<PAGE>
FINAL PROSPECTUS FILED PURSUANT TO
RULE 424(b)(1), REGISTRATION NUMBER
333-26679-01
$923,470,000
EDUCATION LOANS INCORPORATED
STUDENT LOAN ASSET-BACKED CALLABLE NOTES, SERIES 1998-1
CONSISTING OF
$274,900,000 TAX EXEMPT AUCTION RATE STUDENT LOAN ASSET-BACKED CALLABLE NOTES,
SENIOR SERIES 1998-1A THROUGH E
$24,055,000 TAX EXEMPT FIXED RATE STUDENT LOAN ASSET-BACKED CALLABLE NOTES,
SENIOR SERIES 1998-1F
$107,500,000 TAXABLE AUCTION RATE STUDENT LOAN ASSET-BACKED CALLABLE NOTES,
SENIOR SERIES 1998-1G AND H
$424,600,000 TAXABLE LIBOR RATE STUDENT LOAN ASSET-BACKED CALLABLE NOTES,
SENIOR SERIES 1998-1I AND J
$33,215,000 TAX EXEMPT FIXED RATE STUDENT LOAN ASSET-BACKED CALLABLE NOTES,
SUBORDINATE SERIES 1998-1K
$59,200,000 TAXABLE LIBOR RATE STUDENT LOAN ASSET-BACKED CALLABLE NOTES,
SUBORDINATE SERIES 1998-1L
Education Loans Incorporated (formerly known as Student Loan Finance
Corporation), a South Dakota nonprofit corporation (the "Original Issuer"), is
offering $923,470,000 aggregate principal amount of its Student Loan
Asset-Backed Callable Notes, Series 1998-1 (the "Series 1998-1 Notes"). In
connection with an election to be made by the Original Issuer under Section
150(d)(3) of the Internal Revenue Code of 1986, as amended, Education Loans
Incorporated, a separate, newly organized Delaware corporation (the
"Corporation"), will, immediately upon the issuance of the Series 1998-1
Notes, assume all of the Original Issuer's liabilities and obligations with
respect to the Notes, and the Original Issuer will be released from all such
liabilities and obligations. See "The Original Issuer" and "The Corporation"
herein.
(cover continued on next page)
PROSPECTIVE INVESTORS IN THE SERIES 1998-1 NOTES SHOULD CONSIDER THE
DISCUSSION OF CERTAIN MATERIAL FACTORS SET FORTH UNDER "RISK FACTORS" ON PAGE
32 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE SERIES 1998-1 NOTES WILL REPRESENT LIMITED OBLIGATIONS OF THE
CORPORATION, PAYABLE SOLELY FROM THE TRUST ESTATE CREATED UNDER THE INDENTURE
AND DESCRIBED HEREIN. THE SERIES 1998-1 NOTES ARE NOT INSURED OR GUARANTEED
BY ANY GOVERNMENT AGENCY OR INSTRUMENTALITY, BY ANY AFFILIATE OF THE
CORPORATION (INCLUDING THE ORIGINAL ISSUER), BY ANY INSURANCE COMPANY OR BY
ANY OTHER PERSON OR ENTITY. THE HOLDERS WILL HAVE RECOURSE TO THE TRUST ESTATE
PURSUANT TO THE INDENTURE, BUT WILL NOT HAVE RECOURSE TO ANY OTHER ASSETS OF
THE CORPORATION OR THE ORIGINAL ISSUER. THE CORPORATION, MOREOVER, WILL HAVE
NO SIGNIFICANT ASSETS AVAILABLE TO MAKE PAYMENT ON THE SERIES 1998-1 NOTES
OTHER THAN THE TRUST ESTATE PLEDGED AS COLLATERAL FOR THE NOTES UNDER THE
INDENTURE.
<TABLE>
<CAPTION>
=======================================================================================================
PROCEEDS TO
PRICE TO UNDERWRITING ORIGINAL
PUBLIC FEE (1) ISSUER (2)
=======================================================================================================
<S> <C> <C> <C>
Tax Exempt Auction Rate Series 1998-1 Senior Notes . . 100% 0.71% 99.29%
Tax Exempt Fixed Rate Series 1998-1 Senior Notes . . . 100% 0.99% 99.01%
Taxable Auction Rate Series 1998-1 Senior Notes . . . . 100% 0.71% 99.29%
Taxable LIBOR Rate Series 1998-1 Senior Notes . . . . . 100% 0.67% 99.33%
Tax Exempt Fixed Rate Series 1998-1 Subordinate Notes . 100% 0.99% 99.01%
Taxable LIBOR Rate Series 1998-1 Subordinate Notes . . 100% 0.86% 99.14%
Total . . . . . . . . . . . . . . . . . . . . . . . . . $923,470,000 $6,622,868 $916,847,132
=======================================================================================================
</TABLE>
(1) SLFC has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting expenses payable by the Original Issuer, estimated to be
$1,830,000.
As a result of the transfer requirements described herein, the Auction
Rate Series 1998-1 Senior Notes will not be freely transferable, which may
limit the liquidity and marketability of Auction Rate Series 1998-1 Senior
Notes and therefore may not yield a Noteholder the best possible price for an
Auction Rate Series 1998-1 Senior Note. The ratings of the Auction Rate
Series 1998-1 Senior Notes by the Rating Agencies will not address the market
liquidity of such Notes.
The Series 1998-1 Notes are offered by the Underwriters subject to prior
sale, when, as and if issued to the Underwriters. The Underwriters reserve the
right to withdraw, cancel or modify such offer and to reject orders in whole
or in part. It is expected that delivery of the Series 1998-1 Notes will be
made in book-entry-only form through the Same Day Funds Settlement System of
The Depository Trust Company and also Cedel Bank, societe anonyme or the
Euroclear System on or about February 19, 1998.
SALOMON SMITH BARNEY
U.S. BANCORP INVESTMENTS, INC. DOUGHERTY SUMMIT SECURITIES LLC
MILLER & SCHROEDER FINANCIAL, INC. NORWEST INVESTMENT SERVICES, INC.
The date of this Prospectus is February 12, 1998.
<PAGE>
(continued from previous page)
The Series 1998-1 Notes are to be issued in twelve series designated as
Tax Exempt Auction Rate Student Loan Asset- Backed Callable Notes, Senior
Series 1998-1A through 1998-1E (the "Tax Exempt Auction Rate Series 1998-1
Senior Notes"), Tax Exempt Fixed Rate Student Loan Asset-Backed Callable
Notes, Senior Series 1998-1F (the "Tax Exempt Fixed Rate Series 1998-1 Senior
Notes"), Taxable Auction Rate Student Loan Asset-Backed Callable Notes, Senior
Series 1998-1G and 1998-1H (the "Taxable Auction Rate Series 1998-1 Senior
Notes"), Taxable LIBOR Rate Student Loan Asset-Backed Callable Notes, Senior
Series 1998-1I and 1998-1J (the "Taxable LIBOR Rate Series 1998-1 Senior
Notes"), Tax Exempt Fixed Rate Student Loan Asset-Backed Callable Notes,
Subordinate Series 1998-1K (the "Tax Exempt Fixed Rate Series 1998-1
Subordinate Notes"), and Taxable LIBOR Rate Student Loan Asset-Backed Callable
Notes, Subordinate Series 1998-1L (the "Taxable LIBOR Rate Series 1998-1
Subordinate Notes"). See "Description of Series 1998-1 Notes" herein.
The rights of the Holders of Tax Exempt Fixed Rate Student Loan
Asset-Backed Notes, Subordinate Series 1998-1K and Taxable LIBOR Rate Student
Loan Asset-Backed Notes, Subordinate Series 1998-1L to receive payments with
respect to the Notes and to direct remedies upon default will be subordinated
to such rights of the Series 1998-1 Senior Noteholders and any other Senior
Beneficiaries to the extent described in this Prospectus. See "Source of
Payment and Security for the Notes -- Priorities."
The Tax Exempt Auction Rate Series 1998-1 Senior Notes, the Tax Exempt
Fixed Rate Series 1998-1 Senior Notes, the Taxable Auction Rate Series 1998-1
Senior Notes, the Taxable LIBOR Rate Series 1998-1 Senior Notes, the Tax
Exempt Fixed Rate Series 1998-1 Subordinate Notes and the Taxable LIBOR Rate
Series 1998-1 Subordinate Notes will be issued in the initial aggregate
principal amounts of $274,900,000, $24,055,000, $107,500,000, $424,600,000,
$33,215,000 and $59,200,000, respectively. The Series 1998-1 Notes will be
issued pursuant to an Indenture of Trust dated as of February 1, 1998 (as
amended and supplemented from time to time, the "Indenture") from the Original
Issuer to First Bank National Association, as trustee (together with any
successor and any other corporation which may be substituted in its place
pursuant to the Indenture, the "Trustee"). The Series 1998-1 Notes will be
payable from and secured by: (i) Financed Student Loans (which are loans for
post-secondary education originated or acquired with moneys held under the
Indenture) and moneys due or paid thereunder after the applicable date of
acquisition or origination; (ii) funds on deposit in certain trust funds and
accounts held under the Indenture (including investment earnings thereon); and
(iii) rights of the Corporation in and to certain agreements, including the
Servicing Agreement, the Student Loan Purchase Agreements and the Guarantee
Agreements, as the same relate to Financed Student Loans (as more specifically
described herein, the "Trust Estate"). See "Prospectus Summary -- Trust
Estate" and "Source of Payment and Security for the Notes -- General". At the
time of acquisition or origination from moneys held under the Indenture,
Student Loans are required to meet certain eligibility criteria described
herein, and upon acquisition or origination such Student Loans are referred to
as Financed Eligible Loans. See "Glossary of Certain Defined Terms". The
initial Financed Eligible Loans have been acquired by the Original Issuer
pursuant to its programs of purchasing Student Loans from lenders. Additional
Financed Eligible Loans are expected to be originated or acquired by the
Trustee on behalf of the Corporation. The Corporation will contract with
Student Loan Finance Corporation, a newly organized South Dakota corporation
("SLFC"), to provide origination, acquisition, administration and collection
services with respect to the Financed Student Loans and to perform certain of
the Corporation's obligations under the Indenture (referred to in such
capacities as the Servicer). See "The Servicer" and "Certain Relationships
Among Financing Participants" herein.
THE SERIES 1998-1 NOTES ARE SUBJECT TO OPTIONAL AND SPECIAL CALL FOR
REDEMPTION AND PREPAYMENT AS MORE FULLY DESCRIBED HEREIN. SEE "DESCRIPTION OF
SERIES 1998-1 NOTES" HEREIN.
The Tax Exempt Auction Rate Series 1998-1 Senior Notes and the Taxable
Auction Rate Series 1998-1 Senior Notes (collectively, the "Auction Rate
Series 1998-1 Senior Notes") will be issued in the series and respective
principal amounts set forth in the table below, and will bear interest at the
respective Initial Interest Rates described
(cover continued on next page)
-2-
<PAGE>
(continued from previous page)
herein during the respective Initial Interest Periods, being the periods from
the Date of Issuance to, but not including, the respective Initial Interest
Rate Adjustment Dates set forth in the following table:
<TABLE>
<CAPTION>
Initial Interest
Series Principal Amount Rate Adjustment Dates
------ ---------------- ---------------------
<S> <C> <C>
1998-1A $74,900,000 March 26, 1998
1998-1B 50,000,000 April 2, 1998
1998-1C 50,000,000 April 9, 1998
1998-1D 50,000,000 April 16, 1998
1998-1E 50,000,000 April 23, 1998
1998-1G 53,500,000 March 24, 1998
1998-1H 54,000,000 March 31, 1998
</TABLE>
After the Initial Interest Periods, interest on each series of the Auction
Rate Series 1998-1 Senior Notes will accrue at the Auction Rate with respect
thereto, determined from time to time pursuant to the applicable Auction
Procedures described herein. Interest on the Tax Exempt Auction Rate Series
1998-1 Senior Notes will be paid on each June 1 and December 1, commencing
June 1, 1998. Interest on the Taxable Auction Rate Series 1998-1 Senior Notes
will be paid on the first Business Day following the expiration of each
respective Auction Period. The Auction Rate Series 1998-1 Senior Notes will
mature June 1, 2020. See "Terms of the Tax Exempt Auction Rate Series 1998-1
Senior Notes" and "Terms of the Taxable Auction Rate Series 1998-1 Senior
Notes."
The purpose of the Auction Procedures is to set the interest rates on the
Auction Rate Series 1998-1 Notes. By purchasing Auction Rate Series 1998-1
Senior Notes, whether in an Auction (as defined herein) or otherwise, each
purchaser will be deemed to have agreed: (i) to participate in Auctions on the
terms described herein, and (ii) so long as the beneficial ownership of the
Auction Rate Series 1998-1 Senior Notes is maintained in book-entry form, to
sell, transfer or otherwise dispose of the Auction Rate Series 1998-1 Senior
Notes only pursuant to a bid or a sell order in an Auction, or to or through a
specified broker-dealer (initially, Smith Barney Inc.); provided, that in the
case of any transfer other than one pursuant to an Auction, either the owner
of the Auction Rate Series 1998-1 Senior Notes so transferred, its participant
or a specified broker-dealer advises the Auction Agent (as defined herein) of
such transfer. Broker-Dealer fees (which are based on the Broker-Dealer fee
rate specified in the Indenture) are paid by the Auction Agent from moneys
furnished to it by the Corporation or the Trustee from amounts available
therefor under the Indenture. Noteholders do not pay additional fees and
commissions in disposing of Auction Rate Series 1998-1 Notes. See "Auction of
the Auction Rate Series 1998-1 Senior Notes" herein.
The Tax Exempt Fixed Rate Series 1998-1 Senior Notes will mature on the
dates, and in the respective principal amounts, and will bear interest at the
respective rates per annum, set forth in the following table:
<TABLE>
<CAPTION>
Maturity Date Principal Amount Interest Rate
------------- ---------------- -------------
<S> <C> <C>
June 1, 2010 $14,270,000 4.95%
June 1, 2020 9,785,000 5.45
</TABLE>
Interest on the Tax Exempt Fixed Rate Series 1998-1 Senior Notes will be
payable on each June 1 and December 1, commencing June 1, 1998. See "Terms of
the Tax Exempt Fixed Rate Series 1998-1 Senior Notes."
The Taxable LIBOR Rate Series 1998-1 Senior Notes will be issued in the
series and respective principal amounts, and will mature on the respective
dates, set forth in the table below:
(cover continued on next page)
-3-
<PAGE>
(continued from previous page)
<TABLE>
<CAPTION>
Series Principal Amount Maturity Date
------ ---------------- -------------
<S> <C> <C>
1998-1I $185,000,000 June 1, 2002
1998-1J 239,600,000 June 1, 2020
</TABLE>
Interest on the Taxable LIBOR Rate Series 1998-1 Senior Notes will be payable
monthly on the first Business Day of each month, commencing March 2, 1998. The
Taxable LIBOR Rate Series 1998-1 Senior Note Interest Rate with respect to
each series of Taxable LIBOR Rate Series 1998-1 Senior Notes will be
determined by the Trustee monthly as described herein to equal the One- Month
LIBOR plus 0.15% per annum with respect to the Series 1998-1I Notes and the
One-Month LIBOR plus 0.20% per annum with respect to the Series 1998-1J Notes.
See "Terms of the Taxable LIBOR Rate Series 1998-1 Senior Notes."
The Tax Exempt Fixed Rate Series 1998-1 Subordinate Notes will bear
interest at the rate of 5.60% per annum, payable on each June 1 and December
1, commencing June 1, 1998. The Tax Exempt Fixed Rate Series 1998-1
Subordinate Notes will mature June 1, 2020. See "Terms of the Tax Exempt
Fixed Rate Series 1998-1 Subordinate Notes."
Interest on the Taxable LIBOR Rate Series 1998-1 Subordinate Notes will be
payable monthly on the first Business Day of each month, commencing March 2,
1998. The Taxable LIBOR Rate Series 1998-1 Subordinate Note Interest Rate
will be determined by the Trustee monthly as described herein to equal the
One-Month LIBOR plus 0.40% per annum. The Taxable LIBOR Rate Series 1998-1
Subordinate Notes will mature June 1, 2020. See "Terms of the Taxable LIBOR
Rate Series 1998-1 Subordinate Notes."
Principal payments on Financed Student Loans are not anticipated to be
used to retire principal of the Taxable Auction Rate Series 1998-1 Senior
Notes until all Taxable LIBOR Rate Series 1998-1 Notes have been paid in full,
and principal of the Series 1998-1J Notes will not be paid from principal
payments on Financed Student Loans until the Series 1998-1I Notes have been
paid in full.
The Indenture authorizes the issuance of other Notes ("Additional Notes")
in the future, which Additional Notes may be issued on a parity basis (as to
payment and security) with the Series 1998-1 Senior Notes or with the Series
1998-1 Subordinate Notes or on a subordinate basis to all such Notes. The
Series 1998-1 Notes and any Additional Notes are collectively referred to
herein as the "Notes." Any Additional Notes will not be offered or sold
pursuant to this Prospectus.
In the opinion of Bond Counsel, under existing laws, regulations, rulings
and decisions, interest on the Tax Exempt Series 1998-1 Notes is not
includable in the gross income of the owners thereof for federal income tax
purposes. Interest on the Tax Exempt Series 1998-1 Notes is an item of tax
preference which is included in alternative minimum taxable income for
purposes of the federal alternative minimum tax applicable to all taxpayers,
and is includable in certain other taxes imposed upon corporations. For a
more detailed description of the tax status of the interest on the Tax Exempt
Series 1998-1 Notes, Bond Counsel's opinion with respect thereto (including
its reliance on the Original Issuer's, SLFC's and the Corporation's compliance
with covenants made by them to satisfy certain requirements of the Internal
Revenue Code of 1986, as amended) and certain income tax consequences of Tax
Exempt Series 1998-1 Note ownership, see "Tax Matters -- Tax Exempt Series
1998-1 Notes."
Neither the Original Issuer nor the Corporation has authorized any offer
of Series 1998-1 Notes to the public in the United Kingdom within the meaning
of the Public Offers of Securities Regulations 1995 (the "U.K. Regulations").
The Series 1998-1 Notes may not lawfully be offered or sold to persons in the
United Kingdom
(cover continued on next page)
-4-
<PAGE>
(continued from previous page)
except in circumstances which do not result in an offer to the public in the
United Kingdom within the meaning of the U.K. Regulations or otherwise are in
compliance with all applicable provisions of the U.K. Regulations.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SERIES 1998-1
NOTES, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE COVERING
TRANSACTIONS AND PENALTY BIDS. SEE "PLAN OF DISTRIBUTION" HEREIN.
There is currently no secondary market for the Series 1998-1 Notes and
there is no assurance that one will develop. The Underwriters expect, but will
not be obligated, to make a market in the Series 1998-1 Notes. There is no
assurance that such a market will develop or, if such a market does develop,
that such market will continue. The Series 1998-1 Notes will not be listed on
any national securities exchange or quoted on any inter-dealer quotation
system.
It is a condition of issuance of the Series 1998-1 Notes that Moody's
Investors Service, Inc. rate the Series 1998-1 Senior Notes "Aaa" and the
Series 1998-1 Subordinate Notes at least "A3" and that Fitch IBCA, Inc. rate
the Series 1998-1 Senior Notes "AAA" and the Series 1998-1 Subordinate Notes
at least "A". See "Ratings of the Series 1998-1 Notes."
Upon receipt of a request by an investor who has received an electronic
Prospectus from any Underwriter or a request by such investor's representative
within the period during which there is an obligation to deliver a Prospectus,
such Underwriter will promptly deliver, or cause to be delivered, without
charge, to such investor a paper copy of the Prospectus.
-5-
<PAGE>
AVAILABLE INFORMATION
The Corporation has filed a Registration Statement under the Securities
Act of 1933, as amended (the "1933 Act"), with the Securities and Exchange
Commission (the "Commission") with respect to the Series 1998-1 Notes. The
Registration Statement and amendments thereof and the exhibits thereto, as
well as certain reports referred to below under "Reports to Noteholders" and
other information, are available for inspection without charge at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549; 7 World Trade Center, 13th Floor, New York, New York
10048; and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of the Registration Statement and
amendments thereof and exhibits thereto may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, the Commission maintains a World Wide
Web site that contains reports, proxy and information statements and other
information regarding registrants, such as the Corporation, that file
electronically with the Commission at the following address:
(http://www.sec.gov).
REPORTS TO NOTEHOLDERS
Monthly unaudited reports concerning the Notes and the Trust Estate (the
"Monthly Servicing Reports"), prepared by the Servicer, will be provided to
the Noteholders as required by the Indenture. The Series 1998-1 Notes will be
issued in book-entry form and registered in the name of Cede & Co. ("Cede &
Co."), the nominee of The Depository Trust Company, New York, New York
("DTC"). Unless and until definitive Notes are issued (which will occur under
the limited circumstances described herein) all Monthly Servicing Reports will
be provided to Cede & Co., as the sole Holder of the Notes. The receipt by a
beneficial owner of a Series 1998-1 Note of any Monthly Servicing Report will
depend on Cede & Co. forwarding such report to the appropriate Participant or
Indirect Participant of DTC, and such Participant or Indirect Participant then
forwarding such report to the beneficial owner. See "Description of Series
1998-1 Notes -- Book-Entry-Only System" herein. In addition, at the request
of any beneficial owner of Series 1998-1 Notes, the Trustee will mail Monthly
Servicing Reports directly to such beneficial owner. The Corporation 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, and will suspend the filing of
such reports at its option if not so required. In accordance with the
Exchange Act and such rules and regulations, the Corporation expects that its
obligation to file such reports will be terminated after June 30, 1998.
-6-
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus. Capitalized terms
used herein and not defined shall have the respective meanings assigned to
them under "Glossary of Certain Defined Terms" beginning on page 173 of this
Prospectus.
ISSUER The Series 1998-1 Notes will be issued by Education
Loans Incorporated, a South Dakota nonprofit
corporation formerly known as Student Loan Finance
Corporation (the "Original Issuer"). The Original
Issuer is a corporation described in Section 150(d)
of the Code. Section 150(d) permits certain
nonprofit corporations (such as the Original Issuer)
to finance the acquisition of Student Loans made
under the Higher Education Act by issuing
obligations, the interest on which is not includable
in the gross income of the owners thereof for
federal income tax purposes. In connection with the
Original Issuer's election under Section 150(d)(3)
of the Code to terminate its status as a corporation
described in Section 150(d) following the issuance
of the Series 1998-1 Notes, the Original Issuer will
issue the Series 1998-1 Notes and then immediately
transfer its interest in the Trust Estate (see
"Trust Estate" below) and be released from all
obligations with respect to the Notes and under the
Indenture.
Immediately following the issuance of the Series
1998-1 Notes, the Original Issuer will transfer all
of its student loans (including its rights in
Financed Student Loans), student loan acquisition
and servicing operations and physical facilities,
together with certain other assets (including the
Original Issuer's interest in the other assets
comprising the Trust Estate) to Student Loan Finance
Corporation, a newly organized South Dakota
corporation and wholly-owned subsidiary of the
Original Issuer ("SLFC"), and SLFC will assume all
of the Original Issuer's obligations with respect to
the Notes, the Indenture, the Trust Estate and all
related contracts. See "The Servicer" herein.
Immediately upon the transfer of the Original
Issuer's interest in the Trust Estate to SLFC, SLFC
will assign such interest in the Trust Estate to
Education Loans Incorporated, a separate, newly
organized Delaware corporation (the "Corporation"),
which will assume all of the obligations of the
Original Issuer with respect to the Notes and under
the Indenture. In connection with these assignments
and assumptions, SLFC and the Corporation will not
issue new Notes to the Holders of the Series 1998-1
Notes in exchange for those issued by the Original
Issuer. Thus, the securities offered by this
Prospectus are obligations of the issuer under the
Indenture, which initially will be the Original
Issuer but immediately after the issuance thereof
will be the Corporation (and not the Original
Issuer). Although the Original Issuer and the
Corporation initially will have the same name, they
are different entities. Because all functions and
obligations of the issuer of the Series 1998-1 Notes
under the Indenture will immediately be assumed by
the Corporation, discussions of those functions and
obligations in this Prospectus generally refer to
the Corporation, notwithstanding that the Series
1998-1 Notes will actually be issued by the Original
Issuer.
Following the transfer described above, the Original
Issuer will have no further obligations or
liabilities with respect to the Notes or otherwise
under the Indenture. It also will change its name
to Great Plains Education Foundation, Inc. and
continue to exist, though it will change its
purposes. Section 150(d)(3) of the Code requires,
however, that it continue to be an organization
described in Section 501(c)(3) of the Code. A
Section 501(c) organization must be organized and
operated exclusively for certain purposes specified
in the Code, including charitable or educational
purposes, and
-7-
<PAGE>
no part of its net earnings may inure to the benefit
of any private individual or shareholder. The Original
Issuer expects that its new purposes following the
transfer will be charitable or educational. See "The
Original Issuer", "The Corporation" and "Certain
Relationships Among Financing Participants" herein.
As of December 31, 1997, $912,425,000 aggregate
principal amount of the Original Issuer's bonds and
notes were outstanding, bearing interest at rates
per annum between 3.85% and 7.85%, and maturing from
August 1, 1998 through August 1, 2020. A portion of
the proceeds of the Series 1998-1 Notes will be used
to refund the entire outstanding principal amount of
such bonds and notes, which have been issued to
finance the Original Issuer's Student Loan program.
TRUST ESTATE The Trust Estate will consist of: (i) Financed
Student Loans, as described below, and moneys
payable with respect thereto after their respective
dates of acquisition or origination from moneys
under the Indenture; (ii) moneys and investment
securities in the Funds and Accounts held by the
Trustee under the Indenture; (iii) rights of the
Corporation in and to the Servicing Agreement, the
Student Loan Purchase Agreements and the Guarantee
Agreements, as the same relate to Financed Student
Loans, and (iv) the rights of the Corporation under
certain other related contracts.
SECURITIES OFFERED The Series 1998-1 Notes are to be issued in twelve
series, designated as Tax Exempt Auction Rate
Student Loan Asset-Backed Callable Notes, Senior
Series 1998-1A through 1998-1E (the "Tax Exempt
Auction Rate Series 1998-1 Senior Notes"), Tax
Exempt Fixed Rate Student Loan Asset-Backed Callable
Notes, Senior Series 1998-1F (the "Tax Exempt Fixed
Rate Series 1998-1 Senior Notes"), Taxable Auction
Rate Student Loan Asset-Backed Callable Notes,
Senior Series 1998-1G and 1998-1H (the "Taxable
Auction Rate Series 1998-1 Senior Notes"), Taxable
LIBOR Rate Student Loan Asset-Backed Callable Notes,
Senior Series 1998-1I and 1998-1J (the "Taxable
LIBOR Rate Series 1998-1 Senior Notes"), Tax Exempt
Fixed Rate Student Loan Asset-Backed Callable Notes,
Subordinate Series 1998-1K (the "Tax Exempt Fixed
Rate Series 1998-1 Subordinate Notes"), and Taxable
LIBOR Rate Student Loan Asset-Backed Callable Notes,
Subordinate Series 1998-1L (the "Taxable LIBOR Rate
Series 1998-1 Subordinate Notes"). See "Description
of Series 1998-1 Notes" herein. The original
principal amounts of the Tax Exempt Auction Rate
Series 1998-1 Senior Notes, the Tax Exempt Fixed
Rate Series 1998-1 Senior Notes, the Taxable Auction
Rate Series 1998-1 Senior Notes, the Taxable LIBOR
Rate Series 1998-1 Senior Notes, the Tax Exempt
Fixed Rate Series 1998-1 Subordinate Notes and the
Taxable LIBOR Rate Series 1998-1 Subordinate Notes
shall be $274,900,000, $24,055,000, $107,500,000,
$424,600,000, $33,215,000 and $59,200,000,
respectively. The Series 1998-1 Subordinate Notes
are subordinated in certain respects to the Series
1998-1 Senior Notes and any other Senior
Obligations, as more fully described herein. The
Series 1998-1 Notes will be issued pursuant to the
Indenture as hereinafter described.
RISK FACTORS There are material risks associated with an
investment in the Series 1998-1 Notes. See "Risk
Factors". The material risks include:
- the limited recourse nature of the Series
1998-1 Notes and the limited assets
available for their payment
- the subordination of the Series 1998-1
Subordinate Notes
-8-
<PAGE>
- the risk that failure to comply with Student
Loan origination and servicing procedures
may result in loss of Guarantee Payments
- the lack of recourse against the Original
Issuer for any failure to comply with
Student Loan origination and servicing
procedures
- the risk of changes in law adversely
affecting the Federal Family Education Loan
Program and the Financed Student Loans
- the risk that competition from the Federal
Direct Student Loan Program may result in
higher servicing costs, reduced Student Loan
values and higher prepayments of Financed
Student Loans
- the Corporation's right to issue Additional
Notes without the consent of Noteholders
- the risk that the interest rates on Financed
Student Loans may be insufficient to cover
the interest on certain Series 1998-1 Notes
due to differences in indexes or to borrower
incentive programs
- risks associated with changing assets in the
Trust Estate and the variability of the
actual cash flows provided by such assets
- the Original Issuer's and Corporation's
reliance on representations of Lenders as to
qualification of Financed Eligible Loans
- the possible inability of Lenders to honor
their repurchase obligations under Student
Loan Purchase Agreements
- the risk that adverse regional economic
conditions could affect geographically
concentrated borrowers' ability to repay
Financed Student Loans
- the risk of loss of the tax exemption of
interest on the Tax Exempt Series 1998-1
Notes
- risks associated with the insolvency of the
Original Issuer, SLFC, the Corporation or
Lenders
- the risk that failure to comply with the
Original Issuer's Plan for Doing Business
may result in a loss of Special Allowance
Payments
- the risk that Guarantee Payments, interest
subsidy payments and Special Allowance
Payments with respect to Financed Student
Loans could be offset against obligations
with respect to other Student Loans held
under the same lender number
- the risk of the Trustee's security interest
in the Trust Estate being defeated
- risks associated with the failure to comply
with consumer protection laws
-9-
<PAGE>
- the possibility that Series 1998-1
Noteholders may be unable to reinvest
amounts received from calls for redemption
or prepayments of the Series 1998-1 Notes
except at lower yields
- the possible inability of Guarantee Agencies
to make Guarantee Payments
- the relatively greater risk of prepayment of
the Series 1998-1I Notes and the Series
1998-1J Notes
- the possible insufficiency of Financed
Student Loans and other Trust Estate assets
to provide for payment of all Notes
- risks associated with the acquisition of
investment agreements
- the risk that ratings of the Series 1998-1
Notes may be reduced
- the limited liquidity of the Series 1998-1 Notes
- risks associated with Swap Agreements that
the Corporation may enter into in the future
- the effect of book-entry registration
PAYMENT OF INTEREST
ON SERIES 1998-1
NOTES
Tax Exempt The Tax Exempt Fixed Rate Series 1998-1 Senior Notes
Fixed Rate maturing on the dates set forth below will bear
Series 1998-1 interest at the respective rates per annum set forth
Senior Notes below, payable on each June 1, and December 1,
commencing June 1, 1998, to the Holders thereof as
of the fifteenth day of the month preceding the
Interest Payment Date:
<TABLE>
<CAPTION>
Maturity Date Interest Rate
------------- -------------
<S> <C>
June 1, 2010 4.95%
June 1, 2020 5.45
</TABLE>
Tax Exempt The Series 1998-1A, 1998-1B, 1998-1C, 1998-1D and
Auction 1998-1E Notes will bear interest at initial rates of
Rate Series 1998-1 3.75%, 3.75%, 3.75%, 3.75%, and 3.75% per annum,
Senior Notes respectively, to the respective Initial Interest
Rate Adjustment Dates, which will be March 26, 1998
for the Series 1998-1A Notes, April 2, 1998 for the
Series 1998-1B Notes, April 9, 1998 for the Series
1998-1C Notes, April 16, 1998 for the Series 1998-1D
Notes, and April 23, 1998 for the Series 1998-1E
Notes.
After the Initial Interest Period for the Tax Exempt
Auction Rate Series 1998-1 Senior Notes of each
series, each Interest Period will generally consist
of 35 days, subject to adjustment as set forth in
"Auction of the Auction Rate Series 1998-1 Senior
Notes - Changes in Auction Terms - Changes in
Auction Period or Periods." The interest rates for
the Tax Exempt Auction Rate Series 1998-1 Senior
Notes will be reset at the Auction Rates pursuant to
the Auction Procedures described in "Auction of the
Auction Rate
-10-
<PAGE>
Series 1998-1 Senior Notes - Auction Procedures"
(but in no event exceeding the Maximum Auction Rate,
as defined herein). See "Auction Procedures" below.
Interest on the Tax Exempt Auction Rate Series
1998-1 Senior Notes will be payable on each June 1
and December 1, commencing June 1, 1998, to the
Holders thereof as of the fifteenth day of the month
preceding the Interest Payment Date.
Taxable Auction The Series 1998-1G and 1998-1H Notes will bear
Rate Series 1998-1 interest at initial rates of 5.57% and 5.57% per
Senior Notes annum, respectively, to the respective Initial
Interest Rate Adjustment Dates, which will be March
24, 1998 for the Series 1998-1G Notes and March 31,
1998 for the Series 1998-1H Notes.
After the Initial Interest Period for the Taxable
Auction Rate Series 1998-1 Senior Notes of each
series, each Interest Period will generally consist
of 28 days, subject to adjustment as set forth in
"Auction of the Auction Rate Series 1998-1 Senior
Notes - Changes in Auction Terms - Changes in
Auction Period or Periods". The interest rates for
the Taxable Auction Rate Series 1998-1 Senior Notes
will be reset at the Auction Rates pursuant to the
Auction Procedures described in "Auction of the
Auction Rate Series 1998-1 Senior Notes - Auction
Procedures" (but in no event exceeding the Maximum
Auction Rate, as defined herein). See "Auction
Procedures" below. Interest on each series of
Taxable Auction Rate Series 1998-1 Senior Notes will
be payable on the first Business Day following the
expiration of each Auction Period for such series,
to the Holders thereof as of the Business Day next
preceding each Auction Date.
Auction The following summarizes certain procedures that
Procedures will be used in determining the interest rates on
the Auction Rate Series 1998-1 Senior Notes.
"Auction of the Auction Rate Series 1998-1 Senior
Notes - Auction Procedures" provides a more detailed
description of these procedures. Prospective
investors in the Auction Rate Series 1998-1 Senior
Notes should read carefully the following summary,
along with the more detailed description in "Auction
of the Auction Rate Series 1998-1 Senior Notes -
Changes in Auction Terms - Changes in Auction Period
or Periods."
The interest rate on each series of Auction Rate
Series 1998-1 Senior Notes will be determined
periodically (generally, for periods ranging from 7
days to one year, and initially 28 days, in the case
of the Taxable Auction Rate Series 1998-1 Senior
Notes, or 35 days, in the case of the Tax Exempt
Auction Rate Series 1998-1 Senior Notes) by means of
a "Dutch auction." In this Dutch auction, investors
and potential investors submit orders through an
eligible Broker-Dealer as to the principal amount of
Auction Rate Series 1998-1 Senior Notes such
investors wish to buy, hold or sell at various
interest rates. The Broker-Dealers submit their
clients' orders to the Auction Agent, who processes
all orders submitted by all eligible Broker-Dealers
and determines the interest rate for the upcoming
interest period. The Broker-Dealers are notified by
the Auction Agent of the interest rate for the
upcoming interest period and are provided with
settlement instructions relating to purchases and
sales of Auction Rate Series 1998-1 Senior Notes.
Taxable LIBOR The Taxable LIBOR Rate Series 1998-1 Senior Note
Rate Series 1998-1 Interest Rate with respect to each series of Taxable
Senior Notes LIBOR Rate Series 1998-1 Senior Notes will be
determined by the Trustee monthly as described
herein to equal the One-Month LIBOR plus 0.15% per
annum with respect to the Series 1998-1I Notes and
the One-Month LIBOR plus 0.20% per annum with
respect to the Series 1998-1J Notes. Interest on
each series of the Taxable LIBOR Rate Series 1998-1
Senior Notes will be payable monthly on the first
Business Day of each month, commencing March 2,
1998, to the Holders thereof as of
-11-
<PAGE>
the last Business Day preceding the Interest Payment
Date. See "Terms of the Taxable LIBOR Rate Series
1998-1 Senior Notes."
Tax Exempt Fixed The Series 1998-1K Notes will bear interest at the
Rate Series rate of 5.60% per annum, payable on each June 1 and
1998-1 December 1, commencing June 1, 1998, to the Holders
Subordinate thereof as of the fifteenth day of the month
Notes preceding the Interest Payment Date.
Taxable LIBOR The Taxable LIBOR Rate Series 1998-1 Subordinate
Rate Series Note Interest Rate will be determined by the Trustee
1998-1 monthly as described herein to equal the One-Month
Sudordinate LIBOR plus 0.40% per annum. Interest on the Taxable
Notes LIBOR Rate Series 1998-1 Subordinate Notes will be
payable monthly on the first Business Day of each
month, commencing March 2, 1998, to the Holders
thereof as of the last Business Day preceding the
Interest Payment Date. See "Terms of the Taxable
LIBOR Rate Series 1998-1 Subordinate Notes."
PAYMENT OF
PRINCIPAL ON
SERIES 1998-1
NOTES
Stated Maturity The Stated Maturity dates and respective principal
amounts of the Tax Exempt Fixed Rate Series 1998-1
Senior Notes are as follows:
<TABLE>
<CAPTION>
Date Principal Amount
---- ----------------
<S> <C>
June 1, 2010 $ 14,270,000
June 1, 2020 $ 9,785,000
</TABLE>
The Stated Maturity date of the Series 1998-1I Notes
is June 1, 2002.
The Stated Maturity date of all other Series 1998-1
Notes is June 1, 2020.
Optional Call for At the Corporation's option, Auction Rate Series
Redemption 1998-1 Senior Notes of any series may be called for
redemption on any Interest Rate Adjustment Date or
regularly scheduled Interest Payment Date for such
series, in whole or in part, at a Redemption Price
of 100% of Principal Amount of such Notes to be
redeemed, plus accrued interest thereon to the
Redemption Date.
At the Corporation's option, Tax Exempt Fixed Rate
Series 1998-1 Senior Notes and Tax Exempt Fixed Rate
Series 1998-1 Subordinate Notes may be called for
redemption at any time on and after June 1, 2008, in
whole or in part, at the following respective
Redemption Prices (expressed as percentages of
Principal Amount) plus accrued interest thereon to
the Redemption Date:
<TABLE>
Redemption Period
(both dates inclusive) Redemption Price
---------------------- ----------------
<S> <C>
June 1, 2008 through May 31, 2009 102%
June 1, 2009 through May 31, 2010 101%
June 1, 2010 and thereafter 100%
</TABLE>
-12-
<PAGE>
Prepayment of Principal of the Taxable LIBOR Rate Series 1998-1
Taxable LIBOR Rate Notes shall be prepaid on any Interest Payment Date
Series from moneys credited to the Retirement Account as
1998-1 Notes hereinafter described. The Corporation is required
to direct the Trustee to transfer to the Retirement
Account from the Special Redemption and Prepayment
Account any moneys therein, up to an amount equal to
the Special Prepayment Amount, which the Corporation
has not determined are reasonably expected to be
required to be transferred to the Note Fund, the
Rebate Fund or the Reserve Fund prior to the next
succeeding regularly scheduled Interest Payment
Date, provided no deficiencies exist at the time of
such transfer in the Note Fund, the Rebate Fund or
the Reserve Fund. See "Description of Flow of
Revenues in the Funds." Such prepayments of
principal of Taxable LIBOR Rate Series 1998-1 Notes
shall, subject to the Senior Asset Requirement, be
allocated between the Taxable LIBOR Rate Series
1998-1 Senior Notes and the Taxable LIBOR Rate
Series 1998-1 Subordinate Notes pro rata. Principal
of the Taxable LIBOR Rate Series 1998-1 Senior Notes
so allocated to be prepaid shall be applied to the
Series 1998-1I Notes so long as any such Notes
remain Outstanding, and thereafter to the Series
1998-1J Notes. Within a given series of Taxable
LIBOR Rate Series 1998-1 Notes, the Principal Amount
of such series to be prepaid shall be allocated pro
rata to the reduction of the Principal Amount of all
Notes of such series. The Senior Asset Requirement
requires the maintenance of certain ratios between
the Outstanding Principal Amounts of the Series
1998-1 Senior Notes and the Series 1998-1
Subordinate Notes and the Value of the assets of the
Trust Estate following calls for redemption and
prepayments. In general, the Senior Asset
Requirement requires that the Senior Percentage is
at least 110% and the Subordinate Percentage is at
least 100%, though each such percentage may be
lowered under the conditions prescribed in the
Indenture. See "Description of Series 1998-1 Notes
-- Senior Asset Requirement," "Glossary of Certain
Defined Terms" and "Summary of the Indenture -- Call
for Redemption, Prepayment or Purchase of Notes;
Senior Asset Requirement".
The Special Prepayment Amount is an amount, as of
the last day of any month, equal to the excess, if
any, of (1) the sum of (a) all payments received as
of such last day with respect to principal of
Financed Student Loans credited to the Series 1998-
1 Taxable Acquisition Account, plus (b) the amount
of any Balances theretofore transferred from the
Series 1998-1 Taxable Acquisition Account to the
Retirement Account to redeem Taxable Auction Rate
Series 1998-1 Senior Notes which are called for
redemption as described below under "Call for
Redemption of Auction Rate Series 1998-1 Notes and
Fixed Rate Series 1998-1 Notes from Unused
Proceeds," minus (c) the aggregate amount of
interest on Financed Student Loans credited to the
Series 1998-1 Taxable Acquisition Account which has
been capitalized after the Financing thereof, minus
(d) the principal component of the repurchase price
of Student Loans originally Financed from Balances
in Series 1998-1 Taxable Acquisition Account which
have been repurchased from a Guarantee Agency upon
rehabilitation of such Student Loans pursuant to the
Higher Education Act, over (2) the sum of (a) the
aggregate amount of all previous prepayments of the
Principal Amount of all Taxable LIBOR Rate Series
1998-1 Notes, plus (b) the aggregate Principal
Amount of Taxable LIBOR Rate Series 1998-1 Notes to
be prepaid on the next regularly scheduled Interest
Payment Date from Balances then on hand in the
Retirement Account. Payments described in clause
(1)(a) of the preceding sentence include, without
limitation, any prepayments by borrowers from the
proceeds of a consolidation loan made or acquired by
the Trustee on behalf of the Corporation or from any
other sources, but exclude, for this purpose,
proceeds of the sale or other disposition of
Financed Student Loans to any Person other than a
Guarantee Agency, with respect to Guarantee
payments, or a Lender, with respect to the
repurchase of Financed Student
-13-
<PAGE>
Loans by such Lender pursuant to its repurchase
obligation under a Student Loan Purchase Agreement.
In general, this prepayment provision is intended to
require the Corporation to prepay Taxable LIBOR Rate
Series 1998-1 Notes in amounts related to the amount
of principal payments received with respect to
Student Loans Financed with proceeds of the Taxable
Series 1998-1 Notes in the Acquisition Fund. See
"Weighted Average Life of the Taxable LIBOR Rate
Series 1998-1 Notes" for a description of the
Corporation's projected schedule of such
prepayments. Because of the uncertainties relating
to the timing of receipt of principal of Student
Loans expected to be Financed with proceeds of the
Taxable Series 1998-1 Notes, the actual level of
prepayments resulting therefrom cannot be
definitively stated. See "Risk Factors -- Holders
of Series 1998-1 Notes Which are Prepaid or Called
for Redemption Due to Accelerated Payments with
respect to Financed Student Loans May Have to
Reinvest Amounts Received From Prepayments or Calls
for Redemption at a Lower Rate of Return" and " --
The Average Life of the Series 1998-1 Notes May Be
Lengthened As a Result of Extension of Payments on
the Financed Student Loans".
Special Call for
Redemption
Call for Redemption Tax Exempt Auction Rate Series 1998-1 Senior Notes
of Tax Exempt Auction of any series, Tax Exempt Fixed Rate Series 1998-1
Rate Series 1998-1 Senior Notes and Tax Exempt Fixed Rate Series 1998-1
Senior Notes, Tax Subordinate Notes, may, at the Corporation's option,
Exempt Fixed Rate be called for redemption, in whole or in part, at a
Series 1998-1 Senior Redemption Price of 100% of Principal Amount of such
Notes and Tax Notes to be redeemed, plus accrued interest thereon
Exempt Fixed Rate to the Redemption Date, on any Interest Rate
Series 1998-1 Adjustment Date or regularly scheduled Interest
Subordinate Notes Payment Date for such series occurring on or after
from Excess Revenues March 1, 1999, from amounts transferred to the
Series 1998-1 Tax Exempt Retirement Sub-Account from
the Series 1998-1 Tax Exempt Surplus Sub- Account
and the Series 1998-1 Tax Exempt Reserve Account.
In general, such transfers are intended to allow the
Corporation to call Tax Exempt Auction Rate Series
1998-1 Senior Notes, Tax Exempt Fixed Rate Series
1998-1 Senior Notes and Tax Exempt Fixed Rate Series
1998-1 Subordinate Notes for redemption to the
extent that revenues allocable to the Tax Exempt
Series 1998-1 Notes under the Indenture exceed
scheduled debt service payments on the Tax Exempt
Series 1998-1 Notes, payments on other Indenture
Obligations and other expenses payable under the
Indenture. See "Description of Series 1998-1 Notes
-- Special Call for Redemption -- From Moneys in the
Surplus Account" and "Summary of the Indenture --
Funds and Accounts -- Surplus Fund" and " -- Reserve
Fund".
Call for Redemption Taxable Auction Rate Series 1998-1 Senior Notes of
of Taxable Auction any series may, at the Corporation's option, be
Rate Series 1998-1 called for redemption, in whole or in part, at a
Senior Notes from Redemption Price of 100% of Principal Amount of such
Excess Revenues Notes to be redeemed, plus accrued interest thereon
to the Redemption Date, on any regularly scheduled
Interest Payment Date for such series occurring on
or after March 1, 1999, from amounts transferred to
the Series 1998-1 Taxable Retirement Sub-Account
from the Series 1998-1 Taxable Surplus Sub-Account
and the Series 1998-1 Taxable Reserve Account. In
general, such transfers are intended to allow the
Corporation to call Taxable Auction Rate Series
1998-1 Senior Notes for redemption to the extent
that revenues under the Indenture allocable to
Taxable Series 1998-1 Notes exceed scheduled debt
service payments on the Taxable Series 1998-1 Notes,
prepayments of Taxable LIBOR Rate Series 1998-1
Notes, payments on other Indenture Obligations and
other expenses payable under the Indenture. Such
revenues
-14-
<PAGE>
could result in whole or in part from Student Loans
acquired with, and from investment earnings on, the
proceeds of Additional Notes. (Any Additional Notes
will not be offered or sold pursuant to this
Prospectus.) See "Description of Series 1998-1
Notes -- Special Call for Redemption -- From Moneys
in the Surplus Account" and "Summary of the
Indenture -- Funds and Accounts -- Surplus Fund" and
"-- Reserve Fund."
Call for Redemption Taxable Auction Rate Series 1998-1 Senior Notes of
of Auction Rate any series may, at the Corporation's option, be
Series 1998-1 Senior called for redemption, in whole or in part, at a
Notes and Tax Exempt Redemption Price of 100% of Principal Amount of such
Fixed Rate Series Notes to be redeemed, plus accrued interest to the
1998-1 Notes From Redemption Date, on any regularly scheduled Interest
Unused Proceeds Payment Date for such series, from proceeds of the
Series 1998-1 Notes in the Series 1998-1 Taxable
Acquisition Account that have not been used to
acquire Eligible Loans and from amounts in the
Series 1998-1 Taxable Reserve Account. Such Series
1998-1 Notes shall be so called for redemption on
the regularly scheduled Interest Payment Date for
such series in March 1999 (from proceeds remaining
as of February 1, 1999), unless the Trustee receives
certain certifications from the Corporation. See
"Description of Series 1998-1 Notes -- Special Call
for Redemption -- From Unused Proceeds" and "Summary
of the Indenture -- Funds and Accounts --
Acquisition Fund" and " -- Reserve Fund".
Tax Exempt Auction Rate Series 1998-1 Senior Notes
of any series may, at the Corporation's option, be
called for redemption, in whole or in part, on any
Interest Rate Adjustment Date for such series or on
any regularly scheduled Interest Payment Date for
such series, and (if no Tax Exempt Auction Rate
Series 1998-1 Senior Notes remain Outstanding) Tax
Exempt Fixed Rate Series 1998-1 Notes may, at the
Corporation's option, be called for redemption, in
whole or in part, on any date, in each case at a
Redemption Price of 100% of Principal Amount of such
Notes to be redeemed, plus accrued interest thereon
to the Redemption Date, from proceeds of the Series
1998-1 Notes in the Series 1998-1 Tax Exempt
Acquisition Account that have not been used to
acquire Eligible Loans and from amounts in the
Series 1998-1 Tax Exempt Reserve Account. Such
Series 1998-1 Notes shall be so called for
redemption on June 1, 2001 (to the extent the
proceeds remaining in the Series 1998-1 Tax Exempt
Acquisition Account exceed $60,000,000 as of April
15, 2001) and on June 1, 2002 (from such proceeds
remaining as of April 15, 2002), in each case unless
the Trustee receives certain certifications from the
Corporation. See "Description of Series 1998-1
Notes -- Special Call for Redemption -- From Unused
Proceeds" and "Summary of the Indenture -- Funds and
Accounts -- Acquisition Fund" and " -- Reserve
Fund".
Call for Redemption The Series 1998-1 Notes may, at the Corporation's
of Series 1998-1 option, be called for redemption, in whole but not
Notes upon in part, at a Redemption Price of 100% of Principal
Reduction of Amount, plus accrued interest thereon to the
Portfolio Balance Redemption Date, on any date when the remaining
aggregate outstanding principal balance of Student
Loans Financed with the proceeds of the Series
1998-1 Notes is less than 10% of the amount
deposited to the Acquisition Fund on the Date of
Issuance.
Selection of Series If less than all Outstanding Series 1998-1 Notes are
1998-1 Notes for Call to be called for redemption, the particular series
for Redemption to be called for redemption will be determined by
the availability of particular amounts (in the case
of special call for redemption) or the Corporation's
decision to call Notes of such series for redemption
based upon its analysis that such redemption is in
the best interest of the Corporation (in the case of
optional call for redemption). To the extent Series
1998-1 Subordinate Notes are subject to call for
redemption, such Notes will (unless specifically
provided otherwise or unless the Corporation elects
otherwise and provides certain required
certifications) be called for
-15-
<PAGE>
redemption pro rata with Series 1998-1 Senior Notes.
If less than all Outstanding Series 1998-1 Notes of
a given series are to be called for redemption, the
particular Notes to be called for redemption will be
determined by lot. See "Description of Series
1998-1 Notes -- Selection of Series 1998-1 Notes for
Call for Redemption".
DATE OF ISSUANCE February 19, 1998.
DENOMINATIONS The Tax Exempt Auction Rate Series 1998-1 Senior
Notes, the Taxable Auction Rate Series 1998-1 Senior
Notes, the Taxable LIBOR Rate Series 1998-1 Senior
Notes and the Taxable LIBOR Rate Series 1998-1
Subordinate Notes will be issued in denominations of
$100,000 in original Principal Amount and any
multiple thereof. The Tax Exempt Fixed Rate Series
1998-1 Senior Notes and the Tax Exempt Fixed Rate
Series 1998-1 Subordinate Notes will be issued in
denominations of $5,000 in original Principal Amount
and any multiple thereof.
INDENTURE The Series 1998-1 Notes are being issued pursuant to
the Indenture (including the First Supplemental
Indenture) between the Original Issuer and the
Trustee and are payable solely from the funds and
assets held thereunder. The Original Issuer's
rights under the Indenture will be assigned to, and
the Original Issuer's obligations under the
Indenture will be assumed by, the Corporation. The
Corporation expects to issue additional series of
Notes in the future which also will be secured by
the Trust Estate.
The Series 1998-1 Senior Notes constitute "Senior
Notes" under the Indenture, secured on a basis which
is on a parity with any other Senior Obligations and
which is senior to the Series 1998-1 Subordinate
Notes and any Additional Notes secured on a parity
with or subordinate to the Series 1998-1 Subordinate
Notes. The Series 1998-1 Subordinate Notes
constitute "Subordinate Notes" under the Indenture,
secured on a basis which is on a parity with any
other Subordinate Obligations and which is
subordinate to the Series 1998-1 Senior Notes and
any other Senior Obligations. Additional Notes or
Other Indenture Obligations secured on a parity with
or on a basis subordinate to the Series 1998-1
Senior Notes may be issued under the Indenture. Such
Additional Notes or Other Indenture Obligations may
be secured on a basis which is senior to or on a
parity with the Series 1998-1 Subordinate Notes. Any
Additional Notes will not be offered or sold
pursuant to this Prospectus.
TRUSTEE First Bank National Association, the headquarters of
which is located in Minneapolis, Minnesota. The
Trustee is also the trustee for the Original
Issuer's outstanding bond and note issues, which
will be refunded by the Series 1998-1 Notes. The
Trustee, either directly or through its affiliates,
has in the past entered into student loan purchase
agreements with the Original Issuer, including
Student Loan Purchase Agreements pursuant to which
the Original Issuer acquired Eligible Loans which
will be Financed under the Indenture. The
Corporation expects that the Trustee will enter into
Student Loan Purchase Agreements providing for the
sale of a substantial amount of additional Eligible
Loans. The Original Issuer also has obtained (and
the Corporation may in the future obtain) financial
services from the Trustee and related entities. U.S.
Bancorp Investments, Inc., one of the Underwriters
of the Series 1998-1 Notes, is a wholly-owned
subsidiary of the Trustee. See "Certain
Relationships Among Financing Participants" herein.
-16-
<PAGE>
The Higher Education Act provides that only
"eligible lenders" (defined to include banks and
certain other entities) may hold title to student
loans made under the Federal Family Education Loan
Program. Because the Corporation does not qualify
as an "eligible lender," the Trustee will hold title
to all such Financed Student Loans on behalf of the
Corporation. The Trustee will agree under the
Indenture to maintain its status as an "eligible
lender" under the Higher Education Act.
USE OF PROCEEDS The Original Issuer estimates that the proceeds from
the sale of the Series 1998-1 Notes will be applied
as follows:
<TABLE>
<CAPTION>
<S> <C>
Deposit to Acquisition Fund:
Series 1998-1 Tax Exempt Acquisition Account $332,170,000
Series 1998-1 Taxable Acquisition Account 572,820,000
Deposit to Reserve Fund 18,480,000
------------
Total $923,470,000
</TABLE>
Approximately $87,070,000 of the proceeds deposited
to the Series 1998-1 Tax Exempt Acquisition Account
and approximately $507,720,000 of the proceeds
deposited to the Series 1998-1 Taxable Acquisition
Account are expected to be used on the Date of
Issuance to refinance a portfolio of Student Loans
currently owned by the Original Issuer, which
Student Loans have been acquired by the Original
Issuer pursuant to its secondary market program or
originated by the Original Issuer. These Student
Loans currently secure outstanding obligations of
the Original Issuer used to acquire such Student
Loans, which will be refunded from the proceeds of
the Series 1998-1 Notes. The remaining proceeds
deposited to the Series 1998-1 Tax Exempt
Acquisition Account are expected to be used to
purchase Eligible Loans from Lenders or to originate
Eligible Loans on or before April 15, 2002. At the
Corporation's option, or if not expended as of
certain dates, such proceeds may be transferred to
the Retirement Account and used to redeem Tax Exempt
Series 1998-1 Notes which are called for redemption.
The remaining proceeds deposited to the Series
1998-1 Taxable Acquisition Account are expected to
be used to purchase Eligible Loans from lenders or
to originate Eligible Loans on or before February 1,
1999. At the Corporation's option, or if not
expended as of February 1, 1999, such proceeds may
be transferred to the Retirement Account and used to
redeem Taxable Auction Rate Series 1998-1 Senior
Notes which are called for redemption. See
"Description of Series 1998-1 Notes -- Special Call
for Redemption -- From Unused Proceeds" herein.
THE FINANCED Financed Eligible Loans will initially consist
ELIGIBLE LOANS solely of loans originated pursuant to the Federal
Family Education Loan Program as described herein
under "Description of the Federal Family Educational
Loan Program" to students or parents of students
enrolled in qualified accredited institutions of
higher education. Based upon outstanding principal
balances as of December 31, 1997, approximately
60.2% of the Eligible Loans expected to be Financed
on the Date of Issuance with the proceeds of the
Series 1998-1 Notes are guaranteed by Education
Assistance Corporation ("EAC"), approximately 33.4%
of such Eligible Loans are guaranteed by
Pennsylvania Higher Education Assistance Agency
("PHEAA"), and substantially all of the remainder
are guaranteed by one of the following Guarantee
Agencies: United Student Aid Funds, Inc., Northstar
Guarantee Inc., Great Lakes Higher Education
Corporation, Student Loans of North Dakota, Iowa
College Aid Commission, Missouri Coordinating Board
for Higher Education, Illinois Student Aid
Commission, or Educational Credit Management
Corporation (formerly known as Transitional Guaranty
Agency, Inc.). The Corporation expects that
California Student
-17-
<PAGE>
Aid Commission also will be a Guarantee Agency for
Eligible Loans to be Financed following the Date of
Issuance. Any other state agency or private
nonprofit institution or organization which
administers a Guarantee Program may also be a
Guarantee Agency of Eligible Loans to be Financed,
subject to meeting certain requirements of the
Indenture. See "Description of the Guarantee
Agencies."
The Corporation may in the future acquire or
originate (or cause the Trustee to acquire or
originate) Eligible Loans under the Indenture which
are not originated pursuant to the Federal Family
Education Loan Program.
Some Financed Eligible Loans will have been
originated by the Original Issuer or by the Trustee
on behalf of the Corporation. The remainder of the
Financed Eligible Loans will have been originated by
independent third parties and subsequently sold to
the Original Issuer (before the Date of Issuance) or
to the Trustee on behalf of the Corporation (after
the Date of Issuance). The Financed Eligible Loans
included in the Trust Estate will vary from time to
time and are required to be Eligible Loans. Eligible
Loans are (A) Student Loans which: (1) have been or
will be made to an Eligible Borrower for
post-secondary education, (2) are guaranteed by a
Guarantee Agency as to at least 98% of the principal
of and accrued interest on such Student Loans and
are covered by Federal Reimbursement Contracts
providing, among other things, for reimbursement to
the Guarantee Agency for losses incurred by it on
defaulted Financed Student Loans insured or
guaranteed by the Guarantee Agency to the extent
provided in the Higher Education Act, (3) are
"eligible loans" as defined in Section 438 of the
Higher Education Act for purposes of receiving
Special Allowance Payments (other than Nonsubsidized
Stafford Loans originally financed by the Original
Issuer), and (4) bear interest at rates per annum
not less than or in excess of the applicable rates
of interest provided by the Higher Education Act, or
such lesser rates as may be approved by the Rating
Agencies; or (B) other Student Loans if the
Corporation shall have received the necessary Rating
Agency, Bond Counsel and other approvals. See
"Glossary of Certain Defined Terms." The
Corporation expects that most of the Eligible Loans
to be acquired with the proceeds of the Series
1998-1 Notes will be those described in clause (A)
above. Eligible Loans to be Financed with the
proceeds of the Tax Exempt Series 1998-1 Notes (or
from Balances in the Series 1998-1 Tax Exempt
Surplus Sub-Account) must be made to an Eligible
Borrower for the post-secondary education of (a) a
resident of the State of South Dakota attending a
post-secondary school located within or without the
State of South Dakota, or (b) a resident of a state
other than the State of South Dakota attending a
post-secondary school located within the State of
South Dakota.
Although other types of Eligible Loans may be
permitted to be Financed under clause (B), in
general, the descriptions of Eligible Loans in this
Prospectus (except for an immaterial amount of
non-Guaranteed Loans as shown herein under
"Characteristics of the Initial Financed Eligible
Loans -- Distribution of Financed Eligible Loans by
Guarantee Agency as of December 31, 1997") relate to
those described in clause (A). The Corporation has
no current plans to acquire other Eligible Loans
described under clause (B) and cannot predict what
the terms of any such Eligible Loans might be.
However, a broad range of loans, including loans
which are not made under the Federal Family
Education Loan Program, may qualify as Eligible
Loans under clause (B) upon receiving the necessary
approvals from the Rating Agencies and Bond Counsel.
Eligible Loans not made under the Federal Family
Education Loan Program may be insured by other
entities or uninsured.
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THE FEDERAL The Financed Student Loans will initially consist
FAMILY solely of, and are expected at all times to consist
EDUCATION LOAN primarily of, student loans originated pursuant to
PROGRAM the Federal Family Education Loan Program under the
Higher Education Act. Pursuant to the Federal
Family Education Loan Program, each such Financed
Eligible Loan is guaranteed as to the payment of at
least 98% of principal and interest by a state or
private non-profit Guarantee Agency. The Guarantee
Agencies each have reinsurance contracts with the
Secretary of the United States Department of
Education (the "Department of Education"), pursuant
to which the Department of Education reimburses the
Guarantee Agencies for such portions of guarantee
claims paid by the Guarantee Agencies as is provided
in the Higher Education Act. In addition, the
Department of Education is obligated to make certain
interest and other subsidy payments to the holders
of such Financed Eligible Loans. See "Description
of the Federal Family Educational Loan Program" for
a more complete description of the provisions of the
Higher Education Act that provide for such programs.
The obligations of the Guarantee Agencies to the
holders of loans, such as the Trustee, are payable
from the general funds available to each such
Guarantee Agency, including reserve funds maintained
by the Guarantee Agencies as required by the Higher
Education Act. Certain delays in receiving
reimbursement could occur if a Guarantee Agency
fails to meet its obligations. In addition, failure
to properly originate or service an Eligible Loan
can cause an Eligible Loan to lose its guarantee
and/or its eligibility for federal interest payments
and subsidies. See "Risk Factors -- Risk That
Failure to Comply with Student Loan Origination and
Servicing Procedures for Financed Student Loans May
Result in the Department of Education's Refusal to
Make Certain Payments to Guarantee Agencies and the
Trustee and the Guarantee Agencies' Refusal to Make
Guarantee Payments to the Trustee" and " -- Risk
That Financial Status of Guarantee Agencies Will
Affect Their Ability to Make Guarantee Payments".
STUDENT LOAN The pool of Financed Student Loans included in the
PORTFOLIO Trust Estate from time to time is sometimes referred
CHARACTERISTICS to herein as the "Student Loan Portfolio." A
description of the initial Student Loan Portfolio
expected to be Financed with the proceeds of the
Series 1998-1 Notes and pledged to the Trustee on
the Date of Issuance is included herein under
"Characteristics of the Initial Financed Eligible
Loans." The Corporation expects the Trustee to
originate and acquire additional Student Loans on
behalf of the Corporation, and Financed Student
Loans may be sold and certain events may occur with
respect to individual Financed Student Loans.
Consequently, the Student Loan Portfolio
characteristics are expected to change during the
period that the Series 1998-1 Notes are Outstanding.
See "Risk Factors -- Changes in the Assets of the
Trust Estate, Including Future Funding of Student
Loans, Changing Characteristics of Financed Student
Loans, Financed Eligible Loans That are Not Made
Under the Federal Family Education Loan Program, and
Financed Student Loans That are Not Eligible Loans
in the Surplus Account" and "-- Reduction in Amounts
Available to Pay Notes Due to the Variability of
Actual Cash Flows and Due to the Inability of
Guarantee Agencies to Make Guarantee Payments,"
"Description of the Federal Family Education Loan
Program," and "Characteristics of the Initial
Financed Eligible Loans".
INVESTMENT The Corporation expects that the proceeds of the
AGREEMENTS Series 1998-1 Notes that are deposited into the
Reserve Fund and, pending use to finance additional
Student Loans, proceeds that are deposited into the
Acquisition Fund and not used on the Date of
Issuance to acquire Eligible Loans will be used to
acquire a series of investment agreements. The
Corporation also expects that amounts deposited in
the Revenue Fund, the Note Fund and the Surplus Fund
relating to the Series 1998-1 Notes also will be
used to acquire a series of investment agreements.
Each investment agreement will require the financial
institution to which such amounts are loaned (each,
an "Investment Provider") to repay
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such amounts when requested by the Corporation or
the Trustee (subject to such limitations as may be
provided therein), and to pay interest on such
amounts periodically. Each Investment Provider will
be a party which meets the Rating Agencies' criteria
for creditworthiness or which has pledged collateral
satisfactory to the Rating Agencies to secure its
repayment obligations. Such investment agreements
will be part of the Trust Estate securing the Series
1998-1 Notes.
SERVICER AND THE SLFC shall act as the Servicer and custodian of the
SLFC SERVICING Financed Student Loans. See "The Servicer" and
AGREEMENT "Certain Relationships Among Financing
Participants".
The Corporation and the Trustee will enter into a
Servicing Agreement, dated as of February 1, 1998
(the "SLFC Servicing Agreement"), with SLFC.
Pursuant to the SLFC Servicing Agreement, SLFC
agrees to provide services to the Corporation and
the Trustee in connection with the origination and
acquisition of Student Loans to be Financed, and to
service the Financed Student Loans. SLFC is
required to perform all services under the SLFC
Servicing Agreement in compliance with the Higher
Education Act, applicable requirements of the
Guarantee Agencies and all other applicable federal,
state and local laws and regulations. SLFC may
perform all or part of its origination, acquisition,
and servicing activities through a subcontractor
(for which SLFC will be responsible).
SLFC also agrees to perform various administrative
and management activities on behalf of the
Corporation, including duties of the Corporation
under the Indenture. The SLFC Servicing Agreement
subjects SLFC to various obligations relating to
audits, examinations and inspections.
SLFC is required to be paid a monthly fee for the
performance of its functions under the SLFC
Servicing Agreement (from funds available for such
purpose under the Indenture) in an amount each month
equal to 0.104167% of the outstanding principal
balance of all Financed Student Loans as of the last
day of the immediately preceding month. Such fee is
subject to adjustment under certain circumstances.
See "The SLFC Servicing Agreement."
LENDERS With the exception of certain Consolidation Loans
that have been originated by the Original Issuer and
certain Eligible Loans that may be originated by the
Trustee on behalf of the Corporation, the Student
Loans expected to be Financed have been or will be
originated by banks, savings and loan associations,
credit unions and other financial institutions that
qualify as "eligible lenders" under the Higher
Education Act. The Lenders have sold or will sell
the Student Loans to be Financed to the Original
Issuer, or to the Trustee on behalf of the
Corporation, pursuant to Student Loan Purchase
Agreements.
REPURCHASES AND Pursuant to each Student Loan Purchase Agreement,
EXCHANGES OF the Lender will be obligated to repurchase any
LOANS Financed Eligible Loan if: (i) any representation or
warranty made or furnished by such Lender in or
pursuant to the Student Loan Purchase Agreement
shall prove to have been materially incorrect as to
such Financed Eligible Loan; (ii) the Department of
Education or a Guarantee Agency, as the case may be,
refuses to honor all or part of a claim filed with
respect to a Financed Eligible Loan on account of
any circumstance or event that occurred prior to the
sale of such Financed Eligible Loan to the Original
Issuer or to the Trustee, on behalf of the Original
Issuer or the Corporation, as the case may be; or
(iii) on account of any circumstance or event that
occurred prior to the sale of a Financed Eligible
Loan to the Original Issuer or to the Trustee, on
behalf
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of the Original Issuer or the Corporation, as the
case may be, a valid defense that makes the Financed
Eligible Loan unenforceable is asserted by a maker
(or endorser, if any) of the Financed Eligible Loan
with respect to his or her obligation to pay all or
any part of the Financed Eligible Loan.
The Financed Student Loans owned by the Original
Issuer as of the Date of Issuance, together with the
Original Issuer's rights under the related Student
Loan Purchase Agreements, will be assigned by the
Original Issuer and acquired by the Trustee under
the Indenture, without recourse or warranty.
Neither the Corporation, the Trustee, nor any other
party will have any recourse to the Original Issuer
in the event any Financed Student Loan should fail
to qualify as an Eligible Loan or in any other
circumstance.
The Indenture permits the Corporation to exchange
Financed Student Loans for other Eligible Loans
which evidence additional obligations of borrowers
whose Student Loans have already been Financed.
FUNDS AND Pursuant to the Indenture, there will be established
ACCOUNTS the Acquisition Fund, the Revenue Fund, the Note
Fund, the Administration Fund, the Reserve Fund, the
Rebate Fund and the Surplus Fund.
Acquisition Fund The Indenture establishes the Acquisition Fund,
within which will be established a Series 1998-1 Tax
Exempt Acquisition Account and a Series 1998-1
Taxable Acquisition Account. With respect to each
series of Notes, the Trustee shall credit to the
Acquisition Fund the amount, if any, specified in
the Supplemental Indenture providing for the
issuance of such series of Notes (which amount, with
respect to the Series 1998-1 Notes, is described
below). The Trustee shall also deposit in the
Acquisition Fund: (i) any funds to be transferred
thereto from the Surplus Fund, and (ii) any other
amounts specified in a Supplemental Indenture.
Balances in the Acquisition Fund shall be used only
for (a) the purchase or origination of Eligible
Loans, (b) the redemption of Notes which are called
for redemption or the purchase of Notes as provided
in a Supplemental Indenture providing for the
issuance of such series of Notes, (c) the payment of
Debt Service on the Senior Notes and Other Senior
Obligations when due (upon transfer to the Note
Fund), (d) the payment of the purchase price of any
Senior Notes required to be purchased on a Purchase
Date or a Mandatory Tender Date (upon transfer to
the Note Fund), or (e) to cure deficiencies in the
Rebate Fund. The Trustee shall make payments to
Lenders from the Acquisition Fund for the
acquisition of Eligible Loans (such payments to be
made from the Series 1998-1 Tax Exempt and Taxable
Acquisition Accounts at a purchase price not in
excess of 100% of the remaining unpaid principal
amount of such Eligible Loan, plus accrued
noncapitalized borrower interest thereon, if any, to
the date of purchase, reasonable transfer,
origination or assignment fees, if applicable, and a
premium not to exceed certain limitations set forth
in the Indenture). The Trustee shall also make
payments from the Acquisition Fund for the
origination of Eligible Loans.
The sum of $904,990,000 will be deposited in the
Series 1998-1 Tax Exempt and Taxable Acquisition
Accounts on the Date of Issuance of the Series
1998-1 Notes and approximately $594,790,000 of such
amount will be used on the Date of Issuance to
refinance a portfolio of Eligible Loans, which is
described herein. See "Characteristics of the
Initial Financed Eligible Loans" herein. The
remaining proceeds deposited in the Series 1998-1
Tax Exempt and Taxable Acquisition Accounts in the
Acquisition Fund on the Date of Issuance are
expected to be used to acquire additional Eligible
Loans from
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<PAGE>
Lenders or to originate Eligible Loans on or before
April 15, 2002. Proceeds deposited in the Series
1998-1 Tax Exempt and Taxable Acquisition Accounts
in the Acquisition Fund and not used to purchase
Eligible Loans may be transferred to the Retirement
Account and used to redeem Series 1998-1 Notes which
are called for redemption.
Revenue Fund The Indenture establishes the Revenue Fund, which is
comprised of two Accounts: the Repayment Account and
the Income Account. The Trustee shall credit to the
Revenue Fund: (i) all amounts received as interest,
including federal interest subsidy payments, and
principal payments with respect to Financed Student
Loans, including all Guarantee Payments and all
Special Allowance Payments with respect to Financed
Student Loans (excluding, except in the case of the
Eligible Loans to be Financed on the Date of
Issuance, any federal interest subsidy payments and
Special Allowance Payments that accrued prior to the
date on which such Student Loans were Financed),
(ii) unless otherwise provided in a Supplemental
Indenture, proceeds of the resale to a Lender of any
Financed Student Loans pursuant to such Lender's
repurchase obligation under the applicable Student
Loan Purchase Agreement, (iii) all amounts received
as earnings on or income from Investment Securities
in the Acquisition Fund, the Reserve Fund, the
Administration Fund, the Surplus Fund and the Note
Fund, and (iv) all amounts to be transferred to the
Revenue Fund from the Rebate Fund. The Trustee shall
deposit and credit all such amounts received as
payments of principal of Financed Student Loans to
the Repayment Account, and all other such amounts
shall be credited by the Trustee to the Income
Account. The Indenture requires the Trustee to
transfer moneys on a monthly basis (after taking
into account any periodic rebate fee payment
required to be made in respect of Student Loans
Financed under the Indenture), first from the
Repayment Account and then from the Income Account,
to the following Funds and Accounts in the following
order: the Rebate Fund, the Interest Account for the
payment of Senior Obligations, the Principal Account
for the payment of Senior Obligations, the
Retirement Account for the redemption of Senior
Notes which are called for redemption, the Interest
Account for the payment of Subordinate Obligations,
the Principal Account for the payment of Subordinate
Obligations, the Retirement Account for the
redemption of Subordinate Notes which are called for
redemption, the Administration Fund (but only from
the Income Account), the Reserve Fund, the Principal
Account (relating to cumulative sinking fund
installments with respect to Subordinate Term Notes
to be called for redemption on a Sinking Fund
Payment Date), the Special Redemption and Prepayment
Account and the Surplus Account. In addition, any
amounts payable by a Swap Counterparty pursuant to a
Swap Agreement are required to be credited directly
to the Interest Account.
Note Fund The Indenture establishes the Note Fund, which is
comprised of three Accounts: the Interest Account,
the Principal Account and the Retirement Account.
The Note Fund shall be used only for the payment
when due of principal of, premium, if any, and
interest on the Senior Notes and the Subordinate
Notes, the purchase price of Senior Notes and
Subordinate Notes to be purchased on a Purchase Date
or Mandatory Tender Date in accordance with the
Indenture, Other Indenture Obligations and
Carry-Over Amounts (including any accrued interest
thereon) and to make transfers to the credit of the
Rebate Fund. The principal of and interest on the
Class C Notes are payable from the Surplus Fund.
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<PAGE>
Interest Account The Trustee shall deposit in the Interest Account
(i) that portion of the proceeds from the sale of
Financed Student Loans representing accrued interest
and Special Allowance Payments thereon, (ii) that
portion of the proceeds from the sale of the
Corporation's bonds, notes or other evidences of
indebtedness, if any, to be used to pay interest on
the Senior Notes or the Subordinate Notes, (iii) all
Counterparty Swap Payments, (iv) all payments under
any Credit Enhancement Facilities to be used to pay
interest on (or the interest portion of the purchase
price of) the Notes and (v) all amounts required to
be transferred thereto from other Funds and
Accounts, as described below.
To provide for the payment of each installment of
interest which falls due upon Senior Notes or
Subordinate Notes on each regularly scheduled
Interest Payment Date and all Corporation Swap
Payments and fees to a Credit Facility Provider
payable on such Interest Payment Date, the Trustee
shall make deposits to the credit of the Interest
Account on each Monthly Payment Date (less certain
credits against such payments). If, on any Interest
Payment Date (including a Redemption Date or a date
that Notes are to be purchased that is not a
regularly scheduled Interest Payment Date), moneys
in the Interest Account are insufficient to pay the
accrued interest due on the Senior Notes and
Subordinate Notes and all Corporation Swap Payments
and fees to a Credit Enhancement Facility Provider
payable on such Interest Payment Date or
constituting a portion of the purchase price of
Notes to be so purchased, the Trustee shall deposit
immediately to the credit of the Interest Account an
amount equal to such deficiency by transfer from the
following Funds and Accounts, in the following order
of priority: the Revenue Fund, the Surplus Fund
(other than that portion of the Balance thereof
consisting of Eligible Loans), the Reserve Fund, the
Administration Fund, the Surplus Fund (including any
portion of the Balance thereof consisting of
Eligible Loans), the Retirement Account, the
Principal Account and, as to Senior Notes and Other
Senior Obligations only, the Acquisition Fund (other
than that portion of the Balance thereof consisting
of Student Loans); provided that such transfers in
respect of Subordinate Notes or Other Subordinate
Obligations shall be so made from the Principal
Account or the Retirement Account only if, and to
the extent, any amounts to be so transferred are in
excess of the requirements of such Accounts with
respect to Senior Obligations payable therefrom.
If, as of any regularly scheduled Interest Payment
Date, any Carry-Over Amount (including any accrued
interest thereon) is due and payable with respect to
a series of Notes, as provided in the related
Supplemental Indenture, the Trustee shall transfer
to the Interest Account (to the extent amounts are
available therefor in the Surplus Account, after
taking into account all other amounts payable from
the Surplus Fund on such Interest Payment Date) an
amount equal to such Carry-Over Amount (including
any accrued interest thereon) so due and payable.
Balances in the Interest Account shall be
transferred to the credit of the Rebate Fund to the
extent necessary, after transfers thereto from the
Revenue Fund, the Surplus Fund, the Reserve Fund,
the Administration Fund, the Retirement Account and
the Principal Account, to make any deposit to the
credit of the Rebate Fund required by the Indenture.
(See "Rebate Fund" below.)
Apart from transfers to the Rebate Fund and
transfers to the Principal Account as described
under "Principal Account" below, Balances in the
Interest Account shall be applied, first, to the
payment of interest on all Senior Notes, Corporation
Swap Payments under Senior Swap Agreements and fees
payable to Senior Credit Facility Providers due on
an Interest Payment Date, and if such money (after
the transfers hereinabove described, including all
amounts, to the extent necessary, in the Principal
Account) is less
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than such interest and Other Senior Obligations on
such Interest Payment Date, such money shall be
applied, pro rata, among such indebtedness based
upon such amounts then owing to Senior Beneficiaries
and to be paid from the Interest Account; second, to
the payment of interest on all Subordinate Notes,
Corporation Swap Payments under Subordinate Swap
Agreements and fees payable to Subordinate Credit
Facility Providers due on an Interest Payment Date,
and if such money (after the transfers hereinabove
described, including all amounts, to the extent
necessary, in the Principal Account over and above
the amount on deposit therein to meet any accrued
obligations to pay principal of the Senior Notes or
amounts, other than fees, to Senior Credit Facility
Providers) is less than such interest and Other
Subordinate Obligations on such Interest Payment
Date, such money shall be applied, pro rata, among
such indebtedness based upon such amounts then owing
to Subordinate Beneficiaries and to be paid from the
Interest Account; and third, to the payment of all
Carry-Over Amounts (including any accrued interest
thereon) due and payable on all series of Notes, and
if such money is less than such Carry-Over Amounts
(including any accrued interest thereon) on an
Interest Payment Date, such money shall be applied,
pro rata, among such Carry-Over Amounts (including
any accrued interest thereon) based upon such
amounts then otherwise due and payable to
Noteholders and to be paid from the Interest
Account.
Other Indenture Obligations payable from the
Interest Account would include reimbursement to any
Credit Facility Provider for interest paid on Senior
Notes or Subordinate Notes from amounts derived from
the related Credit Enhancement Facility, which
reimbursement shall have the same priority of
payment from the Interest Account as the interest so
paid.
Principal Account The Trustee shall deposit to the credit of the
Principal Account: (i) that portion of the proceeds
from the sale of Financed Student Loans representing
principal thereof, (ii) that portion of the proceeds
from the sale of the Corporation's bonds, notes or
other evidences of indebtedness, if any, to be used
to pay principal of the Senior Notes and the
Subordinate Notes, (iii) all payments under any
Credit Enhancement Facilities to be used to pay
principal of Senior Notes or Subordinate Notes or
the purchase price of Senior Notes or Subordinate
Notes to be purchased on a Purchase Date or
Mandatory Tender Date, and (iv) all amounts required
to be transferred thereto from the following Funds,
in the following order of priority: (1) in the case
of payment of principal of Notes at Stated Maturity,
call of Senior Notes for redemption on a Sinking
Fund Payment Date or the purchase of Notes on a
Purchase Date or Mandatory Tender Date, the Revenue
Fund, the Surplus Fund (other than that portion of
the Balance thereof consisting of Eligible Loans),
the Reserve Fund, the Administration Fund and the
Surplus Fund (including any portion of the Balance
thereof consisting of Eligible Loans), and (2) in
the case of call of Subordinate Notes for redemption
on a Sinking Fund Payment Date, the Revenue Fund and
the Surplus Fund (other than that portion of the
Balance thereof consisting of Eligible Loans);
provided, however, that if principal is payable on
Senior Notes at the Stated Maturity thereof or upon
a Sinking Fund Payment Date therefor, or the
purchase price is payable on Senior Notes on a
Purchase Date or Mandatory Tender Date, and money
credited to the Principal Account, after the
foregoing transfers, is insufficient to pay such
principal or purchase price, funds shall be
transferred, to the extent necessary, to the
Principal Account for this purpose, (i) from the
Interest Account, but only to the extent that the
Balance in the Interest Account exceeds any then
accrued payments of interest on the Senior Notes,
Corporation Swap Payments under Senior Swap
Agreements and fees owing to Senior Credit
Enhancement Providers and (ii) thereafter from the
Acquisition Fund (other than that portion of the
Balance thereof consisting of Student Loans).
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To provide for the payment of principal due on the
Stated Maturity of Senior or Subordinate Serial
Notes or on a Sinking Fund Payment Date for Senior
or Subordinate Term Notes, the Trustee shall make
deposits to the credit of the Principal Account on
each Monthly Payment Date from amounts available
therefor in the Revenue Fund and the other Funds
referred to above.
In the event that the Corporation is required to
furnish moneys to the Depositary to purchase Notes
on a Purchase Date or Mandatory Tender Date, the
Trustee shall, subject to the applicable provisions
of the related Supplemental Indenture, immediately
deposit to the credit of the Principal Account
moneys sufficient to pay the purchase price thereof.
Balances in the Principal Account shall be
transferred to the credit of the Rebate Fund to the
extent necessary, after transfers thereto from the
Revenue Fund, the Surplus Fund, the Reserve Fund,
the Administration Fund and the Retirement Account,
to make any required deposit to the credit of the
Rebate Fund. (See "Rebate Fund" below.)
Balances to the credit of the Principal Account
shall be applied in the following order of priority:
first, for transfer to the Rebate Fund; second, to
the Interest Account to the extent required (see
"Interest Account" above) for the payment of
interest on Senior Notes and Other Senior
Obligations payable therefrom; third, to the payment
of Senior Notes at their Stated Maturity or on their
Sinking Fund Payment Date and Other Senior
Obligations payable therefrom; fourth, to the
payment of the purchase price of Senior Notes on a
Purchase Date or Mandatory Tender Date; fifth, to
the Interest Account to the extent required (see
"Interest Account" above) for the payment of
interest on Subordinate Notes and Other Subordinate
Obligations payable therefrom; sixth, to the payment
of Subordinate Notes at their Stated Maturity and
Other Subordinate Obligations payable therefrom;
seventh, to the payment of the purchase price of
Subordinate Notes on a Purchase Date or Mandatory
Tender Date; and eighth, to the payment of
Subordinate Term Notes on a Sinking Fund Payment
Date.
Other Indenture Obligations payable from the
Principal Account would include reimbursement to any
Credit Facility Provider for principal or the
purchase price paid on Senior Notes or Subordinate
Notes from amounts derived from the related Credit
Enhancement Facility, which reimbursement shall have
the same priority of payment from the Principal
Account as the principal so paid.
Balances in the Principal Account may also be
applied to the purchase of Senior Notes or
Subordinate Notes. Any such purchase shall be
limited to those Senior Notes or Subordinate Notes
whose Stated Maturity or Sinking Fund Payment Date
is the next succeeding Principal Payment Date.
Retirement The Trustee shall deposit to the credit of the
Account Retirement Account (i) any amounts transferred
thereto from the Reserve Fund and the Surplus Fund,
(ii) that portion of the proceeds from the sale of
the Corporation's bonds, notes or other evidences of
indebtedness, if any, to be used to pay the
principal or Redemption Price of Senior Notes or
Subordinate Notes on a date other than the Stated
Maturity thereof or a Sinking Fund Payment Date
therefor, and (iii) all payments under any Credit
Enhancement Facilities to be used to pay the
Redemption Price of Notes payable from the
Retirement Account. All Senior Notes or Subordinate
Notes which are to be retired, or the principal of
which is to be prepaid, other than with moneys in
the Principal Account shall be retired or prepaid
with moneys deposited to the credit of the
Retirement Account.
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Balances in the Retirement Account shall be
transferred to the credit of the Rebate Fund to the
extent necessary, after transfers thereto from the
Revenue Fund, the Surplus Fund, the Reserve Fund and
the Administration Fund, to make any required
deposit to the Rebate Fund. (See "Rebate Fund"
below.) After taking into account any such required
transfers to the Rebate Fund, Balances in the
Retirement Account shall be transferred to the
credit of the Interest Account to the extent
required (see "Interest Account" above) for the
payment of interest on Notes and Other Indenture
Obligations payable therefrom.
Other Indenture Obligations payable from the
Retirement Account will include reimbursement to any
Credit Facility Provider for the Redemption Price
paid on Senior Notes or Subordinate Notes from
amounts derived from the related Credit Enhancement
Facility, which reimbursement shall have the same
priority of payment from the Retirement Account as
the Redemption Price so paid.
Balances in the Retirement Account (other than any
portion thereof to be applied to the mandatory
prepayment of principal of any Notes) may also be
applied to the purchase of Senior Notes or
Subordinate Notes.
Administration Fund With respect to each series of Notes, the Trustee
shall, upon delivery thereof and from the proceeds
thereof, credit to the Administration Fund
established under the Indenture the amount, if any,
specified in the Supplemental Indenture providing
for the issuance of such series of Notes. The
Trustee shall also credit to the Administration Fund
all amounts transferred thereto from the Revenue
Fund and the Surplus Account. Amounts in the
Administration Fund shall be used to pay Costs of
Issuance, Administrative Expenses and Note Fees or
to reimburse another fund, account or other source
of the Corporation for the previous payment of Costs
of Issuance, Administrative Expenses or Note Fees.
Balances in the Administration Fund shall also be
applied to remedy deficiencies in the Rebate Fund
and the Note Fund after transfers thereto from the
Revenue Fund, the Surplus Fund (other than that
portion of the Balance thereof consisting of
Eligible Loans) and the Reserve Fund.
Deposits to the credit of the Administration Fund
shall be made from the following sources in the
following order of priority: the Income Account
after transfers therefrom to the Rebate Fund, the
Interest Account, the Principal Account (other than
with respect to the payment of sinking fund
installments for Subordinate Notes), and the
Retirement Account; and the Surplus Account after
transfers therefrom to the Rebate Fund, the Interest
Account, the Principal Account (other than with
respect to the payment of sinking fund installments
for Subordinate Notes) and the Retirement Account,
provided that any such deposit from the Surplus
Account shall only be made to the extent that
portion of the Balance thereof not consisting of
Eligible Loans is sufficient therefor.
Reserve Fund Immediately upon the delivery of any series of
Senior Notes or Subordinate Notes, and from the
proceeds thereof or, at the option of the
Corporation, from any amounts to be transferred
thereto from the Surplus Fund, the Trustee shall
credit to the Reserve Fund the amount, if any,
specified in the Supplemental Indenture providing
for the issuance of that series of Notes, such that,
upon issuance of such Notes, the Balance in the
Reserve Fund shall not be less than the Reserve Fund
Requirement, which is an amount initially equal to
the greater of 2% of the aggregate principal amount
of all Notes then Outstanding or $500,000.
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<PAGE>
If on any Monthly Payment Date the Balance in the
Reserve Fund is less than the Reserve Fund
Requirement, the Trustee shall transfer and credit
thereto an amount equal to the deficiency from
moneys available therefor in the following Funds and
Accounts in the following order of priority: the
Repayment Account, the Income Account and the
Surplus Fund.
The Balance in the Reserve Fund shall be used and
applied solely for (i) transfers to the Rebate Fund
to the extent necessary, after transfers thereto
from the Revenue Fund and the Surplus Fund (other
than that portion of the Balance thereof consisting
of Eligible Loans), to make any required deposit to
the Rebate Fund (see "Rebate Fund" below), and (ii)
after such transfer, if any, to be made pursuant to
the preceding clause (i) has been taken into
account, the payment when due of principal and
interest on the Senior Notes and the Subordinate
Notes and any Other Indenture Obligations and the
purchase price of Senior Notes and Subordinate Notes
on a Purchase Date or Mandatory Tender Date, and the
other purposes specified in the Indenture (see "Note
Fund" above).
Rebate Fund The Indenture establishes the Rebate Fund into which
the Trustee is required to make annual deposits from
Balances in the Revenue Fund, the Surplus Fund, the
Reserve Fund, the Administration Fund, the Bond Fund
and the Acquisition Fund, in that order, equal to
the amount computed under Section 148(f) of the Code
as being subject to rebate to the United States (the
"Rebate Amount") and certain amounts constituting
Excess Earnings on the Financed Student Loans. The
Trustee is required to pay to the United States
Treasury, at least once every five years, an amount
which ensures that not less than 90% of the
cumulative Rebate Amount will have been paid to the
United States Treasury. The Trustee is required to
consult with Bond Counsel and take such action as
may be required under the Code (which may include
forgiveness of principal of Financed Student Loans
or payments to the United States Treasury) with
respect to Excess Earnings. Under certain
circumstances, including delivery to the Trustee of
a favorable opinion of Bond Counsel, certain amounts
determined not to be subject to rebate or other
disposition may be transferred from the Rebate Fund
to the Income Account.
Surplus Fund The Indenture establishes a Surplus Fund comprised
of two Accounts: the Special Redemption and
Prepayment Account and the Surplus Account. The
Trustee shall deposit to the credit of the Surplus
Fund Balances in the Revenue Fund not required for
deposit to any other Fund or Account. Deposits to
the Surplus Fund from the Revenue Fund shall be
credited to the Special Redemption and Prepayment
Account to the extent the Balance thereof is less
than the Special Redemption and Prepayment Account
Requirement for each series of Notes, and otherwise
to the Surplus Account.
Balances in the Surplus Fund shall be used first to
make up deficiencies in, or make required transfers
to, the Rebate Fund, the Note Fund, the
Administration Fund and the Reserve Fund. Balances
in the Surplus Fund may also be applied, as
determined by the Corporation from time to time, to
the payment of principal of or interest on Class C
Notes when due or upon the call thereof for
redemption at the option of the Corporation, subject
to meeting certain conditions described in "Summary
of the Indenture -- Funds and Accounts -- Surplus
Fund" are met.
If the Trustee shall have first certified that no
deficiencies exist in any of the Rebate Fund, the
Note Fund, the Reserve Fund or the Special
Redemption and Prepayment Account, and shall have
received certain certifications from the
Corporation, Balances in the Surplus Account may be
used to redeem Notes which are called for redemption
(including Series 1998-1 Notes as described under
"Description of Series 1998-1 Notes
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<PAGE>
-- Special Call for Redemption -- From Moneys in the
Surplus Account") or to purchase Notes, or may be:
(a) used to acquire Student Loans meeting the
requirements of clauses (A) (1) and (2) or clause
(B) of the definition of "Eligible Loans" (see
"Glossary of Certain Defined Terms"); or (b)
released from the Indenture to be used for certain
other authorized purposes; provided, however, that
the Indenture prohibits the use of the Surplus
Account to acquire Student Loans that are not
Eligible Loans and for the purposes specified in
clause (b) above unless, after taking into account
any such application (i) the Senior Percentage will
be not less than 112%, and (ii) the Subordinate
Percentage will be not less than 102%; provided that
such percentages may be lower upon receipt of
certain approvals from each Rating Agency and, under
certain circumstances, consent of Other
Beneficiaries.
Balances in the Special Redemption and Prepayment
Account may be transferred to the credit of the
Retirement Account to redeem Senior Notes or
Subordinate Notes which are called for redemption or
to prepay Senior Notes or Subordinate Notes as
provided in a Supplemental Indenture relating
thereto (provision for which, in the case of the
Taxable LIBOR Rate Series 1998-1 Notes has been made
in the First Supplemental Indenture and is described
under "Prepayment of Taxable LIBOR Rate Series
1998-1 Notes" above) or to the Acquisition Fund for
the acquisition or origination of Eligible Loans as
provided in the Indenture and as further authorized
or limited in a Supplemental Indenture. Balances in
the Special Redemption and Prepayment Account (other
than any portion thereof to be applied to the
mandatory prepayment of principal of any Notes) may
also be transferred to the Note Fund for the
purchase of Notes.
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<PAGE>
Flow of Revenue in the Funds and Accounts
Student Loan
Revenues and
Investment
Earnings
--------------
Revenue
Fund
--------------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
- --------------- Note
Rebate and Proceeds
Excess Interest
--------------
Rebate
Fund
-------------- --------------
Acquisition
-------------- Fund
Note --------------
- -------------- Fund
Principal and -------------- Acquire
Interest on Eligible Eligible
Notes Loans Loans
-------------- Note
Reserve Proceeds
Fund
--------------
--------------
- -------------- Administration
Administrative Fund
Expenses --------------
--------------
Surplus
Fund
--------------
- --------------
To Corporation
</TABLE>
The above chart is intended to illustrate, in simple form, the flow of revenues
to and from the Funds and Accounts under the Indenture. For a more detailed
description of such flow of funds, see "Source of Payment and Security for the
notes -- Description of Flow of Revenues in the Funds" and "Summary of the
Indenture -- Funds and Accounts"
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<PAGE>
ADDITIONAL PARITY The Corporation may, upon complying with the
NOTES provisions of the Indenture, issue from time to time
Additional Notes or incur certain other Indenture
Obligations secured by the Trust Estate on a parity
with or subordinate to the Senior Notes. Any
Additional Notes will not be offered or sold
pursuant to this Prospectus. See "Summary of the
Indenture" herein.
