<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 24, 1999
REGISTRATION NO. 333-64009
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
EFG FUNDING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 04-3434429
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
</TABLE>
------------------------
ONE FINANCIAL PLACE
297 NORTH STREET
HYANNIS, MASSACHUSETTS 02601
(508) 862-2524
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
STEPHEN J. GALVIN
ONE FINANCIAL PLACE
297 NORTH STREET
HYANNIS, MASSACHUSETTS 02601
(508) 862-2537
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
With copies to:
RICHARD C. SAMMIS, ESQ.
WILLKIE FARR & GALLAGHER
787 SEVENTH AVENUE
NEW YORK, NEW YORK 10019-6099
(212) 728-8263
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this Registration Statement becomes effective as determined by
market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
investment plans, check the following box. /x/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check following box. / /
------------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
====================================================================================================================
PROPOSED PROPOSED
TITLE OF EACH CLASS AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Student Loan-Backed Securities.......... $1,000,000 100% $1,000,000 $295.00
</TABLE>
(1) Estimated solely for the purposes of calculating the registration fee in
accordance with Rule 457(o). The registration fee in the amount of $295.00
was previously paid in connection with the September 22, 1998 filing of the
Registration Statement and such amounts are shown solely for informational
purposes only.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus Supplement and the accompanying Prospectus shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any state in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such state.
Information contained within these markers < > refers to transactions with
Revolving Periods (as defined herein)
SUBJECT TO COMPLETION, DATED FEBRUARY 24, 1999
[FORM OF]
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED [ , 1999])
$
EFG STUDENT LOAN TRUST -
ISSUER
FLOATING RATE ASSET BACKED SENIOR NOTES
EFG FUNDING CORPORATION
DEPOSITOR
EDUCATIONAL FINANCE GROUP, INC.
SELLER
The EFG Student Loan Trust - (the "Trust") will issue $
aggregate principal amount of Floating Rate Student Loan-Backed Senior Notes
(the "Senior Notes") and $ aggregate principal amount of Floating Rate
Student Loan-Backed Subordinate Notes (the "Subordinate Notes" and, together
with the Senior Notes, the "Notes"). Only the Senior Notes are offered hereby.
The assets of the Trust will include a pool of guaranteed education loans to
students and parents of students sold by Educational Finance Group, Inc. ("EFG"
or the "Seller") to EFG Funding Corporation (the "Depositor") and transferred to
the Trust by the Depositor (such loans, together with any Additional Student
Loans (as defined herein), the "Student Loans"), collections and other payments
with respect to the Student Loans, and monies on deposit in certain trust
accounts (including the Collection Account<, and> the Reserve Account <and the
Collateral Reinvestment Account>). However, in all events legal title to loans
originated under and subject to the Federal Family Education Loan Program will
be held by an eligible lender under applicable law. The Notes will be
collateralized by the assets of the Trust. The rights of the Subordinate
Noteholders to receive payments of interest will be subordinate to the rights of
the Senior Noteholders to receive payments of interest and the rights of the
Subordinate Noteholders to receive payments of principal will be subordinate to
the rights of the Senior Noteholders to receive payments of interest and
principal to the extent described herein. <After the Closing Date, certain
Additional Fundings will be made from time to time during the Revolving Period
described herein, and in certain cases after the Revolving Period, by or on
behalf of the Trust, as described herein.> Capitalized terms used herein are
defined on the pages indicated in the "Index of Terms" in this Prospectus
Supplement and the Prospectus.
(Cover continued on next page)
------------------
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER
"RISK FACTORS" HEREIN AT PAGE S-19 AND IN THE ACCOMPANYING
PROSPECTUS AT PAGE 15.
------------------
THE NOTES REPRESENT OBLIGATIONS OF THE TRUST ONLY AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF THE SELLER, THE DEPOSITOR, THE SERVICER OR
ANY AFFILIATE THEREOF. THE NOTES ARE NOT GUARANTEED OR INSURED
BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO THE UNDERWRITING PROCEEDS TO THE
PUBLIC DISCOUNT(2) DEPOSITOR(1)(3)
<S> <C> <C> <C>
Senior Notes.............................................. % % %
Total..................................................... $ $ $
</TABLE>
(1) Plus accrued interest, if any, from .
(2) The Seller and the Depositor has agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended.
(3) Before deducting expenses payable by the Depositor, estimated at $ .
The Senior Notes are offered by the several Underwriters when and if issued
by the Trust, delivered and accepted by them and subject to their respective
rights to reject orders in whole or in part. It is expected that delivery of the
Senior Notes in book- entry form will be made through the facilities of The
Depository Trust Company on the Same Day Funds Settlement System and Cedel Bank,
societe anonyme, and the Euroclear System on or about , 1999.
------------------
The date of this Prospectus Supplement is , 1999.
<PAGE>
(Cover continued from previous page)
The per annum rate of interest on the Notes for each Quarterly Interest
Period will, subject to certain limitations described herein, be equal to the
T-Bill Rate (determined as described herein) plus % with respect to the Senior
Notes and plus % with respect to the Subordinate Notes.
Interest and principal on the Notes will be payable quarterly on or about
each January , April , July and October of each year (or, if such day is
not a business day, on the next succeeding business day), commencing
(each, a "Quarterly Payment Date"); provided, that no principal payments will be
made on the Notes until after the end of the Revolving Period (as defined
herein) and provided, further, that no principal payments on the Subordinate
Notes will be made until the Senior Notes are paid in full.
The final maturity date for the Senior Notes will be the
Quarterly Payment Date and the final maturity date for the Subordinate Notes
will be the Quarterly Payment Date. However, payment in full of the Notes
could occur other than on such dates as described herein. In addition, the
outstanding Notes will be redeemed on any Quarterly Payment Date on which the
Seller or an assignee of the Seller, exercises its option to purchase the
Student Loans, exercisable when the aggregate principal balance of the Student
Loans is reduced to % or less of the initial aggregate principal balance of
the Notes. The Notes will be, at the time of initial offer and issuance,
"investment grade securities" as defined under the Securities Act of 1933, as
amended.
EFG Technologies, a division of EFG (the "Servicer") will service all the
Student Loans. The Servicer will contract with sub-servicers to perform
substantially all of the servicing activities for the Student Loans. The Student
Loans will include loans guaranteed by the Federal Guarantors described herein
and reinsured by the United States Department of Education (the "Department")
under the Federal Family Education Loan Program ("FFELP") and the Private
Guarantors described herein.
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE SENIOR NOTES. ADDITIONAL INFORMATION IS CONTAINED IN THE
PROSPECTUS, AND PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE SENIOR NOTES MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED NOTES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SENIOR NOTES.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF SENIOR NOTES TO COVER
SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement or the Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the
Depositor or the Underwriters. This Prospectus Supplement and the Prospectus do
not constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction. Neither the delivery of this
Prospectus Supplement and the Prospectus nor any sale made hereunder shall,
under any circumstances, create an implication that the information herein or
therein is correct as of any time subsequent to the date hereof or that there
has been no change in the affairs of the Depositor since such date.
S-2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
REPORTS TO SECURITYHOLDERS............................................................................... S-4
SUMMARY OF TERMS......................................................................................... S-5
RISK FACTORS............................................................................................. S-19
Limited Liquidity; Stabilization.................................................................... S-19
Subordination; Limited Assets....................................................................... S-19
Risks Resulting From Excess of Principal Balance of Notes over Pool Balance......................... S-19
<Additional Fundings; Risk of Change in Characteristics of the Student Loan Pool>................... S-20
Maturity and Prepayment Considerations.............................................................. S-20
Certain Differences Between the Senior Notes and the Subordinate Notes.............................. S-23
Basis Risk.......................................................................................... S-23
Default Risk on Certain FFELP Student Loans......................................................... S-24
Fees Payable on Certain FFELP Student Loans......................................................... S-24
Ratings of the Notes................................................................................ S-24
Consolidation of Federal Benefit Billings and Receipts Under One Eligible Lender Number............. S-25
Incentive Programs.................................................................................. S-25
Risk of Year 2000................................................................................... S-26
FORMATION OF THE TRUST................................................................................... S-26
The Trust.............................................................................................. S-26
Eligible Lender Trustee................................................................................ S-27
The Student Loan Pool.................................................................................. S-28
Guarantee Of Student Loans............................................................................. S-39
General............................................................................................. S-39
Federal Guarantors.................................................................................. S-39
Guaranty Volume..................................................................................... S-39
Reserve Ratio....................................................................................... S-40
Recovery Rates...................................................................................... S-40
Claims Rate......................................................................................... S-41
Private Guarantors.................................................................................. S-41
Description of the Business and Guaranty of , Private Guarantor.......................... S-42
Financial and Operating Information Summary......................................................... S-42
DESCRIPTION OF THE NOTES................................................................................. S-43
General................................................................................................ S-43
Payments of Interest................................................................................... S-43
Distributions of Principal............................................................................. S-44
<Mandatory Redemption>................................................................................. S-45
Determination of T-Bill Rates.......................................................................... S-45
Book-Entry Registration................................................................................ S-46
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS..................................................... S-49
General................................................................................................ S-49
Sale of Student Loans; Representations and Warranties.................................................. S-49
<Revolving Period and Additional Fundings>............................................................. S-49
Accounts............................................................................................... S-52
Servicing Compensation; Administration Fee............................................................. S-52
Distributions.......................................................................................... S-53
Deposits to Collection Account...................................................................... S-53
Distributions from Collection Account............................................................... S-55
Credit Enhancement..................................................................................... S-57
Reserve Account..................................................................................... S-57
Subordination....................................................................................... S-58
Termination............................................................................................ S-59
Optional Redemption.................................................................................... S-59
</TABLE>
S-3
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CERTAIN FEDERAL INCOME TAX AND STATE TAX CONSEQUENCES.................................................... S-59
ERISA CONSIDERATIONS..................................................................................... S-60
UNDERWRITING............................................................................................. S-60
LEGAL MATTERS............................................................................................ S-61
INDEX OF TERMS........................................................................................... S-62
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES............................................ A-I-1
Initial Settlement..................................................................................... A-I-1
Secondary Market Trading............................................................................... A-I-1
Trading between DTC Participants.................................................................... A-I-1
Trading between Cedel and/or Euroclear Participants................................................. A-I-1
Trading between DTC seller and Cedel or Euroclear purchaser......................................... A-I-1
Trading between Cedel or Euroclear seller and DTC purchaser......................................... A-I-2
Certain U.S. Federal Income Tax Documentation Requirements............................................. A-I-3
</TABLE>
REPORTS TO SECURITYHOLDERS
Unless and until Definitive Notes are issued, quarterly and annual
unaudited reports containing information concerning the Student Loans will be
prepared by the Administrator and sent on behalf of the Trust only to Cede & Co.
("Cede"), as nominee of The Depository Trust Company ("DTC") and registered
holder of the Senior Notes, and will not be sent to the beneficial owners of the
Senior Notes. Beneficial owners of Senior Notes will, however, be able to obtain
such reports by requesting them from the Indenture Trustee. Such reports will
contain the information described under "DESCRIPTION OF THE TRANSFER AND
SERVICING AGREEMENTS--Statements to Indenture Trustee and Trust" in the
Prospectus. Such reports will not constitute financial statements prepared in
accordance with generally accepted accounting principles. See "CERTAIN
INFORMATION REGARDING THE SECURITIES--Book-Entry Registration" and "--Reports to
Securityholders" in the Prospectus. The Trust will file with the Commission such
periodic reports as are required under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules and regulations of the Commission
thereunder. Copies of such periodic reports may be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, DC
20549, at prescribed rates.
S-4
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus. Certain
capitalized terms used herein are defined elsewhere in this Prospectus
Supplement on the pages indicated in the "INDEX OF TERMS" or, to the extent not
defined herein, have the meanings assigned to such terms in the Prospectus.
<TABLE>
<S> <C>
Issuer...................... EFG Student Loan Trust - (the "Trust").
Securities Offered.......... Floating Rate Asset Backed Senior Notes (the "Senior Notes") in the aggregate
principal amount of $[ ].
Persons acquiring beneficial ownership interests in the Senior Notes will hold their
interests in the Senior Notes through The Depository Trust Company ("DTC") in the
United States or in Europe, through Cedel Bank, societe anonyme ("Cedel"), or the
Euroclear System ("Euroclear"). Transfers within DTC, Cedel or Euroclear, as the
case may be, will be made in accordance with the usual rules and operating
procedures of the relevant system. Cross-market transfers between persons holding
directly or indirectly through DTC, on the one hand, and counterparties holding
directly or indirectly through Cedel or Euroclear, on the other, will be effected in
DTC through Citibank, N.A. ("Citibank") or Morgan Guaranty Trust Company of New York
("Morgan"), the relevant depositaries (collectively, the "Depositaries") of Cedel or
Euroclear, respectively, and each a participating member of DTC. See "DESCRIPTION OF
THE NOTES--Book-Entry Registration" herein.
Securities Other Than the
Securities.................. In addition to the Senior Notes, the Trust will issue Floating Rate Asset Backed
Offered Subordinate Notes (the "Subordinate Notes" and, together with the Senior
Notes, the "Notes") in the aggregate principal amount of $[ ]. The
Subordinate Notes are not offered hereby and the information herein with respect
thereto is provided only to permit a better understanding of the Senior Notes.
Depositor................... EFG Funding Corporation (the "Depositor"), a Delaware corporation. The Depositor is
a wholly owned subsidiary of Educational Finance Group, Inc., a Delaware
corporation.
Servicer.................... EFG Technologies, a division of EFG (the "Servicer"). Under certain circumstances,
the Servicer may transfer its obligations as Servicer. The Servicer will contract
with one or more of USA Group Loan Services Inc. ("USAG"), AFSA Data Corporation
("AFSA") or [ ], as sub-servicers (each a "Sub-Servicer") for servicing of the
Student Loans.
