As filed with the Securities and Exchange Commission on May 2, 1997
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
First Union Student Loan Trust 1997-1
(Name of trust issuing Asset Backed Notes)
of which First Union National Bank is Depositor
(Exact name of registrant as specified in its governing instruments)
United States 22-1147033
(Jurisdiction of Organization) (I.R.S. Employer Identification No.)
----------------------
FIRST UNION STUDENT LOAN TRUST 1997-1
c/o [Name of Eligible Lender Trustee]
[Address]
[Phone Number]
(Address of principal executive offices)
--------------------------
[Name of Eligible Lender Trustee],
as Eligible Lender Trustee of First Union Student Loan Trust 1997-1
[Address]
[Phone Number]
ATTENTION: [CORPORATE TRUST ADMINISTRATION]
(Name and address of agent for service)
--------------------------
The Commission is
requested to send copies of all communications to:
<TABLE>
<S> <C> <C>
KARSTEN P. GIESECKE, ESQ. MARION A. COWELL, JR., ESQ. R. MICHAEL DURRER, ESQ.
Cadwalader, Wickersham & Taft First Union Corporation Kilpatrick Stockton LLP
201 South College Street 301 South College Street 301 South College Street
Charlotte, NC 28244 Charlotte, North Carolina 28288-0013 Charlotte, North Carolina 28202-6001
(704) 348-5100 (704) 374-6161 (704) 338-5083
</TABLE>
--------------------------
Approximate date of commencement of the proposed sale of the securities to
the public: As soon as practicable after the effective date of this Registration
Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. |_|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
--------------------------
CALCULATION OF
REGISTRATION FEE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title of Each Class of Securities Amount to Proposed Maximum Proposed Maximum Amount of
to be Registered be Registered Offering Price Per Aggregate Offering Registration Fee
<S> <C> <C> <C> <C>
First Union Student Loan Trust 1997-1 $1,000,000 100% $1,000,000 $303.03
Asset Backed Notes..................
</TABLE>
*Estimated for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses Of Issuance And Distribution.
Set forth below is an estimate of the amount of fees and expenses (other
than underwriting discounts and commissions to be incurred with the issuance and
distribution of the shares.)
SEC Filing Fee......................................... $303.03
Indenture Trustee's Fees............................... *
Eligible Lender Trustee's Fees......................... *
Legal Fees and Expenses................................ *
Accounting Fees and Expenses........................... *
Blue Sky and Legal Investment Fees and Expenses........ *
Printing Fees and Expenses............................. *
Rating Agency Fees and Expenses........................ *
Miscellaneous.......................................... *
Total............................................. $ *
- --------------
* Not determinable at this time.
Item 15. Indemnification Of Directors And Officers.
The Sale Agreement and the Master Servicing Agreement will provide that no
director, officer, employee or agent of the Depositor is liable to the Trust or
the Securityholders, except for any liability which would otherwise be imposed
by reason of willful misfeasance, bad faith or negligence in the performance of
their respective duties under such Sale Agreement and Master Servicing
Agreement, or by reason of reckless disregard of such duties. The Sale Agreement
and the Master Servicing Agreement will further provide that with the exceptions
stated above, a director, officer, employee or agent of the Depositor is
entitled to be indemnified and held harmless by the Trust against any loss,
liability or expense incurred in connection with legal action relating to such
Sale Agreement and Master Servicing Agreements and related Securities, other
than any loss, liability or expense: (i) specifically required to be borne
thereby pursuant to the terms of such Sale Agreement and Master Servicing
Agreements, or otherwise incidental to the performance of obligations and duties
thereunder; and (ii) incurred in connection with any violation of any state or
federal securities law.
First Union Corporation maintains directors and officers liability
insurance for the benefit of its subsidiaries, which provides coverage of up to
$80,000,000, subject to certain deductible amounts. In general, the policy
insures (i) the Depositor's directors and, in certain cases, its officers
against any loss by reason of any of their wrongful acts, and/or (ii) the
Depositor against loss arising from claims against the directors and officers by
reason of their wrongful acts, all subject to the terms and conditions contained
in the policy.
Under agreements which may be entered into by the Depositor, certain
controlling persons, directors and officers of the Depositor may be entitled to
indemnification by underwriters and agents who participate in the distribution
of Securities covered by the Registration Statement against certain liabilities,
including liabilities under the Securities Act.
Item 16. Exhibits.
Exhibits
1.1 Form of Underwriting Agreement*
4.1 Form of Indenture (including forms of Notes)*
4.2 Form of Trust Agreement (including form of Certificates)*
4.3 Form of Master Servicing Agreement*
4.4 Form of Sale Agreement*
4.5 Form of Administration Agreement*
4.6 Form of Guarantee Agreements*
5.1 Opinion of Counsel to the Issuer as to legality*
8.1 Opinion of Special Federal Income Tax Counsel to the Issuer as to certain
federal income tax matters*
23.1 Consents of Counsel and Special Federal Income Tax Counsel to Issuer
(included in exhibits 5.1 and 8.1)*
24.1 Power of Attorney (included on page II-4 of this Registration Statement)
25.1 Statement of Eligibility and Qualification on Form T-1 of [_____________],
as Indenture Trustee, under the Indenture relating to the Notes*
- -----------------------
* To be filed by amendment.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Depositor pursuant to the provisions contained in foregoing provisions or
otherwise, the Depositor has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in such Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the reimbursement
by the Depositor of expenses incurred or paid by a director, officer or
controlling person of the Depositor in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Depositor will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in such Act and
will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in New Brunswick, New Jersey, on May 2, 1997.
FIRST UNION NATIONAL BANK
as depositor for First Union Student
Loan Trust 1997-1
By: /s/Robert A. Dressel
--------------------
Name: Robert A. Dressel
Title: Vice President
<PAGE>
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Brian E. Simpson, James F. Powers and Stephen J.
Antal, and each of them, his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for and in his name, place and
stead, in any and all capacities to sign any or all amendments (including
post-effective amendments) to this Registration Statement and any or all other
documents in connection therewith, and to file the same, with all exhibits
thereto, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as might or could be done in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/Anthony P. Terracciano Chairman of the Board, Director and Chief May 2, 1997
- ---------------------------------- Executive Officer (Principal Executive
Officer)
/s/Anthony R. Burriesci Director and Chief Financial Officer May 2, 1997
- ---------------------------------- (Principal Financial Officer)
/s/James H. Hatch Chief Accounting Officer (Principal May 2, 1997
- ---------------------------------- Accounting Officer)
/s/Michael A. Gallagher Director May 1, 1997
- ----------------------------------
/s/George R. Halvorsen Director May 2, 1997
- ----------------------------------
/s/Michael L. LaRusso Director May 2, 1997
- ----------------------------------
/s/ Donald C. Parcells Director May 2, 1997
- ----------------------------------
</TABLE>
<PAGE>
EXHIBIT INDEX
1.1 Form of Underwriting Agreement*
4.1 Form of Indenture (including forms of Notes)*
4.2 Form of Trust Agreement (including form of Certificates)*
4.3 Form of Master Servicing Agreement*
4.4 Form of Sale Agreement*
4.5 Form of Administration Agreement*
4.6 Form of Guarantee Agreements*
5.1 Opinion of Counsel to the Issuer as to legality*
8.1 Opinion of Special Federal Income Tax Counsel to the Issuer as to certain
federal income tax matters*
24.1 Consents of Counsel and Special Federal Income Tax Counsel to Issuer
(included in exhibits 5.1 and 8.1)*
25.1 Power of Attorney (included on page II-4 of this Registration Statement)
26.1 Statement of Eligibility and Qualification on Form T-1 of [_____________],
as Indenture Trustee, under the Indenture relating to the Notes*
- --------
* To be filed by amendment.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 2, 1997
$-----------
FIRST UNION STUDENT LOAN TRUST 1997-1
$---------- Floating Rate Class A-1 Asset Backed Notes
$---------- Floating Rate Class A-2 Asset Backed Notes
$---------- Floating Rate Asset Backed Certificates
------------------
FIRST UNION NATIONAL BANK
Seller
FIRST UNION NATIONAL BANK
Master Servicer
------------------
The First Union Student Loan Trust 1997-1 (the "Trust") will issue
$----------- aggregate principal amount of Floating Rate Class A-1 Asset Backed
Notes (the "Class A-1 Notes"), $----------- 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 $---------- aggregate principal
amount of Floating Rate Asset Backed Certificates (the "Certificates" and,
together with the Notes, the "Securities"). (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 16.
