the related
Class Interest Rate will be reset based
upon the T-Bill Rate. If a Class of
Notes bears interest based upon another
method, the related Prospectus
Supplement will describe such method. If
provided in a Prospectus Supplement, the
Trust may issue one or more Classes of
Accrual Notes, which Accrual Notes will
not be entitled to receive distributions
of interest during the related Accrual
Period. Instead, interest accrued on
such Accrual Notes will be capitalized
and added to the outstanding principal
amount thereof.
Interest on the outstanding principal
amount of each Class of Notes will
accrue initially from and including the
related Closing Date through and
including the date set forth in the
related Prospectus Supplement and,
thereafter, except as otherwise set
forth in the related Prospectus
Supplement, for periods (each, an
"Interest Period") consisting of (i)
with respect to Auction Rate Notes,
between 7 days to one year, subject to
adjustment as set forth in the Auction
Procedures described in Appendix I or in
the related Prospectus Supplement, (ii)
with respect to LIBOR Rate Notes,
generally a one-month period beginning
and ending on the dates set forth in the
related Prospectus Supplement, (iii)
with respect to T-Bill Rate Notes,
generally a one-month period beginning
and ending on the dates set forth in the
related Prospectus Supplement, or (iv)
with respect to Notes accruing interest
based on some other method, the period
set forth in the related Prospectus
Supplement. Interest on each Class of
Notes will be payable either (i)
quarterly on the first Business Day
following the expiration of the first
Interest Period for such Class ending in
January, April, July and October,
commencing on the date set forth in the
related Prospectus Supplement, (ii)
monthly or weekly on the first Business
Day following the expiration of each
related Interest Period, or (iii) on
such other dates and for such other
periods as may be set forth in the
related Prospectus Supplement. The date
on which a Class of Notes is entitled to
receive a distribution (or, for Accrual
Notes, have accrued interest added to
principal) is referred to as the "Note
Distribution Date" for such Class.
Distributions will be made to holders of
record of the related Class of Notes
(the "Noteholders") as of the second
Business Day (or such other day as may
be set forth in the related Prospectus
Supplement) preceding the related Note
Distribution Date (such day, the "Note
Record Date"). Unless otherwise set
forth in the related Prospectus
Supplement, interest will be calculated
on the basis of the actual number of
days elapsed in each Interest Period
divided by 360.
Notwithstanding the foregoing, unless
provided otherwise in the related
Prospectus Supplement, if the Class
Interest Rate with respect to a Class of
Notes for an Interest Period is greater
than the applicable Net Loan Rate, then
such Class Interest Rate for such Notes
for such Interest Period will be the Net
Loan Rate. However, in no event will the
Class Interest Rate for certain Classes
of Notes exceed the rate set forth in
the related Prospectus Supplement. The
"Net Loan Rate" for any Interest Period
for a Class of Notes will be set forth
in the related Prospectus Supplement.
Unless provided otherwise in the related
Prospectus Supplement, if the Class
Interest Rate for any Class of Notes for
any Interest 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 Period had interest
been calculated based on the applicable
Auction Rate, LIBOR Rate, T-Bill Rate or
other applicable rate, as the case may
be, over (b) the amount of interest on
the Class of Notes actually accrued in
respect of such Interest Period based on
the Net Loan Rate (such excess, together
with the unpaid portion of any such
excess from prior Interest Periods (and
interest accrued thereon calculated
based on One-Month LIBOR or the rate set
forth in the related Prospectus
Supplement), is referred to as the
"Noteholders' Interest Carryover") will
be paid on the dates and in the priority
set forth in the related Prospectus
Supplement. The rating of each Series or
Class of Notes will not address the
likelihood of the payment of the amount
of any Noteholders' Interest Carryover.
B. PRINCIPAL.....................All payments of principal on the Classes of
Notes issued by a Trust will be made in
an aggregate amount determined as set
forth in the related Prospectus
Supplement and will be paid at the times
and will be allocated among the Classes
of Notes of such Trust in the order and
amounts specified in the related
Prospectus Supplement.
The Prospectus Supplement for each Series
of Notes will set forth the date on
which the outstanding principal amount
of each Class of such Series will be
payable in full (each, a "Final Maturity
Date"). However, payment in full of any
Class of Notes is likely to occur sooner
than such Final Maturity Date as a
result of a variety of factors,
including the sale by a Trust of
Financed Student Loans and borrowers
leaving school and commencing repayment
of their Financed Student Loans.
Additionally, Additional Principal
Payments may be made on the Notes as set
forth in the related Prospectus
Supplement. See "The Financed Student
Loan Pool -- Maturity and Prepayment
Assumptions" herein.
C. MANDATORY REDEMPTION...........If a Pre-Funding Account has been
established with respect to a Trust and
a deposit therein has been made in
connection with the issuance of a Series
of Notes, the Class of Notes then
entitled to receive payments of
Principal will be redeemed in part on
the applicable Note Distribution Date on
or immediately following the last day of
each Funding Period in the event that
any amount remains on deposit in the
Pre-Funding Account after giving effect
to all Additional Fundings to be made on
or prior to such date. The aggregate
principal amount of Notes to be redeemed
will be an amount equal to the amount
then on deposit in the Pre-Funding
Account.
The Certificates.....................Concurrently with the issuance of each
Series of Notes, a Trust may issue one
or more Classes of Certificates pursuant
to a Trust Agreement and, after the
issuance of the initial Class of
Certificates of a Trust, a supplement
thereto (each, a "Trust Supplement").
The date of an initial issuance of the
Certificates is referred to herein as
the "Initial Closing Date." The
Certificates will represent undivided
participation interests in the related
Trust. Student Holdings, or such other
entities as may be named in a Prospectus
Supplement, will purchase a 1.0%
interest in the Certificates unless
provided otherwise in a Trust Agreement
or Trust Supplement. See "Formation of
the Trusts -- The Trust."
A. INTEREST.......................Each Class of Certificates will bear
interest at the rate per annum (the
"Certificate Rate") set forth in the
related Trust Agreement or the related
Trust Supplement until (i) with respect
to Auction Rate Certificates, the first
Auction Date for such Class, at which
time the related Certificate Rate will
be reset pursuant to the Auction
Procedures described in Appendix I, (ii)
with respect to LIBOR Rate Certificates,
the date set forth in the related Trust
Supplement at which time the related
Certificate Rate will be reset based
upon One-Month LIBOR or (iii) with
respect to T-Bill Rate Certificates, the
date set forth in the related Trust
Supplement at which time the related
Certificate Rate will be reset based
upon the T-Bill Rate. If a Class of
Certificates bears interest based upon
another method, the related Trust
Supplement will describe such method.
Interest on the outstanding principal
balance of each Class of Certificates
will accrue initially from and including
the related Closing Date through and
including the date set forth in the
related Trust Agreement or the related
Trust Supplement and thereafter, except
as otherwise set forth in a Trust
Supplement, for Interest Periods
consisting of (i) with respect to
Auction Rate Certificates, periods of
between 7 days and one year, subject to
adjustment as set forth in the Auction
Procedures described in Appendix I, (ii)
with respect to LIBOR Rate Certificates,
the one-month period beginning and
ending on the dates set forth in the
related Trust Supplement, (iii) with
respect to T-Bill Rate Certificates, the
one-month period beginning and ending on
the dates set forth in the related Trust
Supplement, and (iv) with respect to
Certificates accruing interest based on
some other method, the period set forth
in the related Trust Supplement.
Interest on the Certificates will be
payable on the first Business Day
following the expiration of each
Interest Period, or on such other dates
and for such other periods as may be set
forth in the related Trust Supplement
(each, a "Certificate Distribution
Date") to holders of record of the
Certificates (the "Certificateholders"
and, together with the Noteholders, the
"Securityholders") as of the second
Business Day (or such other day as may
be set forth in the related Trust
Supplement) preceding the related
Certificate Distribution Date (such day,
the "Certificate Record Date"). Unless
otherwise set forth in the related Trust
Agreement or Trust Supplement, interest
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
Certificate Rate with respect to a Class
of Certificates for an Interest Period
is greater than the Net Loan Rate for
the applicable Trust, then the
Certificate Rate for such Class of
Certificates for such Interest Period
will be such Net Loan Rate. However, in
no event will the Certificate Rate
exceed 16.0% per annum, or such other
rate as may be set forth in a Trust
Agreement or Trust Supplement.
As used herein, the term "Distribution
Date" refers to either a Note
Distribution Date or a Certificate
Distribution Date, as the context
requires.
If the Certificate Rate for any Class of
Certificates for any Certificate
Distribution Date is based on the Net
Loan Rate, the excess of (a) the amount
of interest on such Class of
Certificates that would have accrued in
respect of the related Interest Period
had interest been calculated based on
the applicable Auction Rate, LIBOR Rate
or other applicable rate, as the case
may be, over (b) the amount of interest
on the Class of Certificates actually
accrued in respect of such Interest
Period based on the Net Loan Rate (such
excess, together with the unpaid portion
of any such excess from prior Interest
Periods (and interest accrued thereon
calculated based on One-Month LIBOR), is
referred to as the "Certificateholders'
Interest Carryover") will be paid on the
dates and in the priority set forth in
the related Trust Agreement or Trust
Supplement. The rating of each Class of
Certificates does not address the
likelihood of the payment of any
Certificateholders' Interest Carryover.
B. PRINCIPAL......................Principal of the Class of Certificates for
each Trust with the earliest Final
Maturity Date, or such other Class as
may be set forth in the related Trust
Supplement, will be payable on each
Certificate Distribution Date on and
after which each Series of Notes of the
related Trust has been paid in full in
an amount generally equal to (i) the
amount of principal paid with respect to
the Financed Student Loans of the
related Trust (plus any Realized Losses
thereon), (ii) proceeds realized upon
the sale of Financed Student Loans by
the related Trust and (iii) Additional
Principal Payments, if any, or such
other amount as may be set forth in the
related Trust Agreement or a Trust
Supplement. Also, on the Final Maturity
Date for a Class of Certificates, the
Certificateholders' Principal
Distribution Amount also will include
the then outstanding principal balance
of such Class of Certificates. See
"Description of the Transfer and
Servicing Agreements--Distributions."
The outstanding principal amount of a Class
of Certificates will be payable in full
on the date set forth in the related
Trust Agreement or a related Trust
Supplement (each, a "Certificate Final
Maturity Date"). However, payment in
full of the Certificates is likely to
occur sooner than such Certificate Final
Maturity Date as a result of a variety
of factors, including the sale by the
related Trust of Financed Student Loans
and borrowers leaving school and
commencing repayment of their Financed
Student Loans. Additional Principal
Payments may be made on the Certificates
to the extent described in the related
Trust Agreement or Trust Supplement. See
"The Financed Student Loan
Pool--Maturity and Prepayment
Assumptions."
If a Certificate Surety Bond has been
obtained, on the Certificate Final
Maturity Date for each Class of
Certificates, the applicable Surety
Provider will be required to provide for
payment to the related Trust pursuant to
the related Certificate Surety Bond of
an amount generally equal to the excess,
if any, of the unpaid principal balance
of such Class of Certificates on such
Certificate Final Maturity Date over
amounts on deposit in the Certificate
Distribution Account, after taking into
account the required application of
funds in the remaining Trust Accounts,
including but not limited to the Reserve
Account, pursuant to the related Sale
and Servicing Agreement, to the payment
of principal on such Class of
Certificates on such Certificate Final
Maturity Date, subject to certain
exceptions. Any such amount will be
distributed to Certificateholders of
such Class of Certificates on the
related Certificate Final Maturity Date.
If, however, no required payments are
made under a Certificate Surety Bond,
holders of the Certificates of such
Class would likely incur losses.
C. SUBORDINATION OF THE
CERTIFICATES.................The rights of Certificateholders in the
assets of the related Trust (other than
with respect to the related Certificate
Surety Bond) to receive payments of
principal will be subordinated to the
rights of the Noteholders of the related
Trust to the extent described herein.
See "Description of the Transfer and
Servicing Agreement--Credit Enhancement-
-Subordination of the Certificates."
Monthly Advances.....................If the Master Servicer has applied for a
Guarantee Payment from a Guarantor, an
Interest Subsidy Payment or a Special
Allowance Payment from the Department or
an insurance payment from the Secretary,
and the Master Servicer has not received
the related payment prior to the end of
the Collection Period immediately
preceding the Note Distribution Date or
Certificate Distribution Date on which
such amount would be required to be
distributed as a payment of interest,
the Representative may, no later than
the Determination Date relating to such
Note Distribution Date or Certificate
Distribution Date, as the case may be,
deposit into an account in the name of
the Indenture Trustee (the "Monthly
Advance Account") an amount up to the
amount of such payments applied for but
not received (such deposits by the
Representative are referred to herein as
"Monthly Advances"). Monthly Advances
will be distributed to the Noteholders
or Certificateholders on the upcoming
Note Distribution Date or Certificate
Distribution Date, as the case may be.
Monthly Advances are recoverable by the
Representative from the source for which
such Monthly Advance was made.
Optional Purchase....................The applicable Sellers may, with the
consent of the Surety Provider, if any,
repurchase all remaining Financed
Student Loans from a Trust, and thus
effect the early retirement of the
related Notes and Certificates issued by
such Trust, on any Certificate
Distribution Date on or after which the
Pool Balance of such Trust is equal to
10% or less of the Aggregate Pool
Balance of such Trust, or such other
percentage set forth in a Prospectus
Supplement, 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. See "Description of the
Transfer and Servicing
Agreements--Termination." The "Aggregate
Pool Balance" of a Trust will equal the
Pool Balance of such Trust as of the
date set forth in the related Prospectus
Supplement (each, a "Cut-off Date") of
each Series of Notes issued by the
related Trust plus the principal balance
of each Additional Student Loan pledged
to the Indenture Trustee on behalf of
the Issuer on each Transfer Date through
the last Funding Period.
Tax Considerations...................In the opinion of special Federal tax
counsel for the applicable Trust and
special tax counsel for the Trust in the
jurisdiction in which such Trust is
formed, each Series of Notes will be
characterized as debt for Federal and
state income tax purposes, respectively,
although there is no specific authority
with respect to the characterization for
Federal or state income tax purposes of
securities having the same terms as the
Notes.
In the opinion of special Federal tax
counsel for the applicable Trust, for
Federal income tax purposes the Trust
will not be characterized as an
association (or publicly traded
partnership) taxable as a corporation.
The Certificateholders will agree to
treat the related Trust as a partnership
in which they are partners for Federal
income tax purposes. However, there are
no cases or rulings on similar
transactions involving a trust that
issues debt and equity interests with
terms similar to those of the Notes and
the Certificates. Alternative
characterizations are possible, but
would not result in materially adverse
Federal tax consequences to
Certificateholders.
Due to the method of allocation of Trust
income to the Certificateholders, cash
basis holders may, in effect, be
required to report income from the
Certificates on an accrual basis. In
addition, because tax allocations and
tax reporting will be done on a uniform
basis, but Certificateholders may be
purchasing Certificates at different
times and at different prices,
Certificateholders may be required to
report on their tax returns taxable
income that is greater or less than the
amount reported to them by the related
Trust.
See "Certain Tax Consequences" for
additional information concerning the
application of Federal and state tax
laws with respect to the Notes, the
Trusts and the Certificates.
ERISA Considerations...............Each Prospectus Supplement will set forth
the extent, if any, to which Notes may
be purchased by or on behalf of employee
benefit plans, retirement arrangements,
individual retirement accounts and Keogh
Plans. See "ERISA Considerations."
The Certificates may not be acquired by or
on behalf of any employee benefit plan,
retirement arrangement, individual
retirement account or Keogh Plan subject
to either Title I of the Employee
Retirement Income Security Act of 1974,
as amended ("ERISA"), or Section 4975 of
the Internal Revenue Code of 1986, as
amended. See "ERISA Considerations--The
Certificates."
Registration of
Notes..............................Securities may be represented by global
certificates registered in the name of
Cede & Co. ("Cede"), as nominee of The
Depository Trust Company ("DTC"), or
another nominee. In such case,
Securityholders will not be entitled to
receive definitive certificates
representing such Holders' interests,
except in certain circumstances
described in the related Prospectus
Supplement. See "Description of the
Securities--Book-Entry Registration."
Rating of the
Securities........................It is a condition to the issuance and sale
of each Series and Class of Notes that
they each be rated by at least one
nationally recognized statistical rating
organization (a "Rating Agency") in one
of its four highest applicable rating
categories (or an equivalent short-term
rating for certain Classes of Notes
having a Final Maturity Date of no more
than 13 months after the related Closing
Date). The rating or ratings applicable
to Notes of each Series offered hereby
and by the related Prospectus Supplement
will be as set forth in the related
Prospectus Supplement. 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.
<PAGE>
RISK FACTORS
Prospective purchasers of the Securities should consider carefully the
following discussion of certain risk factors associated with an investment in
the Securities.
LIMITED LIQUIDITY. There can be no assurance that a secondary market
for the Securities will develop or, if a secondary market does develop, that it
will provide Securityholders with liquidity of investment or that it will
continue for the life of the Securities.
FAILURE TO COMPLY WITH LOAN ORIGINATION AND SERVICING PROCEDURES FOR
FEDERAL LOANS AND HEAL LOANS. The Higher Education Act and the Public Health
Service Act, including the respective implementing regulations thereunder,
require lenders and their assignees making and servicing Federal Loans or HEAL
Loans, as the case may be, and guarantors guaranteeing Federal Loans to follow
specified procedures, including due diligence procedures, to ensure that the
Federal Loans and HEAL Loans are properly made and disbursed to, and repaid on a
timely basis by or on behalf of, borrowers. Certain of those procedures, which
are specifically set forth in the Higher Education Act and the Public Health
Service Act, are summarized herein. See "The Student Loan Financing Business"
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 Public Health Service Act, as the case may be, be made, the borrower's
responsibilities under the loan be explained to him or her, the promissory note
evidencing the loan be executed by the borrower and then that the loan proceeds
be disbursed in a specified manner by the lender. After the loan is made, the
lender must establish repayment terms with the borrower, properly administer
deferrals and forbearances and credit the borrower for payments made. If a
borrower becomes delinquent in repaying a loan, a lender must perform certain
collection procedures (primarily telephone calls and demand letters) which vary
depending upon the length of time a loan is delinquent. The Master Servicer will
agree pursuant to the related Sale and Servicing Agreement to perform (or
provide for third party servicers to perform) servicing and collection
procedures on behalf of the related Trust. However, failure to follow these
procedures or failure of the applicable Seller or any other originator of the
Purchased Loans to follow procedures relating to the origination of any Federal
Loans may result in the Department's refusal to make reinsurance payments to the
Guarantors or to make Interest Subsidy Payments and Special Allowance Payments
to the applicable Eligible Lender Trustee with respect to such Federal Loans or
in the Guarantors' refusal to honor their Guarantee Agreements with the
applicable Eligible Lender Trustee with respect to such Federal Loans. Failure
of the Guarantors to receive reinsurance payments from the Department could
adversely affect the Guarantors' ability or legal obligation to make payments
under the Guarantee Agreements ("Guarantee Payments") to the applicable Eligible
Lender Trustee. Similarly, the failure to follow required procedures in
originating or servicing HEAL Loans may result in the Secretary denying
insurance coverage for such HEAL Loans. Loss of any such Guarantee Payments,
Interest Subsidy Payments or Special Allowance Payments with respect to Federal
Loans, or insurance payments from the Secretary with respect to HEAL Loans,
could adversely affect the amount of Available Funds for any Collection Period
and the related Trust's ability to pay principal and interest on the Notes and
the Certificates. Under certain circumstances, pursuant to a Sale and Servicing
Agreement, the applicable Seller is obligated to purchase, or the Master
Servicer is obligated to purchase (which obligations, unless otherwise limited
in a Prospectus Supplement, also will be obligations of The Money Store), any
Financed Student Loan if a breach of the representations, warranties or
covenants of the applicable Seller 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 or the Certificateholders therein and such breach
is not cured within any applicable cure period (it being understood that any
such breach that does not affect any Guarantor's or the Secretary's obligation
to guarantee payment of such Financed Student Loans will not be considered to
have such a material adverse effect). In addition, under certain circumstances
pursuant to a Sale and Servicing Agreement, the applicable Seller or the Master
Servicer, as the case may be, is obligated to reimburse the related Trust (which
obligations (unless otherwise limited in a Prospectus Supplement) also will be
obligations of The Money Store) for 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 applicable Seller's
representations and warranties or the Master Servicer's covenants, as the case
may be, with respect to a Federal Loan. These purchase and reimbursement
obligations also will apply with respect to the Purchased Loans. If the
applicable Seller is obligated to purchase a Financed Student Loan as a result
of such Seller's or a third party's failure to originate such Financed Student
Loan in accordance with the Higher Education Act and the applicable Guarantee
Agreement, the Public Health Service Act or the applicable Private Loan Program,
as the case may be, it will reimburse the related Trust for the remaining
principal balance of such Financed Student Loan (plus certain unamortized
premiums) and any accrued but unpaid interest thereon. 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, the Public Health Service Act or the
applicable Private Loan Program, as the case may be, it will reimburse the
related Trust only up to the amount the related Guarantor or the Secretary would
be obligated to pay if not for such breach. See "Description of the Transfer and
Servicing Agreements--Sale of Financed Student Loans; Representations and
Warranties" and "--Servicer Covenants." There can be no assurance, however, that
the applicable Seller, the Master Servicer or The Money Store will have the
financial resources to do so. The failure of the applicable Seller to so
purchase or the Master Servicer to so purchase a Financed Student Loan would
constitute a breach of the related Sale and Servicing Agreement, enforceable by
the Eligible Lender Trustee on behalf of the related Trust or by the Indenture
Trustee on behalf of the Noteholders, but would not constitute an Event of
Default under the related Master Indenture or a Terms Supplement or permit the
exercise of remedies thereunder.
FAILURE TO COMPLY WITH LOAN ORIGINATION AND SERVICING PROCEDURES FOR
PRIVATE LOANS. Each Private Loan Program prescribes rules and procedures
applicable to originating and servicing Private Loans. Failure to make or
service properly a Private Loan pursuant to the applicable Private Loan Program
could adversely affect the Eligible Lender Trustee's ability to obtain a
Guarantee Payment from the applicable Guarantor. Loss of such Guarantee Payments
could adversely affect the amount of Available Funds for any Collection Period.
COMMINGLING RISK OF CONSOLIDATION OF FEDERAL BENEFIT BILLINGS AND
RECEIPTS WITH OTHER TRUSTS. Due to a recent change in Department policy limiting
the granting of new lender identification numbers, an Eligible Lender Trustee
will be allowed under a Trust Agreement to permit trusts, other than the related
Trust established by a Seller to securitize Financed Student Loans, to use the
Department lender identification number applicable to the related Trust. In that
event, the billings submitted to the Department for Interest Subsidy and Special
Allowance Payments on loans in the Trust would be consolidated with the billings
for such payments for Financed Student Loans in other trusts using the same
lender identification number and payments on such billings would be made by the
Department in lump sum form. Such lump sum payments would then be allocated
among the various trusts using the same lender identification number.
In addition, the sharing of the lender identification number by a
Trust with other trusts may result in the receipt of claim payments by
guarantors in lump sum form. In that event, such payments would be allocated
among the trusts in a manner similar to the allocation process for Interest
Subsidy and Special Allowance Payments.
The Department regards an Eligible Lender Trustee as the party
primarily responsible to the Department for any liabilities owed to the
Department or guarantors resulting from an Eligible Lender Trustee's activities
in the Federal Program. As a result, if the Department or a guarantor were to
determine that an Eligible Lender Trustee owes a liability to the Department or
a guarantor on any Financed Student Loan for which such Eligible Lender Trustee
is or was legal titleholder, including loans held in a Trust or other trusts,
the Department or guarantor might seek to collect that liability by offset
against payments due the Eligible Lender Trustee under the Trust. In the event
that the Department or a guarantor determines such a liability exists in
connection with a trust using the shared lender identification number, the
Department or a guarantor would be likely to collect that liability by offset
against amounts due such Eligible Lender Trustee under the shared lender
identification number, including amounts owned in connection with a Trust.
In addition, other trusts using the shared lender identification
number may in a given quarter incur origination fees that exceed the Interest
Subsidy and Special Allowance Payments payable by the Department on the loans in
such other trusts, resulting in the consolidated payment from the Department
received by an Eligible Lender Trustee under such shared lender identification
number for that quarter equaling an amount that is less than the amount owed by
the Department on the loans in the Trust for that quarter.
The Trust Agreement for a Trust and the trust agreement for other
trusts established by the Sellers which share the lender identification number
to be used by a Trust (such Trust and such other trusts, collectively, the
"Seller Trusts") may require a Seller Trust (including a Trust) to indemnify the
other Seller Trusts for a shortfall or an offset by the Department or a
guarantor arising from the Financed Student Loans held by the Eligible Lender
Trustee on such Seller Trust's behalf.
CHANGING ASSETS OF THE TRUSTS. Upon each issuance of Notes, and during
the related Funding Periods, the related Trust will acquire Financed Student
Loans from the applicable Sellers. Each Financed Student Loan acquired by a
Trust will serve as collateral for each Series of Notes of such Trust
outstanding, or to be outstanding in the future. Therefore, the Financed Student
Loans constituting the assets of a Trust will vary during the term of the Trust.
Likewise, the percentage of the Financed Student Loans consisting of Federal
Loans, HEAL Loans and Private Loans also will vary.
REPAYMENT OF PRINCIPAL. If set forth in the related Prospectus
Supplement, amounts otherwise required to be deposited into the Reserve Account
may be applied as an Additional Principal Payment on the Class of Notes
specified in the related Prospectus Supplement (or, after all Notes have been
paid in full, the Certificates). Such Additional Principal Payments will result
in accelerated payments of principal on the Notes.
Each Trust may issue, from time to time, several Series and Classes of
Securities. The payment priorities of each Series and Class will be described in
the applicable Prospectus Supplement. Such priorities may provide that some or
all payments of principal will be distributed to the Classes of Securities in
order of their Final Maturity Date or such other priority as may be set forth in
a Prospectus Supplement, regardless of Series and regardless of when issued. A
Series of Notes may contain one or more Classes of Notes with an earlier Final
Maturity Date or higher payment priority than one or more Classes of Notes of a
previously issued or subsequently issued Series. Also, a Class of Certificates
may have an earlier Final Maturity Date or higher payment priority than one or
more previously issued or subsequently issued Classes of Certificates. In such
event, the Classes of Notes or Certificates with the later Final Maturity Date
or lower payment priority will receive limited or no payments of principal until
each of the Notes or Certificates, as the case may be, with an earlier Final
Maturity Date or higher payment priority, regardless of when issued, have been
paid in full or to the extent described in a Prospectus Supplement. Also, upon
each issuance of Securities, and during the related Funding Periods, the related
Trust will acquire Financed Student Loans from the applicable Sellers. Each
Financed Student Loan acquired by a Trust will serve as collateral for each
Series of Notes of such Trust outstanding, or to be outstanding in the future.
PRINCIPAL BALANCE OF SECURITIES MAY EXCEED INITIAL POOL BALANCE OF THE
INITIAL FINANCED STUDENT LOANS AND PRE-FUNDED AMOUNT. On each Closing Date, the
aggregate initial principal amount of the Notes and the principal balance of the
Certificates of a Trust may be greater than the initial Pool Balance of the
initial Financed Student Loans as of the Cut-off Date and the Pre-Funded Amount
as of the Closing Date for such Trust. Each initial Financed Student Loan may be
purchased by the applicable Trust for an amount greater than the principal
balance thereof (including any accrued interest thereon expected to be
capitalized upon repayment) as of the Cut-off Date. In addition, each Financed
Student Loan purchased during the Funding Period may be purchased for an amount
greater than the principal balance thereof. 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 and the principal balance of the Certificates will be equal to or less
than the sum of the Pool Balance, the Pre-Funded Amount and the amounts in the
other Trust Accounts. As a result, if an Event of Default should occur under the
related 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 and the Certificates exceeded the sum of the Pool Balance, the Pre-Funded
Amount and the amounts in the other Trust Accounts, such Financed Student Loans
would likely have to be liquidated at a premium for Certificateholders and, in
some circumstances, Noteholders not to suffer a loss.
VARIABILITY OF ACTUAL CASH FLOWS; INABILITY OF INDENTURE TRUSTEE TO
LIQUIDATE FINANCED STUDENT LOANS. 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 deferral 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
Securityholders. In addition, failures by borrowers of student loans generally
to pay timely the principal and interest due on such student loans could
obligate the Guarantors to make payments thereon, which could adversely affect
the solvency of the Guarantors and their ability to meet their guarantee
obligations (including with respect to the Financed Student Loans). The
inability of any Guarantor to meet its guarantee obligations could reduce the
amount of principal and interest paid to the Securityholders. The effect of such
factors, including the effect on a Guarantor's ability to meet its guarantee
obligations with respect to the Financed Student Loans or the Trust's ability to
pay principal and interest with respect to the Securities, is impossible to
predict. Pursuant to the 1992 Amendments, under Section 432(o) of the Higher
Education Act, if the Department has determined that a Guarantor of Federal
Loans is unable to meet its insurance obligations, the loan holder may submit
claims directly to the Department and the Department is required to pay the full
Guarantee Payment due with respect thereto in accordance with guarantee claim
processing standards no more stringent than those applied by the Guarantor of
such loans. However, the Department's obligation to pay guarantee claims
directly in this fashion is contingent upon the Department making the
determination referred to above. There can be no assurance that the Department
would ever make such a determination with respect to a Guarantor or, if such a
determination was made, whether such determination or the ultimate payment of
such guarantee claims would be made in a timely manner.
If an Event of Default occurs under a Master Indenture or any
applicable Terms Supplement, subject to certain conditions, the related
Indenture Trustee, at the request of the Surety Provider, if applicable, is
authorized, without the consent of the Noteholders and the Certificateholders,
to sell the Financed Student Loans. There can be no assurance, however, that an
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 Securities 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, holders of any Class of Notes not paid in full will not be entitled to
payments of principal under an applicable Note Surety Bond until the related
Final Maturity Date or such other date as may be set forth in a Prospectus
Supplement. In such circumstances, the Certificateholders would not be entitled
to receive any portion of such proceeds. Also, Certificateholders will not be
entitled to payments of principal under an applicable Certificate Surety Bond
until the Final Maturity Date of the applicable Class of Certificates. In
addition, the amount of principal required to be distributed to Noteholders
under an Indenture is generally limited to amounts available to be so
distributed. Therefore, the failure to pay principal on any Class or Series of
Notes may not result in the occurrence of an Event of Default until the Final
Maturity Date of such Class or Series of Notes. See "Description of the Transfer
and Servicing Agreements--Credit Enhancement."
UNSECURED NATURE OF FINANCED STUDENT LOANS; FINANCIAL STATUS OF
GUARANTORS. The Higher Education Act, the Public Health Service Act and each
Private Loan Program require all Financed Student Loans to be unsecured. As a
result, the only security for payment of the Financed Student Loans are the
Guarantee Agreements between the applicable Eligible Lender Trustee and the
Guarantors or, in the case of HEAL Loans, insurance payments from the Secretary.
A deterioration in the financial status of the Guarantors and their ability to
honor guarantee claims with respect to the Financed Student Loans could result
in a delay in making or a failure to make Guarantee Payments to the applicable
Eligible Lender Trustee. One of the primary causes of a possible deterioration
in a Guarantor's financial status is directly related to the amount and
percentage of defaulting Financed Student Loans guaranteed by a Guarantor.
Moreover, with respect to Federal Loans, to the extent that the Department pays
reimbursement claims submitted by a Guarantor for any fiscal year exceeding
certain specified levels, the Department'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 1, 1993) to a minimum of 80% (78% for loans made on or after
October 1, 1993), except that death, disability, bankruptcy, closed school and
false certification claims are reimbursed 100% by the Department. The Private
Loans will not be reinsured by the Department, the Secretary or any other
governmental agency. Therefore, the failure of a Guarantor of a Private Loan to
make a required Guarantee Payment could adversely affect the amount of Available
Funds for any Collection Period.
CHANGES IN LAW. There can be no assurance that the Higher Education
Act, the Public Health Service Act, the Private Programs 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 Guarantors. In addition, existing
legislation and future measures to reduce the federal budget deficit may
adversely affect the amount and nature of federal financial assistance available
with respect to these programs. In recent years, federal budget legislation has
provided for the recovery of certain funds held by guarantee agencies in order
to achieve reductions in federal spending. There can be no assurance that future
federal budget legislation or administrative actions will not adversely affect
expenditures by the Department, the Secretary or the financial condition of the
Guarantors.
Under the Omnibus Budget Reconciliation Act of 1993, Congress made a
number of changes that may adversely affect the financial condition of the
Guarantors of Federal Loans, including reducing to 98% the maximum percentage of
Guarantee Payments the Department will reimburse for loans first disbursed on or
after October 1, 1993, reducing substantially the premiums and default
collections that Guarantors of Federal Loans are entitled to receive and/or
retain and giving the Department broad powers over Guarantors of Federal Loans
and their reserves. These powers include the authority to require a Guarantor of
Federal Loans to return all reserve funds to the Department if the Department
determines such action is necessary to ensure an orderly termination of such
Guarantor, to serve the best interests of the Federal Programs or to ensure the
proper maintenance of such Guarantor's funds or assets. The Department is also
now authorized to direct a Guarantor of Federal Loans to return a portion of its
reserve funds which the Department determines is unnecessary to pay the program
expenses and contingent liabilities of such Guarantor and/or to cease any
activities involving the use of such Guarantor's reserve funds or assets which
the Department determines is a misapplication or otherwise improper. The
Department may also terminate the reinsurance agreement of a Guarantor of
Federal Loans if the Department determines that such action is necessary to
protect the federal fiscal interest or to ensure an orderly transition to full
implementation of direct federal lending. In such event, however, the Department
is required to assume the functions of such Guarantor as described herein under
the heading "The Financed Student Loan Pool--Insurance of Student Loans;
Guarantors of Federal Loans." These various changes create a significant risk
that the resources available to the Guarantors of Federal Loans to meet their
guarantee obligations will be significantly reduced. In addition, this
legislation greatly expands the loan volume under the direct lending program of
the Department (the "Federal Direct Student Loan Program") to a target of
approximately 60% of student loan demand in academic year 1998-1999, which could
result in increasing reductions in the volume of loans made under the Federal
Programs. As the Federal Direct Student Loan Program expands, the Servicer may
experience increased costs due to reduced economies of scale to the extent the
volume of new loans serviced by the Servicer is reduced. Such cost increases
could affect the ability of the Servicer to satisfy its obligations to service
the Financed Student Loans or to purchase Financed Student Loans in the event of
certain breaches of covenants. See "Description of the Transfer and Servicing
Agreements--Servicer Covenants". Such volume reductions could further reduce
revenues received by the Guarantors of Federal Loans available to pay claims on
defaulted Federal Loans. Finally, the level of competition currently in
existence in the secondary market for loans made under the Federal Programs
could be reduced, resulting in fewer potential buyers of the Federal Loans and
lower prices available in the secondary market for those loans. Further, the
Department is implementing a direct consolidation loan program, which program
may further reduce the volume of loans made under the Federal Programs.
The Balanced Budget Act of 1997 requires Guarantors of Federal Loans
to return to the Secretary $1.0 billion in reserves by September 1, 2002 in
accordance with statutory criteria. This legislation also revised the minimum
reserve levels required by the Higher Education Act to require a permanent
minimum level of .5% of the total attributable amount of all outstanding loans
guaranteed by the Guarantor. During the 105th session of the United States
Congress, the reauthorization of the Higher Education Act will be considered.
The potential impacts on the Financed Student Loans resulting from the
reauthorization process, if any, cannot be determined at this time.
Under the Emergency Student Loan Consolidation Act of 1997,
Consolidation Loans made between November 13, 1997, and October 1, 1998, carry a
maximum interest rate equal to a 91-day T-bill plus 3.1%.
RECENT DEVELOPMENTS - PRESIDENT CLINTON'S PROPOSED FY 1999 BUDGET. In
his proposed FY 1999 Budget, President Clinton has proposed a number of changes
to the Higher Education Act affecting lenders and Guarantors of Federal Loans.
These proposals would, among other things, reduce the yield on certain Federal
Loans loans while the student is in school, require certain new payments to be
made by lenders to guarantors in connection with default aversion, eliminate
guarantor risk-sharing, reduce guarantor reserve fund levels, reduce guarantor
retention rates on post-default payments, and institute performance-based
contracts for guarantors. These proposals are likely to encounter strenuous
opposition from lenders and guarantors, and their prospects for enactment by the
Congress are uncertain. No assurance can be made that some or all of these
proposals will not be enacted, or that other amendments to the Higher Education
Act adverse to lenders or guarantors will not be included in the final FY 1999
budget or related legislation.
SUBORDINATION; LIMITED ASSETS. The rights of Certificateholders to
receive payments of principal (other than with respect to an applicable
Certificate Surety Bond or other forms of Enhancement) will be subordinated to
those of the Noteholders as described herein. If amounts otherwise allocable to
the Certificates are used to fund payments of principal on the Notes,
distributions with respect to the Certificates may be delayed or reduced to the
extent the applicable Surety Provider or other provider of Enhancement fails for
any reason to satisfy its obligation under a Certificate Surety Bond or other
form or Enhancement, if any. Notwithstanding the foregoing, distributions to
Certificateholders of amounts representing the Certificateholders' Distribution
Amount will not be subordinated to the payment of any Noteholders' Interest
Carryover that may exist from time to time. The Certificateholders bear
directly, subject to the protection provided by the related Certificate Surety
Bond or other form of Enhancement, the credit and other risks associated with an
undivided interest in the related Trust. See "Description of the Securities--The
Certificates--Subordination of the Certificates," "Description of the Transfer
and Servicing Agreements--Distributions" and "--Credit
Enhancement--Subordination of the Certificates."
Moreover, a Trust is not permitted or expected to have any significant
assets or sources of funds other than the Financed Student Loans (and the
related Guarantee Agreements to the extent assigned to the Trust by the
applicable Sellers ("Assigned Rights")), the Collection Account, the
Distribution Accounts, the Pre-Funding Account, the Capitalized Interest
Account, the Capitalized Pre-Funding Account, the Reserve Account, such other
accounts as may be set forth in a Prospectus Supplement, any Note Surety Bonds,
any other Enhancement described in a Prospectus Supplement and, solely for the
benefit of Certificateholders, any Certificate Surety Bonds and such other
Enhancement as may be described in a Prospectus Supplement. Each Series of Notes
represents obligations solely of the related Trust, and the Certificates
represent interests solely in the related Trust and its assets, and, except for
certain guarantees of The Money Store Inc. described in the applicable
Prospectus Supplement, neither any Series of Notes nor the Certificates will be
insured or guaranteed by the Sellers, the Master Servicer, the Guarantors, the
Eligible Lender Trustee, any of their affiliates or the Department.
Consequently, holders of each Series of Notes and the Certificates 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 or in a Prospectus Supplement, amounts on deposit
in the Pre-Funding Account, the Capitalized Interest Account, the Capitalized
Pre-Funding Account, the Reserve Account, such other accounts as may be set
forth in a Prospectus Supplement and amounts available under any Note Surety
Bonds, any other Enhancement and, with respect to Certificateholders only, the
related Certificate Surety Bond and such other Enhancement as may be described
in a Prospectus Supplement. The Pre-Funding Account, the Capitalized Interest
Account and the Capitalized Pre-Funding Account generally will only be available
to cover obligations of the related Trust relating to Additional Fundings and
interest payments, and are not intended to cover losses on the Financed Student
Loans. Similarly, amounts to be deposited in the Reserve Account are limited in
amount and will be reduced, subject to a specified minimum (which may be resuced
with the consent of a Surety Provider or other provider of Enhancement, as the
Pool Balance is reduced. If the Reserve Account is exhausted, the related Trust
will depend solely on payments with respect to the Financed Student Loans and
amounts made available under the applicable Surety Bond and other forms of
Enhancement to make payments on the Notes and the Certificates. See "Description
of the Sale and Servicing Agreements--Distributions" and "--Credit
Enhancement."
THE FINANCED STUDENT LOANS AND THE PRE-FUNDING ACCOUNT. If a
Pre-Funding Account is included as part of a Trust, as set forth in the related
Prospectus Supplement, on each Closing Date, the related Eligible Lender Trustee
on behalf of such Trust will own the outstanding principal amount of Financed
Student Loans and the Pre-Funded Amount, as set forth in the related Prospectus
Supplement, on deposit in the Pre-Funding Account together with the outstanding
principal amount of Financed Student Loans previously obtained. If the aggregate
principal amount of eligible Financed Student Loans sold or contributed by the
applicable Sellers to the Trust during the related Funding Period, net of the
principal amount of the Financed Student Loans sold to the Sellers during such
Funding Period in connection with the Sellers' making of Consolidation Loans, is
less than the Pre-Funded Amount, the Trust will have insufficient opportunities
to make Additional Fundings, thereby resulting in a prepayment of principal to
Noteholders as described in the following paragraph. In addition, any conveyance
of Additional Student Loans is subject to the following conditions, among
others: (i) each such Additional Student Loan must satisfy the eligibility
criteria specified in the related Sale and Servicing Agreement and any
applicable Insurance Agreement; and (ii) the applicable Seller will not select
such Additional Student Loans in a manner that it believes is adverse to the
interests of the Noteholders, the Certificateholders or, if applicable, the
Surety Provider.
To the extent that amounts on deposit in the Pre-Funding Account have
not been fully applied to Additional Fundings by a Trust by the end of the
related Funding Period, the holders of the Class or Classes of Notes of such
Trust then entitled to receive payments of principal will receive as a
prepayment of principal an amount equal to the Pre-Funded Amount remaining in
the Pre-Funding Account following any Additional Fundings on the last
Distribution Date in the Funding Period. The applicable Sellers expect that the
amount of the Additional Fundings will approximate 100% of each Pre-Funded
Amount by the last day of the Collection Period preceding the Distribution Date
identified in the related Prospectus Supplement. See also "--Maturity and
Prepayment Assumptions" regarding the risk to Noteholders and Certificateholders
of prepayment in the event that Consolidation Loans are made with respect to the
Financed Student Loans by the Sellers after the Funding Period or by another
lender at any time.