Eligible Lender
Trustee..................... For each of the Depositor, the Trust and trusts created by the Depositor from time
to time to hold legal title to guaranteed education loans to students and parents of
students made under the Federal Family Education Loan Program ("FFELP Loans"),
including the FFELP Student Loans ("Future Trusts") and their respective assigns,
The First National Bank of Chicago, as trustee (the "Eligible Lender Trustee") under
a trust agreement (the "Eligible Lender Trust Agreement") and holder of legal title
to FFELP Loans (the "Eligible Lender Trust"). See "FORMATION OF THE TRUST--Eligible
Lender Trustee". None of the Depositor, the Trust or Future Trusts is an institution
eligible to hold legal title to FFELP Loans; therefore, the Eligible Lender Trustee
will hold legal title to FFELP Loans on behalf of the Depositor, the Trust and
Future Trusts. References herein to the Depositor and the Trust shall mean the
Eligible Lender Trustee for all
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
purposes, where the context so requires, involving holding or transferring legal
title to FFELP Loans beneficially owned by the Depositor, the Trust or Future
Trusts.
The Seller.................. Educational Finance Group, Inc. (together with any successors or assigns thereto,
"EFG"), a Delaware corporation (the "Seller"). The Seller will sell the Student
Loans to the Depositor pursuant to the Loan Sale Agreement (as defined herein). EFG
is not an institution eligible to hold legal title to FFELP Loans; therefore, The
First National Bank of Chicago, as eligble lender trustee under a trust agreement
(the "EFG Eligible Lender Trustee") holds legal title to the FFELP Loans owned by
EFG. References to EFG or the Seller shall mean the EFG Eligible Lender Trustee for
all purposes, where the context so requires, involving holding or transferring legal
title to the FFELP Loans beneficially owned by EFG.
Indenture Trustee........... [ ], (the "Indenture Trustee"), as trustee under the indenture.
Administrator............... Educational Finance Group, Inc., as administrator (the "Administrator") on behalf of
the Trust pursuant to an Administration Agreement dated as of 1,
(as amended and supplemented from time to time, the "Administration Agreement")
among the Administrator, the Depositor, the Trust, the Trustee, the Eligible Lender
Trustee, the Servicer and the Indenture Trustee.
The Trust................... The Trust will be established under the laws of the state of Delaware by a trust
agreement to be dated as of 1, (as amended and supplemented from time to
time, the "Trust Agreement"), between the Depositor and the Trustee. The activities
of the Trust and the Trustee are limited by the terms of the Trust Agreement to
acquiring, originating, owning and managing the Student Loans and the other assets
of the Trust as described herein, issuing the Notes, making payments thereon and
other activities related thereto.
The Trustee................. The First National Bank of Chicago.
Assets of the Trust......... The assets of the Trust will include the following:
A. Student Loans.......... The Student Loans will consist of certain guaranteed or insured education loans to
students and parents of students made under (i) the Federal Family Education Loan
Program ("FFELP") (such loans, the "FFELP Student Loans"), and (ii) private loan
programs that are not related to the FFELP (the "Private Student Loans", and
together with the FFELP Student Loans, the "Student Loans"), and in either case,
will include rights to receive payments made with respect to such Student Loans and
the proceeds thereof. On or prior to (the "Closing Date"), the
Seller will sell to the Depositor, Student Loans <(the "Initial Student Loans")>
having an aggregate principal balance of approximately $ (the "Initial Pool
Balance") as of (the "Cutoff Date") pursuant to the Loan Sale
Agreement. On or prior to the Closing Date, the Depositor will transfer the
<Initial> Student Loans to the Trust pursuant to the Transfer Agreement (as defined
herein). <Following the Closing Date and during the Revolving Period (described
below), and in the case of [Serial Loans](described below) continuing after the
Revolving Period, it is anticipated that, subject to certain conditions described
herein, additional Student Loans (the "Additional Student Loans," and together with
the <Initial> Student Loans, the "Student Loans") will be acquired or originated by
the Trust, as described below.>
The Student Loans were originally acquired by EFG in the course of its student loan
financing business. [ %] of the Student Loans are guaranteed as to the payment of
principal and interest by the Federal Guarantors described herein which are
reinsured by the United States Department of Education (the "Department"). [ %] of
the Student Loans are guaranteed by the Private
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
Guarantors described herein. <Guarantors of Initial Student Loans are sometimes
referred to herein as "Initial Guarantors".>
<An Additional Student Loan may be guaranteed, to the extent described herein, by a
Federal Guarantor or Private Guarantor other than an Initial Guarantor (each an
"Additional Guarantor", collectively, the "Additional Guarantors" and, together with
the Initial Guarantors, the "Guarantors") provided certain conditions are met.> See
"The Student Loan Pool--Guarantee of Student Loans".
FFELP Loans made before October 1, 1993 are 100% guaranteed by a Federal Guarantor,
and reinsured against default by the Department up to a maximum of 100% of Guarantee
Payments. FFELP Loans made on or after October 1, 1993 are 98% guaranteed by a
Federal Guarantor, and reinsured against default by the Department up to a maximum
of 98% of Guarantee Payments. All references herein to the guarantee and reinsurance
coverage with respect to the FFELP Student Loans should be understood to mean such
100% guarantee, and 100% maximum reinsurance coverage, respectively, with respect to
FFELP Student Loans made before October 1, 1993 and 98% guarantee and 98% maximum
reinsurance coverage, respectively, with respect to FFELP Student Loans made on or
after October 1, 1993. Private Student Loans are 100% guaranteed by a Private
Guarantor.
As of the Cutoff Date, the weighted average borrower interest rate per annum with
respect to the Student Loans was approximately % (based on the applicable
interest rates as of the Cutoff Date) and the weighted average remaining term to
scheduled maturity of the Student Loans was approximately months.
<During the period (the "Revolving Period") from the Closing Date until the first to
occur of (i) an Early Amortization Event as described herein under "DESCRIPTION OF
THE TRANSFER AND SERVICING AGREEMENTS--Revolving Period and Additional Fundings" or
(ii) the last day of the Collection Period preceding the Quarterly
Payment Date, the Eligible Lender Trustee on behalf of the Trust will be obligated
from time to time, subject to certain conditions described herein, to purchase from
the Depositor, subject to the availability thereof and to the availability of funds
therefor in the Collateral Reinvestment Account, and the Depositor will be obligated
to tender to the Trust, Student Loans which (i) are made to a borrower who is not a
borrower under any Student Loan, (ii) are made under loan programs which existed as
of the Closing Date, and (iii) are guaranteed by a Guarantor (each a "New Loan," and
collectively the "New Loans"). "Collection Period" means , with respect to a
Quarterly Payment Date (or any other date), each period of three calendar months
from and including the date next following the end of the preceding Collection
Period (or with respect to the first Collection Period, the period beginning on the
Cutoff Date and ending on ) through and including the last day of
the calendar month immediately preceding such Quarterly Payment Date (or, in the
case of a date other than a Quarterly Payment Date, the last day of the calendar
month immediately preceding the most recent Quarterly Payment Date). New Loans will
be acquired from the Seller by the Eligible Lender Trustee on behalf of the
Depositor. Each such New Loan will be transferred to the Trust by the Depositor
pursuant to a transfer agreement (each a "Transfer Agreement") between the
Depositor, the Trust and the Eligible Lender Trustee. During the Revolving Period,
each purchase of a New Loan will be funded by means of a transfer from the
Collateral Reinvestment Account of an amount equal to the sum of (i) the principal
balance owed by the applicable borrower thereon plus accrued interest thereon
expected to be capitalized upon repayment (the "Purchase Collateral Balance") and
(ii) an additional amount not to exceed [ ]% of the
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
principal balance owed by the applicable borrower thereon (the "Purchase Premium
Amount" and together with the Purchase Collateral Balance, the "Loan Purchase
Amount"). The purchase of New Loans by the Trust will be subject to the availability
of funds therefor in the Collateral Reinvestment Account. Following the end of the
Revolving Period, New Loans may not be purchased by the Trust. See "DESCRIPTION OF
THE TRANSFER AND SERVICING AGREEMENTS--Revolving Period and Additional Fundings"
herein.
In addition, following the Closing Date and both during and subsequent to the
Revolving Period, the Eligible Lender Trustee on behalf of the Trust will be
obligated from time to time, subject to certain conditions described under "The
Student Loan Pool" and "DESCRIPTION OF THE TRANSFER AND SERVICING
AGREEMENTS--Revolving Period and Additional Fundings" herein, to purchase from the
Depositor, subject to the availability thereof, FFELP Loans which (i) are made to a
borrower who is also a borrower under at least one outstanding Student Loan,
(ii) are made under the same loan program as such Student Loan, and (iii) are
guaranteed by the Guarantor that guaranteed such Student Loan (each a "Serial Loan,"
and collectively the "Serial Loans"). Serial Loans will be acquired from the Seller
by the Eligible Lender Trustee on behalf of the Depositor or another eligible lender
on behalf of the Depositor. Each such Serial Loan will be transferred to the Trust
by the Depositor pursuant to a Transfer Agreement. During the Revolving Period, each
purchase of a Serial Loan will be funded by means of a transfer from the Collateral
Reinvestment Account of an amount equal to the Loan Purchase Amount of such loan.
Following the end of the Revolving Period, the Purchase Collateral Balance for such
purchases will be funded by amounts representing distributions of principal on the
outstanding Student Loans which would otherwise have been part of the Available
Funds of the Trust, as described under "DESCRIPTION OF THE TRANSFER AND SERVICING
AGREEMENTS--Distributions" herein and the Purchase Premium Amounts for such
purchases will be funded on the next succeeding Quarterly Payment Date from amounts,
if any, on deposit in the Reserve Account in excess of the Specified Reserve Account
Balance as described under "DESCRIPTION OF THE TRANSFER AND SERVICING
AGREEMENTS--Credit Enhancement--Reserve Account" herein. Alternatively, at the
Depositor's option, following the end of the Revolving Period, the Eligible Lender
Trustee will, in lieu of purchasing Serial Loans as described above, be obligated to
exchange with the Depositor existing Student Loans owned by the Trust for Serial
Loans purchased by the Depositor from the Seller, provided such Serial Loans and
Student Loans meet certain criteria described herein. See "DESCRIPTION OF THE
TRANSFER AND SERVICING AGREEMENTS--Revolving Period and Additional Fundings" herein.
In addition, following the Closing Date and prior to the end of the Revolving
Period, in the event that a borrower on a Student Loan who is also a borrower under
one or more FFELP Loans (whether or not all such loans are in the Trust) elects to
consolidate such loans, the Eligible Lender Trustee on behalf of the Trust will seek
to originate Federal Consolidation Loans pursuant to the Federal Consolidation Loan
Program described in the Prospectus under "FEDERAL FAMILY EDUCATION LOAN
PROGRAM--Federal Consolidation Loan Program". Any such origination by the Eligible
Lender Trustee on behalf of the Trust will be funded by means of a transfer from the
Collateral Reinvestment Account of the amount required to repay in full any Student
Loans not held by the Trust that are being discharged in the consolidation process,
which amount will be paid by the Eligible Lender Trustee on behalf of the Trust to
the holder or holders of such Student Loans to prepay such loans. No assurance can
be given that the
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Eligible Lender Trustee, rather than another lender, will be the lender which makes
such Federal Consolidation Loan. In the event that another lender makes such Federal
Consolidation Loan, any Student Loan which is being consolidated by such Federal
Consolidation Loan will be prepaid.
As described under "THE FEDERAL FAMILY EDUCATION LOAN PROGRAM--Federal Consolidation
Loan Program" in the Prospectus, borrowers may consolidate additional Student Loans
("Add-on Consolidation Loans") with an existing Federal Consolidation Loan within
[180] days from the date that the existing Federal Consolidation Loan was made. As a
result of the addition of any Add-on Consolidation Loans, the related Federal
Consolidation Loan may, in certain cases, have a different interest rate and a
different loan term. Any Add-on Consolidation Loans added to a Federal Consolidation
Loan in the Trust during the Revolving Period will be funded by means of a transfer
from the Collateral Reinvestment Account of the amount required to repay in full any
Student Loans not held by the Trust that are being discharged in the consolidation
process, which amount will be paid by the Eligible Lender Trustee on behalf of the
Trust to the holder or holders of such Student Loans to prepay such loans. For a
maximum period of [210] days following the end of the Revolving Period (30 days
being attributed to the processing of any such Add-on Consolidation Loans), such
amounts will be funded by amounts representing distributions of principal on the
outstanding Student Loans which would otherwise have been part of the Available
Funds of the Trust, as described under "DESCRIPTION OF THE TRANSFER AND SERVICING
AGREEMENTS--Distributions" herein. The Eligible Lender Trustee will not be permitted
to originate Federal Consolidation Loans (including the addition of any Add-on
Consolidation Loans) on behalf of the Trust during the Revolving Period in an
aggregate principal amount in excess of $[ ]; additionally, no Federal
Consolidation Loan may be originated by the Trust having a scheduled maturity date
after [ ] if at the time of such origination the aggregate principal
amount of all Federal Consolidation Loans held by the Trust that have a scheduled
maturity date after exceeds or, after giving effect to such
origination, would exceed $[ ]; provided, however, that the Eligible Lender
Trustee will be permitted to fund the addition of Add-on Consolidation Loans in
excess of such amounts, as required by the Act. After the Revolving Period, the
Eligible Lender Trustee on behalf of the Trust will cease to originate Federal
Consolidation Loans, and any Federal Consolidation Loan made with respect to a
Student Loan will be made by another lender, thereby resulting in a prepayment of
such loan; provided, however, for a maximum period of 210 days following the end of
the Revolving Period, the Eligible Lender Trustee may be required to increase the
principal balance of Federal Consolidation Loans existing in the Trust by the
addition of Add-on Consolidation Loans.
As described under "THE FEDERAL FAMILY EDUCATION LOAN PROGRAM" in the Prospectus,
during certain qualifying periods, interest on certain of the Student Loans is not
required to be paid currently, but instead is added to the outstanding principal
balance of the loan at the end of the qualifying period. In order to minimize the
possibility that the failure to receive current interest payments on such loans
during such periods will result in a shortfall in the amount required to be
distributed on the Notes, amounts on deposit in the Collateral Reinvestment Account
will be transferred during the Revolving Period to make deposits to the Collection
Account in lieu of current interest payments on such loans as described herein under
"DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Revolving Period and
Additional Fundings". Following the end of the Revolving Period, the Collateral
Reinvestment Account will cease to be available as a source to fund such interest
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payments to Noteholders and thereafter such payments will be funded through the
application of amounts which would otherwise have been distributable in respect of
the Principal Distribution Amount for the related Quarterly Payment Date, as
described herein under "DESCRIPTION OF THE TRANSFER AND SERVICING
AGREEMENTS--Distributions".