------------------
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 (1) Commissions the Seller (1)(2)
--------------- ------------- -------------------
<S> <C> <C> <C>
Per Class A-1 Note
Per Class A-2 Note
Per Certificate
Total
</TABLE>
(1) Plus accrued interest, if any, from June ---, 1997. (2) Before
deducting expenses, estimated to be $-------------. ------------------ The Notes
and the Certificates are offered severally by First Union Capital Markets Corp.
and [------------------] (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 June ---,
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. expects to enter into market-making
transactions in the Notes and the Certificates and may act as principal or agent
in any such transactions. Any such purchases or sales will be made at prices
related to prevailing market prices at the time of sale. This Prospectus may be
used by First Union Capital Markets Corp. in connection with such market-making
transactions.
FIRST UNION CAPITAL MARKETS CORP. [-----------------------------------]
The date of this Prospectus is ----- --, 1997.
The assets of the Trust will include a pool of student loans (the "Financed
Student Loans") purchased by [---------------------------], as eligible lender
trustee on behalf of the Trust (the "Eligible Lender Trustee"), from First Union
National Bank (the "Seller"), 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). The aggregate principal balance of the Financed Student Loans,
including previously accrued interest which has been or is expected to be
capitalized (as more specifically defined herein, the "Pool Balance"), was
approximately $------------ as of June 1, 1997 (the "Cutoff Date"). The Notes
will be secured by the assets of the Trust. 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 herein.
Interest on and principal of the Securities will be payable quarterly on or
about the [----------] day of each of March, June, September and December,
commencing September --, 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 --% for the Class A-1 Notes, --% for the
Class A-2 Notes and -----% for the Certificates.
The final maturity date for the Class A-1 Notes will be the -------- 200-
Distribution Date, the final maturity date for the Class A-2 Notes will be the
- -------- 20-- Distribution Date and the scheduled final payment date for the
Certificates will be the ---------- 20-- 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 and an
affiliate of the Seller ("First Union"), 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"), the United Student Aid Funds, Inc. (("USAF"),
[and other agencies further described herein] 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 neither has any obligation to do so. There can be
no assurance that a secondary market for the Notes or the Certificates will
develop or, if it does develop, that it will continue.
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."
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. The Trust intends to suspend the filing of such
reports under the Exchange Act when and if the filing of such reports is no
longer statutorily required.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Administrator, on behalf of
the Trust, pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Prospectus and prior to the termination of the
offering of the Notes 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-____, Attention: Trust Administrator, First
Union Student Loan Trust 1997-1. Telephone requests for such copies should be
directed to the Administrator at (704) ----------------.
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 Principal Terms".
Issuer .......................First Union Student Loan Trust 1997-1 (the
"Trust"). The Trust was 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 $-----------, 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 $----------- and Floating Rate Asset Backed
Certificates (the "Certificates" and, together
with the Notes, the "Securities") in an initial
aggregate principal amount of $-----------. The
Securities will be available for purchase in
denominations of $1,000 and integral multiples
thereof in book-entry form only. Persons acquiring
beneficial ownership interests in the Notes will
hold their interests in the Notes through The
Depository Trust Company ("DTC") in the United
States or 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 (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"), 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 June 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 is a
subsidiary of First Union Corporation and an
affiliate of the Seller and First Union Capital
Markets Corp. The 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, 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 ......[---------------------------], as trustee (the
"Eligible Lender Trustee") under the Trust
Agreement dated as of June 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 ............[---------------------------] (the "Indenture
Trustee"), as trustee under the Indenture to be
dated as of June 1, 1997 (as amended and
supplemented from time to time, the "Indenture")
between the Trust and the Indenture Trustee.
Transaction Overview .........The Trust will issue the Notes pursuant to the
Indenture. The Notes will be secured by the assets
which will include (i) a pool of student loans
(the "Financed Student Loans") made under the
Federal Family Education Loan Program ("FFELP"),
guaranteed as to the payment of principal and
interest by certain guarantee agencies and
reinsured by the United States Department of
Education, 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. Pursuant to the
Trust Agreement, the Trust will issue the
Certificates. 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."
Credit Enhancement ...........The principal source of payments on the Notes and
distributions on the Certificates will be payments
received from or on behalf of borrowers, payments
from Guarantors and the Department, and proceeds
of the repurchase of Financed Student Loans by the
Seller. 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 cover
only 98% of the principal balance 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 [ ] day of each of March, June, September and
December, commencing September ---, 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 --% for the Class A-1 Notes, --%
for the Class A-2 Notes and ----% 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.
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 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 Cutoff Date
and ending on August 31, 1997).
"Pool Balance" is defined under "Description of
the Transfer and Servicing Agreements --
Distributions". The Pool Balance at any time
generally represents the aggregate principal
balance of the Financed Student Loans at the end
of the preceding Collection Period (including
accrued interest thereon for such Collection
Period to the extent such interest will be
capitalized upon commencement of repayment), after
giving effect to all payments received by the
Trust 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
----- 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):
(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) the quarterly fee payable to the Indenture
Trustee and all overdue fees to the Indenture
Trustee;
(iv) the quarterly fee payable to the Eligible
Lender Trustee and all overdue fees to the
Eligible Lender Trustee;
(v) interest due to the Noteholders and all
overdue interest (other than the Noteholders'
Interest Index Carryover) as described above under
"-- Payments and Distributions -- Interest";
(vi) interest due to the Certificateholders and
all overdue interest (other than the
Certificateholders' Interest Index Carryover) as
described above under "-- Payments and
Distributions -- Interest ";
(vii) principal payable to the Noteholders as
described above under "-- Payments and
Distributions -- Principal";
(viii) 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";
(ix) the amount, if any, necessary to be deposited
in the Reserve Account to reinstate the balance
thereof to the Specified Reserve Account Balance;
[(x) the aggregate unpaid amount of the Excess
Servicing Fee (as defined under "-- Transfer and
Servicing Agreements" below), if any, to the
Master Servicer;]
(xi) the aggregate unpaid amount of Noteholders'
Interest Index Carryover, if any, to the
Noteholders;
(xii) the aggregate unpaid amount of
Certificateholders' Interest Index Carryover, if
any, to the Certificateholders; and
(xiii) any remaining amounts after application of
clauses (i) through (xii) 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 ------ 200-
Distribution Date. The "Class A-2 Final Maturity
Date" is the ------ 200- Distribution Date, and
the "Certificate Final Payment Date" is the ------
200- 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 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, 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 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 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
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 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 and (v) pay the
aggregate fees and expenses of such auction. See
"Description of the Transfer and Servicing
Agreements -- Termination" herein.
Optional Purchase ............The Seller may repurchase all remaining Financed
Student Loans at a price equal to the Minimum
Purchase Amount, 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
$--------------- as of the Cutoff Date to the
Eligible Lender Trustee on behalf of the Trust
pursuant to a Sale Agreement to be dated as June
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 -----% of the
aggregate principal balance of the Financed
Student Loans as of the Cutoff Date. 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, USAF,
[and other agencies further described herein] (the
"Guarantors"), and are 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, and reinsured against
default by the Department up to a maximum of 100%.
Student Loans made 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%. All references herein to the
guarantee and reinsurance coverage with respect to
the Financed Student Loans should be understood to
mean either (i) such 100% guarantee and maximum
reinsurance coverage with respect to Financed
Student Loans made prior to October 1, 1993 or
(ii) such 98% guarantee and maximum reinsurance
coverage with respect to Financed Student Loans
made on or after October 1, 1993. As of the Cutoff
Date, approximately ----% 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 ----% (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 ----- months. As of the Cutoff Date,
approximately ----% of the Financed Student Loans
by principal balance are guaranteed by PHEAA, ---%
are guaranteed by NJHEAA, ---% are guaranteed by
CSLF, ---% are guaranteed by NYSHESC, ---% are
guaranteed by USAF [and ----% are guaranteed by
the other Guarantors further described herein.]
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. Except under certain
conditions described herein, 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
Collection Account. Except under certain
conditions described herein, the Eligible Lender
Trustee will be required to remit Interest Subsidy
Payments and Special Allowance Payments (each as
defined under "The Federal Family Education Loan
Program-- General") it receives with respect to
the Financed Student Loans within two business
days of receipt thereof to the Collection Account.
If, however, such 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 generally until on or before
the business day preceding each Distribution Date.
See "Description of the Transfer and Servicing
Agreements-- Payments on Financed Student Loans".