SUBORDINATION The rights of the Series 1998-1 Subordinate
Noteholders to receive payments with respect to the
Notes will be subordinated to such rights of the
Series 1998-1 Senior Noteholders and any other
Senior Beneficiaries to the extent described in this
Prospectus. This subordination is intended to
enhance the likelihood of timely receipt by the
Series 1998-1 Senior Noteholders of the full amount
of scheduled payments of principal and interest due
them. Thus, payments of interest and principal on
the Series 1998-1 Subordinate Notes will be made
when due (on a parity basis with any other
Subordinate Obligations) only to the extent there
are sufficient monies available for such payment,
after making all payments due on such date with
respect to the Senior Obligations. So long as
Senior Obligations remain Outstanding under the
Indenture, the failure to make interest or principal
payments on the Series 1998-1 Subordinate Notes will
not constitute an Event of Default under the
Indenture. Payments of principal and interest on
the Series 1998-1 Subordinate Notes would be
similarly subordinated to Senior Obligations if the
Notes were accelerated because of an Event of
Default.
The Series 1998-1 Subordinate Notes are also
subordinated to the Series 1998-1 Senior Notes and
any other Senior Obligations as to the direction of
remedies upon default.
FEDERAL INCOME In the opinion of Dorsey & Whitney LLP, the Series
TAX TREATMENT OF 1998-1 Notes will be treated as debt of the Original
SERIES 1998-1 NOTES Issuer (and upon the assumption by the Corporation
of the Original Issuer's obligations under the
Indenture, as debt of the Corporation), rather than
as an interest in the Financed Student Loans and
other Trust Estate assets, for federal income tax
purposes. As such, the owners of the Taxable Series
1998-1 Notes will be required to include in income
interest on such Taxable Series 1998-1 Notes as paid
or accrued, in accordance with their respective
accounting methods and the provisions of the Code.
See "Tax Matters -- Federal Income Tax
Consequences".
EXCLUSION OF In the opinion of Dorsey & Whitney LLP, as Bond
INTEREST ON TAX Counsel, under existing laws, regulations, rulings
EXEMPT SERIES and decisions, interest on the Tax Exempt Series
1998-1 NOTES 1998-1 Notes is not includable in the gross income
FROM GROSS INCOME of the owners thereof for federal income tax
purposes. Interest on the Tax Exempt Series 1998-1
Notes is an item of tax preference which is included
in alternative minimum taxable income for purposes
of the federal alternative minimum tax applicable to
all taxpayers, and is includable in certain other
taxes imposed upon corporations. For a more
detailed description of the tax status of the
interest on the Tax Exempt Series 1998-1 Notes, Bond
Counsel's opinion with respect thereto (including
its reliance on the Original Issuer's, SLFC's and
the Corporation's compliance with covenants made by
them to satisfy certain requirements of the Code)
and certain income tax consequences of Tax Exempt
Series 1998-1 Note ownership, see "Tax Matters --
Tax Exempt Series 1998-1 Notes".
ERISA The Series 1998-1 Notes are eligible for purchase by
CONSIDERATIONS or on behalf of employee benefit plans, retirement
arrangements, individual retirement accounts and
Keogh Plans, subject to certain considerations
discussed under "ERISA Considerations".
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<PAGE>
RATINGS It is a condition to the issuance of the Series
1998-1 Notes that the Series 1998-1 Senior Notes
each be rated "AAA" by Fitch IBCA, Inc. and "Aaa" by
Moody's Investors Services, Inc., and that the
Series 1998-1 Subordinate Notes each be rated no
less than "A" by Fitch and "A3" by Moody's. The
ratings of each series of Series 1998-1 Notes
address the likelihood of the timely payment of
principal and interest on such Series 1998-1 Notes.
The ratings do not address the market liquidity of
Series 1998-1 Notes or the likelihood of prepayments
of the Series 1998-1 Notes. 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. See "Ratings".
REGISTRATION OF The Series 1998-1 Notes of each series initially
NOTES will be represented by one or more certificates
registered in the name of Cede & Co., as a nominee
of DTC. No person acquiring an interest in such
Notes will be entitled to a definitive certificate
representing such person's interest, except in the
event that definitive securities are issued under
the limited circumstances described herein. See
"Description of Series 1998-1 Notes --
Book-Entry-Only System".
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<PAGE>
RISK FACTORS
Prospective investors should consider, among other things, the following
factors regarding the purchase of the Series 1998-1 Notes.
THE SERIES 1998-1 NOTES ARE LIMITED RECOURSE OBLIGATIONS AND LIMITED ASSETS OF
THE CORPORATION ARE AVAILABLE FOR THE PAYMENT OF THE SERIES 1998-1 NOTES
The Corporation is a special purpose corporation and the Series 1998-1
Notes will represent obligations solely of the Corporation. The Series 1998-1
Notes are not insured or guaranteed by any government agency or
instrumentality, by any affiliate of the Corporation, by any insurance company
or by any other person or entity. The Corporation will have no significant
assets available to make payment on the Series 1998-1 Notes other than the
Trust Estate pledged as collateral for the Notes under the Indenture.
Moreover, the Series 1998-1 Notes are limited obligations of the Corporation,
payable solely from the Trust Estate and not from any other assets which the
Corporation may have or any other revenues to which the Corporation may be
entitled. The Trust Estate will not have, nor is it expected to have, any
significant assets or sources of funds other than the Financed Student Loans,
the Acquisition Fund, the Reserve Fund and the other Funds and Accounts.
Payments on the Series 1998-1 Notes will depend solely on the amount and
timing of payments and collections in respect of the Financed Student Loans,
investment earnings on the various Funds and Accounts established pursuant to
the Indenture, amounts on deposit in the Reserve Fund and the other Funds and
Accounts, and the payment priority of the Series 1998-1 Notes, any Additional
Notes to be issued in the future and any credit enhancement obtained with
respect to such Additional Notes. (Any Additional Notes will not be offered
or sold pursuant to this Prospectus.) There will be no additional recourse to
the Corporation or any other person if such proceeds are insufficient. As a
result, Noteholders must depend on the cash flow with respect to the Financed
Student Loans and funds on deposit in the Acquisition Fund, the Reserve Fund
and the other Funds and Accounts for payment of principal of and interest on
the Series 1998-1 Notes.
HOLDERS OF THE SERIES 1998-1 SUBORDINATE NOTES ARE SUBORDINATE IN PAYMENT
PRIORITY AND AS TO THE DIRECTION OF REMEDIES
Payments of principal of and interest on the Series 1998-1 Subordinate
Notes are subordinated in priority of payment to payments of principal of and
interest on the Series 1998-1 Senior Notes and any other Senior Obligations
that may be outstanding from time to time. See "Source of Payment and
Security for the Notes". The Series 1998-1 Subordinate Notes are also
subordinated to the Series 1998-1 Senior Notes and any other Senior
Obligations as to the direction of remedies upon an Event of Default.
FAILURE TO COMPLY WITH STUDENT LOAN ORIGINATION AND SERVICING PROCEDURES FOR
FINANCED STUDENT LOANS MAY RESULT IN THE DEPARTMENT OF EDUCATION'S REFUSAL TO
MAKE CERTAIN PAYMENTS TO GUARANTEE AGENCIES AND THE TRUSTEE AND THE GUARANTEE
AGENCIES' REFUSAL TO MAKE GUARANTEE PAYMENTS TO THE TRUSTEE
The Higher Education Act requires lenders and their agents making and
servicing student loans under the Federal Family Education Loan Program and
Guarantee Agencies guaranteeing such student loans to follow specified
procedures, including due diligence procedures, to ensure that such student
loans are properly originated, disbursed and collected. Certain of those
procedures, which are specifically set forth in the Higher Education Act, are
summarized herein. See "Description of Financed Eligible Loan Program" and
"Description of the Federal Family Education Loan Program." Generally, those
procedures require that completed loan applications be processed, a
determination of whether an applicant is an eligible borrower under the Higher
Education Act be made, the borrower's responsibilities under the loan be
explained to him or her, the promissory note evidencing the loan be executed
by the borrower and the loan proceeds be disbursed by the lender in a
specified manner. After the loan is made, the lender must establish repayment
terms with the borrower, properly administer deferments and forbearances and
credit the borrower for payments made. If a borrower becomes delinquent in
repaying a loan, a lender must perform certain collection procedures
(including numerous telephone calls and demand letters, skip-
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<PAGE>
tracing procedures, and requesting assistance from the applicable Guarantee
Agency) which vary depending upon the length of time a loan is delinquent.
The Corporation believes that the Original Issuer has followed these
procedures in its acquisition, servicing and collection of the Eligible Loans
to be Financed. In addition, SLFC will agree in the SLFC Servicing Agreement
to perform origination, servicing and collection procedures on behalf of the
Trustee and the Corporation in compliance with those procedures. However,
failure of the Original Issuer to have followed these procedures with respect
to the existing Student Loan Portfolio, failure of SLFC or any successor
Servicer to follow these procedures or failure of any Lender or any other
originator or Servicer of the Financed Student Loans to have followed or to
follow these procedures with respect to any Financed Student Loans may result
in the Department of Education's refusal to make reinsurance payments to the
Guarantee Agencies or to make Special Allowance Payments or Interest Subsidy
Payments to the Trustee with respect to such Financed Student Loans or in the
Guarantee Agencies' refusal to make payments under their Guarantee Agreements
with the Trustee ("Guarantee Payments") with respect to such Financed Student
Loans. Failure of the Guarantee Agencies to receive reinsurance payments from
the Department of Education could adversely affect the Guarantee Agencies'
ability or legal obligation to make Guarantee Payments to the Trustee. Loss
of any such Guarantee Payments, Special Allowance Payments or Interest Subsidy
Payments with respect to Financed Student Loans could adversely affect the
amount of revenues under the Indenture and the Corporation's ability to pay
principal of and interest on the Series 1998-1 Notes. See "Description of the
Federal Family Education Loan Program."
NO RECOURSE EXISTS AGAINST THE ORIGINAL ISSUER FOR ANY FAILURES TO COMPLY WITH
ORIGINATION AND SERVICING PROCEDURES RELATING TO THE FINANCED STUDENT LOANS
The transfer of the original portfolio of Financed Student Loans from the
Original Issuer to the Trustee is without recourse. Neither the Corporation
nor the Trustee will have any right to resell the Financed Student Loans to
the Original Issuer or otherwise to make recourse to or collect from the
Original Issuer if such Financed Student Loans should fail to meet the
requirements of an Eligible Loan for any reason or if such transfer should
fail to provide the Trustee with good title to such Financed Student Loans.
The failure of any Financed Student Loan to conform to all of the
requirements of the Higher Education Act or the Guarantee Agencies with
respect thereto could result in the loss of the Trustee's right to receive
Guarantee Payments, Special Allowance Payments, and/or Interest Subsidy
Payments with respect to such Financed Student Loan.
CHANGES IN LAW COULD ADVERSELY AFFECT THE FEDERAL FAMILY EDUCATION LOAN
PROGRAM AND THE FINANCED STUDENT LOANS
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 herein and the loans made thereunder,
including the Financed Student Loans or the Guarantee Agencies. The Federal
Family Education Loan Program has been the subject of numerous amendments and
proposed amendments to the Higher Education Act, including amendments designed
to reduce the federal budget deficit. Amendments to the Higher Education Act
in the past several years have reduced the portion of loans covered by
Guarantee Payments and the portion of Guarantee Payments covered by
reinsurance, reduced certain administrative expense allowances paid by the
Department of Education to Guarantee Agencies, reduced the premiums and
default collections that Guarantee Agencies are entitled to receive and/or
retain, and given the Department of Education broad powers over Guarantee
Agencies and their reserves, including the authority to require a Guarantee
Agency to pay a portion or all reserve funds to the Department of Education in
certain circumstances.
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<PAGE>
Several proposals have been made by Congress and the Administration to
amend the Higher Education Act, including proposals that would significantly
alter the Federal Family Education Loan Program and the roles of its
participants. It is impossible to predict whether any such proposals will be
adopted as legislation or, if so, what impact such legislation may have on the
Corporation's or Trustee's receipt of revenues with respect to Financed
Student Loans.
THE COMPETING FEDERAL DIRECT STUDENT LOAN PROGRAM MAY RESULT IN HIGHER
SERVICER COSTS BECAUSE OF REDUCED ECONOMIES OF SCALE; A SMALLER SECONDARY
MARKET AND REDUCED VALUE FOR FINANCED STUDENT LOANS; AND HIGHER PREPAYMENTS OF
FINANCED STUDENT LOANS THROUGH CONSOLIDATIONS
The Higher Education Act provides for a Federal Direct Student Loan
Program. This program, established in academic year 1994-1995, has a
statutory target volume of 60% of student loan demand in academic year
1998-1999, which could result in reductions in the volume of loans made under
the Federal Family Education Loan Program. As the Federal Direct Student Loan
Program expands, the Servicer may experience increased costs due to reduced
economies of scale to the extent the volume of new loans serviced by the
Servicer is reduced. Such cost increases could affect the ability of the
Servicer to satisfy its obligations to service the Financed Eligible Loans.
Such volume reductions could also reduce revenues received by the Guarantee
Agencies available to pay claims on defaulted Eligible Loans. Finally, the
level of competition currently in existence in the secondary market for loans
made under the Federal Family Education Loan Program could be reduced,
resulting in fewer potential buyers of the Eligible Loans and lower prices
available in the secondary market for those loans. Further, the Department of
Education has implemented a direct consolidation loan program, which program
may further reduce the volume of loans made under the Federal Family Education
Loan Program and is expected to result in prepayments of Financed Student
Loans. See "Description of the Federal Family Education Loan Program."
ADDITIONAL NOTES MAY BE ISSUED WITHOUT NOTEHOLDER CONSENT
The Corporation may, from time to time pursuant to the provisions of the
Indenture, issue Additional Notes or incur other Indenture Obligations secured
by the Trust Estate on a parity with or subordinate to the Series 1998-1
Senior Notes and senior to, on a parity with or subordinate to the Series
1998-1 Subordinate Notes, as determined by the Corporation, without the
consent or approval of the Holders of any Notes then Outstanding. While the
Indenture requires that the Corporation satisfy certain conditions, including,
but not limited to, the condition that the issuance of the Additional Notes
will not adversely affect the ratings on the then outstanding Notes, if
Additional Notes are issued and the Financed Student Loans acquired with the
proceeds of such Additional Notes do not produce sufficient revenue to pay
principal of and interest on those Additional Notes, it may result in a delay
in or reduction of payments on the Series 1998-1 Notes. Moreover, if
Additional Notes are issued and an Event of Default occurs with respect to
such Additional Notes and such Event of Default is not cured or waived, then
all Notes which are then outstanding, including the Series 1998-1 Notes, are
subject to acceleration. Any Additional Notes will not be offered or sold
pursuant to this Prospectus. This Prospectus relates only to the Series
1998-1 Notes. See "Additional Notes" herein.
THE INTEREST RATES ON FINANCED STUDENT LOANS AND OTHER INVESTMENTS MAY BE
INSUFFICIENT TO COVER INTEREST ON THE SERIES 1998-1 NOTES (OTHER THAN TAX
EXEMPT FIXED RATE SERIES 1998-1 SENIOR NOTES AND TAX EXEMPT FIXED RATE SERIES
1998-1 SUBORDINATE NOTES) DUE TO RATE-INDEX DIFFERENCE
The interest rates with respect to the Series 1998-1 Notes (other than the
Tax Exempt Fixed Rate Series 1998-1 Senior Notes and the Tax Exempt Fixed Rate
Series 1998-1 Subordinate Notes) may fluctuate from one interest period to
another in response to changes in benchmark rates or general market
conditions. The Corporation can make no representation as to what such rates
may be in the future. The interest rates on each series of Auction Rate
Series 1998-1 Senior Notes will be based generally on the outcome of each
Auction of such series of Notes. The interest rates on each series of Taxable
LIBOR Rate Series 1998-1 Notes will be based generally on One-Month LIBOR. The
Financed Student Loans, however, generally bear interest at an effective rate
(taking into account any Special Allowance Payments, the "Loan Rates") equal
to the average bond equivalent rates of weekly auctions of
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<PAGE>
91-day Treasury bills for each quarter (the "91-day Treasury Bill Rate") (or,
in certain circumstances, 52-week Treasury bills) plus margins specified for
such Financed Student Loans. See "Description of the Federal Family Education
Loan Program - - Loan Terms -- Interest Rates" and " -- Federal Special
Allowance Payments." As a result of these differences between the indices
used to determine the Loan Rates and the interest rates on the variable rate
Series 1998-1 Notes, there could be periods of time when the Loan Rates are
inadequate to cover the interest on the Series 1998-1 Notes and expenses
required under the Indenture. Moreover, the Net Loan Rate will be determined
as of a date as much as two months prior to the determination of the rates
borne by the variable rate Taxable Series 1998-1 Notes. Thus, in a period of
rapidly rising interest rates, the Net Loan Rate may not increase as quickly
as the variable interest rates with respect to the Taxable Series 1998-1
Notes. To the extent that the Loan Rates decrease or do not increase as fast
as the variable interest rates with respect to the Taxable Series 1998-1
Notes, the interest rates with respect to such Taxable Series 1998-1 Notes may
be limited to the Net Loan Rate or may be deferred to future periods. There
can be no assurance that sufficient funds will be available in future periods
to make up for any shortfalls in the current payments of interest on the
Taxable Series 1998-1 Notes. Further, if there is a decline in the Loan
Rates, the amount of funds representing interest deposited into the Trust
Estate may be reduced and, even if there is a similar reduction in the
variable interest rates applicable to any series of Series 1998-1 Notes, there
may not necessarily be a similar reduction in the other amounts required to be
funded out of such funds (such as certain administrative expenses). In
addition, proceeds of and revenues relating to the Series 1998-1 Notes in the
Reserve Fund, the Acquisition Fund, the Revenue Fund, the Note Fund and the
Surplus Fund will be used to acquire investment agreements at fluctuating
interest rates. Although the Corporation will structure such investment
agreements to minimize such risk, there can be no assurance that the interest
rates on such investment agreements will keep pace with the fluctuating
interest rates on the Series 1998-1 Notes.
CHANGES IN REPAYMENT TERMS OF FINANCED STUDENT LOANS PURSUANT TO INCENTIVE
PROGRAM.
The Original Issuer currently makes available and the Corporation may
hereafter make available certain incentive programs to borrowers. It cannot
be predicted with certainty how many borrowers will qualify or decide to
participate in these programs. The effect of these incentive programs may be
to reduce the yield on the Financed Student Loans. Reductions in the yield on
the Financed Student Loans resulting from such incentive programs will result
in a reduction of the Net Loan Rate. There is no assurance that the Net Loan
Rate (and thus the interest rate on the Taxable Series 1998-1 Notes) will not
be reduced below the rates that would otherwise be borne by such Notes.
CHANGES IN THE ASSETS OF THE TRUST ESTATE, INCLUDING FUTURE FUNDING OF STUDENT
LOANS, CHANGING CHARACTERISTICS OF FINANCED STUDENT LOANS, FINANCED ELIGIBLE
LOANS THAT ARE NOT MADE UNDER THE FEDERAL FAMILY EDUCATION LOAN PROGRAM AND
FINANCED STUDENT LOANS THAT ARE NOT ELIGIBLE LOANS IN THE SURPLUS ACCOUNT
The initial Student Loan Portfolio to be Financed on the Date of Issuance
with a portion of the proceeds of the Series 1998-1 Notes is described herein
under "Characteristics of the Initial Financed Eligible Loans." The
investment agreements which will be acquired on the Date of Issuance with the
remaining proceeds of the Series 1998-1 Notes are described herein under
"Application of Series 1998-1 Note Proceeds." After the Date of Issuance, the
Corporation intends to cause the Trustee to purchase Financed Eligible Loans
from Lenders and to originate Eligible Loans from amounts initially deposited
in the Acquisition Fund and used to acquire such investment agreements (upon
repayment of such amounts pursuant to such investment agreements). The actual
characteristics of the Student Loan Portfolio will change from time to time
due to factors such as adjustments made in the normal course of business,
amendments to the Higher Education Act, changes in the classifications of
Eligible Loans, sales or exchanges of Eligible Loans by the Trustee on behalf
of the Corporation, scheduled amortization, prepayment or the occurrence of
delinquencies or defaults. In addition, the Indenture allows the Corporation
to apply balances in the Surplus Account to the acquisition of Student Loans
that do not qualify as Eligible Loans. See "Summary of the Indenture - Funds
and Accounts - Surplus Fund." Moreover, though all Financed Eligible Loans
will initially be loans made under the Federal Family Education Loan Program,
Eligible Loans that are not made under such
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<PAGE>
program may be Financed in the future and such other Eligible Loans may have
different features and be of lesser credit quality. Among possible
differences, such loans may be Guaranteed at lesser reimbursement rates by the
Guarantee Agencies, may be insured by private entities or uninsured, may have
different interest rates and repayment terms, and may not have any third party
subsidies. If Student Loans are Financed which are not Eligible Loans
(whether or not made under the Federal Family Education Loan Program), they
may have no third party guarantee or eligibility for interest subsidies and
Special Allowance Payments, and thus may bear a lower rate of return and a
greater risk of loss from borrower default in payment.
RELIANCE UPON LENDERS' REPRESENTATIONS AND WARRANTIES RELATING TO FINANCED
STUDENT LOANS WITHOUT CONDUCTING COMPLETE INDIVIDUAL STUDENT LOAN DOCUMENT
EXAMINATIONS
The Original Issuer has acquired the majority of the initial Student Loan
Portfolio, and the Corporation expects to cause the Trustee to acquire
additional Financed Eligible Loans, from Lenders pursuant to Student Loan
Purchase Agreements under which each Lender has agreed or will agree to sell
to the Original Issuer or to the Trustee, on behalf of the Corporation,
Eligible Loans which comply with certain representations and warranties. The
Student Loan Purchase Agreements provide for the repurchase by the Lender of
Financed Student Loans that do not comply with such representations and
warranties. However, neither the Original Issuer, SLFC nor the Corporation
has conducted or will conduct an examination of documents relating to the
Eligible Loans to be Financed of sufficient scope to determine whether the
Lenders who have sold such Eligible Loans to the Original Issuer, or will sell
such Eligible Loans to the Trustee on behalf of the Corporation, have met or
will have met all the conditions of the Higher Education Act necessary for
such loans to qualify for Guarantee Payments from the applicable Guarantee
Agency. Moreover, no assurance can be given that any Lender will honor, or be
able to honor, its obligations to sell Eligible Loans to the Trustee or to
repurchase non-conforming Student Loans, or that the Trustee would be able to
acquire Eligible Loans in an equivalent amount, with similar characteristics
or at comparable prices from other sources in the event that any Lenders fail
to sell Eligible Loans to the Trustee or are required to repurchase Financed
Student Loans.
INABILITY OF LENDERS TO HONOR THEIR OBLIGATIONS TO REPURCHASE FINANCED STUDENT
LOANS
Under the circumstances set forth in the Student Loan Purchase Agreements,
a Lender may be obligated to repurchase Financed Student Loans from the
Trustee. If a Lender were to become insolvent or otherwise be unable to
repurchase such Financed Student Loans, it is unlikely that a repurchase of
such Financed Student Loan from the Trustee would occur. The failure of such
a Lender to repurchase a Financed Student Loan would constitute a breach of
the respective Student Loan Purchase Agreement, enforceable by the Trustee,
but would not constitute an Event of Default under the Indenture or permit the
exercise of remedies thereunder.
GEOGRAPHICALLY CONCENTRATED BORROWERS MAY BE SUBJECT TO REGIONAL ECONOMIC
CONDITIONS THAT ADVERSELY AFFECT THEIR ABILITY TO REPAY STUDENT LOANS
Although the Original Issuer has not experienced any geographical risks,
it is possible that geographically concentrated borrowers will be subject to
economic risks specific to their region which could adversely affect their
ability to repay Student Loans. See "Characteristics of the Initial Financed
Eligible Loans -- Distribution of Financed Eligible Loans by Borrowers'
Address as of December 31, 1997 (Based on Address as of January 9, 1998)."
POSSIBLE LOSS OF TAX EXEMPTION OF THE INTEREST ON THE TAX EXEMPT SERIES 1998-1
NOTES
Provisions of the Code impose continuing requirements that must be met
after the issuance of the Tax Exempt Series 1998-1 Notes for interest thereon
to be and remain excludable from gross income for federal income tax purposes.
Noncompliance with such requirements may cause the interest on the Tax Exempt
Series 1998-1 Notes to be includable in gross income for such purposes, either
prospectively or retroactively to the date of issuance of the Tax Exempt
Series 1998-1 Notes. These requirements include, but are not limited to,
provisions that prescribe that the proceeds of the Tax Exempt Series 1998-1
Notes and certain other amounts are subject to yield
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and other investment limits and provisions that require that certain
investment earnings be rebated on a periodic basis to the Treasury Department
of the United States. These provisions limit the return to which the
Corporation is entitled from investments allocable to the Tax Exempt Series
1998-1 Notes (1) in the case of Student Loans, generally to 2% in excess of
the yield on the Tax Exempt Series 1998-1 Notes, and (2) in the case of other
investments, generally to the yield on the Tax Exempt Series 1998-1 Notes. To
the extent such investments are permitted to, and do, produce a yield in
excess of such limitations, such excess would generally be required to be
rebated to the Treasury Department every five years.
In addition, Section 150(d)(3) of the Code contains numerous provisions
that must be complied with at and after the time an election under such
section is made for interest on the Tax Exempt Series 1998-1 Notes to be and
remain excludable from gross income. Although the Original Issuer and the
Corporation believe that the issuance of the Series 1998-1 Notes, the
organization of SLFC and the Corporation, and the transfers of assets and
assumptions of obligations described herein under "The Original Issuer" and
"The Corporation" will comply with the requirements of Section 150(d)(3) of
the Code, no determination has been obtained or is expected to be sought from
the Internal Revenue Service with respect to such compliance. Moreover, the
Original Issuer believes that it will be the first entity to make the election
provided for in Section 150(d)(3) of the Code, and no established practices
have developed nor have any regulations or other guidance been published by
the Internal Revenue Service.
It is possible that future action or inaction by the Corporation, SLFC or
the Original Issuer could cause the inclusion of interest on the Tax Exempt
Series 1998-1 Notes in gross income for federal income tax purposes (in some
cases retroactively to the date of their original issuance). In such event,
it is probable that certain (and possibly all) of the interest payments
received by owners of Tax Exempt Series 1998-1 Notes would be subject to
Federal income taxes, thereby having the effect of reducing (possibly
substantially) the effective, after-tax yield on their investment in the Tax
Exempt Series 1998-1 Notes.
INSOLVENCY OF THE ORIGINAL ISSUER, SLFC OR THE CORPORATION
The Corporation has taken steps in structuring the transactions
contemplated hereby that are intended to ensure that the voluntary or
involuntary application for relief by the Original Issuer or SLFC under the
United States Bankruptcy Code or other insolvency laws, as the case may be
("Insolvency Laws"), will not result in consolidation of the assets and
liabilities of the Corporation with those of the Original Issuer and/or SLFC.
These steps include the creation of the Corporation as a separate,
limited-purpose subsidiary of SLFC pursuant to a certificate of incorporation
containing certain limitations (including restrictions on the nature of the
Corporation's business and a restriction on the Corporation's ability to
commence a voluntary case or proceeding under any Insolvency Law without the
prior unanimous affirmative vote of all of its directors, including at least
two directors who must be independent of the Corporation and its affiliates).
However, there can be no assurance that the activities of the Corporation
would not result in a court concluding that the assets and liabilities of the
Corporation should be consolidated with those of the Original Issuer or SLFC
in a proceeding under any Insolvency Law. If a court were to reach such a
conclusion or if a filing were made under any Insolvency Law by or against the
Corporation, or if an attempt were made to litigate any of the foregoing
issues, then delays in payments on the Notes could occur or reductions in the
amounts of such payments could result. See "The Original Issuer", "The
Corporation" and "Certain Relationships Among Financing Participants."
The Original Issuer will transfer all of its rights and interest in and to
the Financed Student Loans (subject to the lien of the Trustee under the
Indenture) to SLFC, and SLFC will in turn transfer all such rights and
interest in and to the Financed Student Loans to the Corporation.
The Original Issuer intends that its transfer of the Financed Student
Loans to SLFC constitute a sale of all of the Original Issuer's rights in such
Financed Student Loans (subject to the lien of the Trustee under the
Indenture), rather than a pledge to secure indebtedness. Similarly, SLFC
intends that its transfer of the Financed Student Loans to the Corporation
constitute a sale of all of SLFC's rights in such Financed Student Loans,
rather than a pledge to secure indebtedness. Dorsey & Whitney LLP, counsel to
the Original Issuer and SLFC, will
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deliver a legal opinion of the effect that, subject to the qualifications and
limitations expressed therein, the transfers of the Financed Student Loans
from the Original Issuer to SLFC and from SLFC to the Corporation each
constitute a true sale, rather than a pledge to secure indebtedness, and that
the Financed Student Loans would not be considered property of the Original
Issuer or SLFC should either entity thereafter become subject to any
Insolvency Law.
If, however, the Original Issuer or SLFC were to become subject to any
Insolvency Law and a creditor or trustee-in- bankruptcy of the Original Issuer
or SLFC were to take the position that the sale of the Financed Student Loans
by the Original Issuer to SLFC or by SLFC to the Corporation, as appropriate,
should instead be treated as a pledge of such interest to secure a borrowing
from SLFC or the Corporation, as appropriate, delays in payments on the Notes
from collections on Financed Student Loans could occur or (should the court
rule in favor of the Original Issuer or SLFC, as appropriate, or such
creditor) reductions in the amounts of such payments could result.
Upon the occurrence of any of certain events of bankruptcy or insolvency
with respect to the Corporation, the Financed Student Loans may be liquidated.
The proceeds from any such liquidation of Financed Student Loans would be
treated as collections on the Financed Student Loans and deposited in the
Revenue Fund. There can be no assurance that the proceeds from the
liquidation of the Financed Student Loans and amounts (if any) on deposit in
the Reserve Fund and the other Funds and Accounts held under the Indenture
would be sufficient to pay the Notes in full. See "Summary of the
Indenture-Events of Default."
As the Servicer of the Financed Student Loans, the insolvency of SLFC may
result in a disruption in the servicing of the Financed Student Loans and the
receipt of payments with respect thereto, and also may result in a failure to
comply with servicing requirements of the Department of Education and the
Guarantee Agencies.
FAILURE TO COMPLY WITH THE ORIGINAL ISSUER'S PLAN FOR DOING BUSINESS MAY
RESULT IN THE DEPARTMENT OF EDUCATION REFUSING TO MAKE SPECIAL ALLOWANCE
PAYMENTS WITH RESPECT TO FINANCED STUDENT LOANS OR SEEKING TO BE REIMBURSED
FOR PRIOR SPECIAL ALLOWANCE PAYMENTS
The Higher Education Act provides that, for holders of Federal Family
Education Loan Program loans that are financed with tax exempt debt to be
eligible for Special Allowance Payments with respect to such loans, the issuer
of the debt must adopt, obtain approval of, and comply with, a plan for doing
business meeting the requirements of the Higher Education Act. The Original
Issuer has adopted, and the Governor of the State of South Dakota has
approved, such a plan. Because the Original Issuer expects to terminate its
participation in the Federal Family Education Loan Program, the Original
Issuer will no longer be capable of carrying out certain provisions of such
plan for doing business. The Original Issuer, SLFC, and the Corporation will
each covenant to comply with the provisions of such plan for doing business
that apply to their respective operations. However, if any such party fails
to comply with such provisions of the plan for doing business, or if the
Original Issuer failed to comply in the past with all provisions of its plan
for doing business, or if the Department of Education determines that the
Original Issuer's plan for doing business or the reallocation of
responsibilities thereunder in connection with the Original Issuer's election
under Section 150(d)(3) of the Code does not comply with the Higher Education
Act, Financed Student Loans could lose their eligibility for Special Allowance
Payments and the Original Issuer, the Corporation and/or the Trustee may be
required to repay Special Allowance Payments theretofore made to the Original
Issuer or the Trustee with respect to Financed Student Loans. Depending on
the amount involved, loss of Special Allowance Payments or required repayment
of Special Allowance Payments could have a materially adverse affect on the
Corporation's ability to pay the principal of and interest on the Series
1998-1 Notes.
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USE OF A SHARED LENDER IDENTIFICATION NUMBER MAY RESULT IN THE GUARANTEE
AGENCIES AND THE DEPARTMENT OF EDUCATION OFFSETTING AGAINST GUARANTEE PAYMENTS
AND OTHER FEDERAL BENEFIT PAYMENTS OWED TO THE TRUSTEE
Due to Department of Education policy limiting the granting of new lender
identification numbers, the Indenture will allow the Trustee, if necessary, to
use the Department of Education lender identification number that it uses for
the Financed Student Loans for other Student Loans held by the Trustee as
trustee under other indentures, if any, securing obligations of the
Corporation or obligations of other subsidiaries of SLFC, or for trusts
established by the Corporation or other subsidiaries of SLFC. In that event,
the billings submitted to the Department of Education for interest subsidy
payments and Special Allowance Payments on Financed Student Loans would be
consolidated with the billings for such payments for Student Loans held under
such other indentures and trusts using the same lender identification number
and payments on such billings would be made by the Department of Education to
the Trustee in lump sum form. Such lump sum payments would then be allocated
by the Trustee among the various trusts and indentures using the same lender
identification number.
In addition, such sharing of the lender identification number may result
in the receipt of Guarantee Payments by Guarantee Agencies in lump sum form.
In that event, such payments would be allocated by the Trustee among the
various trusts and indentures in a manner similar to the allocation process
for interest subsidy payments and Special Allowance Payments.
The Department of Education regards the Trustee as the party primarily
responsible to the Department of Education for any liabilities owed to the
Department of Education or Guarantee Agencies resulting from the Trustee's
activities in the Federal Family Education Loan Program. As a result, if the
Department of Education or a Guarantee Agency were to determine that the
Trustee owes a liability to the Department of Education or a Guarantee Agency
on any Student Loans for which the Trustee is or was legal titleholder,
including loans held under the Indenture or such other trusts or indentures,
the Department of Education or the Guarantee Agency might seek to collect that
liability by offset against payments due the Trustee under the Indenture. If
the Department of Education or a Guarantee Agency determines such a liability
exists in connection with a trust or indenture using the shared lender
identification number, the Department of Education or the Guarantee Agency
would be likely to collect that liability by offsetting against amounts due
the Trustee under the shared lender identification number, including amounts
owed in connection with the Financed Student Loans. Such offsetting of
payments due to the Trustee with respect to the Financed Student Loans could
adversely affect the receipt of revenues under the Indenture and the
Corporation's ability to pay interest and principal on the Notes.
In addition, other trusts or indentures using the shared lender
identification number may in a given quarter incur origination fees that
exceed the interest subsidy payments and Special Allowance Payments payable by
the Department of Education on the loans held under such other trusts and
indentures, resulting in the payment from the Department of Education received
by the Trustee under such shared lender identification number for that quarter
equaling an amount that is less than the amount owed by the Department of
Education on the Financed Student Loans for that quarter.
The Indenture and the indentures or trust agreements under which the
Trustee may separately hold Student Loans which share the lender
identification number to be used by the Trustee (the separate trusts created
thereunder being collectively referred to herein as the "Corporation Trusts")
may require a Corporation Trust (including the Trust Estate under the
Indenture) to indemnify the other Corporation Trusts for a shortfall or an
offset by the Department of Education or a Guarantee Agency arising from the
Student Loans held by the Trustee on such Corporation Trust's behalf. To the
extent that the Trustee is required to indemnify other Corporation Trusts from
the assets held under the Indenture as part of the Trust Estate with respect
to an offset by the Department of Education or a Guarantee Agency arising from
Financed Student Loans held by the Trustee under the Indenture, such
indemnification obligation could adversely affect the amount of assets in the
Trust Estate and the Corporation's ability to pay principal of and interest on
the Notes. Also, to the extent that the Trustee may be entitled to
indemnification with respect to an offset by the Department of Education or a
Guarantee Agency arising from
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Student Loans held by the Trustee for a Corporation Trust other than the Trust
Estate under the Indenture, there can be no assurance that the amount of funds
available to the Trustee with respect to such right of indemnification may be
adequate to compensate the Trust Estate under the Indenture and Noteholders
for any previous reduction in the Trust Estate.
DEFEAT OR LACK OF PERFECTED SECURITY INTEREST IN TRUST ESTATE ASSETS
The Higher Education Act provides that a security interest in student
loans made pursuant to the Federal Family Education Loan Program may be
perfected either through the taking of possession of such loans or by the
filing of notice of such security interest in the manner in which security
interests in accounts may be perfected by applicable state law. The Uniform
Commercial Code as in effect in the State of South Dakota provides for
perfection of security interests in accounts by the filing of financing
statements with the Secretary of State. The perfection of the security
interest in the Financed Student Loans granted by the Corporation to the
Trustee is to be accomplished by the filing of financing statements. SLFC,
acting as custodial agent for the Trustee, will retain possession of the
promissory notes evidencing the Financed Student Loans. The Corporation is a
wholly-owned subsidiary of SLFC. If, through fraud, inadvertence or
otherwise, a third-party lender or purchaser acting in good faith were to
obtain possession of any such promissory notes, the security interest of the
Trustee in the related Financed Student Loans could be defeated. See "Certain
Relationships Among Financing Participants" herein.
The Trustee's security interest in revenues, moneys, evidences of
indebtedness (including any Financed Student Loans that are not made under the
Federal Family Education Loan Program) and, unless registered in the name of
the Trustee, securities payable into the various Funds and Accounts under the
Indenture does not constitute a perfected security interest until such
revenues, moneys, evidences of indebtedness and securities are received by the
Trustee.
INSOLVENCY OF LENDERS AFFECTING THE TRANSFER OF STUDENT LOANS
Each Student Loan Purchase Agreement is structured as, and intended to
effectuate, a valid sale and assignment by the Lender to the Original Issuer
or the Trustee on behalf of the Corporation, as applicable, of the Financed
Student Loans transferred thereunder. Notwithstanding the foregoing, if a
Lender were to become subject to any Insolvency Law and a creditor or
trustee-in-bankruptcy of such Lender were to take the position that the sale
of Financed Student Loans by such Lender should instead be treated as a pledge
of such Financed Student Loans to secure a borrowing, delays in payments on
the Notes from collections on Financed Student Loans could occur or (should
the court rule in favor of such Lender or such creditor) reductions in the
amounts of such payments could result. In the event of insolvency of any such
Lender that is a bank, moreover, its affairs might become subject to Federal
Deposit Insurance Corporation ("FDIC") receivership. In such case, the FDIC,
as a receiver, or a court could treat the transfer of the Financed Student
Loans to the Original Issuer or the Trustee on behalf of the Corporation as an
assignment of collateral as security for the benefit of the Original Issuer or
the Corporation as a creditor of such Lender. If the transfer of the Financed
Student Loans to the Original Issuer or the Trustee on behalf of the
Corporation is deemed to create a security interest therein, a tax or
government lien on property of such Lender arising before the Financed Student
Loans were transferred may have priority over the Trustee's interest in such
Financed Student Loans. If such Lender becomes subject to receivership, to
the extent that the transfer of the Financed Student Loans is deemed to create
a security interest, and that such interest was validly perfected before such
Lender's insolvency and was not taken in contemplation of insolvency or with
the intent to hinder, delay or defraud such Lender or its creditors, such
security interest should not be subject to avoidance and payments with respect
to the Financed Student Loans should not be subject to recovery by such
Lender's creditors. The Corporation will receive an opinion of counsel,
subject to the assumptions and limitations set forth therein, that the
provisions of the Indenture, the Student Loan Purchase Agreements, and the
SLFC Servicing Agreement and the actions required thereunder in connection
with the acquisition of Financed Student Loans are sufficient to create both a
perfected security interest in favor of the Trustee against any such Lender in
the Financed Student Loans, if the transfer of Financed Student Loans by such
Lender is considered as an assignment of collateral as security for an
obligation, as well as a perfected security interest in favor of the Trustee
against the Corporation in the
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Financed Student Loans. No assurance can be given that delays in receipt of
funds with respect to the Financed Student Loans will not occur even if no
such prior liens exist. Moreover, no assurance can be given that the FDIC
would not seek to effect the release of the Financed Student Loans to it, as
receiver, by accelerating such Lender's "debt" and repaying the outstanding
amount thereof.
FAILURE TO COMPLY WITH CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon lenders and servicers
involved in consumer finance. Also, some state laws impose finance charge
ceilings and other restrictions on certain consumer transactions and require
contract disclosures in addition to those required under federal law. These
state laws are, in large part, preempted by the Higher Education Act.
However, the form of promissory notes required by the Department of Education
for Federal Family Education Loan Program loans provides that holders of such
promissory notes evidencing certain loans made to borrowers attending
for-profit schools are subject to any defenses that the borrower may have
against the school. Moreover, the Indenture permits, under certain
circumstances, the Financing of Student Loans other than those made under the
Federal Family Education Loan Program. Such state laws may not be pre-empted
as they apply to any such Student Loans.
HOLDERS OF AUCTION RATE SERIES 1998-1 NOTES AND TAX EXEMPT FIXED RATE SERIES
1998-1 NOTES MAY HAVE TO REINVEST AMOUNTS RECEIVED FROM CALLS FOR REDEMPTION
FROM UNUSED PROCEEDS AT A LOWER RATE OF RETURN
The Corporation expects approximately $245,100,000 of the Series 1998-1
Note proceeds deposited in the Series 1998-1 Tax Exempt Acquisition Account to
be used to originate or purchase Eligible Loans on or before April 15, 2002.
If such proceeds are not so used, they may be used to redeem Tax Exempt
Auction Rate Series 1998-1 Senior Notes which are called for redemption and,
if no Tax Exempt Auction Rate Series 1998-1 Senior Notes remain Outstanding,
Tax Exempt Fixed Rate Series 1998-1 Notes which are called for redemption.
Investors holding such Tax Exempt Series 1998-1 Notes (particularly Tax Exempt
Fixed Rate Series 1998-1 Notes) which are called for redemption may be unable
to reinvest the proceeds of the redemption at the same yield as the Tax Exempt
Series 1998-1 Notes. Also, depending on the price at which investors
purchased such Series 1998-1 Notes, their yield may be adversely affected by
such early call for redemption.
The Corporation expects approximately $65,100,000 of the Series 1998-1
Note proceeds deposited in the Series 1998-1 Taxable Acquisition Account to be
used to originate or purchase Eligible Loans on or before February 1, 1999.
If such proceeds are not so used, they may be transferred to the Retirement
Account and used to redeem Taxable Auction Rate Series 1998-1 Senior Notes
which are called for redemption. Investors holding such Taxable Auction Rate
Series 1998-1 Senior Notes which are called for redemption may be unable to
reinvest the proceeds of the redemption at the same yield as the Taxable
Auction Rate Series 1998-1 Senior Notes. Also, depending on the price at
which investors purchased such Series 1998-1 Notes, their yield may be
adversely affected by such early call for redemption. See "Application of
Series 1998-1 Note Proceeds" and "Description of Series 1998-1 Notes --
Special Call for Redemption -- From Unused Proceeds."
REDUCTION IN AMOUNTS AVAILABLE TO PAY NOTES DUE TO THE VARIABILITY OF ACTUAL
CASH FLOWS AND DUE TO THE INABILITY OF GUARANTEE AGENCIES TO MAKE GUARANTEE
PAYMENTS
Amounts received with respect to the Financed Student Loans for a
particular period may vary in both timing and amount from the payments
actually due on the Financed Student Loans for a variety of economic, social
and other factors, including both individual factors, such as additional
periods of deferment or forbearance prior to or after a borrower's
commencement of repayment, and general factors, such as a general economic
downturn which could increase the amount of defaulted Financed Student Loans.
Failures by borrowers to pay timely the principal and interest on the Financed
Student Loans will affect the amount of revenues, which may reduce the amount
available to be paid to the Series 1998-1 Noteholders. The inability of any
Guarantee Agency to meet its guarantee obligations could reduce the amount
available to be paid to the Series 1998-1 Noteholders.
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HOLDERS OF SERIES 1998-1 NOTES WHICH ARE PREPAID OR CALLED FOR REDEMPTION DUE
TO ACCELERATED PAYMENTS WITH RESPECT TO FINANCED STUDENT LOANS MAY HAVE TO
REINVEST AMOUNTS RECEIVED FROM PREPAYMENTS OR CALLS FOR REDEMPTION AT A LOWER
RATE OF RETURN
Principal payments with respect to the Financed Student Loans may be
influenced by a variety of economic, geographic, social and other factors. The
Financed Student Loans may be prepaid at any time without penalty. The
Corporation believes that in a fluctuating interest rate environment a factor
affecting the prepayment rate on a large pool of loans such as the Student
Loan Portfolio is the difference between the interest rates on the loans and
prevailing interest rates generally (giving consideration to the cost of any
refinancing). In general, if interest rates fall below the interest rates on
the Financed Student Loans, the rate of prepayment would be expected to
increase. Conversely, if interest rates rise above the interest rates on the
Financed Student Loans, the rate of prepayment would be expected to decrease.
Historically, the Original Issuer has not tracked instances of partial or full
prepayment of its Student Loan Portfolio except to the extent such prepayments
occurred in connection with defaults. No assurances can be given as to the
actual rate of prepayment with respect to the Financed Student Loans in the
Student Loan Portfolio. Other factors affecting prepayment of loans include
changes in the borrower's employment and other economic circumstances, and
refinancing opportunities which may provide more favorable repayment terms
such as those offered under various consolidation loan programs, including the
federal direct consolidation loan programs. Because of the benefits of
consolidating numerous Student Loans into a single loan and, in some cases,
obtaining more favorable repayment terms, a borrower may choose to prepay
Financed Student Loans through consolidation programs regardless of the
general level of interest rates. In addition, the rate of the payments of
principal on the Notes will be directly related to the actual amortization
schedules of the Financed Eligible Loans. See "Description of Federal Family
Education Loan Program -- Loan Terms -- Repayment."
Receipt of principal and interest on Financed Student Loans may be
accelerated due to: (1) default claims or claims due to the disability, death
or bankruptcy of the borrowers or school closure; (2) actual principal
amortization periods which are shorter than those assumed based upon the
current analysis of the expected Student Loan Portfolio; (3) the commencement
of principal repayment by borrowers on earlier dates than are assumed based
upon the current analysis of the expected Student Loan Portfolio; and (4)
economic conditions being such that borrowers elect to refinance or prepay
their loans prior to maturity. Eligible lenders, including the Trustee on
behalf of the Corporation, and the Secretary of Education may make
Consolidation Loans to borrowers for the purpose of retiring borrowers'
existing loans under various federal higher education loan programs. To the
extent that Financed Student Loans are repaid with Consolidation Loans, the
Corporation will realize payment of such loans earlier than projected. In
addition, under certain circumstances, a Lender will be obligated to
repurchase Financed Student Loans from the Trust Estate pursuant to its
Student Loan Purchase Agreement as a result of breaches of its
representations, warranties or covenants.
Taxable LIBOR Rate Series 1998-1 Notes are subject to prepayment in
amounts related to the amount of principal payments received with respect to
Student Loan Financed with the proceeds of the Taxable Series 1998-1 Notes in
the Acquisition Fund. Because of the uncertainties relating to the timing of
receipt of principal of Student Loans expected to be Financed with proceeds of
the Taxable Series 1998-1 Notes, the actual level of prepayments resulting
therefrom cannot be definitively stated. Investors holding Taxable LIBOR Rate
Series 1998-1 Notes which are prepaid may be unable to reinvest the proceeds
of the prepayment at the same yield as the Taxable LIBOR Rate Series 1998-1
Notes. Also, depending on the price at which investors purchased such Series
1998-1 Notes, their yield may be adversely affected by such prepayment.
The Series 1998-1 Notes (other than the Taxable LIBOR Rate Series 1998-1
Notes) are subject to call for redemption from revenues under the Indenture in
excess of required debt service payments and other expenses under the
Indenture and all Series 1998-1 Notes are subject to call for redemption if
the Student Loan Portfolio balance is less than 10% of the amount deposited to
the Acquisition Fund on the Date of Issuance. Investors holding Series 1998-1
Notes which are called for redemption may be unable to reinvest the proceeds
of the redemption at the same yield as the Series 1998-1 Notes they previously
held. Also, depending on the price at which investors purchased such Series
1998-1 Notes, their yield may be adversely affected by such call for
redemption.
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DIFFERENCES IN PRINCIPAL PAYMENTS AMONG SERIES OF TAXABLE SERIES 1998-1 NOTES
WITH RESPECT TO RECEIPT OF PAYMENTS ON THE FINANCED STUDENT LOANS
The Taxable Auction Rate Series 1998-1 Senior Notes are not expected to
receive any payments of principal from principal payments on Financed Student
Loans until all Taxable LIBOR Rate Series 1998-1 Notes have been paid in full.
Series 1998-1J Notes will receive no payments of principal from such source
until the Series 1998-1I Notes have been paid in full. Therefore, the Series
1998-1I Notes and (as compared to all Taxable Series 1998-1 Notes other than
Series 1998-1I Notes) the Series 1998-1J Notes bear relatively greater risk
than other series of Taxable Series 1998-1 Notes of an increased rate of
principal payments derived from principal payments relating to Financed
Student Loans.
THE AVERAGE LIFE OF THE SERIES 1998-1 NOTES MAY BE LENGTHENED AS A RESULT OF
EXTENSION OF PAYMENTS ON THE FINANCED STUDENT LOANS
Principal and interest payments on Financed Student Loans may be delayed
due to: (1) borrowers entering Deferment Periods due to a return to school or
other eligible purposes: (2) forbearance being granted to borrowers; (3) loans
becoming delinquent for periods longer than assumed; (4) actual loan principal
amortization periods which are longer than those expected based upon the
current analysis of the expected Student Loan Portfolio; and (5) the
commencement of principal repayment by borrowers at dates later than those
assumed based upon the current analysis of the Eligible Loans expected to be
Financed. These factors may lengthen the remaining term of the Financed
Student Loans and the average life of the Series 1998-1 Notes. See
"Description of Federal Family Education Loan Program -- Loan Terms --
Repayment."
THE TRUSTEE'S INABILITY TO LIQUIDATE FINANCED STUDENT LOANS AND POSSIBLE
INSUFFICIENCY OF TRUST ESTATE ASSETS
If an Event of Default occurs under the Indenture, subject to certain
conditions, the Trustee is authorized, without the consent of the Noteholders,
to sell the Financed Student Loans. There can be no assurance that the
Trustee would 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 sufficient to provide for the payment of all amounts due with
respect to the Notes. The Higher Education Act requires that the purchaser of
the Student Loans must be an eligible lender under the Higher Education Act.
Additionally, any such sale by the Trustee would need to comply with the
applicable requirements of the Uniform Commercial Code then in effect in the
State of South Dakota, which currently provides that such sale may be by
private or public proceedings conducted at any time or place and on any terms,
provided that every aspect of the sale, including the method, manner, time,
place and terms, be commercially reasonable. If it were established that the
Trustee failed to proceed in a commercially reasonable manner, the Corporation
may be entitled to recover from the Trustee (which would, in turn, look to the
Trust Estate for indemnification) any loss to the Corporation caused by such
failure. However, if the Trustee sells the Student Loans in the usual manner
in any recognized market therefor, or sells at the price current in such
market at the time of such sale, or has otherwise sold the Student Loans in
conformity with reasonable commercial practices among dealers in Student
Loans, the Trustee will have sold the Student Loans in a commercially
reasonable manner. Further, a sale which has been approved in any judicial
proceeding or by any bona fide creditors' committee or representatives of
creditors of the Corporation shall conclusively be deemed to be commercially
reasonable. Seeking such approval could result in delays in the ultimate
disposition of the Financed Student Loans.
THE FINANCIAL STATUS OF GUARANTEE AGENCIES WILL AFFECT THEIR ABILITY TO MAKE
GUARANTEE PAYMENTS
The Higher Education Act requires all loans made under the Federal Family
Education Loan Program to be unsecured. As a result, the only security for
payment of the Financed Eligible Loans is the Guarantee Agreements between the
Trustee and each Guarantee Agency. A deterioration in the financial status of
the Guarantee Agencies and their ability to honor guarantee claims with
respect to the Financed Eligible Loans could
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result in a delay in making or a failure to make Guarantee Payments to the
Trustee. Failures by borrowers of Student Loans generally to pay timely the
principal and interest due on such Student Loans could obligate the Guarantee
Agencies to make payments thereon, which could adversely affect the solvency
of the Guarantee Agencies and their ability to meet their guarantee
obligations (including with respect to the Financed Student Loans). Moreover,
to the extent that the Department of Education pays reimbursement claims
submitted by a Guarantee Agency for any fiscal year exceeding certain
specified levels (see "Description of the Guarantee Agencies -- Effect of
Annual Claims Rate"), the Department of Education's obligation to reimburse
the Guarantee Agency for losses will be reduced on a sliding scale from a
maximum of 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) of Guarantee Agency
payments, except that death, disability, bankruptcy, closed school and false
certification claims are reimbursed 100% by the Department of Education.
Pursuant to Section 432(o) of the Higher Education Act, if the Department
of Education has determined that a Guarantee Agency is unable to meet its
insurance obligations, the holders of loans guaranteed by such Guarantee
Agency may submit claims directly to the Department of Education and the
Department of Education is required to pay the full Guarantee Payment due with
respect thereto in accordance with standards no more stringent than those
applied by the Guarantee Agency. However, the Department of Education's
obligation to pay guarantee claims directly in this fashion is contingent upon
the Department of Education making the determination referred to above. There
can be no assurance that the Department of Education would ever make such a
determination with respect to a Guarantee Agency or, if such a determination
were made, that such determination or the ultimate payment of such guarantee
claims would be made in a timely manner. See "Description of the Federal
Family Education Loan Program."
USE OF SERIES 1998-1 NOTE PROCEEDS AND REVENUES TO ACQUIRE INVESTMENT
AGREEMENTS
The proceeds of the Series 1998-1 Notes that are not used to acquire
Financed Student Loans on the Date of Issuance will be used to acquire a
limited number of investment agreements with one or more Investment Providers.
Revenues deposited in the Revenue Fund, the Note Fund and the Surplus Fund
also are expected to be used to acquire a limited number of investment
agreements with one or more Investment Providers. Each such investment
agreement will initially involve a significant portion of the proceeds of the
Series 1998-1 Notes. If any Investment Provider were unable to repay funds
loaned to it under an unsecured investment agreement, or if the collateral
pledged for a secured investment agreement were insufficient or unavailable
for any reason, the Corporation's ability to pay the principal of and interest
on the Series 1998-1 Notes could be adversely affected.
CHANGE OF RATINGS OF THE SERIES 1998-1 NOTES
It is a condition to issuance of the Series 1998-1 Notes that they be
rated as indicated under the caption "Ratings." Ratings are based primarily on
the credit underlying the Financed Eligible Loans, the existence and amount of
subordinate debt, any credit enhancement and the legal structure of the
transaction. The ratings are not a recommendation to purchase, hold or sell
Series 1998-1 Notes and do not take into account factors such as the market
price or suitability for a particular investor. There is no expectation that
any additional rating agency will rate the Series 1998-1 Notes, and there can
be no assurance the rating that would be assigned by any such other rating
agency would be equivalent to the initial ratings described herein. Moreover,
there can be no assurance that the ratings will remain for any given period of
time or that ratings will not be lowered or withdrawn by any Rating Agency if
in such Rating Agency's judgment circumstances so warrant. Any such lowering
or withdrawal could adversely affect the market value of the Series 1998-1
Notes.
LIMITED LIQUIDITY OF THE SERIES 1998-1 NOTES
The Series 1998-1 Notes will not be listed on any national security
exchange. There is currently no secondary market for the Series 1998-1 Notes
and there is no assurance that one will develop or, if such a market does
develop, that such market will continue. The Underwriters expect, but will not
be obligated, to make a market
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in the Series 1998-1 Notes. As a result, investors must be prepared to bear
the risk of holding the Series 1998-1 Notes for so long as the Series 1998-1
Notes remain outstanding.
SWAP AGREEMENTS
Under the Indenture, the Corporation may execute Swap Agreements if
certain requirements are met, including that the Trustee shall have received
written confirmation from each Rating Agency that the execution and delivery
of the Swap Agreement will not cause the reduction or withdrawal of any rating
or ratings then applicable to any Outstanding Notes. No Swap Agreement is
being entered into in connection with the issuance of the Series 1998-1 Notes.
See "Source of Payment and Security for the Notes -- Additional Indenture
Obligations." Swap Agreements carry risks relating to the credit quality of
the counterparty and the legal enforceability of the Swap Agreement.
EFFECT OF BOOK-ENTRY REGISTRATION
Initially, the Series 1998-1 Notes will be in the form of certificates
registered in the name of Cede & Co., the nominee for DTC, and will not be
registered in the names of the beneficial owners of the Series 1998-1 Notes or
their nominees. Because of this, unless and until definitive securities are
issued, beneficial owners of the Series 1998-1 Notes will not be recognized by
the Trustee as "Holders" (as such term is used in the Indenture). Therefore,
unless and until certificated securities are issued, beneficial owners of the
Series 1998-1 Notes will only be able to exercise the rights of Holders
indirectly through DTC and its participating organizations in the United
States or Cedel Bank, societe anonyme or the Euroclear System in Europe. See
"Description of Series 1998-1 Notes -- Book-Entry-Only System."
DESCRIPTION OF SERIES 1998-1 NOTES
The Series 1998-1 Notes will be issued pursuant to the Indenture. The form
of the Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
TERMS OF THE SERIES 1998-1 NOTES
For summaries of the terms of the Series 1998-1 Notes, see "Terms of the
Tax Exempt Auction Rate Series 1998-1 Senior Notes," "Terms of the Tax Exempt
Fixed Rate Series 1998-1 Senior Notes," "Terms of the Taxable Auction Fixed
Rate Series 1998- 1 Senior Notes," "Terms of the Taxable LIBOR Rate Series
1998-1 Senior Notes," "Terms of the Tax Exempt Fixed Rate Series 1998-1
Subordinate Notes" and "Terms of the Taxable LIBOR Rate Series 1998-1
Subordinate Notes."
BOOK-ENTRY-ONLY SYSTEM
The description which follows of the procedures and record keeping with
respect to beneficial ownership interests in the Series 1998-1 Notes, payment
of principal of and interest on the Series 1998-1 Notes to DTC Participants,
Cedel Participants and Euroclear Participants (as hereinafter respectively
defined) or to purchasers of the Series 1998-1 Notes, confirmation and
transfer of beneficial ownership interests in the Series 1998-1 Notes, and
other securities-related transactions by and between DTC, Cedel, Euroclear,
DTC Participants, Cedel Participants, Euroclear Participants and Beneficial
Owners (as hereinafter defined), is based solely on information furnished by
DTC, Cedel and Euroclear and has not been independently verified by the
Original Issuer, the Corporation or the Underwriters. The inclusion of this
information is not, and should not be construed as, a representation by the
Original Issuer, the Corporation or the Underwriters as to its accuracy or
completeness or otherwise.
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DTC will act as securities depository for the Series 1998-1 Notes. Upon
the issuance of the Series 1998-1 Notes, one or more fully registered notes
for each series, in the aggregate principal amount of the Series 1998-1 Notes,
are to be registered in the name of Cede & Co., as nominee for DTC. So long
as Cede & Co. is the Holder of the Series 1998-1 Notes, as nominee of DTC,
references herein to the owners or Holders of the Series 1998-1 Notes shall
mean DTC or its nominee, Cede & Co., and shall not mean the Beneficial Owners
of the Series 1998-1 Notes. Noteholders may hold their certificates through
DTC (in the United States) or Cedel or Euroclear (in Europe) if they are
participants of such systems, or indirectly through organizations that are
participants in such systems.
Cede, as nominee for DTC, will hold the global Notes. Cedel and Euroclear
will hold omnibus positions on behalf of the Cedel Participants and the
Euroclear Participants, respectively, through customers' securities accounts
in Cedel's and Euroclear's names on the books of their respective depositories
(collectively, the "Depositories") which in turn will hold such positions in
customers' securities accounts in the Depositories' names on the books of DTC.
DTC is a limited-purpose trust company organized under New York Banking
Law, a "banking organization" within themeaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants (the "DTC Participants") deposit with
DTC. DTC also facilitates the settlement among DTC Participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic computerized book-entry changes in DTC Participants' accounts,
thereby eliminating the need for physical movement of securities certificates.
DTC Participants include securities brokers and dealers, banks, trust
companies, clearing corporations, and certain other organizations. DTC is
owned by a number of DTC Participants and by the New York Stock Exchange,
Inc., the American Stock Exchange, Inc., and the National Association of
Securities Dealers, Inc. Access to the DTC system is also available to others
such as securities brokers and dealers, banks and trust companies that clear
through or maintain a custodial relationship with a DTC Participant, either
directly or indirectly (the "Indirect Participants"). The Rules applicable to
DTC and the DTC Participants are on file with the Commission.
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between Cedel Participants and Euroclear Participants will
occur in the ordinary way in accordance with their applicable rules and
operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by its Depository; however, such cross-market transactions
will require delivery of instructions to the relevant European international
clearing system by the counterparty in such system in accordance with its
rules and procedures and within its established deadlines (European time).
The relevant European international clearing system will, if the transaction
meets its settlement requirements, deliver instructions to its Depository to
take action to effect final settlement on its behalf by delivering or
receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same-day funds settlement applicable to DTC. Cedel
Participants and Euroclear Participants may not deliver instructions directly
to the Depositories.
Because of time-zone differences, credits of securities in Cedel or
Euroclear as a result of a transaction with a DTC Participant will be made
during the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in
such securities settled during such processing will be reported to the
relevant Cedel Participant or Euroclear Participant on such business day.
Cash received in Cedel or Euroclear as a result of sales of securities by or
through a Cedel Participant or a Euroclear Participant to a DTC Participant
will be received with value on the DTC settlement date but will be available
in the relevant Cedel or Euroclear cash account only as of the business day
following settlement in DTC.
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Day traders that use Cedel or Euroclear and that purchase the globally
offered Series 1998-1 Notes from DTC Participants for delivery to Cedel
Participants or Euroclear Participants should note that these trades may fail
on the sale side unless affirmative actions are taken. Participants should
consult with their clearing system to confirm that adequate steps have been
taken to assure settlement.
Purchases of the Series 1998-1 Notes (in authorized denominations) under
the book-entry system may be made only through brokers and dealers who are, or
act through, DTC Participants. The DTC Participants purchasing the Series
1998-1 Notes will receive a credit balance in the records of DTC. The
ownership interest of the actual purchaser of each Series 1998-1 Note (a
"Beneficial Owner") will be recorded in the records of the applicable DTC
Participant or Indirect Participant. Beneficial Owners will not receive
written confirmation from DTC of their purchase, but Beneficial Owners are
expected to receive from the applicable DTC Participant or Indirect
Participant written confirmations providing details of the transaction, as
well as periodic statements of their holdings. Transfers of beneficial
ownership of the Series 1998-1 Notes will be accomplished by book entries made
by the DTC Participants or Indirect Participants who act on behalf of the
Beneficial Owners and, if necessary, in turn by DTC. No Series 1998-1 Notes
will be registered in the names of the Beneficial Owners, and Beneficial
Owners will not receive certificates representing their ownership interest in
the Series 1998-1 Notes, except in the event participation in the book-entry
system is discontinued as described below.
The Corporation and the Trustee will recognize DTC or its nominee as the
Holder of the Series 1998-1 Notes for all purposes, including notice purposes.
DTC has no knowledge of the actual Beneficial Owners of the Series 1998-1
Notes; DTC's records reflect only the identity of the DTC Participants to
whose accounts such Series 1998-1 Notes are credited, which may or may not be
the Beneficial Owners. The DTC Participants and Indirect Participants will
remain responsible for keeping account of their holdings on behalf of their
customers.
Conveyance of notices and other communications by DTC to DTC Participants,
by DTC Participants to Indirect Participants and by DTC Participants and
Indirect Participants to Beneficial Owners will be governed by arrangements
among DTC, DTC Participants, Indirect Participants and Beneficial Owners,
subject to any statutory and regulatory requirements as may be in effect from
time to time. Beneficial Owners may desire to make arrangements with a DTC
Participant or an Indirect Participant so that all notices of calls of Series
1998-1 Notes for redemption or other communications to DTC which affect such
Beneficial Owners, and notification of all interest payments, will be
forwarded in writing by the DTC Participant or Indirect Participant. Any
failure of DTC to advise any DTC Participant, or of any DTC Participant or
Indirect Participant to advise a Beneficial Owner, of any notice of call for
redemption or its content or effect will not affect the validity of the
redemption of the Series 1998-1 Notes called for redemption or any other
action premised on such notice.
Neither DTC nor Cede & Co. will consent or vote with respect to the Series
1998-1 Notes. Under its usual procedures, DTC mails an Omnibus Proxy to the
Corporation as soon as possible after the record date it establishes. The
Omnibus Proxy assigns Cede & Co.'s consenting or voting rights to those DTC
Participants to whose accounts the Series 1998-1 Notes are credited on the
record date (identified in a listing attached to the Omnibus Proxy).
Payments of principal of, premium, if any, and interest on the Series
1998-1 Notes will be made to DTC or its nominee, Cede & Co., as Holder of the
Series 1998-1 Notes. DTC's current practice is to credit the accounts of the
DTC Participants on payment dates in accordance with their respective holdings
shown on the records of DTC, unless DTC has reason to believe that it will not
receive payment on that date. Payments by DTC Participants and Indirect
Participants to Beneficial Owners will be governed by standing instructions
and customary practices, as is the case with securities held for the accounts
of customers in bearer form or registered in "street name", and will be the
responsibility of such DTC Participant or Indirect Participant and not of DTC
or the Corporation, subject to any statutory and regulatory requirements as
may be in effect from time to time. Payment of principal and interest to DTC
is the responsibility of the Corporation and the Trustee, disbursement of such
payments to DTC Participants shall be the responsibility of DTC, and
disbursement of such payments to the Beneficial Owners shall be the
responsibility of DTC Participants and Indirect Participants.
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By purchasing the Auction Rate Series 1998-1 Senior Notes, whether in an
Auction or otherwise, each prospective purchaser of the Auction Rate Series
1998-1 Senior Notes or its Broker-Dealer must agree and will be deemed to have
agreed: (i) to have its beneficial ownership of the Auction Rate Series 1998-1
Senior Notes maintained at all times in Book-Entry Form for the account of its
DTC Participant, which in turn will maintain records of such beneficial
ownership, and to authorize such DTC Participant to disclose to the Auction
Agent such information with respect to such beneficial ownership as the
Auction Agent may request; and (ii) so long as the beneficial ownership of the
Auction Rate Series 1998-1 Senior Notes is maintained in Book-Entry Form, to
sell, transfer or otherwise dispose of the Auction Rate Series 1998-1 Senior
Notes only pursuant to a Bid or a Sell Order in an Auction, or otherwise
through a Broker-Dealer, provided that in the case of all transfers other than
those pursuant to an Auction, the Existing Holder of the Auction Rate Series
1998-1 Senior Notes so transferred, its DTC Participant or Broker-Dealer
advises the Auction Agent of such transfer.
For every transfer of the Series 1998-1 Notes, the Beneficial Owner may be
charged a sum sufficient to cover any tax or other governmental charge that
may be imposed in relation thereto.
So long as Cede & Co. or its registered assign is the registered holder of
the Series 1998-1 Notes, the Corporation and the Trustee will be entitled to
treat Cede & Co., or its registered assign, as the absolute owner thereof for
all purposes of the Indenture and any applicable laws, notwithstanding any
notice to the contrary received by the Corporation or the Trustee, and the
Corporation and the Trustee will have no responsibility for transmitting
payments to, communicating with, notifying, or otherwise dealing with any
Beneficial Owners of the Series 1998-1 Notes.
If (i) the Series 1998-1 Notes of any series are not eligible for the
services of DTC, (ii) DTC determines to discontinue providing its services
with respect to the Series 1998-1 Notes of any series or (iii) the Corporation
determines that a system of book-entry transfers for Series 1998-1 Notes of
any series, or the continuation thereof, through DTC is not in the best
interest of the Beneficial Owners or the Corporation, the Corporation may
either identify another qualified securities depository or direct or cause
Series 1998-1 Note certificates for such series to be delivered to Beneficial
Owners thereof or their nominees and, if certificates are delivered to the
Beneficial Owners, the Beneficial Owners or their nominees, upon
authentication of the Series 1998-1 Notes of such series in authorized
denominations and registration thereof in the Beneficial Owners' or nominees'
names, shall become the Holders of such Series 1998-1 Notes for all purposes.
In any such event, the Trustee is to mail an appropriate notice to the
securities depository for notification to DTC Participants and Beneficial
Owners of the substitute securities depository or the issuance of Series
1998-1 Note certificates to Beneficial Owners or their nominees, as
applicable.
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 the underwriters of the Series 1998-1 Notes. Indirect access to Cedel
is also available to others, such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a Cedel
Participant, either directly or indirectly.
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
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and any risk from lack of simultaneous transfers of securities and cash.
Transactions may now be settled in any of 32 currencies, including United
States dollars. The Euroclear System includes various other services,
including securities lending and borrowing and interfaces with domestic
markets in 25 countries generally similar to the arrangements for cross-market
transfers with DTC described above. The Euroclear System is operated by
Morgan Guaranty Trust Company of New York, Brussels, Belgium office (the
"Euroclear Operator" or "Euroclear"), under contract with Euroclear Clearance
System, Societe Cooperative, a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and
all Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear Operator, not the Cooperative. The Cooperative
Board establishes policy for the Euroclear System. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries and may include the underwriters
of any Series of Notes. Indirect access to the Euroclear System is also
available to other firms that maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System (collectively,
the "Terms and Conditions"). The Terms and Conditions govern transfers of
securities and cash within the Euroclear System, withdrawal of securities and
cash from the Euroclear System, and receipts of payments with respect to
securities in the Euroclear System. All securities in the Euroclear System are
held on a 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.
The Euroclear Operator has advised as follows: Under Belgian law,
investors that are credited with securities on the records of the Euroclear
Operator have a co-property right in the fungible pool of interests in
securities on deposit with the Euroclear Operator in an amount equal to the
amount of interests in securities credited to their accounts. In the event of
the insolvency of the Euroclear Operator, Euroclear Participants would have a
right under Belgian law to the return of the amount and type of interests in
securities credited to their accounts with the Euroclear Operator. If the
Euroclear Operator did not have a sufficient amount of interests in securities
on deposit of a particular type to cover the claims of all Participants
credited with such interests in securities on the Euroclear Operator's
records, all Participants having an amount of interests in securities of such
type credited to their accounts with the Euroclear Operator would have the
right under Belgian law to the return of their pro-rata share of the amount of
interests in securities actually on deposit. Under Belgian law, the Euroclear
Operator is required to pass on the benefits of ownership in any interests in
securities on deposit with it (such as dividends, voting rights and other
entitlements) to any person credited with such interests in securities on its
records.
Distributions with respect to Series 1998-1 Notes held through Cedel or
Euroclear will be credited to the cash accounts of Cedel Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depository. Such distributions will
be subject to tax reporting in accordance with relevant United States tax laws
and regulations. See "Tax Matters -- Federal Tax Consequences" and "--
Certain U.S. Federal Income Tax Documentation Requirements." Cedel or the
Euroclear Operator, as the case may be, will take any other action permitted
to be taken by a Series 1998-1 Noteholder 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 Depository's ability to
effect such actions on its behalf through DTC.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Series 1998-1 Notes among participants of
DTC, Cedel and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any
time.
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DENOMINATION AND PAYMENT
The Tax Exempt Auction Rate Series 1998-1 Senior Notes and the Taxable
Series 1998-1 Notes are being issued in denominations of $100,000 in original
Principal Amount and any multiple thereof. The Tax Exempt Fixed Rate Series
1998-1 Notes are being issued in denominations of $5,000 in original Principal
Amount and any multiple thereof.
The principal of and premium, if any, on the Series 1998-1 Notes, together
with interest payable on the Series 1998-1 Notes at the Maturity thereof if
the date of such Maturity is not a regularly scheduled Interest Payment Date,
shall be payable in lawful money of the United States of America upon, except
as otherwise provided in the Indenture with respect to a Securities
Depository, presentation and surrender of such Series 1998-1 Notes at the
Principal Office of the Trustee, as Paying Agent with respect to the Series
1998-1 Notes, or a duly appointed successor Paying Agent. Interest on each
series of the Series 1998-1 Notes shall be payable on each regularly scheduled
Interest Payment Date with respect to such series, except as otherwise
provided in the Indenture with respect to a Securities Depository, by check or
draft drawn upon the Paying Agent and mailed to the person who is the Holder
thereof as of 5:00 p.m. in the city in which the Principal Office of the Note
Registrar is located on the Regular Record Date for such Interest Payment Date
at the address of such Holder as it appears on the Note Register, or, in the
case of any Series 1998-1 Note the Holder of which is the Holder of Series
1998-1 Notes in the aggregate Principal Amount of $1,000,000 or more (or, if
less than $1,000,000 in Principal Amount of Series 1998-1 Notes is
outstanding, the Holder of all outstanding Series 1998-1 Notes), at the
direction of such Holder received by the Paying Agent by 5:00 p.m. in the city
in which the Principal Office of the Paying Agent is located on the last
Business Day preceding the applicable Regular Record Date, by electronic
transfer by the Paying Agent in immediately available funds to an account
designated by such Holder. The Regular Record Date is (i) with respect to any
regularly scheduled Interest Payment Date for a series of the Auction Rate
Series 1998-1 Senior Notes or the Taxable LIBOR Rate Series 1998-1 Notes, the
last Business Day preceding such Interest Payment Date, and (ii) with respect
to any regularly scheduled Interest Payment Date for the Tax Exempt Fixed Rate
Series 1998-1 Senior Notes or the Tax Exempt Fixed Rate Series 1998-1
Subordinate Notes, the fifteenth day (whether or not a Business Day) of the
calendar month immediately preceding such Interest Payment Date. Any interest
not so timely paid or duly provided for (herein referred to as "Defaulted
Interest") shall cease to be payable to the person who is the Holder thereof
at the close of business on the Regular Record Date and shall be payable to
the person who is the Holder thereof at the close of business on a special
record date established by the Trustee (a "Special Record Date") for the
payment of any such Defaulted Interest. Such Special Record Date shall be
fixed by the Trustee whenever moneys become available for payment of the
Defaulted Interest, and notice of the Special Record Date shall be given to
the Holders of the Series 1998-1 Notes not less than 10 days prior thereto by
first-class mail to each such Holder as shown on the Note Register on a date
selected by the Trustee, stating the date of the Special Record Date and the
date fixed for the payment of such Defaulted Interest. All payments of
principal of and interest on the Series 1998-1 Notes shall be made in lawful
money of the United States of America.
PREPAYMENT OF TAXABLE LIBOR RATE SERIES 1998-1 NOTES
Principal of the Taxable LIBOR Rate Series 1998-1 Notes shall be prepaid
on any Interest Payment Date from moneys credited to the Retirement Account as
hereinafter described. The Corporation is required to direct the Trustee to
transfer to the Retirement Account from the Special Redemption and Prepayment
Account any moneys therein, up to an amount equal to the Special Prepayment
Amount, which the Corporation has not determined are reasonably expected to be
required to be transferred to the Note Fund, the Rebate Fund or the Reserve
Fund prior to the next succeeding regularly scheduled Interest Payment Date,
provided no deficiencies exist at the time of such transfer in the Note Fund,
the Rebate Fund or the Reserve Fund. See "Source of Payment and Security for
the Notes -- Description of Flow of Revenues in the Funds." Such prepayments
of principal of Taxable LIBOR Rate Series 1998-1 Notes shall, subject to the
Senior Asset Requirement, be allocated between the Taxable LIBOR Rate Series
1998-1 Senior Notes and the Taxable LIBOR Rate Series 1998-1 Subordinate Notes
pro rata. All such prepayments of principal allocated to the Taxable LIBOR
Rate Series 1998-1 Senior Notes shall be applied to the Series 1998-1I Notes
so long as any such Notes remain Outstanding, and thereafter to the Series
1998-1J Notes.
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<PAGE>
Within a given series of Taxable LIBOR Rate Series 1998-1 Notes, the Principal
Amount of such series to be prepaid shall be allocated pro rata to the
reduction of the Principal Amount of all Notes of such series.
The "Special Prepayment Amount" is an amount, as of the last day of any
month, equal to the excess, if any, of (1) the sum of (a) all payments
received as of such last day with respect to principal of Financed Student
Loans credited to the Series 1998-1 Taxable Acquisition Account, plus (b) the
amount of any Balances theretofore transferred from the Series 1998-1 Taxable
Acquisition Account to the Retirement Account to redeem Taxable Auction Rate
Series 1998-1 Senior Notes which are called for redemption as described below
under "Special Call for Redemption -- From Unused Proceeds," less (c) the
aggregate amount of interest on Financed Student Loans credited to the Series
1998-1 Taxable Acquisition Account which has been capitalized after the
Financing thereof, less (d) the principal component of the repurchase price of
Student Loans originally Financed from Balances in Series 1998-1 Taxable
Acquisition Account which have been repurchased from a Guarantee Agency upon
rehabilitation of such Eligible Loans pursuant to the Higher Education Act,
over (2) the sum of (a) the aggregate of the amounts previously applied to the
reduction of the Principal Amount of all Taxable LIBOR Rate Series 1998-1
Notes, plus (b) the aggregate Principal Amount of Taxable LIBOR Rate Series
1998-1 Notes to be prepaid on the next regularly scheduled Interest Payment
Date from Balances then on hand in the Retirement Account. Payments described
in clause (1)(a) of the preceding sentence include, without limitation, any
prepayments by borrowers from the proceeds of a Consolidation Loan made or
acquired by the Trustee on behalf of the Corporation or from any other
sources, but exclude, for this purpose, proceeds of the sale or other
disposition of Financed Student Loans to any Person other than a Guarantee
Agency, with respect to Guarantee Payments, or a Lender, with respect to the
repurchase of Financed Student Loans by such Lender pursuant to its repurchase
obligation under a Student Loan Purchase Agreement.
In general, this prepayment provision is intended to require the
Corporation to prepay Taxable LIBOR Rate Series 1998-1 Notes in amounts
related to the amount of principal payments received with respect to Student
Loans Financed with proceeds of the Taxable Series 1998-1 Notes in the
Acquisition Fund. See "Weighted Average Life of the Taxable LIBOR Rate Series
1998-1 Notes." Because of the uncertainties relating to the timing of receipt
of principal of Student Loans expected to be Financed with proceeds of the
Taxable Series 1998-1 Notes, the actual level of prepayments resulting
therefrom cannot be definitively stated. See "Risk Factors -- Holders of
Series 1998-1 Notes Which are Prepaid or Called for Redemption Due to
Accelerated Payments with respect to Financed Student Loans May Have to
Reinvest Amounts Received From Prepayments or Calls for Redemption at a Lower
Rate of Return."
SPECIAL CALL FOR REDEMPTION
From Moneys in the Surplus Account
Tax Exempt Auction Rate Series 1998-1 Senior Notes of any series, Tax
Exempt Fixed Rate Series 1998-1 Senior Notes and Tax Exempt Fixed Rate Series
1998-1 Subordinate Notes, may, at the Corporation's option but subject to
compliance with the conditions described under "Senior Asset Requirement"
below, be called for redemption, in whole or in part, and if in part as
described under "Selection of Series 1998-1 Notes for Call for Redemption"
below, at a Redemption Price equal to 100% of Principal Amount of such Notes
to be redeemed, plus accrued interest thereon to the Redemption Date, on any
Interest Rate Adjustment Date or regularly scheduled Interest Payment Date for
such series occurring on or after March 1, 1999, from amounts transferred to
the Series 1998-1 Tax Exempt Retirement Sub-Account from the Series 1998-1 Tax
Exempt Surplus Sub-Account and the Series 1998-1 Tax Exempt Reserve Account.
In general, such transfers are intended to allow the Corporation to call Tax
Exempt Auction Rate Series 1998-1 Senior Notes, Tax Exempt Fixed Rate Series
1998-1 Senior Notes and Tax Exempt Fixed Rate Series 1998-1 Subordinate Notes
for redemption to the extent that revenues allocable to the Tax Exempt Series
1998-1 Notes under the Indenture exceed scheduled debt service payments on the
Tax Exempt Series 1998-1 Notes, payments on other Indenture Obligations and
other expenses payable under the Indenture. See "Summary of the Indenture --
Funds and Accounts -- Surplus Fund" and " -- Reserve Fund".
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<PAGE>
Taxable Auction Rate Series 1998-1 Senior Notes of any series may, at the
Corporation's option but subject to compliance with the conditions described
under "Senior Asset Requirement" below, be called for redemption, in whole or
in part, and if in part as described under "Selection of Series 1998-1 Notes
for Call for Redemption" below, at a Redemption Price equal to 100% of
Principal Amount of such Notes to be redeemed, plus accrued interest thereon
to the Redemption Date, on any regularly scheduled Interest Payment Date for
such series occurring on or after March 1, 1999, from amounts transferred to
the Series 1998-1 Taxable Retirement Sub-Account from the Series 1998-1
Taxable Surplus Sub-Account and the Series 1998-1 Taxable Reserve Account. In
general, such transfers are intended to allow the Corporation to call Taxable
Auction Rate Series 1998-1 Senior Notes for redemption to the extent that
revenues under the Indenture allocable to Taxable Series 1998-1 Notes exceed
scheduled debt service payments on the Taxable Series 1998-1 Notes,
prepayments of Taxable LIBOR Rate Series 1998-1 Notes, payments on other
Indenture Obligations and other expenses payable under the Indenture. Such
revenues could result in whole or in part from Student Loans acquired with,
and from investment earnings on, the proceeds of Additional Notes. (Any
Additional Notes will not be offered or sold pursuant to this Prospectus.)
See "Summary of the Indenture -- Funds and Accounts -- Surplus Fund" and "--
Reserve Fund."
Because of the uncertainties relating to the amounts and timing of receipt
of revenues under the Indenture, and the amounts and terms of additional
Indenture Obligations, if any, the amounts expected to be available in the
Surplus Account for such call for redemption cannot be definitively stated. In
addition, it is difficult to predict whether the Corporation will elect to
exercise such option. However, the Corporation expects that such calls for
redemption will occur.
From Unused Proceeds
Subject to compliance with the conditions described under "Senior Asset
Requirement" below, Taxable Auction Rate Series 1998-1 Senior Notes of any
series may, at the Corporation's option, be called for redemption (and shall
be so called for redemption under the circumstances described below), in whole
or in part, and if in part as described under "Selection of Series 1998-1
Notes for Call for Redemption" below, on any regularly scheduled Interest
Payment Date for such series at a Redemption Price of 100% of Principal Amount
of such Notes to be redeemed, plus accrued interest thereon to the Redemption
Date, from proceeds of the Series 1998-1 Notes in the Series 1998-1 Taxable
Acquisition Account that have not been used to acquire Eligible Loans and from
amounts in the Series 1998-1 Taxable Reserve Account. Such Series 1998-1
Notes shall be so called for redemption on the regularly scheduled Interest
Payment Date for such series in March 1999 (from such proceeds remaining as of
February 1, 1999), unless the Corporation delivers to the Trustee: (i) a
Corporation certificate certifying that, based on a Cash Flow Projection, the
failure to so call Series 1998-1 Notes for redemption will not materially
adversely affect the Corporation's ability to pay Debt Service on the
Outstanding Notes and other Indenture Obligations, Carry-Over Amounts
(including accrued interest thereon) with respect to Outstanding Notes,
Administrative Expenses or Note Fees or to make required deposits to the
Rebate Fund, and (ii) written confirmation from each of the Rating Agencies
then rating the Series 1998-1 Notes to the effect that the failure to call
such Series 1998-1 Notes for redemption will not result in a reduction or
withdrawal of the rating of the Series 1998-1 Notes. See "Summary of the
Indenture -- Funds and Accounts -- Acquisition Fund" and " -- Reserve Fund".
Subject to compliance with the conditions described under "Senior Asset
Requirement" below, Tax Exempt Auction Rate Series 1998-1 Senior Notes of any
series may, at the Corporation's option, be called for redemption (and shall
be so called for redemption under the circumstances described below), in whole
or in part, and if in part as described under "Selection of Series 1998-1
Notes for Call for Redemption" below, on any Interest Rate Adjustment Date or
regularly scheduled Interest Payment Date for such series, and (if no Tax
Exempt Auction Rate Series 1998-1 Senior Notes remain Outstanding) Tax Exempt
Fixed Rate Series 1998-1 Notes may, at the Corporation's option, be called for
redemption (and shall be so called for redemption under the circumstances
described below), in whole or in part, and if in part as described under
"Selection of Series 1998-1 Notes for Call for Redemption" below, on any date,
in each case at a Redemption Price of 100% of Principal Amount of such
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<PAGE>
Notes to be redeemed, plus accrued interest thereon to the Redemption Date,
from proceeds of the Series 1998-1 Notes in the Series 1998-1 Tax Exempt
Acquisition Account that have not been used to acquire Eligible Loans and from
amounts in the Series 1998-1 Tax Exempt Reserve Account. Such Series 1998-1
Notes shall be so called for redemption on June 1, 2001 (to the extent the
proceeds remaining in the Series 1998-1 Tax Exempt Acquisition Account exceed
$60,000,000 as of April 15, 2001) and on June 1, 2002 (from such proceeds
remaining as of April 15, 2002), in each case unless the Corporation delivers
to the Trustee: (i) an opinion of Bond Counsel stating in effect that such
call for redemption is not required pursuant to the Code and that failure to
so call Tax Exempt Series 1998-1 Notes for redemption will not adversely
affect the tax exempt status of interest on any Tax Exempt Series 1998-1 Notes
for federal income tax purposes, (ii) a Corporation certificate certifying
that, based on a Cash Flow Projection, the failure to so call Series 1998-1
Notes for redemption will not materially adversely affect the Corporation's
ability to pay Debt Service on the Outstanding Notes and Other Indenture
Obligations, Carry-Over Amounts (including accrued interest thereon) with
respect to Outstanding Notes, Administrative Expenses or Note Fees or to make
required deposits to the Rebate Fund, and (iii) written confirmation from each
of the Rating Agencies then rating the Series 1998-1 Notes to the effect that
the failure to call such Series 1998-1 Notes for redemption will not result in
a reduction or withdrawal of the rating of the Series 1998-1 Notes. See
"Summary of the Indenture -- Funds and Accounts -- Acquisition Fund" and " --
Reserve Fund".
Call for Redemption of Series 1998-1 Notes Upon Reduction of Portfolio Balance
The Series 1998-1 Notes may, at the Corporation's option but subject to
compliance with the conditions described under "Senior Asset Requirement"
below, be called for redemption in whole but not in part, at a Redemption
Price of 100% of Principal Amount, plus accrued interest thereon to the
Redemption Date, on any date when the remaining aggregate outstanding
principal balance of Student Loans Financed with the proceeds of the Series
1998-1 Notes is less than 10% of the amount deposited to the Acquisition Fund
on the Date of Issuance.
OPTIONAL CALL FOR REDEMPTION
At the Corporation's option but subject to compliance with the conditions
described under "Senior Asset Requirement" below, Auction Rate Series 1998-1
Senior Notes of any series may be called for redemption on any Interest Rate
Adjustment Date or regularly scheduled Interest Payment Date for such series,
in whole or in part, and if in part as described under "Selection of Series
1998-1 Notes for Call for Redemption" below, at a Redemption Price of 100% of
Principal Amount of such Notes to be redeemed, plus accrued interest thereon
to the Redemption Date.
At the Corporation's option but subject to compliance with the conditions
described under "Senior Asset Requirement" below, Tax Exempt Fixed Rate Series
1998-1 Senior Notes and Tax Exempt Series 1998-1 Subordinate Notes may be
called for redemption on June 1, 2008, or on any date thereafter, in whole or
in part, and if in part as described under "Selection of Series 1998-1 Notes
for Call for Redemption" below, at the following Redemption Prices (expressed
as a percentage of Principal Amount) plus accrued interest to the Redemption
Date:
<TABLE>
<CAPTION>
Redemption Period
(both dates inclusive) Redemption Price
---------------------- ----------------
<S> <C>
June 1, 2008 through May 31, 2009 102%
June 1, 2009 through May 31, 2010 101%
June 1, 2010 and thereafter 100%
</TABLE>
Notwithstanding the foregoing, no Series 1998-1 Notes shall be so called
for redemption unless the Trustee receives a Corporation certificate
certifying that, based on a Cash Flow Projection, such redemption will not
materially adversely affect the Corporation's ability to pay Debt Service on
the Outstanding Notes and other
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<PAGE>
Indenture Obligations, Carry-Over Amounts (including accrued interest thereon)
with respect to Outstanding Notes, Administrative Expenses or Note Fees or to
make required deposits to the Rebate Fund.
SELECTION OF SERIES 1998-1 NOTES FOR CALL FOR REDEMPTION
If less than all Outstanding Series 1998-1 Notes are to be called for
redemption, the Principal Amounts of each series of Series 1998-1 Notes to be
called for redemption shall be selected as follows, to the extent that the
provisions of the Indenture described under "Senior Asset Requirement" below
will not be violated thereby: either (1) except as otherwise specifically
provided above under "Special Call for Redemption" or as described in clause
(2), to the extent Series 1998-1 Subordinate Notes are subject to call for
redemption, that Principal Amount thereof shall be called for redemption which
bears, as nearly as practicable, the same proportion to the Principal Amount
of all Series 1998-1 Notes to be called for redemption as the aggregate
Principal Amount of Outstanding Series 1998-1 Subordinate Notes bears to the
aggregate Principal Amount of all Outstanding Series 1998-1 Notes, or (2) if
the Trustee receives a Corporation certificate certifying that, based on a
Cash Flow Projection, a different proportion of Series 1998-1 Subordinate
Notes to be called for redemption will not materially adversely affect the
Corporation's ability to pay Debt Service on the Outstanding Notes and other
Indenture Obligations, Carry-Over Amounts (including accrued interest thereon)
with respect to Outstanding Notes, Administrative Expenses or Note Fees or to
make required deposits to the Rebate Fund, Series 1998-1 Subordinate Notes
shall be called for redemption in such principal amount as is designated by
the Corporation in such certificate. The remaining Series 1998-1 Notes to be
called for redemption on a given Redemption Date shall be selected from the
appropriate series of Series 1998-1 Senior Notes.
If less than all Outstanding Series 1998-1 Senior Notes subject to call
for redemption are to be called for redemption, and more than one series of
Series 1998-1 Senior Notes is so subject, the Principal Amounts of each series
of Series 1998-1 Notes to be called for redemption shall be selected from each
such series in such Principal Amounts as the Corporation may designate or, in
the absence of such designation, from each such series in, as nearly as
practicable, the same proportion to the aggregate Principal Amount of all
Outstanding Series 1998-1 Senior Notes to be called for redemption as the
aggregate Principal Amount of Outstanding Series 1998-1 Senior Notes of such
series bears to the aggregate Principal Amount of all Outstanding Series
1998-1 Senior Notes subject to such call for redemption. Notwithstanding the
foregoing, if Series 1998-1 Subordinate Notes cannot be called for redemption
due to the application of the provisions of the Indenture described under
"Senior Asset Requirement" below, but Series 1998-1 Senior Notes can be called
for redemption without violating such provisions, the particular Series 1998-1
Notes to be called for redemption shall be selected from the appropriate
series of the Series 1998-1 Senior Notes according to the provisions described
above.
If less than all of the Outstanding Series 1998-1 Notes of a given series
are to be called for redemption, the particular Series 1998-1 Notes to be
called for redemption shall be selected by the Trustee by lot in such manner
as the Trustee shall deem fair and appropriate and which may provide for the
selection for call for redemption of portions of the principal of Series
1998-1 Notes in authorized denominations.
SENIOR ASSET REQUIREMENT
No call for redemption or prepayment of any Series 1998-1 Note under any
of the foregoing provisions is to be made unless, after giving effect to the
call for redemption or prepayment: (a) in the case of the call for redemption
or prepayment of Series 1998-1 Senior Notes, either the Senior Asset
Requirement will be met or the Senior Percentage will be greater than it would
have been without such call for redemption or prepayment, and (b) in the case
of the call for redemption or prepayment of Series 1998-1 Subordinate Notes,
the Senior Asset Requirement will be met. Compliance with the Senior Asset
Requirement will be determined as of the date of the selection of Series
1998-1 Notes to be called for redemption or as of the date on which moneys are
transferred to the Retirement Account to make any prepayment of Taxable LIBOR
Rate Series 1998-1 Notes, as the case may be,
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<PAGE>
and any failure to meet the Senior Asset Requirement as of the Redemption Date
or prepayment date, as applicable, will not affect such determination. In
general, the "Senior Asset Requirement" requires that the Senior Percentage is
at least 110% and the Subordinate Percentage is at least 100%, although each
such percentage may be lowered under the conditions prescribed in the
Indenture. See "Glossary of Certain Defined Terms" and "Summary of the
Indenture -- Call for Redemption, Prepayment or Purchase of Notes; Senior
Asset Requirement".