The application, during the Revolving Period, of amounts in the Collateral
Reinvestment Account (i) by the Eligible Lender Trustee on behalf of the Trust to
purchase New Loans or Serial Loans, (ii) by the Eligible Lender Trustee on behalf of
the Trust to fund the origination of Federal Consolidation Loans and (iii) by the
Eligible Lender Trustee on behalf of the Trust to fund the addition of any Add-on
Consolidation Loans are referred to herein as "Additional Fundings." The
application, during the Revolving Period, of amounts in the Collateral Reinvestment
Account by the Trust to make deposits to the Collection Account in lieu of
collections of interest on Student Loans to the extent such interest is not paid
currently but will be capitalized and added to the principal balance of the Student
Loans, and the application, after the end of the Revolving Period, of amounts
representing distributions of principal on the outstanding Student Loans (i) by the
Eligible Lender Trustee on behalf of the Trust to purchase Serial Loans, (ii) for a
maximum period of [210] days following the end of the Revolving Period by the
Eligible Lender Trustee on behalf of the Trust to fund the addition of any Add-on
Consolidation Loans and (iii) by the Trust to apply amounts that would otherwise
have been distributable in respect of the Principal Distribution Amount for the
related Quarterly Payment Date to payments, in lieu of collections, of interest on
Student Loans to the extent such interest is not paid currently but will be
capitalized and added to the principal balance of the Student Loans, are also
referred to herein as "Additional Fundings".
B. Collateral Reinvestment
Account................ During the Revolving Period, an account will be maintained in the name of the
Indenture Trustee (the "Collateral Reinvestment Account"). No money will be on
deposit in the Collateral Reinvestment Account on the Closing Date. During the
Revolving Period, deposits will be made to the Collateral Reinvestment Account as
described herein under "DESCRIPTION OF THE TRANSFER AND SERVICING
AGREEMENTS--Distributions" and withdrawals will be made from time to time for
Additional Fundings in accordance with the Loan Sale Agreement. Any amount remaining
on deposit in the Collateral Reinvestment Account at the end of the Revolving Period
will be distributed to Noteholders on the next succeeding Quarterly Payment Date as
a payment of principal. Any such principal payments shall be distributed first to
the Senior Noteholders until the Senior Notes have been paid in full, and then to
the Subordinate Noteholders until the Subordinate Notes have been paid in full. See
"DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Revolving Period and
Additional Fundings" herein.>
C. Collection
Account............... The Servicer will be required to remit all collections received with respect to the
Student Loans, and the Eligible Lender Trustee will be required to remit Interest
Subsidy Payments and Special Allowance Payments it receives with respect to the
Student Loans, in each case within two business days of receipt of freely available
funds therefor to one or more accounts in the name of the Indenture Trustee (the
"Collection Account").
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Pursuant to the Administration Agreement, the Administrator will have the power to
instruct the Indenture Trustee to withdraw Available Funds on deposit in the
Collection Account and to apply such funds <(a) on any date during the Revolving
Period, to the extent that such funds represent payments in respect of principal on
the Student Loans, to the Collateral Reinvestment Account for application to make
Additional Fundings, (b)> on each Monthly Payment Date that is not a Quarterly
Payment Date to the following (in the priority indicated): (i) the Servicing Fee and
all overdue Servicing Fees to the Servicer and (ii) the Administration Fee and all
overdue Administration Fees to the Administrator and (c) on each Quarterly Payment
Date to the following (in the priority indicated): (i) the Servicing Fee and all
overdue Servicing Fees to the Servicer; (ii) the Administration Fee and all overdue
Administration Fees to the Administrator; (iii) the Senior Noteholders' Interest
Distribution Amount to the Senior Noteholders; (iv) the Subordinate Noteholders'
Interest Distribution Amount to the Subordinate Noteholders; (v) <if the Revolving
Period has terminated,> the Senior Noteholders' Principal Distribution Amount to the
Senior Noteholders; (vi) <if the Revolving Period has terminated and> if the Senior
Notes have been paid in full, the Subordinate Noteholders' Principal Distribution
Amount to the Subordinate Noteholders; and (vii) any remaining amounts after
application of clauses (i) through (vi) above, to the Reserve Account. "Monthly
Payment Date" means the day of each month (or if any such date is not a
business day, the next succeeding business day), commencing , 199[_].
D. Reserve Account........ Pursuant to the Administration Agreement, an account in the name of the Indenture
Trustee (the "Reserve Account") will be established and maintained by the
Administrator with the Indenture Trustee and will be an asset of the Trust. The
Seller will make an initial deposit into the Reserve Account on the Closing Date of
cash or Eligible Investments equal to $ (the "Reserve Account Initial
Deposit"). The Reserve Account Initial Deposit will be augmented on each Quarterly
Payment Date by the deposit into the Reserve Account of any Available Funds for such
Quarterly Payment Date remaining after making all prior distributions required to be
made from Available Funds on such date. See "DESCRIPTION OF THE TRANSFER AND
SERVICING AGREEMENTS--Distributions" herein. Amounts in the Reserve Account on any
Quarterly Payment Date (after giving effect to all distributions required to be made
from Available Funds on such Quarterly Payment Date) in excess of the Specified
Reserve Account Balance for such Quarterly Payment Date (the "Reserve Account
Excess") will be applied <(a) during the Revolving Period, for deposit to the
Collateral Reinvestment Account; provided, however, if such date is on or after the
Parity Date (as defined below), to the extent that such funds represent payments of
interest with respect to the Student Loans, such funds shall be applied in the order
of priority set forth in clauses (b)(iii) through (vi) below, and (b) at and after
the termination of the Revolving Period,> to the following (in the priority
indicated): (i) <any unpaid Purchase Premium Amounts for any Serial Loans purchased
by the Trust prior to the end of the related Collection Period to the Seller; (ii)>
if such Quarterly Payment Date is on or prior to the Parity Date, payment of the
unpaid principal amount of the Senior Notes or, if the Senior Notes have been paid
in full, of the Subordinate Notes, until the aggregate principal balance of the
Notes is equal to the Pool Balance as of the close of business on the last day of
the related Collection Period; (ii) the aggregate unpaid amount of Senior
Noteholders' Interest T-Bill Carryover, if any, to the Senior Noteholders;
(iii) the aggregate unpaid amount of Subordinate Noteholders' Interest T-Bill
Carryover, if any, to the Subordinate Noteholders; (iv) the Servicing Fee Shortfall
and all prior unpaid Servicing Fee Shortfalls, if any, to the Servicer; and (v) any
remaining amounts after application of clauses (i) through (iv) (<v>) above will be
released to the
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Seller and Noteholders will have no claim thereto. As of the Closing Date, the
aggregate principal balance of the Notes will equal approximately % of the
Initial Pool Balance. See "RISK FACTORS--Risk Resulting From Excess of Principal
Balance of Notes over Pool Balance" herein. The "Parity Date" is the first Quarterly
Payment Date on which the aggregate principal balance of the Notes, after giving
effect to all distributions on such date, is no longer in excess of the Pool Balance
as of the last day of the related Collection Period. <As described in the first
sentence of this paragraph, if at the termination of the Revolving Period the Parity
Date has not yet occurred, (i) all Reserve Account Excess, if any, for each
succeeding Quarterly Payment Date will, after payment to the Seller of any unpaid
Purchase Premium Amounts for any Serial Loans purchased by the Trust prior to the
end of the related Collection Period, be applied to pay principal of the Notes until
the Parity Date, (ii) on the Parity Date only such portion of the Reserve Account
Excess remaining after payment of any such unpaid Purchase Premium Amounts as is
necessary to reduce the aggregate principal balance of the Notes so that it is equal
to the Pool Balance will be applied to pay principal of the Notes, and (iii) after
the Parity Date no portion of the Reserve Account Excess will be available to pay
principal of the Notes. Moreover, as further described in the first sentence of this
paragraph, if at the termination of the Revolving Period the Parity Date has
previously occurred, no portion of Reserve Account Excess will at any time be
available to pay principal of the Notes; and regardless of whether the Parity Date
occurs before or after the termination of the Revolving Period, no funds will be
applied to the payment of any Senior Noteholders' Interest T-Bill Carryover or
Subordinate Noteholders' Interest T-Bill Carryover until the Parity Date, and on and
after the Parity Date application of funds for such purposes will be subject to the
availability of Reserve Account Excess therefor.> The "Specified Reserve Account
Balance" with respect to any Quarterly Payment Date generally will be equal to the
greater of (i) % of the aggregate principal balance of the Notes after taking
into account the effect of distributions on such Quarterly Payment Date, or
(ii) $ ; provided, however, that the Specified Reserve Account Balance shall
in no event exceed the sum of the outstanding principal balance of the Notes. See
"DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Credit Enhancement-Reserve
Account" herein and "DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Credit
and Cash Flow Enhancement--Reserve Account" in the Prospectus.
Amounts on deposit in the Reserve Account will be available (a) on each Monthly
Payment Date that is not a Quarterly Payment Date, to cover any shortfalls (in the
priority indicated) in payments for such Monthly Payment Date of: (i) the Servicing
Fee and all overdue Servicing Fees and (ii) the Administration Fee and all overdue
Administration Fees, in each case, for which Monthly Available Funds for such
Monthly Payment Date are insufficient to make such payments and (b) on each
Quarterly Payment Date to cover any shortfalls (in the priority indicated) in
payments for such Quarterly Payment Date of: (i) the Servicing Fee and all overdue
Servicing Fees; (ii) the Administration Fee and all overdue Administration Fees;
(iii) the Senior Noteholders' Interest Distribution Amount; (iv) the Subordinate
Noteholders' Interest Distribution Amount; (v) <if the Revolving Period has
terminated,> the Senior Noteholders' Principal Distribution Amount; and (vi) <if the
Revolving Period has terminated,> the Subordinate Noteholders' Principal
Distribution Amount, in each case, for which Available Funds for such Quarterly
Payment Date are insufficient to make such payments and distributions. Amounts on
deposit in the Reserve Account (other than any Reserve Account Excess) will not be
available to cover any unpaid Purchase Premium Amount, Senior Noteholders' Interest
T-Bill Carryover, Subordinate Noteholders' Interest T-Bill Carryover, Servicing Fee
Shortfall and prior unpaid
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Servicing Fee Shortfalls or (except in the case of shortfalls in the Senior
Noteholders' Principal Distribution Amount or the Subordinate Noteholders' Principal
Distribution Amount as indicated in the preceding sentence) to make principal
payments on the Notes.
The funding and maintenance of the Reserve Account is intended to enhance the
likelihood of timely payment to the Senior Noteholders on each Quarterly Payment
Date of the Senior Noteholders' Interest Distribution Amount and to the Subordinate
Noteholders on each Quarterly Payment Date of the Subordinate Noteholders' Interest
Distribution Amount, and on each Quarterly Payment Date <at and after the
termination of the Revolving Period> of the Senior Noteholders' Principal
Distribution Amount to the Senior Noteholders and, after the Senior Notes have been
paid in full, of the Subordinate Noteholders' Principal Distribution Amount to the
Subordinate Noteholders. In certain circumstances, however, the Reserve Account
could be depleted and shortfalls in distributions and resulting losses to the
Noteholders could occur.
E. The Transfer and
Servicing Agreements... Pursuant to a loan sale agreement dated as of (the "Loan Sale
Agreement") between the Seller and the Depositor, the Seller will sell the Student
Loans to the Depositor and pursuant to a transfer agreement dated as of
(the "Transfer Agreement"), the Depositor will transfer the Student
Loans (together with all of its rights and remedies under the Loan Sale Agreement
pertaining thereto) to the Trust. The Trust and the Servicer will enter into two
separate loan servicing agreements, one with respect to the FFELP Student Loans and
one with respect to the Private Student Loans (the "FFELP Loan Servicing Agreement"
and the "Private Loan Servicing Agreement", respectively, and each a "Servicing
Agreement"). Pursuant to each Servicing Agreement, the Servicer will agree with the
Trust to be responsible for servicing, managing, maintaining custody of and making
collections on the Student Loans. The Seller will be obligated under the Loan Sale
Agreement to repurchase a Student Loan or, in the alternative, substitute an
eligible Student Loan, and the Servicer will be obligated (subject to the
limitations described under "RISK FACTORS--Maturity and Prepayment Considerations"
herein) under the FFELP Loan Servicing Agreement to purchase or arrange for the
purchase of a FFELP Student Loan, if the interests of the Noteholders therein are
materially adversely affected by a breach of any representation, warranty or
covenant (including the Servicer's covenant to service all the FFELP Student Loans
in accordance with applicable laws, restrictions and guidelines) made by the Seller
or the Servicer, as the case may be, with respect to such Student Loan, if the
breach has not been cured following the discovery by or notice to the Seller or the
Servicer, as the case may be, of the breach (it being understood that any such
breach that does not affect a Guarantor's obligation to guarantee payment of such
Student Loan will not be considered to have a material adverse effect for this
purpose). In addition, the Seller will be obligated to reimburse the Trust with
respect to a FFELP Student Loan for any accrued interest amounts not guaranteed by a
Federal Guarantor due to, or any lost Interest Subsidy Payments or Special Allowance
Payments as a result of, a breach of the Seller's representations and warranties
with respect to such FFELP Student Loan. The Servicer will not, however, have any
similar obligation to reimburse the Trust for non-guaranteed interest amounts or
lost Interest Subsidy Payments or Special Allowance Payments which result from a
breach of its representations and warranties with respect to the Student Loans. In
addition, the Seller may, at its option, repurchase a Student Loan if there is a
dispute with the related borrower which in the Servicer's reasonable judgment would
call into question whether such Student Loan will be repaid by the borrower.