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 $-------- (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 generally will be
equal to the greater of (i) ---% of the Pool
Balance as of the close of business on the last
day of the related Collection Period, and (ii)
$---------; 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 $------------. 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, the Administration Fee and the fees of the
Indenture Trustee and the Eligible Lender Trustee
(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 [Excess Servicing Fee,]
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 to pay the
remaining principal amount of and interest accrued
on the Notes and Certificates, and to pay any
Excess Servicing Fee, 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 Excess
Servicing Fee, Noteholders' Interest Index
Carryover and Certificateholders' Interest Index
Carryover. 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 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, subject to the
limitations set forth in the following paragraph,
a monthly fee (the "Servicing Fee") payable on
each Monthly Servicing Payment Date equal to [the
sum of] (i) ----% per annum of the Pool Balance as
of the last day of the preceding calendar month
and (ii) [------------------------------], in each
case subject to certain adjustments, together with
other administrative fees and similar charges. The
Servicing Fee will be payable out of funds
available therefor and amounts on deposit in the
Reserve Account on each Monthly Servicing Payment
Date, commencing -------- --, 1997.
[Notwithstanding the foregoing, in the event that
the fee payable to the Master Servicer as
described above for any Monthly Servicing Payment
Date would exceed --% per annum of the Pool
Balance as of the last day of the preceding
calendar month (the "Capped Amount"), then the
"Servicing Fee" for such Monthly Servicing Payment
Date will instead be the Capped Amount for such
date. The remaining amount in excess of such
Servicing Fee, together with any such excess
amounts from prior Monthly Servicing Payment Dates
that remain unpaid (the "Excess Servicing Fee"),
will be payable to the Master Servicer on each
succeeding Distribution Date out of funds
available therefor after payment on such
Distribution Date of the Trust Fees, and amounts
payable in respect of the Notes and the
Certificates (other than the Noteholders' Interest
Index Carryover and the Certificateholders'
Interest Index Carryover).]
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, although there is no specific authority
with respect to the characterization for federal
income tax purposes of securities having the same
terms as the Notes. 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 [firm], [state] tax counsel for
the Trust, the same characterizations would apply
for --- state income and franchise tax purposes as
for federal income tax purposes and Noteholders
and Certificateholders that are not otherwise
subject to [state] taxation on income will not
become subject to [state] 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 holders
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.
See "Certain 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 using 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.
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 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 -----% of the Pool Balance as of
the Cutoff Date. 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 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.
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 a Guarantor's ability to meet its guarantee
obligations with respect to the Financed Student Loans, or the Trust's ability
to pay principal and interest with respect to the Securities, is impossible to
predict.
Basis Risk. Although the interest rate on the Notes and the Certificates is
generally based on the T-Bill Rate it is 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. In such a case, the
interest rate on one or both classes of Notes and the Certificates, as
applicable, for such Distribution Date will be the applicable Student Loan Rate.
See "Description of the Securities -- The Notes -- Distributions of Interest"
and "-- The Certificates -- Distributions of Interest". Any Noteholders'
Interest Index Carryover or Certificateholders' Interest Index Carryover arising
as a result of the interest rate on one or both classes of Notes and the
Certificates being determined on the basis of the applicable Student Loan Rate
will be paid on that Distribution Date or on any succeeding Distribution Date to
the extent funds are allocated and available therefor after making all required
prior distributions and deposits with respect to such date. Except on the final
Distribution Date upon termination of the Trust, 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".
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. 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 -----% 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
that the Department pays reimbursement claims submitted by a Guarantor in
respect of defaulting Student Loans for any fiscal year exceeding certain
specified levels, the Department's obligation to reimburse the Guarantor for
losses will be reduced on a sliding scale from 100% (98% for loans made on or
after October 1, 1993) to a minimum of 80% (78% for loans made on or after
October 1, 1993).
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.
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 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 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 greatly expands the loan
volume under the direct lending program of the Department (the "Federal Direct
Student Loan Program") to a minimum 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.
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 Interim Final 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.
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, 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".
In addition, in the event of the occurrence of certain insolvency related
events with respect to the Seller, the Financed Student Loans may be required to
be sold. There can be no assurance, however, that the net sale proceeds will be
sufficient to repay the principal amount of the Notes and the Certificates in
full plus accrued interest thereon. See "Description of Transfer and Servicing
Agreements -- Insolvency Event."
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 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 collections in respect of the Financed Student Loans
may occur. See "Description of the Transfer and Servicing Agreements -- Rights
Upon Master Servicer Default and Administrator Default".
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 to securitize 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 other trusts using the same lender identification number and payments
on such billings would be made by the Department in lump sum form. Such lump sum
payments would then be allocated among the various trusts using the 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.
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
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 interest rates and the availability of alternative
financing. 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 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 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 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 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 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
repayments 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".
Consumer Protection Laws May Affect Enforceability of Student Loans.
Numerous federal and state consumer protection laws and related regulations
impose substantial requirements upon lenders and servicers involved in consumer
finance. Also, some state laws impose finance charge ceilings and other
restrictions on certain consumer transactions and require contract disclosures
in addition to those required under federal law. These requirements impose
specific statutory liability that could affect an assignee's ability to enforce
consumer finance contracts such as the Student Loans. In addition, the remedies
available to the Indenture Trustee or the Noteholders upon an Event of Default
under the Indenture may not be readily available or may be limited by applicable
state and federal laws. See "Certain Legal Aspects of the Financed Student
Loans".
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 -----% and -----% by principal
balance of the Initial Financed Student Loans have borrowers with permanent
billing addresses located in either ---------- or ----------, 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 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 $----------
excluding amounts deposited in the Reserve Account by the Trust on the Closing
Date, representing the initial principal balance of the Certificates.
[Certificates with an original principal balance of approximately $----------
will be sold to and retained by the Seller and] the remaining Certificates will
be sold to third-party investors that are expected to be unaffiliated with the
Seller, the Master Servicer, the Guarantors, the Trust or the Department. The
equity of the Trust, together with the proceeds from the sale of the Notes, will
be used by the Eligible Lender Trustee to purchase on behalf of the Trust the
Financed Student Loans from the Seller pursuant to the Sale Agreement. The
Seller 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 [June] 1, 1997, 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 ----------, in care of
- --------------------, 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:
Floating Rate Class A-1 Asset Backed Notes $
----------------
Floating Rate Class A-2 Asset Backed Notes $
----------------
Floating Rate Asset Backed Certificates $
----------------
Total $
=================
Eligible Lender Trustee
General. --------------------- is the Eligible Lender Trustee for the Trust
under the Trust Agreement. --------------------- is a national banking
association whose principal offices are located at --------------------- and
whose Delaware offices are located at ---------------------. 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 plans to maintain normal commercial
banking relations with the Eligible Lender Trustee.
Fees. In consideration for its performance of its obligations under the
Sale Agreement, the Eligible Lender Trustee will be entitled to receive a fee of
- -----, payable by the Trust on each Distribution Date.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Sources of Capital and Liquidity
The Trust's primary 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 primary sources of liquidity will be collections with respect
to the Financed Student Loans and amounts on deposit in the Reserve Account.
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, the Administration Fee and the
fees of the Indenture Trustee and the Eligible Lender Trustee (such fees
collectively, the "Trust Fees") and the Excess Servicing Fee, if any.
USE OF PROCEEDS
The net proceeds from the sale of the Certificates and the Notes will be
paid to the Seller to purchase the Financed Student Loans on the Closing Date.
The Seller will use such proceeds paid to it (i) to make the Reserve Account
Initial Deposit and (ii) [for general corporate purposes.]
THE SELLER, THE MASTER SERVICER AND THE ADMINISTRATOR
The Seller
General. First Union National Bank (the "Bank") is the Seller under the
Sale Agreement. The Bank is a national banking association having its main
office in Avondale, Pennsylvania, and 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. First Union
Corporation is the sixth largest bank holding company in the United States based
on total assets as of December 31, 1996. As of December 31, 1996, First Union
Corporation had assets of $140.1 billion, net loans of $95.9 billion, deposits
of $94.8 billion and shareholders' equity of $10.01 billion. For the fiscal year
ended December 31, 1996, First Union Corporation had net earnings of $1.5
billion. At December 31, 1996, First Union Corporation's tier 1 and total
capital ratios were 7.33% and 12.33%, respectively. First Union Corporation's
leverage ratio at December 31, 1996 was 6.13%.