NOTICE AND EFFECT OF CALL FOR REDEMPTION
Notice of call for redemption of the Series 1998-1 Notes shall be given by
first class mail, mailed not less than 15 days (in the case of Auction Rate
Series 1998-1 Senior Notes) or 30 days (in the case of any other Series 1998-1
Notes), as the case may be, prior to the date fixed for redemption to each
Holder (which initially will be DTC or its nominee) of Series 1998-1 Notes to
be called for redemption at the address of such Holder appearing in the Note
Register; but no defect in or failure to give such mailed notice of call for
redemption shall affect the validity of proceedings for the redemption of any
Series 1998-1 Note not affected by such defect or failure. All notices of
call for redemption shall state: (i) the Redemption Date; (ii) the Redemption
Price; (iii) the name, Stated Maturity and CUSIP numbers of the Series 1998-1
Notes to be called for redemption, the principal amount of Series 1998-1 Notes
of each series to be called for redemption, and, if less than all Outstanding
Notes of such series are to be called for redemption, the identification (and,
in the case of partial redemption, the respective principal amounts) of the
Series 1998-1 Notes to be called for redemption; (iv) that, on the Redemption
Date, the Redemption Price of and accrued interest on each such Series 1998-1
Note will become due and payable and interest thereon shall cease to accrue on
and after such date; (v) the place or places where such Series 1998-1 Notes
are to be surrendered for payment of the Redemption Price thereof and accrued
interest thereon; and (vi) if it be the case, that such Series 1998-1 Notes
are to be called for redemption by the application of certain specified trust
moneys and for certain specified reasons.
Notice of call for redemption having been given as provided above, the
Series 1998-1 Notes designated in such notice shall become due and payable at
the applicable Redemption Price, plus interest accrued thereon to the
Redemption Date, and, upon surrender in accordance with such notice, shall be
so paid, and thereafter such Series 1998-1 Notes shall cease to accrue
interest.
No such notice shall be required with respect to prepayments of the
Taxable LIBOR Rate Series 1998-1 Notes as described above under "Prepayment of
Taxable LIBOR Rate Series 1998-1 Notes."
APPLICATION OF SERIES 1998-1 NOTE PROCEEDS
The Original Issuer and the Corporation intend to use the proceeds of the
sale of the Series 1998-1 Notes in the following amounts for the following
purposes:
(1) $332,170,000 will be deposited in the Series 1998-1 Tax Exempt
Acquisition Account and used as follows:
(a) approximately $87,070,000 will be used on the Date of
Issuance to refinance approximately $85,760,000 aggregate principal
amount of Eligible Loans previously acquired or originated by the
Original Issuer; and
(b) the remainder will be used to acquire or originate
additional Eligible Loans;
(2) $572,820,000 will be deposited in the Series 1998-1 Taxable
Acquisition Account and used as follows:
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<PAGE>
(a) approximately $507,720,000 will be used on the Date of
Issuance to refinance approximately $500,870,000 aggregate principal
amount of Eligible Loans previously acquired or originated by or on
behalf of the Original Issuer; and
(b) the remainder will be used to acquire or originate
additional Eligible Loans; and
(3) $18,480,000 will be deposited in the Reserve Fund.
It is expected that immediately after the deposit of the proceeds of the
Series 1998-1 Notes as described above, the principal amount of, and accrued
interest on and Special Allowance Payments with respect to, Financed Eligible
Loans, together with the remaining proceeds in the Acquisition Fund and the
Balance in the Reserve Fund, will equal 100% of the principal amount of the
Series 1998-1 Notes.
The characteristics as of December 31, 1997 of the Eligible Loans expected
to be Financed on the Date of Issuance with proceeds deposited to the Series
1998-1 Tax Exempt Acquisition Account and to the Series 1998-1 Taxable
Acquisition Account (aggregating approximately $590 million as of that date)
are more particularly described under "Characteristics of the Initial Financed
Eligible Loans." These Eligible Loans currently secure outstanding
obligations of the Original Issuer used to acquire such Student Loans, which
will be refunded from the proceeds of the Series 1998-1 Notes .
The Corporation expects the remaining proceeds deposited to the Series
1998-1 Tax Exempt Acquisition Account (approximately $245,100,000 or 27% of
the Series 1998-1 Note proceeds) to be used to purchase Eligible Loans (see
"Glossary of Certain Defined Terms") from Lenders or to originate Eligible
Loans on or before April 15, 2002, approximately according to the following
schedule:
<TABLE>
<CAPTION>
Amount
By June 30 (millions)
---------- ----------
<S> <C>
1998 $20.6
1999 60.9
2000 62.4
2001 64.0
2002 37.2
</TABLE>
At the Corporation's option, or if not expended as of certain dates, such
proceeds may be transferred to the Retirement Account and used to redeem Tax
Exempt Auction Rate Series 1998-1 Senior Notes which are called for redemption
and, if no Tax Exempt Auction Rate Series 1998-1 Senior Notes remain
Outstanding, Tax Exempt Fixed Rate Series 1998-1 Notes which are called for
redemption. See "Description of Series 1998-1 Notes -- Special Call for
Redemption -- From Unused Proceeds" herein. Investors holding such Tax Exempt
Series 1998-1 Notes (particularly Tax Exempt Fixed Rate Series 1998-1 Notes)
which are called for redemption may be unable to reinvest the proceeds of the
redemption at the same yield as the Tax Exempt Series 1998-1 Notes. Also,
depending on the price at which investors purchased such Series 1998-1 Notes,
their yield may be adversely affected by such early call for redemption.
The Corporation expects the remaining proceeds deposited to the Series
1998-1 Taxable Acquisition Account (approximately $65,100,000 or 7% of the
Series 1998-1 Note proceeds) to be used to purchase Eligible Loans from
Lenders or to originate Eligible Loans on or before February 1, 1999. At the
Corporation's option, or if not expended as of February 1, 1999, such proceeds
may be transferred to the Retirement Account and used to redeem Taxable
Auction Rate Series 1998-1 Senior Notes which are called for redemption. See
"Description of Series 1998-1 Notes -- Special Call for Redemption -- From
Unused Proceeds" herein. Investors holding such Taxable Auction Rate Series
1998-1 Senior Notes which are called for redemption may be unable to reinvest
the
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<PAGE>
proceeds of the redemption at the same yield as the Taxable Auction Rate
Series 1998-1 Senior Notes. Also, depending on the price at which investors
purchased such Series 1998-1 Notes, their yield may be adversely affected by
such early call for redemption.
For a more detailed description of the Original Issuer's programs of
Financing Eligible Loans (which will be continued by SLFC on behalf of the
Corporation pursuant to the Servicing Agreement), Eligible Loans expected to
be Financed after the Date of Issuance, and possible limitations on the
expenditure of these proceeds as expected, see "Description of Financed
Eligible Loan Program." Use of the moneys in the Acquisition Fund pending
Financing of Eligible Loans is more particularly described in "Summary of the
Indenture -- Funds and Accounts -- Acquisition Fund."
Balances in the Acquisition Fund representing proceeds of the Series
1998-1 Notes not used to acquire Eligible Loans on the Date of Issuance, and
Balances in the Reserve Fund, are expected to be used to acquire one or more
investment agreements meeting the requirements of the Indenture. Each
investment agreement will require the Investment Provider (a financial
institution to which such proceeds are loaned) to repay such proceeds when
requested by the Corporation or the Trustee (subject to such limitations as
may be provided therein), and to pay interest on such proceeds periodically.
Each Investment Provider will be a party which meets the Rating Agencies'
criteria for creditworthiness or which has pledged collateral satisfactory to
the Rating Agencies to secure its repayment obligations. See "Summary of the
Indenture -- Investments".
Although the Corporation expects that the investment return on the
Balances in the Acquisition Fund pending its use to finance Eligible Loans,
together with other Pledged Revenues and Pledged Funds and Accounts (each as
defined in "Source of Payment and Security for the Notes -- General") under
the Indenture (including Financed Eligible Loans), will be sufficient to meet
principal and interest payments on the Series 1998-1 Notes and required
expenses under the Indenture, various risk factors could adversely affect that
expectation. See "Risk Factors."
The Costs of Issuance of the Series 1998-1 Notes will be paid by the
Original Issuer from other moneys available therefor.
SOURCE OF PAYMENT AND SECURITY FOR THE NOTES
GENERAL
The Notes will be limited obligations of the Corporation payable solely
from the Trust Estate created under the Indenture, consisting of certain
revenues ("Pledged Revenues") and Funds and Accounts pledged under the
Indenture (the "Pledged Funds and Accounts", which do not include the Rebate
Fund). The Pledged Revenues include: (i) payments of interest and principal
made by obligors of Financed Student Loans, (ii) Guarantee Payments made by
the Guarantee Agencies to or for the account of the Trustee as the holder of
defaulted Financed Student Loans, (iii) interest subsidy payments and Special
Allowance Payments made by the Department of Education to or for the account
of the Trustee as the holder of Financed Student Loans (excluding, except in
the case of the Eligible Loans to be Financed on the Date of Issuance, any
Special Allowance Payments and interest subsidy payments accrued prior to the
date of Financing the related Student Loan), (iv) income from investment of
moneys in the Pledged Funds and Accounts (except to the extent such income is
required to be deposited in the Rebate Fund), (v) payments from a Swap
Counterparty under a Swap Agreement, (vi) proceeds of any sale or assignment
by the Corporation of any Financed Student Loans, and (vii) available Note
proceeds. In addition, the Pledged Revenues with respect to one or more
series of Notes may include payments made by a Credit Facility Provider
pursuant to a Credit Enhancement Facility. No Credit Enhancement Facility or
Swap Agreement is being delivered in connection with the issuance of the
Series 1998-1 Notes, and it is not expected that any such revenues will be
available to pay the Series 1998-1 Notes.
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The principal of, premium, if any, and interest on the Notes will be
secured by a pledge of and a security interest in all rights, title, interest
and privileges of the Corporation (1) with respect to Financed Student Loans,
in, to and under any Servicing Agreement, the Student Loan Purchase
Agreements, the Guarantee Agreements and the Federal Reimbursement Contracts;
(2) in, to and under all Financed Student Loans (including the evidences of
indebtedness thereof and related documentation), any Swap Agreement and
(subject to the limitations therein or in the Indenture limiting the benefits
thereunder to the Notes of one or more series) any Credit Enhancement
Facility; and (3) in and to the proceeds from the sale of the Notes (until
expended for the purpose for which issued) and the Pledged Revenues, moneys,
evidences of indebtedness and securities in the Pledged Funds and Accounts.
The security interest in revenues, moneys, evidences of indebtedness and,
unless registered in the name of the Trustee, securities payable into the
various Funds and Accounts does not constitute a perfected security interest
until received by the Trustee. Certain Pledged Revenues are subject to
withdrawal from the Pledged Funds and Accounts, to prior applications to pay
Costs of Issuance, Administrative Expenses and Note Fees, and to certain other
applications as described under "Description of Flow of Revenues in the Funds"
below and "Summary of the Indenture -- Funds and Accounts".
ADDITIONAL INDENTURE OBLIGATIONS
The Indenture provides that, upon the satisfaction of certain conditions,
the Corporation may issue one or more series of Additional Notes thereunder.
(Any Additional Notes will not be offered or sold pursuant to this
Prospectus.) Additional Notes may be issued as Senior Notes on a parity basis
with the Series 1998-1 Senior Notes; as Subordinate Notes on a parity basis
with the Series 1998-1 Subordinate Notes; or as Class C Notes on a subordinate
basis to the Senior Notes and the Subordinate Notes. In addition, the
Corporation may enter into Swap Agreements and may obtain Credit Enhancement
Facilities from one or more Credit Facility Providers. The Corporation's
obligations under the Swap Agreements, and its obligations to pay the premiums
or fees of Credit Facility Providers and, if applicable, to reimburse payments
made under Credit Enhancement Facilities, may be parity obligations with the
Senior Notes (such Other Senior Obligations, together with the Senior Notes,
being referred to herein as Senior Obligations) or parity obligations with the
Subordinate Notes (such Other Subordinate Obligations, together with the
Subordinate Notes, being referred to herein as Subordinate Obligations). The
Senior Obligations, the Subordinate Obligations, and any Class C Notes are
referred to herein as "Indenture Obligations". See "Summary of the Indenture
- -- Additional Notes" and "-- Covenants -- Credit Enhancement Facilities and
Swap Agreements".
Under the Indenture, the Corporation may not execute a Swap Agreement
unless the Swap Counterparty's obligations are rated by each Rating Agency not
lower than in its third highest Specific Rating Category. No Swap Agreement
shall be a Senior Obligation unless, as of the date the Corporation enters
into such Swap Agreement, the Senior Asset Requirement will be met and the
Trustee shall have received written confirmation from each Rating Agency that
the execution and delivery of the Swap Agreement will not cause the reduction
or withdrawal of any rating or ratings then applicable to any Outstanding
Notes. No Swap Agreement is being entered into in connection with the
issuance of the Series 1998-1 Notes.
No limitations are imposed by the Indenture on the ability of the
Corporation to obtain Credit Enhancement Facilities or to enter into
agreements with respect thereto, or as to the identity or creditworthiness of
any Credit Facility Provider. Any Credit Enhancement Facility may be obtained
for the sole benefit of the series of Notes designated therein, in which event
payments under such Credit Enhancement Facility would not be available for the
payment of principal of, premium, if any, or interest on any other series of
Notes. However, any payments required to be made to any Credit Facility
Provider would be parity obligations with the other Senior Obligations or
Subordinate Obligations, as the case may be, payable from any revenues
available to pay such Indenture Obligations. No Credit Enhancement Facility
is being entered into in connection with the issuance of the Series 1998-1
Notes and it is not expected that any Credit Enhancement Facility which may be
obtained would be for the benefit of the Series 1998-1 Notes.
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The Indenture also permits the Corporation to issue Class C Notes from
time to time upon satisfaction of the conditions specified therein. See
"Summary of the Indenture -- Additional Notes".
PRIORITIES
The Series 1998-1 Senior Notes (and any other Senior Obligations) are
entitled to payment and certain other priorities over the Series 1998-1
Subordinate Notes (and any other Subordinate Obligations). Current payments
of interest and principal due on the Subordinate Notes on an Interest Payment
Date or Principal Payment Date will be made (on a parity basis with any other
Subordinate Obligations) only to the extent there are sufficient moneys
available for such payment, after making all such payments due on such date
with respect to Senior Obligations. So long as any Senior Obligations remain
Outstanding under the Indenture, the failure to make interest or principal
payments with respect to Subordinate Notes (including the Series 1998-1
Subordinate Notes) will not constitute an Event of Default under the
Indenture. In the event of an acceleration of the Notes, the principal of and
accrued interest on the Subordinate Notes will be paid (on a parity basis with
any other Subordinate Obligations) only to the extent there are moneys
available under the Indenture after payment of the principal of, and accrued
interest on, all Senior Notes and the satisfaction of all other Senior
Obligations. In addition, holders of Senior Notes and Beneficiaries of other
Senior Obligations are entitled to direct certain actions to be taken by the
Trustee prior to and upon the occurrence of an Event of Default, including
election of remedies. See "Summary of the Indenture -- Remedies".
Senior Obligations and Subordinate Obligations are entitled to payment and
certain other priorities over any Class C Notes. Principal of and interest on
the Class C Notes are not payable from moneys in the Note Fund or the Reserve
Fund, but are payable solely from amounts available therefor in the Surplus
Fund. See "Summary of the Indenture -- Funds and Accounts -- Surplus Fund".
DESCRIPTION OF FLOW OF REVENUES IN THE FUNDS
The Indenture establishes a Revenue Fund which is divided into a Repayment
Account and an Income Account. Except for certain amounts received with
respect to Financed Student Loans required to be credited to the Surplus Fund,
the Indenture requires the deposit into the Revenue Fund of (i) all amounts
received as principal and interest in repayment of Financed Student Loans,
including all federal interest subsidy payments, Guarantee Payments and
Special Allowance Payments received with respect to each Financed Student Loan
(excluding, except in the case of the Eligible Loans to be Financed on the
Date of Issuance, Special Allowance Payments and federal interest subsidy
payments that accrued prior to the date on which such Student Loans were
Financed), (ii) except as otherwise provided in a Supplemental Indenture,
proceeds of the resale to a Lender of any Financed Student Loans pursuant to
the Lender's repurchase obligation under the applicable Student Loan Purchase
Agreement, (iii) all amounts received as earnings on or income from Investment
Securities in the Revenue Fund, the Surplus Fund, the Reserve Fund, the
Administration Fund and the Note Fund, and (iv) any amounts permitted to be
transferred to the Revenue Fund from the Rebate Fund. The Trustee is required
to credit all such revenues received as payments of principal of Financed
Student Loans to the Repayment Account, and to credit all other such revenues
and amounts (including revenues received as payments of interest on or Special
Allowance Payments with respect to Financed Student Loans and income from
Investment Securities) to the Income Account. The Indenture requires the
Trustee to transfer moneys on a monthly basis (after taking into account any
periodic rebate fee payment required to be made in respect of Student Loans
Financed under the Indenture), first from the Repayment Account and then from
the Income Account, to the following Funds and Accounts in the following
order: the Rebate Fund, the Interest Account for the payment of Senior
Obligations, the Principal Account for the payment of Senior Obligations, the
Retirement Account for the redemption of Senior Notes which are called for
redemption, the Interest Account for the payment of Subordinate Obligations,
the Principal Account for the payment of Subordinate Obligations, the
Retirement Account for the redemption of Subordinate Notes which are called
for redemption, the Administration Fund (but only from the Income Account),
the Reserve Fund, the Principal Account (relating to cumulative sinking fund
installments with respect to Subordinate Term Notes which are called for
redemption on a Sinking Fund Payment Date), the Special Redemption and
Prepayment Account and the Surplus Account. In
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addition, any amounts payable by a Swap Counterparty pursuant to a Swap
Agreement are required to be credited directly to the Interest Account.
Moneys in the Administration Fund may be used, as provided in the
Indenture, to pay Costs of Issuance, Note Fees and Administrative Expenses.
Balances in the Surplus Fund shall be used first to make up deficiencies
in, or make required transfers to, the Rebate Fund, the Note Fund, the
Administration Fund and the Reserve Fund. Balances in the Surplus Fund may
also be applied, as determined by the Corporation from time to time, to the
payment of principal of or interest on Class C Notes when due or upon the call
thereof for redemption at the option of the Corporation; provided that the
conditions described under "Summary of the Indenture -- Funds and Accounts --
Surplus Fund" are met.
If the Trustee shall have first certified that no deficiencies exist in
any of the Rebate Fund, the Note Fund, the Reserve Fund or the Special
Redemption and Prepayment Account, and shall have received certain
certifications from the Corporation, Balances in the Surplus Account may be
used to redeem Notes which are called for redemption (including Series 1998-1
Notes as described under "Description of Series 1998-1 Notes -- Special Call
for Redemption -- From Moneys in the Surplus Account") or to purchase Notes or
may be: (a) used to acquire Student Loans meeting the requirements of clauses
(A) (1) and (2) or clause (B) of the definition of "Eligible Loans" (see
"Glossary of Certain Defined Terms"); or (b) released from the Indenture to be
used for certain other authorized purposes; provided, however, that the
Indenture prohibits the use of the Surplus Account to acquire Student Loans
that are not Eligible Loans and for the purposes specified in clause (b) above
unless, after taking into account any such application (i) the Senior
Percentage will be not less than 112%, and (ii) the Subordinate Percentage
will be not less than 102%; provided that such percentages may be lower upon
receipt of certain approvals from each Rating Agency and, under certain
circumstances, consent of Other Beneficiaries.
The Indenture establishes a Rebate Fund into which the Trustee is
required to make annual deposits from Balances in the Revenue Fund, the
Surplus Fund, the Reserve Fund, the Administration Fund, the Bond Fund and the
Acquisition Fund, in that order, equal to the amount computed under Section
148(f) of the Code as being subject to rebate to the United States (the
"Rebate Amount") and certain amounts constituting Excess Earnings on the
Financed Student Loans. The Trustee is required to pay to the United States
Treasury, at least once every five years, an amount which ensures that not
less than 90% of the cumulative Rebate Amount will have been paid to the
United States Treasury. The Trustee is required to consult with Bond Counsel
and take such action as may be required under the Code (which may include
forgiveness of principal of Financed Student Loans or payments to the United
States Treasury) with respect to Excess Earnings. Under certain
circumstances, including delivery to the Trustee of a favorable opinion of
Bond Counsel, certain amounts determined not to be subject to rebate or other
disposition may be transferred from the Rebate Fund to the Income Account.
Balances in the Reserve Fund shall be used and applied solely for the
purpose of paying Debt Service on the Senior Notes and the Subordinate Notes,
paying net amounts due with respect to other Senior Obligations or Subordinate
Obligations or for transfer to the Rebate Fund to the extent provided in the
Indenture.
For a more detailed description of the receipt and application of moneys
in the Revenue Fund, the Acquisition Fund, the Note Fund, the Rebate Fund, the
Reserve Fund, the Administration Fund and the Surplus Fund, see "Summary of
the Indenture -- Funds and Accounts".
THE ORIGINAL ISSUER
The Original Issuer is a South Dakota nonprofit corporation organized in
December 1978, at the request of the then Governor of the State, to provide a
statewide student loan acquisition program pursuant to the provisions of the
Higher Education Act and Section 150(d) of the Code. Former Governor Wollman
designated the Original Issuer as the single nonprofit private agency in the
State acting as an eligible lender in connection with the student
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loan program provided for by the Higher Education Act. The Original Issuer
has received an Internal Revenue Service determination that, based on its
original organization and purposes, it is a tax-exempt organization under
Section 501(c)(3) of the Code.
As required by Section 150(d) of the Code, the Original Issuer's Articles
of Incorporation provide that the Original Issuer is organized exclusively for
the purpose of acquiring student loan notes incurred under the Higher
Education Act, and that income of the Original Issuer may be used only for:
(i) the payment of expenses and debt service on bonds or notes issued by the
Original Issuer or the creation of reserves for such purposes; (ii) the
acquisition of additional student loan notes; or (iii) payment to the United
States. In connection with an election under Section 150(d)(3) of the Code to
terminate its status as a corporation described in Section 150(d), the
Original Issuer will enter into an agreement with Student Loan Finance
Corporation, a newly organized South Dakota corporation and wholly-owned
subsidiary of the Original Issuer ("SLFC"), pursuant to which the Original
Issuer will transfer all of its student loans (including its rights in
Financed Student Loans), student loan acquisition and servicing operations and
physical facilities, together with certain other assets (including the
Original Issuer's interest in the other assets comprising the Trust Estate),
to SLFC and SLFC will assume all of the Original Issuer's obligations with
respect to the Notes, the Indenture, the Trust Estate and all related
contracts. See "The Servicer" herein. The Original Issuer will transfer
such assets without recourse, and will be released from all obligations under
the Indenture or otherwise with respect to the Notes. Concurrently with such
transfer, the Original Issuer will amend its articles of incorporation to
amend its corporate purpose and change its name to Great Plains Education
Foundation, Inc. Under Section 150(d)(3) of the Code, the Original Issuer
must continue to be an organization described in Section 501(c)(3) of the
Code. No determination has been received from the Internal Revenue Service as
to the Original Issuer's qualification as an organization described in Section
501(c)(3) of the Code after the amendment of its articles of incorporation.
Immediately upon such transfer, SLFC will transfer all its rights and
interest in the Financed Student Loans and other assets of the Trust Estate to
the Corporation, which is a newly organized, bankruptcy-remote, limited
purpose Delaware corporation and wholly-owned subsidiary of SLFC, and the
Corporation will assume all of SLFC's obligations under the Indenture and
otherwise with respect to the Notes, the Trust Estate and the related
contracts. SLFC will also transfer such assets without recourse, and will be
released from all obligations under the Indenture or otherwise with respect to
the Notes (except in its capacity as Servicer). Neither the Original Issuer
nor SLFC (except in its capacity as Servicer) will be obligated under the
Indenture.
THE SERVICER
GENERAL
SLFC will be a newly organized South Dakota corporation. In connection
with the Original Issuer's election under Section 150(d)(3) of the Code, all
of the assets of the Original Issuer used in its business of acquiring,
originating, holding, servicing and collecting student loans, including its
physical facilities, computer hardware and software, and certain other assets
will be transferred to SLFC. At that time, all of the Original Issuer's
employees are expected to become employees of SLFC. Immediately after such
transfer, SLFC expects to operate the student loan business formerly operated
by the Original Issuer and service and collect the Financed Eligible Loans in
substantially the same manner (including using the same staff, offices and
computer hardware and software) in which the Original Issuer currently
administers its program and services and collects such loans.
The Original Issuer has operated as a secondary market for student loans
since 1979. As of December 31, 1997, the Original Issuer had a staff of 88
persons. The Original Issuer services the student loans which it owns and has
also from time to time serviced student loans owned by other lenders in
anticipation of sale to the Original Issuer. The Original Issuer utilizes its
own computer hardware and software systems designed specifically for student
loan servicing. The Original Issuer installed the original hardware in 1979
and since then has added additional hardware or replaced hardware as needed.
As of December 31, 1997, the Original Issuer owned and was
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servicing student loans to approximately 91,600 borrowers representing
approximately $590 million outstanding principal amount of student loans. As
of such date, the Original Issuer also was servicing student loans held by
other lenders representing less than $3 million outstanding principal amount.
The Original Issuer has financed its acquisition of student loans through
the issuance of its student loan revenue bonds, student loan asset-backed
notes and other evidences of indebtedness. The Original Issuer has issued
approximately $2.25 billion aggregate principal amount of bonds and notes, of
which $912,425,000 principal amount were outstanding as of December 31, 1997.
All of such outstanding bonds and notes will be refunded with a portion of the
proceeds of the Series 1998-1 Notes. After the transfer of the assets
described above to SLFC, the Original Issuer expects to participate in various
aspects of the student loan business, but cease its participation in the
Federal Family Education Loan Program.
The information included above concerning the Original Issuer has been
included solely to describe the expected future operations of SLFC. The
Original Issuer will not transfer all of its cash and investments to SLFC.
None of the assets retained by the Original Issuer will be available to SLFC
or for the payment of the Notes. The Original Issuer will have no obligation
with respect to (i) the Financed Eligible Loans or the servicing thereof, (ii)
the payment of the Series 1998-1 Notes, or (iii) the administration of the
Indenture. Moreover, the Original Issuer's transfer of assets to SLFC will be
without recourse or warranty. Thus, in the event of a failure of the Original
Issuer's hardware and software systems to adequately function, or any other
factor which adversely affects the value of the assets transferred to SLFC or
SLFC's ability to perform its obligations under the SLFC Servicing Agreement,
the Original Issuer would have no obligation or liability with respect
thereto.
DELINQUENCY AND LOAN LOSS EXPERIENCE
The following tables provide information regarding the delinquency status
of the student loan portfolio of the Original Issuer (which has been serviced
by the Original Issuer) as of June 30, 1997, 1996, 1995, 1994 and 1993. For
each delinquency status listed (based on number of days delinquent and claims
filed), the tables show the aggregate principal amount of Student Loans in
each delinquency status as of each date; the percent of the aggregate
principal amount of the Original Issuer's Student Loan portfolio in repayment,
deferment, forbearance and claims status as of each date represented by such
principal amounts; and the percent of the aggregate principal amount of the
Original Issuer's entire Student Loan portfolio as of each date represented by
such principal amounts. The Original Issuer's management believes that the
distribution of delinquent loans in the Original Issuer's Student Loan
portfolio has been consistent over the last five years and it is unaware of
any current trends that are expected to materially alter such distributions or
materially impact the future performance of the Financed Eligible Loans.
Notwithstanding the above, no assurance can be made that any such trends will
continue or not deteriorate.
DISTRIBUTION OF ORIGINAL ISSUER'S STUDENT LOAN PORTFOLIO BY DELINQUENCY STATUS
AS OF JUNE 30, 1997, 1996, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
---------------------------------------------------------------------------------
Delinquency
Status June 30, 1997 June 30, 1996 June 30, 1995 June 30, 1994 June 30, 1993
- ----------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
31 to 60 days $16,237,073 $17,765,179 $14,077,909 $13,639,924 $12,866,442
61 to 90 days 7,786,808 7,666,789 6,550,528 6,212,040 5,843,349
91 to 120 days 4,939,841 4,664,322 3,834,229 3,633,351 2,770,248
121 to 180 days 6,774,711 6,339,235 5,817,809 5,225,322 4,150,481
181 to 270 days 2,479,580 2,579,598 2,319,294 1,398,039 1,400,538
Over 270 days 9,061 3,532 0 147 4,227
Claims filed, not yet paid 1,736,799 1,193,954 1,200,925 1,460,674 2,096,725
----------- ----------- ----------- ----------- -----------
Total $39,963,873 $40,212,609 $33,800,694 $31,569,497 $29,132,010
=========== =========== =========== =========== ===========
</TABLE>
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<TABLE>
<CAPTION>
PERCENT OF OUTSTANDING PRINCIPAL - REPAYMENT DEFERMENT
FORBEARANCE AND CLAIM STATUS LOANS ONLY
---------------------------------------------------------------------------------
Delinquency
Status June 30, 1997 June 30, 1996 June 30, 1995 June 30, 1994 June 30, 1993
- ----------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
31 to 60 days 3.2% 3.7% 3.5% 3.8% 3.9%
61 to 90 days 1.5 1.6 1.6 1.7 1.8
91 to 120 days 1.0 1.0 1.0 1.0 0.8
121 to 180 days 1.3 1.3 1.5 1.5 1.2
181 to 270 days 0.5 0.5 0.6 0.4 0.4
Over 270 days 0.0 0.0 0.0 0.0 0.0
Claims filed, not yet paid 0.3 0.2 0.3 0.4 0.6
----------- ----------- ----------- ----------- -----------
Total 7.8% 8.3% 8.5% 8.8% 8.7%
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF OUTSTANDING PRINCIPAL - ENTIRE PORTFOLIO
---------------------------------------------------------------------------------
Delinquency
Status June 30, 1997 June 30, 1996 June 30, 1995 June 30, 1994 June 30, 1993
- ----------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
31 to 60 days 2.9% 3.3% 3.2% 3.5% 3.6%
61 to 90 days 1.4 1.4 1.5 1.6 1.6
91 to 120 days 0.9 0.9 0.9 0.9 0.8
121 to 180 days 1.2 1.2 1.3 1.3 1.2
181 to 270 days 0.4 0.5 0.5 0.4 0.4
Over 270 days 0.0 0.0 0.0 0.0 0.0
Claims filed, not yet paid 0.3 0.2 0.3 0.4 0.6
----------- ----------- ----------- ----------- -----------
Total 7.1% 7.5% 7.7% 8.1% 8.2%
=========== =========== =========== =========== ===========
</TABLE>
The following tables provide information regarding principal losses
relating to the Original Issuer's Student Loan portfolio (which has been
serviced by the Original Issuer) for each of the years ended June 30, 1993
through 1997. The first table shows the aggregate principal amount of losses
during each period, and the breakdown of such losses between the amount
representing the two percent portion of default claims filed with a Guarantee
Agency which is not paid by the Guarantee Agency with respect to loans made
after September 30, 1993, and the amount representing other principal
write-offs (i.e., for loans that may have lost Guarantee eligibility) net of
recoveries. The second table shows the percent of the Original Issuer's
entire Student Loan portfolio end-of-period balances represented by the
aggregate losses listed in the first table during the relevant period.
Subject to compliance with Department of Education and Guarantee Agency
requirements, student loans made under the Federal Family Education Loan
Program prior to October 1, 1993 are entitled to 100% guarantee coverage for
defaulted loans while student loans made on or after that date are entitled to
98% coverage. The
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Original Issuer's management expects that overall write-offs of the portfolio
related to this two percent difference will increase over time as a greater
percentage of the portfolio consists of loans made on or after October 1,
1993.
Other write-offs arise if a claim is rejected by the Guarantee Agency, and
the Original Issuer determines that the reason for the rejection cannot be
cured, that the Lender from which the loan was acquired cannot or should not
be required to repurchase the loan, and that the loan is otherwise not
collectible. The Original Issuer's management believes that the amount of
other write-offs during this period has been consistent and immaterial and it
is unaware of any current trends that are expected to materially alter the
loss experience or materially impact the future performance of the Financed
Eligible Loans. Notwithstanding the above, no assurance can be made that any
such trends will continue or not deteriorate.
ORIGINAL ISSUER'S STUDENT LOAN PORTFOLIO PRINCIPAL LOSSES
FOR EACH OF THE YEARS ENDED JUNE 30, 1993 THROUGH 1997
<TABLE>
<CAPTION>
PRINCIPAL AMOUNTS
---------------------------------------------------------
2% Claim Other Principal
Losses on 98% Write-Offs, Net Total Principal
For the Fiscal Year Ended Guaranteed Loans of Recoveries Losses
- ------------------------- ---------------- ------------- ------
<S> <C> <C> <C>
June 30, 1997 $88,367 $ 7,020 $95,387
June 30, 1996 56,730 20,484 77,214
June 30, 1995 10,266 9,211 19,477
June 30, 1994 0 3,778 3,778
June 30, 1993 0 55 55
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE (ANNUALIZED) OF PRINCIPAL LOSSES TO
END-OF-PERIOD PORTFOLIO BALANCES
---------------------------------------------------------
2% Claim Other Principal
Losses on 98% Write-Offs, Net Total Principal
For the Fiscal Year Ended Guaranteed Loans of Recoveries Losses
- ------------------------- ---------------- ------------- ------
<S> <C> <C> <C>
June 30, 1997 0.016% 0.001% 0.017%
June 30, 1996 0.011% 0.004% 0.015%
June 30, 1995 0.002% 0.002% 0.004%
June 30, 1994 0.000% 0.001% 0.001%
June 30, 1993 0.000% 0.000% 0.000%
</TABLE>
The data presented in the foregoing tables are for illustrative purposes
only and there is no assurance that the delinquency and loss experience of the
Financial Student Loans will be similar to that set forth above.
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THE CORPORATION
GENERAL
The Corporation is a newly organized, bankruptcy remote, limited purpose
Delaware corporation and a wholly owned subsidiary of SLFC. Immediately
following the issuance of the Series 1998-1 Notes, the Corporation will assume
all of SLFC's obligations under the Indenture and otherwise with respect to
the Notes, the Trust Estate and the related contracts.
As a bankruptcy-remote entity, the Corporation's operations will be
restricted so that (i) it does not engage in business with, or incur
liabilities to, any other entity (other than the Noteholders and Other
Beneficiaries, and beneficiaries under indentures similar to the Indenture)
which may bring bankruptcy proceedings against the Corporation, and (ii) the
risk that it will be consolidated into the bankruptcy proceedings of any other
entity is diminished. The Corporation has covenanted in the Indenture that it
will not engage in any business other than financing, originating, purchasing,
owning, selling and managing Student Loans in the manner contemplated by its
certificate of incorporation and the Indenture and the activities incidental
thereto.
The Corporation will have no substantial assets other than those
transferred to it from SLFC and pledged under the Indenture. The Corporation
will have no full-time employees. Certain responsibilities of the Corporation
under the Indenture will be administered by SLFC. See "The SLFC Servicing
Agreement" and "Certain Relationships Among Financing Participants."
The Corporation's address is 105 First Avenue Southwest, Aberdeen, South
Dakota 57401 and its phone number is (605) 622-4400.
FINANCED ELIGIBLE LOAN PROGRAM
The Corporation will, upon the Section 150(d)(3) Transfer and the
assumption of the Original Issuer's obligations under the Indenture, become
responsible for the acquisition or origination of Eligible Loans to be
Financed with proceeds of the Series 1998-1 Notes deposited to the credit of
the Acquisition Fund. In this regard, as of December 31, 1997, the
Corporation has entered into Student Loan Purchase Agreements with
approximately 95 Lenders providing for the purchase of approximately $194
million in principal amount of Eligible Loans from moneys available therefor
in the Series 1998-1 Tax Exempt Acquisition Account and Student Loan Purchase
Agreements (which do not provide for the purchase of a stated principal amount
of Eligible Loans) with approximately 85 Lenders providing for the purchase of
Eligible Loans from moneys available therefor in the Series 1998-1 Taxable
Acquisition Account. As further described under "Description of Financed
Eligible Loan Program -- Background of the Original Issuer's Program", the
Original Issuer has historically entered into comparable agreements with
Lenders (including substantially all of the Lenders with which the Corporation
has current agreements) pursuant to which the Original Issuer has purchased
over $1.29 billion in Student Loans from proceeds of its bonds and notes in
the same manner as the Corporation intends to purchase Eligible Loans from
proceeds of the Series 1998-1 Notes. Thus, the Corporation anticipates that
it will be able to apply all, or substantially all, of the proceeds of the
Series 1998-1 Notes to the acquisition or origination of Eligible Loans. See
"Description of Financed Eligible Loan Program". However, there is no
assurance that the Corporation will be able to so apply such proceeds.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
As of the date of this Prospectus, the Corporation has had no operating
history. The proceeds of the sale of the Series 1998-1 Notes will be used
primarily to refinance a portfolio of Student Loans currently owned by the
Original Issuer and to purchase Eligible Loans from Lenders or to originate
Eligible Loans on or before April 15, 2002. See "Application of Series 1998-1
Note Proceeds." The Corporation is prohibited by its certificate of
incorporation from engaging in any business other than (i) receiving the
assets and assuming the liabilities
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transferred to it in connection with the Original Issuer's election under
Section 150(d)(3) of the Code; (ii) originating or acquiring Student Loans;
(iii) entering into certain agreements relating to Student Loans; (iv) issuing
bonds, notes, asset-backed certificates or other securities payable solely
from Student Loans and other assets pledged to the payment thereof; and (v)
engaging in acts incidental to and necessary, suitable or convenient for the
accomplishment of the foregoing purposes and permitted under Delaware law. The
Corporation's ability to incur, assume or guarantee indebtedness for borrowed
money is also restricted by its certificate of incorporation.
DIRECTORS AND EXECUTIVE OFFICER
The following table identifies the directors and executive officer of the
Corporation and their ages and positions as of the date of this Prospectus.
Because the Corporation is organized as a special purpose entity and will be
largely passive, it is expected that the officers and directors in such
capacity will participate in the management of the Corporation only to a
limited extent. Most of the actions related to maintaining and servicing the
assets will be performed by SLFC.
<TABLE>
<CAPTION>
Name Age Positions
---- --- ---------
<S> <C> <C>
A. Norgrin Sanderson 55 President, Treasurer and
Chairman of the Board
V. G. Stoia 73 Director
Manley B. Feinstein 70 Director
Harvey C. Jewett 49 Director
</TABLE>
In order to comply with certain provisions of its certificate of incorporation
and the requirements of the Rating Agencies, the Board of Directors will
increase in size to six members and will appoint two additional independent
directors within 30 days after the closing of the offering of the Series
1998-1 Notes.
Mr. Sanderson has been President, Treasurer and Chairman of the
Corporation since its formation in May 1997. Mr. Sanderson is also the
President, Treasurer and Chairman of SLFC and has been President, Treasurer
and a Director of the Original Issuer since 1979. Prior to assuming his
positions with the Original Issuer, he was employed for 16 years by Norwest
Corporation, a bank holding company based in Minneapolis, Minnesota, where he
held Vice President and Branch Manager positions.
Mr. Stoia has been a Director of the Corporation since its formation in
May 1997. Mr. Stoia is also a Director of SLFC and has been a Director of the
Original Issuer since its formation in 1978. Mr. Stoia is a Chartered
Financial Consultant with the firm of Stoia, Seiler and Associates in
Aberdeen, South Dakota. Currently, Mr. Stoia also serves on the Board of
Trustees of St. Luke's Hospital and as a member of the Board of Northern State
University Foundation. In the past, he served as a member of the Board of the
South Dakota Foundation of Private Colleges, Presentation College and South
Dakota Crippled Children's School. He served as President of the Aberdeen
Development Corporation from 1972 to 1987.
Mr. Feinstein has been a Director of the Corporation since its formation
in May 1997. Mr. Feinstein is also a Director of SLFC and has been a Director
of the Original Issuer since its formation in 1978. He also is a Director of
EAC. Mr. Feinstein has been self-employed as a business consultant in
Aberdeen, South Dakota since 1990.
Mr. Jewett has been a Director of the Corporation since its formation in
May 1997. Mr. Jewett is also a Director of SLFC and has been a Director of
the Original Issuer since 1979. He also is a Director of EAC. Mr. Jewett has
been the President and Chief Operating Officer of The Rivett Group, L.L.C., a
motel management operation, since 1987, and has been an attorney in private
practice in Aberdeen, South Dakota since 1974. Mr. Jewett is a member of the
Board of Directors of Norwest South Dakota, N.A., a bank with branches
throughout
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South Dakota, which has sold a substantial number of Student Loans to the
Original Issuer in past years and is expected to continue selling Student
Loans to the Corporation in the future.
Except for Mr. Sanderson, none of the directors and officers listed above
will be compensated directly by the Corporation nor with any funds or assets
of the Corporation. Mr. Sanderson will be paid for serving as an executive
officer of the Corporation. Mr. Sanderson's compensation will be based upon
the amount of time he spends handling the Corporation's affairs. It is
currently estimated that he will receive approximately $35,000 per year for
his service as an executive officer of the Corporation.
It is anticipated that the independent directors of the Corporation to be
appointed as described above will receive compensation of approximately $2,500
per year.
THE SLFC SERVICING AGREEMENT
IN GENERAL
The Corporation and the Trustee will enter into a Servicing Agreement,
dated as of February 1, 1998 (the "SLFC Servicing Agreement"), with SLFC. A
form of the SLFC Servicing Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The following
summary describes certain provisions of the SLFC Servicing Agreement. The
summary does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all of the provisions of the SLFC Servicing
Agreement.
Pursuant to the SLFC Servicing Agreement, SLFC agrees to provide services
to the Corporation and the Trustee in connection with the origination and
acquisition of Student Loans to be Financed, to commence servicing the
Financed Student Loans as of the day they are Financed and to service the
Financed Student Loans, all in accordance with the SLFC Servicing Agreement.
SLFC may perform all or part of its origination, acquisition, and servicing
activities through a subcontractor. SLFC is required to perform or cause its
subcontractor to perform all services under the SLFC Servicing Agreement in
compliance with the Higher Education Act, applicable requirements of the
Guarantee Agency and all other applicable federal, state and local laws and
regulations. SLFC will be responsible for the performance of its obligations
under the SLFC Servicing Agreement, whether such obligations are performed by
SLFC or by its subcontractor, and SLFC will be responsible for any fees and
payments required by the subcontractor. The SLFC Servicing Agreement requires
a subcontractor to be subject to the same obligations relating to audits,
examinations and inspections as to which SLFC is subject. SLFC also agrees to
perform various duties of the Corporation under the Indenture.
ACQUISITION PROCESS
Unless and until otherwise directed in writing by the Corporation, SLFC
agrees to provide to the Trustee all certificates and directions required to
be delivered by the Corporation to the Trustee under the Indenture in
connection with the Financing through acquisition of Eligible Loans and
Student Loans thereunder. SLFC also agrees to work with the Lenders to obtain
from each Lender loan documentation and information relating to each Student
Loan to be Financed and to establish and maintain all records delivered to
SLFC with respect to each Financed Student Loan, and complete records of
SLFC's servicing of the Financed Student Loan from the date SLFC's servicing
commences. However, SLFC will not conduct a complete file and note
examination of each Student Loan to be Financed.
ORIGINATION PROCESS
Unless and until otherwise directed in writing by the Corporation, SLFC
agrees to provide to the Trustee all certificates and directions required to
be delivered by the Corporation to the Trustee under the Indenture in
connection with the Financing through origination of Eligible Loans and
Student Loans thereunder. SLFC also
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agrees to provide disbursement and origination services in connection with the
origination and disbursement of Eligible Loans under the Indenture.
SERVICING
SLFC agrees to perform all servicing obligations relating to the Financed
Student Loans required of the Corporation or the Trustee, or which the
Corporation or the Trustee is required to cause the Servicer to perform. The
SLFC Servicing Agreement specifies various activities and obligations to be
performed by SLFC in servicing the Financed Student Loans. These activities
and obligations include, without limitation, file maintenance; maintaining
Guarantee coverage on Financed Student Loans; handling borrower requests for
forbearance and deferments; exercising due diligence (within the meaning of
the Higher Education Act and the Guarantee Program regulations) in the
servicing, administration and collection of all Financed Student Loans;
collecting payments of principal and interest, Special Allowance Payments, and
Guarantee Payments with respect to Financed Student Loans and causing all such
interest subsidy payments and Special Allowance Payments to be forwarded by
the Secretary of Education directly to the Trustee for immediate deposit into
the appropriate fund or account under the Indenture and depositing all other
such payments immediately upon receipt into a lock-box account (which shall be
part of the Revenue Fund) to be established by the Trustee in the name of and
for the account of the Trustee; representing the interests of the Corporation
and the Trustee in handling discrepancies or disputes, if any, with the
Secretary of Education; preparing and maintaining all appropriate accounting
records with respect to all transactions related to each Financed Student
Loan; for defaulted Financed Student Loans, taking steps necessary to file and
prove a claim for loss with the Secretary of Education or the Guarantee
Agency, as the case may be and as required, and assuming responsibility for
all necessary communications and contacts with the Secretary of Education or
the Guarantee Agency, as the case may be and as required, to recover on such
defaulted Financed Student Loans within the time required by the Higher
Education Act and the requirements of the Guarantee Agency; if a claim is
denied by the Secretary of Education or the Guarantee Agency, as the case may
be, under circumstances resulting in a Lender being required by a Student Loan
Purchase Agreement to repurchase a Financed Student Loan, taking such action
as shall be necessary to allow the Corporation or the Trustee to cause such
Lender to repurchase such Financed Student Loan or to substitute a different
Eligible Loan in accordance with the requirements of the applicable Student
Loan Purchase Agreement; preparing and filing various reports with the
Secretary of Education, the Guarantee Agency, the Corporation and the Trustee;
identifying on the servicing system the Notes as the source of financing for
each such Financed Student Loan; and maintaining duplicates or copies of
certain file documents.
RIGHT OF INSPECTION AND AUDITS
The SLFC Servicing Agreement provides that, subject to any restrictions
of applicable law, the Corporation, the Trustee, the Guarantee Agency, the
Secretary of Education and/or any governmental agency having jurisdiction over
the Corporation or the Trustee (and, in each case, such entities'
representatives), will have the right, at any time and from time to time,
during normal business hours, and upon reasonable notice to SLFC, to examine
and audit any and all of the SLFC's records or accounts pertaining to any
Financed Student Loan. The Corporation and the Trustee also may require SLFC
to furnish such documents as they from time to time deem necessary to
determine that SLFC has complied with the provisions of the SLFC Servicing
Agreement, the Student Loan Purchase Agreements and the Indenture.
SLFC also agrees to have prepared and submitted to the Secretary of
Education and the Guarantee Agencies any third-party servicer compliance
audits and audited financial statements required under the Higher Education
Act and the Guarantee Program regulations relating to SLFC and its servicing
of Financed Student Loans, and any lender compliance audits required under the
Higher Education Act and the Guarantee Program regulations relating to the
Trustee (as the holder of the Financed Student Loans) and the Financed Student
Loans. SLFC agrees to provide to the Corporation and the Trustee these and
various other specified reports and audits.
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<PAGE>
ADMINISTRATION AND MANAGEMENT
SLFC agrees to perform various administrative activities and obligations
on behalf of the Corporation under the SLFC Servicing Agreement. These include
providing all necessary personnel, facilities, equipment, forms and supplies
for operating the Program in accordance with the Indenture; disseminating
information on the Program to Lenders and to student financial aid officers
and to other persons as necessary; controlling and accounting for the receipt
and expenditure of the Corporation's funds in accordance with the resolutions
of the Corporation's board of directors and the Indenture and maintaining
accurate and complete records on all aspects of the Program; reviewing all
statements and reports to the Corporation required of the Trustee, the
Servicer and the Lender in accordance with the provisions of the Indenture,
the SLFC Servicing Agreement and the Student Loan Purchase Agreements;
preparing and submitting to the Trustee the Monthly Servicing Reports required
to be delivered to the Noteholders pursuant to the Indenture; and determining
and notifying the Trustee and Auction Agent of the Net Loan Rate. SLFC also
agrees to prepare for filing, and provide such other assistance as is required
by the Corporation to file, any other reports required to be filed by the
Corporation under the Indenture or under any applicable law, including without
limitation, the Higher Education Act and any federal and state securities
laws.
SERVICER AS BAILEE
The SLFC Servicing Agreement provides that SLFC, in holding documents
relating to the Financed Student Loans, will hold such documents as bailee for
and on behalf of the Trustee.
PLAN FOR DOING BUSINESS
In providing administrative services on behalf of the Corporation under
the SLFC Servicing Agreement, SLFC agrees to operate the Program in compliance
with the Plan for Doing Business of the Original Issuer, to advise the
Original Issuer if any amendments to the Plan for Doing Business are required
from time to time, and to assist the Original Issuer in preparing, obtaining
approval of, and filing any such amendments to the Plan for Doing Business.
SERVICING FEES
The SLFC Servicing Agreement provides that SLFC shall be paid for the
performance of its functions under the SLFC Servicing Agreement (from funds
available for such purpose under the Indenture) a monthly fee in an amount
each month equal to 0.104167% of the outstanding principal balance of all
Financed Student Loans as of the last day of the immediately preceding month.
Such fee is required to be paid to SLFC on a monthly basis within fifteen (15)
days of receipt by the Trustee of a written monthly billing statement from
SLFC. If SLFC believes that it is necessary to increase the monthly fee
payable under the SLFC Servicing Agreement, it shall provide a written request
to the Corporation and the Trustee of its need for an increase in such fee,
together with all information required under the Indenture for the Trustee to
approve an increase in the fees payable thereunder. SLFC acknowledges in the
SLFC Servicing Agreement that such fee shall not be increased unless the
conditions for increasing such fees under the Indenture have been satisfied.
SLFC also acknowledges in the SLFC Servicing Agreement that the
Corporation and the Trustee contemplate paying all servicing fees payable
under the SLFC Servicing Agreement solely from funds available for such
purpose in the Administration Fund created under the Indenture, which funds
are primarily dependent upon collection by SLFC and receipt by the Trustee of
payments with respect to the Financed Student Loans. SLFC agrees to continue
to be bound by the terms and provisions of the SLFC Servicing Agreement
relating to Financed Student Loans in all respects, and to perform for a
period of 120 days its obligations thereunder, regardless of the receipt or
non-receipt on a timely basis by it of any payments in respect of servicing
fees.
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<PAGE>
NO BANKRUPTCY OR INSOLVENCY PETITION
SLFC agrees that it will not at any time institute against the
Corporation, or join in any institution against the Corporation of, any
bankruptcy, reorganization, arrangement, insolvency or liquidation
proceedings, or other proceedings under any federal or state bankruptcy or
similar law in connection with any obligation relating to the SLFC Servicing
Agreement.
BENEFIT OF THE NOTEHOLDERS
The SLFC Servicing Agreement recites that it is made and entered into for
the benefit of all Noteholders, and its provisions may be enforced not only by
the parties thereto but also by the Noteholders in the manner and to the
extent to which Noteholders may enforce provisions of the Indenture.
AMENDMENT
The SLFC Servicing Agreement may be amended, supplemented or modified
only by written instrument duly executed by all parties thereto and only upon
receipt of a written certificate from the Corporation and the Trustee that
such amendment, supplement or modification will not deprive any Noteholder in
any material respect of the security afforded by the SLFC Servicing Agreement.
TERM AND TERMINATION
The term of the SLFC Servicing Agreement continues for so long as any of
the Notes remain Outstanding, unless the SLFC Servicing Agreement is
terminated in accordance with its terms. The SLFC Servicing Agreement shall
terminate:
A. If SLFC shall:
1. admit in writing its inability to pay its debts
generally as they become due;
2. consent to the appointment of a custodian (as that term
is defined in the federal Bankruptcy Code) for or
assignment to a custodian of the whole or any
substantial part of SLFC's property, or fail to stay,
set aside or vacate within sixty (60) days from the
date of entry thereof any order or decree entered by a
court of competent jurisdiction ordering such
appointment or assignment;
3. commence any proceeding or file a petition under the
provisions of the federal Bankruptcy Code for
liquidation, reorganization or adjustment of debts, or
under any insolvency law or other statute or law
providing for the modification or adjustment of the
rights of creditors, or fail to stay, set aside or
vacate within sixty (60) days from the date of entry
thereof any order or decree entered by a court of
competent jurisdiction pursuant to an involuntary
proceeding, whether under federal or state law,
providing for liquidation or reorganization of SLFC or
modification or adjustment of the rights of creditors;
or
4. contest in writing the validity or enforceability of
the SLFC Servicing Agreement as a whole or deny in
writing that the SLFC Servicing Agreement as a whole is
binding upon SLFC;
B. upon written notice by the Corporation or the Trustee to
SLFC, if SLFC materially breaches its obligations, or any
representation or warranty, under the SLFC Servicing
Agreement; or
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C. upon written notice by the Corporation or the Trustee, if at
any time the Guarantee Agency or the Department of Education
has issued a notice of suspension or termination against
SLFC, or has suspended or terminated the payment of all
claims with respect to Financed Student Loans or, in the
case of the Department of Education, all Special Allowance
Payments or interest benefit payments with respect to
Financed Student Loans as a result of actions or omissions
of SLFC (it being understood that the cessation of less than
all such claims or payments may constitute a breach under
clause (B) above).
Notwithstanding the foregoing, any termination pursuant to clauses (B) or (C)
will be subject to the following conditions. If such breach under clause (B)
or suspension or termination under clause (C) is capable of being cured within
90 days without, in the judgment of the Trustee, adversely affecting the
security provided to the Noteholders by the Financed Student Loans and the
related Guarantee Payments, Special Allowance Payments and interest subsidy
payments, SLFC shall have the right to cure such breach, within 90 days of the
date SLFC learns of such breach or receives notice of such breach from the
Corporation or the Trustee, prior to such termination. If such breach is not
capable of being cured in the manner specified above, no termination pursuant
to clause (B) or (C) shall occur if, in the judgment of the Trustee, such
breach or suspension or termination will not adversely affect the security
provided the Noteholders by the Financed Student Loans and the related
Guarantee Payments, Special Allowance Payments and interest subsidy payments.
SLFC agrees to promptly notify the Trustee and the Corporation of any
occurrence or condition which constitutes (or which with the passage of time
or the giving of notice or both would constitute) an event permitting the
termination of the SLFC Servicing Agreement. SLFC also agrees to continue
performing its obligations under the Servicing Agreement until a successor
Servicer has been appointed.
DESCRIPTION OF FINANCED ELIGIBLE LOAN PROGRAM
BACKGROUND OF ORIGINAL ISSUER'S PROGRAM
The Original Issuer was organized as a secondary market for student loans
for lenders throughout the State of South Dakota, including banks, savings and
loan associations and credit unions. The Original Issuer began operating a
secondary market program in 1979 and financed its initial acquisitions of
student loans through the issuance of its student loan revenue bonds. The
Original Issuer has ongoing contact with, and holds numerous workshop meetings
in various locations in the State and surrounding States which are attended
by, approximately 250 financial and educational institutions. SLFC will
undertake similar activities to make the financial and education communities
aware of its activities and objectives.
The following table lists the approximate aggregate outstanding principal
balances of all Student Loans acquired by the Original Issuer from the
proceeds of its tax exempt student loan revenue bond issues during each of the
last six fiscal years and during the six months ended December 31, 1997.
These Student Loans have been made to Eligible Borrowers for the
post-secondary education of (a) residents of the State attending
post-secondary schools located within or without the State, or (b) residents
of a state other than the State attending post-secondary schools located
within the State (sometimes referred to herein as "In-State Loans"). The Code
requires that proceeds of tax exempt debt obligations issued by the Original
Issuer generally be used only to acquire In-State Loans.
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<TABLE>
<CAPTION>
Year Ending Student Loans
June 30 Acquired
----------- -------------
<S> <C>
1992................................ $49,702,000
1993................................ 56,963,000
1994................................ 65,818,000
1995................................ 81,802,000
1996................................ 92,043,000
1997................................ 69,716,000
1998 (six months ended 12/31/97) 39,123,000
</TABLE>
In addition to the loans included in the table above, the Original Issuer
has acquired Student Loans from the proceeds of its taxable borrowings during
each year since 1988. In general, the Original Issuer has used the proceeds
of these financings to acquire Student Loans for which the borrower is neither
a resident of the State nor attending an eligible school located within the
State. The following table lists the approximate aggregate outstanding
principal balances of all Student Loans acquired by or on behalf of the
Original Issuer from the proceeds of its taxable borrowings for each of the
last six fiscal years and for the six months ended December 31, 1997.
<TABLE>
<CAPTION>
Additional
Year Ending Student Loans
June 30 Acquired
----------- -------------
<S> <C>
1992................................ $27,798,000
1993................................ 35,113,000
1994................................ 40,655,000
1995................................ 60,665,000
1996................................ 87,864,000
1997................................ 42,856,000
1998 (six months ended 12/31/97) 31,492,000
</TABLE>
DESCRIPTION OF ELIGIBLE LOANS TO BE FINANCED
It is expected that a portion of the proceeds of the Series 1998-1 Notes
deposited in the Acquisition Fund will be used to refinance the Original
Issuer's portfolio of approximately $586,630,000 aggregate principal amount of
student loans. Certain characteristics of such portfolio as of December 31,
1997 are set forth below under "Characteristics of the Initial Financed
Eligible Loans." Based on outstanding principal amounts as of December 31,
1997, approximately 47% of such Financed Eligible Loans have been acquired by
the Original Issuer from two Lenders (and affiliates thereof).
It is expected that the remaining proceeds of the Series 1998-1 Notes
deposited in (i) the Series 1998-1 Tax Exempt Acquisition Account will be used
to acquire or originate approximately $241,070,000 additional aggregate
principal amount of Eligible Loans that are In-State Loans on or before April
15, 2002 and (ii) the Series 1998-1 Taxable Acquisition Account will be used
to acquire or originate approximately $64,110,000 additional aggregate
principal amount of Eligible Loans that are not In-State Loans on or before
February 1, 1999. See "Application of Series 1998-1 Note Proceeds."
Although the Higher Education Act contains certain provisions that may
decrease the principal amount of Eligible Loans made by Lenders, the
Corporation does not expect that such provisions will affect its ability to
spend the proceeds of the Series 1998-1 Notes initially deposited in the
Acquisition Fund to acquire Eligible Loans. There is no assurance, however,
that relevant federal laws, including the Higher Education Act, will not be
amended in
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a manner that may adversely affect the qualification of Student Loans as
Eligible Loans under the Indenture and thus prevent their acquisition by the
Trustee or that may decrease the aggregate principal amount of Eligible Loans
made by Lenders and available for purchase by the Trustee. Proposals by
Congress and the Administration to amend the Higher Education Act could affect
the qualification of Student Loans made under the Federal Family Education
Loan Program as Eligible Loans. If any such amendments are enacted, the
Corporation may seek any necessary Rating Agency approvals to allow it to
finance such Student Loans under the Indenture. If the Trustee does not
acquire all the Eligible Loans which it is expected to acquire, the
Corporation may use the unexpended portion of the Series 1998-1 Notes proceeds
and Balances in the Series 1998-1 Tax Exempt and Taxable Surplus Sub-Accounts
to redeem Series 1998-1 Notes which are called for redemption. See
"Description of Series 1998-1 Notes -- Special Call for Redemption -- From
Unused Proceeds".
The First Supplemental Indenture contains various limits on certain types
of Eligible Loans that may be Financed (originated or purchased) after the
Date of Issuance, with proceeds deposited in the Series 1998-1 Tax Exempt
Acquisition Account and the Series 1998-1 Taxable Acquisition Account without
receiving further approval from the Rating Agencies. The First Supplemental
Indenture limits the amount of additional Consolidation Loans that may be
Financed after the Date of Issuance from (i) the Series 1998-1 Tax Exempt
Acquisition Account (together with the Series 1998-1 Tax Exempt Surplus
Sub-Account) to the greater of (a) $49,000,000, or (b) 20% of the aggregate of
the amounts applied from such Accounts, after the Date of Issuance, to the
acquisition or origination of all Student Loans; and (ii) the Series 1998-1
Taxable Acquisition Account (together with the Series 1998-1 Taxable Surplus
Sub-Account) to the greater of (a) $26,000,000, or (b) 40% of the aggregate of
the amounts applied from such Accounts, after the Date of Issuance, to the
acquisition or origination of all Student Loans. The First Supplemental
Indenture also limits the aggregate amount of Eligible Loans for which the
first disbursement is made on or after July 1, 1998, other than Consolidation
Loans, that may be Financed after the Date of Issuance from the Series 1998-1
Tax Exempt Acquisition Account, the Series 1998-1 Tax Exempt Surplus
Sub-Account, the Series 1998-1 Taxable Acquisition Account and the Series
1998-1 Taxable Surplus Sub-Account to $5,000,000. Additionally, the First
Supplemental Indenture limits the aggregate amount of Financed Eligible Loans
that may be subject to certain forms of interest rate reduction features to
Borrowers. In all these cases, the Corporation could use Balances in such
Accounts or Sub-Accounts to originate or acquire additional amounts of such
Eligible Loans if it delivers to the Trustee a Corporation certificate
certifying that, based on a Cash Flow Projection, the Financing of such
Eligible Loans will not materially adversely affect the Corporation's ability
to pay Debt Service on the Outstanding Notes and on Outstanding Other
Indenture Obligations, to pay Carry-Over Amounts (including accrued interest
thereon) with respect to Outstanding Notes or to make required deposits to the
Rebate Fund. The Corporation does not expect that these limitations will
prevent the expenditure of the proceeds of the Series 1998-1 Note proceeds
deposited in the Acquisition Fund.
For a more detailed description of student loans under the Higher
Education Act, see "Description of Federal Family Education Loan Program".
For a description of the Guarantee Agencies, see "Description of the Guarantee
Agencies".
The Indenture also permits the Financing of Student Loans from moneys in
the Surplus Account under certain circumstances. Such Student Loans are not
required to be Eligible Loans. See "Summary of the Indenture -- Funds and
Accounts -- Surplus Fund".
SUMMARY OF STUDENT LOAN PURCHASE AGREEMENTS
The Original Issuer entered into Student Loan Purchase Agreements with
approximately 500 Lenders for the purchase of Eligible Loans to be refinanced
with the proceeds of the Series 1998-1 Notes (the "Original Issuer Student
Loan Purchase Agreements"). The Original Issuer's right, title and interest
in the Original Issuer Student Loan Purchase Agreements will be pledged to the
Trustee. In addition, the Corporation has entered into Student Loan Purchase
Agreements with approximately 140 Lenders for the purchase of additional
Eligible Loans by the Trustee from the proceeds of the Series 1998-1 Notes and
expects to enter into additional Student Loan Purchase Agreements for the
purchase of additional Eligible Loans by the Trustee from Balances in the
Series 1998-1 Tax Exempt and Taxable Surplus Sub-Accounts (collectively, the
"Corporation Student Loan Purchase Agreements").
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As of December 31, 1997, approximately $99 million outstanding principal
amount of the Eligible Loans to be Financed on the Date of Issuance
represented Consolidation Loans originated by the Original Issuer (and not
acquired from Lenders pursuant to Original Issuer Student Loan Purchase
Agreements). Consolidation Loans and other Eligible Loans Financed after the
Date of Issuance which are originated by the Trustee also will not be covered
by Corporation Student Loan Purchase Agreements.
The Corporation Student Loan Purchase Agreements will provide for the
purchase by the Trustee on behalf of the Corporation, of Eligible Loans at
100% of their outstanding unpaid principal amount, plus accrued interest
thereon payable by the Borrower. The Corporation Student Loan Purchase
Agreements require the Lender to report and offset against its interest
subsidy and Special Allowance Payments all authorized origination fees. Under
certain circumstances, the Trustee will also pay to the Lender reasonable
transfer, origination or assignment fees and a premium to the extent permitted
by the Indenture. See "Summary of the Indenture -- Funds and Accounts --
Acquisition Fund".
Each Lender, with respect to each Financed Eligible Loan purchased under
a Student Loan Purchase Agreement, has represented or will represent that at
the date of sale by the Lender to the Original Issuer or the Trustee, each
Eligible Loan was or will be Guaranteed. Each Lender makes additional
representations as to the validity, enforceability and transferability of each
such Eligible Loan and as to the legal authority of the Lender to engage in
the transactions contemplated by the respective Student Loan Purchase
Agreement.
The Student Loan Purchase Agreements provide that if any representation
furnished by a Lender with respect to an Eligible Loan sold to the Original
Issuer or the Trustee proves to have been materially incorrect, or if the
Guarantee Agency refuses to honor all or part of a Guarantee claim filed with
respect to any Financed Eligible Loan on account of any circumstance or event
occurring prior to the sale of such Eligible Loan to the Original Issuer or
the Trustee, or under certain other circumstances specified in the Student
Loan Purchase Agreement, the Lender shall repurchase such loan at a price
equal to the then outstanding principal balance, plus accrued interest and
Special Allowance Payments, plus any expenses incurred by the Corporation, the
Original Issuer or the Trustee in connection therewith and any other amounts
paid to the Lender by the Original Issuer or the Trustee in connection with
the acquisition of such loan.
SERVICING AND "DUE DILIGENCE"
The Servicer will service student loans originated or acquired by the
Trustee under the Indenture. The Corporation will covenant in the Indenture
to cause a Servicer to administer and collect all Financed Student Loans in a
competent, diligent and orderly fashion, and in accordance with all
requirements of the Higher Education Act, the Secretary of Education, the
Indenture, the Federal Reimbursement Contracts and the Guarantee Agreements.
The Higher Education Act requires that the Original Issuer, the Trustee
(in its capacity as "eligible lender"), a Lender and their agents (including
the Servicer) and employees exercise "due diligence" in the making, servicing
and collection of Financed Student Loans and that a Guarantee Agency exercise
due diligence in collecting loans which it holds. The Higher Education Act
defines "due diligence" as requiring the holder of a Student Loan to utilize
servicing and collection practices at least as extensive and forceful as those
generally practiced by financial institutions for the collection of consumer
loans, and requires that certain specified collection actions be taken within
certain specified time periods with respect to a delinquent loan or defaulted
loan. The Guarantee Agencies have established procedures and standards for
due diligence to be exercised by each Guarantee Agency and by Lenders
(including the Original Issuer and the Trustee) which hold loans that are
guaranteed by the respective Guarantee Agencies. The Original Issuer, the
Trustee, a Lender, or a Guarantee Agency may not relieve itself of its
responsibility for meeting these standards by delegation to any servicing
agent. Accordingly, if the Original Issuer has failed to meet such standards,
or if a Lender or the Servicer fails to meet such standards, the Trustee's
ability to realize the benefits of Guarantee Payments, and (with respect to
Student Loans eligible for such payments) interest
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<PAGE>
subsidy payments and Special Allowance Payments may be adversely affected. If
a Guarantee Agency fails to meet such standards, that Guarantee Agency's
ability to realize the benefits of federal reinsurance payments may be
adversely affected.
CHARACTERISTICS OF THE INITIAL
FINANCED ELIGIBLE LOANS
This section sets forth tables describing certain characteristics, as of
December 31, 1997, of the Eligible Loans expected to be Financed on the Date
of Issuance of the Series 1998-1 Notes. The Corporation expects that the
Eligible Loans to be Financed on the Date of Issuance will also include
approximately $8.2 million principal amount of Eligible Loans originated or
purchased by or on behalf of the Original Issuer between December 31, 1997 and
the Date of Issuance, and that the characteristics of the Eligible Loans
reflected in such tables will vary due to the continued amortization of such
Eligible Loans between such date and the Date of Issuance. Although the
statistical distribution of the characteristics of the Financed Eligible Loans
as of the Date of Issuance will vary somewhat from the statistical
distribution of such characteristics shown below, the Corporation does not
believe that such characteristics will differ materially.
<TABLE>
<CAPTION>
COMPOSITION OF THE STUDENT LOAN PORTFOLIO AS OF DECEMBER 31, 1997
<S> <C>
Aggregate Outstanding Principal Balance.................... $589,514,175
Number of Borrowers........................................ 91,564
Average Outstanding Principal Balance Per Borrower......... $6,438
Number of Loans (Promissory Notes)......................... 271,023
Average Outstanding Principal Balance Per Loan............. $2,175
Repayment Status Loans:
Weighted Average Remaining Term (Months).............. 103
Weighted Average Payments Received (Months)........... 26
Weighted Average Interest Rate............................. 8.26%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS BY LOAN TYPE AS OF
DECEMBER 31, 1997
Outstanding Percent of Loans
Number of Principal by Outstanding
Loan Types Loans Balance Balance
---------- --------- ----------- ----------------
<S> <C> <C> <C>
Stafford - Subsidized 214,946 $375,054,479 63.6%
Stafford - Unsubsidized* 27,323 65,941,225 11.2
Stafford - Nonsubsidized* 3,306 5,304,369 0.9
PLUS 10,867 25,430,529 4.3
SLS 7,250 18,551,432 3.2
Consolidation 7,331 99,232,141 16.8
------- ------------ -----
Total 271,023 $589,514,175 100.0%
======= ============ =====
</TABLE>
- -----------------------
* Nonsubsidized Stafford loans are ineligible for interest subsidy
payments and Special Allowance Payment; Unsubsidized Stafford loans are
eligible for Special Allowance Payments but are ineligible for interest
subsidy payments.
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<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS BY INTEREST RATE AS OF
DECEMBER 31, 1997
Outstanding Percent of Loans
Number of Principal by Outstanding
Interest Rate Range** Loans Balance Balance
- --------------------- --------- ----------- -----------------
<S> <C> <C> <C>
Less Than 7.00% 80 $ 356,680 0.1%
7.00% to 7.49% 10,313 15,111,514 2.6
7.50% to 7.99% 16,723 42,698,123 7.2
8.00% to 8.49% 210,603 416,284,894 70.6
8.50% to 8.99% 10,938 31,575,123 5.4
9.00% to 9.49% 22,232 82,229,016 13.9
9.50% or greater 134 1,258,825 0.2
------- ------------ -----
Total 271,023 $589,514,175 100.0%
======= ============ =====
</TABLE>
- -----------------------
** Determined using the interest rates applicable to the Financed Student
Loans as of December 31, 1997. Because certain of the Financed Student Loans
bear interest at variable rates per annum, there can be no assurance that such
rates will remain applicable to the Financed Student Loans at any time after
December 31, 1997. See "Description of the Federal Family Education Loan
Program."
DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS BY SCHOOL TYPES AS OF
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
School Type Loans Balance Balance
- ----------- --------- ----------- ----------------
<S> <C> <C> <C>
Under 4 Year 44,364 $ 74,324,197 12.6%
4 and 5 Year 198,427 379,725,178 64.4
Proprietary 19,109 31,861,440 5.4
Consolidation 7,331 99,232,141 16.8
Other/Unknown 1,792 4,371,219 0.8
------- ------------ -----
Total 271,023 $589,514,175 100.0%
======= ============ =====
</TABLE>
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<PAGE>
DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS BY
BORROWER PAYMENT STATUS AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
Borrower Payment Status Loans Balance Balance
- ----------------------- --------- ----------- ----------------
<S> <C> <C> <C>
School 15,582 $ 38,582,428 6.5%
Grace 4,753 12,256,512 2.1
Repayment:
First Year Repayment 45,877 135,763,424 23.0
Second Year Repayment 34,355 96,224,499 16.3
Third Year Repayment 33,063 83,281,874 14.1
Fourth Year Repayment
and thereafter 98,274 123,072,847 20.9
Deferment 26,686 67,607,690 11.5
Forbearance 10,176 28,294,819 4.8
Claims 2,257 4,430,082 0.8
------- ------------ -----
Total 271,023 $589,514,175 100.0%
======= ============ =====
</TABLE>
DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS BY
GUARANTEE STATUS AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
Guarantee Status Loans Balance Balance
- ---------------- --------- ----------- ----------------
<S> <C> <C> <C>
Guaranteed 100% 164,235 $258,613,557 43.8%
Guaranteed 98% 105,881 330,592,281 56.1
Non-Guaranteed 907 308,337 0.1
------- ------------ -----
Total 271,023 $589,514,175 100.0%
======= ============ =====
</TABLE>
DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS BY GUARANTEE AGENCY AS OF
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
Guarantee Agencies Loans Balance Balance
- ------------------ --------- ----------- ----------------
<S> <C> <C> <C>
EAC 143,508 $354,690,204 60.2%
PHEAA 107,052 197,147,922 33.4
Other Guarantee Agencies 19,556 37,367,712 6.3
Non-Guaranteed 907 308,337 0.1
------- ------------ -----
Total 271,023 $589,514,175 100.0%
======= ============ =====
</TABLE>
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<PAGE>
DISTRIBUTION OF THE FINANCED ELIGIBLE LOANS BY RANGE OF PRINCIPAL BALANCE
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
Outstanding Percent of Loans
Number of Principal by Outstanding
Principal Balance Range Borrowers Balance Balance
- ----------------------- --------- ----------- ----------------
<S> <C> <C> <C>
Less than $1,000 10,931 $ 5,637,387 1.0%
$1,000-$1,999 12,536 18,777,938 3.2
$2,000-$2,999 13,406 33,442,176 5.7
$3,000-$3,999 8,744 30,477,686 5.2
$4,000-$4,999 7,150 32,046,657 5.4
$5,000-$5,999 6,183 33,755,164 5.7
$6,000-$6,999 4,996 32,222,065 5.5
$7,000-$7,999 3,631 27,165,195 4.6
$8,000-$8,999 3,082 26,158,156 4.4
$9,000-$9,999 2,608 24,745,869 4.2
$10,000-$10,999 2,326 24,387,544 4.1
$11,000-$11,999 2,071 23,772,733 4.0
$12,000-$12,999 1,637 20,450,489 3.5
$13,000-$13,999 1,548 20,875,133 3.5
$14,000-$14,999 1,372 19,863,761 3.4
$15,000 or greater 9,343 215,736,222 36.6
------ ------------ -----
Total 91,564 $589,514,175 100.0%
====== ============ =====
</TABLE>
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<PAGE>
DISTRIBUTION OF REPAYMENT STATUS FINANCED ELIGIBLE LOANS BY REMAINING TERM
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
Outstanding Percent by
Number of Principal Outstanding
Remaining Term Loans Balance Balance
- -------------- --------- ----------- ----------------
<S> <C> <C> <C>
1 to 12 Months 14,628 $ 3,659,054 0.8%
13 to 24 Months 15,818 8,622,626 2.0
25 to 36 Months 16,921 14,387,027 3.3
37 to 48 Months 17,961 20,005,976 4.6
49 to 60 Months 18,751 25,590,440 5.8
61 to 72 Months 19,275 31,495,246 7.2
73 to 84 Months 17,697 35,972,249 8.2
85 to 96 Months 26,703 61,962,408 14.1
97 to 108 Months 27,526 72,608,386 16.6
109 to 120 Months 31,487 91,136,094 20.8
121 to 180 Months 3,582 38,572,149 8.8
181 to 240 Months 1,046 26,207,596 6.0
241 to 300 Months 136 5,797,604 1.3
Over 300 Months 38 2,325,789 0.5
------- ------------ -----
Total 211,569 $438,342,644 100.0%
======= ============ =====
</TABLE>
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<PAGE>
DISTRIBUTION OF FINANCED ELIGIBLE LOANS BY BORROWERS' ADDRESS
AS OF DECEMBER 31, 1997 (BASED ON ADDRESS AS OF JANUARY 9, 1998)
<TABLE>
<CAPTION>
Outstanding Percent by
Number of Principal Outstanding
State of Borrowers' Address Loans Balance Balance
- --------------------------- --------- ----------- ----------------
<S> <C> <C> <C>
South Dakota 112,233 $239,229,526 40.6%
Minnesota 54,110 115,810,153 19.6
North Dakota 24,248 50,226,464 8.5
Iowa 8,065 18,612,166 3.2
Nebraska 5,828 12,661,034 2.1
Colorado 5,292 11,631,645 2.0
Washington 4,955 10,393,248 1.8
Texas 4,170 9,766,035 1.7
California 4,460 9,752,014 1.7
Oregon 4,497 9,168,878 1.6
Wisconsin 3,205 7,740,080 1.3
Illinois 2,953 7,236,560 1.2
Arizona 3,417 7,129,734 1.2
Alaska 2,334 6,643,301 1.1
Idaho 2,873 6,084,089 1.0
Others Less Than 1% Each 28,383 67,429,248 11.4
------- ------------ -----
Total 271,023 $589,514,175 100.0%
======= ============ =====
</TABLE>
DESCRIPTION OF FEDERAL FAMILY EDUCATION LOAN PROGRAM
GENERAL
The Higher Education Act sets forth provisions establishing the Federal
Family Education Loan Program, pursuant to which state agencies or private
nonprofit corporations administering student loan insurance programs (referred
to as "guarantee agencies") are reimbursed for losses sustained in the
operation of their programs, and holders of certain loans made under such
programs are paid subsidies for owning such loans.
The Higher Education Act currently authorizes certain student loans to be
covered under the Federal Family Education Loan Program if they are contracted
for and paid to the student prior to September 30, 2002, unless a student has
received a loan under the Federal Family Education Loan Program prior to such
date, in which case that student may receive a student loan covered by the
Federal Family Education Loan Program until September 30, 2006. Congress has
extended similar authorization dates in prior versions of the Higher Education
Act; however,
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<PAGE>
there can be no assurance that the current authorization dates will again be
extended or that the other provisions of the Higher Education Act will be
continued in their present form.
Various amendments to the Higher Education Act have revised the Federal
Family Education Loan Program from time to time. These amendments include, but
are not limited to, the Balanced Budget Act of 1997 (the "1997 Amendments"),
the Higher Education Technical Amendments Act of 1993 (the "1993 Technical
Amendments"), the Omnibus Budget Reconciliation Act of 1993 (the "1993
Amendments"), the Higher Education Amendments of 1992 (the "1992 Amendments"),
which reauthorized the Federal Family Education Loan Program, the Omnibus
Budget Reconciliation Act of 1990, the Omnibus Budget Reconciliation Act of
1989 (the "1989 Amendments"), the Omnibus Budget Reconciliation Act of 1987,
the Higher Education Technical Amendments Act of 1987 (the "1987 Amendments"),
the Higher Education Amendments of 1986 (the "1986 Amendments"), which
reauthorized the Federal Family Education Loan Program, the Consolidated
Omnibus Budget Reconciliation Act of 1985, the Postsecondary Student
Assistance Amendments of 1981 (the "1981 Amendments") and the Education
Amendments of 1980 (the "1980 Amendments").
The 1993 Amendments made several changes to the terms of the Federal
Family Education Loan Program that are adverse to the Guarantee Agencies and
lenders under the Federal Family Education Loan Program. In addition, the
1993 Amendments authorized a program of student loans originated by schools on
behalf of the Secretary of Education to partially replace the Federal Family
Education Loan Program. See "Direct Loans" below. There can be no assurance
that relevant federal laws, including the Higher Education Act, will not be
further changed in a manner that may adversely impact the receipt of funds by
the Guarantee Agencies or by the Corporation or the Trustee with respect to
Financed Eligible Loans or the amount of loans made by Lenders and available
for purchase by the Trustee on behalf of the Corporation.
Proposals have been made by Congress and the Administration which, if
enacted into law, would amend the Higher Education Act and make various
changes to the Federal Family Education Loan Program, including changes that
would reduce various payments to Guarantee Agencies and restructure guarantee
agencies' operations and programs and revise terms of student loans and
payments to Lenders. There is no certainty that any of the proposals will be
enacted into law in their current form or at all, and the Corporation cannot
predict at this time how such legislation, if enacted, would affect SLFC's
business or operations, or the Corporation.
This is only a summary of certain provisions of the Higher Education
Act. Reference is made to the text of the Higher Education Act for full and
complete statements of its provisions.
LOAN TERMS
General
Four types of loans are currently available under the Federal Family
Education Loan Program: Stafford Loans, Unsubsidized Stafford Loans, Plus
Loans and Consolidation Loans. These loan types vary as to eligibility
requirements, interest rates, repayment periods, loan limits and eligibility
for interest subsidies and Special Allowance Payments. Some of these loan
types have had other names in the past. References herein to the various loan
types include, where appropriate, predecessors to such loan types.
The primary loan under the Federal Family Education Loan Program is the
Stafford Loan. Students who are not eligible for Stafford Loans based on
their economic circumstances may be able to obtain Unsubsidized Stafford
Loans. Parents of students may be able to obtain Plus Loans. Consolidation
Loans are available to borrowers with existing loans made under the Federal
Family Education Loan Program and certain other federal programs to
consolidate repayment of such existing loans. For periods of enrollment
beginning prior to July 1, 1994, SLS Loans were available to students with
costs of education that were not met by other sources and that exceeded the
Stafford or Unsubsidized Stafford Loan limits.
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<PAGE>
Eligibility
General. A student is eligible for loans made under the Federal Family
Education Loan Program only if he or she: (i) has been accepted for
enrollment or is enrolled in good standing at an eligible institution of
higher education (which term includes certain vocational schools), (ii) is
carrying or planning to carry at least one-half the normal full-time workload
for the course of study the student is pursuing as determined by the
institution (which, in the case of a loan to cover the cost of a period of
enrollment beginning on or after July 1, 1987, must either lead to a recognized
educational credential or be necessary for enrollment in a course of study
that leads to such a credential), (iii) has agreed to notify promptly the
holder of the loan concerning any change of address, (iv) (if presently
enrolled) is maintaining satisfactory progress in the course of study he or
she is pursuing, (v) does not owe a refund on, and is not (except as
specifically permitted under the Higher Education Act) in default under, any
loan or grant made under the Higher Education Act, (vi) has filed with the
eligible institution a statement of educational purpose, (vii) meets certain
citizenship requirements, and (viii) (except in the case of a graduate or
professional student) has received a preliminary determination of eligibility
or ineligibility for a Pell Grant.
Stafford Loans. Stafford Loans generally are made only to student
borrowers who meet certain needs tests. The educational institution must
provide the lender with a statement evidencing a determination of need for a
loan, and the amount of such need, calculated by subtracting from the
estimated cost of attendance the sum of the expected family contribution with
respect to the student plus the estimated financial assistance available to
such student. The amounts of the expected family contribution, estimated
available financial assistance, and estimated costs of attendance are to be
computed in accordance with standards set forth in the Higher Education Act.
Unsubsidized Stafford Loans. A student borrower meeting the requirements
set forth under "General" above is eligible for an Unsubsidized Stafford Loan
without regard to need. Unsubsidized Stafford Loans were not available before
October 1, 1992.
Plus Loans. Plus Loans are made only to borrowers who are parents (and,
under certain circumstances, spouses of remarried parents) of dependent
undergraduate students. For Plus Loans made on or after July 1, 1993, the
parent borrower must not have an adverse credit history (as determined
pursuant to criteria established by the Department of Education). Prior to
the 1986 Amendments, the Higher Education Act did not distinguish between Plus
Loans and SLS Loans. Student borrowers were eligible for Plus Loans; however,
parents of graduate and professional students were ineligible.
SLS Loans. Eligible borrowers for SLS Loans were limited to (a) graduate
or professional students, (b) independent undergraduate students, and (c)
under certain circumstances, dependent undergraduate students, if such
students' parents were unable to obtain a Plus Loan and were also unable to
provide such students' expected family contribution. Prior to the 1987
Amendments, a dependent undergraduate student was not eligible under any
circumstances. Except as described in clause (c), eligibility was determined
without regard to need.
Consolidation Loans. To be eligible for a Consolidation Loan a borrower
must (a) have outstanding indebtedness on student loans made under the Federal
Family Education Loan Program and/or certain other federal student loan
programs, and (b) be in repayment status or in a Grace Period, or be a
defaulted borrower who has made arrangements to repay the defaulted loan(s)
satisfactory to the holder of the defaulted loan(s). A married couple who
agree to be jointly liable on a Consolidation Loan for which the application
is received on or after January 1, 1993 may be treated as an individual for
purposes of obtaining a Consolidation Loan. For Consolidation Loans disbursed
prior to July 1, 1994 the Borrower was required to have outstanding student
loan indebtedness of at least $7,500. Prior to the adoption of the 1993
Technical Amendments, Plus Loans could not be included in the Consolidation
Loan. For Consolidation Loans for which the applications were received prior
to January 1, 1993, the minimum student loan indebtedness was $5,000 and the
borrower could not be delinquent more than 90 days in the payment of such
indebtedness.
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<PAGE>
Interest Rates
The Higher Education Act establishes maximum interest rates for each of
the various types of loans. These rates vary not only among loan types, but
also within loan types depending upon when the loan was made or when the
borrower first obtained a loan under the Federal Family Education Loan
Program. The Higher Education Act allows lesser rates of interest to be
charged. Many Lenders have offered repayment incentives or other programs
that involve reduced interest rates on certain loans made under the Federal
Family Education Loan Program.
Stafford Loans. For a Stafford Loan made prior to July 1, 1994, the
applicable interest rate for a borrower who, on the date the promissory note
was signed, did not have an outstanding balance on a previous loan which was
made, insured or guaranteed under the Federal Family Education Loan Program (a
"New Borrower"):
(a) is 7% per annum for a loan covering a period of instruction beginning
before January 1, 1981;
(b) is 9% per annum for a loan covering a period of instruction beginning
on or after January 1, 1981, but before September 13, 1983;
(c) is 8% per annum for a loan covering a period of instruction beginning
on or after September 13, 1983, but before July 1, 1988;
(d) for a loan made prior to October 1, 1992, covering a period of
instruction beginning on or after July 1, 1988, is 8% per annum for
the period from the disbursement of the loan to the date which is
four years after the loan enters repayment, and thereafter shall be
adjusted annually, and for any 12-month period commencing on a July 1
shall be equal to the bond equivalent rate of 91-day U.S. Treasury
bills auctioned at the final auction prior to the preceding June 1,
plus 3.25% per annum (but not to exceed 10% per annum); or
(e) for a loan made on or after October 1, 1992 shall be adjusted
annually, and for any 12-month period commencing on a July 1 shall be
equal to the bond equivalent rate of 91-day U.S. Treasury bills
auctioned at the final auction prior to the preceding June 1, plus
3.1% per annum (but not to exceed 9% per annum).
For a Stafford Loan made prior to July 1, 1994, the applicable interest rate
for a borrower who, on the date the promissory note evidencing the loan was
signed, had an outstanding balance on a previous loan made, insured or
guaranteed under the Federal Family Education Loan Program (a "Repeat
Borrower"):
(f) for a loan made prior to July 23, 1992 is the applicable interest
rate on the previous loan or, if such previous loan is not a Stafford
Loan, 8% per annum; or
(g) for a loan made on or after July 23, 1992 shall be adjusted annually,
and for any twelve month period commencing on a July 1 shall be equal
to the bond equivalent rate of 91-day U.S. Treasury bills auctioned
at the final auction prior to the preceding June 1, plus 3.1% per
annum but not to exceed:
(i) 7% per annum in the case of a Stafford Loan made to a
borrower who has a loan described in clause (a) above;
(ii) 8% per annum in the case of (A) a Stafford Loan made to a
borrower who has a loan described in clause (c) above, (B) a
Stafford Loan which has not been in repayment for four years
and which was made
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<PAGE>
to a borrower who has a loan described in clause (d) above or
(C) a Stafford Loan for which the first disbursement was made
prior to December 20, 1993 to a borrower whose previous loans
do not include a Stafford Loan or an Unsubsidized Stafford
Loan;
(iii) 9% per annum in the case of a (A) Stafford Loan made to a
borrower who has a loan described in clauses (b) or (e) above
or (B) a Stafford Loan for which the first disbursement was
made on or after December 20, 1993 to a borrower whose
previous loans do not include a Stafford Loan or an
Unsubsidized Stafford Loan; and
(iv) 10% per annum in the case of a Stafford Loan which has been
in repayment for four years or more and which was made to a
borrower who has a loan described in clause (d) above.
The interest rate on all Stafford Loans made on or after July 1, 1994,
regardless of whether the borrower is a New Borrower or a Repeat Borrower, is
the rate described in clause (g) above, except that such rate shall not exceed
8.25% per annum. For any Stafford Loan made on or after July 1, 1995, the
interest rate is further reduced prior to the time the loan enters repayment
and during any Deferment Periods (as such term is defined below under
"Repayment"). During such periods, the formula described in clause (g) above
is applied, except that 2.5% is substituted for 3.1%, and the rate shall not
exceed 8.25% per annum.
For loans made on or after July 1, 1998, the applicable rate will
continue to be adjusted annually, but for any 12-month period commencing on a
July 1 will be equal to the bond equivalent rate of securities with a
comparable maturity (as established by the Secretary of Education), plus 1%
per annum, but not to exceed 8.25% per annum. There can be no assurance that
the interest rate provisions for such loans will not be further amended,
either before or after the rate described herein becomes effective.
Unsubsidized Stafford Loans. Unsubsidized Stafford Loans are subject to
the same interest rate provisions as Stafford Loans.
Plus Loans. The applicable interest rate on a Plus Loan:
(a) made on or after January 1, 1981, but before October 1, 1981 is 9%
per annum;
(b) made on or after October 1, 1981, but before November 1, 1982 is 14%
per annum;
(c) made on or after November 1, 1982, but before July 1, 1987 is 12% per
annum;
(d) made on or after July 1, 1987 and before October 1, 1992 shall be
adjusted annually, and for any 12-month period beginning on July 1
shall be equal to the bond equivalent rate of 52-week U.S. Treasury
bills auctioned at the final auction prior to the preceding June 1,
plus 3.25% per annum (but not to exceed 12% per annum); or
(e) made on or after October 1, 1992 shall be adjusted annually, and for
any 12-month period beginning on July 1 shall be equal to the bond
equivalent rate of 52-week U.S. Treasury bills auctioned at the final
auction prior to the preceding June 1, plus 3.1% per annum (but not
to exceed 10% per annum).
The applicable interest rate for Plus Loans made on or after July 1, 1994
is the same as that described in clause (e) above, except that such rate shall
not exceed 9% per annum. For Plus Loans made on or after July 1, 1998, the
applicable rate will continue to be adjusted annually, but for any 12-month
period commencing on a July
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<PAGE>
1 will be equal to the bond equivalent rate of securities with a comparable
maturity (as established by the Secretary of Education), plus 2.1% per annum,
but not to exceed 9% per annum.
If requested by the borrower, an eligible lender may consolidate SLS or
Plus Loans of the same borrower held by the lender under a single repayment
schedule. The repayment period for each included loan shall be based on the
commencement of repayment of the most recent loan. The consolidated loan shall
bear interest at a rate equal to the weighted average of the rates of the
included loans. Such a consolidation shall not be treated as the making of a
new loan. In addition, at the request of the borrower, a lender may refinance
an existing fixed rate SLS or Plus Loan (including an SLS or Plus Loan held by
a different lender who has refused so to refinance such loan) at a variable
interest rate. In such a case, proceeds of the new loan are used to discharge
the original loan.
SLS Loans. The applicable interest rates on SLS Loans made prior to
October 1, 1992 are identical to the applicable interest rates on Plus Loans
made at the same time. For SLS Loans made on or after October 1, 1992, the
applicable interest rate is the same as the applicable interest rate on Plus
Loans, except that the ceiling is 11% per annum instead of 10% per annum.
Consolidation Loans. A Consolidation Loan made prior to July 1, 1994
bears interest at a rate equal to the weighted average of the interest rates
on the loans retired, rounded to the nearest whole percent, but not less than
9% per annum. Except as described in the next sentence, a Consolidation Loan
made on or after July 1, 1994 bears interest at a rate equal to the weighted
average of the interest rates on the loans retired, rounded upward to the
nearest whole percent, but with no minimum rate. For a Consolidation Loan for
which the application is received by an eligible lender on or after November
13, 1997 and before October 1, 1998, the interest rate shall be adjusted
annually, and for any twelve month period commencing on a July 1 shall be
equal to the bond equivalent rate of 91-day U.S. Treasury bills auctioned at
the final auction prior to the preceding June 1, plus 3.1% per annum, but not
to exceed 8.25% per annum. Notwithstanding these general interest rates, the
portion, if any, of a Consolidation Loan that repaid a loan made under the
federal health education assistance loan program may have a different interest
rate. For a discussion of required payments that reduce the return on
Consolidation Loans, see "Fees -- Rebate Fees on Consolidation Loans" below.
Loan Limits
Each type of loan (other than Consolidation Loans, which are limited only
by the amount of eligible loans to be consolidated) is subject to limits as to
the maximum principal amount, both with respect to a given year and in the
aggregate. All of the loans are limited to the difference between the cost of
attendance and the other aid available to the student. Stafford Loans are
also subject to limits based upon the needs analysis as described above under
"Eligibility -- Stafford Loans" above. Additional limits are described below.
