<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-26405
$405,596,574
FIRST UNION STUDENT LOAN TRUST 1997-1
$263,637,773 FLOATING RATE CLASS A-1 ASSET BACKED NOTES
$127,762,921 FLOATING RATE CLASS A-2 ASSET BACKED NOTES
$14,195,880 FLOATING RATE ASSET BACKED CERTIFICATES
------------------------------
FIRST UNION NATIONAL BANK
(PENNSYLVANIA)
SELLER
FIRST UNION NATIONAL BANK
(NORTH CAROLINA)
MASTER SERVICER
------------------------------
The First Union Student Loan Trust 1997-1 (the "Trust") will issue
$263,637,773 aggregate principal amount of Floating Rate Class A-1 Asset Backed
Notes (the "Class A-1 Notes"), $127,762,921 aggregate principal amount of
Floating Rate Class A-2 Asset Backed Notes (the "Class A-2 Notes" and, together
with the Class A-1 Notes, the "Notes") and $14,195,880 aggregate principal
amount of Floating Rate Asset Backed Certificates (the "Certificates" and,
together with the Notes, the "Securities").
The assets of the Trust will include a pool of student loans (the "Financed
Student Loans") with an aggregate principal balance, including previously
accrued interest which has been or is expected to be capitalized, of
approximately $389,996,706 (the "Initial Pool Balance") as of June 30, 1997 (the
"Cutoff Date"). On the Closing Date, the aggregate initial principal amount of
the Notes and the Certificates is 104% of the Initial Pool Balance. The Notes
will be secured by the assets of the Trust. The interests of the holders of the
Certificates in the assets of the Trust will be subordinated to the interests of
the holders of the Notes therein to the extent described herein, and the Class
A-2 Notes will be subordinated to the Class A-1 Notes to the extent described
herein.
(Continued on following page)
------------------------------
THE CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN, AND THE NOTES REPRESENT
OBLIGATIONS OF, THE TRUST ONLY AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS
OF THE SELLER, THE MASTER SERVICER OR ANY AFFILIATE THEREOF. NEITHER THE
CERTIFICATES NOR THE NOTES ARE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY.
------------------------------
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS
SET FORTH UNDER "RISK FACTORS" BEGINNING ON PAGE 18.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO THE DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS THE SELLER(1)
------------ ------------- ----------------
<S> <C> <C> <C>
PER CLASS A-1 NOTE...................................... 100% 0.250% 99.750%
PER CLASS A-2 NOTE...................................... 100% 0.300% 99.700%
PER CERTIFICATE......................................... 100% 0.472% 99.528%
TOTAL................................................... $405,596,574 $1,109,388 $404,487,186
</TABLE>
- ---------------
(1) Before deducting expenses, estimated to be $718,408.
------------------------------
The Notes and the Certificates are offered severally by First Union Capital
Markets Corp., Lehman Brothers Inc., Morgan Stanley & Co. Incorporated and Smith
Barney Inc. (the "Underwriters") when, as and if issued by the Trust and
delivered to and accepted by the Underwriters, and subject to their right to
reject orders in whole or in part. It is expected that delivery of the Notes and
the Certificates in book-entry form will be made on or about July 29, 1997
through the facilities of The Depository Trust Company on the Same Day Funds
Settlement System and, in the case of the Notes, also through the facilities of
Cedel Bank, societe anonyme and the Euroclear System.
FIRST UNION CAPITAL MARKETS CORP.
LEHMAN BROTHERS
MORGAN STANLEY DEAN WITTER
SMITH BARNEY INC.
THE DATE OF THIS PROSPECTUS IS JULY 23, 1997.
<PAGE> 2
In addition to the Financed Student Loans purchased by The First National Bank
of Chicago, as eligible lender trustee on behalf of the Trust (the "Eligible
Lender Trustee"), from First Union National Bank, a national banking association
having its main office in Avondale, Pennsylvania ("First Union--Pennsylvania" or
the "Seller"), the assets of the Trust will include collections and other
payments with respect to the Financed Student Loans and monies on deposit in
certain trust accounts to be established (including the Collection Account and
the Reserve Account described herein).
Interest on and principal of the Securities will be payable quarterly on or
about the 25th day of each of January, April, July and October, commencing
October 27, 1997 (each, a "Distribution Date"); provided, that no distributions
in respect of principal of the Class A-2 Notes will be payable until the Class
A-1 Notes are paid in full, and no distributions in respect of principal of the
Certificates will be payable until the Class A-2 Notes are paid in full.
Interest will accrue, subject to certain limitations described herein, for each
quarterly interest period on each class of Securities at a per annum rate equal
to the T-Bill Rate (determined as described herein) plus the applicable Margin.
The Margin will be 0.58% for the Class A-1 Notes, 0.64% for the Class A-2 Notes
and 0.82% for the Certificates.
The final maturity date for the Class A-1 Notes will be the July 2004
Distribution Date, the final maturity date for the Class A-2 Notes will be the
April 2010 Distribution Date and the scheduled final payment date for the
Certificates will be the January 2016 Distribution Date. However, payment in
full of the Notes and the Certificates could occur earlier, and final payment of
the Certificates could occur later, than such dates as described herein. In
addition, the Notes and the Certificates will be repaid (i) upon the sale of any
Financed Student Loans remaining in the Trust after the Pool Balance has been
reduced to 10% or less of the Initial Pool Balance, pursuant to the auction
procedures described herein and (ii) on any Distribution Date on which the
Seller exercises its option to purchase the Financed Student Loans, exercisable
after the Pool Balance has been reduced to 5% or less of the Initial Pool
Balance.
First Union National Bank, a separate national banking association having
its main office in Charlotte, North Carolina and an affiliate of the Seller
("First Union -- North Carolina"), will serve as Master Servicer and
Administrator of the Financed Student Loans. The Financed Student Loans will
include loans guaranteed by the Pennsylvania Higher Education Assistance Agency
("PHEAA"), the New Jersey Higher Education Assistance Authority ("NJHEAA"), the
Connecticut Student Loan Foundation ("CSLF"), the N.Y. State Higher Education
Services Corporation ("NYSHESC") and the United Student Aid Funds, Inc. ("USAF")
and reinsured by the United States Department of Education (the "Department").
Neither the Notes nor the Certificates will be listed on any national
securities exchange. The Underwriters intend to make a secondary market in the
Notes and the Certificates but none has any obligation to do so. There can be no
assurance that a secondary market for the Notes or the Certificates will develop
or, if it does develop, that it will continue.
The Seller has not authorized any offer of Notes or Certificates to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995 (the "Regulations"). The Notes and Certificates may
not lawfully be offered or sold to persons in the United Kingdom except in
circumstances which do not result in an offer to the public in the United
Kingdom within the meaning of the Regulations or otherwise in compliance with
all applicable provisions of the Regulations.
---------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
IN THE UNITED STATES THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF
THE NOTES AND THE CERTIFICATES, INCLUDING OVER-ALLOTMENT, STABILIZING AND
SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY
BID, DURING AND AFTER THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE> 3
AVAILABLE INFORMATION
The Seller, as originator of the Trust, has filed with the Securities and
Exchange Commission (the "Commission") a Registration Statement (together with
all amendments and exhibits thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Securities offered hereby. This Prospectus, which forms part of the Registration
Statement, does not contain all the information contained therein. For further
information, reference is made to the Registration Statement which may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; and at the
Commission's regional offices at Seven World Trade Center, New York, New York
10048; and 500 West Madison Street, 14th Floor, Chicago, Illinois 60661, and
copies of all or any part thereof may be obtained from the Public Reference
Branch of the Commission upon the payment of certain fees prescribed by the
Commission. In addition, the Registration Statement may be accessed
electronically at the Commission's site on the World Wide Web located at
http://www.sec.gov.
REPORTS TO SECURITYHOLDERS
Unless and until Definitive Notes or Definitive Certificates are issued,
quarterly and annual unaudited reports containing information concerning the
Financed Student Loans will be prepared by the Administrator and sent on behalf
of the Trust only to Cede & Co. ("Cede"), as nominee of The Depository Trust
Company ("DTC") and registered holder of the Notes and the Certificates, but
will not be sent to any beneficial holder of the Securities. Such reports will
not constitute financial statements prepared in accordance with generally
accepted accounting principles. See "Description of the Securities -- Book-Entry
Registration" and "-- Reports to Securityholders". The Trust will file with the
Commission such periodic reports as are required under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of
the Commission thereunder.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Administrator, on behalf of
the Trust, pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Prospectus and prior to the termination of the
offering of the Notes and Certificates shall be deemed to be incorporated by
reference into this Prospectus and to be part hereof. Any statement contained
herein or in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Administrator will provide without charge to each person to whom a copy
of this Prospectus is delivered, on the written or oral request of any such
person, a copy of any or all of the documents incorporated herein by reference,
except the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Written requests for such copies
should be directed to First Union National Bank, 301 South College Street,
Charlotte, North Carolina 28288-1075, Attention: Trust Administrator, First
Union Student Loan Trust 1997-1. Telephone requests for such copies should be
directed to the Administrator at (704) 383-6955.
3
<PAGE> 4
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus. Certain capitalized
terms used in this Prospectus are defined elsewhere herein on the pages
indicated in the "Index of Defined Terms" beginning on page 99.
ISSUER..................... First Union Student Loan Trust 1997-1 (the
"Trust"). The Trust will be established under the
laws of the State of Delaware as a Delaware
business trust under the Trust Agreement. The
activities of the Trust and the Eligible Lender
Trustee will be limited by the terms of the Trust
Agreement to acquiring, owning and managing the
Financed Student Loans and the other assets of
the Trust as described herein, issuing the
Securities and making payments thereon, and other
activities related thereto.
SECURITIES OFFERED......... Floating Rate Class A-1 Asset Backed Notes (the
"Class A-1 Notes") in an initial aggregate
principal amount of $263,637,773, Floating Rate
Class A-2 Asset Backed Notes (the "Class A-2
Notes" and, together with the Class A-1 Notes,
the "Notes") in an initial aggregate principal
amount of $127,762,921 and Floating Rate Asset
Backed Certificates (the "Certificates" and,
together with the Notes, the "Securities") in an
initial aggregate principal amount of
$14,195,880. The Securities will be available for
purchase in denominations of $1,000 and integral
multiples thereof in book-entry form only,
provided that one Note or Certificate of each
class may be issued in the residual amount.
Persons acquiring beneficial ownership interests
in the Notes will hold their interests in the
Notes through The Depository Trust Company
("DTC") in the United States or Cedel Bank,
societe anonyme ("Cedel") or the Euroclear System
("Euroclear") in Europe, and persons acquiring
beneficial ownership interests in the
Certificates will hold their interests in the
Certificates through DTC. See "Description of the
Securities Book -- Entry Registration".
Securityholders will not be entitled to receive a
Definitive Security, except in the event that
Definitive Securities are issued in the limited
circumstances described herein. See "Description
of the Securities -- Definitive Securities".
SELLER..................... First Union National Bank, a national banking
association having its main office in Avondale,
Pennsylvania ("First Union -- Pennsylvania" or
the "Seller"), has originated or acquired the
Financed Student Loans and will sell them to the
Trust. The Seller is an indirect subsidiary of
First Union Corporation and an affiliate of the
Master Servicer, the Administrator and First
Union Capital Markets Corp.
MASTER SERVICER............ First Union National Bank, a separate national
banking association having its main office in
Charlotte, North Carolina ("First Union -- North
Carolina"), as Master Servicer on behalf of the
Trust (the "Master Servicer"), will service the
Financed Student Loans pursuant to a Master
Servicing Agreement to be dated as of July 1,
1997 (as amended and supplemented from time to
time, the "Master Servicing Agreement") among the
Trust, the Master Servicer, the Administrator and
the Eligible Lender Trustee. First Union -- North
Carolina is a subsidiary of First Union
Corporation and an affiliate of the Seller and
First Union Capital Markets Corp. The
4
<PAGE> 5
Master Servicer intends to service the Financed
Student Loans through one or more subservicers as
described herein under "The Seller, the Master
Servicer and the Administrator -- The Master
Servicer and the Administrator".
ADMINISTRATOR.............. First Union -- North Carolina, as administrator
(the "Administrator") on behalf of the Trust
pursuant to an Administration Agreement to be
entered into (as amended and supplemented from
time to time, the "Administration Agreement"),
among the Administrator, the Trust and the
Indenture Trustee.
ELIGIBLE LENDER TRUSTEE.... The First National Bank of Chicago, a national
banking association, as eligible lender trustee
(the "Eligible Lender Trustee") under the Trust
Agreement dated as of July 1, 1997 (as amended
and supplemented from time to time, the "Trust
Agreement") between the Seller and the Eligible
Lender Trustee pursuant to which the Eligible
Lender Trustee acts as holder of legal title to
the Financed Student Loans on behalf of the
Trust. See "Formation of the Trust -- Eligible
Lender Trustee".
INDENTURE TRUSTEE.......... Bankers Trust Company, a New York banking
corporation, as indenture trustee (the "Indenture
Trustee") under the Indenture to be dated as of
July 1, 1997 (as amended and supplemented from
time to time, the "Indenture") between the Trust
and the Indenture Trustee.
TRANSACTION OVERVIEW;
TRUST ASSETS............. The Trust will issue the Notes pursuant to the
Indenture. The Trust will issue the Certificates
representing undivided beneficial interests in
the Trust pursuant to the Trust Agreement. The
interests of the Certificateholders in the assets
of the Trust will be subordinated to the
interests of the Noteholders therein to the
extent described under "Description of the
Securities -- The Certificates -- Subordination
of the Certificates."
The Notes will be secured by all of the assets of
the Trust, which will include (i) a pool of
student loans (the "Financed Student Loans") made
under the Federal Family Education Loan Program
("FFELP"), all of which are guaranteed as to the
payment of principal and interest by certain
guarantee agencies in an amount equal to 100%
(or, for Financed Student Loans disbursed on or
after October 1, 1993, 98%) of their principal
balance and accrued interest, and insured in the
full amount of such guarantee by the United
States Department of Education (the "Department")
in the event the guarantor fails to pay (subject
to a determination by the Department that the
guarantor is unable to meet its insurance
obligations), which Financed Student Loans will
be purchased by the Eligible Lender Trustee on
behalf of the Trust from the Seller on or prior
to the date of issuance of the Securities (the
"Closing Date"), (ii) collections and other
payments with respect to the Financed Student
Loans and (iii) monies on deposit in certain
trust accounts to be established (including the
Collection Account and the Reserve Account). See
"-- Assets of the Trust" below.
CREDIT ENHANCEMENT......... The principal source of payments on the Notes and
distributions on the Certificates will be
payments received from or on behalf of borrow-
5
<PAGE> 6
ers, payments from Guarantors and the Department,
and proceeds of the repurchase by the Seller, or
purchase by the Master Servicer, of Financed
Student Loans. Additional credit enhancement is
available, however, in the form of the Reserve
Account described herein and excess interest
payable on the Financed Student Loans to cover
(a) losses or delays in payment due to delay in
receiving payments from borrowers, Guarantors or
the Department, (b) losses on Financed Student
Loans (including those disbursed on or after
October 1, 1993, as to which guarantees of
Guarantors and the Department's insurance
(subject to a determination by the Department
that the guarantor is unable to meet its
insurance obligations) cover only 98% of the
principal balance and accrued interest of the
Financed Student Loans) and (c) certain other
shortfalls described herein, in each case, to the
extent such losses, delays or other shortfalls
result in shortfalls in payments of interest on
the Notes and the Certificates on any
Distribution Date (or shortfalls of principal at
final maturity, as defined herein).
PAYMENTS AND DISTRIBUTIONS:
A. DISTRIBUTION DATES...... Interest on and principal of each class of
Securities will be payable quarterly on or about
the 25th day of each of January, April, July and
October, commencing October 27, 1997 (each, a
"Distribution Date"); provided, however, that no
distributions in respect of principal of the
Class A-2 Notes will be made until the Class A-1
Notes have been paid in full, and no
distributions in respect of principal of the
Certificates will be made until the Class A-2
Notes have been paid in full.
B. RECORD DATE............. Payments in respect of the Securities will be
payable to holders of record of the Notes (the
"Noteholders") and to holders of record of the
Certificates (the "Certificateholders" and,
together with the Noteholders, the
"Securityholders") as of the business day
preceding each Distribution Date.
C. INTEREST................ Interest accrued on the Securities during each
Interest Period will be payable on the related
Distribution Date. Interest will accrue on each
class of Securities at a per annum rate equal to
the lesser of (i) the daily weighted average of
the T-Bill Rates within such Interest Period
(determined as described under "Description of
the Securities -- Determination of the T-Bill
Rates") plus the applicable Margin and (ii) the
Student Loan Rate (determined as described under
"Description of the Securities -- The Notes").
The "Margin" will be 0.58% for the Class A-1
Notes, 0.64% for the Class A-2 Notes and 0.82%
for the Certificates. Interest will be calculated
on the basis of the actual number of days elapsed
in each Interest Period divided by 365 (or 366 in
the case of a leap year). Interest not paid on
any Distribution Date will be carried forward and
be payable, with interest accrued thereon at the
rate borne by the respective Security, on the
next Distribution Date.
The "Interest Period" with respect to any
Distribution Date means the period from the
Closing Date, or from the most recent
Distribution Date on which interest has been
paid, to but excluding such current Distribution
Date.
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<PAGE> 7
The T-Bill Rate will generally be adjusted weekly
on the calendar day following each auction of
direct obligations of the United States with a
maturity of 13 weeks ("91-day Treasury Bills") to
equal the weighted average per annum discount
rate (expressed on a bond equivalent basis and
applied on a daily basis) of the 91-day Treasury
Bills sold at such auction. Notwithstanding the
foregoing, (i) the T-Bill Rate in effect from the
first day of the Interest Period, including the
initial Interest Period, through the day of the
first 91-day Treasury Bill auction on or after
the first day of each Interest Period will be
based on the results of the most recent 91-day
Treasury Bill auction prior to such day and (ii)
the T-Bill Rate will be subject to a lock-in
period of six business days preceding each
Distribution Date, during which the same T-Bill
Rate will remain in effect from the first day of
such period until the end of the Interest Period
related to such Distribution Date. See
"Description of the Securities -- Determination
of the T-Bill Rates."
To the extent that the interest rate for a class of
Securities is based on the Student Loan Rate for
any such Interest Period, the excess of (i) the
amount of interest on such class of Securities
calculated on the basis of the daily weighted
average of the T-Bill Rates within such Interest
Period plus the applicable Margin as described
above over (ii) the amount of interest on such
class of Securities actually accrued in respect
of such Interest Period based on the Student Loan
Rate will be paid (together with the unpaid
portion of any such excess from prior
Distribution Dates and interest accrued thereon
at the daily weighted average of the T-Bill Rates
within such Interest Period plus the applicable
Margin as described above for such class of
Securities) on such Distribution Date or any
subsequent Distribution Date on a subordinated
basis to the extent funds are allocated and
available therefor after making all required
prior allocations and distributions on such
Distribution Dates, as described under
"Description of the Transfer and Servicing
Agreements -- Distributions." The payment of such
amounts due to Certificateholders on any
Distribution Date (such amount, the
"Certificateholders' Interest Index Carryover")
is further subordinated to the payment of such
amounts due to the Noteholders on any
Distribution Date (such amount, the "Noteholders'
Interest Index Carryover"). To the extent funds
are available therefor, the Certificateholders'
Interest Index Carryover may be paid prior to the
time that the Notes are paid in full.
Noteholders' Interest Index Carryover and
Certificateholders' Interest Index Carryover will
continue to be so payable notwithstanding that
the principal amount of the applicable class of
Securities has been reduced to zero; provided
that no such amounts will be payable after the
final Distribution Date upon termination of the
Trust. The ratings on the Securities do not
address the likelihood of payment of any
Noteholders' Interest Index Carryover or
Certificateholders' Interest Index Carryover.
The "Student Loan Rate" for any Interest Period is
defined under "Description of the
Securities -- The Notes -- Distributions of
Interest." The Student Loan Rate for any Interest
Period is a rate calculated generally on the
basis of collections on the Financed Student
Loans available or expected to be available to
pay interest on
7
<PAGE> 8
the Securities after payment of certain expenses
of the Trust for such Interest Period.
D. PRINCIPAL............... Principal will be payable on each Distribution Date
in an amount equal to the Principal Distribution
Amount for such Distribution Date. The Principal
Distribution Amount will be equal (i) with
respect to the initial Distribution Date, to the
amount by which the sum of the outstanding
principal balance of the Notes and the
Certificates exceeds the Adjusted Pool Balance
for such Distribution Date and (ii) with respect
to each subsequent Distribution Date, to the
amount by which the Adjusted Pool Balance for the
preceding Distribution Date exceeds the Adjusted
Pool Balance for such Distribution Date. For this
purpose, "Adjusted Pool Balance" means, for any
Distribution Date, (a) if the Pool Balance as of
the last day of the related Collection Period is
greater than 40% of the Initial Pool Balance, the
sum of such Pool Balance and the Specified
Reserve Account Balance for such Distribution
Date, or (b) if the Pool Balance as of the last
day of the related Collection Period is less than
or equal to 40% of the Initial Pool Balance, such
Pool Balance. See "Description of the Transfer
and Servicing
Agreements -- Distributions -- Distributions from
Collection Account."
The Principal Distribution Amount will be applied
on each Distribution Date, first, to the
principal balance of the Class A-1 Notes until
such principal balance is reduced to zero, then
to the principal balance of the Class A-2 Notes
until such principal balance is reduced to zero
and then to the principal balance of the
Certificates until such principal balance is
reduced to zero. See "Description of the Transfer
and Servicing
Agreements -- Distributions -- Distributions from
Collection Account."
"Collection Period" means each period of three
calendar months from and including the date next
following the end of the preceding Collection
Period (or, with respect to the first Collection
Period, the period beginning on the day following
the Cutoff Date and ending on September 30,
1997).
"Pool Balance" is defined under "Description of the
Transfer and Servicing
Agreements -- Distributions". The Pool Balance as
of any date generally represents the aggregate
principal balance of the Financed Student Loans
at such date (including accrued interest thereon
to the extent such interest will be capitalized
upon commencement of repayment), after giving
effect to all payments received by the Trust
during such Collection Period allocable to
principal and all losses realized on Financed
Student Loans liquidated during such Collection
Period.
E. PAYMENT PRIORITIES...... Pursuant to the Master Servicing Agreement, the
Administrator will instruct the Indenture Trustee
to withdraw funds on deposit in the Collection
Account and to apply such funds on or about the
25th day of each month (the "Monthly Servicing
Payment Date") to the payment of the Servicing
Fee (as defined under "-- Transfer and Servicing
Agreements" below) to the Master Servicer, and on
each Distribution Date to the following (in the
priority indicated):
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<PAGE> 9
(i) the Servicing Fee and all overdue Servicing
Fees to the Master Servicer;
(ii) the quarterly fee payable to the Administrator
and all overdue administration fees to the
Administrator;
(iii) interest due to the Noteholders and all
overdue interest (other than the Noteholders'
Interest Index Carryover) as described above
under "-- Payments and
Distributions -- Interest";
(iv) interest due to the Certificateholders and all
overdue interest (other than the
Certificateholders' Interest Index Carryover) as
described above under "-- Payments and
Distributions -- Interest";
(v) principal payable to the Noteholders as
described above under "-- Payments and
Distributions -- Principal";
(vi) on each Distribution Date on and after which
the Notes are paid in full, principal
distributable to the Certificateholders as
described above under "-- Payments and
Distributions -- Principal";
(vii) the amount, if any, necessary to be deposited
in the Reserve Account to reinstate the balance
thereof to the Specified Reserve Account Balance;
(viii) the aggregate unpaid amount of Noteholders'
Interest Index Carryover, if any, to the
Noteholders;
(ix) the aggregate unpaid amount of
Certificateholders' Interest Index Carryover, if
any, to the Certificateholders; and
(x) any remaining amounts after application of
clauses (i) through (ix) above to the Reserve
Account.
Notwithstanding the foregoing, upon the occurrence
of the Event of Default under the Indenture, all
amounts payable with respect to the Certificates
will be subordinated to the payment of all
amounts payable with respect to the Notes. See
"Description of Transfer and Servicing
Agreements -- Distributions -- Distributions from
Collection Account."
F. MATURITY DATES.......... The outstanding principal amount of the Class A-1
Notes, Class A-2 Notes and the Certificates is
payable in full on the Class A-1 Final Maturity
Date, the Class A-2 Final Maturity Date and the
Certificate Final Payment Date, respectively. The
"Class A-1 Final Maturity Date" is the July 2004
Distribution Date. The "Class A-2 Final Maturity
Date" is the April 2010 Distribution Date, and
the "Certificate Final Payment Date" is the
January 2016 Distribution Date. Although the
maturity of certain of the Financed Student Loans
may extend beyond such maturity dates, the actual
maturity of one or both classes of Notes and/or
the Certificates could occur sooner than such
dates as a result of a variety of factors,
including as a result of (i) prepayments on the
Financed Student Loans, (ii) accelerated payments
of principal in respect of the Securities from
amounts on deposit in the Reserve Account as
described under "-- Assets of the
Trust -- Reserve Account," (iii) the sale of the
Financed Student Loans pursuant to an auction of
the Financed Student Loans after the Pool Balance
has been reduced to 10% or less of the Initial
Pool
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<PAGE> 10
Balance as described below under "-- Auction of
Trust Assets," or (iv) the exercise by the Seller
of its option to repurchase the Financed Student
Loans after the Pool Balance has been reduced to
5% or less of the Initial Pool Balance (as
defined under "-- Assets of the
Trust -- Collection Account -- Distributions from
the Collection Account"). See "The Financed
Student Loan Pool -- Maturity and Prepayment
Assumptions". Because the actual rate and timing
of payments of principal 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 payments of principal.
AUCTION OF TRUST ASSETS.... Any Financed Student Loans remaining in the Trust
as of the end of the Collection Period
immediately following the Distribution Date on
which the Pool Balance is less than or equal to
10% of the Initial Pool Balance will be offered
for sale by the Indenture Trustee as of the
succeeding Distribution Date (the "Auction
Distribution Date"). First Union -- North
Carolina, its affiliates, and unrelated third
parties may offer bids to purchase such Financed
Student Loans as of such succeeding Distribution
Date. If at least two bids are received, the
Indenture Trustee will solicit and resolicit new
bids from all participating bidders until only
one bid remains or the remaining bidders decline
to resubmit bids. The Indenture Trustee will
accept the highest of such remaining bids if it
is equal to or in excess of the higher of the
Minimum Purchase Amount and the fair market value
of such Financed Student Loans as of the end of
the Collection Period immediately preceding the
Auction Distribution Date. If at least two bids
are not received or the highest bid after the
resolicitation process is completed is not equal
to or in excess of the higher of the Minimum
Purchase Amount and the fair market value of the
Financed Student Loans, the Indenture Trustee
will not consummate such sale. The Indenture
Trustee may consult and, at the direction of the
Seller, will be required to consult with a
financial advisor, which may include either of
the Underwriters or the Administrator, to
determine if the fair market value of the
Financed Student Loans has been offered. The net
proceeds of any such sale will be used to pay the
outstanding Trust Fees, to redeem any outstanding
Notes and to retire any outstanding Certificates
on such Auction Distribution Date. Any such sale
will be made without representations or
warranties by the Trust, and none of the Trust,
the Noteholders or the Certificateholders will
retain any continuing obligation to the purchaser
of the Financed Student Loans.
If the sale is not consummated in accordance with
the procedures described above, the Indenture
Trustee may, but shall not be under any
obligation to, solicit bids for sale of the
Financed Student Loans on future Distribution
Dates upon terms similar to those described
above. In the event the Financed Student Loans
are not sold in accordance with the foregoing, on
each subsequent Distribution Date, if the amount
on deposit in the Reserve Account on such
Distribution Date (after giving effect to all
withdrawals therefrom on such Distribution Date,
except withdrawals payable to the Seller other
than as a Certificateholder) is in excess of the
Specified Reserve Account Balance for such
Distribution Date, the Administrator will
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direct the Indenture Trustee to distribute the
amount of such excess as accelerated payments of
principal on the Notes and the Certificates. No
assurance can be given as to whether the
Indenture Trustee will be successful in
soliciting acceptable bids to purchase the
Financed Student Loans on either the Auction
Distribution Date or any subsequent Distribution
Date.
"Minimum Purchase Amount" means an amount that
would be sufficient to (i) reduce the outstanding
principal amount of each class of Notes then
outstanding on such Distribution Date to zero,
(ii) pay to the Noteholders the Noteholders'
Interest Distribution Amount payable on such
Distribution Date, (iii) reduce the Certificate
Balance to zero, (iv) pay to the
Certificateholders the Certificateholders'
Interest Distribution Amount payable on such
Distribution Date, (v) pay to the Master Servicer
and the Administrator the Servicing Fee and the
Administration Fee, respectively, payable on such
Distribution Date and (vi) pay the aggregate fees
and expenses related to such auction. See
"Description of the Transfer and Servicing
Agreements -- Termination".
OPTIONAL PURCHASE.......... The Seller may repurchase all remaining Financed
Student Loans at a price equal to the aggregate
Purchase Amounts for such Financed Student Loans,
and thus effect the early retirement of the
Securities, on any Distribution Date on or after
which the Pool Balance is equal to 5% or less of
the Initial Pool Balance. See "Description of the
Transfer and Servicing
Agreements -- Termination".
ASSETS OF THE TRUST........ The assets of the Trust will include the following:
A. FINANCED STUDENT
LOANS...................... The Financed Student Loans will consist of
education loans to students and/or parents of
students ("Student Loans") made under the Federal
Family Education Loan Program ("FFELP") and will
include rights to receive payments made with
respect to such Financed Student Loans and the
proceeds thereof. On or prior to the Closing
Date, the Seller will sell the Financed Student
Loans having an aggregate principal balance,
including previously accrued interest which has
been or is expected to be capitalized (calculated
as described herein) of approximately
$389,996,706 as of the Cutoff Date to the
Eligible Lender Trustee on behalf of the Trust
pursuant to a Sale Agreement to be dated as July
1, 1997 (as amended and supplemented from time to
time, the "Sale Agreement"), among the Seller,
the Trust and the Eligible Lender Trustee. On the
Closing Date, the aggregate initial principal of
the Notes and the Certificates is 104% of the
Initial Pool Balance. Payments on Financed
Student Loans in excess of interest accrued on
the Notes and the Certificates and other
distributions required under "Description of
Transfer and Servicing
Agreements -- Distributions -- Distributions from
Collection Account" will be applied to principal
of the Notes until the aggregate principal
balance of the Notes and Certificates has been
reduced to the Adjusted Pool Balance for such
Distribution Date.
The Financed Student Loans were originated or
acquired by the Seller or an affiliate of the
Seller and include only Student Loans that are
guaranteed as to the payment of principal and
interest by PHEAA, NJHEAA, CSLF, NYSHESC or USAF
(the "Guarantors"), and are
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<PAGE> 12
reinsured by the United States Department of
Education (the "Department"). The Financed
Student Loans have been selected from the Student
Loans owned by the Seller based on the criteria
specified in the Sale Agreement and described
herein. Student Loans made prior to October 1,
1993 are 100% guaranteed by the applicable
Guarantor. Student Loans made on or after October
1, 1993 are 98% guaranteed by the applicable
Guarantor. All Student Loans are insured against
default by the Department in the full amount of
the Guarantor's guarantee (subject to a
determination by the Department that the
Guarantor is unable to meet its insurance
obligations). All references herein to the
guarantee and insurance coverage with respect to
the Financed Student Loans should be understood
to mean either (i) such 100% guarantee and
insurance coverage with respect to Financed
Student Loans made prior to October 1, 1993 or
(ii) such 98% guarantee and insurance coverage
with respect to Financed Student Loans made on or
after October 1, 1993. As of the Cutoff Date,
approximately 57.46% of the Financed Student
Loans by principal balance were made on or after
October 1, 1993.
As of the Cutoff Date, the weighted average
interest rate per annum of the Financed Student
Loans was approximately 8.25% (based on the
applicable interest rates as of the Cutoff Date)
and the weighted average remaining term to
scheduled maturity (exclusive of any future
deferral or forbearance periods and assuming
expected graduation dates and typical grace
periods) of the Financed Student Loans was
approximately 107.93 months. As of the Cutoff
Date, approximately 55.94% of the Financed
Student Loans by principal balance are guaranteed
by PHEAA, 31.99% are guaranteed by NJHEAA, 7.06%
are guaranteed by CSLF, 3.01% are guaranteed by
NYSHESC and 2.01 % are guaranteed by USAF.
B. COLLECTION ACCOUNT...... The Administrator will establish in the name of the
Indenture Trustee one or more accounts into which
all collections in respect of the Financed
Student Loans will be required to be deposited.
Pursuant to the Master Servicing Agreement, an
account in the name of the Indenture Trustee (the
"Collection Account") will be established and
maintained by the Administrator and will be an
asset of the Trust. The Master Servicer will be
required to remit all collections received with
respect to the Financed Student Loans within two
business days of receipt thereof to the
Administrator for deposit in the Collection
Account. Similarly, the Eligible Lender Trustee
will be required to remit Interest Subsidy
Payments and Special Allowance Payments (each as
defined under "The Federal Family Education Loan
Program -- General") it receives with respect to
the Financed Student Loans within two business
days of receipt thereof to the Administrator for
deposit in the Collection Account. If, however,
the following conditions are satisfied as
described herein, such collections received by
the Master Servicer and the Eligible Lender
Trustee will be remitted to the Administrator,
who will not be required to deposit such amounts
into the Collection Account until on or before
the business day preceding each Distribution
Date. For so long as the Administrator meets
certain conditions (including that (i) the Rating
Agencies have not downgraded or withdrawn their
ratings of the Notes and Certificates and (ii)
there exists no
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<PAGE> 13
Administrator Default), the Administrator will
not be required to remit such amounts to the
Collection Account until the business day
preceding the Distribution Date on which
distribution of such amounts is required, or on
each Monthly Servicing Payment Date to the extent
of the Servicing Fee payable on such date. If
such conditions are not satisfied, however, the
Master Servicer and Eligible Lender Trustee will
be directed to remit such amounts directly to the
Collection Account within two business days of
receipt. See "Description of the Transfer and
Servicing Agreements -- Payments on Financed
Student Loans".
C. RESERVE ACCOUNT......... Pursuant to the Master Servicing Agreement, an
account in the name of the Indenture Trustee (the
"Reserve Account") will be established and
maintained by the Administrator and will be an
asset of the Trust. The Trust will make an
initial deposit into the Reserve Account on the
Closing Date of cash or certain eligible
investments equal to $1,754,985 (the "Reserve
Account Initial Deposit"). On the Closing Date,
the Reserve Account Initial Deposit will equal
the Specified Reserve Account Balance. The
Reserve Account will be replenished as required
on each Distribution Date by the deposit into the
Reserve Account of certain amounts available
therefor remaining after making all prior
distributions on such date. See "Description of
the Transfer and Servicing Agreements --
Distributions".
The "Specified Reserve Account Balance" with
respect to any Distribution Date will be equal to
0.45% of the Pool Balance as of the Cutoff Date
(the "Initial Pool Balance"); provided, however,
that in no event will such balance exceed the
aggregate outstanding principal balance of the
Notes and the Certificates. The "Initial Pool
Balance" will equal $389,996,706. See
"Description of the Transfer and Servicing
Agreements -- Credit Enhancement -- Reserve
Account".
Amounts on deposit in the Reserve Account will be
available on each Monthly Servicing Payment Date
to cover any shortfalls in payments of the
Servicing Fee, and on each Distribution Date to
cover any shortfalls in payments of the Servicing
Fee and the Administration Fee (such fees
collectively, the "Trust Fees"), and interest
payable in respect of the Notes and the
Certificates (other than the Noteholders'
Interest Index Carryover and the
Certificateholders' Interest Index Carryover) for
such Distribution Date for which funds otherwise
available therefor for such Distribution Date are
insufficient to make such payments and
distributions. In addition, amounts on deposit in
the Reserve Account will be available on the
Class A-1 Maturity Date and the Class A-2
Maturity Date to cover any shortfalls in payments
of the Noteholders' Principal Distribution Amount
and interest accrued thereon, and on the final
Distribution Date upon termination of the Trust
to pay the Certificate Principal Distribution
Amount and interest accrued thereon and any
Noteholders' Interest Index Carryover or
Certificateholders' Interest Index Carryover, in
each case to the extent funds in the Collection
Account available therefor on any such date are
insufficient to make such payments and
distributions. If the market value of securities
and cash in the Reserve Account is on any
Distribution Date is sufficient
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<PAGE> 14
to pay the remaining principal amount of and
interest accrued on the Notes and Certificates,
and to pay any Noteholders' Interest Index
Carryover and Certificateholders' Interest Index
Carryover, such amount will be so applied on such
Distribution Date.
Amounts in the Reserve Account on any Distribution
Date (after giving effect to all distributions to
be made on such Distribution Date) in excess of
the Specified Reserve Account Balance for such
Distribution Date will generally be released to
the Seller after the payment of any unpaid
Noteholders' Interest Index Carryover and
Certificateholders' Interest Index Carryover. The
Seller's right to receive such amounts represents
part of the consideration received in exchange
for the sale of the Financed Student Loans to the
Trust under the Sale Agreement. Notwithstanding
the foregoing, in the event the Financed Student
Loans are not sold pursuant to the auction
process described under "Description of the
Transfer and Servicing Agreements -- Termination"
on or after the Auction Distribution Date, if the
amount on deposit in the Reserve Account is
greater than the Specified Reserve Account
Balance, such excess will generally be
distributed as accelerated payments of principal.
See "Description of Transfer and Servicing
Agreements -- Credit Enhancement -- Reserve
Account."
The funding and maintenance of the Reserve Account
is intended to enhance the likelihood of timely
payment of the interest payable in respect of the
Notes and the Certificates (other than the
Noteholders' Interest Index Carryover and the
Certificateholders' Interest Index Carryover) and
the ultimate payment of principal thereon. In
certain circumstances, however, the Reserve
Account could be depleted and shortfalls in
distributions to the Noteholders or the
Certificateholders could result.
D. TRANSFER AND SERVICING
AGREEMENTS............... Under the Sale Agreement, the Seller will sell the
Financed Student Loans to the Trust, with the
Eligible Lender Trustee holding legal title
thereto. In addition, under the Master Servicing
Agreement, the Master Servicer will agree with
the Trust to be responsible for servicing,
managing, maintaining custody of and making
collections on the Financed Student Loans.