The Master Servicer and the Administrator
General. First Union National Bank ("First Union") 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 is a separate national banking association having its
main office in Charlotte, North Carolina, an affiliate of the Seller and 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 will merge into the Bank and the Bank
will succeed to all of First Union'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 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 such Subservicing Agreements are
terminated or are 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, subject to certain limitations
described herein, a monthly fee payable by the Trust on each Monthly Servicing
Payment Date equal [the sum of] (i) -----% per annum of the Pool Balance as of
the last day of the preceding calendar month and (ii)
[-------------------------], in each case subject to certain adjustments,
together with other administrative fees and similar charges. See "Description of
Transfer and Servicing Agreements -- Servicing Compensation".
The Subservicers. The Master Servicer may from time to time enter into
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 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 Student Loans.
Services and Fees of Administrator. Pursuant to the Administration
Agreement, the Administrator will be responsible 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 ------ (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,
including, as of the Cutoff Date, that 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 amortize
the amount financed over its original term to maturity (exclusive of any Grace,
Deferral or Forbearance Periods), (v) is not more than 90 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.
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 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.
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 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 270 days of delinquency may result in denial of the
guarantee claim with respect to such loan. 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
Aggregate Outstanding Principal Balance(l) ............
Number of Borrowers....................................
Average Outstanding Principal Balance Per Borrower.....
Number of Loans........................................
Average Outstanding Principal Balance Per Loan.........
Weighted Average Remaining Term to Maturity(2) ........
Weighted Average Annual Interest Rate(3)(4)............
- ---------------
(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 $---------- 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 or 52-week T-Bill rate,
as applicable, was -----% as of the Cutoff Date.
Distribution of the Financed Student Loans by Loan Type as of the Cutoff Date
Aggregate
Outstanding Percent of Pool
Number Principal By Outstanding
Loan Type of Loans Balance(1) Principal Balance
--------- -------- ---------- -----------------
Stafford Loans,
Subsidized
Stafford Loans,
Unsubsidized
SLS Loans
PLUS Loans
Federal
Consolidation
Loans
Total
---------------
(1) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$---------- as of the Cutoff Date.
Distribution of the Financed Student Loans by Interest
Rates as of the Cutoff Date
Aggregate
Outstanding Percent of Pool
Number Principal By Outstanding
Range of Interest Rates (1) of Loans Balance(2) Principal Balance
--------------------------- -------- ---------- -----------------
Less than 7.500%
7.500% to 7.999%
8.000% to 8.499%
8.500% to 8.999%
9.000% and above
Total
- -----------
(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
$---------- as of the Cutoff Date.
Distribution of the Financed Student Loans by Outstanding Principal Balance
as of the Cutoff Date
<TABLE>
<CAPTION>
Aggregate
Outstanding Percent of Pool
Range of Outstanding Number Principal By Outstanding
Principal Balances(1) of Borrowers Balance(2) Principal Balance
--------------------- ------------ ---------- -----------------
<S> <C> <C> <C>
Less than $1,000
$1,000 to $1,999
$2,000 to $2,999
$3,000 to $3,999
$4,000 to $4,999
$5,000 to $5,999
$6,000 to $6,999
$7,000 to $7,999
$8,000 to $8,999
$9,000 to $9,999
$10,000 to $10,999
$11,000 to $11,999
$12,000 to $12,999
$13,000 to $13,999
$14,000 and above
</TABLE>
Total
---------------
(1) Borrowers generally have more than one outstanding loan. The average
aggregate outstanding principal balance of loans per borrower is
$----------, 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
$---------- as of the Cutoff Date.
Distribution of the Financed Student Loans By School Type
Aggregate
Outstanding Percent of Pool
Number Principal By Outstanding
School Type of Loans Balance(1 Principal Balance
----------- -------- --------- -----------------
2-year institutions
4-year institutions
Proprietary/Vocational
Not identified
Total
---------------
(1) Includes net principal balance due from borrowers, plus accred interest
thereon, estimated to be $----------- as of the Cutoff Date to be
capitalized upon commencement of repayment.
Distribution of the Financed Student Loans by
Remaining Term to Scheduled Maturity as of the Cutoff Date
Aggregate
Number of Months Outstanding Percent of Pool
Remaining to Scheduled Number Principal By Outstanding
Maturity(1) of Loans Balance(2) Principal Balance
----------- -------- ---------- -----------------
Less than 24
24 to 35
36 to 47
48 to 59
60 to 71
72 to 83
84 to 95
96 to 107
108 to 119
120 to 131
132 to 143
144 to 155
156 to 167
168 to 179
180 to 191
192 and above
Total
- ---------------
(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
$---------- as of the Cutoff Date.
Distribution of the Financed Student Loans by Borrower
Payment Status as of the Cutoff Date
Aggregate
Outstanding Percent of Pool
Number Principal By Outstanding
Borrower Payment Status(1) of Loans Balance(2) Principal Balance
-------------------------- -------- ---------- -----------------
In-School
Grace
Deferral
Forbearance
Repayment
First year in repayment
Second year in repayment
Third year or greater in
repayment
Total
- ---------------
(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") 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
$----------- as of the Cutoff Date.
(3) The weighted average number of months in repayment of all Financed Student
Loans currently in repayment is ---, calculated as the term to maturity at
the commencement of repayment less the number of months remaining to
scheduled maturity as of the Cutoff Date.
Scheduled Weighted Average Months in Status of the Financed Student Loans
by Current Loan Payment Status as the Cutoff Date(1)
<TABLE>
<CAPTION>
Current Borrower Payment Status Scheduled Months in Status
-------------------------------------------------------------------
In-School Grace Deferral Forbearance Repayment
--------- ----- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
In-School
Grace
Deferral
Forbearance
Repayment
</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
Aggregate
Outstanding Percent of Pool
Number Principal By Outstanding
State(1) of Loans Balance(2) Principal Balance
-------- -------- ---------- -----------------
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Guam
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Puerto Rico
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virgin Islands
Virginia
Washington
Washington, DC
West Virginia
Wisconsin
Wyoming
Other
Total
- ---------------
(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 obligors, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$---------- as of the Cutoff Date.
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
Pre-October 1, 1993
</TABLE>
Total
---------------
(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 $---------- as of the Cutoff Date to be
capitalized upon commencement of repayment.
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"), the United Student Aid Funds, Inc., a non-profit
corporation ("USAF"), or other eligible guarantors (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 a SLS 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 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
----------------- -------- ---------- -----------------
<S> <C> <C> <C>
Connecticut Student Loan Foundation
Pennsylvania Higher Education Assistance Authority
New Jersey Higher Education Assistance Authority
N.Y. State Higher Education Services Corporation
United Student Aid Funds, Inc.
[Others]
Total
</TABLE>
---------------
(1) Includes net principal balance due from borrowers, plus accrued interest
thereon, estimated to be $----------- as of the Cutoff Date to be
capitalized upon commencement of repayment.
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 death of the borrower thereof; or
(d) 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 90 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 any state government.
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 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 Federal Consolidation Loans) that have first become guaranteed by
each Guarantor and by all guarantors in each of the last five federal fiscal
years:*
Stafford, SLS and PLUS Loans Guaranteed
---------------------------------------
<TABLE>
<CAPTION>
(in millions)
Federal
Fiscal All
Year PHEAA NJHEAA CSLF NYSHESC USAF Guarantors
---- ----- ------ ---- ------- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
1991 $1,195 $ $ $ $ $13,500
1992 $1,295 $ $ $ $ $14,749
1993 $1,523 $ $ $ $ $17,863
1994 $1,747 $ $ $ $ **
1995 $1,808 $ $ $ $ **
</TABLE>
* The information set forth in the table above for All Guarantors
has been obtained from the Department of Education's Guaranteed
Student Loan Programs Data Books (each, a "DOE Data Book") for
Fiscal Years 1991, 1992 and 1993. Information for PHEAA, NJHEAA,
CSLF, NYSHESC, and USAF was obtained from PHEAA NJHEAA, CSLF,
NYSHESC, and USAF, respectively. The information for "All
Guarantors" for 1993 was obtained from the Department of
Education's Loan Volume Update. 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 or
the Underwriters.
** Not available.
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' cumulative cash reserves and their corresponding reserve
ratios and the national average reserve ratio for all guarantors for the last
five federal fiscal years:*
<TABLE>
<CAPTION>
Federal
Fiscal All
Year PHEAA NJHEAA CSLF NYSHESC USAF Guarantors
---- ----- ------ ---- ------- ---- ----------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
1991 $29.41 0.4% $ $ $ %
1992 $85.89 1.1% $ $ $ %
1993 $100.95 1.1% $ $ $ %
1994 $133.63 1.3% $ $ $ %
1995 $166.31 1.5% $ $ $ 5
</TABLE>
* The information set forth in the table above with respect to
PHEAA, NJHEAA, CSLF, NYSHESC, and USAF has been obtained from
PHEAA, NJHEAA, CSLF, NYSHESC, and USAF, respectively and the
information with respect to the national average has been
obtained from the Fiscal Years 1991, 1992 and 1993 DOE Data
Books. 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 or the
Underwriters.