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Under each Servicing Agreement, the Servicer will receive a monthly fee (the
"Servicing Fee") with respect to each Student Loan calculated as described under
"DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Servicing Compensation;
Administration Fee". The Servicing Fee will be payable from (i) in the case of each
Monthly Payment Date that is not a Quarterly Payment Date, Monthly Available Funds
and (ii) in the case of each Quarterly Payment Date, Available Funds, in each case
on deposit in the Collection Account and, if such amounts are insufficient, from
amounts on deposit in the Reserve Account. The Servicer will also receive amounts
related to any Servicing Fee Shortfall, as defined herein, on each Quarterly Payment
Date. Such amounts will be payable only from any Reserve Account Excess available on
such Quarterly Payment Date after all other amounts required to be paid from such
excess have been paid. See "DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--
Credit Enhancement--Reserve Fund". The Servicer will be obligated to perform its
servicing obligations whether or not it receives any amounts in respect of Servicing
Fee Shortfalls.
Pursuant to the Administration Agreement, the Administrator will agree with the
Trust to be responsible for, among other things, preparing and filing with the
Department all appropriate claims forms and other documents and filings on behalf of
the Eligible Lender Trustee in order to claim the Interest Subsidy Payments and
Special Allowance Payments from the Department in respect of the Student Loans
entitled thereto and preparing and providing monthly, quarterly and annual
statements to the Indenture Trustee with respect to distributions to Noteholders.
As compensation for the performance of the Administrator's obligations under the
Administration Agreement and as reimbursement for its expenses related thereto, the
Administrator will be entitled to receive a monthly administration fee (the
"Administration Fee") payable as provided herein on each Monthly Payment Date in an
amount equal to one-twelfth of the product of (i) % and (ii) the Pool Balance as
of the close of business on the last day of the calendar month immediately preceding
such Monthly Payment Date.
The Notes................... The Trust will issue the Notes pursuant to an indenture to be dated as of
, 199[_] (as amended and supplemented from time to time, the
"Indenture"), between the Trust and the Indenture Trustee. The Notes will be secured
by the assets of the Trust. The Notes will be available for purchase in
denominations of $1,000 and integral multiples thereof and will be available in
book-entry form only.
A. Interest............... The Notes will bear interest during each Quarterly Interest Period at the respective
rates per annum, except as described below (the "Senior Note Rate" or the
"Subordinate Note Rate" and, collectively, the "Note Rates"), equal to the weighted
average of [the T-Bill Rates] within such Quarterly Interest Period (determined as
described herein) plus %, in the case of the Senior Notes (the "Senior Note
T-Bill Rate"), and plus %, in the case of the Subordinate Notes (the
"Subordinate Note T-Bill Rate" and, together with the Senior Note T-Bill Rate, the
"Note T-Bill Rates"). Each Note T-Bill Rate will be adjusted weekly on the calendar
day following each auction of 91-day Treasury Bills, except that (i) each Note Rate
in effect from the first day of each Quarterly Interest Period, including the
initial Quarterly Interest Period, through the day of the first 91-day Treasury Bill
auction on or after the first day of each Quarterly Interest Period will be based on
the results of the most recent 91-day Treasury Bill auction prior to such day and
(ii) each Note Rate will be subject to a Lock-In Period of six business days
preceding each Quarterly Payment Date. See "DESCRIPTION OF THE NOTES--Determination
of T-Bill Rates". Interest on the outstanding principal amount of each class of
Notes will accrue from and including the
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preceding Quarterly Payment Date (or in the case of the first Quarterly Interest
Period, the Closing Date) to but excluding the following Quarterly Payment Date
(each a "Quarterly Interest Period") and will be payable on the th day of each
January, April, July and October, or, if any such date is not a business day, on the
next succeeding business day (each a "Quarterly Payment Date"), commencing
, 199[_], to holders of record of the Senior Notes (the "Senior
Noteholders") and the Subordinate Notes (the "Subordinate Noteholders" and, together
with the Senior Noteholders, the "Noteholders") on the related Record Date. "Record
Date" means, with respect to any Quarterly Payment Date, the day of the month in
which such Quarterly Payment Date occurs (whether or not such date is a business
day). Interest on the Notes will be calculated on the basis of the actual number of
days elapsed in each Quarterly Interest Period divided by 365 (or 366 in the case of
a leap year).
Notwithstanding the foregoing, if either Note Rate for any Quarterly Interest Period
(after the first Quarterly Interest Period) calculated on the basis of the
applicable Note T-Bill Rate is greater than the Student Loan Rate for such Quarterly
Interest Period, then such Note Rate for the applicable Quarterly Payment Date will
be the Student Loan Rate. The "Student Loan Rate" for any Quarterly Interest Period
will equal the product of (a) the quotient obtained by dividing (i) 365 (or 366 in
the case of a leap year) by (ii) the actual number of days elapsed in such Quarterly
Interest Period and (b) the percentage equivalent of a fraction, (i) the numerator
of which is equal to Expected Interest Collections for such Quarterly Interest
Period less the Servicing Fee and the Administration Fee with respect to such period
and (ii) the denominator of which is the aggregate principal balance of the Notes as
of the last day of such Quarterly Interest Period.
"Expected Interest Collections" means, with respect to any Quarterly Interest
Period, the sum of (i) the amount of interest accrued, net of any accrued Monthly
Rebate Fees and other amounts required by the Act to be paid to the Department (as
described under "RISK FACTORS--Fees Payable on Certain Student Loans" herein), with
respect to the Student Loans during the Collection Period preceding the applicable
Quarterly Payment Date (the "Student Loan Rate Accrual Period"), whether or not such
interest is actually paid, (ii) all Interest Subsidy Payments and Special Allowance
Payments estimated to have accrued for the applicable Student Loan Rate Accrual
Period whether or not actually received (after taking into account any expected
deduction therefrom of the Federal Origination Fee described under "RISK
FACTORS--Fees Payable on Certain Student Loans" herein) and (iii) Investment
Earnings (as defined in "DESCRIPTION OF THE TRANSFER AND SERVICING
AGREEMENTS--Accounts" in the Prospectus) for the applicable Student Loan Rate
Accrual Period.
If either Note Rate for any Quarterly Payment Date is based on the Student Loan
Rate, the excess of (a) the amount of interest on the related Notes that would have
accrued in respect of the related Quarterly Interest Period had interest been
calculated based on the related Note T-Bill Rate over (b) the amount of interest on
the related Notes actually accrued in respect of such Quarterly Interest Period
based on the Student Loan Rate (such excess, together with the unpaid portion of any
such excess from prior Quarterly Payment Dates (and interest accrued thereon at the
applicable Note Rate calculated based on the related Note T-Bill Rate) is referred
to as the "Senior Noteholders' Interest T-Bill Carryover", in the case of the Senior
Notes and the "Subordinate Noteholders' Interest T-Bill Carryover", in the case of
the Subordinate Notes) will be payable on the Quarterly Payment Date when incurred
or on any subsequent Quarterly Payment Date to the extent funds are available
therefor out of the amount of Reserve Account Excess, if any, for such Quarterly
Payment Date after making all required prior distributions
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therefrom on such date (including, in the case of the Subordinate Noteholders'
Interest T-Bill Carryover, after paying any Senior Noteholders' Interest T-Bill
Carryover for such date) as described herein under "DESCRIPTION OF THE TRANSFER AND
SERVICING AGREEMENTS--Credit Enhancement--Reserve Account". Among other things, as
described under such heading, no Senior Noteholders' Interest T-Bill Carryover or
Subordinate Noteholders' Interest T-Bill Carryover will be paid until the Parity
Date. The rating of the Notes does not address the likelihood of the payment of any
Senior Noteholders' Interest T-Bill Carryover or Subordinate Noteholders' Interest
T-Bill Carryover, as the case may be.
B. Principal.............. <No principal will be payable on the Notes prior to the end of the Revolving
Period.> Principal of the Notes will be payable on each Quarterly Payment Date
beginning on <at and after the termination of the Revolving Period> in an amount
generally equal to the Principal Distribution Amount for such Quarterly Payment
Date. The "Principal Distribution Amount" <at and after the termination of the
Revolving Period> generally will be equal to the amount of principal paid or, in
certain cases, due to be paid with respect to the Student Loans (including any
realized losses thereon) during the related Collection Period less <the sum of
(i) any such amount applied by the Eligible Lender Trustee on behalf of the Trust
during such Collection Period to purchase Serial Loans, as described herein,
(ii) for a maximum period of 210 days following the end of the Revolving Period, any
such amount applied by the Eligible Lender Trustee on behalf of the Trust during
such Collection Period to fund the addition of any Add-on Consolidation Loans and
(iii)> accrued and unpaid interest on the Student Loans for such Collection Period
to the extent such interest will be capitalized and added to the principal balance
of such Student Loans, upon the commencement of repayment of such Student Loans, as
described herein. See "DESCRIPTION OF THE TRANSFER AND SERVICING
AGREEMENTS--Distributions" herein.
In addition, on each Quarterly Payment Date beginning on <at and after the
termination of the Revolving Period> for so long as the aggregate principal balance
of the Notes is greater than the Pool Balance as of the close of business on the
last day of the related Collection Period,> any Reserve Account Excess will<, after
payment to the Seller of any unpaid Purchase Premium Amounts for any Serial Loans
purchased by the Trust prior to the end of the related Collection Period, be
applied, as described herein, to the unpaid principal balance of the Senior Notes
or, if the Senior Notes have been paid in full, the Subordinate Notes.
On each Quarterly Payment Date the aggregate amount distributable as principal to
the Notes shall be applied first, to the Senior Notes until the aggregate principal
balance thereof has been reduced to zero and then to the Subordinate Notes until the
aggregate principal balance thereof has been reduced to zero. The outstanding
principal amount, if any, of the Senior Notes will be payable in full on the
Quarterly Payment Date (the "Senior Note Final Maturity Date") and the outstanding
principal amount of the Subordinate Notes will be payable in full on the
Quarterly Payment Date (the "Subordinate Note Final Maturity Date"). However, the
actual maturity of the Notes could occur other than on such dates as a result of a
variety of factors including prepayments of the Student Loans. See "RISK
FACTORS--Maturity and Prepayment Considerations" herein.
<C. Mandatory
Redemption............ If any amount remains on deposit in the Collateral Reinvestment Account on the last
day of the Revolving Period after giving effect to all Additional Fundings to be
made on or prior to such date, such amount will be used on the Quarterly Payment
Date on or immediately following such date to redeem the Senior Notes
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until the aggregate principal balance thereof has been reduced to zero, and then to
redeem the Subordinate Notes until the aggregate principal balance thereof has been
reduced to zero. The aggregate amount of the Notes to be redeemed will be an amount
equal to the amount on deposit in the Collateral Reinvestment Account.>
D. Subordination.......... The rights of the Subordinate Noteholders to receive payments of interest will be
subordinate to the rights of the Senior Noteholders to receive payments of interest
and the rights of the Subordinate Noteholders to receive payments of principal will
be subordinate to the rights of the Senior Noteholders to receive payments of
interest and principal to the extent described herein. See "RISK
FACTORS--Subordination; Limited Assets" and "DESCRIPTION OF THE TRANSFER AND
SERVICING AGREEMENTS--Credit Enhancement--Subordination of the Subordinate Notes"
herein.
Auction of Trust Assets..... Any Student Loans remaining in the Trust as of the end of the Collection Period
immediately preceding the Quarterly Payment Date will be offered for sale by
the Indenture Trustee. The Seller, its affiliates and unrelated third parties may
offer bids to purchase such Student Loans on such Quarterly Payment Date. If at
least two bids are received, the Indenture Trustee will accept the highest bid equal
to or in excess of the greater of (x) the Purchase Amounts of such Student Loans as
of the end of the Collection Period immediately preceding such Quarterly Payment
Date or (y) an amount that would be sufficient to (i) reduce the outstanding
principal amount of the Notes on such Quarterly Payment Date to zero and (ii) pay to
the Noteholders the Noteholders' Interest Distribution Amount payable on such
Quarterly Payment Date (the "Minimum Purchase Price"). If at least two bids are not
received or the highest bid is not equal to or in excess of the Minimum Purchase
Price, the Indenture Trustee will not consummate such sale. The proceeds of any such
sale will be used to redeem any outstanding Notes on such Quarterly Payment Date. If
the sale is not consummated in accordance with the foregoing, the Indenture Trustee
may, but shall not be under any obligation to, solicit bids for sale of the Student
Loans on future Quarterly Payment Dates upon terms similar to those described above.
No assurance can be given as to whether the Indenture Trustee will be successful in
soliciting acceptable bids to purchase the Student Loans on either the
Quarterly Payment Date or any subsequent Quarterly Payment Date. "Purchase Amount"
with respect to a Student Loan means the unpaid balance owed by the applicable
borrower thereon plus accrued interest thereon to the date of purchase. See
"DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Termination" herein.
Optional Redemption......... The Seller, or an assignee of the Seller, may, at its option, purchase all remaining
Student Loans, and thus effect the early retirement of the Notes, on any Quarterly
Payment Date on or after which the Pool Balance is equal to [10%] or less of the
aggregate initial principal balance of the Notes, at a price equal to the aggregate
Purchase Amounts for such Student Loans as of the end of the preceding Collection
Period. [From time to time the Depositor, or an assignee of the Depositor, may at
its option purchase from the Trust, as of the end of any Monthly Collection Period
immediately preceding a Monthly Payment Date, one or more Student Loans that are to
be refinanced by Federal Consolidation Loans.] See "DESCRIPTION OF THE TRANSFER AND
SERVICING AGREEMENTS--Termination" herein, and "DESCRIPTION OF THE TRANSFER AND
SERVICING AGREEMENTS--Termination--Optional Redemption" in the Prospectus.
The "Pool Balance" at any time represents the aggregate principal balance of the
Student Loans at the end of the preceding Collection Period (including accrued
interest thereon through the end of such Collection Period to the extent such
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interest will be capitalized upon commencement of repayment), after giving effect to
the following, without duplication: (i) all payments received by the Trust during
such Collection Period from or on behalf of borrowers, the Guarantors and, with
respect to certain payments on certain Student Loans, the Department (collectively,
"Obligors"), (ii) all Purchase Amounts received by the Trust for such Collection
Period from the Seller or the Servicer, <(iii) all Additional Fundings made with
respect to such Collection Period,> and (<iii>) all losses realized on Student Loans
liquidated during such Collection Period.