Stafford and Unsubsidized Stafford Loans. Except as described in the next
paragraph, Stafford and Unsubsidized Stafford Loans are generally treated as
one loan type for loan limit purposes. A student who has not successfully
completed the first year of a program of undergraduate education may borrow up
to $2,625 in an academic year. A student who has successfully completed such
first year, but who has not successfully completed the second year may borrow
up to $3,500 per academic year. An undergraduate student who has successfully
completed the first and second year, but who has not successfully completed
the remainder of a program of undergraduate education, may borrow up to $5,500
per academic year. For students enrolled in programs of less than an academic
year in length, the limits are generally reduced in proportion to the amount
by which such programs are less than one year in length. A graduate or
professional student may borrow up to $8,500 in an academic year. The maximum
aggregate amount of Stafford and Unsubsidized Stafford Loans (including that
portion of a Consolidation Loan used to repay such loans) which an
undergraduate student may have outstanding is $23,000. The maximum aggregate
amount for a graduate and professional student, including loans for
undergraduate education, is $65,500. The Secretary is authorized to increase
the limits applicable to graduate and professional students who are pursuing
programs which the Secretary determines to be exceptionally expensive.
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Under the 1993 Amendments, at the same time that SLS Loans were
eliminated, the loan limits for Unsubsidized Stafford Loans to independent
students, or dependent students whose parents cannot borrow a Plus Loan, were
increased by amounts equal to the prior SLS Loan limits (as described below
under "SLS Loans").
Prior to the enactment of the 1992 Amendments, an undergraduate student
who had not successfully completed the first and second year of a program of
undergraduate education could borrow Stafford Loans in amounts up to $2,625 in
an academic year. An undergraduate student who had successfully completed
such first and second year, but who had not successfully completed the
remainder of a program of undergraduate education could borrow up to $4,000
per academic year. The maximum for graduate and professional students was
$7,500 per academic year. The maximum aggregate amount of Stafford Loans
which a borrower could have outstanding (including that portion of a
Consolidation Loan used to repay such loans) was $17,250. The maximum
aggregate amount for a graduate or professional student, including loans for
undergraduate education, was $54,750. Prior to the enactment of the 1986
Amendments, the annual limits were generally lower.
Plus Loans. For Plus Loans made on or after July 1, 1993, the amounts of
Plus Loans are limited only by the student's unmet need. Prior to that time
Plus Loans were subject to limits similar to those to which SLS Loans were
then subject (see "SLS Loans" below), applied with respect to each student on
behalf of whom the parent borrowed.
SLS Loans. A student who had not successfully completed the first and
second year of a program of undergraduate education could borrow an SLS Loan
in an amount of up to $4,000. A student who had successfully completed such
first and second year, but who had not successfully completed the remainder of
a program of undergraduate education could borrow up to $5,000 per year.
Graduate and professional students could borrow up to $10,000 per year. SLS
Loans were subject to an aggregate maximum of $23,000 ($73,000 for graduate
and professional students). Prior to the 1992 Amendments, SLS Loans were
available in amounts of $4,000 per academic year, up to a $20,000 aggregate
maximum. Prior to the 1986 Amendments, a graduate or professional student
could borrow $3,000 of SLS Loans per academic year, up to a $15,000 maximum,
and an independent undergraduate student could borrow $2,500 of SLS Loans per
academic year minus the amount of all other Federal Family Education Loan
Program loans to such student for such academic year, up to a maximum amount
of all Federal Family Education Loan Program loans to that student of $12,500.
The 1989 Amendments limited the amount of SLS Loans for students enrolled in
programs of less than an academic year in length (similar to the limits
described above under "Stafford Loans"), and such limits were continued by the
1992 Amendments.
Repayment
Loans made under the Federal Family Education Loan Program (other than
Consolidation Loans) must provide for repayment of principal in periodic
installments over a period of not less than five nor more than ten years. A
Consolidation Loan must be repaid during a period agreed to by the borrower
and lender, subject to maximum repayment periods which vary depending upon the
principal amount of the borrower's outstanding student loans (but no longer
than 30 years). For Consolidation Loans for which the application was
received prior to January 1, 1993, the repayment period could not exceed 25
years. The repayment period commences (a) not more than twelve months after
the borrower ceases to pursue at least a half-time course of study with
respect to Stafford Loans for which the applicable rate of interest is 7% per
annum, (b) not more than six months after the borrower ceases to pursue at
least a half-time course of study with respect to other Stafford Loans and
Unsubsidized Stafford Loans (the six month or twelve month periods are the
"Grace Periods") and (c) on the date of final disbursement of the loan in the
case of SLS, Plus and Consolidation Loans, except that the borrower of an SLS
Loan who also has a Stafford or Unsubsidized Stafford Loan may defer repayment
of the SLS Loan to coincide with the commencement of repayment of the Stafford
or Unsubsidized Stafford Loan. During periods in which repayment of principal
is required, payments of principal and interest must in general be made at a
rate of not less than the greater of $600 per year or the interest that
accrues during the year, except that a borrower and lender may agree at any
time before or during the repayment period that repayment may be at a lesser
rate. A borrower may agree, with concurrence of the lender, to repay the loan
in less than five years with the right subsequently to extend his
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minimum repayment period to five years. Borrowers are entitled to accelerate,
without penalty, the repayment of all or any part of the loan.
In addition, the 1992 Amendments required lenders of Consolidation Loans
to establish graduated or income-sensitive repayment schedules and required
lenders of Stafford and SLS Loans to offer borrowers the option of repaying in
accordance with graduated or income-sensitive repayment schedules. The
Original Issuer has implemented (and SLFC will implement) graduated repayment
schedules and income-sensitive repayment schedules. Use of income-sensitive
repayment schedules may extend the ten-year maximum term for up to five years.
In addition, if the repayment schedule on a loan that has been converted to a
variable interest rate does not provide for adjustments to the amount of the
monthly installment payments, the ten-year maximum term may be extended for up
to three years.
No principal repayments need be made during certain periods of deferment
prescribed by the Higher Education Act ("Deferment Periods"). For loans to a
borrower who first obtained a loan which was disbursed before July 1, 1993,
deferments are available (i) during a period not exceeding three years while
the borrower is a member of the Armed Forces, an officer in the Commissioned
Corps of the Public Health Service or, with respect to a borrower who first
obtained a student loan disbursed on or after July 1, 1987, or a student loan
to cover the cost of instruction for a period of enrollment beginning on or
after July 1, 1987, an active duty member of the National Oceanic and
Atmospheric Administration Corps, (ii) during a period not in excess of three
years while the borrower is a volunteer under the Peace Corps Act, (iii)
during a period not in excess of three years while the borrower is a full-time
volunteer under the Domestic Volunteer Act of 1973, (iv) during a period not
exceeding three years while the borrower is in service, comparable to the
service referred to in clauses (ii) and (iii), as a full-time volunteer for an
organization which is exempt from taxation under Section 501(c)(3) of the
Code, (v) during a period not exceeding two years while the borrower is
serving an internship, the successful completion of which is required to
receive professional recognition required to begin professional practice or
service, or a qualified internship or residency program, (vi) during a period
not exceeding three years while the borrower is temporarily totally disabled,
as established by sworn affidavit of a qualified physician, or while the
borrower is unable to secure employment by reason of the care required by a
dependent who is so disabled, (vii) during a period not to exceed twenty-four
months while the borrower is seeking and unable to find full-time employment,
(viii) during any period that the borrower is pursuing a full-time course of
study at an eligible institution (or, with respect to a borrower who first
obtained a student loan disbursed on or after July 1, 1987, or a student loan
to cover the cost of instruction for a period of enrollment beginning on or
after July 1, 1987, is pursuing at least a half-time course of study for which
the borrower has obtained a loan under the Federal Family Education Loan
Program), or is pursuing a course of study pursuant to a graduate fellowship
program or a rehabilitation training program for disabled individuals approved
by the Secretary of Education, (ix) during a period, not in excess of 6
months, while the borrower is on parental leave, and (x) only with respect to
a borrower who first obtained a student loan disbursed on or after July 1,
1987, or a student loan to cover the cost of instruction for a period of
enrollment beginning on or after July 1, 1987, (A) during a period not in
excess of three years while the borrower is a full-time teacher in a public or
nonprofit private elementary or secondary school in a "teacher shortage area"
(as prescribed by the Secretary of Education), and (B) during a period not in
excess of 12 months for mothers, with preschool age children, who are entering
or re-entering the work force and who are compensated at a rate not exceeding
$1 per hour in excess of the federal minimum wage. For loans to a borrower
who first obtains a loan on or after July 1, 1993, deferments are available
(a) during any period that the borrower is pursuing at least a half-time
course of study at an eligible institution or a course of study pursuant to a
graduate fellowship program or rehabilitation training program approved by the
Secretary, (b) during a period not exceeding three years while the borrower is
seeking and unable to find full-time employment, and (c) during a period not
in excess of three years for any reason which the lender determines, in
accordance with regulations under the Higher Education Act, has caused or will
cause the borrower economic hardship. Economic hardship includes working full
time and earning an amount not in excess of the greater of the minimum wage or
the poverty line for a family of two. Additional categories of economic hardshi
p are based on the relationship between a borrower's educational debt burden
and his or her income. Prior to the 1992 Amendments, only the Deferment
Periods described above in clauses (vi) and (vii) (with respect to the parent
borrower) and the Deferment Period described in clause (viii) (with respect to
the parent borrower or a student on
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whose behalf the parent borrowed) were available to Plus Loan borrowers, and
only the Deferment Periods described above in clauses (vi), (vii) and (viii)
were available to Consolidation Loan borrowers. Prior to the 1986 Amendments,
Plus Loan borrowers were not entitled to Deferment Periods. Deferment Periods
extend the ten year maximum term.
The Higher Education Act also provides for periods of forbearance during
which the borrower, in case of temporary financial hardship, may defer any
payments. A borrower is entitled to forbearance for a period not to exceed
three years while the borrower's debt burden under Title IV of the Higher
Education Act (which includes the Federal Family Education Loan Program)
equals or exceeds 20% of the borrower's gross income, and also is entitled to
forbearance while he or she is serving in a qualifying medical or dental
internship program or in a "national service position" under the National and
Community Service Trust Act of 1993. In addition, mandatory administrative
forbearances are provided when exceptional circumstances such as a local or
national emergency or military mobilization exist; or when the geographical
area in which the borrower or endorser resides has been designated a disaster
area by the President of the United States or Mexico, the Prime Minister of
Canada, or by the governor of a state. In other circumstances, forbearance is
at the lender's option. Such forbearance also extends the ten year maximum
term.
As described under "Contracts with Guarantee Agencies -- Federal Interest
Subsidy Payments" below, the Secretary of Education makes interest payments on
behalf of the borrower of certain eligible loans while the borrower is in
school and during Grace and Deferment Periods. Interest that accrues during
periods of forbearance and, if the loan is not eligible for interest subsidy
payments, while the borrower is in school and during the Grace and Deferment
Periods, may be paid monthly or quarterly or capitalized (added to the
principal balance) not more frequently than quarterly.
Disbursement
Loans made under the Federal Family Education Loan Program (except
Consolidation Loans) generally must be disbursed in two or more installments,
none of which may exceed 50% of the total principal amount of the loan.
Fees
Guarantee Fee. A Guarantee Agency is authorized to charge a premium, or
guarantee fee, of up to 1% of the principal amount of the loan, which must be
deducted proportionately from each installment payment of the proceeds of the
loan to the borrower. Guarantee fees may not currently be charged to
borrowers of Consolidation Loans. However, lenders may be charged an
insurance fee to cover the costs of increased or extended liability with
respect to Consolidation Loans. For loans made prior to July 1, 1994, the
maximum guarantee fee was 3% of the principal amount of the loan, but no such
guarantee fee was authorized to be charged with respect to Unsubsidized
Stafford Loans.
Origination Fee. An eligible lender is authorized to charge the borrower
of a Stafford or Plus Loan an origination fee in an amount not to exceed 3% of
the principal amount of the loan, and is required to charge the borrower of an
Unsubsidized Stafford Loan an origination fee in the amount of 3% of the
principal amount of the loan. These fees must be deducted proportionately
from each installment payment of the loan proceeds prior to payment to the borro
wer and are not retained by the eligible lender, but must be passed on to the
Secretary of Education. For loans made prior to July 1, 1994, the maximum
authorized fee for Stafford, Plus and SLS Loans was 5%, and the required fee
for Unsubsidized Stafford Loans was 6.5%, of the principal amount of the loan.
Lender Origination Fee. The lender of any loan under the Federal Family
Education Loan Program made on or after October 1, 1993 is required to pay to
the Secretary of Education a fee equal to 0.5% of the principal amount of such
loan.
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Rebate Fee on Consolidation Loans. The holder of any Consolidation Loan
made on or after October 1, 1993 is required to pay to the Secretary of
Education a monthly fee equal to .0875% (1.05% per annum) of the principal
amount of, and accrued interest on, such Consolidation Loan.
Loan Guarantees
Under the Federal Family Education Loan Program, Guarantee Agencies are
required to guarantee the payment of not less than 100% of the principal
amount of loans made prior to October 1, 1993 and covered by their respective
guarantee programs. For a description of the requirements for loans to be
covered by such guarantees, see "Description of the Guarantee Agencies". The
1993 Amendments reduced the minimum percentage of the principal amount of
loans which a Guarantee Agency must pay to 98%, effective with respect to
loans made on or after October 1, 1993. The Department of Education has taken
the position that a Guarantee Agency may not pay more than 98% of the
principal amount of and accrued interest on such a loan. Under certain
circumstances, guarantees may be assumed by the Secretary of Education or
another Guarantee Agency. See "Contracts with Guarantee Agencies" below.
CONTRACTS WITH GUARANTEE AGENCIES
Under the Federal Family Education Loan Program, the Secretary of
Education is authorized to enter into guaranty and interest subsidy agreements
with Guarantee Agencies. The Federal Family Education Loan Program provides
for reimbursements to Guarantee Agencies for default claims paid by Guarantee
Agencies, support payments to Guarantee Agencies for administrative and other
expenses, advances for a Guarantee Agency's reserve funds, and interest
subsidy payments and Special Allowance Payments to the holders of qualifying
student loans made pursuant to the Federal Family Education Loan Program.
The 1992 Amendments gave the Secretary of Education certain oversight
powers over Guarantee Agencies. Guarantee Agencies are required to maintain
their reserves at certain levels based on the amount of outstanding loans that
they have guaranteed. If a Guarantee Agency falls below the required level in
two consecutive years, or its claims rate exceeds 9% in any year, or if the
Secretary determines that the agency's administrative or financial condition
jeopardizes its ability to meet its obligations, the Secretary can require the
Guarantee Agency to submit and implement a plan by which it will correct such
problem(s). If a Guarantee Agency fails to timely submit an acceptable plan
or fails to improve its condition, or if the Secretary determines that the
Guarantee Agency is in danger of financial collapse, the Secretary may
terminate the Guarantee Agency's reimbursement contract. The 1993 Amendments
broadened the circumstances under which the Secretary may terminate such
reimbursement contracts, to include a determination that such action is
necessary to protect the federal fiscal interest or to ensure continued
availability of student loans or a smooth transition to direct lending (See
"Direct Loans" below).
The 1992 Amendments also added provisions authorizing the Secretary of
Education to assume the guarantee obligations of a Guarantee Agency. The
Higher Education Act now provides that, if the Secretary terminates a
Guarantee Agency's agreements under the Federal Family Education Loan Program,
the Secretary shall assume responsibility for all functions of the Guarantee
Agency under its program. To that end, the Secretary is authorized to, among
other options, transfer the guarantees to another Guarantee Agency or assume
the guarantees. It also provides that in the event the Secretary has
determined that a Guarantee Agency is unable to meet its guarantee
obligations, holders of loans guaranteed by such Guarantee Agency may submit
claims directly to the Secretary for payment, unless the Secretary has
provided for the assumption of such guarantees by another Guarantee Agency.
Federal Reimbursement
A Guarantee Agency's right to receive federal reimbursements for various
guarantee claims paid by such Guarantee Agency is governed by the Higher
Education Act and various contracts entered into between Guarantee Agencies
and the Secretary of Education. See "Description of the Guarantee Agencies --
Federal Agreements".
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Under the Higher Education Act and the Federal Reimbursement Contracts, the
Secretary of Education currently agrees to reimburse a Guarantee Agency for
the amounts expended by the Guarantee Agency in the discharge of its guarantee
obligation (i.e., the unpaid principal balance of and accrued interest on
loans guaranteed by the Guarantee Agency, which loans are referred to herein
as "guaranteed loans") as a result of the default of the borrower. With
respect to loans made prior to October 1, 1993, the Secretary currently agrees
to reimburse the Guarantee Agency for up to 100% of the amounts so expended.
The 1993 Amendments provide for reimbursement of a maximum of 98% of the
amount expended with respect to guaranteed loans made on or after October 1,
1993. Depending on the claims rate experience of a Guarantee Agency, such
100% (or 98%) reimbursement may be reduced as discussed in the formula
described below. The Secretary of Education also agrees to repay 100% of the
unpaid principal plus applicable accrued interest expended by a Guarantee
Agency in discharging its guarantee obligation as a result of the bankruptcy,
death, or total and permanent disability of a borrower (or in the case of a
Plus Loan, the death of the student on behalf of whom the loan was borrowed),
or in certain circumstances, as a result of school closures, which
reimbursements are not to be included in the calculations of the Guarantee
Agency's Claims Rate experience for the purpose of federal reimbursement under
the Federal Reimbursement Contracts.
The formula for computing the percentage of federal reimbursement under
the Federal Reimbursement Contracts is not accumulated over a period of years
but is measured by the amount of federal reimbursement payments in any one
federal fiscal year as a percentage of the original principal amount of loans
under the Federal Family Education Loan Program guaranteed by the Guarantee
Agency and in repayment at the end of the preceding fiscal year. Under the
formula, federal reimbursement payments to a Guarantee Agency in any one
fiscal year not exceeding 5% of the original principal amount of loans in
repayment at the end of the preceding fiscal year are to be paid by the
Secretary of Education at 100% (or 98% for loans made on or after October 1,
1993). Beginning at any time during any fiscal year that federal reimbursement
payments exceed 5%, and until such time as they may exceed 9%, of the original
principal amount of loans in repayment at the end of the preceding fiscal
year, then reimbursement payments on claims submitted during that period are
to be paid at 90% (or 88% for loans made on or after October 1, 1993).
Beginning at any time during any fiscal year that federal reimbursement
payments exceed 9% of the original principal amount of loans in repayment at
the end of the preceding fiscal year, then such payments for the balance of
that fiscal year will be paid at 80% (or 78% for loans made on or after
October 1, 1993). The original principal amount of loans in repayment for
purposes of computing reimbursement payments to a Guarantee Agency means the
original principal amount of all loans guaranteed by such Guarantee Agency
less: (1) guarantee payments on such loans, (2) the original principal amount
of such loans that have been fully repaid, and (3) the original principal
amount of such loans for which the first principal installment payment has not
become due or such first installment need not be paid because of a Deferment
Period.
Under present practice, after the Secretary of Education reimburses a
Guarantee Agency for a default claim paid on guaranteed loan, the Guarantee
Agency continues to seek repayment from the borrower. The Guarantee Agency
returns to the Secretary of Education payments that it receives from a
borrower after deducting and retaining (i) a percentage amount equal to the
complement of the reimbursement percentage in effect at the time the loan was
reimbursed, and (ii) an amount equal to 27% (or 18½% in the case of a
payment from the proceeds of a Consolidation Loan) of such payments for
certain administrative costs. The Secretary of Education may, however,
require the assignment to the Secretary of defaulted guaranteed loans, in
which event no further collections activity need be undertaken by the
Guarantee Agency, and no amount of any recoveries shall be paid to the
Guarantee Agency. Prior to the 1993 Amendments, the percentage of collections
which Guarantee Agencies could retain (as described in clause (ii) above) was
30%.
A Guarantee Agency may enter into an addendum to its Interest Subsidy
Agreement (as hereinafter defined), which addendum provides for the Guarantee
Agency to refer to the Secretary of Education certain defaulted guaranteed
loans. Such loans are then reported to the Internal Revenue Service to
"offset" any tax refunds which may be due any defaulted borrower. To the
extent that the Guarantee Agency has originally received less than 100%
reimbursement from the Secretary of Education with respect to such a referred
loan, the Guarantee Agency
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will not recover any amounts subsequently collected by the federal government
which are attributable to that portion of the defaulted loan for which the
Guarantee Agency has not been reimbursed.
Rehabilitation of Defaulted Loans
Under Section 428F of the Higher Education Act, the Secretary of Education
is authorized to enter into an agreement with a Guarantee Agency pursuant to
which the Guarantee Agency shall sell defaulted loans that are eligible for
rehabilitation to an eligible lender. The Guarantee Agency shall repay the
Secretary of Education an amount equal to 81.5% of the then current principal
balance of such loan, multiplied by the reimbursement percentage in effect at
the time the loan was reimbursed. The amount of such repayment shall be
deducted from the amount of federal reimbursement payments for the fiscal year
in which such repayment occurs, for purposes of determining the reimbursement
rate for that fiscal year.
For a loan to be eligible for rehabilitation, the Guarantee Agency must
have received consecutive payments for 12 months of amounts owed on such loan.
Upon rehabilitation, a loan is eligible for all the benefits under the Higher
Education Act for which it would have been eligible had no default occurred
(except that a borrower's loan may only be rehabilitated once).
Eligibility for Federal Reimbursement
To be eligible for federal reimbursement payments, guaranteed loans must
be made by an eligible lender under the applicable Guarantee Agency's
Guarantee Program, which must meet requirements prescribed by the rules and
regulations promulgated under the Higher Education Act, including the borrower
eligibility, loan amount, disbursement, interest rate, repayment period and
guarantee fee provisions described herein and the other requirements set forth
in Section 428(b) of the Higher Education Act.
Under the Higher Education Act, a guaranteed loan must be delinquent for
180 days if it is repayable in monthly installments or 240 days if it is
payable in less frequent installments before a lender may obtain payment on a
guarantee from the Guarantee Agency. The Guarantee Agency must pay the lender
for the defaulted loan prior to submitting a claim to the Secretary of
Education for reimbursement. The Guarantee Agency must submit a reimbursement
claim to the Secretary of Education within 45 days after it has paid the
lender's default claim. As a prerequisite to entitlement to payment on the
guarantee by the Guarantee Agency, and in turn payment of reimbursement by the
Secretary of Education, the lender must have exercised reasonable care and
diligence in making, servicing and collecting the Guaranteed Loan.
Federal Interest Subsidy Payments
Interest subsidy payments are interest payments paid with respect to an
eligible loan during the period prior to the time that the loan enters
repayment and during Grace and Deferment Periods. The Secretary of Education
and the Guarantee Agencies entered into the Interest Subsidy Agreements as
described in "Description of the Guarantee Agencies -- Federal Agreements",
whereby the Secretary of Education agrees to pay interest subsidy payments to
the holders of eligible guaranteed loans for the benefit of students meeting
certain requirements, subject to the holders' compliance with all requirements
of the Higher Education Act. Only Stafford Loans, and Consolidation Loans for
which the application was received on or after January 1, 1993, are eligible
for interest subsidy payments. Consolidation Loans made after August 10, 1993
are eligible for interest subsidy payments only if all loans consolidated
thereby are Stafford Loans, except that Consolidation Loans for which the
application is received by an eligible lender on or after November 13, 1997
and before October 1, 1998, are eligible for interest subsidy payments on that
portion of the Consolidation Loan that repays Stafford Loans or similar
subsidized loans made under the direct loan program. In addition, to be
eligible for interest subsidy payments, guaranteed loans must be made by an
eligible lender under the applicable Guarantee Agency's Guarantee Program, and
must meet requirements prescribed by the rules and regulations promulgated
under the Higher Education Act, including the
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borrower eligibility, loan amount, disbursement, interest rate, repayment
period and guarantee fee provisions described herein and the other
requirements set forth in Section 428(b) of the Higher Education Act.
The Secretary of Education makes interest subsidy payments quarterly on
behalf of the borrower to the holder of a guaranteed loan in a total amount
equal to the interest which accrues on the unpaid principal amount prior to
the commencement of the repayment period of the loan or during any Deferment
Period. A borrower may elect to forego interest subsidy payments, in which
case the borrower is required to make interest payments.
Federal Administrative Expense Allowances
Prior to the adoption of the 1993 Amendments, each Guarantee Agency was
entitled to receive from the Secretary of Education an administrative cost
allowance equal to 1% of the total principal amount of the loans (other than
Consolidation Loans) guaranteed by the Guarantee Agency in any fiscal year,
for the purposes of administrative costs of pre-claims assistance for default
prevention and collection of defaulted guaranteed loans, administrative costs
of promoting commercial lender participation, administrative costs of
monitoring the enrollment and repayment status of students, and for other such
costs related to the Guarantee Agency's Guarantee Program. The 1993
Amendments repealed such entitlement, effective October 1, 1993. The 1993
Amendments, however, authorized payments for transition support (including
administrative costs) to Guarantee Agencies, in connection with the transition
to direct lending. See "Direct Loans" below. Budget legislation adopted
since that time has provided for the payment to Guarantee Agencies of an
administrative expense allowance equal to 0.85% of the agency's annual new
guarantee volume. The 1997 Amendments provide for payment of such an
administrative expense allowance through the fiscal year ending September 30,
2002. However, after the fiscal year ending September 30, 1997, such amounts
are subject to decreasing aggregate limits. There are no assurances as to the
level of such payments that can be made within such aggregate limits, or that
Congress will require such payments or that the Secretary of Education will
determine to continue to make any such payments in future years.
Federal Advances
Pursuant to agreements entered into between the Guarantee Agencies and the
Secretary of Education under Sections 422 and 422(c) of the Higher Education
Act, the Secretary of Education was authorized to advance moneys from time to
time to the Guarantee Agencies for the purpose of establishing and
strengthening the Guarantee Agencies' reserves. Section 422(c) currently
authorizes the Secretary of Education to make advances to Guarantee Agencies
in various circumstances, on terms and conditions satisfactory to the
Secretary, including if the Secretary is seeking to terminate the Guarantee
Agency's reimbursement contract or assume the Guarantee Agency's functions, to
assist the Guarantee Agency in meeting its immediate cash needs or to ensure
the uninterrupted payment of claims.
FEDERAL SPECIAL ALLOWANCE PAYMENTS
The Higher Education Act provides for the payment by the Secretary of
Education of additional subsidies, called Special Allowance Payments, to
holders of qualifying student loans. The amount of the Special Allowance
Payments, which are made on a quarterly basis, is computed by reference to the
average of the bond equivalent rates of the 91-day Treasury bills auctioned
during the preceding quarter (the "91-day T-Bill Rate"). The quarterly rate
for Special Allowance Payments for Student Loans made on or after October 1,
1981, and generally before November 16, 1986 is computed by subtracting the
applicable interest rate on such loans from the 91-day T-Bill Rate, adding
3.5% to the resulting per centum, and dividing the resulting per centum by
four. For loans disbursed on or after November 16, 1986, or loans to cover
the costs of instruction for periods of enrollment beginning on or after
November 16, 1986, the 1986 Amendments and 1987 Amendments substituted 3.25%
for 3.5% in the foregoing formula. For loans disbursed on or after October 1,
1992, the 1992 Amendments substituted 3.1% for 3.5% in such formula. For
Stafford and Unsubsidized Stafford Loans made on or after July 1, 1995, the
1993 Amendments substitute 2.5% for 3.1% in such formula prior to the time
such loans enter repayment and during any Deferment Periods. For loans made
on or after July 1, 1998, the special allowance formula is to be revised
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similarly to the manner in which the applicable interest rate formula is
revised, as described above under "Loan Terms -- Interest Rates -- Stafford
Loans".
For Plus and SLS Loans which bear interest at rates adjusted annually,
Special Allowance Payments are made only in years during which the interest
rate ceiling on such loans operates to reduce the rate that would otherwise
apply based upon the applicable formula. See "Loan Terms -- Interest Rates --
Plus Loans" and "-- SLS Loans" above. Under the 1993 Amendments, Special
Allowance Payments are paid with respect to Plus Loans made on or after July
1, 1994 only if the rate that would otherwise apply exceeds 10% per annum,
notwithstanding that the interest rate ceiling on such loans is 9% per annum.
The portion, if any, of a Consolidation Loan that repaid a loan made under the
federal health education assistance loan program may be ineligible for Special
Allowance Payments.
Section 438(b)(2) of the Higher Education Act provides that the quarterly
rate of Special Allowance Payments paid to holders of loans which were made or
purchased with funds obtained by the holder from the issuance of certain
obligations, the income from which is exempt from taxation under the Code (as
well as with funds obtained by the holder from certain earnings related
thereto) shall be one-half the quarterly rate of the special allowance
established under the formula described above (without giving effect to the
changes in such formula enacted by the 1986 Amendments, the 1987 Amendments,
the 1992 Amendments and the 1993 Amendments). Such reduced rate, however,
shall not be less than: (a) for loans disbursed before October 1, 1992, 2.5%
per annum in the case of loans for which the applicable interest rate is 7%
per annum, 1.5% per annum in the case of loans for which the applicable
interest rate is 8% per annum, or 0.5% per annum in the case of loans for
which the applicable rate is 9% per annum; and (b) for loans disbursed on or
after October 1, 1992, the difference between 9.5% per annum and the
applicable interest rate on the loan. The effect of these provisions is to
provide a minimum rate of return (i.e., combined interest and Special
Allowance Payments) of 9.5% per annum on 7%, 8% and 9% Stafford Loans, on
Consolidation Loans, and on Stafford and Unsubsidized Stafford Loans that bear
interest at a rate that is adjusted annually and that were made on or after
October 1, 1992 . However, Plus and SLS Loans do not have such an assured
rate of return because Special Allowance Payments are made on such loans only
if the interest rate ceiling on such loans operates to limit the applicable
interest rate. In addition, variable rate loans made before October 1, 1992
will not have such an assured minimum rate of return. The "rebate" fee
payable with respect to Consolidation Loans (as described above under "Loan
Terms -- Fees -- Rebate Fee on Consolidation Loans") also has the effect of
reducing the rate of return on Consolidation Loans made on or after October 1,
1993. The special provisions described above for holders of loans made or
purchased with funds obtained from the issuance of certain obligations, the
income from which is exempt from taxation, applies only to such obligations
issued on or before September 30, 1993, and obligations issued to refund such
obligations.
The Balanced Budget and Deficit Control Act of 1985, as amended (known as
the "Gramm-Rudman Law") requires the President to issue a sequester order for
any federal fiscal year in which the projected budget exceeds the target for
that year. A sequester order for any fiscal year would apply to loans made on
or after October 1 of that fiscal year. The sequester order would change the
formula for calculating Special Allowance Payments for the first four Special
Allowance Payment periods relating to loans originally disbursed during that
fiscal year. The special allowance formula would be reduced to the 91-day
T-Bill Rate plus 3.0% (for loans with a special allowance formula of the
91-day T-Bill Rate plus 3.1%).
For the Trustee to be eligible to receive Special Allowance Payments with
respect to any loans which were made or purchased with funds obtained by the
issuance of obligations, the income from which is exempt from taxation under
the Code (such as the Tax Exempt Series 1998-1 Notes), the Original Issuer may
not engage in any pattern or practice which results in a denial of a
borrower's access to loans under the Higher Education Act because of the
borrower's race, sex, color, religion, national origin, age, handicap status,
income, attendance at a particular eligible institution within the area served
by the Original Issuer, length of the borrower's educational program, or the
borrower's academic year in school.
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The Higher Education Act also provides that no special allowance may be
paid for such loans unless the Original Issuer submitted to the Governor of
the State a plan for doing business, for approval by the Governor after
consultation with EAC. Such plan is required to contain provisions designed
to assure that:
(1) no eligible lender in the area served by the Original Issuer
will be excluded from participation in the program of the Original Issuer
and that all eligible lenders may participate in the program on the same
terms and conditions if eligible lenders are going to participate in the
program;
(2) no director or staff member of the Original Issuer who receives
compensation from the Original Issuer may own stock in, or receive
compensation from any agency that would contract to service and collect
the loans of the Original Issuer;
(3) the Original Issuer will not purchase student loans from
participating lenders at a premium amounting to more than 1% of the unpaid
principal amount borrowed plus accrued interest to the date of
acquisition, but the Original Issuer may pay reasonable loan transfer
fees;
(4) the Original Issuer will, within the limit of funds available
and subject to applicable State and federal law, make loans to, or
purchase loans incurred by, all eligible students who are residents of or
who attend an eligible institution within the area served by the Original
Issuer;
(5) the Original Issuer has a plan under which it will pursue the
development of new lender participation in a continuing program of
benefits to students together with assurances of existing lender
commitments to the program; and
(6) there will be an annual audit of the Original Issuer by a
certified public accounting firm which will include review of compliance
by the Original Issuer with the provisions of the plan.
The Governor of the State has approved the Original Issuer's most recent
Plan for Doing Business. Because the Original Issuer expects to terminate its
participation in the Federal Family Education Loan Program, the Original
Issuer will no longer be capable of carrying out certain provisions of such
plan for doing business. The Original Issuer, SLFC, and the Corporation will
each covenant to comply with the provisions of such plan for doing business
that apply to their respective operations.
The Department of Education's regulations impose various sanctions on
holders of such loans for failure to comply with the plan for doing business
and such regulations, including, without limitation, withholding or seeking
reimbursement of Special Allowance Payments.
The Higher Education Act provides that if Special Allowance Payments or
interest subsidy payments have not been made within 30 days after the
Secretary of Education receives an accurate, timely and complete request
therefor, the special allowance payable to such holder shall be increased by
an amount equal to the daily interest accruing on the special allowance and
interest subsidy payments due the holder.
Special Allowance Payments and interest subsidy payments are reduced by
the amount which the lender is authorized or required to charge as an
origination fee, as described above under "Loan Terms -- Fees -- Origination
Fee". In addition, the amount of the lender origination fee described above
under "Loan Terms -- Fees -- Lender Origination Fees" is collected by offset
to Special Allowance Payments and interest subsidy payments.
FEDERAL STUDENT LOAN INSURANCE FUND
The Higher Education Act authorizes the establishment of a Student Loan
Insurance Fund by the Federal government for making the federal insurance and
the federal reimbursement payments on defaulted student loans to Guarantee
Agencies. If moneys in the fund are insufficient to make the federal payments
on defaults of such
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loans, the Secretary of Education is authorized, to the extent provided in
advance by appropriation acts, to issue to the Secretary of the Treasury
obligations containing terms and conditions prescribed by the Secretary of
Education and approved by the Secretary of the Treasury, bearing interest at a
rate determined by the Secretary of the Treasury. The Secretary of the
Treasury is authorized and directed by the Higher Education Act to purchase
such obligations.
DIRECT LOANS
The 1993 Amendments authorized a program of "direct loans", to be
originated by schools with funds provided by the Secretary of Education. Under
the direct loan program, the Secretary of Education is directed to enter into
agreements with schools, or origination agents in lieu of schools, to disburse
loans with funds provided by the Secretary. Participation in the program by
schools is voluntary. The goals set forth in the 1993 Amendments call for the
direct loan program to constitute 5% of the total volume of loans made under
the Federal Family Education Loan Program and the direct loan program for
academic year 1994-1995, 40% for academic year 1995-1996, 50% for academic
years 1996-1997 and 1997-1998 and 60% for academic year 1998-1999. No
provision is made for the size of the direct loan program thereafter. Based
upon information released by the General Accounting Office, participation by
schools in the direct loan program has not been sufficient to meet the goals
for the 1995-1996 or 1996-1997 academic years.
The loan terms are generally the same under the direct loan program as
under the Federal Family Education Loan Program, though more flexible
repayment provisions are available under the direct loan program. At the
discretion of the Secretary of Education, students attending schools that
participate in the direct loan program (and their parents) may still be
eligible for participation in the Federal Family Education Loan Program,
though no borrower could obtain loans under both programs.
It is difficult to predict the impact of the direct lending program. There
is no way to accurately predict the number of schools that will participate in
future years, or, if the Secretary authorizes students attending participating
schools to continue to be eligible for Federal Family Education Loan Program
loans, how many students will seek loans under the direct loan program instead
of the Federal Family Education Loan Program. In addition, it is impossible
to predict whether future legislation will eliminate, limit or expand the
direct loan program or the Federal Family Education Loan Program.
DESCRIPTION OF THE GUARANTEE AGENCIES
GENERAL
The Indenture permits the Financing of Eligible Loans guaranteed by
various Guarantee Agencies. The Corporation expects that of the Eligible
Loans to be Financed on the Date of Issuance with the proceeds of the Series
1998-1 Notes, approximately 60.2% will be guaranteed by Education Assistance
Corporation ("EAC"), approximately 33.4% will be guaranteed by Pennsylvania
Higher Education Assistance Agency ("PHEAA"), and the remainder will be
guaranteed by one of the following Guarantee Agencies: United Student Aid
Funds, Inc., Northstar Guarantee Inc., Great Lakes Higher Education
Corporation, Student Loans of North Dakota, Iowa College Aid Commission,
Missouri Coordinating Board for Higher Education, Illinois Student Aid
Commission, or Educational Credit Management Corporation (formerly known as
Transitional Guaranty Agency, Inc.). The Corporation expects that California
Student Aid Commission also will be a Guarantee Agency for Eligible Loans to
be Financed following the Date of Issuance. Any other state agency or private
nonprofit institution or organization which administers a Guarantee Program,
may also be a Guarantee Agency of Eligible Loans to be Financed, subject to
confirmation of ratings on any Outstanding Unenhanced Notes or, if no
Unenhanced Notes are then Outstanding but Other Indenture Obligations are
Outstanding, consent of each Other Beneficiary holding such Outstanding Other
Indenture Obligations, as evidenced in writing to the Trustee by each such
Other Beneficiary.
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The Corporation expects that the percentage of Financed Eligible Loans
guaranteed by EAC will increase over time, while the percentage guaranteed by
PHEAA will decrease. However, actual amounts guaranteed by these Guarantee
Agencies may vary from the Corporation's expectations. Proceeds of Additional
Notes issued on a parity basis under the Indenture, moreover, may be used to
finance Eligible Loans guaranteed by these or other Guarantee Agencies in
amounts unrelated to the expected amount of loans guaranteed by a particular
Guarantee Agency that is Financed with the proceeds of the Series 1998-1
Notes. (Any Additional Notes will not be issued and sold under the
Registration Statement filed with respect to the Series 1998-1 Notes.)
A Guarantee Agency guarantees loans made to students or parents of
students by lending institutions such as banks, credit unions, savings and
loan associations, certain schools, pension funds and insurance companies. A
Guarantee Agency generally purchases defaulted student loans which it has
guaranteed from its cash and reserves (generally referred to herein as its
"Guarantee Fund"). A lender may submit a default claim to the Guarantee
Agency after the student loan has been delinquent for at least 180 days;
however, lenders are strongly encouraged not to file a claim until the loan is
at least 210 days delinquent. The default claim package must include all
information and documentation required under the Federal Family Education Loan
Program regulations and the Guarantee Agency's policies and procedures. Under
the Guarantee Agencies' current procedures, assuming that the default claim
package complies with the Guarantee Agency's loan procedures manual or
regulations, the Guarantee Agency pays the lender for a default claim within
90 days of the lender's filing the claim with the Guarantee Agency. The
Guarantee Agency will pay the lender interest accrued on the loan for up to
360 days after delinquency. The Guarantee Agency must file a reimbursement
claim with the Department of Education within 45 days after the Guarantee
Agency has paid the lender for the default claim.
In general, a Guarantee Agency's Guarantee Fund has been funded
principally by administrative cost allowances paid by the Secretary of
Education, guarantee fees paid by lenders (the cost of which may be passed on
to borrowers), investment income on moneys in the Guarantee Fund, and a
portion of the moneys collected from borrowers on Guaranteed Loans that have
been reimbursed by the Secretary of Education to cover the Guarantee Agency's
administrative expenses.
Various changes to the Higher Education Act have adversely affected the
receipt of revenues by the Guarantee Agencies and their ability to maintain
their Guarantee Funds at previous levels, and may adversely affect their
ability to meet their guarantee obligations. These changes include the
reduction in reinsurance payments from the Secretary of Education because of
reduced reimbursement percentages; the reduction in maximum permitted
guarantee fees from 3% to 1% for loans made on or after July 1, 1994; the
reduction and possible elimination of administrative expense allowances from
the Secretary of Education; the reduction in supplemental preclaims assistance
payments from the Secretary of Education; and the reduction in retention by a
Guarantee Agency of collections on defaulted loans from 30% to 27%.
Additionally, the adequacy of a Guarantee Agency's Guarantee Fund to meet its
guarantee obligations with respect to existing student loans depends, in
significant part, on its ability to collect revenues generated by new loan
guarantees. The Federal Direct Student Loan Program may adversely affect the
volume of new loan guarantees. Future legislation may make additional changes
to the Higher Education Act that would significantly affect the revenues
received by Guarantee Agencies and the structure of the guarantee agency
program. For a more complete description of provisions of the Higher
Education Act that relate to payments described in this paragraph or affect
the funding of a Guarantee Fund, see "Description of Federal Family Education
Loan Program".
The Higher Education Act gives the Secretary of Education various
oversight powers over Guarantee Agencies. These include requiring a Guarantee
Agency to maintain its Guarantee Fund at a certain required level and taking
various actions relating to a Guarantee Agency if its administrative and
financial condition jeopardizes its ability to meet its obligations. These
actions include, among others, providing advances to the Guarantee Agency,
terminating the Guarantee Agency's Federal Reimbursement Contracts, assuming
responsibility for all functions of the Guarantee Agency, and transferring the
Guarantee Agency's guarantees to another guarantee agency or assuming such
guarantees. The Higher Education Act provides that a Guarantee Agency's
Guarantee Fund shall be considered to be the property of the United States to
be used in the operation of the Federal Family Education
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Loan Program or the Federal Direct Student Loan Program, and, under certain
circumstances, the Secretary of Education may demand payment of amounts in the
Guarantee Fund. The 1997 Amendments direct the Secretary of Education to
demand payment on September 1, 2002 of a total of one billion dollars from all
of the guarantee agencies participating in the Federal Family Education Loan
Program. The amounts to be demanded of each Guarantee Agency shall be
determined in accordance with formulas included in the Higher Education Act.
Each Guarantee Agency will be required to deposit funds in a restricted
account in installments, beginning in the federal fiscal year ending September
30, 1998, to provide for such payment. The Secretary has made the
determinations, and advised the Guarantee Agencies, of the amounts required to
be so transferred by the Guarantee Agencies. There can be no assurance that
relevant federal laws, including the Higher Education Act, will not be further
changed in a manner that may adversely affect the ability of a Guarantee
Agency to meet its guarantee obligations. See "Description of Federal Family
Education Loan Program".
There are no assurances as to the Secretary of Education's actions if a
Guarantee Agency encounters administrative or financial difficulties or that
the Secretary of Education will not demand that a Guarantee Agency transfer
additional portions or all of its Guarantee Fund to the Secretary of
Education.
Information relating to the particular Guarantee Agencies set forth in
this Prospectus has been provided by the respective Guarantee Agencies, and
neither such information nor information included in the reports referred to
herein has been verified by, or is guaranteed as to accuracy or completeness
by, the Original Issuer, the Corporation or the Underwriters. Such
information should not be construed as a representation by the Original
Issuer, the Corporation or the Underwriters. No representation is made by the
Original Issuer, the Corporation or the Underwriters as to the accuracy or
adequacy of such information or the absence of material adverse changes in
such information subsequent to the dates thereof.
FEDERAL AGREEMENTS
Each Guarantee Agency and the Secretary of Education have entered into
Federal Reimbursement Contracts pursuant to Section 428(c) of the Higher
Education Act (which include, for older Guarantee Agencies, a supplemental
contract pursuant to former Section 428A of the Higher Education Act), which
provide for the Guarantee Agency to receive 80% to 100% reimbursement of
insurance payments that the Guarantee Agency makes to eligible lenders with
respect to loans guaranteed by the Guarantee Agency prior to the termination
of the Federal Reimbursement Contracts or the expiration of the authority of
the Higher Education Act. The 1993 Amendments reduced the reimbursement
percentages referred to above with respect to claims on most loans made on or
after October 1, 1993. See "Effect of Annual Claims Rate" below. The Federal
Reimbursement Contracts provide for termination under certain circumstances
and also provide for certain actions short of termination by the Secretary of
Education to protect the federal interest. See "Description of Federal Family
Education Loan Program -- Contracts with Guarantee Agencies -- Federal
Reimbursement".
In addition to guarantee benefits, qualified Student Loans acquired under
the Program benefit from certain federal subsidies. Each Guarantee Agency and
the Secretary of Education have entered into an interest subsidy agreement
under Section 428(b) of the Higher Education Act (an "Interest Subsidy
Agreement"), which entitles the holders of eligible loans guaranteed by the
Guarantee Agency to receive interest subsidy payments from the Secretary of
Education on behalf of certain students while the student is in school, during
a six to twelve month Grace Period after the student leaves school, and during
certain Deferment Periods, subject to the holders' compliance with all
requirements of the Higher Education Act. See "Description of Federal Family
Education Loan Program -- Contracts with Guarantee Agencies -- Federal
Interest Subsidy Payments" for a more detailed description of the interest
subsidy payments.
United States Courts of Appeals have held that the federal government,
through subsequent legislation, has the right unilaterally to amend the
contracts between the Secretary of Education and the Guarantee Agencies
described herein. Amendments to the Higher Education Act in 1986, 1987, 1992
and 1993, respectively (i) abrogated certain rights of guarantee agencies
under contracts with the Secretary of Education relating to the
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repayment of certain advances from the Secretary of Education, (ii) authorized
the Secretary of Education to withhold reimbursement payments otherwise due to
certain guarantee agencies until specified amounts of such guarantee agencies'
reserves had been eliminated, (iii) added new reserve level requirements for
guarantee agencies and authorized the Secretary of Education to terminate the
Federal Reimbursement Contracts under circumstances that did not previously
warrant such termination, and (iv) expanded the Secretary of Education's
authority to terminate such contracts and to seize guarantee agencies'
reserves. There can be no assurance that future legislation will not further
adversely affect the rights of the Guarantee Agencies, or holders of loans
guaranteed by a Guarantee Agency under such contracts.
EFFECT OF ANNUAL CLAIMS RATE
A Guarantee Agency's ability to meet its obligation to pay default claims
on Financed Eligible Loans will depend on the adequacy of its Guarantee Fund
and, under the current federal reinsurance arrangement, the default experience
of all lenders under the Guarantee Agency's Guarantee Program. A high default
experience among lenders participating in a Guarantee Agency's Guarantee
Program may cause the Guarantee Agency's Claims Rate (as defined below) for
its Guarantee Program to exceed the 5% and 9% levels described below, and
result in the Secretary of Education reimbursing the Guarantee Agency at lower
percentages of default claims payments made by the Guarantee Agency.
Each Guarantee Agency is currently entitled to receive reimbursement
payments under the Federal Reimbursement Contracts in amounts that vary
depending on the Claims Rate experience of the Guarantee Agency. The "Claims
Rate" is computed by dividing total default claims since the previous
September 30 by the total original principal amount of the Guarantee Agency's
guaranteed loans in repayment on such September 30. On October 1 of each year
the Claims Rate begins at zero, regardless of the experience in preceding
years. For loans made prior to October 1, 1993, if the Claims Rate remains
equal to or below 5% within a given federal fiscal year (October 1 through
September 30), the Secretary of Education is currently obligated to provide
100% reimbursement; if and when the Claims Rate exceeds 5% and until such
time, if any, as it exceeds 9% during the fiscal year, the reimbursement rate
is at 90%; if and when the Claims Rate exceeds 9% during the fiscal year, the
reimbursement rate for the remainder of the fiscal year is at 80%. For loans
made prior to October 1, 1993, each Guarantee Agency is currently entitled to
at least 80% reimbursement from the Secretary of Education on default claims
that it purchases, regardless of its Claims Rate. The reimbursement
percentages for loans made on or after October 1, 1993 are reduced from 100%,
90% and 80% to 98%, 88% and 78%, respectively. See "Description of Federal
Family Education Loan Program".
The Claims Rates for EAC and PHEAA for each of the last five federal
fiscal years is set forth in the table under "Certain Historical Information
for Guarantee Agencies -- Claims Rate" below.
EDUCATION ASSISTANCE CORPORATION - EAC
EAC is a South Dakota nonprofit corporation organized in 1978 to
administer the guaranteed loan program in the State. Since 1983, EAC also has
provided student loan guarantees and other services to certain lenders,
borrowers and schools in other states. EAC has no members. Two of the
present seven members of the Board of Directors of EAC are presently members
of the Boards of Directors of the Original Issuer, the Corporation and SLFC.
EAC presently employs a staff of 57 persons, plus part time help employed on a
periodic basis.
From January 16, 1979 through September 30, 1997, EAC had guaranteed
approximately $1,170,594,000 principal amount of loans under the Higher
Education Act, of which EAC estimates that approximately $573,861,000
aggregate unpaid principal amount was outstanding as of September 30, 1997. As
of September 30, 1997, EAC had total assets of approximately $17,294,000,
total liabilities of approximately $8,767,000, total deferred revenue of
approximately $5,382,000 and retained earnings of approximately $3,145,000.
The Secretary of Education has advised EAC that, pursuant to the 1997
Amendments, EAC must pay $5,903,366 to the Secretary of Education on September
1, 2002 (and make annual restricted account deposits toward such payment
beginning
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in fiscal year 1998 of approximately $1,181,000). EAC's liabilities as of
September 30, 1997 include the entire amount ($5,903,666) that will be
required to be paid to the Secretary of Education under the 1997 Amendments.
See "General" above. EAC will provide a copy of its most recent annual report
upon receipt of a written request directed to Education Assistance
Corporation, 115 First Avenue, Southwest, Aberdeen, South Dakota 57401,
Attention: President.
EAC ceased issuing new loan guarantees as of December 22, 1987 in
connection with the enactment of the Omnibus Budget Reconciliation Act of 1987
and EAC's related dispute with the Secretary of Education concerning EAC's
right to retain its reserves. In January 1988, EAC entered into an
arrangement with PHEAA, whereby EAC processed applications and guarantee
claims and undertook other administrative tasks with respect to loans made
after December 21, 1987 that EAC would otherwise have guaranteed, and PHEAA
guaranteed such loans. EAC recommenced guaranteeing student loans in July
1991, around which time PHEAA ceased guaranteeing South Dakota loans pursuant
to this arrangement. In May 1997, EAC recommenced guaranteeing loans to
borrowers neither resident in South Dakota nor attending school in South
Dakota, and ceased its arrangement with PHEAA with respect to such loans.
EAC has created Educational Assistance Service Company, Inc. ("EASCI"), a
wholly-owned subsidiary of EAC, the primary purpose of which is to furnish a
complete range of loan origination, processing, monitoring and related
services with respect to student loans made under the federal guaranteed
student loan program. EASCI commenced operations on March 6, 1985. As of
September 30, 1997, EASCI provided services to 138 lenders for a portfolio of
approximately $226,625,000 outstanding principal amount. The persons that
presently constitute EAC's Board of Directors also are the Directors of
EASCI. EAC shares some personnel, office space, overhead and computer time
with EASCI.
PENNSYLVANIA HIGHER EDUCATION ASSISTANCE AGENCY - PHEAA
PHEAA is a body corporate and politic constituting a public corporation
and government instrumentality of the Commonwealth of Pennsylvania (the
"Commonwealth") created pursuant to the Act of August 7, 1963, P.L. 549 (as
amended, the "PHEAA Act"). PHEAA's statutory purpose of improving higher
education opportunities by assisting students in meeting their expenses
involves a variety of activities, including administering numerous grant
programs, originating and purchasing student loans, servicing student loans
made by PHEAA and others and guaranteeing student loans.
PHEAA is designated by the Secretary of Education as the Guarantee Agency
for the Commonwealth and for the States of West Virginia and Delaware. PHEAA
has approximately 2,200 employees. Its principal office is located in
Harrisburg, Pennsylvania, with six regional offices located throughout
Pennsylvania and additional offices located in California, West Virginia and
Delaware.
PHEAA's activities are subject to audit by the Commonwealth's Department
of the Auditor General, and PHEAA is required to make an annual report to the
Governor of the Commonwealth and the legislature showing its condition at the
end of the Commonwealth's fiscal year.
PHEAA will provide a copy of its most recent annual report upon receipt
of a written request directed to Pennsylvania Higher Education Assistance
Agency, 1200 North 7th Street, Harrisburg, Pennsylvania 17102-1444, Attention:
Timothy A. Guenther, Senior Vice President and Chief Financial Officer.
The PHEAA Act created an educational loan assistance fund within the
State Treasury (the "Educational Loan Assistance Fund"). The PHEAA Act
provides that this fund is a continuing fund in which may be deposited moneys
received from repayments of principal on loans from the fund and payments of
interest and other fees and charges with respect to loans made pursuant to the
PHEAA Act, insurance premiums and charges assessed and collected by PHEAA on
loans made from the fund, appropriations made to the fund by the legislature,
proceeds of the sale of notes, bonds or other indebtedness to the extent and
in the manner provided by resolution of PHEAA's
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Board of Directors, other moneys received from any other source for the
purpose of this fund, and moneys received from the federal government for the
purpose of this fund or the PHEAA Act. The PHEAA Act further provides that,
except as otherwise provided for in any contracts with bondholders, all
appropriations and payments made into the Educational Loan Assistance Fund are
appropriated to the Board of Directors and may be applied and reapplied as the
Board of Directors shall direct and shall not be subject to lapsing.
PHEAA is authorized to issue bonds or notes, with the approval of the
Governor of the Commonwealth, for the purpose of purchasing, making or
guaranteeing loans to students or parents, or to lending institutions or
postsecondary institutions to make student or parent loans. The PHEAA Act
provides that all accrued and future earnings from funds invested by the Board
of Directors and such other accrued and future nonappropriated funds,
including, but not limited to, those funds obtained from the federal
government, insurance premiums, charges assessed by PHEAA, loan servicing
revenues, and contributions for the same purpose shall be available to PHEAA
and shall be deposited in the State Treasury and may be utilized at the
discretion of the Board of Directors for carrying out any of the corporate
purposes of PHEAA. Upon the dissolution of PHEAA or the cession of its
activities, all the property and moneys of PHEAA in excess of its obligations
shall become the property of the Commonwealth.
PHEAA has no power to pledge the credit or taxing power of the
Commonwealth or to make PHEAA debts payable out of any moneys except those of
PHEAA. Neither the faith and credit nor the taxing power of the Commonwealth
is pledged to the payment of any of PHEAA's obligations.
For accounting purposes, PHEAA has divided the Educational Loan
Assistance Fund into a Higher Education Assistance Fund (the "Assistance
Fund") and a Revenue Bond Fund (the "PHEAA Bond Fund"). Appropriations,
revenues and expenditures allocable to all PHEAA's programs, other than assets
and expenditures relating to its tax-exempt revenue bond financings, are
allocated to the Assistance Fund. All assets included in the PHEAA Bond Fund
are pledged to particular bond and note issues of PHEAA and are not available
to meet guarantee or other obligations of PHEAA related to its other
programs. As noted below, several obligations of PHEAA under certain bond and
note financings, though secured and collateralized by specified assets in
PHEAA's Bond Fund, are obligations not limited to such assets. Under those
financings, certain persons may seek recourse against the Assistance Fund.
As of June 30, 1997, the Assistance Fund had total assets of
approximately $789 million, total liabilities of approximately $551 million,
and retained earnings of approximately $237 million. PHEAA estimates that the
portion of its retained earnings that would be treated as its Guarantee Fund
under the Higher Education Act would be approximately $196 million. The
Secretary of Education has advised PHEAA that, pursuant to the 1997
Amendments, PHEAA must pay $116.2 million to the Secretary of Education on
September 1, 2002 (and make annual restricted account deposits toward such
payment beginning in fiscal year 1998 of approximately $23.24 million).
PHEAA's liabilities as of June 30, 1997 do not include the amount that will be
required to be paid to the Secretary of Education under the 1997 Amendments.
See "General" above. The PHEAA Bond Fund had total assets of approximately
$1.65 billion, total liabilities of approximately $1.55 billion and retained
earnings of approximately $52 million as of June 30, 1997.
Substantially all of PHEAA's expenditures relating to the various grant
programs that it administers (other than administrative expenses) are derived
from appropriations from the Commonwealth. In recent years, PHEAA has not
received any appropriations to cover its administrative expenses. To meet
PHEAA's obligations under its servicing and guarantee programs, PHEAA has in
the past relied, and expects in the future to continue to rely, principally on
servicing fee revenues; income on various investments in the Assistance Fund
(including various types of student loans); and revenues generated by its
activity as a guarantee agency under the Higher Education Act, including
federal reimbursement payments, administrative cost allowances, student loan
insurance premiums, and retentions from collections on defaulted loans. The
implementation of the new direct loan program or other modifications to the
Higher Education Act may reduce certain servicing fee revenues or income
generated by PHEAA's activity as a guarantee agency.
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<PAGE>
PHEAA began guaranteeing student loans in 1964. As of June 30, 1997,
PHEAA had guaranteed a total of approximately $20.0 billion principal amount
of student loans under the Higher Education Act. Of that amount, PHEAA
estimates that approximately $13.3 billion original principal amount of such
loans was outstanding. PHEAA initially guaranteed loans only to residents of
the Commonwealth or persons who planned to attend or were attending eligible
educational institutions in the Commonwealth. In May 1986, PHEAA began
guaranteeing loans to borrowers that did not meet these residency requirements
pursuant to its national guarantee program. Under the PHEAA Act, guarantee
payments on loans under PHEAA's national guarantee program (including Financed
Eligible Loans Guaranteed by PHEAA) may not be paid from funds appropriated by
the Commonwealth. The annual amount of loans guaranteed by PHEAA pursuant to
its Guarantee Program has increased in each of the last three fiscal years.
PHEAA's claims rate for purposes of receiving federal reinsurance is described
above under "Effect of Annual Claims Rate".
In addition to guaranteeing loans under the Higher Education Act, PHEAA
also operates certain guarantee programs for which it receives no federal
reinsurance. PHEAA had outstanding guarantee obligations on such loans in the
amount of approximately $49 million as of June 30, 1997.
PHEAA began servicing loans for lenders in 1973, under a contract with
Student Loan Marketing Association ("Sallie Mae") to service loans Sallie Mae
purchased from Pennsylvania banks and other lenders. In 1974, PHEAA was
granted legislative authority to market its servicing system to other states
and lenders. As a result, PHEAA now has contracts with Sallie Mae, state
agencies and commercial lenders throughout the United States. PHEAA's two
principal servicing products are its full-servicing operation and its remote
servicing operation. As of June 30, 1997, under PHEAA's full-servicing
program, it serviced approximately 1,145,000 accounts with a principal balance
of approximately $11.3 billion for more than 320 customers; and under its
remote servicing operation, it serviced approximately 700,000 accounts in an
aggregate principal amount of approximately $3.5 billion for four customers.
Servicing revenue generated from PHEAA's servicing of loans that it owns
accounted for approximately 25% of servicing revenues for the 12 months ended
June 30, 1997. For the year then ended, one other customer accounted for
approximately 17% of servicing revenues. PHEAA's management expects gross
servicing revenues to continue to increase.
PHEAA's current servicing agreements have contractual terms at inception
ranging from three years to life of the loan. Under PHEAA's servicing
agreements, PHEAA generally has agreed to reimburse customers for any claims,
losses, liabilities or expenses which arise out of or relate to PHEAA's acts
or omissions with respect to services provided under such agreements where the
final determination of PHEAA's liability is established by an arbitrator, by a
court of law of competent jurisdiction, or by way of settlement. PHEAA must
rely on moneys in the Assistance Fund to cover expenditures necessary to meet
its contractual obligations under the servicing agreements, including any
potential liabilities. PHEAA has developed a new servicing system in
consultation with the consulting firm Deloitte & Touche, IBM and servicing
clients. Conversion to the new system began in the second quarter of 1995 and
is ongoing.
PHEAA acts as an originator and secondary market for various types of
student loans, including loans it has guaranteed under the Higher Education
Act, loans insured by the United States Department of Health and Human
Services under the Health Education Assistance Loan Program, and loans which
are insured by PHEAA without any form of federal reinsurance. PHEAA has
financed most of its acquisitions and originations of student loans through
the issuance of student loan revenue bonds. PHEAA has, however, used moneys in
the Assistance Fund to finance student loans. As of June 30, 1997, the
Assistance Fund contained the following approximate outstanding principal
amounts of student loans which are not otherwise pledged to secure PHEAA's
financings: $20.0 million of student loans which are not insured or reinsured;
$33.0 million of student loans guaranteed by PHEAA under the Higher Education
Act which are reinsured (approximately $22.5 million of which were
Consolidation Loans); and $5.6 million of health education assistance loans
which are federally insured. Of those amounts, $1.3 million of student loans
guaranteed by PHEAA under the Higher Education Act which are federally
reinsured, are not eligible for federal interest subsidy payments or Special
Allowance Payments. Other student loans owned by PHEAA in the Assistance Fund
and the PHEAA Bond Fund are pledged to certain financings and
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unavailable to meet PHEAA's guarantee obligations. As of such date,
approximately $154.4 million of the Assistance Fund was deposited with and
invested by the State Treasurer.
PHEAA had outstanding debt and/or credit facilities (under which the
entire aggregate amount of funds available has not been drawn) in the amount
of approximately $2.2 billion as of June 30, 1997. Although most of PHEAA's
debt issues are limited obligations of PHEAA, under certain circumstances,
PHEAA's reimbursement obligations to certain credit facility providers are not
limited to the assets pledged to those debt issues. For instance, PHEAA is
party to several credit facilities relating to certain series of bonds
requiring purchase by PHEAA of specified student loans from the applicable
trust estate when a claim for insurance has been denied. Such covenants are
sometimes general obligations of PHEAA. Even if these financings are fully
collateralized, therefore, credit enhancement providers may be able to seek
repayment from the Assistance Fund. None of the above referenced indebtedness
is general obligation debt of, or is backed by the faith, credit and taxing
power of, the Commonwealth or any of its political subdivisions.
PHEAA is also a party to various sublease agreements and lease purchase
agreements in connection with debt financings used to provide funds for the
acquisition of office buildings, parking facilities, and equipment for PHEAA.
PHEAA's financial obligations under such agreements are payable from the
Assistance Fund.
CERTAIN HISTORICAL INFORMATION FOR GUARANTEE AGENCIES
Set forth below is certain historical information with respect to
each Guarantee Agency that is expected to guaranty 6% or more of the Financed
Eligible Loans as of the Date of Issuance (EAC and PHEAA) and with respect to
all guarantors of loans under the Federal Family Education Loan Program.
Except as otherwise indicated below, the information regarding each Guarantee
Agency has been obtained from the Department of Education's Federal Fiscal
Year 1993 Loan Programs Data Book and FY94-FY96 Federal Student Loan Programs
Data Book (the "DOE Data Books"). Information for EAC and PHEAA relating to
the federal fiscal year ended September 30, 1997 was obtained from EAC and
PHEAA, respectively. No independent verification of such information has been
or will be made by the Corporation, the Original Issuer or the Underwriters.
Guarantee Volume. The following table sets forth the approximate
aggregate principal amount of loans under the Federal Family Education Loan
Program that have first become committed to be guaranteed by EAC and PHEAA and
by all guarantors of such loans in each of the five federal fiscal years 1992
through 1996. Such approximate amounts for EAC and PHEAA for the federal
fiscal year ended September 30, 1997 were $173.6 million and $2,208.6 million,
respectively.
Stafford, Unsubsidized Stafford, SLS, PLUS and
Consolidated Loans Guaranteed*
Dollars in Millions
<TABLE>
<CAPTION>
Federal
Fiscal
Year EAC PHEAA All Guarantors
------- --- ----- --------------
<S> <C> <C> <C>
1992 $ 66.7 $1,410.4 $16,114.0
1993 85.7 1,857.1 19,356.6
1994 120.3 2,003.4 25,070.4
1995 142.8 2,221.5 24,213.0
1996 128.2 2,227.7 23,831.3
</TABLE>
__________
* The information set forth in the table above has been obtained from EAC,
PHEAA and, as to All Guarantors, the DOE Data Books.
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<PAGE>
Reserve Ratio. Each Guarantee Agency's reserve ratio is determined
by dividing its cumulative cash reserves by the original principal amount of
the outstanding loans it has agreed to guarantee. The term "cumulative cash
reserves" refers to cash reserves plus (i) sources of funds (including
insurance premiums, state appropriations, federal advances, federal
reinsurance payments, administrative cost allowances, collections on claims
paid and investment earnings) minus (ii) uses of funds (including claims paid
to lenders, operating expenses, lender fees, the Department's share of
collections on claims paid, returned advances and reinsurance fees). The
"original principal amount of outstanding loans" consists of the original
principal amount of loans guaranteed by such Guarantee Agency minus (i) the
original principal amount of loans cancelled, claims paid, loans paid in full
and loan guarantees transferred from such Guarantee Agency to other
guarantors, plus (ii) the original principal amount of loan guarantees
transferred to such Guarantee Agency from other guarantors. The following
table sets forth each of EAC's and PHEAA's cumulative cash reserves and their
corresponding reserve ratios and the national average reserve ratio for all
guarantors for the five federal fiscal years 1992 through 1996. On May 21,
1997, EAC prepaid various long term borrowings in the aggregate principal
amount of $6,464,912, plus accrued interest in the amount of $122,745, thus
reducing its assets and liabilities as of such date by an aggregate amount of
$6,587,657. This resulted in EAC's cumulative cash reserve being reduced by
this amount. EAC's cumulative cash reserves and reserve ratio as of September
30, 1997 were $12.8 million and 1.8%, and PHEAA's cumulative cash reserves and
reserve ratio as of September 30, 1997 were $189.3 million and 1.4%.
<TABLE>
<CAPTION>
EAC* PHEAA*
--------------------- ----------------------
National
Cumulative Cumulative Average
Federal Cash Reserve Cash Reserve Reserve
Fiscal Year Reserves** Ratio Reserves** Ratio Ratio*
- ----------- ---------- ------- ---------- ------- --------
<S> <C> <C> <C> <C> <C>
1992 $ 9.2 2.6% $ 85.9 1.1% 1.5%
1993 12.1 3.1 100.9 1.1 1.7
1994 14.2 3.1 133.6 1.3 1.4
1995 15.7 2.9 166.3 1.5 1.6
1996 17.0 2.8 210.6 1.6 1.8
</TABLE>
__________
* The information set forth in the table above has been obtained from EAC,
PHEAA and, as to the national average, the DOE Data Books (with respect
to fiscal years 1992, 1993, 1994 and 1995) and from the Department of
Education (with respect to fiscal year 1996). According to the
Department of Education, available cash reserves may not always be an
accurate barometer of a guarantor's financial health.
** Dollars in millions.
Cumulative Recovery Rates. A Guarantee Agency's cumulative recovery
rate is determined by dividing the cumulative aggregate amount recovered from
borrowers by such Guarantee Agency by the cumulative aggregate amount of
default claims paid by such Guarantee Agency as of the end of the applicable
federal fiscal year. The table below sets forth the cumulative recovery rates
for EAC and PHEAA and the national average cumulative recovery rates for all
guarantors as of the end of the five federal fiscal years 1992 through 1996.
EAC's and PHEAA's cumulative recovery rates for the federal fiscal year ended
September 30, 1997 were 44.82% and 54.83%, respectively. The Original
Issuer's management does not believe that cumulative recovery rates provide an
accurate indication of a guarantor's financial health.
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<PAGE>
<TABLE>
<CAPTION>
Cumulative Recovery Rate*
Federal ----------------------------------------
Fiscal Year EAC PHEAA National Average
----------- --- ----- ----------------
<S> <C> <C> <C>
1992 29.86% 46.5% 35.09%
1993 34.94 48.2 37.97
1994 40.20 52.90 42.19
1995 41.26 53.29 47.36
1996 43.12 55.04 52.59
</TABLE>
__________
* The information set forth in the table above has been obtained from EAC,
PHEAA and, as to the national average, the Department of Education.
Loan Loss Reserve. The DOE Data Books do not disclose whether any
guarantor has established a segregated loan loss reserve with respect to its
student loan guarantee obligations. Accordingly, to the extent that a
guarantor has not established such a segregated loan loss reserve, if a
guarantor receives less than full reimbursement of its guarantee obligations
from the Department of Education, the guarantor would be forced to look to its
existing assets to satisfy any such guarantee obligations not so reimbursed.
Claims Rate. The following table sets forth the Claims Rate of EAC
and PHEAA and the national average for all guarantors for the five federal
fiscal years 1992 through 1996. EAC's and PHEAA's Claims Rates for the
federal fiscal year ended September 30, 1997 were 1.30% and 1.92%,
respectively.
<TABLE>
<CAPTION>
Claims Rate*
Federal ----------------------------------------
Fiscal Year EAC PHEAA National Average
----------- --- ----- ----------------
<S> <C> <C> <C>
1992 1.25% 2.84% 4.15%
1993 1.28 2.32 3.83
1994 1.43 2.18 3.44
1995 1.56 1.97 3.21
1996 1.54 1.58 3.25
</TABLE>
__________
* The information set forth in the table above has been obtained from EAC,
PHEAA and, as to the national average, the Department of Education.
EAC's and PHEAA's Claims Rate have been lower than the national average
Claims Rate in each of the five federal fiscal years shown in the Claims Rate
table above. Management of EAC and PHEAA have indicated to the Corporation
that they are currently unaware of any trends or conditions which would cause
their respective Claims Rate to exceed 5% and thereby result in less than
maximum reimbursement for reinsurance claims to the Department of Education.
Notwithstanding the above, no assurance can be made that any such trends will
continue or not deteriorate, or that any Guarantee Agency will receive full
reimbursement for reinsurance claims (or the full 98% maximum reimbursement
for loans first disbursed on or after October 1, 1993).
TERMS OF THE TAX EXEMPT AUCTION RATE SERIES 1998-1 SENIOR NOTES
GENERALLY
The Tax Exempt Auction Rate Series 1998-1 Senior Notes will be dated as
of the date of their initial issuance and, subject to call for redemption
pursuant to the provisions referred to below, will mature on June 1,
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2020. The Tax Exempt Auction Rate Series 1998-1 Senior Notes will bear
interest, payable on each June 1 and December 1, commencing June 1, 1998, at
rates determined as described below under "Interest Rate on the Tax Exempt
Auction Rate Series 1998-1 Senior Notes". The Tax Exempt Auction Rate Series
1998-1 Senior Notes will be issued in fully registered form, without coupons,
and when issued will be registered in the name of Cede & Co., as nominee of
DTC. DTC will act as securities depository for the Tax Exempt Auction Rate
Series 1998-1 Senior Notes. Individual purchases of the Tax Exempt Auction
Rate Series 1998-1 Senior Notes will be made in book-entry form only in the
principal amount of $100,000 or multiples thereof. Purchasers of the Tax
Exempt Auction Rate Series 1998-1 Senior Notes will not receive certificates
representing their interest in the Tax Exempt Auction Rate Series 1998-1
Senior Notes purchased. See "Description of Series 1998-1 Notes -
Book-Entry-Only System".
INTEREST RATE ON THE TAX EXEMPT AUCTION RATE SERIES 1998-1 SENIOR NOTES
The Initial Interest Rate Adjustment Dates for the Tax Exempt Auction
Rate Series 1998-1 Senior Notes will be as follows:
<TABLE>
<CAPTION>
Initial Interest Rate
Series Adjustment Date
------ ---------------------
<S> <C>
1998-1A March 26, 1998
1998-1B April 2, 1998
1998-1C April 9, 1998
1998-1D April 16, 1998
1998-1E April 23, 1998
</TABLE>
During the Initial Interest Period, each series of the Tax Exempt Auction Rate
Series 1998-1 Senior Notes will bear interest at the Auction Rate Series
1998-1 Senior Note Initial Interest Rate for such series. Thereafter, the Tax
Exempt Auction Rate Series 1998-1 Senior Notes of each series will bear
interest at an Auction Rate Series 1998-1 Senior Note Interest Rate based on
an Auction Period generally consisting of 35 days, subject to adjustment as
described in "Auction of the Auction Rate Series 1998-1 Senior Notes --
Changes in Auction Terms -- Changes in Auction Period or Periods". In no
event will the Auction Rate Series 1998-1 Senior Note Interest Rate exceed the
applicable Auction Rate Series 1998-1 Senior Note Interest Rate Limitation of
14% per annum.
For each series of the Tax Exempt Auction Rate Series 1998-1 Senior Notes
during the Initial Interest Period and each Auction Period thereafter,
interest at the Auction Rate Series 1998-1 Senior Note Interest Rate will
accrue daily and will be computed for the actual number of days elapsed on the
basis of a year consisting of 360 days. Interest due on the Tax Exempt
Auction Rate Series 1998-1 Senior Notes on any Interest Payment Date will be
calculated on a per unit basis, based on a unit of $100,000.
The Auction Rate Series 1998-1 Senior Note Interest Rate to be borne by
each series of the Tax Exempt Auction Rate Series 1998-1 Senior Notes after
the Initial Interest Period for each Auction Period until an Auction Period
Adjustment, if any, will be determined as hereinafter described. Each such
Auction Period will commence on and include the Thursday following the
expiration of the immediately preceding Auction Period and terminate on and
include the Wednesday immediately preceding the Thursday of the fifth
following week; provided, however, that in the case of the Auction Period that
immediately follows the Initial Interest Period for a series of the Tax Exempt
Auction Rate Series 1998-1 Senior Notes, such Auction Period will commence on
the Initial Interest Rate Adjustment Date for such series. The Auction Rate
Series 1998-1 Senior Note Interest Rate on each series of the Tax Exempt
Auction Rate Series 1998-1 Senior Notes for each Auction Period will be the
Auction Rate in effect for such Auction Period as determined in accordance
with the Auction Procedures described in "Auction of the Series 1998-1 Senior
Notes"; provided that if, on any Interest Rate Determination Date, an Auction
is not held with respect to a series of Tax Exempt Auction Rate Series 1998-1
Senior Notes for any reason, then the Auction Rate Series 1998-1 Senior Note
Interest Rate on such series for the next succeeding Auction Period will be
the Maximum Auction Rate.
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<PAGE>
Notwithstanding the foregoing:
(A) if the ownership of a series of Tax Exempt Auction Rate Series
1998-1 Senior Notes is no longer maintained in book-entry form, the
Auction Rate Series 1998-1 Senior Note Interest Rate on the Tax Exempt
Auction Rate Series 1998-1 Senior Notes of such series for any Interest
Period commencing after the delivery of certificates representing the Tax
Exempt Auction Rate Series 1998-1 Senior Notes of such series will equal
the Maximum Auction Rate on the Business Day immediately preceding the
first day of such subsequent Interest Period; or
(B) if a Payment Default has occurred with respect to a series of
Tax Exempt Auction Rate Series 1998-1 Senior Notes, the Auction Rate
Series 1998-1 Senior Note Interest Rate on such series for the Interest
Period for such series commencing on or immediately after such Payment
Default and for each Interest Period thereafter, to and including the
Interest Period, if any, during which, or commencing less than two
Business Days after, such Payment Default is cured in accordance with the
First Supplemental Indenture, will equal the Non-Payment Rate on the
first day of each such Interest Period.
In any event, no Auction will be held on any Auction Date under the First
Supplemental Indenture during the continuance of a Payment Default.
The Auction Agent is to promptly give written notice to the Trustee and
the Corporation of each Auction Rate Series 1998-1 Senior Note Interest Rate
(unless the Auction Rate Series 1998-1 Senior Note Interest Rate is the
Non-Payment Rate) applicable to each series of the Tax Exempt Auction Rate
Series 1998-1 Senior Notes. The Trustee is to notify the Holders of Tax
Exempt Auction Rate Series 1998-1 Senior Notes of the Auction Rate Series
1998-1 Senior Note Interest Rate applicable to each such series of Tax Exempt
Auction Rate Series 1998-1 Senior Notes for each Auction Period on the second
Business Day of such Auction Period.
If the Auction Agent no longer determines, or fails to determine, when
required, the Auction Rate Series 1998-1 Senior Note Interest Rate with
respect to a series of Tax Exempt Auction Rate Series 1998-1 Senior Notes, or
if, for any reason, such manner of determination is held to be invalid or
unenforceable, the Auction Rate Series 1998-1 Senior Note Interest Rate for
the next succeeding Interest Period (which period will be an Auction Period
for such series of the Tax Exempt Auction Rate Series 1998-1 Senior Notes)
will be the Maximum Auction Rate as determined by the Auction Agent for such
next succeeding Auction Period, and if the Auction Agent fails or refuses to
determine said Maximum Auction Rate, the Maximum Auction Rate is to be
determined by a securities dealer appointed by the Corporation capable of
making such a determination in accordance with the provisions of the
Indenture, and written notice of such determination is to be given by such
securities dealer to the Trustee.
INTEREST LIMITED TO THE EXTENT PERMISSIBLE BY LAW
In no event shall the cumulative amount of interest paid or payable on a
series of Tax Exempt Auction Rate Series 1998-1 Senior Notes exceed the amount
permitted by applicable law. If the applicable law is ever judicially
interpreted so as to render usurious any amount called for under the Tax
Exempt Auction Rate Series 1998-1 Senior Notes of a series or related
documents or otherwise contracted for, charged, reserved, taken or received in
connection with the Tax Exempt Auction Rate Series 1998-1 Senior Notes of such
series, or if the call for redemption or acceleration of the maturity of the
Tax Exempt Auction Rate Series 1998-1 Senior Notes of such series results in
payment to or receipt by the Holder or any former Holder of the Tax Exempt
Auction Rate Series 1998-1 Senior Notes of such series of any interest in
excess of that permitted by applicable law, then, notwithstanding any
provision of the Tax Exempt Auction Rate Series 1998-1 Senior Notes of such
series or related documents to the contrary, all excess amounts theretofore
paid or received with respect to the Tax Exempt Auction Rate Series 1998-1
Senior Notes of such series shall be credited on the principal balance of the
Tax Exempt Auction Rate Series 1998-1 Senior Notes of such series (or, if the
Tax Exempt Auction Rate Series 1998-1 Senior Notes of such series have been
paid or would thereby be paid in full, refunded by the recipient thereof), and
the provisions of the Tax Exempt Auction Rate Series 1998-1 Senior Notes of
such series and related documents shall automatically
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<PAGE>
and immediately be deemed reformed and the amounts thereafter collectible
thereunder reduced, without the necessity of the execution of any new
document, so as to comply with the applicable law, but so as to permit the
recovery of the fullest amount otherwise called for under the Tax Exempt
Auction Rate Series 1998-1 Senior Notes of such series and under the related
documents.
CALL FOR REDEMPTION OF TAX EXEMPT AUCTION RATE SERIES 1998-1 SENIOR NOTES
The Tax Exempt Auction Rate Series 1998-1 Senior Notes will be
subject to call for redemption as described in this Prospectus under the
captions "Description of Series 1991-1 Notes -- Special Call for Redemption"
and "-- Optional Call for Redemption."
TERMS OF THE TAX EXEMPT FIXED RATE
SERIES 1998-1 SENIOR NOTES
The Tax Exempt Fixed Rate Series 1998-1 Senior Notes will be dated as of
February 1, 1998 and, subject to call for redemption pursuant to the
provisions referred to below, will mature on the dates, and in the respective
principal amounts, and will bear interest from their date at the respective
rates per annum, set forth in the table below:
<TABLE>
<CAPTION>
Date Principal Amount Interest Rate
---- ---------------- -------------
<S> <C> <C>
June 1, 2010 $14,270,000 4.95%
June 1, 2020 9,785,000 5.45
</TABLE>
Interest on the Tax Exempt Series 1998-1 Senior Notes will be
computed on the assumption that each year contains 360 days and is composed of
twelve 30-day months and will be payable semiannually on each June 1 and
December 1, commencing June 1, 1998. The Tax Exempt Series 1998-1 Senior
Notes will be issued in fully registered form, without coupons, and when
issued will be registered in the name of Cede & Co., as nominee of DTC, New
York, New York. DTC will act as securities depository for the Tax Exempt
Series 1998-1 Senior Notes. Individual purchases of the Tax Exempt Series
1998-1 Senior Notes will be made in book-entry form only in the principal
amount of $5,000 or multiples thereof. Purchasers of the Tax-Exempt Series
1998-1 Senior Notes will not receive certificates representing their interest
in the Tax-Exempt Series 1998-1 Senior Notes purchased. See "Description of
the Series 1998-1 Notes - Book-Entry-Only System."
The Tax Exempt Fixed Rate Series 1998-1 Senior Notes will be subject
to call for redemption as described in this Prospectus under the captions
"Description of the Series 1998-1 Notes -- Special Call for Redemption" and
"-- Optional Call for Redemption."
TERMS OF THE TAXABLE AUCTION RATE SERIES 1998-1 SENIOR NOTES
GENERALLY
The Taxable Auction Rate Series 1998-1 Senior Notes will be dated as of
the date of their initial issuance and, subject to the tender provisions set
forth below and to call for redemption pursuant to the provisions referred to
below, will mature on June 1, 2020. The Taxable Auction Rate Series 1998-1
Senior Notes will bear interest, payable on the Business Day following the
expiration of each Auction Period, at rates determined as described below
under "Interest Rate on the Taxable Auction Rate Series 1998-1 Senior Notes."
The Taxable Auction Rate Series 1998-1 Senior Notes will be issued in fully
registered form, without coupons, and when issued will be registered in the
name of Cede & Co., as nominee of DTC. DTC will act as securities depository
for the Taxable Auction Rate Series 1998-1 Senior Notes. Individual purchases
of the Taxable Auction Rate Series 1998-1 Senior Notes will be made in
book-entry form only in the principal amount of $100,000 or multiples
thereof. Purchasers of the
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<PAGE>
Taxable Auction Rate Series 1998-1 Senior Notes will not receive certificates
representing their interest in the Taxable Auction Rate Series 1998-1 Senior
Notes purchased. See "Description of Series 1998-1 Notes - Book-Entry-Only
System".
INTEREST RATE ON THE TAXABLE AUCTION RATE SERIES 1998-1 SENIOR NOTES
The Initial Interest Rate Adjustment Date for the Taxable Auction Rate
Series 1998-1 Senior Notes will be as follows:
<TABLE>
<CAPTION>
Initial Interest Rate
Series Adjustment Date
------ ----------------------
<S> <C>
1998-1G March 24, 1998
1998-1H March 31, 1998
</TABLE>
During the Initial Interest Period, each series of the Taxable Auction Rate
Series 1998-1 Senior Notes will bear interest at the Auction Rate Series
1998-1 Senior Note Initial Interest Rate for such series. Thereafter, except
with respect to an Auction Period Adjustment as described in "Auction of the
Auction Rate Series 1998-1 Senior Notes", the Taxable Auction Rate Series
1998-1 Senior Notes will bear interest at an Auction Rate Series 1998-1 Senior
Note Interest Rate based on an Auction Period generally consisting of 28 days,
subject to adjustment as described in "Auction of the Auction Rate Series
1998-1 Senior Notes -- Changes in Auction Terms -- Changes in Auction Period
or Periods". In no event will the Series 1998-1 Senior Note Interest Rate
exceed the applicable Auction Rate Series 1998-1 Senior Note Interest Rate
Limitation of 18% per annum.
Interest on each series of the Taxable Auction Rate Series 1998-1 Senior
Notes will be paid on the Business Day following each Auction Period for such
series. For each series of the Taxable Auction Rate Series 1998-1 Senior
Notes during the Initial Interest Period and each Auction Period thereafter,
interest at the Auction Rate Series 1998-1 Senior Note Interest Rate will
accrue daily and will be computed for the actual number of days elapsed on the
basis of a year consisting of 360 days.
The Auction Rate Series 1998-1 Senior Note Interest Rate to be borne by
each series of the Taxable Auction Rate Series 1998-1 Senior Notes after the
Initial Interest Period for each Auction Period until an Auction Period
Adjustment, if any, will be determined as hereinafter described. Each such
Auction Period will commence on and include the first day following the
expiration of the immediately preceding Auction Period and terminate on and
include the day immediately preceding the second Business Day of the fourth
following week; provided, however, that in the case of the Auction Period that
immediately follows the Initial Interest Period for a series of the Taxable
Auction Rate Series 1998-1 Senior Notes, such Auction Period will commence on
the Initial Interest Rate Adjustment Date for such series. The Auction Rate
Series 1998-1 Senior Note Interest Rate on each series of the Taxable Auction
Rate Series 1998-1 Senior Notes for each Auction Period will be the lesser of
(i) the Net Loan Rate in effect for such Auction Period and (ii) the Auction
Rate in effect for such Auction Period as determined in accordance with the
Auction Procedures described in "Auction of the Auction Rate Series 1998-1
Senior Notes"; provided that if, on any Interest Rate Determination Date, an
Auction is not held with respect to a series of the Taxable Auction Rate
Series 1998-1 Senior Notes for any reason, then the Auction Rate Series 1998-1
Senior Note Interest Rate on such series for the next succeeding Auction
Period will be the Net Loan Rate (subject to the applicable Auction Rate
Series 1998-1 Senior Note Interest Rate Limitation of 18%).
Notwithstanding the foregoing:
(A) if the ownership of a series of the Taxable Auction Rate Series
1998-1 Senior Notes is no longer maintained in book-entry form, the
Auction Rate Series 1998-1 Senior Note Interest Rate on the Taxable
Auction Rate Series 1998-1 Senior Notes of such series for any Interest
Period commencing after
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<PAGE>
the delivery of certificates representing the Taxable Auction Rate Series
1998-1 Senior Notes of such series will equal the lesser of (i) the
Maximum Auction Rate and (ii) the Net Loan Rate; or
(B) if a Payment Default has occurred with respect to a series of
the Taxable Auction Rate Series 1998-1 Senior Notes, the Auction Rate
Series 1998-1 Senior Note Interest Rate on such series for the Interest
Period for such series commencing on or immediately after such Payment
Default and for each Interest Period thereafter, to and including the
Interest Period, if any, during which, or commencing less than two
Business Days after, such Payment Default is cured in accordance with the
First Supplemental Indenture, will equal the Non-Payment Rate on the
first day of each such Interest Period.
In any event, no Auction will be held on any Auction Date under the First
Supplemental Indenture on which there are insufficient moneys in the Note Fund
to pay, or otherwise held by the Trustee under the Indenture and available to
pay, the principal, if any, of and interest due on the Taxable Auction Rate
Series 1998-1 Senior Notes on the Interest Payment Date immediately following
such Auction Date.
The Auction Agent is to promptly give written notice to the Trustee and
the Corporation of each Auction Rate Series 1998-1 Senior Note Interest Rate
(unless the Auction Rate Series 1998-1 Senior Note Interest Rate is the
Non-Payment Rate) and either the Auction Rate or the Net Loan Rate, as the
case may be, when such rate is not the Auction Rate Series 1998-1 Senior Note
Interest Rate, applicable to each series of the Taxable Auction Rate Series
1998-1 Senior Notes. The Trustee is to notify the Holders of Taxable Auction
Rate Series 1998-1 Senior Notes of the Auction Rate Series 1998-1 Senior Note
Interest Rate applicable to each such series of Taxable Auction Rate Series
1998-1 Senior Notes for each Auction Period on the second Business Day of such
Auction Period.
If the Auction Agent no longer determines, or fails to determine, when
required, the Auction Rate Series 1998-1 Senior Note Interest Rate with
respect to a series of Taxable Auction Rate Series 1998-1 Senior Notes, or, if
for any reason, such manner of determination is held to be invalid or
unenforceable, the Auction Rate Series 1998-1 Senior Note Interest Rate for
the next succeeding Interest Period (which period will be an Auction Period
for such series of the Taxable Auction Rate Series 1998-1 Senior Notes) will
be the Net Loan Rate for such next succeeding Auction Period. The Net Loan
Rate with respect to each Interest Period commencing in a given month shall be
determined by or on behalf of the Corporation and written notice thereof given
to the Auction Agent at the time the Monthly Servicing Report for the second
preceding month is distributed. If the Corporation fails or refuses to
determine such Net Loan Rate, the Net Loan Rate for any such Interest Period
shall be the most recently determined Net Loan Rate.
CARRY-OVER AMOUNTS ON THE TAXABLE AUCTION RATE SERIES 1998-1 SENIOR NOTES
If the Auction Rate for a series of the Taxable Auction Rate Series
1998-1 Senior Notes is greater than the Net Loan Rate, then the Auction Rate
Series 1998-1 Senior Note Interest Rate applicable to such series for that
Interest Period will be the Net Loan Rate. If the Auction Rate Series 1998-1
Senior Note Interest Rate for a series of Taxable Auction Rate Series 1998-1
Senior Notes for any Interest Period is the Net Loan Rate, the Trustee shall
determine the Carry-Over Amount, if any, with respect to such series for such
Interest Period. Such determination of the Carry-Over Amount shall be made
separately for each series of Taxable Auction Rate Series 1998-1 Senior
Notes. Each Carry-Over Amount shall bear interest calculated at a rate equal
to One-Month LIBOR (as determined by the Auction Agent, provided the Trustee
has received notice of One-Month LIBOR from the Auction Agent, and, if the
Trustee shall not have received such notice from the Auction Agent, then as
determined by the Trustee) from the Interest Payment Date for the Interest
Period with respect to which such Carry-Over Amount was calculated, until
paid. Any payment in respect of Carry-Over Amount shall be applied, first, to
any accrued interest payable thereon and, thereafter, in reduction of such
Carry-Over Amount. For purposes of the Indenture and the Taxable Auction Rate
Series 1998-1 Senior Notes, any reference to "principal" or "interest" therein
shall not include, within the meaning of such words, Carry-Over Amount or any
interest accrued on any such Carry-Over Amount. Such Carry-Over Amount shall
be separately calculated for each Taxable Auction Rate Series 1998-1 Senior
Note of such series by the Trustee during such Interest Period in sufficient
time for the Trustee to give notice to each Holder of
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such Carry-Over Amount as required in the next succeeding sentence. On the
Interest Payment Date for an Interest Period with respect to which such
Carry-Over Amount has been calculated by the Trustee, the Trustee shall give
written notice to each Holder of the Carry-Over Amount applicable to such
Holder's Taxable Auction Rate Series 1998-1 Senior Note, which written notice
may accompany the payment of interest by check made to each such Holder on
such Interest Payment Date or otherwise shall be mailed on such Interest
Payment Date by first-class mail, postage prepaid, to each such Holder at such
Holder's address as it appears on the registration books maintained by the
Note Registrar. Such notice shall state, in addition to such Carry-Over
Amount, that, unless and until a Taxable Auction Rate Series 1998-1 Senior
Notes has been redeemed or has been deemed no longer Outstanding under the
Indenture (after which all accrued Carry-Over Amount with respect to such
Taxable Auction Rate Series 1998-1 Senior Note (and all accrued interest
thereon) that remains unpaid shall be cancelled and no Carry-Over Amount (or
interest accrued thereon) shall be paid with respect to such Taxable Auction
Rate Series 1998-1 Senior Note), (i) the Carry-Over Amount (and interest
accrued thereon) shall be paid by the Trustee on such Taxable Auction Rate
Series 1998-1 Senior Note on the first occurring Interest Payment Date for a
subsequent Interest Period if and to the extent that (l) the Eligible
Carry-Over Make-Up Amount with respect to such Interest Period is greater than
zero, and (2) moneys are available pursuant to the terms of the First
Supplemental Indenture to pay such Carry-Over Amount (and interest accrued
thereon), and (ii) interest shall accrue on the Carry-Over Amount at a per
annum rate equal to One-Month LIBOR until such Carry-Over Amount is paid in
full or is cancelled.
The Carry-Over Amount (and interest accrued thereon) for a series of the
Taxable Auction Rate Series 1998-1 Senior Notes shall be paid by the Trustee
on Outstanding Taxable Auction Rate Series 1998-1 Senior Notes of such series
on the first occurring Interest Payment Date for a subsequent Interest Period
if and to the extent that (i) the Eligible Carry-Over Make-Up Amount with
respect to such Interest Period is greater than zero, and (ii) moneys in the
Surplus Account are available on such Interest Payment Date for transfer to
the Interest Account for such purpose in accordance with the priorities
described in the second paragraph under "Summary of the Indenture -- Funds and
Accounts -- Surplus Fund", after taking into account all other amounts payable
from the Surplus Fund in accordance with such paragraph on such Interest
Payment Date. Any Carry-Over Amount (and any interest accrued thereon) with
respect to any Taxable Auction Rate Series 1998-1 Senior Note which is unpaid
as of an Interest Payment Date, which Taxable Auction Rate Series 1998-1
Senior Note is to be called for redemption or deemed no longer Outstanding
under the First Supplemental Indenture on such Interest Payment Date, shall be
paid to the Holder thereof on such Interest Payment Date to the extent that
moneys are available therefor in accordance with the provisions of the
preceding sentence; provided, however, that any Carry-Over Amount (and any
interest accrued thereon) which is not so paid on such Interest Payment Date
shall be cancelled with respect to such Taxable Auction Rate Series 1998-1
Senior Note on such Interest Payment Date and shall not be paid on any
succeeding Interest Payment Date. To the extent that any portion of the
Carry-Over Amount (and any interest accrued thereon) remains unpaid after
payment of a portion thereof, such unpaid portion shall be paid in whole or in
part until fully paid by the Trustee on the next occurring Interest Payment
Date or Dates, as necessary, for a subsequent Interest Period or Periods, if
and to the extent that the conditions in the first sentence of this paragraph
are satisfied. On any Interest Payment Date on which the Trustee pays less
than all of the Carry-Over Amount (and any interest accrued thereon) with
respect to a Taxable Auction Rate Series 1998-1 Senior Note, the Trustee shall
give written notice in the manner set forth in the immediately preceding
paragraph to the Holder of such Taxable Auction Rate Series 1998-1 Senior Note
of the Carry-Over Amount remaining unpaid on such Taxable Auction Rate Series
1998-1 Senior Note.