Subject to the terms and conditions described
herein and in the Master Servicing Agreement, the
Master Servicer intends to delegate certain of
its obligations under the Master Servicing
Agreement to one or more subservicers but no such
delegation shall relieve the Master Servicer from
its responsibilities to service the Financed
Student Loans as if it alone were servicing the
Financed Student Loans. The obligations of the
Seller and the Master Servicer under the Sale
Agreement and the Master Servicing Agreement
include the following:
Under the Sale Agreement the Seller will be
obligated to repurchase, and under the Master
Servicing Agreement the Master Servicer will be
obligated to purchase, any Financed Student Loan
if the interests of the Noteholders or the
Certificateholders therein are materially
adversely affected by a breach of any
representation, warranty or covenant (including
the Master Servicer's covenant to service all the
Financed Student Loans in accordance with, and to
otherwise
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comply with, applicable laws, restrictions and
guidelines) made by the 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
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
obligation to guarantee payment of such Financed
Student Loan will not be considered to have a
material adverse effect for this purpose). In
addition, the Seller or the Master Servicer, as
the case may be, will be obligated to reimburse
the Trust with respect to a Financed Student Loan
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 Seller's
representations and warranties or the Master
Servicer's covenants, as the case may be, with
respect to such Financed Student Loan.
The Master Servicer will receive a monthly fee (the
"Servicing Fee") payable on each Monthly
Servicing Payment Date equal to one-twelfth of
the product of (i) 1.25% per annum and (ii) the
Pool Balance as of the last day of the preceding
calendar month, subject to certain adjustments,
together with other administrative fees and
similar charges. The Servicing Fee will be
payable out of funds available therefor in the
Collection Account and amounts on deposit in the
Reserve Account on each Monthly Servicing Payment
Date, commencing August 25, 1997.
Pursuant to the Master Servicing Agreement, the
Master Servicer will agree with the Trust to be
responsible for, among other things, causing all
appropriate claims forms and other documents and
filings on behalf of the Eligible Lender Trustee
to be prepared or filed with the Department in
order to claim the Interest Subsidy Payments and
Special Allowance Payments from the Department in
respect of the Financed Student Loans entitled
thereto, and preparing and providing quarterly
and annual statements to the Administrator with
respect to distributions to Noteholders and
Certificateholders. See "Description of the
Transfer and Servicing Agreements -- Servicing
Procedures".
TAX CONSIDERATIONS......... In the opinion of Cadwalader, Wickersham & Taft,
Federal tax counsel for the Trust, the Notes will
be characterized as debt for federal income tax
purposes. However, it should be noted that there
is no specific statutory, regulatory or case law
authority with respect to the characterization
for federal income tax purposes of securities
having the same terms as the Notes. Noteholders,
by acceptance of a Note, will agree to treat such
Note as indebtedness.
In the opinion of Federal tax counsel for the
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, by
acceptance of Certificates, will agree to treat
the Trust as a partnership in which they are
partners.
In the opinion of Pepper, Hamilton & Scheetz,
Delaware tax counsel for the Trust, the same
characterizations would apply for Delaware state
income and franchise tax purposes as for federal
income tax
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purposes and Noteholders and Certificateholders
that are not otherwise subject to Delaware
taxation on income will not become subject to
Delaware tax as a result of their ownership of
Notes or Certificates. However, there are no
cases or rulings on similar transactions
involving a trust that issues and debt and equity
interests with terms similar to those of the
Notes and Certificates.
The Trust will report income and expenses on an
accrual basis. Due to the allocation of Trust
income to Certificateholders, cash basis
Certificateholders may, in effect, be required to
report their share of Trust income 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 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. Therefore, such
Certificateholders may be required to pay income
taxes on such income without a corresponding
distribution from the Trust before or at the time
such income tax is due.
See "Material Federal Income Tax Consequences" and
"Certain State Tax Consequences" for additional
information concerning the application of federal
and state tax laws with respect to the Notes and
the Certificates.
ERISA CONSIDERATIONS....... The Notes. A fiduciary of any employee benefit
plan or other retirement arrangement subject to
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 (the "Code") (each, a "Plan")
should carefully review with its legal advisors
whether the purchase or holding of the Notes
could give rise to a transaction prohibited or
not otherwise permissible under ERISA or Section
4975 of the Code. See "ERISA Considerations".
Subject to the conditions set forth herein under
"ERISA Considerations," the Notes may, in
general, be purchased by or on behalf of a Plan.
The Certificates. The Certificates may not be
acquired by, on behalf of, or with the assets of
any Plan, and each purchaser of Certificates
shall be deemed to have represented that it is
neither a Plan, purchasing the Certificates on
behalf of a Plan, nor using the assets of a Plan
to purchase any of the Certificates.
RATING OF THE SECURITIES... It is a condition to the issuance and sale of the
Notes and the Certificates that each class of
Notes be rated in the highest investment rating
category and that the Certificates be rated in
one of the three highest investment rating
categories by at least two nationally recognized
rating agencies. The ratings do not address the
likelihood of the payment of any Noteholders'
Interest Index Carryover or Certificateholders'
Interest Index Carryover. A rating is not a
recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at
any time by the assigning rating agency. In
addition, a rating does not address the
likelihood or frequency of prepayments of the
Financed Student Loans or the corresponding
effect on yield to the Securityholders.
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RISK FACTORS............... Certain factors which investors should consider
prior to making an investment in the Securities
are set forth herein under "Risk Factors"
beginning on page 18.
17
<PAGE> 18
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information contained in this Prospectus before purchasing the
Securities offered hereby.
LIMITED LIQUIDITY OF SECURITIES
The Securities will not be listed on any national securities exchange.
There is currently no secondary market for the Securities. The Underwriters
currently intend to make a market in the Securities, but none has any obligation
to do so. There can be no assurance that a secondary market will develop or, if
a secondary market does develop, that it will provide the Securityholders with
liquidity of investment or that it will continue for the life of the Securities.
LIMITED ASSETS OF TRUST
The Trust does not have, nor is it permitted or expected to have, any
significant assets or sources of funds other than the Financed Student Loans
(and the related Guarantee Agreements), the Collection Account and the Reserve
Account. The Notes represent obligations solely of the Trust, and the
Certificates represent interests solely in the Trust and its assets, and neither
the Notes nor the Certificates will be insured or guaranteed by the Seller, the
Master Servicer, the Administrator, the Guarantors, the Eligible Lender Trustee
or the Department. Consequently, holders of the Notes and the Certificates must
rely for repayment upon payments with respect to the Financed Student Loans and,
if and to the extent available under the circumstances described herein, amounts
on deposit in the Reserve Account. Amounts to be deposited in the Reserve
Account are limited in amount and will be reduced, subject to a specified
minimum, as the Pool Balance is reduced. If the Reserve Account is exhausted,
the Trust will depend solely on payments with respect to the Financed Student
Loans to make payments on the Notes and distributions on the Certificates. See
"Description of the Transfer and Servicing Agreements -- Distributions" and
"-- Credit Enhancement".
INITIAL PRINCIPAL BALANCE OF SECURITIES EXCEEDS AGGREGATE INITIAL PRINCIPAL
BALANCE OF FINANCED STUDENT LOANS
On the Closing Date, the aggregate initial principal of the Notes and the
Certificates is 104% of the Initial Pool Balance. Because the actual rate and
timing of payments of principal 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 payments of principal. 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 and amounts on deposit in the Reserve Account, 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.
Moreover, Noteholders and Certificateholders will have to rely on accelerated
payments of principal, if any, from interest payments in excess of the interest
payable on the Securities to reduce the balance of the Securities to the Pool
Balance.
SUBORDINATION OF CERTIFICATES TO NOTES
The interests of Certificateholders in the assets of the Trust will be
subordinated to the interests of the Noteholders to the extent described herein.
Payments of interest on the Certificates will be subordinated to payments of
interest on the Notes and payments of principal of the Certificates will be
subordinated until the full payment of the principal of the Notes. In addition,
upon the occurrence of the Event of Default under the Indenture, all amounts
payable with respect to the Certificates will be subordinated to the payment of
all amounts payable with respect to the Notes. If amounts otherwise allocable to
the Certificates are used to fund payments on the Notes, distributions with
respect to the Certificates may be delayed or reduced. The Certificateholders
bear directly the credit and other risks associated with an undivided interest
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<PAGE> 19
in the Trust. See "Description of the Securities -- The
Certificates -- Subordination of the Certificates", "Description of the Transfer
and Servicing Agreements -- Distributions".
VARIABILITY OF ACTUAL CASH FLOWS
Amounts received with respect to the Financed Student Loans for a
particular Collection Period may vary greatly in both timing and amount from the
payments actually due on the Financed Student Loans as of such Collection Period
for a variety of economic, social and other factors, including both individual
factors, such as additional periods of Deferral or Forbearance prior to or after
a borrower's commencement of repayment and the borrower's selection of a
repayment option (which may include interest only payments for certain periods),
and general factors, such as a general economic downturn which could increase
the amount of defaulted Student Loans. For a new borrower who receives a
Stafford Loan first disbursed on or after July 1, 1993, lenders are required to
offer borrowers a choice among standard, graduated and income-sensitive
repayment schedules. If a borrower fails to elect a particular repayment
schedule or fails to submit the documentation necessary for the option the
borrower chooses, the standard repayment schedule will be used. Additional
periods of Deferral or Forbearance may occur after a borrower has commenced
repayment under certain conditions when the student has returned to an eligible
educational institution on a full time (or, in certain cases, half time) basis,
or when the student is a member of the Armed Forces or a volunteer under the
Peace Corps Act or the Domestic Volunteer Service Act of 1973, or when the
borrower is temporarily or totally disabled, or periods during which the
borrower may defer principal payments because of temporary financial hardship.
For new borrowers to whom loans are first disbursed on or after July 1, 1993,
payment of principal may be deferred only while the Borrower is at least a
half-time student, or when the borrower is seeking but unable to find full-time
employment, or when for any reason the lender determines that payment of
principal will cause the borrower economic hardship. See "The Federal Family
Education Loan Program -- Stafford Loans." Failures by borrowers to pay timely
the principal and interest on the Financed Student Loans will affect the amount
of funds available for distribution on a Distribution Date, which may reduce the
amount of principal and interest paid to the Securityholders on such
Distribution Date. In addition, because the funds available for distribution on
any Distribution Date include Interest Subsidy Payments and Special Allowance
Payments on the Financed Student Loans that are received during that Collection
Period (and which accrued during the prior Collection Period) but the Student
Loan Rate is based on the amount of Interest Subsidy Payments and Special
Allowance Payments that have accrued during such Collection Period, a
significant increase in the amount of such payments being made by the Department
in respect of the Financed Student Loans from one Collection Period to the next
(as a result, for example, of a significant increase in prevailing interest
rates) could result in a temporary shortfall in the funds available for
distribution for the given Distribution Date. In addition, the failure of a
Guarantor to timely meet its guarantee obligations with respect to the Financed
Student Loans could also reduce the amount of funds available for distribution
on a given Distribution Date. The effect of such factors, including the effect
on the Trust's ability to pay principal and interest with respect to the
Securities, is impossible to predict.
BASIS RISK
Although the interest rate on the Notes and the Certificates is generally
based on the T-Bill Rate and the Student Loan Rate is generally also based on
the T-Bill Rate, it is nevertheless possible that a positive spread may not
exist between (a) the Student Loan Rate calculated with respect to one or both
classes of Notes or the Certificates and (b) the interest rate on each class of
Notes and the Certificates based on the T-Bill Rate. This may occur, among other
reasons, because interest rates generally adjust weekly on the Notes and
Certificates and adjust less frequently on the Student Loans. Accordingly, in a
sharply rising interest rate environment, the Student Loan Rate may not rise as
rapidly as the rise in the interest rate on the Notes and Certificates based on
the T-Bill Rate and such positive spread may be temporarily reduced or
eliminated. If the interest rate on either class of Notes or the Certificates
based on the T-Bill Rate exceeds the Student Loan Rate for any Interest Period,
then interest will accrue on such class of Notes or the Certificates, as
applicable, at the Student Loan Rate and the remainder of the amount so accrued
at the T-Bill Rate will be carried forward as Noteholder's Interest Index
Carryover or Certificateholders' Interest
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Index Carryover and will be paid on that Distribution Date or on any succeeding
Distribution Date to the extent funds are allocated and available therefor after
making all required prior distributions and deposits with respect to such date.
Payment of such amounts, however, will not be covered, in the case of the Notes,
by amounts on deposit in the Reserve Account (other than amounts in excess of
the Specified Reserve Account Balance) or by subordination of distributions in
respect of the Certificates (although distributions of any Certificateholders'
Interest Index Carryover will be subordinated to payment of any Noteholders'
Interest Index Carryover) and, in the case of the Certificates, by amounts on
deposit in the Reserve Account (other than amounts in excess of the Specified
Reserve Account Balance, subject to certain limitations). See "Description of
the Transfer and Servicing Agreements -- Distributions." To the extent not paid
in full on the Distribution Date when the related principal balance is paid in
full, the obligation to pay any such Noteholders' Interest Index Carryover and
Certificateholders' Interest Index Carryover will be extinguished.
BORROWER DEFAULT RISK ON CERTAIN FINANCED STUDENT LOANS
Under the Omnibus Budget Reconciliation Act of 1993, Student Loans first
disbursed on or after October 1, 1993, are 98% insured by Guarantors. As a
result, to the extent a borrower of such a Student Loan defaults, the Trust will
experience a loss of 2% of outstanding principal and accrued interest on each
such Student Loan. To the extent excess interest received on other Financed
Student Loans and the amount on deposit in the Reserve Fund are insufficient to
cover such loss, it may be borne initially by the Certificates to the extent of
the outstanding Certificate Balance, and then by the Notes to the extent of the
respective principal balances thereof. A defaulted loan will be fully assigned
to the applicable Guarantor in exchange for a guarantee payment on the 98%
guaranteed portion and the Trust may have no right thereafter to pursue the
borrower for the 2% unguaranteed portion. Student Loans continue to be 100%
guaranteed in the event of death, disability or bankruptcy of the borrower
regardless of disbursement date. As of the Cutoff Date, approximately 57.46% of
the Financed Student Loans by principal balance were made on or after October 1,
1993.
DEPENDENCE ON GUARANTORS AS SECURITY FOR FINANCED STUDENT LOANS
The Higher Education Act of 1965, as amended (such act, together with all
rules and regulations promulgated thereunder by the Department, the "Higher
Education Act") requires all Financed Student Loans to be unsecured. As a
result, the only security for payment of the Financed Student Loans are the
guaranties provided under the Guarantee Agreements between the Eligible Lender
Trustee and the Guarantors. A deterioration in the financial status of the
Guarantors and their ability to honor guarantee claims with respect to the
Financed Student Loans could result in a delay in making or a failure to make
Guarantee Payments to the Eligible Lender Trustee. Failures by borrowers of
Student Loans generally to pay timely the principal and interest due on such
Student Loans could obligate the Guarantors to make payments thereon, which
could adversely affect the solvency of the Guarantors and their ability to meet
their guarantee obligations (including with respect to the Financed Student
Loans). Moreover, to the extent reimbursement claims paid by the Department to a
Guarantor in respect of defaulting Student Loans for any fiscal year equal or
exceed 5% of the aggregate original principal amount of FFELP loans guaranteed
by such Guarantor that are in repayment on the last day of the prior fiscal
year, 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), in
the event such Guarantor's claims experience equals or exceeds 9%. See "The
Federal Family Education Loan Program -- Insurance and Reinsurance of
Guarantors".
Pursuant to the 1992 Amendments, under Section 432(o) of the Higher
Education Act, if the Department has determined that a Guarantor is unable to
meet its insurance obligations, the loan holder may submit claims directly to
the Department and the Department is required to pay the full Guarantee Payment
due with respect thereto in accordance with guarantee claim processing standards
no more stringent than those applied by such Guarantor. However, the
Department's obligation to pay guarantee claims directly in this fashion is
contingent upon the Department making the determination referred to
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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 were made,
whether such determination or the ultimate payment of such guarantee claims
would be made in a timely manner.
RISK OF LOSS OF GUARANTOR AND DEPARTMENT PAYMENTS FOR FAILURE TO COMPLY WITH
LOAN ORIGINATION AND SERVICING PROCEDURES FOR STUDENT LOANS
The Higher Education Act, including the implementing regulations
thereunder, requires lenders and their assignees making and servicing Student
Loans that are reinsured by the Department and guarantors guaranteeing Student
Loans to follow specified procedures, including due diligence procedures, to
ensure that the Student Loans are properly made and disbursed to, and repaid on
a timely basis by or on behalf of, borrowers. Certain of those procedures, which
are specifically set forth in the Higher Education Act, are summarized herein.
See "The Federal Family Education Loan Program" and "Description of the Transfer
and Servicing Agreements -- Servicing Procedures". The Master Servicer has
agreed pursuant to the Master Servicing Agreement to perform servicing and
collection procedures on behalf of the Trust in accordance with the Higher
Education Act and the rules and regulations promulgated thereunder. However,
failure to follow these procedures or failure of the Seller to follow procedures
relating to the origination of any Financed Student 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 Eligible Lender
Trustee with respect to such Financed Student Loans or in the Guarantors'
refusal or inability to honor their agreements with the Eligible Lender Trustee
to, inter alia, guarantee the payment of such Financed Student Loans (each such
agreement, a "Guarantee Agreement"). 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 Eligible Lender Trustee. Loss of any such
Guarantee Payments, Interest Subsidy Payments or Special Allowance Payments
could adversely affect the Trust's ability to pay principal and interest on the
Notes and the Certificates.
Pursuant to the Sale Agreement the Seller is obligated to repurchase, or
pursuant to the Master Servicing Agreement 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 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 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
the Sale Agreement, the Seller or, pursuant to the Master Servicing Agreement,
the Master Servicer, as the case may be, is obligated to reimburse the Trust
with respect to a Financed Student Loan for any accrued interest amounts not
guaranteed by a Guarantor due to, or any lost Interest Subsidy Payments and
Special Allowance Payments as a result of, a breach of the Seller's
representations and warranties or the Master Servicer's covenants, as the case
may be, with respect to such Financed Student Loan. See "Description of the
Transfer and Servicing Agreements -- Sale of Financed Student Loans;
Representations and Warranties" and "-- Master Servicer Covenants". There can be
no assurance, however, that the Seller or the Master Servicer will have the
financial resources to do so. The failure of the Seller to so repurchase or the
Master Servicer to so purchase a Financed Student Loan would constitute a breach
of the Sale Agreement or the Master Servicing Agreement, as applicable,
enforceable by the Eligible Lender Trustee on behalf of the Trust or by the
Indenture Trustee on behalf of the Noteholders, but would not constitute an
Event of Default under the Indenture or permit the exercise of remedies
thereunder.
CHANGES IN LEGISLATION MAY ADVERSELY AFFECT FINANCED STUDENT LOANS AND
GUARANTORS
There can be no assurance that the Higher Education Act or other relevant
federal or state laws, rules and regulations and the programs implemented
thereunder will not be amended or modified in the future in a manner that will
adversely impact the programs described in this Prospectus and the Student Loans
made thereunder, including the Financed Student Loans, or the Guarantors. In
addition, existing legislation
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and future measures to reduce the federal budget deficit or for other purposes
may adversely affect the amount and nature of federal financial assistance
available with respect to these programs. In recent years, federal 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, however, that future federal budget legislation or administrative
actions will not adversely affect expenditures by the Department 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,
as such changes reduce certain financial benefits previously enjoyed by
Guarantors and give the Department broad powers over Guarantors and their
reserves. See "The Federal Family Education Loan Program -- Legislative and
Administrative Matters" for a more detailed description of the impact of such
legislation on Guarantors. The 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 contemplates a
substantial increase in 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 FFELP.
Under the Federal Direct Student Loan Program, the Department directly
originates and holds student loans without the involvement of private lenders.
Such volume reductions could further reduce revenues received by the Guarantors
available to pay claims on defaulted Financed Student Loans. Finally, the level
of competition currently in existence in the secondary market for loans made
under the FFELP could be reduced, resulting in fewer potential buyers of the
Financed Student Loans and lower prices available in the secondary market for
those loans.
Proposed federal budget legislation being considered by Congress could
modify many of the provisions of the Higher Education Act and could result in
reductions in reserves of the Guarantors. Until final legislation is adopted,
the impact on the Financed Student Loans, if any, is impossible to determine.
During the 105th session of the United States Congress, the reauthorization of
the Higher Education Act is expected to be considered. The potential impacts on
the Financed Student Loans resulting from the reauthorization process, if any,
cannot be determined at this time.
INABILITY OF INDENTURE TRUSTEE TO LIQUIDATE FINANCED STUDENT LOANS
If an Event of Default occurs under the Indenture, subject to certain
conditions, the Indenture Trustee is authorized, without the consent of the
Certificateholders, to sell the Financed Student Loans. There can be no
assurance, however, that the Indenture Trustee will be able to find a purchaser
for the Financed Student Loans in a timely manner or that the market value of
such Financed Student Loans would, at any time, be equal to the aggregate
outstanding principal amount of the 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, the Noteholders will suffer a loss. In such
circumstances, the Certificateholders would not be entitled to receive any
portion of such proceeds. In addition, the amount of principal required to be
distributed to Noteholders under the Indenture is generally limited to amounts
available to be so distributed. Therefore, the failure to pay principal on the
Notes may not result in the occurrence of an Event of Default until the Class
A-1 Final Maturity Date, in the case of the Class A-1 Notes, or the Class A-2
Final Maturity Date, in the case of the Class A-2 Notes. See "Description of the
Transfer and Servicing Agreements -- Credit Enhancement".
FAILURE TO COMPLY WITH THIRD-PARTY SERVICER REGULATIONS MAY ADVERSELY AFFECT
LOAN SERVICING
On November 29, 1994, the Secretary of the Department of Education (the
"Secretary") published final regulations amending the FFELP regulations. These
regulations, among other things, establish requirements governing contracts
between holders of Student Loans and third-party servicers, establish standards
of administrative and financial responsibility for third-party servicers that
administer any aspect of a guarantee agency's or lender's participation in the
FFELP, and establish sanctions for third-party servicers.
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Under these regulations, a third-party servicer (such as the Master
Servicer) is jointly and severally liable with its client lenders for
liabilities to the Department arising from the servicer's violation of
applicable requirements. In addition, if the servicer fails to meet standards of
financial responsibility or administrative capability included in the new
regulations, or violates other FFELP requirements, the new regulations authorize
the Department to fine the servicer and/or limit, suspend, or terminate the
servicer's eligibility to contract to service FFELP loans. The effect of such a
limitation or termination on the servicer's eligibility to service loans already
on its system, or to accept new loans for servicing under existing contracts, is
unclear. There can be no assurance that the Master Servicer will not be fined or
held liable by the Department for liabilities arising out of its FFELP
activities for the Trust or other client lenders, or that its eligibility will
not be limited, suspended, or terminated in the future. If the Master Servicer
were so fined or held liable, or its eligibility were limited, suspended, or
terminated, its ability to properly service the Financed Student Loans and to
satisfy its obligation to purchase loans with respect to which it breaches its
representations, warranties or covenants under the Master Servicing Agreement
could be adversely affected. However, in the event of a termination of
eligibility, the Master Servicing Agreement provides for the removal of the
Master Servicer and the appointment of a successor Master Servicer.
INSOLVENCY RISK OF SELLER
The Seller intends that the transfer of the Financed Student Loans by it to
the Eligible Lender Trustee on behalf of the Trust under the Sale Agreement
constitutes a valid sale and assignment of such Financed Student Loans. However,
although unlikely, a court could treat the transfer of the Financed Student
Loans to the Eligible Lender Trustee as an assignment of collateral as security
for the benefit of the Noteholders and the Certificateholders. If the transfer
of the Financed Student Loans to the Eligible Lender Trustee is deemed to create
a security interest therein, a tax or government lien on property of the Seller
arising before the Financed Student Loans came into existence may have priority
over the Eligible Lender Trustee's interest in such Financed Student Loans and,
if the Federal Deposit Insurance Corporation (the "FDIC") were appointed
receiver or conservator of the Seller, the FDIC's administrative expenses may
also have priority over the Eligible Lender Trustee's interest in such Financed
Student Loans. In the event that the Seller becomes insolvent or is in an
unsound condition or if certain other circumstances occur, the Federal Deposit
Insurance Act ("FDIA"), as amended by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA"), sets forth certain powers which
the FDIC could exercise if it were appointed as receiver or conservator of the
Seller. Subject to clarification by FDIC regulations or interpretations, it
would appear from the positions taken by the FDIC that the FDIC, in its capacity
as a receiver or conservator for the Seller, would not interfere with the timely
transfer to the Trust of collections with respect to the Financed Student Loans.
To the extent that the transfer of the Financed Student Loans is deemed to
create a security interest, and that interest was validly perfected before the
Seller's insolvency and was not taken in contemplation of insolvency or with the
intent to hinder, delay or defraud the Seller or its creditors, based upon
opinions and statements of policy issued by the general counsel of the FDIC
addressing the enforceability against the FDIC, as conservator or receiver for a
depository institution, of a security interest in collateral granted by such
depository institution, such security interest should not be subject to
avoidance and payments to the Trust with respect to the Financed Student Loans
should not be subject to stay or to recovery by the FDIC as receiver or
conservator of the Seller. If, however, the FDIC were to assert a contrary
position, certain provisions of the FDIA may be asserted by the FDIC, and
thereby possibly result in delays and reductions in payments on the Notes and
the Certificates. In addition, if the FDIC were to require the Indenture Trustee
or the Eligible Lender Trustee to establish its right to such payments by
submitting to and completing the administrative claims procedure under the FDIA,
as amended by FIRREA, delays in payments on the Notes and the Certificates and
possible reductions in the amount of those payments could occur. See "Certain
Legal Aspects of the Financed Student Loans".
CUSTODIAL RISK OF MASTER SERVICER
Pursuant to the Master Servicing Agreement, the Master Servicer as
custodian on behalf of the Trust will have the responsibility to maintain
custody of the promissory notes evidencing the Financed Student Loans following
the sale of the Financed Student Loans to the Eligible Lender Trustee. Although
the
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accounts of the Seller will be marked to indicate the sale and although the
Seller will cause UCC financing statements to be filed with the appropriate
authorities, the Financed Student Loans will not be physically segregated,
stamped or otherwise marked to indicate that such Financed Student Loans have
been sold to the Eligible Lender Trustee. If, through inadvertence or otherwise,
any of the Financed Student Loans were sold to another party, or a security
interest therein were granted to another party, that purchased (or took such
security interest in) any of such Financed Student Loans in the ordinary course
of its business and took possession of such Financed Student Loans, then the
purchaser (or secured party) would acquire an interest in the Financed Student
Loans superior to the interest of the Eligible Lender Trustee if the purchaser
(or secured party) acquired such Financial Student Loans without knowledge of
the Eligible Lender Trustee's interest. See "Description of the Transfer and
Servicing Agreements -- Sale of Financed Student Loans; Representations and
Warranties" and "-- Master Servicer Covenants".
INSOLVENCY RISK OF MASTER SERVICER OR ADMINISTRATOR
In the event of a Master Servicer Default or an Administrator Default
resulting solely from certain events of insolvency or bankruptcy that may occur
with respect to the Master Servicer or the Administrator, a court, conservator,
receiver or liquidator may have the power to prevent either the Indenture
Trustee or the Noteholders from appointing a successor Master Servicer or
Administrator, as the case may be, and delays in (a) collections in respect of
the Financed Student Loans and (b) recovery of payments held by the
Administrator prior to their deposit into the Collection Account may occur. See
"Description of the Transfer and Servicing Agreements -- Rights Upon Master
Servicer Default and Administrator Default" and "-- Payments on Financed Student
Loans".
COMMINGLING RISK OF CONSOLIDATION OF FEDERAL BENEFIT BILLINGS AND RECEIPTS WITH
OTHER TRUSTS
Due to a Department policy limiting the granting of new lender
identification numbers, the Eligible Lender Trustee will be allowed under the
Trust Agreement to permit trusts, other than the Trust, established by the
Seller in the future to securitize other Student Loans, to use the Department
lender identification number applicable to the Trust. No such trusts currently
exist, but such trusts could be formed in the future. 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 Student Loans in such 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 by
the Eligible Lender Trustee among the various trusts using the same lender
identification number.
In addition, the sharing of the lender identification number by the Trust
with other trusts may result in the receipt of claim payments by 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 the Eligible Lender Trustee as the party primarily
responsible to the Department for any liabilities owed to the Department or
guarantors resulting from the Eligible Lender Trustee's activities in the FFELP.
As a result, if the Department or a guarantor were to determine that the
Eligible Lender Trustee owes a liability to the Department or a guarantor on any
Student Loan for which the Eligible Lender Trustee is or was legal titleholder,
including loans held in the Trust or other trusts, the Department or 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 the Eligible Lender Trustee
under the shared lender identification number, including amounts owed in
connection with the Trust. Such offsetting of payments due with respect to the
Trust could adversely affect the Trust's ability to pay principal and interest
on the Notes and the Certificates.
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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
the Eligible Lender Trustee under such 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 the Trust and the trust agreement for other trusts
established by the Seller which share the lender identification number to be
used by the Trust (the Trust and such other trusts, collectively, the "Seller
Trusts") may require a Seller Trust (including the Trust) to indemnify the other
Seller Trusts for a shortfall or an offset by the Department or a guarantor
arising from the Student Loans held by the Eligible Lender Trustee on such
Seller Trust's behalf.
PREPAYMENT, MATURITY AND YIELD RISKS
All the Financed Student Loans are prepayable at any time without premium
or penalty. For this purpose the term "prepayments" includes prepayments in full
or in part (including in the event a Financed Student Loan is consolidated with
other Student Loans as a Consolidation Loan) 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 (a) factors which may increase
voluntary prepayment such as the occurrence of consolidations or the
availability of attractive alternative financing programs as a result of the
availability of low fixed rates or the improvement in the individual credit
rating of a borrower and (b) factors which may affect the rate of defaults, such
as a general economic downturn affecting a large segment of the population. In
addition, under certain circumstances, the Seller will be obligated to
repurchase or the Master Servicer will be obligated to purchase Financed Student
Loans from the Trust pursuant to the Sale Agreement or the Master Servicing
Agreement, respectively, as a result of breaches of their respective
representations, warranties or covenants. See "Description of the Transfer and
Servicing Agreements -- Sale of Financed Student Loans; Representations and
Warranties" and "-- Master Servicer Covenants". Moreover, to the extent
borrowers of Financed Student Loans elect to borrow Federal Direct Consolidation
Loans (a prong of the Federal Direct Loan Program) or Consolidation Loans with
respect to such Financed Student Loans, Noteholders (and after the Notes have
been paid in full, Certificateholders) will collectively receive as a prepayment
of principal the aggregate principal amount of such Financed Student Loans.
There can be no assurance that borrowers with Financed Student Loans will not
seek to obtain Federal Direct Consolidation Loans or Consolidation Loans with
respect to such Financed Student Loans. See "The Federal Family Education Loan
Program -- The Consolidation Loan Program" and "The Financed Student Loan
Pool -- Maturity and Prepayment Assumptions".
The Federal Direct Consolidation Loan program provides borrowers with the
opportunity to consolidate outstanding student loans at interest rates below,
and income-contingent repayment terms that some borrowers may find preferable
to, those that would be available from the Seller on a loan originated by the
Seller under the Consolidation Loan program. The availability of such
lower-rate, income-contingent loans may increase the likelihood that a Financed
Student Loan in the Trust will be prepaid through the issuance of a Federal
Direct Consolidation Loan. The volume of existing loans that may be prepaid in
this fashion is not determinable at this time.
On the other hand, scheduled payments with respect to, and maturities of,
the Financed Student Loans may be extended, including pursuant to Grace Periods,
Deferral Periods and, under certain circumstances, Forbearance Periods (each as
defined under "The Federal Family Education Loan Program -- The Stafford
Loans"). In addition, the stated maturity of certain of the Financed Student
Loans may occur beyond the Final Maturity Date. See "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.
Any Financed Student Loans remaining in the Trust on or after the Auction
Distribution Date will be offered for sale by the Indenture Trustee. If
acceptable bids to purchase such Financed Student Loans on
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the Auction Distribution Date are received, as described herein, the proceeds of
the sale will be applied on the Auction Distribution Date to redeem any
outstanding Notes and to retire any outstanding Certificates on such date. In
addition, if acceptable bids to purchase such Financed Student Loans on the
Auction Distribution Date are not received, the sale of such Financed Student
Loans may occur on a subsequent Distribution Date, as described herein, and
applied on such date to redeem any outstanding Notes and retire any outstanding
Certificates. No assurance can be given as to whether the Indenture Trustee will
be successful in soliciting acceptable bids to purchase the Financed Student
Loans on the Auction Distribution Date or any subsequent Distribution Date. See
"Description of the Transfer and Servicing Agreement -- Termination". See also
"Description of the Transfer and Servicing Agreements" -- "Insolvency Event"
regarding the sale of the Financed Student Loans if an Insolvency Event occurs
and "-- Termination" regarding the Seller's option to purchase the Financed
Student Loans when the Pool Balance is less than or equal to 5% of the Initial
Pool Balance.
Any reinvestment risks resulting from a faster or slower incidence of
prepayment of Financed Student Loans will be borne entirely by the
Securityholders. Such reinvestment risks may include the risk that interest
rates and the relevant spreads above particular interest rate bases are lower at
the time Securityholders receive payments from the Trust than such interest
rates and such spread would otherwise have been had such prepayments not been
made or had such prepayments been made at a different time. The yield on the
Notes and Certificates may also be reduced by the discharge of any Noteholders'
Interest Index Carryover and Certificateholders' Interest Index Carryover
remaining after distribution of all Available Funds and amounts available in the
Reserve Account on the respective final maturity dates of the Notes and
Certificates.
Holders of Securities should consider, in the case of Securities purchased
at a discount, the risk that a slower than anticipated rate of principal
payments on the Financed Student Loans could result in an actual yield that is
less than the anticipated yield and, in the case of Securities purchased at a
premium, the risk that a faster than anticipated rate of principal payments on
the Financed Student Loans could result in an actual yield that is less than the
anticipated yield.
PREPAYMENT RISKS DIFFER BETWEEN THE NOTES AND THE CERTIFICATES
Because the Class A-2 Noteholders will receive no payments of principal
until the Class A-1 Notes have been paid in full, and the Certificateholders
will receive no payments of principal until the Class A-2 Notes have been paid
in full, the Class A-1 Notes and, to a lesser extent, the Class A-2 Notes bear
relatively greater risk than do the Certificates of an increased rate of
principal prepayments with respect to the Financed Student Loans (whether as a
result of voluntary prepayments, Consolidation Loans or liquidations due to
default or breach). On the other hand, Certificateholders and, to a lesser
extent, the Class A-2 Noteholders bear a greater risk of loss of principal than
do Class A-1 Noteholders 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 from Available Funds until the Class A-2 Notes
are paid in full and the Class A-2 Notes do not receive principal distributions
until the Class A-1 Notes are paid in full.
NOTEHOLDERS' RIGHT TO CONTROL UPON CERTAIN DEFAULTS
In the event a Master Servicer Default or an Administrator Default occurs,
the Indenture Trustee or the Noteholders, as described under "Description of the
Transfer and Servicing Agreements -- Rights upon Master Servicer Default and
Administrator Default", 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 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
Master 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".
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LIMITATIONS ON CREDIT RATINGS OF THE SECURITIES
It is a condition to the issuance and sale of each class of the Notes and
of the Certificates that the Notes be rated in the highest investment rating
category and that the Certificates be rated in one of the three highest
investment rating categories by at least two nationally recognized Rating
Agencies. A rating is not a recommendation to purchase, hold or sell Securities,
inasmuch as such rating does not comment as to market price or suitability for a
particular investor. The ratings of the Securities address the likelihood of the
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 the Noteholders'
Interest Index Carryover or the Certificateholders' Interest Index Carryover.
There can be no assurance that a rating will remain for any given period of time
or that a rating will not be lowered or withdrawn entirely by a Rating Agency if
in its judgment circumstances in the future so warrant.
BOOK-ENTRY REGISTRATION -- BENEFICIAL OWNERS NOT RECOGNIZED BY TRUST
The Class A-1 Notes, the Class A-2 Notes and the Certificates will each be
initially represented by one or more certificates registered in the name of
Cede, the nominee for DTC, and will not be registered in the names of the
holders of such Securities or their nominees. Because of this, unless and until
Definitive Securities are issued, holders of such Securities will not be
recognized by the Indenture Trustee or the Eligible Lender Trustee as
"Noteholders" or "Certificateholders", as the case may be (as such terms are
used in the Indenture and the Trust Agreement, respectively). Hence, until
Definitive Securities are issued, holders of such Securities will only be able
to exercise the rights of Securityholders indirectly through DTC, Cedel or
Euroclear and their respective participating organizations. See "Description of
the Securities -- Book-Entry Registration" and "-- Definitive Securities".
GEOGRAPHIC CONCENTRATION
Approximately 39.30% and 30.41% by principal balance of the Financed
Student Loans have borrowers with permanent billing addresses located in
Pennsylvania and New Jersey, respectively. Consequently, a material
deterioration in general economic conditions in those states could result in an
increased level of delinquencies and/or defaults from such borrowers requiring
increased default claims to be paid by the Guarantors. In such circumstances,
Securityholders could experience delays in receiving payments or, if default
claims increase significantly, could receive accelerated payments.
FORMATION OF THE TRUST
THE TRUST
First Union Student Loan Trust 1997-1 is a business trust to be formed
under the laws of the State of Delaware pursuant to the Trust Agreement for the
transactions described in this Prospectus. The Trust will not engage in any
activity other than (i) acquiring, holding and managing the Financed Student
Loans and the other assets of the Trust and proceeds therefrom, (ii) issuing the
Certificates and the Notes, (iii) making payments thereon and (iv) engaging in
other activities that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto or connected therewith.
The Trust will be initially capitalized with equity of $14,195,880
excluding amounts deposited in the Reserve Account by the Trust on the Closing
Date, representing the initial principal balance of the Certificates. The
Certificates will be sold to third-party investors that are expected to be
unaffiliated with the Seller, the Master Servicer, the Guarantors, the Trust or
the Department. The equity of the Trust, together with the proceeds from the
sale of the Notes and the Certificates, will be used by the Eligible Lender
Trustee to purchase on behalf of the Trust the Financed Student Loans from the
Seller pursuant to the Sale Agreement. The Trust will use a portion of the net
proceeds it receives from the sale of the Financed Student Loans to make the
Reserve Account Initial Deposit. Upon the consummation of such transactions, the
property of the Trust will consist of (a) a pool of Student Loans, legal title
to which is held by the Eligible Lender Trustee on behalf of the Trust, (b) all
funds collected in respect thereof on or after
27
<PAGE> 28
the Cutoff Date, and (c) all moneys and investments on deposit in the Collection
Account and the Reserve Account. The Notes will be secured by the property of
the Trust. The Collection Account and the Reserve Account will be maintained in
the name of the Indenture Trustee for the benefit of the Noteholders and the
Certificateholders. To facilitate servicing and to minimize administrative
burden and expense, the Master Servicer will delegate to the respective
Subservicers the responsibility to maintain custody of the promissory notes
representing the Financed Student Loans by the Eligible Lender Trustee.
The Trust's principal offices are in Chicago, Illinois, in care of The
First National Bank of Chicago, as Eligible Lender Trustee, at the address
listed below.
