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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X Annual Report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934 for the fiscal year ended June 30, 1998 or
--- Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______________ to
_______________
Commission file number: 333-26679-01
Exact name of Registrant as specified in its charter: Education Loans
Incorporated
State or other jurisdiction of incorporation or organization: Delaware
I.R.S. Employer Identification No.: 91-1819974
Address of principal executive offices: 105 First Avenue Southwest, Aberdeen,
SD 57401
Registrant's telephone number, including area code: (605) 622-4400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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PART I
Item 1. BUSINESS.
Education Loans Incorporated (the "Company") is a bankruptcy remote,
limited purpose Delaware corporation and a wholly owned subsidiary of Student
Loan Finance Corporation, a South Dakota corporation. The sole business of the
Company is restricted to financing, originating, purchasing, owning, selling and
managing Student Loans, as described in the Company's Prospectus (dated
February 12, 1998) and the related Registration Statement on Form S-1 (File
No. 333-26679-01).
Item 2. PROPERTIES.
Not applicable.
Item 3. LEGAL PROCEEDINGS.
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of June 30, 1998, the Trust had 65 holders of record of the Notes,
computed in accordance with Rule 12g5-1 under the Securities Exchange
Act of 1934, as amended.
Item 6. SELECTED FINANCIAL DATA.
Not applicable.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Not applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Not applicable.
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Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Not applicable.
Item 11. EXECUTIVE COMPENSATION.
Not applicable.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Not applicable.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The Report of Independent Auditors, delivered pursuant to Section
21 of the Servicing Agreement dated as of February 1, 1998 is filed
herewith.
(b) None.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
STUDENT LOANS INCORPORATED
By /s/ A. Norgrin Sanderson
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President
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EXHIBIT INDEX
Item
- ----
99.1 The Report of Independent Auditors, delivered pursuant to Section 21 of
the Servicing Agreement dated as of February 1, 1998.
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To the Board of Directors
Education Loans Incorporated
Aberdeen, South Dakota
We have audited, in accordance with generally accepted auditing standards, the
consolidated balance sheet of Student Loan Finance Corporation (SLFC) and
wholly-owned subsidiaries, Education Loans Incorporated and Surety Loan Funding
Company, as of June 30, 1998 and the related consolidated statements of income,
shareholder's equity, and cash flows for the period May 7, 1997 to June 30, 1998
and have issued our report thereon dated August 20, 1998.
Our audit, referred to in the preceding paragraph, included procedures applied
to the documents and records relating to the servicing agreement regarding the
servicing of student loans, the acquisition process, the origination process,
and due diligence. These procedures were determined on the basis of our
objective to issue an opinion on the financial statements referred to above
taken as a whole. Because the procedures referred to in this paragraph and
described below do not constitute an audit of the documents and records relating
to the servicing of student loans or other information relating to the
Corporation's student loan portfolio, we do not express an opinion on those
documents or records.
The procedures we performed on these documents and records as part of our audit
of the financial statements of the Corporation were as follows:
1. Reviewed the servicing agreement between Education Loans Incorporated,
beneficial owner of the student loan receivables, and Student Loan Finance
Corporation, servicer of the student loan receivables. Recalculated and
determined the reasonableness of the annual service fee expense.
2. To satisfy ourselves as to the validity of the outstanding balance of
student loans, we sent confirmation requests directly to 196 borrowers
requesting they confirm the terms and outstanding balance of their loans if
they disagreed with the confirmation details. There were no unresolved
discrepancies noted as a result of the confirmations, which were selected
by cumulative monetary sampling techniques.
3. Determined the reasonableness of fluctuations of student loan receivable
balances and related accounts from February 19, 1998 (initial loan
acquisition date) to June 30, 1998.
4. Reconciled the receivable subsidiary records to the general ledger.
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Education Loans Incorporated
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5. Analyzed the reserve for loan loss account for reasonableness based on
historical default rates, claim rates, uninsured percentages, and average
loan lives.