Tax Considerations.......... Upon the issuance of the Senior Notes, Willkie Farr & Gallagher, special federal tax
counsel for the Trust ("Special Federal Tax Counsel"), will deliver its opinion
that, although there is no specific authority with respect to the characterization
for federal income tax purposes of securities having the same terms as the Senior
Notes, the Senior Notes will be characterized as debt for federal income tax
purposes. [ ], special state tax counsel for the Trust, will deliver its
opinion that the Senior Notes will be characterized as debt for North Carolina and
Indiana, respectively, state income tax purposes, although there is no specific
authority with respect to the characterization for such income tax purposes of
securities having the same terms as the Senior Notes. In the opinion of Special
Federal Tax Counsel, for federal income tax purposes the Trust will not be
characterized as an association (or publicly traded partnership) taxable as a
corporation. The Depositor, as owner of all amounts not otherwise required to be
distributed to Noteholders or to pay expenses of the Trust, will agree to treat the
Trust as a security arrangement for the issuance of debt represented by the Notes.
Alternative characterizations are possible, but would not result in materially
adverse federal income tax consequences to the Senior Noteholders. In the opinion of
special state tax counsel for the Trust, the same characterizations would apply for
North Carolina and Indiana state income tax purposes as for federal income tax
purposes. However, there are no cases or rulings on similar transactions involving a
trust that issues debt interests with terms similar to those of the Senior Notes.
Finally, Senior Noteholders may be required to accrue any Senior Noteholders'
Interest Carryover in income in advance of the receipt of cash with respect to such
amounts regardless of whether such Senior Noteholders are on the cash or accrual
methods of accounting.
See "CERTAIN FEDERAL INCOME TAX AND STATE TAX CONSEQUENCES" herein and "MATERIAL
FEDERAL INCOME TAX CONSEQUENCES" and "CERTAIN STATE TAX CONSEQUENCES" in the
Prospectus for additional information concerning the application of federal and
Indiana state tax laws with respect to the Senior Notes.
ERISA Considerations........ Subject to the considerations discussed under "ERISA CONSIDERATIONS" herein and
"ERISA CONSIDERATIONS--The Notes" in the Prospectus, the Senior Notes are eligible
for purchase by employee benefit plans.
Rating of the Securities.... It is a condition to the issuance and sale of the Senior Notes that the Senior Notes
be rated in the highest investment rating category by at least two nationally
recognized rating agencies and that the Subordinate Notes be rated in the "BBB" or
equivalent rating category by at least two such rating agencies. 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. The rating agencies do not
evaluate, and the ratings of the Senior Notes do not address, the likelihood of
payment of the Senior Noteholders' Interest T-Bill Carryover or the Subordinate
Noteholders' Interest T-Bill Carryover. There can be no assurance as to whether any
additional rating agency will rate the Senior Notes or the Subordinate Notes, or if
one does, what rating would be assigned by such other rating agency.
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RISK FACTORS
Prospective purchasers of the Senior Notes should consider, among other
things, the following factors (as well as the factors set forth under "RISK
FACTORS" in the Prospectus) in connection with an investment therein:
LIMITED LIQUIDITY; STABILIZATION. There is currently no secondary market
for the Senior Notes. The Underwriter currently intends, but is not obligated,
to make a market in the Senior Notes. There can be no assurance that a secondary
market will develop or, if a secondary market does develop, that it will provide
the Senior Noteholders with liquidity of investment or that it will continue for
the life of the Senior Notes.
Certain persons participating in the offering of the Senior Notes may
engage in transactions that stabilize, maintain, or otherwise affect the price
of the Senior Notes. Such transactions could cause the price of the Senior Notes
to be higher than it might otherwise be in the absence of such transactions. See
"UNDERWRITING" herein.
SUBORDINATION; LIMITED ASSETS. The rights of the Subordinate Noteholders
to receive payments of interest are subordinated to the rights of the Senior
Noteholders to receive payments of interest and the rights of the Subordinate
Noteholders to receive payments of principal will be subordinate to the rights
of the Senior Noteholders to receive payments of interest and principal. Payment
to Subordinate Noteholders of amounts representing the Subordinate Noteholders'
Distribution Amount will not be subordinated to the payment of any Senior
Noteholders' Interest T-Bill Carryover that may exist from time to time. See
"DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Distributions" and
"--Credit Enhancement--Subordination" herein.
Moreover, the Trust does not have, nor is it permitted or expected to have,
any significant assets or sources of funds other than the Student Loans (and the
related Guarantee Agreements), the Collection Account, <the Collateral
Reinvestment Account> and the Reserve Account. The Notes represent obligations
solely of the Trust and will not be insured or guaranteed by the Seller, the
Depositor, the Servicer, the Administrator, the Guarantors, the Eligible Lender
Trustee or the Department. Consequently, holders of the Notes must rely for
repayment upon payments with respect to the Student Loans and, if and to the
extent available under the circumstances described herein, amounts on deposit in
the accounts described above. <The Collateral Reinvestment Account will only be
available during the Revolving Period to cover obligations of the Trust relating
to Additional Fundings and is not intended to cover losses on the Student Loans.
Similarly,> amounts to be deposited in the Reserve Account are limited in amount
and will be reduced, subject to a specified minimum, as the principal balance of
the Notes is reduced. If the Reserve Account is exhausted, the Trust will depend
solely on payments with respect to the Student Loans to make payments on the
Notes and Noteholders could suffer a loss. Noteholders will have no claim to any
amounts properly distributed to the Depositor or the Servicer from time to time
as described herein and in the Prospectus and the Depositor and the Servicer
shall in no event be required to refund such distributed amounts. See
"DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Distributions" and
"--Credit Enhancement" herein.
RISKS RESULTING FROM EXCESS OF PRINCIPAL BALANCE OF NOTES OVER POOL
BALANCE. As of the Closing Date, the aggregate principal balance of the Notes
will be equal to approximately % of the Initial Pool Balance. As a result,
Noteholders will generally be reliant on the availability of Reserve Account
Excess to bring the aggregate principal balance of the Notes into parity with
the Pool Balance by <(a) during the Revolving Period, the application of Reserve
Account Excess deposited into the Collateral Reinvestment Account (other than
any Reserve Account Excess that may reflect principal collections on the Student
Loans) to fund the Purchase Collateral Balance of New Loans or Serial Loans
acquired by the Trust or to fund the origination of Federal Consolidation Loans
or any additions to the principal balances thereof caused by the addition of
Add-on Consolidation Loans or (b) after the Revolving Period,> the application
thereof to pay principal of the Notes until the Parity Date. The availability of
Reserve Account Excess will in turn generally be dependent on (a) the interest
component of Available Funds for any Quarterly Payment Date being in excess of
the amount necessary to pay (i) the Servicing Fee and all prior unpaid Servicing
Fees, (ii) the Administration Fee and all prior unpaid Administration Fees and
(iii) the Noteholders' Interest Distribution Amount for such Quarterly Payment
Date, and/or (b) declines in the Specified Reserve Account Balance that exceed
any amounts required to be withdrawn for any Quarterly Payment Date from the
Reserve Account to make up shortfalls required to be paid therefrom. At such
time as the aggregate principal balance of the Notes has been reduced so that it
equals the Pool Balance, any Reserve Account Excess will no longer be available
to pay principal of the Notes. See "DESCRIPTION OF
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THE TRANSFER AND SERVICING AGREEMENTS--Credit Enhancement--Reserve Account"
herein. To the extent that Noteholders are reliant on excess interest
collections on the Student Loans to repay a portion of the principal balance of
the Notes, Noteholders could be adversely affected by an increase in the rate of
prepayments on the Student Loans or an increase in the T-Bill Rate, since either
such increase would diminish the amount of such excess interest that would
subsequently be available to pay such principal. In addition, payments on the
Notes may be more sensitive to rates of default on the Student Loans than would
be the case were the principal balance of the Notes not issued in an amount in
excess of the Initial Pool Balance, particularly with respect to those Student
Loans first disbursed after October 1, 1993 which are 98% insured by a Guarantor
(rather than 100% so insured as is the case for such loans first disbursed prior
to such date). <Additionally, payment of Purchase Premium Amounts to the Seller
for New Loans and Serial Loans purchased by the Trust during the Revolving
Period and Serial Loans acquired by the Trust after the Revolving Period will
decrease the amount of funds that would otherwise be available to pay principal
of the Notes and will thereby delay reduction of the amount represented by the
excess of the aggregate principal balance of the Notes over the Pool Balance and
could, to the extent that during the Revolving Period the amount expended on
such Purchase Premium Amounts exceeds those amounts on deposit in the Collateral
Reinvestment Account that are other than amounts in respect of principal
collections on the Student Loans, cause such excess to increase.>
<ADDITIONAL FUNDINGS; RISK OF CHANGE IN CHARACTERISTICS OF THE STUDENT LOAN
POOL. Except for the criteria described under "The Student Loan Pool", there
will be no other required characteristics of the Additional Student Loans.
Therefore, upon the transfer of the Additional Student Loans to or on behalf of
the Trust, the aggregate characteristics of the entire pool of Student Loans,
including the composition of the Student Loans and of the borrowers thereof, the
Guarantors thereof (which may include Additional Guarantors whose ability to
fulfill their insurance obligations may vary from the Initial Guarantors), the
distribution by loan type, the distribution by interest rate, the distribution
by principal balance and the distribution by remaining term to scheduled
maturity may vary significantly from those of the <Initial> Student Loans as of
the Cutoff Date. See "The Student Loan Pool" herein.>
<MATURITY AND PREPAYMENT CONSIDERATIONS. During the Revolving Period,
amounts in respect of principal collections on the Student Loans and, so long as
the Parity Date has not occurred, other amounts constituting Available Funds
that are in excess, on each Quarterly Payment Date during the Revolving Period,
of the amounts necessary to pay (i) the Servicing Fee and all prior unpaid
Servicing Fees, (ii) the Administration Fee and all prior unpaid Administration
Fees, (iii) the Noteholders' Interest Distribution Amount for such Quarterly
Payment Date and (iv) the amount, if any, necessary to cause the amount on
deposit in the Reserve Account to equal the Specified Reserve Account Balance,
shall be deposited into the Collateral Reinvestment Account. If the sum of
(i) the Loan Purchase Amount of New Loans and Serial Loans available to be
acquired from the Depositor during the Revolving Period, (ii) the amount
required by the Trust to fund the origination by the Eligible Lender Trustee on
behalf of the Trust of Federal Consolidation Loans or to fund increases in the
principal balances of Federal Consolidation Loans existing in the Trust by the
addition of Add-on Consolidation Loans and (iii) the amount of interest on the
Student Loans capitalized and not paid currently by or on behalf of the
borrowers during the Revolving Period is less than the amount deposited in the
Collateral Reinvestment Account, the Trust will have insufficient opportunities
to make Additional Fundings during the Revolving Period, thereby resulting in a
prepayment of principal to Noteholders as described in the following paragraph.
The extent to which the Trustee will be able, during the Revolving Period, to
apply amounts in the Collateral Reinvestment Account to Additional Fundings
consisting of the purchase of New Loans and Serial Loans will be dependent, in
part, upon the ability of the Depositor and the Seller to originate or acquire
such loans and upon the opportunities the Trust may have to originate Federal
Consolidation Loans. A material adverse change in the operations or business or
financial condition of the Seller or in conditions in the market for Student
Loans could have a material adverse impact on the Seller's and the Depositor's
ability to originate or acquire such loans, which could, in turn, result in the
Trust being unable to apply some or all of the amounts in the Collateral
Reinvestment Account to Additional Fundings. If funds in the Collateral
Reinvestment Account cannot be invested in sufficient purchases of New Loans and
Serial Loans or originations of Federal Consolidation Loans, funds in the
Collateral Reinvestment Account may not be able to be invested at a sufficiently
high yield to avoid an Early Amortization Event.
To the extent that amounts on deposit in the Collateral Reinvestment
Account have not been fully applied to Additional Fundings by the Trust by the
end of the Revolving Period, whether on its scheduled termination date or
earlier following an Early Amortization Event, an amount equal to the entire
amount then on deposit in the
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Collateral Reinvestment Account will be paid on the next succeeding Quarterly
Payment Date as a prepayment of principal first to the Senior Noteholders, until
the aggregate principal balance of the Senior Notes has been reduced to zero,
and then to the Subordinate Noteholders, until the aggregate principal balance
of the Subordinate Notes has been reduced to zero. It is anticipated that the
amount of Additional Fundings made by the Trust will not be exactly equal to the
amount on deposit in the Collateral Reinvestment Account and that therefore
there will be at least a nominal amount of principal prepaid to the Noteholders
at the end of the Revolving Period.
There can be no assurance as to the amount of Additional Fundings that will
be available to be made by the Trust during the Revolving Period or that the
amount and timing of Additional Fundings will be sufficient to avoid the
occurrence of an Early Amortization Event or of a mandatory redemption of a more
than nominal portion of the Notes at the end of the Revolving Period.