CAPITALIZATION OF THE TRUST
The following table illustrates the capitalization of the Trust as of the
Cutoff Date, as if the issuance and sale of the Securities offered hereby had
taken place on such date:
<TABLE>
<S> <C>
Floating Rate Class A-1 Asset Backed Notes................ $263,637,773
------------
Floating Rate Class A-2 Asset Backed Notes................ $127,762,921
------------
Floating Rate Asset Backed Certificates................... $ 14,195,880
------------
Total........................................... $405,596,574
============
</TABLE>
ELIGIBLE LENDER TRUSTEE
General. The First National Bank of Chicago is the Eligible Lender Trustee
for the Trust under the Trust Agreement. The First National Bank of Chicago is a
national banking association whose principal offices are located at One First
National Plaza, Suite 0126, Chicago, Illinois 60670 and whose New York offices
are located in care of First Chicago Trust Company of New York, 14 Wall Street,
New York, New York 10005. The offices of the Delaware trustee of the Trust are
located at First Chicago Delaware Inc., 300 King Street, Wilmington, Delaware
19801. The Eligible Lender Trustee will acquire on behalf of the Trust legal
title to all the Financed Student Loans acquired pursuant to the Sale Agreement.
The Eligible Lender Trustee on behalf of the Trust will enter into a Guarantee
Agreement with each of the Guarantors with respect to such Financed Student
Loans. The Eligible Lender Trustee qualifies as an eligible lender and owner of
all Student Loans for all purposes under the Higher Education Act and the
Guarantee Agreements. Failure of the Financed Student Loans to be owned by an
eligible lender would result in the loss of any Guarantee Payments from any
Guarantor and any Federal Assistance with respect to such Financed Student
Loans. See "The Financed Student Loan Pool -- Insurance of Student Loans;
Guarantors of Student Loans". The Eligible Lender Trustee's liability in
connection with the issuance and sale of the Notes and the Certificates is
limited solely to the express obligations of the Eligible Lender Trustee set
forth in the Trust Agreement and the Sale Agreement. See "Description of the
Securities" and "Description of the Transfer and Servicing Agreements". The
Seller and its affiliates may maintain normal commercial banking relations with
the Eligible Lender Trustee.
Fees. In consideration for its performance of its obligations under the
Trust Agreement, the Eligible Lender Trustee will be entitled to receive
compensation for its services in accordance with a separate agreement between
the Seller and the Eligible Lender Trustee.
28
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SOURCES OF CAPITAL AND LIQUIDITY
The Trust's only material sources of capital will be the net proceeds of
the Securities offered hereby. See "Formation of the Trust -- Capitalization of
the Trust".
The Trust's sole sources of liquidity will be collections with respect to
the Financed Student Loans and amounts on deposit in the Reserve Account. The
Trust does not have any external sources for liquidity.
RESULTS OF OPERATIONS
The Trust was recently formed and, accordingly, has no meaningful results
of operations as of the date of this Prospectus. Because the Trust does not have
any operating history, there has not been included in this Prospectus any
historical or pro forma ratio of earnings to fixed charges. The earnings on the
Financed Student Loans and other assets owned by the Trust and the interest
costs of the Notes will determine the Trust's results of operations in the
future. The income generated from the Trust's assets will be used to pay
operating costs and expenses of the Trust (to the extent not paid by the
Seller), interest and principal on the Notes and distributions to the holders of
the Certificates. The principal operating expenses of the Trust are expected to
be, but are not limited to, the Servicing Fee and the Administration Fee (such
fees collectively, the "Trust Fees").
USE OF PROCEEDS
The net proceeds from the sale of the Certificates and the Notes will be
used (a) to make the Reserve Account Initial Deposit in the amount of $1,754,985
and (b) for payment to the Seller as part of the consideration to purchase the
Financed Student Loans on the Closing Date.
THE SELLER, THE MASTER SERVICER AND THE ADMINISTRATOR
THE SELLER
First Union National Bank ("First Union -- Pennsylvania") is the Seller
under the Sale Agreement. First Union -- Pennsylvania is a national banking
association having its main office in Avondale, Pennsylvania, and is an indirect
banking subsidiary of First Union Corporation, a North Carolina corporation and
a multi-bank holding company registered under the Bank Holding Company Act of
1956, as amended.
THE MASTER SERVICER AND THE ADMINISTRATOR
General. First Union National Bank ("First Union -- North Carolina") will
act as the Master Servicer under the Master Servicing Agreement and it will act
as the Administrator under the Administration Agreement and the Master Servicing
Agreement. First Union -- North Carolina is a separate national banking
association having its main office in Charlotte, North Carolina, is an affiliate
of the Seller and is a banking subsidiary of First Union Corporation. Pursuant
to a proposed reorganization of the banking subsidiaries of First Union
Corporation, it is expected that by February 1998 First Union -- North Carolina
will merge into First Union -- Pennsylvania, First Union -- Pennsylvania will
relocate its main office to Charlotte, North Carolina, and First
Union -- Pennsylvania will succeed to all of First Union -- North Carolina's
obligations as Master Servicer and Administrator under the Trust.
Services and Fees of the Master Servicer. Pursuant to the Master Servicing
Agreement and except as otherwise expressly assumed by the Administrator, the
Master Servicer has agreed as the Master Servicer to service, and perform all
other related tasks with respect to, all the Financed Student Loans acquired by
the Eligible Lender Trustee on behalf of the Trust. The Master Servicer is
required to perform all services and duties customary to the servicing of
Student Loans and to do so in the same manner as the Master Servicer
29
<PAGE> 30
has serviced Student Loans on behalf of the Seller and otherwise in compliance
with all applicable standards and procedures. In addition, the Master Servicer
is required to maintain its eligibility as a third-party servicer under the
Higher Education Act. See "Description of the Transfer and Servicing
Agreements -- Servicing Procedures".
The Master Servicer may perform its servicing obligations under the Master
Servicing Agreement through one or more subservicing agreements with other
student loan servicers (each, a "Subservicer" and a "Subservicing Agreement").
Such Subservicing Agreements may be terminated by the Master Servicer with
notice, and the Subservicing Agreements may not have a term which extends to the
maturity date of the Securities. In the event any such Subservicing Agreement is
terminated or is not renewed or extended, the Trust may experience delays in
collections on the Student Loans until the servicing obligations of such
Subservicer are transferred and assumed by another Subservicer. See "-- The
Subservicers" below.
In consideration for performing its obligations under the Master Servicing
Agreement, the Master Servicer will receive a monthly fee payable by the Trust
on each Monthly Servicing Payment Date equal to one-twelfth of the product of
(i) 1.25% per annum and (ii) the Pool Balance as of the last day of the
preceding calendar month, subject to certain adjustments, together with other
administrative fees and similar charges. See "Description of Transfer and
Servicing Agreements -- Servicing Compensation".
The Subservicers. The Master Servicer may from time to time enter into
Subservicing Agreements with Subservicers. The Master Servicer has currently
entered into Subservicing Agreements with AFSA Data Corporation, PHEAA and
Connecticut Assistance For Loan Servicing, a division of Connecticut Student
Loan Foundation, to serve as Subservicers under the Master Servicing Agreement.
As the scheduled termination date of any Subservicing Agreement may be prior to
the maturity date of the Securities, successor subservicers not identified
herein may be engaged to subservice a portion of the related Financed Student
Loans; provided, however, that no successor subservicer shall be engaged unless
the Master Servicer shall have received prior written notice from each of the
Rating Agencies that the engagement of such successor subservicer shall not
cause such Rating Agency to lower its then-current rating on any of the
Securities. Any successor subservicer shall be deemed to be a Subservicer under
the Master Servicing Agreement. Notwithstanding the provisions of any
Subservicing Agreement, the Master Servicing Agreement will provide that the
Master Servicer will remain liable for its servicing duties and the obligations
under the Master Servicing Agreement as if the Master Servicer were servicing
the Financed Student Loans.
Services and Fees of Administrator. Pursuant to the Administration
Agreement, the Administrator will be responsible for providing notices and
reports and performing other administrative obligations required by the
Indenture, the Trust Agreement and the Master Servicing Agreement. As
compensation for the performance of the Administrator's obligations and as
reimbursement for its expenses related thereto, the Administrator will be
entitled to an administration fee in an amount equal to one-fourth of the
product of (i) 0.04% per annum and (ii) the Pool Balance as of the last day of
the immediately preceding Collection Period (the "Administration Fee") payable
by the Trust on each Distribution Date. See "Description of the Transfer and
Servicing Agreements -- Administrator."
THE FINANCED STUDENT LOAN POOL
GENERAL
The Student Loans to be sold by the Seller to the Eligible Lender Trustee
on behalf of the Trust pursuant to the Sale Agreement will be selected from the
portfolio of Student Loans originated under the Federal Family Education Loan
Program (see "The Federal Family Education Loan Program") by several criteria,
namely that as of the Cutoff Date, each Student Loan (i) is guaranteed as to
principal and interest by a Guarantor and is in turn reinsured by the Department
in accordance with the terms of the Federal Family Education Loan Program, (ii)
was originated in the United States of America, its territories or its
possessions under and in accordance with the Federal Family Education Loan
Program, (iii) contains terms in accordance with those required by the Federal
Family Education Loan Program, the applicable Guarantee Agreements and other
applicable requirements, (iv) provides for regular payments that fully
30
<PAGE> 31
amortize the amount financed over its original term to maturity (exclusive of
any Grace, Deferral or Forbearance Periods), (v) is not more than 120 days
delinquent as of the Cutoff Date and (vi) satisfies the other criteria set forth
herein. In addition, as of the Cutoff Date no Financed Student Loan had a
borrower who was noted in the related records of the Seller as being currently
involved in a bankruptcy proceeding or deceased. Although there can be no
assurance that a borrower of a Financed Student Loan has not become involved in
a bankruptcy proceeding or deceased, each such loan is guaranteed as to
principal and interest by a Guarantor in the event of any such bankruptcy or
death of a borrower. No Financed Student Loan as of the Cutoff Date was subject
to the Seller's prior obligation to sell such loan to a third party. No
selection procedures believed by the Seller to be adverse to the Securityholders
were used in selecting the Financed Student Loans.
Legal title to the Student Loans that comprise the assets of the Trust will
be held by the Eligible Lender Trustee, on behalf of the Trust. The Eligible
Lender Trustee will also enter into, on behalf of the Trust, Guarantee
Agreements with the Guarantors pursuant to which each of such Student Loans will
be guaranteed by one of such Guarantors.
ORIGINATION AND MARKETING PROCESS
The Higher Education Act specifies rules regarding loan origination
practices, which lenders must comply with in order for the Student Loans to be
guaranteed and to be eligible to receive Federal Assistance. Lenders of Student
Loans are prohibited from offering points, premiums, payments or other
inducements, directly or indirectly, to any educational institution, guarantor
or individual in order to secure Student 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.
Generally the student and school complete the combined application with
promissory note and mail or electronically transmit it either to a lender or
directly to the applicable Guarantor. Both the lender and such Guarantor must
approve such application, including confirming that such application is complete
and that it (and the prospective borrower and institution) complies with all
applicable requirements of the Higher Education Act and the requirements of such
Guarantor. The Higher Education Act requires that each Guarantor have procedures
designed to assure that it guarantees Student Loans only to students attending
institutions which meet the requirements of the Higher Education Act. Certain
lenders establish maximum default rates for institutions whose students they
will serve. Each lender will only make loans that are approved by the applicable
Guarantor (consistent with the approval requirements of the Higher Education Act
and the Guarantor). For each such application that is approved, the applicable
Guarantor will issue a guarantee certificate to the lender, which will then
cause the loan to be disbursed (typically in multiple installments) and a
disclosure statement confirming the terms of the Student Loan to be sent to the
student (or parent) borrower. These procedures differ slightly for Consolidation
Loans, which are originated as described under "The Federal Family Education
Loan Program -- The Consolidation Loan Program".
SERVICING AND COLLECTIONS PROCESS
The Higher Education Act and the Guarantee Agreements require the holder of
Student Loans to cause specified procedures, including due diligence procedures
and the taking of specific steps at specific intervals, to be performed with
respect to the servicing of the Student Loans that are designed to ensure that
such Student Loans are repaid on a timely basis by or on behalf of borrowers.
The Master Servicer performs such procedures on behalf of the Seller and has
agreed, pursuant to the Master Servicing Agreement, to perform, through its
Subservicing Agreements, specified and detailed servicing and collection
procedures with respect to the Financed Student Loans on behalf of the Trust.
Such procedures generally include periodic attempts to contact any delinquent
borrower by telephone and by mail, commencing 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 respective Subservicer's loan file for
the borrower. Each Subservicer is also required to perform skip tracing
procedures on delinquent borrowers whose current location is unknown, including
contacting such borrowers' schools
31
<PAGE> 32
and references. Failure to comply with the established procedures could
adversely affect the ability of the Eligible Lender Trustee, as holder of legal
title to the Financed Student Loans on behalf of the Trust, to realize the
benefits of any Guarantee Agreement or to receive the benefits of Federal
Assistance from the Department with respect thereto. Failure to comply with
certain of the established procedures with respect to a Financed Student Loan
may also result in the denial of coverage under a Guarantee Agreement for
certain accrued interest amounts, in circumstances where such failure has not
caused the loss of the guarantee of the principal of such Financed Student Loan.
See "Risk Factors -- Risk of Loss of Guarantor and Department Payments for
Failure to Comply with Loan Origination and Servicing Procedures for Student
Loans".
At prescribed times prior to submitting a claim for payment under a
Guarantee Agreement for a delinquent Financed Student 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 may file a default claim with the respective Guarantor. Failure
to file a claim within 240 days of delinquency may result in denial of the
guarantee claim with respect to such loan and failure to file such a claim
within shorter periods may result in a denial of certain interest amounts
included in such claims. The Master Servicer's failing 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 Financed Student
Loan. See "Description of the Transfer and Servicing Agreements -- Master
Servicer Covenants".
THE FINANCED STUDENT LOANS
Set forth below in the following tables is a description of certain
additional characteristics of the Financed Student Loans as of the Cutoff Date.
COMPOSITION OF THE FINANCED STUDENT LOANS AS OF THE CUTOFF DATE
<TABLE>
<S> <C>
Aggregate Outstanding Principal Balance(1).................. $389,996,706
Number of Borrowers......................................... 53,592
Average Outstanding Principal Balance Per Borrower.......... $7,277
Number of Loans............................................. 241,185
Average Outstanding Principal Balance Per Loan.............. $1,617
Weighted Average Remaining Term to Maturity(2).............. 107.93 Months
Weighted Average Annual Interest Rate(3)(4)................. 8.25%
</TABLE>
- ---------------
(1) Includes in each case net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment, estimated
to be $3,355,624 with respect to the Financed Student Loans as of the Cutoff
Date.
(2) Determined from the Cutoff Date to the stated maturity date of the
applicable Financed Student Loan, assuming repayment commences promptly upon
expiration of the typical grace period following the expected graduation
date and without giving effect to any Deferral or forbearance periods that
may be granted in the future. See "The Federal Family Education Loan
Program".
(3) Determined using the interest rates applicable to the Financed Student Loans
as of the Cutoff Date. However, because all the Financed Student Loans
effectively bear interest at a variable rate per annum, there can be no
assurance that the foregoing percentage will remain applicable to the
Financed Student Loans at any time after the Cutoff Date. See "The Federal
Family Education Loan Program".
(4) Exclusive of Special Allowance Payments. The weighted average spread,
including Special Allowance Payments, to the 91-day Treasury Bills or 52
Week T-Bill Rate, as applicable, was 3.10% as of the Cutoff Date.
32
<PAGE> 33
DISTRIBUTION OF THE FINANCED STUDENT LOANS BY LOAN TYPE AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
AGGREGATE
OUTSTANDING PERCENT OF POOL
NUMBER PRINCIPAL BY OUTSTANDING
LOAN TYPE OF LOANS BALANCE(1) PRINCIPAL BALANCE
- --------- -------- ------------ -----------------
<S> <C> <C> <C>
Stafford Loans, Subsidized........................... 189,507 $249,761,107 64.04%
Stafford Loans, Unsubsidized......................... 30,731 52,206,506 13.39
SLS Loans............................................ 7,297 16,765,303 4.30
PLUS Loans........................................... 10,126 25,822,696 6.62
Federal Consolidation Loans.......................... 3,524 45,441,094 11.65
------- ------------ --------
Total...................................... 241,185 $389,996,706 100.00%
</TABLE>
- ---------------
(1) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$3,355,624 as of the Cutoff Date.
DISTRIBUTION OF THE FINANCED STUDENT LOANS BY INTEREST RATES AS OF THE CUTOFF
DATE
<TABLE>
<CAPTION>
AGGREGATE
OUTSTANDING PERCENT OF POOL
NUMBER PRINCIPAL BY OUTSTANDING
RANGE OF INTEREST RATES(1) OF LOANS BALANCE(2) PRINCIPAL BALANCE
- -------------------------- -------- ------------ -----------------
<S> <C> <C> <C>
Less than 7.500%..................................... 6,550 $ 9,127,770 2.34%
7.500% to 7.999%..................................... 17,068 33,159,996 8.50
8.000% to 8.499%..................................... 184,524 261,675,352 67.10
8.500% to 8.999%..................................... 11,575 31,388,347 8.05
9.000% and above..................................... 21,468 54,645,242 14.01
------- ------------ --------
Total...................................... 241,185 $389,996,706 100.00%
</TABLE>
- ---------------
(1) Determined using the interest rates applicable to the Financed Student Loans
as of the Cutoff Date. However, because all the Financed Student Loans
effectively bear interest at a variable rate per annum, there can be no
assurance that the foregoing information will remain applicable to the
Financed Student Loans at any time after the Cutoff Date. See "The Federal
Family Education Loan Program".
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$3,355,624 as of the Cutoff Date.
33
<PAGE> 34
DISTRIBUTION OF THE FINANCED STUDENT LOANS BY OUTSTANDING PRINCIPAL BALANCE
AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
AGGREGATE
OUTSTANDING PERCENT OF POOL
NUMBER PRINCIPAL BY OUTSTANDING
RANGE OF OUTSTANDING PRINCIPAL BALANCES(1) OF BORROWERS BALANCE(2) PRINCIPAL BALANCE(3)
- ------------------------------------------ ------------ ------------ --------------------
<S> <C> <C> <C>
Less than $1,000................................. 96,719 $ 50,612,728 12.98%
$1,000 to $1,999................................. 87,346 122,673,322 31.45
$2,000 to $2,999................................. 34,194 85,172,650 21.84
$3,000 to $3,999................................. 10,489 36,977,589 9.48
$4,000 to $4,999................................. 5,569 24,384,043 6.25
$5,000 to $5,999................................. 2,548 14,128,189 3.62
$6,000 to $6,999................................. 970 6,288,562 1.61
$7,000 to $7,999................................. 630 4,744,396 1.22
$8,000 to $8,999................................. 372 3,162,869 0.81
$9,000 to $9,999................................. 269 2,576,517 0.66
$10,000 to $10,999............................... 270 2,857,463 0.73
$11,000 to $11,999............................... 237 2,738,767 0.70
$12,000 to $12,999............................... 210 2,651,222 0.68
$13,000 to $13,999............................... 150 2,028,166 0.52
$14,000 to $14,999............................... 135 1,981,128 0.51
$15,000 and above................................ 1,077 27,019,094 6.93
------- ------------ --------
Total.................................. 241,185 $389,996,706 100.00%
</TABLE>
- ---------------
(1) Borrowers generally have more than one outstanding loan. The average
aggregate outstanding principal balance of loans per borrower is $7,277,
with respect to the Financed Student Loans, as of the Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$3,355,624 as of the Cutoff Date.
(3) Total does not sum to 100.00% due to rounding.
DISTRIBUTION OF THE FINANCED STUDENT LOANS BY SCHOOL TYPE
<TABLE>
<CAPTION>
AGGREGATE
OUTSTANDING PERCENT OF POOL
NUMBER PRINCIPAL BY OUTSTANDING
SCHOOL TYPE OF LOANS BALANCE(1) PRINCIPAL BALANCE
- ----------- -------- ------------ -----------------
<S> <C> <C> <C>
2-year institutions.................................. 21,443 $ 38,193,589 9.79%
4-year institutions.................................. 170,389 280,016,310 71.80
Proprietary/Vocational............................... 39,159 54,752,499 14.04
Not identified....................................... 10,194 17,034,308 4.37
------- ------------ --------
Total...................................... 241,185 $389,996,706 100.00%
</TABLE>
- ---------------
(1) Includes net principal balance due from borrowers, plus accrued interest
thereon, estimated to be $3,355,624 as of the Cutoff Date to be capitalized
upon commencement of repayment.
34
<PAGE> 35
DISTRIBUTION OF THE FINANCED STUDENT LOANS BY
REMAINING TERM TO SCHEDULED MATURITY AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
AGGREGATE
OUTSTANDING PERCENT OF POOL
NUMBER PRINCIPAL BY OUTSTANDING
NUMBER OF MONTHS REMAINING TO SCHEDULED MATURITY(1) OF LOANS BALANCE(2) PRINCIPAL BALANCE
- --------------------------------------------------- -------- ------------ -----------------
<S> <C> <C> <C>
Less than 24......................................... 21,870 $ 7,488,153 1.92%
24 to 35............................................. 14,114 9,262,725 2.38
36 to 47............................................. 13,947 11,837,955 3.04
48 to 59............................................. 13,477 15,068,888 3.86
60 to 71............................................. 15,803 20,096,946 5.15
72 to 83............................................. 15,176 21,968,449 5.63
84 to 95............................................. 21,639 34,202,353 8.77
96 to 107............................................ 29,024 50,883,308 13.05
108 to 119........................................... 45,849 85,510,238 21.93
120 to 131........................................... 42,558 87,803,316 22.51
132 to 143........................................... 3,694 10,328,103 2.65
144 to 155........................................... 1,523 6,863,263 1.76
156 to 167........................................... 928 6,028,283 1.55
168 to 179........................................... 593 4,963,657 1.27
180 to 191........................................... 181 1,925,319 0.49
192 and above........................................ 809 15,765,752 4.04
------- ------------ --------
Total...................................... 241,185 $389,996,706 100.00%
</TABLE>
- ---------------
(1) Determined from the Cutoff Date to the stated maturity date of the
applicable Financed Student Loan, assuming repayment commences promptly upon
expiration of the typical grace period following the expected graduation
date and without giving effect to any Deferral or forbearance periods that
may be granted in the future. See "The Federal Family Education Loan
Program".
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$3,355,624 as of the Cutoff Date.
DISTRIBUTION OF THE FINANCED STUDENT LOANS BY BORROWER PAYMENT STATUS
AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
AGGREGATE
OUTSTANDING PERCENT OF POOL
NUMBER PRINCIPAL BY OUTSTANDING
BORROWER PAYMENT STATUS(1) OF LOANS BALANCE(2) PRINCIPAL BALANCE(3)
-------------------------- -------- ------------ --------------------
<S> <C> <C> <C>
In-School.......................................... 6,616 $ 11,088,327 2.84%
Grace.............................................. 24,173 43,676,719 11.20
Deferral........................................... 17,886 36,502,311 9.36
Forbearance........................................ 8,857 21,130,870 5.42
Repayment
First year in repayment.......................... 57,022 110,432,755 28.32
Second year in repayment......................... 33,313 61,624,211 15.80
Third year in repayment.......................... 25,268 41,444,385 10.63
Fourth year or greater in repayment.............. 68,050 64,097,128 16.44
------- ------------ --------
Total.................................... 241,185 $389,996,706 100.00%
</TABLE>
- ---------------
(1) Refers to the status of the borrower of each Financed Student Loan as of the
Cutoff Date; such borrower may still be attending school ("In-School"), may
be in a grace period prior to repayment commencing ("Grace"), may be
repaying such loan ("Repayment") or may have temporarily ceased repaying
such loan through a Deferral ("Deferral") or a forbearance ("Forbearance")
period. See "The Federal Family Education Loan Program".
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$3,355,624 as of the Cutoff Date.
(3) Total does not sum to 100.00% due to rounding.
35
<PAGE> 36
SCHEDULED WEIGHTED AVERAGE MONTHS IN STATUS OF THE FINANCED STUDENT LOANS
BY CURRENT LOAN PAYMENT STATUS AS THE CUTOFF DATE(1)
<TABLE>
<CAPTION>
SCHEDULED MONTHS IN STATUS
------------------------------------------------------
CURRENT BORROWER PAYMENT STATUS IN-SCHOOL GRACE DEFERRAL FORBEARANCE REPAYMENT
------------------------------- --------- ----- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
In-School.................................. 10.3 6.0 -- -- 111.2
Grace...................................... -- 4.2 -- -- 115.9
Deferral................................... -- -- 9.9 -- 103.2
Forbearance................................ -- -- -- 3.5 130.3
Repayment.................................. -- -- -- -- 101.2
</TABLE>
- ---------------
(1) Determined without giving effect to any deferral or forbearance periods that
may be granted in the future.
GEOGRAPHIC DISTRIBUTION OF THE FINANCED STUDENT LOANS AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
AGGREGATE
OUTSTANDING PERCENT OF POOL
NUMBER PRINCIPAL BY OUTSTANDING
STATE(1) OF LOANS BALANCE(2) PRINCIPAL BALANCE(3)
-------- -------- ------------ --------------------
<S> <C> <C> <C>
Alabama............................................ 218 $ 372,550 0.10%
Alaska............................................. 86 174,059 0.04
Arizona............................................ 797 1,335,685 0.34
Arkansas........................................... 32 67,704 0.02
California......................................... 4,113 7,384,800 1.89
Colorado........................................... 709 1,244,968 0.32
Connecticut........................................ 8,975 20,942,634 5.37
Delaware........................................... 2,575 3,807,243 0.98
District of Columbia............................... 1,255 2,236,919 0.57
Florida............................................ 3,260 5,381,600 1.38
Georgia............................................ 1,402 2,716,507 0.70
Hawaii............................................. 187 283,111 0.07
Idaho.............................................. 71 114,984 0.03
Illinois........................................... 2,132 3,382,436 0.87
Indiana............................................ 940 1,393,473 0.36
Iowa............................................... 165 314,303 0.08
Kansas............................................. 146 308,767 0.08
Kentucky........................................... 123 206,840 0.05
Louisiana.......................................... 225 435,652 0.11
Maine.............................................. 237 614,256 0.16
Maryland........................................... 5,958 9,858,470 2.53
Massachusetts...................................... 2,767 5,784,871 1.48
Michigan........................................... 603 1,009,596 0.26
Minnesota.......................................... 333 527,042 0.14
Mississippi........................................ 57 77,386 0.02
Missouri........................................... 277 526,511 0.14
Montana............................................ 64 102,673 0.03
Nebraska........................................... 115 146,094 0.04
Nevada............................................. 187 292,844 0.08
New Hampshire...................................... 251 576,854 0.15
</TABLE>
36
<PAGE> 37
<TABLE>
<CAPTION>
AGGREGATE
OUTSTANDING PERCENT OF POOL
NUMBER PRINCIPAL BY OUTSTANDING
STATE(1) OF LOANS BALANCE(2) PRINCIPAL BALANCE(3)
-------- -------- ------------ --------------------
<S> <C> <C> <C>
New Jersey......................................... 69,841 118,614,319 30.41
New Mexico......................................... 180 308,593 0.08
New York........................................... 13,362 24,963,431 6.40
North Carolina..................................... 1,717 3,274,702 0.84
North Dakota....................................... 41 93,400 0.02
Ohio............................................... 1,072 2,004,203 0.51
Oklahoma........................................... 80 157,105 0.04
Oregon............................................. 267 559,428 0.14
Pennsylvania....................................... 107,602 153,260,350 39.30
Puerto Rico........................................ 116 248,977 0.06
Rhode Island....................................... 308 686,175 0.18
South Carolina..................................... 583 1,110,558 0.28
South Dakota....................................... 7 23,471 0.01
Tennessee.......................................... 399 784,154 0.20
Texas.............................................. 1,770 2,738,413 0.70
Utah............................................... 103 257,029 0.07
Vermont............................................ 167 292,229 0.07
Virgin Islands..................................... 51 106,915 0.03
Virginia........................................... 3,498 5,693,603 1.46
Washington......................................... 581 1,103,410 0.28
West Virginia...................................... 252 333,083 0.09
Wisconsin.......................................... 169 297,441 0.08
Wyoming............................................ 20 49,326 0.01
Other.............................................. 739 1,415,559 0.36
------- ------------ --------
Total.................................... 241,185 $389,996,706 100.00%
</TABLE>
- ---------------
(1) Based on the permanent billing addresses of the borrowers of the Financed
Student Loans shown on the Master Servicer's records as of the Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$3,355,624 as of the Cutoff Date.
(3) Total does not sum to 100.00% due to rounding.
DISTRIBUTION OF FINANCED STUDENT LOANS BY DATE OF DISBURSEMENT
<TABLE>
<CAPTION>
AGGREGATE
OUTSTANDING PERCENT OF POOL
NUMBER PRINCIPAL BY OUTSTANDING
DISBURSEMENT DATE(1) OF LOANS BALANCE(2) PRINCIPAL BALANCE
- -------------------- -------- ------------ -----------------
<S> <C> <C> <C>
October 1, 1993 and thereafter....................... 113,096 $224,098,738 57.46%
Pre-October 1, 1993.................................. 128,089 165,897,968 42.54
------- ------------ --------
Total...................................... 241,185 $389,996,706 100.00%
</TABLE>
- ---------------
(1) Student Loans disbursed prior to October 1, 1993 are 100% guaranteed by the
applicable Guarantor, and reinsured against default by the Department up to
a maximum of 100% of the Guarantee Payments. Student Loans disbursed on or
after October 1, 1993 are 98% guaranteed by the applicable Guarantor, and
reinsured against default by the Department up to a maximum of 98%.
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon, estimated to be $3,355,624 as of the Cutoff Date to be capitalized
upon commencement of repayment.
37
<PAGE> 38
DISTRIBUTION OF FINANCED STUDENT LOANS BY
NUMBER OF DAYS OF DELINQUENCY AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF WEIGHTED
AGGREGATE POOL BY PERCENT OF WEIGHTED AVERAGE
OUTSTANDING OUTSTANDING POOL BY AVERAGE AVERAGE WEIGHTED REMAINING
NUMBER OF PRINCIPAL PRINCIPAL NUMBER OF PRINCIPAL INTEREST AVERAGE TERM
DAYS DELINQUENT LOANS BALANCE(1) BALANCE LOANS BALANCE RATE MARGIN (IN MONTHS)(2)
- --------------- --------- ------------ ----------- ---------- --------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
0.................... 159,438 $274,008,810 70.26% 66.11% $1,719 8.23% 3.08% 112.18
1-30................. 60,204 83,646,175 21.45 24.96 1,389 8.30 3.16 96.81
31-60................ 12,669 19,045,240 4.88 5.25 1,503 8.31 3.16 100.35
61-90................ 5,622 8,542,791 2.19 2.33 1,520 8.29 3.15 101.75
91-120............... 3,252 4,753,690 1.22 1.35 1,462 8.27 3.15 99.78
------- ------------ ------ ------ ------ ---- ---- ------
Total...... 241,185 $389,996,706 100.00% 100.00% $1,617 8.25% 3.10% 107.93
======= ============ ====== ====== ====== ==== ==== ======
</TABLE>
- ---------------
(1) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$3,355,624 as of the Cutoff Date.
(2) Remaining term defined as period from Cutoff Date until loan maturity date.
Each of the Financed Student Loans provides or will provide for the
amortization of the outstanding principal balance of such Financed Student Loan
over a series of regular payments. Each regular payment consists of an
installment of interest which is calculated on the basis of the outstanding
principal balance of such Financed Student Loan multiplied by the applicable
interest rate and further multiplied by the period elapsed (as a fraction of a
calendar year) since the preceding payment of interest was made. As payments are
received in respect of such Financed Student Loan, the amount received is
applied first to interest accrued to the date of payment and the balance is
applied to reduce the unpaid principal balance. Accordingly, if a borrower pays
a regular installment before its scheduled due date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be less than it would have been had the payment been made as scheduled, and the
portion of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if a borrower pays a monthly installment
after its scheduled due date, the portion of the payment allocable to interest
for the period since the preceding payment was made will be greater than it
would have been had the payment been made as scheduled, and the portion of the
payment applied to reduce the unpaid principal balance will be correspondingly
less. In either case, subject to any applicable Deferral Periods 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.
INSURANCE OF STUDENT LOANS; GUARANTORS OF STUDENT LOANS
General. Each Financed Student Loan will be required to be guaranteed as
to principal and interest by the Pennsylvania Higher Education Assistance
Agency, an agency of the Commonwealth of Pennsylvania ("PHEAA"), the New Jersey
Higher Education Assistance Authority, an agency of the State of New Jersey
("NJHEAA"), the Connecticut Student Loan Foundation, an agency of the State of
Connecticut ("CSLF"), the N.Y. State Higher Education Services Corporation, an
agency of the State of New York ("NYSHESC") or the United Student Aid Funds,
Inc., a non-profit corporation ("USAF") (collectively, the "Guarantors") 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 Unsubsidized Stafford Loan, a PLUS Loan or a Federal
Consolidation Loan, Interest Subsidy Payments paid by the Department.
Guarantors for the Financed Student Loans. The Eligible Lender Trustee has
entered into a Guarantee Agreement with each of the Guarantors by which each of
the Guarantors has agreed to serve as
38
<PAGE> 39
Guarantor for certain of the Financed Student Loans. The following table
provides information with respect to the portion of the Financed Student Loans
guaranteed by each Guarantor:
DISTRIBUTION OF FINANCED STUDENT LOANS BY GUARANTOR AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
AGGREGATE
OUTSTANDING PERCENT OF POOL
NUMBER PRINCIPAL BY OUTSTANDING
NAME OF GUARANTOR OF LOANS BALANCE(1) PRINCIPAL BALANCE(2)
- ----------------- -------- ------------ --------------------
<S> <C> <C> <C>
Pennsylvania Higher Education Assistance
Authority........................................ 145,020 $218,165,307 55.94%
New Jersey Higher Education Assistance Authority... 72,487 124,745,491 31.99
Connecticut Student Loan Foundation................ 11,112 27,522,268 7.06
N.Y. State Higher Education Services Corporation... 6,817 11,722,213 3.01
United Student Aid Funds, Inc...................... 5,749 7,841,428 2.01
------- ------------ --------
Total.................................... 241,185 $389,996,706 100.00%
</TABLE>
- ---------------
(1) Includes net principal balance due from borrowers, plus accrued interest
thereon, estimated to be $3,355,624 as of the Cutoff Date to be capitalized
upon commencement of repayment.
(2) Total does not sum to 100.00% due to rounding.
Pursuant to its respective Guarantee Agreement, each of the Guarantors
guarantees payment of 100% of the principal (including any interest capitalized
from time to time) and accrued interest for each Financed Student Loan
guaranteed by it as to which any one of the following events has occurred:
(a) failure by the borrower thereof to make monthly principal or
interest payments on such Financed Student Loan when due, provided such
failure continues for a period of 180 days (except that such guarantee
against such failures will be 98% of principal and accrued interest for
loans first disbursed on or after October 1, 1993);
(b) any filing by or against the borrower thereof of a petition in
bankruptcy pursuant to any chapter of the Federal bankruptcy code, as
amended;
(c) the closure or false certification of the borrower's eligibility
by the school;
(d) the death of the borrower thereof; or
(e) the total and permanent disability of the borrower thereof to work
and earn money or attend school, as certified by a qualified physician.
When these conditions are satisfied, the Higher Education Act requires the
Guarantors generally to pay the claim within 60 days of its submission by the
lender. The obligations of the Guarantors pursuant to their respective Guarantee
Agreements are obligations solely of the Guarantors, respectively, and are not
supported by the full faith and credit of the federal government or any state
government.
Pursuant to the 1992 Amendments, under Section 432(o) of the Higher
Education Act, if the Department has determined that a Guarantor is unable to
meet its insurance obligations, the loan holder may submit claims directly to
the Department and the Department is required to pay the full Guarantee Payment
due with respect thereto in accordance with guarantee claim processing standards
no more stringent than those applied by such Guarantor. However, the
Department's obligation to pay guarantee claims directly in this fashion is
contingent upon the Department making the determination referred to above. There
can be no assurance that the Department would ever make such a determination
with respect to a Guarantor or, if such a determination were made, whether such
determination or the ultimate payment of such guarantee claims would be made in
a timely manner.
Each of the Guarantors' guarantee obligations with respect to any Financed
Student Loan are conditioned upon the satisfaction of all the conditions set
forth in the applicable Guarantee Agreement. These conditions include, but are
not limited to, the following: (i) the origination and servicing of such
Financed Student Loan being performed in accordance with the Higher Education
Act and other applicable requirements, (ii) the timely payment to the Guarantors
of the guarantee fee payable with respect to such
39
<PAGE> 40
Financed Student Loan, (iii) the timely submission to the Guarantors of all
required pre-claim delinquency status notifications and of the claim with
respect to such Financed Student Loan and (iv) the transfer and endorsement of
the promissory note evidencing such Financed Student Loan to the Guarantors,
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 Guarantors to honor their Guarantee
Agreements with respect to such Financed Student Loan, in the denial of
guarantee coverage with respect to certain accrued interest amounts with respect
thereto or in the loss of certain Interest Subsidy Payments and Special
Allowance Payments with respect thereto. Under the Master Servicing Agreement,
such failure to comply would constitute a breach of the Master Servicer's
covenants or, under the Sale Agreement, the Seller's representations and
warranties, as the case may be, and would create an obligation of the Seller or
the Master Servicer, as the case may be, to repurchase or purchase such Financed
Student Loan or to reimburse the Trust for such non-guaranteed interest amounts
or such lost Interest Subsidy Payments and Special Allowance Payments with
respect thereto. See "Description of the Transfer and Servicing
Agreements -- Sale of Financed Student Loans; Representations and Warranties"
and "-- Master Servicer Covenants".
Set forth below is certain current and historical information with respect
to each of the Guarantors in its capacity as a Guarantor of all education loans
(including but not limited to law school loans) guaranteed by each of them:
Guaranty Volume. The following table sets forth the approximate
aggregate principal amount of federally reinsured education loans
(including PLUS Loans but excluding Consolidation Loans) that have first
become guaranteed by each Guarantor and by all guarantors in the federal
fiscal years indicated:*
GUARANTY VOLUME
(IN MILLIONS)
<TABLE>
<CAPTION>
ALL
FEDERAL FISCAL YEAR PHEAA NJHEAA CSLF NYSHESC USAF GUARANTORS
- ------------------- ------ ------ ---- ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
1992........................... $1,296 $251 $110 $1,109 $3,373 $14,755
1993........................... $1,523 $279 $130 $1,309 $4,088 $17,843
1994........................... $1,747 $346 $167 $1,667 $5,474 $23,053
1995........................... $1,809 $288 $172 $1,554 $6,326 $20,951
1996........................... $1,794 $220 $171 $1,411 $7,249 $19,907
</TABLE>
- ---------------
* The information for PHEAA, NJHEAA, CSLF, NYSHESC, and USAF was provided
by each entity, respectively. The information set forth in the table
above for all Guarantors has been obtained from the Department. The
information set forth in the table above has not been audited or
independently verified for accuracy or completeness by the Seller, the
Master Servicer, the Administrator or the Underwriters.