6. Calculated the income earned (special allowance, government interest, and
borrower interest) as a percentage of average monthly balance of student
loans outstanding during the period ended June 30, 1998 and compared it to
the same calculation for June 30, 1997 (at which time such loans were owned
by SLFC's parent company, Great Plains Education Foundation, Inc.) for
reasonableness.
7. Calculated interest income earned on student loan receivables (government
interest and borrower interest) by multiplying the quarterly average
balance of student loans outstanding per ED Form 799s filed with the
Department of Education by the applicable interest rate and compared our
results to amounts recorded in the general ledger.
8. Agreed the net amounts of government interest, special allowance, loan
origination fees, and lender fees received for the quarters ended March 31,
1998, and June 30, 1998 to Lender Search Reports provided directly from the
Department of Education.
9. Agreed the amounts of government interest, special allowance, loan
origination fees, and lender fees due from/to the Department of Education
at June 30, 1998 to subsequent receipt and the Department of Education's
letter of notification of payment scheduled by EFT.
We also performed the procedures enumerated below, which were agreed to by the
Board of Directors and management, solely to assist the users in evaluating
management's assertion about compliance and operational performance as it
relates to the documents and records relating to the servicing of student loans,
the acquisition process, the origination process and due diligence. Management
has represented in a letter dated August 20, 1998 that the procedures with
respect to loan servicing have been designed to assure loans are processed in a
manner which conforms to federal regulations and requirements. This agreed-upon
procedures engagement was performed in accordance with standards established by
the American Institute of Certified Public Accountants. The sufficiency of these
procedures is solely the responsibility of the specified users of this letter.
Consequently, we make no representation regarding the sufficiency of the
procedures described below either for the purpose for which this letter has been
requested or for any other purpose.
On February 19, 1998, SLFC's parent company transferred its rights to student
loan receivables to Education Loans, Inc., the current beneficial owner of the
loans. The procedures that follow were performed for the period February 19,
1998 to June 30, 1998 (hereafter referred to as the period ended June 30, 1998),
and during that entire period SLFC serviced the student loan receivables, on
behalf of Education Loans, Inc.
Based on our preliminary evaluation of internal control and risk assessments, we
selected a statistical based sample of at least 132 loans (initial sample) to be
reviewed in detail. The procedures we performed on these documents and records
are as follows:
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Education Loans Incorporated
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Acquisition Process
1. Acquisition Process and Loan Data
We reviewed the procedures used during the acquisition process and, for a
sample of five loans purchased during the period ended June 30, 1998, we
tested to ensure that all applicable ED799 loan data, including beginning
balances, was entered completely and accurately into the loan servicing
system.
For a sample of 18 loans purchased during the period ended June 30, 1998,
we traced the amount purchased to the monetary transaction journal (MTJ),
which listed all transactions for each lender. We then traced the total
daily purchase amount for each lender to the transaction breakdown report,
which summarizes the MTJ by bond issue and is used to post to the general
ledger.
For the same sample noted above, we agreed the total daily purchase amount
for each lender to the eligible loan acquisition certificates. For a sample
of five of the 18 loans tested, the summary of the acquisition certificates
were then traced to the trustee reports.
We recalculated the premium and transfer fee for all 18 loans sampled to
determine that the fees paid to lenders agreed to the company policies and
lender agreements and that the premium paid for loans purchased with in
state, tax-exempt funds was less than one percent.
No exceptions were noted during the aforementioned tests of the acquisition
process.
2. National Credit Bureau Reporting
For a sample of four loans, we tested to ensure that the national credit
bureaus were notified of the total amount of loans the lender has made to
each borrower within 90 days of each acquisition and that other information
as required by 34CFR 682.208(b) was reported as required.
No exceptions were noted during the aforementioned tests of the reporting
to national credit bureaus.