MATURITY AND PREPAYMENT ASSUMPTIONS. Financed Student Loans may be
prepaid by borrowers at any time. (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).) 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 applicable Seller will be obligated
to repurchase, or the Master Servicer will be obligated to purchase, which
obligations (unless otherwise limited in a Prospectus Supplement) also will be
obligations of the Money Store, Financed Student Loans from the applicable Trust
pursuant to the related Sale and Servicing Agreement as a result of breaches of
their respective represent ations, warranties or covenants. See "Description of
the Transfer and Servicing Agreements--Sale of Financed Student Loans;
Representations and Warranties" and "--Servicer Covenants." Moreover, to the
extent borrowers of Financed Student Loans elect to borrow money through
Consolidation Loans with respect to such Financed Student Loans from the
applicable Seller 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 to the same borrower (each, a "Serial Loan"), holders of the
Class of Notes then entitled to receive payments of principal (and after each
Class of Notes been paid in full, holders of the Certificates then entitled to
receive payments of principal) will collectively receive as a prepayment of
principal the aggregate principal amount of such Financed Student Loans. There
can be no assurance that borrowers with Financed Student Loans will not seek to
obtain Consolidation Loans with respect to such Financed Student Loans or when
Serial Loans will be sold. Agreements may be entered into with a third party
pursuant to which such third party agrees to purchase all Federal Loans entering
the Repayment Phase that are serial to student loans owned by such third party.
However, the Sellers are unable to determine the amount or timing of any such
purchases. See "The Student Loan Financing Business" and "The Financed Student
Loan Pool--Maturity and Prepayment Assumptions."
In administering the Federal Direct Consolidation Loan Program, a
component of the Federal Direct Student Loan Program, the Department has
indicated that it will permit borrowers with Federal Loans to consolidate their
outstanding student loans at interest rates below those which would apply if
they consolidated their outstanding student loans by means of a Consolidation
Loan under the Federal Loan Program. The availability of such lower-rate
consolidation loans may increase the likelihood that a Federal Loan will be
prepaid.
Scheduled payments with respect to, and maturities of, the Financed
Student Loans may be extended, including pursuant to the applicable Deferral
Phase certain other grace periods authorized by the Higher Education Act, the
Public Health Service Act or the applicable Private Loan Program ("Grace
Periods") and, under certain circumstances, periods of forbearance ("Forbearance
Periods") or as a result of refinancings through Consolidation Loans having
longer maturities, which may lengthen the remaining term of the Financed Student
Loans and the average life of each Class of Notes and Certificates. See "The
Student Loan Financing Business" and "The Financed Student Loan Pool--Maturity
and Prepayment Assumptions". Any reinvestment risks resulting from a faster or
slower incidence of prepayment of Financed Student Loans will be borne entirely
by the Noteholders and the Certificateholders. See also "Description of the
Transfer and Servicing Agreements--Additional Fundings" regarding the prepayment
of principal to Noteholders as a result of a Pre-Funded Amount remaining at the
end of the Funding Period, "--Insolvency Event" regarding the sale of the
Financed Student Loans if a Seller Insolvency Event occurs and "--Termination"
regarding the Sellers' option to purchase the Financed Student Loans.
BASIS RISK. The Class Interest Rate for any Class of Auction Rate
Notes and the Certificate Rate for any Class of Auction Rate Certificates will
be based generally on the outcome of each Auction of such Notes or Certificates,
as the case may be, and the Class Interest Rate for any Class of LIBOR Rate
Notes and the Certificate Rate for any Class of LIBOR Rate Certificates will be
based generally on the level of LIBOR. The Class Interest Rate for other Classes
of Notes may be based on the index, formula or other method described in the
related Prospectus Supplement. Financed Student Loans, however, generally bear
interest at an effective rate (taking into account any Special Allowance
Payments) equal to the average bond equivalent rates of weekly auctions of
91-day Treasury bills for each quarter (the "T-Bill Rate") (or, in certain
circumstances, 52-week Treasury bills) plus margins specified for such Financed
Student Loans under "The Student Loan Financing Business." As a result, if set
forth in a Prospectus Supplement, if in respect of any Distribution Date, there
does not exist a positive spread between (a) the Net Loan Rate and (b) the Class
Interest Rate or the Certificate Rate, as the case may be, the Class Interest
Rate or the Certificate Rate, as applicable, for such Note Distribution Date or
Certificate Distribution Date will be the Net Loan Rate. See "Description of the
Securities--The Notes--Distributions of Interest" and "--The
Certificates--Distributions of Interest." Any Noteholders' Interest Carryover or
Certificateholders' Interest Carryover arising as a result of the applicable
Class Interest Rate or Certificate Rate being determined on the basis of the Net
Loan Rate will be paid on the following Note Distribution Date or Certificate
Distribution Date, as applicable, or on any succeeding Note Distribution Date or
Certificate Distribution Date to the extent funds are allocated and available
therefor after making all required prior distributions and deposits with respect
to such date. Payment of such amounts, however, will not be covered, in the case
of the Notes, by amounts on deposit in the related Reserve Account, if any
(other than amounts in excess of the Specified Reserve Account Balance), or by
subordination of distributions of the Certificateholders' Distribution Amount in
respect of the Certificates (although distributions of any Certificateholders'
Interest Carryover will be subordinated to payment of any Noteholders' Interest
Carryover) and, in the case of the Certificates, by amounts on deposit in the
related Reserve Account, if any (other than amounts in excess of the Specified
Reserve Account Balance), or by any applicable Certificate Surety Bonds. Any
applicable Note Surety Bonds will not cover payment of any Noteholders' Interest
Carryover. See "Description of the Transfer and Servicing
Agreements--Distributions."
SERVICER DEFAULT; ADMINISTRATOR DEFAULT. In the event a Servicer
Default or an Administrator Default occurs, the Surety Provider, if applicable,
the related Indenture Trustee or Noteholders, as described under "Description of
the Transfer and Servicing Agreements--Rights upon Servicer Default and
Administrator Default," may remove the related Master Servicer or Administrator,
as the case may be, without the consent of the Eligible Lender Trustee or any of
the Certificateholders. Moreover, until such time as each Class of Notes has
been paid in full, only the Surety Provider, if applicable, the related
Indenture Trustee or Noteholders, and not the Eligible Lender Trustee or the
Certificateholders, have the ability to remove the related Master Servicer or
Administrator, as the case may be, if a Servicer Default or an Administrator
Default occurs. In addition, the Noteholders have the ability, with certain
specified exceptions, to waive defaults by the Master Servicer and the
Administrator, including defaults that could materially adversely affect the
Certificateholders. See "Description of the Transfer and Servicing
Agreements--Waiver of Past Defaults."
CERTAIN LEGAL ASPECTS. The Sellers intend that the transfer of the
Financed Student Loans by them to the applicable Eligible Lender Trustee on
behalf of the related Trust under a Sale and Servicing Agreement constitutes a
valid sale or 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 Noteholders and the Certificateholders. If the transfer of the
Financed Student Loans to the Eligible Lender Trustee is deemed to create a
security interest therein, a tax or government lien on property of the
applicable Seller arising before the Financed Student Loans came into existence
may have priority over the Eligible Lender Trustee's interest in such Financed
Student Loans. If a Seller becomes subject to an insolvency proceeding under
applicable law, 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 such Seller's insolvency and was not taken in contemplation of insolvency
or with the intent to hinder, delay or defraud the Seller or its creditors, such
security interest should not be subject to avoidance and payments to the related
Trust with respect to the Financed Student Loans should not be subject to
recovery by the Seller's creditors. No assurance can be given, however, that
delays in receipt of funds with respect to the Financed Student Loans will occur
in such circumstances.
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. Although these
state laws are, in large part, pre-empted by the Higher Education Act and the
Public Health Service Act, they are applicable to the Private Loans. These
requirements impose specific statutory liability that would affect an assignee's
ability to enforce consumer finance contracts such as the Private Loans.
RATINGS OF THE SECURITIES. It is a condition to the issuance and sale
of each Series and Class of Notes that they each be rated by at least one
nationally recognized statistical rating organization (a "Rating Agency") in one
of its four highest applicable rating categories. A rating is not a
recommendation to purchase, hold or sell securities, inasmuch as such rating
does not comment as to market price or suitability for a particular investor.
The ratings of the Securities address the likelihood of the ultimate payment of
principal of and interest on the Securities pursuant to their terms. However,
the Rating Agencies do not evaluate, and the ratings of the Securities do not
address, the likelihood of payment of any Noteholders' Interest Carryover or the
Certificateholders' 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.
BOOK-ENTRY REGISTRATION. It is expected that each Class of Notes and
the Certificates (except for the Certificates sold to Student Holdings or such
other entity as may be named in a Prospectus Supplement) will each be initially
represented by one or more certificates registered in the name of Cede & Co.
("Cede"), the nominee for DTC, and will not be registered in the names of the
holders of such Securities or their nominees. Because of this, unless and until
Definitive Securities are issued, holders of such Securities will not be
recognized by the applicable Indenture Trustee or Eligible Lender Trustee as
"Noteholders" or "Certificateholders," as the case may be (as such terms are
used in the related Indenture and Trust Agreement, respectively). Hence, until
Definitive Securities are issued, holders of such Securities will only be able
to exercise the rights of Securityholders indirectly through DTC and its
participating organizations. See "Description of the Securities--Book-Entry
Registration" and "--Definitive Securities."
FORMATION OF THE TRUSTS
THE TRUSTS
Each Trust will be formed under the laws of the jurisdiction set forth
in the related Prospectus Supplement pursuant to a Trust Agreement for the
transactions described in this Prospectus and each Prospectus Supplement. After
its formation, a Trust will not engage in any 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 the Certificates, Notes and the
Originators' Interests, (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.
A Trust will initially be capitalized with equity, excluding amounts
deposited in any Reserve Account, Pre-Funding Account, Capitalized Investment
Account and Capitalized Pre-Funding Account on the Initial Closing Date,
representing the initial principal balance of the Certificates being issued on
the Initial Closing Date. Unless provided otherwise in the related Prospectus
Supplement, approximately 1% of the Certificates will be sold to Student
Holdings or such other entity as may be named in a Prospectus Supplement and the
remaining Certificates will be offered for sale in transactions exempt from the
registration requirements of the Securities Act. The equity of a Trust, together
with the proceeds from the sale of each Series of Notes, will be used by the
related Eligible Lender Trustee in connection with its acquisition, on behalf of
the Trust, of the Financed Student Loans from the applicable Sellers pursuant to
a Sale and Servicing Agreement and to fund each deposit of the Pre-Funding
Account, if applicable. Generally, a portion of the net proceeds received from
each transfer of Financed Student Loans may be used to make a Reserve Account
Deposit or deposits into other Trust Accounts. Upon the consummation of each
such transaction, the property of a Trust will consist of (a) a pool of Financed
Student Loans, legal title to which is held by the related Eligible Lender
Trustee on behalf of the Trust, (b) all funds collected in respect thereof on or
after each Cut-off Date, (c) if specified in the related Prospectus Supplement,
all moneys and investments on deposit in the Collection Account, the Pre-Funding
Account, the Capitalized Interest Account, the Capitalized Pre-Funding Account,
the Certificate Distribution Account, the Note Distribution Account, the Expense
Account, the Monthly Advance Account, the Reserve Account or such other accounts
specified in a Prospectus Supplement, (d) if specified in the related Prospectus
Supplement, the Note Surety Bonds, (e) if specified in the related Prospectus
Supplement, the Certificate Surety Bond issued solely for the benefit of the
Certificateholders and (f) letters of credit, insurance policies or other forms
of credit support, including but not limited to a guaranty of The Money Store
Inc., as described in the related Prospectus Supplement. The Notes will be
collateralized by the property of the related Trust (other than the Certificate
Surety Bond, if applicable, and other forms of Enhancement, if any, obtained for
the benefit of the Certificates). The Collection Account, the Pre-Funding
Account, the Capitalized Interest Account, the Capitalized Pre-Funding Account,
the Note Distribution Account, the Expense Account, the Reserve Account and the
Monthly Advance Account, as applicable, will be maintained with and in the name
of the related Indenture Trustee or such other entity as may be set forth in a
Prospectus Supplement. The Certificate Distribution Account will be maintained
with and in the name of the related Eligible Lender Trustee. To facilitate
servicing and to minimize administrative burden and expense, either the related
Master Servicer or the related Servicer will be appointed custodian of the
promissory notes representing the Financed Student Loans by the Eligible Lender
Trustee.
A Trust will use funds on deposit in a Pre-Funding Account established
for such Trust during each Funding Period to acquire Additional Student Loans,
which will constitute property of the related Trust. See "Description of the
Transfer and Servicing Agreements--Additional Fundings." The Pool Balance will
be increased during each Funding Period by the principal amount of Additional
Student Loans conveyed to the applicable Eligible Lender Trustee on behalf of
the Trust, less the principal amount of Financed Student Loans sold. Any such
conveyance of Additional Student Loans is conditioned on compliance with the
procedures described in the related Sale and Servicing Agreement and Insurance
Agreement. The applicable Sellers expect that the amount of Additional Fundings
will approximate 100% of the Pre-Funded Amount by the last day of the Funding
Period identified in the related Prospectus Supplement; however, there can be no
assurance that a sufficient amount of Additional Fundings will be made by such
date. If the Pre-Funded Amount has not been reduced to zero by the end of the
Funding Period, the holders of the Class or Classes of Notes then entitled to
receive payments of principal will receive any amounts remaining in the
Pre-Funding Account as a payment of principal. See "Description of the Sale and
Servicing Agreements--Additional Fundings."
A Trust's principal offices will be located at the address of the
applicable Eligible Lender Trustee set forth in the related Prospectus
Supplement.
ELIGIBLE LENDER TRUSTEE
The Eligible Lender Trustee on behalf of a Trust will be the entity
named in the applicable Prospectus Supplement and will acquire on behalf of a
Trust legal title to all the Financed Student Loans acquired by such Trust from
time to time pursuant to a Sale and Servicing Agreement. The Eligible Lender
Trustee on behalf of a Trust will enter into a Guarantee Agreement with each of
the Guarantors with respect to such Financed Student Loans. The Eligible Lender
Trustee qualifies, or prior to taking title to Financed Student Loans for which
additional qualifications are necessary, will qualify, as an eligible lender and
owner of all Financed Student Loans for all purposes under the Higher Education
Act, the Public Health Service Act, the applicable Private Loan Programs and the
Guarantee Agreements. Failure of the Financed Student Loans to be owned by an
eligible lender could result in the loss of Guarantee Payments, Federal
Assistance and insurance payments from the Secretary, as the case may be, with
respect to such Financed Student Loans. See "The Financed Student Loan
Pool--Insurance of Student Loans; Guarantors of Student Loans."
USE OF PROCEEDS
After making the deposit of the Pre-Funded Amount to the Pre-Funding
Account, if established for the related Trust, the balance of the net proceeds
from the sale of Certificates and each Series of Notes ultimately will be paid
to the applicable Sellers on the related Closing Date as consideration for the
Financed Student Loans being sold or conveyed on such date. A Seller will use
such proceeds paid to it generally to make each Reserve Account Deposit,
deposits into certain other Trust Accounts, for general corporate purposes,
including the origination and/or purchase of Additional Financed Student Loans
and/or paying dividends to the Representative, which dividends the
Representative may use to to repay debt.
THE SELLERS AND THE MONEY STORE
Each Seller is a wholly-owned subsidiary of The Money Store Inc., a
New Jersey corporation ("The Money Store"). The Money Store is a financial
services company engaged, through its subsidiaries, in the business of
originating, purchasing, selling and servicing consumer and commercial loans of
specified types and offering related services. Loans originated by The Money
Store and its subsidiaries primarily consist of home equity loans, loans (the
"SBA Loans") guaranteed in part by the United States Small Business
Administration (the "SBA"), government guaranteed student loans and financing
for new and used vehicles.
Since 1967, The Money Store and its subsidiaries have been active in
the development of the residential home equity lending industry in the United
States. In 1979, The Money Store and its subsidiaries began to originate SBA
Loans and, based upon statistics compiled by the SBA, The Money Store believes
that during each of the last 14 SBA fiscal years it originated a greater
principal amount of SBA Loans than any other originator of such loans in the
United States. In 1984, The Money Store and Educaid entered into the government
guaranteed student loan origination market. ClassNotes was organized in 1995 to
originate, purchase, sell and service non-government guaranteed student loans.
The executive offices of each Seller are located at 3301 C Street,
Suite 100-A, Sacramento, California 95816. Their telephone number is (916)
446-5000. The executive offices of The Money Store are located in Union, New
Jersey and Sacramento, California. Its telephone number is (908) 686-2000.
THE SERVICERS
Each Seller or an affiliate thereof identified in the related
Prospectus Supplement will act as Master Servicer with respect to the Financed
Student Loans sold or contributed by it to the related Trust and generally will
service the Financed Student Loans originated by its during the Deferral Phase.
Pursuant to Sub-Servicing Agreements and except as otherwise expressly assumed
by a Seller, the Administrator or set forth in a Prospectus Supplement, PHEAA,
AFSA Data Corporation, Great Lakes Higher Education Corporation and/or UNIPAC
Service Corporation, or the entities set forth in the related Prospectus
Supplement, generally will service, and perform all other related tasks with
respect to, all Financed Student Loans originated by the Sellers and acquired by
the applicable Eligible Lender Trustee on behalf of a Trust generally after they
have entered the Repayment Phase. Such Servicers are required to perform all
services and duties customary to the servicing of such Financed Student Loans in
the same manner as the applicable Master Servicer has serviced Financed Student
Loans and otherwise in compliance with all applicable standards and procedures.
With respect to the Purchased Loans, either the originators of the Purchased
Loans, the applicable Seller or another party will service such Purchased Loans
during both the Deferral Phase and the Repayment Phase. See "Description of the
Transfer and Servicing Agreements--Servicing Procedures."
THE STUDENT LOAN FINANCING BUSINESS
GENERAL
The Financed Student Loans to be sold or contributed by the Sellers to
the related Eligible Lender Trustee on behalf of a Trust pursuant to a Sale and
Servicing Agreement will be selected from Financed Student Loans originated or
purchased by the Sellers and made to students enrolled in or recently graduated
from accredited institutions of higher education within the meaning of the
Higher Education Act, the Public Health Service Act and the applicable Private
Loan Programs, or, with respect to the PLEASE Program described herein, made to
students enrolled in private primary or secondary schools. The proceeds of these
loans are used by students to finance a portion of the costs of school and, in
the case of certain of the Private Loan Programs, specified related costs. It
currently is anticipated that Educaid will originate or purchase Federal Loans
and HEAL Loans and that ClassNotes will be originating or purchasing Private
Loans. Under current law, ClassNotes may not originate or purchase Federal Loans
since it is not an "Eligible Lender" as defined in the Higher Education Act of
1965, as amended. If, as a result of changes in law, ClassNotes can qualify as
an Eligible Lender, ClassNotes also may originate and purchase Federal Loans and
deposit such loans into one or more Trusts.
FEDERAL LOANS. Payment of principal and interest with respect to the
Federal 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 an Eligible Lender Trustee (such agreements, each as
amended or supplemented from time to time, the "Federal Guarantee Agreements").
Each Guarantor of Federal Loans is entitled, subject to certain conditions, to
be reimbursed for 98% (or 100% for loan made prior to October 1, 1993 and all
loans filed as nondefault claims) of Federal Guarantee Payments it makes by the
Department pursuant to a program of federal reinsurance under the Higher
Education Act of 1965, as amended (such Act, together with all rules and
regulations promulgated thereunder by the Department and/or the Guarantors, the
"Higher Education Act"). In addition, an Eligible Lender Trustee, as a holder of
the Federal Loans on behalf of a Trust, is entitled to receive from the
Department certain Interest Subsidy Payments and Special Allowance Payments with
respect to certain of such Federal Loans as described herein. See "--Types of
Federal Loans Under the Program" and "The Financed Student Loan Pool--Insurance
of Student Loans; Guarantors of Student Loans."
HEAL LOANS. The Public Health Service Act provides that the Secretary
may issue a certificate of comprehensive insurance coverage to any eligible
lender who so applies, which will insure all insurable HEAL Loans made by that
eligible lender after the date the certificate is issued until a specified
cut-off date and within limits of an aggregate maximum amount stated in the
certificate. The rights of an eligible lender under a certificate of insurance
may be assigned to another eligible lender under the Public Health Service Act
(including a public entity in the business of purchasing student loans). See "--
The HEAL Program."
PRIVATE LOANS. Payment of principal and interest with respect to the
Private Loans is guaranteed against default, death, bankruptcy or disability of
the applicable borrower by a Guarantor pursuant to a guarantee agreement between
the applicable Guarantor and the applicable Eligible Lender Trustee (such
agreements, as amended or supplemented from time to time, together with the
Federal Guarantee Agreements, the "Guarantee Agreements"). The Guarantors of the
Private Loans are not entitled to reimbursement from, and the Private Loans are
not insured by, the Department, the Secretary or any other governmental agency.
See "The Private Loan Programs."
Legal title to all the Financed Student Loans that from time to time
comprise assets of a Trust will be held by the applicable Eligible Lender
Trustee, as trustee on behalf of the Trust. See "Formation of the
Trust--Eligible Lender Trustee."
The description and summaries of the Higher Education Act, the Federal
Programs, the Public Health Service Act, the Private Loan Programs, the
Guarantee Agreements and the other statutes, regulations and documents referred
to in this Prospectus do not purport to be comprehensive, and are qualified in
their entirety by reference to each such statute, regulation or document. 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.
However, any such amendments or modifications will be described in each
Prospectus Supplement relating to a Series of Notes to be offered after the
dates of such amendments or modifications. See "Risk Factors--Possible Changes
in Legislation."
THE FEDERAL LOAN PROGRAM
GENERAL. Educaid's loan program for Federal Loans (the "Program"),
provides educational financing to students (or their parents) enrolled in or
recently graduated from accredited institutions of higher education. Educaid has
been originating loans under the Program since 1984 and has, as of September 30,
1996, originated loans under the Program in an aggregate principal amount of
approximately $2.064 billion. The Program consists of certain Federal Loans each
of which is guaranteed by a Guarantor and reinsured by the Department. As
described below, Federal Loans include "Stafford Loans," "SLS Loans," "PLUS
Loans", "Unsubsidized Stafford Loans" and "Consolidation Loans." The loan
programs under which the Purchased Loans constituting Federal Loans will be
originated are substantially similar to Educaid's Program.
ELIGIBILITY. To be eligible to obtain a loan under the Program, a
student must, among other things, (i)(a) be enrolled in, or be admitted for
enrollment in, a school that is an accredited and licensed State or nonprofit
institution of higher education and be enrolled in, or enroll in, an eligible
undergraduate or graduate degree or certificate program, be attending at least
half-time and be making satisfactory progress toward the completion of such
program according to the standards of the school, or (b) be enrolled in, or
admitted for enrollment in, an eligible degree or certificate program at an
accredited and licensed Proprietary School (I.E., a privately-owned school
offering post-secondary education and operating on a for profit basis), (ii) be
a U.S. citizen, U.S. national or eligible noncitizen, (iii) not have borrowed,
together with the loan being requested, more than the applicable annual and
aggregate limits specified from time to time under the Program, (iv) meet the
applicable "needs" requirements and agree to notify promptly the holder of the
loan of any address change and (v) not be in default on any Federal education
loan or owe a refund on a Federal educational grant (each such student, an
"Eligible Student").
ORIGINATION PROCESS. The Higher Education Act specifies rules
regarding loan origination practices, which lenders must comply with in order
for their loans to be guaranteed and to be eligible to receive Federal
assistance. Lenders are prohibited from offering points, premiums, payments or
other inducements, directly or indirectly, to any educational institution,
guarantee agency or individual in order to secure loan applications, and no
lender may conduct unsolicited mailings of student loan applications to students
who have not previously received student loans from that lender.
With respect to all Federal Loans made under the Program (other than
Consolidation Loans discussed below), Educaid or its agent receives from a
borrower an application for a Federal Loan (which includes an executed
promissory note). Educaid reviews or causes to be reviewed each application to
confirm its completeness, to confirm that the applicant is an Eligible Student
and that such loan complies with certain other conditions of the Program.
Educaid forwards or causes to be forwarded a copy of each application (or
electronically transmits the data from such application) that satisfies the
foregoing reviews to the respective Guarantor, who reviews such application to
determine that such application satisfies all applicable conditions, including
the foregoing, for the loan to be eligible to receive Guarantee Payments,
subject to compliance with the terms of the respective Guarantee Agreements,
including the proper servicing of the loan. Upon approval of an application by
both Educaid and the respective Guarantor and receipt of evidence from such
Guarantor that the applicable loan is guaranteed, Educaid causes the proceeds of
such loan to be disbursed in one or more installments. For each loan that is
made, Educaid forwards or causes to be forwarded the completed loan application
and executed promissory note to the applicable Master Servicer, which serves as
custodian for such materials.
With respect to borrower inquiries concerning Consolidation Loans, the
applicable Servicer will contact the borrower and prepare and send to the
borrower an application (which includes a promissory note) for a Consolidation
Loan for the borrower's review and signature. Although the borrower is permitted
to choose any lender from whom he or she currently has federally guaranteed
education loans (including undergraduate loans) to make such Consolidation Loan,
borrowers typically express no preference as to the identity of the lender. In
that event, the Servicer will choose a lender based on various considerations,
which may include the lender that has the highest balance of the loans to be
consolidated or, if there is no such lender, the lender that has made the most
recent loan to the borrower to be consolidated. Pursuant to the Program, the
Servicer will be required to obtain certifications from the lenders of the loans
to be consolidated and to review the loan application and the certifications to
confirm that the borrower is eligible for a Consolidation Loan. Upon approval of
an application for a Consolidation Loan, the applicable lender will cause the
proceeds of such Consolidation Loan to be disbursed to each lender of the loans
being consolidated in amounts sufficient to retire each of such loans. For each
Consolidation Loan that is made by Educaid, the Servicer will retain the
completed loan application and executed promissory note as custodian.
SERVICING AND COLLECTIONS PROCESS. The Higher Education Act, the
Federal Program and the applicable Guarantee Agreements require the holder of
Federal Loans to cause specified procedures, including due diligence procedures
and the taking of specific steps at specific intervals, to be performed with
respect to the servicing of the Federal Loans that are designed to ensure that
such Federal Loans are repaid on a timely basis by or on behalf of borrowers.
The Master Servicer will perform such procedures and agrees, pursuant to a Sale
and Servicing Agreement, to perform, or cause to be performed, specified and
detailed servicing and collection procedures with respect to the Federal Loans
on behalf of a Trust. Such procedures generally include periodic attempts to
contact any delinquent borrower by telephone and by mail, commencing with a
written notice at the tenth day of delinquency and including multiple written
notices and telephone calls to the borrower thereafter at specified times during
any such delinquency. All telephone calls and letters are automatically
registered, and a synopsis of each call or the mailing of each letter is noted
in the Master Servicer's loan file for the borrower. The Master Servicer is also
required to perform, or cause to be performed, skip tracing procedures on
delinquent borrowers whose current location is unknown, including contacting
such borrowers' schools and references. Failure to comply with the established
procedures could adversely affect the ability of the related Eligible Lender
Trustee, as holder of legal title to the Federal Loans on behalf of a Trust, to
realize the benefits of any Guarantee Agreement or to receive the benefits of
Federal assistance from the Department with respect thereto. Failure to comply
with certain of the established procedures with respect to a Federal Loan may
also result in the denial of coverage under a Guarantee Agreement for certain
accrued interest amounts, in circumstances where such failure has not caused the
loss of the guarantee of the principal of such Federal Loan. See "Risk
Factors--Failure to Comply with Loan Origination and Servicing Procedures for
Federal Loans".
At prescribed times prior to submitting a claim for payment under a
Guarantee Agreement for a delinquent Federal Loan, the Master Servicer is
required to notify the applicable Guarantor of the existence of such
delinquency. These requests notify the Guarantors of seriously delinquent
accounts and allow the Guarantors to make additional attempts to collect on such
loans prior to the filing of claims. If a loan is delinquent for 180 days, the
Master Servicer is required to file a default claim with the respective
Guarantor. Failure to file a claim within 270 days of delinquency may result in
denial of the guarantee claim with respect to such Federal Loan. The failure by
the Master Servicer to file a guarantee claim in a timely fashion would
constitute a breach of its covenants and create an obligation of the Master
Servicer to purchase the applicable Federal Loan. See "Description of the
Transfer and Servicing Agreements--Servicer Covenants."
TYPES OF FEDERAL LOANS UNDER THE PROGRAM
GENERAL. The following descriptions of the Stafford Student Loan
Program, the Unsubsidized Stafford Loan Program, the Supplemental Loans for
Students Program, the Parental Loans for Undergraduate Students Program and the
Consolidation Loan Program (such programs being collectively referred to herein
as the "Federal Programs") as authorized under the Higher Education Act are
qualified in their entirety by reference to the Higher Education Act. Since its
original enactment in 1965, the Higher Education Act has been amended and
reauthorized several times, including by the Higher Education Amendments of 1992
(the "1992 Amendments"), the Student Loan Reform Act of 1993 (the "1993
Amendments") and the Higher Education Technical Amendments Act of 1993 (the
"1993 Technical Amendments"). The 1992 Amendments extended the principal
provisions of the Federal Programs through October 1, 1998 (or, in the case of
borrowers who have received Federal Loans prior to that date, September 30,
2002).
There can be no assurance that the Higher Education Act or other
relevant federal or state laws, rules and regulations and the programs
implemented thereunder will not be amended or modified in the future in a manner
that will adversely impact the programs described in this Prospectus and the
Federal Loans made thereunder, or the Guarantors. In addition, existing
legislation and future measures to reduce the federal budget deficit may
adversely affect the amount and nature of federal financial assistance available
with respect to these programs. In recent years, federal budget legislation has
provided for the recovery of certain funds held by guarantee agencies in order
to achieve reductions in federal spending. There can be no assurance that future
federal budget legislation or administrative actions will not adversely affect
expenditures by the Department or the financial condition of the Guarantors.
Also, effective for student loans first disbursed after October 1,
1993, Lenders will be assessed an up-front, user/origination fee equal to .5% of
the principal amount of the student loan.
STAFFORD LOANS. "Stafford Loans" are loans made by eligible lenders in
accordance with the Higher Education Act to Eligible Students, based on
financial need, to finance a portion of the costs of attending an eligible
institution of higher education or a vocational school. The Higher Education Act
limits the amount of Stafford Loans that may be made to a student in any given
academic year and the amount of Stafford Loans that a student may have
outstanding in the aggregate and specifies certain payment terms, including the
interest rates that may be charged on Stafford Loans. Holders of Stafford Loans
complying with these limitations and the other conditions specified in the
Higher Education Act will be entitled to the benefits of: (i) a guarantee of the
payment of principal and interest with respect to such Stafford Loans by a
guarantee agency, which guarantee will be supported by federal reinsurance of
all or most of such guaranteed amounts as described herein; (ii) federal
interest subsidy payments equal to the interest payable on such Stafford Loans
prior to the time the borrower begins repayment of such Stafford Loans and
during any applicable Deferral Periods, together with interest on any such
amounts not paid by the Department when due ("Interest Subsidy Payments"), and
(iii) federal special allowance payments, together with interest on any such
amounts not paid by the Department when due ("Special Allowance Payments"),
during the term of such Stafford Loans in varying amounts to ensure that
interest payable on such Stafford Loans, together with these payments,
approximates current market interest rates (such federal reinsurance
obligations, together with those obligations referred to in clauses (ii) and
(iii) above, being collectively referred to herein as "Federal Assistance").
(1) ELIGIBILITY REQUIREMENTS. Subject to the annual and aggregate
limits on the amount of Stafford Loans that a student can borrow discussed
below, Stafford Loans are available to eligible students in amounts not
exceeding their unmet need for financing as determined in accordance with the
provisions of the Higher Education Act.
In addition to complying with the borrower's eligibility requirements
set forth above under the caption "--The Loan Program," each Stafford Loan (i)
must be unsecured, (ii) must provide for deferral of the obligation of the
borrower to make (x) interest payments for as long as the Department makes
Interest Subsidy Payments and (y) principal payments so long as the borrower
remains an Eligible Student and thereafter during any applicable Grace Periods,
Deferral Periods or Forbearance Periods and (iii) must provide for repayment
over a period generally not to exceed 10 years (excluding any Deferral Periods
or Forbearance Periods) from the date repayment commences.
(2) LOAN LIMITS. In order to qualify for Federal Assistance under the
Stafford Federal Student Loan Program, the Higher Education Act imposes an
annual limit on the amount of Stafford Loans and other Federal Loans that may be
made to any single student and an aggregate limit on the amount of such Federal
Loans such student may have outstanding. Under the 1992 Amendments, the annual
Stafford limit for first year students is $2,625 (except that lower limits apply
to certain short-term courses of study), increasing to $3,500 for second year
students, $5,500 for third and fourth year students, and $8,500 for graduate and
professional students. The aggregate limit is $23,000 for undergraduates and
$65,600 for graduate and professional students.
(3) INTEREST. Stafford Loans made to students with respect to periods
of enrollment in school commencing prior to July 1, 1988 (or thereafter to
students who had Federal Loans outstanding on such date), bear interest at
either 7%, 8% or 9% per annum, depending on the date of issuance and the
interest rate applicable to such student's outstanding Federal Loans. For the
time periods applicable to the Financed Student Loans, Stafford Loans made on or
after July l, 1988, to students with no outstanding Federal Loans on the date
such Stafford Loan is made ("new borrowers"), bear interest at rates of 8% per
annum from disbursement through four years after repayment commences and 10% per
annum thereafter, subject to a provision requiring annual discharge of principal
or rebate to the borrower to the extent that, for each quarter, the interest due
at the 10% rate (or, for Stafford Loans to such borrowers which are first
disbursed after July 23, 1992, the interest rate then applicable thereto)
exceeds the interest that would be payable at a rate per annum equal to the sum
of the average of the bond equivalent rates of 91-day Treasury bills auctioned
for that quarter (the "T-Bill Rate") plus 3.25% (or, for Stafford Loans to such
borrowers which are first disbursed after July 23, 1992, and from the date of
disbursement, 3.10%). Notwithstanding the foregoing, no such discharge of
principal or rebate to a borrower will be payable if such borrower is more than
30 days delinquent in making payments on such Stafford Loan. However, under the
1993 Technical Amendments, lenders must convert all loans subject to this
provision to a variable rate equal to the 91-day Treasury bill rate plus 3.25%
or, in the case of a loan made to a borrower with outstanding Federal Loans
under the Federal Programs after October 1, 1993, the 91-day Treasury bill rate
plus 3.1%, such conversion to take place before January 1, 1995. The converted
loans will not thereafter be subject to the rebate requirements described above.
A Stafford Loan made on or after October 1, 1992, to a student with no
outstanding Federal Loans on the date such Stafford Loan is made, bears interest
at a variable rate based on 91-day Treasury bills plus 3.10%. A Stafford Loan
made on or after July 1, 1994 (regardless of whether the student has outstanding
Federal Loans on the date such Stafford Loan is made) will bear interest at a
variable rate equal to the sum of the T-Bill Rate plus 3.10%, or 8.25%,
whichever is less. Stafford Loans disbursed on or after July 1, 1998 will bear
interest at the bond equivalent yield of a security of comparable maturity plus
1.0%, not to exceed 8.25%.
Interest is payable on each Stafford Loan monthly in arrears until the
principal amount thereof is paid in full. However, prior to the date the
borrower begins repaying the principal of such Stafford Loan and during any
applicable Deferral Period or Grace Period, the borrower has no obligation to
make interest payments. Instead, the Department makes quarterly Interest Subsidy
Payments to the holder of the Stafford Loan on behalf of the borrower during
such periods, in amounts equal to the accrued and unpaid interest for the
previous quarter with respect to such Stafford Loan. During a Forbearance
Period, the Department will not make any Interest Subsidy Payments; instead, at
the borrower's option, interest on each Stafford Loan may be paid currently or
capitalized and added to the outstanding principal balance of such Stafford Loan
at the end of such Forbearance Period. See "--(6) Interest Subsidy Payments."
(4) REPAYMENT. No principal and/or interest payments with respect to a
Stafford Loan are required to be made during the time a borrower remains an
Eligible Student and during the existence of an applicable Grace Period,
Deferral Period or Forbearance Period. In general, a borrower must repay each
Stafford Loan in monthly installments over a period generally not to exceed 10
years (excluding any Deferral Period or Forbearance Period) after commencement
of repayment. Any borrower may voluntarily prepay without premium or penalty any
Federal Loan and in connection therewith may waive any Grace Period or Deferral
Period. The Higher Education Act presently requires a minimum annual principal
and interest payment with respect to a Stafford Loan of $600 in the aggregate
(but in no event less than accrued interest), unless the borrower and the lender
agree to a lesser amount. The 1992 Amendments adopted several provisions that
affect loan repayment terms. These include, among others, provisions to grant
new borrowers with respect to loans for which the first disbursement is on or
after July 1, 1993, the right to choose a graduated or income-sensitive
repayment schedule.
(5) GRACE PERIODS, DEFERRAL PERIODS, FORBEARANCE PERIODS. Borrowers of
Stafford Loans must generally commence repaying the loans following a period of
(a) not less than 9 months nor more than 12 months (with respect to loans for
which the applicable interest rate is 7% per annum) and (b) not more than 6
months (with respect to loans for which the applicable interest rate is in
excess of 7% per annum and for loans to first time borrowers on or after July 1,
1988) (a "Grace Period") after the borrower ceases to be an Eligible Student.
However, subject to certain conditions, no principal repayments need be made
with respect to Stafford Loans during periods when the borrower has returned to
an eligible educational institution on at least a half-time basis or is pursuing
studies pursuant to an approved graduate fellowship program and during certain
other periods (varying from six months to three years) when the borrower has
joined the military or certain volunteer organizations (for all loans made after
July 1, 1993, or loans made after such date to borrowers with loans already
outstanding on such date), for periods when the borrower is unable to secure
employment (up to three years) or for periods during which the borrower is
experiencing economic hardship (for loans made after July 1, 1993, to borrowers
with no outstanding loans on such date) (each a "Deferral Period"). The lender
may also allow, in accordance with standards and guidelines approved by the
applicable guarantor and the Department, periods of forbearance during which the
borrower may defer principal and/or interest payments because of temporary
financial hardship (a "Forbearance Period").
(6) INTEREST SUBSIDY PAYMENTS. Interest Subsidy Payments are payments
made quarterly to the holder of a qualifying Stafford Loan by the Department
with respect to those Stafford Loans as to which the applicable conditions of
the Higher Education Act have been satisfied, in an amount equal to the accrued
and unpaid interest on the outstanding principal amount of each Stafford Loan
for such quarter, commencing from the date such Stafford Loan is made until the
end of the applicable Grace Period after the borrower ceases to be an eligible
student and during any applicable Deferral Period. The Department will not make
Interest Subsidy Payments during any Forbearance Period. The Higher Education
Act provides that the holder of such a qualifying Stafford Loan has a
contractual right, as against the United States, to receive Interest Subsidy
Payments from the Department (including the right to receive interest on any
Interest Subsidy Payments not timely paid). Receipt of Interest Subsidy Payments
is conditioned on compliance with the requirements of the Higher Education Act,
including satisfaction of certain need-based criteria (and the delivery of
sufficient information by the borrower and the lender to the Department to
confirm the foregoing) and continued eligibility of the Stafford Loan for
federal reinsurance. Such eligibility may be lost, however, if the loans are not
originated and serviced, or are not held by an eligible lender, in accordance
with the requirements of the Higher Education Act and the applicable guarantee
agreements. See "--(1) Eligibility Requirements"; "Risk Factors--Failure to
Comply With Loan Origination and Servicing Procedures for Federal Loans";
"Formation of the Trust--Eligible Lender Trustee" and "Description of the
Transfer and Servicing Agreements--Servicing Procedures." Educaid expects that
each of the Stafford Loans that are part of the pool of Financed Student Loans
will be eligible to receive Interest Subsidy Payments.
(7) SPECIAL ALLOWANCE PAYMENTS. The Higher Education Act requires,
subject to certain conditions, the Department to make quarterly Special
Allowance Payments to holders of qualifying Federal Loans (including Stafford
Loans) in an amount equal to a specified percentage of the average outstanding
principal amount of each such Federal Loan during each quarter.
The percentage or rate used to determine the Special Allowance
Payments for a particular loan varies based on a number of factors, including
when the loan was disbursed and the period of enrollment with respect to which
it was made. Generally, the Special Allowance Payment with respect to a loan
such as any Federal Loan for a quarter will be equal to the excess, if any, of
(i) the amount of interest that would be payable on such loan at a rate per
annum equal to the T-Bill Rate plus 3.10% (3.25% for loans first disbursed
before October 1, 1992 and 2.50% while the borrower is in school, grace or
deferment status for loans made on or after July 1, 1995) over (ii) the stated
amount of interest payable on such loan.
For loans disbursed oin or after July 1, 1998, special allowance
payments on all loans (including PLUS Loans) will be based on the bond
equivalent yield of a security of comparable maturity plus 1.0%.
The Higher Education Act provides that a holder of a qualifying loan
who is entitled to receive Special Allowance Payments has a contractual right
against the United States to receive those Special Allowance Payments (including
the right to receive interest on any Special Allowance Payments not timely
paid). Receipt of Special Allowance Payments, however, is conditioned on
compliance with the requirements of the Higher Education Act, including
satisfaction of certain need-based criteria (and the delivery of sufficient
information by the borrower and the lender to the Department to confirm the
foregoing) and continued eligibility for federal reinsurance. Such eligibility
may be lost, however, if the loans are not originated and serviced, or are not
held by an eligible lender, in accordance with the requirements of the Higher
Education Act and the applicable guarantee agreement. See "--(1) Eligibility
Requirements"; "Risk Factors --Failure to Comply With Loan Origination and
Servicing Procedures for Federal Loans"; "Formation of the Trust--Eligible
Lender Trustee" and "Description of the Transfer and Servicing
Agreements--Servicing Procedures." Educaid expects that each of the Stafford
Loans that are part of the pool of Financed Student Loans will be eligible to
receive Special Allowance Payments, if any are payable from time to time.
Interest Subsidy Payments and Special Allowance Payments are generally
received within 45 to 60 days after submission to the Department of the
applicable claims forms for any given calendar quarter, although there can be no
assurance that such payments will in fact be received from the Department within
that period. See "Risk Factors--Variability of Actual Cash Flows; Inability of
Indenture Trustee to Liquidate Financed Student Loans." The Administrator will
agree to prepare and file with the Department all such claims forms and any
other required documents or filings on behalf of the applicable Eligible Lender
Trustee as owner of the Financed Student Loans on behalf of a Trust. The
Administrator will also agree to assist an Eligible Lender Trustee in
monitoring, pursuing and obtaining such Interest Subsidy Payments and Special
Allowance Payments, if any, with respect to such Federal Loans. Except under
certain conditions described herein, the Eligible Lender Trustee will be
required to remit to the Indenture Trustee, for deposit in the Collection
Account, Interest Subsidy Payments and Special Allowance Payments it receives
with respect to the Federal Loans within two Business Days of receipt thereof.