The Interest Payment Date on which any Carry-Over Amount for a series of
the Taxable Auction Rate Series 1998-1 Senior Notes will be paid is to be
determined by the Trustee as described in the immediately preceding paragraph,
and the Trustee is to make payment of the Carry-Over Amount in the same manner
as, and from the same Account from which, it pays interest on the Taxable
Auction Rate Series 1998-1 Senior Notes on an Interest Payment Date. ANY
UNPAID CARRY-OVER AMOUNT, INCLUDING ANY ACCRUED AND UNPAID INTEREST THEREON,
ON A TAXABLE AUCTION RATE SERIES 1998-1 SENIOR NOTE NOT PAYABLE ON ANY
REDEMPTION DATE WITH RESPECT TO SUCH TAXABLE AUCTION RATE SERIES 1998-1 SENIOR
NOTE WILL BE FORFEITED UPON THE REDEMPTION (WHETHER PURSUANT TO
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OPTIONAL CALL FOR REDEMPTION OR SPECIAL CALL FOR REDEMPTION) OR AT MATURITY OF
SUCH TAXABLE AUCTION RATE SERIES 1998-1 SENIOR NOTE, OR ON SUCH EARLIER
INTEREST PAYMENT DATE, IF ANY, ON WHICH SUCH TAXABLE AUCTION RATE SERIES
1998-1 SENIOR NOTE CEASES TO BE OUTSTANDING UNDER THE FIRST SUPPLEMENTAL
INDENTURE. FITCH'S RATING ON THE TAXABLE AUCTION RATE SERIES 1998-1 SENIOR
NOTES WILL NOT APPLY TO ANY CARRY-OVER AMOUNT THAT MAY ACCRUE ON THE TAXABLE
AUCTION RATE SERIES 1998-1 SENIOR NOTES.
INTEREST LIMITED TO THE EXTENT PERMISSIBLE BY LAW
In no event shall the cumulative amount of interest paid or payable on a
series of Taxable Auction Rate Series 1998-1 Senior Notes exceed the amount
permitted by applicable law. If the applicable law is ever judicially
interpreted so as to render usurious any amount called for under the Taxable
Auction Rate Series 1998-1 Senior Notes of a series or related documents or
otherwise contracted for, charged, reserved, taken or received in connection
with the Taxable Auction Rate Series 1998-1 Senior Notes of such series, or if
the call for redemption or acceleration of the maturity of the Taxable Auction
Rate Series 1998-1 Senior Notes of such series results in payment to or
receipt by the Holder or any former Holder of the Taxable Auction Rate Series
1998-1 Senior Notes of such series of any interest in excess of that permitted
by applicable law, then, notwithstanding any provision of the Taxable Auction
Rate Series 1998-1 Senior Notes of such series or related documents to the
contrary, all excess amounts theretofore paid or received with respect to the
Taxable Auction Rate Series 1998-1 Senior Notes of such series shall be
credited on the principal balance of the Taxable Auction Rate Series 1998-1
Senior Notes of such series (or, if the Taxable Auction Rate Series 1998-1
Senior Notes of such series have been paid or would thereby be paid in full,
refunded by the recipient thereof), and the provisions of the Taxable Auction
Rate Series 1998-1 Senior Notes of such series and related documents shall
automatically and immediately be deemed reformed and the amounts thereafter
collectible thereunder reduced, without the necessity of the execution of any
new document, so as to comply with the applicable law, but so as to permit the
recovery of the fullest amount otherwise called for under the Taxable Auction
Rate Series 1998-1 Senior Notes of such series and under the related
documents.
CALL FOR REDEMPTION OF THE TAXABLE AUCTION RATE SERIES 1998-1 SENIOR NOTES
The Taxable Auction Rate Series 1998-1 Senior Notes will be subject to
call for redemption as described in this Prospectus under the captions
"Description of Series 1998-1 Notes -- Special Call for Redemption" and "--
Optional Call for Redemption."
TERMS OF THE TAXABLE LIBOR RATE SERIES 1998-1 SENIOR NOTES
GENERALLY
The Taxable LIBOR Rate Series 1998-1 Senior Notes will be dated as of the
date of their initial issuance and, subject to call for redemption and
prepayment pursuant to the provisions referred below, will mature on the dates
set forth in the table below:
<TABLE>
<CAPTION>
Notes Date
----- ----
<S> <C>
Series 1998-1I Notes June 1, 2002
Series 1998-1J Notes June 1, 2020
</TABLE>
The Taxable LIBOR Rate Series 1998-1 Senior Notes will bear interest, payable
on the first Business Day of each month, commencing March 2, 1998, at rates
determined as described below under "Interest Rate on the Taxable
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LIBOR Rate Series 1998-1 Senior Notes." The Taxable Series 1998-1 Senior
Notes will be issued in fully registered form, without coupons, and when
issued will be registered in the name of Cede & Co., as nominee of DTC, New
York, New York. DTC will act as securities depository for the Taxable LIBOR
Rate Series 1998-1 Senior Notes. Individual purchases of the Taxable LIBOR
Rate Series 1998-1 Senior Notes will be made in book-entry form only in the
principal amount of $5,000 or multiples thereof. Purchasers of the Taxable
LIBOR Rate Series 1998-1 Senior Notes will not receive certificates
representing their interest in the Taxable LIBOR Rate Series 1998-1 Senior
Notes purchased. See "Description of the Series 1998-1 Notes -
Book-Entry-Only System."
INTEREST RATE ON THE TAXABLE LIBOR RATE SERIES 1998-1 SENIOR NOTES
During the Initial Interest Period for the Taxable LIBOR Rate Series
1998-1 Senior Notes, being the period from the date of delivery through March
1, 1998, the Taxable LIBOR Rate Series 1998-1 Senior Notes of each series will
bear interest at the Initial Interest Rate for such series. The Taxable LIBOR
Rate Series 1998-1 Senior Note Interest Rate for each Interest Period after
the Initial Interest Period will be the Taxable LIBOR Rate Series 1998-1
Senior Note LIBOR-Based Rate based upon One-Month LIBOR plus the Taxable LIBOR
Rate Series 1998-1 Senior Note Spread, determined and subject to certain
limitations as hereinafter described.
Interest on the Taxable LIBOR Rate Series 1998-1 Senior Notes shall be
computed on the basis of actual days elapsed and accrue daily from the date
thereof (on the basis of a 360-day year), and shall be payable on each
regularly scheduled Interest Payment Date with respect thereto (which shall be
the first Business Day of each calendar month, commencing March 2, 1998) prior
to the maturity thereof and at the maturity thereof. The interest payable on
each Interest Payment Date for the Taxable LIBOR Rate Series 1998-1 Senior
Notes shall be that interest which has accrued through the last day of the
last complete Interest Period immediately preceding the Interest Payment Date
or, in the case of the maturity thereof, the last day preceding the date of
such maturity. Each such Interest Period (other than the Initial Interest
Period) will commence on and include the first Business Day of a calendar
month and terminate on and include the last day preceding the next Interest
Rate Adjustment Date. Each Interest Rate Adjustment Date shall be the
Interest Payment Date for the preceding Interest Period. The Taxable LIBOR
Rate Series 1998-1 Senior Note Interest Rate shall be effective as of and on
the Interest Rate Adjustment Date of the applicable Interest Period and be in
effect thereafter through the end of such Interest Period.
The interest rate to be borne by the Taxable LIBOR Rate Series 1998-1
Notes during each Interest Period after the Initial Interest Period shall be
determined on the related Interest Rate Determination Date and shall be equal
to the lesser of (i) the sum of One-Month LIBOR determined with respect to
such Interest Rate Determination Date plus the applicable Taxable LIBOR Rate
Series 1998-1 Senior Note Spread of 0.15% per annum (in the case of the Series
1998-1I Notes) or 0.20% per annum (in the case of the Series 1998-1J Notes),
as the case may be (which is herein referred to as the "Taxable LIBOR Rate
Series 1998-1 Senior Note LIBOR-Based Rate"), and (ii) the Net Loan Rate
determined with respect to such Interest Period. The Trustee shall determine
such interest rate on each Interest Rate Determination Date and shall give the
Corporation written notice thereof prior to 2:00 p.m., New York City time, on
such Interest Rate Determination Date. The Net Loan Rate with respect to each
Interest Period shall be determined by or on behalf of the Corporation and
written notice thereof given to the Trustee together with the Monthly
Servicing Report for the second preceding calendar month. See "Carry-Over
Amounts on the Taxable LIBOR Rate Series 1998-1 Senior Notes" below.
In the event that the Trustee no longer determines, or fails to
determine, when required, the Taxable LIBOR Rate Series 1998-1 Senior Note
LIBOR-Based Rate with respect to an Interest Rate Determination Date, or if,
for any reason, such manner of determination shall be held to be invalid or
unenforceable, the Taxable LIBOR Rate Series 1998-1 Senior Note LIBOR-Based
Rate for the related Interest Period shall be the Net Loan Rate as determined
with respect to such Interest Period. If the Corporation shall fail or refuse
to determine such Net Loan Rate, the Net Loan Rate for such Interest Period
shall be the most recently determined Net Loan Rate.
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CARRY-OVER AMOUNTS ON THE TAXABLE LIBOR RATE SERIES 1998-1 SENIOR NOTES
If the Taxable LIBOR Rate Series 1998-1 Senior Note LIBOR-Based Rate
determined with respect to a given Interest Period is greater than the Net
Loan Rate, then the Taxable LIBOR Rate Series 1998-1 Senior Note Interest Rate
for such Interest Period will be the Net Loan Rate. If the Taxable LIBOR Rate
Series 1998-1 Senior Note Interest Rate for any Interest Period is the Net
Loan Rate, the Trustee shall determine the Carry-Over Amount, if any, with
respect to the Taxable LIBOR Rate Series 1998-1 Senior Notes for such Interest
Period. Each such Carry-Over Amount shall bear interest calculated at a rate
equal to the Taxable LIBOR Rate Series 1998-1 Senior Note LIBOR-Based Rate (as
determined by the Trustee) from the Interest Payment Date for the Interest
Period with respect to which such Carry-Over Amount was calculated, until
paid. Any payment in respect of Carry-Over Amount shall be applied, first, to
any accrued interest payable thereon and, thereafter, in reduction of such
Carry-Over Amount. For purposes of the Indenture and the Taxable LIBOR Rate
Series 1998-1 Senior Notes, any reference to "principal" or "interest" therein
shall not include, within the meaning of such words, Carry-Over Amount or any
interest accrued on any such Carry-Over Amount. Such Carry-Over Amount shall
be separately calculated for each Taxable LIBOR Rate Series 1998-1 Senior Note
by the Trustee during such Interest Period in sufficient time for the Trustee
to give notice to each Holder of such Carry-Over Amount as required in the
next succeeding sentence. On the Interest Payment Date for an Interest Period
with respect to which such Carry-Over Amount has been calculated by the
Trustee, the Trustee shall give written notice to each Holder of the
Carry-Over Amount applicable to such Holder's Taxable LIBOR Rate Series 1998-1
Senior Note, which written notice may accompany the payment of interest by
check made to each such Holder on such Interest Payment Date or otherwise
shall be mailed on such Interest Payment Date by first-class mail, postage
prepaid, to each such Holder at such Holder's address as it appears on the
registration books maintained by the Note Registrar. Such notice shall state,
in addition to such Carry-Over Amount, that, unless and until a Taxable LIBOR
Rate Series 1998-1 Senior Note has been redeemed or has been deemed no longer
Outstanding under the Indenture (after which all accrued Carry-Over Amount
with respect to such Taxable LIBOR Rate Series 1998-1 Senior Note (and all
accrued interest thereon) that remains unpaid shall be cancelled and no
Carry-Over Amount (or interest accrued thereon) shall be paid with respect to
such Taxable LIBOR Rate Series 1998-1 Senior Note), (i) the Carry-Over Amount
(and interest accrued thereon) shall be paid by the Trustee on such Taxable
LIBOR Rate Series 1998-1 Senior Note on the first occurring Interest Payment
Date for a subsequent Interest Period if and to the extent that (a) the
Eligible Carry-Over Make-Up Amount with respect to such Interest Period is
greater than zero, and (b) moneys are available pursuant to the terms of the
First Supplemental Indenture to pay such Carry-Over Amount (and interest
accrued thereon), and (ii) interest shall accrue on the Carry-Over Amount at a
per annum rate equal to the Taxable LIBOR Rate Series 1998-1 Senior Note
LIBOR-Based Rate until such Carry-Over Amount is paid in full or is cancelled.
The Carry-Over Amount (and interest accrued thereon) for the Taxable
LIBOR Rate Series 1998-1 Senior Notes shall be paid by the Trustee on
Outstanding Taxable LIBOR Rate Series 1998-1 Senior Notes on the first
occurring Interest Payment Date for a subsequent Interest Period if and to the
extent that (a) the Eligible Carry-Over Make-Up Amount with respect to such
Interest Period is greater than zero, and (b) moneys in the Surplus Account
are available on such Interest Payment Date for transfer to the Interest
Account for such purpose in accordance with the second paragraph under
"Summary of the Indenture -- Funds and Accounts -- Surplus Account", after
taking into account all other amounts payable from the Surplus Fund in
accordance with such paragraph on such Interest Payment Date. Any Carry-Over
Amount (and any interest accrued thereon) with respect to any Taxable LIBOR
Rate Series 1998-1 Senior Note which is unpaid as of an Interest Payment Date,
which Taxable LIBOR Rate Series 1998-1 Senior Note is to be called for
redemption or deemed no longer Outstanding under the First Supplemental
Indenture on such Interest Payment Date, shall be paid to the Holder thereof
on such Interest Payment Date to the extent that moneys are available therefor
in accordance with the provisions of the preceding clauses (a) and (b);
provided, however, that any Carry-Over Amount (and any interest accrued
thereon) which is not so paid on such Interest Payment Date shall be cancelled
with respect to such Taxable LIBOR Rate Series 1998-1 Senior Note on such
Interest Payment Date and shall not be paid on any succeeding Interest Payment
Date. To the extent that any portion of the Carry-Over Amount (and any
interest accrued thereon) remains unpaid after payment of a portion thereof,
such unpaid portion shall be paid in whole or in part until fully paid by the
Trustee on the next occurring Interest Payment Date or Dates, as necessary,
for a subsequent Interest Period or Periods, if and to the extent that
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the conditions in the first sentence of this paragraph are satisfied. On any
Interest Payment Date on which the Trustee pays less than all of the
Carry-Over Amount (and any interest accrued thereon) with respect to a Taxable
LIBOR Rate Series 1998-1 Senior Note, the Trustee shall give written notice in
the manner set forth in the immediately preceding paragraph to the Holder of
such Taxable LIBOR Rate Series 1998-1 Senior Note of the Carry-Over Amount
remaining unpaid on such Taxable LIBOR Rate Series 1998-1 Senior Note.
The Interest Payment Date on which any Carry-Over Amount (or any interest
accrued thereon) for the Taxable LIBOR Rate Series 1998-1 Senior Notes shall
be paid shall be determined by the Trustee in accordance with the provisions
of the immediately preceding paragraph, and the Trustee shall make payment of
the Carry-Over Amount (and any interest accrued thereon) in the same manner
as, and from the same Account from which, it pays interest on the Taxable
LIBOR Rate Series 1998-1 Senior Notes on an Interest Payment Date. ANY UNPAID
CARRY-OVER AMOUNT, INCLUDING ANY ACCRUED AND UNPAID INTEREST THEREON, ON A
TAXABLE LIBOR RATE SERIES 1998-1 SENIOR NOTE NOT PAYABLE ON ANY REDEMPTION
DATE WITH RESPECT TO SUCH TAXABLE LIBOR RATE SERIES 1998-1 SENIOR NOTE WILL BE
FORFEITED UPON THE REDEMPTION OR AT MATURITY OF SUCH TAXABLE LIBOR RATE SERIES
1998-1 SENIOR NOTE, OR ON SUCH EARLIER INTEREST PAYMENT DATE, IF ANY, ON WHICH
SUCH TAXABLE LIBOR RATE SERIES 1998-1 SENIOR NOTE CEASES TO BE OUTSTANDING
UNDER THE FIRST SUPPLEMENTAL INDENTURE. FITCH'S RATING ON THE TAXABLE LIBOR
RATE SERIES 1998-1 SENIOR NOTES WILL NOT APPLY TO ANY CARRY-OVER AMOUNT THAT
MAY ACCRUE ON THE TAXABLE LIBOR RATE SERIES 1998-1 SENIOR NOTES.
INTEREST LIMITED TO THE EXTENT PERMISSIBLE BY LAW
In no event shall the cumulative amount of interest paid or payable on
the Taxable LIBOR Rate Series 1998-1 Senior Notes exceed the amount permitted
by applicable law. If the applicable law is ever judicially interpreted so as
to render usurious any amount called for under the Taxable LIBOR Rate Series
1998-1 Senior Notes or related documents or otherwise contracted for, charged,
reserved, taken or received in connection with the Taxable LIBOR Rate Series
1998-1 Senior Notes, or if the call for redemption or acceleration of the
maturity of the Taxable LIBOR Rate Series 1998-1 Senior Notes results in
payment to or receipt by the Holder or any former Holder of the Taxable LIBOR
Rate Series 1998-1 Senior Notes of any interest in excess of that permitted by
applicable law, then, notwithstanding any provision of the Taxable LIBOR Rate
Series 1998-1 Senior Notes or related documents to the contrary, all excess
amounts theretofore paid or received with respect to the Taxable LIBOR Rate
Series 1998-1 Senior Notes shall be credited on the principal balance of the
Taxable LIBOR Rate Series 1998-1 Senior Notes (or, if the Taxable LIBOR Rate
Series 1998-1 Senior Notes have been paid or would thereby be paid in full,
refunded by the recipient thereof), and the provisions of the Taxable LIBOR
Rate Series 1998-1 Senior Notes and related documents shall automatically and
immediately be deemed reformed and the amounts thereafter collectible
thereunder reduced, without the necessity of the execution of any new
document, so as to comply with the applicable law, but so as to permit the
recovery of the fullest amount otherwise called for under the Taxable LIBOR
Rate Series 1998-1 Senior Notes and under the related documents.
CALL FOR REDEMPTION AND PREPAYMENT OF TAXABLE TAXABLE LIBOR RATE SERIES 1998-1
SENIOR NOTES
The Taxable Taxable LIBOR Rate Series 1998-1 Senior Notes will be subject
to call for redemption and prepayment as described in this Prospectus under
the caption "Description of Series 1998-1 Notes -- Prepayment of Taxable LIBOR
Rate Series 1998-1 Notes" and "-- Special Call for Redemption -- Call for
Redemption of Series 1998-1 Notes Upon Reduction of Portfolio Balance."
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TERMS OF THE TAX EXEMPT FIXED RATE SERIES 1998-1 SUBORDINATE NOTES
The Tax Exempt Fixed Rate Series 1998-1 Subordinate Notes will be dated
as of February 1, 1998 and, subject to call for redemption pursuant to
provisions referred to below, will mature on June 1, 2020, and will bear
interest from their date at the rate of 5.60% per annum. Interest on the Tax
Exempt Series 1998-1 Subordinate Notes will be computed on the assumption that
each year contains 360 days and is composed of twelve 30-day months and will
be payable semiannually on each June 1 and December 1, commencing June 1,
1998. The Tax Exempt Fixed Rate Series 1998-1 Subordinate Notes will be
issued in fully registered form, without coupons, and when issued will be
registered in the name of Cede & Co., as nominee of DTC, New York, New York.
DTC will act as securities depository for the Tax Exempt Series 1998-1
Subordinate Notes. Individual purchases of the Tax Exempt Series 1998-1
Subordinate Notes will be made in book-entry form only in the principal amount
of $5,000 or multiples thereof. Purchasers of the Tax-Exempt Series 1998-1
Subordinate Notes will not receive certificates representing their interest in
the Tax-Exempt Series 1998-1 Subordinate Notes purchased. See "Description of
the Series 1998-1 Notes -- Book-Entry-Only System."
The Tax Exempt Fixed Rate Series 1998-1 Subordinate Notes will be subject
to call for redemption as described in this Prospectus under the captions
"Description of the Series 1998-1 Notes -- Special Call for Redemption" and
"-- Optional Call for Redemption."
TERMS OF THE TAXABLE LIBOR RATE SERIES 1998-1 SUBORDINATE NOTES
GENERALLY
The Taxable LIBOR Rate Series 1998-1 Subordinate Notes will be dated as
of the date of their initial issuance and, subject to call for redemption and
prepayment pursuant to the provisions referred below, will mature on June 1,
2020. The Taxable LIBOR Rate Series 1998-1 Subordinate Notes will bear
interest, payable on the first Business Day of each month, commencing March 2,
1998, at rates determined as described below under "Interest Rate on the
Taxable LIBOR Rate Series 1998-1 Subordinate Notes." The Taxable Series
1998-1 Subordinate Notes will be issued in fully registered form, without
coupons, and when issued will be registered in the name of Cede & Co., as
nominee of DTC, New York, New York. DTC will act as securities depository for
the Taxable LIBOR Rate Series 1998-1 Subordinate Notes. Individual purchases
of the Taxable LIBOR Rate Series 1998-1 Subordinate Notes will be made in
book-entry form only in the original principal amount of $100,000 or multiples
thereof. Purchasers of the Taxable LIBOR Rate Series 1998-1 Subordinate Notes
will not receive certificates representing their interest in the Taxable LIBOR
Rate Series 1998-1 Subordinate Notes purchased. See "Description of the
Series 1998-1 Notes - Book-Entry-Only System."
INTEREST RATE ON THE TAXABLE LIBOR RATE SERIES 1998-1 SUBORDINATE NOTES
During the Initial Interest Period for the Taxable LIBOR Rate Series
1998-1 Subordinate Notes, being the period from the date of delivery through
March 1, 1998, the Taxable LIBOR Rate Series 1998-1 Subordinate Notes will
bear interest at the Initial Interest Rate for such series. The Taxable LIBOR
Rate Series 1998-1 Subordinate Note Interest Rate for each Interest Period
after the Initial Interest Period for the Taxable LIBOR Rate Series 1998-1
Subordinate Notes will be the Taxable LIBOR Rate Series 1998-1 Subordinate
Note LIBOR-Based Rate based upon One-Month LIBOR plus the Taxable LIBOR Rate
Series 1998-1 Subordinate Note Spread, determined and subject to certain
limitations as hereinafter described.
Interest on the Taxable LIBOR Rate Series 1998-1 Subordinate Notes shall
be computed on the basis of actual days elapsed and accrue daily from the date
thereof (on the basis of a 360-day year), and shall be payable on each
regularly scheduled Interest Payment Date with respect thereto (which shall be
the first Business Day of each calendar month, commencing March 2, 1998) prior
to the maturity thereof and at the maturity thereof. The interest payable on
each Interest Payment Date for the Taxable LIBOR Rate Series 1998-1
Subordinate Notes shall
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be that interest which has accrued through the last day of the last complete
Interest Period immediately preceding the Interest Payment Date or, in the
case of the maturity thereof, the last day preceding the date of such
maturity. Each such Interest Period (other than the Initial Interest Period)
will commence on and include the first Business Day of a calendar month and
terminate on and include the last day preceding the next Interest Rate
Adjustment Date. Each Interest Rate Adjustment Date shall be the Interest
Payment Date for the preceding Interest Period. The Taxable LIBOR Rate Series
1998-1 Subordinate Note Interest Rate shall be effective as of and on the
Interest Rate Adjustment Date of the applicable Interest Period and be in
effect thereafter through the end of such Interest Period.
The interest rate to be borne by the Taxable LIBOR Rate Series 1998-1
Subordinate Notes during each Interest Period after the Initial Interest
Period shall be determined on the related Interest Rate Determination Date and
shall be equal to the lesser of (i) the sum of One-Month LIBOR determined with
respect to such Interest Rate Determination Date plus the Taxable LIBOR Rate
Series 1998-1 Subordinate Note Spread of 0.40% per annum (which is herein
referred to as the "Taxable LIBOR Rate Series 1998-1 Subordinate Note
LIBOR-Based Rate"), and (ii) the Net Loan Rate determined with respect to such
Interest Period. The Trustee shall determine such interest rate on each
Interest Rate Determination Date and shall give the Corporation written notice
thereof prior to 2:00 p.m., New York City time, on such Interest Rate
Determination Date. The Net Loan Rate with respect to each Interest Period
shall be determined by or on behalf of the Corporation and written notice
thereof given to the Trustee together with the Monthly Servicing Report for
the second preceding calendar month. See "Carry-Over Amounts on the Taxable
LIBOR Rate Series 1998-1 Subordinate Notes" below.
In the event that the Trustee no longer determines, or fails to
determine, when required, the Taxable LIBOR Rate Series 1998-1 Subordinate
Note LIBOR-Based Rate with respect to an Interest Rate Determination Date, or
if, for any reason, such manner of determination shall be held to be invalid
or unenforceable, the Taxable LIBOR Rate Series 1998-1 Subordinate Note
LIBOR-Based Rate for the related Interest Period shall be the Net Loan Rate as
determined with respect to such Interest Period. If the Corporation shall
fail or refuse to determine such Net Loan Rate, the Net Loan Rate for such
Interest Period shall be the most recently determined Net Loan Rate.
CARRY-OVER AMOUNTS ON THE TAXABLE LIBOR RATE SERIES 1998-1 SUBORDINATE NOTES
If the Taxable LIBOR Rate Series 1998-1 Subordinate Notes LIBOR-Based
Rate determined with respect to a given Interest Period is greater than the
Net Loan Rate, then the Taxable LIBOR Rate Series 1998-1 Subordinate Note
Interest Rate for such Interest Period will be the Net Loan Rate. If the
Taxable LIBOR Rate Series 1998-1 Subordinate Note Interest Rate for any
Interest Period is the Net Loan Rate, the Trustee shall determine the
Carry-Over Amount, if any, with respect to the Taxable LIBOR Rate Series
1998-1 Subordinate Notes for such Interest Period. Each such Carry-Over
Amount shall bear interest calculated at a rate equal to the Taxable LIBOR
Rate Series 1998-1 Subordinate Note LIBOR-Based Rate (as determined by the
Trustee) from the Interest Payment Date for the Interest Period with respect
to which such Carry-Over Amount was calculated, until paid. Any payment in
respect of Carry-Over Amount shall be applied, first, to any accrued interest
payable thereon and, thereafter, in reduction of such Carry-Over Amount. For
purposes of the Indenture and the Taxable LIBOR Rate Series 1998-1 Subordinate
Notes, any reference to "principal" or "interest" therein shall not include,
within the meaning of such words, Carry-Over Amount or any interest accrued on
any such Carry-Over Amount. Such Carry-Over Amount shall be separately
calculated for each Taxable LIBOR Rate Series 1998-1 Subordinate Note by the
Trustee during such Interest Period in sufficient time for the Trustee to give
notice to each Holder of such Carry-Over Amount as required in the next
succeeding sentence. On the Interest Payment Date for an Interest Period with
respect to which such Carry-Over Amount has been calculated by the Trustee,
the Trustee shall give written notice to each Holder of the Carry-Over Amount
applicable to such Holder's Taxable LIBOR Rate Series 1998-1 Subordinate Note,
which written notice may accompany the payment of interest by check made to
each such Holder on such Interest Payment Date or otherwise shall be mailed on
such Interest Payment Date by first-class mail, postage prepaid, to each such
Holder at such Holder's address as it appears on the registration books
maintained by the Note Registrar. Such notice shall state, in addition to
such Carry-Over Amount, that, unless and until a
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Taxable LIBOR Rate Series 1998-1 Subordinate Note has been redeemed or has
been deemed no longer Outstanding under the Indenture (after which all accrued
Carry-Over Amount with respect to such Taxable LIBOR Rate Series 1998-1
Subordinate Note (and all accrued interest thereon) that remains unpaid shall
be cancelled and no Carry-Over Amount (or interest accrued thereon) shall be
paid with respect to such Taxable LIBOR Rate Series 1998-1 Subordinate Note),
(i) the Carry-Over Amount (and interest accrued thereon) shall be paid by the
Trustee on such Taxable LIBOR Rate Series 1998-1 Subordinate Note on the first
occurring Interest Payment Date for a subsequent Interest Period if and to the
extent that (a) the Eligible Carry-Over Make-Up Amount with respect to such
Interest Period is greater than zero, and (b) moneys are available pursuant to
the terms of the First Supplemental Indenture to pay such Carry-Over Amount
(and interest accrued thereon), and (ii) interest shall accrue on the
Carry-Over Amount at a per annum rate equal to the Taxable LIBOR Rate Series
1998-1 Subordinate Note LIBOR-Based Rate until such Carry-Over Amount is paid
in full or is cancelled.
The Carry-Over Amount (and interest accrued thereon) for the Taxable
LIBOR Rate Series 1998-1 Subordinate Notes shall be paid by the Trustee on
Outstanding Taxable LIBOR Rate Series 1998-1 Subordinate Notes on the first
occurring Interest Payment Date for a subsequent Interest Period if and to the
extent that (a) the Eligible Carry-Over Make-Up Amount with respect to such
Interest Period is greater than zero, and (b) moneys in the Surplus Account
are available on such Interest Payment Date for transfer to the Interest
Account for such purpose in accordance with the second paragraph under
"Summary of the Indenture -- Funds and Accounts -- Surplus Account", after
taking into account all other amounts payable from the Surplus Fund in
accordance with such paragraph on such Interest Payment Date. Any Carry-Over
Amount (and any interest accrued thereon) with respect to any Taxable LIBOR
Rate Series 1998-1 Subordinate Note which is unpaid as of an Interest Payment
Date, which Taxable LIBOR Rate Series 1998-1 Subordinate Note is to be called
for redemption or deemed no longer Outstanding under the First Supplemental
Indenture on such Interest Payment Date, shall be paid to the Holder thereof
on such Interest Payment Date to the extent that moneys are available therefor
in accordance with the provisions of the preceding clauses (a) and (b);
provided, however, that any Carry-Over Amount (and any interest accrued
thereon) which is not so paid on such Interest Payment Date shall be cancelled
with respect to such Taxable LIBOR Rate Series 1998-1 Subordinate Note on such
Interest Payment Date and shall not be paid on any succeeding Interest Payment
Date. To the extent that any portion of the Carry-Over Amount (and any
interest accrued thereon) remains unpaid after payment of a portion thereof,
such unpaid portion shall be paid in whole or in part until fully paid by the
Trustee on the next occurring Interest Payment Date or Dates, as necessary,
for a subsequent Interest Period or Periods, if and to the extent that the
conditions in the first sentence of this paragraph are satisfied. On any
Interest Payment Date on which the Trustee pays less than all of the
Carry-Over Amount (and any interest accrued thereon) with respect to a Taxable
LIBOR Rate Series 1998-1 Subordinate Note, the Trustee shall give written
notice in the manner set forth in the immediately preceding paragraph to the
Holder of such Taxable LIBOR Rate Series 1998-1 Subordinate Note of the
Carry-Over Amount remaining unpaid on such Taxable LIBOR Rate Series 1998-1
Subordinate Note.
The Interest Payment Date on which any Carry-Over Amount (or any interest
accrued thereon) for the Taxable LIBOR Rate Series 1998-1 Subordinate Notes
shall be paid shall be determined by the Trustee in accordance with the
provisions of the immediately preceding paragraph, and the Trustee shall make
payment of the Carry-Over Amount (and any interest accrued thereon) in the
same manner as, and from the same Account from which, it pays interest on the
Taxable LIBOR Rate Series 1998-1 Subordinate Notes on an Interest Payment
Date. ANY UNPAID CARRY-OVER AMOUNT, INCLUDING ANY ACCRUED AND UNPAID INTEREST
THEREON, ON A TAXABLE LIBOR RATE SERIES 1998-1 SUBORDINATE NOTE NOT PAYABLE ON
ANY REDEMPTION DATE WITH RESPECT TO SUCH TAXABLE LIBOR RATE SERIES 1998-1
SUBORDINATE NOTE WILL BE FORFEITED UPON THE REDEMPTION OR AT MATURITY OF SUCH
TAXABLE LIBOR RATE SERIES 1998-1 SUBORDINATE NOTE, OR ON SUCH EARLIER INTEREST
PAYMENT DATE, IF ANY, ON WHICH SUCH TAXABLE LIBOR RATE SERIES 1998-1
SUBORDINATE NOTE CEASES TO BE OUTSTANDING UNDER THE FIRST SUPPLEMENTAL
INDENTURE. FITCH'S RATING ON THE TAXABLE LIBOR RATE SERIES 1998-1 SUBORDINATE
NOTES WILL NOT APPLY TO ANY CARRY-OVER AMOUNT THAT MAY ACCRUE ON THE TAXABLE
LIBOR RATE SERIES 1998-1 SUBORDINATE NOTES.
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INTEREST LIMITED TO THE EXTENT PERMISSIBLE BY LAW
In no event shall the cumulative amount of interest paid or payable on
the Taxable LIBOR Rate Series 1998-1 Subordinate Notes exceed the amount
permitted by applicable law. If the applicable law is ever judicially
interpreted so as to render usurious any amount called for under the Taxable
LIBOR Rate Series 1998-1 Subordinate Notes or related documents or otherwise
contracted for, charged, reserved, taken or received in connection with the
Taxable LIBOR Rate Series 1998-1 Subordinate Notes, or if the call for
redemption or acceleration of the maturity of the Taxable LIBOR Rate Series
1998-1 Subordinate Notes results in payment to or receipt by the Holder or any
former Holder of the Taxable LIBOR Rate Series 1998-1 Subordinate Notes of any
interest in excess of that permitted by applicable law, then, notwithstanding
any provision of the Taxable LIBOR Rate Series 1998-1 Subordinate Notes or
related documents to the contrary, all excess amounts theretofore paid or
received with respect to the Taxable LIBOR Rate Series 1998-1 Subordinate
Notes shall be credited on the principal balance of the Taxable LIBOR Rate
Series 1998-1 Subordinate Notes (or, if the Taxable LIBOR Rate Series 1998-1
Subordinate Notes have been paid or would thereby be paid in full, refunded by
the recipient thereof), and the provisions of the Taxable LIBOR Rate Series
1998-1 Subordinate Notes and related documents shall automatically and
immediately be deemed reformed and the amounts thereafter collectible
thereunder reduced, without the necessity of the execution of any new
document, so as to comply with the applicable law, but so as to permit the
recovery of the fullest amount otherwise called for under the Taxable LIBOR
Rate Series 1998-1 Subordinate Notes and under the related documents.
CALL FOR REDEMPTION AND PREPAYMENT OF THE TAXABLE LIBOR RATE SERIES 1998-1
SUBORDINATE NOTES
The Taxable LIBOR Rate Series 1998-1 Subordinate Notes will be subject to
call for redemption and prepayment as described in this Prospectus under the
caption "Description of Series 1998-1 Notes -- Prepayment of Taxable LIBOR
Rate Series 1998-1 Notes" and "-- Special Call for Redemption -- Call for
Redemption of Series 1998-1 Notes Upon Reduction of Portfolio Balance."
WEIGHTED AVERAGE LIFE OF THE
TAXABLE LIBOR RATE SERIES 1998-1 NOTES
THE FOLLOWING INFORMATION IS GIVEN SOLELY TO ILLUSTRATE THE EFFECT OF
PREPAYMENTS ON THE FINANCED STUDENT LOANS HELD IN THE SERIES 1998-1 TAXABLE
ACQUISITION ACCOUNT ON THE WEIGHTED AVERAGE LIFE OF THE TAXABLE LIBOR RATE
SERIES 1998-1 NOTES UNDER THE ASSUMPTIONS STATED BELOW AND IS NOT A PREDICTION
OF THE PREPAYMENT RATE THAT MIGHT ACTUALLY BE EXPERIENCED BY THE FINANCED
STUDENT LOANS HELD IN THE SERIES 1998-1 TAXABLE ACQUISITION ACCOUNT.
Weighted average life refers to the average amount of time from the date
of issuance of a security until each dollar of principal of such security will
be repaid to the investor. The weighted average life of the Taxable LIBOR
Rate Series 1998-1 Notes will be primarily a function of the rate at which
payments are made on the Financed Student Loans held in the Series 1998-1
Taxable Acquisition Account. Payments on such Financed Student Loans may be
in the form of scheduled amortization of principal or prepayments (including,
for this purpose, reimbursements on defaults).
The Constant Prepayment Rate prepayment model ("CPR") represents an
assumed constant rate of prepayment of Financed Student Loans held in the
Series 1998-1 Taxable Acquisition Account outstanding as of the beginning of
each month expressed as a per annum percentage. There can be no assurance
that such Financed Student Loans will experience prepayments at a constant
prepayment rate or otherwise in the manner assumed by the prepayment model.
The weighted average lives in the following table were determined
assuming that (i) scheduled payments of principal on the Financed Student
Loans held in the Series 1998-1 Taxable Acquisition Account are received in
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a timely manner and prepayments are made at the percentages of the prepayment
model set forth in the table; (ii) the initial principal balance of the
Financed Student Loans held in the Series 1998-1 Taxable Acquisition Account
is $500,870,000; (iii) payments are made on the Taxable LIBOR Rate Series
1998-1 Notes on the 1st day of each month commencing March 1, 1998; and (iv)
the Taxable LIBOR Rate Series 1998-1 Notes are issued on February 19, 1998. No
representation is made that these assumptions will be correct, including the
assumption that the Financed Student Loans held in the Series 1998-1 Taxable
Acquisition Account will not experience delinquencies or unanticipated
losses. See "Risk Factors -- Changes in the Assets of the Trust Estate,
Including Future Funding of Student Loans, Changing Characteristics of
Financed Student Loans, Financed Eligible Loans That are Not Made Under the
Federal Family Education Loan Program and Financed Student Loans That are Not
Eligible Loans in the Surplus Account," "-- Reduction in Amounts Available to
Pay Notes Due to the Variability of Actual Cash Flows and Due to the Inability
of Guarantee Agencies to Make Guarantee Payments," "-- Holders of Series
1998-1 Notes Which are Prepaid or Called for Redemption Due to Accelerated
Payments with respect to Financed Student Loans May Have to Reinvest Amounts
Received From Prepayments or Calls for Redemption at a Lower Rate of Return,"
and "-- The Average Life of the Series 1998-1 Notes May Be Lengthened As a
Result of Extension of Payments on the Financed Student Loans."
In making an investment decision with respect to the Taxable LIBOR Rate
Series 1998-1 Notes, investors should consider a variety of possible
prepayment scenarios, including the limited scenarios described in the table
below.
WEIGHTED AVERAGE LIFE OF THE TAXABLE LIBOR RATE SERIES 1998-1 NOTES
AT THE RESPECTIVE CPRS SET FORTH BELOW:
<TABLE>
<CAPTION>
Weighted Average Life (years)
------------------------------------------
0% CPR 3% CPR 5% CPR 7% CPR 10%CPR
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Senior Series 1998-1I Notes. . . 2.09 1.75 1.58 1.44 1.26
Senior Series 1998-1J Notes. . . 7.14 6.34 5.88 5.48 4.93
Subordinate Series
1998-1L Notes. . . . . . . . . 4.94 4.34 4.01 3.72 3.34
</TABLE>
AUCTION OF THE AUCTION RATE SERIES 1998-1 SENIOR NOTES
If not otherwise defined below, capitalized terms used below will have
the meanings given such terms under "Glossary of Certain Defined Terms".
Unless otherwise noted or the context otherwise requires, the following
description of Auctions and related procedures is applicable separately to
each series of the Auction Rate Series 1998-1 Senior Notes.
SUMMARY OF AUCTION PROCEDURES
The following summarizes certain procedures that will be used in
determining the interest rates on the Auction Rate Series 1998-1 Senior
Notes. Immediately following this summary is a more detailed description of
these procedures. Prospective investors in the Auction Rate Series 1998-1
Senior Notes should read carefully the following summary, along with the more
detailed description.
The interest rate on each series of Auction Rate Series 1998-1 Senior
Notes will be determined periodically (generally, for periods ranging from 7
days to one year, and initially 28 days, in the case of the Taxable Auction
Rate Series 1998-1 Senior Notes, or 35 days, in the case of Tax Exempt Auction
Rate Series 1998-1 Senior Notes) by means of a "Dutch auction." In this Dutch
auction, investors and potential investors submit orders through an eligible
Broker-Dealer as to the principal amount of Auction Rate Series 1998-1 Senior
Notes such investors wish
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to buy, hold or sell at various interest rates. The Broker-Dealers submit
their clients' orders to the Auction Agent, who processes all orders submitted
by all eligible Broker-Dealers and determines the interest rate for the
upcoming interest period. The Broker-Dealers are notified by the Auction
Agent of the interest rate for the upcoming interest period and are provided
with settlement instructions relating to purchases and sales of Auction Rate
Series 1998-1 Senior Notes.
In the auction procedure, the following orders may be submitted:
(i) "Bid Orders" - the minimum interest rate that a current investor is
willing to accept in order to continue to hold some or all of its
Auction Rate Series 1998-1 Senior Notes for the upcoming interest
period;
(ii) "Sell Orders" - an order by a current investor to sell a specified
principal amount of Auction Rate Series 1998-1 Senior Notes,
regardless of the upcoming interest rate;
(iii) "Hold Order" - an order by a current investor to hold a specified
principal amount of Auction Rate Series 1998-1 Senior Notes,
regardless of the upcoming interest rate; and
(iv) "Potential Bid Orders" - the minimum interest rate that a potential
investor (or a current investor wishing to purchase additional
Auction Rate Series 1998-1 Senior Notes) is willing to accept in
order to buy a specified principal amount of Auction Rate Series
1998-1 Senior Notes.
If an existing investor does not submit orders with respect to all its
Auction Rate Series 1998-1 Senior Notes of a particular series, the investor
will be deemed to have submitted a Hold Order at the new interest rate for
that portion of such series for which no order was received.
In connection with each Auction, Auction Rate Series 1998-1 Senior Notes
will be purchased and sold between investors and potential investors at a
price equal to their then-outstanding principal balance (i.e., par) plus any
accrued interest. The following example helps illustrate how the
above-described procedures are used in determining the interest rate on the
Auction Rate Series 1998-1 Senior Notes.
(a) Assumptions:
1. Denominations (Units) = $100,000
2. Interest Period = 28 days
3. Principal Amount Outstanding = $50 Million (500 Units)
(b) Summary of All Orders Received for the Auction
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<TABLE>
<CAPTION>
Bid Orders Sell Orders Potential Bid Orders
---------- ----------- --------------------
<S> <C> <C>
10 Units at 2.90% 50 Units Sell 20 Units of 2.95%
30 Units at 3.02% 50 Units Sell 30 Units of 3.00%
60 Units at 3.02% 100 Units Sell 50 Units of 3.05%
--------------
100 Units at 3.10% 200 Units 50 Units of 3.10%
100 Units at 3.12% 50 Units of 3.11%
------------------
300 Units 50 Units of 3.14%
100 Units of 3.15%
-------------------
350 Units
</TABLE>
Total units under existing Bid Orders, Hold Orders and Sell Orders always
equal issue size (in this case 500 units).
(c) Auction Agent organizes Orders in Ascending Order
<TABLE>
<CAPTION>
Order Number Cumulative Order Number Cumulative
Number of Units Total (Units) Percent Number of Units Total (Units) Percent
- ------ -------- ------------- ------- ------ -------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1. 10(W) 10 2.90% 7. 100(W) 300 3.10%
2. 20(W) 30 2.95 8. 50(W) 350 3.10
3. 30(W) 60 3.00 9. 50(W) 400 3.11
4. 30(W) 90 3.02 10. 100(W) 500 3.12
5. 50(W) 140 3.05 11. 50(L) 3.14
6. 60(W) 200 3.05 12. 100(L) 3.15
</TABLE>
(W) Winning Order (L) Losing Order
Order #10 is the order that clears the market of all available units.
All winning orders are awarded the winning rate (in this case, 3.12%) as the
interest rate for the next Interest Period, when another Auction will be
held. Multiple orders at the winning rate are allocated units on a pro rata
basis. Notwithstanding the foregoing, in no event will the interest rate
exceed (i) in the case of the Tax Exempt Auction Rate Series 1998-1 Senior
Notes, the Maximum Auction Rate, or (ii) in the case of the Taxable Auction
Rate Series 1998-1 Senior Notes, the lesser of the Net Loan Rate or the
Maximum Auction Rate.
The above example assumes that a successful Auction has occurred (i.e.,
all Sell Orders and all Bid Orders below the new interest rate were
fulfilled). In certain circumstances, there may be insufficient Potential Bid
Orders to purchase all the Auction Rate Series 1998-1 Senior Notes offered for
sale. In such circumstances, the interest rate for the upcoming Interest
Period will equal (i) in the case of the Tax Exempt Auction Rate Series 1998-1
Senior Notes, the Maximum Auction Rate, or (ii) in the case of the Taxable
Auction Rate Series 1998-1 Senior Notes, the lesser of the Net Loan Rate and
the Maximum Auction Rate. Also, if all the Auction Rate Series 1998-1 Senior
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Notes are subject to Hold Orders (i.e., each Holder of Auction Rate Series
1998-1 Senior Notes wishes to continue holding its Auction Rate Series 1998-1
Senior Notes, regardless of the interest rate), the interest rate for the
upcoming Interest Period will equal (i) in the case of the Tax Exempt Auction
Rate Series 1998-1 Senior Notes, the lesser of the Maximum Auction Rate and
the All Hold Rate, or (ii) in the case of the Taxable Auction Rate Series
1998-1 Senior Notes, the least of the Maximum Auction Rate, the Net Loan Rate
and the All Hold Rate.
Neither the Original Issuer nor the Corporation will be involved in
directing the Auction Agent in conducting an Auction.
As stated above, the foregoing is only a summary of the Auction
Procedures. The remainder of this Section is a more detailed description of
these procedures.
AUCTION PARTICIPANTS
Existing Holders and Potential Holders
Participants in each Auction will include: (1) "Existing Holders", which
shall mean any Person (including a Broker-Dealer) who is a holder of Auction
Rate Series 1998-1 Senior Notes in the records of the Auction Agent (described
below) at the close of business on the Business Day preceding each Auction
Date; and (ii) "Potential Holders", which shall mean any Person (including a
Broker-Dealer), including any Existing Holder, who may be interested in
acquiring the Auction Rate Series 1998-1 Senior Notes (or, in the case of an
Existing Holder, an additional principal amount of the Auction Rate Series
1998-1 Senior Notes). See "Broker-Dealer" below.
By purchasing the Auction Rate Series 1998-1 Senior Notes, whether in an
Auction or otherwise, each prospective purchaser of the Auction Rate Series
1998-1 Senior Notes or its Broker-Dealer must agree and will be deemed to have
agreed: (i) to participate in Auctions on the terms described in the First
Supplemental Indenture; (ii) to have its beneficial ownership of the Auction
Rate Series 1998-1 Senior Notes maintained at all times in Book-Entry Form for
the account of its Participant, which in turn will maintain records of such
beneficial ownership, and to authorize such Participant to disclose to the
Auction Agent such information with respect to such beneficial ownership as
the Auction Agent may request; (iii) so long as the beneficial ownership of
the Auction Rate Series 1998-1 Senior Notes is maintained in Book-Entry Form,
to sell, transfer or otherwise dispose of the Auction Rate Series 1998-1
Senior Notes only pursuant to a Bid (as defined below) or a Sell Order (as
defined below) in an Auction, or otherwise through a Broker-Dealer, provided
that in the case of all transfers other than those pursuant to an Auction, the
Existing Holder of the Auction Rate Series 1998-1 Senior Notes so transferred,
its Participant or Broker-Dealer advises the Auction Agent of such transfer;
(iv) that a Sell Order placed by an Existing Holder will constitute an
irrevocable offer to sell the principal amount of the Auction Rate Series
1998-1 Senior Notes specified in such Sell Order; (v) that a Bid placed by an
Existing Holder will constitute an irrevocable offer to sell the principal
amount, or a lesser principal amount, of the Auction Rate Series 1998-1 Senior
Notes specified in such Bid if the rate specified in such Bid is greater than,
or in some cases equal to, the Auction Rate Series 1998-1 Senior Note Interest
Rate, determined as described herein; and (vi) that a Bid placed by a
Potential Holder will constitute an irrevocable offer to purchase the amount,
or a lesser principal amount, of the Auction Rate Series 1998-1 Senior Notes
specified in such Bid if the rate specified in such Bid is, respectively, less
than or equal to the Auction Rate Series 1998-1 Senior Note Interest Rate,
determined as described herein.
The principal amount of the Auction Rate Series 1998-1 Senior Notes
purchased or sold may be subject to proration procedures on the Auction Date.
Each purchase or sale of the Auction Rate Series 1998-1 Senior Notes on the
Auction Date will be made for settlement on the first day of the Interest
Period immediately following such Auction Date at a price equal to 100% of the
principal amount thereof plus, unless such day is an Interest Payment Date,
accrued interest thereon to but not including such day. The Auction Agent is
entitled to rely upon the terms of any Order submitted to it by a
Broker-Dealer.
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Auction Agent
Bankers Trust Company is appointed in the First Supplemental Indenture as
the initial Auction Agent to serve as agent for the Corporation in connection
with Auctions with respect to Tax Exempt Auction Rate Series 1998-1 Senior
Notes. The Trustee and the Corporation will enter into the initial Auction
Agent Agreement relating to Tax Exempt Auction Rate Series 1998-1 Senior Notes
with Bankers Trust Company, as the initial Auction Agent. Bankers Trust
Company also is appointed in the First Supplemental Indenture as the initial
Auction Agent to serve as agent for the Corporation in connection with
Auctions with respect to Taxable Auction Rate Series 1998-1 Senior Notes. The
Trustee and the Corporation will enter into the initial Auction Agent
Agreement relating to Taxable Auction Rate Series 1998-1 Senior Notes with
Bankers Trust Company, as the initial Auction Agent. Any substitute Auction
Agent shall be (i) a bank, national banking association or trust company duly
organized under the laws of the United States of America or any state or
territory thereof having its principal place of business in the Borough of
Manhattan, New York, or such other location as approved by the Trustee in
writing and having a combined capital stock or surplus of at least
$50,000,000, or (ii) a member of the National Association of Securities
Dealers, Inc., having a capitalization of at least $50,000,000, and, in either
case, authorized by law to perform all the duties imposed upon it under the
First Supplemental Indenture and the Auction Agent Agreement. The Auction
Agent may at any time resign and be discharged of the duties and obligations
created by the First Supplemental Indenture and the Auction Agent Agreement by
giving at least 90 days' notice to the Trustee and the Corporation. The
Auction Agent may be removed at any time by the Trustee upon the written
direction of an Authorized Officer of the Corporation or the Holders of
66-2/3% of the aggregate principal amount of the Auction Rate Series 1998-1
Senior Notes of all series then Outstanding, and, if by such Holders, by an
instrument signed by such Holders or their attorneys and filed with the
Auction Agent, the Corporation and the Trustee upon at least 90 days' notice.
Neither resignation nor removal of the Auction Agent pursuant to the preceding
two sentences shall be effective unless and until a substitute Auction Agent
has been appointed and has accepted such appointment. If required by the
Corporation, a substitute Auction Agent Agreement shall be entered into with a
substitute Auction Agent. Notwithstanding the foregoing, the Auction Agent
may terminate the Auction Agent Agreement if, within 25 days after notifying
the Trustee and the Corporation in writing that it has not received payment of
any Auction Agent fee due it in accordance with the terms of the Auction Agent
Agreement, the Auction Agent does not receive such payment.
If the Auction Agent shall resign or be removed or be dissolved, or if
the property or affairs of the Auction Agent shall be taken under the control
of any state or federal court or administrative body because of bankruptcy or
insolvency, or for any other reason, the Trustee, at the direction of an
Authorized Officer of the Corporation, shall use its best efforts to appoint a
substitute Auction Agent.
The Auction Agent is acting as agent for the Corporation in connection
with Auctions. In the absence of bad faith, negligent failure to act or
negligence on its part, the Auction Agent shall not be liable for any action
taken, suffered or omitted or any error of judgment made by it in the
performance of its duties under the Auction Agent Agreement and shall not be
liable for any error of judgment made in good faith unless the Auction Agent
shall have been negligent in ascertaining (or failing to ascertain) the
pertinent facts.
The Corporation will pay the Auction Agent the Auction Agent fee on each
Interest Payment Date and will reimburse the Auction Agent upon its request
for all reasonable expenses, disbursements and advances incurred or made by
the Auction Agent in accordance with any provision of the Auction Agent
Agreement or the Broker-Dealer Agreements (including the reasonable
compensation and the expenses and disbursements of its agents and counsel).
Such amounts are payable from the Administration Fund. The Corporation will
indemnify and hold harmless the Auction Agent for and against any loss,
liability or expense incurred without negligence or bad faith on the Auction
Agent's part, arising out of or in connection with the acceptance or
administration of its agency under the Auction Agent Agreement and the
Broker-Dealer Agreements, including the reasonable costs and expenses
(including the reasonable fees and expenses of its counsel) of defending
itself against any such claim or liability in connection with its exercise or
performance of any of its respective duties thereunder and of enforcing this
indemnification provision; provided that the Corporation will not indemnify
the Auction Agent as described in this paragraph for any fees and
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expenses incurred by the Auction Agent in the normal course of performing its
duties under the Auction Agent Agreement and under the Broker-Dealer
Agreements, such fees and expenses being payable as described above.
Broker-Dealer
Existing Holders and Potential Holders may participate in Auctions only
by submitting orders (in the manner described below) through a Broker-Dealer,
including Smith Barney Inc., which initially will be the only Broker-Dealer
for each of the Tax Exempt Auction Rate Series 1998-1 Senior Notes and the
Taxable Auction Rate Series 1998-1 Senior Notes, or any other broker or dealer
(each as defined in the Exchange Act), commercial bank or other entity
permitted by law to perform the functions required of a Broker-Dealer set
forth below which (i) is a Participant or an affiliate of a Participant, (ii)
has been selected by the Corporation and (iii) has entered into a
Broker-Dealer Agreement with the Auction Agent that remains effective, in
which the Broker-Dealer agrees to participate in Auctions as described in the
Auction Procedures, as from time to time amended or supplemented.
The Broker-Dealers are entitled to a Broker-Dealer fee, which is payable
by the Auction Agent from monies received from the Corporation, on each
Interest Payment Date. Such Broker-Dealer fee is payable from the
Administration Fund as provided in the First Supplemental Indenture.
Market Agent
Although Smith Barney Inc. is acting as an Underwriter in connection with
the offering, in connection with the Auction Rate Series 1998-1 Senior Notes,
Smith Barney Inc. will initially be the Market Agent and will act solely as
agent of the Corporation when acting as the Market Agent and will not assume
any obligation or relationship of agency or trust for or with any of the
Beneficial Owners when so acting.
AUCTION PROCEDURES
General
Pursuant to the First Supplemental Indenture, Auctions to establish the
Auction Rate for the Auction Rate Series 1998-1 Senior Notes will be held on
each Auction Date, except as described under Appendices Terms of the Tax
Exempt Auction Rate Series 1998-1 Senior Notes -- Interest Rate on the Tax
Exempt Auction Rate Series 1998-1 Senior Notes" and "Terms of the Taxable
Auction Rate Series 1998-1 Senior Notes -- Interest Rate on the Taxable
Auction Rate Series 1998-1 Senior Notes", respectively, by application of the
Auction Procedures described herein. Such procedures are to be applicable
separately to each series of Auction Rate Series 1998-1 Senior Notes.
"Auction Date" means, initially, with respect to the Series 1998-1A Notes,
March 25, 1998, with respect to the Series 1998-1B Notes, April 1, 1998, with
respect to the Series 1998-1C Notes, April 8, 1998, with respect to the Series
1998-1D Notes, April 15, 1998, with respect to the Series 1998-1E Notes, April
22, 1998, with respect to the Series 1998-1G Notes, March 23, 1998, and with
respect to the Series 1998-1H Notes, March 30, 1998, and, thereafter, with
respect to each such series of Auction Rate Series 1998-1 Senior Notes, the
Business Day immediately preceding the first day of each related Auction
Period, other than: (i) any Interest Period commencing after the ownership of
such series is no longer maintained in Book-Entry Form; (ii) any Interest
Period commencing after the occurrence and during the continuance of a Payment
Default; or (iii) any Auction Period commencing less than two Business Days
after the cure of a Payment Default. Notwithstanding the foregoing, the
Auction Date for one or more Auction Periods may be changed as described below
under "Changes in Auction Terms".
The Auction Agent will calculate the Maximum Auction Rate and the All
Hold Rate on each Auction Date. The Corporation (or the Servicer on behalf of
the Corporation) will calculate the Net Loan Rate monthly. If the ownership
of the Auction Rate Series 1998-1 Senior Notes is no longer maintained in
Book-Entry Form, the Trustee will calculate the Maximum Auction Rate on the
Business Day immediately preceding the first day of each Interest Period
commencing after delivery of the Auction Rate Series 1998-1 Senior Notes. If
a Payment Default has occurred, the Trustee will calculate the Non-Payment
Rate on the Interest Rate Determination Date for (i) each
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Interest Period commencing after the occurrence and during the continuance of
such Payment Default and (ii) any Interest Period commencing less than two
Business Days after the cure of any Payment Default. The Auction Agent shall
determine (i) with respect to the Taxable Auction Rate Series 1998-1 Senior
Notes, the One-Month LIBOR or the Three-Month LIBOR, as applicable, and (ii)
with respect to the Tax Exempt Auction Rate Series 1998-1 Senior Notes, the
After-Tax Equivalent, the "AA" Composite Commercial Paper Rate and the
Applicable Percentage for each Interest Period other than the Initial Interest
Period. If the ownership of the Auction Rate Series 1998-1 Senior Notes is no
longer maintained in Book-Entry Form, or if a Payment Default has occurred,
then the Trustee shall determine the One-Month LIBOR or the Three-Month LIBOR,
as applicable, the After-Tax Equivalent, the "AA" Composite Commercial Paper
Rate and the Applicable Percentage for each such Interest Period. The
determination by the Trustee or the Auction Agent, as the case may be, of the
One-Month LIBOR or the Three-Month LIBOR, as applicable, the After-Tax
Equivalent, the "AA" Composite Commercial Paper Rate and the Applicable
Percentage shall (in the absence of manifest error) be final and binding upon
all parties. The Auction Agent shall promptly advise the Trustee of the
One-Month LIBOR or the Three-Month LIBOR, as applicable, the After-Tax
Equivalent, the "AA" Composite Commercial Paper Rate and the Applicable
Percentage upon its determination thereof. The Market Agent shall calculate
the Index (if the Index is other than the PSA Index) with respect to the Tax
Exempt Auction Rate Series 1998-1 Senior Notes on each Interest Rate
Determination Date and shall notify the Trustee and the Auction Agent of the
Index on each Interest Rate Determination Date. The determination by the
Market Agent of the Index shall (in the absence of manifest error) be final
and binding upon all parties.
If the Federal Reserve Bank of New York does not make available its
30-day commercial paper rate for purposes of determining the "AA" Composite
Commercial Paper Rate, the Auction Agent shall notify the Trustee of such fact
and the Trustee shall thereupon request that an Authorized Officer of the
Corporation promptly appoint at least two Commercial Paper Dealers (in
addition to Smith Barney Inc.) to provide commercial paper quotes for purposes
of determining the "AA" Composite Commercial Paper Rate. Pending appointment
of both such additional Commercial Paper Dealers, Smith Barney Inc. and any
other Commercial Paper Dealer appointed and serving as such shall provide the
required quotations and such quotations shall be used for purposes of the
First Supplemental Indenture. Smith Barney Inc. has been appointed as a
Commercial Paper Dealer to provide commercial paper quotes for purposes of
determining the "AA" Composite Commercial Paper Rate as aforesaid.
Submission of Orders
So long as the ownership of a series of Auction Rate Series 1998-1 Senior
Notes is maintained in Book-Entry Form, an Existing Holder may sell, transfer
or otherwise dispose of Auction Rate Series 1998-1 Senior Notes of such series
only pursuant to a Bid or Sell Order (as hereinafter defined) placed in an
Auction or otherwise sell, transfer or dispose of such series through a
Broker-Dealer, provided that, in the case of all transfers other than pursuant
to Auctions, such Existing Holder, its Broker-Dealer or its Participant
advises the Auction Agent of such transfer. Auctions shall be conducted on
each Auction Date, if there is an Auction Agent on such Auction Date, in the
following manner:
Prior to the Submission Deadline (defined as 1:00 p.m., New York City
time, on any Auction Date or such other time on any Auction Date by which
Broker-Dealers are required to submit Orders to the Auction Agent as specified
by the Auction Agent from time to time) on each Auction Date:
(a) each Existing Holder of Auction Rate Series 1998-1 Senior
Notes may submit to a Broker-Dealer by telephone or otherwise information
as to: (i) the principal amount of Outstanding Auction Rate Series 1998-1
Senior Notes, if any, held by such Existing Holder which such Existing
Holder desires to continue to hold without regard to the Auction Rate
Series 1998-1 Senior Note Interest Rate for the next succeeding Auction
Period (a "Hold Order"); (ii) the principal amount of Outstanding Auction
Rate Series 1998-1 Senior Notes, if any, which such Existing
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Holder offers to sell if the Auction Rate Series 1998-1 Senior Note
Interest Rate for the next succeeding Auction Period will be less than
the rate per annum specified by such Existing Holder (a "Bid"); and/or
(iii) the principal amount of Outstanding Auction Rate Series 1998-1
Senior Notes, if any, held by such Existing Holder which such Existing
Holder offers to sell without regard to the Auction Rate Series 1998-1
Senior Note Interest Rate for the next succeeding Auction Period (a "Sell
Order"); and
(b) one or more Broker-Dealers may contact Potential Holders to
determine the principal amount of Auction Rate Series 1998-1 Senior Notes
which each such Potential Holder offers to purchase, if the Auction Rate
Series 1998-1 Senior Note Interest Rate for the next succeeding Auction
Period will not be less than the rate per annum specified by such
Potential Holder (also a "Bid").
Each Hold Order, Bid and Sell Order will be an "Order". Each Existing
Holder and each Potential Holder placing an Order is referred to as a
"Bidder".
Subject to the provisions of the First Supplemental Indenture described
below under "Validity of Orders", a Bid by an Existing Holder will constitute
an irrevocable offer to sell: (i) the principal amount of Outstanding Auction
Rate Series 1998-1 Senior Notes specified in such Bid if the Auction Rate
Series 1998-1 Senior Note Interest Rate will be less than the rate specified
in such Bid, (ii) such principal amount or a lesser principal amount of
Outstanding Auction Rate Series 1998-1 Senior Notes to be determined as
described below in "Acceptance and Rejection of Orders", if the Auction Rate
Series 1998-1 Senior Note Interest Rate will be equal to the rate specified in
such Bid, or (iii) such principal amount or a lesser principal amount of
Outstanding Auction Rate Series 1998-1 Senior Notes to be determined as
described below under "Acceptance and Rejection of Orders", if the rate
specified therein will be higher than the Auction Rate Series 1998-1 Senior
Note Interest Rate and Sufficient Bids (as defined below) have not been made.
Subject to the provisions of the First Supplemental Indenture described
below under "Validity of Orders", a Sell Order by an Existing Holder will
constitute an irrevocable offer to sell: (i) the principal amount of
Outstanding Auction Rate Series 1998-1 Senior Notes specified in such Sell
Order or (ii) such principal amount or a lesser principal amount of
Outstanding Auction Rate Series 1998-1 Senior Notes as described below under
"Acceptance and Rejection of Orders", if Sufficient Bids have not been made.
Subject to the provisions of the First Supplemental Indenture described
below under "Validity of Orders", a Bid by a Potential Holder will constitute
an irrevocable offer to purchase: (i) the principal amount of Outstanding
Auction Rate Series 1998-1 Senior Notes specified in such Bid if the Auction
Rate Series 1998-1 Senior Note Interest Rate will be higher than the rate
specified in such Bid or (ii) such principal amount or a lesser principal
amount of Outstanding Auction Rate Series 1998-1 Senior Notes as described
below in "Acceptance and Rejection of Orders", if the Auction Rate Series
1998-1 Senior Note Interest Rate is equal to the rate specified in such Bid.
Each Broker-Dealer will submit in writing to the Auction Agent prior to
the Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer and will specify with respect to each such Order: (i) the name
of the Bidder placing such Order; (ii) the aggregate principal amount of
Auction Rate Series 1998-1 Senior Notes that are the subject of such Order;
(iii) to the extent that such Bidder is an Existing Holder: (a) the principal
amount of Auction Rate Series 1998-1 Senior Notes, if any, subject to any Hold
Order placed by such Existing Holder; (b) the principal amount of Auction Rate
Series 1998-1 Senior Notes, if any, subject to any Bid placed by such Existing
Holder and the rate specified in such Bid; and (c) the principal amount of
Auction Rate Series 1998-1 Senior Notes, if any, subject to any Sell Order
placed by such Existing Holder; and (iv) to the extent such Bidder is a
Potential Holder, the rate specified in such Potential Holder's Bid.
If any rate specified in any Bid contains more than three figures to the
right of the decimal point, the Auction Agent will round such rate up to the
next highest .001%.
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If an Order or Orders covering all Outstanding Auction Rate Series 1998-1
Senior Notes held by any Existing Holder are not submitted to the Auction
Agent prior to the Submission Deadline, the Auction Agent will deem a Hold
Order to have been submitted on behalf of such Existing Holder covering the
principal amount of Outstanding Auction Rate Series 1998-1 Senior Notes held
by such Existing Holder and not subject to an Order submitted to the Auction
Agent.
Neither the Corporation, the Trustee nor the Auction Agent will be
responsible for any failure of a Broker-Dealer to submit an Order to the
Auction Agent on behalf of any Existing Holder or Potential Holder.
An Existing Holder may submit multiple Orders, of different types and
specifying different rates, in an Auction with respect to Auction Rate Series
1998-1 Senior Notes then held by such Existing Holder. An Existing Holder
that offers to purchase additional Auction Rate Series 1998-1 Senior Notes is,
for purposes of such offer, treated as a Potential Holder.
Any Bid specifying a rate higher than the applicable Maximum Auction Rate
will (i) be treated as a Sell Order if submitted by an Existing Holder and
(ii) not be accepted if submitted by a Potential Holder.
Validity of Orders
If any Existing Holder submits through a Broker-Dealer to the Auction
Agent one or more Orders covering in the aggregate more than the principal
amount of Outstanding Auction Rate Series 1998-1 Senior Notes held by such
Existing Holder, such Orders will be considered valid as follows and in the
order of priority described below.
Hold Orders. All Hold Orders will be considered valid, but only up
to the aggregate principal amount of Outstanding Auction Rate Series
1998-1 Senior Notes held by such Existing Holder, and if the aggregate
principal amount of Auction Rate Series 1998-1 Senior Notes subject to
such Hold Orders exceeds the aggregate principal amount of Auction Rate
Series 1998-1 Senior Notes held by such Existing Holder, the aggregate
principal amount of Auction Rate Series 1998-1 Senior Notes subject to
each such Hold Order will be reduced pro rata so that the aggregate
principal amount of Auction Rate Series 1998-1 Senior Notes subject to
all such Hold Orders equals the aggregate principal amount of Outstanding
Auction Rate Series 1998-1 Senior Notes held by such Existing Holder.
Bids. Any Bid will be considered valid up to an amount equal to the
excess of the principal amount of Outstanding Auction Rate Series 1998-1
Senior Notes held by such Existing Holder over the aggregate principal
amount of Auction Rate Series 1998-1 Senior Notes subject to any Hold
Orders referred to above. Subject to the preceding sentence, if multiple
Bids with the same rate are submitted on behalf of such Existing Holder
and the aggregate principal amount of Outstanding Auction Rate Series
1998-1 Senior Notes subject to such Bids is greater than such excess,
such Bids will be considered valid up to an amount equal to such excess.
Subject to the two preceding sentences, if more than one Bid with
different rates is submitted on behalf of such Existing Holder, such Bids
will be considered valid first in the ascending order of their respective
rates until the highest rate is reached at which such excess exists and
then at such rate up to the amount of such excess. In any event, the
aggregate principal amount of Outstanding Auction Rate Series 1998-1
Senior Notes, if any, subject to Bids not valid under the provisions
described above will be treated as the subject of a Bid by a Potential
Holder at the rate therein specified.
Sell Orders. All Sell Orders will be considered valid up to an
amount equal to the excess of the principal amount of Outstanding Auction
Rate Series 1998-1 Senior Notes held by such Existing Holder over the
aggregate principal amount of Auction Rate Series 1998-1 Senior Notes
subject to valid Hold Orders and valid Bids as referred to above.
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If more than one Bid for Auction Rate Series 1998-1 Senior Notes is
submitted on behalf of any Potential Holder, each Bid submitted will be a
separate Bid with the rate and principal amount therein specified. Any Bid or
Sell Order submitted by an Existing Holder covering an aggregate principal
amount of Auction Rate Series 1998-1 Senior Notes not equal to an Authorized
Denomination will be rejected and will be deemed a Hold Order. Any Bid
submitted by a Potential Holder covering an aggregate principal amount of
Auction Rate Series 1998-1 Senior Notes not equal to an Authorized
Denomination will be rejected. Any Order submitted in an Auction by a
Broker-Dealer to the Auction Agent prior to the Submission Deadline on any
Auction Date will be irrevocable.
A Hold Order, a Bid or a Sell Order that has been determined valid
pursuant to the procedures described above is referred to as a "Submitted Hold
Order", a "Submitted Bid" and a "Submitted Sell Order", respectively (collective
ly, "Submitted Orders").
Determination of Sufficient Bids and Bid Auction Rate
Not earlier than the Submission Deadline on each Auction Date, the
Auction Agent will assemble all valid Submitted Orders and will determine:
(a) the excess of the total principal amount of Outstanding
Auction Rate Series 1998-1 Senior Notes over the sum of the aggregate
principal amount of Outstanding Auction Rate Series 1998-1 Senior Notes
subject to Submitted Hold Orders (such excess being hereinafter referred
to as the "Available Auction Rate Series 1998-1 Senior Notes"); and
(b) from such Submitted Orders whether the aggregate principal
amount of Outstanding Auction Rate Series 1998-1 Senior Notes subject to
Submitted Bids by Potential Holders specifying one or more rates equal to
or lower than the Maximum Auction Rate exceeds or is equal to the sum of
(i) the aggregate principal amount of Outstanding Auction Rate Series
1998-1 Senior Notes subject to Submitted Bids by Existing Holders
specifying one or more rates higher than the Maximum Auction Rate and
(ii) the aggregate principal amount of Outstanding Auction Rate Series
1998-1 Senior Notes subject to Submitted Sell Orders (in the event such
excess or such equality exists other than because all of the Outstanding
Auction Rate Series 1998-1 Senior Notes are subject to Submitted Hold
Orders, such Submitted Bids by Potential Holders above will be
hereinafter referred to collectively as "Sufficient Bids"); and
(c) if Sufficient Bids exist, the "Bid Auction Rate", which will
be the lowest rate specified in such Submitted Bids such that if:
(i) each such Submitted Bid from Existing Holders
specifying such lowest rate and all other Submitted Bids from
Existing Holders specifying lower rates were rejected (thus
entitling such Existing Holders to continue to hold the principal
amount of Auction Rate Series 1998-1 Senior Notes subject to such
Submitted Bids); and
(ii) each such Submitted Bid from Potential Holders
specifying such lowest rate and all other Submitted Bids from
Potential Holders specifying lower rates, were accepted,
the result would be that such Existing Holders described in subparagraph
(c)(i) above would continue to hold an aggregate principal amount of
Outstanding Auction Rate Series 1998-1 Senior Notes which, when added to
the aggregate principal amount of Outstanding Auction Rate Series 1998-1
Senior Notes to be purchased by such Potential Holders described in
subparagraph (c)(ii) above would equal not less than the Available
Auction Rate Series 1998-1, Senior Notes.
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Determination of Auction Rate and Auction Rate Series 1998-1 Senior Note
Interest Rate; Notice
Promptly after the Auction Agent has made the determinations described
above, the Auction Agent is to advise the Trustee of the Maximum Auction Rate
and the All Hold Rate and the components thereof on the Auction Date and,
based on such determinations and the Net Loan Rate determined by the
Corporation or the Servicer, the Auction Rate for the next succeeding Interest
Period as follows:
(a) if Sufficient Bids exist, that the Auction Rate for the next
succeeding Interest Period will be equal to the Bid Auction Rate so
determined;
(b) if Sufficient Bids do not exist (other than because all of
the Outstanding Auction Rate Series 1998-1 Senior Notes are subject to
Submitted Hold Orders), that the Auction Rate for the next succeeding
Interest Period will be equal to the Maximum Auction Rate; or
(c) if all Outstanding Auction Rate Series 1998-1 Senior Notes
are subject to Submitted Hold Orders, that the Auction Rate for the next
succeeding Interest Period will be equal to the All Hold Rate.
Promptly after the Auction Agent has determined the Auction Rate, the
Auction Agent will determine and advise the Trustee of the Auction Rate Series
1998-1 Senior Note Interest Rate, which rate will be (i) in the case of the
Taxable Auction Rate Series 1998-1 Senior Notes, the lesser of the Auction
Rate and the Net Loan Rate, and (ii) in the case of the Tax Exempt Auction
Rate Series 1998-1 Senior Notes, the Auction Rate. In no event shall the
Auction Rate Series 1998-1 Senior Note Interest Rate exceed the Auction Rate
Series 1998-1 Senior Note Interest Rate Limitation, which, in the case of the
Taxable Auction Rate Series 1998-1 Senior Notes, will be 18% per annum, and,
in the case of the Tax Exempt Auction Rate Series 1998-1 Senior Notes, will be
14% per annum.
Acceptance and Rejection of Orders
Existing Holders will continue to hold the principal amount of Auction
Rate Series 1998-1 Senior Notes that are subject to Submitted Hold Orders. If
Sufficient Bids, as described above under "Determination of Sufficient Bids
and Bid Auction Rate", have been received by the Auction Agent (and if, in the
case of the Taxable Auction Rate Series 1998-1 Senior Notes, the Net Loan Rate
is equal to or greater than the Bid Auction Rate), the Bid Auction Rate will
be the Auction Rate Series 1998-1 Senior Note Interest Rate, and Submitted
Bids and Submitted Sell Orders will be accepted or rejected and the Auction
Agent will take such other action as provided in the First Supplemental
Indenture and described below under "Sufficient Bids".
If the Auction Rate is (or, in the case of the Taxable Auction Rate
Series 1998-1 Senior Notes, if the Auction Rate and the Net Loan Rate are
both) greater than the Auction Rate Series 1998-1 Senior Note Interest Rate
Limitation, the Auction Rate Series 1998-1 Senior Note Interest Rate will be
equal to the Auction Rate Series 1998-1 Senior Note Interest Rate Limitation.
If, in the case of the Taxable Auction Rate Series 1998-1 Senior Notes, the
Net Loan Rate is less than the Auction Rate, the Auction Rate Series 1998-1
Senior Note Interest Rate for such Notes will be the Net Loan Rate. If the
Auction Agent has not received Sufficient Bids as described above under
"Determination of Sufficient Bids and Bid Auction Rate" (other than because
all of the Outstanding Auction Rate Series 1998-1 Senior Notes are subject to
Submitted Hold Orders), the Auction Rate Series 1998-1 Senior Note Interest
Rate will be (i) in the case of the Taxable Auction Rate Series 1998-1 Senior
Notes, the lesser of the Maximum Auction Rate and the Net Loan Rate, and (ii)
in the case of the Tax Exempt Auction Rate Series 1998-1 Senior Notes, the
Maximum Auction Rate. In any of the cases described above in this paragraph,
Submitted Orders will be accepted or rejected and the Auction Agent will take
such other action as described below under "Insufficient Bids".
Sufficient Bids. If Sufficient Bids have been made (and, in the
case of the Taxable Auction Rate Series 1998-1 Senior Notes, the Net Loan
Rate is equal to or greater than the Bid
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Auction Rate) (in which case the Auction Rate Series 1998-1 Senior Note
Interest Rate shall be the Bid Auction Rate), all Submitted Sell Orders
will be accepted and, subject to the denomination requirements described
below, Submitted Bids will be accepted or rejected as follows in the
following order of priority and all other Submitted Bids will be
rejected:
(a) Existing Holders' Submitted Bids specifying any rate
that is higher than the Auction Rate Series 1998-1 Senior Note
Interest Rate will be accepted, thus requiring each such Existing
Holder to sell the aggregate principal amount of Auction Rate Series
1998-1 Senior Notes subject to such Submitted Bids;
(b) Existing Holders' Submitted Bids specifying any rate
that is lower than the Auction Rate Series 1998-1 Senior Note
Interest Rate will be rejected, thus entitling each such Existing
Holder to continue to hold the aggregate principal amount of Auction
Rate Series 1998-1 Senior Notes subject to such Submitted Bids;
(c) Potential Holders' Submitted Bids specifying any rate
that is lower than the Auction Rate Series 1998-1 Senior Note
Interest Rate will be accepted;
(d) Each Existing Holder's Submitted Bid specifying a rate
that is equal to the Auction Rate Series 1998-1 Senior Note Interest
Rate will be rejected, thus entitling such Existing Holder to
continue to hold the aggregate principal amount of Auction Rate
Series 1998-1 Senior Notes subject to such Submitted Bid, unless the
aggregate principal amount of Auction Rate Series 1998-1 Senior
Notes subject to such Submitted Bids will be greater than the
principal amount of Auction Rate Series 1998-1 Senior Notes (the
"remaining principal amount") equal to the excess of the Available
Auction Rate Series 1998-1 Senior Notes over the aggregate principal
amount of Auction Rate Series 1998-1 Senior Notes subject to
Submitted Bids described in subparagraphs (b) and (c) above, in
which event such Submitted Bid of such Existing Holder will be
rejected in part and such Existing Holder will be entitled to
continue to hold the principal amount of Auction Rate Series 1998-1
Senior Notes subject to such Submitted Bid, but only in an amount
equal to the aggregate principal amount of Auction Rate Series
1998-1 Senior Notes obtained by multiplying the remaining principal
amount by a fraction, the numerator of which will be the principal
amount of Outstanding Auction Rate Series 1998-1 Senior Notes held
by such Existing Holder subject to such Submitted Bid and the
denominator of which will be the sum of the principal amount of
Outstanding Auction Rate Series 1998-1 Senior Notes subject to such
Submitted Bids made by all such Existing Holders that specified a
rate equal to the Auction Rate Series 1998-1 Senior Note Interest
Rate; and
(e) Each Potential Holder's Submitted Bid specifying a rate
that is equal to the Auction Rate Series 1998-1 Senior Note Interest
Rate will be accepted, but only in an amount equal to the principal
amount of Auction Rate Series 1998-1 Senior Notes obtained by
multiplying the excess of the aggregate principal amount of
Available Auction Rate Series 1998-1 Senior Notes over the aggregate
principal amount of Auction Rate Series 1998-1 Senior Notes subject
to Submitted Bids described in subparagraphs (b), (c) and (d) above
by a fraction, the numerator of which will be the aggregate
principal amount of Outstanding Auction Rate Series 1998-1 Senior
Notes subject to such Submitted Bid and the denominator of which
will be the sum of the principal amount of Outstanding Auction Rate
Series 1998-1 Senior Notes subject to Submitted Bids
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made by all such Potential Holders that specified a rate equal to
the Auction Rate Series 1998-1 Senior Note Interest Rate.
Insufficient Bids. If Sufficient Bids have not been made (other than
because all of the Outstanding Auction Rate Series 1998-1 Senior Notes are
subject to Submitted Hold Orders), or if the Auction Rate Series 1998-1 Senior
Note Interest Rate Limitation applies (or if, in the case of the Taxable
Auction Rate Series 1998-1 Senior Notes, the Net Loan Rate is less than the
Bid Auction Rate, in which case the Auction Rate Series 1998-1 Senior Note
Interest Rate for such Notes will be the Net Loan Rate), subject to the
denomination requirements described below, Submitted Orders will be accepted
or rejected as follows in the following order of priority and all other
Submitted Bids will be rejected:
(a) Existing Holders' Submitted Bids specifying any rate
that is equal to or lower than the Auction Rate Series 1998-1 Senior
Note Interest Rate will be rejected, thus entitling such Existing
Holders to continue to hold the aggregate principal amount of
Auction Rate Series 1998-1 Senior Notes subject to such Submitted
Bids;
(b) Potential Holders' Submitted Bids (i) specifying any
rate that is equal to or lower than the Auction Rate Series 1998-1
Senior Note Interest Rate will be accepted, and (ii) specifying any
rate that is higher than the Auction Rate Series 1998-1 Senior Note
Interest Rate will be rejected; and
(c) each Existing Holder's Submitted Bid specifying any
rate that is higher than the Auction Rate Series 1998-1 Senior Note
Interest Rate and the Submitted Sell Order of each Existing Holder
will be accepted, thus entitling each Existing Holder that submitted
any such Submitted Bid or Submitted Sell Order to sell the Auction
Rate Series 1998-1 Senior Notes subject to such Submitted Bid or
Submitted Sell Order, but in both cases only in an amount equal to
the aggregate principal amount of Auction Rate Series 1998-1 Senior
Notes obtained by multiplying the aggregate principal amount of
Auction Rate Series 1998-1 Senior Notes subject to Submitted Bids
described in subparagraph (b) above by a fraction, the numerator of
which will be the aggregate principal amount of Outstanding Auction
Rate Series 1998-1 Senior Notes held by such Existing Holder subject
to such Submitted Bid or Submitted Sell Order and the denominator of
which will be the aggregate principal amount of Outstanding Auction
Rate Series 1998-1 Senior Notes subject to all such Submitted Bids
and Submitted Sell Orders.
All Hold Orders. If all Outstanding Auction Rate Series 1998-1
Senior Notes are subject to Submitted Hold Orders, all Submitted Bids
will be rejected.
Authorized Denominations Requirement. If, as a result of the
procedures described above regarding Sufficient Bids and Insufficient
Bids, any Existing Holder would be entitled or required to sell, or any
Potential Holder would be entitled or required to purchase, a principal
amount of Auction Rate Series 1998-1 Senior Notes that is not equal to an
Authorized Denomination, the Auction Agent will, in such manner as in its
sole discretion it may determine, round up or down the principal amount
of Auction Rate Series 1998-1 Senior Notes to be purchased or sold by any
Existing Holder or Potential Holder so that the principal amount of
Auction Rate Series 1998-1 Senior Notes purchased or sold by each
Existing Holder or Potential Holder will be equal to an Authorized
Denomination. If, as a result of the procedures described above
regarding Sufficient Bids, any Potential Holder would be entitled or
required to purchase less than a principal amount
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of Auction Rate Series 1998-1 Senior Notes equal to an Authorized
Denomination, the Auction Agent will, in such manner as in its sole
discretion it may determine, allocate Auction Rate Series 1998-1 Senior
Notes for purchase among Potential Holders so that only Auction Rate
Series 1998-1 Senior Notes in an Authorized Denomination are purchased by
any Potential Holder, even if such allocation results in one or more of
such Potential Holders not purchasing any Auction Rate Series 1998-1
Senior Notes.
Based on the results of each Auction, the Auction Agent is to determine
the aggregate principal amount of Auction Rate Series 1998-1 Senior Notes to
be purchased and the aggregate principal amount of Auction Rate Series 1998-1
Senior Notes to be sold by Potential Holders and Existing Holders on whose
behalf each Broker-Dealer submitted Bids or Sell Orders and, with respect to
each Broker-Dealer, to the extent that such aggregate principal amount of
Auction Rate Series 1998-1 Senior Notes to be sold differs from such aggregate
principal amount of Auction Rate Series 1998-1 Senior Notes to be purchased,
determine to which other Broker-Dealer or Broker-Dealers acting for one or
more purchasers such Broker-Dealer will deliver, or from which Broker-Dealers
acting for one or more sellers such Broker-Dealer will receive, as the case
may be, Auction Rate Series 1998-1 Senior Notes.
Any calculation by the Auction Agent (or the Trustee, if applicable) of
the Auction Rate Series 1998-1 Senior Note Interest Rate, Maximum Auction
Rate, One-Month LIBOR, Three-Month LIBOR, All Hold Rate and Non-Payment Rate,
and any calculation by the Corporation or the Servicer of the Net Loan Rate,
will, in the absence of manifest error, be binding on all other parties.
Notwithstanding anything in the First Supplemental Indenture to the
contrary, no Auction is to be held on any Auction Date during the continuance
of a Payment Default.
Settlement Procedures
The Auction Agent is required to advise each Broker-Dealer that submitted
an Order in an Auction of the Auction Rate Series 1998-1 Senior Note Interest
Rate for the next Interest Period and, if such Order was a Bid or Sell Order,
whether such Bid or Sell Order was accepted or rejected, in whole or in part,
by telephone not later than 3:00 p.m., New York City time, on the Auction
Date, if the Auction Rate Series 1998-1 Senior Note Interest Rate is the
Auction Rate; provided that such notice is not required until 4:00 p.m., New
York City time, on the Auction Date, if the Auction Rate Series 1998-1 Senior
Note Interest Rate is the Maximum Auction Rate (or, in the case of the Taxable
Auction Rate Series 1998-1 Senior Notes, the Net Loan Rate). Each
Broker-Dealer that submitted an Order on behalf of a Bidder is required to
then advise such Bidder of the Auction Rate Series 1998-1 Senior Note Interest
Rate for the next Interest Period and, if such Order was a Bid or a Sell
Order, whether such Bid or Sell Order was accepted or rejected, in whole or in
part, confirm purchases and sales with each Bidder purchasing or selling
Auction Rate Series 1998-1 Senior Notes as a result of the Auction and advise
each Bidder purchasing or selling Auction Rate Series 1998-1 Senior Notes as a
result of the Auction to give instructions to its Participant to pay the
purchase price against delivery of such Auction Rate Series 1998-1 Senior
Notes or to deliver such Auction Rate Series 1998-1 Senior Notes against
payment therefor, as appropriate. Pursuant to the Auction Agent Agreement,
the Auction Agent is to record each transfer of Auction Rate Series 1998-1
Senior Notes on the Existing Holders Registry to be maintained by the Auction
Agent.
In accordance with DTC's normal procedures, on the Business Day after the
Auction Date, the transactions described above will be executed through DTC,
so long as DTC is the Securities Depository, and the accounts of the
respective Participants at DTC will be debited and credited and Auction Rate
Series 1998-1 Senior Notes delivered as necessary to effect the purchases and
sales of Auction Rate Series 1998-1 Senior Notes as determined in the
Auction. Purchasers are required to make payment through their Participants
in same-day funds to DTC against delivery through their Participants. DTC
will make payment in accordance with its normal procedures, which now provide
for payment against delivery by its Participants in immediately available
funds.
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If any Existing Holder selling Auction Rate Series 1998-1 Senior Notes in
an Auction fails to deliver such Auction Rate Series 1998-1 Senior Notes, the
Broker-Dealer of any person that was to have purchased Auction Rate Series
1998-1 Senior Notes in such Auction may deliver to such person a principal
amount of Auction Rate Series 1998-1 Senior Notes that is less than the
principal amount of Auction Rate Series 1998-1 Senior Notes that otherwise was
to be purchased by such person but in any event equal to an Authorized
Denomination. In such event, the principal amount of Auction Rate Series
1998-1 Senior Notes to be delivered will be determined by such Broker-Dealer.
Delivery of such lesser principal amount of Auction Rate Series 1998-1 Senior
Notes will constitute good delivery. Neither the Trustee nor the Auction
Agent will have any responsibility or liability with respect to the failure of
a Potential Holder, Existing Holder or their respective Broker-Dealer or
Participant to deliver the principal amount of Auction Rate Series 1998-1
Senior Notes or to pay for the Auction Rate Series 1998-1 Senior Notes
purchased or sold pursuant to an Auction or otherwise. For a further
description of the settlement procedures, see "Settlement Procedures for
Auction Rate Series 1998-1 Senior Notes."
TRUSTEE NOT RESPONSIBLE FOR AUCTION AGENT, MARKET AGENT AND BROKER-DEALERS
The Trustee shall not be liable or responsible for the actions of or
failure to act by the Auction Agent, the Market Agent or any Broker-Dealer
under the First Supplemental Indenture, the Auction Agent Agreement or any
Broker-Dealer Agreement. The Trustee may conclusively rely upon any
information required to be furnished by the Auction Agent, the Market Agent or
any Broker-Dealer without undertaking any independent review or investigation
of the truth or accuracy of such information.
CHANGES IN AUCTION TERMS
Changes in Auction Period or Periods
While any of the Auction Rate Series 1998-1 Senior Notes are Outstanding,
the Corporation may, from time to time, change the length of one or more
Auction Periods (an "Auction Period Adjustment") in order to conform with
then-current market practice with respect to similar securities or to
accommodate economic and financial factors that may affect or be relevant to
the length of the Auction Period and the interest rate borne by the Auction
Rate Series 1998-1 Senior Notes. The Corporation will not initiate such
change in the length of the Auction Period unless it shall have received, not
less than three days nor more than 20 days prior to the Auction Period
Adjustment, (i) in the case of the Tax Exempt Auction Rate Series 1998-1
Senior Notes, a written opinion of Bond Counsel to the effect that such
Auction Period Adjustment will not adversely affect the exclusion of interest
on any of such Notes from income for federal income tax purposes, (ii) the
written consent of the Market Agent, which consent shall not be unreasonably
withheld, and (iii) written confirmation from each of the Rating Agencies then
rating the Auction Rate Series 1998-1 Senior Notes that such Auction Period
Adjustment will not adversely affect its ratings then applicable to any of the
Auction Rate Series 1998-1 Senior Notes. The Corporation will initiate an
Auction Period Adjustment by giving written notice to the Trustee, the Auction
Agent, the Market Agent and the Securities Depository in substantially the
form of, or containing substantially the information contained in, the First
Supplemental Indenture at least ten days prior to the Auction Date for such
Auction Period.
Any such Auction Period Adjustment shall not result in an Auction Period
of less than seven days nor more than 91 days. If any such Auction Period
Adjustment will result in an Auction Period of less than 35 days (in the case
of the Tax Exempt Auction Rate Series 1998-1 Senior Notes) or 28 days (in the
case of the Taxable Auction Rate Series 1998-1 Senior Notes), the notice
described above will be effective only if it is accompanied by a written
statement of the Trustee, the Auction Agent and the Securities Depository to
the effect that they are capable of performing their duties, if any, under the
First Supplemental Indenture, the Auction Agent Agreement and any
Broker-Dealer Agreement with respect to such changed Auction Period.
An Auction Period Adjustment will take effect only if (A) the Trustee and
the Auction Agent receive, by 11:00 a.m., New York City time, on the Business
Day before the Auction Date for the first such Auction Period, a certificate
from the Corporation authorizing an Auction Period Adjustment specified in
such certificate, the opinion
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of Bond Counsel (in the case of the Tax Exempt Auction Rate Series 1998-1
Senior Notes), the written consent of the Market Agent and the Rating Agency
confirmations described above and, if applicable, the written statement of the
Trustee, the Auction Agent and the Securities Depository described above, and
(B) Sufficient Bids exist at the Auction on the Auction Date for such first
Auction Period. If the condition referred to in (A) is not met, the Auction
Rate Series 1998-1 Senior Note Interest Rate applicable for the next Auction
Period will be determined pursuant to the Auction Procedures and the Auction
Period will be the Auction Period determined without reference to the proposed
change. If the condition referred to in (A) is met, but the condition
referred to in (B) above is not met, the Auction Rate Series 1998-1 Senior
Note Interest Rate applicable for the next Auction Period will be (i) with
respect to the Taxable Auction Rate Series 1998-1 Senior Notes, the lesser of
the Maximum Auction Rate and the Net Loan Rate, and (ii) with respect to the
Tax Exempt Auction Rate Series 1998-1 Senior Notes, the Maximum Auction Rate,
and the Auction Period will be the Auction Period determined without reference
to the proposed change.