Origination Process
1. Consolidation Originations
During the period ended June 30, 1998, no student loans were originated,
other than consolidations. We selected one consolidation loan that was
consolidated during the period ended June 30, 1998 and agreed the amount to
the monetary transaction journal, examined the consolidation application,
and agreed the total payoff amount to the student loan system.
No exceptions were noted during the aforementioned tests of consolidation
originations.
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Education Loans Incorporated
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Servicing and Due Diligence
1. Borrower File Review
Our tests were designed to ensure that borrower files were complete and
included all documentation required by the Higher Education Act of 1965, as
amended and that administrative procedures included all applicable due
diligence relating to the servicing and collection of student loans in
accordance with current federal regulations.
Accordingly, for the loans included in our initial sample, our procedures
included testing of the original application, notice of guarantee,
disclosure statements, evidence of disbursement, credit evaluations,
promissory notes, loan types, aggregate loan limits, enrollment status,
loan conversions, repayment history, collection history and other documents
or administrative procedures required by current federal regulations.
With respect to collection efforts, we selected a sample of 22 telephone
calls made to borrowers as documented on the student loan servicing system
collection history and traced them to actual telephone bills to ensure
contacts were made as indicated.
No exceptions were noted during the aforementioned tests of borrower file
review, including due diligence.
2. Deferment and Forbearance
Our testing of procedures and documentation concerning forbearance and
deferment is designed to determine the eligibility for such classification
and the proper completion of all required forms and documents.
Accordingly, for the loans included in our initial sample which were in
deferment or forbearance, we examined the file for signed requests,
evidence of default, agreed terms, which included testing of the beginning
and ending dates of the change in status, and whether only authorized
circumstances for deferment are allowed.
No exceptions were noted during the aforementioned tests of loans in
deferment or forbearance.
3. Payments and Capitalization of Interest
Our testing is designed to ensure payments received on student loans are
appropriately applied in accordance with the terms of the various loan
programs and, if applicable, late charges are appropriately calculated.
When applicable, our testing included the re-calculation of interest
capitalized on the individual loans.
Accordingly, for a sample of 39 of the loans included in our initial
sample, we recalculated the application of principal, interest, and late
fees for the most recent payment received on the borrowers account prior to
June 30, 1998. If no payments were received, we recalculated the
capitalization of interest, if applicable.
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Education Loans Incorporated
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For 24 of the 39 loans described above, we traced individual payments to a
detailed payment report. We traced the total daily payment amount and any
capitalized interest amounts to the monetary transaction journal (MTJ). We
then traced the total amount per the MTJ to the transaction breakdown
report, which summarizes the MTJ by bond issue and is used to post to the
general ledger. The transaction breakdown totals were then traced to the
general ledger.
No exceptions were noted during the aforementioned tests of payments and
capitalization of interest.
4. Special Allowance and Interest Subsidies
Our procedures are designed to test the classification and coding of loans,
as to eligibility for special allowance and interest subsidies, based on
applicable criteria, including the date of disbursement.
Accordingly, for the loans included in our initial sample, we tested to
ensure that the correct interest rate and special allowance code were
assigned to each loan.
A significant amount of the Corporation's accounting and statistical data
is generated by electronic data processing systems. Amounts billed to the
Department of Education for interest subsidy and special allowance are
generated from such programs. In June of 1998, we used computer aided audit
techniques (CAATS) to reperform certain calculations and routines, which
are an integral part of generating the information used in preparing the
government billings (ED Form 799s). Those procedures were used in
determining our overall audit scope and testing procedures.
The results of those procedures indicated that the information generated by
electronic data processing systems in preparation of government billings
was reliable.
No exceptions were noted during the aforementioned tests of loan
eligibility for government interest or special allowance.
5. Timely Claim Filings
Our procedures are designed to test the processing of claims for payment of
death, disability, closed schools, false certification, bankruptcy and
default claims to assure claims are filed within applicable time frames and
in accordance with specific requirements for reimbursement by the guarantee
agencies.