No principal payments will be made on the Notes until after the end of the
Revolving Period which is scheduled to occur on the last day of the Collection
Period preceding the Quarterly Payment Date. If, however, an
Early Amortization Event, as described under "DESCRIPTION OF THE TRANSFER AND
SERVICING AGREEMENTS--Revolving Period and Additional Fundings," occurs prior to
the last day of such Collection Period, the Revolving Period will terminate
early, principal will be payable on the Notes as described herein, and the
average life and maturity of the Notes may be significantly reduced from what it
would have been had no such Early Amortization Event occurred.>
The rate of payment of principal of the Notes<, after the end of the
Revolving Period,> and the yield on the Notes will be affected by prepayments of
the Student Loans that may occur as described below. All the Student Loans are
prepayable in whole or in part by the borrowers at any time (including by means
of Federal Consolidation Loans as discussed below) or as a result of a borrower
default, death, disability or bankruptcy and subsequent liquidation or
collection of Guarantee Payments with respect thereto. The rate of such
prepayments cannot be predicted and may be influenced by a variety of economic,
social and other factors, including those described below. In general, the rate
of prepayments may tend to increase to the extent that alternative financing
becomes available at prevailing interest rates which fall significantly below
the interest rates applicable to the Student Loans. However, because a portion
of the Student Loans bear interest at a rate that either actually or effectively
is floating to the borrower, it is impossible to determine whether changes in
prevailing interest rates will be similar to or vary from changes in the
interest rates on the Student Loans. In addition, to the extent that Noteholders
are reliant on a portion of the interest collections on the Financial Student
Loans to pay the portion of the initial principal balance of the Notes that is
in excess of the Initial Pool Balance, Noteholders could be adversely affected
by increased rates of prepayment on the Student Loans, since upon any such
prepayment no further interest would be collected on the loan so prepaid. To the
extent borrowers of Student Loans elect to borrow Federal Consolidation Loans,
such Student Loans will be prepaid<; provided, however, that if the Eligible
Lender Trustee on behalf of the Trust makes any such Federal Consolidation Loan
during the Revolving Period, the aggregate outstanding principal balance of
Student Loans (after giving effect to the addition of such Federal Consolidation
Loan and, if applicable the addition thereto of any Add-on Consolidation Loans)
will be at least equal to and in most cases greater than such balance prior to
such prepayment, although the guaranteed portion of the Federal Consolidation
Loan may be less than the Student Loan that is discharged as a result of such
consolidation.> See "FEDERAL FAMILY EDUCATION LOAN PROGRAM--Federal
Consolidation Loan Program" in the Prospectus. <There can be no assurance that
the Eligible Lender Trustee on behalf of the Trust rather than another lender
will make any particular Federal Consolidation Loan with respect to borrowers
with Student Loans during the Revolving Period.> The Department in administering
the Federal Direct Consolidation Loan Program (See "FEDERAL FAMILY EDUCATION
LOAN PROGRAM--Legislative and Administrative Matters" in the Prospectus) permits
borrowers with FFELP Loans to consolidate their outstanding student loans at
interest rates as much as 0.8% below those which would apply if they
consolidated their outstanding student loans by means of a Federal Consolidation
Loan under the Federal Consolidation Loan Program. The availability of such
lower-rate consolidation loans may <decrease the likelihood that the Eligible
Lender Trustee will be the originator of Federal Consolidation Loans with
respect to borrowers of Student Loans and may> increase the likelihood that a
Student Loan will be prepaid. <The Eligible Lender Trustee will not be permitted
to originate Federal Consolidation Loans (including the addition of any Add-on
Consolidation Loans) on behalf of the Trust during the Revolving Period in an
aggregate principal amount in excess of $ ; additionally, no Federal
Consolidation Loan may be originated by the Trust having a scheduled maturity
date after if at the time of such origination the aggregate
principal amount of all Federal Consolidation Loans held by the Trust that
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have a scheduled maturity date after exceeds or, after giving
effect to such origination, would exceed $ ; provided, however, that
the Eligible Lender Trustee will be permitted to fund Add-on Consolidation Loans
in excess of such amounts if required to do so by the Act. In addition, after
the end of the Revolving Period, the Eligible Lender Trustee will not make
Federal Consolidation Loans; provided, however, for a maximum period of
210 days following the end of the Revolving Period, the Eligible Lender Trustee
may increase the principal balance of Federal Consolidation Loans existing in
the Trust by the amount of any related Add-on Consolidation Loans.>
Furthermore, the Seller is obligated to repurchase or substitute for any
Student Loan pursuant to the Loan Sale Agreement which will be assigned in part
to the Trust by the Depositor as a result of a breach of any of its
representations and warranties, and the Servicer (subject to the limitations
described below) is obligated to purchase any Student Loan pursuant to the FFELP
Loan Servicing Agreement as a result of a breach of certain covenants with
respect to a FFELP Student Loan, in each case where such breach materially
adversely affects the interests of the Noteholders in such Student Loan and is
not cured within the applicable cure period (it being understood that any such
breach that does not affect the applicable Guarantor's obligation to guarantee
payment of such Student Loan will not be considered to have a material adverse
effect for this purpose); provided, however, that, during each 12-month period
following the Cutoff Date or an anniversary of the Cutoff Date, the Servicer
will be obligated to purchase Student Loans only to the extent its total
liability incurred during such period for such purchases and any other
liabilities under the FFELP Loan Servicing Agreement exceeds an amount (the
"Servicer Liability Limit") equal to % of the outstanding principal balance
of the FFELP Student Loans as of the Cutoff Date or, after the first anniversary
of the Cutoff Date, as of the preceding , and, after the Servicer
Liability Limit for any such period has been exceeded, the Servicer's total
liability during such period for losses for rejected claims by a Federal
Guarantor for any FFELP Student Loan based on a breach of its representations,
warranties or covenants (including, but not limited to, any such losses caused
by negligence or willful misfeasance by the Servicer) will not exceed that
amount which such Federal Guarantor would have been obligated to pay with
respect to such loan had its obligation to guarantee payment thereof not been
affected by the Servicer's breach.
In addition, the Depositor may, at its option, repurchase a Student Loan if
there is a dispute with the related borrower which in the Servicer's reasonable
judgment would call into question whether such Student Loan will be repaid by
the borrower. See "DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Sale of
Student Loans; Representations and Warranties" and "--Servicer Covenants" in the
Prospectus. See also "DESCRIPTION OF THE TRANSFER AND SERVICING
AGREEMENTS--Termination", herein, regarding the Depositor, or its assignee's,
option to purchase the Student Loans when the aggregate Pool Balance is less
than or equal to % of the initial aggregate principal balance of the Notes.
On the other hand, scheduled payments with respect to, and maturities of,
the Student Loans may be extended<, including> pursuant to Grace Periods,
Deferral Periods and Forbearance Periods in the case of the FFELP Student
Loans<.> <as a result of the conveyance of New Loans to the Eligible Lender
Trustee on behalf of the Trust during the Revolving Period or as a result of the
conveyance of Serial Loans to the Eligible Lender Trustee on behalf of the Trust
during or after the Revolving Period as described herein or of refinancings
through Federal Consolidation Loans to the extent such Federal Consolidation
Loans are originated by the Eligible Lender Trustee on behalf of the Trust
during the Revolving Period as described herein. In that event, the fact that
such New Loans and Serial Loans will have varying maturities, the fact that New
Loans will be made to borrowers who were not borrowers on any of the Student
Loans and such new borrowers may themselves become borrowers under Serial Loans
or consolidate such loans by electing to borrow Federal Consolidation Loans, the
fact that Additional Student Loans purchased or originated during the Revolving
Period may, and Serial Loans purchased after the termination of the Revolving
Period will, be purchased with principal distributions on the Student Loans
which may otherwise have been applied to amortize the Notes and the fact that
such Federal Consolidation Loans will likely have longer maturities than the
Student Loans they are replacing may lengthen the remaining term of the Student
Loans and the average life of the Notes. In addition, any Add-on Consolidation
Loans added to the principal balance of a related Federal Consolidation Loan may
lengthen the remaining term of such Federal Consolidation Loan and after the
Revolving Period will be funded with principal distributions on Student Loans
which may otherwise have been applied to amortize the Notes. In addition, such
New Loans, Serial Loans or Federal Consolidation Loans may have, and certain of
the <Initial> Student Loans have, stated maturities which occur after the
Subordinate Note Final Maturity Date.> <The application, after the end of the
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Revolving Period,> of amounts which would otherwise have been distributable in
respect of the Principal Distribution Amount for a related Quarterly Payment
Date to make interest distributions to Noteholders and in lieu of collections of
interest on certain Student Loans on which interest is not currently required to
be paid will also have the effect of lengthening the average life of the Notes
over what it would have been had such amounts been applied to amortize the
Notes.
Any Student Loans remaining in the Trust as of the end of the Collection
Period immediately preceding the Quarterly Payment Date will be
offered for sale by the Indenture Trustee. If acceptable bids to purchase such
Student Loans on such Quarterly Payment Date are received, as described herein,
the proceeds of the sale will be applied on such Quarterly Payment Date to
redeem any outstanding Notes on such date. In addition, if acceptable bids to
purchase such Student Loans on such Quarterly Payment Date are not received, the
sale of such Financial Student Loans may occur on a subsequent Quarterly Payment
Date, as described herein, in which case the proceeds thereof will be applied on
such date to redeem any outstanding Notes. No assurance can be given as to
whether the Indenture Trustee will be successful in soliciting acceptable bids
to purchase the Student Loans on the Quarterly Payment Date or
any subsequent Quarterly Payment Date. See "DESCRIPTION OF THE TRANSFER AND
SERVICING AGREEMENTS--Termination" herein.
The rate of payment of principal of the Notes <after the end of the
Revolving Period> and the yield on the Notes may also be affected by the rate of
defaults resulting in losses on Liquidated Student Loans, by the severity of
those losses and by the timing of those losses, which may affect the ability of
the Guarantors to make Guarantee Payments with respect thereto <and such default
rates may be affected, among other things, by the conveyance to the Trust during
the Revolving Period of New Loans made to borrowers who are not borrowers under
any of the Student Loans.> The rate of prepayment on the Student Loans cannot be
predicted, and any reinvestment risks resulting from a faster or slower
incidence of prepayment of Student Loans will be borne entirely by the
Noteholders. Such reinvestment risks may include the risk that interest rates
and the relevant spreads above particular interest rate bases are lower at the
time Noteholders receive payments from the Trust than such interest rates and
such spreads would otherwise have been had such prepayments not been made or had
such prepayments been made at a different time.
Because of the factors discussed above, and because of the number and
variability of the determinants affecting the rate of principal payments on the
Student Loans, no assurances can be given as to the timing of payments of
principal to Noteholders.
CERTAIN DIFFERENCES BETWEEN THE SENIOR NOTES AND THE SUBORDINATE
NOTES. Because the Subordinate Noteholders will receive no payments of
principal until the Senior Notes have been paid in full, the Senior Notes bear
relatively greater risk than do the Subordinate Notes of an increased rate of
principal prepayments with respect to the Student Loans (whether as a result of
voluntary prepayments<, Federal Consolidation Loans not made by the Eligible
Lender Trustee on behalf of the Trust> or liquidations due to default or
breach). <In addition, the Senior Noteholders generally bear the risk of
principal prepayments as a result of any mandatory redemption from amounts on
deposit in the Collateral Reinvestment Account at the end of Revolving Period or
of such redemption occurring prior to the scheduled end of the Revolving Period
on the last day of the Collection Period preceding the Quarterly Payment Date
occurring in due to an Early Amortization Event.> On the other
hand, Subordinate Noteholders bear a greater risk of loss of principal than do
Senior Noteholders in the event of a shortfall in Available Funds and amounts on
deposit in the Reserve Account because the Subordinate Notes do not receive
principal distributions until the Senior Notes are paid in full.
BASIS RISK. FFELP Student Loans generally bear interest at an effective
rate (taking into account any Special Allowance Payments) equal to the average
bond equivalent rates of 91-day Treasury Bills auctioned for each quarter (or,
in certain circumstances, 52-week Treasury bills) plus margins specified for
such Student Loans described under "FEDERAL FAMILY EDUCATION LOAN PROGRAM" in
the Prospectus calculated on the basis of the actual number of days since the
last day through which interest on such Student Loan was paid in full and the
actual number of days in the year. Moreover, the Pool Balance will initially be
less than the principal balance of the Notes, and therefore the principal amount
of Student Loans on which interest will be collected will be less than the
principal amount of Notes on which interest must be paid. Although the Senior
Note Rate and the Subordinate Note Rate are generally based on the weighted
average bond equivalent rates of 91-day Treasury Bills, it is possible that on
any Quarterly Payment Date there may not exist a positive spread between
(a) the Student Loan Rate and (b) the Senior Note Rate or the Subordinate Note
Rate based on the Senior Note T-Bill Rate or the Subordinate Note T-Bill Rate,
as the case may be. In such case, the Senior Note Rate or the
S-23
<PAGE>
Subordinate Note Rate, as applicable, for such Quarterly Payment Date will be
the Student Loan Rate. See "DESCRIPTION OF THE TRANSFER AND SERVICING
AGREEMENTS--Distributions of Interest" herein. Any Senior Noteholders' Interest
T-Bill Carryover or Subordinate Noteholders' Interest T-Bill Carryover arising
as a result of the Senior Note Rate or the Subordinate Note Rate being
determined on the basis of the Student Loan Rate will be paid on any succeeding
Quarterly Payment Date (including, if incurred on a Quarterly Payment Date, such
Quarterly Payment Date) but only on or after the Parity Date and only then out
of any Reserve Account Excess available after payment out of such excess of
<(i) if the Revolving Period has terminated, any Purchase Premiums due the
Seller for Serial Loans purchased by the Trust prior to the end of the related
Collection Period, (ii) on the Parity Date (if the Parity Date occurs after the
end of the Revolving Period), any amount necessary to reduce to zero the
remaining amount by which the aggregate principal balance of the Notes exceeds
the Pool Balance and (iii)> in the case of the Subordinate Noteholders' Interest
T-Bill Carryover, payment of the Senior Noteholders' Interest T-Bill Carryover.
See "DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Credit
Enhancement--Reserve Account" herein.
DEFAULT RISK ON CERTAIN FFELP STUDENT LOANS. Under the Omnibus Budget
Reconciliation Act of 1993, FFELP Student Loans first disbursed on or after
October 1, 1993 are 98% insured by the applicable Guarantor. As a result, to the
extent a borrower of such a Student Loan defaults, the Trust will experience a
loss of 2% of outstanding principal and accrued interest on each such Student
Loan. A defaulted loan will be fully assigned to the applicable Guarantor in
exchange for a guarantee payment on the 98% guaranteed portion and the Trust may
have no right thereafter to pursue the borrower for the 2% unguaranteed portion.