UNSUBSIDIZED STAFFORD LOANS. The Federal Loans also may include
Stafford Loans that do not qualify for Interest Subsidy Payments but otherwise
qualify for all other forms of Federal Assistance ("Unsubsidized Stafford
Loans"). These loans are identical to Stafford Loans in all material respects,
except that interest accruing thereon during periods when the borrower is in
school or in a Deferral Period or Grace Period is either paid periodically by
the borrower during such periods or added periodically to the principal balance
of the loan by the holder thereof. A borrower qualifies for an Unsubsidized
Stafford Loan if, and to the extent that, the borrower's need for a Stafford
Loan, as calculated pursuant to the Higher Education Act, is less than the
maximum Stafford Loan authorized by statute due to the borrower's expected
family contribution as calculated thereunder. As discussed below, no SLS Loans
may be made on or after July 1, 1994. As a result of this change, on July 1,
1994, the maximum amount a single borrower may receive under the Unsubsidized
Stafford Loan program was increased by the amount such borrower could formerly
have obtained under the SLS Program.
SLS LOANS. In addition to the Stafford Student Loan Program, the
Higher Education Act provides a separate program to facilitate additional loans
to graduate and professional students and independent undergraduate students.
This program is referred to as the "Supplemental Loans for Students Program"
(the "SLS Program"). The basic framework and principal provisions of the
Stafford Student Loan Program as described above are similar in many respects to
those that are applicable to loans under the SLS Program, ("SLS Loans"). In
particular, SLS Loans are subject to similar eligibility requirements and,
provided that such requirements are satisfied, are entitled to the same
guarantee and federal reinsurance arrangements. SLS Loans differ significantly
from Stafford Loans, however, in the context of the Interest Subsidy Payments
and Special Allowance Payments discussed above.
The annual and aggregate limitations that are applicable to SLS Loans
are as follows: SLS Loans to a single borrower cannot exceed $4,000 per academic
year for first year and second year students, increasing to $5,000 for third
year and fourth year students, and to $10,000 for graduate and professional
students, with aggregate limits of $23,000 for undergraduate students ($20,000
for loans first disbursed on or before July 1, 1993) and $73,000 for graduate
and professional students (exclusive of any capitalized interest) at any one
time outstanding. SLS Loans are also limited, generally, to the cost of
attendance minus other financial aid for which the borrower is eligible. A
determination of a borrower's eligibility for the Stafford Student Loan Program,
among other programs, is a condition to the making of an SLS Loan.
As specified by the Higher Education Act, the applicable interest rate
for an SLS Loan depends upon the date of issuance of the loan and the period of
enrollment for which the loan is made. The interest rate per annum for SLS Loans
made and disbursed on or after July 1, 1987 is fixed each July 1 for each
succeeding 12-month period at a rate equal to the sum of (i) the bond equivalent
rate of 52-week Treasury bills auctioned at the final auction held prior to the
preceding June 1 and (ii) 3.10% (3.25% for loans first disbursed before October
1, 1992), with a maximum rate of 11% per annum (12% for loans first disbursed
before October 1, 1992).
Although holders of SLS Loans are not entitled to receive Interest
Subsidy Payments with respect thereto, interest on such SLS Loans accrues from
the date each such SLS Loan is made and may either be paid currently by a
borrower or may be capitalized and added to the outstanding principal amount of
such SLS Loan at the time the borrower begins repayment. SLS Loans are eligible
for Special Allowance Payments only if and to the extent that the interest rate
for such SLS Loans calculated based on the 52-week Treasury bill rate referred
to above would exceed the applicable maximum interest rate. Because the basis
for determining the amount, if any, of Special Allowance Payments due to lenders
is based on the 91-day T-Bill Rate while the interest rate for SLS Loans is
based on the 52-week Treasury bill rate (which may differ from the 91-day T-Bill
Rate), there can be no assurance that any Special Allowance Payments will be due
and payable with respect to SLS Loans even though such SLS Loans are deemed to
be eligible therefor. See "--(7) Special Allowance Payments."
A borrower of an SLS Loan is required to begin repayment of the
principal of such SLS Loan within 60 days after the date the last installment of
such SLS Loan is advanced, subject to deferral so long as such borrower remains
an Eligible Student or as a result of any applicable Deferral Period or
Forbearance Period. In addition, any borrower of an SLS Loan made and advanced
after July 23, 1992, who also has Stafford Loans outstanding may defer
commencing repayment of such SLS Loan for the Grace Period applicable to such
Stafford Loans. Pursuant to the Omnibus Budget Reconciliation Act of 1993, no
SLS Loans may be made on or after July 1, 1994.
PLUS LOANS. The Higher Education Act authorizes PLUS Loans to be made
to parents of eligible dependent students. The basic provisions applicable to
PLUS Loans are similar to those of Stafford Loans with respect to the
involvement of guaranty agencies and the Department in providing guarantees and
federal reinsurance on the loans. However, PLUS Loans differ significantly from
Stafford Loans, particularly because Interest Subsidy Payments are not available
and in some instances Special Allowance Payments are more restricted.
Parents of dependent students are eligible to receive PLUS Loans and
may borrow up to $4,000 per academic year per student with a maximum aggregate
amount of $20,000 per student. Pursuant to the 1992 Amendments, with respect to
PLUS Loans originated after July 1, 1993, there are no annual loan limits for
PLUS Loans. PLUS Loans, however, are limited by a formula whereby the amount
borrowed annually, when combined with the student's other loans and grants for
that year, may not exceed the student's estimated educational costs. The 1992
Amendments prohibit origination of PLUS Loans to borrowers determined, pursuant
to regulations of the Department, to have adverse credit histories for loans
with first disbursement on or after July 1, 1993.
The interest rates on a PLUS Loan depend upon the date of issuance of
the loan and the period of enrollment for which the loan is to apply. PLUS Loans
disbursed or refinanced on or after July 1, 1987 bear interest at a variable
rate which is in effect from each July 1 through June 30, which is determined on
the June 1 preceding the commencement of the interest rate period, and which is
equal to the bond equivalent rate of 52-week Treasury bills auctioned at the
final auction held prior to such June 1 plus 3.10% (3.25% for PLUS Loans
disbursed before October 1, 1992), except that such rate cannot exceed 10% (or
12% for PLUS Loans disbursed before October 1, 1992). The 1993 Amendments reduce
this interest rate ceiling to 9% for PLUS Loans made to new borrowers on or
after July 1, 1994. PLUS Loans made on or after July 1, 1998 are to bear a rate
equal to the bond equivalent rate of the U.S. Treasury security with a
comparable maturity, as established by the Department, plus 2.1% (not to exceed
9%).
Lenders are required to charge a 5% origination fee, payable to the
Department, to any borrower of a PLUS Loan made on or after October 1, 1992,
except that such fee is 3% for Plus Loans first disbursed on or after July 1,
1994.
Repayment of the principal of PLUS Loans is required to commence no
later than 60 days after the date of final disbursement of such loan, subject to
certain deferment provisions. A parent borrower may defer principal payments for
periods during which the borrower has a dependent student for whom the parent
borrowed a PLUS Loan, if such student is engaged in a qualifying educational
program, graduate fellowship program or rehabilitation training program and the
PLUS Loan was originated before July 1, 1993; a parent borrower of a PLUS Loan
made thereafter may defer principal payments only if such parent borrower is
engaged in a qualifying educational program, graduate fellowship program or
rehabilitation training program.
Interest Subsidy Payments are not available with respect to PLUS
Loans. However, the capitalization of interest is allowed during deferral
periods. Thus, the borrower and lender may agree either to capitalize interest
or to have the borrower make the interest payments during an authorized period.
The annual loan limits are not violated by any decision to capitalize interest.
CONSOLIDATION LOANS. The Higher Education Act established a program to
facilitate the ability of eligible borrowers of Stafford Loans, SLS Loans and
PLUS Loans (each an "Underlying Federal Loan") to consolidate such Federal
Loans, together with such borrowers' other education loans that are made or
guaranteed by the federal government (including HEAL Loans), into a single loan
(a "Consolidation Loan"). Subject to the satisfaction of certain conditions set
forth in the Higher Education Act, including limitations on the timing and
payment of principal and interest with respect to Consolidation Loans and a
requirement that the proceeds of Consolidation Loans are to be used to repay the
respective Underlying Federal Loans (and any other loans consolidated
thereunder) of any borrower, each holder of a Consolidation Loan will be
entitled to the same guarantee and federal reinsurance arrangements as are
available on Stafford Loans, SLS Loans and PLUS Loans. Consolidation Loans, like
Stafford Loans, are also eligible for Interest Subsidy Payments and Special
Allowance Payments; however, for Consolidation Loan applications received by
lenders on or after August 10, 1993, the Department will no longer make Interest
Subsidy Payments on Consolidation Loans other than those loans which consolidate
only subsidized Stafford Loans. Also, as described below under "--The HEAL
Program--Consolidation of HEAL Loans," any HEAL Loan consolidated pursuant to
the provisions of the Higher Education Act will not be eligible for Special
Allowance Payments or Interest Subsidy Payments. Under this program, an eligible
borrower of Consolidation Loans means a borrower who has begun repaying, who is
in a grace period preceding repayment of, or who is a delinquent or defaulted
borrower who will, through such loan consolidation, recommence repayment of such
Underlying Federal Loans. A married couple, each of whom has outstanding
Underlying Federal Loans, may apply for and obtain a single Consolidation Loan
so long as both individuals agree to be held jointly and severally liable on
such Consolidation Loan.
Under this program, a lender may make a Consolidation Loan to an
eligible borrower at the request of the borrower if the lender holds an
outstanding Underlying Federal Loan of the borrower or the borrower certifies
that he or she has been unable to obtain a Consolidation Loan from any of the
holders of the outstanding Underlying Federal Loans of the borrower. The lender
making any Consolidation Loan will pay the amount thereof to the various lenders
of the respective Underlying Federal Loans and other loans being consolidated
thereby.
A Trust may be affected by Consolidation Loans in the following way. A
Trust may own Underlying Federal Loans with respect to which an institution
other than Educaid (or Educaid, if the Pre-Funded Amount has been reduced to
less than the amount of the Consolidation Loan) makes the Consolidation Loan, in
which case such Underlying Federal Loans will be prepaid in full and such
prepayment amount will constitute Available Funds for the applicable Collection
Period. See "Description of the Transfer and Servicing
Agreements--Distributions."
In accordance with the Higher Education Act, Consolidation Loans may
bear interest at a rate per annum equal to the weighted average of the interest
rates on the Underlying Federal Loans (rounded up to the nearest whole percent).
In general, a borrower must repay each Consolidation Loan in scheduled monthly
installments over a period of not more than 10 to 30 years (excluding any
Deferral Period and any Forbearance Period), depending on the original principal
amount of such Consolidation Loan. The repayment schedules for Consolidation
Loans will not exceed: 12 years for loans greater than or equal to $7,500, but
less than $10,000; 15 years for loans greater than or equal to $10,000, but less
than $20,000; 20 years for loans greater than or equal to $20,000, but less than
$40,000; 25 years for loans greater than or equal to $40,000, but less than
$60,000; and not more than 30 years for loans in excess of $60,000. Effective
July 1, 1994, Consolidation Loans for less than $7,500 will have a repayment
schedule of not more than 10 years. Borrowers may voluntarily prepay all or a
portion of any Consolidation Loan without premium or penalty. Repayment of a
Consolidation Loan must commence within 60 days after all holders of Underlying
Federal Loans have discharged the liability of the borrower thereon; PROVIDED,
HOWEVER, that such repayment obligation is deferred for as long as the borrower
remains an Eligible Student and during any applicable Deferral Phase and
Forbearance Phase.
The 1993 Amendments made a number of changes to the Consolidation Loan
Program, including requiring holders of Consolidation Loans made on or after
October 1, 1993, to pay to the Department a monthly fee equal to 1.05% per
annum.
Under the Emergency Student Loan Consolidation Act of 1997,
Consolidation Loans made between November 13, 1997, and October 1, 1998, carry a
maximum interest rate equal to 91-day T-bill plus 3.1%.
The Federal Direct Consolidation Loan Program provides borrowers with
the opportunity to consolidate outstanding student loans at interest rates
below, and income-contingent repayment terms that some borrowers may find
preferable to, those that would be available from a Seller on a Consolidation
Loan originated by such Seller under the Federal Loan Program. The availability
of such lower-rate, income-contingent loans may decrease the likelihood that a
Seller would be the originator of a Consolidation Loan with respect to borrowers
with Federal Loans, as well as increase the likelihood that a Federal Loan in a
Trust will be prepaid through the issuance of a Federal Direct Consolidation
Loan.
THE HEAL PROGRAM
GENERAL. The Public Health Service Act sets forth provisions
establishing a program to provide insured health education assistance loans
("HEAL Loans") for eligible graduate students in schools of medicine,
osteopathy, dentistry, veterinary medicine, optometry, podiatry, public health,
pharmacy, chiropractic medicine or in programs in health administration,
clinical psychology or allied health. The Public Health Service Act provides for
direct federal insurance, backed by the full faith and credit of the United
States, to holders of HEAL Loans (the "HEAL Program").
The maximum amount of new loans made under the HEAL Program during
fiscal years 1993, 1994, and 1995 may not exceed $350,000,000, $375,000,000 and
$425,000,000, respectively. Any unused ceiling during a fiscal year carries over
and is added to the ceiling established for the following fiscal year. After
fiscal year 1995, unless the HEAL Program is otherwise extended by federal law,
only those students who have previously received a HEAL Loan may receive
additional HEAL Loans for purposes of continuing or completing their educational
program or to pay interest on prior HEAL Loans received by the borrower, and the
Secretary may not insure any HEAL Loan made or installment paid after September
30, 1998. Students who had not received a HEAL Loan prior to October 1, 1995 are
not eligible to borrow under the HEAL Program. Such students may be eligible for
an increased loan limit with respect to the amount of Unsubsidized Stafford
Loans they may receive.
The Public Health Service Act is found at 42 U.S.C. Section 201, et
seq. Most provisions relating to the HEAL Program are found at 42 U.S.C.
Sections 292 through 292p. Regulations relating to the HEAL Program are found at
42 CFR Sections 60.1 through 60.61 (the "Regulations").
Proposed federal budget legislation being considered by Congress could
modify many of the provisions of the Public Health Service Act. Until final
legislation is adopted, the impact on the Financed Student Loans, if any, is
impossible to determine.
ELIGIBLE BORROWERS. A student loan is eligible for insurance by the
Secretary under the Public Health Service Act if it is made to a student who (i)
is a citizen, national, or lawful permanent resident of the United States or
permanent resident of certain territories of the United States, (ii) has been
accepted for enrollment or is enrolled in good standing at an "eligible
institution" (defined in the Public Health Service Act as a school of medicine,
osteopathic medicine, dentistry, veterinary medicine, optometry, podiatric
medicine, pharmacy, public health, allied health or chiropractic, or a graduate
program in health administration or clinical psychology), (iii) is or will be a
full-time student, (iv) has agreed that all loan proceeds received shall be used
solely for tuition, other reasonable educational expenses, including fees,
books, supplies and equipment, and laboratory expenses, and reasonable living
and transportation expenses, (v) has presented himself and submitted to
registration under the Military Selective Service Act, if required by such act,
(vi) needs the loan to pursue his or her course of study at the eligible
institution, and (vii) in the case of a pharmacy student, has satisfactorily
completed three years of training. HEAL Loans also may be made to certain
nonstudents (such as doctors who are serving as interns or residents) who (A)
previously had a HEAL Loan, (B) is in a period of deferment (as described herein
under "--Deferment Periods") during which no principal is required to be paid,
(C) has agreed that all funds received under the proposed HEAL Loan will be used
solely to repay interest due on a previous HEAL Loan, and (D) has presented
himself and submitted to registration under the Military Selective Service Act,
if required by such act. Beginning on January 1, 1996, a student is NOT eligible
to obtain a HEAL Loan for attendance at an institution that has a default rate
in excess of 20 percent. (See "--Risk-Based Premiums" below.)
ELIGIBLE INSTITUTIONS. In order to participate in the HEAL Program, a
school must enter into a written agreement with the Secretary in which the
school agrees to comply with the provisions of the Public Health Service Act and
the Regulations. The school must be legally authorized within a State, the
District of Columbia or certain territories of the United States to conduct a
course of study leading to one of the following degrees: (i) doctor of medicine,
osteopathic medicine, dentistry, optometry, veterinary medicine, podiatric
medicine, chiropractic, or clinical psychology, (ii) Bachelor or Master of
Science in pharmacy, (iii) Masters or doctoral degree in health administration,
or (iv) graduate or equivalent degree in public health. The school must also be
accredited by a recognized agency approved for that course of study by the
Secretary of Education, except where a school is not eligible for accreditation
solely because it is too new. A new school is eligible if the Secretary of
Education determines that it can reasonably expect to be accredited before the
beginning of the academic year following the normal graduation date of its first
entering class.
ELIGIBLE LENDERS. The following types of organizations are eligible to
apply to the Secretary to be eligible lenders of HEAL Loans: (i) a financial or
credit institution (including 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; (ii) a pension fund approved by
the Secretary; (iii) an agency or instrumentality of a State; (iv) an eligible
institution under the HEAL Program; and (v) a private nonprofit entity,
designated by the State, regulated by the State, and approved by the Secretary.
In addition, the following types of organizations are eligible to apply to the
Secretary to be holders of HEAL Loans: (i) public entities in the business of
purchasing student loans; (ii) the Student Loan Marketing Association; and (iii)
other eligible lenders. If an application is approved by the Secretary, eligible
lenders enter into a comprehensive contract (as described further in the
following subsections) with the Secretary pursuant to which the lender agrees to
comply with all of the laws, regulations and other requirements applicable to
its participation in the HEAL Program and the Secretary agrees to insure each
HEAL Loan held by the lender.
CERTIFICATE OF LOAN INSURANCE. The Public Health Service Act provides
that the Secretary may issue a certificate of comprehensive insurance coverage
to any eligible lender who so applies, which will insure all insurable loans
made by that eligible lender after the date the certificate is issued until a
specified cutoff date and within the limits of an aggregate maximum amount
stated in the certificate. If the Secretary determines that the eligible lender
has failed to (i) exercise reasonable care and diligence in the making and
collection of loans, (ii) make reports and statements required by the Public
Health Service Act, or (iii) pay required federal loan insurance premiums, the
Secretary is required to disqualify that lender from obtaining further insurance
on HEAL Loans until the Secretary is satisfied that such failure has ceased and
the eligible lender will comply with such requirements. The rights of an
eligible lender under a certificate of insurance may be assigned to another
eligible lender (including a public entity in the business of purchasing student
loans) or the Student Loan Marketing Association.
ANNUAL AND AGGREGATE LOAN LIMITS. The total principal amount of HEAL
Loans which may be made to a student enrolled in a school of medicine,
osteopathic medicine, dentistry, veterinary medicine, optometry, or podiatric
medicine may not exceed $20,000 during any academic year and may not at any time
exceed $80,000 in the aggregate. The total principal amount of HEAL Loans which
may be made to a student enrolled in a school of pharmacy, public health, allied
health, or chiropractic, or a graduate program in health administration or
clinical psychology may not exceed $12,500 during any academic year and may not
at any time exceed $50,000 in the aggregate. Checks for the proceeds of HEAL
Loans are made payable jointly to the borrower and the eligible institution in
which the borrower is enrolled.
INTEREST RATE. The interest rate on HEAL Loans may be calculated on a
fixed rate or variable rate basis. Whichever method is selected must continue
over the life of the loan unless the loan is consolidated (see "Consolidation of
HEAL Loans" herein). The interest rate may not exceed an annual rate equal to
the average of the bond equivalent rates of the 91-day Treasury bills auctioned
for the previous quarter plus 3%, rounded to the next higher one-eighth of 1%.
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 executed, but the rate
may not exceed the maximum rate described in the preceding sentence as
determined by the Secretary for such calendar quarter. Interest that is
calculated on a variable rate basis may change every calendar quarter as the
market price of U.S. Treasury bills changes, but the rate may not exceed the
maximum rate described above.
Interest accrues from the date the loan is disbursed until the loan is
paid in full. Unpaid accrued interest may be compounded not more frequently than
semiannually and added to principal; however, a lender may postpone the
compounding of interest before the beginning of the repayment period or during
periods of deferment or forbearance and add interest to principal at the time
repayment of principal begins or resumes.
The interest rate on HEAL Loans is not subject to any federal or state
usury laws that limit the rate or amount of interest payable on loans.
REPAYMENT TERMS. HEAL Loans must provide for repayment of the
principal amount, except during a deferment period described in the following
subsection, in installments over a period of not less than 10 years (unless
sooner repaid at the borrower's option) nor more than 25 years beginning not
earlier than 9 months nor later than 12 months after (i)(a) the date on which
the borrower ceases to be a participant in an accredited internship or residency
program of not more than four years in duration, (b) the borrower completes the
fourth year of an accredited internship or residency program of more than four
years in duration, or (c) the borrower, if not a participant in a program
described in clause (a) or (b) above, ceases to carry the normal full-time
academic workload as determined by the eligible institution, or (ii) the date on
which a borrower who is a graduate 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 (a) is directly related to the health profession for which the borrower
prepared at an eligible institution, as determined by the Secretary, and (b) may
be engaged in by the borrower during such a two-year period which begins within
12 months after the completion of the borrower's participation in a program
described in clauses (i)(a) or (b) above or prior to the completion of the
borrower's participation in such program. Except for deferment periods (as
described in the following subsection), the payments made on all outstanding
HEAL Loans by a borrower during any year must be at least equal to the annual
interest on the outstanding principal (unless the borrower agrees in writing to
make payments during any year or any repayment period in a lesser amount), and
lenders and holders of HEAL Loans must offer borrowers graduated loan repayment
schedules that, during the first five years of loan repayment, are based on the
borrower's debt-to-income ratio.
Any deferment period (as described in the following subsection) is not
included in the maximum 25 year total loan repayment period, but in no event may
the period of the loan exceed 33 years from the date of execution of the note or
written agreement evidencing the loan.
DEFERMENT PERIODS. All HEAL Loans must provide that periodic
installments of principal and interest need not be paid, but interest will
accrue and be added to principal if not paid, during any "deferment period"
which is described in the Public Health Service Act as any period (i) during
which the borrower is pursuing a full-time course of study at an eligible
institution under the Public Health Service Act (or at an institution defined by
section 481(a) of the Higher Education Act); (ii) not in excess of four years
during which the borrower is a participant in an accredited internship or
residency program (including any period in such program in which the borrower
ceases to be a participant or the borrower completes the fourth year of such
program which has a duration of greater than four years); (iii) not in excess of
three years during which the borrower is (a) a member of the Armed Forces of the
United States, (b) in service as a volunteer under the Peace Corps Act, (c) a
member of the National Health Service Corps, (d) in service as a full-time
volunteer under Title I of the Domestic Volunteer Service Act of 1973, or (c)
practicing primary care and has completed an accredited internship or residency
training program in osteopathic general practice, family medicine, general
internal medicine, preventive medicine, or general pediatrics; (iv) not in
excess of one year for borrowers who are graduates of chiropractic schools; (v)
any period not in excess of two years which is described in clause (ii) of the
first paragraph of the preceding subsection.
FORBEARANCE. Forbearance is defined in the Regulations as "an
extension of time for making loan payments or the acceptance of smaller payments
than were previously scheduled to prevent a borrower from defaulting on his or
her payment obligations". Provided that the borrower and the lender execute a
written agreement of forbearance, a lender or holder must grant forbearance
whenever the borrower is temporarily unable to make scheduled payments on a HEAL
Loan and the borrower continues to repay the loan in an amount commensurate with
his or her ability to repay the loan. Each forbearance period may not exceed six
months, and the total period of forbearance (with or without interruption) may
not exceed two years (except under certain circumstances approved by the
Secretary).
NO ENDORSEMENT OR SECURITY PERMITTED. All HEAL Loans are made directly
to the student without security and without endorsement (unless the student is a
minor and applicable law requires an endorsement to create a binding
obligation). Endorsement is defined in the Regulations to mean the signature of
anyone other than the borrower who is to assume either primary or secondary
liability on the note.
CONSOLIDATION OF HEAL LOANS. HEAL Loans may be consolidated, but the
lender or holder must first inform the borrower of the effect of the
consolidation on the interest rate (as described in the following sentence) and
explain to the borrower that he or she is not required to agree to the
consolidation. The maximum interest rate on a consolidation loan may not exceed
the maximum rate as determined by the Secretary (and described herein under
"--Interest Rate") for the calendar quarter during which the consolidation loan
is made. HEAL Loans also may be consolidated with a borrower's outstanding
Federal Loans; however, unlike most Federal Loans, HEAL Loans consolidated
pursuant to the provisions of the Higher Education Act will not be eligible for
Special Allowance Payments or Interest Subsidy Payments.
DEFAULT OF BORROWER. Upon default by the borrower of a HEAL Loan and
after substantial collection efforts (including the commencement and prosecution
of an action against the borrower unless the amount of such loan was made in an
amount less than $2,500 or the Secretary determines that the eligible lender or
holder of the loan has made reasonable efforts to serve process on the borrower
and has been unsuccessful with respect to such efforts or the prosecution of
such an action would be fruitless because of the financial or other
circumstances of the borrower), the Secretary is required to pay to the
beneficiary the amount of the loss sustained by the insured. The United States
is subrogated for all of the rights of the holder of the defaulted obligation
and is entitled to an assignment of the note or other evidence of the insured
loan by the beneficiary. Any federal or state statutes of limitations do not
apply to any HEAL Loan which has been assigned to the Secretary.
The Regulations define default as "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 finds it reasonable to conclude that the borrower no longer intends to
honor the obligation to repay the loan." In the case of loans payable in monthly
installments, such failure to pay must have persisted for at least 120 days. In
the case of loans payable in less frequent installments, such failure to pay
must have persisted for at least 180 days. If the lender or holder determines
that it is not appropriate to commence and prosecute an action against a default
borrower, it must file a default claim with the Secretary within 30 days after a
loan has been determined to be in default. The lender must also have requested
preclaim assistance from the Public Health Service before the Secretary will pay
a default claim.
In an effort to collect on defaulted HEAL Loans, payments to a
borrower under any federal law (i.e. Medicare and Medicaid) for health services
rendered by a borrower in default on an outstanding HEAL Loan are required to be
reduced, after notice and opportunity for a hearing, up to the amount of the
remaining balance on such defaulted HEAL Loans.
DEATH OR DISABILITY OF BORROWER. The Secretary will pay the
outstanding balance on any HEAL Loan of a borrower who dies or becomes
permanently and totally disabled. The Regulations state that a borrower is
permanently and totally disabled if the borrower is "unable to engage in any
substantial gainful activity because of a medically determinable impairment
which the Secretary expects to continue for a long and indefinite period of time
or to result in death". A lender or holder must file a death or disability claim
with the Secretary within 30 days after such lender or holder receives
documentation of the borrower's death or 30 days after the lender or holder has
been notified that the Secretary has determined the borrower to be permanently
and totally disabled.
DISCHARGE IN BANKRUPTCY. A HEAL Loan may be released by a discharge in
bankruptcy under the U.S. Bankruptcy Code but only if such discharge is granted
(i) after the expiration of the seven-year period beginning on the first date
the borrower of the HEAL Loan is required to commence repayment, (ii) upon a
finding of the Bankruptcy Court that not discharging such debt would be
unconscionable, and (iii) upon the condition that the Secretary has not waived
his rights to reduce payments made to a borrower for health services rendered
under any federal law as further described in the second paragraph of the
subsection entitled "Default of Borrower".
RISK-BASED PREMIUMS. The Secretary assesses a risk-based premium to an
eligible borrower and, in certain circumstances, an eligible institution, on all
HEAL Loans based on the "default rate" (as defined below) of the eligible
institution the eligible borrower attends. The Public Health Service Act
establishes three rate levels known as the "low-risk rate", the "medium-risk
rate", and the "high-risk rate" which are further described as follows:
Low-Risk Rate: Applies to an eligible borrower seeking
a HEAL Loan for attendance at an eligible
institution with a default rate of not
greater than five percent. The premium
assessed to such eligible borrower is equal
to six percent of the principal amount of
the loan. No premium is assessed to the
eligible institution.
Medium-Risk Rate: Applies to an eligible borrower seeking
a HEAL Loan for attendance at an eligible
institution with a default rate grater than
five percent but not greater than ten
percent. The premium assessed to such
eligible borrower is equal to eight percent
of the principal amount of the loan, and the
premium assessed to the eligible
institution is equal to five percent of the
principal amount of the loan.
High-Risk Rate: Applies to an eligible borrower seeking
a HEAL Loan for attendance at an eligible
institution with a default rate greater than
ten percent but not greater than 20
percent. The premium assessed to such
eligible borrower is equal to eight percent
of the principal amount of the loan, and the
premium assessed to the eligible
institution is equal to ten percent of the
principal amount of the loan.
The risk-based premium to any eligible borrower is reduced by 50 percent if a
credit worthy parent or other responsible party co-signs the loan note.
Any eligible institution in which the medium-risk rate or the
high-risk rate applies is required to submit to the Secretary for approval an
annual default management plan that specifies the short-term and long-term
procedures the institution will incorporate to minimize defaults on HEAL Loans.
Students attending eligible institutions with a default rate greater than 20
percent are not eligible to receive a HEAL Loan. The Secretary may consider
mitigating circumstances prior to making such institution ineligible for the
HEAL Program.
The "default rate" is defined in the Public Health Service Act to mean
the percentage determined by the ratio of (i) the principal amount of HEAL Loans
(A) that are made with respect to such eligible institution and that entered
repayment status after April 7, 1987; AND (B) for which amounts have been paid
to insurance beneficiaries due to the default of the borrower, excluding any
loan which has been discharged in bankruptcy or for which the borrower begins
payments to the Secretary after the loan has been assigned to the Secretary as a
result of the Secretary making an insurance payment on such loan, by (ii) the
total principal amount of HEAL Loans that are made with respect to such eligible
institution and that entered repayment status after April 7, 1987.
INSURANCE ACCOUNT. The Public Health Service Act established an
insurance account, which is available without fiscal year limitation to the
Secretary for making payments in connection with the collection and default of
HEAL Loans. All amounts received by the Secretary as premium charges for
insurance and as receipts, earning, or proceeds derived from any claim or other
assets acquired by the Secretary in connection with the HEAL Program are
deposited in such account. All payments in connection with the default of HEAL
Loans are paid from such account. The Public Health Service Act also provides
that in the event moneys in such account are insufficient to make payments in
connection with the collection or default of any HEAL Loan, the Secretary of the
Treasury may lend such amounts as may be necessary to make the payments in such
insurance account, subject to the Federal Credit Reform Act of 1990.
THE PRIVATE LOAN PROGRAMS
GENERAL. It is expected that the Private Loans primarily will be
originated under one or more of the following Private Loan Programs: (i) the
Option 4 Program, (ii) the TERI Alternative Program and the PEP Program, (iii)
the PLEASE Program and (iv) the PAL Program. The Private Loans may, to a lesser
extent, be originated under other Private Loan Programs that will be identified
in the related Prospectus Supplement. As of the date of this Prospectus,
ClassNotes does not originate loans under a Private Loan Program. Therefore,
until such time, if any, as ClassNotes originates loans under one or more
Private Loan Programs, all Private Loans sold to a Trust by ClassNotes will be
Purchased Loans. The following is a brief description of the Private Loan
Programs identified above.
OPTION 4 PROGRAM. The Option 4 Program is a private loan program
established by United Student Aid Funds, Inc. ("USAF") and designed to help full
time students from families who are not eligible for Federal Loans, HEAL Loans
or other federal grants or loans or, if eligible, need to borrow additional
funds to finance their college educations. USAF is a private non-profit
corporation located in Indianapolis, Indiana.
Parents of full-time students enrolled or accepted for enrollment at
an accredited college or university are eligible to apply for a loan under the
Option 4 Program ("Option 4 Loans"). In general, applicants are required to have
an annual income of at least $15,000 and a monthly debt burden, including the
Option 4 Loan, of no greater than 40% of all monthly income. Eligible borrowers
of an Option 4 Loan may borrow from $2,000 up to $10,000 per academic year for
up to five years. However, the amount of the Option 4 Loan plus other financial
aid received by a student may not exceed the cost of education, as determined by
the school. A 4% guarantee fee is deducted from the loan proceeds.
The interest rate on Option 4 Loans varies and is indexed to the
average quarterly bond equivalent rate of the 91 day U.S. Treasury Bills plus
3.50%, subject to a maximum rate of 18%. The interest rate is adjusted on the
first day of February, May, August and November of each year.
Borrowers of Option 4 Loans may elect between two repayment plans.
Under the standard plan, borrowers begin repayment of principal and interest
within 45 days of disbursement of the loan. Under the deferred principal
repayment plan, borrowers may defer principal payments and make interest only
payments while the student is in school. Principal and interest payments will
begin 45 days after the student graduates or leaves school, or earlier if
requested by the borrower. Borrowers may take up to 15 years to repay. The
minimum monthly payment, once principal and interest payments begin, is the
greater of $50 or the amount that will result in loan repayment within the 15
year limit. Option 4 Loans may be prepaid at any time without penalty.
Each Option 4 Loan is funded by a lender selected by USAF and is
guaranteed by USAF. Currently, all Option 4 Loans are serviced by Educational
Loan Servicing Center, Inc., an affiliate of USAF.
TERI ALTERNATIVE PROGRAM. The TERI Alternative Program is a private
loan program established by The Education Resources Institute ("TERI") and
designed to offer loans to students enrolled in nationally or regionally
accredited 2- to 4-year degree-granting institutions in the United States and
Canada. TERI is a private non-profit corporation headquartered in Boston,
Massachusetts. To be eligible for a loan under the TERI Alternative Program
("TERI Alternative Loans"), a student must be deemed creditworthy or provide a
creditworthy co-borrower with a two-year credit history and a debt-to-income
ratio not to exceed 40%. Also at least one applicant must be a U.S. citizen or a
certified permanent resident of the United States.
In determining whether a student or co-borrower is creditworthy, a
credit bureau report is obtained for each applicant, including the student. A
satisfactory credit history is defined as making continuous and prompt payment
on all credit obligations such as mortgages, personal loans, credit cards, auto
loans, and especially, education loans. There should be no record of charged off
loans within the past five years nor a record of foreclosure, repossession, open
judgment or suit, unpaid tax lien, unpaid prior education loan defaults or other
negative public record items in the past seven years. There should not be a
record of bankruptcy within the past 10 years (exceptions may be granted where
the applicant provides written documentation demonstrating that the
circumstances leading up to the bankruptcy were beyond the applicant's control).
Eligible borrowers of a TERI Alternative Loan may borrow from $2,000
up to the cost of education, less any financial aid received per academic year.
A 5% guarantee fee is deducted from the loan proceeds.
The interest rate on TERI Alternative Loans varies depending upon the
lender. Several lenders currently offer a fixed rate. The remaining lenders
offer variable rates ranging from the prime rate plus 1.5% to the prime rate
plus 2.0%.
The TERI Alternative loan may be repaid in up to 25 years, depending
on the total amount borrowed. Repayment of the TERI Alternative Loan begins
within 45 days after the disbursement date. However, deferment of principal is
allowed for up to four years, with only interest being paid, while the student
is in school. Payment of principal and interest begins within 45 days of
graduation or withdrawal from school. Once principal payments commence, the
monthly principal and interest payment remains fixed throughout the life of the
loan. Therefore, for variable rate loans fluctuations in the interest rate are
reflected in the length of the repayment term, not the monthly amount, unless an
increase in the monthly amount is needed to keep the repayment period within 25
years. TERI Alternative Loans may be prepaid at any time without penalty.
Each TERI Alternative Loan is funded by one of the banks participating
in the TERI Alternative Program and is guaranteed by TERI. TERI guarantees
payment of 100% of the principal (including any interest or fees capitalized
from time to time) and accrued interest for each TERI Alternative Loan as to
which any one of the following events has occurred:
(a) failure by the borrower thereof to make monthly principal
or interest payments on such TERI Alternative Loan when due,
provided such failure continues for a period of 120 days;
(b) any filing by or against the borrower thereof of a
petition in bankruptcy pursuant to any chapter of the Federal
bankruptcy code, as amended;
(c) the death of the borrower thereof; or
(d) the total and permanent disability of the borrower thereof
to be employed on a full-time basis, as certified by two
qualified physicians.
TERI's guarantee obligations with respect to any TERI Alternative Loan
is conditioned upon certain conditions, including, but not limited to, the
following: (i) the origination and servicing of the such TERI Alternative Loans
being performed in accordance with the TERI Alternative Program and other
applicable requirements, (ii) the timely payment to TERI of all guarantee fees
payable with respect to such TERI Alternative Loan, (iii) the timely submission
to TERI of all required pre-claim delinquency status notifications and of the
claim with respect to such TERI Alternative Loan and (iv) the transfer and
endorsement of the promissory note evidencing such TERI Alternative Loan to TERI
upon and in connection with making a claim to receive guarantee payments
thereon. Failure to comply with any of the applicable conditions, including the
foregoing, may result in the refusal of TERI to honor its guarantee obligations
with respect to such TERI Alternative Loan. In addition, in the event that any
TERI Alternative Loan is determined to be unenforceable because the terms of
such TERI Alternative Loan or the forms of the application or promissory note
related thereto violate any provisions of applicable state law, TERI's guarantee
obligation is reduced to 50% of principal (including capitalized interest and
fees) and accrued interest with respect to such TERI Alternative Loan. Under a
Sale and Servicing Agreement, such failure to comply or such unenforceability
would constitute a breach of ClassNotes' covenants, representation and/or
warranties, as the case may be, and would create an obligation of ClassNotes to
purchase such TERI Alternative Loan. See "Description of the Transfer and
Servicing Agreements -- Sale of Financed Student Loans; Representations and
Warranties" and "--Master Servicer Covenants".
TERI, as a guarantor of Private Loans, is not entitled to any federal
reinsurance or assistance from the Department. Although TERI maintains a loan
loss reserve intended to absorb losses arising from its guarantee commitments,
there can be no assurance that the amount of such reserve will be sufficient to
cover the obligations of TERI over the term of the TERI Alternative Loans.
PEP PROGRAM. The PEP Program is a private loan program established by
TERI and designed to offer loans ("PEP Loans") to graduate and professional
school students enrolled at least half-time in an accredited 2- to 4-year
degree-granting institution in the United States and Canada. The underwriting
standards for the PEP Program are substantially the same as described above for
the TERI Alternative Program.
Eligible borrowers of PEP Loans may borrow up to $7,500 or $20,000 on
a student's good credit history, or up to $20,000 with a creditworthy
co-borrower. Law students can borrow up to $12,000 on their own signature. The
aggregate total amount of borrowings is based on future income projections, with
an aggregate total of $80,000 with a co-borrower. A 9% guarantee fee (6% with a
co-borrower) is deducted from the loan proceeds.
The interest rates on PEP Loans vary by lender, but under current
guidelines cannot exceed the prime rate plus 2.0%. PEP loans may be repaid in up
to 20 years, depending on the total amount borrowed. Repayment of the PEP Loan
begins within 45 days after the disbursement date. Further, both principal and
interest may be deferred for up to 4 1/2 years while the student is in school
(any such deferred interest will be capitalized and added to principal). Medical
students may request a second deferment on the new principal balance while
completing their internship or residency (with a maximum deferment of 8 1/2
years). Once principal payments commence, the monthly principal and interest
payment remains fixed throughout the life of the loan. Therefore, for variable
rate loans fluctuations in the interest rate are reflected in the length of the
repayment term, not the monthly amount, unless an increase in the monthly amount
is needed to keep the repayment period within 20 years. PEP Alternative Loans
may be prepaid at any time without penalty.
Each PEP Loan is funded by one of the banks participating in the PEP
Program and is guaranteed by TERI. TERI's guarantee obligations under the PEP
Program are substantially the same as its guarantee obligations described above
for the TERI Alternative Program.
PLEASE PROGRAM. Parent Loans for Elementary and Secondary Education is
a private loan program established by TERI and designed to offer loans ("PLEASE
Loans") to borrowers interested in financing the education expense of a student
associated with attendance at a private primary or secondary school. The
underwriting standards for the PLEASE Program are substantially the same as
described for the TERI Alternative Program.
Eligible borrowers of PLEASE Loans may borrow up to the cost of
education less any financial aid with a maximum amount borrowed of $20,000 per
school year. The minimum amount borrowed is $1,000. The aggregate total amount
of borrowings is $80,000. A 6% guarantee fee is deducted from the loan proceeds.
Application fees and interest rates on PLEASE Loans vary by lender,
but the interest rate cannot under current guidelines exceed the prime rate plus
2.0%. PLEASE loans may be repaid in up to 10 years, depending on the total
amount borrowed. Immediate repayment of principal and interest payments on the
PLEASE Loan begins within 45 days after the disbursement date. Variable rate
loan fluctuations in the interest rate are reflected in the length of the
repayment term, not the monthly amount, unless an increase in the monthly amount
is needed to keep the repayment period within 10 years. PLEASE Loans may be
prepaid at any time without penalty.
Each PLEASE Loan is funded by one of the lenders participating in the
PLEASE Program and is guaranteed by TERI. TERI's guarantee obligations under the
PLEASE Program are substantially the same as its guarantee obligations described
for the TERI Alternative Program.
PAL PROGRAM. The PAL Program is a private loan program established by
HEMAR Insurance Corporation of America ("HICA") designed to offer loans ("PAL
Loans") to meet the educational financing needs of students enrolled in a
four-year collegiate or graduate degree granting educational institution which
has been approved for participation in the PAL Program by HICA. The underwriting
standards for the PAL Program are substantially the same as described above for
the TERI Alternative Program.
Eligible borrowers of PAL Loans may borrow from $1,000 up to a maximum
annual limit of the lesser of (i) the student's estimated cost of attendance for
the loan period less the estimated amount of assistance that a school is aware a
student has been or will be awarded in federal, state or private scholarships or
loan programs and (ii) the amount of allowable debt after a credit analysis is
performed. A 6% guarantee fee is deducted from the loan proceeds.
The interest rate on PAL Loans varies depending on the lender. PAL
Loans may be repaid in up to 20 years. Repayment of the PAL Loan may begin
immediately after the disbursement date. Both principal and interest may be
deferred for up to the earlier of (i) six months after the date the borrower
ceases to be at least a half-time student or (ii) 5 years after the borrower's
first disbursement of a PAL Loan (any such deferred interest will be capitalized
and added to principal). PAL Loans may be prepaid at any time without penalty.