Reserve Ratio. Each 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 Guarantor minus (i) the
original principal amount of loans cancelled, claims paid, loans paid in
full and loan guarantees transferred from such Guarantor to other
guarantors, plus (ii) the original principal amount of loan guarantees
transferred to such Guarantor from other guarantors. The following table
sets forth the Guarantors'
40
<PAGE> 41
reserve ratios and the national average reserve ratio for all guarantors
for the federal fiscal years indicated:*
RESERVE RATIO
<TABLE>
<CAPTION>
ALL
FEDERAL FISCAL YEAR PHEAA NJHEAA CSLF NYSHESC USAF GUARANTORS
- ------------------- ------ ------ ---- ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
1992........................... 1.1% 1.4% 0.9% 0.3% 1.0% 1.5%
1993........................... 1.1% 1.3% 1.0% 0.8% 1.3% 1.7%
1994........................... 1.3% 1.5% 1.0% 0.7% 1.2% 1.4%
1995........................... 1.5% 1.5% 1.1% 1.3% 1.5% 1.6%
1996........................... 1.6% 1.5% 1.0% 1.3% 1.5% 1.6%
</TABLE>
- ---------------
* The information set forth in the table above with respect to PHEAA,
NJHEAA, CSLF, NYSHESC, and USAF, was provided by each entity,
respectively. The information set forth in the table above for all
Guarantors has been obtained from the Department. The above information
with respect to PHEAA for fiscal years 1993 and earlier represents a
restatement of such information from that previously supplied by PHEAA to
the Department. The restated information corrects certain errors in the
cumulative cash reserves previously reported, which PHEAA has indicated
resulted from a failure to properly reflect in cumulative cash reserves
all transactions which should have been reflected in a reconciliation of
its sources and uses of funds as at September 30 of the years indicated.
The restatement of these reserves did not affect PHEAA's claims-paying
ability during these years. The information set forth in the table above
has not been audited or independently verified for accuracy or
completeness by the Seller, the Master Servicer, the Administrator or the
Underwriters.
Recovery Rates. A Guarantor's recovery rate, which provides a measure
of the effectiveness of the collection efforts against defaulting borrowers
after the guarantee claim has been satisfied, is determined by dividing the
amount recovered from borrowers by the Guarantor by the aggregate amount of
default claims paid by the Guarantor during the applicable federal fiscal
year with respect to borrowers. The table below sets forth the recovery
rates for each of the Guarantors and the national average recovery rates
for all guarantors for the federal fiscal years indicated:*
RECOVERY RATES
<TABLE>
<CAPTION>
NATIONAL
FEDERAL FISCAL YEAR PHEAA NJHEAA CSLF NYSHESC USAF AVERAGE
- ------------------- ------ ------ ---- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
1992....................... 46.5% 53.3% 43.6% 36.3% 24.1% 31.9%
1993....................... 48.2% 54.6% 45.5% 34.2% 26.6% 34.7%
1994....................... 52.9% 56.1% 49.9% 41.9% 30.3% 39.2%
1995....................... 53.3% 58.5% 53.2% 43.9% 35.3% 40.7%
1996....................... 55.0% 60.6% 57.5% 46.2% 32.9% 43.1%
</TABLE>
- ---------------
* The information for PHEAA, NJHEAA, CSLF, NYSHESC, and USAF, was provided
by each entity, respectively. The information set forth in the table
above for all Guarantors has been obtained from the Department. The
information set forth in the table above has not been audited or
independently verified for accuracy or completeness by the Seller, the
Master Servicer, the Administrator or the Underwriters.
Loan Loss Reserve. Neither PHEAA, NJHEAA, CSLF, NYSHESC, and USAF
maintains a segregated loan loss reserve with respect to its student loan
guarantee obligations. In the event that a Guarantor receives less than
full reimbursement of its guarantee obligations from the Department (see
"-- Reinsurance" above), such Guarantor would be forced to look to its
existing assets to satisfy any such guarantee obligations not so
reimbursed.
Claims Rate. For the past five federal fiscal years, none of the
Guarantors' claims rates have exceeded 5%, and as a result, all claims of
the Guarantors have been fully reimbursed by the
41
<PAGE> 42
Department. See "-- Reinsurance" above. Nevertheless, there can be no
assurance that the Guarantors will continue to receive full reimbursement
for such claims (or the full 98% maximum reimbursement for loans first
disbursed on or after October 1, 1993). The following table sets forth the
claims rates of each Guarantor and the national average for all guarantors
for the federal fiscal years indicated:*
CLAIMS RATE
<TABLE>
<CAPTION>
ALL
FEDERAL FISCAL YEAR PHEAA NJHEAA CSLF NYSHESC USAF GUARANTORS
- ------------------- ------ ------ ---- ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
1992...................... 2.8% 2.0% 2.3% 3.7% 5.0% 4.2%
1993...................... 2.3% 2.1% 3.1% 2.9% 6.9% 3.8%
1994...................... 2.2% 2.7% 2.4% 2.8% 5.0% 3.5%
1995...................... 2.0% 1.9% 2.0% 3.2% 4.7% 3.2%
1996...................... 1.6% 2.2% 2.7% 2.9% 4.7% 3.3%
</TABLE>
- ---------------
* The information set forth in the table above for PHEAA, NJHEAA, CSLF,
NYSHESC, and USAF was provided by each entity, respectively. The
information set forth in the table for all Guarantors has been obtained
from the Department. The information set forth in the table above has not
been audited or independently verified for accuracy or completeness by
the Seller, the Master Servicer, the Administrator or the Underwriters.
Recovery Rate and Claims Rate Trends. As indicated in the above Recovery
Rates table, recovery rates generally show a trend of improved recovery rates
from 1992 to 1996. While the Seller has no specific knowledge about any
individual Guarantor's experience, such improvements are generally due to more
successful collection efforts.
As indicated in the above Claims Rate table, while claims rates for the
industry have generally declined, and such claims rate for PHEAA, which
guarantees 55.94% of the Financed Student Loans by principal balance as of the
Cutoff Date, have similarly declined from 1992 to 1996, the claims rate
experience of the other guarantors have been more variable. While the Issuer has
no specific knowledge about any individual Guarantor's experience, claims rates
may generally be affected by changes in origination standards, school
eligibility criteria and general economic conditions affecting obligors on the
student loans.
If the loan is guaranteed by a Guarantor, the eligible lender is reimbursed
by the Guarantor for 100% (98% for loans first disbursed on or after October 1,
1993) of the unpaid principal balance and accrued unpaid interest on any loan
defaulted so long as the eligible lender has properly originated and serviced
such loan. The Guarantor's guaranty obligation is unaffected by its particular
Recovery Rate or Claims Rate experience. To the extent, however, that the
Guarantor is financially unable to pay claims under its guarantee, whether due
to reductions in reimbursement from the Department or for other reasons, and to
the extent the Department does not step in and perform the Guarantor's
obligations as they become due but instead requires holders of defaulted
Financed Student Loans to first make claims against the Guarantor and thereafter
to make claims directly against the Department, payment to holders of Financed
Student Loans may be delayed.
Management of PHEAA, NJHEAA, CSLF, NYSHESC, and USAF have all indicated to
the Seller that they are currently unaware of any trends or conditions which
would cause their respective claims rate to exceed 5% and thereby result in less
than maximum reimbursement for reinsurance claims to the Department.
Notwithstanding the above, no assurance can be made that any such trends will
continue or not deteriorate, and that any Guarantor will receive full
reimbursement for reinsurance claims (or the full 98% maximum reimbursement for
loans first disbursed after October 1, 1993). See "The Federal Family Education
Loan Program -- Insurance and Reinsurance of Guarantors".
There can be no assurance that the claims rate experience of PHEAA, NJHEAA,
CSLF, NYSHESC, and USAF for any future year will be similar to the historical
claims rate experience set forth above. See "Risk Factors -- Dependence on
Guarantors as Security for Financed Student Loans".
42
<PAGE> 43
MATURITY AND PREPAYMENT CONSIDERATIONS
The rate of payment of principal of the Notes and the Certificates and the
yield on the Notes and the Certificates will be affected by prepayments of the
Financed Student Loans that may occur as described below. All the Financed
Student Loans are prepayable in whole or in part by the borrowers at any time
(including by means of Federal Consolidation Loans or consolidation loans made
under the Federal Direct Student Loan Program as discussed below) or as a result
of a borrower's default, death, disability or bankruptcy and subsequent
liquidation or collection of Guarantee Payments with respect thereto. The rate
of such prepayments cannot be predicted and may be influenced by a variety of
economic, social and other factors, including as 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
obtain Federal Direct Consolidation Loans under the Federal Direct Student Loan
Program, such Financed Student Loans will be prepaid. See "The Federal Family
Education Loan Program -- The Consolidation Loan Program". There can be no
assurance that borrowers will not choose to obtain a Federal Direct
Consolidation Loan under the Federal Direct Student Loan Program. In addition,
the Seller is obligated to repurchase any Financed Student Loan pursuant to the
Sale Agreement as a result of a breach of any of its representations and
warranties, and the Master Servicer is obligated to purchase any Financed
Student Loan pursuant to the Master 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 "-- Master Servicer Covenants". See also "Description of the Transfer and
Servicing Agreements -- Insolvency Event" regarding the sale of the Financed
Student Loans if an Insolvency Event occurs and "-- Termination" regarding the
Seller's option to purchase the Financed Student Loans when the Pool Balance is
less than or equal to 5% of the Initial Pool Balance and the auction of the
Financed Student Loans on or after the Distribution Date.
On the other hand, scheduled payments with respect to, and maturities of,
the Financed Student Loans may be extended, including pursuant to Grace Periods,
Deferral Periods and, under certain circumstances, Forbearance Periods. The rate
of payment of principal of the Notes and the Certificates and the yield on the
Notes and the Certificates may also be affected by the rate of defaults
resulting in losses on defaulted Student Loans which have been liquidated, by
the severity of those losses and by the timing of those losses, which may affect
the ability of the Guarantors to make Guarantee Payments with respect thereto.
In addition, the maturity of certain of the Financed Student Loans may extend
beyond the Class A-1 Final Maturity Date, Class A-2 Final Maturity Date or
Certificate Final Payment Date.
The rate of prepayment on the Financed Student Loans cannot be predicted,
and any reinvestment risks resulting from a faster or slower incidence of
prepayment of Financed Student Loans will be borne entirely by the
Securityholders. Such reinvestment risks may include the risk that interest
rates and the relevant spreads above particular interest rate bases are lower at
the time Securityholders receive payments from the Trust than such interest
rates and such spreads would otherwise have been had such prepayments not been
made or had such prepayments been made at a different time.
The following tables show the percentages of the original principal
balances of the classes of Securities that would remain outstanding after such
Distribution Date under various scenarios and their corresponding weighted
average lives. For purposes of the tables, it is assumed, among other things,
that: (i) the Closing Date for the Securities occurs on July 29, 1997, (ii)
distributions on the Securities occur on the 25th date of each January, April,
July and October, regardless of the day on which the Distribution Date
43
<PAGE> 44
actually occurs, (iii) no delinquencies or defaults in the payment of principal
and interest on the Financed Student Loans are experienced, (iv) no Financed
Student Loan is repurchased by the Seller or purchased by the Master Servicer
for breach of representation or warranty or otherwise, (v) interest accrues on
each Financed Student Loan at the applicable rate for such loan (based on the
characteristics of the Financed Student Loans shown under "The Financed Student
Loan Pool"), (vi) Special Allowance Payments accrue on each Financed Student
Loan at the applicable rate for such loan and are received from the Department
60 days after the end of the quarter, (vii) interest on Subsidized Stafford
Loans currently not in repayment is received from the Department 60 days after
the end of the quarter, (viii) interest on Unsubsidized Stafford, SLS and PLUS
Loans currently not in repayment accrues monthly and is capitalized in the month
such loans enter repayment, (ix) prepayments on the Financed Student Loans are
received on the last day of each Collection Period, (x) no Financed Student
Loans prepay prior to entering repayment, (xi) once entering repayment, no
Financed Student Loans enter an In-school, Grace, Deferral or Forbearance
status, (xii) the 91-day Treasury Bills Rate is 5.25% and the 52 Week T-Bill
Rate is 5.56%, (xiii) the Class A-1 Note Rate is 5.83%, the Class A-2 Note Rate
is 5.89% and the Certificate Rate is 6.07%, (xiv) such rates do not change
during the life of the Securities, (xv) the Trust Fee is equal to 1.29% per
annum, (xvi) the Financed Student Loan pool consists of 915 groups, (xvii) the
Reserve Account is fully funded on the Closing Date, and (xviii) the outstanding
Securities are paid in full on the earliest permitted Auction Distribution Date,
(collectively, the "Modeling Assumptions").
The prepayment model used in the tables is the "CPR" model. This model
represents an assumed annual constant rate of prepayments each month relative to
the then outstanding principal balance of the pool of the Financed Student Loans
for the life of such loans. CPR is not a description of historical prepayment
experience or a prediction of the rate of prepayment of the Financed Student
Loans.
44
<PAGE> 45
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCES OUTSTANDING
AND WEIGHTED AVERAGE LIVES
CLASS A-1 NOTES
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% CPR 5% CPR 7% CPR 9% CPR
- ----------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Closing Date............................................... 100.00% 100.00% 100.00% 100.00%
10/25/97................................................. 97.70 96.38 95.84 95.29
1/25/98.................................................. 94.63 91.92 90.81 89.69
4/25/98.................................................. 91.14 86.95 85.26 83.56
7/25/98.................................................. 87.55 81.95 79.70 77.46
10/25/98................................................. 83.72 76.72 73.94 71.17
1/25/99.................................................. 79.85 71.53 68.25 65.00
4/25/99.................................................. 75.86 66.33 62.60 58.92
7/25/99.................................................. 71.82 61.18 57.06 53.02
10/25/99................................................. 67.74 56.11 51.65 47.29
1/25/00.................................................. 63.58 51.08 46.32 41.70
4/25/00.................................................. 59.33 46.08 41.08 36.25
7/25/00.................................................. 55.02 41.13 35.94 30.96
10/25/00................................................. 50.70 36.28 30.95 25.85
1/25/01.................................................. 46.42 31.58 26.13 20.96
4/25/01.................................................. 42.13 26.97 21.45 16.24
7/25/01.................................................. 37.81 22.42 16.88 11.68
10/25/01................................................. 33.54 17.99 12.46 7.29
1/25/02.................................................. 29.40 13.61 8.14 3.04
4/25/02.................................................. 25.21 9.29 3.90 0.00
7/25/02.................................................. 20.98 5.05 0.00 0.00
10/25/02................................................. 16.98 1.10 0.00 0.00
1/25/03.................................................. 13.01 0.00 0.00 0.00
4/25/03.................................................. 9.06 0.00 0.00 0.00
7/25/03.................................................. 5.02 0.00 0.00 0.00
10/25/03................................................. 1.00 0.00 0.00 0.00
1/25/04 through 1/25/07.................................. 0.00 0.00 0.00 0.00
Weighted Average Life (Years).............................. 3.39 2.72 2.51 2.33
</TABLE>
45
<PAGE> 46
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCES OUTSTANDING
AND WEIGHTED AVERAGE LIVES
CLASS A-2 NOTES
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% CPR 5% CPR 7% CPR 9% CPR
- ----------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Closing Date....................................... 100.00% 100.00% 100.00% 100.00%
10/25/97......................................... 100.00 100.00 100.00 100.00
1/25/98.......................................... 100.00 100.00 100.00 100.00
4/25/98.......................................... 100.00 100.00 100.00 100.00
7/25/98.......................................... 100.00 100.00 100.00 100.00
10/25/98......................................... 100.00 100.00 100.00 100.00
1/25/99.......................................... 100.00 100.00 100.00 100.00
4/25/99.......................................... 100.00 100.00 100.00 100.00
7/25/99.......................................... 100.00 100.00 100.00 100.00
10/25/99......................................... 100.00 100.00 100.00 100.00
1/25/00.......................................... 100.00 100.00 100.00 100.00
4/25/00.......................................... 100.00 100.00 100.00 100.00
7/25/00.......................................... 100.00 100.00 100.00 100.00
10/25/00......................................... 100.00 100.00 100.00 100.00
1/25/01.......................................... 100.00 100.00 100.00 100.00
4/25/01.......................................... 100.00 100.00 100.00 100.00
7/25/01.......................................... 100.00 100.00 100.00 100.00
10/25/01......................................... 100.00 100.00 100.00 100.00
1/25/02.......................................... 100.00 100.00 100.00 100.00
4/25/02.......................................... 100.00 100.00 100.00 97.77
7/25/02.......................................... 100.00 100.00 99.56 89.56
10/25/02......................................... 100.00 100.00 91.68 81.99
1/25/03.......................................... 100.00 94.38 84.11 74.77
4/25/03.......................................... 100.00 86.66 76.77 67.84
7/25/03.......................................... 100.00 79.25 69.78 61.28
10/25/03......................................... 100.00 72.04 63.04 55.01
1/25/04.......................................... 93.66 64.92 56.45 48.93
4/25/04.......................................... 85.35 58.02 50.11 43.13
7/25/04.......................................... 77.10 51.41 44.02 37.61
10/25/04......................................... 69.19 45.13 38.23 32.41
1/25/05.......................................... 61.77 39.32 32.91 27.66
4/25/05.......................................... 54.60 33.81 27.90 23.22
7/25/05.......................................... 47.53 28.50 23.12 0.00
10/25/05......................................... 40.70 23.47 0.00 0.00
1/25/06.......................................... 35.00 19.29 0.00 0.00
4/25/06.......................................... 30.16 0.00 0.00 0.00
7/25/06.......................................... 25.34 0.00 0.00 0.00
10/25/06......................................... 21.06 0.00 0.00 0.00
1/25/07.......................................... 0.00 0.00 0.00 0.00
Weighted Average Life (Years)...................... 8.09 7.23 6.88 6.59
</TABLE>
46
<PAGE> 47
PERCENTAGE OF ORIGINAL PRINCIPAL BALANCES OUTSTANDING
AND WEIGHTED AVERAGE LIVES
CERTIFICATES
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% CPR 5% CPR 7% CPR 9% CPR
- ----------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
Closing Date....................................... 100.00% 100.00% 100.00% 100.00%
10/25/97......................................... 100.00 100.00 100.00 100.00
1/25/98.......................................... 100.00 100.00 100.00 100.00
4/25/98.......................................... 100.00 100.00 100.00 100.00
7/25/98.......................................... 100.00 100.00 100.00 100.00
10/25/98......................................... 100.00 100.00 100.00 100.00
1/25/99.......................................... 100.00 100.00 100.00 100.00
4/25/99.......................................... 100.00 100.00 100.00 100.00
7/25/99.......................................... 100.00 100.00 100.00 100.00
10/25/99......................................... 100.00 100.00 100.00 100.00
1/25/00.......................................... 100.00 100.00 100.00 100.00
4/25/00.......................................... 100.00 100.00 100.00 100.00
7/25/00.......................................... 100.00 100.00 100.00 100.00
10/25/00......................................... 100.00 100.00 100.00 100.00
1/25/01.......................................... 100.00 100.00 100.00 100.00
4/25/01.......................................... 100.00 100.00 100.00 100.00
7/25/01.......................................... 100.00 100.00 100.00 100.00
10/25/01......................................... 100.00 100.00 100.00 100.00
1/25/02.......................................... 100.00 100.00 100.00 100.00
4/25/02.......................................... 100.00 100.00 100.00 100.00
7/25/02.......................................... 100.00 100.00 100.00 100.00
10/25/02......................................... 100.00 100.00 100.00 100.00
1/25/03.......................................... 100.00 100.00 100.00 100.00
4/25/03.......................................... 100.00 100.00 100.00 100.00
7/25/03.......................................... 100.00 100.00 100.00 100.00
10/25/03......................................... 100.00 100.00 100.00 100.00
1/25/04.......................................... 100.00 100.00 100.00 100.00
4/25/04.......................................... 100.00 100.00 100.00 100.00
7/25/04.......................................... 100.00 100.00 100.00 100.00
10/25/04......................................... 100.00 100.00 100.00 100.00
1/25/05.......................................... 100.00 100.00 100.00 100.00
4/25/05.......................................... 100.00 100.00 100.00 100.00
7/25/05.......................................... 100.00 100.00 100.00 0.00
10/25/05......................................... 100.00 100.00 0.00 0.00
1/25/06.......................................... 100.00 100.00 0.00 0.00
4/25/06.......................................... 100.00 0.00 0.00 0.00
7/25/06.......................................... 100.00 0.00 0.00 0.00
10/25/06......................................... 100.00 0.00 0.00 0.00
1/25/07.......................................... 0.00 0.00 0.00 0.00
Weighted Average Life (Years)...................... 9.49 8.74 8.24 7.99
</TABLE>
47
<PAGE> 48
THE FEDERAL FAMILY EDUCATION LOAN PROGRAM
GENERAL
The Federal Family Education Loan Program ("FFELP") (formerly the
Guaranteed Student Loan Program (the "Guaranteed Student Loan Program")) under
Title IV of the Higher Education Act provides for loans to be made to students
or parents of dependent students enrolled in eligible institutions to finance a
portion of the costs of attending school. If a borrower defaults on a Student
Loan (as described herein), becomes totally or permanently disabled, dies, files
for bankruptcy or attends a school that closes prior to the student earning a
degree, or if the applicable educational institution falsely certifies the
borrower's eligibility for a Student Loan (collectively, "insurance triggers"),
the holder of the loan (which must be an eligible lender) may file a claim with
the applicable Guarantor. Provided that the loan has been properly originated
and serviced, the Guarantor pays the holder all or a portion of the unpaid
principal balance on the loans as well as accrued interest. See "-- Guarantors."
Origination and servicing requirements, as well as procedures to cure
deficiencies, are established by the Department and the Guarantors.
Under the FFELP, payment of principal and interest with respect to the
Student Loans is guaranteed upon occurrence of an insurance trigger by the
applicable Guarantor and reinsured by the Department. As described herein, the
Guarantors are entitled, subject to certain conditions, to be reimbursed by the
Department for all or a portion of Guarantee Payments they make pursuant to a
program of federal reinsurance under the Act. See "-- Insurance and Reinsurance
of Guarantors." In addition, the related Eligible Lender Trustee, as an
"eligible lender" and the "holder" of the Financed Student Loans under the
Higher Education Act on behalf of a Trust, is entitled to receive from the
Department certain interest subsidy payments ("Interest Subsidy Payments") and
special allowance payments ("Special Allowance Payments") with respect to
certain Student Loans as described herein.
Guarantors enter into reinsurance agreements with the Secretary pursuant to
which the Secretary agrees to reimburse the Guarantor for all or a portion of
the amount expended by the Guarantor in discharge of its guarantee obligation
with respect to default claims provided the loans have been properly originated
and serviced. Except for claims resulting from death, disability or bankruptcy
of a borrower, in which case the Secretary pays the Guarantor the full amount of
the claim, the amount of reinsurance depends on the default experience of the
Guarantor. See "-- Insurance and Reinsurance of Guarantors."
In the event of a shortfall between the amounts of claims paid to holders
of defaulted loans and reinsurance payments from the federal government,
Guarantors pay the claims from their reserves. These reserves come from four
principal sources: insurance premiums they charge on Student Loans (currently up
to 1% of loan principal), administrative cost allowances from the Department
(payment of which is currently discretionary on the part of the Department),
debt collection activities (generally, the Guarantor may retain 27% of its
collections on defaulted student loans), and investment income from reserve
funds. Claims which a Guarantor is financially unable to pay will be paid by the
Secretary or transferred to a financially sound Guarantor, if the Secretary
makes the necessary determination that the Guarantor is so financially unable to
pay.
Several types of guaranteed student loans are currently authorized under
the Act: (i) loans to students who pass certain financial need tests
("Subsidized Stafford Loans"); (ii) loans to students who do not pass the
Stafford need tests or who need additional loans to supplement their Subsidized
Stafford Loans ("Unsubsidized Stafford Loans"; together with the Subsidized
Stafford Loans, the "Stafford Loans"); (iii) loans to parents of dependent
students ("PLUS Loans"); and (iv) loans to consolidate the borrower's
obligations under various federally authorized student loan programs into a
single loan ("Consolidation Loans"). Prior to July 1, 1994 the Act also
permitted loans to graduate and professional students and independent
undergraduate students and, under certain circumstances, dependent undergraduate
students who needed additional loans to supplement their Subsidized Stafford
Loans ("Supplemental Loans to Students" or "SLS Loans").
The FFELP is subject to statutory and regulatory revision from time to
time. The most recent revisions are contained in the Higher Education Amendments
of 1992 (the "1992 Amendments"), the Omnibus
48
<PAGE> 49
Budget Reconciliation Act of 1993 (the "1993 Act") and the Higher Education
Technical Amendments of 1993 (the "Technical Amendments"). As part of the 1992
Amendments the name of the Guaranteed Student Loan Program was changed to the
FFELP. The 1993 Act contained significant changes to the FFELP and created a
direct loan program funded directly by the U.S. Department of Treasury (each
loan under such program, a "Federal Direct Student Loan").
The description and summaries of the Higher Education Act, the FFELP, the
Guarantee Agreements and the other statutes, regulations and documents referred
to in this Prospectus describe or summarize the material provisions of such
statutes, regulations and agreements. The Higher Education Act is codified at 20
U.S.C. sec. 1071 et seq., and the regulations promulgated thereunder can be
found at 34 C.F.R. Part 682. There can be no assurance that future amendments or
modifications will not materially change any of the terms or provisions of the
programs described in this Prospectus or of the statutes and regulations
implementing these programs. See "Risk Factors -- Changes in Legislation May
Adversely Affect Financed Student Loans and Guarantors."
LEGISLATIVE AND ADMINISTRATIVE MATTERS
The Higher Education Act was amended by enactment of the 1992 Amendments,
the general provisions of which became effective on July 23, 1992 and which
extend the principal provisions of the FFELP to September 30, 1998 (or in the
case of borrowers who have received loans prior to that date, September 30,
2002, except that authority to make Consolidation Loans expires on September 30,
1998). The Technical Amendments became effective on December 20, 1993.
The 1993 Act, effective on August 10, 1993, implements a number of changes
to the federal guaranteed student loan programs, including imposing on lenders
or holders of guaranteed student loans certain fees, providing for 2% lender
risk sharing, reducing reimbursement payments to Guarantors, giving the
Department the discretion to reduce administrative cost allowance payments to
Guarantors, reducing interest rates and Special Allowance Payments for certain
loans, reducing the interest payable to holders of Consolidation Loans, reducing
the percentage of claims the Department will reimburse Guarantors and reducing
more substantially the premiums and default collections that Guarantors are
entitled to receive and/or retain. In addition, such legislation contemplates
replacement of at least 60% of the federal guaranteed student loan programs with
direct lending by the Department by the 1998-99 Academic Year.
The expansion of the new direct lending program has resulted in increasing
reductions since 1993 in the volume of FFELP Loans made under the existing
programs. Such volume reductions and other changes effected by the 1993 Act
could reduce revenues received by the Guarantors that are available to pay
claims on defaulted Student Loans in a timely manner and have other adverse
economic consequences to the Guarantors and their ability to pay claims. Also,
Subservicers may experience increased costs due to reduced economies of scale to
the extent the volume of serviced loans is reduced, which could affect their
ability to properly service the Financed Student Loans. Finally, the level of
competition currently in existence in the secondary market for loans made under
the existing programs could be reduced, resulting in fewer potential buyers of
the Student Loans and lower prices available in the secondary market for those
loans, and the liquidity provided by such market may be impaired.
ELIGIBLE LENDERS, BORROWERS AND INSTITUTIONS
Lenders eligible to make and/or hold loans under the FFELP generally
include banks, savings and loan associations, credit unions, pension funds,
insurance companies and, under certain conditions, schools and Guarantors. First
Union -- Pennsylvania is an eligible lender for the purpose of making and
holding Student Loans made under FFELP.
A Student Loan made under FFELP may be made only to qualified borrowers.
Generally, a qualified borrower is an individual or the parent of an individual
who (a) has been accepted for enrollment or is enrolled and is maintaining
satisfactory progress at an eligible institution, (b) is carrying or will carry
at least one-half of the normal full-time academic workload for the course of
study the student is pursuing, as determined by such institution, (c) has agreed
to notify promptly the holder of the loan of any address
49
<PAGE> 50
change and (d) meets the applicable "need" requirements for the particular loan
program. Each loan is to be evidenced by an unsecured promissory note signed by
the qualified borrower.
Eligible Institutions are post-secondary schools which meet the
requirements set forth in the Higher Education Act. They include institutions of
higher education, proprietary institutions of higher education and
post-secondary vocational institutions.
FINANCIAL NEED ANALYSIS
Student Loans may generally be made in amounts, subject to certain limits
and conditions, to cover the student's estimated costs of attendance, including
tuition and fees, books, supplies, room and board, transportation and
miscellaneous personal expenses (as determined by the institution). Each
borrower must undergo a need analysis, which requires the borrower to submit a
need analysis form to a multiple data entry processor which forwards the
information to the federal central processor. The central processor evaluates
the parents' and student's financial condition under federal guidelines and
calculates the amount that the student and/or the family is expected to
contribute towards the student's cost of education (the "family contribution").
After receiving information on the family contribution, the institution then
subtracts the family contribution from its cost of attendance to determine the
student's eligibility for grants, Subsidized Stafford Loans and work assistance.
The difference between (a) the sum of (i) the amount of grants, (ii) the amount
earned through work assistance and (iii) the amount of Subsidized Stafford Loans
for which the borrower is eligible, and (b) the student's estimated cost of
attendance (the "Unmet Need") may be borrowed through Unsubsidized Stafford
Loans. Parents may finance the family contribution amount through their own
resources or through PLUS Loans.
SPECIAL ALLOWANCE PAYMENTS
The Higher Education Act provides for quarterly Special Allowance Payments
to be made by the Department to holders of Student Loans to the extent necessary
to ensure that such holder receives at least a specified market interest rate of
return on such loans. The rates for Special Allowance Payments are based on
formulas that differ according to the type of loans, the date the loan was
originally made or insured and the type of funds used to finance such a loan. A
Special Allowance Payment is made for each of the 3-month periods ending March
31, June 30, September 30 and December 31. The Special Allowance Payment equals
the average unpaid principal balance (including interest permitted to be
capitalized) of all eligible loans held by such holder during such period
multiplied by the special allowance percentage. The special allowance percentage
is computed by (i) determining the average of the bond equivalent rates of
91-day Treasury bills auctioned for such 3-month period, (ii) subtracting the
applicable borrower interest rate on such loan from such average, (iii) adding
the applicable Special Allowance Margin (as set forth below) to the resultant
percentage, and (iv) dividing the resultant percentage by 4.
<TABLE>
<CAPTION>
DATE OF DISBURSEMENT SPECIAL ALLOWANCE MARGIN
-------------------- ------------------------
<C> <C>
Prior to 10/17/86 3.50%
10/17/86 - 9/30/92 3.25%
10/1/92 - 6/30/95 3.10%
7/1/95 - 6/30/98 2.50% (Subsidized and Unsubsidized Stafford
Loans, in school, grace or Deferral) 3.10%
(Subsidized and Unsubsidized Stafford Loans, in
repayment and all other loans)
</TABLE>
Special Allowance Payments are available on variable rate PLUS Loans and
SLS Loans as described below under "PLUS and SLS Loan Programs" only if the
variable rate, which is reset annually based on the 52-week Treasury Bill, would
exceed the applicable maximum rate.
50
<PAGE> 51
ORIGINATION FEES
The eligible lender charges borrowers an origination fee on Subsidized and
Unsubsidized Stafford Loans and PLUS Loans equal to 3% of the principal balance
of each loan. The amount of the origination fee may be deducted from each
disbursement pursuant to a loan on a pro rata basis. No origination fee is paid
on Consolidation Loans.
Lenders must refund all origination fees attributable to a disbursement
that was returned to the lender by the school or repaid or not delivered within
120 days of the disbursement. Such origination fees must be refunded by
crediting the borrower's loan balance with the applicable lender.
For loans first disbursed after October 1, 1993, lenders must pay an
origination fee of 0.5% of the loan. This fee cannot be passed on to the
borrower.
STAFFORD LOANS
The Higher Education Act provides for (i) federal insurance or reinsurance
of Subsidized Stafford Loans made by eligible lenders to qualified borrowers,
(ii) Interest Subsidy Payments on certain eligible Subsidized Stafford Loans to
be paid by the Department to holders of the loans during certain periods in lieu
of the borrower making interest payments, and (iii) Special Allowance Payments
representing an additional subsidy paid by the Department to the holders of
eligible Subsidized Stafford Loans (collectively referred to herein as "Federal
Assistance") when the interest rate paid by the borrower falls below market
interest rates.
Subsidized Stafford Loans are loans under the FFELP that may be made, based
on need, only to post-secondary students accepted or enrolled in good standing
at an eligible institution who are carrying at least one-half the normal
full-time course load at such institution. The Higher Education Act limits the
amount a student can borrow in any academic year and the amount he or she can
have outstanding in the aggregate. The following chart sets forth the current
and historic loan limits.
MAXIMUM LOAN AMOUNTS
FEDERAL STAFFORD LOAN PROGRAM
<TABLE>
<CAPTION>
ALL
STUDENTS (1) INDEPENDENT STUDENTS(1)
-------------- -----------------------
BASE AMOUNT ADDITIONAL
SUBSIDIZED AND UNSUBSIDIZED
SUBSIDIZED SUBSIDIZED UNSUBSIDIZED ONLY ON
PRE- ON OR ON OR AFTER OR AFTER TOTAL
BORROWER'S ACADEMIC LEVEL 1/1/87 AFTER 1/1/87 7/7/93(2) 7/1/94(3) AMOUNT
- ------------------------- ---------- ------------ -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
UNDERGRADUATE (PER YEAR)
1st year........................ $ 2,500 $ 2,625 $ 2,625 $ 4,000 $ 6,625
2nd year........................ $ 2,500 $ 4,000 $ 3,500 $ 4,000 $ 7,500
3rd year and above.............. $ 5,000 $ 7,500 $ 5,500 $ 5,000 $ 10,500
GRADUATE (PER YEAR)............... $ 5,000 $ 7,500 $ 8,500 $10,000 $ 18,500
AGGREGATE LIMIT
Undergraduate................... $12,500 $17,250 $23,000 $23,000 $ 46,000
Graduate (including
undergraduate)............... $25,000 $54,750 $65,500 $73,000 $138,500
</TABLE>
- ---------------
(1) The loan limits are inclusive of both Stafford Loans and Federal Direct
Stafford Loans. "Federal Direct Stafford Loans" are loans under the Federal
Direct Student Loan Program similar in all material respects to Stafford
Loans.
(2) These amounts represent the combined maximum loan amount per year for
Subsidized and Unsubsidized Stafford Loans. Accordingly, the maximum amount
that a student may borrow under an Unsubsidized Loan is the difference
between the combined maximum loan amount and the amount the student received
in the form of a Subsidized Stafford Loan.
(3) Independent undergraduate students, graduate students or professional
students may borrow these additional amounts. In addition, dependent
undergraduate students may also receive these additional
51
<PAGE> 52
Loan amounts if the parents of such students are unable to provide the
family contribution amount and it is unlikely that the student's parents
will qualify for a Federal PLUS Loan.
The rate for variable rate Subsidized Stafford Loans applicable for any
12-month period beginning on July 1 and ending on June 30, is determined on the
preceding June 1 and is equal to the lesser of (a) the applicable Maximum Rate
or (b) the sum of (i) the bond equivalent rate of 91-day Treasury bills
auctioned at the final auction held prior to such June 1 and (ii) the applicable
Interest Rate Margin.
SUBSIDIZED STAFFORD LOANS
<TABLE>
<CAPTION>
TRIGGER DATE(1) BORROWER RATE MAXIMUM RATE INTEREST RATE MARGIN
- --------------- ------------- ----------------- ---------------------
<S> <C> <C> <C>
09/13/83 - 06/30/88 8% 8% N/A
07/01/88 - 09/30/92 8% for 48 months; thereafter, 8% for 48 months, 3.25%
91-Day Treasury + Interest then 10%
Rate Margin
10/01/92 - 06/30/94 91-Day Treasury + Interest 9% 3.10%
Rate Margin
07/01/94 - 06/30/95 91-Day Treasury + Interest 8.25% 3.10%
Rate Margin
07/01/95 - 06/30/98 91-Day Treasury + Interest 8.25% 2.50% (in school,
Rate Margin grace or Deferral);
3.10% (in
repayment)
</TABLE>
- ---------------
(1) The Trigger Date for Stafford Loans made before October 1, 1992 is the first
day of enrollment period for which a borrower's first Stafford Loan is made
and for Stafford Loans made on October 1, 1992 and after the Trigger Date is
the date of the disbursement of a borrower's first Stafford Loan.
The 1992 Amendments provide that, for fixed rate loans made on or after
July 23, 1992 and for certain loans made to new borrowers on or after July 1,
1988, the lender must have converted by January 1, 1995 the interest rate on
such loans to an annual interest rate adjusted each July 1 equal to (1) for
certain loans made between July 1, 1988 and July 23, 1992, the 91-day Treasury
bill rate at the final auction prior to the preceding June 1 plus 3.25% and (2)
for loans made on or after July 23, 1992, the 91-day Treasury Bills Rate at the
final auction prior to the preceding June 1 plus 3.10%, in each case capped at
the applicable interest rate for such loan existing prior to the conversion. The
variable interest rate does not apply to loans made prior to July 23, 1992
during the first 48 months of repayment.
Holders of Subsidized Stafford Loans are eligible to receive Special
Allowance Payments. The Department is also responsible for paying interest on
Subsidized Stafford Loans while the borrower is a qualified student, during a
Grace Period or during certain Deferral Periods. The Department makes quarterly
Interest Subsidy Payments to the owner of Subsidized Stafford Loans in the
amount of interest accruing on the unpaid balance thereof prior to the
commencement of repayment or during any Deferral Periods. The Higher Education
Act provides that the owner of an eligible Subsidized Stafford Loan shall be
deemed to have a contractual right against the United States to receive Interest
Subsidy Payments and Special Allowance Payments in accordance with its
provisions. Receipt of Interest Subsidy Payments and Special Allowance Payments
is conditioned on compliance with the requirements of the Higher Education Act
and continued eligibility of such loan for federal reinsurance. Such eligibility
may be lost, however, if the loans are not held by an eligible lender, or
originated or serviced, in accordance with the requirements of the Higher
Education Act and the applicable guarantee agreements. See "-- Eligible Lenders,
Borrowers and Institutions"; "Risk Factors -- Risk of Loss of Guarantor and
Department Payments for Failure to Comply with Loan Origination and Servicing
Procedures for Student Loans"; "Formation of the Trust -- Eligible Lender
Trustee" and "Description of the Transfer and Servicing Agreements -- Servicing
Procedures."