Such 2% loss would diminish the amount of Available Funds, which would, in turn,
absent adequate collateralization in the Trust, adversely affect the ability of
the Trust to pay interest and principal on the Notes. Pursuant to the Higher
Education Amendments of 1998, the 98% insurance level was lowered to 95% for
FFELP Loans first disbursed on or after October 1, 1998. FFELP Student Loans
continue to be 100% guaranteed in the event of death, disability or bankruptcy
of the borrower and a closing of or false certification by the borrower's school
regardless of disbursement date.
FEES PAYABLE ON CERTAIN FFELP STUDENT LOANS. Under the Federal
Consolidation Program, the Trust will be obligated to pay to the Department a
monthly rebate fee (the "Monthly Rebate Fee") at an annualized rate of % of
the outstanding principal balance on the last day of each month plus accrued
interest thereon of each Federal Consolidation Loan which is a part of the
Trust, which rebate will be payable prior to distributions to the Noteholders
and which rebate will reduce the amount of funds which would otherwise be
available to make distributions on the Notes and will reduce the Student Loan
Rate. <In addition, the Trust must pay to the Department a 0.50% origination fee
(the "Federal Origination Fee") on the initial principal balance of each FFELP
Student Loan which is originated on its behalf by the Eligible Lender Trustee
(i.e., each Federal Consolidation Loan originated on its behalf by the Eligible
Lender Trustee during the Revolving Period and each Add-on Consolidation Loan
added to a Federal Consolidation Loan in the Trust), which fee will be deducted
by the Department out of Interest Subsidy and Special Allowance Payments.> If
sufficient Interest Subsidy and Special Allowance Payments are not due to the
Trust to cover the amount of the Federal Origination Fee, the balance of such
Federal Origination Fee may be deferred by the Department until sufficient
Interest Subsidy and Special Allowance Payments accrue to cover such fee or may
be required to be paid immediately. If such amounts never accrue, the Trust
would be obligated to pay any remaining fee from other assets of the Trust prior
to making distributions to Noteholders. The offset of Interest Subsidy and
Special Allowance Payments, and the payment of any remaining fee from other
Trust assets, will further reduce the amount of Available Funds from which
payments to Noteholders may be made. Furthermore, any offset of Interest Subsidy
and Special Allowance Payments will further reduce the Student Loan Rate.
RATINGS OF THE NOTES. It is a condition to the issuance and sale of the
Senior Notes that the Senior Notes be rated in the highest investment rating
category by at least two nationally recognized rating agencies and that the
Subordinate Notes be rated in the "BBB" or equivalent rating category by at
least two such rating agencies. A rating is not a recommendation to purchase,
hold or sell securities, inasmuch as such rating does not comment as to market
price or suitability for a particular investor. The ratings of the Notes address
the likelihood of the ultimate payment of principal of and interest on such
Notes pursuant to their terms. However, the Rating Agencies do not evaluate, and
the ratings of the Notes do not address, the likelihood of payment of the Senior
Noteholders' Interest T-Bill Carryover or the Subordinate Noteholders' Interest
T-Bill Carryover, as the case may be. <In addition, the ratings do not address
the likelihood of an Early Amortization Event.> There can be no assurance that a
rating will remain for any given period of time or that a rating will not be
lowered or withdrawn entirely by a Rating Agency if in its judgment
circumstances in the future so warrant. There can be no assurance as to whether
any additional rating agency will rate the Senior Notes or the Subordinate
Notes, or if one does, what rating would be assigned by such other rating
agency.
S-24
<PAGE>
CONSOLIDATION OF FEDERAL BENEFIT BILLINGS AND RECEIPTS UNDER ONE ELIGIBLE
LENDER NUMBER. Due to a recent change in Department policy limiting the
granting of new lender identification numbers, the Eligible Lender Trustee will
use a common Department lender identification number under the Eligible Lender
Trust Agreement for all of the beneficiaries of the trust established thereunder
(i.e., the Depositor, the Trust and any Future Trusts). The billings submitted
to the Department for Interest Subsidy and Special Allowance Payments on FFELP
Student Loans in the Trust will be consolidated with the billings for such
payments for FFELP Loans in any Future Trusts, as well as FFELP Loans owned by
the Depositor or their permitted assigns, and payments on such billings will be
made by the Department in lump sum form. Such lump sum payments will then be
allocated among the various beneficiaries of the Eligible Lender Trust.
In addition, the sharing of a single lender identification number by the
beneficiaries of the Eligible Lender Trust will result in the receipt of claim
payments by Federal Guarantors in lump sum form. In that event, such payments
would be allocated among the beneficiaries in a manner similar to the allocation
process for Interest Subsidy and Special Allowance Payments.
The Department regards the Eligible Lender Trustee as the party primarily
responsible to the Department for any liabilities owed to the Department or
Federal Guarantors resulting from the Eligible Lender Trustee's activities in
FFELP. As a result, if the Department or a guarantor were to determine that the
Eligible Lender Trustee owed a liability to the Department or a guarantor on any
FFELP Loan for which the Eligible Lender Trustee is or was legal titleholder,
including loans held for the benefit of the Trust or Future Trusts, the
Department or guarantor may seek to collect that liability by offset against
payments due the Eligible Lender Trustee in respect of any FFELP Loans legally
owned by the Eligible Lender Trustee without regard to their beneficial
ownership.
In addition, certain beneficiaries of the Eligible Lender Trust may in a
given quarter incur Federal Origination Fees that exceed the Interest Subsidy
and Special Allowance Payments payable by the Department on the loans in the
Eligible Lender Trust beneficially owned by such beneficiaries, resulting in the
consolidated payment from the Department received by the Eligible Lender Trustee
for that quarter equaling an amount that is less than the amount owed by the
Department on all of the FFELP Student Loans in the Trust for that quarter.
The Trust Agreement for the Trust and the trust agreement for any Future
Trusts (the Trust and such Future Trusts, collectively, the "Seller Trusts")
will require a Seller Trust (including the Trust) to indemnify the other Seller
Trusts for a shortfall or an offset by the Department or a Federal Guarantor
arising from the FFELP Student Loans held by the Eligible Lender Trustee on such
trust's behalf.
INCENTIVE PROGRAMS. EFG has offered, and intends to continue to offer,
incentive programs to certain FFELP Loan borrowers. Two such programs are
currently made available by EFG and may apply to FFELP Loans owned by the
Trusts. Under the "Grad Advantage Program," which is made available for all
FFELP Loans which enter repayment after July 1993, if a borrower makes 36
consecutive scheduled payments in a timely fashion, the effective interest rate
charged to the borrower will be permanently reduced by 2% per annum thereafter.
Pursuant to the Grad Advantage program, a borrower who graduates will be
entitled to a reduction in the principal of the borrower's student loan equal to
the amount of the borrower's origination and guarantee fee on subsidized loans
(not to exceed 4% of the principal), and an amount equal to the guarantee fee on
unsubsidized loans (not to exceed 1% of the principal amount of the loan).
Pursuant to the "direct repay plan" or "Auto Advantage Repayment Plan" borrowers
who make student loan payments electronically through automatic monthly
deductions from a savings or checking account receive a 0.25% effective interest
rate reduction as long as they continue the Auto Advantage repayment plan. It
cannot be predicted with certainty the extent to which borrowers will decide to
participate in these programs. EFG may alter its incentive programs in the
future, and is currently updating its offerings to accommodate changes to
interest rates.
These incentives programs currently or hereafter made available by EFG to
borrowers may also be made available by the Servicer to borrowers of Student
Loans. Any such incentive program that effectively reduces borrower payments or
principal balances on Student Loans and is not required by the Act will be
applicable to Student Loans only if and to the extent that the Trust that owns
the subject Student Loan has received an amount that is adequate to offset such
effective yield reductions.
S-25
<PAGE>
RISK OF YEAR 2000. The transition from the year 1999 to the year 2000 may
disrupt the ability of computerized systems to process information (the "Year
2000 Problem"). The collection of payments on the Student Loans, the servicing
of Student Loans (which includes the timely notification of delinquent borrowers
as required under each Guaranty Agreement), and the distributions on the Notes
are highly dependent on the computer systems of the Servicer, any Sub-Servicer,
the Indenture Trustee, the Eligible Lender Trustee, the Guarantors, the Seller,
the Administrator and other third parties. The Depositor has not made any
independent investigation of the computer systems of any of such parties. If any
related third party is not year 2000 compliant, the ability of the Servicer,
each Sub-Servicer, the Eligible Lender Trustee or the Indenture Trustee to
service the Student Loans and to make distributions on the Notes may be
materially and adversely affected and Noteholders may suffer delays in payment
of interest and principal.
In addition, DTC (as defined herein) has further advised the Depositor that
management of DTC is aware that some computer applications, systems, and the
like for processing data ("Systems") that are dependent upon calendar dates,
including dates before, on, and after January 1, 2000, may encounter Year 2000
Problems. DTC has informed its participants and other members of the financial
community (the "Industry") that it has developed and is implementing a program
so that its Systems, as the same relate to the timely payment of distributions
(including principal and income payments) to securityholders, book-entry
deliveries, and settlement of trades within DTC ("DTC Services"), continue to
function appropriately. This program includes a technical assessment and a
remediation plan, each of which is complete. Additionally, DTC's plan includes a
testing phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as DTC's direct and indirect participants and third-party vendors from whom
DTC licenses software and hardware, and third party vendors on whom DTC relies
for information or the provision of services, including telecommunication and
electrical utility service providers, among others. DTC has informed the
Industry that it is contacting (and will continue to contact) third-party
vendors from whom DTC acquires services to: (i) impress upon them the importance
of such services being Year 2000 compliant; and (ii) determine the extent of
their efforts for Year 2000 remediation (and, as appropriate, testing) of their
services. In addition, DTC is in the process of developing such contingency
plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the industry for informational purposes only and is not intended to
serve as a representation, warranty, or contract modification of any kind.
FORMATION OF THE TRUST
THE TRUST
EFG Student Loan Trust - (the "Trust") will be a trust formed under
the laws of the State of Delaware pursuant to the Trust Agreement for the
transactions described herein and in the Prospectus. The Trust will not engage
in any activity other than (i) acquiring, holding and managing the Student Loans
and the other assets of the Trust and proceeds therefrom, (ii) issuing the
Notes, (iii) making payments thereon, <(iv) originating Federal Consolidation
Loans during the Revolving Period, and> (<iv>) engaging in other activities that
are necessary, suitable or convenient to accomplish the foregoing or are
incidental thereto or connected therewith.
The proceeds from the sale of the Notes will be used by the Eligible Lender
Trustee to purchase on behalf of the Trust through the Transfer Agreement the
<Initial> Student Loans sold by the Seller to the Depositor pursuant to the Loan
Sale Agreement and to fund the Reserve Account Initial Deposit. Upon the
consummation of such transactions, the property of the Trust will consist of
(a) a pool of Student Loans, legal title to the FFELP Student Loans in which is
to be held by the Eligible Lender Trustee on behalf of the Trust, (b) all funds
collected in respect thereof on or after the Cutoff Date, and (c) all moneys and
investments on deposit in the Collection Account and the Reserve Account. The
Notes will be collateralized by the property of the Trust. The Collection
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<PAGE>
Account<, and> the Reserve Account <and the Collateral Reinvestment Account>
will be maintained in the name of the Indenture Trustee for the benefit of the
Noteholders. To facilitate servicing and to minimize administrative burden and
expense, the Servicer and, in turn, any Sub-Servicer, will be appointed
custodian of the promissory notes representing the Student Loans.
<The Trust will use funds on deposit in the Collateral Reinvestment Account
during the Revolving Period to make Additional Fundings, including to make or
acquire Additional Student Loans which will constitute property of the Trust.
See "DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Revolving Period and
Additional Fundings" herein. In addition, after the Revolving Period, Additional
Student Loans will be added to the Trust to the extent that (i) the Eligible
Lender Trustee on behalf of the Trust purchases Serial Loans from the Depositor,
(ii) the Trust owns Student Loans which are exchanged for Serial Loans owned by
the Depositor as described herein or (iii) for 210 days after the end of the
Revolving Period, Add-on Consolidation Loans are added to Federal Consolidation
Loans owned by the Trust. Any such origination or conveyance during or after the
Revolving Period of Additional Student Loans is conditioned on compliance with
the procedures described in the Transfer Agreement and the Loan Sale Agreement.
The Depositor expects that the amount of Additional Fundings during the
Revolving Period will approximately equal the amount deposited during the
Revolving Period into the Collateral Reinvestment Account and that the timing of
such Additional Fundings will be sufficient so as not to cause a build-up of
funds in the Collateral Reinvestment Account that would cause an Early
Amortization Event to occur prior to the scheduled end of the Revolving Period
on the last day of the Collection Period preceding the Quarterly
Payment Date. The Depositor's expectations in this regard, based on current
facts and circumstances, but relating to future events, are inherently forward
looking. These expectations are based primarily upon current market conditions,
including conditions in the secondary market for Student Loans, and current
expectations as to when Additional Fundings will need to be made (based, in
part, on expectations as to the rate at which the <Initial> Student Loans will
repay). There is a risk that market conditions will change or that the actual
repayment experience on the <Initial> Student Loans will be other than as
expected. See "RISK FACTORS--Maturity and Prepayment Considerations" herein and
in the Prospectus. In addition, a material adverse change in the operations or
business or financial condition of the Seller could affect the amount or timing
of Additional Fundings of New Loans or Serial Loans during the Revolving Period.
Accordingly, there can be no assurance as to the amount or timing of Additional
Fundings during the Revolving Period. Upon an Early Amortization Event or in any
event if the amount on deposit in the Collateral Reinvestment Account has not
been reduced to zero by the end of the Revolving Period, any amounts remaining
on deposit in the Collateral Reinvestment Account will be paid on the Quarterly
Payment Date immediately following the end of the Revolving Period as a payment
of principal first to the Senior Noteholders, until the aggregate principal
balance of the Senior Notes has been reduced to zero, and then to the
Subordinate Noteholders, until the aggregate principal balance of the
Subordinate Notes has been reduced to zero. There can also be no assurance as to
the amount of Additional Fundings that will occur after the Revolving Period.
See "DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Revolving Period and
Additional Fundings" herein.>
The Trust's principal offices are in [ ], in care of The First
National Bank of Chicago, as Trustee, at the address listed below for the
Eligible Lender Trustee.