Each PAL Loan is funded by one of the banks participating in the PAL
Program and is guaranteed by HICA. If a borrower defaults on a PAL Loan, HICA
will pay the lender 100% of the unpaid principal (including any interest or fees
capitalized from time to time) and accrued interest. However, HICA's guarantee
obligations with respect to any PAL Loan is conditioned upon certain conditions,
including, but not limited to, the following: (i) the timely payment to HICA of
all guarantee fees payable with respect to such PAL Loan, (ii) the origination,
servicing and collection of such PAL Loan being performed in accordance with the
PAL Program, (iii) the timely submission to HICA of the executed surety
certificate, a complete payment history and a complete collection efforts
history, and (iv) the transfer and endorsement of the original executed note
evidencing such PAL Loan. Failure to comply with any of the applicable
conditions, including the foregoing, may result in the refusal of HICA to honor
its guarantee obligations with respect to such PAL Loan.
THE FINANCED STUDENT LOAN POOL
The pool of Financed Student Loans will include the Financed Student
Loans acquired by the applicable Eligible Lender Trustee on behalf of a Trust
from time to time as of the applicable Cut-off Date and, if set forth in the
related Prospectus Supplement, any Additional Student Loans acquired by the
applicable Eligible Lender Trustee on behalf of a Trust from the Sellers during
the applicable Funding Period.
The Financed Student Loans will be selected from the Sellers'
portfolios of Federal Loans, HEAL Loans and Private Loans (including Purchased
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 Federal Program, the HEAL Program
or the applicable Private Loan 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,
a Proprietary School or, with respect to PLEASE Loans, to, or on behalf of, a
student who is enrolled in private primary or secondary schools, (ii) contains
terms in accordance with those required by the applicable Program, the Guarantee
Agreements and other applicable requirements, and (iii) is not more than 90 days
past due as of the related Cut-off Date. The relative percentages of each type
of Financed Student Loan, as well as the relative percentages of Financed
Student Loans originated by a Seller and Purchased Loans, to be included in the
pool of Financed Student Loans will be determined from time to time by the
Sellers. No selection procedures believed by the Sellers to be adverse to the
Securityholders will be used in selecting the Financed Student Loans.
The Additional Student Loans to be conveyed to the applicable Eligible
Lender Trustee on behalf of a Trust during each Funding Period are required to
comply with the criteria set forth above. See "Description of the Transfer and
Servicing Agreements--Additional Fundings."
In addition to the criteria described in the preceding paragraphs, an
applicable Surety Provider or other provider of Enhancement may require certain
other characteristics for the Additional Student Loans. However, following each
transfer of Additional Student Loans to an Eligible Lender Trustee on behalf of
a Trust, the aggregate characteristics of the entire pool of Financed Student
Loans, including the composition and type of the Financed Student Loans, the
distribution by weighted average interest rate and the distribution by principal
amount to be described in tables included in each Prospectus Supplement, may
vary significantly from those of the Financed Student Loans, if any, previously
transferred to such Trust. In addition, the distribution by weighted average
interest rate applicable to the Financed Student Loans on any date following the
related Cut-off Date may vary significantly from that set forth in the tables
included in the related Prospectus Supplement as a result of variations in the
effective rates of interest applicable to the Financed Student Loans. Moreover,
the information included in the related Prospectus Supplement with respect to
the original term to maturity and remaining term to maturity of Financed Student
Loans as of the related Cut-off Date may vary significantly from the actual term
to maturity of any of the Financed Student Loans as a result of the granting of
deferral and forbearance periods with respect thereto.
Each Prospectus Supplement will set forth, as of the related Cut-off
Date, with respect to the Pool Balance of a Trust upon the issuance of the
related Series of Notes, the composition of the Financed Student Loans, the
distribution by loan type, the distribution by interest rates, the distribution
by outstanding principal balance, the distribution by remaining term to
scheduled maturity and the distribution by borrower payment status.
Each of the Federal Loans and HEAL Loans provides or will provide for
the amortization of the outstanding principal balance of such Financed Student
Loan over a series of regular payments. Each regular payment consists of an
installment of interest which is calculated on the basis of the outstanding
principal balance of such Financed Student Loan multiplied by the applicable
interest rate and further multiplied by the period elapsed (as a fraction of a
calendar year) since the preceding payment of interest was made. As payments are
received in respect of such Financed Student Loan, the amount received is
applied first to interest accrued to the date of payment and the balance is
applied to reduce the unpaid principal balance. Accordingly, if a borrower pays
a regular installment before its scheduled due date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be less than it would have been had the payment been made as scheduled, and the
portion of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if a borrower pays a monthly installment
after its scheduled due date, the portion of the payment allocable to interest
for the period since the preceding payment was made will be greater than it
would have been had the payment been made as scheduled, and the portion of the
payment applied to reduce the unpaid principal balance will be correspondingly
less. In either case, subject to any applicable Deferral Periods 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. The Private Loans may contain different amortization
provisions.
MATURITY AND PREPAYMENT ASSUMPTIONS
The rate of payment of principal of the Notes and the Certificates and
the yield on the Notes and the Certificates will be affected by (i) prepayments
of the Financed Student Loans that may occur as described below, (ii) the sale
by the related Trust of Financed Student Loans, (iii) the application of
Additional Principal Payments, if any, and (iv) the issuance by a Trust of
additional Securities. All the Financed Student Loans are prepayable in whole or
in part by the borrowers at any time (including by means of Consolidation Loans
and Serial Loans as discussed below) and may be prepaid as a result of default,
death, disability, bankruptcy, school closing or false certification by the
school, and subsequent liquidation or collection of Guarantee Payments with
respect thereto. The rate of such prepayments cannot be predicted and may be
influenced by a variety of economic, social and other factors, including those
described below. In general, the rate of prepayments may tend to increase to the
extent that alternative financing becomes available at prevailing interest rates
which fall significantly below the interest rates applicable to the Financed
Student Loans. However, because many of the Financed Student Loans bear interest
at a rate that either actually or effectively is floating, it is impossible to
determine whether changes in prevailing interest rates will be similar to or
vary from changes in the interest rates on the Financed Student Loans. To the
extent borrowers of Financed Student Loans elect to borrow Consolidation Loans,
or a Trust sells Serial Loans, such Financed Student Loans will be prepaid;
provided, however, that if the related Seller makes any such Consolidation Loan
during the Funding Period, if applicable (in which event such Seller will then
sell that Consolidation Loan to the applicable Eligible Lender Trustee, to the
extent that funds are available in the Pre-Funding Account for the purchase
thereof), the aggregate outstanding principal balance of Financed Student Loans
(after giving effect to the addition of such Consolidation Loan) will be at
least equal to and in most cases greater than such balance prior to such
prepayment. See "The Student Loan Financing Business--Federal Loans Under the
Program--Consolidation Loans." There can be no assurance that the applicable
Seller rather than another institution will make any particular Consolidation
Loan with respect to borrowers with Financed Student Loans or that borrowers
will not choose to obtain a consolidation loan under the Federal Direct Student
Loan Program. In addition, a Seller is obligated to purchase any Financed
Student Loan pursuant to a Sale and Servicing Agreement as a result of a breach
of any of its representations and warranties, and the applicable Master Servicer
is obligated to purchase any Financed Student Loan pursuant to a Sale and
Servicing Agreement as a result of a breach of certain covenants with respect to
such Financed Student Loan, in each case where such breach materially adversely
affects the interests of the Certificateholders or the Noteholders in that
Financed Student Loan and is not cured within the applicable cure period (it
being understood that any such breach that does not affect any Guarantor's
obligation to guarantee payment of such Financed Student Loan will not be
considered to have a material adverse effect for this purpose). See "Description
of the Transfer and Servicing Agreements--Sale of Financed Student Loans;
Representations and Warranties" and "--Servicer Covenants." See also
"--Termination" regarding the Sellers' option to purchase the Financed Student
Loans of a Trust when the aggregate Pool Balance of such Trust is less than or
equal to 10% of the applicable Aggregate Pool Balance and "--Insolvency Event"
regarding the sale of Financed Student Loans if a Seller Insolvency Event
occurs.
Scheduled payments with respect to, and maturities of, the Financed
Student Loans may be extended, including pursuant to Grace Periods, Deferral
Periods and, under certain circumstances, Forbearance Periods or as a result of
refinancings through Consolidation Loans to the extent such Consolidation Loans
are sold to the applicable Eligible Lender Trustee on behalf of a Trust as
described above. In that event, the fact that such Consolidation Loans will
likely have longer maturities than the Financed Student Loans they are replacing
may lengthen the remaining term of the Financed Student Loans and the average
life of the Notes and the Certificates of the related Trust. The rate of payment
of principal of the Notes and the Certificates and the yield on the Notes and
the Certificates may also be affected by the rate of defaults resulting in
losses on 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.
If set forth in a Prospectus Supplement, amounts otherwise required to
be deposited into the Reserve Account, if established, may be applied as an
Additional Principal Payment to the Class of Notes then entitled to receive
payments of principal (or, after all Classes of Notes have been paid in full,
the Certificates).
Each Trust may issue, from time to time, several Series and Classes of
Securities. The payment priorities of each Series and Class will be described in
the applicable Prospectus Supplement. Such priorities may provide that a
subsequently issued Class of Notes receive payments of principal prior to a
previously issued Class of Notes, even if such previously issued Class of Notes
had been receiving payments of principal. However, each Class of Securities will
be payable in full by its Final Maturity Date.
If a Note Surety Bond or Certificate Surety Bond has been issued with
respect to a Class of Notes or the Certificates, the related Surety Provider
will generally be required on the Final Maturity Date relating to a Class of
Notes or the Certificates (after giving effect to all distributions to be made
on each such date), pursuant to the applicable Note Surety Bond or Certificate
Surety Bond, to provide an amount equal to all unpaid principal and interest
payable in respect of the related Class of Notes or the Certificates (other than
Noteholders' Interest Carryover and Certificateholders' Interest Carryover). If
the Surety Provider fails to satisfy such obligations, the affected
Securityholders would likely incur losses. In addition, the maturity of many of
the Financed Student Loans will extend well beyond the final Maturity Date of
certain Classes of Notes.
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 Securityholders.
Such reinvestment risks may include the risk that interest rates and the
relevant spreads above particular interest rate bases are lower at the time
Securityholders receive payments from the related Trust than such interest rates
and such spreads would otherwise have been had such prepayments not been made or
had such prepayments been made at a different time.
INSURANCE OF STUDENT LOANS; GUARANTORS OF FEDERAL LOANS
GENERAL. Each Federal Loan is required to be guaranteed as to
principal and interest by a Guarantor and reinsured by the Department under the
Higher Education Act and must be eligible for Special Allowance Payments and,
with respect to each Financed Student Loan that is not an SLS Loan, PLUS Loan or
Unsubsidized Stafford Loan, Interest Subsidy Payments paid by the Department.
FEDERAL REINSURANCE. Under the Higher Education Act, each Guarantor is
reimbursed by the Department pursuant to certain agreements between the
Department and such Guarantor for amounts paid under its Guarantee Agreement.
The amount of reimbursement by the Department for Federal Loans for each fiscal
year commencing October 1 varies for each Guarantor depending on the annual
claims rate for that Guarantor (i.e., the dollar amount of reimbursement claims
filed by that Guarantor during that fiscal year as a percentage of the
outstanding aggregate principal amount at the end of the preceding fiscal year
of those Federal Loans it guarantees whose borrowers were repaying such Federal
Loans at the end of the preceding fiscal year) as follows:
CLAIMS RATE REIMBURSEMENT TO GUARANTOR BY THE
OF GUARANTOR DEPARTMENT OF EDUCATION (1)
0% to and including 5% 100%
Greater than 5% to and including 9% 100% of claims to and
including 5%; 90% of
claims greater than 5%
Greater than 9% 100% of claims to and
including 5%; 90% of
claims greater than 5% to
and including 9%; and 80%
of claims greater than 9%
(1) Each of the reimbursement percentages listed above is reduced
by two percentage points for a loan made on or after October
1, 1993.
The claims experience for any Guarantor is not accumulated from year
to year for purposes of this test but is determined solely on the basis of
claims filed in any one federal fiscal year. The Higher Education Act provides
that the obligation of the Department to reimburse each such Guarantor as
described above is, subject to compliance with the Higher Education Act,
supported by the full faith and credit of the United States and that Guarantors
are deemed to have a contractual right against the United States to receive
reinsurance in accordance with its provisions.
Under the 1993 Amendments, Congress made a number of changes that may
adversely affect the financial condition of the Guarantors, including reducing
to 98% the maximum percentage of Guarantee Payments the Department will
reimburse for loans first disbursed on or after October 1, 1993, reducing
substantially the premiums and default collections that Guarantors are entitled
to receive and/or retain and giving the Department broad powers over Guarantors
and their reserves. The 1993 Amendments also reduced Guarantors default
collection retention rate from 30% to 27%, reduced the maximum insurance premium
charged by a Guarantor from 3% to 1% and authorized the Secretary to terminate a
Guarantor's reinsurance agreement if the Secretary determines such action is
necessary to protect federal fiscal interests or ensure an orderly transition to
full implementation of the FDSLP. The Administrative Cost Allowance ("ACA") was
eliminated; however, legislative history and subsequent Department actions
suggest that it is likely that Guarantors will continue to receive a substantial
ACA. The Department's powers over Guarantors include the authority to require a
Guarantor to return all reserve funds to the Department if the Department
determines such action is necessary to ensure an orderly termination of the
Guarantor, to serve the best interests of the Federal Programs or to ensure the
proper maintenance of such Guarantor's funds or assets. The Department is also
now authorized to direct a Guarantor to return a portion of its reserve funds
which the Department determines is unnecessary to pay the program expenses and
contingent liabilities of the Guarantor and/or to cease any activities involving
the use of the Guarantor's reserve funds or assets which the Department
determines is a misapplication or otherwise improper. Subject to the
requirements described in the following paragraphs, the Department may also
terminate a Guarantor's reinsurance agreement if the Department determines that
such action is necessary to protect the federal fiscal interest or to ensure an
orderly transition to full implementation of direct federal lending. These
various changes create a significant risk that the resources available to the
Guarantors to meet their guarantee obligations will be significantly reduced. In
addition, this legislation greatly expands the Federal Direct Student Loan
Program volume to a target of approximately 60% of student loan demand in
academic year 1998-1999, which could result in increasing reductions in the
volume of loans made under the Program. Such changes could have an adverse
effect on the financial condition of the Guarantors and on the ability of a
Guarantor to satisfy its obligations under its Guarantee Agreement with respect
to the Federal Loans. See "Risk Factors--Changes in Legislation."
In issuing guarantees with respect to Federal Loans, each Guarantor is
required by the Higher Education Act to review loan applications to verify the
completion of required information and to make a determination that the
applicant has not borrowed amounts in excess of any applicable annual and
aggregate limits imposed by the Higher Education Act.
Each Guarantor is required to maintain a current minimum reserve level
of at least 0.5% of the aggregate principal amount of all outstanding Federal
Loans guaranteed by such Guarantor. Annually, the Department will collect
information from each Guarantor to determine the amount of such Guarantor's
reserves and other information regarding its solvency. If a Guarantor's current
reserve level falls below the required minimum for any two consecutive years,
that Guarantor's annual claims rate exceeds 9% or the Department determines that
a Guarantor's administrative or financial condition jeopardizes that Guarantor's
continued ability to perform its responsibilities, then that Guarantor must
submit and implement a management plan acceptable to the Department. The 1992
Amendments also provide that under certain circumstances the Department is
authorized, on terms and conditions satisfactory to the Department, but is not
obligated, to terminate its reimbursement agreement with any Guarantor. In that
event, however, the Department is required to assume the functions of such
Guarantor and in connection therewith is authorized to do one or more of the
following: to assume the guarantee obligations of, to assign to other guarantors
the guarantee obligations of, or to make advances to, a Guarantor in order to
assist such Guarantor in meeting its immediate cash needs and to ensure
uninterrupted payment of default claims to lenders or to take any other action
the Department deems necessary to ensure the continued availability of student
loans and the full honoring of guarantee claims thereunder. In addition, the
1992 Amendments provide that if the Department determines that a Guarantor is
unable to meet its guarantee obligations, holders of Federal Loans covered
thereby may submit guarantee claims directly to the Department until such time
as such guarantee obligations are transferred to a new guarantor capable of
meeting such obligations or until a successor guarantor assumes such
obligations. There can be no assurance, however, that the Department would under
any given circumstances assume such obligation to ensure satisfaction of a
guarantee obligation by exercising its right to terminate a reimbursement
agreement with a Guarantor or by making a determination that such Guarantor is
unable to meet its guarantee obligations.
The Balanced Budget Act of 1997 requires Guarantors of Federal Loans
to return to the Secretary $1.0 billion in reserves by September 1, 2002 in
accordance with statutory criteria. This legislation also revised the minimum
reserve levels required by the Higher Education Act to require a permanent
minimum level of .5% of the total attributable amount of all outstanding loans
guaranteed by the Guarantor.
GUARANTORS FOR THE FINANCED STUDENT LOANS. The Higher Education Act
requires every state to designate a guarantee agency, either by establishing its
own or by designating another guarantee agency. A Guarantor who has been
designated by a particular state is obligated to guarantee loans for students
who reside or attend school in such state and must agree to provide loans to any
such students who are otherwise unable to obtain a loan from any other lender.
Guarantee agencies may guarantee a loan made to any eligible borrower and are
not limited to guaranteeing loans for students attending institutions in their
particular state or region or for their residents attending schools in another
state or region. Each Eligible Lender Trustee has entered, or will enter, into a
Guarantee Agreement with each Guarantor guaranteeing the Federal Loans acquired,
or to be acquired, by the related Trust.
Pursuant to its respective Guarantee Agreement, each Guarantor
guarantees payment of 98% (except that such guarantee is 100% against defaults
of principal and accrued interest for loans first disbursed prior to October 1,
1993 and against the nondefault conditions described below); of the principal
(including any interest capitalized from time to time) and accrued interest for
each Federal Loan guaranteed by it as to which any one of the following events
has occurred:
(a) failure by the borrower thereof to make monthly principal
or interest payments on such Federal Loan when due, provided such
failure continues for a period of 180 days;
(b) any filing by or against the borrower thereof of a
petition in bankruptcy pursuant to any chapter of the Federal
bankruptcy code, as amended;
(c) the death of the borrower thereof;
(d) the total and permanent disability of the borrower thereof
to work and earn money or attend school, as certified by a qualified
physician;
(e) closure of the borrower's school; or
(f) the school's false certification of the borrower's loan
application.
When these conditions are satisfied, the Higher Education Act requires
the Guarantor generally to pay the claim within 90 days of its submission by the
lender. The obligations of the Guarantors pursuant to their respective Guarantee
Agreements are obligations solely of the applicable Guarantor, and are not
supported by the full faith and credit of any state government, except loans
guaranteed by the New York State Higher Education Services Corporation.
Each Guarantor's guarantee obligations with respect to any Federal
Loan are conditioned upon the satisfaction of all the conditions set forth in
the applicable Guarantee Agreement. These conditions include, but are not
limited to, the following: (i) the origination and servicing of such Federal
Loan being performed in accordance with the Program, the Higher Education Act
and other applicable requirements, (ii) the timely payment to the applicable
Guarantor of the guarantee fee payable with respect to such Federal Loan, (iii)
the timely submission to the applicable Guarantor of all required preclaim
delinquency status notifications and of the claim with respect to such Federal
Loan and (iv) the transfer and endorsement of the promissory note evidencing
such Federal Loan to the applicable Guarantor upon and in connection with making
a claim to receive Guarantee Payments thereon. Failure to comply with any of the
applicable conditions, including the foregoing, may result in the refusal of the
applicable Guarantor to honor its Guarantee Agreement with respect to such
Federal Loan, in the denial of guarantee coverage with respect to certain
accrued interest amounts with respect thereto or in the loss of certain Interest
Subsidy Payments and Special Allowance Payments with respect thereto. Under a
Sale and Servicing Agreement, such failure to comply would constitute a breach
of the applicable Master Servicer's covenants or Educaid's representations and
warranties, as the case may be, and would create an obligation of Educaid or the
Master Servicer, as the case may be, to repurchase or purchase such Federal Loan
or to reimburse the related Trust for such non-guaranteed interest amounts or
such lost Interest Subsidy Payments and Special Allowance Payments with respect
thereto. See "Description of the Transfer and Servicing Agreements--Sale of
Financed Student Loans; Representations and Warranties" and "--Servicer
Covenants."
Certain historical information concerning the Guarantors expected to
be guaranteeing at least 2.0% of the Federal Loans included in a Trust will be
set forth in the related Prospectus Supplement. Such information will include
for the periods presented the related Guarantor's guarantee volume, reserve
ratios, recovery rates and claims rate. It is expected that such information
will be obtained from the Department of Education's Guaranteed Student Loan
Program Data Books or from the applicable Guarantor. Neither the Sellers nor The
Money Store will independently verify such information.
DESCRIPTION OF THE SECURITIES
GENERAL
Each Series of Notes will be issued pursuant to the terms of a Master
Indenture and a related Terms Supplement and each Class of Certificates will be
issued pursuant to the terms of the related Trust Agreement and, except for an
initial Class of Certificates of a Trust, the related Trust Supplement. The
following summary describes certain terms of the Notes, the Certificates, a
Master Indenture, each Terms Supplement and a Trust Agreement. The summary does
not purport to be complete and is qualified in its entirety by reference to the
provisions of each Series of Notes, each Class of Certificates, the applicable
Master Indenture, each Terms Supplement and the applicable Trust Agreement.
It is expected that each Class of Notes and each Class of Certificates
(except for the Certificates being sold to Student Holdings or such other entity
as may be set forth in a Prospectus Supplement) will initially be represented by
one or more Notes and Certificates, respectively, in each case registered in the
name of the nominee of DTC (together with any successor depository selected by
the Administrator, the "Depository") except as set forth below. The Notes will
be available for purchase in the denominations set forth in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement, the
Notes may be available in book-entry form only. The Certificates generally will
be available for purchase in denominations equal to $1,000,000, and integral
multiples of $50,000 in excess thereof, or such other amounts as may be set
forth in a Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, DTC's nominee will be Cede. Accordingly, Cede is expected
to be the holder of record of the Securities. If Securities are available in
book-entry form only, unless and until Definitive Notes or Definitive
Certificates are issued under the limited circumstances described herein, no
Noteholder or Certificateholder will be entitled to receive a physical
certificate representing a Note or Certificate. All references herein and in a
Prospectus Supplement to actions by Noteholders or Certificateholders of book-
entry securities refer to actions taken by DTC upon instructions from its
participating organizations (the "Participants") and all references herein and
therein to distributions, notices, reports and statements to Noteholders or
Certificateholders refer to distributions, notices, reports and statements to
DTC or Cede, as the registered holder of the Notes or Certificates, as the case
may be, for distribution to Noteholders or Certificateholders in accordance with
DTC's procedures with respect thereto. See "--Book-Entry Registration" and
"--Definitive Securities."
Each Class of Notes within a Series will evidence the interests
specified in the related Prospectus Supplement, which may (i) include the right
to receive distributions allocable only to principal, only to interest or to any
combination thereof; (ii) include the right to receive distributions only of
prepayments of principal throughout the lives of the Notes or during specified
periods; (iii) be subordinated in its right to receive distributions of
scheduled payments of principal, prepayments or principal, interest or any
combination thereof to one or more other Classes of Notes of the related Trust
throughout the lives of the Notes or during specified periods or may be
subordinated with respect to certain losses or delinquencies; (iv) include the
right to receive such distributions only after the occurrence of events
specified in the Prospectus Supplement; (v) include the right to receive
distributions in accordance with a schedule or formula or on the basis of
collections from designated portions of the assets in the related Trust; (vi)
include, as to Notes entitled to distributions allocable to interest, the right
to receive interest at a fixed rate or an adjustable rate; and (vii) include, as
to Notes entitled to distributions allocable to interest, the right to
distributions allocable to interest only after the occurrence of events
specified in the related Prospectus Supplement.
THE NOTES
DISTRIBUTIONS OF INTEREST. Interest will accrue on the principal
balance of each Class of Notes at a rate per annum (calculated as provided below
or in the related Prospectus Supplement) equal to the related Class Interest
Rate. Interest may accrue initially from and including the Closing Date on which
the related Series was issued through and including the date set forth in the
related Prospectus Supplement and, thereafter, except as otherwise set forth in
the related Prospectus Supplement, for periods (each, an "Interest Period")
consisting of (i) with respect to Auction Rate Notes, as set forth in the
related Prospectus Supplement, (ii) with respect to LIBOR Rate Notes, generally
a one-month period beginning and ending on the dates set forth in the related
Prospectus Supplement, (iii) with respect to T-Bill Rate Notes, generally a
one-month period beginning and ending on the dates set forth in the related
Prospectus Supplement or (iv) with respect to Notes accruing interest based on
some other method, the period set forth in the related Prospectus Supplement.
Interest on each Class of Notes will be payable (or with respect to Accrual
Notes during the related Accrual Period, added to the principal amount thereof)
on the Note Distribution Dates described in the applicable Prospectus
Supplement. Interest payments on the Notes will generally be funded from
Available Funds and Monthly Advances (and, when applicable, amounts on deposit
in the Reserve Account, Capitalized Interest Account, the Capitalized
Pre-Funding Account or such other account as may be set forth in a Prospectus
Supplement) remaining after the deposit of the Transaction Fees in the Expense
Account. See "Description of the Transfer and Servicing Agreements
Distributions" and "--Credit Enhancement." If insufficient funds are available
to pay the Noteholders' Interest Distribution Amount on a Note Distribution
Date, such shortfall will be paid from draws on the applicable Note Surety
Bonds, if any, or other forms of Enhancement to the extent described in the
related Prospectus Supplement under "Description of the Surety Bonds--Note
Surety Bonds."
Until the date of an Auction Period adjustment, if any, the interest
rate on each Class of Auction Rate Notes for each Interest Period will be the
Class Interest Rate based on an Auction Period, subject to adjustment as
described herein. The Class Interest Rate on each Class of Auction Rate Notes
for each Auction Period will be the lesser of (i) the Net Loan Rate in effect
for such Auction Period and (ii) the Auction Rate in effect for such Auction
Period, as determined by the Auction Agent pursuant to the Auction Procedures
described in Appendix I hereto and in the related Prospectus Supplement;
provided that if on any Rate Determination Date, an Auction for a Class of Notes
is not held for any reason, then the Class Interest Rate for such Class of Notes
will be the Net Loan Rate or such other rate as may be described in a Prospectus
Supplement. Unless otherwise set forth in a Prospectus Supplement, the Class
Interest Rate on each Class of LIBOR Rate Notes for each Interest Period will be
the lesser of (i) the Net Loan Rate in effect for such Interest Period and (ii)
LIBOR plus the margin set forth in the applicable Prospectus Supplement (the
"LIBOR Rate"). Unless otherwise set forth in a Prospectus Supplement, the Class
Interest Rate on each Class of T-Bill Rate Notes for each Interest Period will
be the lesser of (i) the Net Loan Rate in effect for such Interest Period and
(ii) the T-Bill Rate plus the margin set forth in the applicable Prospectus
Supplement. The Class Interest Rate on each Class of Notes bearing interest
based upon another method will be as described in the related Prospectus
Supplement. However, if set forth in a Prospectus Supplement, no Class Interest
Rate will exceed the rate per annum set forth in the related Prospectus
Supplement, and will be subject to other limitations described herein and
therein.
For each Class of Notes, the applicable Initial Rate, Initial Rate
Adjustment Date and last day of the Initial Period will be set forth in the
related Prospectus Supplement. Thereafter, interest will accrue as set forth
above or in the related Prospectus Supplement.
AUCTION PERIOD ADJUSTMENT. With respect to Auction Rate Notes, the
Administrator may, from time to time, change the length of one or more Auction
Periods to conform with then current market practice or accommodate other
economic or financial factors that may affect or be relevant to the length of
the Auction Period or any Class Interest Rate (an "Auction Period Adjustment").
An Auction Period Adjustment will not cause an Auction Period to be less than 7
days nor more than one year and will not be allowed unless certain conditions
described in the Auction Procedures in Appendix I hereto are satisfied. If an
Auction Period Adjustment is made, the intervals between Note Distribution Dates
will be adjusted accordingly.
NOTEHOLDERS' INTEREST CARRYOVER. If set forth in a Prospectus
Supplement, with respect to any Class of Notes, if for any Interest Period the
Auction Rate, the LIBOR Rate, the T-Bill Rate or other applicable interest rate
plus the applicable margin, exceeds the Net Loan Rate, the applicable Class
Interest Rate for such Interest Period will be the Net Loan Rate, and the excess
of the amount of interest on such Class of Notes that would have accrued at a
rate equal to the Auction Rate, the LIBOR Rate, the T-Bill Rate or other
applicable interest rate plus the applicable margin, over the amount of interest
on such Class actually accrued at the Net Loan Rate will accrue as the
Noteholders' Interest Carryover with respect to such Class of Notes. Such
determination of the Noteholders' Interest Carryover will be made separately for
each Class of Notes. The Noteholders' Interest Carryover on any Class of Notes
will bear interest at a rate equal to One-month LIBOR, or the rate set forth in
the related Prospectus Supplement, from the Note Distribution Date for the
Interest Period for which the Noteholders' Interest Carryover was calculated
until paid.
Any Noteholders' Interest Carryover that may exist on any Note
Distribution Date will be paid as described in the related Prospectus
Supplement.
DISTRIBUTIONS OF PRINCIPAL. All payments of principal of a Series of
Notes will be made in an aggregate amount determined as set forth in the related
Prospectus Supplement and will be paid at the times and will be allocated among
the Classes of Notes of such Series in the order and amounts, all as specified
in the related Prospectus Supplement.
As described herein, each Trust may issue, from time to time, several
Series and Classes of Notes. A Series of Notes may contain one or more Classes
of Notes with a higher payment priority than one or more Classes of Notes of a
previously issued or subsequently issued Series. In such event, the Classes of
Notes with the lower payment priority will receive limited or no payments of
principal until each of the Classes of Notes with a higher payment priority,
regardless of when issued, have been paid to the extent set forth in a
Prospectus Supplement. See "Risk Factors--Repayment of Principal" herein.
The aggregate outstanding principal amount of each Class of Notes will
be payable in full on the Note Distribution Date identified in the related
Prospectus Supplement (the "Final Maturity Date"). The actual date on which the
aggregate outstanding principal and accrued interest of 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--Maturity and
Prepayment Assumptions" and "The Financed Student Loan Pool--Maturity and
Prepayment Assumptions."
If a Note Surety Bond has been obtained, on the Final Maturity Date
related to a Class of Notes, the applicable Surety Provider will be required to
provide for payment to the related Trust pursuant to the applicable Note Surety
Bond of an amount generally equal to the excess, if any, of the unpaid principal
balance of the Notes of such Class on such Final Maturity Date over amounts on
deposit in the Note Distribution Account, after taking into account the required
application of funds in the remaining Trust Accounts, including but not limited
to the Reserve Account, if any, pursuant to the related Sale and Servicing
Agreement, to be applied to the payment of principal on the Notes of such Class
on such Final Maturity Date, subject to the exceptions described in the related
Prospectus Supplement. Any such amount will be distributed to the holders of the
applicable Class of Notes on the related Final Maturity Date.
MANDATORY REDEMPTION. If a Pre-Funding Account has been established
with respect to a Trust and a deposit therein has been made in connection with
the issuance of a Series of Notes, the Class or Classes of Notes then entitled
to receive payments of principal will be redeemed in part on the applicable Note
Distribution Date on or immediately following the last day of each Funding
Period, in the event that any amount remains on deposit in the Pre-Funding
Account after giving effect to all Additional Fundings on or prior to such date,
in an aggregate principal amount equal to the amount then on deposit in the
Pre-Funding Account.
THE CERTIFICATES
DISTRIBUTIONS OF INTEREST. On each Certificate Distribution Date,
Certificateholders of the related Class will be entitled to distributions in an
amount equal to the amount of interest accrued during the related Interest
Period on the principal amount of such Class at the applicable Certificate Rate.
Interest on the Certificates will accrue initially from and including the
Closing Date on which the related Class was issued through and including the
date set forth in the related Trust Agreement or the related Trust Supplement
and, thereafter, except as otherwise provided in the related Trust Supplement,
for Interest Periods consisting of, (i) with respect to Auction Rate
Certificates, between 7 days and one year, subject to adjustment as set forth in
the Auction Procedures described in Appendix I, (ii) with respect to LIBOR Rate
Certificates, the one-month period beginning and ending on the dates set forth
in the related Trust Supplement, (iii) with respect to T-Bill Rate Certificates,
the one-month period beginning and ending on the dates set forth in the related
Trust Supplement , and (iv) with respect to Certificates accruing interest based
on some other method, the period set forth in the related Trust Supplement.
Interest distributions with respect to the Certificates will generally be funded
from Available Funds and Monthly Advances (and, when applicable, certain
amounts, if any, on deposit in the Reserve Account); provided, however, that
Certificateholders of a Trust will not be entitled to any distributions if there
has been an Event of Default under any Series of Notes of such Trust until each
Class of Notes has been paid in full. See "Description of the Transfer and
Servicing Agreements--Distributions" and "--Credit Enhancement--Reserve
Account." If insufficient funds are available to pay the Certificateholders'
Interest Distribution Amount for such Certificate Distribution Date, then
amounts may be drawn under the applicable Certificate Surety Bonds, if any, or
other forms of Enhancement to cover such shortfalls.
Until the date of an Auction Period Adjustment, if any, the interest
rate on each Class of Auction Rate Certificates for each Interest Period will be
the Certificate Rate based on an Auction Period, subject to adjustment as
described herein. The Certificate Rate on each Class of Auction Rate
Certificates for each Auction Period will be the lesser of (i) the Net Loan Rate
in effect for such Auction Period and (ii) the Auction Rate in effect for such
Auction Period, as determined by the Auction Agent generally pursuant to the
Auction Procedures described in Appendix I hereto; provided that if on any Rate
Determination Date, an Auction for a Class of Auction Rate Certificates is not
held for any reason, then the Certificate Rate for such Certificates will be the
Net Loan Rate or such other rate as may be described in a Trust Agreement or
Trust Supplement. The Certificate Rate on each Class of LIBOR Rate Certificates
for each Interest Period generally will be the lesser of (i) the Net Loan Rate
in effect for such Interest Period and (ii) the applicable LIBOR Rate. The Class
Interest Rate on each Class of T-Bill Rate Certificates for each Interest Period
generally will be the lesser of (i) the Net Loan Rate in effect for such
Interest Period and (ii) the T-Bill Rate plus the applicable margin. The Class
Interest Rate on each Class of Notes bearing interest based upon another method
will be as described in the related Trust Agreement or Trust Supplement.
However, no Certificate Rate will exceed such rate as may be set forth in a
Trust Agreement or Trust Supplement, and will be subject to other limitations
described herein and therein.
AUCTION PERIOD ADJUSTMENT. With respect to Auction Rate Certificates,
the Administrator may, from time to time, change the length of one or more
Auction Periods to conform with then current market practice or to accommodate
other economic or financial factors that may affect or be relevant to the length
of the Auction Period or any Certificate Rate. An Auction Period Adjustment with
respect to the Certificates will not cause an Auction Period to be less than 7
days nor more than one year and will not be allowed unless certain conditions
described in the Auction Procedures in Appendix I hereto are satisfied.
CERTIFICATEHOLDERS' INTEREST CARRYOVER. If set forth in a Trust
Agreement or Trust Supplement with respect to any Class of Certificates, if for
any Interest Period the Auction Rate, the LIBOR Rate, the T-Bill Rate or other
applicable interest rate plus the applicable margin, exceeds the Net Loan Rate,
the applicable Certificate Rate for such Interest Period will be the Net Loan
Rate, and the excess of the amount of interest on such Class of Certificates
that would have accrued at a rate equal to the Auction Rate, the LIBOR Rate, the
T-Bill Rate, or other applicable interest rate plus the applicable margin, over
the amount of interest actually accrued at the Net Loan Rate will accrue as the
Certificateholders' Interest Carryover with respect to such Class of
Certificates. The Certificateholders' Interest Carryover on any Class of
Certificates will bear interest at a rate equal to One-Month LIBOR or such other
rate set forth in the related Trust Agreement or Trust Supplement from the
Certificate Distribution Date for the Interest Period for which the
Certificateholders' Interest Carryover Amount was calculated until paid.
Any Certificateholders' Interest Carryover that may exist on any
Certificateholders' Distribution Date will be paid as described in the related
Trust Agreement or Trust Supplement.
DISTRIBUTIONS OF PRINCIPAL. For each Trust, Certificateholders of the
Class of Certificates of the related Trust with the earliest Final Maturity
Date, or such other Class set forth in the related Trust Supplement, will be
entitled to distributions on each Certificate Distribution Date on and after
which each Class of Notes has been paid in full in an amount generally equal to
the Principal Distribution Amount for such Certificate Distribution Date.
Distributions with respect to principal payments on the Certificates for such
Certificate Distribution Date will generally be funded from the portion of
Available Funds and amounts, if any, on deposit in the applicable Reserve
Account, if any, remaining after the transfer by the Indenture Trustee to the
Expense Account of the Transaction Fees and the transfer to the Certificate
Distribution Account of the Certificateholder Interest Distribution Amount.
Additionally, with the consent of the applicable Surety Provider, if any,
amounts otherwise required to be deposited into the Reserve Account may be
applied as Additional Principal Payments. See "Description of the Transfer and
Servicing Agreements--Distributions" and "--Credit Enhancement--Reserve Account"
herein. If such sources are insufficient to pay the Certificateholders'
Principal Distribution Amount for such Certificate Distribution Date, such
shortfall will be added to the principal payable to Certificateholders on
subsequent Certificate Distribution Dates.
Principal payments on the Certificates will be applied on each
applicable Certificate Distribution Date, first, to the principal balance of the
Class of Certificates of the related Trust with the earliest Final Maturity
Date, or such other Class set forth in the related Trust Agreement or Trust
Supplement, until such principal balance is reduced to zero and then to the
principal balance of each other Class of Certificates of the related Trust, in
order of Final Maturity Date, until the principal balance of each Class is
reduced to zero. The aggregate outstanding principal amount of each Class of
Certificates will be payable in full on the Final Maturity Date set forth in the
Trust Agreement or the related Trust Supplement. The actual date on which the
aggregate outstanding principal and accrued interest of any Class of
Certificates will be paid may be earlier than its respective Certificate Final
Maturity Date, however, based on a variety of factors, including those described
above under "Risk Factors--Maturity and Prepayment Assumptions" and "The
Financed Student Loan Pool--Maturity and Prepayment Assumptions."
As described herein, each Trust may issue, from time to time, several
Series and Classes of Certificates. A series of Certificates may contain one or
more Classes of Certificates with a higher payment priority than one or more
Classes of Certificates of a previously issued or subsequently issued Series. In
such event, the Classes of Certificates with the lower payment priority will
receive limited or no payments of principal until each of the Classes of
Certificates with a higher payment priority, regardless of when issued, have
been paid to the extent set forth in a Trust Agreement or Trust Supplement. See
"Risk Factors--Repayment of Principal" herein.
If a Certificate Surety Bond has been obtained, on the Final Maturity
Date related to a Class of Certificates, the applicable Surety Provider will be
required to provide for payment to the related Trust pursuant to the applicable
Certificate Surety Bond of an amount generally equal to the excess, if any, of
the unpaid principal balance of the Certificates of such Class on such
Certificate Final Maturity Date over amounts on deposit in the Certificate
Distribution Account, after taking into account the required application of
funds in the remaining Trust Accounts, including but not limited to the Reserve
Account, if any, pursuant to the related Sale and Servicing Agreement, to be
applied to the payment of principal on the Certificates of such Class on such
Certificate Final Maturity Date, subject to the exceptions described in the
related Prospectus Supplement. Any such amount will be distributed to holders of
the applicable Class of Certificates on the related Certificate Final Maturity
Date.
SUBORDINATION OF THE CERTIFICATES. No distributions in respect of
principal of any Class of Certificates will be made until the Certificate
Distribution Date on or after which each Class of Notes has been paid in full.
SUMMARY OF AUCTION PROCEDURES
The following summarizes certain procedures that will be used in
determining the interest rates on the Auction Rate Notes and the Auction Rate
Certificates (the "Auction Rate Securities"). Annex I hereto contains a more
detailed description of these procedures. Prospective investors in the Auction
Rate Securities should read carefully the following summary, along with the more
detailed description in Annex I.
The interest rate on each Class of Auction Rate Securities will be
determined periodically (generally, for periods ranging from 7 days to one year)
by means of a "Dutch Auction." In this Dutch Auction, investors and potential
investors submit orders through an eligible broker/dealer as to the principal
amount of Auction Rate Securities such investors wish to buy, hold or sell at
various interest rates. The broker/dealers submit their clients' orders to the
auction agent, who processes all orders submitted by all eligible broker/dealers
and determines the interest rate for the upcoming interest period. The
broker/dealers are notified by the auction agent of the interest rate for the
upcoming interest period and are provided with settlement instructions relating
to purchases and sales of Auction Rate Securities.
In the auction procedures, the following types of orders may be
submitted:
(i) Bid/Hold Orders - the minimum interest rate that a
current investor is willing to accept in order to
continue to HOLD some or all of its Auction Rate
Securities for the upcoming interest period;
(ii) Sell Orders - an order by a current investor to SELL
a specified principal amount of Auction Rate
Securities, regardless of the upcoming interest rate;
and
(iii) Potential Bid Orders - the minimum interest rate that
a potential investor (or a current investor wishing
to purchase additional Auction Rate Securities) is
willing to accept in order to BUY a specified
principal amount of Auction Rate Securities.
If an existing investor does not submit orders with respect to all its
Auction Rate Securities of the applicable Class, the investor will be deemed to
have submitted a Hold Order at the new interest rate for that portion of the
Auction Rate Securities for which no order was received.
In connection with each auction, Auction Rate Securities will be
purchased and sold between investors and potential investors at a price equal to
their then outstanding principal balance (I.E., par) plus any accrued interest.
The following example helps illustrate how the above-described procedures are
used in determining the interest rate on the Auction Rate Securities.
(a) Assumptions:
1. Denominations (Units) = $100,000
2. Interest Period = 28 Days
3. Principal Amount Outstanding = $50 Million (500 Units)
(b) Summary of All Orders Received For The Auction
BID/HOLD ORDERS SELL ORDERS POTENTIAL BID ORDERS
10 Units at 2.90% 50 Units Sell 20 Units at 2.95%
30 Units at 3.02% 50 Units Sell 30 Units at 3.00%
60 Units at 3.05% 100 UNITS SELL 50 Units at 3.05%
--------------
100 Units at 3.10% 200 Units 50 Units at 3.10%
100 UNITS AT 3.12% 50 Units at 3.11%
------------------
300 Units 50 Units at 3.14%
100 UNITS AT 3.15%
------------------
350 Units
Total units under existing Bid/Hold Orders and Sell Orders always equal issue
size (in this case 500 units).