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Interest Subsidy Payments and Special Allowance Payments are generally
received within 45 days to 60 days after the end of any given calendar quarter
(provided that the applicable claim form is properly filed with the Department),
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." The Master Servicer has agreed to prepare and file with the
Department all such claims forms and any other required documents or filings on
behalf of the Eligible Lender Trustee as owner of the Financed Student Loans on
behalf of the Trust. The Master Servicer has also agreed to assist the Eligible
Lender Trustee in monitoring, pursuing and obtaining such Interest Subsidy
Payments and Special Allowance Payments, if any, with respect to such Financed
Student Loans. Interest Subsidy Payments and Special Allowance Payments will be
remitted with respect to such Financed Student Loans within two business days of
receipt thereof by the Eligible Lender Trustee to the Collection Account.
Repayment of principal on a Subsidized or Unsubsidized Stafford Loan
typically does not commence while a student remains a qualified student, but
generally begins upon expiration of the applicable Grace Period, as described
below. Any borrower may voluntarily prepay without premium or penalty any loan
and in connection therewith may waive any Grace Period or Deferral Period. In
general, each loan must be scheduled for repayment over a period of not more
than ten years after the commencement of repayment. The Act currently requires
minimum annual payments of $600 including principal and interest, or, if
greater, the amount of accrued interest for that year, unless the borrower and
the lender agree to lesser payments. As of July 1, 1993, lenders are required to
offer borrowers a choice among standard, graduated and income-sensitive
repayment schedules. These repayment options must be offered to all new
borrowers who receive a loan first disbursed on or after July 1, 1993. If a
borrower fails to elect a particular repayment schedule or fails to submit the
documentation necessary for the option the borrower chooses, the standard
repayment schedule will be used.
Repayment of principal on a Subsidized or Unsubsidized Stafford Loan must
generally commence following a period of (a) not less than 9 months or 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 9% per annum or 8% per annum and for loans to first
time borrowers on or after July 1, 1988) after the borrower ceases to pursue at
least a half-time course of study (a "Grace Period"). However, during certain
other periods (each, a "Deferral Period") and subject to certain conditions, no
principal repayments need be made, including periods when the student has
returned to an eligible educational institution on a full time (or in certain
cases half time) basis or is pursuing studies pursuant to an approved graduate
fellowship program, or when the student is a member of the Armed Forces or a
volunteer under the Peace Corps Act or the Domestic Volunteer Service Act of
1973, or when the borrower is temporarily or totally disabled, or periods during
which the borrower may defer principal payments because of temporary financial
hardship. For new borrowers to whom loans are first disbursed on or after July
1, 1993, payment of principal may be deferred only while the Borrower is at
least a half-time student or is in an approved graduate fellowship program or is
enrolled in a rehabilitation program, or when the borrower is seeking but unable
to find full-time employment, or when for any reason the lender determines that
payment of principal will cause the borrower economic hardship: in the case of
unemployment or economic hardship the Deferral is subject to a maximum Deferral
period of three years. The 1992 Amendments also require forbearance of loans in
certain circumstances and permit forbearance of loans in certain other
circumstances (each such period, a "Forbearance Period").
The Unsubsidized Stafford Loan program created under the 1992 Amendments is
designed for borrowers who do not qualify for Subsidized Stafford Loans and for
independent, graduate and professional students whose Unmet Need exceeds what
they can borrow under the Subsidized Stafford Loan program. The basic
requirements for Unsubsidized Stafford Loans are essentially the same as those
for the Subsidized Stafford Loans, including with respect to provisions
governing the interest rate, the annual loan limits and the Special Allowance
Payments. The terms of the Unsubsidized Stafford Loans, however, differ in some
respects. Specifically, the federal government does not make Interest Subsidy
Payments on Unsubsidized Stafford Loans.
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<PAGE> 54
The borrower must either pay interest on an Unsubsidized Stafford Loan on a
periodic basis beginning 60 days after the time the loan is disbursed or permit
the lender to capitalize the interest that accrues until repayment begins.
Effective July 1, 1994, the maximum insurance premium was set at 1%. Subject to
the same loan limits established for Subsidized Stafford Loans, the student may
borrow up to the amount of such student's Unmet Need. Lenders are authorized to
make Unsubsidized Stafford Loans applicable for periods of enrollment beginning
on or after October 1, 1992.
PLUS AND SLS LOAN PROGRAMS
The Higher Education Act also provides for the PLUS Program. The Higher
Education Act authorizes PLUS Loans to be made to parents of eligible dependent
students. The 1993 Act eliminated the SLS Program after July 1, 1994.
The PLUS program permits parents of dependent students to borrow an amount
equal to each student's Unmet Need. Under the former SLS program, independent
graduate or professional students and certain dependent undergraduate students
were permitted to borrow subject to certain loan limitations.
The first payment of principal and interest is due within 60 days of full
disbursement of the loan except for borrowers eligible for Deferral who may
defer principal and interest payments while eligible for Deferral; deferred
interest is then capitalized periodically or at the end of the Deferral period
under specific arrangements with the borrower. The maximum repayment term is 10
years. PLUS and SLS loans carry no Interest Subsidy Payments.
The interest rate determination for a PLUS or SLS loan is dependent on when
the loan was originally made and disbursed and the period of enrollment. Some
PLUS or SLS loans carry a variable rate. The rate varies annually for 12-month
periods beginning on July 1 and ending on June 30. The variable rate is
determined on the preceding June 1 and is equal to the lesser of (a) the
applicable Maximum Rate or (b) the sum of (i) the bond equivalent rate of
52-week Treasury bills auctioned at the final auction held prior to such June 1,
and (ii) the applicable Interest Rate Margin as set forth below.
A holder of a PLUS or SLS loan is eligible to receive Special Allowance
Payments during any such 12-month period if (a) the sum of (i) the bond
equivalent rate of 52-week Treasury bills auctioned at the final auction held
prior to such June 1 and (ii) the Interest Rate Margin exceeds (b) the Maximum
Rate.
PLUS/SLS LOANS
<TABLE>
<CAPTION>
TRIGGER DATE(1) BORROWER RATE MAXIMUM RATE INTEREST RATE MARGIN
- --------------- ------------- ------------ --------------------
<S> <C> <C> <C>
Prior to 10/01/81 9% 9% N/A
10/01/81 - 10/30/82 14% 14% N/A
11/01/82 - 06/30/87 12% 12% N/A
07/01/87 - 09/30/92 52-Week Treasury + 12% 3.25%
Interest Rate
Margin
10/01/92 - 06/30/94 52-Week Treasury + PLUS 10% 3.10%
Interest Rate
Margin SLS 11%
After 06/30/94 52-Week Treasury + 9% 3.10%
(SLS repealed 07/01/94) Interest Rate
Margin
</TABLE>
- ---------------
(1) The Trigger Date for PLUS and SLS Loans made before October 1, 1992 is the
first day of enrollment period for which the loan is made, and for PLUS and
SLS loans made on October 1, 1992 and after the Trigger Date is the date of
the disbursement of the loan, respectively.
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<PAGE> 55
THE CONSOLIDATION LOAN PROGRAM
The Higher Education Act authorizes a program under which certain borrowers
may consolidate one or more of their various Student Loans into Consolidation
Loans which will be insured and reinsured to the same extent as other loans made
under the FFELP. Under this program, a lender may make a Consolidation Loan only
if, among other things, (a) such lender holds one of the borrower's outstanding
Student Loans that is selected for consolidation, or (b) the borrower has
unsuccessfully sought a Consolidation Loan from the holders of the Student Loans
selected for consolidation.
Consolidation Loans are made in an amount sufficient to pay outstanding
principal and accrued unpaid interest and late charges on all Student Loans made
under FFELP, as well as loans made pursuant to various other federal student
loan programs, which were selected by the borrower for consolidation. The unpaid
principal balance of a Consolidation Loan made prior to July 1, 1994 bears
interest at a rate not less than 9%. The interest rate on a Consolidation Loan
made after July 1, 1994 is equal to the weighted average of the interest rates
on the loans selected for consolidation, rounded upward to the nearest whole
percent. The holder of a Consolidation Loan made on or after October 1, 1993
must pay the Secretary a monthly rebate fee calculated on an annual basis equal
to 1.05 percent of the principal plus accrued unpaid interest on any such loan.
The repayment term under a Consolidation Loan varies depending upon the
aggregate amount of the loans being consolidated. In no case may the repayment
term exceed 30 years. A Consolidation Loan is evidenced by an unsecured
promissory note and entitles the borrower to prepay the loan, in whole or in
part, without penalty.
GUARANTORS
The Higher Education Act authorizes Guarantors to support education
financing and credit needs of students at post-secondary schools. The Guarantors
are reinsured by the federal government for 80% to 100% of claims paid,
depending on their claims experience for loans disbursed prior to October 1,
1993 and for 78% to 98% of claims paid for loans disbursed on or after October
1, 1993. See "-- Insurance and Reinsurance of Guarantors."
Guarantors may collect a one-time insurance fee of up to 1% of the
principal amount of each loan, other than Consolidation Loans, that the agency
guarantees.
The Higher Education Act requires every state to designate a Guarantor,
either by establishing its own or by designating another Guarantor. 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. Guarantors may guarantee a loan made to any eligible borrower and
are generally 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. Certain Guarantors have been
designated as the Guarantor for more than one state. Some Guarantors contract
with other entities to administer their Guarantor program.
Each Student Loan to be sold to the Eligible Lender Trustee on behalf of
the Trust will be guaranteed as to principal and interest by a Guarantor
pursuant to a Guarantee Agreement between such Guarantor and the Eligible Lender
Trustee.
INSURANCE AND REINSURANCE OF GUARANTORS
A Student Loan is considered to be in default for purposes of the Higher
Education Act when the borrower fails to make an installment payment when due,
or to comply with other terms of the loan, and if the failure persists for 180
days in the case of a loan repayable in monthly installments or for 240 days in
the case of a loan repayable in less frequent installments.
If the loan is guaranteed by a Guarantor, the eligible lender is reimbursed
by the Guarantor for 100% (98% for loans first disbursed on or after October 1,
1993) of the unpaid principal balance of the loan plus
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<PAGE> 56
accrued unpaid interest on any loan defaulted so long as the eligible lender has
properly originated and serviced such loan. Under certain circumstances the
guarantee on a loan deemed ineligible for reimbursement may be reinstated.
Under the Higher Education Act, the Department enters into a reinsurance
agreement with each Guarantor, which provides for federal reinsurance of amounts
paid to eligible lenders by the Guarantor with respect to defaulted loans.
Pursuant to such agreements, the Department agrees to reimburse a Guarantor for
100% of the amounts expended in connection with a claim resulting from the
death, bankruptcy or total and permanent disability of a borrower, the death of
a student whose parent is the borrower of a PLUS Loan or claims by borrowers who
received loans on or after January 1, 1986 and who are unable to complete the
programs in which they are enrolled due to school closure or borrowers whose
borrowing eligibility was falsely certified by the eligible institution; such
claims are not included in calculating a Guarantor's "claims experience" for
federal reinsurance purposes, as set forth below. The Department is also
required to repay the unpaid balance of any loan if collection is stayed under
the Federal bankruptcy code and is authorized to acquire the loans of borrowers
who are at high risk of default and who request an alternative repayment option
from the Department.
With respect to FFELP loans in default, the Department is required to pay
the applicable Guarantor a certain percentage ("Reinsurance Rate") of the amount
such agency paid pursuant to default claims filed by the lender on a reinsured
loan. The level of such Reinsurance Rate is subject to specified reductions when
the total reinsurance claims paid by the Department to a Guarantor during a
fiscal year equals or exceeds 5% of the aggregate original principal amount of
FFELP loans guaranteed by such agency that are in repayment on the last day of
the prior fiscal year. Accordingly, the amount of the reinsurance payment
received by the Guarantor may vary. The Reinsurance Rates are set forth in the
following table.
<TABLE>
<CAPTION>
GUARANTOR'S CLAIMS EXPERIENCE(1) APPLICABLE REINSURANCE RATE(2)
-------------------------------- ------------------------------
<C> <C>
0% up to and including 5% 98% (100% for loans disbursed before Oct. 1,
1993)
Greater than 5% up to and including 9% 88% (90% for loans disbursed before Oct. 1,
1993)
Greater than 9% 78% (80% for loans disbursed before Oct. 1,
1993)
</TABLE>
- ---------------
(1) The claims experience is not cumulative. Rather, the claims experience for
any given Guarantor is determined solely on the basis of claims for any one
federal fiscal year compared with the original principal amount of loans in
repayment at the beginning of that year.
(2) Within each fiscal year, the applicable Reinsurance Rate steps down
incrementally with respect to claims made only after the claims experience
thresholds are reached.
On August 10, 1993 President Clinton signed the 1993 Act, which made a
number of changes, 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, giving the Department
discretion to reduce administrative cost allowance payments, and giving the
Department broad powers over Guarantors and their reserves. These powers 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 student
loan 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. 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. Certain of these 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 contemplates an increase in the Federal Direct Student Loan Program
volume to a minimum of approximately 60% of student loan demand in academic year
1998-1999, which
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<PAGE> 57
could result in increasing reductions in the volume of loans made under the
FFELP. 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 Financed Student Loans. See
"Risk Factors -- Changes in Legislation May Adversely Affect Financed Student
Loans and Guarantors".
In issuing guarantees with respect to Student 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.
The 1992 Amendments addressed industry concerns regarding the Department's
commitment to providing support in the event of Guarantor failures. Pursuant to
the 1992 Amendments, Guarantors are required to maintain specified reserve fund
levels. Such levels are defined as 0.5% of the total attributable amount of all
outstanding loans guaranteed by the agency for the fiscal year of the agency
that begins in 1993, 0.7% for the agency's fiscal year beginning in 1994, 0.9%
for the agency's fiscal year beginning in 1995 and 1.1% for the agency's fiscal
year beginning on or after January 1, 1996. If (i) the Guarantor fails to
achieve the minimum reserve level in any two consecutive years, (ii) the
Guarantor's federal reimbursements are reduced to 80 percent (or 78 percent
after October 1, 1993) or (iii) the Department determines the Guarantor's
administrative or financial condition jeopardizes its continued ability to
perform its responsibilities, the Department must require the Guarantor to
submit and implement a management plan to address the deficiencies. The
Department may terminate the Guarantor's agreements with the Department if the
Guarantor fails to submit the required plan, or fails to improve its
administrative or financial condition substantially, or if the Department
determines the Guarantor is in danger of financial collapse. In such event, the
Department is authorized to undertake specified actions to assure the continued
payment of claims, including making advances to Guarantors to cover immediate
cash needs, transfer guarantees to another Guarantor, or transfer of guarantees
to the Department itself.
The Higher Education Act provides that, subject to compliance with the
Higher Education Act, Guarantors are deemed to have a contractual right against
the United States to receive reinsurance in accordance with its provisions. In
addition, the 1992 Amendments provide that if the Department determines that a
Guarantor is unable to meet its insurance obligations, holders of loans may
submit insurance claims directly to the Department until such time as the
obligations are transferred to a new Guarantor capable of meeting such
obligations or until a successor Guarantor assumes such obligations. There can
be no assurance that the Department would under any given circumstances assume
such obligation to assure 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.
POOL FACTORS AND TRADING INFORMATION
Each of the "Class A-1 Note Pool Factor," the "Class A-2 Note Pool Factor"
and the "Certificate Pool Factor" (each, a "Pool Factor") is a seven-digit
decimal which the Administrator will compute for each Distribution Date
indicating the remaining outstanding principal balance of each class of Notes or
the remaining Certificate Balance, respectively, as of that Distribution Date
(after giving effect to distributions on such Distribution Date), as a fraction
of the initial outstanding principal balance of each class of Notes or the
initial Certificate Balance, respectively. Each Pool Factor will be 1.0000000 as
of the Closing Date, and thereafter will decline to reflect reductions in the
outstanding principal balance of each class of Notes or the Certificate Balance,
as applicable. A Securityholder's portion of the aggregate outstanding principal
balance of each class of Notes or the Certificate Balance, as applicable, is the
product of (i) the original denomination of that Securityholder's Note or
Certificate and (ii) the applicable Pool Factor.
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<PAGE> 58
Pursuant to the Indenture and the Trust Agreement, the Securityholders will
receive quarterly reports concerning the payments received on the Financed
Student Loans, the Pool Balance, the applicable Pool Factor and various other
items of information. Securityholders of record during any calendar year will be
furnished information for tax reporting purposes not later than the latest date
permitted by law. See "Description of the Securities -- Reports to
Securityholders".
DESCRIPTION OF THE SECURITIES
Terms used in this section and not previously defined and not defined
herein are defined under "Description of the Transfer and Servicing
Agreements -- Distributions."
GENERAL
The Notes will be issued pursuant to the terms of the Indenture and the
Certificates will be issued pursuant to the terms of the Trust Agreement, in
each case substantially in the form filed or incorporated by reference as an
exhibit to the Registration Statement of which this Prospectus is a part. The
following description and summaries of certain terms of the Notes, the
Certificates, the Indenture and the Trust Agreement describe or summarize the
material provisions of such agreements. Copies of the Notes, the Certificates,
the Indenture and the Trust Agreement will be substantially in the form filed or
incorporated by reference as an exhibit to the Registration Statement of which
this Prospectus is a part, and the provisions of the Indenture and the Trust
Agreement are hereby incorporated by reference.
The Class A-1 Notes, the Class A-2 Notes and the Certificates will each
initially be represented by one or more Notes and Certificates, respectively, in
each case registered in the name of the nominee of DTC (together with any
successor depository selected by the Administrator, the "Depository") except as
set forth below. The Securities will be available for purchase in denominations
of $1,000 and integral multiples thereof in book-entry form only, provided that
one Note or Certificate of each class may be issued in the residual amount. The
Trust has been informed by DTC that DTC's nominee will be Cede. Accordingly,
Cede is expected to be the holder of record of the Securities. Unless and until
Definitive Notes or Definitive Certificates are issued under the limited
circumstances described herein, no Noteholder or Certificateholder will be
entitled to receive a physical certificate representing a Note or Certificate.
All references herein to actions by Noteholders or Certificateholders refer to
actions taken by DTC upon instructions from its participating organizations (the
"Participants") and all references herein to distributions, notices, reports and
statements to Noteholders or Certificateholders refer to distributions, notices,
reports and statements to DTC or Cede, as the registered holder of the Notes or
the Certificates, as the case may be, for distribution to Noteholders or
Certificateholders in accordance with DTC's procedures with respect thereto. See
"-- Book-Entry Registration" and "-- Definitive Securities".
THE NOTES
Distributions of Interest. Interest will accrue on the principal balance
of the Class A-1 Notes and the Class A-2 Notes at a rate per annum (calculated
as provided below) equal to the Class A-1 Rate and the Class A-2 Rate,
respectively. Interest will accrue from and including the Closing Date or from
the most recent Distribution Date on which interest has been paid to but
excluding the current Distribution Date (each an "Interest Period") and will be
payable to the Noteholders on each Distribution Date. Interest accrued as of any
Distribution Date, but not paid on such Distribution Date, will be due on the
next Distribution Date together with an amount equal to interest on such amount
at the respective Note Interest Rate. Interest payments on the Notes for any
Distribution Date will generally be funded from Available Funds and amounts on
deposit in the Reserve Account remaining after the distribution of the Servicing
Fee for each Monthly Servicing Payment Date and of the Trust Fees for each
Distribution Date. See "Description of the Transfer and Servicing
Agreements -- Distributions" and "-- Credit Enhancement". If such sources are
insufficient to pay the Noteholders' Interest Distribution Amount for such
Distribution Date, such shortfall will be allocated pro rata to the Class A-1
Noteholders and the Class A-2 Noteholders (based upon the total amount of
interest then due on each class of Notes).
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<PAGE> 59
The "Class A-1 Rate" for each Interest Period will be equal to the lesser
of (a) the T-Bill Rate for such Interest Period (determined as set forth under
"-- Determination of the T-Bill Rate") plus 0.58% and (b) the Student Loan Rate
for such Interest Period. The "Class A-2 Rate" for each Interest Period will be
equal to the lesser of the T-Bill Rate for such Interest Period (determined as
set forth under "-- Determination of the T-Bill Rate") plus 0.64% and (b) the
Student Loan Rate for such Interest Period. The Class A-1 Rate and the Class A-2
Rate are the "Note Interest Rates."
The "Student Loan Rate" for any Interest Period will equal the product of
(a) the quotient obtained by dividing (i) 365 (or 366 in a leap year) by (ii)
the actual number of days elapsed in such Interest Period and (b) the percentage
equivalent of a fraction, (i) the numerator of which is equal to Expected
Interest Collections for the Collection Period relating to such Interest Period
less the Trust Fees payable on the related Distribution Date and any Servicing
Fees paid on the two preceding monthly Servicing Payment Dates during the
related Collection Period and (ii) the denominator of which is the Pool Balance.
"Expected Interest Collections" means, with respect to any Collection
Period, the sum of (i) the amount of interest accrued, net of amounts required
by the Higher Education Act to be paid to the Department or to be repaid to
Guarantors or borrowers, with respect to the Financed Student Loans for such
Collection Period (whether or not such interest is actually paid) and (ii) all
Interest Subsidy Payments and Special Allowance Payments pursuant to claims
submitted by the Eligible Lender Trustee for such Collection Period (whether or
not actually received), net of amounts required to be paid to the Department
with respect to the Financed Student Loans, to the extent not included in (i)
above.
Any Noteholders' Interest Index Carryover that may exist on any
Distribution Date will be payable to the Noteholders on that Distribution Date
on a pro rata basis, based on the amount of the Noteholders' Interest Index
Carryover then owing on each class of Notes, and any succeeding Distribution
Dates solely out of the amount of Available Funds remaining in the Collection
Account on any such Distribution Date after distribution of the Trust Fees, the
Noteholders' Distribution Amount, the Certificateholders' Distribution Amount,
the amount, if any, necessary to be deposited into the Reserve Account to
reinstate the balance therein to the Specified Reserve Account Balance; provided
that (except on the final Distribution Date upon termination of the Trust) no
amounts on deposit in the Reserve Account (other than amounts in excess of the
Specified Reserve Account Balance) will be available to pay any such
Noteholders' Interest Index Carryover.
Distributions of Principal. Principal payments will be made to the
Noteholders on each Distribution Date in an amount generally equal to the
Principal Distribution Amount for such Distribution Date, until the principal
balance of the Notes is reduced to zero. Principal payments on the Notes will
generally be derived from Available Funds remaining after the distribution of
the Trust Fees, the Noteholders' Interest Distribution Amount and the
Certificateholders' Interest Distribution Amount. In addition, in the event the
Financed Student Loans are not sold pursuant to the auction process described
under "Description of the Transfer and Servicing Agreements Termination" on or
after the Auction Distribution Date on which the Pool Balance if the amount on
deposit in the Reserve Account is greater than the Specified Reserve Account
Balance, such excess will generally be released from the Reserve Account and
distributed to Noteholders as an accelerated payment of principal. See
"Description of the Transfer and Servicing Agreements -- Distributions" and
" -- Credit Enhancement". If such sources are insufficient to pay the
Noteholders' Principal Distribution Amount for such Distribution Date, such
shortfall will be added to the principal payable to the Noteholders on
subsequent Distribution Dates. Amounts on deposit in the Reserve Account will
not be available to make principal payments on the Notes except at maturity or
on the final Distribution Date upon termination of the Trust.
Principal payments on the Notes will be applied on each Distribution Date,
first, to the principal balance of the Class A-1 Notes until such principal
balance is reduced to zero and then to the principal balance of the Class A-2
Notes until such principal balance is reduced to zero; provided that following
the occurrence of an Event of Default and the exercise by the Indenture Trustee,
acting at the direction of the Noteholders, of remedies under the Indenture,
principal payments on the Notes will be made first to the Class A-1 Noteholders,
and then after the Class A-1 Notes have been paid in full, to the Class A-2
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Noteholders, in each case ratably, without preference or priority. See " -- The
Indenture -- Events of Default; Rights Upon Event of Default." The aggregate
outstanding principal amount of the Class A-1 Notes will be payable in full on
the July 2004 Distribution Date (the "Class A-1 Final Maturity Date") and of the
Class A-2 Notes will be payable in full on the April 2010 Distribution Date (the
"Class A-2 Final Maturity Date"). Although the maturity of certain of the
Financed Student Loans may extend beyond such maturity dates, the actual date on
which the aggregate outstanding principal and accrued interest of the Class A-1
Notes or Class A-2 Notes are paid may be earlier than the Class A-1 Final
Maturity Date or Class A-2 Final Maturity Date, respectively, based on a variety
of factors, including those described above under "Risk Factors -- Prepayment,
Maturity and Yield Risks", "Risk Factors -- Prepayment Risks Differ Between the
Notes and the Certificates" and "The Financed Student Loan Pool -- Maturity and
Prepayment Assumptions".
THE CERTIFICATES
Distributions of Interest. Certificateholders will be entitled to
distributions in an amount equal to the amount of interest that would accrue on
the Certificate Balance at a rate per annum (calculated as provided below) equal
to the Certificate Rate. Interest will accrue during each Interest Period and
will be payable to the Certificateholders on each Distribution Date. Interest
distributions due for any Distribution Date but not distributed on such
Distribution Date will be due on the next Distribution Date increased by an
amount equal to interest on such amount at the Certificate Rate. Interest
distributions with respect to the Certificates for such Distribution Date will
generally be funded from the portion of the Available Funds and the amounts on
deposit in the Reserve Account remaining after the distribution of the Trust
Fees and the Noteholders' Interest Distribution Amount for such Distribution
Date. See "Description of the Transfer and Servicing
Agreements -- Distributions" and " -- Credit Enhancement -- Reserve Account".
The "Certificate Rate" for each Interest Period will be equal to the lesser
of (a) the T-Bill Rate for such Interest Period (determined as set forth under
" -- Determination of the T-Bill Rates") plus 0.82% and (b) the Student Loan
Rate for such Interest Period.
Any Certificateholders' Interest Index Carryover that may exist on any
Distribution Date will be payable to the Certificateholders on that Distribution
Date and any succeeding Distribution Dates solely out of the amount of Available
Funds remaining in the Collection Account on any such Distribution Date after
distribution of the Trust Fees, the Noteholders' Distribution Amount, the
Certificateholders' Distribution Amount, the amount, if any, necessary to be
deposited into the Reserve Account to reinstate the balance therein to the
Specified Reserve Account Balance and any Noteholders' Interest Index Carryover;
provided that (except on the final Distribution Date upon termination of the
Trust) amounts on deposit in the Reserve Account (other than amounts in excess
of the Specified Reserve Account Balance) will not be available to pay any such
Certificateholders' Interest Index Carryover.
Distributions of Principal. Certificateholders will be entitled to
distributions on each Distribution Date on and after which the Notes are paid in
full in an amount generally equal to the Certificateholders' Principal
Distribution Amount for such Distribution Date. Distributions with respect to
principal payments on the Certificates for such Distribution Date will generally
be funded from the portion of Available Funds remaining after distribution of
the Trust Fees, any Noteholders' Distribution Amount and the Certificateholders'
Interest Distribution Amount for such Distribution Date. See "Description of the
Transfer and Servicing Agreements -- Distributions" and " -- Credit
Enhancement -- Reserve Account". In addition, in the event the Financed Student
Loans are not sold pursuant to the auction process described under "Description
of the Transfer and Servicing Agreements -- Termination" on or after the Auction
Distribution Date, if the amount on deposit in the Reserve Account is greater
than the Specified Reserve Account Balance, such excess will generally be
released and paid to the Certificateholders as accelerated principal payments as
described under "Description of the Transfer and Servicing Agreements -- Credit
Enhancement -- Reserve Account", subject to the prior payment in full of the
Notes. Amounts on deposit in the Reserve Account will not be available to make
payments on the Certificate Balance except on the final Distribution Date upon
termination of the Trust.
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The outstanding principal amount of the Certificates will be payable in
full on the January 2016 Distribution Date (the "Certificate Final Payment
Date"). The actual date on which the aggregate outstanding principal and accrued
interest of the Certificates will be paid may be earlier than the Certificate
Final Payment Date, however, based on a variety of factors, including those
described above under "Risk Factors -- Prepayment, Maturity and Yield Risks",
"Risk Factors -- Prepayment Risks Differ Between the Notes and the Certificates"
and "The Financed Student Loan Pool -- Maturity and Prepayment Assumptions".
Subordination of the Certificates. On any Distribution Date distributions
in respect of interest on the Certificates will be subordinated to the payment
of interest on the Notes and distributions in respect of the Certificate Balance
will be subordinated to the payment of interest on the Notes (other than any
Noteholders' Interest Index Carryover) and principal of the Notes. Consequently,
on any Distribution Date, Available Funds and amounts on deposit in the Reserve
Account remaining after payment of the Trust Fees will be applied to the payment
of the Noteholders' Interest Distribution Amount (but not to the payment of any
Noteholders' Interest Index Carryover) for such Distribution Date prior to any
distribution thereof to Certificateholders. Moreover, no distributions in
respect of principal of the Certificates will be made until the Distribution
Date on or after which the Notes have been paid in full. Notwithstanding the
foregoing, if on any Distribution Date, following all distributions to be made
on such Distribution Date, the outstanding principal amount of the Notes would
be in excess of the sum of the outstanding principal balance of the Financed
Student Loans and any accrued but unpaid interest on the Financed Student Loans
as of the last day of the related Collection Period plus the balance of the
Reserve Account on such Distribution Date following such distributions, or if an
Insolvency Event with respect to the Seller or an Event of Default under the
Indenture has occurred and is continuing, amounts on deposit in the Collection
Account and the Reserve Account will be applied on such Distribution Date to the
payment of the Noteholders' Distribution Amount before any amounts are applied
to the payment of the Certificateholders' Distribution Amount. In addition, on
any Distribution Date, Available Funds remaining after payment of the Trust
Fees, the Noteholders' Distribution Amount, the Certificateholders' Distribution
Amount, the amount, if any, necessary to be deposited into the Reserve Account
to reinstate the balance therein to the Specified Reserve Account Balance for
such Distribution Date will be applied to the payment of the Noteholders'
Interest Index Carryover prior to any distribution thereof to Certificateholders
to cover the Certificateholders' Interest Index Carryover. Any portion of the
Certificateholders' Interest Distribution Amount not received on such
Distribution Date in connection with such subordination will be treated as a
Certificateholders' Interest Shortfall to be paid on succeeding Distribution
Dates.
DETERMINATION OF THE T-BILL RATE
"T-Bill Rate" means, on any day, the weighted average per annum discount
rate (expressed on a bond equivalent basis and applied on a daily basis) for
91-day Treasury bills sold at the most recent 91-day Treasury bill auction prior
to such date, as reported by the U.S. Department of the Treasury. In the event
that the results of the auctions of 91-day Treasury bills cease to be reported
as provided above, or that no such auction is held in a particular week, then
the T-Bill Rate in effect as a result of the last such publication or report
will remain in effect until such time, if any, as the results of auctions of
91-day Treasury bills shall again be reported or such an auction is held, as the
case may be. The T-Bill Rate will be subject to a Lock-In Period of six business
days.
"Lock-In Period" means the period of days preceding any Distribution Date
during which the Note Rate or Certificate Rate, as applicable, in effect on the
first day of such period will remain in effect until the end of the Interest
Period related to such Distribution Date.
Accrued interest on either class of Notes from and including the Closing
Date or the preceding Distribution Date, as applicable, to but excluding the
current Distribution Date is calculated by multiplying the principal amount of
such Notes by an "accrued interest factor." This factor is calculated by adding
the interest rates applicable to each day on which each such Note has been
outstanding since the Closing Date or the preceding Distribution Date, as
applicable, and dividing the sum by 365 (or by 366 in the case of
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accrued interest which is payable on a Distribution Date in a leap year) and
rounding the resulting number to nine decimal places.
The following table sets forth the accrued interest factors that would have
been applicable to any Note bearing interest at the indicated rates, assuming a
365-day year:
<TABLE>
<CAPTION>
ASSUMED INTEREST
--------------------------------------
DAYS RATE ON INTEREST
SETTLEMENT DATE OUTSTANDING THE NOTES FACTOR
- --------------- ----------- --------- -----------
<S> <C> <C> <C>
1st............................................ 0 5.00000% 0.000000000
2nd............................................ 1 5.00000% 0.000136986
3rd............................................ 2 5.00000% 0.000273973
4th............................................ 3 5.00000% 0.000410959
5th*........................................... 4 5.15000% 0.000547945
6th............................................ 5 5.15000% 0.000689041
7th............................................ 6 5.15000% 0.000830137
8th............................................ 7 5.15000% 0.000971233
9th............................................ 8 5.15000% 0.001112329
10th........................................... 9 5.15000% 0.001253425
</TABLE>
- ---------------
* First interest rate adjustment (91-day Treasury bills are generally auctioned
weekly).
The numbers in this table are examples given for information purposes only
and are in no way a prediction of interest rates on any Notes. A similar factor
calculated in the same manner is applicable to the return on the Certificates.
The Administrator intends to make information concerning the current 91-day
Treasury Bill Rate and the accrued interest factor available through Bloomberg
L.P., but such information may not become available until several months after
the Closing Date.
THE INDENTURE
Modification of Indenture. With the consent of the holders of a majority
of the outstanding Notes, the Indenture Trustee and the Trust may execute a
supplemental indenture to add provisions to, or change in any manner or
eliminate any provisions of, the Indenture with respect to the Notes, or to
modify (except as provided below) in any manner the rights of the Noteholders.
Without the consent of the holder of each outstanding Note affected
thereby, however, no supplemental indenture will (i) change the due date of any
installment of principal of or interest on any Note or reduce the principal
amount thereof, the interest rate specified thereon or the redemption price with
respect thereto or change any place of payment where or the coin or currency in
which any Note or any interest thereon is payable, (ii) impair the right to
institute suit for the enforcement of certain provisions of the Indenture
regarding payment, (iii) reduce the percentage of the aggregate amount of the
outstanding Notes the consent of the holders of which is required for any such
supplemental indenture or the consent of the holders of which is required for
any waiver of compliance with certain provisions of the Indenture or of certain
defaults thereunder and their consequences as provided for in the Indenture,
(iv) modify or alter the provisions of the Indenture regarding the voting of
Notes held by the Trust, the Seller, an affiliate of either of them or any
obligor on the Notes, (v) reduce the percentage of the aggregate outstanding
amount of the Notes the consent of the holders of which is required to direct
the Eligible Lender Trustee on behalf of the Trust to sell or liquidate the
Financed Student Loans if the proceeds of such sale would be insufficient to pay
the principal amount and accrued but unpaid interest on the outstanding Notes,
(vi) decrease the percentage of the aggregate principal amount of the Notes
required to amend the sections of the Indenture which specify the applicable
percentage of aggregate principal amount of the Notes necessary to amend the
Indenture or certain other related agreements or (vii) permit the creation of
any lien ranking prior to or on a parity with the lien of the Indenture with
respect to any of the collateral for the Notes or, except as otherwise permitted
or contemplated in the Indenture, terminate the lien of the Indenture on any
such collateral or deprive the holder of any Note of the security afforded by
the lien of the Indenture.
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The Trust and the Indenture Trustee may also enter into supplemental
indentures, without obtaining the consent of Noteholders, for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Indenture or of modifying in any manner the rights of
Noteholders so long as such action will not, in the opinion of counsel
satisfactory to the Indenture Trustee, materially and adversely affect the
interest of any Noteholder.
Events of Default; Rights Upon Event of Default. An "Event of Default"
with respect to the Notes is defined in the Indenture as consisting of the
following (except as described in the remaining sentences of this paragraph):
(i) a default for five days or more in the payment of any interest on any Note
after the same becomes due and payable; (ii) a default in the payment of the
principal of or any installment of the principal of any Note when the same
becomes due and payable; (iii) a default in the observance or performance of any
covenant or agreement of the Trust made in the Indenture and the continuation of
any such default for a period of thirty days after notice thereof is given to
the Trust by the Indenture Trustee or to the Trust and the Indenture Trustee by
the holders of at least 25% in principal amount of the Notes then outstanding;
(iv) any representation or warranty made by the Trust in the Indenture or in any
certificate delivered pursuant thereto or in connection therewith having been
incorrect in a material respect as of the time made, and such breach not having
been cured within thirty days after notice thereof is given to the Trust by the
Indenture Trustee or to the Trust and the Indenture Trustee by the holders of at
least 25% in principal amount of the Notes then outstanding; or (v) certain
events of bankruptcy, insolvency, receivership or liquidation of the Trust.
However, the amount of principal required to be distributed to Noteholders under
the Indenture on any Distribution Date is limited to the amount of Available
Funds and amounts on deposit in the Reserve Account after payment of the
Servicing Fee, the Administration Fee and the Noteholders' Interest Distribution
Amount. Any such shortfalls on any Distribution Date will be carried over as a
Noteholders' Principal Shortfall to be paid on succeeding Distribution Dates.
Therefore, the failure to pay principal on the Class A-1 Notes may not result in
the occurrence of an Event of Default until the Class A-1 Final Maturity Date
and the failure to pay principal on the Class A-2 Notes may not result in the
occurrence of an Event of Default until the Class A-2 Final Maturity Date. In
addition, the failure to pay the aggregate amount of Noteholders' Interest Index
Carryover as a result of insufficient Available Funds will not result in the
occurrence of an Event of Default.
If an Event of Default should occur and be continuing with respect to the
Notes, the Indenture Trustee or holders of a majority in principal amount of the
Notes then outstanding may declare the principal of the Notes to be immediately
due and payable. Such declaration may be rescinded by the holders of a majority
in principal amount of the Notes then outstanding at any time prior to the entry
of judgment for the payment of such amount if (i) the Trust has paid to the
Indenture Trustee a sum equal to all amounts then due with respect to the Notes
(without giving effect to such acceleration) and (ii) all Events of Default
(other than nonpayment of amounts due solely as a result of such acceleration)
have been cured or waived.
If the Notes have been declared to be due and payable following an Event of
Default with respect thereto, the Indenture Trustee may, in its discretion,
either require the Eligible Lender Trustee to sell the Financed Student Loans,
or elect to have the Eligible Lender Trustee maintain possession of the Financed
Student Loans and continue to apply collections with respect to such Financed
Student Loans as if there had been no declaration of acceleration. In addition,
the Indenture Trustee is prohibited from directing the Eligible Lender Trustee
to sell the Financed Student Loans following an Event of Default, other than a
default in the payment of any principal or a default for five days or more in
the payment of any interest on any Note, unless (i) the holders of all
outstanding Notes consent to such sale, (ii) the proceeds of such sale are
sufficient to pay in full the principal of and the accrued interest on the
outstanding Notes at the date of such sale or (iii) the Indenture Trustee
determines that the collections on the Financed Student Loans would not be
sufficient on an ongoing basis to make all payments on the Notes as such
payments would have become due if such obligations had not been declared due and
payable, and the Indenture Trustee obtains the consent of the holders of 66 2/3%
of the aggregate principal amount of the Notes then outstanding. If the proceeds
of any such sale are insufficient to pay the then outstanding principal amount
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of the Notes and any accrued interest, such proceeds shall be distributed to the
holders of Class A-1 Notes and Class A-2 Notes on a pro rata basis, based on the
amount then owing on each class of Notes.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, if an Event of Default should occur and be continuing with
respect to the Notes, the Indenture Trustee will be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of Notes, if the Indenture Trustee reasonably
believes it will not be adequately indemnified against the costs, expenses and
liabilities which might be incurred by it in complying with such request.