Changes in Percentages Used in Determining All Hold Rate, Maximum Auction
Rate and Non-Payment Rate with Respect to the Tax Exempt Auction Rate Series
1998-1 Senior Notes
The Market Agent may adjust the percentage used in determining the All
Hold Rate, the Applicable Percentage used in determining the Maximum Auction
Rate and the percentage of the Index used in determining the Non-Payment Rate,
in each case with respect to the Tax Exempt Auction Rate Series 1998-1 Senior
Notes, if any such adjustment is necessary, in the judgment of the Market
Agent, to reflect any Change of Tax Law such that a Tax Exempt Auction Rate Seri
es 1998-1 Senior Note bearing interest at the All Hold Rate, a Tax Exempt
Auction Rate Series 1998-1 Senior Note bearing interest at the Maximum Auction
Rate and a Tax Exempt Auction Rate Series 1998-1 Senior Note bearing interest
at the Non-Payment Rate shall have substantially the same market values after
such Change of Tax Law as before such Change of Tax Law. In making any such
adjustment, the Market Agent shall take the following factors in existence
both before and after such Change of Tax Law into account: (i) short-term
taxable and tax-exempt market rates and indices of such short-term rates; (ii)
the market supply and demand for short-term tax-exempt securities; (iii) yield
curves for short-term and long-term tax-exempt securities or obligations
having a credit rating that is comparable to the Tax Exempt Auction Rate
Series 1998-1 Senior Notes; (iv) general economic conditions; and (v) economic
and financial factors present in the securities industry that may affect or
that may be relevant to the Tax Exempt Auction Rate Series 1998-1 Senior
Notes.
The Market Agent shall communicate its determination to adjust the
percentage used in determining the All Hold Rate, the Applicable Percentage
used in determining the Maximum Auction Rate and the percentage of the Index
used in determining the Non-Payment Rate pursuant to the previous paragraph by
means of a written notice delivered in writing at least ten days prior to the
Interest Rate Determination Date on which the Market Agent desires to effect
the change, to the Corporation, the Trustee and the Auction Agent. Such
notice shall not be given unless the Market Agent has received a Corporation
consent thereto and a written opinion of Bond Counsel to the effect that such
adjustment will not adversely affect the exclusion of interest on any of the
Tax Exempt Auction Rate Series 1998-1 Senior Notes from income for federal incom
e tax purposes.
Any such adjustment in the percentages used to determine the All Hold
Rate, the Maximum Auction Rate and the Non-Payment Rate with respect to the
Tax Exempt Auction Rate Series 1998-1 Senior Notes shall take effect on an
Interest Rate Determination Date only if (A) the Trustee, the Auction Agent
and the Corporation receive, by 11:00 a.m., New York City time, on the
Business Day immediately preceding such Interest Rate Determination Date, a
Corporation certificate authorizing the adjustment of such percentage,
together with a copy of the Corporation consent thereto and the opinion of
Bond Counsel described above; and (B) the Trustee and the Corporation have
received written confirmation from each of the Rating Agencies then rating the
Tax Exempt Auction Rate Series 1998-1 Senior Notes that such proposed
adjustment will not adversely affect its ratings then applicable to any of the
Tax Exempt Auction Rate Series 1998-1 Senior Notes. If any of the conditions
referred to in (A) and (B) above are not met, the existing percentage used to
determine the All Hold Rate, Applicable Percentage used to determine the
Maximum Auction Rate and percentage of the Index used to determine the
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Non-Payment Rate shall remain in effect, and the rate of interest on Tax
Exempt Auction Rate Series 1998-1 Senior Notes for the next succeeding
Interest Period shall be determined in accordance with the Auction Procedures.
Changes in the Auction Date
The Market Agent, with the written consent of an Authorized Officer of
the Corporation and, in the case of the Tax Exempt Auction Rate Series 1998-1
Senior Notes, upon receipt of the opinion of Bond Counsel as hereinafter
required, may specify an earlier Auction Date (but in no event more than five
Business Days earlier) than the Auction Date that would otherwise be
determined in accordance with the definition of "Auction Date" set forth above
under "Auction Procedures -- General", with respect to one or more specified
Auction Periods in order to conform with then-current market practice with
respect to similar securities or to accommodate economic and financial factors
that may affect or be relevant to the day of the week constituting an Auction
Date and the interest rate on the Auction Rate Series 1998-1 Senior Notes. No
such change in the Auction Date shall be effective with respect to the Auction
Rate Series 1998-1 Senior Notes unless the Corporation and the Trustee, prior
to the proposed effective date of such change, have received a written opinion
of Bond Counsel to the effect that such change will not adversely affect the
exclusion of interest on any of such Notes from income for federal income tax
purposes. The Market Agent shall deliver a written request for consent to
such change in the Auction Date to the Corporation not less than three days
nor more than 20 days prior to the effective date of such change. The Market
Agent shall provide notice of its determination to specify an earlier Auction
Date for one or more Auction Periods by means of a written notice delivered at
least ten days prior to the proposed changed Auction Date to the Trustee, the
Auction Agent, the Corporation and the Securities Depository. Such notice
will be substantially in the form of, or contain substantially the information
contained in, the First Supplemental Indenture.
Notice of Changes in Auction Terms
In connection with any change in Auction Terms described above, the
Auction Agent is to provide such further notice to such parties as is
specified in the Auction Agent Agreement.
SETTLEMENT PROCEDURES FOR AUCTION RATE
SERIES 1998-1 SENIOR NOTES
If not otherwise defined below, capitalized terms used below will have
the meanings given such terms under "Glossary of Certain Defined Terms" or
"Auction of the Auction Rate Series 1998-1 Senior Notes". These Settlement
Procedures apply separately to each series of Auction Rate Series 1998-1
Senior Notes.
(a) Not later than 3:00 p.m., New York City time, if the Auction Rate
Series 1998-1 Senior Note Interest Rate is the Auction Rate (provided that
such notice is not required until 4:00 p.m., New York City time, if the
Auction Rate Series 1998-1 Senior Note Interest Rate is the Maximum Auction
Rate (or in the case of the Taxable Auction Rate Series 1998-1 Senior Notes,
the Net Loan Rate)), the Auction Agent is to notify by telephone each
Broker-Dealer that participated in the Auction held on such Auction Date and
submitted an Order on behalf of an Existing Holder or Potential Holder of:
(i) the Auction Rate Series 1998-1 Senior Note Interest Rate
fixed for the next Interest Period;
(ii) whether there were Sufficient Bids in such Auction;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer")
submitted Bids or Sell Orders on behalf of an Existing Holder, whether
such Bid or Sell Order was accepted or rejected, in whole or in part, and
the principal amount of Auction Rate Series 1998-1 Senior Notes, if any,
to be sold by such Existing Holder;
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(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted
a Bid on behalf of a Potential Holder, whether such Bid was accepted or
rejected, in whole or in part, and the principal amount of Auction Rate
Series 1998-1 Senior Notes, if any, to be purchased by such Potential
Holder;
(v) if the aggregate principal amount of Auction Rate Series
1998-1 Senior Notes to be sold by all Existing Holders on whose behalf
such Seller's Broker-Dealer submitted Bids or Sell Orders exceeds the
aggregate principal amount of Auction Rate Series 1998-1 Senior Notes to
be purchased by all Potential Holders on whose behalf such Buyer's
Broker-Dealer submitted a Bid, the name or names of one or more Buyer's
Broker-Dealers (and the name of the Participant, if any, of each such
Buyer's Broker-Dealer) acting for one or more purchasers of such excess
principal amount of Auction Rate Series 1998-1 Senior Notes and the
principal amount of Auction Rate Series 1998-1 Senior Notes to be
purchased from one or more Existing Holders on whose behalf such Seller's
Broker-Dealer acted by one or more Potential Holders on whose behalf each
of such Buyer's Broker-Dealers acted;
(vi) if the aggregate principal amount of Auction Rate Series
1998-1 Senior Notes to be purchased by all Potential Holders on whose
behalf such Buyer's Broker-Dealer submitted a Bid exceeds the aggregate
principal amount of Auction Rate Series 1998-1 Senior Notes to be sold by
all Existing Holders on whose behalf such Seller's Broker-Dealer
submitted a Bid or a Sell Order, the name or names of one or more
Seller's Broker-Dealers (and the name of the Participant, if any, of each
such Seller's Broker-Dealer) acting for one or more sellers of such
excess principal amount of Auction Rate Series 1998-1 Senior Notes and
the principal amount of Auction Rate Series 1998-1 Senior Notes to be
sold to one or more Potential Holders on whose behalf such Buyer's
Broker-Dealer acted by one or more Existing Holders on whose behalf each
of such Seller's Broker-Dealers acted; and
(vii) the Auction Date for the next succeeding Auction.
(b) On each Auction Date, each Broker-Dealer that submitted an Order
on behalf of any Existing Holder or Potential Holder is to:
(i) advise each Existing Holder and Potential Holder on whose
behalf such Broker-Dealer submitted a Bid or Sell Order in the Auction on
such Auction Date whether such Bid or Sell Order was accepted or
rejected, in whole or in part;
(ii) in the case of a Broker-Dealer that is a Buyer's
Broker-Dealer, advise each Potential Holder on whose behalf such Buyer's
Broker-Dealer submitte d a Bid that was accepted, in whole or in part, to
instruct such Potential Holder's Participant to pay to such Buyer's
Broker-Dealer (or its Participant) through the Securities Depository the
amount necessary to purchase the principal amount of the Auction Rate
Series 1998-1 Senior Notes to be purchased pursuant to such Bid (which
amount, unless the date of such purchase is an Interest Payment Date,
will include an amount equal to the interest accrued and unpaid on such
principal amount of Auction Rate Series 1998-1 Senior Notes) against
receipt of such Auction Rate Series 1998-1 Senior Notes;
(iii) in the case of a Broker-Dealer that is a Seller's
Broker-Dealer, instruct each Existing Holder on whose behalf such
Seller's Broker-Dealer submitted a Sell Order that was accepted, in whole
or in part, or a Bid that was accepted, in whole or in part, to instruct
such Existing Holder's Participant to deliver to such Seller's
Broker-Dealer (or its Participant) through the Securities Depository the
principal amount of the Auction Rate Series 1998-1 Senior Notes to be
sold pursuant to such Order against payment therefor;
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(iv) advise each Existing Holder on whose behalf such
Broker-Dealer submitted an Order and each Potential Holder on whose
behalf such Broker-Dealer submitted a Bid of the Auction Rate Series
1998-1 Senior Note Interest Rate for the next Interest Period;
(v) advise each Existing Holder on whose behalf such
Broker-Dealer submitted an Order of the next Auction Date; and
(vi) advise each Potential Holder on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or in part, of
the next Auction Date.
(c) On the basis of the information provided to it pursuant to
paragraph (a) above, each Broker-Dealer that submitted a Bid or Sell Order in
an Auction is required to allocate any funds received by it in connection with
such Auction pursuant to paragraph (b)(ii) above, and any Auction Rate Series
1998-1 Senior Notes received by it in connection with such Auction pursuant to
paragraph (b)(iii) above, among the Potential Holders, if any, on whose behalf
such Broker-Dealer submitted Bids, the Existing Holders, if any on whose
behalf such Broker-Dealer submitted Bids or Sell Orders in such Auction, and
any Broker-Dealers identified to it by the Auction Agent following such
Auction pursuant to paragraph (a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Holder and Existing Holder with an Order in
the Auction on such Auction Date will instruct its Participant as
provided in paragraph (b)(ii) or (b)(iii) above, as the case may be;
(ii) each Seller's Broker-Dealer that is not a Participant of the
Securities Depository will instruct its Participant to deliver such
Auction Rate Series 1998-1 Senior Notes through the Securities Depository
to a Buyer's Broker-Dealer (or its Participant) identified to such
Seller's Broker-Dealer pursuant to paragraph (a)(v) above against payment
therefor; and
(iii) each Buyer's Broker-Dealer that is not a Participant of the
Securities Depository will instruct its Participant to pay through the
Securities Depository to Seller's Broker-Dealer (or its Participant)
identified to such Buyer's Broker-Dealer pursuant to paragraph (a)(vi)
above the amount necessary to purchase the Auction Rate Series 1998-1
Senior Notes to be purchased pursuant to paragraph (b)(ii) above against
receipt of such Auction Rate Series 1998-1 Senior Notes.
(e) On the Business Day following each Auction Date:
(i) each Participant for a Bidder in the Auction on such Auction
Date referred to in paragraph (d)(i) above will instruct the Securities
Depository to execute the transactions described under paragraph (b)(ii)
or (b)(iii) above for such Auction, and the Securities Depository will
execute such transactions;
(ii) each Seller's Broker-Dealer or its Participant will instruct
the Securities Depository to execute the transactions described in
paragraph (d)(ii) above for such Auction, and the Securities Depository
will execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Participant will instruct
the Securities Depository to execute the transactions described in
paragraph (d)(iii) above for such Auction, and the Securities Depository
will execute such transactions.
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(f) If an Existing Holder selling Auction Rate Series 1998-1 Senior
Notes in an Auction fails to deliver such Auction Rate Series 1998-1 Senior
Notes (by authorized book-entry), a Broker-Dear may deliver to the Potential
Holder on behalf of which it submitted a Bid that was accepted a principal
amount of Auction Rate Series 1998-1 Senior Notes that is less than the
principal amount of Auction Rate Series 1998-1 Senior Notes that otherwise was
to be purchased by such Potential Holder. In such event, the principal amount
of Auction Rate Series 1998-1 Senior Notes to be so delivered will be
determined solely by such Broker-Dealer. Delivery of such lesser principal
amount of Auction Rate Series 1998-1 Senior Notes will constitute good
delivery. Notwithstanding the foregoing terms of this paragraph (f), any
delivery or nondelivery of Auction Rate Series 1998-1 Senior Notes which will
represent any departure from the results of an Auction, as determined by the
Auction Agent, will be of no effect unless and until the Auction Agent will
have been notified of such delivery or nondelivery in accordance with the
provisions of the Auction Agent Agreement and the Broker-Dealer Agreements.
Neither the Trustee nor the Auction Agent will have any responsibility or
liability with respect to the failure of a Potential Holder, Existing Holder
or their respective Broker-Dealer or Participant to take delivery of or
deliver, as the case may be, the principal amount of the Auction Rate Series
1998-1 Senior Notes purchased or sold pursuant to an Auction or otherwise.
SUMMARY OF THE INDENTURE
The following is a summary of the material provisions of the Indenture
and the First Supplemental Indenture and is not to be considered as a full
statement of the provisions of the Indenture or the First Supplemental
Indenture. The summary is qualified by reference to and is subject to the
complete Indenture and the First Supplemental Indenture, which are
incorporated by reference herein. Copies thereof, in reasonable quantity, may
be obtained during the offering period upon request directed to Education
Loans Incorporated, Attention: President, 105 First Avenue Southwest,
Aberdeen, South Dakota 57401. Although the following summary refers to the
"Corporation" only, the use of such term should also be read to include the
Original Issuer prior to the Section 150(d)(3) Transfer.
The Indenture establishes the general provisions of Notes issued by the
Corporation thereunder and sets forth various covenants and agreements of the
Corporation relating thereto, default and remedy provisions, responsibilities
and duties of the Trustee and establishes the various Funds into which the
Corporation's revenues related to the Notes are deposited and transferred for
various purposes. The First Supplemental Indenture provides for the specific
terms and details of the Series 1998-1 Notes, pledges the Financed Student
Loans and the revenues related thereto and establishes the various Accounts in
the Funds related to the Series 1998-1 Notes.
GENERAL TERMS OF NOTES
Each series of Notes shall be created by and issued pursuant to a
Supplemental Indenture and such Supplemental Indenture shall designate Notes
of each series as Senior Notes, Subordinate Notes or Class C Notes. The Notes
of each series shall bear such date or dates, shall be payable at such place
or places, shall have such Principal Payment Dates, shall bear interest at
such rate or rates, from such date or dates, payable in such installments and
on Interest Payment Dates and at such place or places, and may be subject to
prepayment or call for redemption at such Redemption Price or Prices and upon
such terms, as shall be provided for in the Supplemental Indenture creating
that series.
The Stated Maturities and Sinking Fund Payment Dates of all Notes shall
occur on a June 1 or a December 1, unless otherwise specified with respect to
any series of Variable Rate Notes in the Supplemental Indenture providing for
the issuance thereof. All Corporation Swap Payments and other payments to be
made by the Corporation to Credit Facility Providers shall be payable on a
regularly scheduled Interest Payment Date.
Except as may be otherwise provided in a Supplemental Indenture, in any
case where the principal of, premium, if any, or interest on the Notes or
amounts due to any Other Beneficiary shall be due on a day other than a
Business Day, then payment of such principal, premium and interest or such
amounts may be made on the next
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succeeding Business Day with the same force and effect as if made on the date
due and no interest shall accrue for the intervening period.
In the event a default occurs in the due and punctual payment of any
interest on any Note, interest shall be payable thereon to the extent
permitted by law on the overdue installment of interest, at the interest rate
borne by the Note in respect of which such interest is overdue.
The Notes, including the principal thereof, premium, if any, and interest
thereon and any Carry-Over Amounts (and accrued interest thereon) with respect
thereto, and Other Indenture Obligations are limited obligations of the
Corporation, payable solely from the revenues and assets of the Corporation
pledged therefor under the Indenture.
ADDITIONAL NOTES
Notes shall be issued under the Indenture only for the purposes of (a)
providing funds for the origination or purchase, or both, by the Trustee on
behalf of the Corporation or by the Corporation of Eligible Loans (including,
for this purpose, the acquisition under the Indenture of Eligible Loans
previously purchased or originated by the Corporation from other available
moneys of the Corporation), (b) refunding at or before their Stated Maturity
any or all Outstanding Notes issued for that purpose, and (c) paying
Administrative Costs, Note Fees, Costs of Issuance and capitalized interest on
the Notes being issued and making deposits to the Reserve Fund.
At any time, one or more series of Notes may be issued in such principal
amounts as may be determined by the Corporation for any of the purposes
hereinbefore specified upon compliance with certain conditions specified in
the Indenture (including the requirement that each Rating Agency shall have
confirmed that no outstanding ratings on any of the Outstanding Unenhanced
Notes will be reduced or withdrawn as a result of such issuance) and any
additional conditions specified in a Supplemental Indenture. Any Additional
Notes will not be offered or sold pursuant to this Prospectus.
COMPARATIVE SECURITY OF NOTEHOLDERS AND OTHER BENEFICIARIES
The Senior Notes (including the Series 1998-1 Senior Notes) are equally
and ratably secured under the Indenture with any Other Senior Obligations.
The Senior Obligations have payment and certain other priorities over the
Subordinate Notes, the Other Subordinate Obligations and the Class C Notes.
The Subordinate Notes (including the Series 1998-1 Subordinate Notes) are
equally and ratably secured under the Indenture with any Other Subordinate
Obligations. The Subordinate Obligations have payment and certain other
priorities over the Class C Notes. (See "Source of Payment and Security for
the Notes -- Priorities" in this Prospectus.) The Senior Notes and the
Subordinate Notes are each payable from the Note Fund and are secured by the
Reserve Fund. The Class C Notes are payable solely from the Surplus Fund.
The Corporation may at any time issue a series of Notes as described
under "Additional Notes" above, either as Senior Notes, Subordinate Notes or
Class C Notes. (Any Additional Notes will not be offered or sold pursuant to
this Prospectus.) In connection with any such Senior Notes or Subordinate
Notes, the Corporation may enter into a Swap Agreement or Credit Enhancement
Facility as it deems in its best interest, subject to the provisions described
in the next succeeding paragraphs, and the Swap Counterparty or the Credit
Enhancement Provider may become a Senior Beneficiary or a Subordinate
Beneficiary, as herein described.
The Corporation may enter into a Swap Agreement only if the Swap
Counterparty has outstanding obligations rated by each Rating Agency not lower
that in its third highest Specific Rating Category (or each Rating Agency has
a comparable other rating with respect to such Swap Counterparty, such as a
comparable rating of claims paying ability or deposits). No Swap Agreement
shall be designated as a Senior Swap Agreement unless, as of the date the
Corporation enters into such Swap Agreement, the Senior Asset Requirement will
be met and the Trustee shall have received written confirmation from each
Rating Agency that the execution and delivery of the
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Swap Agreement will not cause the reduction or withdrawal of any rating or
ratings then applicable to any Outstanding Unenhanced Notes.
CALL FOR REDEMPTION, PREPAYMENT OR PURCHASE OF NOTES; SENIOR ASSET REQUIREMENT
No call for redemption (other than mandatory sinking fund redemption of
Senior Term Notes), prepayment of principal or purchase (other than on a
Purchase Date or Mandatory Tender Date) of Notes by the Trustee shall be
effective under the Indenture unless, prior to the Trustee giving notice of
call for redemption, determining that such prepayment will be made or
soliciting such purchase, the Corporation furnishes the Trustee a Corporation
certificate to the effect that:
1. if Senior Notes are to be called for redemption prepaid or
purchased, either (A) after giving effect to such call for redemption,
prepayment or purchase, the Senior Asset Requirement will be met, or (B)
(i) prior to such call for redemption, prepayment or purchase, the Senior
Asset Requirement is not being met, (ii) no Subordinate Notes or Class C
Notes will be called for redemption on the Redemption Date, prepaid on the
Prepayment Date or purchased on the purchase date for the Senior Notes
then proposed to be called for redemption, prepaid or purchased, and (iii)
after giving effect to such call for redemption, prepayment or purchase,
the Senior Percentage will be greater than it would have been without such
call for redemption, prepayment or purchase;
2. if Subordinate Notes are to be called for redemption, prepaid
or purchased, after giving effect to such call for redemption, prepayment
or purchase, the Senior Asset Requirement will be met; and
3. if Class C Notes are to be called for redemption, prepaid or
purchased, after giving effect to such call for redemption, prepayment or
purchase, the Senior Asset Requirement will be met and there shall be no
deficiency then existing in the Note Fund, the Reserve Fund or the Rebate
Fund.
In general, compliance with the foregoing conditions is determined as of
the date of selection of Notes to be called for redemption or as of the date
on which moneys are transferred to the Retirement Account to make any
prepayment and any failure to satisfy such conditions as of the Redemption
Date or Prepayment Date, as applicable, will not affect such determination;
provided that, if Notes have been defeased and are to be called for
redemption, compliance with such conditions will be determined on the date of
defeasance instead of as of the date of selection. (See "Discharge of Notes
and Indenture" below.)
Any election to call Notes for redemption or to prepay Notes may also be
conditioned upon such additional requirements as may be set forth in the
Supplemental Indenture authorizing the issuance of such Notes.
FUNDS AND ACCOUNTS
Acquisition Fund
The Indenture establishes an Acquisition Fund. With respect to each
series of Notes, the Trustee shall, upon delivery to the initial purchasers
thereof and from the proceeds thereof, credit to the Acquisition Fund the
amount, if any, specified in the Supplemental Indenture providing for the
issuance of such series of Notes. The Trustee shall also deposit in the
Acquisition Fund: (i) any funds to be transferred thereto from the Surplus
Fund, and (ii) any other amounts specified in a Supplemental Indenture. In
addition, the Trustee shall also credit to the Acquisition Fund any Eligible
Loans transferred thereto from the Surplus Account as described under "Surplus
Fund" below (any such Eligible Loans so transferred being thereafter deemed to
have been Financed with moneys in the Acquisition Fund).
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Balances in the Acquisition Fund shall be used only for (a) the purchase
or origination of Eligible Loans, (b) the redemption of Notes which are called
for redemption or the purchase of Notes as provided in a Supplemental
Indenture providing for the issuance of such series of Notes, (c) the payment
of Debt Service on the Senior Notes and Other Senior Obligations when due, (d)
the payment of the purchase price of any Senior Notes required to be purchased
on a Purchase Date or a Mandatory Tender Date, or (e) to cure deficiencies in
the Rebate Fund. The Trustee shall make, or authorize any Deposit Agent to
make, payments to Lenders from the Acquisition Fund for the acquisition of
Eligible Loans, such payments to be made from the Series 1998-1 Tax Exempt and
Taxable Acquisition Accounts at a purchase price not in excess of 100% of the
remaining unpaid principal amount of such Eligible Loan, plus accrued
noncapitalized borrower interest thereon, if any, to the date of purchase,
reasonable transfer, origination or assignment fees, if applicable, and a
premium not to exceed certain limitations set forth in the First Supplemental
Indenture. The Trustee shall also make, or authorize the Deposit Agent to
make, payments from the Acquisition Fund for the origination of Eligible
Loans.
Balances in the Acquisition Fund (other than any portion of such Balances
consisting of Student Loans) shall be (i) transferred to the credit of the
Rebate Fund to the extent necessary, after transfers thereto from the Revenue
Fund, the Surplus Fund, the Reserve Fund, the Administration Fund and the Note
Fund, to make any deposit to the credit of the Rebate Fund as described under
"Rebate Fund" below, (ii) after such transfer, if any, to be made pursuant to
the preceding clause (i) has been taken into account, transferred to the
credit of the Note Fund on the last Business Day preceding any Interest
Payment Date, Principal Payment Date or Redemption Date to the extent required
to pay the Debt Service due on the Senior Notes and any Other Senior
Obligations, as described under "Note Fund" below, and (iii) after such
transfers, if any, to be made pursuant to the preceding clauses (i) and (ii)
have been taken into account, transferred to the credit of the Principal
Account on any Purchase Date or Mandatory Tender Date with respect to Senior
Notes, to the extent described under "Note Fund" below. In the event that,
after transfers to the Rebate Fund from all other Funds and Accounts, a
deficiency exists in the Rebate Fund, the Trustee shall use its best efforts
to sell Student Loans included in the Balance of the Acquisition Fund at the
best price available to the extent of such deficiency; and the proceeds of any
such sale shall be credited to the Rebate Fund, to the extent of any
deficiency in the Rebate Fund, and otherwise to the Revenue Fund. If any
amounts have been transferred to either or both of the Rebate Fund or the Note
Fund pursuant to this paragraph, the Trustee shall, to the extent necessary to
cure the deficiency in the Acquisition Fund as a result of such transfer or
transfers, transfer to the Acquisition Fund amounts from the Revenue Fund as
described below under "Revenue Fund".
Pending application of moneys in the Acquisition Fund for one or more
authorized purposes, such moneys shall be invested in Investment Securities,
as described under "Investments" below, and any earnings on or income from
said investments shall be deposited in the Revenue Fund.
Revenue Fund
The Indenture establishes a Revenue Fund, which is comprised of two
Accounts: the Repayment Account and the Income Account. The Trustee and any
Deposit Agent shall credit to the Revenue Fund: (i) all amounts received as
interest, including federal interest subsidy payments, and principal payments
with respect to Financed Student Loans, including all Guarantee payments and
all Special Allowance Payments with respect to Financed Student Loans
(excluding, except in the case of the Eligible Loans to be Financed on the
Date of Issuance and as otherwise provided in a Supplemental Indenture, any
federal interest subsidy payments and Special Allowance Payments that accrued
prior to the date on which such Student Loans were Financed), (ii) unless
otherwise provided in a Supplemental Indenture, proceeds of the resale to a
Lender of any Financed Student Loans pursuant to such Lender's repurchase
obligation under the applicable Student Loan Purchase Agreement, (iii) all
amounts received as earnings on or income from Investment Securities in the
Acquisition Fund, the Reserve Fund, the Administration Fund, the Surplus Fund
and the Note Fund, and (iv) all amounts to be transferred to the Revenue Fund
from the Rebate Fund. The Trustee shall deposit and credit all such amounts
received as payments of principal of Financed Student Loans to the Repayment
Account, and all other such amounts to the Income Account.
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Pending transfers from the Revenue Fund, the moneys therein shall be
invested in Investment Securities as described under "Investments" below, and
any earnings on or income from said investments shall be retained therein.
Repayment Account. On each Monthly Payment Date and on any other date on
which the Balance in the Note Fund is not sufficient to pay all amounts
payable therefrom on such date, the Trustee shall, from the moneys received
since the preceding Monthly Payment Date in the Repayment Account, (1) make
any periodic rebate fee payments required to be made to the Secretary of
Education in connection with Financed Student Loans, and (2) transfer the
remainder of such moneys as follows:
First, to the credit of the Rebate Fund, to the extent necessary to
cure any deficiency therein as provided in the Indenture; second, to the
credit of the Interest Account, to the extent necessary to increase the
Balance thereof to the amount required on such Monthly Payment Date or
such other date pursuant to the Indenture for the payment of interest on
Senior Notes or Other Senior Obligations payable therefrom; third, to the
credit of the Principal Account, to the extent
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necessary to increase the Balance thereof to the amount required on such
Monthly Payment Date or such other date pursuant to the Indenture for the
call of Senior Notes for redemption or payment of principal or the
purchase price of Senior Notes or the payment of Other Senior Obligations
payable therefrom; fourth, to the credit of the Retirement Account, to
the extent and in the manner provided in the Indenture with respect to
the call of Senior Notes for redemption from the Retirement Account or
the payment of Other Senior Obligations payable therefrom; fifth, to the
credit of the Acquisition Fund, to the extent described above under
"Acquisition Fund"; sixth, to the credit of the Interest Account, to the
extent necessary to increase the Balance thereof to the amount required
on such Monthly Payment Date or such other date pursuant to the Indenture
for the payment of interest on Subordinate Notes or Other Subordinate
Obligations payable therefrom; seventh, to the credit of the Principal
Account, to the extent necessary to increase the Balance thereof to the
amount required on such Monthly Payment Date or such other date pursuant
to the Indenture for the payment of principal at Stated Maturity or the
purchase price of Subordinate Notes or the payment of Other Subordinate
Obligations payable therefrom; eighth, to the credit of the Retirement
Account, to the extent and in the manner provided in the Indenture with
respect to the call of Subordinate Notes for redemption from the
Retirement Account or payment of Other Subordinate Obligations payable
therefrom; ninth, to the credit of the Reserve Fund, to the extent
necessary to increase the Balance thereof to the Reserve Fund
Requirement; tenth, to the credit of the Principal Account, to the extent
necessary to increase the Balance thereof to the amount required to meet
the sinking fund installment with respect to the call of Subordinate Term
Notes for redemption on the next Sinking Fund Payment Date therefor;
eleventh, to the credit of the Special Redemption and Prepayment Account,
to the extent necessary to increase the Balance thereof to the Special
Redemption and Prepayment Account Requirement with respect to each series
of Notes; and twelfth, any remainder to the credit of the Surplus
Account.
Income Account. On each Monthly Payment Date and on any other date on
which the Balance in the Note Fund is not sufficient to pay all amounts
payable therefrom on such date, the Trustee shall, after transferring all
amounts received in the Repayment Account pursuant to the preceding paragraph,
from the moneys received since the preceding Monthly Payment Date in the
Income Account, (1) to the extent amounts in the Repayment Account were not
sufficient therefor, make any periodic rebate fee payments required to be made
to the Secretary of Education in connection with Financed Student Loans, and
(2) transfer the remainder of such moneys as follows:
First, to the credit of the Rebate Fund, to the extent necessary to
cure any deficiency therein as provided in the Indenture; second, to the
credit of the Interest Account, to the extent necessary to increase the
Balance thereof to the amount required on such Monthly Payment Date or
such other date pursuant to the Indenture for the payment of interest on
Senior Notes or Other Senior Obligations payable therefrom; third, to the
credit of the Principal Account, to the extent necessary to increase the
Balance thereof to the amount required on such Monthly Payment Date or
such other date pursuant to the Indenture for the call of Senior Notes
for redemption or payment of principal or the purchase price of Senior
Notes or the payment of Other Senior Obligations payable therefrom;
fourth, to the credit of the Retirement Account, to the extent and in the
manner provided in the Indenture with respect to the call of Senior Notes
for redemption from the Retirement Account or payment of Other Senior
Obligations payable therefrom; fifth, to the credit of the Acquisition
Fund, to the extent described above under "Acquisition Fund"; sixth, to
the credit of the Interest Account, to the extent necessary to increase
the Balance thereof to the amount required on such Monthly Payment Date
or such other date pursuant to the Indenture for the payment of interest
on Subordinate Notes or Other Subordinate Obligations payable therefrom;
seventh, to the credit of the Principal Account, to the extent necessary
to increase the Balance thereof to the amount required on such Monthly
Payment Date or such other date pursuant to the Indenture for the payment
of principal at Stated Maturity or the purchase price of Subordinate
Notes or the payment of Other Subordinate Obligations payable therefrom;
eighth, to the credit of the Retirement Account, to the extent and in the
manner provided in the Indenture with respect to the call of Subordinate
Notes for redemption from the Retirement Account or payment of Other
Subordinate Obligations payable therefrom; ninth, to the credit of the
Administration Fund, to extent necessary to increase the Balance thereof
to such amounts as an Authorized Officer of the Corporation shall direct
by Corporation order for certain costs and expenses; tenth, to the credit
of the Reserve Fund, to the extent necessary to increase the Balance
thereof to the Reserve Fund Requirement; eleventh, to the credit of the
Principal Account, to the extent necessary to increase the Balance
thereof to the amount required to meet the sinking fund installment with
respect to the call of Subordinate Term Notes for redemption on the next
Sinking Fund Payment Date therefor; twelfth, to the credit of the Special
Redemption and Prepayment Account, to the extent necessary to increase
the Balance thereof to the Special Redemption and Prepayment Account
Requirement with respect to each series of Notes; and thirteenth, any
remainder to the credit of the Surplus Account.
Note Fund
The Indenture establishes a Note Fund, which is comprised of three
Accounts: the Interest Account, the Principal Account and the Retirement
Account. The Note Fund shall be used only for the payment when due of
principal of, premium, if any, and interest on the Senior Notes and the
Subordinate Notes, the purchase price of Senior Notes and Subordinate Notes to
be purchased on a Purchase Date or Mandatory Tender Date in accordance with
the Indenture, Other Indenture Obligations and Carry-Over Amounts (including
any accrued interest thereon) and to make transfers to the credit of the
Rebate Fund. The principal of and interest on the Class C Notes are payable
from the Surplus Fund.
Interest Account. The Trustee shall deposit in the Interest Account (i)
that portion of the proceeds from the sale of Financed Student Loans
representing accrued interest and Special Allowance Payments thereon, (ii)
that portion of the proceeds from the sale of the Corporation's bonds, notes
or other evidences of indebtedness, if any, to be used to pay interest on the
Senior Notes or the Subordinate Notes, (iii) all Counterparty Swap Payments,
(iv) all payments under any Credit Enhancement Facilities to be used to pay
interest on (or the interest portion of the purchase price of) the Notes and
(v) all amounts required to be transferred thereto from the Funds and Accounts
specified in the last sentence of the following paragraph. The moneys in the
Interest Account shall be invested in Investment Securities as described under
"Investments" below, and any earnings on or income from such investments shall
be deposited in the Revenue Fund.
To provide for the payment of each installment of interest which falls
due upon Senior Notes or Subordinate Notes on each regularly scheduled
Interest Payment Date and all Corporation Swap Payments and fees to a Credit
Facility Provider payable on such Interest Payment Date, the Trustee shall
make deposits to the credit of the Interest Account on each Monthly Payment
Date (less certain credits against such payments). If, on any Interest
Payment
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Date (including a Redemption Date or a date that Notes are to be purchased
that is not a regularly scheduled Interest Payment Date), moneys in the
Interest Account are insufficient to pay the accrued interest due on the
Senior Notes and Subordinate Notes and all Corporation Swap Payments and fees
to a Credit Enhancement Facility Provider payable on such Interest Payment
Date or constituting a portion of the purchase price of Notes to be so
purchased, the Trustee shall deposit immediately to the credit of the Interest
Account an amount equal to such deficiency. Each deposit required by this
paragraph shall be made by transfer from the following Funds and Accounts, in
the following order of priority: the Revenue Fund, the Surplus Fund (other
than that portion of the Balance thereof consisting of Eligible Loans), the
Reserve Fund, the Administration Fund, the Surplus Fund (including any portion
of the Balance thereof consisting of Eligible Loans), the Retirement Account,
the Principal Account and, as to Senior Notes and Other Senior Obligations
only, the Acquisition Fund (other than that portion of the Balance thereof
consisting of Student Loans); provided that such transfers in respect of
Subordinate Notes or Other Subordinate Obligations shall be so made from the
Principal Account or the Retirement Account only if, and to the extent, any
amounts to be so transferred are in excess of the requirements of such
Accounts with respect to Senior Obligations payable therefrom.
If, as of any regularly scheduled Interest Payment Date, any Carry-Over
Amount (including any accrued interest thereon) is due and payable with
respect to a series of Notes, as provided in the related Supplemental
Indenture, the Trustee shall transfer to the Interest Account (to the extent
amounts are available therefor in the Surplus Account, after taking into
account all other amounts payable from the Surplus Fund on such Interest
Payment Date) an amount equal to such Carry-Over Amount (including any accrued
interest thereon) so due and payable.
Balances in the Interest Account shall be transferred to the credit of
the Rebate Fund to the extent necessary, after transfers thereto from the
Revenue Fund, the Surplus Fund, the Reserve Fund, the Administration Fund, the
Retirement Account and the Principal Account, to make any deposit to the
credit of the Rebate Fund required by the Indenture. (See "Rebate Fund"
below.)
Apart from transfers to the Rebate Fund and transfers to the Principal
Account as described under "Principal Account" below, Balances in the Interest
Account shall be applied, first, to the payment of interest on all Senior
Notes, Corporation Swap Payments under Senior Swap Agreements and fees payable
to Senior Credit Enhancement Providers due on an Interest Payment Date, and if
such money (after the transfers hereinabove described, including all amounts,
to the extent necessary, in the Principal Account) is less than such interest
and Other Senior Obligations on such Interest Payment Date, such money shall
be applied, pro rata, among such indebtedness based upon such amounts then
owing to Senior Beneficiaries and to be paid from the Interest Account;
second, to the payment of interest on all Subordinate Notes, Corporation Swap
Payments under Subordinate Swap Agreements and fees payable to Subordinate
Credit Enhancement Providers due on an Interest Payment Date, and if such
money (after the transfers hereinabove described, including all amounts, to
the extent necessary, in the Principal Account over and above the amount on
deposit therein to meet any accrued obligations to pay principal of the Senior
Notes or amounts, other than fees, to Senior Credit Facility Providers) is
less than such interest and Other Subordinate Obligations on such Interest
Payment Date, such money shall be applied, pro rata, among such indebtedness
based upon such amounts then owing to Subordinate Beneficiaries and to be paid
from the Interest Account; third, to the payment of all Carry-Over Amounts
(including any accrued interest thereon) due and payable on all series of
Senior Notes, and if such money is less than such Carry-Over Amounts
(including any accrued interest thereon) on an Interest Payment Date, such
money shall be applied, pro rata, among such Carry-Over Amounts (including any
accrued interest thereon) based upon such amounts then otherwise due and
payable to Senior Noteholders and to be paid from the Interest Account; and
fourth, to the payment of all Carry-Over Amounts (including any accrued
interest thereon) due and payable on all series of Subordinate Notes, and if
such money is less than such Carry-Over Amounts (including any accrued
interest thereon) on an Interest Payment Date, such money shall be applied,
pro rata, among such Carry-Over Amounts (including any accrued interest
thereon) based upon such amounts then otherwise due and payable to Subordinate
Noteholders and to be paid from the Interest Account.
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Other Indenture Obligations payable from the Interest Account will
include reimbursement to any Credit Facility Provider for interest paid on
Senior Notes or Subordinate Notes from amounts derived from the related Credit
Enhancement Facility, which reimbursement shall have the same priority of
payment from the Interest Account as the interest so paid.
Principal Account. The Trustee shall deposit to the credit of the
Principal Account: (i) that portion of the proceeds from the sale of Financed
Student Loans representing principal thereof, (ii) that portion of the
proceeds from the sale of the Corporation's bonds, notes or other evidences of
indebtedness, if any, to be used to pay principal of the Senior Notes and the
Subordinate Notes, (iii) all payments under any Credit Enhancement Facilities
to be used to pay principal of Senior Notes or Subordinate Notes or the
purchase price of Senior Notes or Subordinate Notes to be purchased on a
Purchase Date or Mandatory Tender Date, and (iv) all amounts required to be
transferred thereto from the following Funds, in the following order of
priority: (1) in the case of payment of principal of Notes at Stated
Maturity, redemption of Senior Notes called for redemption on a Sinking Fund
Payment Date or the purchase of Notes on a Purchase Date or Mandatory Tender
Date, the Revenue Fund, the Surplus Fund (other than that portion of the
Balance thereof consisting of Eligible Loans), the Reserve Fund, the
Administration Fund and the Surplus Fund (including any portion of the Balance
thereof consisting of Eligible Loans), and (2) in the case of redemption of
Subordinate Notes called for redemption on a Sinking Fund Payment Date, the
Revenue Fund and the Surplus Fund (other than that portion of the Balance
thereof consisting of Eligible Loans); provided, however, that if principal is
payable on Senior Notes at the Stated Maturity thereof or upon a Sinking Fund
Payment Date therefor, or the purchase price is payable on Senior Notes on a
Purchase Date or Mandatory Tender Date, and money credited to the Principal
Account, after the foregoing transfers, is insufficient to pay such principal
or purchase price, funds shall be transferred, to the extent necessary, to the
Principal Account for this purpose, (i) from the Interest Account, but only to
the extent that the Balance in the Interest Account exceeds any then accrued
payments of interest on the Senior Notes, Corporation Swap Payments under
Senior Swap Agreements and fees owing to Senior Credit Enhancement Providers
and (ii) thereafter from the Acquisition Fund (other than that portion of the
Balance thereof consisting of Student Loans).
To provide for the payment of principal due on the Stated Maturity of
Senior or Subordinate Serial Notes or on a Sinking Fund Payment Date for
Senior or Subordinate Term Notes, the Trustee shall make deposits to the
credit of the Principal Account on each Monthly Payment Date from amounts
available therefor in the Revenue Fund and the other Funds referred to above.
To the extent there are not available moneys to make any monthly payment with
respect to the cumulative sinking fund redemption of Subordinate Term Notes,
subsequent monthly payments shall be increased to make up any such deficiency,
and to the extent that on any Sinking Fund Payment Date the aggregate of such
payments actually made as of the next-to-the-last Monthly Payment Date prior
to such Sinking Fund Payment Date is less than the amount of the sinking fund
installment due on such Sinking Fund Payment Date, the amount of such
deficiency shall be added to the amount of the sinking fund installment due on
the next Sinking Fund Payment Date, and the increased amount thereupon shall
be deemed to be the amount due for such next sinking fund installment.
However, the requirement for payments of cumulative sinking fund installments
on Subordinate Term Notes shall not be construed to create an Event of Default
in the event of any such deficiency (other than, under certain circumstances,
in amounts due with respect to the Stated Maturity of Subordinate Term Notes)
unless a sinking fund installment of such Subordinate Term Notes shall not
only be due and not applied to the redemption of Subordinate Term Notes which
are called for redemption or the purchase of Subordinate Term Notes, but also
that all contingencies upon the obligation so to apply it as of such time in
fact have been satisfied.
In the event that the Corporation is required to furnish moneys to the
Depositary to purchase Notes on a Purchase Date or Mandatory Tender Date, the
Trustee shall, subject to the applicable provisions of the related
Supplemental Indenture, immediately deposit to the credit of the Principal
Account moneys sufficient to pay the purchase price thereof.
Balances in the Principal Account shall be transferred to the credit of
the Rebate Fund to the extent necessary, after transfers thereto from the
Revenue Fund, the Surplus Fund, the Reserve Fund, the Administration
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Fund and the Retirement Account, to make any required deposit to the credit of
the Rebate Fund. (See "Rebate Fund" below.)
Balances to the credit of the Principal Account shall be applied in the
following order of priority: first, to the extent required by the immediately
preceding paragraph, for transfer to the Rebate Fund; second, to the Interest
Account to the extent required (see "Interest Account" above) for the payment
of interest on Senior Notes and Other Senior Obligations payable therefrom;
third, to the payment of Senior Notes at their Stated Maturity or on their
Sinking Fund Payment Date and Other Senior Obligations payable therefrom;
fourth, to the payment of the purchase price of Senior Notes on a Purchase
Date or Mandatory Tender Date; fifth, to the Interest Account to the extent
required (see "Interest Account" above) for the payment of interest on
Subordinate Notes and Other Subordinate Obligations payable therefrom; sixth,
to the payment of Subordinate Notes at their Stated Maturity and Other
Subordinate Obligations payable therefrom; seventh, to the payment of the
purchase price of Subordinate Notes on a Purchase Date or Mandatory Tender
Date; and eighth, to the payment of Subordinate Term Notes on a Sinking Fund
Payment Date.
Other Indenture Obligations payable from the Principal Account will
include reimbursement to any Credit Facility Provider for principal or the
purchase price paid on Senior Notes or Subordinate Notes from amounts derived
from the related Credit Enhancement Facility, which reimbursement shall have
the same priority of payment from the Principal Account as the principal so
paid.
Subject to compliance with the provisions of the Indenture described
under "Call for Redemption, Prepayment or Purchase of Notes; Senior Asset
Requirement" above, Balances in the Principal Account may also be applied to
the purchase of Senior Notes or Subordinate Notes at a purchase price
(including any brokerage or other charges) not to exceed the Principal Amount
thereof plus accrued interest, as determined by the Corporation at such time,
provided the Trustee shall have first certified that no deficiencies exist at
such time in the Note Fund or the Rebate Fund. Any such purchase shall be
limited to those Senior Notes or Subordinate Notes whose Stated Maturity or
Sinking Fund Payment Date is the next succeeding Principal Payment Date.
The moneys in the Principal Account shall be invested in Investment
Securities as described under "Investments" below, and any earnings on or
income from such investments shall be deposited in the Revenue Fund.
Retirement Account. The Trustee shall deposit to the credit of the
Retirement Account (i) any amounts transferred thereto from the Reserve Fund
and the Surplus Fund, (ii) that portion of the proceeds from the sale of the
Corporation's bonds, notes or other evidences of indebtedness, if any, to be
used to pay the principal or Redemption Price of Senior Notes or Subordinate
Notes on a date other than the Stated Maturity thereof or a Sinking Fund
Payment Date therefor, and (iii) all payments under any Credit Enhancement
Facilities to be used to pay the Redemption Price of Notes payable from the
Retirement Account. All Senior Notes or Subordinate Notes which are to be
retired, or the principal of which is to be prepaid, other than with moneys in
the Principal Account shall be retired or prepaid with moneys deposited to the
credit of the Retirement Account.
Balances in the Retirement Account shall be transferred to the credit of
the Rebate Fund to the extent necessary, after transfers thereto from the
Revenue Fund, the Surplus Fund, the Reserve Fund and the Administration Fund,
to make any required deposit to the Rebate Fund. (See "Rebate Fund" below.)
After taking into account any such required transfers to the Rebate Fund,
Balances in the Retirement Account shall be transferred to the credit of the
Interest Account to the extent required (see "Interest Account" above) for the
payment of interest on Notes and Other Indenture Obligations payable
therefrom.
Other Indenture Obligations payable from the Retirement Account will
include reimbursement to any Credit Facility Provider for the Redemption Price
paid on Senior Notes or Subordinate Notes from amounts derived from the
related Credit Enhancement Facility, which reimbursement shall have the same
priority of payment from the Retirement Account as the Redemption Price so
paid.
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Subject to compliance with the provisions of the Indenture described
under "Call for Redemption, Prepayment or Purchase of Notes; Senior Asset
Requirement" above, Balances in the Retirement Account (other than any portion
thereof to be applied to the mandatory prepayment of principal of any Notes)
may also be applied to the purchase of Senior Notes or Subordinate Notes at a
purchase price (including any brokerage or other charges) not to exceed the
Principal Amount thereof plus accrued interest plus any then applicable
redemption premium, as determined by the Corporation at such time; provided
the Trustee shall have first certified that no deficiencies exist at such time
in the Note Fund or the Rebate Fund.
The moneys in the Retirement Account shall be invested in Investment
Securities as described under "Investments" below, and any earnings on or
income from such investment shall be deposited in the Revenue Fund.
Administration Fund
With respect to each series of Notes, the Trustee shall, upon delivery
thereof and from the proceeds thereof, credit to the Administration Fund
established under the Indenture the amount, if any, specified in the
Supplemental Indenture providing for the issuance of such series of Notes.
The Trustee shall also credit to the Administration Fund all amounts
transferred thereto from the Revenue Fund and the Surplus Account. Amounts in
the Administration Fund shall be used to pay Costs of Issuance, Administrative
Expenses and Note Fees or to reimburse another fund, account or other source
of the Corporation for the previous payment of Costs of Issuance,
Administrative Expenses or Note Fees. Balances in the Administration Fund
shall also be applied to remedy deficiencies in the Rebate Fund and the Note
Fund after transfers thereto from the Revenue Fund, the Surplus Fund (other
than that portion of the Balance thereof consisting of Eligible Loans) and the
Reserve Fund.
The Trustee shall transfer and credit to the Administration Fund moneys
available under the Indenture for transfer thereto from the sources set forth
in the following paragraph and in such amounts and at such times as an
Authorized Officer of the Corporation shall direct by Corporation order;
provided such Corporation order shall certify that the amounts are required
and have been or will be expended within the next 90 days for a purpose for
which the Administration Fund may be used and applied.
Deposits to the credit of the Administration Fund shall be made from the
following sources in the following order of priority: the Income Account
after transfers therefrom to the Rebate Fund, the Interest Account, the
Principal Account (other than with respect to the payment of sinking fund
installments for Subordinate Notes), and the Retirement Account; and the
Surplus Account after transfers therefrom to the Rebate Fund, the Interest
Account, the Principal Account (other than with respect to the payment of
sinking fund installments for Subordinate Notes) and the Retirement Account,
provided that any such deposit from the Surplus Account shall only be made to
the extent that portion of the Balance thereof not consisting of Eligible
Loans is sufficient therefor.
Pending transfers from the Administration Fund, the moneys therein shall
be invested in Investment Securities, as described under "Investments" below,
and any earnings on or income from such investments shall be deposited in the
Revenue Fund.
Reserve Fund
The Reserve Fund is established under the Indenture only for the security
of the Senior Beneficiaries and the Subordinate Beneficiaries, and not for the
Holders of the Class C Notes (other than to provide funds for transfers to the
Rebate Fund for Tax Exempt Class C Notes as hereinafter described).
Immediately upon the delivery of any series of Senior Notes or Subordinate
Notes, and from the proceeds thereof or, at the option of the Corporation,
from any amounts to be transferred thereto from the Surplus Fund and from any
other available moneys of the Corporation not otherwise credited to or payable
into any Fund or Account under the Indenture or otherwise subject to the
pledge and security interest created by the Indenture, the Trustee shall
credit to the Reserve Fund the amount, if any, specified in the Supplemental
Indenture providing for the issuance of that series of Notes, such that, upon
issuance of such Notes, the Balance in the Reserve Fund shall not be less than
the Reserve Fund Requirement.
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If on any Monthly Payment Date the Balance in the Reserve Fund is less
than the Reserve Fund Requirement, the Trustee shall transfer and credit
thereto an amount equal to the deficiency from moneys available therefor in
the following Funds and Accounts in the following order of priority: the
Repayment Account, the Income Account and the Surplus Fund; provided that any
such transfer from the Surplus Fund shall only be made to the extent that
portion of the Balance thereof not consisting of Eligible Loans is sufficient
therefor.
The Balance in the Reserve Fund shall be used and applied solely for (i)
transfers to the Rebate Fund to the extent necessary, after transfers thereto
from the Revenue Fund and the Surplus Fund (other than that portion of the
Balance thereof consisting of Eligible Loans), to make any required deposit to
the Rebate Fund (see "Rebate Fund" below), and (ii) after such transfer, if
any, to be made pursuant to the preceding clause (i) has been taken into
account, the payment when due of principal and interest on the Senior Notes
and the Subordinate Notes and any Other Indenture Obligations and the purchase
price of Senior Notes and Subordinate Notes on a Purchase Date or Mandatory
Tender Date, and the other purposes specified in the Indenture (see "Note
Fund" above), and shall be so used and applied by transfer by the Trustee to
the credit of the Note Fund, (a) at any time and to the extent that the
Balance therein and the Balances available for deposit to the credit thereof
from the Revenue Fund and the Surplus Fund (other than that portion of the
Balance thereof consisting of Eligible Loans) are insufficient to meet the
requirements specified in the Indenture for deposit to the credit of the Note
Fund at such time (provided, however, that such amounts shall be applied,
first, to the payment of interest on the Senior Notes and Other Senior
Obligations payable from the Interest Account, second, to the payment of
principal and the purchase price of Senior Notes and Other Senior Obligations
payable from the Principal Account, third, to the payment of interest on the
Subordinate Notes and Other Subordinate Obligations payable from the Interest
Account, and, fourth, to the payment of principal and the purchase price of
Subordinate Notes and Other Subordinate Obligations payable from the Principal
Account) and (b) at any time when a portion of the Balance therein is required
to be transferred to the Retirement Account to pay a portion of the Redemption
Price of Senior Notes or Subordinate Notes called for redemption as provided
in a Supplemental Indenture relating thereto. If on any Monthly Payment Date
the Balance in the Reserve Fund exceeds the Reserve Fund Requirement, such
excess shall, upon Corporation order, be transferred to the Principal Account,
to the extent necessary to make the deposits required to be made to the credit
of the Principal Account on such Monthly Payment Date, whether or not other
moneys are available to make such deposits.
Pending transfers from the Reserve Fund, the moneys therein shall be
invested in Investment Securities as described under "Investments" below and
any earnings on or income from such investments shall be deposited in the
Revenue Fund.
Rebate Fund
The Indenture establishes a Rebate Fund, which is comprised of two
Accounts: the Rebate Account and the Excess Earnings Account.
Rebate Account. The Trustee shall deposit to the credit of the Rebate
Account amounts from the Balances in the Revenue Fund, the Surplus Fund (other
than that portion of the Balance thereof consisting of Eligible Loans), the
Reserve Fund, the Administration Fund, the Surplus Fund (including any portion
of the Balance thereof consisting of Eligible Loans), the Retirement Account,
the Principal Account, the Interest Account and the Acquisition Fund, in that
order of priority, upon receipt of a Corporation certificate (which the
Corporation is required to provide on an annual basis) that any amounts to be
so transferred equal amounts which are subject to rebate to the United States
under Section 148 of the Code with respect to each series of Tax-Exempt
Notes. In addition, the Trustee shall deposit to the credit of the Rebate
Account all investment earnings received on amounts in the Rebate Account. In
determining the rebate amount, the Corporation and the Trustee shall take into
account all amounts held under the Indenture and, pending the application of
such amounts to the purpose for which such amounts were removed, all amounts
removed from under the Indenture.
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Moneys in the Rebate Account shall be paid by the Trustee to the United
States at such times and in such amounts as are necessary to comply with the
rebate provisions of Section 148 of the Code with respect to each series of
Tax-Exempt Notes. In addition, upon receipt by the Trustee of a certification
of the Corporation that certain amounts in the Rebate Account are not subject
to rebate and an opinion of Bond Counsel to the effect that failure to rebate
such amounts will not cause interest on any series of Tax-Exempt Notes to
become includable in gross income of the owners thereof for federal income tax
purposes under either existing laws, regulations, rulings and decisions or any
then pending federal legislation, the Trustee shall transfer any such amounts
to the credit of the Revenue Fund. Moneys in the Rebate Account are not
available for transfer to any Fund or Account under the Indenture, except the
Revenue Fund under the circumstances described above, and shall be applied
solely to meet the Corporation's rebate obligations.
Excess Earnings Account. On or prior to each date established under the
Indenture for the calculation of Excess Earnings with respect to each series
of Tax-Exempt Notes (each an "Excess Earnings Computation Date"), the Trustee
and the Corporation shall determine whether any Excess Earnings have resulted
with respect to such series of Notes. In this regard, a portion of the
proceeds of the Tax Exempt Series 1998-1 Notes will be applied to the purchase
of certain Eligible Loans previously financed with the proceeds of other bonds
or notes of the Original Issuer (the "Refunded Obligations"), thereby
refunding such bonds or notes. Excess Earnings on such Eligible Loans shall
be the "Excess Earnings" computed with respect to the related series of
Refunded Obligations in accordance with the requirements of the indenture
relating to such series, all deposits to the Series 1998-1 Excess Earnings
Sub-Account in respect of Excess Earnings for each such series of Refunded
Obligations shall be applied to reduce the yield on the applicable Eligible
Loans in accordance with the requirements of the related indenture, and
amounts in respect of such Excess Earnings shall be deposited in, and shall be
applied from, the Series 1998-1 Excess Earnings Sub-Account prior to any other
deposits in, or applications from, the Excess Earnings Account. The foregoing
provisions shall apply to each series of Refunded Obligations until such
series has been retired, after which time Excess Earnings on the applicable
Eligible Loans will be computed with respect to the Tax Exempt Series 1998-1
Notes. The Corporation shall, upon each such calculation, furnish the Trustee
with a Corporation certificate verifying such calculation and with any
supporting documentation required to calculate or evidence the Excess Earnings
in accordance with applicable Treasury Regulations. In the event any Excess
Earnings with respect to a series of Notes have resulted, the Trustee shall,
on or prior to such Excess Earnings Computation Date, transfer to the Excess
Earnings Account the amount, if any, which is necessary to increase the
balance in such Account to an amount equal to such Excess Earnings. Any such
transfer shall be made from the Balances in the Revenue Fund, the Surplus Fund
(other than that portion of the Balance thereof consisting of Eligible Loans),
the Reserve Fund, the Administration Fund, the Surplus Fund (including any
portion of the Balance thereof consisting of Eligible Loans), the Retirement
Account, the Principal Account, the Interest Account and the Acquisition Fund,
in that order of priority.
All amounts in the Excess Earnings Account, including all investment
earnings thereon, shall remain therein until transferred to the Revenue Fund
or paid by the Trustee to the United States Department of the Treasury or for
such other purpose as the Corporation may specify, upon receipt by the Trustee
of (a) a Corporation order directing the Trustee to so transfer or pay a
specified amount, and (b) a written opinion of Bond Counsel to the effect that
any such transfer or payment, upon satisfaction of any conditions set forth in
such opinion (e.g., forgiveness of indebtedness on all or a portion of the
related Financed Student Loans), would not cause interest on any series of
Tax-Exempt Notes to be includable in the gross income of any owners thereof
for federal income tax purposes.
Amounts in the Excess Earnings Account shall be used only for the
purposes specified in the preceding paragraph, and shall not be available for
any other purpose, including, but not limited to, payment of Debt Service on
or the purchase price of the Notes or any Other Indenture Obligations.
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Surplus Fund
The Indenture establishes a Surplus Fund, which is comprised of two
Accounts: the Special Redemption and Prepayment Account and the Surplus
Account. The Trustee shall deposit to the credit of the Surplus Fund Balances
in the Revenue Fund not required for deposit to any other Fund or Account.
Deposits to the Surplus Fund from the Revenue Fund shall be credited to the
Special Redemption and Prepayment Account to the extent the Balance thereof is
less than the Special Redemption and Prepayment Account Requirement for each
series of Notes, and otherwise to the Surplus Account.
Balances in the Surplus Fund shall be applied to the following purposes
in the following order of priority: first, to remedy deficiencies in the
Rebate Fund (after transfers thereto from the Revenue Fund); second, to remedy
deficiencies in the Interest Account (after transfers thereto from the Revenue
Fund) for the payment of interest on Senior Notes or Other Senior Obligations
payable therefrom; third, to remedy deficiencies in the Principal Account
(after transfers thereto from the Revenue Fund) for the call of Senior Notes
for redemption or the payment of principal or the purchase price of Senior
Notes or the payment of Other Senior Obligations payable therefrom; fourth, to
remedy deficiencies in the Retirement Account (after transfers thereto from
the Revenue Fund) for the call of Senior Notes for redemption or the payment
of Other Senior Obligations payable therefrom; fifth, to remedy deficiencies
in the Interest Account (after transfers thereto from the Revenue Fund) for
the payment of interest on Subordinate Notes or Other Subordinate Obligations
payable therefrom; sixth, to remedy deficiencies in the Principal Account
(after transfers thereto from the Revenue Fund) for the payment of the
principal at Stated Maturity or the purchase price of Subordinate Notes or the
payment of Other Subordinate Obligations payable therefrom; seventh, to remedy
deficiencies in the Retirement Account (after transfers thereto from the
Revenue Fund) for the call of Subordinate Notes for redemption or the payment
of Other Subordinate Obligations payable therefrom; eighth, to make deposits
(but only from the Surplus Account) to the credit of the Administration Fund
(after transfers thereto from the Revenue Fund) to the extent required
pursuant to a Corporation order for certain costs and expenses; ninth, to
remedy deficiencies in the Reserve Fund (to the extent that the Balance is
less than the Reserve Fund Requirement after transfers thereto from the
Revenue Fund); tenth, to remedy deficiencies in the Principal Account (after
transfers thereto from the Revenue Fund) to meet the sinking fund installment
with respect to the call of Subordinate Term Notes for redemption on a Sinking
Fund Payment Date; eleventh, to make transfers to the credit of the Retirement
Account to redeem Senior Notes or Subordinate Notes which are called for
redemption or to prepay Senior or Subordinate Notes as provided in a
Supplemental Indenture relating thereto (provided that any such transfers
shall be made only from Balances in the Special Redemption and Prepayment
Account); and twelfth, to make deposits (but only from the Surplus Account) to
the credit of the Interest Account for the payment of Carry-Over Amounts (and
accrued interest thereon). Notwithstanding the foregoing, Balances in the
Surplus Fund consisting of Eligible Loans shall not be required to be applied
(1) pursuant to priorities first through seventh above until after any
transfers from the Reserve Fund have been taken into account, and (2) in any
event pursuant to priorities eighth through twelfth above. If the Surplus Fund
is to be used to make such transfers, transfers shall be made, first, from any
cash or Investment Securities included in the Surplus Account or the Special
Redemption and Prepayment Account, in that order, and, second, from the
proceeds of any sale of Student Loans included in the Surplus Account.
Balances in the Special Redemption and Prepayment Account may also be
transferred to the Acquisition Fund for the acquisition or origination of
Eligible Loans as provided in the Indenture and as further authorized or
limited in a Supplemental Indenture.
Subject to compliance with the provisions of the Indenture described
under "Call for Redemption, Prepayment or Purchase of Notes; Senior Asset
Requirement" above and satisfaction of certain other conditions set forth in
the Indenture, Balances in the Special Redemption and Prepayment Account
(other than any portion thereof to be applied to the mandatory prepayment of
principal of any Notes) may also be transferred to the Note Fund for the
purchase of Notes.
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Balances in the Surplus Account may, subject to satisfaction of certain
conditions set forth in the Indenture (including the requirement that, after
taking into account any such payments, the Senior Asset Requirement will be
met) also be applied, as determined by the Corporation from time to time, to
the payment of principal of or interest on Class C Notes when due or upon the
call for redemption thereof at the option of the Corporation.
Subject to compliance with the provisions of the Indenture described
under "Call for Redemption, Prepayment or Purchase of Notes; Senior Asset
Requirement" above, Balances in the Surplus Account may also be applied to any
one or more of the following purposes at any time as determined by the
Corporation at such time, provided the Trustee shall have first certified that
no deficiencies exist at such time in the Note Fund, the Rebate Fund, the
Reserve Fund or the Special Redemption and Prepayment Account:
(1) transfer to the Retirement Account for the redemption
of Senior Notes or Subordinate Notes called for redemption;
(2) transfer to the Principal Account or the Retirement
Account for the purchase of Senior Notes or Subordinate Notes; or
(3) upon satisfaction of certain conditions set forth in
the Indenture, (a) the acquisition of Student Loans meeting the
requirements of clauses (A) (1) and (2) or (B) of the definition of
"Eligible Loan" (see "Glossary of Certain Defined Terms"); (b) to
reimburse another fund, account or other source of the Corporation
for the previous payment of Costs of Issuance; and (c) for such
other purposes as the Corporation shall determine; provided,
however, that Balances in the Surplus Account shall not be applied
to any of the purposes specified in the preceding clause (3)(b) or
(c) or to the purchase of Student Loans that are not Eligible Loans
unless, after taking into account any such application and
excluding, for these purposes only, from the calculation of
Aggregate Value, any Financed Student Loans which are not Eligible
Loans and any moneys reasonably expected to be needed for transfer
to the Rebate Fund or to be used to pay Costs of Issuance, Note
Fees or Administrative Expenses, (i) the Senior Percentage will not
be less than 112% (or such lower percentage specified in a
Corporation certificate delivered to the Trustee which, if
Unenhanced Senior Notes are Outstanding, shall not result in the
lowering or withdrawal of the outstanding rating assigned by any
Rating Agency to any of the Unenhanced Senior Notes Outstanding,
or, if no Unenhanced Senior Notes are Outstanding but Other Senior
Obligations are Outstanding, is acceptable to the Other Senior
Beneficiaries entitled to such Other Senior Obligations), and (ii)
the Subordinate Percentage will not be less than 102% (or such
lower percentage specified in a Corporation certificate delivered
to the Trustee which, if Unenhanced Subordinate Notes are
Outstanding, shall not result in the lowering or withdrawal of the
outstanding rating assigned by any Rating Agency to any of the
Unenhanced Subordinate Notes Outstanding, or, if no Unenhanced
Subordinate Notes are Outstanding but Other Subordinate Obligations
are Outstanding, is acceptable to the Other Subordinate
Beneficiaries entitled to such Other Subordinate Obligations); and
provided, further, that Balances in the Surplus Account may be
applied to the purchase of Eligible Loans as specified in the
preceding clause (3)(a) without satisfying any other condition of
this clause (3), to the extent provided in a Supplemental Indenture
(in this regard, the First Supplemental Indenture does not so
provide with respect to the application of Balances in the Series
1998-1 Tax Exempt and Taxable Surplus Sub-Accounts).
The Trustee shall use its best efforts to sell Student Loans included in
the Balance of the Surplus Account at the best price available to the extent
necessary to make any transfer or payment therefrom described above. In
addition, the Corporation may, at any time, sell to any purchaser (A) one or
more Eligible Loans Financed with moneys in the Surplus Account at a price not
less than 100% of the Principal Balance thereof plus accrued noncapitalized
interest thereon payable by the Eligible Borrower, or (B) one or more Student
Loans Financed with moneys in the Surplus Account that are not Eligible Loans
at a price not less than the lesser of 100% of the Principal Balance thereof
or the percentage of the Principal Balance thereof paid to finance such
Student Loan plus,
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in either case, accrued noncapitalized interest thereon payable by the
Eligible Borrower. Student Loans from time to time held in the Surplus
Account may also be purchased at any time with the proceeds of the
Corporation's bonds, notes or other evidences of indebtedness, at a purchase
price equal to 100% of the Principal Balance of the Student Loans so purchased
plus accrued noncapitalized interest thereon payable by the Eligible Borrower.
Any money received by the Corporation in connection with a sale of Financed
Student Loans pursuant to this paragraph shall be deposited to the credit of
the Surplus Account.
Pending transfers from the Surplus Fund, the moneys therein shall be
invested in Investment Securities as described under "Investments" below, and
any earnings on or income from such investments shall be deposited in the
Revenue Fund.
PLEDGE; ENCUMBRANCES
The Notes and all Other Indenture Obligations are special, limited
obligations of the Corporation specifically secured by the pledge of the
proceeds of the sale of Notes (until expended for the purpose for which the
Notes were issued), the Financed Student Loans and the revenues, moneys and
securities in the Acquisition Fund, the Note Fund, the Revenue Fund, the
Administration Fund, the Reserve Fund and the Surplus Fund, in the manner and
subject to the prior applications provided in the Indenture. Financed Student
Loans purchased with the proceeds of the Corporation's bonds, notes or
obligations or sold to another purchaser, or resold to a Lender pursuant to
its repurchase obligation under a Student Loan Purchase Agreement, or sold or
exchanged for Eligible Loans in accordance with the provisions of the
Indenture, are, contemporaneously with receipt by the Trustee of the purchase
price thereof, including any Eligible Loans to be received in exchange
therefor, no longer pledged to nor serve as security for the payment of the
principal of, premium, if any, or interest on, or any Carry-Over Amounts (or
accrued interest thereon) with respect to the Notes or any Other Indenture
Obligations. The revenues, moneys and securities in the Rebate Fund and the
proceeds thereof are not pledged to, and do not serve as security for, the
payment of the principal of, premium, if any, or interest on, any Carry-Over
Amounts (or accrued interest thereon) with respect to, or the purchase price
of, the Notes or any Other Indenture Obligations.
The Corporation agrees that it will not create, or permit the creation
of, any pledge, lien, charge or encumbrance upon the Financed Student Loans or
the revenues and other moneys, securities, properties, rights, interests and
evidences of indebtedness pledged under the Indenture, except only as to a
lien subordinate to the lien of the Indenture created by any other indenture
authorizing the issuance of bonds, notes or other evidences of indebtedness of
the Corporation, the proceeds of which have been or will be used to refund or
otherwise retire all or a portion of the Outstanding Notes or as otherwise
provided in or permitted by the Indenture. The Corporation agrees that it
will not issue any bonds or other evidences of indebtedness, other than the
Notes as permitted by the Indenture and other than Swap Agreements and Credit
Enhancement Facilities relating to Notes as permitted by the Indenture,
secured by a pledge of the revenues and other moneys, securities, properties,
rights, interests and evidences of indebtedness pledged under the Indenture or
held aside by the Corporation or by a fiduciary under the Indenture, creating
a lien or charge on such revenues and other moneys, securities, properties,
rights, interests and evidences of indebtedness equal or superior to the lien
of the Indenture; provided that nothing in the Indenture is intended to
prevent the Corporation from issuing obligations secured by assets and
revenues of the Corporation other than the revenues and other moneys,
securities, properties, rights, interests and evidences of indebtedness
pledged in the Indenture.
COVENANTS
Certain covenants with the Holders of the Notes and Other Beneficiaries
contained in the Indenture are summarized as follows:
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Trustee to Hold Financed Student Loans. The Corporation shall cause all
Financed Student Loans to be endorsed and otherwise conveyed to the Trustee on
behalf of the Corporation in accordance with the provisions of the applicable
Student Loan Purchase Agreement or, in the case of any origination of Financed
Student Loans, shall cause such Student Loans to be originated in the name of
the Trustee. The Trustee shall be the legal owner of all Financed Student
Loans for all purposes of the Higher Education Act and each Guarantee
Program. The Trustee shall so hold such Financed Student Loans in its
capacity as trustee pursuant to the Indenture and, in such capacity, shall be
acting on behalf of the Corporation, as the beneficial owner of such Student
Loans, as well as the Holders of the Notes and all Other Beneficiaries, as
their interests may appear.
Enforcement and Amendment of Guarantee Agreements. So long as any Notes
or Other Indenture Obligations are Outstanding and Financed Eligible Loans are
Guaranteed by a Guarantee Agency, the Corporation agrees that it (1) will,
from and after the date on which the Trustee on its behalf shall have entered
into the Guarantee Agreement, cause the Trustee to maintain the same and
diligently enforce the Trustee's rights thereunder, (2) will cause the Trustee
to enter into such other similar or supplemental agreements as shall be
required to maintain benefits for all Financed Student Loans covered thereby,
and (3) will not consent to or permit any rescission of or consent to any
amendment to or otherwise take any action under or in connection with the same
which in any manner will materially adversely affect the rights of the
Noteholders or Other Beneficiaries under the Indenture.
Acquisition, Collection and Assignment of Student Loans. The Corporation
agrees that it will, except as provided with regard to the Surplus Fund (see
"Funds and Accounts -- Surplus Fund" above), cause the Trustee to originate or
acquire only Eligible Loans with moneys in any of the Funds and (subject to
any adjustments referred to in the following paragraph) shall diligently cause
to be collected all principal and interest payments on all the Financed
Student Loans and other sums to which the Corporation is entitled pursuant to
any Student Loan Purchase Agreement, and all grants, subsidies, donations,
insurance payments, Special Allowance Payments and all defaulted payments
Guaranteed by any Guarantee Agency which relate to such Financed Student
Loans. The Corporation shall also make, or cause to be made by Lenders or
Servicers, every effort to perfect the Corporation's, the Trustee's or such
Lender's or Servicer's claims for payment from the Secretary of Education or a
Guarantee Agency, as soon as possible, of all payments related to such
Financed Student Loans. The Corporation will cause the Trustee to assign such
Financed Student Loans for payment of guarantee or insurance benefits within
the time required under applicable law and regulations. The Corporation will
cause all United States and State statutes, rules and regulations which apply
to the Program and to Financed Student Loans to be complied with.
Enforcement of Financed Student Loans. The Corporation agrees that it
shall cause to be diligently enforced, and cause to be taken all steps,
actions and proceedings reasonably necessary for the enforcement of, all
terms, covenants and conditions of all Financed Student Loans and agreements
in connection therewith, including the prompt payment of all principal and
interest payments (as such payments may be adjusted to take into account (i)
any discount the Corporation may cause to be made available to borrowers who
make payments on Financed Student Loans through automatic withdrawals, and
(ii) any reduction in the interest payable on Financed Student Loans provided
for in any special program under which such loans were originated) and all
other amounts due the Corporation or the Trustee thereunder. Nothing in the
provisions of the Indenture described in this paragraph, however, shall be
construed to prevent the Corporation from settling a default or curing a
delinquency on any Financed Student Loan on such terms as shall be required by
law. In addition, (1) the Corporation may cause the Trustee to forgive the
indebtedness on all or a portion of the Financed Student Loans or take such
other action as may be provided in the written opinion of Bond Counsel, as
provided in the Indenture, to the extent necessary to prevent interest on any
series of Tax-Exempt Notes from being includable in the gross income of the
owners thereof for federal income tax purposes, and may cause the Trustee to
forgive the remaining indebtedness on any Financed Student Loan having a
principal balance not in excess of $100 if, in the reasonable judgment of the
Corporation, the cost of collection of the remaining indebtedness of such
Financed Student Loan would exceed such remaining indebtedness, and (2) the
Corporation may cause the Trustee to amend the terms of a Financed Student
Loan to provide for a different rate of interest thereon to the extent
required by law or, if such Financed Student Loan is a Plus or SLS Loan, to
effect a reissuance of such Plus or SLS Loan at a variable rate.
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Servicing and Other Agreements. The Corporation may contract with other
Persons to assist it in performing its duties under the Indenture, and any
performance of such duties by a Person so identified to the Trustee shall be
deemed to be action taken by the Corporation. The Corporation may, and prior
to or contemporaneously with the Section 150(d)(3) Transfer shall, enter into
a Servicing Agreement providing for the servicing of the Financed Student
Loans and performance of certain of its other obligations under the Indenture.
Administration and Collection of Financed Student Loans. The Corporation
agrees that all Financed Student Loans shall be administered and collected
either by the Corporation or by a Servicer selected by the Corporation (and,
after the Section 150(d)(3) Transfer, shall be so administered and collected
by a Servicer) in a competent, diligent and orderly fashion and in accordance
with all requirements of the Higher Education Act, the Secretary of Education,
the Indenture, the Contract of Insurance, the Federal Reimbursement Contracts,
each Guarantee Program and each Guarantee Agreement.
Books of Account, Annual Audit. The Corporation agrees that it will
cause to be kept and maintained proper books of account relating to the
Program in which full, true and correct entries will be made, in accordance
with generally accepted accounting principles, of all dealings or transactions
of or in relation to the business and affairs of the Corporation, and within
120 days after the end of each Fiscal Year will cause such books of account to
be audited by an Accountant. A copy of each audit report, annual balance
sheet and income and expense statement showing in reasonable detail the
financial condition of the Corporation as at the close of each Fiscal Year,
and summarizing in reasonable detail the income and expenses for such year,
including the transactions relating to the Funds and Accounts, shall be filed
promptly with the Trustee and be available for inspection by any Noteholder or
Other Beneficiary.
Punctual Payments. The Corporation agrees that it will duly and
punctually pay, or cause to be paid, the principal of, premium, if any, and
interest on and any Carry-Over Amount (and accrued interest thereon) with
respect to each and every Note and each Other Indenture Obligation from the
revenues and other assets pledged under the Indenture on the dates and at the
places, and in the manner provided, in the Notes and with respect to each
Other Indenture Obligation according to the true intent and meaning thereof,
and the Corporation will faithfully do and perform and at all times fully
observe and keep any and all of its covenants, undertakings, stipulations and
provisions contained in the Notes, the Other Indenture Obligations and the
Indenture.
Monthly Servicing Reports. The Corporation shall prepare, or cause a
Servicer to prepare, a Monthly Servicing Report for each calendar month and
shall furnish, or cause to be furnished, to the Trustee a copy of each such
report by the 25th day of the next calendar month (or the next succeeding
Business Day if such 25th day is not a Business Day).
Tax Covenant. The Corporation covenants that (a) it will not take or
omit to take any action which may render the interest on any Tax-Exempt Notes
includable in gross income for purposes of federal income taxation, (b) it
will use the proceeds of the Notes and any other funds of the Corporation in
such a manner that the use thereof would not cause the Tax-Exempt Notes to be
"arbitrage bonds" under Section 148 of the Code, and (c) it will not permit at
any time any proceeds of the Notes or any other funds of the Corporation to be
used, directly or indirectly, in a manner which would result in the inclusion
of the interest on any Tax-Exempt Note in gross income for purposes of federal
income taxation otherwise afforded by the Code.
THE FIRST SUPPLEMENTAL INDENTURE PROHIBITS ANY OBLIGOR ON A STUDENT LOAN
FINANCED, IN WHOLE OR IN PART, WITH PROCEEDS OF THE TAX EXEMPT SERIES 1998-1
NOTES, OR ANY RELATED PARTY TO SUCH OBLIGOR, FROM PURCHASING ANY TAX EXEMPT
SERIES 1998-1 NOTES IN AN AMOUNT RELATED TO THE AMOUNT OF SUCH STUDENT LOAN.
Limitation on Administrative Expenses and Note Fees. The Corporation
covenants and agrees that the Administrative Expenses and Note Fees will not,
in any Fiscal Year, exceed those that are reasonable and necessary in light of
all circumstances then existing and will not, in any event, be in such amounts
as will materially adversely affect the ability of the Corporation to pay or
perform, as the case may be, any of its obligations under the Indenture
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or the security for any Beneficiaries. The Corporation further covenants in
the First Supplemental Indenture that the Costs of Issuance, Administrative
Expenses and Note Fees to be paid, or reimbursed to the Corporation, from the
Administration Fund will not exceed the aggregate amount thereof specified in
the Closing Cash Flow Projection, unless the Corporation satisfies certain
conditions, including confirmation from each of the Rating Agencies then
rating the Series 1998-1 Notes that payment or reimbursement of such
additional Costs of Issuance, Administrative Expenses or Note Fees will not
result in a reduction or withdrawal of the rating of the Series 1998-1 Notes.
Amendment of Student Loan Purchase Agreements. The Corporation shall
notify the Trustee in writing of any proposed amendments to the Student Loan
Purchase Agreements. No such amendment shall become effective unless and
until the Trustee consents in writing thereto, which consent shall not be
given unless the Trustee receives an opinion of Counsel that such amendment is
required by the Higher Education Act or is not to the prejudice of the Holders
of the Notes or Other Beneficiaries.
Amendment of Remarketing Agreements and Depositary Agreements. The
Corporation shall notify the Trustee and any related Credit Facility Provider
in writing of any proposed amendments to any Remarketing Agreement or
Depositary Agreement. No such amendment shall become effective unless and
until (1) the Trustee consents in writing thereto, which consent shall not be
given unless the Trustee receives an opinion of Counsel that such amendment is
required by a Credit Enhancement Facility or the Indenture or is not to the
material prejudice of the Holders of the Notes, and (2) any related Credit
Facility Provider consents in writing thereto, which consent shall not be
unreasonably withheld, provided that no consent of the Credit Facility
Provider shall be required if the Credit Facility Provider receives an opinion
of Counsel that such amendment is required by the Indenture.
Credit Enhancement Facilities and Swap Agreements. The Corporation may
from time to time enter into or obtain the benefit of any Credit Enhancement
Facilities or Swap Agreements with respect to any Notes of any series;
provided that a Supplemental Indenture is entered into authorizing the
execution and delivery of such agreement. (See "Supplemental Indentures"
below.)
No Supplemental Indenture shall authorize the execution of a Swap
Agreement unless, as of the date the Corporation enters into such Swap
Agreement, the Swap Counterparty has outstanding obligations rated by each
Rating Agency not lower than in its third highest Specific Rating Category (or
each Rating Agency has a comparable other rating with respect to such Swap
Counterparty, such as a comparable rating of claims paying ability or
deposits). No such Swap Agreement shall be designated as a Senior Swap
Agreement unless, as of the date the Corporation enters into such Swap
Agreement, the Senior Asset Requirement will be met and the Trustee shall have
received written confirmation from each Rating Agency that the execution and
delivery of the Swap Agreement will not cause the reduction or withdrawal of
any rating or ratings then applicable to any Outstanding Unenhanced Notes.
Any Supplemental Indenture authorizing the execution by the Corporation
of a Swap Agreement or Credit Enhancement Facility may include provisions with
respect to the application and use of all amounts to be paid thereunder. No
amounts paid under any such Credit Enhancement Facility will be part of the
Trust Estate except to the extent, if any, specifically provided in such
Supplemental Indenture and no Beneficiary shall have any rights with respect
to any such amounts so paid except as may be specifically provided in such
Supplemental Indenture.
NO PETITION
The Trustee, by entering into the Indenture, and each Noteholder, by
accepting a Note, covenants and agrees that it will not at any time institute
against the Corporation, or join in any institution against the Corporation
of, any bankruptcy, reorganization, arrangement, insolvency or liquidation
proceedings, or other proceedings under any United States Federal or state
bankruptcy or similar law in connection with any obligations relating to the
Notes or the Indenture.
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INVESTMENTS
"Investment Securities" shall mean any of the following:
1. Government Obligations;
2. Interest-bearing time or demand deposits, certificates
of deposit or other similar banking arrangements with any bank,
trust company, national banking association or other depositary
institution (including the Trustee or any of its affiliates),
provided that, at the time of deposit or purchase, if the
investment is for a period exceeding one year, such depository
institution shall have long-term unsecured debt rated by each
Rating Agency not lower than in its highest applicable Specific
Rating Category or if the investment is for a period of less than
one year, such depository institution shall have short-term
unsecured debt rated by each Rating Agency not lower than its
highest applicable Specific Rating Category;
3. Obligations issued or guaranteed as to principal and
interest by any of the following: (a) the Government National
Mortgage Association; (b) the Federal National Mortgage
Association; or (c) the Federal Farm Credit Banks, the Federal
Intermediate Credit Banks, the Export-Import Bank of the United
States, the Federal Land Banks, the Student Loan Marketing
Association, the Federal Financing Bank, the Federal Home Loan
Banks, the Federal Home Loan Mortgage Corporation or the Farmers
Home Administration, or any agency or instrumentality of the United
States of America which shall be established for the purpose of
acquiring the obligations of any of the foregoing or otherwise
providing financing therefor, provided that any such obligation
described in this clause (c) shall either be rated by Fitch or, if
not rated by Fitch, rated by Moody's, (i) if such obligation has a
term of less than one year, not lower than in its highest
applicable Specific Rating Category, or (ii) if such obligation has
a term of one year or longer, not lower than in its highest
applicable Specific Rating Category;
4. Repurchase agreements or reverse repurchase agreements
with banks (which may include the Trustee or any of its affiliates)
which are members of the Federal Deposit Insurance Corporation or
with government bond dealers insured by the Securities Investor
Protection Corporation, which such agreements are secured by
Government Obligations to a level sufficient to obtain a rating by
each Rating Agency in its highest applicable Specific Rating
Category, or with brokers or dealers whose unsecured long-term debt
is rated by each Rating Agency in its highest applicable Specific
Rating Category;
5. Any money market fund, including a qualified regulated
investment company described in I.R.S. Notice 87-22, rated by each
Rating Agency not lower than its highest applicable Specific Rating
Category;
6. Any debt instrument; provided that if such instrument
has a term of less than one year, it is rated by each Rating Agency
not lower than in its highest applicable Specific Rating Category,
and if such instrument has a term of one year or longer, it is
rated by each Rating Agency not lower than in its highest
applicable Specific Rating Category;
7. Any investment agreement which constitutes a general
obligation of an entity whose debt, unsecured securities, deposits
or claims paying ability is rated by each Rating Agency, (a) if
such investment agreement has a term of less than one year, not
lower than in its highest applicable Specific Rating Cat egory, or
(b) if such investment agreement has a term of one year or longer,
not lower than in its highest applicable Specific Rating Category;
and
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8. Any other investment if the Trustee shall have received
written evidence from each Rating Agency that treating such
investment as an Investment Security will not cause any rating then
applicable to any Outstanding Unenhanced Notes to be lowered or
withdrawn or, if no Unenhanced Notes are then Outstanding but Other
Indenture Obligations are Outstanding, is acceptable to the Other
Beneficiaries entitled to such Other Indenture Obligations, as
evidenced in writing to the trustee by each such Other Beneficiary.
REPORTS TO NOTEHOLDERS
The Trustee, in accordance with the Indenture, is required to mail a copy
of each Monthly Servicing Report to each Noteholder of record as of the most
recent Record Date. In addition, beneficial owners of the Notes may receive
such reports, upon written request to the Trustee together with a
certification that they are beneficial owners of the Notes. In the case of
the Series 1998-1 Notes, the Servicer will file a copy of each such report
with the Commission on Form 8-K. However, in accordance with the Exchange Act
and the rules and regulations of the Commission thereunder, the Corporation
expects that it's obligation to file such reports will be terminated after
June 30, 1998.
EVENTS OF DEFAULT
If any of the following events occur, it is an "Event of Default" under
the Indenture:
(A) default in the due and punctual payment of any
interest on any Senior Note; or
(B) default in the due and punctual payment of the
principal of, or premium, if any, on, any Senior Note, whether at
the Stated Maturity thereof, at the date fixed for redemption
thereof (including, but not limited to, Sinking Fund Payment Dates)
or otherwise upon the maturity thereof; or
(C) default by the Corporation in its obligation to
purchase any Senior Note on a Purchase Date or Mandatory Tender
Date therefor; or
(D) default in the due and punctual payment of any amount
owed by the Corporation to any Other Senior Beneficiary under a
Senior Swap Agreement or Senior Credit Enhancement Facility; or
(E) if no Senior Obligations are Outstanding, default in
the due and punctual payment of any interest on any Subordinate
Note; or
(F) if no Senior Obligations are Outstanding, default in
the due and punctual payment of the principal of, or premium, if
any, on, any Subordinate Note, whether at the Stated Maturity
thereof, at the date fixed for redemption thereof (including, but
not limited to, Sinking Fund Payment Dates) or otherwise upon the
maturity thereof; or
(G) if no Senior Obligations are Outstanding, default by
the Corporation in its obligation to purchase any Subordinate Note
on a Purchase Date or Mandatory Tender Date therefor; or
(H) if no Senior Obligations are Outstanding, default in
the due and punctual payment of any amount owed by the Corporation
to any Other Subordinate Beneficiary under a Subordinate Swap
Agreement or a Subordinate Credit Enhancement Facility; or
(I) if no Senior Obligations or Subordinate Obligations
are Outstanding, default in the due and punctual payment of any
interest on any Class C Note; or
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(J) if no Senior Obligations or Subordinate Obligations
are Outstanding, default in the due and punctual payment of the
principal of, or premium, if any, on, any Class C Note, whether at
the Stated Maturity thereof, at the date fixed for redemption
thereof (including, but not limited to, Sinking Fund Payment Dates)
or otherwise upon the maturity thereof; or
(K) default in the performance of any of the Corporation's
obligations with respect to the transmittal of moneys to be
credited to the Revenue Fund, the Rebate Fund, the Acquisition Fund
or the Note Fund under the provisions of the Indenture and such
default shall have continued for a period of 30 days; or
(L) default in the performance or observance of any other
of the covenants, agreements or conditions on the part of the
Corporation in the Indenture or in the Notes contained, and such
default shall have continued for a period of 30 days after written
notice thereof, specifying such default, shall have been given by
the Trustee to the Corporation, which may give such notice in its
discretion and shall give such notice at the written request of the
Acting Beneficiaries Upon Default, or by the Holders of not less
than 10% in aggregate Principal Amount of the Outstanding Notes to
the Corporation and the Trustee, provided that, except with respect
to the Corporation's covenants relating to the tax exemption of
interest on any Tax-Exempt Notes, if the default is such that it
can be corrected, but not within such 30 days, it shall not
constitute an Event of Default if corrective action is instituted
by the Corporation within such 30 days and is diligently pursued
until the default is corrected; or
(M) certain events of bankruptcy or insolvency of the
Corporation.
REMEDIES
Whenever any Event of Default other than that described in paragraph (L)
under "Events of Default" above shall have occurred and be continuing, the
Trustee may (and, upon the written request of the Acting Beneficiaries Upon
Default, the Trustee shall), by notice in writing delivered to the
Corporation, declare the principal of and interest accrued on all Notes then
Outstanding due and payable.
Whenever any Event of Default described in paragraph (L) under "Events of
Default" above shall have occurred and be continuing, (1) the Trustee may, by
notice in writing delivered to the Corporation, declare the principal of and
interest on all Notes then Outstanding due and payable; and (2) the Trustee
shall, upon the written request of the Acting Beneficiaries Upon Default, by
notice in writing delivered to the Corporation, declare the principal of and
interest on all Notes then Outstanding due and payable.
At any time after such a declaration of acceleration has been made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee, the Acting Beneficiaries Upon Default, by written notice to the
Corporation and the Trustee, may rescind and annul such declaration and its
consequences if:
(1) There has been paid to or deposited with the Trustee by or for
the account of the Corporation, or provision satisfactory to the Trustee has
been made for the payment of, a sum sufficient to pay:
(A) if Senior Notes or Other Senior Obligations are
Outstanding: (i) all overdue installments of interest on all
Senior Notes; (ii) the principal of (and premium, if any, on) any
Senior Notes which have become due other than by such declaration
of acceleration, together with interest thereon at the rate or
rates borne by such Senior Notes; (iii) to the extent that payment
of such interest is lawful, interest upon overdue installments of
interest on the Senior Notes at the rate or rates borne by such
Senior Notes; (iv) all Other Senior Obligations which have become
due other than as a direct result of such declaration of
acceleration; (v) all other sums required to be paid to satisfy the
Corporation's obligations with respect to the transmittal of moneys
to be credited to the Revenue Fund, the Rebate Fund, the
Acquisition Fund and the Interest
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Account under the provisions of the Indenture; and (vi) all sums paid or
advanced by the Trustee under the Indenture and the reasonable
compensation, expenses, disbursements and advances of the Trustee, its
agents and counsel and any Paying Agents, Deposit Agents, Remarketing
Agents, Depositaries, Auction Agents and Broker-Dealers; or
(B) if no Senior Obligations are Outstanding, but
Subordinate Notes or Other Subordinate Obligations are Outstanding:
(i) all overdue installments of interest on all Subordinate Notes;
(ii) the principal of (and premium, if any, on) any Subordinate
Notes which have become due other than by such declaration of
acceleration, together with interest thereon at the rate or rates
borne by such Subordinate Notes; (iii) to the extent that payment
of such interest is lawful, interest upon overdue installments of
interest on the Subordinate Notes at the rate or rates borne by
such Subordinate Notes; (iv) all Other Subordinate Obligations
which have become due other than as a direct result of such
declaration of acceleration; (v) all other sums required to be paid
to satisfy the Corporation's obligations with respect to the
transmittal of moneys to be credited to the Revenue Fund, the
Rebate Fund, the Acquisition Fund and the Interest Account under
the provisions of the Indenture; and (vi) all sums paid or advanced
by the Trustee under the Indenture and the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and
counsel and any Paying Agents, Deposit Agents, Remarketing Agents,
Depositaries, Auction Agents and Broker-Dealers; or
(C) if no Senior Obligations or Subordinate Obligations
are Outstanding: (i) all overdue installments of interest on all
Class C Notes and all overdue sinking fund installments for the
retirement of Class C Notes; (ii) the principal of (and premium, if
any, on) any Class C Notes which have become due otherwise than by
such declaration of acceleration and interest thereon at the rate
or rates borne by such Class C Notes; (iii) to the extent that
payment of such interest is lawful, interest upon overdue
installments of interest on the Class C Notes at the rate or rates
borne by such Class C Notes; (iv) all other sums required to be
paid to satisfy the Corporation's obligations with respect to the
transmittal of moneys to be credited to the Revenue Fund, the
Rebate Fund and the Acquisition Fund under the provisions of the
Indenture; and (v) all sums paid or advanced by the Trustee under
the Indenture and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel
and any Paying Agents, Deposit Agents, Remarketing Agents,
Depositaries, Auction Agents and Broker-Dealers; and
(2) All Events of Default, other than the nonpayment of the principal
of and interest on Notes or amounts owing to Other Beneficiaries which have
become due solely by such declaration of acceleration, have been cured or
waived as provided in the Indenture.
If an Event of Default has occurred and is continuing, the Trustee may,
subject to applicable law, pursue any available remedy by suit at law or in
equity to enforce the covenants of the Corporation in the Indenture and may
pursue such appropriate judicial proceedings as the Trustee shall deem most
effective to protect and enforce, or aid in the protection and enforcement of,
the covenants and agreements in the Indenture. The Trustee is also authorized
to file proofs of claims in any equity, receivership, insolvency, bankruptcy,
liquidation, readjustment, reorganization or other similar proceedings.