<PAGE>
(c) Auction Agent Organizes Orders In Ascending Order
<TABLE>
<CAPTION>
Order Number Cumulative Order Number Cumulative
NUMBER OF UNITS TOTAL (UNITS) % NUMBER OF UNITS TOTAL (UNITS) %
<S> <C> <C> <C> <C> <C> <C> <C>
1 10(W) 10 2.90% 7 100(W) 300 3.10%
2 20(W) 30 2.95% 8 50(W) 350 3.10%
3 30(W) 60 3.00% 9 50(W) 400 3.11%
4 30(W) 90 3.02% 10 100(W) 500 3.12%
5 50(W) 140 3.05% 11 50(L) 3.14%
6 60(W) 200 3.05% 12 100(L) 3.15%
</TABLE>
(W) Winning Order (L) Losing Order
Order #10 is the order that clears the market of all available units.
All winning orders are awarded the winning rate (in this case, 3.12%) as the
interest rate for the next Interest Period, when another auction will be held.
Multiple orders at the winning rate are allocated units on a pro rata basis.
Notwithstanding the foregoing, in no event will the interest rate exceed the
lesser of the Net Loan Rate or the Maximum Auction Rate (each as described in
Annex I).
The above example assumes that a successful auction has occurred
(I.E., all Sell Orders and all Bid/Hold Orders below the new interest rate were
fulfilled). In certain circumstances, there may be insufficient Potential Bid
Orders to purchase all the Auction Rate Securities offered for sale. In such
circumstances, the interest rate for the upcoming Interest Period will equal the
lesser of the Net Loan Rate and the Maximum Auction Rate. Also, if all the
Auction Rate Securities are subject to Hold Orders (I.E., each holder of Auction
Rate Securities wishes to continue holding its Auction Rate Securities,
regardless of the interest rate) the interest rate for the upcoming Interest
Period will equal the lesser of the Net Loan Rate and the All Hold Rate (as
defined below).
As stated above, the foregoing is only a summary of the auction
procedures. A more detailed description of these procedures is contained in
Annex I.
DETERMINATION OF LIBOR
Each Prospectus Supplement will identify the party that will determine
One-Month LIBOR for each given Interest Period. Such determination will be made
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.
"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 party
identified in the related Prospectus Supplement 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 party identified in the related
Prospectus Supplement, 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 Interest Period will be One-Month LIBOR in effect for the previous
Interest 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 transaction in
Eurodollar deposits in the international Eurocurrency market, (ii) not
controlling, controlled by or under common control with the Administrator or The
Money Store and (iii) having an established place of business in London.
THE INDENTURE
MODIFICATION OF A MASTER INDENTURE. Generally, with the consent of the
applicable Surety Provider or other provider of Enhancement, if any, and the
holders of a majority of the outstanding Notes of a Trust (or, with respect to
any change affecting only certain Series of Notes of a Trust, the holders of a
majority of the Notes of such Series), the applicable Indenture Trustee and the
related Trust may execute a supplemental indenture to add provisions to, or
change in any manner or eliminate any provisions of, a Master Indenture with
respect to the Notes, or to modify (except as provided below) in any manner the
rights of the Noteholders.
MODIFICATION OF A TERMS SUPPLEMENT. Generally, with the consent of the
applicable Surety Provider or other provider of Enhancement, if any, and the
holders of a majority of outstanding Notes of the related Series, the applicable
Indenture Trustee and the related Trust may execute a supplemental indenture to
add provisions to, or change in any manner or eliminate any provisions of, a
Terms Supplement with respect to the related Series of Notes, or to modify
(except as provided below) in any manner the rights of the related Noteholders.
Without the consent of the holder of each outstanding Note affected
thereby, however, no supplement to a Master Indenture or any Terms Supplement
will (i) change the due date of any installment of principal of or interest on
any Note or reduce the principal amount thereof or the interest rate specified
thereon, change the provisions relating to the application of collections on, or
the proceeds of the sale of, the assets of the applicable 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 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 Master
Indenture or Terms Supplement, as the case may be, or of certain defaults
thereunder and their consequences as provided for in the Master Indenture, (iv)
modify or alter the provisions of the Master Indenture regarding the voting of
Notes held by the applicable Trust, the Sellers, an affiliate of either of them
or any obligor on the Notes, (v) reduce the percentage of the aggregate
outstanding amount of the Notes the consent of the holders of which is required
to direct the applicable Eligible Lender Trustee on behalf of the applicable
Trust to sell or liquidate the Financed Student Loans if the proceeds of such
sale would be insufficient to pay the principal amount and accrued but unpaid
interest on the outstanding Notes, (vi) decrease the percentage of the aggregate
principal amount of the Notes required to amend the sections of the Master
Indenture which specify the applicable percentage of aggregate principal amount
of the Notes necessary to amend the Master Indenture or certain other related
agreements, (vii) modify any of the provisions of the Master Indenture in such
manner as to affect the calculation of the amount of any payment of interest or
principal due on any Note, or (viii) permit the creation of any lien ranking
prior to or on a parity with the lien of the Master Indenture with respect to
any of the collateral for the Notes or, except as otherwise permitted or
contemplated in the Master Indenture, terminate the lien of the Master Indenture
on any such collateral or deprive the holder of any Note of the security
afforded by the lien of the Master Indenture.
Generally, a Trust and the related Indenture Trustee may also enter
into supplemental indentures, with the consent of the Surety Provider or other
provider of Enhancement, if applicable, 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 Master Indenture or of
modifying in any manner the rights of Noteholders so long as such action will
not, in the opinion of counsel satisfactory to the Indenture Trustee, materially
and adversely affect the interest of any Noteholder.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. Unless provided
otherwise in the related Prospectus Supplement, an "Event of Default" with
respect to the Notes is defined in a Master Indenture as consisting of the
following (except as described in the remaining sentences of this paragraph):
(i) a default for two business days or more in the payment of any interest on
any Note after the same becomes due and payable; (ii) a default for two business
days in the payment of the principal of or any installment of the principal of
any Note when the same becomes due and payable; (iii) a default in the
observance or performance of any covenant or agreement of the applicable Trust
made in the Master Indenture and the continuation of any such default for a
period of thirty days after notice thereof is given to the Trust by the
applicable Indenture Trustee or to the Trust and the Indenture Trustee by the
holders of at least 25% in principal amount of the Notes of such Trust then
outstanding; (iv) any representation or warranty made by the Trust in the
Indenture or in any certificate delivered pursuant thereto or in connection
therewith having been incorrect in a material respect as of the time made, and
such breach not having been cured within thirty days after notice thereof is
given to the Trust by the Indenture Trustee or to the Trust and the Indenture
Trustee by the holders of at least 25% in principal amount of the Notes of such
Trust 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 under a Master Indenture on any Note
Distribution Date is generally limited to the amount of Available Funds and
amounts on deposit in the applicable Reserve Account, if any, after payment of
the Transaction Fees, the Noteholders' Interest Distribution Amount and the
Certificateholder's Interest Distribution Amount. Any such shortfalls on any
Note Distribution Date will be carried over as a Noteholders' Principal
Carryover Shortfall to be paid on succeeding Note Distribution Dates, unless
provided otherwise in the related Prospectus Supplement. 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, unless provided otherwise in the related Prospectus Supplement, 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 a Note Surety Bond has been obtained and an Event of Default should
occur and be continuing with respect to any Series of Notes, unless provided
otherwise in the related Prospectus Supplement, the applicable Surety Provider
may or, with the consent of the Surety Provider, the applicable Indenture
Trustee or holders of a majority in principal amount of the Notes then
outstanding may, declare the principal of the Notes to be immediately due and
payable. If specified in the related Prospectus Supplement, with the consent of
the Surety Provider, such declaration may be rescinded by the holders of a
majority in principal amount of the Notes then outstanding at any time prior to
the entry of judgment in a court of competent jurisdiction for the payment of
such amount if (i) the related Trust has paid to the Indenture Trustee a sum
equal to all amounts then due with respect to the Notes (without giving effect
to such acceleration) and (ii) all Events of Default (other than nonpayment of
amounts due solely as a result of such acceleration) have been cured or waived.
If the Notes of a Trust have been declared to be due and payable
following an Event of Default with respect thereto, the applicable Indenture
Trustee may, in its discretion, either require the applicable 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 with respect to such Financed Student Loans as if there had been no
declaration of acceleration. In addition, unless provided otherwise in the
related Prospectus Supplement, the Indenture Trustee is prohibited from
directing the Eligible Lender Trustee to sell the Financed Student Loans
following an Event of Default, other than a default in the payment of any
principal or a default for five days or more in the payment of any interest on
any Note, unless (i) the Surety Provider, if applicable, and the holders of all
outstanding Notes consent to such sale, (ii) the proceeds of such sale are
sufficient to pay in full the principal of and the accrued interest on the
outstanding Notes of such Trust 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 applicable Trust would not be sufficient on an ongoing basis to
make all payments on the Notes of such Trust 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 Surety Provider, if applicable, and the
holders of 66-2/3% of the aggregate principal amount of the Notes of such Trust
then outstanding.
Notwithstanding any declaration of the Notes to be due and payable,
the applicable Surety Provider, if specified in the related Prospectus
Supplement, will have no obligation to pay in full the principal of any Class of
outstanding Notes until the Final Maturity Date of such Class.
Subject to the provisions of a Master Indenture relating to the duties
of the applicable Indenture Trustee if an Event of Default should occur and be
continuing with respect to the Notes of a Trust, the applicable Indenture
Trustee will be under no obligation to exercise any of the rights or powers
under the Indenture at the request or direction of the applicable Surety
Provider, if any, or any of the holders of Notes of such Trust, if the Indenture
Trustee reasonably believes it will not be adequately indemnified against the
costs, expenses and liabilities which might be incurred by it in complying with
such request. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the holders of a majority in principal
amount of the outstanding Notes of a Trust, with the consent of the Surety
Provider, if specified in the related Prospectus Supplement, will have the right
to direct the time, method and place of conducting any proceeding or any remedy
available to the Indenture Trustee and the holders of a majority in principal
amount of the Notes of a Trust then outstanding, with the consent of the Surety
Provider, if any, may, in certain cases, waive any default with respect thereto,
except a default in the payment of principal or interest or a default in respect
of a covenant or provision of the Indenture that cannot be modified without the
waiver or consent of all the holders of the outstanding Notes of such Trust.
No holder of any Note will have the right to institute any proceeding
with respect to a Master Indenture, unless provided otherwise in the related
Prospectus Supplement, unless (i) such holder previously has given to the
Indenture Trustee written notice of a continuing Event of Default, (ii) the
holders of not less than 25% in principal amount of the outstanding Notes of the
related Trust have requested in writing that the Indenture Trustee institute
such proceeding in its own name as Indenture Trustee, (iii) such holder or
holders have offered the Indenture Trustee reasonable indemnity, (iv) the
Indenture Trustee has for 60 days failed to institute such proceeding and (v) no
direction inconsistent with such written request has been given to the Indenture
Trustee during such 60-day period by the holders of a majority in principal
amount of the outstanding Notes of the related Trust.
In addition, the Indenture Trustee and the Noteholders will covenant
that they will not at any time institute against the applicable Trust any
bankruptcy, reorganization or other proceeding under any Federal or state
bankruptcy or similar law.
None of the Indenture Trustee, the Sellers, the Administrator, the
Master Servicer, the Servicer or the Eligible Lender Trustee in its individual
capacity, nor any holder of a Certificate representing an ownership interest in
the applicable Trust, nor any of their respective owners, beneficiaries, agents,
officers, directors, employees, successors or assigns will, in the absence of an
express agreement to the contrary (including but not limited to a guaranty of
The Money Store), be personally liable for the payment of the principal of or
interest on the Notes or for the agreements of the related Trust contained in
the related Master Indenture.
CERTAIN COVENANTS. Unless provided otherwise in the related Prospectus
Supplement, a Trust may not consolidate with or merge into any other entity,
unless (i) the entity formed by or surviving such consolidation or merger is
organized under the laws of the United States, any state or the District of
Columbia, (ii) such entity expressly assumes the Trust's obligation to make due
and punctual payments upon the Notes and the performance or observance of every
agreement and covenant of the Trust under the related Master Indenture and any
Terms Supplement, (iii) no Event of Default has occurred and is continuing
immediately after such merger or consolidation, (iv) the Trust has been advised
that the rating of any Class or Series of Notes or Certificates issued by such
Trust would not be reduced or withdrawn by the Rating Agencies as a result of
such merger or consolidation and (v) the Trust has received an opinion of
counsel to the effect that such consolidation or merger would have no material
adverse federal or applicable state tax consequence to the Trust or to any
Certificateholder or Noteholder.
A Trust will not, unless provided otherwise in the related Prospectus
Supplement, among other things, (i) except as expressly permitted by the related
Master Indenture, the Transfer and Servicing Agreements or certain related
documents (collectively, the "Related Documents"), sell, transfer, exchange or
otherwise dispose of any of the assets of the Trust, (ii) claim any credit on or
make any deduction from the principal and interest payable in respect of any
Class or Series of 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 Master
Indenture to be impaired, or permit the lien of the Master 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
Class or Series of Notes under the Master Indenture except as may be expressly
permitted thereby or (v) permit any lien, charge, excise, claim, security
interest, mortgage or other encumbrance to be created on or extend to or
otherwise arise upon or burden the assets of the Trust or any part thereof, or
any interest therein or the proceeds thereof, except as expressly permitted by
the Related Documents.
A Trust may not engage in any activity other than financing,
purchasing, owning, selling and managing the Financed Student Loans and the
other assets of the Trust and making Additional Fundings, in each case in the
manner contemplated by the Related Documents and activities incidental thereto.
After each Funding Period, the Trust may not make any Additional Fundings with
respect to the related Series of Notes.
A Trust will not incur, assume or guarantee any indebtedness other
than indebtedness incurred pursuant to the Notes and the Indenture or otherwise
in accordance with the Related Documents.
ANNUAL COMPLIANCE STATEMENT. The Administrator, on behalf of the
related Trust will be required to file annually with the applicable Indenture
Trustee a written statement as to the fulfillment of its obligations under the
related Indenture.
SATISFACTION AND DISCHARGE OF INDENTURE. An Indenture will be
discharged with respect to the collateral securing the Notes upon the delivery
to the applicable 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. The Indenture Trustee on behalf of a Series of
Securities will be the entity named in the related Prospectus Supplement.
<PAGE>
BOOK-ENTRY REGISTRATION
The Depository Trust Company ("DTC") is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York UCC and a "clearing agency" registered pursuant to Section 17A of the
Exchange Act. DTC was created to hold securities for its Participants and to
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entries, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations. Indirect access to
the DTC system also is available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants").
Securityholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Securities may do so only through Participants and Indirect Participants. In
addition, Securityholders will receive all distributions of principal and
interest from the Indenture Trustee or the Eligible Lender Trustee, as
applicable (the "Applicable Trustee"), through Participants and Indirect
Participants. Under a book-entry format, Securityholders may experience some
delay in their receipt of payments, since such payments will be forwarded by the
Applicable Trustee to Cede, as nominee for DTC. DTC will forward such payments
to its Participants, which thereafter will forward them to Indirect Participants
or Securityholders. It is anticipated that the only "Securityholder,"
"Certificateholder" and "Noteholder" will be Cede, as nominee for DTC.
Securityholders will not be recognized by the Indenture Trustee or the Eligible
Lender Trustee as Noteholders or Certificateholders, as such terms are used in
the Indenture and the Trust Agreement, respectively, and Securityholders will be
permitted to exercise the rights of Securityholders only indirectly through DTC
and its Participants.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of Securities among Participants on whose behalf it acts with respect to the
Securities and to receive and transmit distributions of principal of, and
interest on, the Securities. Participants and Indirect Participants with which
Securityholders have accounts with respect to the Securities similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Securityholders. Accordingly, although
Securityholders will not possess Securities, the Rules provide a mechanism by
which Participants will receive payments and will be able to transfer their
interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to such
Securities, may be limited due to the lack of a physical certificate for such
Securities.
DTC will take any action permitted to be taken by a Securityholder
under an Indenture or the related Trust Agreement, as the case may be, only at
the direction of one or more Participants to whose accounts with DTC the
Securities are credited. DTC may take conflicting actions with respect to other
undivided interests to the extent that such actions are taken on behalf of
Participants whose holdings include such undivided interests.
Except as required by law, neither the applicable Administrator nor
the Applicable Trustee will have any liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests of the
Securities held by Cede, as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
DEFINITIVE SECURITIES
If set forth in a Prospectus Supplement, the Notes and the
Certificates (other than the Certificate being sold to Student Holdings or such
other entity as may be set forth in a Prospectus Supplement) will be issued in
fully registered, certificated form ("Definitive Notes" and "Definitive
Certificates," respectively, and collectively referred to herein as "Definitive
Securities") to Noteholders or Certificateholders or their respective nominees,
rather than to DTC or its nominee, only if (i) the Administrator advises the
Applicable Trustee in writing that DTC is no longer willing or able to discharge
properly its responsibilities as depository with respect to the Securities and
the Administrator is unable to locate a qualified successor, (ii) the
Administrator, at its option, elects to terminate the book-entry system through
DTC or (iii) after the occurrence of an Event of Default, a Servicer Default or
an Administrator Default, Securityholders representing at least a majority of
the outstanding principal amount of the Notes or the Certificates, as the case
may be, advise the Applicable Trustee through DTC in writing that the
continuation of a book-entry system through DTC (or a successor thereto) with
respect to such Notes or Certificates is no longer in the best interest of the
holders of such Securities.
Upon the occurrence of any event described in the immediately
preceding paragraph, the Applicable Trustee will be required to notify all
applicable Securityholders through Participants of the availability of
Definitive Securities. Upon surrender by DTC of the definitive security
representing the corresponding Securities and receipt of instructions for
re-registration, the Applicable Trustee will reissue such Securities as
Definitive Securities to such Securityholders.
Distributions of principal of, and interest on, such Definitive
Securities will thereafter be made by the Applicable Trustee in accordance with
the procedures set forth in the Indenture or the Trust Agreement, as the case
may be, directly to holders of Definitive Securities in whose names the
Definitive Securities were registered at the close of business on the Record
Date. Such distributions will be made by check mailed to the address of such
holder as it appears on the register maintained by the Applicable Trustee. The
final payment on any such Definitive Security, however, will be made only upon
presentation and surrender of such Definitive Security at the office or agency
specified in the notice of final distribution to Securityholders.
Definitive Securities will be transferable and exchangeable at the
offices of the Applicable Trustee or of a registrar named in a notice delivered
to holders of Definitive Securities. No service charge will be imposed for any
registration of transfer or exchange, but the Applicable Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
LIST OF SECURITYHOLDERS
Three or more Noteholders of the related Trust or one or more holders
of Notes evidencing not less than 25% of the aggregate outstanding principal
balance of the Notes of the related Trust may, unless provided otherwise in the
related Prospectus Supplement, by written request to the applicable Indenture
Trustee, obtain access to the list of all Noteholders of the related Trust
maintained by the Indenture Trustee for the purpose of communicating with other
Noteholders of the related Trust with respect to their rights under the related
Indenture or the Notes. The Indenture Trustee may elect not to afford the
requesting Noteholders access to the list of Noteholders if it agrees to mail
the desired communication or proxy, on behalf and at the expense of the
requesting Noteholders, to all Noteholders.
Three or more Certificateholders of the related Trust, Student
Holdings or one or more holders of Certificates evidencing not less than 25% of
the Certificate Balance of the related Trust may, unless provided otherwise in
the related Prospectus Supplement, by written request to the applicable Eligible
Lender Trustee, obtain access to the list of all Certificateholders of the
related Trust for the purpose of communicating with other Certificateholders of
the related Trust with respect to their rights under the related Trust Agreement
or under the Certificates.
REPORTS TO SECURITYHOLDERS
On each Note Distribution Date, the applicable Indenture Trustee will
provide to the applicable Noteholders of record as of the related Record Date,
and on each Certificate Distribution Date the applicable Eligible Lender Trustee
will provide to the Certificateholders 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 related Trust described
under "Description of Transfer and Servicing Agreements--Statements to Indenture
Trustee and Trust."
Within the prescribed period of time for tax reporting purposes after
the end of each calendar year during the term of the applicable Indenture or
Trust Agreement, as the case may be, the Applicable Trustee will mail to each
person who at any time during such calendar year was a Securityholder and
received any payment thereon, a statement containing certain information for the
purposes of such Securityholder's preparation of federal income tax returns. See
"Certain Tax Consequences."
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
GENERAL
The following is a summary of certain terms expected to be contained
in each Sale and Servicing Agreement, pursuant to which the applicable Eligible
Lender Trustee on behalf of the related Trust will obtain, the applicable Master
Servicer will service and the applicable Administrator will perform certain
administrative functions with respect to the Financed Students Loans; each
Administration Agreement, pursuant to which the applicable Administrator will
undertake certain other administrative duties with respect to the related Trust,
the Financed Student Loans and each Trust Agreement, pursuant to which a Trust
will be created and the Certificates of such Trust will be issued (collectively,
the "Transfer and Servicing Agreements"). However, the summary does not purport
to be complete and is qualified in its entirety by reference to the provisions
of the Transfer and Servicing Agreements and such changes as may be described in
the related Prospectus Supplement.
CONVEYANCE OF FINANCED STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
On each Closing Date for the sale of a Series of Notes issued by a
Trust, the applicable Sellers will sell or contribute and assign to the
applicable Eligible Lender Trustee on behalf of the applicable Trust, without
recourse, its entire interest in the Financed Student Loans described in the
related Sale and Servicing Agreement, all collections received and to be
received with respect thereto after the related Cut-off Date for such Financed
Student Loans and all the Assigned Rights pursuant to the Sale and Servicing
Agreement. Each Financed Student Loan will be identified in schedules appearing
as an exhibit to the related Sale and Servicing Agreement or supplement thereto.
The Eligible Lender Trustee will, concurrently with such sale or contribution
and assignment, execute, authenticate and deliver the related Series of Notes
and Certificates. The net proceeds received from the sale of the Notes and the
Certificates will be applied in connection with the Trust's acquisition of the
Financed Student Loans and, if specified in the related Prospectus Supplement,
to the deposit of the Pre-Funded Amount in the Pre-Funding Account. See
"--Additional Fundings" for a description of the application of funds on deposit
in the Pre-Funding Account during the Funding Period.
In each Sale and Servicing Agreement, the Sellers and (unless
otherwise limited in a Prospectus Supplement) The Money Store will make certain
representations and warranties with respect to the Financed Student Loans to the
related 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 threatened; (ii) the information provided with respect to the
Financed Student Loans is true and correct as of the related Cut-off Date or
such other date as may be set forth in a Sale and Servicing Agreement and (iii)
each Financed Student Loan, at the time it was originated, complied and, at the
applicable Closing Date, complies in all material respects with applicable
federal and state laws (including, without limitation, the Higher Education Act
or the Public Health Service Act, if applicable, consumer credit,
truth-in-lending, equal credit opportunity and disclosure laws) and applicable
restrictions imposed by the applicable Program or under any Guarantee Agreement.
Following the discovery by or notice to the applicable Seller or The
Money Store of a breach of any such representation or warranty with respect to
any Financed Student Loan that materially and adversely affects the interests of
the Certificateholders, the Noteholders or, if specified in the related
Prospectus Supplement, the Surety Provider or other provider of Enhancement in
such Financed Student Loan (it being understood that any such breach that does
not affect any Guarantor's or the Secretary's obligation to guarantee payment of
such Financed Student Loan will not be considered to have such a material
adverse effect), the applicable Seller will, unless such breach is cured within
60 days or such other time as may set forth in the related Prospectus
Supplement, purchase such Financed Student Loan from the applicable Eligible
Lender Trustee, as of the first day following the end of such 60-day period (or
such other time as may be set forth in the related Prospectus Supplement) that
is the last day of a Collection Period, at a price equal to the applicable
Purchase Amount (as defined below). If the Seller fails to purchase within the
above-described time period any Financed Student Loan it is required to
purchase, unless otherwise limited in a Prospectus Supplement, The Money Store
will remit, or cause to be remitted, to the Collection Account no later than the
date the Seller would be required to remit such amount, the Purchase Amount for
such Financed Student Loan. In addition, the Seller will reimburse the related
Trust 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, or
any insurance payments that the Secretary refuses to pay, with respect to a
Financed Student Loan as a result of a breach of any such representation or
warranty by the Seller. If the Seller fails to reimburse the Trust such amount,
unless otherwise limited in a Prospectus Supplement, The Money Store will
reimburse the Trust such amount no later than the date the Seller would be
required to remit such amount. The purchase and reimbursement obligations of the
Seller and, if applicable, The Money Store will constitute, together with the
right to receive certain amounts from the applicable Reserve Account, if any,
the sole remedy available to or on behalf of the Trust, the Certificateholders,
the Noteholders or the applicable Surety Provider or other provider of
Enhancement, if any, for any such uncured breach. The Seller's purchase and
reimbursement obligations are contractual obligations pursuant to a Sale and
Servicing Agreement that may be enforced against the Seller, but the breach of
which will not constitute an Event of Default.
"Purchase Amount" means, unless provided otherwise in the related
Prospectus Supplement, as to any Financed Student Loan on any date of
determination, the sum of (i) 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 (or, with respect to certain Serial Loans, through the last day of the
Collection Period in which such Serial Loan is transferred to the Seller's
designee) plus (ii) certain unamortized premiums, if any; provided, however,
that with respect to any Financed Student Loan required to be purchased due to a
breach by the Master Servicer of certain representations and warranties
concerning the servicing of such Financed Student Loan, the Purchase Amount will
not exceed the amount the related Guarantor would have been obligated to pay the
related Trust but for such breach.
ACCOUNTS
An Indenture Trustee may establish and maintain on behalf of a Trust
as set forth in the related Prospectus Supplement a Collection Account,
Pre-Funding Account, Capitalized Interest Account, Capitalized Pre-Funding
Account, Note Distribution Account, Expense Account, Reserve Account and Monthly
Advance Account, in addition to such other accounts as may be described in a
Prospectus Supplement. The Eligible Lender Trustee will establish and maintain
the Certificate Distribution 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."
Funds in the Trust Accounts will be invested as provided in the Sale
and Servicing Agreement in Eligible Investments. "Eligible Investments" are
generally limited to investments acceptable to an applicable Surety Provider, if
any, and the applicable Rating Agencies as being consistent with the rating of
the Notes. Eligible Investments are limited to obligations or securities that
mature not later than the Business Day immediately preceding the day on which
funds in the applicable Trust Account may be required to be withdrawn. If the
amount required to be withdrawn from the Reserve Account, if established, 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 or to the Certificateholders could result. This could, in turn,
increase the average life of the Notes and the Certificates. 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 and will be treated as collections of interest on the Financed Student
Loans, unless otherwise released to the Sellers or another party as may be
described in a Prospectus Supplement.
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.
"Eligible Institution" means 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), (i) which has a
long-term unsecured debt rating and/or a short-term unsecured debt rating
acceptable to the applicable Rating Agencies and the Surety Provider and (ii)
whose deposits are insured by the Federal Deposit Insurance Corporation.
ADDITIONAL FUNDINGS
If a Pre-Funding Account has been established with respect to a Trust
and a Pre-Funded Amount has been deposited therein with respect to a Series of
Notes, the Trust will distribute funds on deposit in the Pre-Funding Account
from time to time during each Funding Period in an amount equal to the aggregate
principal balance (plus certain premiums) and accrued interest thereon of the
additional Financed Student Loans (the "Additional Student Loans') conveyed by
the applicable Seller to the Trust during such Funding Period (the expenditures
referred to above being referred to herein as "Additional Fundings"). Additional
Student Loans may include Federal Loans, HEAL Loans and/or Private Loans in such
amounts as may be determined by the Sellers and satisfying any conditions
imposed by a Surety Provider or other provider of Enhancement, if applicable.
Pursuant to a Sale and Servicing Agreement, during each Funding
Period, the applicable Sellers may convey to the related Eligible Lender Trustee
on behalf of the related Trust, Additional Student Loans having an aggregate
principal balance up to the amount then on deposit in the Pre-Funding Account.
The obligation to accept any Additional Student Loan by the Eligible Lender
Trustee on behalf of the Trust is subject to the following conditions, among
others as may be set forth in the related Prospectus Supplement: (i) such
Additional Student Loan must satisfy all applicable origination requirements and
all other requirements specified in the Sale and Servicing Agreement and any
applicable Insurance Agreement and (ii) the applicable Seller will not select
such Additional Student Loan in a manner that it believes is adverse to the
interests of the Securityholders or the Surety Provider, if any. On such dates
as may from time to time be designated by the applicable Seller during a Funding
Period (each, a "Transfer Date"), the Seller may sell or contribute and assign,
without recourse, to the Eligible Lender Trustee on behalf of the Trust, its
entire interest in Additional Student Loans (each, a "Subsequent Cut-off Date").
Subject to the satisfaction of the foregoing conditions, such Seller will convey
the Additional Student Loans to the Eligible Lender Trustee on behalf of the
Trust on each such Transfer Date pursuant to the Sale and Servicing Agreement
and the applicable Transfer Agreement (a "Transfer Agreement") executed by the
Seller, on such Transfer Date. Each such Transfer Agreement will include as an
exhibit a schedule identifying each Additional Student Loan transferred on such
Transfer Date. Upon such conveyance of Additional Student Loans to the Eligible
Lender Trustee on behalf of the Trust, the Pool Balance will increase in an
amount equal to the aggregate principal balances of the Additional Student Loans
and an amount equal to the aggregate principal balance of such Additional
Student Loans (plus certain premiums) and accrued interest thereon will be
withdrawn from the Pre-Funding Account on such date and ultimately be
transferred to the Seller.
Any amounts remaining in the Pre-Funding Account at the end of the
related Funding Period will be distributed as set forth in the related
Prospectus Supplement.
CAPITALIZED INTEREST ACCOUNT AND CAPITALIZED PRE-FUNDING ACCOUNT
On each Closing Date, to the extent set forth in the related
Prospectus Supplement, the Sellers may make a cash deposit in the Capitalized
Interest Account in the name of the Indenture Trustee on behalf of the related
Trust. The amount, if any, deposited therein will generally be used on each Note
Distribution Date and Certificate Distribution Date to make interest payments to
Noteholders and Certificateholders to the extent amounts deposited in the Note
Distribution Account or the Certificate Distribution Account, as the case may
be, plus amounts in the applicable Reserve Account, if any, and, in the case of
the Notes, the Capitalized Pre-Funding Account, are insufficient for such
purpose. Any amounts remaining in the Capitalized Interest Account after the
period set forth in the applicable Terms Supplement will be applied as set forth
in the related Prospectus Supplement.
On each Closing Date, to the extent set forth in the related
Prospectus Supplement, the Sellers may make a cash deposit in the Capitalized
Pre-Funding Account in the name of the Indenture Trustee on behalf of the
related Trust. The amount, if any, deposited therein will be used by the
Indenture Trustee on each Note Distribution Date during the applicable Funding
Period to fund the excess, if any, of (i) the amount of interest accrued for
each such Note Distribution Date at the Class Interest Rate of the applicable
Class of Notes on its pro rata portion of the amount on deposit in the
Pre-Funding Account over (ii) the amount of any earnings on funds in the
Pre-Funding Account that are available to pay interest on the Notes of such
Class on each such Note Distribution Date. Any amounts remaining in the
Capitalized Pre-Funding Account on the last Note Distribution Date of a Funding
Period and not used for such purposes will be distributed as set forth in the
related Prospectus Supplement.
All funds in the Capitalized Interest Account and the Capitalized
Pre-Funding Account are required to be held (i) uninvested, up to the limits
insured by the Federal Deposit Insurance Corporation, (ii) invested in Eligible
Investments or (iii) as otherwise set forth in the related Prospectus
Supplement. Any investment earnings on funds in the Capitalized Interest Account
and the Capitalized Pre-Funding Account will generally be applied to payment of
interest on the Notes and the Certificates or as otherwise set forth in the
related Prospectus Supplement.
SERVICING PROCEDURES
Pursuant to a Sale and Servicing Agreement, the Master Servicers will
agree to service, and perform all other related tasks with respect to, all the
Financed Student Loans acquired from time to time. The Master Servicers will be
required pursuant to a Sale 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 in the same manner as the Master Servicers
have serviced student loans on their own behalf and in compliance with all
standards and procedures provided for in the Higher Education Act, the Public
Health Service Act, the Guarantee Agreements, the Private Loan Programs, and all
other applicable federal and state laws.
Without limiting the foregoing, the duties of the Master Servicers
under a Sale and Servicing Agreement may include, but are not limited to, the
following: collecting and depositing into the Collection Account all payments
with respect to the Financed Student Loans, including claiming and obtaining any
Guarantee Payments with respect thereto and with respect to Interest Subsidy
Payments and Special Allowance Payments, claiming and obtaining insurance
payments from the Secretary with respect to HEAL Loans, responding to inquiries
from borrowers on the Financed Student Loans, investigating delinquencies and
sending out statements, payment coupons and tax reporting information to
borrowers. In addition, the Master Servicers 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 each Master Servicer's customary practices and
as otherwise required in the Sale and Servicing Agreement.
The Master Servicers 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 a Master Servicer. No such sub-servicing arrangement will
relieve the Master Servicer of its duties and obligations under the related Sale
and Servicing Agreement. Generally, PHEAA, AFSA Data Corporation, Great Lakes
Higher Education Corporation, UNIPAC Service Corporation, or such other entity
set forth in the related Prospectus Supplement, will sub-service Financed
Student Loans originated by the Sellers in the Repayment Phase. It is
anticipated that the Purchased Loans will be serviced during both the Deferral
Phase and the Repayment Phase either by the originators of such Purchased Loans,
the Sellers or another party.
PAYMENTS ON FINANCED STUDENT LOANS
Each Master Servicer will deposit all payments on Financed Student
Loans for which it is acting as primary servicer (from whatever source), and the
applicable Master Servicer shall cause each other Servicer to deposit into the
Collection Account all payments on such Financed Student Loans collected by such
other Servicers for which such other Servicers are acting as primary servicer
(from whatever source), in the manner and at the times set forth in the related
Prospectus Supplement. The Eligible Lender Trustee will deposit all Interest
Subsidy Payments, all Special Allowance Payments and all insurance payments from
the Secretary with respect to the Financed Student Loans received by it during
each Collection Period into the Collection Account within two Business Days (or
such other time as may be set forth in a Prospectus Supplement) of receipt
thereof.
MASTER SERVICER COVENANTS
In a Sale and Servicing Agreement, each Master Servicer will covenant
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 in order 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 Certificateholders or
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 Certificateholders and 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
deferral or forbearance periods or otherwise in accordance with its guidelines
with respect to the servicing of the Financed Student 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, or such other amount as may be
set forth in the related Prospectus); provided, however, that a Master Servicer
may agree to a decrease of the interest rate of a Financed Student Loan in
accordance with the terms of its interest reduction program for borrowers with a
steady history of timely payments of interest and principal.
Under the terms of a Sale and Servicing Agreement, if The Money Store
or the related Master Servicer discovers, or receives written notice, that any
covenant of such Master Servicer set forth above has not been complied with in
all material respects and such noncompliance has not been cured within 60 days
thereafter, or such other period as may be set forth in the related Prospectus
Supplement, and has a materially adverse effect on the interest of the
Certificateholders, the Noteholders or the applicable Surety Provider or other
provider of Enhancement, if applicable, in any Financed Student Loan (it being
understood that any such breach that does not affect any Guarantor's or the
Secretary's obligation to guarantee payment of such Financed Student Loan will
not be considered to have such a material adverse effect), unless such breach is
cured, the Master Servicer will purchase such Financed Student Loan as of the
first day following the end of such 60-day period (or such other 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 related Trust's interest in any
such purchased Financed Student Loan will be automatically assigned to such
Master Servicer. If the Master Servicer fails to purchase within the
above-described time period any Financed Student Loan it is required to
purchase, unless otherwise limited in a Prospectus Supplement, The Money Store
will remit, or cause to be remitted, no later than the date the Master Servicer
would be required to remit such amount, the Purchase Amount for such Financed
Student Loan. 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, the Public
Health Service Act, the applicable Private Loan Program and the applicable
Guarantee Agreement, the Purchase Amount will not exceed the amount the related
Guarantor or the Secretary would be obligated to pay if not for such breach. In
addition, the Master Servicer or, if applicable, The Money Store will reimburse
the related Trust 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 or for any insurance payments that the Secretary refuses to pay, with
respect to a Financed Student 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 Secretary would have paid if not for such
breach. Notwithstanding the above, with respect to any purchase obligation
arising as a result of a Guarantor denying a Guarantee Payment on a Financed
Student Loan, neither the Master Servicer nor, if applicable, The Money Store
will be required to purchase such Financed Student Loan until the last day of
the Collection Period following the date a Realized Loss on such Financed
Student Loan is allocated.
SERVICING COMPENSATION
Each Master Servicer will be entitled to receive, subject to the
limitations set forth in the following paragraph, the Servicing Fee monthly in
the amount set forth in the related Prospectus Supplement. To the extent the
Master Servicer engages a sub-servicer, including but not limited to PHEAA, AFSA
Data Corporation, Great Lakes Higher Education Corporation or UNIPAC Service
Corporation, the Master Servicer will direct a portion of the Servicing Fee to
the applicable sub-servicer as compensation for its services. The Servicing Fee
(together with any portion of the Servicing Fee that remains unpaid from prior
Note Distribution Dates) will be allocated and payable as set forth in the
related Prospectus Supplement.
Notwithstanding the foregoing, in the event that the fee payable to
the Master Servicers as defined above for any month would exceed 1.05% per annum
(or such other percentage as may be set forth in the related Prospectus
Supplement) of the Pool Balance of the related Trust as of the last day of the
preceding calendar month (the "Capped Amount"), then the "Servicing Fee" for
such month will instead be the Capped Amount for such month. The remaining
amount in excess of such Servicing Fee, together with any such excess amounts
from prior months that remain unpaid (the "Servicing Fee Carryover"), will be
payable to the Master Servicers as described in the related Prospectus
Supplement.
The Servicing Fee and the Servicing Fee Carryover will compensate each
Master 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 any insurance payments from the Secretary, accounting for
collections and furnishing monthly and annual statements to the Administrator.
The Servicing Fee and the Servicing Fee Carryover also will reimburse each
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 day of each month set
forth in the related Prospectus Supplement, the Administrator will provide the
applicable Indenture Trustee and Eligible Lender Trustee a report setting forth
by component the Available Funds for the immediately preceding Collection
Period.
For purposes hereof, unless modified by a Prospectus Supplement, the
term "Available Funds" means the sum 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 received with respect to the Financed Student Loans); (ii) any
payments, including without limitation Interest Subsidy Payments, Special
Allowance Payments and any insurance payments from the Secretary received by the
Eligible Lender Trustee during such Collection Period with respect to the
Financed Student Loans; (iii) all proceeds of 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) that portion of amounts released from the
Pre-Funding Account at the end of a Funding Period to be applied as a payment of
principal; (vi) amounts released from the Capitalized Interest Account and the
Capitalized Pre-Funding Account to cover shortfalls in interest; (vii) the
aggregate Purchase Amounts received for those Financed Student Loans repurchased
by the Seller or purchased by the Master Servicer or by or on behalf of The
Money Store under an obligation which arose during the related Collection
Period; (viii) the aggregate amounts, if any, received from the Seller, The
Money Store or the Master Servicer as reimbursement of non-guaranteed interest
amounts, or lost Interest Subsidiary Payments, Special Allowance Payments and
insurance payments from the Secretary, with respect to the Financed Student
Loans pursuant to the Sale and Servicing Agreement and (ix) Investments Earnings
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.
DISTRIBUTIONS FROM COLLECTION ACCOUNT. On each Determination Date, the
Administrator will advise the Indenture Trustee in writing of the applicable
Noteholders' Interest Distribution Amount or Certificateholders' Interest
Distribution Amount. Additionally, at the respective times sets forth in the
related Prospectus Supplement, the Administrator will advise the Indenture
Trustee in writing of the applicable Noteholders' Principal Distribution Amount
or, if applicable, the Certificateholders' Principal Distribution Amount and the
Transaction Fees for the preceding month.
On each Note Distribution Date described in the related Prospectus
Supplement (other than those relating to Accrual Notes during the related
Accrual Period), the Indenture Trustee will transfer from the applicable
Collection Account to the Note Distribution Account, from payments received on
or with respect to the Financed Student Loans, as described in the related
Prospectus Supplement, an amount up to the related Noteholders' Interest
Distribution Amount. For each Note Distribution Date described in the related
Prospectus Supplement relating to a Class of Accrual Notes during the related
Accrual Period, the related Noteholders' Interest Distribution Amount will be
added to the principal amount of such Notes. As will be set forth in the related
Prospectus Supplement, on certain Note Distribution Dates relating to Classes of
Notes then entitled to receive payments of principal, after making the transfers
set forth above, the Indenture Trustee will transfer from the Collection Account
to the Note Distribution Account from payments received on or with respect to
the Financed Student Loans, as described in the related Prospectus Supplement,
together with any Additional Principal Payments (to the extent set forth in the
related Prospectus Supplement), an amount up to the Noteholders' Principal
Distribution Amount; provided, however, that, if set forth in a Prospectus
Supplement, for each month in which the first Note Distribution Date occurs
prior to the Certificate Distribution Date in such month, prior to transferring
amounts to the Note Distribution Account, the Indenture Trustee will transfer to
the Expense Account, from payments received on or with respect to the Financed
Student Loans as set forth in the related Prospectus Supplement, an amount up to
the Transaction Fees for the month preceding such Note Distribution Date and all
overdue Transaction Fees from prior months.
On each Certificate Distribution Date, the Indenture Trustee will
transfer from the applicable Collection Account, from payments received on or
with respect to the Financed Student Loans during the periods set forth in a
Prospectus Supplement, (i) to the Expense Account, the amount, if any, described
in such Prospectus Supplement and (ii) to the Certificate Distribution Account,
an amount up to the related Certificateholders' Interest Distribution Amount.
Additionally, on each Certificate Distribution Date the Indenture Trustee will
transfer from the Collection Account to the Eligible Lender Trustee, for deposit
in the Certificate Distribution Account, an amount up to the applicable
Certificateholders' Principal Distribution Amount.