** Not available.
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. With respect to Stafford Loans only, the table below sets
forth the recovery rates for each of the Guarantors and the national average
recovery rates for all guarantors for the last five federal fiscal years:*
Recovery Rate
-------------
<TABLE>
<CAPTION>
Federal
Fiscal National
Year PHEAA NJHEAA CSLF NYSHESC USAF Average
---- ----- ------ ---- ------- ---- -------
<S> <C> <C> <C> <C> <C> <C>
1991 44.5% % $ $ $ 28.9%
1992 46.5% % $ $ $ 32.0%
1993 48.1% % $ $ $ -- **
1994 52.9% % $ $ $ -- **
1995 53.3% % $ $ $ -- **
</TABLE>
* The information set forth in the table above for the National
Average has been compiled from the DOE Data Book for Fiscal Year
1991 and 1992. Information for PHEAA, NJHEAA, CSLF, NYSHESC, and
USAF, as applicable, was provided by each entity, respectively.
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 or the Underwriters.
** Not available.
[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 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 each of the last five federal fiscal years:*
Claims Rate
-----------
<TABLE>
<CAPTION>
Federal
Fiscal All
Year PHEAA NJHEAA CSLF NYSHESC USAF Guarantors
---- ----- ------ ---- ------- ---- ----------
<S> <C> <C> <C> <C> <C> <C>
1991 2.9% % $ $ $ 4.5%
1992 2.8% % $ $ $ -- **
1993 2.3% % $ $ $ -- **
1994 2.2% % $ $ $ -- **
1995 2.0% % $ $ $ -- **
</TABLE>
* The information set forth in the table above has been obtained
from the Department (with respect to fiscal years 1991 and 1992)
and from PHEAA , NJHEAA, CSLF, NYSHESC, and USAF as applicable
(with respect to fiscal years 1993, 1994 and 1995). 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 or the Underwriters.
** Not available.
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".
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 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 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 June --, 1997, (ii)
distributions on the Securities occur on the ---th date of each March, June,
September and December, regardless of the day on which the Distribution Date
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
- -- days after the end of the quarter, (vii) interest on Subsidized Stafford
Loans currently not in repayment is received from the Department --- 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 T-Bill Rate is ---% and the 52 Week T-Bill Rate is
- ---%, (xiii) the Class A-1 Note Rate is ---%, the Class A-2 Note Rate is ---%
and the Certificate Rate is ---%, (xiv) such rates do not change during the life
of the Securities, (xv) the Trust Fees are equal to -----, (xvi) the Financed
Student Loan pool consists of ----- groups, (xvii) the Reserve Fund is fully
funded on the Closing Date and amortizes, with a floor equal to the Specified
Reserve Account Balance, 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 [quarter][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.]
Percentage of Original Principal Balances Outstanding
and Weighted Average Lives
Class A-1 Notes
---------------
Date 0% CPR ---% CPR ---% CPR ---% CPR
----
Closing Date
09/25/97
12/25/97
03/25/98
06/25/98
09/25/98
12/25/98
03/25/99
06/25/99
09/25/99
12/25/99
03/25/00
06/25/00
09/25/00
12/25/00
- -----------....
Weighted Average Life
(Years)
Class A-2 Notes
---------------
Date 0% CPR ---% CPR ---% CPR ---% CPR
----
Closing Date
09/25/97
12/25/97
03/25/98
06/25/98
09/25/98
12/25/98
03/25/99
06/25/99
09/25/99
12/25/99
03/25/00
06/25/00
09/25/00
12/25/00
-----------....
Weighted Average Life
(Years)
Certificates
------------
Date 0% CPR ---% CPR ---% CPR ---% CPR
----
Closing Date
09/25/97
12/25/97
03/25/98
06/25/98
09/25/98
12/25/98
03/25/99
06/25/99
09/25/99
12/25/99
03/25/00
06/25/00
09/25/00
12/25/00
-----------....
Weighted Average Life
(Years)
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"); (iii) loans to parents of
students ("PLUS Loans") who are dependents and whose need exceeds the financing
available from Unsubsidized Stafford Loans and/or Subsidized Stafford 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 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 contains
significant changes to the FFELP and creates a direct loan program funded
directly by the U.S. Department of Treasury (each loan under such program, a
"Federal Direct Student Loan").
Following enactment of the 1992 Amendments, Subsidized Stafford Loans and
Unsubsidized Stafford Loans, PLUS Loans and Consolidation Loans are officially
referred to as "Federal Stafford Loans," "Federal Unsubsidized Stafford Loans,"
"Federal PLUS Loans" and "Federal Consolidation Loans," respectively.
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 do not purport to be comprehensive, and are qualified in
their entirety by reference to each such statute, regulation or document. 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, reducing interest
rates and Special Allowance Payments for certain loans, reducing the interest
payable to holders of Consolidation Loans and affecting the Department's
financial assistance to Guarantors, including by 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 also 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 transition from the federal guaranteed student loan programs to 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. 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. The
Bank is an eligible lender for the purpose of making Consolidation Loans 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 change and (d) meets
the application "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.
Date of Disbursement Special Allowance Margin
-------------------- ------------------------
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)
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.
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.
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 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").
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 on Unsubsidized on only on or Total
Borrower's Academic Level Pre-1/1/87 or after 1/1/87 or after 7/7/93(2) after 7/1/94(3) Amount
------------------------- ---------- --------------- ------------------ --------------- ------
<S> <C> <C> <C> <C> <C>
Undergraduate (per year) $2,500 $2,625 $2,625 $4,000 $6,625
1st year $2,500 $2,625 $3,500 $4,000 $7,500
2nd year $2,500 $4,000 $5,500 $5,000 $10,500
3rd year and above $5,000 $7,500 $8,500 $10,000 $18,500
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 $25,000 $54,750 $65,500 $73,000 $138,500
undergraduate)
</TABLE>
- -------------------------
(1) The loan limits are inclusive of both Federal Stafford Loans and Federal
Direct Student 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 Loan.
(3) Independent undergraduate students, graduate students or professional
students may borrow these additional amounts. In addition, dependent
undergraduate students may also receive these additional loan amounts if
the parents of such students are unable to provide the family contribution
amount and it is unlikely that the student's parents will qualify for a
Federal PLUS Loan.
The interest rate paid by the borrower on a Subsidized Stafford Loan is
dependent on the date the promissory note evidencing the loan is signed by the
borrower except for loans made prior to October 1, 1992, whose interest rate
depends on any outstanding borrowings of that borrower as of such date. 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>
Date of Disbursement 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 3.25%
91-Day Treasury + Interest Rate months, then
Margin 10%
10/01/92 - 06/30/94 91-Day Treasury + Interest Rate 9% 3.10%
Margin
07/01/94 - 06/30/95 91-Day Treasury + Interest Rate 8.25% 3.10%
Margin
07/01/95 - 06/30/98 91-Day Treasury + Interest Rate 8.25% 2.50% (in school,
Margin grace or Deferral);
3.10% (in repayment)
</TABLE>
The Technical 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 bill 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 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, 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."
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. Except under certain conditions described herein, 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
Master Servicer 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, unless the
borrower and the lender agree to lesser payments. As of July 1, 1995, 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 enter repayment on or after July 1, 1995. 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.
The borrower must either pay interest on a periodic basis beginning 60 days
after the time the loan is disbursed or 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 the same 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 in-school interest subsidy.
The interest rate determination for a PLUS or SLS loan is dependent on when
the loan was originally made or disbursed. 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>
Date of Disbursement 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>
The Consolidation Loan Program
The Higher Education Act authorizes a program under which certain borrowers
may consolidate 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 Consolidated 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. Under various
programs throughout the United States, Guarantors insure and sometimes service
and hold guaranteed student loans. 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 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 accrued unpaid interest
on any loan defaulted so long as the eligible lender has properly originated and
serviced such loan. Under certain circumstances a loan deemed ineligible for
reimbursement may be restored to eligibility.
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.
Guarantor's claims
------------------
experience(1) Applicable Reinsurance Rate(2)
------------------ ------------------------------
0% up to 5% 98% (100% for loans disbursed before Oct. 1, 1993)
5% up to 9% 98% (100% for loans disbursed before Oct. 1, 1993)
9% and over 78% (100% for loans disbursed before Oct. 1, 1993)
- -------------------------
(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 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 greatly expands the Federal Direct Student Loan Program volume to a
minimum 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. 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, the full faith and credit of the United States is pledged
to the payment of federal reinsurance claims. It further 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.