Accordingly, we selected 22 loans at random from the claims transmittal
sheets, which included three bankruptcy claims and 19 default claims. For
the bankruptcy claims, we recomputed the number of days from receipt of
required documents to the date the claim was filed. For default claims, we
recomputed the number of days delinquent and compared it to the date the
claim was filed to ensure compliance. We scanned the loan delinquency
report as of May 26, 1998 and found no eligible loans delinquent for a
period exceeding the claim filing deadline. Based on our samples, we found
all eligible claims were submitted within the time frames required.
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Education Loans Incorporated
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In addition, we reviewed a random sample of five of the 36 claims that were
rejected during the period ended June 30, 1998. Of the five sampled, all
were resubmitted and subsequently paid. These claim forms were also scanned
for potential problem areas, i.e. deferment period longer than allowed by
law, repayment started at incorrect time, etc. No significant problem areas
were noted.
No exceptions were noted during the aforementioned tests of the timely
filing of claims.
6. ED Form 799s
We traced all information reported on ED Form 799s for the quarters ended
March 31, 1998 and June 30, 1998 to supporting documentation to ensure that
information reported to the Department of Education for payment processing
is supported by Corporation books and records.
We recalculated a sample of 15 borrower loans for prior quarter manual
special allowance adjustments reported on ED Form 799s. Most prior quarter
adjustments are generated by the automated loan servicing system, but
manual adjustments are utilized generally for quarters other than the
current and two preceding quarters. We agreed the adjustment to appropriate
documentation and determined the propriety of the adjustment.
We recalculated a sample of 18 borrower loans for prior quarter government
interest adjustments reported on ED Form 799s. We agreed the adjustment to
appropriate documentation and determined the propriety of the adjustment.
We noted no exceptions during the aforementioned tests with respect to ED
Form 799s.
7. Loan Classification and Status
Our procedures relating to the loan classification and status are based on
reviewing file documentation to ascertain the loan is properly classified
in accordance with information and data contained in the borrower file.
Accordingly, we selected a sample of 25 status changes from the student
status confirmation reports sent to and received from schools, whose loans
are not guaranteed by Education Assistance Corporation (EAC) or
Pennsylvania Higher Education Assistance Agency (PHEAA), to ensure the
changes were made to the student loan servicing system. For loans
guaranteed by EAC and PHEAA where EAC performs the status confirmation
process with the schools, we selected a sample of 15 status changes from
reports received from EAC to ensure that the changes were made to the
system. We obtained the error reports (manifests, in school discrepancy
reports, or out-of-school status reports) which identify discrepancies
between the student status confirmation reports received from guarantors
and the student loan servicing system. We selected a sample of nine
discrepancies to investigate. Per review of appropriate documentation, five
of the discrepancies required the guarantor to make the change as the
student loan servicing system was correct and four of the discrepancies
were subsequently adjusted to the student loan system.
No exceptions were noted during the aforementioned tests of loan
classification and status.
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Education Loans Incorporated
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8. Cures
For one out of the two loans cured during the period ended June 30, 1998 as
reported on the quarterly ED Form 799s (March 31, 1998 and June 30, 1998),
we reviewed student loan servicing records to determine that the required
cure procedures were performed.
No exceptions were noted during the aforementioned tests of cures.
We were not engaged to, and did not perform an examination, the objective of
which would be the expression of an opinion on procedures with respect to loan
servicing. Accordingly, we do not express such an opinion. Had we performed
additional procedures, other matters might have come to our attention that would
have been reported to you.
This report is intended solely for the use of the Board of Directors, the
management of Education Loans Incorporated and the Corporation's trustee and
should not be used by those who have not agreed to the procedures and taken
responsibility for the sufficiency of the procedures for their purposes.
However, this report is a matter of public record and its distribution is not
limited.
/S/ Eide Bailly LLP
Aberdeen, South Dakota
August 20, 1998