On the Note Distribution Dates set forth in the related Prospectus
Supplement, the Indenture Trustee will distribute from the Expense Account (in
addition to any amounts transferred from the Reserve Account) amounts to pay the
Transaction Fees, in the priorities and in the amounts set forth in the related
Prospectus Supplement.
On each Note Distribution Date, the Indenture Trustee will distribute
to the Noteholders of the applicable Class as of the related Note Record Date
all amounts transferred to the Note Distribution Account as set forth above and
in the related Prospectus Supplement (in addition to any other amounts described
in the Prospectus Supplement). On each Certificate Distribution Date, the
Eligible Lender Trustee will distribute to the Certificateholders of the
applicable Class as of the related Certificate Record Date all amounts
transferred to the Certificate Distribution Account as set forth above and in
the related Prospectus Supplement (in addition to any other amounts described in
the related Prospectus Supplement).
Notwithstanding the foregoing, if set forth in the Prospectus
Supplement, principal payments will be made to each Class of Notes and the
Certificates only in the denominations set forth in such Prospectus Supplement.
If the amount in the Note Distribution Account or the Certificate Distribution
Account otherwise required to be applied as a payment of principal either (i) is
less than the specified denomination or (ii) exceeds an even multiple of such
specified denomination, then, in the case of (i), such entire amount or, in the
case of (ii), such excess amount, will not be paid as principal on the upcoming
Note Distribution Date or Certificate Distribution Date, as the case may be, but
will be retained in the Note Distribution Account or the Certificate
Distribution Account, as the case may be, until the amount therein available for
payment of principal (including any amounts transferred from the Reserve
Account) equals the specified denominations.
With respect to the Class of Notes entitled to receive payments of
principal (or, after each Class of Notes has been paid in full, the Class of
Certificates entitled to receive payments of principal), if specified in the
Prospectus Supplement, the actual Notes or Certificates of such Class, as the
case may be, that will receive payments of principal on each applicable Note
Distribution Date or Certificate Distribution Date will be selected by the
Indenture Trustee (with respect to the Notes) or the Eligible Lender Trustee
(with respect to the Certificates) by lot in such manner as the Indenture
Trustee or the Eligible Lender Trustee, as the case may be, in its discretion
may determine and which may provide for the selection for payment of principal
in the minimum denominations specified in the related Prospectus Supplement, and
integral multiples in excess thereof.
Notice of the specific Notes or Certificates, as the case may be, to
receive payments of principal is to be given by the Indenture Trustee or the
Eligible Lender Trustee, as the case may be, by first-class mail, postage
prepaid, mailed not less than 15 days but no more than 30 days, or such other
time period as may be specified in the related Prospectus Supplement, before the
applicable Note Distribution Date or Certificate Distribution Date at the
address of the applicable Securityholder appearing on the registration books.
Any defect in or failure to give such mailed notice shall not affect the
validity of proceedings for the payment of any other Notes or Certificates not
affected by such failure or defect. All notices of payment are to state: (i) the
applicable Note Distribution Date or Certificate Distribution Date; (ii) the
amount of principal to be paid, and (iii) the Class of the Notes or Certificates
to be paid.
On the Note Distribution Date or Certificate Distribution Date
specified in the related Prospectus Supplement, after making all required
transfers to the Note Distribution Account and, if applicable, the Certificate
Distribution Account and the Expense Account, the Indenture Trustee will
transfer any amounts remaining in the Collection Account (other than amounts
representing payments received during such month or payments of or with respect
to principal received in the immediately preceding month) as set forth in the
related Prospectus Supplement.
Notwithstanding the foregoing, if there has been an Event of Default
with respect to payment of the Notes issued by a Trust, the Certificateholders
of such Trust will not be entitled to any payments of principal or interest
until each outstanding Class of Notes of such Trust has been paid in full.
"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 Certificate Distribution Date relating to such
Certificates, the Certificateholders' Interest Distribution Amount for such
Certificate Distribution Date plus, for each Certificate Distribution Date on
and after which the Notes issued by the related Trust have been paid in full,
the Certificateholders' Principal Distribution Amount for such Certificate
Distribution Date.
"Certificateholders' Interest Carryover Shortfall" means, as to any
Class of Certificates, with respect to any Certificate Distribution Date
relating to such Certificates, the excess, if any, of (i) the sum of the related
Certificateholders' Interest Distribution Amount on the preceding Certificate
Distribution Date relating to such Certificates and any outstanding
Certificateholders' Interest Carryover Shortfall on such preceding Certificate
Distribution Date over (ii) the amount of interest actually distributed to the
Certificateholders of such Class on such preceding Certificate 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 Certificate Distribution Date to the
current Certificate Distribution Date.
"Certificateholders' Interest Distribution Amount" means, as to any
Class of Certificates, with respect to any Certificate Distribution Date
relating to such Certificates, the sum of (i) the amount of interest accrued at
the related Certificate Rate for the related Interest Period on the outstanding
principal amount of such Certificates on the immediately preceding Certificate
Distribution Date relating to such Certificates, after giving effect to all
distributions of principal to Certificateholders of such Class on such
Certificate Distribution Date (or, in the case of the first Certificate
Distribution Date for a Class of Certificates , on the related Closing Date) and
(ii) the Certificateholders' Interest Carryover Shortfall relating to such
Certificates for such Certificate Distribution Date; PROVIDED, HOWEVER, that the
Certificateholders' Interest Distribution Amount will not include any
Certificateholders' Interest Carryover.
"Certificateholders' Principal Carryover Shortfall" means, as of the
close of any Certificate 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
Certificate Distribution Date and any outstanding Certificateholders' Principal
Carryover Shortfall for the preceding Certificate Distribution Date over (ii)
the amount of principal actually distributed to the Certificateholders on such
Certificate Distribution Date.
"Certificateholders' Principal Distribution Amount" means, on each
Certificate Distribution Date relating to the Class or Classes of Certificates
then entitled to receive payments of principal, on and after which the principal
balance of the Notes of the related Trust has been paid in full, the sum of (a)
the Principal Distribution Amount for the Collection Periods specified in the
related Prospectus Supplement , (b) any Additional Principal Payments to be made
on such Certificate Distribution Date and (c) the Certificateholders' Principal
Carryover Shortfall as of the close of the preceding Certificate Distribution
Date; PROVIDED, HOWEVER, that the Certificateholders' Principal Distribution
Amount will in no event exceed the outstanding principal balance of such Class
of Certificates. Further, on the first Certificate Distribution Date occurring
after the Note Distribution Date on which the principal balance of the Notes of
the related Trust 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 Note Distribution Date over the
amount of principal paid on the Notes on such date. In addition, with respect to
each Class of Certificates, on the related Final Maturity Date the
Certificateholders' Principal Distribution Amount will include the amount
required to reduce the outstanding principal balance of such Certificates to
zero.
"Noteholders' Distribution Amount" means, as to any Class of Notes,
with respect to any Distribution Date relating to such Notes, the sum of related
Noteholders' Interest Distribution Amount and the Noteholders' Principal
Distribution Amount for such Note Distribution Date.
"Noteholders' Interest Carryover Shortfall" means, as to any Class of
Notes, with respect to any Note Distribution Date relating to such Notes, the
excess of (i) the sum of the related Noteholders' Interest Distribution Amount
on the preceding Note Distribution Date relating to such Notes and any
Noteholders' Interest Carryover Shortfall on such preceding Note Distribution
Date over (ii) the amount of interest actually allocated to such Noteholders on
such preceding Note 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 Note Distribution Date to the
current Note Distribution Date.
"Noteholders' Interest Distribution Amount" means, as to any Class of
Notes, with respect to any Note Distribution Date, the sum of (i) the amount of
interest accrued at the respective Class Interest Rate for each related Interest
Period since the last Note Distribution Date relating to such Notes (or, in the
case of the first Note Distribution Date following the issuance of a Class of
Notes, the applicable Closing Date) on the outstanding principal balance of such
Class of Notes on the immediately preceding Note Distribution Date relating to
such Notes after giving effect to all principal distributions to holders of
Notes of such Class on such date (or, in the case of the first Note Distribution
Date for such Class, on the related Closing Date) and (ii) the Noteholders'
Interest Carryover Shortfall for such Class for such Note 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 Note Distribution Date relating to a Class of Notes, the excess of (i) the
sum of the Noteholders' Principal Distribution Amount on such Note Distribution
Date and any outstanding Noteholders' Principal Carryover Shortfall for the
preceding Note Distribution Date over (ii) the amount of principal actually
allocated to the Noteholders on such Note Distribution Date.
"Noteholders' Principal Distribution Amount" means, as to the Class or
Classes of Notes then entitled to receive payments of principal on each
applicable Note Distribution Date, the sum of (i) the Principal Distribution
Amount for such Collection Periods as may be set forth in the related Prospectus
Supplement, (ii) any Additional Principal Payments to be made on such Note
Distribution Date and (iii) the Noteholders' Principal Carryover Shortfall as of
the close of the preceding Note Distribution Date relating to such Notes;
PROVIDED, HOWEVER, that the Noteholders' Principal Distribution Amount will not
exceed the outstanding principal balance of such Class or Classes 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, generally, unless provided
otherwise in the related Prospectus Supplement, with respect to any Collection
Period, 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
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 the related Collection Period; (iv) to the extent attributable
to principal, the Purchase Amount received with respect to each Financed Student
Loan repurchased by the Seller or purchased by the Master Servicer or The Money
Store under an obligation which arose during the related Collection Period; and
(v) amounts, if any, transferred from the Pre-Funding Account at the end of the
applicable Funding 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 Student Loan submitted to a Guarantor
for a Guarantee Payment, a "Realized Loss" generally means the excess, if any,
of (i) the unpaid principal balance of such Financed Student 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 Financed Student 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 7 months after the date
the claim for such Guarantee Payment is first denied.
MONTHLY ADVANCES
If the Master Servicer has applied for a Guarantee Payment from a
Guarantor, an Interest Subsidy Payment or a Special Allowance Payment from the
Department or an insurance payment from the Secretary, and the Master Servicer
has not received the related payment prior to the end of the Collection Period
immediately preceding the Note Distribution Date or Certificate Distribution
Date on which such amount would be required to be distributed as a payment of
interest, the Representative may, no later than the Determination Date relating
to such Note Distribution Date or Certificate Distribution Date, as the case may
be, deposit into the Monthly Advance Account an amount up to the amount of such
payments with respect to interest applied for but not received (such deposits by
the Master Servicer are referred to herein as "Monthly Advances"). On each
related Note Distribution Date, the Indenture Trustee will distribute from the
Monthly Advance Account to the applicable Noteholders the Monthly Advance for
such Note Distribution Date. On each related Certificate Distribution Date, the
Indenture Trustee will transfer from the Monthly Advance Account to the Eligible
Lender Trustee for distribution to the Certificateholders, the Monthly Advance
for such Certificate Distribution Date. Such Monthly Advances are recoverable by
the Representative from the source for which such Monthly Advance was made.
CREDIT ENHANCEMENT
The amounts and types of credit enhancement arrangements and the
provider thereof, if applicable, with respect to a Series or any Class of
Securities will be set forth in the related Prospectus Supplement. If specified
in the applicable Prospectus Supplement, credit enhancement for any Series of
Securities may cover one or more Classes of Notes or Certificates, and,
accordingly, may be exhausted for the benefit of a particular Class of Notes or
Certificates and thereafter be unavailable to such other Classes of Notes or
Certificates. Further information regarding any provider of credit enhancement,
including financial information when material, will be included or incorporated
by reference in the related Prospectus Supplement.
If an to the extent provided in the related Prospectus Supplement,
credit enhancement may include one or more of the following or any combination
thereof:
RESERVE ACCOUNT. Pursuant to a Sale and Servicing Agreement, with
respect to each Trust a Reserve Account may be created and on each Closing Date
on which the related Trust sells a Series of Notes, the Sellers may deposit cash
or Eligible Investments in an amount, if any, equal to the Reserve Account
Deposit identified in the related Prospectus Supplement. The Reserve Account may
be augmented on certain Note Distribution Dates or Certificate Distribution
Dates, as set forth in the related Prospectus Supplement, 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 in the
related Prospectus Supplement; provided, however, that, if and as set forth in
the related Prospectus Supplement, such Available Funds may be applied as an
Additional Principal Payment. Also, if amounts were transferred from the Reserve
Account to cover a Realized Loss on a Financed Student Loan, any subsequent
payments of principal received on or with respect to such Financed Student Loan
will be deposited into the Reserve Account or, if so provided in the related
Prospectus Supplement, applied as an Additional Principal Payment. Amounts on
deposit in the Reserve Account exceeding the Specified Reserve Account Balance
will be distributed as set forth in the related Prospectus Supplement.
A Reserve Account is intended to enhance the likelihood of timely
receipt by the Noteholders and the Certificateholders of the full amount of
principal and interest due them and to decrease the likelihood that the
Noteholders or the Certificateholders will experience losses. In certain
circumstances, however, a Reserve Account could be depleted. Further, as
described above, amounts otherwise required to be deposited into the Reserve
Account may, with the consent of the applicable Surety Provider or other
provider of Enhancement, if any, be applied as Additional Principal Payments. 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 or the Certificateholders could result. This
could, in turn, increase the average life of the Notes and the Certificates.
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 Servicing Fee Carryovers, Noteholders' Interest Carryover
or Certificateholders' Interest Carryover.
SUBORDINATION OF THE CERTIFICATES. The rights of the holders of the
Certificates of a Trust to receive distributions with respect to interest and
principal will be subordinated to such rights of the holders of the Notes of the
related Trust to the extent described herein and in a Prospectus Supplement.
This subordination is intended to enhance the likelihood of regular receipt by
holders of Notes of the related Trust of the full amount of the Noteholders'
Interest Distribution Amount and, after distribution of the Certificateholders'
Interest Distribution Amount, the Noteholders' Principal Distribution Amount.
SURETY BONDS. Note Surety Bonds, issued by a Surety Provider, may be
obtained by the Sellers in favor of the Eligible Lender Trustee solely on behalf
of the Noteholders of the related Series. Note Surety Bonds will, if obtained,
except as provided below or in a Prospectus Supplement, provide for coverage of
timely payment of all interest and ultimate payment of all principal due on the
related Series of Notes; PROVIDED, HOWEVER, that Note Surety Bonds will not
ensure payment of any Noteholders' Interest Carryover.
Certificate Surety Bonds will, if obtained, except as provided below
or in a Prospectus Supplement, provide for coverage of timely payment of all
interest and ultimate payment of all principal due on the Certificates;
PROVIDED, HOWEVER, that the Certificate Surety Bonds will not ensure payment of
any Certificateholders' Interest Carryover. Certificate Surety Bonds may be
obtained by the Sellers in favor of the Eligible Lender Trustee solely on behalf
of the Certificateholders of the related Class.
The amount required to be paid under each Surety Bond will be
described in the applicable Prospectus Supplement.
OTHER FORMS OF CREDIT ENHANCEMENT. If and to the extent specified in
the related Prospectus Supplement, enhancement with respect to a Series or any
Class of Securities may also include overcollateralization, a letter of credit,
one or more Classes of subordinate Securities, derivative products or other
forms of credit enhancement including but not limited to third party guarantees
or guarantees of The Money Store (collectively, "Enhancement"). The Enhancement
with respect to any Series or Class of Securities may be structured to provide
protection against delinquencies and/or losses on the Financed Student Loans,
against changes in interest rates, or other risks, to the extent and under the
conditions specified in the related Prospectus Supplement. Any form of
Enhancement will have certain limitations and exclusions from coverage
thereunder, which will be described in the related Prospectus Supplement.
STATEMENTS TO INDENTURE TRUSTEE AND TRUST
For each Trust, on or prior to each Determination Date preceding the
Note Distribution Dates and Certificate Distribution Dates set forth on a
Prospectus Supplement, the Master Servicer or the Administrator will provide to
the Indenture Trustee for the Indenture Trustee to forward on each succeeding
Note Distribution Date to each Noteholder of the applicable Class, and to the
Eligible Lender Trustee for the Eligible Lender Trustee to forward on such
succeeding Certificate Distribution Date to each Certificateholder of the
applicable Class, a statement, which may include the following information with
respect to such Note Distribution Date and Certificate Distribution Date or the
preceding Collection Period, to the extent applicable (provided, however, that
with respect to each Note Distribution Date other than the first Note
Distribution Date occurring in each month, such statement need only contain the
information set forth in clauses (ii), (iii), (v), and (vii) below), and such
other information as may be set forth in the related Prospectus Supplement:
(i) the amount of the distribution allocable to
principal of each Class of Notes or Certificates, as the
case may be;
(ii) the amount of the distribution allocable to interest on
each Class of Notes and Certificates (or in the case of any Accrual
Notes during the related Accrual Period, the amount of interest
capitalized and added to principal), together with the interest rates
applicable with respect thereto (indicating whether such interest rates
are based on the Auction Rate, the LIBOR Rate, the T-Bill Rate or other
applicable rate as set forth in the related Prospectus Supplement, as
the case may be, or on the Net Loan Rate, with respect to each Class of
Notes and Certificates, and specifying what each such interest rate
would have been if it had been calculated using the alternate basis);
(iii) the amount of the distribution, if any, allocable to any
Noteholders' Interest Carryover and any Certificateholders' Interest
Carryover, together with the outstanding amount, if any, of each
thereof after giving effect to any such distribution;
(iv) the Pool Balance as of the close of business on the last
day of the preceding Collection Period;
(v) the aggregate outstanding principal balance of each Class
of Notes and Certificates as of such Note Distribution Date or
Certificate Distribution Date, after giving effect to payments
allocated to principal reported under clause (i) above;
(vi) the amount of the Servicing Fee and any Servicing Fee
Carryover allocated to the Master Servicer, the amount of the
Administration Fee allocated to the Administrator, the amount of the
Auction Agent Fee allocated to the Auction Agent, the amount of the
Indenture Trustee Fee allocated to the Indenture Trustee, the amount of
the Eligible Lender Trustee Fee allocated to the Eligible Lender
Trustee and, if applicable, the amount of the Surety Provider Fee
allocated to the Surety Provider, respectively, with respect to such
Collection Period, and the amount, if any, of the Servicing Fee
Carryover remaining unpaid after giving effect to any such payment;
(vii) if applicable, the amount of the distribution, if any,
payable to the Surety Provider as reimbursement for any unpaid Surety
Bond Payments;
(viii) the amount of the aggregate Realized Losses, if any, for
such 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 Note Distribution Date or Certificate
Distribution Date, the balance of the Reserve Account on such Note
Distribution Date or Certificate Distribution Date, after giving effect
to changes therein on such Note Distribution Date or Certificate
Distribution Date and the then applicable Parity Percentage;
(x) for Note Distribution Dates during each Funding Period, the
portion, if any, of the distribution attributable to amounts on deposit
in the Pre-Funding Account and the remaining Pre-Funded Amount on such
Note Distribution Date, after giving effect to changes therein during
the related Collection Period;
(xi) for the Note Distribution Dates during each Funding Period,
the aggregate amount, if any, paid by the Eligible Lender Trustee on
behalf of the Trust to purchase Additional Financed Student Loans
during the preceding
Collection Period;
(xii) for the first Note Distribution Date on or following the
end of each Funding Period, the amount of any remaining Pre-Funded
Amount that has not been used to make Additional Fundings and is being
paid out to Noteholders;
(xiii) the aggregate amount, if any, paid for Financed Student
Loans purchased from the Trust during the preceding Collection Period;
and
(xiv) the number and principal amount of Financed Student Loans,
as of the preceding Collection Period, that are (i) 30 to 60 days
delinquent, (ii) 61 to 90 days delinquent, (iii) 91 to 120 days
delinquent, (iv) more than 120 days delinquent and (v) for which claims
have been filed with the appropriate Guarantor and which are awaiting
payment.
EVIDENCE AS TO COMPLIANCE
Each Sale and Servicing Agreement will provide that a firm of
independent public accountants will furnish to the related Eligible Lender
Trustee and 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 Initial Closing Date to the end of the calendar
year) with all applicable standards under such Sale and Servicing Agreement
relating to the servicing of the Financed Student Loans.
Each Sale and Servicing Agreement will further provide that a firm of
independent public accountants (which may be the same firm referred to in the
immediately preceding paragraph) will furnish to the related Eligible Lender
Trustee and 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 Initial Closing Date to the end of the
calendar year) with all applicable standards under the Sale and Servicing
Agreement and the Administration Agreement relating to the administration of the
related Trust and the Financed Student Loans.
Each Sale and Servicing Agreement will also provide for delivery to
the related Eligible Lender Trustee and Indenture Trustee, concurrently with the
delivery of each statement of compliance referred to above, of a certificate
signed by an officer of the Master Servicer or the Administrator, as the case
may be, stating that, to his knowledge, the Master Servicer or the
Administrator, as the case may be, has fulfilled its obligations under the Sale
and Servicing Agreement throughout the preceding calendar year (or, in the case
of the first such certificate, the period from the Initial Closing Date to end
of the calendar year) or, if there has been a default in the fulfillment of any
such obligation, describing each such default. Each of the Master Servicer and
the Administrator will agree to give the Indenture Trustee and the Eligible
Lender Trustee notice of certain Servicer Defaults and Administrator Defaults,
respectively, under the Sale and Servicing Agreement.
Copies of such statements and certificates may be obtained by
Securityholders by a request in writing addressed to the Applicable Trustee.
CERTAIN MATTERS REGARDING THE SERVICER
Each Sale and Servicing Agreement will provide that the related Master
Servicer may not resign from its obligations and duties as Master Servicer
thereunder, except upon determination that the Master Servicer's performance of
such duties is no longer permissible under applicable law. No such resignation
will become effective until the related Indenture Trustee or a successor
servicer has assumed the Master Servicer's servicing obligations and duties
under the Sale and Servicing Agreement.
Each Sale and Servicing Agreement will further provide that neither
the related Master Servicer nor any of its directors, officers, employees or
agents will be under any liability to the related Trust, the Surety Provider or
other provider of Enhancement, if any, the Noteholders or the
Certificateholders, the Indenture Trustee or the Eligible Lender Trustee for
taking any action or for refraining from taking any action pursuant to the Sale
and Servicing Agreement, or for errors in judgment; PROVIDED, HOWEVER, that
neither the Master Servicer nor any such person will be protected against any
liability that would otherwise be imposed by reason of willful misfeasance, bad
faith or negligence in the performance of its duties thereunder or by reason of
reckless disregard of obligations and its duties thereunder. In addition, each
Sale and Servicing Agreement will provide that the Master Servicer is under no
obligation to appear in, prosecute, or defend any legal action that is not
incidental to its servicing responsibilities under the Sale and Servicing
Agreement and that, in its opinion, may cause it to incur any expense or
liability.
Under the circumstances specified in the Sale and Servicing Agreement,
any entity into which the Master Servicer may be merged or consolidated, or any
entity resulting from any merger or consolidation to which the Master Servicer
is a party, or any entity succeeding to the business of the Master Servicer,
which corporation or other entity in each of the foregoing cases assumes the
obligations of the Master Servicer, will be the successor of the Master Servicer
under the Sale and Servicing Agreement.
MASTER SERVICER DEFAULT; ADMINISTRATOR DEFAULT
"Master Servicer Default" under a Sale and Servicing Agreement
generally will consist of (i) any failure by the Master Servicer to deliver to
the Indenture Trustee for deposit in any of the Trust Accounts any collections,
Guarantee Payments or other amounts received with respect to the Financed
Student Loans, which failure continues unremedied for two Business Days after
written notice from the Indenture Trustee, the Surety Provider, if any, 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 or The Money Store
duly to observe or perform in any material respect any other covenant or
agreement in the Sale and Servicing Agreement which failure materially and
adversely affects the rights of Noteholders, Certificateholders or the Surety
Provider, if any, and which continues unremedied for 60 days after the giving of
written notice of such failure (A) to the Master Servicer or The Money Store, as
the case may be, by the Indenture Trustee, the Eligible Lender Trustee, the
Surety Provider, if any, or the Administrator or (B) to the Master Servicer or
The Money Store, as the case may be, and to the Indenture Trustee and the
Eligible Lender Trustee by holders of Notes or Certificates, as applicable,
evidencing not less than 25% in principal amount of the outstanding Notes or
Certificates of the related Trust; and (iii) certain events of insolvency,
readjustment of debt, marshalling 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.
"Administrator Default" under a Sale 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 two Business Days after written notice from the
Indenture Trustee, the Surety Provider, if any, 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 Sale and Servicing Agreement which failure materially and
adversely affects the rights of Noteholders, Certificateholders or the Surety
Provider, if any, and which continues unremedied for 60 days after the giving of
written notice of such failure (l) to the Administrator by the Surety Provider,
if any, the Indenture Trustee or the Eligible Lender Trustee or (2) to the
Administrator and to the Indenture Trustee and the Eligible Lender Trustee by
holders of Notes or Certificates, as applicable, evidencing not less than 25% in
principal amount of the outstanding Notes or Certificates of the related Trust;
and (iii) certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities, or similar proceedings with respect to the Administrator
and certain actions by the Administrator indicating its insolvency or inability
to pay its obligations.
RIGHTS UPON SERVICER DEFAULT AND ADMINISTRATOR DEFAULT
As long as a Servicer Default under a Sale and Servicing Agreement or
an Administrator Default under a Sale and Servicing Agreement or the
Administration Agreement remains unremedied, the Surety Provider, if any, may
or, with the consent of the Surety Provider, if any, the Indenture Trustee or
holders of Notes evidencing not less than 25% in principal amount of then
outstanding Notes of the related Trust may, terminate all the rights and
obligations of the Master Servicer under the Sale and Servicing Agreement, or
the Administrator under the Sale and Servicing Agreement and the Administration
Agreement, as the case may be, whereupon a successor servicer or administrator
appointed by the Indenture Trustee and approved by the Surety Provider, if any,
or the Indenture Trustee will succeed to all the responsibilities, duties and
liabilities of the Master Servicer under the Sale and Servicing Agreement, or
the Administrator under the Sale and Servicing Agreement and the Administration
Agreement, as the case may be, and will be entitled to similar compensation
arrangements. If, however, a bankruptcy trustee or similar official has been
appointed for the Master Servicer or the Administrator, and no Servicer Default
or Administrator Default other than such appointment has occurred, such trustee
or official may have the power to prevent the Surety Provider, if any, the
Indenture Trustee or the Noteholders from effecting such a transfer. In the
event that the Indenture Trustee is unwilling or unable to so act, it may
appoint, or petition a court of competent jurisdiction for the appointment of, a
successor whose regular business includes the servicing of student loans. The
Indenture Trustee may make such arrangements for compensation to be paid, which
in no event may be greater than the compensation to the Master Servicer under
the Sale and Servicing Agreement or the Administrator under the Sale and
Servicing Agreement and the Administration Agreement, as the case may be, unless
such compensation arrangements will not result in a downgrading of the Notes and
the Certificates by any Rating Agency. In the event a Servicer Default or an
Administrator Default occurs and is continuing, the Surety Provider, if any, the
Indenture Trustee or the Noteholders, as described above, may remove the Master
Servicer or the Administrator, as the case may be, without the consent of the
Eligible Lender Trustee or any of the Certificateholders. Moreover, only the
Surety Provider, if any, or, with the consent of the Surety Provider, if any,
the Indenture Trustee or the Noteholders, and not the Eligible Lender Trustee or
the Certificateholders, have the ability to remove the Master Servicer or the
Administrator, as the case may be, if a Servicer Default or an Administrator
Default occurs and is continuing.
WAIVER OF PAST DEFAULTS
The Surety Provider, if any, or, with the consent of the Surety
Provider, if any, the holders of Notes evidencing at least a majority in
principal amount of the then outstanding Notes of the related Trust (or the
holders of Certificates evidencing not less than a majority of the outstanding
Certificate Balance, in the case of any default which does not adversely affect
the Indenture Trustee or the Noteholders) may, on behalf of all Noteholders and
Certificateholders of such Trust, waive any default by the Master Servicer in
the performance of its obligations under a Sale and Servicing Agreement, or any
default by the Administrator of its obligations under the Sale and Servicing
Agreement and the Administration Agreement, as the case may be, and their
respective consequences, except a default in making any required deposits to or
payments from any of the Trust Accounts or giving instructions regarding the
same in accordance with the Sale and Servicing Agreement. Therefore, the Surety
Provider, if any, and the Noteholders have the ability, except as noted above,
to waive defaults by the Master Servicer and the Administrator which could
materially adversely affect the Certificateholders. No such waiver will impair
the Noteholders' or the Certificateholders' rights with respect to subsequent
defaults.
AMENDMENT
The Transfer and Servicing Agreements may be amended by the parties
thereto, with the consent of the Surety Provider, if any, but without the
consent of the Noteholders or the Certificateholders, for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of the Transfer and Servicing Agreements or of modifying in any manner the
rights of Noteholders or Certificateholders; provided that such action will not,
in the opinion of counsel satisfactory to the Indenture Trustee and the Eligible
Lender Trustee, materially and adversely affect the interest of any Noteholder
or Certificateholder. The Transfer and Servicing Agreements may also be amended
by the Sellers, the Administrator, the Master Servicer, the Eligible Lender
Trustee and the Indenture Trustee, as applicable, with the consent of the Surety
Provider, if any, and the holders of Notes evidencing at least a majority in
principal amount of the then outstanding Notes of such Trust and the holders of
Certificates evidencing at least a majority of the Certificate Balance of such
Trust for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of such Transfer and Servicing Agreements or
of modifying in any manner the rights of Noteholders or the 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 (including any Guarantee 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.
INSOLVENCY EVENT
If any of certain events of insolvency or receivership, readjustment
of debt, marshalling of assets and liabilities, or similar proceedings with
respect to Student Holdings or certain actions by Student Holdings indicating
its insolvency or inability to pay its obligations (each, an "Insolvency Event")
occurs, the Financed Student Loans will be liquidated and each Trust will be
terminated 90 days after the date of such Insolvency Event, unless, before the
end of such 90-day period, the related Eligible Lender Trustee shall have
received written instructions from the applicable Surety Provider, if any, and
the holders of the Certificates (other than Student Holdings) representing more
than 50% of the aggregate unpaid principal amount of the Certificates (not
including the principal amount of Certificates held by Student Holdings) of the
related Trust to the effect that such group disapproves of the liquidation of
the Financed Student Loans and termination of the related Trust. Promptly after
the occurrence of any Student Holdings Insolvency Event, notice thereof is
required to be given to Noteholders and Certificateholders and the Surety
Provider, if any; PROVIDED, HOWEVER, that any failure to give such required
notice will not prevent or delay termination of the related Trust. Upon
termination of a Trust, the Eligible Lender Trustee will direct the Indenture
Trustee promptly to sell the assets of the Trust (other than the Trust Accounts
and, if applicable, the Surety Bonds) in a commercially reasonable manner 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 to the extent
not covered by applicable Note Surety Bonds,. If such amounts are not sufficient
to pay the Notes and the Certificates in full, the amount of principal returned
to the Certificateholders will be reduced and the Certificateholders will incur
a loss to the extent not covered by a Certificate Surety Bond. A Surety Provider
has no obligation to pay in full the principal of the Certificates until the
Certificate Final Maturity Date.
A Trust Agreement will provide that the Eligible Lender Trustee does
not have the power to commence a voluntary proceeding in bankruptcy relating to
the Trust without the unanimous prior approval of all Certificateholders and the
delivery to the Eligible Lender Trustee by each Certificateholder of a
certificate certifying that such Certificateholder reasonably believes that the
Trust is insolvent.
PAYMENT OF NOTES
Upon the payment in full of all outstanding Notes of a Trust and the
satisfaction and discharge of the related Indenture, the Eligible Lender Trustee
will succeed to all the rights of the Indenture Trustee, and the
Certificateholders will succeed to all the rights of the Noteholders, under the
related Sale and Servicing Agreement, except as otherwise provided therein.
LIABILITY OF STUDENT HOLDINGS
To the extent set forth in a Prospectus Supplement, under a Trust
Agreement, Student Holdings will agree to be liable directly to an injured party
for the entire amount of any losses, claims, damages or liabilities (other than
those incurred by a Noteholder or a Certificateholder in the capacity of an
investor) arising out of or based on the arrangement created by the Trust
Agreement as though such arrangement created a partnership under the partnership
laws of the jurisdiction in which the Trust was established in which Student
Holdings were a general partner.
TERMINATION
The obligations of the Master Servicer, the Sellers, the
Administrator, the Auction Agent, if any, the Eligible Lender Trustee and the
Indenture Trustee pursuant to the Transfer and Servicing Agreements relating to
a Trust 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 of the related Trust and
(ii) the payment to the Noteholders and the Certificateholders of the related
Trust of all amounts required to be paid to them pursuant to the Transfer and
Servicing Agreements. In order to avoid excessive administrative expense, the
Sellers are permitted at their option and, if applicable, with the consent of a
Surety Provider, to repurchase from the Eligible Lender Trustee, as of the end
of any Collection Period immediately preceding a Note Distribution Date or
Certificate Distribution Date, if the then outstanding Pool Balance of a Trust
is 10% or less of the Aggregate Pool Balance, all remaining Financed Student
Loans of the related Trust 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 Certificates concurrently therewith. Upon termination of a 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 Sellers.
ADMINISTRATOR
Either Educaid, ClassNotes Inc. or such other party as may be named in
a Prospectus Supplement, in its capacity as Administrator, will enter into the
Administration Agreement with a Trust and the related 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 Note Distribution Date and Certificate 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 an administration fee equal to the amount set
forth in the related Prospectus Supplement (the "Administration Fee").
CERTAIN LEGAL ASPECTS OF THE FINANCED STUDENT LOANS
TRANSFER OF FINANCED STUDENT LOANS
Each Seller intends that the transfer of the Financed Student Loans by
it to the Eligible Lender Trustee on behalf of a Trust constitutes a valid sale
or contribution and assignment of such Financed Student Loans. In addition, each
of the Seller has taken and will take all actions that are required under
applicable state law to perfect the Eligible Lender Trustee's ownership interest
in the Financed Student Loans and the collections with respect thereto.
Notwithstanding the foregoing, if the transfer of the Financed Student Loans is
deemed to be an assignment of collateral as security for the benefit of a Trust,
the Financed Student Loans would be considered general intangibles for purposes
of the applicable Uniform Commercial Code (the "UCC"). If a transfer of general
intangibles is deemed to be a sale or contribution, then the UCC is not
applicable and no further action under the UCC is required to protect the
Eligible Lender Trustee's interest from third parties.
If the transfer of the Financed Student Loans is deemed to be an
assignment as security for the benefit of a Trust, there are certain limited
circumstances under the UCC in which prior or subsequent transferees of Financed
Student Loans coming into existence after the Closing Date could have an
interest in such Financed Student Loans with priority over the related Eligible
Lender Trustee's interest. A tax or other government lien on property of a
Seller arising prior to the time a Financed Student Loan comes into existence
may also have priority over the interest of the Eligible Lender Trustee in such
Financed Student Loan. Under a Sale and Servicing Agreement, however, each
Seller will warrant that it has transferred the Financed Student Loans to the
Eligible Lender Trustee on behalf of the related Trust free and clear of the
lien of any third party. In addition, each Seller will covenant that it will not
sell, pledge, assign, transfer or grant any lien on any Financed Student Loan
(or any interest therein) other than to the Eligible Lender Trustee on behalf of
the related Trust, except as provided below.
Pursuant to a Sale and Servicing Agreement, either the Master
Servicer, a sub-servicer or another independent party as custodian on behalf of
the related Trust will have custody of the promissory notes evidencing the
Financed Student Loans 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 applicable Seller will be marked to indicate the
conveyance and the applicable Seller will cause UCC financing statements to be
filed with the appropriate authorities, the Financed Student Loans will not be
physically segregated in the Master Servicer's or such sub-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)
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--Sale of Financed Student Loans; Representations and
Warranties" and "-- Servicer Covenants." Under certain circumstances, a
Guarantor in the Federal Program will retain custody of the promissory notes
evidencing the related Financed Student Loans.
CERTAIN MATTERS RELATING TO INSOLVENCY
To the extent that the transfer of the Financed Student Loans from a
Seller to a Trust is deemed to create a security interest, and (i) the interest
was validly perfected prior to the Seller's insolvency and at the time the
Seller received consideration for the Financed Student Loans, (ii) such transfer
does not constitute a fraudulent conveyance or transfer, and (iii) the value of
the Financed Student Loans is equal to or greater than the consideration
received by the Seller, such security interest should not be subject to
avoidance and payments to the Trust made prior to the Seller's insolvency
proceeding should not be subject to recovery by the Seller, any receiver of the
Seller in its insolvency proceeding or any of the Seller's creditors. To the
extent, however, that payment is not made to the Trust prior to the insolvency
proceeding, then the timely transfer to the Trust of such collection may cease.
For example, the Seller may be authorized to use the Financed Student Loans and
proceeds thereof if the court in the insolvency proceeding finds that the Seller
has provided the Trust with adequate protection of the Trust's interest in the
Financed Student Loans and proceeds thereof.
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon lenders and servicers involved
in consumer finance. Also, some state laws impose finance charge ceilings and
other restrictions on certain consumer transactions and require contract
disclosures in addition to those required under federal law. These requirements
impose specific statutory liabilities upon lenders who fail to comply with their
provisions. In certain circumstances, a Trust may be liable for certain
violations of consumer protection laws that apply to the Financed Student Loans,
either as assignee from the Sellers or as the party directly responsible for
obligations arising after the transfer. With respect to the Federal Loans and
the HEAL Loans, many of these requirements are preempted by the provisions of
the Higher Education Act and the Public Health Service Act. For a discussion of
a Trust's rights if the Financed Student Loans were not originated or serviced
in compliance in all material respects with applicable laws. See "Description of
the Transfer and Servicing Agreements -- Sale of Financed Student Loans;
Representations and Warranties" and "--Servicer Covenants."
LOAN ORIGINATION AND SERVICING PROCEDURES APPLICABLE TO FINANCED
STUDENT LOANS
The Higher Education Act, including the implementing regulations
thereunder (in the case of Federal Loans), the Public Health Service Act and the
regulations thereunder (in the case of HEAL Loans) and the Private Loan Programs
(in the case of the Private Loans) impose specified requirements, guidelines and
procedures with respect to originating and servicing Student Loans such as the
Financed Student Loans. Generally, those procedures require that completed loan
applications be processed, a determination of whether an applicant is an
eligible borrower under applicable standards (including a review of a financial
need analysis in the case of certain Federal Loans) be made, the borrower's
responsibilities under the loan be explained to him or her, the promissory note
evidencing the loan be executed by the borrower and then that the loan proceeds
be disbursed in a specified manner by the lender. After the loan is made, the
lender must establish repayment terms with the borrower, properly administer
deferrals and forbearances and credit the borrower for payments made thereon. If
a borrower becomes delinquent in repaying a loan, a lender or a servicing agent
must perform certain collection procedures (primarily telephone calls and demand
letters) which vary depending upon the length of time a loan is delinquent. A
Master Servicer will agree pursuant to a Sale and Servicing Agreement to perform
collection and servicing procedures on behalf of the related Trust. However,
failure to follow these procedures or failure of a Seller to follow procedures
relating to the origination of any Financed Student Loans could result in
adverse consequences. In the case of any such Federal Loans, any such failure
could result in the Department'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 such Financed Student Loans or in
the Guarantors' refusal to honor their Guarantee Agreements with the Eligible
Lender Trustee with respect to such Financed Student Loans. Failure of the
Guarantors to receive reinsurance payments from the Department could adversely
affect the Guarantors' ability or legal obligation to make Guarantee Payments to
the Eligible Lender Trustee with respect to such Federal Loans. In the case of
the HEAL Loans, failure to make or service properly such HEAL Loans in
accordance with such procedures could adversely affect the Eligible Lender
Trustee's ability to obtain insurance payments from the Secretary. In the case
of the Private Loans, failure to make or service properly such Private Loans in
accordance with such procedures could adversely affect the Eligible Lender
Trustee's ability to obtain Guarantee Payments from the applicable Guarantor.
Loss of any such Guarantee Payments, Interest Subsidy Payments,
Special Allowance Payments or insurance payments from the Secretary could
adversely affect the amount of Available Funds on any Distribution Date and a
Trust's ability to pay principal and interest on the Notes and to make
distributions in respect of the Certificates. Under certain circumstances,
pursuant to a Sale and Servicing Agreement, the applicable Seller is obligated
to repurchase any Financed Student Loan, or the Master Servicer is obligated to
purchase any Financed Student Loan, if a breach of the representations,
warranties or covenants of the Seller or the Master Servicer, as the case may
be, with respect to such Financed Student Loan has a material adverse effect on
the interest of the Trust therein and such breach is not cured within any
applicable cure period (it being understood that any such breach that does not
affect any Guarantor's or the Secretary's obligation to guarantee payment of
such Financed Student Loan will not be considered to have such a material
adverse effect). See "Description of the Transfer and Servicing Agreements--Sale
of Financed Student Loans; Representations and Warranties" and "--Servicer
Covenants." The failure of the applicable Seller or the Master Servicer to so
purchase a Financed Student Loan would constitute a breach of the Sale and
Servicing Agreement, enforceable by the Eligible Lender Trustee on behalf of the
Trust or by the Indenture Trustee on behalf of the Noteholders, but would not
constitute an Event of Default under the Indenture.
FEDERAL LOANS AND HEAL LOANS GENERALLY NOT SUBJECT TO DISCHARGE
IN BANKRUPTCY
Federal Loans and HEAL Loans are generally not dischargeable by a
borrower in bankruptcy pursuant to the Bankruptcy Code, unless (A) such loan
first became due before seven years (exclusive of any applicable suspension of
the repayment period) before the date of the bankruptcy (or, in the case of HEAL
Loans, after expiration of the seven-year period beginning on the first date the
HEAL Loan has gone into repayment) or (B) excepting such debt from discharge
will impose an undue hardship on the debtor and the debtor's dependents.
CERTAIN TAX CONSEQUENCES
Set forth below is a summary of certain Federal income tax
consequences of the purchase, ownership and disposition of the Securities.
Stroock & Stroock & Lavan LLP, special Federal tax counsel for the Trust
("Federal Tax Counsel") is of the opinion that the discussion hereunder fully
and fairly discloses all material Federal tax risks associated with the
purchase, ownership and disposition of the Securities. The tax consequences of
the jurisdiction in which a Trust is established with respect to the Securities
will be set forth in the related Prospectus Supplement.
This summary does not deal with all aspects of Federal income taxation
applicable to all categories of holders of the Securities, some of which may be
subject to special rules or special treatment under the Federal income tax laws.
For example, it does not discuss the specific tax treatment of Securityholders
that are insurance companies, banks and certain other financial institutions,
regulated investment companies, individual retirement accounts ("IRA's") life
insurance companies, tax-exempt organizations or dealers in securities.