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 summary describes certain terms of the Notes, the Certificates, the
Indenture and the Trust Agreement. The summary does not purport to be complete
and is qualified in its entirety by reference to the provisions of the Notes,
the Certificates, the Indenture and the Trust Agreement.
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. 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).
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 ---% 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 ---% 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), (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, and (iii) Investment Earnings for such Collection Period and interest on
amounts to be remitted by the Administrator to the Collection Account with
respect to such Collection Period prior to the related Distribution Date.
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 and the
aggregate unpaid Excess Servicing Fee, if any; 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 pro rata, 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 ---------- 200-- Distribution Date (the "Class A-1
Final Maturity Date") and of the Class A-2 Notes will be payable in full on the
- ---------- 20--- 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 -----% 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, the aggregate unpaid Excess Servicing Fee, if
any, 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.
The outstanding principal amount of the Certificates will be payable in
full on the ----------- 20--- 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 and
the aggregate unpaid Excess Servicing Fee, if any, 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 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.
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
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 ---------- state] tax consequence to
the Trust or to any Certificateholder or Noteholder.
The Trust will not, among other things, (i) except as expressly permitted
by the Indenture, the Transfer and Servicing Agreements or certain related
documents (collectively, the "Related Documents"), sell, transfer, exchange or
otherwise dispose of any of the assets of the Trust, (ii) claim any credit on or
make any deduction from the principal and interest payable in respect of the
Notes (other than amounts withheld under the Code or applicable state law) or
assert any claim against any present or former holder of Notes because of the
payment of taxes levied or assessed upon the Trust, (iii) except as contemplated
by the Related Documents, dissolve or liquidate in whole or in part, (iv) permit
the validity or effectiveness of the Indenture to be impaired or permit any
person to be released from any covenants or obligations with respect to the
Notes under the Indenture except as may be expressly permitted thereby or (v)
permit any lien, charge, excise, claim, security interest, mortgage or other
encumbrance to be created on or extend to or otherwise arise upon or burden the
assets of the Trust or any part thereof, or any interest therein or the proceeds
thereof, except as expressly permitted by the Related Documents.
The Trust may not engage in any activity other than financing, purchasing,
owning, selling and managing the Financed Student Loans and the other assets of
the Trust 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. --------------------, a ---------------- banking
corporation, will be the Indenture Trustee under the Indenture. [The Seller
maintains 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 a fee of -----,
payable by the Trust on each Distribution Date.
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 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 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.
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 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, 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 "Certain
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. However, the
summary does not purport to be complete and is qualified in its entirety by
reference to the provisions of such Transfer and Servicing Agreements.
Sale of Financed Student Loans; Representations and Warranties
On or prior to the Closing Date, the Seller will sell and assign to the
Eligible Lender Trustee on behalf of the Trust, without recourse, its entire
interest in the Financed Student Loans and all collections received and to be
received with respect thereto for the period on and after June 1, 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 Initial Financed
Student Loans is true and correct as of the Cutoff Date and, in some cases, the
Closing Date (iii) the information provided with respect to the Subsequent
Financed Student Loans is true and correct as of the Cutoff Date and, as of the
related Subsequent Cutoff Date, no claim has been made to a Guarantor with
respect to such Student Loans, and (iv) each Financed Student Loan, at the time
it was originated, complied and, at the Closing Date or Transfer Date (as
defined below), as applicable, complies in all material respects with applicable
federal and state laws (including, without limitation, the Higher Education Act,
consumer credit, truth in lending, equal credit opportunity and disclosure laws)
and applicable restrictions imposed 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 60 days,
repurchase such Financed Student Loan from the Eligible Lender Trustee, as of
the first day following the end of such 60-day period that is the last day of a
Collection Period, at the related Purchase Price as of the day of repurchase
plus accrued interest thereon to the day of repurchase (the "Purchase Amount").
In addition, the Seller will reimburse the Trust with respect to a Financed
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
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 generally limited to
short-term U.S. government backed securities, certain highly rated commercial
paper and money market funds and other investments acceptable to the Rating
Agencies as being consistent with the rating of the Notes. Subject to certain
conditions, Eligible Investments may include securities or other obligations
issued by the Seller or its affiliates, or trusts originated by the Seller or
its affiliates, or shares of investment companies for which the Seller or its
affiliates may serve as the investment advisor. Eligible Investments are limited
to obligations or securities that mature not later than the business day
immediately preceding the next Distribution Date 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 deposited in the
Collection Account on each Distribution Date and will be treated as collections
of interest on the Financed Student Loans.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in such account, so long as any of the
securities of such depository institution have a credit rating from each Rating
Agency in one of its generic rating categories which signifies investment grade.
"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 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 student loans on behalf of the Seller and] in
compliance with all standards and procedures provided for in the Higher
Education Act, the Guarantee Agreements and all other applicable federal and
state laws.
Without limiting the foregoing, the duties of 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 and file 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 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, in the event that First Union satisfies certain requirements for
quarterly remittances and the Rating Agencies affirm their ratings of the Notes
and the Certificates at the initial level, then so long as First Union is the
Administrator and provided that (i) there exists no Administrator Default (as
described below) and [(ii) each other condition to making quarterly deposits as
may be specified by the Rating Agencies is satisfied], 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 60 days thereafter and
has a materially adverse effect on the interest of the Certificateholders or the
Noteholders in any Financed Student Loan (it being understood that any such
breach that does not affect any Guarantor's obligation to guarantee payment of
such Financed Student Loan will not be considered to have such a material
adverse effect), unless such breach is cured, the Master Servicer will purchase
such Financed Student Loan as of the first day following the end of such 60-day
period that is the last day of a Collection Period. In that event, the Master
Servicer will be obligated to deposit into the Collection Account an amount
equal to the Purchase Amount of such Financed Student Loan and the Trust's
interest in any such purchased Financed Student Loan will be automatically
assigned to the Master Servicer. In addition, the Master Servicer will reimburse
the Trust with respect to any Financed 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 covenant of the Master Servicer.
Servicing Compensation
The Master Servicer will be entitled to receive, subject to the limitations
set forth in the following paragraph, the Servicing Fee monthly in an amount
equal to [the sum of] (i) -----% per annum of the Pool Balance as of the last
day of the preceding calendar month and (ii)
[-------------------------------------], in each case 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 in clause (i) 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.
[Notwithstanding the foregoing, in the event that the fee payable to the
Master Servicer as defined above for any Monthly Payment Date would exceed
- -----% per annum of the Pool Balance as of the last day of the preceding
calendar month (the "Capped Amount"), then the "Servicing Fee" for such Monthly
Servicing Payment Date will instead be the Capped Amount for such date. The
remaining amount in excess of such Servicing Fee, together with any such excess
amounts from prior Monthly Servicing Payment Dates that remain unpaid (the
"Excess Servicing Fee"), will be payable to the Master Servicer on each
succeeding Distribution Date out of Available Funds after payment on such
Distribution Date of the Trust Fees, the Noteholders' Distribution Amount, the
Certificateholders' Distribution Amount and the amount, if any, necessary to be
deposited in the Reserve Account to reinstate the balance thereof to the
Specified Reserve Account Balance. The Master Servicer will only be entitled to
receive the Excess Servicing Fee if and to the extent that Available Funds exist
to make such payments after making all prior distributions and deposits.]
The Servicing Fee and the Excess Servicing Fee will compensate the Master
Servicer for performing the functions of a third party servicer of student loans
as an agent for their beneficial owner, including collecting and posting all
payments, responding to inquiries of borrowers on the Financed Student Loans,
investigating delinquencies, pursuing, filing and collecting any Guarantee
Payments, accounting for collections and furnishing monthly and annual
statements to the Administrator. The Servicing Fee and the Excess 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) 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;
(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;
(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;
(vi) amounts deposited by the Seller into the Collection Account
in connection with the making of Consolidation Loans; and
(vii) Investment Earnings for such Distribution Date and any
interest remitted by the Administrator to the Collection Account prior
to such Distribution Date or Monthly Servicing Payment Date as
described in the preceding paragraph;
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 (vi) 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 Indenture Trustee, the quarterly fee payable and all
overdue fees to the Indenture Trustee from prior Collection Periods;
(iv) to the Eligible Lender Trustee, the quarterly fee payable
and all overdue fees to the Eligible Lender Trustee from prior
Collection Periods;
(v) 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;
(vi) 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;
(vii) 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;
(viii) 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;
(ix) 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 Certificateholder's 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;
(x) to the Reserve Account, the amount, if any, necessary to
reinstate the balance of the Reserve Account to the Specified Reserve
Account Balance;
[(xi) to the Master Servicer, the aggregate unpaid amount, if
any, of the Excess Servicing Fee;]
(xii) 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;
(xiii) 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
(xiv) to the Reserve Account, any remaining amounts after
application of clauses (i) through (xiii).