Subject to such provisions for indemnification and certain limitations contained
in the Indenture, the holders of a majority in principal amount of the
outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding or any remedy available to the Indenture Trustee and
the holders of a majority in principal amount of the Notes then outstanding may,
in certain cases, waive any default with respect thereto, except a default in
the payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the holders of the outstanding Notes.
No holder of any Note will have the right to institute any proceeding with
respect to the Indenture, unless (i) such holder previously has given to the
Indenture Trustee written notice of a continuing Event of Default, (ii) the
holders of not less than 25% in principal amount of the outstanding Notes have
requested in writing that the Indenture Trustee institute such proceeding in its
own name as Indenture Trustee, (iii) such holder or holders have offered the
Indenture Trustee reasonable indemnity, (iv) the Indenture Trustee has for 60
days failed to institute such proceeding and (v) no direction inconsistent with
such written request has been given to the Indenture Trustee during such 60-day
period by the holders of a majority in principal amount of the outstanding
Notes.
In addition, the Indenture Trustee and the Noteholders will covenant that
they will not at any time institute against the Trust any bankruptcy,
reorganization or other proceeding under any Federal or state bankruptcy or
similar law.
None of the Indenture Trustee, the Seller, the Administrator, the Master
Servicer or the Eligible Lender Trustee in its individual capacity, nor any
holder of a Certificate representing an ownership interest in the Trust, nor any
of their respective owners, beneficiaries, agents, officers, directors,
employees, successors or assigns will, in the absence of an express agreement to
the contrary, be personally liable for the payment of the principal of or
interest on the Notes or for the agreements of the Trust contained in the
Indenture.
Certain Covenants. The Trust may not consolidate with or merge into any
other entity, unless (i) the entity formed by or surviving such consolidation or
merger is organized under the laws of the United States, any state or the
District of Columbia, (ii) such entity expressly assumes the Trust's obligation
to make due and punctual payments upon the Notes and the performance or
observance of every agreement and covenant of the Trust under the Indenture,
(iii) no Event of Default has occurred and is continuing immediately after such
merger or consolidation, (iv) the Trust has been advised that the rating of the
Notes and the Certificates would not be reduced or withdrawn by the 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 relevant state tax consequence to the
Trust or to any Certificateholder or Noteholder.
The Trust will not, among other things, (i) except as expressly permitted
by the Indenture, the Transfer and Servicing Agreements or certain related
documents (collectively, the "Related Documents"), sell, transfer, exchange or
otherwise dispose of any of the assets of the Trust, (ii) claim any credit on or
make any deduction from the principal and interest payable in respect of the
Notes (other than amounts withheld under the Code or applicable state law) or
assert any claim against any present or former holder of Notes because of the
payment of taxes levied or assessed upon the Trust, (iii) except as contemplated
by the Related Documents, dissolve or liquidate in whole or in part, (iv) permit
the validity or effectiveness of the Indenture to be impaired or permit any
person to be released from any covenants or obligations with respect to the
Notes under the Indenture except as may be expressly permitted thereby or (v)
permit any
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lien, charge, excise, claim, security interest, mortgage or other encumbrance to
be created on or extend to or otherwise arise upon or burden the assets of the
Trust or any part thereof, or any interest therein or the proceeds thereof,
except as expressly permitted by the Related Documents.
The Trust may not engage in any activity other than financing, purchasing,
owning, selling and managing the Financed Student Loans and the other assets of
the Trust in the manner contemplated by the Related Documents and activities
incidental thereto.
The Trust will not incur, assume or guarantee any indebtedness other than
indebtedness incurred pursuant to the Notes and the Indenture or otherwise in
accordance with the Related Documents.
Annual Compliance Statement. The Trust will be required to file annually
with the Indenture Trustee a written statement as to the fulfillment of its
obligations under the Indenture.
Indenture Trustee's Annual Report. The Indenture Trustee will be required
to mail each year to all Noteholders a brief report relating to, among other
things, its eligibility and qualification to continue as the Indenture Trustee
under the Indenture, any amounts advanced by it under the Indenture, the amount,
interest rate and maturity date of certain indebtedness owing by the Trust to
the Indenture Trustee in its individual capacity, the property and funds
physically held by the Indenture Trustee as such and any action taken by it that
materially affects the Notes and that has not been previously reported.
Satisfaction and Discharge of Indenture. The Indenture will be discharged
with respect to the collateral securing the Notes upon the delivery to the
Indenture Trustee for cancellation of all the Notes or, with certain
limitations, upon deposit with the Indenture Trustee of funds sufficient for the
payment in full of all the Notes.
The Indenture Trustee. Bankers Trust Company, a New York banking
corporation, will be the Indenture Trustee under the Indenture. The Seller and
its affiliates may maintain normal commercial banking relations with the
Indenture Trustee.
Fees. In consideration for its performance of its obligations under the
Indenture, the Indenture Trustee will be entitled to receive compensation for
its services in accordance with a separate agreement between the Administrator
and the Indenture Trustee.
BOOK-ENTRY REGISTRATION
Persons acquiring beneficial ownership interests in the Notes may hold
their interests through The Depository Trust Company ("DTC") in the United
States or Cedel or Euroclear in Europe and persons acquiring beneficial
ownership interests in the Certificates may hold their interests through DTC.
Securities will be registered in the name of Cede & Co. ("Cede") as nominee for
DTC. Cedel and Euroclear will hold omnibus positions with respect to the Notes
on behalf of Cedel Participants and the Euroclear Participants, respectively,
through customers' securities accounts in Cedel's and Euroclear's name on the
books of their respective depositaries (collectively, the "Depositaries") which
in turn will hold such positions in customers' securities accounts in the
Depositaries' names on the books of DTC.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York UCC and a "clearing agency"
registered pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for its participating organizations ("Participants") and to
facilitate the clearance and 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
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the Indenture Trustee or the Eligible Lender Trustee, as applicable (the
"Applicable Trustee"), through Participants and Indirect Participants. Under a
book-entry format, Securityholders may experience some delay in their receipt of
payments, since such payments will be forwarded by the Applicable Trustee to
Cede, as nominee for DTC. DTC will forward such payments to its Participants,
which thereafter will forward them to Indirect Participants or Securityholders.
It is anticipated that the only "Securityholder", "Certificateholder" and
"Noteholder" will be Cede, as nominee for DTC. Securityholders will not be
recognized by the Applicable Trustee as Noteholders or Certificateholders as
such terms are used in the Indenture and the Trust Agreement, respectively, and
Securityholders will be permitted to exercise their rights only indirectly
through DTC and its Participants.
Transfers between DTC Participants will occur in the ordinary way in
accordance with DTC Rules. Transfers between Cedel Participants and Euroclear
Participants will occur in the ordinary way in accordance with their applicable
rules and operating procedures.
Because of time-zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a DTC Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedel Participants on such business day. Cash received in Cedel or
Euroclear as a result of sales of securities by or through a Cedel Participant
or a Euroclear Participant to a DTC Participant will be received with value on
the DTC settlement date but will be available in the relevant Cedel or Euroclear
cash account only as of the business day following settlement in DTC.
Cross-market transfers between persons holding Notes directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC Rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Cedel Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Securities among Participants on whose behalf it acts with respect to the
Securities and to receive and transmit distributions of principal of, and
interest on, the Securities. Participants and Indirect Participants with which
Securityholders have accounts with respect to the Securities similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Securityholders. Accordingly, although
Securityholders will not possess Securities, the Rules provide a mechanism by
which Participants will receive payments and will be able to transfer their
interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to such
Securities, may be limited due to the lack of a physical certificate for such
Securities.
Cedel Bank, societe anonyme ("Cedel") is incorporated under the laws of
Luxembourg as a professional depository. Cedel holds securities for its
participating organizations ("Cedel Participants") and facilitates the clearance
and settlement of securities transactions between Cedel Participants through
electronic book-entry changes in accounts of Cedel Participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in Cedel in any of 32 currencies, including United States dollars. Cedel
provides to its Cedel Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and
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borrowing. Cedel interfaces with domestic markets in several countries. As a
professional depository, Cedel is subject to regulation by the Luxembourg
Monetary Institute. Cedel Participants are recognized financial institutions
around the world including underwriters, securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations and may
include any underwriters, agents or dealers with respect to the Notes offered
hereby. Indirect access to Cedel is also available to others, such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a Cedel Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in any of 32
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. The Euroclear
System is operated by Morgan Guaranty Trust Company of New York, Brussels,
Belgium office (the "Euroclear Operator" or "Euroclear"), under contract with
Euroclear Clearance Systems, S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for the Euroclear System on behalf of Euroclear Participants. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries and may include any
underwriters, agents or dealers with respect to the Notes offered hereby.
Indirect access to the Euroclear System is also available to other firms that
clear through or maintain a custodial relationship with a Euroclear Participant,
either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawals of
securities and cash from the Euroclear System and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants and has no record
of or relationship with persons holding through Euroclear Participants.
Distributions with respect to Notes held through Cedel or Euroclear will be
credited to the cash accounts of Cedel Participants or Euroclear Participants in
accordance with the relevant system's rules and procedures, to the extent
received by its Depositary. Such distributions will be subject to tax reporting
in accordance with relevant United States tax laws and regulations. Cedel or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a beneficial holder of Notes under the Indenture on behalf of a
Cedel Participant or Euroclear Participant only in accordance with its relevant
rules and procedures and subject to its Depositary's ability to effect such
actions on its behalf through DTC.
DTC has advised the Administrator that it will take any action permitted to
be taken by a Securityholder under the Indenture or the Trust Agreement, as the
case may be, only at the direction of one or more Participants to whose accounts
with DTC the Securities are credited. DTC may take conflicting actions with
respect to other undivided interests to the extent that such actions are taken
on behalf of Participants whose holdings include such undivided interests.
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Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of interests in the Notes among Participants of
DTC, Cedel and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
NEITHER THE TRUST, THE SELLER, THE MASTER SERVICER, THE ADMINISTRATOR, THE
ELIGIBLE LENDER TRUSTEE, THE INDENTURE TRUSTEE NOR THE UNDERWRITERS WILL HAVE
ANY RESPONSIBILITY OR OBLIGATION TO ANY PARTICIPANTS, CEDEL PARTICIPANTS OR
EUROCLEAR PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS NOMINEES WITH RESPECT
TO (1) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC, CEDEL OR EUROCLEAR OR ANY
PARTICIPANT, (2) THE PAYMENT BY DTC, CEDEL OR EUROCLEAR OR ANY PARTICIPANT OF
ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE PRINCIPAL AMOUNT OR
INTEREST ON THE SECURITIES, (3) THE DELIVERY BY ANY PARTICIPANT, CEDEL
PARTICIPANT OR EUROCLEAR PARTICIPANT OF ANY NOTICE TO ANY BENEFICIAL OWNER WHICH
IS REQUIRED OR PERMITTED UNDER THE TERMS OF THE INDENTURE OR THE TRUST AGREEMENT
TO BE GIVEN TO SECURITYHOLDERS OR (4) ANY OTHER ACTION TAKEN BY DTC AS THE
SECURITYHOLDER.
DEFINITIVE SECURITIES
The Notes and the Certificates will initially be issued in book-entry form.
The Notes and the Certificates will be issued in fully registered, certificated
form ("Definitive Notes" and "Definitive Certificates", respectively, and
collectively referred to herein as "Definitive Securities") to Noteholders or
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 Master Servicer Default or an Administrator Default,
Securityholders representing at least a majority of the outstanding principal
amount of the Notes or the Certificates, as the case may be, advise the
Applicable Trustee through DTC in writing that the continuation of a book-entry
system through DTC (or a successor thereto) with respect to such Notes or
Certificates is no longer in the best interest of the holders of such
Securities.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Applicable Trustee will be required to notify all applicable
Securityholders through Participants of the availability of Definitive
Securities. Upon surrender by DTC of the definitive security representing the
corresponding Securities and receipt of instructions for re-registration, the
Applicable Trustee will reissue such Securities as Definitive Securities to such
Securityholders.
Distributions of principal of, and interest on, such Definitive Securities
will thereafter be made by the Applicable Trustee in accordance with the
procedures set forth in the Indenture or the Trust Agreement, as the case may
be, directly to holders of Definitive Securities in whose names the Definitive
Securities were registered at the close of business on the Record Date. Such
distributions will be made by check mailed to the address of such holder as it
appears on the register maintained by the Applicable Trustee. The final payment
on any such Definitive Security, however, will be made only upon presentation
and surrender of such Definitive Security at the office or agency specified in
the notice of final distribution to Securityholders.
Definitive Securities will be transferable and exchangeable at the offices
of the Applicable Trustee or of a registrar named in a notice delivered to
holders of Definitive Securities. No service charge will be imposed for any
registration of transfer or exchange, but the Applicable Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
LIST OF SECURITYHOLDERS
Three or more holders of the Notes or one or more holders of Notes
evidencing not less than 25% of the aggregate outstanding principal balance of
the Notes may, by written request to the Indenture Trustee,
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obtain access to the list of all Noteholders maintained by the Indenture Trustee
for the purpose of communicating with other Noteholders with respect to their
rights under the Indenture or the Notes. The Indenture Trustee may elect not to
afford the requesting Noteholders access to the list of Noteholders if it agrees
to mail the desired communication or proxy, on behalf and at the expense of the
requesting Noteholders, to all Noteholders.
Three or more Certificateholders or one or more holders of Certificates
evidencing not less than 25% of the Certificate Balance may, by written request
to the Eligible Lender Trustee, obtain access to the list of all
Certificateholders for the purpose of communicating with other
Certificateholders with respect to their rights under the Trust Agreement or
under the Certificates.
REPORTS TO SECURITYHOLDERS
On each Distribution Date, the Applicable Trustee will provide to
Securityholders of record as of the related Record Date a statement setting
forth substantially the same information as is required to be provided on the
related quarterly report provided to the Indenture Trustee and the Trust
described under "Description of Transfer and Servicing Agreements -- Statements
to Indenture Trustee and Trust".
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of the Indenture or the Trust
Agreement, as the case may be, the Applicable Trustee will mail to each person
who at any time during such calendar year was a Securityholder and received any
payment thereon, a statement containing certain information for the purposes of
such Securityholder's preparation of federal income tax returns. See "Material
Federal Income Tax Consequences".
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
GENERAL
The following is a summary of certain terms of the Sale Agreement, pursuant
to which the Eligible Lender Trustee on behalf of the Trust will purchase the
Financed Student Loans; the Master Servicing Agreement, pursuant to which, the
Master Servicer will service and the Administrator will perform certain
administrative functions with respect to the Financed Student Loans; the
Administration Agreement, pursuant to which the Administrator will undertake
certain other administrative duties with respect to the Trust and the Financed
Student Loans; and the Trust Agreement, pursuant to which the Trust will be
created and the Certificates will be issued (collectively, the "Transfer and
Servicing Agreements"). Each of such Transfer and Servicing Agreements will be
substantially in the form filed or incorporated by reference as an exhibit to
the Registration Statement of which this Prospectus is a part. The following
description and summaries of certain terms of the Transfer and Servicing
Agreements describe or summarize the material provisions of such agreements.
SALE OF FINANCED STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
On or prior to the Closing Date, the Seller will sell and assign to the
Eligible Lender Trustee on behalf of the Trust, without recourse, its entire
interest in the Financed Student Loans and all collections received and to be
received with respect thereto for the period after June 30, 1997 pursuant to the
Sale Agreement. Each Financed Student Loan will be identified in schedules
appearing as an exhibit to the Sale Agreement. The Eligible Lender Trustee will,
concurrently with such sale and assignment, execute, authenticate and deliver
the Notes. The net proceeds received from the sale of the Notes and the
Certificates will be applied to the purchase of the Financed Student Loans.
In the Sale Agreement, the Seller will make certain representations and
warranties with respect to the Financed Student Loans to the Trust for the
benefit of the Certificateholders and the Noteholders, including, among other
things, that (i) each Financed Student Loan, on the date on which transferred to
the Trust, is free and clear of all security interests, liens, charges and
encumbrances and no offsets, defenses or counterclaims have been asserted or
threatened; (ii) the information provided with respect to the
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Financed Student Loans is true and correct as of the Cutoff Date and, in some
cases, the Closing Date, and (iii) each Financed Student Loan, at the time it
was originated, complied and, at the Closing Date or Transfer Date (as defined
below), as applicable, complies in all material respects with applicable federal
and state laws (including, without limitation, the Higher Education Act,
consumer credit, truth in lending, equal credit opportunity and disclosure laws)
and applicable restrictions imposed under any Guarantee Agreement.
Following the discovery by or notice to the Seller of a breach of any such
representation or warranty with respect to any Financed Student Loan that
materially and adversely affects the interests of the Certificateholders or the
Noteholders in such Financed Student Loan (it being understood that any such
breach that does not affect any Guarantor's obligation to guarantee payment of
such Financed Student Loan will not be considered to have such a material
adverse effect), the Seller will, unless such breach is cured within 120 days,
repurchase such Financed Student Loan from the Eligible Lender Trustee, as of
the first day following the end of such 120-day period that is the last day of a
Collection Period, at the related purchase price as of the day of repurchase
equal to 100% (or 98%, in the case of any Financed Student Loan disbursed on or
after October 1, 1993, if the related borrower is in default under such Financed
Student Loan) of the amount required to prepay in full the respective Financed
Student Loan under the terms thereof including all accrued interest thereon and
any lost Interest Subsidy Payments and Special Allowance Payments with respect
thereto (the "Purchase Amount"). In addition, the Seller will reimburse the
Trust with respect to a Financed Student Loan for any accrued interest amounts
that a Guarantor refuses to pay pursuant to its Guarantee Agreement due to, or
for any Interest Subsidy Payments and Special Allowance Payments that are lost
or that must be repaid to the Department as a result of, a breach of any such
representation or warranty by the Seller. The repurchase and reimbursement
obligations of the Seller will constitute the sole remedy available to or on
behalf of the Trust, the Certificateholders or the Noteholders for any such
uncured breach. The Seller's repurchase and reimbursement obligations are
contractual obligations pursuant to the Sale Agreement that may be enforced
against the Seller, but the breach of which will not constitute an Event of
Default.
To facilitate servicing and to reduce administrative costs, the Master
Servicer will delegate to the respective Subservicers its responsibility to
maintain custody of the promissory notes representing the Financed Student Loans
held by the Eligible Lender Trustee on behalf of the Trust. The Seller's and the
Master Servicer's accounting and other records will reflect the sale and
assignment of the Financed Student Loans to the Eligible Lender Trustee on
behalf of the Trust, and Uniform Commercial Code financing statements reflecting
such sale and assignment will be filed.
ACCOUNTS
The Administrator will establish and maintain the Collection Account and
the Reserve Account in the name of the Indenture Trustee on behalf of the
Noteholders and the Certificateholders.
Funds in the Collection Account and the Reserve Account (together, the
"Trust Accounts") will be invested as provided in the Master Servicing Agreement
in Eligible Investments. "Eligible Investments" are: (a) direct obligations of,
and obligations fully guaranteed as to timely payment by, the United States of
America; (b) demand deposits, time deposits or certificates of deposit of any
depository institution or trust company incorporated under the laws of the
United States of America or any State (or any domestic branch of a foreign bank)
and subject to supervision and examination by Federal or state banking or
depository institution authorities (including depository receipts issued by any
such institution or trust company as custodian with respect to any obligation
referred to in clause (a) above or portion of such obligation for the benefit of
the holders of such depository receipts); provided, however, that at the time of
the investment or contractual commitment to invest therein (which shall be
deemed to be made again each time funds are reinvested following each Monthly
Servicing Payment Date or Distribution Date, as the case may be), the commercial
paper or other short-term senior unsecured debt obligations (other than such
obligations the rating of which is based on the credit of a Person other than
such depository institution or trust company) thereof shall have a credit rating
from the Rating Agencies in the highest investment category granted thereby; (c)
commercial paper having, at the time of the investment or contractual commitment
to invest
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therein, a rating from the Rating Agencies in the highest investment category
granted thereby; (d) investments in money market funds having a rating from the
Rating Agencies in the highest investment category granted thereby (including
funds for which the Indenture Trustee, the Administrator or the Eligible Lender
Trustee or any of their respective Affiliates is investment manager or advisor);
(e) bankers' acceptances issued by any depository institution or trust company
referred to in clause (b) above; (f) repurchase obligations with respect to any
security that is a direct obligation of, or fully guaranteed by, the United
States of America or any agency or instrumentality thereof the obligations of
which are backed by the full faith and credit of the United States of America,
in either case entered into with a depository institution or trust company
(acting as principal) described in clause (b) above; and (g) other investments
acceptable to the Rating Agencies as being consistent with the rating of the
Notes. Subject to certain conditions, Eligible Investments may include
securities or other obligations issued by the Seller or its affiliates, or
trusts originated by the Seller or its affiliates, or shares of investment
companies for which the Seller or its affiliates may serve as the investment
advisor. Eligible Investments are limited to obligations or securities that
mature not later than the business day immediately preceding the next
Distribution Date or the next Monthly Servicing Payment Date (to the extent of
the Servicing Fee due on such date). Investment earnings on funds deposited in
the Trust Accounts, net of losses and investment expenses (collectively,
"Investment Earnings"), will be retained by the Master Servicer.
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 of investment grade and/or a short-term
unsecured debt rating in the highest investment rating category, each as
determined by at least two nationally recognized rating agencies and (ii) whose
deposits are insured by the FDIC.
SERVICING PROCEDURES
Pursuant to the Master Servicing Agreement, First Union -- North Carolina
has agreed as the Master Servicer to service, and perform all other related
tasks with respect to, all the Financed Student Loans acquired from time to
time. So long as no claim is being made against a Guarantor for any Financed
Student Loan, the Master Servicer will hold or cause the Subservicers to hold on
behalf of the Trust the notes evidencing, and other documents relating to, that
Financed Student Loan. The Master Servicer is required pursuant to the Master
Servicing Agreement to perform all services and duties customary to the
servicing of Student Loans (including all collection practices), and to do so in
the same manner as the Master Servicer has serviced comparable student loans and
in compliance with all standards and procedures provided for in the Higher
Education Act, the Guarantee Agreements and all other applicable federal and
state laws.
Without limiting the foregoing, the duties of the Master Servicer under the
Master Servicing Agreement include, but are not limited to, collecting and
depositing into the Collection Account (or, in the event that daily deposits
into the Collection Account are not required, paying to the Administrator) all
payments with respect to the Financed Student Loans. In addition, the Master
Servicer will keep ongoing records with respect to such Financed Student Loans
and collections thereon and will furnish quarterly and annual statements to the
Administrator with respect to such information, in accordance with the Master
Servicer's customary practices with respect to the Seller and as otherwise
required in the Master Servicing Agreement. The Master Servicer, pursuant to the
Subservicing Agreements, will cause the Subservicers to prepare for filing by
the Master Servicer with the Department all appropriate claims forms and other
documents and filings on behalf of the Eligible Lender Trustee in order to claim
any Interest Subsidy Payments and Special Allowance Payments that may be payable
in respect of each Collection Period with
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respect to the Financed Student Loans, and to perform other duties which
include, but are not limited to, responding to inquiries from borrowers on the
Financed Student Loans, investigating delinquencies and sending out statements,
payment coupons and tax reporting information to borrowers.
PAYMENTS ON FINANCED STUDENT LOANS
Except as provided below, the Master Servicer will deposit all payments on
Financed Student Loans (from whatever source) and all proceeds of Financed
Student Loans collected by it during each Collection Period into the Collection
Account within two business days of receipt thereof. Except as provided below,
the Eligible Lender Trustee will deposit all Interest Subsidy Payments and all
Special Allowance Payments with respect to the Financed Student Loans received
by it during each Collection Period into the Collection Account within two
business days of receipt thereof.
However, provided (i) no Administrator Default has occurred and is
continuing and (ii) the Rating Agencies have not downgraded or withdrawn their
ratings of the Notes and the Certificates at the initial level (and each other
condition as may be specified by the Rating Agencies is satisfied), the Master
Servicer and the Eligible Lender Trustee will pay all the amounts referred to in
the preceding paragraph that would otherwise be deposited into the Collection
Account to the Administrator, and the Administrator will not be required to
deposit such amounts into the Collection Account until on or before the business
day immediately preceding each Monthly Servicing Payment Date (to the extent of
the Servicing Fee payable on such date) and on or before the business day
immediately preceding each Distribution Date (to the extent of the remainder of
such amounts). In such event, the Administrator will deposit the aggregate
Purchase Amount of Financed Student Loans repurchased by the Seller and
purchased by the Master Servicer into the Collection Account on or before the
business day preceding each Distribution Date. Pending deposit into the
Collection Account, collections may be invested by the Administrator at its own
risk and for its own benefit, and will not be segregated from funds of the
Administrator.
MASTER SERVICER COVENANTS
In the Master Servicing Agreement, the Master Servicer covenants that: (a)
it will duly satisfy all obligations on its part to be fulfilled under or in
connection with the Financed Student Loans, 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
for servicing student loans in general and those of the Seller in particular.
Under the terms of the Master Servicing Agreement, if the Seller or the
Master Servicer discovers, or receives written notice, that any covenant of the
Master Servicer set forth above has not been complied with in all material
respects and such noncompliance has not been cured within 120 days thereafter
and has a materially adverse effect on the interest of the Certificateholders or
the Noteholders in any Financed Student Loan (it being understood that any such
breach that does not affect any Guarantor's obligation to guarantee 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 120-day
period that is the last day of a Collection Period. In that event, the Master
Servicer will be obligated to deposit into the Collection Account an amount
equal to the Purchase Amount of such Financed Student Loan and the Trust's
interest in any such purchased Financed Student Loan will be automatically
assigned to the Master Servicer. In addition, the Master Servicer will reimburse
the Trust with respect to any Financed Student Loan for any accrued interest
amounts that a Guarantor refuses to pay pursuant to its Guarantee Agreement due
to, or for any Interest Subsidy Payments
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and Special Allowance Payments that are lost or that must be repaid to the
Department as a result of, a breach of any such covenant of the Master Servicer.
SERVICING COMPENSATION
The Master Servicer will be entitled to receive the Servicing Fee monthly
in an amount equal to one-twelfth of the product of (i) 1.25% per annum and (ii)
the Pool Balance as of the last day of the preceding calendar month, subject to
adjustment, together with other administrative fees and similar charges, as
compensation for performing the functions as master servicer for the Trust
described above. The Servicing Fee set forth above may be subject to reasonable
increase agreed to by the Administrator, the Eligible Lender Trustee and the
Master Servicer to the extent that a demonstrable and significant increase
occurs in the costs incurred by the Master Servicer in providing the services to
be provided under the Master Servicing Agreement, whether due to changes in
applicable governmental regulations, guarantor program requirements or
regulations, United States Postal Service postal rates or some other
identifiable cost increasing event. The Servicing Fee (together with any portion
of the Servicing Fee that remains unpaid from prior Distribution Dates) will be
payable on each Monthly Servicing Payment Date and will be paid solely out of
Available Funds and amounts on deposit in the Reserve Account on such Monthly
Servicing Payment Date.
The Servicing Fee will compensate the Master Servicer for the costs of
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, accounting for collections and furnishing monthly and annual
statements to the Administrator. The Servicing Fee also will reimburse the
Master Servicer for certain taxes, accounting fees, outside auditor fees, data
processing costs and other costs incurred in connection with administering the
Financed Student Loans.
DISTRIBUTIONS
Deposits to Collection Account. On or about the third business day prior
to each Distribution Date (the "Determination Date"), the Administrator will
provide the Indenture Trustee with certain information with respect to the
distributions to be made on such Distribution Date.
On or before the business day preceding each Monthly Servicing Payment Date
that is not a Distribution Date, the Administrator will cause (or will cause the
Master Servicer and the Eligible Lender Trustee to cause) a portion of the
amount of the Available Funds equal to the Servicing Fee, payable on such date
to be deposited into the Collection Account for payment of the Servicing Fee. On
or before the business day prior to each Distribution Date, the Administrator
will cause (or will cause the Master Servicer and the Eligible Lender Trustee to
cause) the amount of Available Funds to be deposited into the Collection
Account.
For purposes hereof, the term "Available Funds" means, with respect to a
Distribution Date or any Monthly Servicing Payment Date, the sum of the
following amounts received with respect to the related Collection Period (or, in
the case of a Monthly Servicing Payment Date, the applicable portion thereof) to
the extent not previously distributed:
(i) all collections received by the Master Servicer on the Financed
Student Loans (including any Guarantee Payments received with respect to
the Financed Student Loans and any amounts received as a result of a
prepayment in connection with a Financed Student Loan) but net of (x)
amounts required by the Higher Education Act to be paid to the Department
or to be repaid to borrowers (whether or not in the form of a principal
reduction of the applicable Financed Student Loan), with respect to the
Financed Student Loans for such Collection Period, including any
origination fee payable to the Department on Federal Consolidation Loans
disbursed after October 1, 1993, and (y) any collections in respect of
principal on the Financed Student Loans applied by the Trust to repurchase
guaranteed loans from the Guarantors in accordance with the Guarantee
Agreements;
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(ii) any 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 the liquidation of defaulted Financed Student
Loans ("Liquidated Student Loans"), which became Liquidated Student Loans
during such Collection Period in accordance with the Master Servicer's
customary servicing procedures, net of expenses incurred by the Master
Servicer in connection with such liquidation and any amounts required by
law to be remitted to the borrower on such Liquidated Student Loans
("Liquidation Proceeds"), and all recoveries in respect of Liquidated
Student Loans which were written off in prior Collection Periods;
(iv) the aggregate Purchase Amounts received for those Financed
Student Loans repurchased by the Seller or purchased by the Master Servicer
under an obligation which arose during such Collection Period; and
(v) the aggregate amounts, if any, received from the Seller or the
Master Servicer, as the case may be, as reimbursement of non-guaranteed
interest amounts, or lost Interest Subsidy Payments and Special Allowance
Payments, with respect to the Financed Student Loans pursuant to the Sale
Agreement or the Master Servicing Agreement, respectively;
provided, however, that Available Funds will exclude all payments and proceeds
(including Liquidation Proceeds) of any Financed Student Loans the Purchase
Amount of which has been included in Available Funds for a prior Monthly Payment
Date or Distribution Date; provided, further, that if with respect to any
Distribution Date there would not be sufficient funds, after application of
Available Funds (as defined above) and amounts available from the Reserve
Account, to pay any of the items specified in clauses (i) through (iv) under
"-- Distributions -- Distributions from Collection Account," then Available
Funds for such Distribution Date will include, in addition to the Available
Funds (as defined above), amounts on deposit in the Collection Account (or
amounts held by the Administrator, or which the Administrator reasonably
estimates to be held by the Administrator, for deposit into the Collection
Account) on the Determination Date which would have constituted Available Funds
for the Distribution Date succeeding such Distribution Date, up to the amount
necessary to pay such items, and the Available Funds for such succeeding
Distribution Date will be adjusted accordingly.
Distributions from Collection Account. On each Monthly Servicing Payment
Date that is not a Distribution Date, the Administrator will instruct the
Indenture Trustee to pay to the Master Servicer the Servicing Fee due with
respect to the period from and including the preceding Monthly Servicing Payment
Date from amounts on deposit in the Collection Account.
On each Distribution Date, the Administrator will instruct the Indenture
Trustee to make the following deposits and distributions, in the amounts and in
the order of priority specified below, to the extent of the Available Funds with
respect to such Distribution Date:
(i) to the Master Servicer, the Servicing Fee due on such Distribution
Date and all prior unpaid Servicing Fees;
(ii) to the Administrator, the Administration Fee and all unpaid
Administration Fees from prior Collection Periods;
(iii) to the Noteholders, the Noteholders' Interest Distribution
Amount ratably, without preference or priority of any kind, according to
the amounts payable on the Notes in respect of Noteholders' Interest
Distribution Amount;
(iv) to the Eligible Lender Trustee on behalf of the
Certificateholders, the Certificateholders' Interest Distribution Amount,
for distribution by the Eligible Lender Trustee pursuant to the Trust
Agreement, ratably, without preference or priority of any kind, according
to the amounts payable in respect of Certificateholders' Interest
Distribution Amount;
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(v) to the Class A-1 Noteholders, the Noteholders' Principal
Distribution Amount, ratably, without preference or priority of any kind,
according to the amounts payable on the Class A-1 Notes for principal;
(vi) on each Distribution Date on and after which the Class A-1 Notes
have been paid in full, to the Class A-2 Noteholders, the Noteholders'
Principal Distribution Amount, ratably, without preference or priority of
any kind, according to the amounts payable on the Class A-2 Notes for
principal;
(vii) on each Distribution Date on and after which the Notes have been
paid in full, to the Eligible Lender Trustee on behalf of the
Certificateholders, the Certificateholders' Principal Distribution Amount,
for distribution by the Eligible Lender Trustee pursuant to the Trust
Agreement, ratably, without preference or priority of any kind, according
to the amounts payable in respect of the Certificate Balance;
(viii) to the Reserve Account, the amount, if any, necessary to
reinstate the balance of the Reserve Account to the Specified Reserve
Account Balance;
(ix) to the Noteholders, the aggregate unpaid amount of the
Noteholders' Interest Index Carryover, if any, ratably, without preference
or priority of any kind, according to the amounts due and payable on the
Notes in respect of Noteholders' Interest Index Carryover;
(x) to the Eligible Lender Trustee on behalf of the
Certificateholders, the aggregate unpaid amount of the Certificateholders'
Interest Index Carryover, if any, for distribution by the Eligible Lender
trustee pursuant to the Trust Agreement ratably, without preference or
priority of any kind, according to the amounts payable in respect of
Certificateholders' Interest Index Carryover; and
(xi) to the Reserve Account, any remaining amounts after application
of clauses (i) through (x).
For purposes hereof, the following terms have the following meanings:
"Certificate Balance" equals $14,195,880 as of the Closing Date and,
thereafter, equals the initial Certificate Balance, reduced by all amounts
allocable to principal previously distributed to Certificateholders.
"Certificateholders' Distribution Amount" means, with respect to any
Distribution Date, the Certificateholders' Interest Distribution Amount for such
Distribution Date plus, for each Distribution Date on and after which the Notes
have been paid in full, the Certificateholders' Principal Distribution Amount
for such Distribution Date.
"Certificateholders' Interest Shortfall" means, with respect to any
Distribution Date, the excess of (i) the Certificateholders' Interest
Distribution Amount on the preceding Distribution Date over (ii) the amount of
interest actually distributed to the Certificateholders on such preceding
Distribution Date, plus interest on the amount of such excess interest, to the
extent permitted by law, at the Certificate Rate from such preceding
Distribution Date to the current Distribution Date.
"Certificateholders' Interest Distribution Amount" means, with respect to
any Distribution Date, the sum of (i) the amount of interest accrued at the
Certificate Rate for the related Interest Period on the outstanding Certificate
Balance on the immediately preceding Distribution Date, after giving effect to
all distributions to Certificateholders in respect of the Certificate Balance on
such Distribution Date (or, in the case of the first Distribution Date, on the
Closing Date) and (ii) the Certificateholders' Interest Shortfall for such
Distribution Date; provided, however, that the Certificateholders' Interest
Distribution Amount will not include any Certificateholders' Interest Index
Carryover.
"Certificateholders' Interest Index Carryover" means for any Distribution
Date on which the Certificate Rate is based on the Student Loan Rate, the excess
of (a) the amount of return on the Certificates that would have accrued in
respect of such Interest Period at the Certificate Rate without regard to the
Student Loan Rate over (b) the amount of return on the Certificates actually
accrued in respect of such Interest Period based on the Student Loan Rate,
together with the unpaid portion of any such excess
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from prior Distribution Dates and any return accrued thereon calculated at the
Certificate Rate without regard to the Student Loan Rate.
"Certificateholders' Principal Shortfall" means, as of the close of any
Distribution Date, the excess of (i) the Certificateholders' Principal
Distribution Amount on such Distribution Date over (ii) the amount of
distributions made with respect to the Certificate Balance on such Distribution
Date.
"Certificateholders' Principal Distribution Amount" means, on each
Distribution Date, the excess of (i) the sum of (a) the Principal Distribution
Amount for such Distribution Date, (b) the Noteholders' Principal Shortfall as
of the close of the preceding Distribution Date and (c) the Certificateholders'
Principal Shortfall as of the close of the preceding Distribution Date over (ii)
the Noteholders' Principal Distribution Amount for such Distribution Date;
provided that the Certificateholders' Principal Distribution Amount will in no
event exceed the Certificate Balance. In addition, on the Certificate Final
Payment Date, the Certificate Balance to be distributed to the
Certificateholders will include the amount required to reduce the outstanding
Certificate Balance to zero.
"Noteholders' Distribution Amount" means, with respect to any Distribution
Date, the sum of the Noteholders' Interest Distribution Amount and the
Noteholders' Principal Distribution Amount for such Distribution Date.
"Noteholders' Interest Shortfall" means, with respect to any Distribution
Date, the excess of (i) the Noteholders' Interest Distribution Amount on the
preceding Distribution Date over (ii) the amount of interest actually
distributed to the Noteholders on such preceding Distribution Date, plus
interest on the amount of such excess interest due to the Noteholders, to the
extent permitted by law, at the weighted average of the Class A-1 Rate and the
Class A-2 Rate from such preceding Distribution Date to the current Distribution
Date.
"Noteholders' Interest Distribution Amount" means, with respect to any
Distribution Date, the sum of (i) the amount of interest accrued at the
respective Note Interest Rate for the related Interest Period on the aggregate
outstanding principal balances of both classes of Notes on the immediately
preceding Distribution Date after giving effect to all principal distributions
to Noteholders on such date (or, in the case of the first Distribution Date, on
the Closing Date) and (ii) the Noteholders' Interest Shortfall for such
Distribution Date; provided, however, that the Noteholders' Interest
Distribution Amount will not include any Noteholders' Interest Index Carryover.
"Noteholders' Interest Index Carryover" means, for any Distribution Date on
which the Class A-1 Rate or the Class A-2 Rate is based on the Student Loan
Rate, the excess of (a) the amount of interest on the Class A-1 Notes or the
Class A-2 Notes, as the case may be, that would have accrued in respect of the
related Accrual Period had interest been calculated without regard to the
Student Loan Rate over (b) the amount of interest on the Class A-1 Notes or the
Class A-2 Notes, as the case may be, actually accrued in respect of such Accrual
Period based on the Student Loan Rate, together with the unpaid portion of any
such excess from prior Distribution Dates and Interest accrued thereon at the
applicable Note Rate without regard to the Student Loan Rate.
"Noteholders' Principal Shortfall" means, as of the close of any
Distribution Date, the excess of (i) the Noteholders' Principal Distribution
Amount on such Distribution Date over (ii) the amount of principal actually
distributed to the Noteholders on such Distribution Date.