Furthermore, this summary is based upon present provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the regulations promulgated
thereunder, and judicial or ruling authority, all of which are subject to
change, which change may be retroactive. Moreover, there are no cases or
Internal Revenue Service (the "IRS") rulings on similar transactions involving a
trust that issues debt and equity interests with terms similar to those of the
Notes and the Certificates. As a result, the IRS may disagree with all or part
of the discussion below.
Prospective investors are advised to consult their own tax advisors
with regard to the Federal income tax consequences of the purchase, ownership
and disposition of the Securities, as well as the tax consequences arising under
the laws of any state, foreign country or other jurisdiction. The Trust has been
provided with an opinion of Federal Tax Counsel regarding certain of the Federal
income tax matters discussed below. An opinion of counsel, however, is not
binding on the IRS, and no ruling on any of the issues discussed below will be
sought from the IRS.
Each Trust will be provided with an opinion of tax counsel in the
jurisdiction where the Trust is established regarding certain state tax matters.
CERTAIN FEDERAL TAX CONSEQUENCES WITH RESPECT TO THE NOTES
TAX CHARACTERIZATION OF THE NOTES AND THE TRUST. Federal Tax Counsel
has advised the Sellers that based on the terms of the Notes and the
transactions relating to the Financed Student Loans as set forth herein, the
Notes will be treated as debt for Federal income tax purposes. There is,
however, no specific authority with respect to the characterization for Federal
income tax purposes of securities having the same terms as the Notes.
Federal Tax Counsel is also of the opinion that based on the
applicable provisions of a Trust Agreement and related documents and the minimum
denomination of the Certificates, a Trust will not be classified as an
association or publicly traded partnership taxable as a corporation for Federal
income tax purposes. However, there are no authorities directly dealing with
similar transactions. If the IRS were to successfully characterize the Trust as
a corporation for Federal income tax purposes, the income from the Financed
Student Loans (reduced by deductions, possibly including interest on the Notes)
would be subject to Federal income tax at corporate rates, which would reduce
the amounts available to make payments on the Notes. Likewise, if a Trust were
subject to income or franchise tax in the jurisdiction in which it was
established, the amount of cash available to make payments on the Notes would be
reduced.
If, contrary to the opinion of Federal Tax Counsel, the IRS
successfully asserted that the Notes were not debt for Federal income tax
purposes, the Notes might be treated as equity interests in the Trust. If so,
the Trust might be taxable as a corporation with the adverse consequences
described above (and the taxable corporation would not be able to deduct
interest on the Notes). The remainder of this discussion assumes that the Notes
will be treated as debt and that the Trust will not be taxable as a corporation.
INTEREST INCOME ON THE NOTES. The stated interest on the Notes will be
taxable to a Noteholder as ordinary income when received or accrued in
accordance with such Noteholder's method of tax accounting. It is not
anticipated that the Notes will be issued with "original issue discount" within
the meaning of Section 1273 of the Code ("OID"). A holder who purchases a Note
at a discount that exceeds a statutorily defined de minimis amount will be
subject to the "market discount" rules of the Code, and a holder who purchases a
Note at a premium will be subject to the premium amortization rules of the Code.
SALE OR OTHER DISPOSITION. If a Noteholder sells a Note, the holder
will recognize gain or loss in an amount equal to the difference between the
amount realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any OID (if any), market discount and gain
previously included by such Noteholder in income with respect to the Note and
decreased by the amount of bond premium (if any) previously amortized and by the
amount of principal payments previously received by such Noteholder with respect
to such Note. Subject to the rules of the Code concerning market discount on the
Notes, any such gain or loss will be capital gain or loss if the note was held
as a capital asset. Capital losses generally may be deducted only to the extent
the Noteholder has capital gains for the taxable year, although under certain
circumstances non-corporate Noteholders can deduct losses in excess of available
capital gains.
FOREIGN HOLDERS. If interest paid (or accrued) to a Noteholder who is
a nonresident alien, foreign corporation or other non-United States person (a
"foreign person") is not effectively connected with the conduct of a trade or
business within the United States by the foreign person, the interest generally
will be considered "portfolio interest," and generally will not be subject to
United States Federal income tax and withholding tax, if the foreign person (i)
is not actually or constructively a "10 percent shareholder" of the Trust or
Student Holdings (including a holder of 10% of the outstanding Certificates) or
a "controlled foreign corporation" with respect to which the Trust or Student
Holdings is a "related person" within the meaning of the Code and (ii) provides
the person otherwise required to withhold U.S. tax with an appropriate
statement, signed under penalties of perjury, certifying that the beneficial
owner of the Note is a foreign person and providing the foreign person's name
and address. Recently issued Treasury regulations (the "Final Withholding
Regulations"), which are generally effective with respect to payments made after
December 31, 1998, consolidate and modify the current certification requirements
and means by which a holder may claim exemption from United States federal
income tax withholding and provide certain presumptions regarding the status of
holders when payments to the holders cannot be reliably associated with the
appropriate documentation provided to the payor. All holders should consult
their tax advisers regarding the application of the Final Withholding
Regulations. If such interest is not portfolio interest, then it will be subject
to United States Federal income and withholding tax at a rate of 30%, unless
reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States Federal income and withholding tax, provided that (i) the gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign individual is not present in the United States for 183 days
or more in the taxable year or does not have a tax home in the United States.
If the interest, gain or income on a Note held by a foreign person is
effectively connected with the conduct of a trade or business in the United
States by the foreign person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement), the
holder generally will be subject to United States Federal income tax on the
interest, gain or income at regular Federal income tax rates. In addition, if
the foreign person is a foreign corporation, it may be subject to a branch
profits tax equal to 30% of its "effectively connected earnings and profits"
within the meaning of the Code for the taxable year, as adjusted for certain
items, unless it qualifies for a lower rate under an applicable tax treaty (as
modified by the branch profits tax rules).
INFORMATION REPORTING AND BACKUP WITHHOLDING. The Trust will be
required to report annually to the IRS, and to each Noteholder of record, the
amount of interest paid on the Notes (and the amount of interest withheld for
Federal income taxes, if any) for each calendar year, except as to exempt
holders (generally, holders that are corporations, tax-exempt organizations,
qualified pension and profit-sharing trusts, individual retirement accounts, or
nonresident aliens who provide certification as to their status as
nonresidents). Accordingly, each holder (other than exempt holders who are not
subject to the reporting requirements) will be required to provide, under
penalties of perjury, a certificate containing the holder's name, address,
correct Federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt Noteholder fail to
provide the required certification, the Trust will be required to withhold 31%
of the amount otherwise payable to the holder, and remit the withheld amount to
the IRS as a credit against the holder's Federal income tax liability.
CERTAIN FEDERAL TAX CONSEQUENCES WITH RESPECT TO THE CERTIFICATES
TAX CHARACTERIZATION OF THE TRUST. Generally, the Sellers and the
Master Servicer will agree, and the Certificateholders will agree by their
purchase of Certificates, to treat a Trust as a partnership for purposes of
Federal income tax, with the assets of the partnership being the assets held by
the Trust, the partners of the partnership being the Certificateholders
(including Student Holdings in its capacity as recipient of distributions from
the Reserve Account), and the Notes being debt of the partnership. However, the
proper characterization of the arrangement involving a Trust, the Certificates,
the Notes, the Sellers, Student Holdings and the Master Servicer is not clear
because there is no authority on transactions closely comparable to that
contemplated herein. If the related Prospectus Supplement so provides, the
Transfer and Servicing Agreements for a Trust may provide that an election will
be made on or after September 1, 1997 to qualify such Trust as a Financial Asset
Securitization Investment Trust pursuant to new provisions of the Code which
will be effective as of such date.
If a Trust were held to be an "association" taxable as a corporation
for Federal income tax purposes, rather than a partnership, the Trust would be
subject to a corporate level income tax. Any such corporate income tax could
materially reduce or eliminate cash that would otherwise be distributable with
respect to the Certificates (and Certificateholders could be liable for any such
tax that is unpaid by the Trust). However, in the opinion of Federal Tax
Counsel, a Trust will not be classified as an association taxable as a
corporation because it will not have certain "corporate" characteristics
necessary for a business trust to be an association taxable as a corporation.
Even if a Trust were not an association taxable as a corporation under
the rules described above, it would still be subject to corporate income tax if
it were a "publicly traded partnership" taxable as a corporation, but due to the
fact that the Certificates will be issued in minimum denominations to ensure
that the Trust has fewer than 100 partners, Federal Tax Counsel is of the
opinion that the Trust will not be a publicly traded partnership taxable as a
corporation.
As a result of the foregoing, in the opinion of Federal Tax Counsel, a
Trust will not be an association or publicly traded partnership taxable as a
corporation. Nonetheless, because of the lack of cases or rulings on similar
transactions, a variety of alternative characterizations are possible in
addition to the position to be taken by Certificateholders that the Certificates
represent equity interests in a partnership. For example, because the
Certificates have certain features characteristic of debt, the Certificates
might be considered debt of the related Trust or of the Sellers. Any such
characterization should not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership. The remainder of this summary assumes
that the Certificates represent equity interests in a partnership that owns the
Financed Student Loans.
PARTNERSHIP TAXATION. As a partnership, a Trust will not be subject to
Federal income tax, but each Certificateholder will be required to separately
take into account such holder's allocated share of income, gains, losses,
deductions and credits of the Trust. The Trust's income will consist primarily
of interest earned on the Financed Student Loans (including appropriate
adjustments for market discount, original issue discount and bond premium),
investment income from Eligible Investments in the Trust Accounts and any gain
upon collection or disposition of the Financed Student Loans. The Trust's
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees and losses or deductions upon collection or
disposition of the Financed Student Loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, a Trust Agreement and related documents). A Trust Agreement provides (a)
that except as set forth in a Trust Supplement, the Certificateholders will be
allocated taxable income of the Trust for each Interest Period equal to the sum
of (i) the amount of interest that accrues on the Certificates for such Interest
Period based on the Certificate Rate; (ii) an amount equivalent to interest that
accrues during such Interest Period on amounts previously due on the
Certificates but not yet distributed; and (iii) any Trust income attributable to
discount on the Financed Student Loans that corresponds to any excess of the
principal amount of the Certificates over their initial issue price and that (b)
all remaining taxable income of the Trust will be allocated to Student Holdings.
In addition, the Trust Agreement may provide that certain "excess nonrecourse
liabilities" will be allocated to Student Holdings. It is believed that this
allocation will be valid under applicable Treasury regulations, although no
assurance can be given that the IRS would not require a greater amount of income
to be allocated to Certificateholders. Moreover, under the foregoing method of
allocation, holders may be allocated income equal to the entire amount of
interest accruing on the Certificates for an Interest Period based on the
Certificate Rate plus the other items described above even though the Trust
might not have sufficient cash to make current cash distributions of such
amount. Thus, cash basis holders will in effect be required to report income
from the Certificates on the accrual basis. In addition, because tax allocations
and tax reporting will be done on a uniform basis for all Certificateholders of
one Class but Certificateholders may be purchasing Certificates at different
times and at different prices, Certificateholders may be required to report on
their tax returns taxable income that is greater or less than the amount
reported to them by the Trust.
Additionally, all of the taxable income allocated to a
Certificateholder that is a tax-exempt entity will constitute "unrelated
business taxable income," which, under the Code, is generally taxable to such a
holder despite the holder's tax exempt status.
An individual taxpayer may generally deduct miscellaneous itemized
deductions (which do not include interest expenses) only to the extent they
exceed two percent of the individual's adjusted gross income. Those limitations
would apply to an individual Certificateholder's share of expenses of the Trust
(including fees paid to the Master Servicer) and might result in such holder
being taxed on an amount of income that exceeds the amount of cash actually
distributed to such holder over the life of the Trust.
Each Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each of the Financed
Student Loans, the Trust might be required to incur additional expense, but it
is believed that there would not be a material adverse effect on
Certificateholders.
DISCOUNT AND PREMIUM. It is believed that the Financed Student Loans
were not issued (or will not be issued) with OID, and, therefore, a Trust should
not have OID income. However, the purchase price paid by a Trust for the
Financed Student Loans may be greater or less than the remaining principal
balance of the Financed Student Loans at the time of purchase. If so, the
Financed Student Loans will have been acquired at a premium or discount, as the
case may be. (As indicated above, the Trust will make this calculation on an
aggregate basis, but might be required to recompute it on a loan by loan basis.)
The Trust will make an election that will result in any such market discount on
the Financed Student Loans being included in income currently as such discount
accrues over the life of the loans. As indicated above, a portion of such market
discount income will be allocated to Certificateholders. Similarly, the Trust
will make an election to amortize any market premium over the life of the
Financed Student Loans, which could result in additional deductions allocated to
the Certificateholders.
SECTION 708 TERMINATION. Under Section 708 of the Code, a Trust will
be deemed to terminate for Federal income tax purposes if 50% or more of the
capital and profits interests in the Trust (which include the Certificates and
the Seller's interest) are sold or exchanged within a 12-month period. If such a
termination occurs, the Trust will be considered to distribute its assets to the
partners, who would then be treated as recontributing those assets to the Trust,
as a new partnership. The Trust will not comply with certain technical
requirements that might apply when such a constructive termination occurs. As a
result, the Trust may be subject to certain tax penalties and may incur
additional expenses if it is required to comply with those requirements.
Furthermore, the Trust might not be able to comply due to lack of data.
DISPOSITION OF CERTIFICATES. Generally, capital gain or loss will be
recognized on a sale of a Certificate in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificate sold.
A Certificateholder's tax basis in a Certificate will generally equal his cost
increased by his share of Trust income that is includible in his gross income
and decreased by any distributions received with respect to such Certificate. In
addition, both the tax basis in the Certificate and the amount realized on a
sale of a Certificate would include the holder's share of the Notes and other
liabilities of the Trust. A holder acquiring Certificates at different prices
may be required to maintain a single aggregate adjusted tax basis in such
Certificates, and, upon sale or other disposition of some of the Certificates,
allocate a pro rata portion of such aggregate tax basis to the Certificates sold
(rather than maintaining a separate tax basis in each Certificate for purposes
of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's
share of unrecognized accrued market discount on the Financed Student Loans
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. Thus, to avoid these special reporting
requirements, the Trust will elect to include any such market discount in income
as it accrues. The Trust does not expect to have any other assets that would
give rise to such special reporting requirements.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed miscellaneous itemized
deductions described above) over the life of the Certificates that exceeds the
aggregate cash distributions with respect thereto, such excess will generally
give rise to a capital loss upon the retirement of the Certificates.
ALLOCATIONS BETWEEN TRANSFEROR AND TRANSFEREE. In general, a Trust's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the close
of the last day of such month. As a result, a holder purchasing Certificates may
be allocated tax items (which will affect the tax liability and tax basis of the
holder) attributable to periods before the actual purchase takes place.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or is allowed only for
transfers of less than all of the partner's interest), taxable income or losses
of the Trust might be reallocated among the Certificateholders. The Seller is
authorized to revise the Trust's method of allocation between transferors and
transferees to conform to a method permitted by any future authority.
SECTION 754 ELECTION. In the event that a Certificateholder sells a
Certificate at a profit (or loss), the purchasing Certificateholder will have a
higher (or lower) basis in the Certificate than the selling Certificateholder
had. The tax basis of a Trust's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust files an election under Section 754 of
the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, a Trust will not make such an election. As a
result, Certificateholders might be allocated a greater or lesser amount of
Trust income than would be appropriate based on their own purchase price for
Certificates.
ADMINISTRATIVE MATTERS. The Administrator, on behalf of the related
Trust, is required to keep or cause to be kept complete and accurate books of
the Trust. Such books will be maintained for financial reporting and tax
purposes on an accrual basis and the taxable year of the Trust will be the
calendar year. The Eligible Lender Trustee will file a partnership information
return (IRS Form 1065) with the IRS for each taxable year of the Trust and will
report to holders (and to the IRS) each Certificateholder's allocable share of
items of Trust income and expense on Schedule K-l. A Trust will provide the
Schedule K-l information to nominees that fail to provide the Trust with the
information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Certificates.
Generally, holders must file tax returns that are consistent with the
information returns filed by the Trust or be subject to penalties unless the
holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as
a nominee on behalf of another person at any time during a calendar year is
required to furnish the related Trust with a statement containing certain
information on the nominee, the beneficial owners and the Certificates so held.
Such information includes (i) the name, address and taxpayer identification
number of the nominee and (ii) as to each beneficial owner (x) the name, address
and taxpayer identification number of such person, (y) whether such person is a
United States person, a tax-exempt entity or a foreign government, an
international organization, or any wholly-owned agency or instrumentality of
either of the foregoing and (z) certain information concerning Certificates that
were held, acquired or transferred on behalf of such person throughout the year.
In addition, brokers and financial institutions that hold Certificates through a
nominee are required to furnish directly to the Trust information as to
themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act that holds Certificates as a nominee is
not required to furnish any such information statement to the Trust. The
information referred to above for any calendar year must be furnished to the
Trust on or before the following January 31. Nominees, brokers and financial
institutions that fail to provide the Trust with the information described above
may be subject to penalties. The Trust will provide the Schedule K-1 information
to nominees that fail to provide the Trust with the information described above
and such nominees will be required to forward such information to the beneficial
owners of the Certificates.
Student Holdings, as the "tax matters partner," will be responsible
for representing the Certificateholders in any dispute with the IRS. The Code
provides for administrative examination of a partnership as if the partnership
were a separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of a Trust by the appropriate taxing authorities could
result in an adjustment of the returns of the Certificateholders, and, under
certain circumstances, a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Trust. An adjustment could
also result in an audit of a Certificateholder's returns and adjustments of
items not related to the income and losses of the Trust.
BACKUP WITHHOLDING. Distributions made on the Certificates and
proceeds from the sale of the Certificates will be subject to a "backup"
withholding tax of 31% if, in general, the Certificateholder fails to comply
with certain identification procedures, unless the holder is an exempt recipient
under applicable provisions of the Code.
PROPOSED TAX LEGISLATION. For taxable years beginning after December
31, 1997, in the case of a partnership that has 100 or more partners and elects
to be treated as an "electing large partnership", 70 percent of such
partnership's miscellaneous itemized deductions will be disallowed, although the
remaining deductions will generally be allowed at the partnership level and will
not be subject to the 2 percent floor that would otherwise be applicable to
individual partners. Moreover, large partnerships would become subject to new
audit procedures; among other things, an adjustment to taxable income of the
partnership for a prior year would flow through to current partners in the year
the audit was settled, and the partnership itself (rather than the partners)
would be subject to any applicable interest or penalties.
ERISA CONSIDERATIONS
THE NOTES
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and/or Section 4975 of the Code prohibit a pension,
profit-sharing or other employee benefit plan or retirement arrangement, as well
as individual retirement accounts and certain types of Keogh Plans (each a
"Plan") from engaging in certain transactions with persons that are "parties in
interest" under ERISA or "disqualified persons" under the Code with respect to
such Plan. A violation of these "prohibited transaction" rules may result in an
excise tax or other penalties and liabilities under ERISA and the Code for such
persons.
Certain transactions involving the purchase, holding or transfer of
the Notes might be deemed to constitute prohibited transactions under ERISA and
the Code if assets of the related Trust were deemed to be assets of a Plan.
Under a regulation issued by the United States Department of Labor (the "Plan
Assets Regulation"), the assets of a Trust would be treated as plan assets of a
Plan for the purposes of ERISA and the Code only if the Plan acquires an "Equity
Interest" in the Trust and none of the exceptions contained in the Plan Assets
Regulation is applicable. An equity interest is defined under the Plan Assets
Regulation as an interest other than an instrument which is treated as
indebtedness under applicable local law and which has no substantial equity
features. Assuming that a Class of Notes is treated as indebtedness without
substantial equity features for purposes of the Plan Assets Regulation then such
Class of Notes will be eligible for purchase by Plans. Without regard to whether
the Notes are treated as an "equity interest" for such purposes, the acquisition
or holding of Notes by or on behalf of a Plan could be considered to give rise
to a prohibited transaction if the Trust or any of its affiliates is or becomes
a party in interest or disqualified person with respect to such Plan, or in the
event that a Note is purchased in the secondary market and such purchase
constitutes a sale or exchange between a Plan and a party in interest or
disqualified person with respect to such Plan. There can be no assurance that
the Trust or any of its affiliates will not be or become a party in interest or
a disqualified person with respect to a Plan that acquires Notes. However, one
or more of the following prohibited transaction class exemptions may apply to
the acquisition, holding and transfer of the Notes: Prohibited Transaction Class
Exemption ("PTCE") 84-14 (regarding investments by qualified professional asset
managers), PTCE 90-1 (relating to investments by insurance company pooled
separate accounts), PTCE 91-38 (regarding investments by bank collective
investment funds), PTCE 95-60 (regarding investments by insurance company
general accounts) and PTCE 96-23 (regarding investments by in-house asset
managers).
Employee benefit plans that are governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA) are not subject to ERISA requirements.
A Plan fiduciary considering the purchase of Notes should consult its
tax and/or legal advisors regarding whether the assets of a Trust would be
considered Plan assets, the possibility of exemptive relief from the prohibited
transaction rules and other issues and their potential consequences.
THE CERTIFICATES
The Certificates may not be acquired (directly or indirectly) by or on
behalf of any employee benefit plan, retirement arrangement, individual
retirement account or Keogh Plan subject to either Title I of ERISA or Section
4975 of the Code, or any entity (including an insurance company general account)
whose underlying assets include plan assets by reason of a plan's investment in
the entity (each a "Benefit Plan"). By its acceptance of a Certificate, each
Certificateholder will be deemed to have represented and warranted that it is
not a Benefit Plan.
PLAN OF DISTRIBUTION
The Notes will be offered in one or more Series and one or more
Classes either directly by the Sellers and The Money Store or through one or
more underwriters or underwriting syndicates ("Underwriters"). The Prospectus
Supplement for each Series of Notes will set forth the terms of the offering of
such Series and of each Class within such Series, including the name or names of
the Underwriters, the proceeds to the Sellers, and either the initial public
offering price, the discounts and commissions to the Underwriters and any
discounts or concessions allowed or reallowed to certain dealers, or the method
by which the price at which the Underwriters will sell the Notes will be
determined.
The Notes may be acquired by Underwriters for their own account and
may be resold from time to time in one or more transactions, including
negotiated transactions, at a fixed public offering price or at varying prices
determined at the time of sale. The obligations of any Underwriters will be
subject to certain conditions precedent, and such Underwriters will be severally
obligated to purchase all of a Series of Notes described in the related
Prospectus Supplement, if they are purchased. If Notes of a Series are offered
other than through Underwriters, the related Prospectus Supplement will contain
information regarding the nature of such offering and any agreements to be
entered into between the seller and purchasers of Notes of such Series.
The place and time of delivery for the Notes of a Series in respect of
which this Prospectus is delivered will be set forth in the related Prospectus
Supplement.
LEGAL MATTERS
Certain legal matters relating to the Sellers, the Master Servicer and
the Administrator will be passed upon by Eric R. Elwin, Esq., Corporate Counsel
of the Sellers, and Squire, Sanders & Dempsey L.L.P., Phoenix, Arizona, and
certain legal matters relating to the validity of the issuance of each Series of
Notes and the Certificates will be passed upon for the Underwriter by Stroock &
Stroock & Lavan LLP, New York, New York. Stroock & Stroock & Lavan LLP has
performed legal services for the Sellers and The Money Store Inc. and it is
expected that it will continue to perform such services in the future. Certain
federal income tax and other matters will be passed upon for a Trust by Stroock
& Stroock & Lavan LLP. Other parties, if any, passing upon legal matters for a
Trust, the Sellers or The Money Store will be identified in the related
Prospectus Supplement.
EXPERTS
The consolidated financial statements of The Money Store Inc. as of
December 31, 1995 and 1994 and for each of the three years in the period ended
December 31, 1995 incorporated by reference herein have been audited by KPMG
Peat Marwick LLP, independent accountants, as stated in their opinion given upon
their authority as experts in accounting and auditing.
FINANCIAL INFORMATION
The Sellers have determined that their financial statements are not
material to the offering made hereby. The financial statements of The Money
Store, along with certain reports filed by The Money Store under the Securities
Exchange Act of 1934, as amended, will be incorporated by reference into each
Prospectus Supplement containing a guaranty of The Money Store as a form of
Enhancement. A Trust will engage in no activities other than as described
herein. Accordingly, no financial statements with respect to a Trust are
included in this Prospectus or will be included in a Prospectus Supplement. See
"Incorporation of Certain Documents by Reference" in the Prospectus.
RATING
It is a condition to the issuance and sale of each Series and Class of
Notes that they each be rated by at least one nationally recognized statistical
rating organization (a "Rating Agency") in one its four highest applicable
rating categories. 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.
<PAGE>
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
<PAGE>
APPENDIX I
AUCTION PROCEDURES
The following description of the Auction Procedures applies to each
Class of Auction Rate Securities (unless otherwise set forth in a Prospectus
Supplement) and each Class of Auction Rate Certificates (unless otherwise set
forth in a Trust Agreement or Trust Supplement). The term "Security," as used in
this Appendix, refers to each Class of Auction Rate Securities and each Class of
Auction Rate Certificates, and the term "Securityholder" refers to Noteholders
holding Auction Rate Securities and Certificateholders holding Auction Rate
Certificates, as applicable.
DEFINITIONS
Capitalized terms used herein and not otherwise defined have the
meanings ascribed in the accompanying Prospectus and Prospectus Supplement.
Additionally, the following terms have the meanings ascribed to them:
"All Hold Rate" means ninety percent (90%) of One-Month LIBOR.
"Auction" means the implementation of the Auction Procedures on an
Auction Date.
"Auction Agent" means the initial auction agent under the initial
Auction Agent Agreement unless and until a substitute Auction Agent Agreement
becomes effective, after which "Auction Agent" shall mean the substitute auction
agent.
"Auction Agent Agreement" means the initial Auction Agent Agreement
unless and until a substitute Auction Agent Agreement is entered into, after
which "Auction Agent Agreement" shall mean such substitute Auction Agent
Agreement.
"Auction Agent Fee" has the meaning set forth in the Auction Agent
Agreement.
"Auction Agent Fee Rate" has the meaning set forth in the Auction
Agent Agreement.
"Auction Date" means, with respect to the Initial Period for each
Class of Notes, the date set forth in the related Prospectus Supplement, and
with respect to each Class of Certificates, the date set forth in the Trust
Agreement or Trust Supplement and thereafter, the Business Day immediately
preceding the first day of each Auction Period for each Security, other than:
(A) each Auction Period commencing after the ownership of the
Securities is no longer maintained in Book-Entry Form by the
Securities Depository;
(B) each Auction Period commencing after and during the continuance
of an Event of Default; or
(C) each Auction Period commencing less than two Business Days
after the cure or waiver of an Event of Default.
Notwithstanding the foregoing, the Auction Date for one or more Auction Periods
may be changed pursuant to the Master Indenture and the related Terms Supplement
or the Trust Agreement and the related Trust Supplement, as described herein.
"Auction Period" means, with respect to each Security, the Interest
Period applicable to such Security during which time the applicable Security
Interest Rate is determined pursuant to the related Terms Supplement or the
Trust Agreement or the related Trust Supplement, which Auction Period (after the
Initial Period for such Security) initially shall consist of between 7 days and
one year (as set forth in the related Prospectus Supplement), as the same may be
adjusted pursuant to such Terms Supplement or the Trust Agreement or the related
Trust Supplement.
"Auction Period Adjustment" means an adjustment to the Auction Period
as provided in the related Terms Supplement or the Trust Agreement or the
related Trust Supplement, as applicable, as described herein.
"Auction Procedures" means the procedures set forth in the related
Terms Supplement or the Trust Agreement or the related Trust Supplement, as
applicable, and described herein by which the Auction Rate applicable to a
Security is determined.
"Auction Rate" means, with respect to any Security, the rate of
interest per annum that results from the implementation of the Auction
Procedures and is determined as described in the Trust Agreement or the related
Terms Supplement or the related Trust Supplement and this Appendix I.
"Authorized Denominations" means, with respect to any Security,
$50,000 and any integral multiple in excess thereof.
"Broker-Dealer" means the initial broker-dealer under the initial
Broker-Dealer Agreement or any other broker or dealer (each as defined in the
Securities Exchange Act of 1934, as amended), commercial bank or other entity
permitted by law to perform the functions required of a Broker-Dealer set forth
in the Auction Procedures that (a) is a Participant (or an affiliate of a
Participant), (b) has been appointed as such by the Trust pursuant to the
Indenture or the Administrator on behalf of the Eligible Lender Trustee pursuant
to the Trust Agreement and (c) has entered into a Broker-Dealer Agreement that
is in effect on the date of reference.
"Broker-Dealer Agreement" means each agreement between the Auction
Agent and a Broker-Dealer, and approved by the Trust, pursuant to which the
Broker-Dealer agrees to participate in Auctions as set forth in the Auction
Procedures, as from time to time amended or supplemented.
"Broker-Dealer Fee" has the meaning set forth in the Auction Agent
Agreement.
"Broker-Dealer Fee Rate" has the meaning set forth in the Auction
Agent Agreement.
"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 and, in the case of a Federal
Loan, after giving effect to all applicable Interest Subsidy Payments and
Special Allowance Payments due with respect to such Federal Loan.
"Existing Securityholder" means (i) with respect to and for the
purpose of dealing with the Auction Agent in connection with an Auction, a
Person who is a Broker-Dealer listed in the Existing Securityholder Registry at
the close of business on the Business Day immediately preceding such Auction and
(ii) with respect to and for the purpose of dealing with the Broker-Dealer in
connection with an Auction, a Person who is a beneficial owner of any Security.
"Existing Securityholder Registry" means the registry of Persons who
are owners of the Securities, maintained by the Auction Agent as provided in the
Auction Agent Agreement.
"Federal Funds Rate" means, for any date of determination, the federal
funds (effective) rate as published on page 118 of 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) on the immediately preceding
Business Day. If no such rate is published on such page on such date, "Federal
Funds Rate" shall mean for any date of determination, the Federal funds
(effective) rate as published by the Federal Reserve Board in the most recent
edition of Federal Reserve Statistical Release No. H.15 (519) that is available
on the Business Day immediately preceding such date.
"Initial Period" means, as to any Security, the period commencing on
the Closing Date of such Security and continuing through the day immediately
preceding the Security Initial Rate Adjustment Date for such Security.
"Interest Period" means, with respect to a Security, the Initial
Period for such Security and each period commencing on the Rate Adjustment Date
for such Security and ending on the day before (i) the next Rate Adjustment Date
for such Security or (ii) the Final Maturity Date of such Security, as
applicable.
"Market Agent" means the entity named as market agent under the
Indenture, or any successor to it in such capacity thereunder.
"Maximum Auction Rate" generally means (i) for Auction Periods of 34
days or less, either (A) the greater of (1) One-Month LIBOR plus 0.60% or (2)
the Federal Funds Rate plus 0.60% (if both ratings assigned by the Rating
Agencies to the applicable Security are "Aa3" or "AA-" or better) or (B)
One-Month LIBOR plus 1.50% (if any one of the ratings assigned by the Rating
Agencies to the Security is less than "Aa3" or "AA-") or (ii) for Auction
Periods of greater than or equal to 35 days, either (A) the greater of One-Month
LIBOR or Three-Month LIBOR, plus in either case, 0.60% (if both of the ratings
assigned by the Rating Agencies to the applicable Security are "Aa3" or "AA-" or
better) or (B) the greater of One-Month LIBOR or Three-Month LIBOR, plus in
either case, 1.50% (if any one of the ratings assigned by the Rating Agencies to
the applicable Security is less than "Aa3" or "AA-") or such other rate as may
be set forth in the related Prospectus Supplement. For purposes of the Auction
Agent and the Auction Procedures, the ratings referred to in this definition
shall be the last ratings of which the Auction Agent has been given notice
pursuant to the Auction Agent Agreement.
"Net Loan Rate" for any Interest Period will equal the weighted
average Effective Interest Rate for the Collection Period immediately preceding
such Interest Period less the amount set forth in the related Prospectus
Supplement.
"Non-Payment Rate" means One-Month LIBOR plus 1.50%, as the same may
be adjusted pursuant to a Terms Supplement or a Trust Supplement.
"Person" means any individual, corporation, estate, partnership, joint
venture, association, joint stock company, trust (including any beneficiary
thereof), unincorporated organization or government or any agency or political
subdivision thereof.
"Potential Securityholder" means any Person (including an Existing
Securityholder that is (i) a Broker-Dealer when dealing with the Auction Agent
and (ii) a potential beneficial owner when dealing with a Broker-Dealer) who may
be interested in acquiring Securities (or, in the case of an Existing
Securityholder thereof, an additional principal amount of Securities).
"Rate Adjustment Date" means, with respect to each Security, the date
on which the applicable Security Interest Rate is effective and means, with
respect to each such Security, the date of commencement of each Auction Period.
"Rate Determination Date" means, with respect to any Security, the
Auction Date, or if no Auction Date is applicable to such Series, the Business
Day immediately preceding the date of commencement of an Auction Period.
"Security Initial Rate" means, (i) with respect to any Class of Notes,
the rate identified as such in the related Prospectus Supplement and (ii) with
respect to any Class of Certificates, the rate identified as such in the Trust
Agreement or the related Trust Supplement.
"Security Initial Rate Adjustment Date" means, with respect to any
Class of Notes, the date identified as such in the related Prospectus Supplement
and, with respect to any Class of Certificates, the date set forth in the Trust
Agreement or the related Trust Supplement.
"Three-Month LIBOR" means the London interbank offered rate for
deposits in U.S. dollars having a maturity of three months commencing on the
related LIBOR Determination Date (the "Three-Month 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 Three Month 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 Auction Agent 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 Auction Agent, at approximately
11:00 a.m., New York City time, on such LIBOR Determination Date for loans in
U.S. dollars to leading European banks having the Three Month Index Maturity and
in a principal amount equal to an amount of not less than U.S. $1,000,000;
provided that if the banks selected as aforesaid are not quoting as mentioned in
this sentence, Three-Month LIBOR in effect for the applicable Interest Period
will be Three-Month LIBOR in effect for the previous Interest Period.
EXISTING SECURITYHOLDERS AND POTENTIAL SECURITYHOLDERS
Participants in each Auction will include: (1) "Existing
Securityholders," which shall mean any Securityholder according to the records
of the Auction Agent at the close of business on the Business Day preceding each
Auction Date; and (ii) "Potential Securityholders," which shall mean any person,
including any Existing Securityholder or a Broker/Dealer, who may be interested
in acquiring Securities (or, in the case of an Existing Securityholder, an
additional principal amount of the Security such Securityholder then holds). See
"--Broker-Dealer."
By purchasing a Security, whether in an Auction or otherwise, each
prospective purchaser of Securities or its Broker-Dealer must agree and will be
deemed to have agreed: (i) to participate in Auctions on the terms described
herein; (ii) so long as the beneficial ownership of the Securities is maintained
in Book-Entry Form to sell, transfer or otherwise dispose of the Securities only
pursuant to a Bid (as defined below) or a Sell Order (as defined below) in an
Auction, or to or through a Broker-Dealer, provided that in the case of all
transfers other than those pursuant to an Auction, the Existing Securityholder
of the Securities so transferred, its Participant or Broker-Dealer advises the
Auction Agent of such transfer; (iii) to have its beneficial ownership of
Securities maintained at all times in Book-Entry Form for the account of its
Participant, which in turn will maintain records of such beneficial ownership,
and to authorize such Participant to disclose to the Auction Agent such
information with respect to such beneficial ownership as the Auction Agent may
request; (iv) that a Sell Order placed by an Existing Securityholder will
constitute an irrevocable offer to sell the principal amount of the Security
specified in such Sell Order; (v) that a Bid placed by an Existing
Securityholder will constitute an irrevocable offer to sell the principal amount
of the Security specified in such Bid if the rate specified in such Bid is
greater than, or in some cases equal to, the Security Interest Rate of such
Security, determined as described herein; and (vi) that a Bid placed by a
Potential Securityholder will constitute an irrevocable offer to purchase the
amount, or a lesser principal amount, of the Security specified in such Bid if
the rate specified in such Bid is, respectively, less than or equal to the
Security Interest Rate of the specified Security, determined as described
herein.
The principal amount of the Securities purchased or sold may be
subject to proration procedures on the Auction Date. Each purchase or sale of
Securities on the Auction Date will be made for settlement on the first day of
the Interest Period immediately following such Auction Date at a price equal to
100% of the principal amount thereof, plus accrued but unpaid interest thereon.
The Auction Agent is entitled to rely upon the terms of any Order submitted to
it by a Broker-Dealer.
AUCTION AGENT
Bankers Trust Company, or such other entity as may be named in the
related Prospectus Supplement, will be appointed as Auction Agent to serve as
agent for a Trust in connection with Auctions. The Indenture Trustee and the
Trust will enter into the Auction Agreement with Bankers Trust Company or such
other entity, as the Auction Agent. Any Substitute Auction Agent will be (i) a
bank, national banking association or trust company duly organized under the
laws of the United States of America or any state or territory thereof having
its principal place of business in the Borough of Manhattan, New York, or such
other location as approved by the Indenture Trustee and the Market Agent in
writing and having a combined capital stock or surplus of at least $50,000,000,
or (ii) a member of the National Association of Securities Dealers, Inc. having
a capitalization of at least $50,000,000, and, in either case, authorized by law
to perform all the duties imposed upon it under the Indenture and under the
Auction Agent Agreement. The Auction Agent may at any time resign and be
discharged of the duties and obligations created by the Indenture by giving at
least 90 days notice to the Indenture Trustee, the Trust and the Market Agent.
The Auction Agent may be removed at any time by the Indenture Trustee upon the
written direction of the Surety Provider, if applicable, or, with the consent of
the Surety Provider, if applicable, the Noteholders of 66-2/3% of the aggregate
principal amount of the Notes then outstanding, by an instrument signed by the
Surety Provider, if applicable, or such Noteholders or their attorneys and filed
with the Auction Agent, the Trust, the Indenture Trustee and the Market Agent
upon at least 90 days' notice. Neither resignation nor removal of the Auction
Agent pursuant to the preceding two sentences will be effective until and unless
a Substitute Auction Agent has been appointed and has accepted such appointment.
If required by the Trust or by the Market Agent, with the Trust's consent, a
Substitute Auction Agent Agreement shall be entered into with a Substitute
Auction Agent. Notwithstanding the foregoing, the Auction Agent may terminate
the Auction Agent Agreement if, within 25 days after notifying the Indenture
Trustee, the Trust, the Surety Provider, if applicable, and the Market Agent in
writing that it has not received payment of any Auction Agent Fee due it in
accordance with the terms of the Auction Agent Agreement, the Auction Agent does
not receive such payment.
If the Auction Agent should resign or be removed or be dissolved, or
if the property or affairs of the Auction Agent shall be taken under the control
of any state or federal court or administrative body because of bankruptcy or
insolvency, or for any other reason, the Indenture Trustee, at the direction of
the related Trust (after receipt of a certificate from the Market Agent
confirming that any proposed Substitute Auction Agent meets the requirements
described in the immediately preceding paragraph above), shall use its best
efforts to appoint a Substitute Auction Agent.
The Auction Agent is acting as agent for the Trust in connection with
Auctions. In the absence of bad, faith, negligent failure to act or negligence
on its part, the Auction Agent will not be liable for any action taken, suffered
or omitted or any error of judgment made by it in the performance of its duties
under the Auction Agent Agreement and will not be liable for any error of
judgment made in good faith unless the Auction Agent will have been negligent in
ascertaining (or failing to ascertain) the pertinent facts.
The Indenture Trustee will pay the Auction Agent the Auction Agent Fee
on the Note Distribution Date or Certificate Distribution Date set forth in the
related Prospectus Supplement, and will reimburse the Auction Agent upon its
request for all reasonable expenses, disbursements and advances incurred or made
by the Auction Agent in accordance with any provision of the Auction Agent
Agreement or the Broker-Dealer Agreements (including the reasonable compensation
and the expenses and disbursements of its agents and counsel). The Trust will
indemnify and hold harmless the Auction Agent for and against any loss,
liability or expense incurred without negligence or bad faith on the Auction
Agent's part, arising out of or in connection with the acceptance or
administration of its agency under the Auction Agent Agreement and the
Broker-Dealer Agreements including the reasonable costs and expenses (including
the reasonable fees and expenses of its counsel) of defending itself against any
such claim or liability in connection with its exercise or performance of any of
its respective duties thereunder and of enforcing this indemnification
provision; provided that the Trust will not indemnify the Auction Agent as
described in this paragraph for any fees and expenses incurred by the Auction
Agent in the normal course of performing its duties under the Auction Agent
Agreement and under the Broker-Dealer Agreements, such fees and expenses being
payable as described above.
BROKER-DEALER
Existing Securityholders and Potential Securityholders may participate
in Auctions only by submitting orders (in the manner described below) through a
"Broker-Dealer," including the Broker-Dealer, as the sole Broker-Dealer or any
other broker or dealer (each as defined in the Securities Exchange Act of 1934,
as amended), commercial bank or other entity permitted by law to perform the
functions required of a Broker-Dealer set forth below which (i) is a Participant
or an affiliate of a Participant, (ii) has been selected by the Trust and (iii)
has entered into a Broker-Dealer Agreement with the Auction Agent that remains
effective, in which the Broker-Dealer agrees to participate in Auctions as
described in the Auction Procedures, as from time to time amended or
supplemented.
The Broker-Dealers are entitled to a Broker-Dealer Fee, which is
payable by the Auction Agent from monies received from the Indenture Trustee, on
the Note Distribution Date or Certificate Distribution Date set forth in the
related Prospectus Supplement.
MARKET AGENT
In connection with each Series of Notes and the Certificates, the
"Market Agent," will act solely as agent of the Trust and will not assume any
obligation or relationship of agency or trust for or with any of the
Securityholders.
AUCTION PROCEDURES
GENERAL
Pursuant to the related Terms Supplement and the Trust Agreement and
the related Trust Supplement, Auctions to establish the Auction Rate for each
Security issued by the Trust will be held on each applicable Auction Date,
except as described below, by application of the Auction Procedures described
herein. Such procedures are to be applicable separately to each Class of Notes
and each Class of Certificates.