For purposes hereof, the following terms have the following meanings:
"Certificate Balance" equals $---------- 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 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 Note 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 Note 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.
"Pool Balance" means, at any time, the aggregate principal balance of the
Financed Student Loans at the end of the preceding Collection Period including
accrued interest thereon for such Collection Period to the extent such interest
will be capitalized upon commencement of repayment, after giving effect to the
following without duplication: (i) all payments received by the Trust 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 and after payment of any unpaid Excess Servicing Fee, 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
generally will be equal to the greater of (i) -----% of the Pool Balance as of
the close of business on the last day of the related Collection Period and (ii)
$----------------; 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 (vi) 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 (vii)
through (ix) and, in the case of the final Distribution Date upon termination of
the Trust, clauses (xi) through (xiii) 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 (vi) and clauses (vii) through (ix) and
clauses (xi) through (xiii), 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 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 Excess Servicing Fee, 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, except with respect to 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 cover any aggregate unpaid Excess Servicing Fees, 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, the Excess Servicing Fee,
Noteholders' Interest Index Carryover and Certificateholders' 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;
(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 and any Excess Servicing Fee
paid to the Master Servicer, the amount of the Administration Fee paid
to the Administrator, the fees paid to the Indenture Trustee and the
fees paid to the Eligible Lender Trustee, respectively, with respect
to such Collection Period, and the amount, if any, of the Excess
Servicing Fee remaining unpaid after giving effect to any such
payment;
(vii) the amount of the aggregate Realized Losses, if any, for
such Collection Period and the balance of Financed Student Loans that
are delinquent in each delinquency period as of the end of such
Collection Period; 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 Trust and the Indenture Trustee annually
a statement (based on a limited examination of certain documents and records and
on such accounting and auditing procedures considered appropriate under the
circumstances) as to compliance by the Master Servicer 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 Trust and the Indenture
Trustee annually a statement (based on the examination of certain documents and
records and on such accounting and auditing procedures considered appropriate
under the circumstances) as to compliance by the Administrator during the
preceding 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 Trust
and the Indenture Trustee, concurrently with the delivery of each statement of
compliance referred to above, of a certificate signed by an officer of the
Master Servicer or the Administrator, as the case may be, stating that, to 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 Security
holders 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 may not resign
from its obligations and duties as Master Servicer thereunder, except upon
determination that First Union'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's
servicing obligations and duties under the Master Servicing Agreement.
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 will merge into the Bank and the Bank will succeed to
all of First Union'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 three business
days after written notice from the Indenture Trustee or the Eligible Lender
Trustee is received by the Master Servicer or after discovery by the Master
Servicer; (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 three business days after written notice from the Indenture
Trustee or the Eligible Lender Trustee is received by the Administrator or after
discovery by the Administrator; (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 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, 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
If any of certain events of insolvency or receivership, readjustment of
debt, marshalling of assets and liabilities, or similar proceedings with respect
to the Seller or certain actions by the Seller indicating its insolvency or
inability to pay its obligations (each, an "Insolvency Event") occurs, the
Financed Student Loans will be liquidated and the Trust will be terminated 90
days after the date of such Insolvency Event, unless, before the end of such
90-day period, the Eligible Lender Trustee shall have received written
instructions from the holders of the Certificates (other than the Seller)
representing more than 50% of the aggregate unpaid principal amount of the
Certificates (not including the principal amount of Certificates held by the
Seller) to the effect that such group disapproves of the liquidation of the
Financed Student Loans and termination of the Trust. Promptly after the
occurrence of any Insolvency Event, notice thereof is required to be given to
Noteholders and Certificateholders; provided, however, that any failure to give
such required notice will not prevent or delay termination of the Trust. Upon
termination of the Trust, the Eligible Lender Trustee will direct the Indenture
Trustee promptly to sell the assets of the Trust (other than the Trust Accounts)
in a commercially reasonable manner and on commercially reasonable terms. The
proceeds from any such sale, disposition or liquidation of the Financed Student
Loans will be treated as collections thereon and deposited in the Collection
Account. If the proceeds from the liquidation of the Financed Student Loans and
any amounts on deposit in the Reserve Account are not sufficient to pay the
Notes in full, the amount of principal returned to the Noteholders will be
reduced and the Noteholders will incur a loss. If such amounts are not
sufficient to pay the Notes and the Certificates in full, the amount of
principal returned to the Certificateholders will be reduced and the
Certificateholders will incur a loss.
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.]
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 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 Minimum Purchase Amount, 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, 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 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 payments 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 and (v) pay the aggregate fees and expenses of such
auction.
Administrator
First Union, 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 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 in an amount equal to ---------- (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 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".
Consumer Protection Laws
Numerous federal and state consumer protection laws and related regulations
impose substantial requirements upon lenders and servicers involved in consumer
finance. Also, some state laws impose finance charge ceilings and other
restrictions on certain consumer transactions and require contract disclosures
in addition to those required under federal law. These requirements impose
specific statutory liabilities upon lenders who fail to comply with their
provisions. In certain circumstances, the Trust may be liable for certain
violations of consumer protection laws that apply to the Financed Student Loans,
either as assignee from the Seller or as the party directly responsible for
obligations arising after the transfer. For a discussion of the Trust's rights
if the Financed Student Loans were not originated or serviced in compliance in
all material respects with applicable laws, see "Description of the Transfer and
Servicing Agreements -- Sale of Financed Student Loans; Representations and
Warranties" and " -- Master Servicer Covenants".
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 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.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of certain 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
Federal tax counsel will deliver its opinion at closing, 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 will be based on the assumption that
the terms of the Trust Agreement and related documents will be complied with, on
certain representations, and on counsel's conclusions that (1) the Trust will
have certain characteristics and will affirmatively elect not to be
characterized as an 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 will deliver an opinion to
the Trust at closing 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 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.
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 [Issuer] 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 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.
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 [Issuer or First Union] or a "controlled foreign
corporation" with respect to which the [Issuer or First Union] 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.
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 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 (or may be 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 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 considered to
distribute its assets to the Certificateholders' who would then be treated as
recontributing those assets to the Trust, as a new partnership. (Treasury
regulations that would change this treatment have been proposed, but are not yet
effective.) Such deemed distribution and recontribution generally should not
result in material adverse tax consequences to Certificateholders (although it
may accelerate the recognition of income from the Trust for Certificateholders
whose taxable year is different than the Trust's taxable year and result in a
shorter holding period for Certificateholders in their Certificates to the
extent the amount distributed to them in the deemed termination consists of
money). [The Trust will not comply with certain technical requirements that
might apply when such a constructive termination occurs. As a result, the Trust
may be subject to certain tax penalties and may incur additional expenses if it
is required to comply with those requirements. Furthermore, the Trust might not
be able to comply due to lack of data.]
Disposition of Certificates. 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 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 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), (b) plans described in Section 4975(e)(1) of the Code, including
individual retirement accounts or Keogh plans, (c) any entities whose underlying
assets include plan assets 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, 114
S. Ct. 517 (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 Plans subject to
ERISA and prohibits certain transactions between a Plan and Parties in Interest
or Disqualified Persons with respect to such Plans.
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, a Plan investor
must determine whether, and each fiduciary causing the Notes to be purchased by,
on behalf of or using the assets of a Plan that is subject to the prohibited
transaction rules of Title I of ERISA or Section 4975 of the Code shall be
deemed to have represented that, an exemption from the prohibited transaction
rules applies such that the use of the assets of such Plan to purchase the Notes
does not and will not constitute a non-exempt prohibited transaction in
violation of Section 406 of ERISA or Section 4975 of the Code.
Because the Certificates represent equity investments in the Trust, the
Certificates may not be purchased with assets of any Plan or any entity
(including, as applicable, an insurance company general account) that is subject
to Title I of ERISA or Section 4975 of the Code whose underlying assets might be
deemed to include Plan assets by reason of such a Plan's investment in such
entity. Accordingly, each purchaser of Certificates will be deemed to have
represented that it is neither such a Plan, purchasing the Certificates on
behalf of such a Plan, nor using the assets of such a 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 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.