"Noteholders' Principal Distribution Amount" means, with respect to any
Distribution Date, the Principal Distribution Amount for such Distribution Date
plus the Noteholders' Principal Shortfall as of the close of the preceding
Distribution Date; provided that the Noteholders' Principal Distribution Amount
will not exceed the outstanding principal balance of the Notes. In addition, (i)
on the Class A-1 Final Maturity Date, the principal required to be distributed
to the Class A-1 Noteholders will include the amount required to reduce the
outstanding principal balance of the Class A-1 Notes to zero, and (ii) on the
Class A-2 Final Maturity Date, the principal required to be distributed to the
Class A-2 Noteholders will include the amount required to reduce the outstanding
principal balance of the Class A-2 Notes to zero.
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"Pool Balance" means, as of any date, the aggregate principal balance of
the Financed Student Loans on such date including accrued interest thereon to
the extent such interest will be capitalized upon commencement of repayment,
after giving effect to the following without duplication: (i) all payments
received by the Trust during such Collection Period from or on behalf of
borrowers, Guarantors and the Department (collectively, "Obligors"), (ii) all
Purchase Amounts received by the Trust for such Collection Period from the
Seller or the Master Servicer, (iii) all losses realized on Financed Student
Loans liquidated during such Collection Period.
"Principal Distribution Amount" means (i) with respect to the initial
Distribution Date, the amount by which the sum of the outstanding principal
amount of the Notes and the Certificate Balance exceeds the Adjusted Pool
Balance for such Distribution Date and (ii) with respect to each subsequent
Distribution Date, the amount by which the Adjusted Pool Balance for the
preceding Distribution Date exceeds the Adjusted Pool Balance for such
Distribution Date. For this purpose, "Adjusted Pool Balance" means, for any
Distribution Date, (a) if the Pool Balance as of the last day of the related
Collection Period is greater than 40% of the Initial Pool Balance, the sum of
such Pool Balance and the Specified Reserve Account Balance for such
Distribution Date, or (b) if the Pool Balance as of the last day of the related
Collection Period is less than or equal to 40% of the Initial Pool Balance, such
Pool Balance.
"Realized Loss" means the excess of the principal balance (including any
interest that had been or had been expected to be capitalized) of any Liquidated
Student Loan over Liquidation Proceeds with respect to such Student Loan to the
extent allocable to principal (including any interest that had been or had been
expected to be capitalized).
CREDIT ENHANCEMENT
Reserve Account. Pursuant to the Master Servicing Agreement, the Reserve
Account will be created with an initial deposit by the Trust on the Closing Date
of cash or Eligible Investments in an amount equal to the Reserve Account
Initial Deposit. The Reserve Account will be augmented on each Distribution Date
by deposit therein of (i) the amount, if any, necessary to reinstate the balance
of the Reserve Account to the Specified Reserve Account Balance from the amount
of Available Funds remaining after payment of the Trust Fees, the Noteholders'
Distribution Amount and the Certificateholders' Distribution Amount, all for
such Distribution Date, and (ii) any remaining Available Funds after application
of clause (i) above, any unpaid Noteholders' Interest Index Carryover and
Certificateholders' Interest Index Carryover as of such Distribution Date to the
extent described above under "-- Distributions". As described below, subject to
certain limitations, amounts on deposit in the Reserve Account will be released
to the Seller to the extent that the amount on deposit in the Reserve Account
exceeds the Specified Reserve Account Balance.
"Specified Reserve Account Balance" with respect to any Distribution Date
will be equal to 0.45% of the Initial Pool Balance; provided, however, in no
event will such balance exceed the sum of the outstanding principal amount of
the Notes and the outstanding principal balance of the Certificates.
Funds will be withdrawn from cash in the Reserve Account on any Monthly
Servicing Payment Date or Distribution Date to the extent that the amount of
Available Funds on such Monthly Servicing Payment Date or Distribution Date is
insufficient to pay the Servicing Fee on a Monthly Servicing Payment Date or any
of the items specified in clauses (i) through (iv) under
"-- Distributions -- Distributions from Collection Account" on a Distribution
Date. Such funds also will be withdrawn at maturity of the Notes or on the final
Distribution Date upon termination of the Trust to the extent that the amount of
Available Funds at such time is insufficient to pay any of the items specified
in clauses (v) through (vii) under "-- Distributions -- Distributions from
Collection Account." Such funds will be paid from the Reserve Account to the
Master Servicer, on a Monthly Servicing Payment Date, and to the persons and in
the order of priority specified for distributions out of the Collection Account
in such clauses (i) through (iv) and clauses (v) through (vii), as applicable,
on a Distribution Date. See "-- Subordination of the Certificates".
In the event the Financed Student Loans are not sold pursuant to the
auction process described below under "-- Termination" on or after the Auction
Distribution Date if the amount on deposit in the Reserve Account (after giving
effect to all deposits or withdrawals therefrom on such Distribution Date, other
than
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withdrawals described in this sentence) is greater than the Specified Reserve
Account Balance for such Distribution Date, the Administrator will instruct the
Indenture Trustee to distribute the amount of such excess as an accelerated
payment of principal first to the Noteholders until the outstanding principal
balance of the Notes is paid in full and then to the Certificateholders until
the Certificate Balance is paid in full; provided that the amount of such
distribution shall not exceed the principal balance of the Notes or the
Certificate Balance, as applicable, after giving effect to all other payments of
principal to be made on such date.
If the amount on deposit in the Reserve Account on any Distribution Date
(after giving effect to all deposits or withdrawals therefrom on such
Distribution Date) is greater than the Specified Reserve Account Balance for
such Distribution Date, subject to certain limitations, the Administrator will
instruct the Indenture Trustee to distribute the amount of the excess, after
payment of any unpaid Noteholders' Interest Index Carryover and
Certificateholders' Interest Index Carryover, to the Seller. Upon any
distribution to the Seller of amounts from the Reserve Account, neither the
Noteholders nor the Certificateholders will have any rights in, or claims to,
such amounts. Subject to the limitation described in the preceding sentence,
amounts held from time to time in the Reserve Account will continue to be held
for the benefit of the Trust.
The Reserve Account is intended to enhance the likelihood of timely receipt
by the Noteholders and the Certificateholders of the full amount of interest due
them and the ultimate payment of principal thereon at maturity and to decrease
the likelihood that the Noteholders or the Certificateholders will experience
losses. In certain circumstances, however, the Reserve Account could be
depleted. 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 unpaid Noteholders' Interest Index Carryover or
Certificateholders' Interest Index Carryover. Amounts on deposit in the Reserve
Account will be available to pay principal on the Notes and interest accrued
thereon at the maturity of the Notes, and to pay the Certificate Balance and
interest accrued thereon and Certificateholders' Interest Index Carryover on the
final Distribution Date upon termination of the Trust.
STATEMENTS TO INDENTURE TRUSTEE AND TRUST
Prior to each Distribution Date, the Administrator (based on the quarterly
statements and other information provided to it by the Master Servicer) will
provide to the Indenture Trustee and the Trust as of the close of business on
the last day of the preceding Collection Period a statement, which will include
the following information with respect to such Distribution Date or the
preceding Collection Period as to the Notes and the Certificates, to the extent
applicable:
(i) the amount of the distribution allocable to principal of the Class
A-1 Notes, the Class A-2 Notes or the Certificates, as the case may be;
(ii) the amount of the distribution allocable to interest on each of
the Class A-1 Notes, the Class A-2 Notes and the Certificates, together
with the interest rates applicable with respect thereto, indicating whether
such interest rates are based on the T-Bill Rate or on the Student Loan
Rate and specifying what each such interest rate would have been if it had
been calculated using the alternate basis; provided that no such
calculation of the Student Loan Rate will be required to be made unless the
T-Bill Rate for such Interest Period is 100 basis points greater than the
T-Bill Rate of the preceding Determination Date or the 52 Week Treasury
Bill Rate is 100 basis points less than the T-Bill Rate as of such
Determination Date;
(iii) the amount of the distribution, if any, allocable to any
Noteholders' Interest Index Carryover and any Certificateholders' Interest
Index Carryover, together with the outstanding amount, if any, of each
thereof after giving effect to any such distribution;
(iv) the Pool Balance as of the close of business on the last day of
the preceding Collection Period, after giving effect to payments allocated
to principal reported as described in clause (i) above;
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(v) the aggregate outstanding principal balance of Notes, the
Certificate Balance and each Pool Factor as of such Distribution Date,
after giving effect to payments allocated to principal reported under
clause (i) above;
(vi) the amount of the Servicing Fee paid to the Master Servicer, the
amount of the Administration Fee paid to the Administrator, with respect to
such Collection Period;
(vii) the amount of the aggregate Realized Losses, if any, for such
Collection Period and the balance of Financed Student Loans that are
delinquent in each delinquency period as of the end of such Collection
Period; and
(viii) the balance of the Reserve Account on such Distribution Date,
after giving effect to changes therein on such Distribution Date.
"52 Week T-Bill Rate" means, on any date of determination, the bond
equivalent rate of 52-week Treasury bills auctioned at the final auction held
prior to the preceding June 1.
EVIDENCE AS TO COMPLIANCE
The Master 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 a limited examination of certain
documents and records and on such accounting and auditing procedures considered
appropriate under the circumstances) as to compliance by the Master Servicer
during the preceding twelve months (or, in the case of the first such
certificate, the period from the Closing Date to December 31, 1997) with certain
standards under the Master Servicing Agreement relating to the servicing of the
Financed Student Loans.
The Master 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 (or, in the case of the first such
certificate, the period from the Closing Date to December 31, 1997) with all
applicable standards under the Master Servicing Agreement and the Administration
Agreement relating to the administration of the Trust and the Financed Student
Loans.
The Master Servicing Agreement will also provide for delivery to the
Eligible Lender Trustee and the Indenture Trustee, concurrently with the
delivery of each statement of compliance referred to above, of a certificate
signed by an officer of the Master Servicer or the Administrator, as the case
may be, stating that, to such officer's knowledge, the Master Servicer or the
Administrator, as the case may be, has fulfilled its obligations under the
Master Servicing Agreement throughout the preceding twelve months (or, in the
case of the first such certificate, the period from the Closing Date to December
31, 1997) 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 has agreed to give the Indenture Trustee and the Eligible Lender
Trustee notice of certain Master Servicer Defaults and Administrator Defaults,
respectively, under the Master Servicing Agreement.
Copies of such statements and certificates may be obtained by
Securityholders by a request in writing addressed to the Applicable Trustee.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Master Servicing Agreement will provide that First Union -- North
Carolina may not resign from its obligations and duties as Master Servicer
thereunder, except upon determination that First Union -- North Carolina's
performance of such duties is no longer permissible under applicable law. No
such resignation will become effective until the Indenture Trustee or a
successor servicer has assumed First Union -- North Carolina's servicing
obligations and duties under the Master Servicing Agreement.
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The Master Servicing Agreement will further provide that neither the Master
Servicer nor any of its directors, officers, employees or agents will be under
any liability to the Trust, the Noteholders or the Certificateholders for taking
any action or for refraining from taking any action pursuant to the Master
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, the Master
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 Master Servicing Agreement and that, in
its opinion, may cause it to incur any expense or liability.
Under the circumstances specified in the Master 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 Master Servicing Agreement. Pursuant to a proposed reorganization of
the banking subsidiaries of First Union Corporation, it is expected that by
February 1998 First Union -- North Carolina will merge into First
Union -- Pennsylvania, First Union -- Pennsylvania will relocate its main office
to Charlotte, North Carolina, and First Union -- Pennsylvania will succeed to
all of First Union -- North Carolina's obligations as Master Servicer and
Administrator under the Trust.
MASTER SERVICER DEFAULT; ADMINISTRATOR DEFAULT
"Master Servicer Default" under the Master Servicing Agreement will consist
of (i) any failure by the Master Servicer to deliver to the Indenture Trustee
for deposit in any of the Trust Accounts (or, in the event that daily deposits
into the Collection Account are not required, to the Administrator) any
collections, Guarantee Payments or other amounts received with respect to the
Financed Student Loans, which failure continues unremedied for five business
days after written notice from the Indenture Trustee or the Eligible Lender
Trustee is received by the Master Servicer or after discovery by the Master
Servicer; (ii) any failure by the Master Servicer duly to observe or perform in
any material respect any other covenant or agreement in the Master Servicing
Agreement which failure materially and adversely affects the rights of
Noteholders or Certificateholders and which continues unremedied for 60 days
after the giving of written notice of such failure (1) to the Master Servicer by
the Indenture Trustee, the Eligible Lender Trustee or the Administrator or (2)
to the Master Servicer and to the Indenture Trustee and the Eligible Lender
Trustee by holders of Notes or Certificates, as applicable, evidencing not less
than 25% in principal amount of the outstanding Notes or Certificates; (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; and (iv)
failure by the Master Servicer to comply with any requirements under the Higher
Education Act resulting in a loss of its eligibility as a third-party servicer.
"Administrator Default" under the Master Servicing Agreement or the
Administration Agreement will consist of (i)(A) in the event that daily deposits
into the Collection Account are not required, any failure by the Administrator
to deliver to the Indenture Trustee for deposit in any of the Trust Accounts any
required payment on or before the business day prior to any Monthly Servicing
Payment Date or Distribution Date, as applicable, or (B) any failure by the
Administrator to direct the Indenture Trustee to make any required distributions
from any of the Trust Accounts on any Monthly Servicing Payment Date or any
Distribution Date, which failure in case of either clause (A) or (B) continues
unremedied for five business days after written notice from the Indenture
Trustee or the Eligible Lender Trustee is received by the Administrator or after
discovery by the Administrator; (ii) any failure by the Administrator duly to
observe or perform in any material respect any other covenant or agreement in
the Administration Agreement or the Master Servicing Agreement which failure
materially and adversely affects the rights of Noteholders or Certificateholders
and which continues unremedied for 60 days after the giving of written notice of
such failure (1) to the Administrator by the Indenture Trustee or the Eligible
Lender Trustee or (2) to the Administrator and
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to the Indenture Trustee and the Eligible Lender Trustee by holders of Notes or
Certificates, as applicable, evidencing not less than 25% in principal amount of
the outstanding Notes or Certificates; and (iii) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities, or similar
proceedings with respect to the Administrator and certain actions by the
Administrator indicating its insolvency or inability to pay its obligations.
RIGHTS UPON MASTER SERVICER DEFAULT AND ADMINISTRATOR DEFAULT
As long as a Master Servicer Default under the Master Servicing Agreement
or an Administrator Default under the Master Servicing Agreement or the
Administration Agreement remains unremedied, the Indenture Trustee or holders of
Notes evidencing not less than 25% in principal amount of then outstanding Notes
may terminate all the rights and obligations of the Master Servicer under the
Master Servicing Agreement, or the Administrator under the Master Servicing
Agreement and the Administration Agreement, as the case may be, whereupon a
successor servicer or administrator appointed by the Indenture Trustee or the
Indenture Trustee will succeed to all the responsibilities, duties and
liabilities of the Master Servicer under the Master Servicing Agreement, or the
Administrator under the Master 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 Master Servicer
Default or Administrator Default other than such appointment has occurred, such
trustee or official may have the power to prevent the Indenture Trustee or the
Noteholders from effecting such a transfer. In the event that the Indenture
Trustee is unwilling or unable to so act, it may appoint, or petition a court of
competent jurisdiction for the appointment of, a successor servicer whose
regular business includes the servicing of student loans or a successor
administrator whose regular business includes administering trusts containing
pools of loans or receivables. The Indenture Trustee may make such arrangements
for compensation to be paid, which in no event may be greater than the
compensation to the Master Servicer under the Master Servicing Agreement or the
Administrator under the Master 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 Master Servicer Default or an Administrator Default occurs and is
continuing, 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 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 Master Servicer Default
or an Administrator Default occurs and is continuing.
WAIVER OF PAST DEFAULTS
The holders of Notes evidencing at least a majority in principal amount of
the then outstanding Notes (or the holders of Certificates evidencing not less
than a majority of the outstanding Certificate Balance, in the case of any
default which does not adversely affect the Indenture Trustee or the
Noteholders) may, on behalf of all Noteholders and Certificateholders, waive any
default by the Master Servicer in the performance of its obligations under the
Master Servicing Agreement, or any default by the Administrator of its
obligations under the Master 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 Master
Servicing Agreement. Therefore, 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.
Unless and until Definitive Securities are issued, holders of Notes and
Certificates will not be recognized by the Indenture Trustee or the Eligible
Lender Trustee as "Noteholders" or "Certificateholders", as the case may be (as
such terms are used in the Indenture and the Trust Agreement,
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respectively). Hence, until Definitive Securities are issued, holders of such
Securities will only be able to exercise the rights of Securityholders
indirectly through DTC, Cedel or Euroclear and their respective participating
organizations.
AMENDMENT
The Transfer and Servicing Agreements may be amended by the parties
thereto, without the consent of the Noteholders or the Certificateholders, for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of the Transfer and Servicing Agreements or of modifying
in any manner the rights of Noteholders or Certificateholders; provided that
such action will not, in the opinion of counsel satisfactory to the Indenture
Trustee and the Eligible Lender Trustee, materially and adversely affect the
interest of any Noteholder or Certificateholder. The Transfer and Servicing
Agreements may also be amended by the Seller, the Administrator, the Master
Servicer, the Eligible Lender Trustee and the Indenture Trustee, as applicable,
with the consent of the holders of Notes evidencing at least a majority in
principal amount of the then outstanding Notes and the holders of Certificates
evidencing at least a majority of the Certificate Balance for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of such Transfer and Servicing Agreements or of modifying in any
manner the rights of 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
The Trust Agreement provides that the Eligible Lender Trustee does not have
the power to commence a voluntary proceeding in bankruptcy relating to the Trust
without the unanimous prior approval of all 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 and the satisfaction and
discharge of the Indenture, the Eligible Lender Trustee will succeed to all the
rights of the Indenture Trustee, and the Certificateholders will succeed to all
the rights of the Noteholders, under the Sale Agreement, except as otherwise
provided therein.
SELLER LIABILITY
Under the Trust Agreement, the Seller will agree to be liable directly to
an injured party for the entire amount of any losses, claims, damages or
liabilities (other than those incurred by a 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 Delaware Revised Uniform Limited Partnership Act in which the Seller was a
general partner. Such obligation will not apply in the event an opinion of
counsel is delivered to the effect that the deletion of such obligation will not
cause the Trust to be classified as an association or other entity taxable as a
corporation for relevant state income and franchise tax purposes.
TERMINATION
The obligations of the Master Servicer, the Seller, the Administrator, the
Eligible Lender Trustee and the Indenture Trustee pursuant to the Transfer and
Servicing Agreements will terminate upon (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
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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 Seller is permitted at its option to repurchase from the Eligible
Lender Trustee, as of the end of any Collection Period immediately preceding a
Distribution Date, if the then outstanding Pool Balance is 5% or less of the
Initial Pool Balance, all remaining Financed Student Loans at a price equal to
the aggregate Purchase Amounts of such Financed Student Loans, resulting in the
concurrent retirement of the Securities. 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 Seller.
Any Financed Student Loans remaining in the Trust as of the end of the
Collection Period immediately following the Distribution Date on which the Pool
Balance is less than or equal to 10% of the Initial Pool Balance will be offered
for sale by the Indenture Trustee as of the succeeding Distribution Date (the
"Auction Distribution Date"). First Union -- North Carolina, its affiliates and
unrelated third parties may offer bids to purchase such Financed Student Loans
as of such succeeding Distribution Date. If at least two bids are received, the
Indenture Trustee will solicit and resolicit bids from all participating bidders
until only one bid remains or the remaining bidders decline to resubmit bids.
The Indenture Trustee will accept the highest of such remaining bids if it is
equal to or in excess of the higher of the Minimum Purchase Amount and the fair
market value of such Financed Student Loans as of the end of the Collection
Period immediately preceding the Auction Distribution Date. If at least two bids
are not received or the highest bid after the resolicitation process is
completed is not equal to or in excess of the higher of the Minimum Purchase
Amount and the fair market value of the Financed Student Loans, the Indenture
Trustee will not consummate such sale. The Indenture Trustee may consult, and,
at the direction of the Seller, shall consult, with a financial advisor,
including the Underwriters or the Administrator, to determine if the fair market
value of the Financed Student Loans has been offered. The net proceeds of any
such sale will be used to pay the outstanding Trust Fees, to redeem any
outstanding Notes and to retire any outstanding Certificates on such Auction
Distribution Date. If the sale is not consummated in accordance with the
foregoing, the Indenture Trustee may, but shall not be under any obligation to,
solicit bids to purchase the Financed Student Loans on future Distribution Dates
upon terms similar to those described above. In the event the Financed Student
Loans are not sold in accordance with the foregoing, on each subsequent
Distribution Date, if the amount on deposit in the Reserve Account (after giving
effect to all withdrawals therefrom on a Distribution Date, except withdrawals
payable to the Seller other than as a Certificateholder) is in excess of the
Specified Reserve Account Balance for such Distribution Date, the Administrator
will direct the Indenture Trustee to distribute the amount of such excess as an
accelerated payment of principal on the Notes and Certificates. "Minimum
Purchase Amount" means an amount that would be sufficient to (i) reduce the
outstanding principal amount of each class of Notes then outstanding on such
Distribution Date to zero, (ii) pay to Noteholders the Noteholders' Interest
Distribution Amount payable on such Distribution Date, (iii) reduce the
Certificate Balance to zero, (iv) pay to the Certificateholders the
Certificateholders' Interest Distribution Amount payable on such Distribution
Date, (v) pay the Master Servicer and the Administrator the Servicing Fee and
the Administration Fee, respectively, payable on such Distribution Date and (vi)
pay the aggregate fees and expenses of such auction.
ADMINISTRATOR
First Union -- North Carolina, in its capacity as Administrator, will enter
into the Administration Agreement with the Trust and the Indenture Trustee and
the Master Servicing Agreement with the Trust, the Seller, the Master Servicer
and the Eligible Lender Trustee, pursuant to which the Administrator will agree,
to the extent provided therein, (i) in the event that daily deposits into the
Collection Account are not required, to deliver to the Indenture Trustee for
deposit in any of the Trust Accounts any required payment on or before the
business day prior to any Monthly Servicing Payment Date or any Distribution
Date, as applicable, (ii) to direct the Indenture Trustee to make the required
distributions from the Trust Accounts on each Monthly Servicing Payment Date and
each Distribution Date, (iii) to prepare (based on the quarterly and annual
reports received from the Master Servicer) and provide monthly, quarterly and
annual statements to the Eligible Lender Trustee and the Indenture Trustee with
respect to distributions to
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Noteholders and Certificateholders and any related federal income tax reporting
information and (iv) to provide the notices and to perform other administrative
obligations required by the Indenture, the Trust Agreement and the Master
Servicing Agreement. As compensation for the performance of the Administrator's
obligations under the Administration Agreement and the Master Servicing
Agreement and as reimbursement for its expenses related thereto, the
Administrator will be entitled to an administration fee on each Distribution
Date in an amount equal to one-fourth of the product of (i) 0.04% per annum and
(ii) the Pool Balance as of the last day of the immediately preceding Collection
Period (the "Administration Fee").
CERTAIN LEGAL ASPECTS OF THE FINANCED STUDENT LOANS
TRANSFER OF FINANCED STUDENT LOANS
The Seller intends that the transfer of the Financed Student Loans by it to
the Eligible Lender Trustee on behalf of the Trust constitutes a valid sale and
assignment of such Financed Student Loans. In addition, the Seller has taken and
will take all actions that are required under applicable state law to perfect
the Eligible Lender Trustee's ownership interest in the Financed Student Loans
and the collections with respect thereto. Notwithstanding the foregoing, if the
transfer of the Financed Student Loans is deemed to be an assignment of
collateral as security for the benefit of the Trust, the Financed Student Loans
would be considered general intangibles for purposes of the applicable Uniform
Commercial Code (the "UCC"). If such transfer is deemed to create a security
interest, the UCC applies and filing an appropriate financing statement or
statements is also required in order to perfect the Eligible Lender Trustee's
security interest. A financing statement or statements covering the Financed
Student Loans will be filed under the UCC to protect the interest of the
Eligible Lender Trustee in the event the transfer by the Seller is deemed to be
subject to the UCC. If a transfer of general intangibles is deemed to be a sale,
then the UCC is not applicable and no further action under the UCC is required
to protect the Eligible Lender Trustee's interest from third parties.
If the transfer of the Financed Student Loans is deemed to be an assignment
as security for the benefit of the Trust, there are certain limited
circumstances under the UCC in which prior or subsequent transferees of Financed
Student Loans coming into existence after the Closing Date could have an
interest in such Financed Student Loans with priority over the Eligible Lender
Trustee's interest. A tax or other government lien on property of the Seller
arising prior to the time a Financed Student Loan comes into existence may also
have priority over the interest of the Eligible Lender Trustee in such Financed
Student Loan. Furthermore, if the FDIC were appointed as a receiver or
conservator of the Seller, the FDIC's administrative expenses may also have
priority over the interest of the Eligible Lender Trustee in such Financed
Student Loans. Under the Sale Agreement, however, the Seller will warrant that
it has transferred the Financed Student Loans to the Eligible Lender Trustee on
behalf of the Trust free and clear of the lien of any third party. In addition,
the Seller will covenant that it will not sell, pledge, assign, transfer or
grant any lien on any Financed Student Loan (or any interest therein) other than
to the Eligible Lender Trustee on behalf of the Trust, except as provided below.
Pursuant to the Master Servicing Agreement, the Master Servicer as
custodian on behalf of the Trust will be responsible for, and will cause each
Subservicer, pursuant to the respective Subservicing Agreement, to be
responsible for maintaining custody of the promissory notes evidencing the
Financed Student Loans following the sale of the Financed Student Loans to the
Eligible Lender Trustee. Although the accounts of the Seller will be marked to
indicate the sale and although the Seller will cause UCC financing statements to
be filed with the appropriate authorities, the Financed Student Loans will not
be physically segregated, stamped or otherwise marked to indicate that such
Financed Student Loans have been sold to the Eligible Lender Trustee. If,
through inadvertence or otherwise, any of the Financed Student Loans were sold
to another party, or a security interest therein were granted to another party,
that purchased (or took such security interest in) any of such Financed Student
Loans in the ordinary course of its business and took possession of such
Financed Student Loans, then the purchaser (or secured party) would acquire an
interest in the Financed Student Loans superior to the interest of the Eligible
Lender Trustee if the purchaser (or
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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 interest. See "Description of the Transfer and Servicing
Agreements -- Sale of Financed Student Loans; Representations and Warranties"
and "-- Master Servicer Covenants".
CERTAIN MATTERS RELATING TO RECEIVERSHIP
The FDIA, as amended by FIRREA, sets forth certain powers that the FDIC
could exercise if it were appointed as receiver or conservator of the Seller.
Subject to clarification by FDIC regulations or interpretations, it would
appear from the positions taken by the FDIC that the FDIC, in its capacity as a
receiver or conservator for the Seller, would not interfere with the timely
transfer to the Trust of collections with respect to the Financed Student Loans.
To the extent that the transfer of the Financed Student Loans is deemed to
create a security interest, and that interest was validly perfected before the
Seller's insolvency and was not taken in contemplation of insolvency or with the
intent to hinder, delay or defraud the Seller or its creditors, based upon
opinions and statements of policy issued by the general counsel of the FDIC
addressing the enforceability against the FDIC, as conservator or receiver for a
depository institution, of a security interest in collateral granted by such
depository institution, such security interest should not be subject to
avoidance and payments to the Trust with respect to the Financed Student Loans
should not be subject to stay or to recovery by the FDIC as receiver or
conservator of the Seller. If, however, the FDIC were to assert a contrary
position, certain provisions of the FDIA may be asserted by the FDIC, and
thereby possibly result in delays and reductions in payments on the Notes and
the Certificates. In addition, if the FDIC were to require the Indenture Trustee
or the Eligible Lender Trustee to establish its right to such payments by
submitting to and completing the administrative claims procedure under the FDIA,
as amended by FIRREA, delays in payments on the Notes and the Certificates and
possible reductions in the amount of those payments could occur.
In the event of a Master Servicer Default or an Administrator Default
resulting solely from certain events of insolvency or bankruptcy that may occur
with respect to the Master Servicer or the Administrator, a court, conservator,
receiver or liquidator may have the power to prevent either the Indenture
Trustee or Noteholders from appointing a successor Master Servicer or
Administrator, as the case may be. See "Description of the Transfer and
Servicing Agreements -- Rights Upon Master Servicer Default and Administrator
Default".
LOAN ORIGINATION AND SERVICING PROCEDURES APPLICABLE TO FINANCED STUDENT LOANS
The Higher Education Act, including the implementing regulations thereunder
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) be made,
the borrower's responsibilities under the loan be explained to him or her, the
promissory note evidencing the loan be executed by the borrower and then that
the loan proceeds be disbursed in a specified manner by the lender. After the
loan is made, the lender must establish repayment terms with the borrower,
properly administer Deferrals and Forbearances and credit the borrower for
payments made thereon. If a borrower becomes delinquent in repaying a loan, a
lender or a servicing agent must perform certain collection procedures
(primarily telephone calls and demand letters) which vary depending upon the
length of time a loan is delinquent. The Master Servicer has agreed pursuant to
the Master Servicing Agreement to perform collection and servicing procedures on
behalf of the Trust. However, failure to follow these procedures or failure of
the Seller to follow procedures relating to the origination of any Financed
Student Loans could result in adverse consequences. In the case of any such
Financed Student 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
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could adversely affect the Guarantors' ability or legal obligation to make
Guarantee Payments to the Eligible Lender Trustee with respect to such Financed
Student Loans.
Loss of any such Guarantee Payments, Interest Subsidy Payments or Special
Allowance Payments could adversely affect the amount of Available Funds on any
Distribution Date and the Trust's ability to pay principal and interest on the
Notes and to make distributions in respect of the Certificates. Under certain
circumstances, pursuant to the Master Servicing Agreement, the 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 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 "-- Master Servicer
Covenants". The failure of the Seller or the Master Servicer to so purchase a
Financed Student Loan would constitute a breach of the Master Servicing
Agreement, enforceable by the Eligible Lender Trustee on behalf of the Trust or
by the Indenture Trustee on behalf of the Noteholders, but would not constitute
an Event of Default under the Indenture.
STUDENT LOANS GENERALLY NOT SUBJECT TO DISCHARGE IN BANKRUPTCY
The Financed Student Loans are generally not dischargeable by a borrower in
bankruptcy pursuant to the Federal bankruptcy code, unless (A) such Student Loan
first became due before seven years (exclusive of any applicable suspension of
the repayment period) before the date of the bankruptcy or (B) excepting such
debt from discharge will impose an undue hardship on the debtor and the debtor's
dependents.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of material federal income tax
consequences of the purchase, ownership and disposition of the Notes and the
Certificates. The summary does not purport to deal with federal income tax
consequences applicable to all categories of holders, some of which may be
subject to special rules. For example, it does not discuss the tax treatment of
Noteholders or Certificateholders that are insurance companies, banks and
certain other financial institutions, regulated investment companies or dealers
in securities. Moreover, there are no cases or Internal Revenue Service ("IRS")
rulings on similar transactions involving both debt and equity interests issued
by a trust with terms similar to those of the Notes and the Certificates. As a
result, the IRS may disagree with all or a part of the discussion below.
Prospective investors are urged to consult their own tax advisors in determining
the federal, state, local, foreign and any other tax consequences to them of the
purchase, ownership and disposition of the Notes and the Certificates.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder and judicial or ruling authority, all of which are
subject to change, which change may be retroactive. The Trust will be provided
with an opinion of Federal tax counsel regarding certain federal income tax
matters discussed below. An opinion of Federal tax counsel, however, is not
binding on the IRS or the courts. No ruling on any of the issues discussed below
will be sought from the IRS.
TAX CHARACTERIZATION OF THE TRUST
It is the opinion of Cadwalader, Wickersham & Taft, Federal tax counsel for
the Trust, subject to the assumptions and qualifications therein, and based on
representations referenced therein, that, although not free from doubt, the
Trust will not be classified as an association (or publicly traded partnership)
taxable as a corporation for federal income tax purposes. The opinion is based
on the assumption that the terms of the Trust Agreement and related documents
will be complied with and on certain representations, and states that (1) the
Trust will have certain characteristics and will affirmatively elect not to be
characterized as an
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association taxable as a corporation and (2) the structure of the Trust will
exempt it from the rule that certain publicly traded partnerships are taxable as
corporations.
If the Trust were taxable as a corporation for federal income tax purposes,
the Trust would be subject to corporate income tax on its taxable income. The
Trust's taxable income would include all its income on the Financed Student
Loans, and should be reduced by its interest expense on the Notes. Any such
corporate income tax would materially reduce cash available to make payments on
the Notes and distributions on the Certificates, and Certificateholders could be
liable for any such tax that is unpaid by the Trust. Likewise, if the Trust were
subject to state income tax or franchise tax, the amount of cash available to
make payments on the Notes would be reduced.
Even if the 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. However,
although the matter is not free from doubt, because of the nature of the income
of the Trust, the Trust will not be a publicly traded partnership taxable as a
corporation.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Seller will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Federal tax counsel is of the opinion that,
based on the terms of the Notes and the transactions relating to the Financed
Student Loans as set forth herein, the Notes will be classified as debt for
federal income tax purposes. There is, however, no specific authority with
respect to the characterization of the Notes for Federal income tax purposes of
securities having the same terms as the Notes. The discussion below assumes that
the Notes will be characterized as debt.
Stated Interest. Stated interest on the Notes will be taxable as ordinary
income for federal income tax purposes when received or accrued in accordance
with the method of tax accounting of the beneficial owner of a Note (a "Note
Owner").
Original Issue Discount. The discussion below assumes that the interest
formula for the Notes meets the requirements for "qualified stated interest"
under Treasury regulations (the "OID Regulations") relating to original issue
discount ("OID"). However, because of limitations on the payment of interest on
the Notes to the extent of the Trust's having insufficient Available Funds, the
IRS may contend that the Notes should be treated as having been issued with OID.
In such case, Note Owners (regardless of whether they otherwise use the cash or
accrual method of accounting) would be required to include interest on the Notes
in taxable income on an accrual basis. However, until the IRS determines
otherwise, the Trust intends to take the position that the Notes are not issued
with OID. A holder who purchases a Note at a discount that exceeds the
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.
A Note will be treated as issued with OID if the excess of the Note's
"stated redemption price at maturity" over its issue price equals or exceeds a
de minimis amount equal to 1/4 of 1 percent of the Note's stated redemption
price at maturity multiplied by the number of years (based on the anticipated
weighted average life of the Notes, calculated using the prepayment assumption
used in pricing the Notes (the "Prepayment Assumption") and weighing each
payment by reference to the number of full years elapsed from the closing date
prior to the anticipated date of such payment) to its maturity. Generally, the
issue price of a class of Notes should be the first price at which a substantial
amount of such class of Notes is sold to other than placement agents,
underwriters, brokers or wholesalers. The stated redemption price at maturity of
a Note is generally equal to all payments on the Note, other than payments of
"qualified stated interest." Qualified stated interest payments are interest
payments on the Notes that are unconditionally payable at least annually at a
single fixed rate (or certain variable rates) applied to the outstanding
principal amount of the obligation. Assuming that interest is qualified stated
interest, the stated redemption price is generally expected to equal the
principal amount of the Note. Any de minimis OID must be included in
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income as principal payments are received on the Notes in the proportion that
each such payment bears to the original principal balance of the Note.
If the Notes are treated as issued with OID, a Note Owner will be required
to include OID in income before the receipt of cash attributable to such income
using a constant yield method. The amount of OID generally includible in income
is the sum of the daily portions of OID with respect to a Note for each day
during the taxable year or portion of the taxable year in which the Note Owner
holds the Note. Special provisions apply to debt instruments on which payments
may be accelerated due to prepayments of other obligations securing those debt
instruments. Under these provisions, the computation of OID on such debt
instruments must be determined by taking into account both the Prepayment
Assumption used in pricing the debt instrument and the actual prepayment
experience. As a result of these special provisions, the amount of OID on the
Notes issued with OID that will accrue in any given accrual period may either
increase or decrease depending upon the actual prepayment rate. Note Owners
should consult their own tax advisors regarding the impact of the OID rules in
the event that Notes are issued with OID.
The adjusted issue price of a Note is the sum of its issue price plus prior
accruals of OID, reduced by the total payments made with respect to such Note in
all prior periods, other than "qualified stated interest" payments.
Market Discount. The Notes, whether or not issued with OID, will be
subject to the "market discount rules" of Section 1276 of the Code. In general,
these rules provide that if the Note Owner purchases the Note at a market
discount (that is, a discount from its stated redemption price at maturity or,
if the Notes were issued with OID, adjusted issue price) that exceeds a de
minimis amount specified in the Code and thereafter (a) recognizes gain upon a
disposition, or (b) receives payments of principal, the lesser of (i) such gain
or principal payment, or (ii) the accrued market discount, will be taxed as
ordinary interest income. Generally, market discount accrues in the ratio of
stated interest allocable to the relevant period to the sum of the interest for
such period plus the remaining interest as of the end of such period, or in the
case of a Note issued with OID, in the ratio of OID accrued for the relevant
period to the sum of the OID accrued for such period plus the remaining OID as
of the end of such period. A Note Owner may elect, however, to determine accrued
market discount under the constant yield method.
Limitations imposed by the Code which are intended to match deductions with
the taxation of income may defer deductions for interest on indebtedness
incurred or continued, or short-sale expenses incurred, to purchase or carry a
Note with accrued market discount. A Note Owner may elect to include market
discount in gross income as it accrues and, if such Note Owner makes such an
election, is exempt from this rule. Any such election will apply to all debt
instruments acquired by the taxpayer on or after the first day of the first
taxable year to which such election applies. The adjusted basis of a Note
subject to such election will be increased to reflect market discount included
in gross income, thereby reducing any gain or increasing any loss on a sale or
taxable disposition.
Election to Treat All Interest as Original Issue Discount. A Note Owner
may elect to include in gross income all interest that accrues on a Note using
the constant yield method described above under the heading "-- Original Issue
Discount," with modifications described below. For purposes of this election,
interest includes stated interest, acquisition discount, OID, de minimis OID,
market discount, de minimis market discount and unstated interest, as adjusted
by any amortizable bond premium (described below under "-- Amortizable Bond
Premium") or acquisition premium.
In applying the constant yield method to a Note with respect to which this
election has been made, the issue price of the Note will equal the adjusted
basis of the electing Note Owner in the Note immediately after its acquisition,
the issue date of the Note will be the date of its acquisition by the electing
Note Owner, and no payments on the Note will be treated as payments of qualified
stated interest. This election will generally apply only to the Note with
respect to which it is made and may not be revoked without the consent of the
IRS. Note Owners should consult their own tax advisors as to the effect in their
circumstances of making this election.
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Amortizable Bond Premium. In general, if a Note Owner purchases a note at
a premium (that is, an amount in excess of the amount payable upon the maturity
thereof), such Note Owner will be considered to have purchased such Note with
"amortizable bond premium" equal to the amount of such excess. Such Note Owner
may elect to amortize such bond premium as an offset to interest income and not
as a separate deduction item as it accrues under a constant yield method over
the remaining term of the Note. Such Note Owner's tax basis in the Note will be
reduced by the amount of the amortized bond premium. Any such election shall
apply to all debt instruments (other than instruments the interest on which is
excludable from gross income) held by the Note Owner at the beginning of the
first taxable year for which the election applies or thereafter acquired and is
irrevocable without the consent of the IRS. Bond premium on a Note held by a
Note Owner who does not elect to amortize the premium will decrease the gain or
increase the loss otherwise recognized on the disposition of the Note.