The Auction Agent will calculate the Maximum Auction Rate, the All
Hold Rate and One-Month LIBOR or Three-Month LIBOR, as the case may be, on each
Auction Date. The Administrator will calculate and, no later than the Business
Day preceding each Auction Date, will report to the Auction Agent in writing,
the Net Loan Rate. If the ownership of a Security is no longer maintained in
Book-Entry Form, the Indenture Trustee will calculate the Maximum Auction Rate,
and Administrator will report to the Indenture Trustee in writing the Net Loan
Rate, on the Business Day immediately preceding the first day of each Interest
Period commencing after delivery of such Security. If an Event of Default has
occurred, the Indenture Trustee will calculate the Non-Payment Rate on the Rate
Determination Date for (i) each Interest Period commencing after the occurrence
and during the continuance of such Payment Default and (ii) any Interest Period
commencing less than two Business Days after the cure of any Event of Default.
The Auction Agent will determine One-Month LIBOR or the Three-Month LIBOR, as
applicable, for each Interest Period other than the Initial Period for a
Security; provided, that if the ownership of the Securities is no longer
maintained in Book-Entry Form, or if an Event of Default has occurred, then the
Indenture Trustee will determine the One-Month LIBOR or the Three-Month LIBOR,
as applicable, for each such Interest Period. The determination by the Indenture
Trustee or the Auction Agent, as the case may be, of the One-Month LIBOR or the
Three-Month LIBOR, as applicable, will (in the absence of manifest error) be
final and binding upon the Securityholders and all other parties. If calculated
or determined by the Auction Agent, the Auction Agent will promptly advise the
Indenture Trustee of the One-Month LIBOR or the Three-Month LIBOR, as
applicable.
SUBMISSION OF ORDERS
So long as the ownership of the Securities is maintained in Book-Entry
Form, an Existing Securityholder may sell, transfer or otherwise dispose of
Securities only pursuant to a Bid or Sell Order (as hereinafter defined) placed
in an Auction or through a Broker-Dealer, provided that, in the case of all
transfers other than pursuant to Auctions, such Existing Securityholder, its
Broker-Dealer or its Participant advises the Auction Agent of such transfer.
Auctions for each Class of Notes and each Class of Certificates will be
conducted on each applicable Auction Date, if there is an Auction Agent on such
Auction Date, in the following manner (such procedures to be applicable
separately to each Class of Notes and each Class of Certificates).
Prior to the Submission Deadline (defined as 1:00 P.M., eastern time,
on any Auction Date or such other time on any Auction Date by which
Broker-Dealers are required to submit Orders to the Auction Agent as specified
by the Auction Agent from time to time) on each Auction Date relating to a
Security:
(a) each Existing Securityholder of the applicable Security may submit
to a Broker-Dealer by telephone or otherwise information as to: (i) the
principal amount and class of outstanding Securities, if any, held by such
Existing Securityholder which such Existing Securityholder desires to continue
to hold without regard to the Security Interest Rate for such Securities for the
next succeeding Auction Period (a "Hold Order"); (ii) the principal amount and
class of outstanding Securities, if any, which such Existing Securityholder
offers to sell if the Security Interest Rate for such Securities for the next
succeeding Auction Period will be less than the rate per annum specified by such
Existing Securityholder (a "Bid"); and/or (iii) the principal amount and class
of outstanding Securities, if any, held by such Existing Securityholder which
such Existing Securityholder offers to sell without regard to the Security
Interest Rate for such Securities for the next succeeding Auction Period (a
"Sell Order"); and
(b) one or more Broker-Dealers may contact Potential Securityholders
to determine the principal amount and class of Securities which each such
Potential Securityholder offers to purchase, if the Security Interest Rate for
such Securities for the next succeeding Auction Period will not be less than the
rate per annum specified by such Potential Securityholder (also a "Bid").
Each Hold Order, Bid and Sell Order will be an "Order." Each Existing
Securityholder and each Potential Securityholder placing an Order is referred to
as a "Bidder."
Subject to the provisions described below under "Validity of Orders,"
a Bid by an Existing Securityholder will constitute an irrevocable offer to
sell: (i) the principal amount and class of the outstanding Securities specified
in such Bid if the Security Interest Rate for such Securities will be less than
the rate specified in such Bid, (ii) such principal amount or a lesser principal
amount and class of the outstanding Securities to be determined as described
below in "Acceptance and Rejection of Orders," if the Security Interest Rate for
such Securities will be equal to the rate specified in such Bid or (iii) such
principal amount or a lesser principal amount of the then outstanding Securities
to be determined as described below under "Acceptance and Rejection of Orders,"
if the rate specified therein will be higher than the Security Interest Rate for
such Securities and Sufficient Bids (as defined below) have not been made.
Subject to the provisions described below under "Validity of Orders,"
a Sell Order by an Existing Securityholder will constitute an irrevocable offer
to sell: (i) the principal amount of the Security specified in such Sell Order
or (ii) such principal amount or a lesser principal amount of outstanding
Securities of the specified Security as described below under "Acceptance and
Rejection of Orders," if Sufficient Bids have not been made.
Subject to the provisions described below under "Validity of Orders,"
a Bid by a Potential Securityholder will constitute an irrevocable offer to
purchase: (i) the principal amount of the Security specified in such Bid if the
Security Interest Rate for such Securities will be higher than the rate
specified in such Bid or (ii) such principal amount or a lesser principal amount
of such Securities as described below in "Acceptance and Rejection of Orders,"
if the Security Interest Rate is equal to the rate specified in such Bid.
Each Broker-Dealer will submit in writing to the Auction Agent prior
to the Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer and will specify with respect to each such Order: (i) the name of
the Bidder placing such Order; (ii) the aggregate principal amount and class of
Security that are the subject of such Order; (iii) to the extent that such
Bidder is an Existing Securityholder: (a) the principal amount and class of
Securities, if any, subject to any Hold Order placed by such Existing
Securityholder; (b) the principal amount, and class of Securities, if any,
subject to any Bid placed by such Existing Securityholder and the rate specified
in such Bid; and (c) the principal amount, and class of Securities, if any,
subject to any Sell Order placed by such Existing Securityholder, and (iv) to
the extent such Bidder is a Potential Securityholder, the rate specified in such
Potential Securityholder's Bid.
If any rate specified in any Bid contains more than three figures to
the right of the decimal point, the Auction Agent will round such rate up to the
next highest one-thousandth (.001) of one percent.
If an Order or Orders covering all Securities of the applicable class
held by any Existing Securityholder are not submitted to the Auction Agent prior
to the Submission Deadline, the Auction Agent will deem a Hold Order to have
been submitted on behalf of such Existing Securityholder covering the principal
amount of Securities held by such Existing Securityholder and not subject to an
Order submitted to the Auction Agent.
Neither the Trust, the Owner Trustee, the Indenture Trustee nor the
Auction Agent will be responsible for any failure of a Broker-Dealer to submit
an Order to the Auction Agent on behalf of any Existing Securityholder or
Potential Securityholder.
An Existing Securityholder may submit multiple Orders, of different
types and specifying different rates, in an Auction with respect to Securities
then held by such Existing Securityholder. An Existing Securityholder that
offers to purchase additional Securities is, for purposes of such offer, treated
as a Potential Securityholder.
Any Bid specifying a rate higher than the Maximum Auction Rate will
(i) be treated as a Sell Order if submitted by a Existing Securityholder and
(ii) not be accepted if submitted by a Potential Securityholder.
VALIDITY OF ORDERS
If any Existing Securityholder submits through a Broker-Dealer to the
Auction Agent one or more Orders covering in the aggregate more than the
principal amount of the class of Securities held by such Existing
Securityholder, such Orders will be considered valid as follows and in the order
of priority described below.
HOLD ORDERS. All Hold Orders will be considered valid, but only up to
the aggregate principal amount of the class of Securities held by such Existing
Securityholder, and if the aggregate principal amount of the class of Securities
subject to such Hold Orders exceeds the aggregate principal amount of the class
of Securities held by such Existing Securityholder, the aggregate principal
amount of the class of Securities subject to each such Hold Order will be
reduced pro rata so that the aggregate principal amount of the class of
Securities subject to all such Hold Orders equals the aggregate principal amount
of the class of Securities held by such Existing Securityholder.
BIDS. Any Bid will be considered valid up to an amount equal to the
excess of the principal amount of the class of Securities held by such Existing
Securityholder over the aggregate principal amount of such Security, subject to
any Hold Orders referred to above. Subject to the preceding sentence, if
multiple Bids with the same rate are submitted on behalf of such Existing
Securityholder and the aggregate principal amount of Securities subject to such
Bids is greater than such excess, such Bids will be considered valid up to an
amount equal to such excess. Subject to the two preceding sentences, if more
than one Bid with different rates are submitted on behalf of such Existing
Securityholder, such Bids will be considered valid first in the ascending order
of their respective rates until the highest rate is reached at which such excess
exists and then at such rate up to the amount of such excess. In any event, the
aggregate principal amount of Securities, if any, subject to Bids not valid
under the provisions described above will be treated as the subject of a Bid by
a Potential Securityholder at the rate therein specified.
SELL ORDERS. All Sell Orders will be considered valid up to an amount
equal to the excess of the principal amount of Securities of the class held by
such Existing Securityholder over the aggregate principal amount of Securities
subject to valid Hold Orders and valid Bids as referred to above.
If more than one Bid for a class of Security is submitted on behalf of
any Potential Securityholder, each Bid submitted will be a separate Bid with the
rate and principal amount therein specified. Any Bid or Sell Order submitted by
an Existing Securityholder covering an aggregate principal amount of Securities
not equal to an Authorized Denomination or an integral multiple thereof will be
rejected and will be deemed a Hold Order. Any Bid submitted by a Potential
Securityholder covering an aggregate principal amount of Securities not equal to
an Authorized Denomination or an integral multiple thereof will be rejected. Any
Order submitted in an Auction by a Broker-Dealer to the Auction Agent prior to
the Submission Deadline on any Auction Date will be irrevocable.
A Hold Order, a Bid or a Sell Order that has been determined valid
pursuant to the procedures described above is referred to as a "Submitted Hold
Order," a "Submitted Bid" and a "Submitted Sell Order," respectively
(collectively, "Submitted Orders").
DETERMINATION OF SUFFICIENT BID AND BID AUCTION RATE
Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent will assemble all valid Submitted Orders and will determine:
(a) for the applicable Security, the excess of the total principal
amount of such Securities over the sum of the aggregate principal amount of such
Securities subject to Submitted Hold Orders (such excess being hereinafter
referred to as the "Available Securities"); and
(b) from such Submitted Orders whether the aggregate principal amount
of Securities of such class subject to Submitted Bids by Potential
Securityholders specifying one or more rates equal to or lower than the Maximum
Auction Rate exceeds or is equal to the sum of (i) the aggregate principal
amount of Securities of such class subject to Submitted Bids by Existing
Securityholders specifying one or more rates higher than the Maximum Auction
Rate and (ii) the aggregate principal amount of Securities of such class subject
to Submitted Sell Orders (in the event such excess or such equality exists other
than because all of the Securities are subject to Submitted Hold Orders, such
Submitted Bids by Potential Securityholders above will be hereinafter referred
to collectively as "Sufficient Bids"); and
(c) if Sufficient Bids exist, the "Bid Auction Rate," which will be
the lowest rate specified in such Submitted Bids such that if:
(i) each such Submitted Bid from Existing
Securityholders of such Security specifying such lowest rate
and all other Submitted Bids from Existing Securityholders of
such Security specifying lower rates were rejected (thus
entitling such Existing Securityholders to continue to hold the
principal amount of Securities subject to such Submitted Bids);
and
(ii) each such Submitted Bid from Potential
Securityholders of such Security specifying such lowest rate
and all other Submitted Bids from Potential Securityholders
specifying lower rates, were accepted, the result would be that
such Existing Securityholders described in subparagraph (c)(i)
above would continue to hold an aggregate principal amount of
Securities which, when added to the aggregate principal amount
of Securities to be purchased by such Potential Securityholders
described in this subparagraph (ii) would equal not less than
the Available Securities.
DETERMINATION OF AUCTION RATE AND SECURITY INTEREST RATE, NOTICE
Promptly after the Auction Agent has made the determinations described
above, the Auction Agent is to advise the Indenture Trustee of the Net Loan
Rate, the Maximum Auction Rate, the All Hold Rate and the components thereof on
the Auction Date, and based on such determinations, the Auction Rate for the
next succeeding Interest Period for the applicable Security as follows:
(a) if Sufficient Bids exist, that the Auction Rate for the next
succeeding Interest Period will be equal to the Bid Auction Rate so determined;
(b) if Sufficient Bids do not exist (other than because all of the
Securities of the applicable Security are subject to Submitted Hold Orders),
that the Auction Rate for the next succeeding Interest Period will be equal to
the Maximum Auction Rate; or
(c) if all Securities of the applicable Security are subject to
Submitted Hold Orders, that the Auction Rate for the next succeeding Interest
Period will be equal to the All Hold Rate.
Promptly after the Auction Agent has determined the Auction Rate, the
Auction Agent will determine and advise the Indenture Trustee of the Security
Interest Rate for each applicable Security, which rate will be the lesser of (a)
the Auction Rate for each such Security and (b) the Net Loan Rate. In no event
shall a Security Interest Rate exceed the rate (the "Security Interest Rate
Limitation") set forth in the related Prospectus Supplement (with respect to a
Class of Notes) or the Trust Agreement or the related Trust Supplement (with
respect to a Class of Certificates).
ACCEPTANCE AND REJECTION OF ORDERS
Existing Securityholders of the applicable Security will continue to
hold the principal amount of Securities of such class that are subject to
Submitted Hold Orders. If, with respect to a Security, the Net Loan Rate is
equal to or greater than the Bid Auction Rate and if Sufficient Bids, as
described above under "Determination of Sufficient Bids and Bid Auction Rate,"
have been received by the Auction Agent, the Bid Auction Rate will be the
Security Interest Rate, and Submitted Bids and Submitted Sell Orders will be
accepted or rejected and the Auction Agent will take such other action as
provided in the Indenture and described below under "Sufficient Bids."
If the Net Loan Rate is less than the Auction Rate, the Security
Interest Rate will be the Net Loan Rate. If the Auction Rate and the Net Loan
Rate are both greater than the Security Interest Rate Limitation, the Security
Interest Rate for each series shall be equal to the Security Interest Rate
Limitation. If the Auction Agent has not received Sufficient Bids as described
above under "Determination of Sufficient Bids and Bid Auction Rate" (other than
because all of the Securities are subject to Submitted Holds Orders), the
Security Interest Rate will be the lesser of the Maximum Auction Rate or the Net
Loan Rate. In any of the cases described above in this paragraph, Submitted
Orders will be accepted or rejected and the Auction Agent will take such other
action as described below under "Insufficient Bids."
SUFFICIENT BIDS. If Sufficient Bids have been made with a respect to a
Security and the Net Loan Rate is equal to or greater than the Bid Auction Rate
(in which case the Interest Rate shall be the Bid Auction Rate), all Submitted
Sell Orders will be accepted and, subject to the denomination requirements
described below, Submitted Bids will be accepted or rejected as follows in the
following order of priority and all other Submitted Bids will be rejected:
(a) Existing Securityholders' Submitted Bids specifying any rate that
is higher than the Security Interest Rate will be accepted, thus requiring each
such Existing Securityholder to sell the aggregate principal amount of
Securities subject to such Submitted Bids;
(b) Existing Securityholders' Submitted Bids specifying any rate that
is lower than the Security Interest Rate will be rejected, thus entitling each
such Existing Securityholder to continue to hold the aggregate principal amount
of Securities subject to such Submitted Bids;
(c) Potential Securityholders' Submitted Bids specifying any rate that
is lower than the Security Interest Rate will be accepted;
(d) Each Existing Securityholder's Submitted Bid specifying a rate
that is equal to the Security Interest Rate will be rejected, thus entitling
such Existing Securityholder to continue to hold the aggregate principal amount
of Securities subject to such Submitted Bid, unless the aggregate principal
amount of Securities subject to such Submitted Bids will be greater than the
principal amount of Securities (the "remaining principal amount") equal to the
excess of the Available Securities over the aggregate principal amount of
Securities subject to Submitted Bids described in subparagraphs (b) and (c)
above, in which event such Submitted Bid of such Existing Securityholder will be
rejected in part and such Existing Securityholder will be entitled to continue
to hold the principal amount of Securities subject to such Submitted Bid, but
only in an amount equal to the aggregate principal amount of Securities obtained
by multiplying the remaining principal amount by a fraction, the numerator of
which will be the principal amount of Securities held by such Existing
Securityholder subject to such Submitted Bid and the denominator of which will
be the sum of the principal amount of Securities subject to such Submitted Bids
made by all such Existing Securityholders that specified a rate equal to the
Security Interest Rate; and
(e) Each Potential Securityholder's Submitted Bid specifying a rate
that is equal to the Security Interest Rate will be accepted, but only in an
amount equal to the principal amount of Securities obtained by multiplying the
excess of the aggregate principal amount of Available Securities over the
aggregate principal amount of Securities subject to Submitted Bids described in
subparagraphs (b), (c) and (d) above by a fraction, the numerator of which will
be the aggregate principal amount of Securities subject to such Submitted Bid
and the denominator of which will be the sum of the principal amount of
Securities subject to Submitted Bids made by all such Potential Securityholders
that specified a rate equal to the Security Interest Rate.
INSUFFICIENT BIDS. If Sufficient Bids have not been made with respect
to a Security (other than because all of the Securities of such class are
subject to Submitted Hold Orders) or if the Net Loan Rate is less than the Bid
Auction Rate (in which case the Security Interest Rate shall be the Net Loan
Rate) or if the Security Interest Rate Limitation applies, subject to the
denomination requirements described below, Submitted Orders will be accepted or
rejected as follows in the following order of priority and all other Submitted
Bids will be rejected:
(a) Existing Securityholders' Submitted Bids specifying any rate that
is equal to or lower than the Security Interest Rate will be rejected, thus
entitling such Existing Securityholders to continue to hold the aggregate
principal amount of Securities subject to such Submitted Bids;
(b) Potential Securityholders' Submitted Bids specifying any rate that
is equal to or lower than the Security Interest Rate will be accepted, and
specifying any rate that is higher than the Security Interest Rate will be
rejected; and
(c) each Existing Securityholder's Submitted Bid specifying any rate
that is higher than the Security Interest Rate and the Submitted Sell Order of
each Existing Securityholder will be accepted, thus entitling each Existing
Securityholder that submitted any such Submitted Bid or Submitted Sell Order to
sell the Securities subject to such Submitted Bid or Submitted Sell Order, but
in both cases only in an amount equal to the aggregate principal amount of
Securities obtained by multiplying the aggregate principal amount of Securities
subject to Submitted Bids described in subparagraph (b) above by a fraction, the
numerator of which will be the aggregate principal amount of Securities held by
such Existing Securityholder subject to such Submitted Bid or Submitted Sell
Order and the denominator of which will be the aggregate principal amount of
Securities subject to all such Submitted Bids and Submitted Sell Orders.
ALL HOLD ORDERS. If all Securities of a class are subject to Submitted
Hold Orders, all Submitted Bids will be rejected.
AUTHORIZED DENOMINATIONS REQUIREMENT. If, as a result of the
procedures described above regarding Sufficient Bids and Insufficient Bids, any
Existing Securityholder would be entitled or required to sell, or any Potential
Securityholder would be entitled or required to purchase, a principal amount of
Securities that is not equal to an Authorized Denomination or an integral
multiple thereof, the Auction Agent will, in such manner as in its sole
discretion it will determine, round up or down the principal amount of
Securities to be purchased or sold by any Existing Securityholder or Potential
Securityholder so that the principal amount of Securities purchased or sold by
each Existing Securityholder or Potential Securityholder will be equal to an
Authorized Denomination or an integral multiple in excess thereof. If, as a
result of the procedures described above regarding Insufficient Bids, any
Potential Securityholder would be entitled or required to purchase less than a
principal amount of Securities equal to an Authorized Denomination or any
integral multiple thereof, the Auction Agent will, in such manner as in its sole
discretion it will determine, allocate Securities for purchase among Potential
Securityholders so that only Securities in an Authorized Denomination or any
integral multiples in excess thereof are purchased by any Potential
Securityholder, even if such allocation results in one or more of such Potential
Securityholders not purchasing any Securities.
Based on the results of each Auction, the Auction Agent is to
determine the aggregate principal amount of Securities of each class to be
purchased and the aggregate principal amount of Securities of each class to be
sold by Potential Securityholders and Existing Securityholders on whose behalf
each Broker-Dealer submitted Bids or Sell Orders and, with respect to each
Broker-Dealer, to the extent that such aggregate principal amount of Securities
to be sold differs from such aggregate principal amount of Securities to be
purchased, determine to which other Broker-Dealer or Broker-Dealers acting for
one or more purchasers such Broker-Dealer will deliver, or from which
Broker-Dealers acting for one or more sellers such Broker-Dealer will receive,
as the case may be, Securities.
Any calculation by the Auction Agent (or the Indenture Trustee, if
applicable) of the Security Interest Rate, One-Month LIBOR, Three-Month LIBOR,
the Maximum Auction Rate, the All Hold Rate, the Net Loan Rate and the
Non-Payment Rate will, in the absence of manifest error, be binding on all other
parties.
Notwithstanding anything in the Master Indenture, a related Terms
Supplement or the Trust Agreement to the contrary, no Auction is to be held on
any Auction Date on which there are insufficient moneys held by the Indenture
Trustee under the Master Indenture and available to pay the principal of and
interest due on the applicable Security on the Note Distribution Date or
Certificate Distribution Date immediately following such Auction Date.
SETTLEMENT PROCEDURES
The Auction Agent is required to advise each Broker-Dealer that
submitted an Order in an Auction of the Security Interest Rate for a Security
for the next Interest Period and, if such Order was a Bid or Sell Order, whether
such Bid or Sell Order was accepted or rejected, in whole or in part, by
telephone not later than 3:00 pm., eastern time, on the Auction Date if the
Interest Rate is the Auction Rate and not later than 4:00 pm. eastern time on
the Auction Date if the Interest Rate is the Net Loan Rate. Each Broker-Dealer
that submitted an Order on behalf of a Bidder is required to then advise such
Bidder of the applicable Security Interest Rate for the next Interest Period
and, if such Order was a Bid or a Sell Order, whether such Bid or Sell Order was
accepted or rejected, in whole or in part, confirm purchases and sales with each
Bidder purchasing or selling Securities as a result of the Auction and advise
each Bidder purchasing or selling Securities as a result of the Auction to give
instructions to its Participant to pay the purchase price against delivery of
such Securities or to deliver such Securities against payment therefor, as
appropriate. Pursuant to the Auction Agent Agreement, the Auction Agent is to
record each transfer of Securities on the Existing Securityholders Registry to
be maintained by the Auction Agent.
In accordance with DTC's normal procedures, on the Business Day after
the Auction Date, the transactions described above will be executed through DTC,
so long as DTC is the Depository, and the accounts of the respective
Participants at DTC will be debited and credited and Securities delivered as
necessary to effect the purchases and sales of Securities as determined in the
Auction. Purchasers are required to make payment through their Participants in
same-day funds to DTC against delivery through their Participants. DTC will make
payment in accordance with its normal procedures, which now provide for payment
against delivery by its Participants in immediately available funds.
If any Existing Securityholder selling Securities in an Auction fails
to deliver such Securities, the Broker-Dealer of any person that was to have
purchased Securities in such Auction may deliver to such person a principal
amount of Securities that is less than the principal amount of Securities that
otherwise was to be purchased by such person but in any event equal to an
Authorized Denomination or any integral multiple thereof. In such event, the
principal amount of Securities to be delivered will be determined by such
Broker-Dealer. Delivery of such lesser principal amount of Securities will
constitute good delivery. Neither the Indenture Trustee nor the Auction Agent
will have any responsibility or liability with respect to the failure of a
Potential Securityholder, Existing Securityholder or their respective
Broker-Dealer or Participant to deliver the principal amount of Securities or to
pay for the Securities purchased or sold pursuant to an Auction or otherwise.
For a further description of the settlement procedures, see "SETTLEMENT
PROCEDURES."
INDENTURE TRUSTEE NOT RESPONSIBLE FOR AUCTION AGENT, MARKET AGENT AND
BROKER-DEALERS
The Indenture Trustee shall not be liable or responsible for the
actions of or failure to act by the Auction Agent, Market Agent or any
Broker-Dealer under the Master Indenture, the related Terms Supplement or under
the Auction Agent Agreement, the Market Agent Agreement or any Broker-Dealer
Agreement. The Indenture Trustee may conclusively rely upon any information
required to be furnished by the Auction Agent, the Market Agent or any
Broker-Dealer without undertaking any independent review or investigation of the
truth or accuracy of such information.
CHANGES IN AUCTION TERMS
CHANGES IN AUCTION PERIOD OR PERIODS
While any of the Securities are outstanding, the Administrator, may,
from time to time, change the length of the one or more Auction Periods in order
to conform with then current market practice with respect to similar securities
or to accommodate economic and financial factors that may affect or be relevant
to the length of the Auction Period and the interest rate borne by the
Securities (an "Auction Period Adjustment"). The Administrator will not initiate
such change in the length of the Auction Period unless it shall have received
the written consent from the Market Agent, which consent will not be
unreasonably withheld, not less than three days nor more than 20 days prior to
the effective date of an Auction Period Adjustment. The Administrator will
initiate an Auction Period Adjustment by giving written notice to the Indenture
Trustee, the Auction Agent, the Market Agent, the Surety Provider and the
Securities Depository in substantially the form of, or containing substantially
the information contained in, the Indenture at least 10 days prior to the
Auction Date for such Auction Period.
Any such Auction Period Adjustment shall not result in an Auction
Period of less than 7 days nor more than 91 days. If any such Auction Period
Adjustment will result in an Auction Period of less than the number of days in
the then current Auction Period, the notice described above will be effective
only if it is accompanied by a written statement of the Indenture Trustee, the
Eligible Lender Trustee, the Auction Agent and the Depository to the effect that
they are capable of performing their duties, if any, under the Indenture, the
Auction Agent Agreement and any Broker-Dealer Agreement with respect to such
changed Auction Period.
An Auction Period Adjustment will take effect only if (A) the
Indenture Trustee and the Auction Agent receive, by 11:00 A.M., eastern time, on
the Business Day before the Auction Date for the first such Auction Period, a
certificate from the Trust authorizing an Auction Period Adjustment specified in
such certificate, the certificate of the Market Agent described above and the
written statement of the Indenture Trustee, the Eligible Lender Trustee, the
Auction Agent and the Securities Depository described above and (B) Sufficient
Bids exist at the Auction on the Auction Date for such first Auction Period. If
the condition referred to in (A) is not met, the Security Interest Rate
applicable for the next Auction Period will be determined pursuant to the
Auction Procedures and the Auction Period will be the Auction Period determined
without reference to the proposed change. If the condition referred to in (A) is
met, but the condition referred to in (B) above is not met, the Security
Interest Rate applicable for the next Auction Period will be the lesser of the
Maximum Auction Rate and the Net Loan Rate and the Auction Period will be the
Auction Period determined without reference to the proposed change.
CHANGES IN THE AUCTION DATE
The Market Agent, at the written direction of the Trust, may specify
an earlier Auction Date (but in no event more than five Business Days earlier)
than the Auction Date that would otherwise be determined in accordance with the
definition of "Auction Date" with respect to one or more specified Auction
Periods in order to conform with then current market practice with respect to
similar securities or to accommodate economic and financial factors that may
affect or be relevant to the day of the week constituting an Auction Date and
the interest rate borne on the Securities. The Trust will not consent to such
change in the Auction Date unless the Trust will have received from the Market
Agent not less than three days nor more than 20 days prior to the effective date
of such change a written request for consent together with a certificate
demonstrating the need for change in reliance on such factors. The Market Agent
will provide notice of its determination to specify an earlier Auction Date for
one or more Auction Periods by means of a written notice delivered at least 10
days prior to the proposed changed Auction Date to the Indenture Trustee, the
Auction Agent, the Trust and the Depository.
The changes in Auction terms described above may be made with respect
to any class of the Securities. In connection with any change in Auction Terms
described above, the Auction Agent is to provide such further notice to such
parties as is specified in the Auction Agent Agreement.
<PAGE>
APPENDIX II
SETTLEMENT PROCEDURES
These Settlement Procedures apply separately to each class of Securities.
(a) Not later than (i) 3:00 P.M. if the Security Interest Rate is the
Auction Rate or (2) 4:00 p.m. if the Security Interest Rate is the Net Loan
Rate, the Auction Agent is to notify by telephone each Broker-Dealer that
participated in the Auction held on such Auction Date and submitted an Order on
behalf of an Existing Securityholder or Potential Securityholder of:
(i) the Security Interest Rate fixed for the next
Interest Period;
(ii) whether there were Sufficient Bids in such Auction;
(iii) if such Broker-Dealer (a "Seller's
Broker-Dealer") submitted Bids or Sell Orders on behalf of an Existing
Securityholder, whether such Bid or Sell Order was accepted or
rejected, in whole or in part, and the principal amount of Securities,
if any, to be sold by such Existing Securityholder;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer")
submitted a Bid on behalf of a Potential Securityholder, whether such
Bid was accepted or rejected, in whole or in part, and the principal
amount of Securities, if any, to be purchased by such Potential
Securityholder;
(v) if the aggregate amount of Securities to be sold by all
Existing Securityholders on whose behalf such Seller's Broker-Dealer
submitted Bids or Sell Orders exceeds the aggregate principal amount
of Securities to be purchased by all Potential Securityholders on
whose behalf such Buyer's Broker-Dealer submitted a Bid, the name or
names of one or more Buyer's Broker-Dealers and the name of the
Participant, if any, of each such Buyer's Broker-Dealer (an
"Participant") acting for one or more purchasers of such excess
principal amount of Securities and the principal amount of Securities
to be purchased from one or more Existing Securityholders on whose
behalf such Seller's Broker-Dealer acted by one or more Potential
Securityholders on whose behalf each of such Buyer's Broker-Dealers
acted;
(vi) if the principal amount of Securities to be purchased by
all Potential Securityholders on whose behalf such Buyer's
Broker-Dealer submitted a Bid exceeds the amount of Securities to be
sold by all Existing Securityholders on whose behalf such Seller's
Broker-Dealer submitted a Bid or a Sell Order, the name or names of
one or more Seller's Broker-Dealers (and the name of the Participant,
if any, of each such Seller's Broker-Dealer) acting for one or more
sellers of such excess principal amount of Securities and the
principal amount of Securities to be sold to one or more Potential
Securityholders on whose behalf such Buyer's Broker-Dealer acted by
one or more Existing Securityholder on whose behalf each of such
Seller's Broker-Dealers acted; and
(vii) the Auction Date for the next succeeding Auction.
(b) On each Auction Date, each Broker-Dealer that submitted an Order
on behalf of any Existing Securityholder or Potential Securityholder is to:
(i) advise each Existing Securityholder and Potential
Securityholder on whose behalf such Broker-Dealer submitted a Bid or
Sell Order in the Auction on such Auction Date whether such Bid or
Sell Order was accepted or rejected, in whole or in part;
(ii) in the case of a Broker-Dealer that is a Buyer's
Broker-Dealer, advise each Potential Securityholder on whose behalf
such Buyer's Broker-Dealer submitted a Bid that was accepted, in whole
or in part, to instruct such Potential Securityholder's Participant to
pay to such Buyer's Broker-Dealer (or its Participant) through the
Depository the amount necessary to purchase the principal amount of
the Securities to be purchased pursuant to such Bid against receipt of
such Securities together with accrued interest;
(iii) in the case of a Broker-Dealer that is a Seller's
Broker-Dealer, instruct each Existing Securityholder on whose behalf
such Seller's Broker-Dealer submitted a Sell Order that was accepted,
in whole or in part, or a Bid that was accepted, in whole or in part,
to instruct such Existing Securityholder's Participant to deliver to
such Seller's Broker-Dealer (or its Participant) through the
Depository the principal amount of the Securities to be sold pursuant
to such Order against payment therefor;
(iv) advise each Existing Securityholder on whose behalf such
Broker-Dealer submitted an Order and each Potential Securityholder on
whose behalf such Broker-Dealer submitted a Bid of the Security
Interest Rate for the next Interest Period;
(v) advise each Existing Securityholder on whose behalf such
Broker-Dealer submitted an Order of the next Auction Date; and
(vi) advise each Potential Securityholder on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or in part,
of the next Auction Date.
(c) On the basis of the information provided to it pursuant to
paragraph (a) above, each Broker-Dealer that submitted a Bid or Sell Order in
an Auction is required to allocate any funds received by it in connection with
such Auction pursuant to paragraph (b)(ii) above, and any Securities received by
it in connection with such Auction pursuant to paragraph (b)(iii) above, among
the Potential Securityholders, if any, on whose behalf such Broker-Dealer
submitted Bids, the Existing Securityholder, if any, on whose behalf such
Broker-Dealer submitted Bids or Sell Orders in such Auction, and any
Broker-Dealers identified to it by the Auction Agent following such Auction
pursuant to paragraph (a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Securityholder and Existing Securityholder
with an Order in the Auction on such Auction Date will instruct its
Participant as provided in (b)(ii) or (b)(iii) above, as the case may
be:
(ii) each Seller's Broker-Dealer that is not a Participant of
the Depository will instruct its Participant to deliver such
Securities through the Depository to a Buyer's Broker-Dealer (or its
Participant) identified to such Seller's Broker-Dealer pursuant to
(a)(v) above against payment therefor; and
(iii) each Buyer's Broker-Dealer that is not a Participant in
the Depository will instruct its Participant to pay through the
Depository to Seller's Broker-Dealer (or its Participant) identified
following such Auction pursuant to (a)(vi) above the amount necessary
to purchase the Securities to be purchased pursuant to (b)(ii) above
against receipt of such Securities.
(e) On the Business Day following each Auction Date;
(i) each Participant for a Bidder in the Auction on such
Auction Date referred to in (d)(i) above will instruct the Depository
to execute the transactions described under (b)(ii) or (b)(iii) above
for such Auction, and the Depository will execute such transactions;
(ii) each Seller's Broker-Dealer or its Participant will
instruct the Depository to execute the transactions described in
(d)(ii) above for such Auction, and the Depository will execute such
transactions; and
(iii) each Buyer's Broker-Dealer or its Participant will
instruct the Depository to execute the transactions described in
(d)(iii) above for such Auction, and the Depository will execute such
transactions.
(f) If an Existing Securityholder selling Securities in an Auction
fails to deliver such Securities (by authorized book-entry), a Broker-Dealer may
deliver to the Potential Securityholder on behalf of which it submitted a Bid
that was accepted a principal amount of Securities that is less than the
principal amount of Securities that otherwise was to be purchased by such
Potential Securityholder. In such event, the principal amount of Securities to
be so delivered will be determined solely by such Broker-Dealer (but only in
Authorized Denominations). Delivery of such lesser principal amount of
Securities will constitute good delivery. Notwithstanding the foregoing terms of
this paragraph (f), any delivery or nondelivery of Securities which will
represent any departure from the results of an Auction, as determined by the
Auction Agent, will be of no effect unless and until the Auction Agent will have
been notified of such delivery or nondelivery in accordance with the provisions
of the Auction Agent Agreement and the Broker-Dealer Agreements. Neither the
Indenture Trustee nor the Auction Agent will have any responsibility or
liability with respect to the failure of a Potential Securityholder, Existing
Securityholder or their Respective Broker-Dealer or Participant to take
delivery of or deliver, as the case may be, the principal amount of the
Securities purchased or sold pursuant to an Auction or otherwise.
<PAGE>
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<PAGE>
INDEX OF PRICIPAL 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.
1933 Act....................................................................5
1992 Amendments............................................................51
1993 Amendments............................................................51
Accrual Notes...............................................................2
Accrual Period.............................................................16
Additional Funding.........................................................14
Additional Principal Payments..............................................16
Additional Student Loans.................................................. 94
Administration Agreement....................................................9
Administration Fee.........................................................16
Administrator...............................................................9
Administrator Default.................................................... 107
Aggregate Pool Balance.....................................................32
Applicable Trustee........................................................ 89
Assigned Rights............................................................41
Auction Agent Fee..........................................................16
Auction Period Adjustment..................................................77
Auction Rate Certificates...................................................2
Auction Rate Notes..........................................................2
Auction Rate Securities.....................................................2
Available Funds........................................................... 98
Benefit Plan............................................................. 121
Capitalized Interest Account...............................................14
Capitalized Pre-Funding Account............................................15
Capitalized Pre-Funding Requirement........................................15
Capped Amount..............................................................23
Cede.......................................................................33
Certificate Balance...................................................... 100
Certificate Distribution Account...........................................17
Certificate Distribution Date...............................................2
Certificate Final Maturity Date............................................30
Certificate Rate...........................................................28
Certificate Record Date....................................................29
Certificate Surety Bond.....................................................1
Certificate Surety Bond Payment............................................21
Certificateholders.........................................................29
Certificateholders' Distribution Amount.................................. 100
Certificateholders' Interest Carryover.....................................30
Certificateholders' Interest Carryover Shortfall......................... 100
Certificateholders' Interest Distribution Amount......................... 100
Certificateholders' Principal Carryover Shortfall........................ 101
Certificateholders' Principal Distribution Amount........................ 101
Certificates................................................................1
Class.......................................................................1
Class Interest Rate........................................................25
ClassNotes..................................................................1
Closing Date................................................................3
Code..................................................................... 114
Collection Account.........................................................15
Collection Period..........................................................13
Commission..................................................................5
Consolidation Loans........................................................49
Cut-off Date...............................................................32
Deferral Period........................................................... 54
Deferral Phase.............................................................13
Definitive Certificates................................................... 90
Definitive Notes.......................................................... 90
Definitive Securities..................................................... 90
Department..................................................................3
Depository.................................................................75
Determination Date.........................................................15
Distribution Accounts......................................................17
Distribution Date..........................................................29
DTC........................................................................33
Educaid.....................................................................1
Eligible Deposit Account.................................................. 93
Eligible Institution...................................................... 93
Eligible Investments...................................................... 93
Eligible Lender Trustee.....................................................1
Eligible Lender Trustee Fee................................................16
Eligible Student...........................................................49
Enhancement................................................................21
ERISA......................................................................33
Event of Default.......................................................... 85
Exchange Act................................................................6
Expense Account............................................................17
Federal Assistance.........................................................52
Federal Direct Student Loan Program........................................40
Federal Guarantee Agreements...............................................48
Federal Loans...............................................................3
Federal Program............................................................11
Federal Tax Counsel...................................................... 114
Final Maturity Date........................................................27
Financed Student Loans......................................................1
Forbearance Periods........................................................43
Funding Period.............................................................14
Grace Periods..............................................................43
Guarantee Agreements...................................................... 49
Guarantee Payments.........................................................35
Guarantor..................................................................12
HEAL Loans..................................................................3
HEAL Program...............................................................59
HICA.......................................................................11
Higher Education Act.......................................................48
Indenture..................................................................24
Indenture Trustee...........................................................8
Indenture Trustee Fee......................................................16
Index Maturity.............................................................83
Indirect Participants..................................................... 89
Initial Closing Date.......................................................28
Insolvency Event......................................................... 109
Interest Period............................................................25
Interest Subsidy Payments..................................................52
Investment Earnings........................................................93
IRA'S.....................................................................114
IRS...................................................................... 114
LIBOR.......................................................................2
LIBOR Determination Date...................................................83
LIBOR Rate................................................................ 77
LIBOR Rate Notes............................................................2
Master Indenture...........................................................24
Master Servicer.............................................................8
Master Servicer Default.................................................. 107
Monthly Advance Account....................................................31
Monthly Advances...........................................................32
Net Loan Rate..............................................................26
Note Distribution Account..................................................16
Note Distribution Date......................................................2
Note Record Date...........................................................26
Note Surety Bond............................................................1
Note Surety Bond Payment...................................................21
Noteholders................................................................26
Noteholders' Distribution Amount......................................... 101
Noteholders' Interest Carryover............................................27
Noteholders' Interest Carryover Shortfall................................ 101
Noteholders' Principal Distribution Amount............................... 102
Notes.......................................................................1
Obligors...................................................................13
OID...................................................................... 115
One-Month LIBOR............................................................83
Option 4 Loans............................................................ 65
Option 4 Program...........................................................11
Originators' Interests......................................................7
Other Fees.................................................................16
PAL Loans..................................................................68
PAL Program................................................................11
Participants...............................................................75
PEP Loans..................................................................67
PEP Program................................................................11
PHEAA.......................................................................8
Plan..................................................................... 120
Plan Assets Regulation....................................................120
PLEASE Loans...............................................................67
PLEASE Program.............................................................11
PLUS Loans.................................................................11
Pool Balance...............................................................13
Pre-Funded Amount..........................................................14
Pre-Funding Account........................................................14
Principal Distribution Amount............................................ 102
Private Loan Programs......................................................12
Private Loans...............................................................3
Program....................................................................49
Prospectus Supplement.......................................................1
PTCE......................................................................121
Public Health Service Act..................................................11
Purchase Amount........................................................... 92
Purchased Loans.............................................................8
Rating Agency..............................................................34
Realized Loss............................................................ 102
Reference Bank............................................................ 84
Regulations................................................................59
Related Documents..........................................................87
Repayment Phase............................................................13
Representative..............................................................8
Reserve Account............................................................19
Reserve Account Deposit....................................................19
Rules..................................................................... 89
Sale and Servicing Agreement...............................................10
SBA........................................................................47
SBA Loans..................................................................47
Secretary...................................................................3
Securities..................................................................1
Securities Act..............................................................1
Securityholders............................................................29
Seller......................................................................1
Seller Trusts..............................................................37
Seller's Broker-Dealer......................................................1
Sellers.....................................................................8
Serial Loan................................................................42
Series...................................................................1, 7
Servicer....................................................................8
Servicers...................................................................8
Servicing Fee............................................................. 97
Servicing Fee Carryover................................................... 97
SLS Loans..................................................................55
SLS Program................................................................55
Special Allowance Payments.................................................52
Specified Reserve Account Balance..........................................19
Stafford Loans.............................................................51
Student Holdings............................................................9
Subsequent Cut-off Date................................................... 94
Surety Bonds...............................................................21
Surety Provider.............................................................9
Surety Provider Fee........................................................16
T-Bill Rate................................................................52
T-Bill Rate Notes...........................................................2
Telerate Page 3750........................................................ 84
TERI.......................................................................65
TERI Alternative Loans.....................................................65
TERI Alternative Program...................................................11
Terms Supplement...........................................................24
The Money Store............................................................47
Transaction Fees...........................................................16
Transfer Agreement........................................................ 94
Transfer and Servicing Agreements......................................... 91
Transfer Date............................................................. 94
Trust.......................................................................7
Trust Accounts............................................................ 93
Trust Agreement.............................................................9
Trust Supplement...........................................................28
UCC...................................................................... 111
Underlying Federal Loan....................................................57
Underwriters..............................................................121
Unsubsidized Stafford Loans................................................55
USAF...................................................................... 65