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 of Principal Amount of Principal Amount of
Underwriter Class A-1 Notes Class A-2 Notes Certificates
----------- --------------- --------------- ------------
<S> <C> <C> <C>
First Union Capital Markets Corp.
[---------------------------]
------------------ ------------------ ----------------
Total
</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 -----%; per Class A-1 Note, -----% per Class A-2 Note and
- -----% per Certificate. The Underwriters may allow and such dealers may reallow
to other dealers a discount not in excess of -----% per Class A-1 Note, -----%
per Class A-2 Note and -----% 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.
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 transaction 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.
This Prospectus may be used by First Union Capital Markets Corp., an
affiliate of the Seller and Master Servicer, in connection with offers and sales
related to market-making transactions in the Notes and the Certificates. First
Union Capital Markets Corp. may act as principal or agent in such transactions.
Such sales will be made at prices related to prevailing market prices at the
time of sale or otherwise.
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 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.
INDEX OF PRINCIPAL 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.
1
1992 Amendments....................................41
1993 Act...........................................41
5
52 Week T-Bill Rate................................72
9
91-day Treasury Bills...............................6
A
Adjusted Pool Balance...........................7, 69
Administration Agreement............................4
Administration Fee.............................26, 77
Administrator.......................................4
Administrator Default..............................73
Applicable Trustee.................................58
Auction Distribution Date.......................9, 76
Available Funds....................................65
B
Bank...............................................25
C
Capped Amount..................................13, 65
Cede............................................3, 58
Cedel...........................................4, 59
Cedel Participants.................................59
Certificate Balance................................68
Certificate Final Payment Date..................9, 53
Certificate Pool Factor............................50
Certificate Rate...................................53
Certificateholders..................................6
Certificateholders' Principal Distribution Amount..68
Certificateholders' Distribution Amount............68
Certificateholders' Interest Distribution Amount...68
Certificateholders' Interest Index Carryover....6, 68
Certificateholders' Interest Shortfall.............68
Certificateholders' Principal Shortfall............68
Certificates.....................................1, 4
Class A-1 Final Maturity Date...................9, 52
Class A-1 Note Pool Factor.........................50
Class A-1 Notes..................................1, 4
Class A-1 Rate.....................................51
Class A-2 Final Maturity Date...................9, 52
Class A-2 Note Pool Factor.........................50
Class A-2 Notes..................................1, 4
Class A-2 Rate.....................................51
Closing Date........................................5
Code.......................................14, 79, 88
Collection Account.................................11
Collection Period...................................7
Commission..........................................3
Consolidation Loans................................41
Cooperative........................................59
CSLF............................................2, 33
Cutoff Date.........................................2
D
Deferral...........................................31
Deferral Period....................................46
Definitive Certificates............................60
Definitive Notes...................................60
Definitive Securities..............................60
Department......................................2, 10
Depositaries.......................................58
Depository.........................................51
Determination Date.................................65
Disqualified Persons...............................88
Distribution Date................................2, 5
DOE Data Book......................................35
DTC..........................................3, 4, 58
E
Eligible Deposit Account...........................63
Eligible Institution...............................63
Eligible Investments...............................63
Eligible Lender Trustee..........................2, 5
ERISA..........................................14, 88
Euroclear.......................................4, 59
Euroclear Operator.................................59
Euroclear Participants.............................59
Event of Default...................................55
Excess Servicing Fee...........................13, 65
Exchange Act........................................3
Expected Interest Collections......................51
F
family contribution................................43
FDIA...............................................19
FDIC...............................................19
Federal Assistance.................................44
Federal Consolidation Loans........................41
Federal Direct Student Loan........................41
Federal Direct Student Loan Program................18
Federal Guarantors.................................33
Federal PLUS Loans.................................41
Federal Stafford Loans.............................41
Federal Unsubsidized Stafford Loans................41
FFELP...........................................5, 40
Financed Student Loans.......................2, 5, 10
FIRREA.............................................19
First Union..................................2, 4, 25
Forbearance........................................31
Forbearance Period.................................46
Foreign Person.....................................83
G
General Account Regulations........................89
Grace..............................................31
Grace Period.......................................46
Guarantee Agreement................................17
Guarantee Payments.................................17
Guaranteed Student Loan Program....................40
Guarantors.........................................10
H
Higher Education Act...............................17
I
Indenture...........................................5
Indenture Trustee...................................5
Index of Principal Terms............................4
Indirect Participants..............................58
Initial Pool Balance...............................12
In-School..........................................31
Insolvency Event...................................75
insurance triggers.................................40
Interest Period.................................6, 51
Interest Subsidy Payments..........................41
Investment Earnings................................63
IRS................................................79
L
Liquidated Student Loans...........................66
Liquidation Proceeds...............................66
Lock-In Period.....................................54
M
Margin..............................................6
Master Servicer.....................................4
Master Servicer Default............................73
Master Servicing Agreement..........................4
Minimum Purchase Amount........................10, 76
Monthly Servicing Payment Date......................8
N
NJHEAA..........................................2, 33
Note Interest Rates................................51
Note Owner.........................................80
Noteholders.........................................5
Noteholders' Distribution Amount...................68
Noteholders' Interest Distribution Amount..........69
Noteholders' Interest Index Carryover...........6, 69
Noteholders' Interest Shortfall....................69
Noteholders' Principal Distribution Amount.........69
Noteholders' Principal Shortfall...................69
Notes............................................1, 4
NYSHESC.........................................2, 33
O
Obligors...........................................69
OID................................................80
OID Regulations....................................80
P
Participants...................................51, 58
Parties in Interest................................88
PHEAA...........................................2, 33
Plan...........................................14, 88
PLUS and SLS Loan Programs.........................43
PLUS Loans.........................................41
Pool Balance....................................7, 69
Pool Factor........................................50
Prepayment Assumption..............................80
prepayments........................................21
Purchase Amount....................................62
R
Realized Loss......................................70
Registration Statement..............................3
Regulations.........................................2
Reinsurance Rate...................................48
Related Documents..................................57
Repayment..........................................31
Reserve Account....................................11
Reserve Account Initial Deposit....................11
Rules..............................................59
S
Sale Agreement.....................................10
Secretary..........................................18
Securities.......................................1, 4
Securities Act......................................3
Securityholders.....................................6
Seller...........................................2, 4
Seller Trusts......................................21
Servicing Fee..................................13, 65
SLS Loans..........................................41
Special Allowance Payments.........................41
Specified Reserve Account Balance..............11, 70
Student Loan Rate...............................7, 51
Student Loans......................................10
Subservicer........................................25
Subservicing Agreement.............................25
Subsidized Stafford Loans..........................41
Supplemental Loans to Students.....................41
T
T-Bill Rate........................................54
Technical Amendments...............................41
Terms and Conditions...............................60
Transfer and Servicing Agreements..................62
Trust............................................1, 4
Trust Accounts.....................................63
Trust Agreement.....................................5
Trust Fees.....................................12, 25
U
UCC................................................77
Underwriters....................................1, 90
Underwriting Agreements............................90
Unmet Need.........................................43
Unsubsidized Stafford Loans........................41
USAF............................................2, 33
W
Withholding Proposals..............................82
------------------
UNTIL ---------- ---, 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.
------------------------------------------------------
------------------------------------------------------
- ------------------------------------------------------
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
Page
Available Information...............................3
Reports to Securityholders..........................3
Incorporation of Certain Documents by Reference.....3
Summary of Terms....................................5
Risk Factors.......................................16
Formation of the Trust.............................24
Management's Discussion and Analysis of
Financial Condition and Results of Operations..25
Use of Proceeds....................................26
The Seller, the Master Servicer and the
Administrator.................................26
The Financed Student Loan Pool.....................27
The Federal Family Education Loan Program..........42
Pool Factors and Trading Information...............52
Description of the Securities......................53
Description of the Transfer and Servicing
Agreements.....................................64
Certain Legal Aspects of the Financed
Student Loans..................................80
Certain Federal Income Tax Consequences............82
Certain State Tax Consequences.....................91
ERISA Considerations...............................92
Underwriting.......................................93
Legal Matters......................................95
Index of Principal Terms...........................96
$-----------------
First Union Student Loan Trust 1997-1
$-----------------
Floating Rate Class A-1
Asset Backed Notes
$-----------------
Floating Rate Class A-2
Asset Backed Notes
$-----------------
Floating Rate
Asset Backed Certificates
First Union National Bank
Seller
First Union National Bank
Master Servicer
PROSPECTUS
First Union Capital Markets Corp.
[-------------------------]
------------------------------------------------------