Notwithstanding any other provisions of the Indenture, if an "Event of
Default" (as defined therein) occurs under a Swap Agreement or a Credit
Enhancement Facility and, as a result, the Other Beneficiary that is a party
thereto is entitled to exercise one or more remedies thereunder, such Other
Beneficiary may exercise such remedies, including, without limitation, the
termination of such agreement, as provided therein, in its own discretion;
provided that the exercise of any such remedy does not adversely affect the
legal ability of the Trustee or Acting Beneficiaries Upon Default to exercise
any remedy available under the Indenture.
If an Event of Default has occurred and is continuing, and if it shall
have been requested so to do by the Holders of not less than 25% in aggregate
Principal Amount of all Notes then Outstanding or any Other Beneficiary and
shall have been indemnified as provided in the Indenture, the Trustee is
obliged to exercise such one or more
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of the rights and powers conferred by the Indenture as the Trustee, being
advised by its counsel, shall deem most expedient in the interests of the
Beneficiaries; provided, however, that the Trustee has the right to decline to
comply with any such request if the Trustee shall be advised by Counsel that
the action so requested may not lawfully be taken or if the Trustee receives,
before exercising such right or power, contrary instructions from the Holders
of not less than a majority in aggregate Principal Amount of the Notes then
Outstanding or from any Other Beneficiary.
The Acting Beneficiaries Upon Default have the right, at any time, by an
instrument or instruments in writing executed and delivered to the Trustee, to
direct the method and place of conducting all proceedings to be taken in
connection with the enforcement of the terms and conditions of the Indenture;
provided that (a) such direction shall not be otherwise than in accordance
with the provisions of law and of the Indenture; (b) the Trustee shall not
determine that the action so directed would be unjustly prejudicial to the
Holders of Notes or Other Beneficiaries not taking part in such direction,
other than by effect of the subordination of any of their interests
thereunder; and (c) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction.
Except as may be permitted in a Supplemental Indenture with respect to an
Other Beneficiary, no Holder of any Note or Other Beneficiary shall have any
right to institute any suit, action or proceeding in equity or at law for the
enforcement of the Indenture or for the execution of any trust under the
Indenture or for the appointment of a receiver or any other remedy under the
Indenture unless (1) an Event of Default shall have occurred and be
continuing, (2) the Holders of not less than 25% in aggregate Principal Amount
of Notes then Outstanding or any Other Beneficiary shall have made written
request to the Trustee, (3) such Beneficiary or Beneficiaries shall have
offered to the Trustee indemnity, (4) the Trustee shall have thereafter failed
for a period of 60 days after the receipt of the request and indemnification
or refused to exercise the powers granted in the Indenture or to institute
such action, suit or proceeding in its own name and (5) no direction
inconsistent with such written request shall have been given to the Trustee
during such 60-day period by the Holders of not less than a majority in
aggregate Principal Amount of the Notes then Outstanding or by any Other
Beneficiary; provided, however, that, notwithstanding the foregoing provisions
of the Indenture, the Acting Beneficiaries Upon Default may institute any such
suit, action or proceeding in their own names for the benefit of the Holders
of all Outstanding Notes and Other Beneficiaries under the Indenture.
The Holder of any Note shall have the right, which is absolute and
unconditional, to receive payment of the principal of, premium, if any, and
interest on such Note in accordance with the terms thereof and of the
Indenture and, upon the occurrence of an Event of Default with respect
thereto, to institute suit for the enforcement of any such payment, and such
right shall not be impaired without the consent of such Holder.
The Trustee, unless it has declared the principal of and interest on all
Outstanding Notes immediately due and payable and a judgment or decree for
payment of the money due has been obtained by the Trustee, must waive any
Event of Default and its consequences upon written request of the Acting
Beneficiaries Upon Default; provided, however, that there shall not be waived
(a) any Event of Default arising from the acceleration of the maturity of the
Notes, except upon the rescission and annulment of such declaration as
described in the third paragraph under this caption "Remedies"; (b) any Event
of Default in the payment when due of any amount owed to any Beneficiary
(including payment of principal of or interest on any Note) except with the
consent of such Beneficiary or unless, prior to such waiver, the Corporation
has paid or deposited (or caused to be paid or deposited) with the Trustee a
sum sufficient to pay all amounts owed to such Beneficiary (including to the
extent permitted by law, interest upon overdue installments of interest); (c)
any Event of Default arising from the failure of the Corporation to pay unpaid
expenses of the Trustee, its agents and counsel, and any Authenticating Agent,
Paying Agents, Note Registrars, Deposit Agents, Remarketing Agents,
Depositaries, Auction Agents and Broker-Dealers as required by the Indenture,
unless, prior to such waiver, the Corporation has paid or deposited (or caused
to be paid or deposited) with the Trustee sums required to satisfy such
obligations of the Corporation under the provisions of the Indenture.
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APPLICATION OF PROCEEDS
All moneys received by the Trustee pursuant to any remedy shall, after
payment of the cost and expenses of the proceedings resulting in the
collection of such moneys and of the expenses, liabilities and advances
incurred or made by the Trustee with respect thereto, be applied as follows:
(A) Unless the principal of all the Outstanding Notes shall
have become or shall have been declared due and payable, all such
moneys shall be applied as follows:
FIRST, to the payment to the Senior Beneficiaries of all
installments of principal and interest then due on the Senior
Notes and all Other Senior Obligations, and if the amount
available shall not be sufficient to pay all such amounts in
full, then to the payment ratably, in proportion to the
amounts due, to the Senior Noteholders and to each Other
Senior Beneficiary, without any discrimination or preference,
and the Trustee shall apply the amount so apportioned to the
Senior Noteholders first to the payment of interest and
thereafter to the payment of principal;
SECOND, to the payment to the Subordinate Beneficiaries
of all installments of principal and interest then due on the
Subordinate Notes and all Other Subordinate Obligations, and
if the amount available shall not be sufficient to pay all
such amounts in full, then to the payment ratably, in
proportion to the amounts due, without regard to due date, to
the Subordinate Noteholders and to each Other Subordinate
Beneficiary, without any discrimination or preference, and the
Trustee shall apply the amount so apportioned to the
Subordinate Noteholders first to the payment of interest and
thereafter to the payment of principal; and
THIRD, to the payment of the Holders of the Class C Notes
of all installments of principal and interest (other than
interest on overdue principal) then due and payable.
(B) If the principal of all Outstanding Notes shall have
become due or shall have been declared due and payable and such
declaration has not been annulled and rescinded under the
provisions of the Indenture, all such moneys shall be applied as
follows:
FIRST, to the payment to the Senior Beneficiaries of all
principal and interest then due on the Senior Notes and all
Other Senior Obligations, without preference or priority of
principal over interest or of interest over principal, or of
any installment of interest over any other installment of
interest, or of any Senior Beneficiary over any other Senior
Beneficiary, ratably, according to the amounts due, to the
Persons entitled thereto without any discrimination or
preference; and
SECOND, to the payment to the Subordinate Beneficiaries
of the principal and interest then due on the Subordinate
Notes and all Other Subordinate Obligations, without
preference or priority of principal over interest or of
interest over principal, or of any installment of interest
over any other installment of interest, or of any Subordinate
Beneficiary over any other Subordinate Beneficiary, ratably,
according to the amounts due, to the Persons entitled thereto
without any discrimination or preference, and
THIRD, to the payment of the principal and premium, if
any, and interest then due and unpaid upon the Class C Notes,
without preference or priority of principal over interest or
of interest over principal, or of any installment of interest
over any other installment of interest, or of any Class C Note
over any other Class C Note, ratably, according to the amounts
due respectively for principal and interest, and other amounts
owing, to the Persons entitled thereto without any
discrimination or preference.
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(C) If the principal of all Outstanding Notes shall have
been declared due and payable and if such declaration shall
thereafter have been rescinded and annulled, then (subject to the
provisions described in paragraph (B) above, in the event that the
principal of all the Outstanding Notes shall later become or be
declared due and payable) the money held by the Trustee under the
Indenture shall be applied in accordance with the provisions
described in paragraph (A) above.
TRUSTEE
Prior to the occurrence of an Event of Default which has not been cured,
the Trustee is required to perform such duties and only such duties as are
specifically set forth in the Indenture. Upon the occurrence and continuation
of an Event of Default, the Trustee shall exercise the rights and powers
vested in it by Indenture, and use the same degree of care and skill in their
exercise, as a prudent man would exercise or use under the circumstances in
his own affairs.
Before taking any action under the Indenture, the Trustee may require
that satisfactory indemnity be furnished to it for the reimbursement of all
expenses to which it may be put and to protect it against all liability by
reason of any action so taken, except liability which is adjudicated to have
resulted from its negligence or willful misconduct.
The Trustee may at any time resign upon 60 days' notice to the
Corporation and to the Beneficiaries, such resignation to take effect upon the
appointment of a successor Trustee. The Trustee may be removed at any time by
the Corporation at the request of the Holders of a majority in Principal
Amount of Notes Outstanding, except during the existence of an Event of
Default. No such removal shall be effective until the appointment of a
successor Trustee.
DEPOSIT AGENTS
The Corporation may, in a Supplemental Indenture, appoint one or more
Deposit Agents to hold any part or all of the Revenue Fund, the Acquisition
Fund and/or the Administration Fund. Pursuant to the First Supplemental
Indenture, Norwest Bank of South Dakota, N.A., Sioux Falls, South Dakota, has
been appointed a Deposit Agent for the Revenue Fund. Any Deposit Agent may be
removed at any time by the Corporation by Board Resolution and by instrument
signed by an Authorized Officer of the Corporation filed with such Deposit
Agent.
Each Deposit Agent appointed by the Corporation shall be an incorporated
bank having trust powers or trust company organized under the laws of the
State, or a national banking association having trust powers, having its
principal office in the State and having a combined capital and surplus of at
least $5,000,000.
SUPPLEMENTAL INDENTURES
Supplemental Indentures Not Requiring Consent of Beneficiaries
The Corporation and the Trustee may, from time to time and at any time,
without the consent of, or notice to, any of the Noteholders or any Other
Beneficiary (except to the extent, if any, required pursuant to a Supplemental
Indenture authorizing the issuance of a series of Notes), enter into an
indenture or indentures supplemental to the Indenture as shall not be
inconsistent with the terms and provisions of the Indenture, so as to thereby,
among other things:
(a) cure any ambiguity or formal defect or omission in the
Indenture or in any Supplemental Indenture,
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(b) grant to or confer upon the Trustee for the benefit of
the Beneficiaries any additional rights, remedies, powers,
authority or security that may lawfully be granted to or conferred
upon the Beneficiaries or the Trustee,
(c) describe or identify more precisely any part of the
Trust Estate or subject additional revenues, properties or
collateral to the lien and pledge of the Indenture,
(d) authorize the issuance of a series of Notes, subject
to the requirements of the Indenture (see "Additional Notes"
above),
(e) amend the assumptions contained in the definition of
"Cash Flow Projection",
(f) modify the Indenture as required by any Credit
Facility Provider or Swap Counterparty, or otherwise necessary to
give effect to any Credit Enhancement Facility or Swap Agreement,
at the time of issuance of a series of Notes to which such
agreements relate; provided that no such modifications shall be
effective (1) if the consent of any Noteholders would be required
therefor under the proviso described in the next succeeding
paragraph and such consent has not been obtained, or (2) the
Trustee shall determine that such modifications are to the
prejudice of any Class C Noteholder, or
(g) make any other change in the Indenture which, in the
judgment of the Trustee, is not to the prejudice of the Trustee or
any Beneficiary.
Supplemental Indentures Requiring Consent of Noteholders
Exclusive of Supplemental Indentures described in the preceding
paragraph, the Trustee, upon receipt of an instrument evidencing the consent
to the below-mentioned Supplemental Indenture by: (i) if they are affected
thereby, the Holders of not less than two-thirds of the aggregate Principal
Amount of the Outstanding Senior Notes not held by the Corporation or a
related person, (ii) if they are affected thereby, the Holders of not less
than two-thirds of the aggregate Principal Amount of the Outstanding
Subordinate Notes not held by the Corporation or a related person, and (iii)
each other Person which must consent to such Supplemental Indenture as
provided in any then outstanding Supplemental Indenture authorizing the
issuance of a series of Notes, shall join with the Corporation in the
execution of such other Supplemental Indenture as shall be deemed necessary
and desirable for the purpose of modifying, altering, amending, adding to or
rescinding, in any particular, any of the terms or provisions contained in the
Indenture; provided, however, that no such Supplemental Indenture shall permit
without the consent of each Beneficiary which would be affected thereby: (a)
an extension of the maturity of the principal of or the interest on any Note,
(b) a reduction in the Principal Amount, Redemption Price or purchase price of
any Note or the rate of interest thereon, (c) a privilege or priority of any
Senior Obligation over any other Senior Obligation, (d) a privilege or
priority of any Subordinate Obligation over any other Subordinate Obligation,
(e) a privilege or priority of any Class C Note over any other Class C Note,
(f) a privilege of any Senior Notes over any Subordinate Notes or Class C
Notes, or of any Subordinate Notes over any Class C Notes, other than as
theretofore provided in the Indenture, (g) the surrendering of a privilege or
a priority granted by the Indenture if, in the judgment of the Trustee, to the
detriment of another Beneficiary under the Indenture, (h) a reduction or an
increase in the aggregate Principal Amount of the Notes required for consent
to such Supplemental Indenture, (i) the creation of any lien ranking prior to
or on a parity with the lien of the Indenture on the Trust Estate or any part
thereof, except as expressly permitted in the Indenture, (j) any Beneficiary
to be deprived of the lien created on the rights, title, interest, privileges,
revenues, moneys and securities pledged under the Indenture, (k) the
modification of any of the provisions of the Indenture described in this
paragraph, or (l) the modification of any provision of a Supplemental
Indenture which states that it may not be modified without the consent of the
Holders of Notes issued pursuant thereto or any Notes of the same class or any
Beneficiary that has provided a Credit Enhancement Facility or Swap Agreement
of such class.
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Rights of Trustee
If, in the opinion of the Trustee, any Supplemental Indenture adversely
affects the rights, duties or immunities of the Trustee under the Indenture or
otherwise, the Trustee may, in its discretion, decline to execute such
Supplemental Indenture. The Trustee is entitled to receive, and shall be
fully protected in relying upon, an opinion of its Counsel as conclusive
evidence that any such Supplemental Indenture conforms to the requirements of
the Indenture.
Consent of Depositaries, Remarketing Agents, Auction Agents and
Broker-Dealers
So long as any Depositary Agreement, Remarketing Agreement, Auction Agent
Agreement or Broker-Dealer Agreement is in effect, no Supplemental Indenture
which materially adversely affects the rights, duties or immunities of the
Depositary, the Remarketing Agent, the Auction Agent or the Broker-Dealer, as
the case may be, created by the Indenture or the Depositary Agreement,
Remarketing Agreement, Auction Agent Agreement or Broker-Dealer Agreement, as
appropriate, shall become effective unless and until delivery to the Trustee
of a written consent of the Depositary, the Remarketing Agent, the Auction
Agent or the Broker-Dealer, as the case may be, to such Supplemental
Indenture.
Opinion and Rating Agency Approval Required Prior to Execution of
Supplemental Indenture
No Supplemental Indenture shall be executed unless, prior to the
execution thereof: (1) if any Tax-Exempt Notes are Outstanding, the
Corporation shall have provided to the Trustee an opinion of Bond Counsel to
the effect that the execution and delivery of such Supplemental Indenture will
not adversely affect the exclusion from the gross income of the owners thereof
for federal income tax purposes of interest on any such Tax-Exempt Notes; and
(2) the Trustee shall have received written evidence from each Rating Agency
that execution and delivery of such Supplemental Indenture will not adversely
affect any rating or ratings then applicable to any of the Outstanding Notes.
DISCHARGE OF NOTES AND INDENTURE
The obligations of the Corporation under the Indenture, and the liens,
pledges, charges, trusts, covenants and agreements of the Corporation therein
made or provided for, shall be fully discharged and satisfied as to any Note
and such Note shall no longer be deemed to be Outstanding thereunder:
(i) when such Note shall have been canceled, or shall have
been purchased by the Trustee from moneys held by it under the
Indenture; or
(ii) as to any Note not canceled or so purchased, when
payment of the principal of and the applicable redemption premium,
if any, on such Note, plus interest on such principal to the due
date thereof, either (a) shall have been made or caused to be made
in accordance with the terms of the Indenture, or (b) shall have
been provided for by irrevocably depositing with the Trustee
exclusively for such payment, (1) moneys sufficient to make such
payment or (2) Government Obligations maturing as to principal and
interest in such amount and at such times as will ensure the
availability of sufficient moneys to make such payment and, if
payment of all then Outstanding Notes is to be so provided for, all
payments required to be made to the United States Treasury or
otherwise with respect to Rebate Amounts and Excess Earnings, as
well as the fees and expenses of the Trustee and any other
fiduciaries under the Indenture.
Notwithstanding the provisions of the Indenture just described, no Notes
shall be defeased unless, after giving effect to the defeasance, the
requirements in the Indenture described under "Call for Redemption, Prepayment
or Purchase of Notes; Senior Asset Requirement" above are met as if such Notes
were to be called for redemption on the date such Notes are to be defeased.
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NOTICES TO NOTEHOLDERS
Except as is otherwise provided in the Indenture, any provision in the
Indenture for the mailing of notice or other instrument to Holders of Notes
will be fully complied with if it is mailed by first-class mail, postage
prepaid, to each Holder of Notes outstanding at the address appearing on the
Note Register. In addition, whenever notice is to be mailed under the
Indenture to the Holders of Notes, the Trustee is also, upon request, to mail
a copy of such notice to (1) any Holder of at least $1,000,000 in aggregate
Principal Amount of the Notes (or, in the event less than $1,000,000 in
aggregate Principal Amount of Notes is outstanding, the Holder of all
outstanding Notes), in addition to the copy mailed to such Holder's address
appearing on the Note Register, at such other address as such Holder shall
specify in writing to the Trustee, and (2) any Person that is the beneficial
owner of a Note, as evidenced to the satisfaction of the Trustee, at such
address as such beneficial owner shall specify in writing to the Trustee;
provided that any defect in or failure to mail any such notice prescribed by
this sentence shall not affect the validity of any proceedings to be taken
(including, without limitation, for the call of Notes for redemption) pursuant
to such notice.
RIGHTS OF OTHER BENEFICIARIES
All rights of any Other Beneficiary under the Indenture to consent to or
direct certain remedies, waivers, actions and amendments thereunder shall
cease for so long as such Other Beneficiary is in default of any of its
obligations or agreements under the Swap Agreement or the Credit Enhancement
Facility by reason of which such Person is an Other Beneficiary.
TAX MATTERS
TAX EXEMPT SERIES 1998-1 NOTES
In the opinion of Dorsey & Whitney LLP, as Bond Counsel, under laws,
regulations, rulings and decisions in effect on the Date of Issuance of the
Series 1998-1 Notes, interest on the Tax Exempt Series 1998-1 Notes is not
includable in gross income of the owners thereof for federal income tax
purposes. In rendering this opinion, Dorsey & Whitney LLP will rely upon
certifications by officers of the Original Issuer, SLFC and the Corporation
and certain covenants of the Original Issuer, SLFC and the Corporation
contained in the Indenture with respect to certain matters material to the
exemption of interest on the Tax Exempt Series 1998-1 Notes from federal
income taxation, including, without limitation, certifications and covenants
as to the use of the proceeds of the Tax Exempt Series 1998-1 Notes, and will
assume that the Original Issuer, SLFC and the Corporation will comply with
applicable requirements of the Code. In the opinion of Dorsey & Whitney LLP,
interest on the Tax Exempt Series 1998-1 Notes is an item of tax preference
which is included in "alternative minimum taxable income" for purposes of the
federal alternative minimum tax under Section 55 of the Code.
Provisions of the Code impose continuing requirements that must be met
after the issuance of the Tax Exempt Series 1998-1 Notes for interest thereon
to be and remain excludable from gross income for federal income tax
purposes. Noncompliance with such requirements may cause the interest on the
Tax Exempt Series 1998-1 Notes to be includable in gross income for such
purposes, either prospectively or retroactively to the date of issuance of the
Tax Exempt Series 1998-1 Notes. These requirements include, but are not
limited to, provisions that prescribe that the proceeds of the Tax Exempt
Series 1998-1 Notes and certain other amounts are subject to yield and other
investment limits and provisions that require that certain investment earnings
be rebated on a periodic basis to the Treasury Department of the United
States.
The Code contains numerous provisions which could affect the federal tax
consequences of owning Tax Exempt Series 1998-1 Notes and receiving interest
thereon. The following is a brief summary of some of the significant
provisions applicable to particular Tax Exempt Series 1998-1 Noteholders, but
is not intended to be an exhaustive discussion of collateral tax consequences
arising from ownership of the Tax Exempt Series 1998-1 Notes.
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Prospective Tax Exempt Series 1998-1 Noteholders should consult their own tax
advisers with respect to the impact of such provisions on their own tax
situations.
Interest on the Tax Exempt Series 1998-1 Notes is includable in "net
investment income" of foreign insurance companies for purposes of Section
842(b) of the Code, and may be included in the income of a foreign corporation
for purposes of the branch profits tax imposed by Section 884 of the Code.
Additionally, interest on the Tax Exempt Series 1998-1 Notes constitutes
"passive investment income" for purposes of the tax imposed by Section 1375 of
the Code on such income of certain S corporations.
Section 265 of the Code denies a deduction for interest on indebtedness
incurred or continued to purchase or carry the Tax Exempt Series 1998-1
Notes. Indebtedness may be allocated to the Tax Exempt Series 1998-1 Notes
for this purpose even though not directly traceable to the purchase of the Tax
Exempt Series 1998-1 Notes. The Code also restricts the deductibility of
other expenses allocable to the Tax Exempt Series 1998-1 Notes. In the case
of a financial institution described in Section 265(b)(5) of the Code, no
deduction is allowed under the Code for that portion of the taxpayer's
interest expense which is allocable to interest on the Tax Exempt Series
1998-1 Notes within the meaning of Section 265(b). In the case of an insurance
company subject to the tax imposed by Section 831 of the Code, the amount
which otherwise would be taken into account as "losses incurred" under Section
832(b)(5) is reduced by an amount equal to 15% of the interest on the Tax
Exempt Series 1998-1 Notes that is received or accrued during the taxable
year.
Interest on the Tax Exempt Series 1998-1 Notes will be included in
calculating "modified adjusted gross income" under Section 86 of the Code for
purposes of determining whether, and the extent to which, a portion of a
taxpayer's "social security benefits" or "tier 1 railroad retirement benefits"
will be included in gross income for federal income tax.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the material federal income tax
consequences of the purchase, ownership and disposition of Notes for the
investors described below and is based on the opinions of Dorsey & Whitney
LLP, as tax counsel to the Original Issuer and the Corporation. The Original
Issuer and the Corporation, as successor to the Original Issuer in respect of
the Notes, are hereinafter referred to collectively as the "Issuer." This
summary is based upon the Code and other laws, regulations, rulings and
decisions currently in effect, all of which are subject to change. The
discussion does not deal with all federal tax consequences applicable to all
categories of investors, some of which may be subject to special rules. In
addition, this summary is generally limited to investors who will hold the
Series 1998-1 Notes as "capital assets" (generally, property held for
investment) within the meaning of Section 1221 of the Code. Investors should
consult their own tax advisors to determine the federal, state, local and
other tax consequences of the purchase, ownership and disposition of the
Series 1998-1 Notes of any series. Prospective investors should note that no
rulings have been or will be sought from the Internal Revenue Service (the
"Service") with respect to any of the federal income tax consequences
discussed below, and since there are no cases or rulings concerning similar
transactions, there can be no assurance that the Service will not take
contrary positions.
Characterization of the Trust Estate
In the opinion of Dorsey & Whitney LLP, based upon certain assumptions
and certain representations of the Issuer, the Series 1998-1 Notes will be
treated as debt of the Issuer, rather than as an interest in the Financed
Eligible Loans and other assets of the Trust Estate, for federal income tax
purposes. Such opinion will not be binding on the courts or the Service. It
is possible that the Service could assert that, for purposes of the Code, the
transaction contemplated by this Prospectus constitutes a sale of the assets
comprising the Trust Estate (or an interest therein) to the Holders or that
the relationship which will result from this transaction is that of a
partnership, or an association taxable as a corporation.
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If, instead of treating the transaction as creating secured debt in the
form of the Series 1998-1 Notes issued by the Issuer as a corporate entity,
the transaction were treated as creating a partnership among the Noteholders,
the Servicer and the Issuer, which has purchased the underlying Trust Estate
assets, the resulting partnership would not be subject to federal income tax.
Rather, the Servicer, the Issuer and each Noteholder would be taxed
individually on their respective distributive shares of the partnership's
income, gain, loss, deductions and credits. The amount and timing of items of
income and deduction of the Noteholder may differ if the Series 1998-1 Notes
were held to constitute partnership interests, rather than indebtedness.
If, alternatively, it were determined that this transaction created an
entity other than the Issuer which was classified as a corporation or a
publicly traded partnership taxable as a corporation and was treated as having
sold the assets comprising the Trust Estate, the Trust Estate would be subject
to federal income tax at corporate income tax rates on the income it derives
from the Financed Eligible Loans and other assets, which would reduce the
amounts available for payment to the Noteholders. Cash payments to the
Noteholders generally would be treated as dividends for tax purposes to the
extent of such corporation's earnings and profits. A similar result would
apply if the Noteholders were deemed to have acquired stock or other equity
interests in the Issuer. However, as noted above, the Issuer has been advised
that the Series 1998-1 Notes will be treated as debt of the Issuer for federal
income tax purposes.
Characterization of the Series 1998-1 Notes as Indebtedness
The Issuer and the Noteholders express in the Indenture their intent
that, for applicable tax purposes, the Series 1998-1 Notes will be
indebtedness of the Issuer secured by the Trust Estate. The Issuer and the
Noteholders, by accepting the Series 1998-1 Notes, have agreed to treat the
Series 1998-1 Notes as indebtedness of the Issuer for federal income tax
purposes. The Issuer intends to treat this transaction as a financing
reflecting the Series 1998-1 Notes as its indebtedness for tax and financial
accounting purposes.
In general, the characterization of a transaction as a sale of property
or a secured loan, for federal income tax purposes, is a question of fact, the
resolution of which is based upon the economic substance of the transaction,
rather than its form or the manner in which it is characterized. While the
Service and the courts have set forth several factors to be taken into account
in determining whether the substance of a transaction is a sale of property or
a secured indebtedness, the primary factor in making this determination is
whether the transferee has assumed the risk of loss or other economic burdens
relating to the property and has obtained the benefits of ownership thereof.
Notwithstanding the foregoing, in some instances, courts have held that a
taxpayer is bound by the particular form it has chosen for a transaction, even
if the substance of the transaction does not accord with its form.
The Issuer believes that it has retained the preponderance of the primary
benefits and burdens associated with Financed Eligible Loans and other assets
comprising the Trust Estate and should, thus, be treated as the owner of such
assets for federal income tax purposes. If, however, the Service were to
successfully assert that this transaction should be treated as a sale of the
Trust Estate assets, the Service could further assert that the entity created
pursuant to the Indenture, as the owner of the Trust Estate for federal income
tax purposes, should be deemed engaged in a business and, therefore,
characterized as an association taxable as a corporation.
Taxation of Interest Income of Noteholders
In the opinion of Dorsey & Whitney LLP, payments of interest with regard
to the Taxable Series 1998-1 Notes will be includable as ordinary income when
received or accrued by the Holders thereof in accordance with their respective
methods of tax accounting and applicable provisions of the Code. It is
anticipated that the Taxable Series 1998-1 Notes will not be issued with
"original issue discount". There can be no assurance, however, that the
Service would not assert that the interest payable with respect to the Series
1998-1 Subordinate Notes may not be qualified stated interest because such
payments are not unconditional and that the Series 1998-1 Subordinate Notes
are issued with original issue discount.
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Payments of interest received with respect to the Taxable Series 1998-1
Notes may also constitute "investment income" for purposes of certain
limitations of the Code concerning the deductibility of investment interest
expense. Potential Holders should consult their own tax advisors concerning
the treatment of interest payments with regard to the Taxable Series 1998-1
Notes.
A purchaser who buys a Series 1998-1 Note at a discount from its
principal amount or its adjusted issue price if issued with original issue
discount greater than a specified de minimis amount will be subject to the
market discount rules of the Code. In general, the market discount rules of
the Code treat principal payments and gain on disposition of a debt instrument
as ordinary income to the extent of accrued market discount. Although the
accrued market discount on debt instruments such as the Series 1998-1 Notes
which are subject to prepayment based on the prepayment of other debt
instruments is to be determined under regulations yet to be issued, the
legislative history of these provisions of the Code indicate that the same
prepayment assumption used to calculate original issue discount should be
utilized. Each potential investor should consult his tax advisor concerning
the application of the market discount rules to the Series 1998-1 Notes.
The annual statement regularly furnished to Holders for federal income
tax purposes will include information regarding payments of interest with
respect to the Series 1998-1 Notes. As noted above, the Issuer believes,
based on the advice of counsel, that it will retain ownership of the Trust
Estate assets for federal income tax purposes. In the event the Indenture is
deemed to create a pass-through entity as the owner of the Trust Estate assets
for federal income tax purposes instead of the Issuer (assuming such entity is
not, as a result, taxed as an association), the owners of the Series 1998-1
Notes could be required to accrue payments of interest more rapidly than
otherwise would be required.
Backup Withholding
Certain purchasers may be subject to backup withholding at the rate of
31% with respect to interest paid with respect to the Taxable Series 1998-1
Notes if the purchasers, upon issuance, fail to supply the Trustee or their
brokers with their taxpayer identification numbers, furnish incorrect taxpayer
identification numbers, fail to report interest, dividends or other
"reportable payments" (as deemed in the Code) properly, or, under certain
circumstances, fail to provide the Trustee with a certified statement, under
penalty of perjury, that they are not subject to backup withholding.
Information returns will be sent annually to the Service and to each purchaser
setting forth the amount of interest paid with respect to the Taxable Series
1998-1 Notes and the amount of tax withheld thereon.
The Issuer makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Series 1998-1 Notes under the tax
laws of any state, locality or foreign jurisdiction. Investors considering an
investment in the Series 1998-1 Notes should consult their own tax advisors
regarding such tax consequences.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A Beneficial Owner of Series 1998-1 Notes holding securities through
Cedel or Euroclear (or through DTC if the holder has an address outside the
United States) will be subject to the 30% U.S. withholding tax (or, in certain
cases, the 31% backup withholding tax) that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons (as defined below), unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course
of its trade or business in the chain of intermediaries between such
Beneficial Owner and the United States entity required to withhold tax
complies with applicable certification requirements and (ii) such Beneficial
Owner takes one of the following steps to obtain an exemption or reduced tax
rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial Owners of Series
1998-1 Notes that are non-U.S. Persons can obtain a complete exemption from
the United States withholding tax
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and the backup withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown in Form W-8 changes, a new form W-8
must be filed within 30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-United States corporation or bank
with a United States branch, for which the interest income in effectively
connected with its conduct of a trade or business in the United States, can
obtain an exemption from the United States withholding tax and the backup
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on
Income Effectively Connected with the Conduct of a Trade or Business in the
United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are Beneficial Owners of Series
1998-1 Notes residing in a country that has a tax treaty with the United
States can obtain an exemption or reduced tax rate (depending on the treaty
terms) with respect to United States withholding tax and an exemption from the
backup withholding tax by filing Form 1001 (Ownership, Exemption or Reduced
Rate Note). If the treaty provides only for a reduced rate, the United States
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by the Beneficial Owner of the Series
1998-1 Note or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons generally are not
subject to the United States withholding and can obtain a complete exemption
from the backup withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Beneficial Owner of a
Series 1998-1 Note (or in the case of a Form 1001 or a Form 4224 filer, its
agent) files by submitting the appropriate form to the person through whom it
holds (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of
the United States or any political subdivision thereof, (iii) an estate the
income of which is includable in gross income for United States tax purposes,
regardless of its source, or (iv) a trust if a court within the United States
is able to exercise primary jurisdiction over the administration of the trust
and one or more United States fiduciaries have the authority to control all
substantial decisions of the trust.
New Withholding Rules in 1999. Effective January 1, 1999, any foreign
investor that seeks the protection of an income tax treaty with respect to the
imposition of United States withholding tax will generally be required to
obtain a taxpayer identification number ("TIN") from the Service in advance
and provide verification that such investor is entitled to the protection of
the relevant income tax treaty. Foreign tax-exempt investors will generally
be required to provide verification of their tax-exempt status. Foreign
investors are urged to consult with their tax advisors with respect to these
new withholding rules.
This summary does not deal with all aspects of United States federal
income tax withholding that may be relevant to foreign holders of the globally
offered Series 1998-1 Notes. Investors are advised to consult their own tax
advisers for specific tax advice concerning their holding and disposing of the
globally offered Series 1998-1 Notes.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain fiduciary and prohibited transaction restrictions
on employee pension and welfare benefit plans subject to ERISA ("ERISA
Plans"). Section 4975 of the Code imposes essentially the same prohibited
transaction restrictions on tax-qualified retirement plans described in
Section 401(a) of the Code ("Qualified Retirement Plans") and on Individual
Retirement Accounts ("IRAs") described in Section 408(b) of the Code
(collectively, "Tax-Favored Plans"). Certain
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employee benefit plans, such as governmental plans (as defined in Section
3(32) of ERISA), and, if no election has been made under Section 410(d) of the
Code, church plans (as defined in Section 3(33) of ERISA), are not subject to
ERISA requirements. Accordingly, assets of such plans may be invested in
Series 1998-1 Notes without regard to the ERISA considerations described
below, subject to the provisions of applicable federal and state law. Any
such plan which is a Qualified Retirement Plan and exempt from taxation under
Sections 401(a) and 501(a) of the Code, however, is subject to the prohibited
transaction rules set forth in the Code.
In addition to the imposition of general fiduciary requirements,
including those of investment prudence and diversification and the requirement
that a plan's investment be made in accordance with the documents governing
the plan, Section 406 of ERISA and Section 4975 of the Code prohibit a broad
range of transactions involving assets of ERISA Plans and Tax-Favored Plans
and entities whose underlying assets include plan assets by reason of ERISA
Plans or Tax-Favored Plans investing in such entities (collectively, "Benefit
Plans") and persons who have certain specified relationships to the Benefit
Plans ("Parties in Interest" or "Disqualified Persons"), unless a statutory or
administrative exemption is available. Certain Parties in Interest (or
Disqualified Persons) that participate in a prohibited transaction may be
subject to a penalty (or an excise tax) imposed pursuant to Section 502(i) of
ERISA (or Section 4975 of the Code) unless a statutory or administrative
exemption is available.
Certain transactions involving the purchase, holding or transfer of the
Series 1998-1 Notes might be deemed to constitute prohibited transactions
under ERISA and the Code if assets of the Original Issuer or the Corporation
were deemed to be assets of a Benefit Plan. Under a regulation issued by the
United States Department of Labor (the "Plan Assets Regulation"), the assets
of the Original Issuer or the Corporation would be treated as plan assets of a
Benefit Plan for the purposes of ERISA and the Code only if the Benefit Plan
acquires an "equity interest" in the Original Issuer or the Corporation and
none of the exceptions contained in the Plan Assets Regulation is applicable.
An equity interest is defined under the Plan Assets Regulation as an interest
in an entity other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features. Although
there can be no assurances in this regard, it appears that the Series 1998-1
Notes should be treated as debt without substantial equity features for
purposes of the Plan Assets Regulation. However, without regard to whether
the Series 1998-1 Notes are treated as an equity interest for such purposes,
the acquisition or holding of Series 1998-1 Notes by or on behalf of a Benefit
Plan could be considered to give rise to a prohibited transaction if the
Original Issuer, the Corporation or the Trustee, or any of their respective
affiliates, is or becomes a party in interest or a disqualified person with
respect to such Benefit Plan. In such case, certain exemptions from the
prohibited transaction rules could be applicable depending on the type and
circumstances of the plan fiduciary making the decision to acquire a Note.
Included among these exemptions are: Prohibited Transaction Class Exemption
("PTCE") 96-23, regarding transactions effected by "in-house asset managers";
PTCE 90-1, regarding investments by insurance company pooled separate
accounts; PTCE 95-60, regarding transactions effected by "insurance company
general account"; PTCE 91-38, regarding investments by bank collective
investment funds; and PTCE 84-14, regarding transactions effected by
"qualified professional assets managers."
Any ERISA Plan fiduciary considering whether to purchase Series 1998-1
Notes on behalf of an ERISA Plan should consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment and the availability of
any of the exemptions referred to above. Persons responsible for investing
the assets of Tax-Favored Plans that are not ERISA Plans should seek similar
counsel with respect to the prohibited transaction provisions of the Code.
CERTAIN RELATIONSHIPS AMONG FINANCING PARTICIPANTS
As described under "The Original Issuer", "The Servicer" and "The
Corporation", the Corporation will be a wholly-owned subsidiary of SLFC, which
in turn will initially be a wholly-owned subsidiary of the Original Issuer.
There is no assurance that the Original Issuer will continue to own all or any
of the stock of SLFC. The Original Issuer will have no obligations with
respect to the Notes or the Indenture after the transfers described under "The
Original Issuer" and "The Corporation." Except for its obligations under the
SLFC Servicing Agreement,
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SLFC will have no obligations with respect to the Notes or the Indenture. The
Corporation will have no full-time employees, but will initially contract with
SLFC to perform the Corporation's obligations under the Indenture.
The boards of directors of the Original Issuer, the Corporation and SLFC
presently consist of the same four persons, and two of those persons also are
members of the boards of directors of EAC and EASCI.
The Trustee is also the trustee for the Original Issuer's outstanding
student loan revenue bond and student loan asset-backed note issues, which
will be refunded by the Series 1998-1 Notes. The Trustee and its affiliates
have in the past entered into student loan purchase agreements with the
Original Issuer, including Student Loan Purchase Agreements pursuant to which
the Original Issuer acquired as of December 31, 1997, approximately $144
million outstanding principal amount of Eligible Loans which will be Financed
under the Indenture. The Corporation expects that the Trustee will enter into
Student Loan Purchase Agreements providing for the sale of a substantial
amount of additional Eligible Loans. The Original Issuer also has obtained
(and the Corporation may in the future obtain) financial services from the
Trustee and related entities.
Foley & Lardner, counsel to the Underwriters, has from time to time
represented, and is currently representing, the Original Issuer in
connection with various matters (including matters relating to its
transfer of assets to SLFC). In addition, Foley & Lardner has from time
to time represented, and is currently representing, EAC in connection
with various matters.
For a discussion of certain relationships between Underwriters or
affiliates of Underwriters and the Original Issuer or the Corporation,
see "Plan of Distribution".
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement for the sale of the Series 1998-1 Notes, dated February 12, 1998
(the "Underwriting Agreement"), the Original Issuer has agreed to sell and the
Underwriters have jointly and severally (subject to the limitations discussed
below) agreed to purchase all (but not less than all) of the Series 1998-1
Notes. The obligation of U.S. Bancorp Investments, Inc. to purchase the
Series 1998-1 Notes is limited to such principal amount of the Series 1998-1
Notes as does not exceed 10% of the capital stock actually paid in and
unimpaired and 10% of the unimpaired surplus funds of U.S. Bank National
Association (also doing business as First Bank National Association), which is
the commercial bank which owns U.S. Bancorp Investments, Inc. as described
below.
The Original Issuer has been advised by the Underwriters that the
Underwriters propose initially to offer the Series 1998-1 Notes to the public
at the public offering price with respect to each series set forth on the
cover page of this Prospectus. After the initial public offering, the public
offering price may be changed.
The Original Issuer and SLFC have agreed to indemnify the Underwriters
against certain liabilities including liabilities under the Securities Act of
1933, as amended, and the Original Issuer has agreed to reimburse the
Underwriters for the fees and expenses of counsel to the Underwriters.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with the
Regulation M under the Exchange Act. Over-allotment involves syndicate sales
in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so
long as the stabilizing bids do not exceed a specific maximum. Syndicate
covering transactions involve purchases of the Series 1998-1 Notes in the open
market after the distribution has been completed in order to cover syndicate
short positions. Penalty bids permit the Underwriters to reclaim a selling
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concession from a syndicate member when the Series 1998-1 Notes originally
sold by such syndicate member are purchased in a syndicate covering
transaction to cover syndicate short positions. Such stabilizing
transactions, syndicate covering transactions and penalty bids may cause the
price of the Series 1998-1 Notes to be higher than it would otherwise be in
the absence of such transactions.
Each Underwriter has represented and agreed that it has not offered or
sold, and will not offer or sell Series 1998-1 Notes to persons in the United
Kingdom except to persons whose ordinary activities involve them in acquiring,
holding, managing or disposing of investments (as principal or agent) for the
purposes of their businesses or otherwise in circumstances which have not
resulted, and will not result in an offer to the public in the United Kingdom
within the meaning of the U.K. Regulations.
U.S. Bancorp Investments, Inc. is a wholly-owned subsidiary of U.S. Bank
National Association (also doing business as First Bank National Association),
which is the Trustee. Norwest Investment Services, Inc. is an affiliate of
Norwest Bank of South Dakota, N.A., which will act as a deposit agent for the
receipt of certain funds credited to the Revenue Fund. Salomon Smith Barney
and U.S. Bancorp Investments, Inc. have provided to the Original Issuer from
time to time, and may provide to the Corporation in the future, investment or
commercial banking services, for which such Underwriters have received or will
receive customary fees and commissions. First Bank National Association and
banks that are affiliates of Norwest Investment Services, Inc. have in the
past entered into student loan purchase agreements with the Original Issuer.
The Corporation expects that such banks will enter into Student Loan Purchase
Agreements providing for the sale of a substantial amount of additional
Eligible Loans.
LEGAL MATTERS
Certain legal matters will be passed upon for the Original Issuer and the
Corporation by Dorsey & Whitney LLP, Minneapolis, Minnesota, Bond Counsel and
special counsel for the Original Issuer and the Corporation. Certain legal
matters will be passed upon for the Underwriters by Foley & Lardner,
Milwaukee, Wisconsin.
EXPERTS
The balance sheet of the Corporation as of January 27, 1998, has been
included herein and in the registration statement in reliance upon the report
of Eide Helmeke PLLP, Aberdeen, South Dakota, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm
as experts in accounting and auditing.
RATINGS
It is a condition to the issuance of the Series 1998-1 Notes that the
Series 1998-1 Senior Notes each be rated "AAA" by Fitch IBCA, Inc. and "Aaa"
by Moody's Investors Services, Inc., and that the Series 1998-1 Subordinate
Notes be rated no less than "A" by Fitch IBCA, Inc. and "A3" by Moody's
Investors Services, Inc.. The Original Issuer has applied for ratings of the
Series 1998-1 Notes from Moody's Investors Services, Inc.and Fitch IBCA, Inc.
No application was made to any other rating agency for the purpose of
obtaining additional ratings of the Series 1998-1 Notes.
Any ratings, if assigned, reflect only the view of the Rating Agency.
Any explanation of the significance of the ratings may be obtained only from
the Rating Agency. The Original Issuer and the Corporation furnished to the
Rating Agencies certain information and materials, some of which may not have
been included in this Prospectus, relating to the Series 1998-1 Notes, the
Original Issuer and the Corporation. Generally, rating agencies base their
ratings on such information and materials and on investigation, studies and
assumptions made by the rating agencies. There can be no assurance that
ratings when assigned will continue for any given period of time
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or that they will not be lowered or withdrawn entirely by a Rating Agency if
in its judgment circumstances so warrant. If ratings are assigned, any such
downward change in or withdrawal of a rating may have an adverse effect on the
marketability or market price of the Series 1998-1 Notes.
Fitch IBCA, Inc. has stated that its ratings on Series 1998-1 Notes do
not address: (a) the market liquidity of the Series 1998-1 Notes or (b) any
Carry-Over Amount that may accrue with respect to the Taxable Series 1998-1
Notes.
The Corporation expects to furnish to each Rating Agency information and
materials that it may request. However, the Corporation assumes no obligation
to furnish requested information and materials, and may issue additional
obligations for which a rating is not requested. Failure to furnish requested
information and materials, or the issuance of debt for which a rating is not
requested, may result in the suspension or withdrawal of a Rating Agency's
ratings on the Series 1998-1 Notes.
A securities rating addresses the likelihood of the receipt by Holders of
the Series 1998-1 Notes of payments of principal and interest from assets in
the Trust Estate. The rating takes into consideration the characteristics of
the Financed Eligible Loans, and the structural, legal and tax aspects
associated with the Series 1998-1 Notes. A securities rating is not a
recommendation to buy, sell or hold securities and may be subject to revision
or withdrawal at any time by the assigning rating agency. Each securities
rating should be evaluated independently of similar ratings on different
securities.
GLOSSARY OF CERTAIN DEFINED TERMS
In addition to the terms defined elsewhere in this Prospectus, the
following terms shall have the following respective meanings. Any term used
with an initial capital letter but not defined herein shall have the meaning
given such term in the Indenture.
"`AA' Composite Commercial Paper Rate" shall mean, with respect to a
series of Tax Exempt Series 1998-1 Senior Notes, (i) the interest equivalent
of the 30-day rate on commercial paper placed on behalf of issuers whose
corporate bonds are rated "AA" by S&P, or the equivalent of such rating by
S&P, as such 30-day rate is made available on a discount basis or otherwise by
the Federal Reserve Bank of New York for the Business Day immediately
preceding such date of determination, or (ii) if the Federal Reserve Bank of
New York does not make available any such rate, then the arithmetic average of
the interest equivalent of the 30-day rate on commercial paper placed on
behalf of such issuers, as quoted to the Auction Agent on a discount basis or
otherwise by the Commercial Paper Dealers, as of the close of business on the
Business Day immediately preceding the date of determination. If, at the time
quotations are required, any Commercial Paper Dealer does not quote a
commercial paper rate required to determine the "`AA' Composite Commercial
Paper Rate," or if less than three Commercial Paper Dealers are then serving
as such for any reason, the "`AA' Composite Commercial Paper Rate" shall be
determined on the basis of such quotation or quotations furnished by the
Commercial Paper Dealer or Commercial Paper Dealers then serving as such and
providing a quotation. For purposes of this definition, the "interest
equivalent" of a rate stated on a discount basis (a "discount rate") for
commercial paper of a given day's maturity shall be equal to the product of
(a) 100, times (b) the quotient (rounded upward to the next higher .00001) of
(1) the discount rate (expressed in decimals) divided by (2) the difference
between (A) 1.00, and (B) a fraction, the numerator of which shall be the
product of the discount rate (expressed in decimals) times the number of days
from (and including) the date of determination to, but excluding, the date on
which such commercial paper matures, and the denominator of which shall be
360.
"Account" shall mean any of the accounts created within the Funds
established by the Indenture.
"Accountant" shall mean Eide Helmeke PLLP, Certified Public Accountants,
Aberdeen, South Dakota, or any other registered or certified public accountant
or firm of such accountants selected and paid by the Corporation,
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who is Independent and not under the domination of the Corporation, but who
may be regularly retained to make annual or similar audits of the books or
records of the Corporation.
"Acting Beneficiaries Upon Default" shall mean:
(a) at any time that any Senior Obligations are Outstanding:
(i) with respect to directing the Trustee to accelerate
the maturity of Outstanding Notes as a result of an Event of
Default (other than an Event of Default described in paragraph (L)
under "Summary of the Indenture -- Events of Default"): (x) the
Holders of a majority in aggregate Principal Amount of Senior Notes
Outstanding; or (y) (unless the Trustee shall, in its sole
discretion, determine that acceleration of the maturity of the
Outstanding Notes is not in the overall interest of the Senior
Beneficiaries) any Other Senior Beneficiary;
(ii) with respect to directing the Trustee to accelerate
the maturity of the Outstanding Notes as a result of an Event of
Default described in paragraph (L) under "Summary of the Indenture
-- Events of Default": (x) the Holders of 100% in aggregate
Principal Amount of Senior Notes Outstanding; or (y) (unless the
Trustee shall, in its sole discretion, determine that acceleration
of the maturity of the Outstanding Notes is not in the overall
interest of the Senior Beneficiaries) all Other Senior
Beneficiaries;
(iii) with respect to requesting the Trustee to exercise
one or more of the rights and powers conferred by the Indenture,
directing the method and place of conducting proceedings to be
taken in connection with the enforcement of the terms and
conditions of the Indenture and requiring the Trustee to waive
Events of Default: (x) the Holders of a majority in aggregate
Principal Amount of the Senior Notes Outstanding, unless the
Trustee shall have received or shall thereafter receive conflicting
requests or directions from one or more Other Senior Beneficiaries;
or (y) any Other Senior Beneficiary, unless the Trustee shall, in
its sole discretion, determine that the requested action is not in
the overall interest of the Senior Beneficiaries or shall have
received or shall thereafter receive conflicting requests or
directions from one or more Other Senior Beneficiaries or the
Holders of a majority in aggregate Principal Amount of the Senior
Notes Outstanding; and
(iv) with respect to all other matters under the
Indenture, the Holders of a majority in aggregate Principal Amount
of Senior Notes Outstanding or any Other Senior Beneficiary;
(b) at any time that no Senior Obligations are Outstanding but
Subordinate Obligations are Outstanding:
(i) with respect to directing the Trustee to accelerate
the maturity of Outstanding Notes as a result of an Event of
Default (other than an Event of Default described in paragraph (L)
under "Summary of the Indenture -- Events of Default" below): (x)
the Holders of a majority in aggregate Principal Amount of
Subordinate Notes Outstanding; or (y) (unless the Trustee shall, in
its sole discretion, determine that acceleration of the maturity of
the Outstanding Notes is not in the overall interest of the
Subordinate Beneficiaries) any Other Subordinate Beneficiary;
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(ii) with respect to directing the Trustee to accelerate
the maturity of the Outstanding Notes as a result of an Event of
Default described in paragraph (L) under "Summary of the Indenture
-- Events of Default": (x) the Holders of 100% in aggregate
Principal Amount of Subordinate Notes Outstanding; or (y) (unless
the Trustee shall, in its sole discretion, determine that
acceleration of the maturity of the Outstanding Notes is not in the
overall interest of the Subordinate Beneficiaries) all Other
Subordinate Beneficiaries;
(iii) with respect to requesting the Trustee to exercise
one or more of the rights and powers conferred by the Indenture,
directing the method and place of conducting proceedings to be
taken in connection with the enforcement of the terms and
conditions of the Indenture and requiring the Trustee to waive
Events of Default, (x) the Holders of a majority in aggregate
Principal Amount of the Subordinate Notes Outstanding, unless the
Trustee shall have received or shall thereafter receive conflicting
requests or directions from one or more Other Subordinate
Beneficiaries; or (y) any Other Subordinate Beneficiary, unless the
Trustee shall, in its sole discretion, determine that the requested
action is not in the overall interest of the Subordinate
Beneficiaries or shall have received or shall thereafter receive
conflicting requests or directions from one or more Other
Subordinate Beneficiaries or the Holders of a majority in aggregate
Principal Amount of the Subordinate Notes Outstanding; and
(iv) with respect to all other matters under the
Indenture, the Holders of a majority in aggregate Principal Amount
of Subordinate Notes Outstanding or any Other Subordinate
Beneficiary; and
(c) at any time that no Senior Obligations are Outstanding and no
Subordinate Obligations are Outstanding, the Holders of a majority in
aggregate Principal Amount of Class C Notes Outstanding.
"Additional Notes" shall have the meaning assigned thereto on page 4 of
this Prospectus.
"Administrative Cost and Note Fee Rate" shall mean a rate per annum equal
to the sum of (i) 1.275%, (ii) the Auction Agent fee rate (initially 0.025%,
but subject to change in accordance with the provisions of the Auction Agent
Agreement), and (iii) the Broker-Dealer fee rate (initially 0.25%, but subject
to change in accordance with the provisions of the Auction Agent Agreement).
"Administrative Expenses" shall mean the Corporation's actual expenses,
excluding Note Fees but including Servicing Fees and any other expenses of the
Corporation incurred in connection with the servicing of Financed Student
Loans, of carrying out and administering its powers, duties and functions
under (1) its articles of incorporation, its bylaws, the Student Loan Purchase
Agreements, any Servicing Agreement, the Contract of Insurance, the Guarantee
Agreements, the Program, the Higher Education Act or any requirement of the
laws of the United States or the Statutes with respect to the Program, as such
powers, duties and functions relate to Financed Student Loans, (2) any Swap
Agreements and any Credit Enhancement Facilities (other than any amounts
payable thereunder which constitute Other Indenture Obligations), (3) any
Remarketing Agreement, Depositary Agreement, Auction Agent Agreement or
Broker-Dealer Agreement, and (4) the Indenture. Such expenses may include,
without limiting the generality of the foregoing, salaries, supplies,
utilities, mailing, labor, materials, office rent, maintenance, furnishings,
equipment, machinery, telephones, travel expenses, insurance premiums, and
legal, accounting, management, consulting and banking services and expenses,
and payments for pension, retirement, health and hospitalization and life and
disability insurance benefits; but shall not include (i) debt service on the
Notes or any other bonds, notes or other evidences of indebtedness of the
Corporation, (ii) amounts payable under any
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Other Indenture Obligations or (iii) Costs of Issuance or the fees, costs or
expenses of the Corporation with respect to any other bonds, notes or
indebtedness of the Corporation.
"After-Tax Equivalent" shall mean, with respect to a series of Tax Exempt
Series 1998-1 Senior Notes, the interest rate per annum equal to the product
of (i) 1.00 minus the Statutory Corporate Tax Rate and (ii) the "AA" Composite
Commercial Paper Rate.
"Aggregate Value" shall mean on any calculation date the sum of the
Values of all assets of the Trust Estate, less moneys in any Fund or Account
which the Corporation is then entitled to receive for deposit into the Rebate
Fund but has not yet removed from the Trust Estate, and less any funds to be
used to pay Costs of Issuance unless, under the provisions of a Supplemental
Indenture, such funds are not to be applied to the payment of Costs of
Issuance to the extent the Senior Asset Requirement would not be met after
such payment.
"All Hold Rate" shall mean (i) with respect to a series of Tax Exempt
Auction Rate Series 1998-1 Senior Notes, the interest rate per annum equal to
85% (as such percentage may be adjusted pursuant to the provisions of the
First Supplemental Indenture described under "Auction of the Auction Rate
Series 1998-1 Senior Notes -- Changes in Auction Terms -- Changes in
Percentages Used in Determining All Hold Rate, Maximum Auction Rate and
Non-Payment Rate with respect to the Tax Exempt Auction Rate Series 1998-1
Senior Notes") of the lesser of (a) the After-Tax Equivalent and (b) the
Index; provided that in no event shall the All Hold Rate be greater than the
Maximum Auction Rate, and (ii) with respect to a series of Taxable Auction
Rate Series 1998-1 Senior Notes, One-Month LIBOR less .20%.
"Applicable Percentage" shall mean, with respect to a series of Tax
Exempt Auction Rate Series 1998-1 Senior Notes, the percentage determined (as
such percentage may be adjusted pursuant to the provisions of the First
Supplemental Indenture described under "Auction of the Auction Rate Series
1998-1 Senior Notes -- Changes in Auction Terms -- Changes in Percentages Used
in Determining All Hold Rate, Maximum Auction Rate and Non-Payment Rate with
respect to the Tax Exempt Auction Rate Series 1998-1 Senior Notes") based on
the ratings of Moody's and Fitch of the Series 1998-1 Senior Notes as set
forth below:
<TABLE>
<CAPTION>
Moody's Fitch's
Credit Rating Credit Rating Applicable Percentage
------------- ------------- ---------------------
<S> <C> <C>
"Aaa" "AAA" 175%
"Aa" "AA" 175%
"A" "A" 175%
"Baa" "BBB" 200%
Below "Baa" Below "BBB" 265%
</TABLE>
provided that if the Tax Exempt Auction Rate Series 1998-1 Senior Notes are
not then rated by both Moody's and Fitch, the "Applicable Percentage" shall be
265%. In the event that one such Rating Agency has assigned a lower credit
rating to the Tax Exempt Auction Rate Series 1998-1 Senior Notes than the
other Rating Agency, the "Applicable Percentage" shall be based upon such
lower credit rating. All ratings referred to above shall be without regard to
the gradations within each rating category. For purposes of the Auction Agent
and the Auction Procedures, the ratings referred to in this definition shall
be the last ratings of which the Auction Agent shall have been given notice
pursuant to the Auction Agent Agreement.
"Assistance Fund" shall have the meaning assigned thereto on page 100 of
this Prospectus.
"Auction" shall mean the implementation of the Auction Procedures on an
Auction Date.
"Auction Agent" shall mean (i) with respect to the Auction Rate Series
1998-1 Senior Notes, Bankers Trust Company, as the initial Auction Agent under
the initial Auction Agent Agreement, unless and until a substitute
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Auction Agent Agreement becomes effective, after which "Auction Agent" shall
mean the substitute Auction Agent, and (ii) with respect to any other series
of Notes, any bank, national banking association or trust company designated
as such with respect to such Notes pursuant to the provisions of a
Supplemental Indenture, and its successor or successors, and any bank,
national banking association or trust company at any time substituted in its
place pursuant to such Supplemental Indenture.
"Auction Agent Agreement" shall mean (i) with respect to the Tax Exempt
Auction Rate Series 1998-1 Senior Notes, the Auction Agent Agreement (Tax
Exempt Auction Rate Series 1998-1 Notes), dated as of February 1, 1998, among
the Corporation, the Trustee and Bankers Trust Company, unless and until a
substitute Auction Agent Agreement is entered into, after which "Auction Agent
Agreement" shall mean such substitute Auction Agent Agreement, including any
supplement thereto or amendment thereof entered into in accordance with the
provisions thereof, (ii) with respect to the Taxable Auction Rate Series
1998-1 Senior Notes, the Auction Agent Agreement (Taxable Auction Rate Series
1998-1 Notes), dated as of February 1, 1998, among the Corporation, the
Trustee and Bankers Trust Company, unless and until a substitute Auction Agent
Agreement is entered into, after which "Auction Agent Agreement" shall mean
such substitute Auction Agent Agreement, including any supplement thereto or
amendment thereof entered into in accordance with the provisions thereof, and
(iii) with respect to any other series of Notes, an agreement among an Auction
Agent, the Trustee and the Corporation setting forth the rights and
obligations of the Auction Agent acting in such capacity with respect to such
Notes under the Indenture and the related Supplemental Indenture, including
any supplement thereto or amendment thereof entered into in accordance with
the provisions thereof.
"Auction Date" shall have the meaning assigned thereto on page 124 of
this Prospectus.
"Auction Period" shall mean the Interest Period applicable to the Auction
Rate Series 1998-1 Senior Notes, which Auction Period (after the Initial
Interest Period for each such series) initially shall consist generally of 35
days (in the case of Tax Exempt Auction Rate Series 1998-1 Senior Notes) or 28
days (in the case of Taxable Auction Rate Series 1998-1 Senior Notes), as the
same may be adjusted pursuant to the provisions of the First Supplemental
Indenture described under "Auction of the Auction Rate Series 1998-1 Senior
Notes -- Changes in Auction Terms -- Changes in Auction Period or Periods".
"Auction Period Adjustment" shall have the meaning assigned thereto on
page 133 of this Prospectus.
"Auction Procedures" shall mean the procedures described under "Auction
of the Auction Rate Series 1998-1 Senior Notes" by which the Auction Rate is
determined with respect to the Auction Rate Series 1998-1 Senior Notes.
"Auction Rate" shall mean the rate of interest per annum that results
from implementation of the Auction Procedures and is determined with respect
to each series of Auction Rate Series 1998-1 Senior Notes as described under
"Auction of the Auction Rate Series 1998-1 Senior Notes".
"Auction Rate Series 1998-1 Senior Note Interest Rate" shall mean the
rate of interest per annum borne by a series of Auction Rate Series 1998-1
Senior Notes during the Initial Interest Period for such series and each
Interest Period thereafter, including, without limitation, the Auction Rate
Series 1998-1 Senior Note Initial Interest Rate and the interest rate for such
series for each Auction Period determined in accordance with the Auction
Procedures and other provisions of the First Supplemental Indenture; provided,
however, that in the event of a Payment Default with respect to a series, the
Auction Rate Series 1998-1 Senior Note Interest Rate for such series shall
equal the Non-Payment Rate; and provided, further, that such Auction Rate
Series 1998-1 Senior Note Interest Rate shall in no event exceed the Auction
Rate Series 1998-1 Senior Note Interest Rate Limitation.
"Auction Rate Series 1998-1 Senior Note Initial Interest Rate" shall mean
the interest rate to be borne by a series of Auction Rate Series 1998-1 Senior
Notes for the Initial Interest Period therefor, as set forth in the First
Supplemental Indenture.
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"Auction Rate Series 1998-1 Senior Note Interest Rate Limitation" shall
mean a rate per annum equal to 14%, in the case of the Tax Exempt Auction Rate
Series 1998-1 Senior Notes, or 18%, in the case of the Taxable Auction Rate
Series 1998-1 Senior Notes, or, if less than such rate, the highest rate the
Corporation may legally pay, from time to time, as interest on such Auction
Rate Series 1998-1 Senior Notes.
"Auction Rate Series 1998-1 Senior Notes" shall mean, collectively, the
Tax Exempt Auction Rate Series 1998-1 Senior Notes and the Taxable Auction
Rate Series 1998-1 Senior Notes.
"Authenticating Agent," when used with respect to a series of Notes,
shall mean any bank or trust company appointed for the purpose of receiving,
authenticating and delivering Notes of that series in connection with
transfers, exchanges and registrations as provided in the Indenture.
"Authorized Denominations" shall mean (i) with respect to the Auction
Rate Series 1998-1 Notes and the Taxable LIBOR Rate Series 1998-1 Notes,
$100,000 and any multiple thereof, and (ii) with respect to the Tax Exempt
Fixed Rate Series 1998-1 Senior Notes and the Tax Exempt Fixed Rate Series
1998-1 Subordinate Notes, $5,000 and any multiple thereof.
"Authorized Officer", when used with reference to the Corporation, shall
mean the Chairman of the Board, the president, any vice president, the
secretary or other person designated in writing to the Trustee from time to
time by the Board of Directors.
"Available Auction Rate Series 1998-1 Senior Notes" shall have the
meaning assigned thereto on page 128 of this Prospectus.
"Balance", when used with reference to any Account or Fund, shall mean
the aggregate sum of all assets standing to the credit of such Account or
Fund, including, without limitation, Investment Securities computed at the
Value of Investment Securities; Notes purchased with moneys standing to the
credit of such Fund or Account computed at the Principal Amount of such Notes;
Financed Student Loans computed at the Principal Balance thereof; and lawful
money of the United States; provided, however, that (1) the Balance of the
Interest Account shall not include amounts standing to the credit thereof
which are being held therein for (A) the payment of past due and unpaid
interest on Notes, or (B) the payment of interest on Notes that are deemed no
longer Outstanding as a result of the defeasance thereof, and (2) the Balances
of the Principal Account and the Retirement Account shall not include amounts
standing to the credit thereof which are being held therein for the payment of
principal of or premium, if any, on Notes which are deemed no longer
Outstanding in accordance with the provisions of the Indenture.
"Beneficial Owner" shall have the meaning assigned thereto on page 47 of
this Prospectus.
"Beneficiaries" shall mean, collectively, all Senior Beneficiaries, all
Subordinate Beneficiaries and all Holders of any Outstanding Class C Notes.
"Benefit Plans" shall have the meaning assigned thereto on page 170 of
this Prospectus.
"Bid" shall have the meaning assigned thereto on page 126 of this
Prospectus.
"Bid Auction Rate" shall have the meaning assigned thereto on page 128 of
this Prospectus.
"Bid Orders" shall have the meaning assigned thereto on page 120 of this
Prospectus.
"Bidder" shall have the meaning assigned thereto on page 126 of this
Prospectus.
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"Board Resolution" shall mean a copy of a resolution certified by the
secretary or an assistant secretary of the Corporation to have been duly
adopted by the Board of Directors of the Corporation and to be in full force
and effect on the date of such certification, and delivered to the Trustee.
"Bond Counsel" shall mean any Counsel of nationally recognized standing
in the field of law relating to municipal bonds.
"Book-Entry Form" or "Book-Entry System" shall mean a form or system
under which (i) the beneficial right to principal and interest may be
transferred only through a book entry, (ii) physical securities in registered
form are issued only to a Securities Depository or its nominee as registered
holder, with the securities "immobilized" to the custody of the Securities
Depository, and (iii) the book entry is the record that identifies the owners
of beneficial interests in that principal and interest.
"Broker-Dealer" shall mean (i) with respect to the Auction Rate Series
1998-1 Senior Notes, Smith Barney Inc. or any other broker or dealer (each as
defined in the Exchange Act), commercial bank or other entity permitted by law
to perform the functions required of a Broker-Dealer set forth in the Auction
Procedures with respect to the Auction Rate Series 1998-1 Senior Notes that
(a) is a Participant (or an affiliate of a Participant), (b) has been
appointed as such by the Corporation pursuant to the provisions of the First
Supplemental Indenture and (c) has entered into a Broker-Dealer Agreement that
is in effect on the date of reference, and (ii) with respect to any other
series of Notes, any broker or dealer (each as defined in the Exchange Act),
commercial bank or other entity permitted by law to perform the functions
required of a broker-dealer set forth in the auction procedures relating to
such Notes, designated as such with respect to such Notes pursuant to the
provisions of a Supplemental Indenture, and its successor or successors, and
any broker or dealer, commercial bank or other entity at any time substituted
in its place pursuant to such Supplemental Indenture.
"Broker-Dealer Agreement" shall mean (i) with respect to the Tax Exempt
Auction Rate Series 1998-1 Senior Notes, the Broker-Dealer Agreement (Tax
Exempt Auction Rate Series 1998-1 Notes), dated as of February 1, 1998,
between Smith Barney Inc., as Broker-Dealer, and Bankers Trust Company, as
Auction Agent, and each other agreement between the Auction Agent and a
Broker-Dealer, and approved by the Corporation, pursuant to which the
Broker-Dealer agrees to participate in Auctions as set forth in the Auction
Procedures with respect to the Tax Exempt Auction Rate Series 1998-1 Senior
Notes, including any supplement thereto or amendment thereof entered into in
accordance with the provisions thereof, (ii) with respect to the Taxable
Auction Rate Series 1998-1 Senior Notes, the Broker-Dealer Agreement (Taxable
Auction Rate Series 1998-1 Notes), dated as of February 1, 1998, between Smith
Barney Inc., as Broker-Dealer, and Bankers Trust Company, as Auction Agent,
and each other agreement between the Auction Agent and a Broker-Dealer, and
approved by the Corporation, pursuant to which the Broker-Dealer agrees to
participate in Auctions as set forth in the Auction Procedures with respect to
the Taxable Auction Rate Series 1998-1 Senior Notes, including any supplement
thereto or amendment thereof entered into in accordance with the provisions
thereof, and (iii) with respect to any other series of Notes, an agreement
between an Auction Agent and a Broker-Dealer, and approved by the Corporation,
setting forth the rights and obligations of the Broker-Dealer acting in such
capacity with respect to such Notes under the Indenture and the related
Supplemental Indenture, including any supplement thereto or amendment thereof
entered into in accordance with the provisions thereof.
"Budgeted Administrative Expenses" shall mean, with respect to each
Fiscal Year, subject to the provisions of the Indenture (see "Summary of the
Indenture -- Covenants -- Limitations on Administrative Expenses and Note
Fees"), an amount of Administrative Expenses budgeted by the Corporation for
such Fiscal Year, as evidenced by a Board Resolution adopted prior to the
commencement of such Fiscal Year; provided that such Budgeted Administrative
Expenses shall not exceed (and, in the absence of a Board Resolution with
respect thereto, shall be assumed to be equal to) the amount of Administrative
Expenses permitted to be paid, or reimbursed to the Corporation, from the
Administration Fund pursuant to any Supplemental Indenture providing for the
issuance of a series of Notes.
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"Business Day" shall mean, except as otherwise provided in a Supplemental
Indenture, a day of the year other than a Saturday, a Sunday or a day on which
banks located in the city in which the Principal Office of the Trustee is
located, in the city in which the Principal Office of any Authenticating Agent
is located, in the city in which the Principal Office of any Paying Agent
(other than the Trustee) is located, in the city in which the Principal Office
of any Auction Agent is located, or the city in which the Principal Office of
any Depositary is located, are required or authorized by law to remain closed,
or on which The New York Stock Exchange is closed.
"Buyer's Broker-Dealer" shall have the meaning assigned thereto on page
136 of this Prospectus.
"Carry-Over Amount" shall mean (i) with respect to a Taxable Auction Rate
Series 1998-1 Senior Note, the excess, if any, of (a) the amount of interest
on such Note that would have accrued with respect to the related Interest
Period at the Auction Rate over (b) the amount of interest on such Note
actually accrued with respect to such Interest Period based on the Net Loan
Rate, together with the unpaid portion of any such excess from prior Interest
Periods, (ii) with respect to a Taxable LIBOR Rate Series 1998-1 Note, the
excess, if any, of (a) the amount of interest on such Note that would have
accrued with respect to the related Interest Period at the Taxable LIBOR Rate
Series 1998-1 Note Interest Rate over (b) the amount of interest on such Note
actually accrued with respect to such Interest Period based on the Net Loan
Rate, together with the unpaid portion of any such excess from prior Interest
Periods, and (iii) if and to the extent specifically provided for as such in a
Supplemental Indenture with respect any other series of Variable Rate Notes,
the amount, if any, by which (a) the interest payable on such series with
respect to a given interest period is exceeded by (b) the interest that
otherwise would have been payable with respect to such interest period but for
a limitation on the interest rate for such interest period based upon the
anticipated return on Financed Student Loans, together with the unpaid portion
of any such excess from prior interest periods. To the extent required by a
Supplemental Indenture providing for any Carry-Over Amount (including, in the
case of the Taxable Auction Rate Series 1998-1 Senior Notes and the Taxable
LIBOR Rate Series 1998-1 Notes, the First Supplemental Indenture), interest
will accrue on such Carry-Over Amount until paid. Any reference to
"principal" or "interest" in the Indenture and in the related Notes shall not
include, within the meanings of such words, any Carry-Over Amount or any
interest accrued on any Carry-Over Amount.
"Cash Flow Projection" shall mean a projection as to future revenues and
cash flow through the final Stated Maturity of the Outstanding Notes based
upon existing facts and, to the extent not so based, upon assumptions accepted
by each Rating Agency (including, without limitation, assumptions relating to
variable rates of interest under Swap Agreements and any Notes) and the
following assumptions: (1) a thirty-day lag in receipt of borrower payments,
and a sixty-day lag in receipt of federal payments, with respect to Financed
Student Loans; (2) no prepayments of principal of Financed Student Loans; (3)
bond-equivalent rates of 91-day or 52-week U.S. Treasury bills (for purposes
of determining returns on Financed Student Loans that are based upon such
rates or averages thereof) equal to known rates (or averages) for such time as
they are known, and thereafter equal to 5.20% per annum; and (4) a
reinvestment rate of 5.20% per annum. The foregoing assumptions may, pursuant
to a Supplemental Indenture (see "Supplemental Indentures" below), be replaced
with or supplemented by such other reasonable assumptions as will not result
in the withdrawal or reduction of the then-current rating of any of the
Outstanding Unenhanced Notes, as evidenced by written confirmation to that
effect from each Rating Agency or, if no Unenhanced Notes are then Outstanding
but Other Indenture Obligations are Outstanding, such other assumptions as are
acceptable to the Other Beneficiaries entitled to such Other Indenture
Obligations, as evidenced in writing to the Trustee by each such Other
Beneficiary.
"Cede & Co." shall have the meaning assigned thereto on page 6 of this
Prospectus.
"Cedel" shall have the meaning assigned thereto on page 48 of this
Prospectus.
"Cedel Participants" shall have the meaning assigned thereto on page 48
of this Prospectus.
"Change of Tax Law" shall mean, with respect to the Tax Exempt Auction
Rate Series 1998-1 Senior Notes, any amendment to the Code or other statute
enacted by the Congress of the United States, or any temporary,
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proposed or final regulation promulgated by the United States Treasury, after
the date of issuance of the Tax Exempt Auction Rate Series 1998-1 Senior
Notes, which (i) changes or would change any deduction, credit or other
allowance allowable in computing liability for any federal tax with respect
to, or (ii) imposes or would impose or reduces or would reduce or increases or
would increase any federal tax (including, but not limited to, preference or
excise taxes) upon, any interest earned by the owner of a Tax Exempt Series
1998-1 Senior Note the interest on which is excludable from gross income for
federal income tax purposes under Section 103 of the Code.
"Claims Rate" shall have the meaning assigned thereto on page 98 of this
Prospectus.
"Class C Notes" shall mean any Notes designated in a Supplemental
Indenture as Class C Notes, which are secured under the Indenture on a basis
subordinate to any Senior Obligations and any Subordinate Obligations.
"Closing Cash Flow Projection" shall mean the Cash Flow Projection
delivered in conjunction with the issuance of the Series 1998-1 Notes.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commercial Paper Dealer" shall mean Smith Barney Inc., its successors
and assigns, and any other commercial paper dealer appointed pursuant to the
provisions of the First Supplemental Indenture described under "Auction of the
Auction Rate Series 1998-1 Senior Notes -- Auction Procedures -- General".
"Commission" shall have the meaning assigned thereto on page 6 of this
Prospectus.
"Commonwealth" shall have the meaning assigned thereto on page 99 of this
Prospectus.
"Consolidation Loan" shall mean a Student Loan made pursuant to Section
428C of the Higher Education Act.
"Contract of Insurance" shall mean the Contract of Federal Loan
Insurance, dated January 28, 1981, entered into between the Trustee and the
Secretary of Education, and any other document evidencing the eligibility of
the Trustee to receive payments of principal and interest from the Secretary
of Education with respect to Insured Loans Financed hereunder (or, in the
event a co-trustee has been appointed pursuant to the Indenture, such Contract
of Federal Loan Insurance and other documentation relating to such
co-trustee), and any amendment thereof which is hereafter entered into.
"Cooperative" shall have the meaning assigned thereto on page 49 of this
Prospectus.
"Corporation" shall have the meaning assigned thereto on pages 1 and 7 of
this Prospectus.
"Corporation Student Loan Purchase Agreements" shall have the meaning
assigned thereto on page 74 of this Prospectus.
"Corporation Swap Payment" shall mean a payment due to a Swap
Counterparty from the Corporation pursuant to the applicable Swap Agreement
(including, but not limited to, payments in respect of any early termination
of such Swap Agreement).
"Corporation Trusts" shall have the meaning assigned thereto on page 39
of this Prospectus.
"Costs of Issuance" shall mean all items of expense directly or
indirectly payable by or reimbursable to the Corporation and related to the
authorization, sale and issuance of a series of Notes, including, but not
limited to, printing costs, costs of preparation and reproduction of
documents, filing fees, initial fees and charges of the Trustee, any
Authenticating Agent, any Deposit Agent, any Remarketing Agent, any
Depositary, any Auction Agent
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or any Broker-Dealer, legal fees and charges, fees and disbursements of
underwriters, consultants and professionals, underwriters' discount, costs of
credit ratings, fees and charges for preparation, execution, transportation
and safekeeping of such Notes, other costs incurred by the Corporation in
anticipation of the issuance of such Notes and any other cost, charge or fee
in connection with the issuance of such Notes.
"Counsel" shall mean a person, or firm of which such a person is a
member, authorized in any state to practice law.
"Counterparty Swap Payment" shall mean a payment due to or received by
the Corporation from a Swap Counterparty pursuant to a Swap Agreement
(including, but not limited to, payments in respect of any early termination
of such Swap Agreement).
"Credit Enhancement Facility" shall mean, if and to the extent provided
for in a Supplemental Indenture (see "Summary of the Indenture --
Supplemental Indentures"), with respect to Notes of one or more series, an
insurance policy insuring, or a letter of credit or surety bond providing a
direct or indirect source of funds for, the timely payment of principal of and
interest on such Notes (but not necessarily principal due upon acceleration
thereof), or any or all of the credit facilities, reimbursement agreements,
standby purchase agreements and the like pertaining to Notes issued with a
tender right granted to or tender obligation imposed on the Holder thereof.
"Credit Facility Provider" shall mean, if and to the extent provided for
in a Supplemental Indenture (see "Summary of the Indenture -- Supplemental
Indentures"), any institution or institutions engaged by the Corporation
pursuant to a Credit Enhancement Facility to provide credit enhancement or
liquidity for the payment of the principal of and interest on, or for the
Corporation's obligation to repurchase or redeem, Notes of one or more series.
"Date of Issuance" shall have the meaning assigned thereto on page 16 of
this Prospectus.
"Debt Service" shall mean, as of any particular date and with respect to
any particular period, the aggregate of the moneys to be paid or set aside on
such date or during such period for the payment (or retirement) of the
principal of, premium, if any, and interest on Notes, after giving effect to
any Corporation Swap Payments and Counterparty Swap Payments.
"Deemed Tendered" shall mean, with respect to any Note, a Note deemed
tendered in accordance with the provisions of the Supplemental Indenture
providing for the issuance thereof.
"Defaulted Interest" shall have the meaning assigned thereto on page 50
of this Prospectus.
"Deferment Periods" shall have the meaning assigned thereto on page 87 of
this Prospectus.
"Demand Note" shall mean a Note required to be purchased by or on behalf
of the Corporation, at the option of the Holder thereof, upon receipt of a
purchase demand.
"Department of Education" shall have the meaning assigned thereto on page
19 of this Prospectus.
"Deposit Agent" shall mean any bank or banking association having trust
powers or trust company designated as such pursuant to the Indenture and its
successor or successors and any other bank or banking association having trust
powers or trust company at any time substituted in its place pursuant to the
Indenture.
"Depositary" shall mean, with respect to any series of Notes, any
commercial bank or banking association having trust powers or trust company
designated as such with respect to such Notes pursuant to the provisions of
the Indenture and its successor or successors and any other commercial bank or
banking association having trust powers or trust company at any time
substituted in its place pursuant to the Indenture.
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"Depositary Agreement" shall mean an agreement among a Depositary, the
Trustee, the Corporation, any Remarketing Agent and/or any related Credit
Facility Provider setting forth the rights and obligations of the Depositary
acting in such capacity under the Indenture, including any supplement thereto
or amendment thereof entered into in accordance with the provisions thereof.
"Depositories" shall have the meaning assigned thereto on page 46 of this
Prospectus.
"Disqualified Person" shall have the meaning assigned thereto on page 170
of this Prospectus.
"DOE Data Books" shall have the meaning assigned thereto on page 102 of
this Prospectus.
"DTC" shall have the meaning assigned thereto on page 6 of this
Prospectus.
"DTC Participant" shall have the meaning assigned thereto on page 46 of
this Prospectus.
"EAC" shall have the meaning assigned thereto on pages 17 and 95 of this
Prospectus.
"EASCI" shall have the meaning assigned thereto on page 99 of this
Prospectus.
"Educational Loan Assistance Fund" shall have the meaning assigned
thereto on page 99 of this Prospectus.
"Effective Interest Rate" shall mean, with respect to any Financed
Student Loan, the interest rate per annum borne by such Financed Student Loan
after giving effect to all applicable interest subsidy payments, Special
Allowance Payments, rebate fees on Consolidation Loans and reductions pursuant
to borrower incentives. For this purpose, the Special Allowance Payment rate
shall be computed based upon the average of the bond equivalent rates of
91-day United States Treasury Bills auctioned during that portion of the then
current calendar quarter which ends on the date as of which the Effective
Interest Rate is determined.
"Eligible Borrower" shall mean a borrower who is eligible under the
Higher Education Act to be the obligor of a loan for financing a program of
post-secondary education, including a borrower who is eligible under the
Higher Education Act to be an obligor of a Plus Loan.
"Eligible Carry-Over Make-Up Amount" shall mean, (i) with respect to each
Interest Period relating to a series of Taxable Auction Rate Series 1998-1
Senior Notes as to which, as of the first day of such Interest Period, there
is any unpaid Carry-Over Amount, an amount equal to the lesser of (a) interest
computed on the principal balance of such series in respect of such Interest
Period at a per annum rate equal to the excess, if any, of the Net Loan Rate
over the applicable Auction Rate Series 1998-1 Senior Note Interest Rate, and
(b) the aggregate Carry-Over Amount remaining unpaid as of the first day of
such Interest Period together with interest accrued and unpaid thereon through
the end of such Interest Period, and (ii) with respect to each Interest Period
relating to a series of Taxable LIBOR Rate Series 1998-1 Notes as to which, as
of the first day of such Interest Period, there is any unpaid Carry-Over
Amount, an amount equal to the lesser of (a) interest computed on the
principal balance of such series in respect of such Interest Period at a per
annum rate equal to the excess, if any, of the Net Loan Rate over the Series
1998-1 Note LIBOR-Based Rate, and (b) the aggregate Carry-Over Amount
remaining unpaid as of the first day of such Interest Period together with
interest accrued and unpaid thereon through the end of such Interest Period.
The Eligible Carry-Over Make-Up Amount shall be $0.00 for any Interest Period
with respect to which the Net Loan Rate equals or exceeds (1) the Auction Rate
Series 1998-1 Senior Note Interest Rate, in the case of a series of Taxable
Auction Rate Series 1998-1 Senior Notes, or (2) the Taxable LIBOR Rate Series
1998-1 Interest Rate, in the case of a series of Taxable LIBOR Rate Series
1998-1 Notes.
"Eligible Loan" shall mean: (A) a Student Loan which: (1) has been or
will be made to an Eligible Borrower for post-secondary education; (2) is
Guaranteed by a Guarantee Agency to the extent of not less than ninety-eight
percent (98%) of the principal thereof and all accrued interest thereon; (3)
is an "eligible loan" as
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defined in Section 438 of the Higher Education Act for purposes of receiving
Special Allowance Payments (other than Nonsubsidized Stafford Loans originally
financed by the Original Issuer); and (4) bears interest at a rate per annum
not less than or in excess of the applicable rate of interest provided by the
Higher Education Act, or such lesser rates as may be approved by each Rating
Agency; or (B) any other Student Loan if the Corporation shall have caused to
be provided to the Trustee: (1) written advice from each Rating Agency that
treating such type of loan as an Eligible Loan will not adversely affect any
rating or ratings then applicable to any of the Unenhanced Notes or, if no
Unenhanced Notes are then Outstanding but Other Indenture Obligations are
Outstanding, the Other Beneficiaries entitled to such Other Indenture
Obligations consent to the treatment of such type of loan as an Eligible Loan,
as evidenced in writing to the Trustee by each such Other Beneficiary, and (2)
a written opinion of Bond Counsel to the effect that treating such type of
loan as an Eligible Loan will not, under then existing law, affect the
exclusion from gross income for federal income tax purposes of interest on any
Tax-Exempt Notes then outstanding.
"Euroclear" shall have the meaning assigned thereto on page 49 of this
Prospectus.
"Euroclear Operator" shall have the meaning assigned thereto on page 49
of this Prospectus.
"Euroclear Participants" shall have the meaning assigned thereto on page
48 of this Prospectus.
"Event of Default" shall have the meaning assigned thereto on page 157 of
this Prospectus.
"Excess Earnings" shall mean, with respect to the Tax Exempt Series
1998-1 Notes and any other series of Tax-Exempt Notes, the amount, if any,
which, if applied to reduce the yield on all Student Loans Financed, in whole
or in part, with amounts allocated to such Notes, would be necessary to reduce
such yield to the yield on such Notes plus such additional spread as would not
cause such Notes to be "arbitrage bonds" under Section 148 of the Code.
"ERISA" shall have the meaning assigned thereto on page 169 of this
Prospectus.
"ERISA Plans" shall have the meaning assigned thereto on page 169 of this
Prospectus.
"Exchange Act" shall have the meaning assigned thereto on page 6 of this
Prospectus.
"Existing Holders" shall have the meaning assigned thereto on page 122 of
this Prospectus.
"FDIC" shall have the meaning assigned thereto on page 40 of this
Prospectus.
"Federal Direct Student Loan Program" means the program for providing
Student Loans established under Title IV, Part C of the Higher Education Act.
"Federal Family Education Loan Program" means the program for providing
Student Loans established under Title IV, Part B of the Higher Education
Act.
"Federal Reimbursement Contracts" shall mean any agreement between a
Guarantee Agency and the Secretary of Education, providing for the payment by
the Secretary of Education of amounts authorized to be paid pursuant to the
Higher Education Act, including (but not necessarily limited to) reimbursement
of amounts paid or payable upon defaulted Financed Student Loans and other
student loans guaranteed or insured by the Guarantee Agency and interest
subsidy payments to Holders of qualifying student loans guaranteed or insured
by the Guarantee Agency.
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"Financed", when used with respect to Student Loans or Eligible Loans,
shall mean Student Loans or Eligible Loans, as the case may be, acquired by
the Corporation with moneys in the Acquisition Fund or the Surplus Account,
any Eligible Loans received in exchange for Financed Student Loans upon the
sale thereof or substitution therefor in accordance with the Indenture and any
other Student Loans deemed to be "Financed" with moneys in the Acquisition
Fund and the Surplus Account pursuant to the Indenture, but does not include
Student Loans released from the lien of the Indenture and sold, as permitted
in the Indenture, to any purchaser, including a trustee for the holders of the
Corporation's bonds, notes or other evidences of indebtedness.
"First Supplemental Indenture" shall mean the First Supplemental
Indenture of Trust, dated as of February 1, 1998, between the Corporation and
the Trustee, setting forth the terms of the Series 1998-1 Notes.
"Fiscal Year" shall mean the fiscal year of the Corporation as
established from time to time.
"Fitch" shall mean Fitch IBCA, Inc., its successors and their assigns,
and, if such partnership shall be dissolved or liquidated or shall no longer
perform the functions of a securities rating agency, "Fitch" shall be deemed
to refer to any other nationally recognized securities rating agency
designated by the Trustee, at the written direction of the Corporation.
"Government Obligations" shall mean direct obligations of, or obligations
the full and timely payment of the principal of and interest on which are
unconditionally guaranteed by, the United States of America.
"Grace Periods" shall have the meaning assigned thereto on page 86 of
this Prospectus.
"Gramm-Rudman Law" shall have the meaning assigned thereto on page 93 of
this Prospectus.
"Guarantee" or "Guaranteed" shall mean, with respect to a Student Loan,
the insurance or guarantee by a Guarantee Agency, to the extent provided in
the Higher Education Act, of the principal of and accrued interest on such
Student Loan, and the coverage of such Student Loan by one or more Federal
Reimbursement Contracts providing, among other things, for reimbursement to
the Guarantee Agency for losses incurred by it on defaulted Financed Student
Loans insured or guaranteed by the Guarantee Agency to the extent provided in
the Higher Education Act.
"Guarantee Agency" shall mean (1) Education Assistance Corporation, and
its successors and assigns, including, without limitation, the Secretary of
Education, (2) Pennsylvania Higher Education Assistance Agency, and its
successors and assigns, including, without limitation, the Secretary of
Education, (3) United Student Aid Funds, Inc., and its successors and assigns,
including, without limitation, the Secretary of Education, (4) Student Loans
of North Dakota and its successors and assigns, including, without limitation,
the Secretary of Education, (5) Northstar Guarantee Inc., and its successors
and assigns, including, without limitation, the Secretary of Education, (6)
Great Lakes Higher Education Corporation, and its successors and assigns,
including, without limitation, the Secretary of Education, (7) Educational
Credit Management Corporation (formerly known as Transitional Guaranty Agency,
Inc.), and its successors and assigns, including, without limitation, the
Secretary of Education, (8) Iowa College Aid Commission, and its successors
and assigns, including, without limitation, the Secretary of Education, (9)
Missouri Coordinating Board for Higher Education, and its successors and
assigns, including, without limitation, the Secretary of Education, (10)
Illinois Student Aid Commission, and its successors and assigns, including,
without limitation, the Secretary of Education, (11) California Student Aid
Commission, and its successors and assigns, including, without limitation, the
Secretary of Education, or (12) any other state agency or private nonprofit
institution or organization which administers a Guarantee Program, subject to
confirmation of ratings on any Outstanding Unenhanced Notes or, if no
Unenhanced Notes are then Outstanding but Other Indenture Obligations are
Outstanding, consent of each Other Beneficiary holding such Outstanding Other
Indenture Obligations, as evidenced in writing to the Trustee by each such
Other Beneficiary.
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"Guarantee Agreements" shall mean (1) that certain Lender Agreement for
Guarantee of Student Loans With Federal Reinsurance, dated July 3, 1997, and
that certain Certificate of Comprehensive Insurance, dated September 12, 1997,
between the Trustee and Education Assistance Corporation, (2) that Lender
Agreement for Guarantee of Student Loans With Federal Reinsurance, dated
February 28, 1994, between the Trustee and Pennsylvania Higher Education
Assistance Agency, (3) that certain Agreement to Guarantee Loans, dated July
11, 1997, between the Trustee and United Student Aid Funds, Inc., (4) that
certain Lender Participation Agreement for Insurance, dated July 8, 1997,
between the Trustee and Student Loans of North Dakota, (5) that certain Lender
Agreement for Guarantee of Student Loans With Federal Reinsurance, dated July
15, 1997, between the Trustee and Northstar Guarantee Inc., (6) that certain
Student Loan Guaranty, dated July 15, 1997, between the Trustee and Great
Lakes Higher Education Corporation, (7) that certain Agreement for Payment on
Guarantee of Student Loans With Federal Reinsurance, dated December 15, 1994,
between the Trustee and Educational Credit Management Corporation (formerly
known as Transitional Guaranty Agency, Inc.), (8) that certain Holder
Agreement, dated July 16, 1997, between the Trustee and Illinois Student
Assistance Commission, (9) that certain Agreement to Guarantee Loans, dated
July 15, 1997, and that certain Agreement to Guarantee PLUS/SLS Loans, dated
July 15, 1997, between the Trustee and Iowa College Aid Commission, (10) that
certain Agreement to Guarantee Loans made by a Commercial Lender, dated July
10, 1997, that certain Agreement to Guarantee CLAS Program Loans made by a
Commercial Lender, dated July 10, 1997, and that certain Consolidation Loan
Program Lender Participation Agreement, dated July 6, 1997, Addendum to
Consolidation Loan Program Lender Participation Agreement, dated as of June
30, 1997, and Certificate of Comprehensive Insurance, dated July 17, 1997,
between the Trustee and California Student Aid Commission, (11) that certain
Agreement to Guarantee Stafford Loans Federal PLUS Loans Federal SLS Loans,
dated July 15, 1997 between the Trustee and Missouri Coordinating Board for
Higher Education, and (12) any other agreement between a Guarantee Agency and
the Trustee providing for the insurance or guarantee by such Guarantee Agency,
to the extent provided in the Higher Education Act, of the principal of and
accrued interest on Student Loans originated or acquired by the Trustee from
time to time, including any supplement thereto or amendment thereof entered
into in accordance with the provisions thereof and of the Indenture.
"Guarantee Fund" shall have the meaning assigned thereto on page 96 of
this Prospectus.
"Guarantee Payments" shall have the meaning assigned thereto on page 33
of this Prospectus.
"Guarantee Program" shall mean a Guarantee Agency's student loan
insurance program pursuant to which such Guarantee Agency guarantees or
insures Student Loans.
"Guaranteed Loan" shall mean a Student Loan which is Guaranteed.
"Higher Education Act" shall mean the Higher Education Act of 1965, as
amended or supplemented from time to time, and all regulations promulgated
thereunder.
"Hold Order" shall have the meaning assigned thereto on pages 120 and 125
of this Prospectus.
"Holder", when used with respect to a Note, shall mean the Person in
whose name such Note is registered in the Note Register maintained by the
Trustee.
"Independent", when used with respect to any specified Person, shall mean
such a Person who (i) is in fact independent; (ii) does not have any direct
financial interest or any material indirect financial interest in the
Corporation, other than the payment to be received under a contract for
services to be performed by such Person; and (iii) is not connected with the
Corporation as an official, officer, employee, promoter, underwriter, trustee,
partner, affiliate, subsidiary, director or Person performing similar
functions.
"Indenture" shall have the meaning assigned thereto on page 2 of this
Prospectus.
"Indenture Obligations" shall have the meaning assigned thereto on page
58 of this Prospectus.
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"Index" shall mean, with respect to a series of Tax Exempt Auction Rate
Series 1998-1 Senior Notes on any Interest Rate Determination Date, (i) for
Auction Periods of 60 days or less, the PSA Index, or, if such rate is not
published by PSA, the Index so determined by the Market Agent, which shall
equal the prevailing rate for bonds rated in the highest short-term rating
category by Moody's and Fitch in respect of issuers most closely resembling
the "high grade" component issuers selected by PSA that are subject to tender
by the holders thereof for purchase on not more than seven days' notice and
the interest on which is (a) variable on a weekly basis, (b) excludable from
gross income for federal income tax purposes, and (c) not subject to an
"alternative minimum tax" or similar tax under the Code, unless all tax-exempt
bonds are subject to such tax, and (ii) for Auction Periods of more than 60
days, the Index so determined by the Market Agent, which shall equal the
average yield on no less than three publicly offered securities selected by
the Market Agent which are offered at par, have substantially the same
underlying security, bear interest determined for approximately the same
period as the relevant Interest Period on the Tax Exempt Auction Rate Series
1998-1 Senior Notes, bear interest not subject to the alternative minimum tax,
and are rated no lower than "Aa" by Moody's or "AA" by Fitch. If the Index
cannot be determined as provided above, a comparable substitute index selected
by the Market Agent with the approval of an Authorized Officer of the
Corporation may be used.