Disposition of Notes. The adjusted tax basis of a Note Owner will be its
cost, increased by the amount of any OID, market discount and gain previously
included in income with respect to the Note, and reduced by the amount of any
payments on the Note that is not qualified stated interest and the amount of
bond premium previously amortized with respect to the Note. A Note Owner will
generally recognize gain or loss on the sale or retirement of a Note equal to
the difference between the amount realized on the sale or retirement and the tax
basis of the Note. Such gain or loss will be capital gain or loss (except to the
extent attributable to accrued but unpaid interest or as described above under
"-- Market Discount," and, in the event of a prepayment or redemption, any not
yet accrued OID) and will be long-term capital gain or loss if the Note was held
for more than one year. Capital losses generally may be deducted only to the
extent the Note Owner has capital gains for the taxable year, although under
certain circumstances non-corporate Note Owners can deduct capital losses in
excess of available capital gains.
WAIVERS AND AMENDMENTS
The Indenture will permit the Note Owners to waive an event of default or
rescind an acceleration of the Notes in some circumstances upon a vote of the
requisite percentage of Note Owners. Any such waiver or rescission, or any
amendment of the terms of the Notes, could be treated for federal income tax
purposes as a constructive exchange by a Note Owner of the Notes for new notes,
upon which gain or loss would be recognized.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Indenture Trustee will be required to report annually to the IRS, and
to each Note Owner, the amount of interest paid on the Notes (and the amount
withheld for federal income taxes, if any) for each calendar year, except as to
exempt recipients (generally, corporations, tax exempt organizations, qualified
pension and profit-sharing trusts, individual retirement accounts, or
nonresident aliens who provide certification as to their status). Each Note
Owner (other than Note Owners who are not subject to the reporting requirements)
will be required to provide, under penalties of perjury, a certificate
containing the Note Owner's name, address, correct federal taxpayer
identification number (which includes a social security number) and a statement
that the holder is not subject to backup withholding. Should a non-exempt Note
Owner fail to provide the required certification or should the IRS notify the
Indenture Trustee or the Trust that the Note Owner has provided an incorrect
federal taxpayer identification number or is otherwise subject to backup
withholding, the Indenture Trustee will be required to withhold (or cause to be
withheld) 31% of the interest otherwise payable to the Note Owner, and remit the
withheld amounts to the IRS as a credit against the Note Owner's federal income
tax liability.
Proposed regulations ("Withholding Proposals") discussed below under
"-- Tax Consequences to Foreign Investors" would, if finalized in their current
form and upon becoming effective, modify the foregoing rules to conform them
generally to the rules proposed therein with respect to withholding of U.S. tax
on certain payments to foreign persons. Prospective Note Owners who are foreign
persons are urged to consult their own tax advisors with respect to the possible
impact of the Withholding Proposals on their particular situations.
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TAX CONSEQUENCES TO FOREIGN INVESTORS
The following information describes the U.S. federal income tax treatment
of investors that are not U.S. persons (each, a "Foreign Person"). The term
"Foreign Person" means any person other than (i) a citizen or resident of the
United States, (ii) a corporation, partnership or other entity organized in or
under the laws of the United States or any political subdivision thereof, (iii)
an estate the income of which is includible in gross income for U.S. federal
income tax purposes, regardless of its source, or (iv) a trust whose
administration is subject to the primary supervision of a United States court
and which has one or more United States fiduciaries who have the authority to
control all substantial decisions of the trust.
(a) Interest paid or accrued to a Foreign Person that is not
effectively connected with the conduct of a trade or business within the
United States by the Foreign Person, will generally be considered
"portfolio interest" and generally will not be subject to United States
federal income tax and withholding tax, as long as the Foreign Person (i)
is not actually or constructively a "10 percent shareholder" of the Trust
or First Union -- Pennsylvania or a "controlled foreign corporation" with
respect to which the Trust or First Union -- Pennsylvania is a "related
person" within the meaning of the Code, and (ii) provides an appropriate
statement, signed under penalties of perjury, certifying that the holder is
a Foreign Person and providing that Foreign Person's name and address. If
the information provided in this statement changes, the Foreign Person must
so inform the Indenture Trustee within 30 days of such change. The
statement generally must be provided in the year a payment occurs or in
either of the two preceding years. If such interest were not portfolio
interest, then it would be subject to United States federal income and
withholding tax at a rate of 30 percent unless reduced or eliminated
pursuant to an applicable income tax treaty.
(b) Any capital gain realized on the sale or other taxable disposition
of a Note by a Foreign Person will be exempt from United States federal
income and withholding tax, provided that (i) the gain is not effectively
connected with the conduct of a trade or business in the United States by
the Foreign Person, and (ii) in the case of an individual Foreign Person,
the Foreign Person is not present in the United States for 183 days or more
in the taxable year and certain other requirements are met.
(c) 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, the holder (although exempt from the
withholding tax previously discussed if a duly executed Form 4224 is
furnished) 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 percent 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.
The Withholding Proposals were published in the Federal Register on April
22, 1996. If and when finalized, the Withholding Proposals would substantially
modify the existing rules summarized above for the withholding of U.S. tax on
payments of certain kinds of income (including interest and OID paid by U.S.
obligors) to foreign persons. The Withholding Proposals would, if finalized in
their current form and upon becoming effective, make significant changes to
certain of the procedures and certification requirements described above in
order to secure a reduction in, or an exemption from, U.S. withholding tax
otherwise due with respect to payments to Note Owners who are Foreign Persons.
Subject to certain exceptions and transition rules, if finalized in their
current form, the Withholding Proposals would be effective for payments made
after December 31, 1997, regardless of the date of issuance of the instrument
with respect to which those payments are made. There can be no assurance that
the Withholding Proposals will be finalized (whether before or after their
proposed effective date) or, if they are finalized, that they will not be
materially modified from their current form. Prospective Note Owners who are
Foreign Persons are urged to consult their own tax advisors with respect to the
possible impact of the Withholding Proposals on their particular situations.
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POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES
If, contrary to the opinion of Federal tax counsel, the IRS successfully
asserted that one or more of the classes of Notes did not represent debt for
federal income tax purposes, the Notes might be treated as equity interests in
the Trust. If so treated, the Trust might be taxable as a corporation with the
adverse consequences described above (and the taxable corporation would not be
able to reduce its taxable income by deductions for interest expense on Notes
recharacterized as equity). Alternatively, the Trust might be treated as a
publicly traded partnership that would not be taxable as a corporation because
it would meet certain qualifying income tests. Nonetheless, treatment of the
Notes as equity interests in such a publicly traded partnership could have
adverse tax consequences to certain holders. For example, all or a portion of
the income accrued by tax-exempt entities (including pension funds) would be
"unrelated business taxable income," income to foreign holders might be subject
to U.S. federal income tax and U.S. federal income tax return filing and
withholding requirements, and individual holders might be subject to limitations
on their ability to deduct their shares of Trust expenses including losses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust as a Partnership. The Seller and the Master
Servicer will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust as a partnership for purposes of federal and
state income tax, state franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
Trust, the partners of the partnership being the Certificateholders (including
the Seller in its capacity as recipient of distributions from the Trust) and the
Notes being debt of the partnership. The proper characterization of the
arrangement involving the Trust, the Certificates, the Notes, the Seller and the
Master Servicer is not clear, however, because there is no authority on
transactions closely comparable to that contemplated herein. It is possible that
the Certificates could be considered debt of the Seller or the Trust because the
Certificates have certain features characteristic of debt. 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 following discussion assumes that
the Certificates represent equity interests in a partnership.
Partnership Taxation. As a partnership, the Trust will not be subject to
federal income tax. Rather, each Certificateholder will be required to take into
account separately such holder's allocable share of income, gains, losses,
deductions and credits of the Trust (as described below). The Trust's income
will consist primarily of interest and finance charges earned on or with respect
to the Financed Student Loans (including appropriate adjustments for market
discount, OID and bond premium) and any gain upon collection or disposition of
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 Financed Student Loans.
The tax items of a partnership are allocable among the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Trust Agreement and related documents). The Trust Agreement will
provide that the Certificateholders generally will be allocated items of gross
income of the Trust for each month equal to the sum of (i) the product of the
Certificate Rate and the Certificate Balance for such month, (ii) an amount
equivalent to return that accrues during such month on amounts previously due on
the Certificates but not yet distributed, (iii) any Trust income attributable to
discount on the Financed Student Loans that corresponds to any excess of the
Certificate Balance over their initial issue price, (iv) prepayment premium
payable to the Certificateholders for such month and (v) any other amounts of
income payable to the Certificateholders for such month. All remaining taxable
income of the Trust will be allocated to the Seller. Losses and deductions
generally will not be allocated to the Certificateholders except to the extent
the Master Servicer determines that the Certificateholders are reasonably
expected to bear the economic burden of such losses or deductions. If a
Certificateholder were allocated items of loss and deduction that are
characterized as capital losses (including losses recognized upon the sale,
extension, revision or, in certain circumstances, default of a Financed Student
Loan), such losses would generally be deductible by such Certificateholder only
against capital gain income (whether from the Trust or other
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sources). In addition, individual Certificateholders are generally subject to
limitations on their ability to deduct "miscellaneous itemized deductions" of
the Trust, which include fees paid to the Master Servicer (but do not include
interest expense on the Notes). Finally, individual Certificateholders may be
subject to other limitations on their ability to deduct losses and other
deductions, including limitations applicable to investment interest, and should
consult their own tax advisors regarding such limitations. As a consequence of
the above described limitations regarding deduction of losses and other Trust
items, a Certificateholder could be required to report taxable income that is
greater than the Certificateholder's gross income less losses and deductions.
Under the method of allocation described above, Certificateholders may be
allocated income equal to the entire Certificate Rate plus the other items
described above, even though the Trust might not have sufficient cash to make
current cash distributions of such amounts. Thus, cash basis holders will in
effect be required to report income from the Certificates on an accrual basis.
If a Certificateholder is allocated income in excess of cash distributions, the
Certificateholder's basis in the Certificates will be increased by the amount of
such excess, which will reduce any gain or increase any loss upon a sale or
other disposition of the Certificates, as described below under "-- Disposition
of Certificates." It is believed that this method of 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. It is also possible that the IRS would require the Trust to
allocate to Certificateholders net income (instead of gross income) equal to the
foregoing amounts, which allocations would comprise items of gross income and
losses and deductions of the Trust. If the Trust were to allocate net income to
Certificateholders, a Certificateholder's taxable income could exceed the amount
of net income allocated because of limitations on the deductibility of capital
losses and "miscellaneous itemized deductions" described above.
As an alternative to the foregoing, the IRS might treat Certificateholders
as receiving guaranteed payments from the Trust, in which event the payments
would be treated as ordinary income but not as interest income. The Seller is
authorized to adjust the allocations described above to reflect the economic
income, gain or loss to the Certificateholders (including the Seller) or as
otherwise required by the Code.
A portion of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will be treated as income from
"debt financed property," which generally will be taxable as unrelated business
taxable income.
The Eligible Lender Trustee 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 Student
Loan, 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 may
have been issued with OID. In the event that such OID exceeds a de minimis
amount, the Trust would have OID income. As indicated above, a portion of such
OID income may be allocated to the Certificateholders.
Moreover, the purchase price paid by the Trust for the Financed Student
Loans acquired by the Trust 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.)
If the Trust acquires the Financed Student Loans at a market discount or
premium, the Trust will elect to include any such discount in income currently
as it accrues over the life of the Financed Student Loans or to offset any such
premium currently against interest income on the Financed Student Loans. As
indicated above, a portion of such market discount income or premium deduction
may be allocated to Certificateholders.
Distributions to Certificateholders. Certificateholders generally will not
recognize gain or loss with respect to distributions from the Trust. A
Certificateholder will recognize gain, however, to the extent that any money
distributed exceeds the Certificateholder's adjusted basis in the Certificates
(as described below
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under "-- Disposition of Certificates") immediately before the distribution. A
Certificateholder will recognize loss upon termination of the Trust or
termination of the Certificateholder's interest in the Trust if the Trust only
distributes money to the Certificateholder and the amount distributed is less
than the Certificateholder's adjusted basis in the Certificates. Any gain or
loss generally will be long-term capital gain or loss if the Certificateholder's
holding period of the Certificates is more than one year.
Section 708 Termination. Under Section 708 of the Code, the Trust will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a
12-month period. If such a termination occurs, the Trust will be deemed under
the Code to contribute all of its assets and liabilities to a new Trust that is
a partnership in exchange for an interest in such new Trust, and to immediately
thereafter terminate and distribute such interest in the new Trust to the
Certificateholders in proportion to their respective interests in the terminated
Trust. Such deemed termination of the Trust generally should not result in
material adverse tax consequences to Certificateholders (although such deemed
termination may accelerate the recognition of income from the Trust for
Certificateholders whose taxable year is different than the Trust's taxable
year).
Disposition of Certificates. A Certificateholder who disposes of a
Certificate generally will recognize gain or loss in an amount equal to the
difference between the amount realized and the Certificateholder's tax basis in
the Certificates. The gain or loss generally will be capital gain or loss and
will be long-term capital gain or loss if the holding period is more than one
year. A Certificateholder's tax basis in a Certificate generally will equal the
holder's cost increased by the holder's share of Trust income (includible in
income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the holder's share (as
determined under applicable Treasury regulations) 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 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).
Allocations Between Transferors and Transferees. In general, the Trust's
taxable income and losses will be determined monthly and 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 the month. As a result, a holder purchasing Certificates may
be allocated tax items (which will affect its tax liability and tax basis)
attributable to periods before the holder acquired the Certificates.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the Certificateholder'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 the method permitted by future
regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (or loss), the purchasing Certificateholder will have a
higher (or lower) basis in the Certificates than the selling Certificateholder
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust were to file an election under Section
754 of the Code. In order to avoid the administrative complexities that would be
involved in keeping the accounting records necessary if a Section 754 election
is made, as well as potentially onerous information reporting requirements, the
Trust will not make such election. As a result, subsequent purchasers might be
allocated a greater or lesser amount of Trust income than would be appropriate
based on their own purchase price for Certificates.
Administrative Matters. The Eligible Lender Trustee is required to keep or
cause to be kept complete and accurate books of the Trust. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and the
fiscal 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
fiscal year of the Trust and will report each Certificateholder's allocable
share of items of Trust income and expense to Certificateholders and the IRS on
Schedule K-1. The Trust will provide the Schedule K-1 information to nominees
that fail to
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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, Certificateholders must file tax returns that
are consistent with the information return filed by the Trust or be subject to
penalties unless the holder discloses the inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust with
a statement containing certain information about 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, international organization or wholly owned
agency or instrumentality of either of the foregoing and (z) certain information
about Certificates that were held, bought or sold on behalf of such person
throughout the year. In addition, brokers and financial institutions that hold
Certificates through a nominee are required to furnish directly to the Trust
information about themselves and their ownership of Certificates. A clearing
agency registered under Section 17A of the Exchange Act 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 Seller will be designated as the tax matters partner in the Trust
Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust by the appropriate taxing authorities could
result in an adjustment of the returns of the Certificateholders and, under
certain circumstances, a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Trust. An adjustment could
also result in an audit of a Certificateholder's returns and adjustments of
items not related to the income and losses of the Trust.
Tax Consequences to Foreign Certificateholders. No regulations, published
rulings or judicial decisions exist that discuss the characterization for U.S.
federal withholding tax purposes with respect to non-U.S. persons of a
partnership with activities substantially the same as the Trust. Accordingly,
the Trustee intends to withhold tax in the maximum amount that could be required
under different interpretations of the applicable Code provisions.
If the Trust were considered to be engaged in a trade or business in the
United States for such purposes, the income of the Trust allocable to Foreign
Persons would be subject to U.S. federal withholding tax pursuant to Section
1446 of the Code at a rate of 35% for persons taxable as a corporation and 39.6%
for all other Foreign Persons. Also, in such case, a Foreign Certificateholder
that is a corporation may be subject to the branch profits tax. If a beneficial
owner of the Certificates is a Foreign Person, the withholding agent will
withhold an amount at least equal to the amount that would be required to be
withheld if it were engaged in a trade or business in the United States in order
to protect the Trust from possible adverse consequences of a failure to
withhold. Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Trust to change its withholding
procedures. Each Foreign Certificateholder might be required to file a U.S.
individual or corporate income tax return (including in the case of a
corporation, the branch profits tax) on its share of the Trust's income.
Each Foreign Certificateholder must obtain a taxpayer identification number
from the IRS and submit that number to the withholding agent on Form W-8 in
order to assure appropriate crediting of any taxes withheld. A Foreign
Certificateholder generally would be entitled to file with the IRS a claim for
refund with respect to withheld taxes, taking the position that no taxes were
due because the Trust was not engaged in a U.S. trade or business. However,
interest payments made (or accrued) to a Certificateholder who is a Foreign
Person may be characterized as other than "portfolio interest." As a result,
even if the Trust is not considered to be engaged in a U.S. trade or business,
Foreign Certificateholders will likely be
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subject to withholding tax pursuant to Section 1441 or 1442 of the Code at a
rate of 30 percent on the gross amount allocated to such Certificateholders
unless such rate is reduced or eliminated pursuant to an applicable treaty.
Consequently, if a holder of a Certificate is a Foreign Person, the withholding
agent will withhold from the gross amount of income of the Trust allocated to
Foreign Certificateholders at a rate of 30% (to the extent such amount exceeds
the amount withheld pursuant to the preceding paragraph) in order to protect the
Trust from possible adverse consequences of a failure to withhold. A Foreign
Certificateholder would generally be entitled to file with the IRS a refund
claim for such withheld taxes, taking the position that the interest was
portfolio interest. However, the IRS may disagree and no assurance can be given
as to the appropriate amount of tax liability.
AS A RESULT OF THE FOREGOING, THE CERTIFICATES GENERALLY SHOULD NOT BE
PURCHASED BY FOREIGN PERSONS.
Backup Withholding. Proceeds from the sale of the Certificate will be
subject to a "backup" withholding tax of 31% if, in general, the
Certificateholder is a U.S. person and fails to comply with certain
identification procedures, unless the Certificateholder is an exempt recipient
under applicable provisions of the Code.
CERTAIN STATE TAX CONSEQUENCES
The above discussion does not otherwise address the tax treatment of the
related Trust or the Notes, the Certificates, the Noteholders or the
Certificateholders under any state or local tax laws. The activities of the
Master Servicer in servicing and collecting the Trust Student Loans will take
place at each of the locations at which the Master Servicer's operations are
conducted and, therefore, different tax regimes apply to the Trust and the
Securityholders. Prospective investors are urged to consult with their own tax
advisors regarding the state and local tax treatment of the related Trust as
well as any state and local tax consequences to them of purchasing, holding and
disposing of the Notes and the Certificates.
THE FEDERAL AND STATE TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A NOTEHOLDER'S
OR CERTIFICATEHOLDER'S PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES AND CERTIFICATES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Internal Revenue Code of 1988, as amended (the "Code"),
impose certain restrictions on (a) employee benefit plans (as defined in Section
3(3) of ERISA) subject to Title I of ERISA, (b) plans described in Section
4975(e)(1) of the Code, including individual retirement accounts and Keogh
plans, (c) any entities whose underlying assets include plan assets (as defined
in U.S. Department of Labor Regulation sec. 2510.3-101) by reason of a plan's
investment in such entities (each of (a), (b) and (c), a "Plan") and (d) persons
who have certain specified relationships to such Plans ("Parties in Interest"
under ERISA and "Disqualified Persons" under the Code). Moreover, based on the
reasoning of the United States Supreme Court in John Hancock Life Ins. Co. v.
Harris Trust and Sav. Bank, 510 U.S. 86 (1993), an insurance company's general
account may be deemed to include assets of the Plans investing in the general
account (e.g. through the purchase of an annuity contract), and such insurance
company might be treated as a Party in Interest with respect to a Plan by virtue
of such investment. ERISA also imposes certain duties on persons who are
fiduciaries of employee benefit plans subject to Title I of ERISA, and ERISA and
the Code prohibit certain transactions between a Plan and Parties in Interest or
Disqualified Persons with respect to such Plans. A governmental plan as defined
in Section 3(32) of ERISA is not subject to Title I of ERISA or Section 4975
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of the Code. However, such a governmental plan may be subject to a federal,
state or local law which is, to a material extent, similar to the foregoing
provisions of ERISA or the Code ("Similar Law").
The Seller, the Master Servicer, the Administrator, the Eligible Lender
Trustee and the Indenture Trustee may be the sponsor of or investment advisor
with respect to one or more Plans. Because such parties may receive certain
benefits in connection with the sale of the Notes, the purchase of the Notes
using Plan assets over which any of such parties has investment authority might
be deemed to be a violation of the prohibited transaction rules of ERISA and the
Code for which no exemption may be available. Accordingly, the Notes may not be
purchased using the assets of any Plan if any of the Seller, the Master
Servicer, the Administrator, the Eligible Lender Trustee or the Indenture
Trustee has investment authority with respect to such assets.
In addition, a Certificateholder, because of its activities or the
activities of its respective affiliates, may be deemed to be a Party in Interest
or Disqualified Person with respect to certain Plans, including but not limited
to Plans sponsored by such Certificateholder. If the Notes are acquired by a
Plan with respect to which a Certificateholder is a Party in Interest or
Disqualified Person, such transaction could be deemed to be a direct or indirect
violation of the prohibited transaction rules of ERISA and the Code unless such
transaction were subject to one or more statutory or administrative exemptions
such as Prohibited Transaction Class Exemption 84-14, which exempts certain
transactions effected on behalf of a Plan by a "qualified professional asset
manager". It should be noted, however, that even if the conditions specified in
one of these exemptions are met, the scope of relief provided by the exemption
may not necessarily cover all acts that might be construed as prohibited
transactions.
Accordingly, prior to making an investment in the Notes, each fiduciary
causing the Notes to be purchased by or with the assets of a Plan or a
governmental plan subject to Similar Law must determine whether, and shall be
deemed to have represented that, the use of the assets of such Plan or
governmental plan to purchase the Notes does not and will not constitute or
result in a non-exempt prohibited transaction in violation of Section 406 of
ERISA, Section 4975 of the Code or Similar Law.
Because the Certificates represent equity investments in the Trust, the
Certificates may not be purchased by or with assets of any Plan (including, as
applicable, an insurance company general account deemed to include plan assets)
or any governmental plan subject to Similar Law. Accordingly, each purchaser of
Certificates will be deemed to have represented that it is neither such a Plan
or a governmental plan nor is using the assets of such a Plan or governmental
plan to purchase any of the Certificates, and to have agreed that if such
Certificates are subsequently deemed to be plan assets, it will dispose of them.
In this regard, it should be noted that the Small Business Job Protection
Act of 1996 added new Section 401(c) of ERISA relating to the status of the
assets of insurance company general accounts under ERISA and Section 4975 of the
Code. Pursuant to Section 401(c), the Department of Labor is required to issue
final regulations (the "General Account Regulations") not later than December
31, 1997 with respect to insurance policies issued on or before December 31,
1998 that are supported by an insurer's general account. The General Account
Regulations are to provide guidance on which assets held by the insurer
constitute "plan assets" for purposes of the fiduciary responsibility provisions
of ERISA and Section 4975 of the Code. Section 401(c) also provides that, except
in the case of avoidance of the General Account Regulation and actions brought
by the Secretary of Labor relating to certain breaches of fiduciary duties that
also constitute breaches of state or federal criminal law, until the date that
is 18 months after the General Account Regulations become final, no liability
under the fiduciary responsibility and prohibited transaction provisions of
ERISA and Section 4975 may result on the basis of a claim that the assets of the
general account of an insurance company constitute the plan assets of any such
Plan. The plan asset status of insurance company separate accounts is unaffected
by new Section 401(c) of ERISA, and separate account assets continue to be
treated as the plan assets of any such Plan invested in a separate account.
Prior to making an investment in the Notes, prospective Plan investors
should consult with their legal advisors concerning the impact of ERISA and the
Code and the potential consequences of such investment with respect to their
specific circumstances. Moreover, each Plan fiduciary should take into account,
among other considerations, whether the fiduciary has the authority to make the
investment; whether the
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investment constitutes a direct or indirect transaction with a Party in
Interest; the composition of the Plan's portfolio with respect to
diversification by type of asset; the Plan's funding objectives; the tax effects
of the investment; and whether under the general fiduciary standards of
investment procedure and diversification an investment in the Notes is
appropriate for the Plan's investment portfolio.
The sale of Notes to a Plan is in no respect a representation by the Seller
or the Underwriters that this investment meets all relevant requirements with
respect to investments by Plans generally or any particular Plan or that this
investment is appropriate for Plans generally or any particular Plan.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
relating to the Notes and the Certificates (the "Underwriting Agreement"), the
Seller has agreed to cause the Trust to sell to the underwriters named below
(the "Underwriters"), and each of the Underwriters has severally agreed to
purchase, the principal amount of Class A-1 Notes, Class A-2 Notes and
Certificates set forth opposite its name:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT PRINCIPAL AMOUNT
OF CLASS A-1 OF CLASS A-2 PRINCIPAL AMOUNT
UNDERWRITER NOTES NOTES OF CERTIFICATES
- ----------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
First Union Capital Markets Corp...... $107,637,773 $ 51,262,921 $14,195,880
Lehman Brothers Inc................... 52,000,000 25,500,000 --
Morgan Stanley & Co. Incorporated..... 52,000,000 25,500,000 --
Smith Barney Inc...................... 52,000,000 25,500,000 --
Total....................... $263,637,773 $127,762,921 $14,195,880
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase (i) all the Notes offered
hereby if any of the Notes are purchased and (ii) all the Certificates offered
hereby if any of the Certificates are purchased. The Seller has been advised by
the Underwriters that the Underwriters propose initially to offer the Securities
to the public at the respective public offering prices set forth on the covering
page of this Prospectus, and to certain dealers at such prices less a concession
not in excess of 0.15% per Class A-1 Note, 0.18% per Class A-2 Note and 0.283%
per Certificate. The Underwriters may allow and such dealers may reallow to
other dealers a discount not in excess of 0.10% per Class A-1 Note, 0.135% per
Class A-2 Note and 0.161% per Certificate. After the Securities are released for
sale to the public, the offering prices and other selling terms may be varied by
the Underwriters.
The Underwriting Agreement provides that the Seller will indemnify the
Underwriters against certain liabilities, including liabilities under applicable
securities laws, or contribute to payments the Underwriters may be required to
make in respect thereof.
The Notes and Certificates are new issues of securities with no established
trading market. The Seller has been advised by the Underwriters that the
Underwriters intend to make a market in the Notes and Certificates but are not
obligated to do so and may discontinue market marking at any time without
notice. No assurance can be given as to the liquidity of the trading market for
the Notes and Certificates.
The Trust may, from time to time in the ordinary course of business, but is
under no obligation to, invest the funds in the Trust Accounts in Eligible
Investments acquired from the Underwriters.
The closing of the sale of the Certificates is conditioned on the closing
of the sale of the Notes and the closing of the sale of the Notes is conditioned
on the closing of the sale of the Certificates.
Upon receipt of a request by an investor who has received an electronic
Prospectus from the Underwriters or by such investor's representative within the
period during which there is an obligation to deliver a Prospectus, the
applicable Underwriter will promptly deliver to such investor a paper copy of
the Prospectus.
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During and after the offering, the Underwriters may purchase and sell Notes
and Certificates in the open market in transactions in the United States. These
transactions may include overallotment and stabilizing transactions and
purchases to cover short positions created in connection with the offering. The
Underwriters also may impose a penalty bid, whereby selling concessions allowed
to broker-dealers in respect of the Notes and Certificates sold in the offering
for their account may be reclaimed by the Underwriters if such Notes and
Certificates are repurchased by the Underwriters in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Notes and Certificates, which may be higher than the price
that might otherwise prevail in the open market. These transactions may be
effected in the over-the-counter market or otherwise, and these activities, if
commenced, may be discontinued at any time.
Each Underwriter has represented and agreed that (a) it has not offered or
sold, and will not offer or sell Notes or Certificates to persons in the United
Kingdom except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which do not
constitute an offer to the public in the United Kingdom for the purposes of the
Public Offers of Securities Regulations 1995, (b) it has complied and will
comply with all applicable provisions of the Financial Services Act 1986 of
Great Britain with respect to anything done by it in relation to the Notes or
the Certificates in, from or otherwise involving the United Kingdom and (c) it
has only issued or passed on and will only issue or pass on in the United
Kingdom any document in connection with the issue of the Notes or the
Certificates to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996
or is a person to whom the document may otherwise lawfully be issued or passed
on.
No action has been or will be taken by the Seller or the Underwriters that
would permit a public offering of the Notes and the Certificates in any country
or jurisdiction other than in the United States, where action for that purpose
is required. Accordingly, the Notes and the Certificates may not be offered or
sold, directly or indirectly, and neither this Prospectus nor any circular,
prospectus, form of application, advertisement or other material may be
distributed in or from or published in any country or jurisdiction, except under
circumstances that will result in compliance with any applicable laws and
regulations. Persons into whose hands this Prospectus comes are required by the
Seller and the Underwriters to comply with all applicable laws and regulations
in each country or jurisdiction in which they purchase, sell or deliver Notes or
Certificates or have in their possession or distribute such Prospectus, in all
cases at their own expense.
The Seller is an affiliate of First Union Capital Markets Corp. The
Underwriters or agents and their associates may be customers of (including
borrowers from), engage in transaction with, and/or perform services for the
Seller, its affiliates, and the Indenture Trustee in the ordinary course of
business.
LEGAL MATTERS
Certain legal matters relating to the Securities will be passed upon for
the Trust, the Seller, the Master Servicer and the Administrator by Cadwalader,
Wickersham & Taft, Charlotte, North Carolina and for the Underwriters by
Kilpatrick Stockton LLP, Charlotte, North Carolina. Certain federal income tax
and other matters will be passed upon for the Trust by Cadwalader, Wickersham &
Taft, Charlotte, North Carolina.
98
<PAGE> 99
INDEX OF DEFINED TERMS
Set forth below is a list of defined terms used in this Prospectus and the
pages on which the definitions of such terms may be found herein.
<TABLE>
<CAPTION>
PAGE
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<S> <C>
1992 Amendments............................................. 48
1993 Act.................................................... 49
52 Week T-Bill Rate......................................... 79
91-day Treasury Bills....................................... 7
Adjusted Pool Balance....................................... 8, 77
Administration Agreement.................................... 5
Administration Fee.......................................... 30, 84
Administrator............................................... 5
Administrator Default....................................... 80
Applicable Trustee.......................................... 66
Auction Distribution Date................................... 10, 83
Available Funds............................................. 73
Cede........................................................ 3, 65
Cedel....................................................... 4, 66
Cedel Participants.......................................... 66
Certificate Balance......................................... 75
Certificate Final Payment Date.............................. 9, 61
Certificate Pool Factor..................................... 57
Certificate Rate............................................ 60
Certificateholders.......................................... 6
Certificateholders' Distribution Amount..................... 75
Certificateholders' Interest Distribution Amount............ 75
Certificateholders' Interest Index Carryover................ 7, 75
Certificateholders' Interest Shortfall...................... 75
Certificateholders' Principal Distribution Amount........... 76
Certificateholders' Principal Shortfall..................... 76
Certificates................................................ 1, 4
Class A-1 Final Maturity Date............................... 9, 60
Class A-1 Note Pool Factor.................................. 57
Class A-1 Notes............................................. 1, 4
Class A-1 Rate.............................................. 59
Class A-2 Final Maturity Date............................... 9, 60
Class A-2 Note Pool Factor.................................. 57
Class A-2 Notes............................................. 1, 4
Class A-2 Rate.............................................. 59
Closing Date................................................ 5
Code........................................................ 16, 86,95
Collection Account.......................................... 12
Collection Period........................................... 8
Commission.................................................. 3
Consolidation Loans......................................... 48
Cooperative................................................. 67
CSLF........................................................ 2, 38
Cutoff Date................................................. 1
Deferral.................................................... 35
Deferral Period............................................. 53
Definitive Certificates..................................... 68
</TABLE>
99
<PAGE> 100
<TABLE>
<CAPTION>
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<S> <C>
Definitive Notes............................................ 68
Definitive Securities....................................... 68
Department.................................................. 2, 5, 12
Depositaries................................................ 65
Depository.................................................. 58
Determination Date.......................................... 73
Disqualified Persons........................................ 95
Distribution Date........................................... 2, 6
DTC......................................................... 3, 4, 65
Eligible Deposit Account.................................... 71
Eligible Institution........................................ 71
Eligible Investments........................................ 70
Eligible Lender Trustee..................................... 2, 5
ERISA....................................................... 16, 95
Euroclear................................................... 4, 67
Euroclear Operator.......................................... 67
Euroclear Participants...................................... 67
Event of Default............................................ 63
Exchange Act................................................ 3
Expected Interest Collections............................... 59
family contribution......................................... 50
FDIA........................................................ 23
FDIC........................................................ 23
Federal Assistance.......................................... 51
Federal Direct Stafford Loans............................... 51
Federal Direct Student Loan................................. 49
Federal Direct Student Loan Program......................... 22
FFELP....................................................... 5, 11, 48
Financed Student Loans...................................... 1, 5
FIRREA...................................................... 23
First Union -- North Carolina............................... 2, 4, 29
First Union -- Pennsylvania................................. 2, 4, 29
Forbearance................................................. 35
Forbearance Period.......................................... 53
Foreign Person.............................................. 90
General Account Regulations................................. 96
Grace....................................................... 35
Grace Period................................................ 53
Guarantee Agreement......................................... 21
Guarantee Payments.......................................... 21
Guaranteed Student Loan Program............................. 48
Guarantors.................................................. 11, 38
Higher Education Act........................................ 20
Indenture................................................... 5
Indenture Trustee........................................... 5
Indirect Participants....................................... 65
Initial Pool Balance........................................ 1, 13
In-School................................................... 35
insurance triggers.......................................... 48
Interest Period............................................. 6, 58
Interest Subsidy Payments................................... 48
</TABLE>
100
<PAGE> 101
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Investment Earnings......................................... 71
IRS......................................................... 86
Liquidated Student Loans.................................... 74
Liquidation Proceeds........................................ 74
Lock-In Period.............................................. 61
Margin...................................................... 6
Master Servicer............................................. 4
Master Servicer Default..................................... 80
Master Servicing Agreement.................................. 4
Minimum Purchase Amount..................................... 11, 83
Monthly Servicing Payment Date.............................. 8
NJHEAA...................................................... 2, 38
Note Interest Rates......................................... 59
Note Owner.................................................. 87
Noteholders................................................. 6
Noteholders' Distribution Amount............................ 76
Noteholders' Interest Distribution Amount................... 76
Noteholders' Interest Index Carryover....................... 7, 76
Noteholders' Interest Shortfall............................. 76
Noteholders' Principal Distribution Amount.................. 76
Noteholders' Principal Shortfall............................ 76
Notes....................................................... 1, 4
NYSHESC..................................................... 2, 38
Obligors.................................................... 77
OID......................................................... 87
OID Regulations............................................. 87
Participants................................................ 58, 65
Parties in Interest......................................... 95
PHEAA....................................................... 2, 38
Plan........................................................ 16, 95
PLUS Loans.................................................. 48
Pool Balance................................................ 8, 77
Pool Factor................................................. 57
Prepayment Assumption....................................... 87
prepayments................................................. 25
Principal Distribution Amount............................... 77
Purchase Amount............................................. 70
Realized Loss............................................... 77
Registration Statement...................................... 3
Regulations................................................. 2
Reinsurance Rate............................................ 56
Related Documents........................................... 64
Repayment................................................... 35
Reserve Account............................................. 13
Reserve Account Initial Deposit............................. 13
Rules....................................................... 66
Sale Agreement.............................................. 11
Secretary................................................... 22
Securities.................................................. 1, 4
Securities Act.............................................. 3
Securityholders............................................. 6
</TABLE>
101
<PAGE> 102
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Seller...................................................... 2, 4
Seller Trusts............................................... 25
Servicing Fee............................................... 15
Similar Law................................................. 96
SLS Loans................................................... 48
Special Allowance Payments.................................. 48
Specified Reserve Account Balance........................... 13, 77
Stafford Loans.............................................. 48
Student Loan Rate........................................... 7, 59
Student Loans............................................... 11
Subservicer................................................. 30
Subservicing Agreement...................................... 30
Subsidized Stafford Loans................................... 48
Supplemental Loans to Students.............................. 48
T-Bill Rate................................................. 61
Technical Amendments........................................ 49
Terms and Conditions........................................ 67
Transfer and Servicing Agreements........................... 69
Trust....................................................... 1, 4
Trust Accounts.............................................. 70
Trust Agreement............................................. 5
Trust Fees.................................................. 13, 29
UCC......................................................... 84
Underwriters................................................ 1, 97
Underwriting Agreement...................................... 97
Unmet Need.................................................. 50
Unsubsidized Stafford Loans................................. 48
USAF........................................................ 2, 38
Withholding Proposals....................................... 89
</TABLE>
102
<PAGE> 103
=========================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SELLER, THE TRUST OR
THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION
BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR
IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO
OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................... 3
Reports to Securityholders.............. 3
Incorporation of Certain Documents by
Reference............................. 3
Summary of Terms........................ 4
Risk Factors............................ 18
Formation of the Trust.................. 27
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 29
Use of Proceeds......................... 29
The Seller, the Master Servicer and the
Administrator......................... 29
The Financed Student Loan Pool.......... 30
The Federal Family Education Loan
Program............................... 48
Pool Factors and Trading Information.... 57
Description of the Securities........... 58
Description of the Transfer and
Servicing Agreements.................. 69
Certain Legal Aspects of the Financed
Student Loans......................... 84
Material Federal Income Tax
Consequences.......................... 86
Certain State Tax Consequences.......... 95
ERISA Considerations.................... 95
Underwriting............................ 97
Legal Matters........................... 98
Index of Defined Terms.................. 99
</TABLE>
UNTIL OCTOBER 21, 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SECURITIES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
=========================================================
=========================================================
$405,596,574
FIRST UNION
STUDENT LOAN TRUST
1997-1
$263,637,773
FLOATING RATE CLASS A-1
ASSET BACKED NOTES
$127,762,921
FLOATING RATE CLASS A-2
ASSET BACKED NOTES
$14,195,880
FLOATING RATE
ASSET BACKED CERTIFICATES
FIRST UNION NATIONAL BANK
(PENNSYLVANIA)
SELLER
FIRST UNION NATIONAL BANK
(NORTH CAROLINA)
MASTER SERVICER
[FIRST UNION LOGO]
---------------------
PROSPECTUS
---------------------
FIRST UNION CAPITAL MARKETS CORP.
LEHMAN BROTHERS
MORGAN STANLEY DEAN WITTER
SMITH BARNEY INC.
=========================================================