"Indirect Participants" shall have the meaning assigned thereto on page
46 of this Prospectus.
"Insolvency Laws" shall have the meaning assigned thereto on page 37 of
this Prospectus.
"Initial Interest Period" shall mean, as to a series of Auction Rate
Series 1998-1 Senior Notes or Taxable LIBOR Rate Series 1998-1 Notes, the
period commencing on the date of issuance thereof and continuing through the
day immediately preceding the Initial Interest Rate Adjustment Date for such
series.
"Initial Interest Rate Adjustment Date" shall mean (i) with respect to
the Series 1998-1A Notes, March 26, 1998, (ii) with respect to the Series
1998-1B Notes, April 2, 1998, (iii) with respect to the Series 1998-1C Notes,
April 9, 1998, (iv) with respect to the Series 1998-1D Notes, April 16, 1998,
(v) with respect to the Series 1998-1E Notes, April 23, 1998, (vi) with
respect to the Series 1998-1G Notes, March 24, 1998, (vii) with respect to the
Series 1998-1H Notes, March 31, 1998 and (viii) with respect to the Taxable
LIBOR Rate Series 1998-1 Notes, March 2, 1998.
"In-State Loans" shall have the meaning assigned thereto on page 71 of
this Prospectus.
"Interest Payment Date" shall mean each regularly scheduled interest
payment date on the Notes which, except in the case of any series of Variable
Rate Notes (as to which such dates shall be specified in the Supplemental
Indenture providing for the issuance thereof), shall be each June 1 and
December 1 or, with respect to the payment of interest upon call for
redemption or acceleration of a Note, purchase of a Note by the Trustee on a
Mandatory Tender Date (to the extent such Mandatory Tender Date is designated
as an Interest Payment Date in the related Supplemental Indenture) or the
payment of Defaulted Interest, such dates on which such interest is payable
under the Indenture. The regularly scheduled interest payment dates on the
Series 1998-1 Notes shall be (i) with respect to a series of Taxable Auction
Rate Series 1998-1 Senior Notes, the Business Day immediately following the
expiration of the Initial Interest Period for such series and each related
Auction Period thereafter, (ii) with respect to a series of Taxable LIBOR Rate
Series 1998-1 Notes, the first Business Day of each calendar month, commencing
March 2, 1998, and (iii) with respect to the Tax Exempt Series 1998-1 Notes,
each June 1 and December 1, commencing June 1, 1998.
"Interest Period" shall mean, with respect to a series of Auction Rate
Series 1998-1 Senior Notes or Taxable LIBOR Rate Series 1998-1 Notes, the
Initial Interest Period and each period commencing on an Interest Rate
Adjustment Date for such series and ending on the last day before (i) the next
Interest Rate Adjustment Date for such series or (ii) the Stated Maturity of
such series, as applicable.
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"Interest Rate Adjustment Date" shall mean the date on which the interest
rate on a series of Auction Rate Series 1998-1 Senior Notes or Taxable LIBOR
Rate Series 1998-1 Notes is effective, which (i) with respect to a series of
Auction Rate Series 1998-1 Senior Notes, shall be the date of commencement of
each Auction Period, and (ii) with respect to a series of Taxable LIBOR Rate
Series 1998-1 Notes, shall be each Interest Payment Date.
"Interest Rate Determination Date" shall mean (i) with respect to a
series of Auction Rate Series 1998-1 Senior Notes, the Auction Date, or, if no
Auction Date is applicable to such series, the Business Day immediately
preceding the date of commencement of an Auction Period, and (ii) with respect
to a series of Taxable LIBOR Rate Series 1998-1 Notes, the second Business Day
immediately preceding the date of commencement of an Interest Period (other
than the Initial Interest Period).
"Interest Subsidy Agreement" shall have the meaning assigned thereto on
page 97 of this Prospectus.
"Interest Subsidy Payments" shall mean interest payments on certain
student loans authorized to be made by the Secretary of Education by Section
428(a) of the Higher Education Act.
"Investment Provider" shall have the meaning assigned thereto on page 19
of this Prospectus.
"Investment Securities" shall have the meaning assigned thereto on page
156 of this Prospectus.
"IRAs" shall have the meaning assigned thereto on page 169 of this
Prospectus.
"Issuer" shall have the meaning assigned thereto on page 166 of this
Prospectus.
"Lender" shall mean any "eligible lender" (as defined in the Higher
Education Act) permitted to participate as a seller of Student Loans to the
Corporation under the Program and which has received an eligible lender
designation from a Guarantee Agency.
"Loan Rates" shall have the meaning assigned thereto on page 34 of this
Prospectus.
"Mandatory Tender Date" shall mean, with respect to any Note, a date on
which such Note is required to be tendered for purchase by or on behalf of the
Corporation in accordance with the provisions in the Supplemental Indenture
providing for the issuance thereof.
"Market Agent" shall mean Smith Barney Inc., New York, New York, in such
capacity under the First Supplemental Indenture, or any successor to it in
such capacity.
"Maximum Auction Rate" shall mean (i) with respect to a series of Tax
Exempt Auction Rate Series 1998-1 Senior Notes, the interest rate per annum
equal to the lesser of (a) the product of the Applicable Percentage and the
greater of (1) the After-Tax Equivalent and (2) the Index, and (b) 14%, (ii)
with respect to a series of Taxable Auction Rate Series 1998-1 Senior Notes:
(a) for Auction Periods of 35 days or less, either (1) One-Month LIBOR plus
1.50% (if the ratings assigned by Moody's and Fitch to the Taxable Auction
Rate Series 1998-1 Senior Notes are at least "Aa3" and "AA-", respectively),
(2) One-Month LIBOR plus 2.50% (if any one of the ratings assigned by Moody's
and Fitch to the Taxable Auction Rate Series 1998-1 Senior Notes is less than
"Aa3" or "AA-", respectively, but is at least "A") or (3) One-Month LIBOR plus
3.50% (if any one of the ratings assigned by Moody's and Fitch to the Taxable
Auction Rate Series 1998-1 Senior Notes is less than "A"); or (b) for Auction
Periods of greater than 35 days, either (1) the greater of One-Month LIBOR or
Three-Month LIBOR, plus, in either case, 1.50% (if the ratings assigned by
Moody's and Fitch to the Taxable Auction Rate Series 1998-1 Senior Notes are
at least "Aa3", and "AA-", respectively), (2) the greater of One-Month LIBOR
or Three-Month LIBOR, plus, in either case, 2.50% (if any one of the ratings
assigned by Moody's and Fitch to the Taxable Auction Rate Series 1998-1 Senior
Notes is less than "Aa3" or "AA-", respectively, but is at least "A") or (3)
the greater of One-Month LIBOR or Three-Month LIBOR, plus, in either case,
3.50% (if any one of the ratings assigned by Moody's and
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Fitch to the Taxable Auction Rate Series 1998-1 Senior Notes is less than
"A"). For purposes of the Auction Agent and the Auction Procedures, the
ratings referred to in this definition shall be the last ratings of which the
Auction Agent shall have been given notice pursuant to the Auction Agent
Agreement.
"Monthly Payment Date" shall mean the 12th day of each calendar month
(or, if such 12th day is not a Business Day, the next preceding Business Day);
provided that any transfers to be made from the Revenue Fund on a Monthly
Payment Date shall, as to amounts therein constituting payments in respect of
Financed Student Loans, include only such payments as have been deposited in
the Revenue Fund as of the last day of the preceding calendar month.
"Monthly Servicing Report" shall mean the monthly report prepared by the
Corporation or the Servicer in accordance with the Indenture.
"Moody's" shall mean Moody's Investors Service, Inc., its successors and
their assigns, and, if such corporation shall no longer perform the functions
of a securities rating agency, a successor designated by the Trustee at the
direction of the Corporation.
"Net Loan Rate" shall mean, with respect to any Interest Period for a
series of Taxable Auction Rate Series 1998-1 Senior Notes or Taxable LIBOR
Rate Series 1998-1 Notes commencing during a given month, the rate of interest
per annum (rounded to the next highest .01%) equal to (i) the weighted average
Effective Interest Rate of Student Loans in the Series 1998-1 Taxable
Acquisition Account, determined as of the last day of the second preceding
month, less (ii) the Administrative Cost and Note Fee Rate.
"New Borrower" shall have the meaning assigned thereto on page 83 of this
Prospectus.
"1933 Act" shall have the meaning assigned thereto on page 6 of this
Prospectus.
"1980 Amendments" shall have the meaning assigned thereto on page 81 of
this Prospectus.
"1981 Amendments" shall have the meaning assigned thereto on page 81 of
this Prospectus.
"1986 Amendments" shall have the meaning assigned thereto on page 81 of
this Prospectus.
"1987 Amendments" shall have the meaning assigned thereto on page 81 of
this Prospectus.
"1989 Amendments" shall have the meaning assigned thereto on page 81 of
this Prospectus.
"1992 Amendments" shall have the meaning assigned thereto on page 81 of
this Prospectus.
"1993 Amendments" shall have the meaning assigned thereto on page 81 of
this Prospectus.
"1993 Technical Amendments" shall have the meaning assigned thereto on
page 81 of this Prospectus.
"1997 Amendments" shall have the meaning assigned thereto on page 81 of
this Prospectus.
"91-day T-Bill Rate" shall have the meaning assigned thereto on page 92
of this Prospectus.
"Non-Payment Rate" shall mean (i) with respect to a series of Tax Exempt
Auction Rate Series 1998-1 Senior Notes, the interest rate per annum equal to
the lesser of (a) 265% (as such percentage may be adjusted pursuant to the
provisions of the First Supplemental Indenture described under "Auction of the
Auction Rate Series 1998-1 Senior Notes -- Changes in Auction Terms -- Changes
in Percentages Used in Determining All Hold Rate, Maximum Auction Rate and
Non-Payment Rate with respect to the Tax Exempt Auction Rate Series 1998-1
Senior
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Notes") of the Index and (b) 14%, and (ii) with respect to a series of
Taxable Auction Rate Series 1998-1 Senior Notes, the lesser of (a) One-Month
LIBOR plus 1.50% and (b) 18%.
"Note Fees" shall mean the fees, costs and expenses, excluding Costs of
Issuance, of the Trustee and any Paying Agents, Authenticating Agent,
Remarketing Agents, Depositaries, Auction Agents, Broker-Dealers, Deposit
Agents, Bond Counsel, Note Registrar or Accountants incurred by the
Corporation in carrying out and administering its powers, duties and functions
under (1) its articles of incorporation, its bylaws, the Student Loan Purchase
Agreements, any Servicing Agreement, the Contract of Insurance, the Guarantee
Agreements, the Program, the Higher Education Act or any requirement of the
laws of the United States or the State with respect to the Program, as such
powers, duties and functions relate to Financed Student Loans, (2) any Swap
Agreements and any Credit Enhancement Facilities (other than any amounts
payable thereunder which constitute Other Indenture Obligations), (3) any
Remarketing Agreement, Depositary Agreement, Auction Agent Agreement or
Broker-Dealer Agreement and (4) the Indenture.
"Noteholder" shall mean the Holder of a Note.
"Notes" shall mean the Series 1998-1 Notes and any additional notes
hereafter issued under the Indenture.
"One-Month LIBOR" shall mean, with respect to a series of Taxable Auction
Rate Series 1998-1 Senior Notes or Taxable LIBOR Rate Series 1998-1 Notes and
any Interest Rate Determination Date, the rate of interest per annum equal to
the London interbank offered rate for deposits in United States dollars having
a maturity of one month (commencing on such Interest Rate Determination Date)
which appears on Telerate Page 3750 as of 11:00 a.m., London time, on such
Interest Rate Determination Date. If such rate does not appear on Telerate
Page 3750, the rate for that day will be determined by reference to the
Reuters Screen LIBOR Page. If such rate does not appear on Telerate Page 3750
or the Reuters Screen LIBOR Page, One-Month LIBOR for such Interest Rate
Determination Date will be determined on the basis of the rates at which
deposits in United States dollars having a maturity of one month and in a
principal amount of not less than U.S. $1,000,000 are offered at approximately
11:00 a.m., London time, on such Interest Rate Determination Date to prime
banks in the London interbank market by the Reference Banks. The Auction
Agent or the Trustee, as applicable, will request the principal London office
of each of the Reference Banks to provide a quotation of its rate. If at
least two such quotations are provided, One-Month LIBOR for that Interest Rate
Determination Date will be the arithmetic mean (rounded upwards, if necessary,
to the nearest .01%) of such quotations. If fewer than two such quotations
are provided, One-Month LIBOR for that Interest Rate Determination Date will
be the arithmetic mean (rounded upwards, if necessary, to the nearest .01%) of
the rates quoted at approximately 11:00 a.m., New York City time, on such
Interest Rate Determination Date by three major banks in New York, New York,
selected by the Auction Agent after consultation with the Trustee, or by the
Trustee, as applicable, for loans in United States dollars to leading European
banks having a maturity of one month and in a principal amount of not less
than U.S. $1,000,000; provided, however, that if the banks selected as
aforesaid are not quoting as mentioned in this sentence, One-Month LIBOR will
be the One-Month LIBOR in effect for the immediately preceding Interest
Period.
"Original Issuer" shall have the meaning assigned thereto on pages 1 and
7 of this Prospectus.
"Original Issuer Student Loan Purchase Agreements" shall have the meaning
assigned thereto on page 73 of this Prospectus.
"Order" shall have the meaning assigned thereto on page 126 of this
Prospectus.
"Other Beneficiary" shall mean an Other Senior Beneficiary or an Other
Subordinate Beneficiary.
"Other Indenture Obligations" shall mean, collectively, the Other Senior
Obligations and Other Subordinate Obligations.
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"Other Senior Beneficiary" shall mean a Person who is a Senior
Beneficiary other than as a result of ownership of Senior Notes.
"Other Senior Obligations" shall mean the Corporation's obligations to
pay any amounts under any Senior Swap Agreements and any Senior Credit
Enhancement Facilities.
"Other Subordinate Beneficiary" shall mean a Person who is a Subordinate
Beneficiary other than as a result of ownership of Subordinate Notes.
"Other Subordinate Obligations" shall mean the Corporation's obligations
to pay any amounts under any Subordinate Swap Agreements and any Subordinate
Credit Enhancement Facilities.
"Outstanding" shall mean (i) when used with respect to Notes, all Notes
other than (a) any Notes deemed no longer Outstanding as a result of the
purchase, payment or defeasance thereof as described under "Summary of the
Indenture -- Discharge of Notes and the Indenture", (b) any Notes surrendered
for transfer or exchange for which another Note has been issued under the
Indenture, (c) with respect to any request, demand, authorization, direction,
notice, consent or waiver under the Indenture, Notes owned by the Corporation
to the extent the Trustee knows that such Notes are so owned, or (d) any Notes
Deemed Tendered, and (ii) when used with respect to Other Indenture
Obligations, all Other Indenture Obligations which have become, or may in the
future become, due and payable and which have not been paid or otherwise
satisfied.
"Participant" shall mean a member of, or participant in, the Securities
Depository.
"Parties in Interest" shall have the meaning assigned thereto on page 170
of this Prospectus.
"Paying Agent" shall mean the Trustee and any other commercial bank
designated pursuant to the Indenture as a place at which principal of,
premium, if any, or interest on any Note is payable.
"Payment Default" shall mean, with respect to a series of Auction Rate
Series 1998-1 Senior Notes, (i) a default in the due and punctual payment of
any installment of interest on such series, or (ii) a default in the due and
punctual payment of any interest on and principal of such series at maturity.
"Person" shall mean any individual, corporation, partnership, joint
venture, association, joint stock company, trust, incorporated organization or
government or any agency or political subdivision thereof.
"PHEAA" shall have the meaning assigned thereto on pages 17 and 95 of
this Prospectus.
"PHEAA Act" shall have the meaning assigned thereto on page 99 of this
Prospectus.
"PHEAA Bond Fund" shall have the meaning assigned thereto on page 100 of
this Prospectus.
"Plan Assets Regulation" shall have the meaning assigned thereto on page
170 of this Prospectus.
"Plan for Doing Business" shall mean the plan adopted by the Original
Issuer as required by Section 438(e) of the Higher Education Act.
"Pledged Funds and Accounts" shall have the meaning assigned thereto on
page 57 of this Prospectus.
"Pledged Revenues" shall have the meaning assigned thereto on page 57 of
this Prospectus.
"Plus Loan" shall mean a Student Loan made pursuant to Section 428B of
the Higher Education Act.
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"Potential Bid Orders" shall have the meaning assigned thereto on page
120 of this Prospectus.
"Potential Holders" shall have the meaning assigned thereto on page 122
of this Prospectus.
"Prepayment Date", when used with respect to any Note, a portion of the
Principal Amount of which is to be paid prior to its Stated Maturity, shall
mean the date fixed for such prepayment by or pursuant to the Indenture.
"Principal Amount", when used with respect to a Note, shall mean the
original principal amount of such Note less all payments previously made to
the Holder thereof in respect of principal.
"Principal Balance", when used with respect to a Student Loan, shall mean
the unpaid principal amount thereof (including any unpaid capitalized interest
thereon that is authorized to be capitalized under the Higher Education Act
for purposes of Special Allowance Payments, federal interest subsidy payments,
a borrower's liability to a lender and the amount of the lender's loss on a
guarantee or insurance claim) as of a given date.
"Principal Office" shall mean (i) when used with respect to the Trustee,
the principal corporate trust office of the Trustee, and (ii) when used with
respect to a Paying Agent (other than the Trustee), an Authenticating Agent,
the Note Registrar, a Depositary, a Remarketing Agent, an Auction Agent or a
Broker-Dealer, such office designated in writing to the Trustee and the
Corporation as the location of its principal office for the performance of its
duties as Paying Agent, Authenticating Agent, Note Registrar, Depositary,
Remarketing Agent, Auction Agent or Broker-Dealer, as the case may be, under
the Indenture.
"Principal Payment Date" shall mean the Stated Maturity of principal of
any Serial Note and the Sinking Fund Payment Date for any Term Note, which,
unless otherwise specified with respect to any series of Variable Rate Notes
in the Supplemental Indenture providing for the issuance thereof, shall occur
on a June 1 or a December 1.
"Program" shall mean the program to be administered by the Original
Issuer (or, after the Section 150(d)(3) Transfer, the Servicer) for the
purchase of Student Loans from Lenders or origination of Student Loans in
order to increase the supply of moneys available for new Student Loans,
thereby assisting students in obtaining a post-secondary school education.
"PSA" shall mean the Public Securities Association, its successors and
assigns.
"PSA Index" shall mean, with respect to a series of the Tax Exempt
Auction Rate Series 1998-1 Senior Notes, a rate determined on the basis of the
seven-day high grade market index of tax-exempt variable rate demand
obligations, as produced by Municipal Market Data and published or made
available by the PSA or any Person acting in cooperation with or under the
sponsorship of PSA and acceptable to the Market Agent.
"PTCE" shall have the meaning assigned thereto on page 170 of this
Prospectus.
"Purchase Date" shall mean, with respect to a Demand Note, the date
specified in a purchase demand (provided that such date is prior to any
applicable conversion date and is not less than the required number of
calendar days after receipt of such purchase demand by the Depositary) as the
date on which the Holder of the Demand Note identified in such purchase demand
is demanding purchase of such Note, or a specified portion thereof, in
accordance with the applicable provisions of the related Supplemental
Indenture, or the next preceding or succeeding Business Day, as provided for
in such Supplemental Indenture, if such date is not a Business Day.
"Qualified Retirement Plans" shall have the meaning assigned thereto on
page 169 of this Prospectus.
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"Rating Agency" shall mean any rating agency that shall have an outstanding
rating on any of the Notes pursuant to request by the Corporation.
"Rating Category" shall mean one of the general rating categories of a
Rating Agency, without regard to any refinement or gradation of such rating
category by a numerical modifier or otherwise.
"Rebate Amount" shall have the meaning assigned thereto on pages 27 and
60 of this Prospectus.
"Redemption Date," when used with respect to any Note called for
redemption, shall mean the date fixed for such redemption by or pursuant to
the Indenture.
"Redemption Price," when used with respect to any Note called for
redemption, means the price at which it is to be redeemed pursuant to the
Indenture.
"Reference Banks" shall mean four leading banks, selected by the Auction
Agent, after consultation with the Trustee, or by the Trustee, as applicable,
engaged in transactions in Eurodollar deposits in the international
Eurocurrency market and having an established place of business in London.
"Regular Record Date" shall mean, with respect to an Interest Payment
Date for any series of Notes, the record date for the payment of interest
established by the Indenture and the Supplemental Indenture pursuant to which
such series of Notes was issued .
"Refunded Obligations" shall have the meaning assigned thereto on page
149 of this Prospectus.
"Remarketing Agent" shall mean, with respect to any series of Notes, any
securities dealer designated as such with respect to such Notes pursuant to
the provisions of the Indenture and its successor or successors and any
securities dealer at any time substituted in its place pursuant to the
Indenture.
"Remarketing Agreement" shall mean an agreement between a Remarketing
Agent and the Corporation setting forth the rights and obligations of the
Remarketing Agent acting in such capacity under the Indenture, including any
supplement thereto or amendment thereof entered into in accordance with the
provisions thereof.
"Repeat Borrower" shall have the meaning assigned thereto on page 83 of
this Prospectus.
"Reserve Fund Requirement" shall mean, at any time, an amount equal to
the greater of (1) 2.00% of the aggregate Principal Amount of Senior Notes and
Subordinate Notes then Outstanding, and (2) $500,000; or, as determined upon
the issuance of any Senior Notes or any Subordinate Notes, such lesser or
greater amount as will not cause any Rating Agency to lower or withdraw any
rating on any Outstanding Unenhanced Notes, as confirmed in writing to the
Trustee by each Rating Agency, or, if no Unenhanced Notes are then Outstanding
but Other Indenture Obligations are Outstanding and the Reserve Fund
Requirement is to be reduced, such lesser amount as is acceptable to the Other
Beneficiaries entitled to such Other Indenture Obligations, as evidenced in
writing to the Trustee by each such Other Beneficiary. In calculating the
Reserve Fund Requirement, all Notes to be defeased by a series of refunding
Notes shall be deemed not Outstanding as of the date of calculation.
"Reuters Screen LIBOR Page" will be the display designated as page
"LIBOR" on the Reuters Monitor Money Rates Service (or such other page as may
replace the LIBOR page for the purposes of displaying London interbank offered
rates of major banks).
"Sallie Mae" shall have the meaning assigned thereto on page 101 of this
Prospectus.
"S&P" shall mean Standard & Poor's, a division of McGraw-Hill Inc., its
successors and assigns.
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"Secretary of Education" shall mean the Commissioner of Education,
Department of Health, Education and Welfare of the United States, and the
Secretary of the United States Department of Education (who succeeded to the
functions of the Commissioner of Education pursuant to the Department of
Education Organization Act), or any other officer, board, body, commission or
agency succeeding to the functions thereof under the Higher Education Act.
"Section 150(d)(3) Transfer" shall mean the transfer of all of the right,
title and interest in and to the Trust Estate from the Original Issuer to
SLFC, and from SLFC to the Corporation, together with the assumption by the
Corporation of all of the obligations and liabilities of the Original Issuer
under the Indenture and under the Notes and any Other Indenture Obligations,
all in accordance with Section 150(d)(3) of the Code.
"Securities Depository" shall mean The Depository Trust Company, New
York, New York, as depository of the Series 1998-1 Notes, and its successors
and assigns, or, if (i) the then-existing Securities Depository resigns from
its functions as depository of the Series 1998-1 Notes or (ii) the Corporation
discontinues use of the Securities Depository pursuant to the provisions of
the First Supplemental Indenture, then any other securities depository which
agrees to follow the procedures required to be followed by a securities
depository in connection with the Series 1998-1 Notes and which is selected by
the Corporation with the consent of the Trustee.
"Sell Order" shall have the meaning assigned thereto on page 126 of this
Prospectus.
"Seller's Broker-Dealer" shall have the meaning assigned thereto on page
135 of this Prospectus.
"Senior Asset Requirement" shall mean, as of the date of determination,
that:
(a) the Senior Percentage is at least equal to 110% (or
such lower percentage specified in a Corporation certificate
delivered to the Trustee which, if Unenhanced Senior Notes are
Outstanding, shall not result in the lowering or withdrawal of the
outstanding rating assigned by any Rating Agency to any of the
Unenhanced Senior Notes Outstanding, as evidenced in writing to the
Trustee by each such Rating Agency, or, if no Unenhanced Senior
Notes are Outstanding but Other Senior Obligations are Outstanding,
is acceptable to the Other Senior Beneficiaries entitled to such
Other Senior Obligations, as evidenced in writing to the Trustee by
each such Other Senior Beneficiary), and
(b) the Subordinate Percentage is at least equal to 100%
(or such lower percentage specified in a Corporation certificate
delivered to the Trustee which, if Unenhanced Subordinate Notes are
Outstanding, shall not result in the lowering or withdrawal of the
outstanding rating assigned by any Rating Agency to any of the
Unenhanced Subordinate Notes Outstanding, as evidenced in writing
to the Trustee by each such Rating Agency, or, if no Unenhanced
Subordinate Notes are Outstanding but Other Subordinate Obligations
are Outstanding, is acceptable to the Other Subordinate
Beneficiaries entitled to such Other Subordinate Obligations, as
evidenced in writing to the Trustee by each such Other Subordinate
Beneficiary).
"Senior Beneficiaries" shall mean (i) the Holders of any Outstanding
Senior Notes, and (ii) any Senior Credit Facility Provider and any Senior Swap
Counterparty entitled to Other Senior Obligations then Outstanding.
"Senior Credit Enhancement Facility" shall mean a Credit Enhancement
Facility designated as a Senior Credit Enhancement Facility in the
Supplemental Indenture pursuant to which such Credit Enhancement Facility is
furnished by the Corporation.
"Senior Credit Facility Provider" shall mean any Person who provides a
Senior Credit Enhancement Facility.
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"Senior Notes" shall mean the Series 1998-1 Senior Notes and any other
Notes designated in a Supplemental Indenture as Senior Notes, which are
secured under the Indenture on a basis senior to any Subordinate Obligations
and any Class C Notes, and on a parity with other Senior Obligations.
"Senior Obligations" shall mean, collectively, the Senior Notes and the
Other Senior Obligations.
"Senior Percentage" shall mean, as of the date of determination, the
percentage resulting by dividing the Aggregate Value by the sum of (i) the
aggregate Principal Amount of Outstanding Senior Notes plus accrued interest
thereon, (ii) accrued Corporation Swap Payments under Senior Swap Agreements
and (iii) other payments accrued and owing by the Corporation on Other Senior
Obligations.
"Senior Swap Agreement" shall mean a Swap Agreement designated as a
Senior Swap Agreement in the Supplemental Indenture pursuant to which such
Swap Agreement is furnished by the Corporation.
"Senior Swap Counterparty" shall mean any Person who provides a Senior
Swap Agreement.
"Series 1998-1 Excess Earnings Sub-Account" means the Sub-Account of that
name created within the Excess Earnings Account under the Indenture.
"Series 1998-1 Notes" shall mean, collectively, the Series 1998-1 Senior
Notes and the Series 1998-1 Subordinate Notes.
"Series 1998-1 Senior Notes" shall mean, collectively, the Series 1998-1A
Notes, the Series 1998-1B Notes, the Series 1998-1C Notes, the Series 1998-1D
Notes, the Series 1998-1E Notes, the Series 1998-1F Notes, the Series 1998-1G
Notes, the Series 1998-1H Notes, the Series 1998-1I Notes and the Series
1998-1J Notes.
"Series 1998-1 Subordinate Notes" shall mean, collectively, the Series
1998-1K Notes and the Series 1998-1L Notes.
"Series 1998-1A Notes" shall mean the Corporation's Tax Exempt Auction
Rate Student Loan Asset-Backed Callable Notes, Senior Series 1998-1A, issued
under the Indenture.
"Series 1998-1B Notes" shall mean the Corporation's Tax Exempt Auction
Rate Student Loan Asset-Backed Callable Notes, Senior Series 1998-1B, issued
under the Indenture.
"Series 1998-1C Notes" shall mean the Corporation's Tax Exempt Auction
Rate Student Loan Asset-Backed Callable Notes, Senior Series 1998-1C, issued
under the Indenture.
"Series 1998-1D Notes" shall mean the Corporation's Tax Exempt Auction
Rate Student Loan Asset-Backed Callable Notes, Senior Series 1998-1D, issued
under the Indenture.
"Series 1998-1E Notes" shall mean the Corporation's Tax Exempt Auction
Rate Student Loan Asset-Backed Callable Notes, Senior Series 1998-1E, issued
under the Indenture.
"Series 1998-1F Notes" shall mean the Corporation's Tax Exempt Fixed Rate
Student Loan Asset-Backed Callable Notes, Senior Series 1998-1F, issued under
the Indenture.
"Series 1998-1G Notes" shall mean the Corporation's Taxable Auction Rate
Student Loan Asset-Backed Callable Notes, Senior Series 1998-1G, issued under
the Indenture.
"Series 1998-1H Notes" shall mean the Corporation's Taxable Auction Rate
Student Loan Asset-Backed Callable Notes, Senior Series 1998-1H, issued under
the Indenture.
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"Series 1998-1I Notes" shall mean the Corporation's Taxable LIBOR Rate
Student Loan Asset-Backed Callable Notes, Senior Series 1998-1I, issued under
the Indenture.
"Series 1998-1J Notes" shall mean the Corporation's Taxable LIBOR Rate
Student Loan Asset-Backed Callable Notes, Senior Series 1998-1J, issued under
the Indenture.
"Series 1998-1K Notes" shall mean the Corporation's Tax Exempt Fixed Rate
Student Loan Asset-Backed Callable Notes, Subordinate Series 1998-1K, issued
under the Indenture.
"Series 1998-1L Notes" shall mean the Corporation's Taxable LIBOR Rate
Student Loan Asset-Backed Callable Notes, Subordinate Series 1998-1L, issued
under the Indenture.
"Series 1998-1 Tax Exempt Acquisition Account" means the Account of that
name created within the Acquisition Fund under the Indenture.
"Series 1998-1 Tax Exempt Reserve Account" means the Account of that name
created within the Reserve Fund under the Indenture.
"Series 1998-1 Tax Exempt Retirement Sub-Account" means the Sub-Account
of that name created within the Retirement Account under the Indenture.
"Series 1998-1 Tax Exempt Surplus Sub-Account" means the Sub-Account of
that name created within the Surplus Account under the Indenture.
"Series 1998-1 Taxable Acquisition Account" means the Account of that
name created within the Acquisition Fund under the Indenture.
"Series 1998-1 Taxable Reserve Account" means the Account of that name
created within the Reserve Fund under the Indenture.
"Series 1998-1 Taxable Retirement Sub-Account" means the Sub-Account of
that name created within the Retirement Account under the Indenture.
"Series 1998-1 Taxable Surplus Sub-Account" means the Sub-Account of that
name created within the Surplus Account under the Indenture.
"Service" shall have the meaning assigned thereto on page 167 of this
Prospectus.
"Servicer" shall mean SLFC and any other organization with which the
Corporation and the Trustee have entered into a Servicing Agreement, subject
to confirmation of ratings on any Outstanding Unenhanced Notes or, if no
Unenhanced Notes are then Outstanding but Other Indenture Obligations are
Outstanding, consent of each Other Beneficiary entitled to such Other
Indenture Obligations.
"Servicing Agreement" shall mean the SLFC Servicing Agreement, and any
other agreement among the Corporation, the Trustee and a Servicer under which
the Servicer agrees to act as the Corporation's and/or the Trustee's agent or
provides services or facilities (including, without limitation, computer
hardware or software) in connection with the administration and collection of
Financed Student Loans in accordance with the Indenture.
"Servicing Fees" shall mean any fees payable by the Corporation to a
Servicer in respect of Financed Student Loans pursuant to the provisions of a
Servicing Agreement.
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<PAGE>
"Sinking Fund Payment Date" shall mean the date on which any Term Note is
to be called for redemption pursuant to the sinking fund redemption provisions
of the Supplemental Indenture providing for the issuance thereof, or, if not
so called for redemption, the Stated Maturity thereof.
"SLFC" shall have the meaning assigned thereto on pages 2 and 7 of this
Prospectus.
"SLFC Servicing Agreement" shall have the meaning assigned thereto on
pages 20 and 67 of this Prospectus.
"SLS Loan" shall mean a Student Loan made pursuant to former Section 428A
of the Higher Education Act.
"Special Allowance Payments" shall mean special allowance payments
authorized to be made by the Secretary of Education by Section 438 of the
Higher Education Act, or similar allowances authorized from time to time by
federal law or regulation.
"Special Prepayment Amount" shall have the meaning assigned thereto on
page 51 of this Prospectus.
"Special Redemption and Prepayment Account Requirement" (i) with respect
to the Taxable LIBOR Rate Series 1998-1 Notes, shall mean an amount equal to
the Special Prepayment Amount, and (ii) with respect to any other series of
Notes, shall mean the amount described in the Supplemental Indenture providing
for the issuance thereof.
"Specific Rating Category" shall mean a specific rating category of a
Rating Agency, taking into account any refinement or gradation of a Rating
Category by a numerical or other qualifier. For so long as any of the Notes
are rated by Moody's: (a) references to the highest applicable Specific
Rating Category shall be, with respect to obligations or investments having a
term of less than one year, to a rating of "P-1" (or such rating as Moody's
shall advise the Trustee is comparable to "P-1" under any revised rating
schedule), and with respect to obligations or investments having a term of one
year or longer, to a rating of "Aaa" (or such rating as Moody's shall advise
the Trustee is comparable to "Aaa" under any revised rating schedule); and (b)
references to the third highest applicable Specific Rating Category shall be,
with respect to obligations or investments having a term of one year or
longer, to a rating of "Aa2" (or such rating as Moody's shall advise the
Trustee is comparable to "Aa2" under any revised rating schedule). For so
long as any of the Notes are rated by Fitch: (a) references to the highest
applicable Specific Rating Category shall be, with respect to obligations or
investments having a term of less than one year, to a rating of "F-1+" (or, if
Fitch revises its rating schedule from time to time, such rating as Fitch
shall advise the Trustee in writing is comparable to "F-1+" under such revised
rating schedule), and with respect to obligations or investments having a term
of one year or longer, to a rating of "AAA" (or, if Fitch revises its rating
schedule from time to time, such rating as Fitch shall advise the Trustee in
writing is comparable to "AAA" under such revised rating schedule); and (b)
references to the third highest applicable Specific Rating Category shall be,
with respect to obligations or investments having a term of one year or
longer, to a rating of "AA" (or, if Fitch revises its rating schedule from
time to time, such rating as Fitch shall advise the Trustee in writing is
comparable to "AA" under such revised rating schedule).
"Stafford Loan" shall mean a Student Loan made pursuant to Section 428 of
the Higher Education Act.
"Stated Maturity," when used with respect to any Note or any installment
of interest thereon, shall mean the date specified in such Note as the fixed
date on which principal of such Note or such installment of interest is due
and payable.
"Statutory Corporate Tax Rate" shall mean, with respect to a series of
Tax Exempt Auction Rate Series 1998-1 Senior Notes, the highest tax bracket
(expressed in decimals) applicable at the time of determination of the
After-Tax Equivalent on the income tax of any corporation, as set forth in
Section 11 of the Code or any successor
-197-
<PAGE>
section, without regard to any minimum additional tax provision. The
"Statutory Corporate Tax Rate", as of February 1, 1998 is .35.
"Student Loan" shall mean a loan to a borrower for post-secondary
education.
"Student Loan Portfolio" shall have the meaning assigned thereto on page
19 of this Prospectus.
"Student Loan Purchase Agreements" shall mean all agreements between the
Original Issuer or the Corporation and a Lender providing for the sale by such
Lender to the Corporation or the Trustee on behalf of the Corporation (or to
the Original Issuer prior to the Date of Issuance) of Student Loans Financed
or to be Financed under the Indenture and substantially in the forms which are
on file with the Trustee, including amendments thereto made in accordance with
the Indenture.
"Sub-Account" shall mean any subaccount of an Account created by a
Supplemental Indenture.
"Submission Deadline" shall have the meaning assigned thereto on page 125
of this Prospectus.
"Submitted Bid" shall have the meaning assigned thereto on page 128 of
this Prospectus.
"Submitted Hold Order" shall have the meaning assigned thereto on page
128 of this Prospectus.
"Submitted Orders" shall have the meaning assigned thereto on page 128 of
this Prospectus.
"Submitted Sell Order" shall have the meaning assigned thereto on page
128 of this Prospectus.
"Subordinate Beneficiaries" shall mean (i) the Holders of any Outstanding
Subordinate Notes, and (ii) any Subordinate Credit Facility Provider and any
Subordinate Swap Counterparty entitled to any Other Subordinate Obligations
then Outstanding.
"Subordinate Credit Enhancement Facility" shall mean a Credit Enhancement
Facility designated as a Subordinate Credit Enhancement Facility in the
Supplemental Indenture pursuant to which such Credit Enhancement Facility is
furnished by the Corporation.
"Subordinate Credit Facility Provider" shall mean any Person who provides
a Subordinate Credit Enhancement Facility.
"Subordinate Notes" shall mean the Series 1998-1 Subordinate Notes and
any other Notes designated in a Supplemental Indenture as Subordinate Notes,
which are secured under the Indenture on a basis subordinate to any Senior
Obligations, on a parity with other Subordinate Obligations and on a basis
senior to any Class C Notes.
"Subordinate Obligations" shall mean, collectively, the Subordinate Notes
and the Other Subordinate Obligations.
"Subordinate Percentage" shall mean, as of the date of determination, the
percentage resulting by dividing the Aggregate Value by the sum of (i) the
aggregate Principal Amount of Outstanding Senior Notes and Subordinate Notes
plus accrued interest thereon, (ii) accrued Corporation Swap Payments and
(iii) other payments accrued and owing by the Corporation on Other Indenture
Obligations.
"Subordinate Swap Agreement" shall mean a Swap Agreement designated as a
Subordinate Swap Agreement in the Supplemental Indenture pursuant to which
such Swap Agreement is furnished by the Corporation.
"Subordinate Swap Counterparty" shall mean any Person who provides a
Subordinate Swap Agreement.
-198-
<PAGE>
"Sufficient Bids" shall have the meaning assigned thereto on page 128 of
this Prospectus.
"Supplemental Indenture" shall mean any amendment of or supplement to the
Indenture made in accordance with the provisions thereof. (See "Summary of
the Indenture -- Supplemental Indentures".)
"Swap Agreement" shall mean, collectively, (a) an interest rate exchange
agreement between the Corporation and a Swap Counterparty, as originally
executed and as amended or supplemented, or other interest rate hedge
agreement between the Corporation and a Swap Counterparty, as originally
executed and as amended or supplemented, in each case approved by each Rating
Agency, for the purpose of converting, in whole or in part, (i) the
Corporation's fixed interest rate liability on all or a portion of any Notes
to a variable rate liability, (ii) the Corporation's variable rate liability
on all or a portion of the Notes to a fixed rate liability, or (iii) the
Corporation's variable rate liability on all or a portion of the Notes to a
different variable rate liability, and (b) any guarantee of the Swap
Counterparty's obligations under such interest rate exchange agreement.
"Swap Counterparty" shall mean any Person with whom the Corporation
shall, from time to time, enter into a Swap Agreement.
"Tax-Exempt Notes" shall mean the Tax Exempt Series 1998-1 Notes and each
other series of Notes that is issued with the intent that interest thereon be
excludable from gross income for purposes of federal income taxation, as
evidenced by an opinion of Bond Counsel to that effect delivered upon issuance
of such series of Notes.
"Tax Exempt Auction Rate Series 1998-1 Senior Notes" shall mean,
collectively, the Series 1998-1A Notes, the Series 1998-1B Notes, the Series
1998-1C Notes, the Series 1998-D Notes and the Series 1998-E Notes.
"Tax Exempt Fixed Rate Series 1998-1 Notes" shall mean, collectively, the
Tax Exempt Fixed Rate Series 1998-1 Senior Notes and the Tax Exempt Fixed Rate
Series 1998-1 Subordinate Notes.
"Tax Exempt Fixed Rate Series 1998-1 Senior Notes" shall mean the Series
1998-1F Notes.
"Tax Exempt Fixed Rate Series 1998-1 Subordinate Notes" shall mean the
Series 1998-1K Notes.
"Tax-Favored Plans" shall have the meaning assigned thereto on page 169
of this Prospectus.
"Tax Matters Certificate" shall mean, with respect to a series of
Tax-Exempt Notes, the applicable Original Issuer or Corporation certificate or
certificates relating to arbitrage and other tax matters delivered in connection
with the issuance of such series of Notes, as the same may be amended or
supplemented in accordance with its or their terms.
"Taxable Auction Rate Series 1998-1 Senior Notes" shall mean,
collectively, the Series 1998-1G Notes and the Series 1998-1H Notes.
"Taxable LIBOR Rate Series 1998-1 Notes" shall mean, collectively, the
Taxable LIBOR Rate Series 1998-1 Senior Notes and the Taxable LIBOR Rate
Series 1998-1 Subordinate Notes.
"Taxable LIBOR Rate Series 1998-1 Senior Note Initial Interest Rate"
shall mean the interest rate to be borne by a series of Taxable LIBOR Rate
Series 1998-1 Senior Notes for the Initial Interest Period therefor, as set
forth in the First Supplemental Indenture.
"Taxable LIBOR Rate Series 1998-1 Senior Note Interest Rate" shall mean
the rate of interest per annum borne by a series of Taxable LIBOR Rate Series
1998-1 Senior Notes, which, during the Initial Interest Period for such
series, shall be the Taxable LIBOR Rate Series 1998-1 Senior Note Initial
Interest Rate, and during each
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<PAGE>
Interest Period thereafter, shall be the lesser of (i) One-Month LIBOR plus
the Taxable LIBOR Rate Series 1998-1 Senior Note Spread, or (ii) the Net Loan
Rate.
"Taxable LIBOR Rate Series 1998-1 Senior Note LIBOR-Based Rate" shall
have the meaning assigned thereto on page 112 of this Prospectus.
"Taxable LIBOR Rate Series 1998-1 Senior Note Spread" shall mean 0.15%
per annum, with respect to the Series 1998-1I Notes, and 0.20% per annum, with
respect to the Series 1998-1J Notes.
"Taxable LIBOR Rate Series 1998-1 Senior Notes" shall mean, collectively,
the Series 1998-1I Notes and the Series 1998-1J Notes.
"Taxable LIBOR Rate Series 1998-1 Subordinate Note Initial Interest Rate"
shall mean the interest rate to be borne by the Taxable LIBOR Rate Series
1998-1 Subordinate Notes for the Initial Interest Period therefor, as set
forth in the First Supplemental Indenture.
"Taxable LIBOR Rate Series 1998-1 Subordinate Note Interest Rate" shall
mean the rate of interest per annum borne by the Taxable LIBOR Rate Series
1998-1 Subordinate Notes, which, during the Initial Interest Period for such
series, shall be the Taxable LIBOR Rate Series 1998-1 Subordinate Note Initial
Interest Rate, and during each Interest Period thereafter, shall be the lesser
of (i) One-Month LIBOR plus the Taxable LIBOR Rate Series 1998-1 Subordinate
Note Spread or (ii) the Net Loan Rate.
"Taxable LIBOR Rate Series 1998-1 Subordinate Note LIBOR-Based Rate"
shall have the meaning assigned thereto on page 116 of this Prospectus.
"Taxable LIBOR Rate Series 1998-1 Subordinate Note Spread" shall mean
0.40% per annum.
"Taxable LIBOR Rate Series 1998-1 Subordinate Notes" shall mean the
Series 1998-1L Notes.
"Taxable Series 1998-1 Notes" shall mean, collectively, the Taxable
Auction Rate Series 1998-1 Senior Notes and the Taxable LIBOR Rate Series
1998-1 Notes.
"Telerate Page 3750" shall mean the display page so designated on the Dow
Jones Telerate Service (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices).
"Terms and Conditions" shall have the meaning assigned thereto on page 49
of this Prospectus.
"Three-Month LIBOR" shall mean, with respect to a series of Taxable
Auction Rate Series 1998-1 Senior Notes and any Interest Rate Determination
Date, the rate of interest per annum equal to the London interbank offered
rate for deposits in United States dollars having a maturity of three months
(commencing on such Interest Rate Determination Date) which appears on
Telerate Page 3750 as of 11:00 a.m., London time, on such Interest Rate
Determination Date. If such rate does not appear on Telerate Page 3750, the
rate for that day will be determined by reference to the Reuters Screen LIBOR
Page. If such rate does not appear on Telerate Page 3750 or the Reuters
Screen LIBOR Page, Three-Month LIBOR for such Interest Rate Determination Date
will be determined on the basis of the rates at which deposits in United
States dollars having a maturity of three months and in a principal amount of
not less than U.S. $1,000,000 are offered at approximately 11:00 a.m., London
time, on such Interest Rate Determination Date to prime banks in the London
interbank market by the Reference Banks. The Auction Agent will request the
principal London office of each of the Reference Banks to provide a quotation
of its rate. If at least two such quotations are provided, Three-Month LIBOR
for that Interest Rate Determination Date will be the arithmetic mean (rounded
upwards, if necessary, to the nearest .01%) of such quotations. If fewer than
two such quotations are provided, Three-Month LIBOR for that Interest Rate
Determination Date will be the arithmetic mean (rounded upwards, if necessary,
to the nearest .01%) of the rates quoted at approximately 11:00
-200-
<PAGE>
a.m., New York City time, on such Interest Rate Determination Date by three
major banks in New York, New York, selected by the Auction Agent after
consultation with the Trustee, for loans in United States dollars to leading
European banks having a maturity of three months and in a principal amount of
not less than U.S. $1,000,000; provided, however, that if the banks selected
as aforesaid are not quoting as mentioned in this sentence, Three-Month LIBOR
will be the Three-Month LIBOR in effect for the immediately preceding Interest
Period.
"Trust Estate" shall have the meaning assigned thereto on page 2 of this
Prospectus.
"Trust Funds" shall mean, in the aggregate, all of the Funds and
Accounts.
"Trustee" shall have the meaning assigned thereto on page 2 of this
Prospectus.
"Underwriters" shall mean Smith Barney Inc., Salomon Brothers Inc, U.S.
Bancorp Investments, Inc., Dougherty Summit Securities LLC, Miller & Schroeder
Financial, Inc., and Norwest Investment Services, Inc.
"Underwriting Agreement" shall have the meaning assigned thereto on page
171 of this Prospectus.
"Unenhanced" shall mean, with respect to a Senior Note or a Subordinate
Note, that the payment of the principal of and interest on such Note is not
secured by a Credit Enhancement Facility.
"Unsubsidized Stafford Loan" shall mean a Student Loan made pursuant to
Section 428H of the Higher Education Act.
"U.K. Regulations" shall have the meaning assigned thereto on page 4 of
this Prospectus.
"U.S. Person" shall have the meaning assigned thereto on page 169 of this
Prospectus.
"Value" shall mean, on any calculation date when required under the
Indenture, the value of the Trust Estate calculated by the Corporation in
accordance with the following:
(1) with respect to any Eligible Loan, the Principal
Balance thereof, plus any unamortized premiums, accrued interest
and Special Allowance Payments thereon;
(2) with respect to any funds of the Corporation on
deposit in any commercial bank or as to any banker's acceptance or
repurchase agreement or investment agreement, the amount thereof
plus accrued interest thereon;
(3) with respect to any Investment Securities of an
investment company, the bid price of the shares as reported by the
investment company;
(4) as to other investments (i) the bid price published by
a nationally recognized pricing service, or (ii) if the bid and
asked prices thereof are published on a regular basis in The Wall
Street Journal (or, if not there, then in The New York Times), the
average of the bid and asked prices for such investments so
published on or most recently prior to such time of determination,
in each case plus accrued interest thereon;
(5) as to investments the bid prices of which are not
published by a nationally recognized pricing service and the bid
and asked prices of which are not published on a regular basis in
The Wall Street Journal or The New York Times, the lower of the bid
prices at such time of determination for such investments by any
two nationally recognized government securities dealers (selected
by the Corporation in its absolute discretion) at the time making a
market in such investments, plus accrued interest thereon; and
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<PAGE>
(6) any accrued but unpaid Swap Counterparty Payments
under a Swap Agreement, unless the Swap Counterparty is in default
of its obligations thereunder.
"Value of Investment Securities" shall mean (i) as to demand bank
deposits, bank time deposits which may be withdrawn without penalty by the
depositor upon 14 days' or less notice and Investment Securities which mature
not more than six months from the date of computation, the amount of such
deposits and the par value of such Investment Securities, and (ii) as to
Investment Securities, other than demand bank deposits and bank time deposits
described in clause (i), which mature more than six months after the date of
computation, the par value thereof or, if purchased at more or less than par,
the cost thereof adjusted to reflect the amortization or premium or discount,
as the case may be, paid upon their purchase. The computation made under this
paragraph shall included accrued interest.
"Variable Rate Notes" shall mean Notes whose interest rate is not fixed
but varies on a periodic basis as specified in the Supplemental Indenture
providing for the issuance thereof.
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<PAGE>
INDEX TO FINANCIAL STATEMENT
----------------------------
Item Page
- ---- ----
Independent Auditor's Report........................ F-2
Balance Sheet....................................... F-3
Notes to Balance Sheet.............................. F-4
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Board of Directors
Education Loans Incorporated
Aberdeen, South Dakota
We have audited the accompanying balance sheet of Education Loans Incorporated
(a Delaware corporation and wholly-owned subsidiary of Student Loan Finance
Corporation, a South Dakota corporation) as of January 27, 1998. This
financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We have conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the balance sheet referred to above presents fairly the
financial position of Education Loans Incorporated as of January 27, 1998 in
conformity with generally accepted accounting principles.
Eide Helmeke PLLP
January 27, 1998
Aberdeen, South Dakota
F-2
<PAGE>
EDUCATION LOANS INCORPORATED
(a wholly-owned subsidiary of Student Loan Finance Corporation)
BALANCE SHEET
JANUARY 27, 1998
- --------------------------------------------------------------------------
ASSETS
CASH $ 100
----------
Total assets $ 100
==========
STOCKHOLDERS' EQUITY
COMMON STOCK, par value $.01;
100 shares authorized, issued and outstanding $ 1
ADDITIONAL PAID-IN CAPITAL 99
----------
Total stockholders' equity $ 100
==========
See Notes to Balance Sheet
F-3
<PAGE>
EDUCATION LOANS INCORPORATED
(a wholly-owned subsidiary of Student Loan Finance Corporation)
NOTES TO BALANCE SHEET
JANUARY 27, 1998
- --------------------------------------------------------------------------
NOTE 1 - ORGANIZATION
Education Loans Incorporated (the "Corporation"), a Delaware corporation and
wholly-owned subsidiary of Student Loan Finance Corporation ("SLFC"), was
incorporated in the State of Delaware on May 7, 1997 and has had no operations
from that date to January 27, 1998. The Company has established its fiscal
year-end to be June 30.
The Corporation was organized to engage exclusively in the following business
and financial activities: (i) to receive the assets and assume the
liabilities transferred to it in connection with the election by Education
Loans Incorporated, a South Dakota nonprofit corporation, under Section
150(d)(3) of the Internal Revenue Code; (ii) to originate or acquire Student
Loans; (iii) to enter into certain agreements relating to Student Loans; (iv)
to issue bonds, notes, asset-backed certificates or other securities payable
solely from Student Loans and other assets pledged to the payment thereof; and
(v) to engage in acts incidental to and necessary, suitable or convenient for
the accomplishment of the foregoing purposes and permitted under Delaware law.
As of the date of incorporation, Student Loan Finance Corporation, a newly
organized South Dakota corporation, subscribed for all 100 shares of the
Corporation's common stock for a total cash consideration of $100. As of
January 27, 1998, the Corporation had received a total of $100 for which it
had issued 100 shares of its $0.01 par value common stock and had credited $1
to the common stock account and credited $99 to the additional paid-in capital
account.
# # # # #
F-4
<PAGE>
COMPUTATIONAL MATERIALS
Annex A
Relating to
$923,470,000
EDUCATION LOANS INCORPORATED
Student Loan Asset-Backed Callable Notes, Series 1998-1
Debt Payment Summary
LIBOR Floating Rate Classes
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Class 1I Senior Notes 1J Senior Notes
- ------------- ----------------------------- ------------------------------
Prepayment Average Payment Average Payment
Rate Life (Yrs) Window Life (Yrs) Window
- ------------- ----------------------------- ------------------------------
<S> <C> <C> <C> <C>
0% 2.09 3/1/98-3/1/02 7.14 3/1/02-5/1/10
3% 1.75 3/1/98-8/1/01 6.34 8/1/01-10/1/08
5% 1.58 3/1/98-4/1/01 5.88 4/1/01-2/1/08
7% 1.44 3/1/98-1/1/01 5.48 1/1/01-7/1/07
10% 1.26 3/1/98-9/1/00 4.93 9/1/00-10/1/06
</TABLE>
<TABLE>
<CAPTION>
- ------------- ------------------------------
Class 1L Subordinate Notes
- ------------- ------------------------------
Prepayment Average Payment
Rate Life (Yrs) Window
- ------------- ------------------------------
<S> <C> <C>
0% 4.94 3/1/98-5/1/10
3% 4.34 3/1/98-10/1/08
5% 4.01 3/1/98-2/1/08
7% 3.72 3/1/98-7/1/07
10% 3.34 3/1/98-10/1/06
</TABLE>
The amounts shown in the tables above and on the following pages are based on
various assumptions and considerations described under "Weighted Average Life of
the Taxable LIBOR Rate Series 1998-1 Notes".
Page A-1
<PAGE>
$923,470,000
EDUCATION LOANS INCORPORATED
Student Loan Asset-Backed Callable Notes, Series 1998-1
Projected Outstanding Balances
1I Senior Notes
<TABLE>
<CAPTION>
0% CPR 3% CPR 5% CPR 7% CPR 10% CPR
Outstanding Outstanding Outstanding Outstanding Outstanding
Date Balance Balance Balance Balance Balance
<S> <C> <C> <C> <C> <C>
19-Feb-98 185,000,000 185,000,000 185,000,000 185,000,000 185,000,000
01-Mar-98 183,817,438 183,511,788 183,303,169 183,090,485 182,763,463
01-Apr-98 180,493,115 179,327,453 178,534,243 177,727,581 176,491,208
01-May-98 177,276,073 175,250,777 173,875,673 172,479,806 170,345,392
01-Jun-98 173,757,807 170,862,066 168,900,091 166,911,927 163,878,567
01-Jul-98 170,157,440 166,390,181 163,842,994 161,266,189 157,343,300
01-Aug-98 166,736,530 162,109,273 158,987,096 155,833,995 151,044,253
01-Sep-98 163,069,220 157,592,098 153,904,131 150,185,962 144,550,165
01-Oct-98 159,463,424 153,144,372 148,898,251 144,624,584 138,160,826
01-Nov-98 155,948,237 148,799,815 144,006,270 139,189,767 131,920,759
01-Dec-98 152,257,408 144,293,414 138,963,945 133,617,987 125,567,388
01-Jan-99 148,488,828 139,686,650 133,807,833 127,920,312 119,072,433
01-Feb-99 144,817,288 135,191,578 128,775,440 122,360,209 112,739,279
01-Mar-99 140,973,517 130,539,166 123,597,834 116,668,781 106,298,943
01-Apr-99 137,082,278 125,834,520 118,366,619 110,923,795 99,807,753
01-May-99 133,311,931 121,262,784 113,278,368 105,333,441 93,491,689
01-Jun-99 129,381,761 116,538,920 108,045,043 99,606,574 87,054,717
01-Jul-99 125,444,921 111,822,920 102,831,236 93,912,414 80,673,042
01-Aug-99 121,630,455 107,245,002 97,767,891 88,382,577 74,479,170
01-Sep-99 117,661,215 102,525,818 92,574,069 82,734,423 68,187,680
01-Oct-99 113,685,200 97,816,016 87,402,162 77,122,065 61,955,205
01-Nov-99 109,832,313 93,248,374 82,386,842 71,682,039 55,921,023
01-Dec-99 105,858,889 88,578,676 77,283,405 66,169,050 49,838,734
01-Jan-2000 101,858,907 83,890,300 72,167,929 60,651,677 43,765,266
01-Feb-2000 97,938,161 79,302,401 67,168,602 55,267,244 37,851,850
01-Mar-2000 93,934,941 74,653,140 62,123,433 49,853,545 31,935,828
01-Apr-2000 89,939,394 70,025,528 57,110,495 44,483,567 26,082,253
01-May-2000 86,002,099 65,472,930 52,184,945 39,214,194 20,350,486
01-Jun-2000 81,981,072 60,850,427 47,199,816 33,896,334 14,588,087
01-Jul-2000 77,973,752 56,259,202 42,258,796 28,636,193 8,905,054
01-Aug-2000 74,044,177 51,764,153 37,427,323 23,499,707 3,368,001
01-Sep-2000 70,048,298 47,217,458 32,554,887 18,333,543 (0)
01-Oct-2000 66,048,244 42,683,600 27,707,481 13,205,154 (0)
01-Nov-2000 62,088,898 38,209,665 22,933,617 8,164,436 (0)
01-Dec-2000 58,089,392 33,712,503 18,148,530 3,124,939 (0)
01-Jan-2001 54,099,593 29,242,408 13,402,752 0 (0)
01-Feb-2001 50,160,355 24,841,260 8,738,811 0 (0)
01-Mar-2001 46,140,013 20,383,346 4,034,719 0 (0)
01-Apr-2001 42,122,823 15,945,270 0 0 (0)
01-May-2001 38,136,786 11,555,694 0 0 (0)
01-Jun-2001 34,110,140 7,130,543 0 0 (0)
01-Jul-2001 30,083,505 2,725,937 0 0 (0)
01-Aug-2001 26,083,845 0 0 0 (0)
01-Sep-2001 22,097,454 0 0 0 (0)
01-Oct-2001 18,125,475 0 0 0 (0)
01-Nov-2001 14,174,574 0 0 0 (0)
01-Dec-2001 10,248,461 0 0 0 (0)
01-Jan-2002 6,334,690 0 0 0 (0)
01-Feb-2002 2,440,759 0 0 0 (0)
01-Mar-2002 (0) 0 0 0 (0)
01-Apr-2002 (0) 0 0 0 (0)
01-May-2002 (0) 0 0 0 (0)
01-Jun-2002 (0) 0 0 0 (0)
01-Jul-2002 (0) 0 0 0 (0)
01-Aug-2002 (0) 0 0 0 (0)
01-Sep-2002 (0) 0 0 0 (0)
01-Oct-2002 (0) 0 0 0 (0)
01-Nov-2002 (0) 0 0 0 (0)
01-Dec-2002 (0) 0 0 0 (0)
01-Jan-2003 (0) 0 0 0 (0)
01-Feb-2003 (0) 0 0 0 (0)
01-Mar-2003 (0) 0 0 0 (0)
01-Apr-2003 (0) 0 0 0 (0)
01-May-2003 (0) 0 0 0 (0)
01-Jun-2003 (0) 0 0 0 (0)
01-Jul-2003 (0) 0 0 0 (0)
01-Aug-2003 (0) 0 0 0 (0)
01-Sep-2003 (0) 0 0 0 (0)
01-Oct-2003 (0) 0 0 0 (0)
</TABLE>
Page A-2
<PAGE>
$923,470,000
EDUCATION LOANS INCORPORATED
Student Loan Asset-Backed Callable Notes, Series 1998-1
Projected Outstanding Balances
1I Senior Notes
<TABLE>
<CAPTION>
0% CPR 3% CPR 5% CPR 7% CPR 10% CPR
Outstanding Outstanding Outstanding Outstanding Outstanding
Date Balance Balance Balance Balance Balance
<S> <C> <C> <C> <C> <C>
01-Nov-2003 (0) 0 0 0 (0)
01-Dec-2003 (0) 0 0 0 (0)
01-Jan-2004 (0) 0 0 0 (0)
01-Feb-2004 (0) 0 0 0 (0)
01-Mar-2004 (0) 0 0 0 (0)
01-Apr-2004 (0) 0 0 0 (0)
01-May-2004 (0) 0 0 0 (0)
01-Jun-2004 (0) 0 0 0 (0)
01-Jul-2004 (0) 0 0 0 (0)
01-Aug-2004 (0) 0 0 0 (0)
01-Sep-2004 (0) 0 0 0 (0)
01-Oct-2004 (0) 0 0 0 (0)
01-Nov-2004 (0) 0 0 0 (0)
01-Dec-2004 (0) 0 0 0 (0)
01-Jan-2005 (0) 0 0 0 (0)
01-Feb-2005 (0) 0 0 0 (0)
01-Mar-2005 (0) 0 0 0 (0)
01-Apr-2005 (0) 0 0 0 (0)
01-May-2005 (0) 0 0 0 (0)
01-Jun-2005 (0) 0 0 0 (0)
01-Jul-2005 (0) 0 0 0 (0)
01-Aug-2005 (0) 0 0 0 (0)
01-Sep-2005 (0) 0 0 0 (0)
01-Oct-2005 (0) 0 0 0 (0)
01-Nov-2005 (0) 0 0 0 (0)
01-Dec-2005 (0) 0 0 0 (0)
01-Jan-2006 (0) 0 0 0 (0)
01-Feb-2006 (0) 0 0 0 (0)
01-Mar-2006 (0) 0 0 0 (0)
01-Apr-2006 (0) 0 0 0 (0)
01-May-2006 (0) 0 0 0 (0)
01-Jun-2006 (0) 0 0 0 (0)
01-Jul-2006 (0) 0 0 0 (0)
01-Aug-2006 (0) 0 0 0 (0)
01-Sep-2006 (0) 0 0 0 (0)
01-Oct-2006 (0) 0 0 0 (0)
01-Nov-2006 (0) 0 0 0 (0)
01-Dec-2006 (0) 0 0 0 (0)
01-Jan-2007 (0) 0 0 0 (0)
01-Feb-2007 (0) 0 0 0 (0)
01-Mar-2007 (0) 0 0 0 (0)
01-Apr-2007 (0) 0 0 0 (0)
01-May-2007 (0) 0 0 0 (0)
01-Jun-2007 (0) 0 0 0 (0)
01-Jul-2007 (0) 0 0 0 (0)
01-Aug-2007 (0) 0 0 0 (0)
01-Sep-2007 (0) 0 0 0 (0)
01-Oct-2007 (0) 0 0 0 (0)
01-Nov-2007 (0) 0 0 0 (0)
01-Dec-2007 (0) 0 0 0 (0)
01-Jan-2008 (0) 0 0 0 (0)
01-Feb-2008 (0) 0 0 0 (0)
01-Mar-2008 (0) 0 0 0 (0)
01-Apr-2008 (0) 0 0 0 (0)
01-May-2008 (0) 0 0 0 (0)
01-Jun-2008 (0) 0 0 0 (0)
01-Jul-2008 (0) 0 0 0 (0)
01-Aug-2008 (0) 0 0 0 (0)
01-Sep-2008 (0) 0 0 0 (0)
01-Oct-2008 (0) 0 0 0 (0)
01-Nov-2008 (0) 0 0 0 (0)
01-Dec-2008 (0) 0 0 0 (0)
01-Jan-2009 (0) 0 0 0 (0)
01-Feb-2009 (0) 0 0 0 (0)
01-Mar-2009 (0) 0 0 0 (0)
01-Apr-2009 (0) 0 0 0 (0)
01-May-2009 (0) 0 0 0 (0)
01-Jun-2009 (0) 0 0 0 (0)
01-Jul-2009 (0) 0 0 0 (0)
01-Aug-2009 (0) 0 0 0 (0)
01-Sep-2009 (0) 0 0 0 (0)
01-Oct-2009 (0) 0 0 0 (0)
01-Nov-2009 (0) 0 0 0 (0)
01-Dec-2009 (0) 0 0 0 (0)
01-Jan-2010 (0) 0 0 0 (0)
01-Feb-2010 (0) 0 0 0 (0)
01-Mar-2010 (0) 0 0 0 (0)
01-Apr-2010 (0) 0 0 0 (0)
01-May-2010 (0) 0 0 0 (0)
01-Jun-2010 (0) 0 0 0 (0)
</TABLE>
Page A-3
<PAGE>
$923,470,000
EDUCATION LOANS INCORPORATED
Student Loan Asset-Backed Callable Notes, Series 1998-1
Projected Outstanding Balances
1J Senior Notes
<TABLE>
<CAPTION>
0% CPR 3% CPR 5% CPR 7% CPR 10% CPR
Outstanding Outstanding Outstanding Outstanding Outstanding
Date Balance Balance Balance Balance Balance
- ---- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
19-Feb-98 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Mar-98 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Apr-98 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-May-98 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Jun-98 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Jul-98 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Aug-98 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Sep-98 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Oct-98 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Nov-98 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Dec-98 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Jan-99 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Feb-99 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Mar-99 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Apr-99 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-May-99 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Jun-99 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Jul-99 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Aug-99 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Sep-99 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Oct-99 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Nov-99 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Dec-99 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Jan-2000 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Feb-2000 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Mar-2000 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Apr-2000 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-May-2000 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Jun-2000 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Jul-2000 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Aug-2000 239,600,000 239,600,000 239,600,000 239,600,000 239,600,000
01-Sep-2000 239,600,000 239,600,000 239,600,000 239,600,000 237,419,084
01-Oct-2000 239,600,000 239,600,000 239,600,000 239,600,000 231,927,849
01-Nov-2000 239,600,000 239,600,000 239,600,000 239,600,000 226,546,201
01-Dec-2000 239,600,000 239,600,000 239,600,000 239,600,000 221,185,012
01-Jan-2001 239,600,000 239,600,000 239,600,000 237,737,389 215,895,225
01-Feb-2001 239,600,000 239,600,000 239,600,000 232,844,934 210,720,868
01-Mar-2001 239,600,000 239,600,000 239,600,000 227,929,119 205,548,424
01-Apr-2001 239,600,000 239,600,000 238,962,001 223,056,403 200,436,769
01-May-2001 239,600,000 239,600,000 234,349,721 218,256,218 195,415,838
01-Jun-2001 239,600,000 239,600,000 229,705,320 213,427,299 190,370,866
01-Jul-2001 239,600,000 239,600,000 225,095,414 208,646,901 185,395,361
01-Aug-2001 239,600,000 237,967,230 220,544,280 203,938,214 180,510,875
01-Sep-2001 239,600,000 233,640,308 216,037,463 199,286,394 175,701,880
01-Oct-2001 239,600,000 229,346,757 211,576,752 194,693,358 170,970,357
01-Nov-2001 239,600,000 225,092,849 207,168,092 190,164,675 166,321,217
01-Dec-2001 239,600,000 220,881,144 202,813,240 185,701,270 161,754,092
01-Jan-2002 239,600,000 216,699,460 198,500,088 181,291,031 157,256,726
01-Feb-2002 239,600,000 212,555,562 194,236,523 176,941,924 152,837,128
01-Mar-2002 238,183,023 208,462,925 190,034,180 172,663,807 148,502,597
01-Apr-2002 234,344,009 204,406,259 185,879,042 168,443,797 144,241,715
01-May-2002 230,520,360 200,382,699 181,768,473 164,279,415 140,052,112
01-Jun-2002 226,708,646 196,387,004 177,695,980 160,162,882 135,924,014
01-Jul-2002 222,913,317 192,424,552 173,667,513 156,100,683 131,864,667
01-Aug-2002 219,143,347 188,503,569 169,690,773 152,099,985 127,880,410
01-Sep-2002 215,383,122 184,609,676 165,752,061 148,147,656 123,958,778
01-Oct-2002 211,646,732 180,754,463 161,861,340 144,252,063 120,105,806
01-Nov-2002 207,938,519 176,942,324 158,023,025 140,417,642 116,325,955
01-Dec-2002 204,250,136 173,165,329 154,229,375 136,636,774 112,611,687
01-Jan-2003 200,586,095 169,424,616 150,479,227 132,905,957 108,955,923
01-Feb-2003 196,932,445 165,710,632 146,765,837 129,221,168 105,358,584
01-Mar-2003 193,294,834 162,027,561 143,092,450 125,584,747 101,820,720
01-Apr-2003 189,690,927 158,391,311 139,473,852 122,010,400 98,354,496
01-May-2003 186,098,966 154,782,799 135,892,521 118,482,000 94,945,599
01-Jun-2003 182,499,444 151,183,927 132,331,083 114,982,744 91,577,823
01-Jul-2003 178,915,124 147,615,196 128,808,673 111,530,513 88,267,375
01-Aug-2003 175,368,600 144,095,616 125,342,120 108,140,115 85,026,310
01-Sep-2003 171,847,806 140,614,649 121,921,746 104,802,613 81,846,616
01-Oct-2003 168,348,970 137,168,963 118,544,424 101,515,029 78,725,443
</TABLE>
Page A-4
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
01-Nov-2003 164,877,153 133,762,298 115,213,051 98,279,449 75,663,731
01-Dec-2003 161,433,073 130,395,111 111,927,909 95,095,981 72,661,332
01-Jan-2004 158,012,213 127,063,527 108,685,444 91,961,324 69,715,219
01-Feb-2004 154,635,203 123,785,039 105,501,242 88,889,294 66,836,802
01-Mar-2004 151,262,391 120,525,177 102,343,886 85,851,235 64,001,073
01-Apr-2004 147,923,865 117,309,378 99,236,018 82,867,228 61,224,673
01-May-2004 144,605,150 114,125,446 96,166,736 79,927,502 58,499,267
01-Jun-2004 141,303,733 110,970,536 93,132,935 77,028,671 55,821,024
01-Jul-2004 138,019,001 107,844,306 90,134,413 74,170,650 53,189,999
01-Aug-2004 134,753,194 104,748,610 87,172,758 71,354,760 50,607,129
01-Sep-2004 131,495,314 101,674,141 84,239,602 68,573,442 48,065,858
01-Oct-2004 128,240,895 98,617,195 81,331,629 65,823,692 45,563,531
01-Nov-2004 125,007,883 95,592,262 78,461,290 63,116,114 43,108,320
01-Dec-2004 121,789,939 92,594,242 75,624,147 60,446,825 40,697,006
01-Jan-2005 118,605,088 89,637,450 72,832,349 57,826,032 38,337,266
01-Feb-2005 115,447,207 86,716,710 70,081,239 55,249,523 36,025,444
01-Mar-2005 112,319,711 83,834,464 67,372,676 52,718,624 33,762,158
01-Apr-2005 109,230,433 80,997,705 64,713,072 50,239,167 31,552,386
01-May-2005 106,164,496 78,193,293 62,090,316 47,799,975 29,386,201
01-Jun-2005 103,134,164 75,430,565 59,512,060 45,407,205 27,267,845
01-Jul-2005 100,147,737 72,716,099 56,983,881 43,065,548 25,200,868
01-Aug-2005 97,212,316 70,055,449 54,510,442 40,778,878 23,188,135
01-Sep-2005 94,325,293 67,445,882 52,088,932 38,544,312 21,226,676
01-Oct-2005 91,482,307 64,883,970 49,716,435 36,359,375 19,314,567
01-Nov-2005 88,689,448 62,374,023 47,396,269 34,226,527 17,453,209
01-Dec-2005 85,925,597 59,898,843 45,113,431 32,132,676 15,631,911
01-Jan-2006 83,189,660 57,457,673 42,867,314 30,077,317 13,850,263
01-Feb-2006 80,477,164 55,046,523 40,654,172 28,056,902 12,104,940
01-Mar-2006 77,795,967 52,671,445 38,479,050 26,075,610 10,399,061
01-Apr-2006 75,131,835 50,321,113 36,332,228 24,125,098 8,725,983
01-May-2006 72,511,896 48,016,674 34,231,495 22,220,240 7,096,943
01-Jun-2006 69,931,966 45,754,223 32,173,109 20,357,445 5,508,547
01-Jul-2006 67,393,534 43,534,621 30,157,587 18,536,939 3,960,683
01-Aug-2006 64,892,309 41,354,536 28,182,109 16,756,333 2,451,477
01-Sep-2006 62,424,498 39,210,660 26,243,638 15,012,820 978,426
01-Oct-2006 59,990,763 37,103,319 24,342,302 13,306,365 0
01-Nov-2006 57,602,234 36,040,753 22,484,765 11,642,286 0
01-Dec-2006 55,251,229 33,016,839 20,665,755 10,016,043 0
01-Jan-2007 52,930,302 31,025,604 18,880,090 8,423,121 0
01-Feb-2007 50,641,479 29,068,508 17,128,911 6,864,380 0
01-Mar-2007 48,370,396 27,134,429 15,402,854 5,331,950 0
01-Apr-2007 46,117,261 25,223,304 13,701,685 3,825,438 0
01-May-2007 43,882,740 23,335,620 12,025,797 2,345,160 0
01-Jun-2007 41,684,742 21,484,453 10,385,641 899,353 0
01-Jul-2007 39,550,208 19,689,918 8,797,668 (0) 0
01-Aug-2007 37,471,174 17,945,685 7,256,448 (0) 0
01-Sep-2007 35,422,353 16,232,452 5,745,908 (0) 0
01-Oct-2007 33,392,949 14,542,000 4,259,202 (0) 0
01-Nov-2007 31,407,479 12,892,336 2,810,869 (0) 0
01-Dec-2007 29,511,905 11,317,462 1,428,570 (0) 0
01-Jan-2008 27,690,927 9,805,105 101,695 (0) 0
01-Feb-2008 25,876,559 8,305,564 0 (0) 0
01-Mar-2008 24,525,462 7,153,613 0 (0) 0
01-Apr-2008 23,257,557 6,068,749 0 (0) 0
01-May-2008 22,012,798 5,005,636 0 (0) 0
01-Jun-2008 20,781,595 3,957,755 0 (0) 0
01-Jul-2008 19,559,073 2,921,448 0 (0) 0
01-Aug-2008 18,342,402 1,894,487 0 (0) 0
01-Sep-2008 17,147,279 888,444 0 (0) 0
01-Oct-2008 15,957,207 (0) 0 (0) 0
01-Nov-2008 14,766,362 (0) 0 (0) 0
01-Dec-2008 13,577,131 (0) 0 (0) 0
01-Jan-2009 12,529,278 (0) 0 (0) 0
01-Feb-2009 11,491,114 (0) 0 (0) 0
01-Mar-2009 10,461,725 (0) 0 (0) 0
01-Apr-2009 9,538,184 (0) 0 (0) 0
01-May-2009 8,641,976 (0) 0 (0) 0
01-Jun-2009 7,753,565 (0) 0 (0) 0
01-Jul-2009 6,871,946 (0) 0 (0) 0
01-Aug-2009 6,015,626 (0) 0 (0) 0
01-Sep-2009 5,193,257 (0) 0 (0) 0
01-Oct-2009 4,398,656 (0) 0 (0) 0
01-Nov-2009 3,613,720 (0) 0 (0) 0
01-Dec-2009 2,845,948 (0) 0 (0) 0
01-Jan-2010 2,118,810 (0) 0 (0) 0
01-Feb-2010 1,394,702 (0) 0 (0) 0
01-Mar-2010 705,961 (0) 0 (0) 0
01-Apr-2010 47,090 (0) 0 (0) 0
01-May-2010 (0) (0) 0 (0) 0
01-Jun-2010 (0) (0) 0 (0) 0
</TABLE>
Page A-5
<PAGE>
$923,470,000
EDUCATION LOANS INCORPORATED
Student Loan Asset-Backed Callable Notes, Series 1998-1
Projected Outstanding Balances
1L Subordinate Notes
<TABLE>
<CAPTION>
0% CPR 3% CPR 5% CPR 7% CPR 10% CPR
Outstanding Outstanding Outstanding Outstanding Outstanding
Date Balance Balance Balance Balance Balance
- ---- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
19-Feb-98 59,200,000 59,200,000 59,200,000 59,200,000 59,200,000
01-Mar-98 59,035,121 58,992,506 58,963,419 58,933,765 58,888,170
01-Apr-98 58,571,626 58,409,103 58,298,510 58,186,040 58,013,659
01-May-98 58,123,089 57,840,711 57,648,987 57,454,368 57,156,776
01-Jun-98 57,632,553 57,228,814 56,955,265 56,678,064 56,255,137
01-Jul-98 57,130,571 56,605,320 56,250,177 55,890,905 55,343,955
01-Aug-98 56,653,609 56,008,453 55,573,142 55,133,520 54,465,708
01-Sep-98 56,142,294 55,378,644 54,864,448 54,346,041 53,560,268
01-Oct-98 55,639,554 54,758,518 54,166,501 53,570,644 52,669,432
01-Nov-98 55,149,448 54,152,777 53,484,435 52,812,893 51,799,409
01-Dec-98 54,634,853 53,524,470 52,781,407 52,036,045 50,913,588
01-Jan-99 54,109,417 52,882,171 52,062,515 51,241,645 50,008,026
01-Feb-99 53,597,512 52,255,444 51,360,872 50,466,426 49,125,024
01-Mar-99 53,061,593 51,606,780 50,638,982 49,672,896 48,227,078
01-Apr-99 52,519,055 50,950,833 49,909,618 48,871,900 47,322,042
01-May-99 51,993,373 50,313,417 49,200,187 48,092,463 46,441,422
01-Jun-99 51,445,408 49,654,790 48,470,529 47,293,992 45,543,946
01-Jul-99 50,896,513 48,997,261 47,743,592 46,500,082 44,654,178
01-Aug-99 50,364,679 48,358,983 47,037,633 45,729,083 43,790,596
01-Sep-99 49,811,267 47,701,009 46,313,483 44,941,587 42,913,402
01-Oct-99 49,256,910 47,044,343 45,592,388 44,159,082 42,044,437
01-Nov-99 48,719,720 46,407,498 44,893,125 43,400,605 41,203,120
01-Dec-99 48,165,724 45,756,424 44,181,577 42,631,954 40,355,094
01-Jan-2000 47,608,025 45,102,746 43,468,350 41,862,693 39,508,299
01-Feb-2000 47,061,373 44,463,076 42,771,317 41,111,966 38,683,819
01-Mar-2000 46,503,223 43,814,851 42,067,893 40,357,159 37,858,976
01-Apr-2000 45,946,143 43,169,645 41,368,962 39,608,448 37,042,839
01-May-2000 45,397,184 42,534,897 40,682,216 38,873,764 36,243,685
01-Jun-2000 44,836,551 41,890,403 39,987,162 38,132,320 35,440,261
01-Jul-2000 44,277,829 41,250,270 39,298,259 37,398,923 34,647,902
01-Aug-2000 43,729,946 40,623,547 38,624,629 36,682,766 33,875,896
01-Sep-2000 43,172,820 39,989,622 37,945,288 35,962,472 33,102,237
01-Oct-2000 42,615,111 39,357,487 37,269,437 35,247,445 32,336,620
01-Nov-2000 42,063,078 38,733,707 36,603,839 34,544,641 31,586,281
01-Dec-2000 41,505,445 38,106,689 35,936,677 33,842,008 30,838,796
01-Jan-2001 40,949,166 37,483,445 35,274,995 33,146,617 30,101,266
01-Feb-2001 40,399,936 36,869,813 34,624,724 32,464,484 29,379,829
01-Mar-2001 39,839,399 36,248,267 33,968,854 31,779,095 28,658,659
01-Apr-2001 39,279,301 35,629,487 33,317,359 31,099,715 27,945,965
01-May-2001 38,723,546 35,017,468 32,674,290 30,430,448 27,245,920
01-Jun-2001 38,162,130 34,400,490 32,026,743 29,757,174 26,542,523
01-Jul-2001 37,600,715 33,786,377 31,384,005 29,090,665 25,848,811
01-Aug-2001 37,043,061 33,178,662 30,749,462 28,434,155 25,167,790
01-Sep-2001 36,487,257 32,575,380 30,121,097 27,785,574 24,497,295
01-Oct-2001 35,933,462 31,976,750 29,499,161 27,145,188 23,837,600
01-Nov-2001 35,382,607 31,383,647 28,884,482 26,513,775 23,189,392
01-Dec-2001 34,835,207 30,796,429 28,277,305 25,891,463 22,552,620
01-Jan-2002 34,289,528 30,213,396 27,675,943 25,276,564 21,925,573
01-Feb-2002 33,746,616 29,635,632 27,081,494 24,670,188 21,309,369
01-Mar-2002 33,208,749 29,065,014 26,495,580 24,073,710 20,705,025
01-Apr-2002 32,673,493 28,499,412 25,916,249 23,485,334 20,110,950
01-May-2002 32,140,380 27,938,426 25,343,131 22,904,714 19,526,814
01-Jun-2002 31,608,930 27,381,325 24,775,323 22,330,764 18,951,252
01-Jul-2002 31,079,765 26,828,859 24,213,652 21,764,391 18,385,276
01-Aug-2002 30,554,136 26,282,174 23,659,194 21,206,592 17,829,770
01-Sep-2002 30,029,865 25,739,267 23,110,038 20,655,537 17,282,995
01-Oct-2002 29,508,918 25,201,753 22,567,573 20,112,393 16,745,793
01-Nov-2002 28,991,899 24,670,244 22,032,414 19,577,778 16,218,786
01-Dec-2002 28,477,645 24,143,635 21,503,483 19,050,629 15,700,923
01-Jan-2003 27,966,785 23,622,085 20,980,618 18,530,458 15,191,217
01-Feb-2003 27,457,373 23,104,261 20,462,877 18,016,705 14,689,657
01-Mar-2003 26,950,198 22,590,748 19,950,714 17,509,696 14,196,389
01-Apr-2003 26,447,722 22,083,763 19,446,190 17,011,342 13,713,109
01-May-2003 25,946,912 21,580,645 18,946,861 16,519,393 13,237,823
01-Jun-2003 25,445,047 21,078,871 18,450,306 16,031,508 12,768,269
01-Jul-2003 24,945,302 20,581,299 17,959,193 15,550,180 12,306,709
01-Aug-2003 24,450,827 20,090,580 17,475,868 15,077,472 11,854,822
01-Sep-2003 23,959,939 19,605,246 16,998,981 14,612,140 11,411,492
01-Oct-2003 23,472,113 19,124,830 16,528,097 14,153,768 10,976,322
</TABLE>
Page A-6
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
01-Nov-2003 22,988,053 18,649,854 16,063,619 13,702,646 10,549,442
01-Dec-2003 22,507,861 18,180,383 15,605,587 13,258,790 10,130,831
01-Jan-2004 22,030,907 17,715,876 15,153,505 12,821,739 9,720,068
01-Feb-2004 21,560,066 17,258,771 14,709,547 12,393,420 9,318,744
01-Mar-2004 21,089,811 16,804,264 14,269,331 11,969,838 8,923,371
01-Apr-2004 20,624,335 16,355,900 13,836,016 11,553,792 8,536,271
01-May-2004 20,161,622 15,911,979 13,408,080 11,143,919 8,156,280
01-Jun-2004 19,701,321 15,472,105 12,985,091 10,739,749 7,782,865
01-Jul-2004 19,243,346 15,036,229 12,567,021 10,341,268 7,416,034
01-Aug-2004 18,788,010 14,604,611 12,154,092 9,948,662 7,055,916
01-Sep-2004 18,333,779 14,175,952 11,745,135 9,560,876 6,701,599
01-Oct-2004 17,880,031 13,749,736 11,339,690 9,177,491 6,352,711
01-Nov-2004 17,429,267 13,327,984 10,939,492 8,799,986 6,010,392
01-Dec-2004 16,980,604 12,909,984 10,543,923 8,427,819 5,674,194
01-Jan-2005 16,536,555 12,497,732 10,154,675 8,062,414 5,345,186
01-Feb-2005 16,096,266 12,090,507 9,771,101 7,703,184 5,022,860
01-Mar-2005 15,660,214 11,688,649 9,393,458 7,350,312 4,707,300
01-Apr-2005 15,229,490 11,293,133 9,022,642 7,004,613 4,399,202
01-May-2005 14,802,021 10,902,127 8,656,964 6,664,528 4,097,181
01-Jun-2005 14,379,516 10,516,932 8,297,489 6,330,915 3,801,829
01-Jul-2005 13,963,132 10,138,467 7,944,997 6,004,429 3,513,640
01-Aug-2005 13,553,860 9,767,505 7,600,137 5,685,609 3,233,014
01-Sep-2005 13,151,336 9,403,665 7,262,517 5,374,054 2,959,537
01-Oct-2005 12,754,952 9,046,470 6,931,731 5,069,418 2,692,940
01-Nov-2005 12,365,557 8,696,519 6,608,241 4,772,045 2,433,420
01-Dec-2005 11,980,206 8,351,417 6,289,956 4,480,109 2,179,485
01-Jan-2006 11,598,747 8,011,056 5,976,790 4,193,540 1,931,078
01-Feb-2006 11,220,556 7,674,880 5,668,222 3,911,843 1,687,735
01-Mar-2006 10,846,729 7,343,734 5,364,955 3,635,601 1,449,893
01-Apr-2006 10,475,282 7,016,038 5,065,633 3,363,650 1,216,623
01-May-2006 10,109,996 6,694,741 4,772,738 3,098,065 989,494
01-Jun-2006 9,750,288 6,379,298 4,485,747 2,838,344 768,031
01-Jul-2006 9,396,366 6,069,829 4,204,732 2,584,519 552,220
01-Aug-2006 9,047,632 5,765,870 3,929,300 2,336,257 341,798
01-Sep-2006 8,703,557 5,466,960 3,659,028 2,093,168 136,417
01-Oct-2006 8,364,233 5,173,143 3,393,934 1,855,245 0
01-Nov-2006 8,031,211 4,885,569 3,134,946 1,623,230 0
01-Dec-2006 7,703,421 4,603,384 2,881,330 1,396,490 0
01-Jan-2007 7,379,825 4,325,755 2,632,363 1,174,397 0
01-Feb-2007 7,060,705 4,052,887 2,388,204 957,069 0
01-Mar-2007 6,744,059 3,783,227 2,147,548 743,409 0
01-Apr-2007 6,429,915 3,516,768 1,910,362 533,363 0
01-May-2007 6,118,366 3,253,577 1,676,701 326,975 0
01-Jun-2007 5,811,909 2,995,477 1,448,022 125,393 0
01-Jul-2007 5,514,301 2,745,274 1,226,618 0 0
01-Aug-2007 5,224,431 2,502,083 1,011,733 0 0
01-Sep-2007 4,938,774 2,263,215 801,125 0 0
01-Oct-2007 4,655,823 2,027,523 593,841 0 0
01-Nov-2007 4,378,999 1,797,518 391,906 0 0
01-Dec-2007 4,114,707 1,577,941 199,179 0 0
01-Jan-2008 3,860,817 1,367,080 14,179 0 0
01-Feb-2008 3,607,848 1,158,006 (0) 0 0
01-Mar-2008 3,419,471 997,395 (0) 0 0
01-Apr-2008 3,242,693 846,137 (0) 0 0
01-May-2008 3,069,142 697,912 (0) 0 0
01-Jun-2008 2,897,481 551,811 (0) 0 0
01-Jul-2008 2,727,030 407,324 (0) 0 0
01-Aug-2008 2,557,396 264,140 (0) 0 0
01-Sep-2008 2,390,765 123,872 (0) 0 0
01-Oct-2008 2,224,839 (0) (0) 0 0
01-Nov-2008 2,058,805 (0) (0) 0 0
01-Dec-2008 1,892,996 (0) (0) 0 0
01-Jan-2009 1,746,899 (0) (0) 0 0
01-Feb-2009 1,602,153 (0) (0) 0 0
01-Mar-2009 1,458,630 (0) (0) 0 0
01-Apr-2009 1,329,865 (0) (0) 0 0
01-May-2009 1,204,910 (0) (0) 0 0
01-Jun-2009 1,081,043 (0) (0) 0 0
01-Jul-2009 958,123 (0) (0) 0 0
01-Aug-2009 838,731 (0) (0) 0 0
01-Sep-2009 724,072 (0) (0) 0 0
01-Oct-2009 613,284 (0) (0) 0 0
01-Nov-2009 503,844 (0) (0) 0 0
01-Dec-2009 396,797 (0) (0) 0 0
01-Jan-2010 295,416 (0) (0) 0 0
01-Feb-2010 194,457 (0) (0) 0 0
01-Mar-2010 98,429 (0) (0) 0 0
01-Apr-2010 6,566 (0) (0) 0 0
01-May-2010 0 (0) (0) 0 0
01-Jun-2010 0 (0) (0) 0 0
</TABLE>
Page A-7
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and, if given or
made, such information or representations must not be relied upon. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any securities other than the Series 1998-1 Notes offered hereby nor an
offer of the Series 1998-1 Notes to any person in any state or other
jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
______________
TABLE OF CONTENTS TO PROSPECTUS
Page
----
Available Information . . . . . . . . . . . . . . . 6
Reports to Noteholders . . . . . . . . . . . . . . 6
Prospectus Summary . . . . . . . . . . . . . . . . 7
Risk Factors . . . . . . . . . . . . . . . . . . . 32
Description of Series 1998-1 Notes . . . . . . . . 45
Application of Series 1998-1 Note Proceeds . . . . 55
Source of Payment and Security for the Notes . . . 57
The Original Issuer . . . . . . . . . . . . . . . . 60
The Servicer . . . . . . . . . . . . . . . . . . . 61
The Corporation . . . . . . . . . . . . . . . . . . 65
The SLFC Servicing Agreement . . . . . . . . . . . 67
Description of Financed Eligible Loan Program . . . 71
Characteristics of the Initial Financed Eligible
Loans . . . . . . . . . . . . . . . . . . . . . . 75
Description of Federal Family Education Loan
Program . . . . . . . . . . . . . . . . . . . . . 80
Description of the Guarantee Agencies . . . . . . . 95
Terms of the Tax Exempt Auction Rate Series 1998-1
Senior Notes . . . . . . . . . . . . . . . . . . 104
Terms of the Tax Exempt Fixed Rate Series 1998-1
Senior Notes . . . . . . . . . . . . . . . . . . . 107
Terms of the Taxable Auction Rate Series 1998-1
Senior Notes . . . . . . . . . . . . . . . . . . . 107
Terms of the Taxable LIBOR Rate Series 1998-1
Senior Notes . . . . . . . . . . . . . . . . . . . 111
Terms of the Tax Exempt Fixed Rate Series 1998-1
Subordinate Notes . . . . . . . . . . . . . . . . 115
Terms of the Taxable LIBOR Rate Series 1998-1
Subordinate Notes . . . . . . . . . . . . . . . . 115
Weighted Average Life of the Taxable LIBOR Rate
Series 1998-1 Notes . . . . . . . . . . . . . . . 118
Auction of the Auction Rate Series 1998-1 Senior
Notes . . . . . . . . . . . . . . . . . . . . . . 119
Settlement Procedures for Auction Rate Series
1998-1 Senior Notes . . . . . . . . . . . . . . . 135
Summary of the Indenture . . . . . . . . . . . . . 138
Tax Matters . . . . . . . . . . . . . . . . . . . . 165
ERISA Considerations . . . . . . . . . . . . . . . 169
Certain Relationships Among Financing Participants 170
Plan of Distribution . . . . . . . . . . . . . . . 171
Legal Matters . . . . . . . . . . . . . . . . . . . 172
Experts . . . . . . . . . . . . . . . . . . . . . . 172
Ratings . . . . . . . . . . . . . . . . . . . . . . 172
Glossary of Certain Defined Terms . . . . . . . . . 173
Index to Financial Statement . . . . . . . . . . . F-1
Annex A - Computational Materials . . . . . . . . . A-1
______________
UNTIL MAY 14, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE SERIES 1998-1
NOTES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT 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.
EDUCATION LOANS INCORPORATED
STUDENT LOAN ASSET-BACKED
CALLABLE NOTES, SERIES 1998-1
$274,900,000
Tax Exempt Auction Rate
Student Loan Asset-Backed Callable Notes,
Senior Series 1998-1A through E
$24,055,000
Tax Exempt Fixed Rate
Student Loan Asset-Backed Callable Notes,
Senior Series 1998-1F
$107,500,000
Taxable Auction Rate
Student Loan Asset-Backed Callable Notes,
Senior Series 1998-1G and H
$424,600,000
Taxable LIBOR Rate
Student Loan Asset-Backed Callable Notes,
Senior Series 1998-1I and J
$33,215,000
Tax Exempt Fixed Rate
Student Loan Asset-Backed Callable Notes,
Subordinate Series 1998-1K
$59,200,000
Taxable LIBOR Rate
Student Loan Asset-Backed Callable Notes,
Subordinate Series 1998-1L
__________
PROSPECTUS
__________
SALOMON SMITH BARNEY
U.S. BANCORP INVESTMENTS, INC.
DOUGHERTY SUMMIT SECURITIES LLC
MILLER & SCHROEDER FINANCIAL, INC.
NORWEST INVESTMENT SERVICES, INC.
FEBRUARY 12, 1998