ELIGIBLE LENDER TRUSTEE
The First National Bank of Chicago is the Eligible Lender Trustee for the
Trust, the Depositor and Future Trusts under a trust agreement (the "Eligible
Lender Trust Agreement"). The First National Bank of Chicago is a national
banking association whose principal offices are located at One First National
Plaza, Suite 0126, Chicago, Illinois 60670 and whose New York offices are
located at First Chicago Trust Company of New York, 14 Wall Street, New York, NY
10005. The Eligible Lender Trustee will acquire on behalf of the Depositor and
the Trust legal title to all the FFELP Student Loans acquired <from time to
time> pursuant to the Loan Sale Agreement and the Transfer Agreement,
respectively. The Eligible Lender Trustee on behalf of the Trust will enter into
a Guarantee Agreement with each of the Guarantors with respect to such Student
Loans. The Eligible Lender Trustee qualifies as an eligible lender and owner of
all FFELP Loans for all purposes under the Higher Education Act and the
Guarantee Agreements. Failure of the FFELP Student Loans to be owned by an
eligible lender would result in the loss of any Guarantee Payments from any
Federal Guarantor and any federal assistance
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<PAGE>
with respect to such Student Loans. See "THE STUDENT LOAN POOLS" in the
Prospectus. The Eligible Lender Trustee's liability in connection with the
issuance and sale of the Notes is limited solely to the express obligations of
the Eligible Lender Trustee set forth in the Eligible Lender Trust Agreement.
See "DESCRIPTION OF THE NOTES" herein and "DESCRIPTION OF THE TRANSFER AND
SERVICING AGREEMENTS" herein and in the Prospectus. The Seller and its
affiliates may maintain normal commercial banking relations with the Eligible
Lender Trustee.
THE STUDENT LOAN POOL
The pool of Student Loans will include the <Initial> Student Loans
purchased by the Eligible Lender Trustee on behalf of the Trust as of the Cutoff
Date <and any Additional Student Loans made or acquired by the Eligible Lender
Trustee on behalf of the Trust after the Closing Date>.
No <Initial> Student Loan as of the Cutoff Date is a Student Loan that
was subject to the Depositor's prior obligation to sell such loan to a third
party.
As of the Cutoff Date, Student Loans which are more than 30 days delinquent
do not equal or exceed 20% (by principal amount) of the <Initial> Student Loans
and none of the <Initital> Student Loans is a non-performing Student Loan.
Non-performing Student Loans are Student Loans which are in default and which
the Seller expects to write off as a loss.
<Following the Closing Date and prior to the end of the Revolving Period,
the Trust will be obligated from time to time to purchase from the Depositor,
and the Depositor, subject to the availability thereof, will be obligated to
tender to the Trust, New Loans owned by the Depositor each of which will have
been made to a borrower who is not a borrower under any Student Loan. In
addition, following the Closing Date, and both during and after the Revolving
Period, the Trust will be obligated from time to time to purchase from the
Depositor, subject to the availability thereof, Serial Loans owned by the
Depositor. During the Revolving Period, the purchase of New Loans and Serial
Loans, including a Purchase Premium Amount for each New Loan or Serial Loan so
purchased of up to % of the principal balance owed by the applicable borrower
on such loan, will be funded by means of a transfer of amounts on deposit in the
Collateral Reinvestment Account as described herein. Following the end of the
Revolving Period, the purchase of Serial Loans will be funded by amounts
representing distributions of principal on the outstanding Student Loans which
would otherwise have been part of the Available Funds of the Trust or,
alternatively, at the Depositor's option, the Trust will be obligated to
exchange with the Depositor existing Student Loans owned by the Trust for such
Serial Loans, provided such Serial Loans and eligible Student Loans meet certain
criteria described herein. Any Purchase Premium Amounts for Serial Loans
purchased or exchanged for by the Trust after the Revolving Period will be
funded on the Quarterly Payment Date next succeeding the end of the Collection
Period during which such Serial Loan has been acquired by the Trust from
amounts, if any, on deposit in the Reserve Account in excess of the Specified
Reserve Account Balance.
In addition, following the Closing Date, and prior to the end of the
Revolving Period, the Eligible Lender Trustee on behalf of the Trust will seek
to originate Federal Consolidation Loans to borrowers on Student Loans who are
also borrowers under one or more FFELP Student Loans (whether or not all such
loans are in the Trust), which origination will be funded by means of a transfer
from the Collateral Reinvestment Account of the amount required to repay any
Student Loans not held by the Trust that are being consolidated with the Student
Loans in the Trust. Such amount will be paid by the Trust to the holder or
holders of such Student Loans to prepay such loans. The Eligible Lender Trustee
will not be permitted to originate Federal Consolidation Loans (including the
addition of any Add-on Consolidation Loans) on behalf of the Trust during the
Revolving Period in an aggregate principal amount in excess of $ ;
additionally, no Federal Consolidation Loan may be originated by the Trust
having a scheduled maturity date after if at the time of such
origination the aggregate principal amount of all Federal Consolidation Loans
held by the Trust that have a scheduled maturity date after
exceeds or, after giving effect to such origination, would exceed $ ;
provided, however, that the Eligible Lender Trustee will be permitted to fund
the addition of Add-on Consolidation Loans in excess of such amounts if required
to do so by the Act. After the Revolving Period, the Eligible Lender Trustee on
behalf of the Trust will cease to make Federal Consolidation Loans and
Additional Student Loans will consist solely of Serial Loans acquired in the
manner specified above; provided, however, that for a maximum period of
210 days following the end of the Revolving Period, the Eligible Lender Trustee
may be required to increase the
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<PAGE>
principal balance of Federal Consolidation Loans existing in the Trust by the
amount of any related Add-on Consolidation Loans, as described below.
As described under "THE FEDERAL FAMILY EDUCATION LOAN PROGRAM--Federal
Consolidation Loan Program" in the Prospectus, borrowers may consolidate
additional loans ("Add-on Consolidation Loans") with an existing Federal
Consolidation Loan within 180 days from the date that the existing Federal
Consolidation Loan was made. As a result of the addition of any Add-on
Consolidation Loans, the related Federal Consolidation Loan may, in certain
cases, have a different interest rate and a different loan term. Any Add-on
Consolidation Loans added to a Federal Consolidation Loan in the Trust during
the Revolving Period will be funded by means of a transfer from the Collateral
Reinvestment Account of the amount required to repay in full any Student Loans
not held by the Trust that are being discharged in the consolidation process,
which amount will be paid by the Eligible Lender Trustee on behalf of the Trust
to the holder or holders of such Student Loans to prepay such loans. For a
maximum period of 210 days following the end of the Revolving Period (30 days
being attributed to the processing of any such Add-on Consolidation loans), such
amounts will be funded by amounts representing distributions of principal on the
outstanding Student Loans which would otherwise have been part of the Available
Funds of the Trust, as described under "DESCRIPTION OF THE TRANSFER AND
SERVICING AGREEMENTS--Distributions" herein.>
No selection procedures believed by the Depositor to be adverse to the
Noteholders were used or will be used in selecting the Student Loans. <However,
except for the criteria described in the preceding paragraphs and under
"DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Revolving Period and
Additional Fundings" herein or contained in the Loan Sale Agreement,> There will
be no required characteristics of <the Additional> Student Loans. <Therefore,
following the transfer of Additional Student Loans to the Eligible Lender
Trustee on behalf of the Trust, the aggregate characteristics of the entire pool
of Student Loans, including the composition of the Student Loans and of the
borrowers thereof, the Guarantors thereof, the distribution by loan type, the
distribution by interest rate, the distribution by principal balance and the
distribution by remaining term to scheduled maturity described in the following
tables, may vary significantly from those of the Initial Student Loans as of the
Cutoff Date. In addition,> The distribution by weighted average interest rate
applicable to the Student Loans on any date following the Cutoff Date may vary
significantly from that set forth in the following tables as a result of
variations in the effective rates of interest applicable to the Student Loans.
Moreover, the information described below with respect to the original term to
maturity and remaining term of maturity of the <Initial> Student Loans as of the
Cutoff Date may vary significantly from the actual term to maturity of any of
the Student Loans as a result of the granting of deferral and forbearance
periods with respect thereto.
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<PAGE>
Set forth below in the following tables is a description of certain
additional characteristics of the <Initial> Student Loans as of the Cutoff Date:
COMPOSITION OF THE <INITIAL> STUDENT LOANS AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PRIVATE
FFELP STUDENT STUDENT
LOANS LOANS
------------- -------
<S> <C> <C>
Aggregate Outstanding Principal Balance(1).................................... $
Number of Borrowers...........................................................
Average Outstanding Principal Balance Per Borrower............................ $
Number of Loans...............................................................
Average Outstanding Principal Balance Per Loan................................ $
Weighted Average Original Term to Maturity(2).................................
Weighted Average Remaining Term to Maturity(2)................................
Weighted Average Annual Interest Rate(3)...................................... % %
</TABLE>
- ------------------
(1) Includes net principal balance due from Obligors, plus accrued interest
thereon estimated to be $ as of the Cutoff Date to be capitalized
upon commencement of repayment.
(2) Determined from the date of origination or the Cutoff Date, as the case may
be, to the stated maturity date of the applicable <Initial> Student Loans,
assuming repayment commences promptly upon expiration of the typical grace
period following the expected graduation date and without giving effect to
any deferral or forbearance periods that may be granted in the future. See
"THE FEDERAL FAMILY EDUCATION LOAN PROGRAM" in the Prospectus.
(3) Determined using the interest rates applicable to the <Initial> Student
Loans as of the Cutoff Date. However, because a portion of the <Initial>
Student Loans effectively bear interest generally at a variable rate per
annum to the borrower, there can be no assurance that the foregoing
percentage will remain applicable to the <Initial> Student Loans at any time
after the Cutoff Date. See "THE FEDERAL FAMILY EDUCATION LOAN PROGRAM" in
the Prospectus.
DISTRIBUTION OF THE <INITIAL> STUDENT LOANS BY LOAN TYPE
AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF POOL
NUMBER OF OUTSTANDING BY OUTSTANDING
LOAN TYPE STUDENT LOANS PRINCIPAL BALANCE(1) PRINCIPAL BALANCE
- ------------------------------------------------------------ ------------- -------------------- -----------------
<S> <C> <C> <C>
FFELP STUDENT LOANS
Federal Stafford Loans(2).................................
Federal SLS Loans.........................................
Federal PLUS Loans........................................
Federal Consolidation Loans...............................
PRIVATE STUDENT LOANS
Total [100%]
</TABLE>
- ------------------
(1) Includes net principal balance due from borrowers, plus accrued interest
thereon estimated to be $ as of the Cutoff Date to be capitalized
upon commencement of repayment.
(2) Includes Unsubsidized Stafford Loans having an aggregate outstanding
principal balance as of the Cutoff Date of $ .
S-30
<PAGE>
DISTRIBUTION OF THE <INITIAL> FFELP STUDENT LOANS BY BORROWER
INTEREST RATES AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF POOL
OUTSTANDING BY OUTSTANDING
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF INTEREST RATES(1) STUDENT LOANS BALANCE(2) BALANCE
- ------------------------------------------------------------ ------------- -------------------- -----------------
<S> <C> <C> <C>
7.00% to 7.49%..............................................
7.50% to 7.99%..............................................
8.00% to 8.49%..............................................
8.50% to 8.99%..............................................
9.00% to 9.49%..............................................
9.50% and above.............................................
[Total].....................................................
</TABLE>
- ------------------
(1) Determined using the interest rates applicable to the <Initial> Student
Loans as of the Cutoff Date. However, because a portion of the <Initial>
Student Loans effectively bear interest at a variable rate per annum to the
borrower, there can be no assurance that the foregoing information will
remain applicable to the <Initial> Student Loans at any time after the
Cutoff Date. See "THE FEDERAL FAMILY EDUCATION LOAN PROGRAM" in the
Prospectus.
(2) Includes net principal balance due from Obligors, plus accrued interest
thereon estimated to be $ as of the Cutoff Date to be capitalized
upon commencement of repayment.
DISTRIBUTION OF THE <INITIAL> PRIVATE STUDENT LOANS BY BORROWER
INTEREST RATES AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF POOL
OUTSTANDING BY OUTSTANDING
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF INTEREST RATES(1) STUDENT LOANS BALANCE(2) BALANCE
- ------------------------------------------------------------ ------------- -------------------- -----------------
<S> <C> <C> <C>
7.00% to 7.49%..............................................
7.50% to 7.99%..............................................
8.00% to 8.49%..............................................
8.50% to 8.99%..............................................
9.00% to 9.49%..............................................
9.50% and above.............................................
[Total].....................................................
</TABLE>
- ------------------
(1) Determined using the interest rates applicable to the <Initial> Student
Loans as of the Cutoff Date. However, because a portion of the <Initial>
Student Loans effectively bear interest at a variable rate per annum to the
borrower, there can be no assurance that the foregoing information will
remain applicable to the <Initial> Student Loans at any time after the
Cutoff Date. See "THE FEDERAL FAMILY EDUCATION LOAN PROGRAM" in the
Prospectus.
(2) Includes net principal balance due from Obligors, plus accrued interest
thereon estimated to be $ as of the Cutoff Date to be capitalized
upon commencement of repayment.
S-31
<PAGE>
DISTRIBUTION OF THE <INITIAL> FFELP STUDENT LOANS BY OUTSTANDING PRINCIPAL
BALANCE AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF POOL
NUMBER OF OUTSTANDING BY OUTSTANDING
RANGE OF OUTSTANDING PRINCIPAL BALANCES ($) STUDENT LOANS PRINCIPAL BALANCE(1) PRINCIPAL BALANCE
- ------------------------------------------------------- ------------- -------------------- ----------------------
<S> <C> <C> <C>
Less than 2,000.......................................
2,000 to 3,999.......................................
4,000 to 5,999.......................................
6,000 to 7,999.......................................
8,000 to 9,999.......................................
10,000 to 11,999.......................................
12,000 to 13,999.......................................
14,000 to 15,999.......................................
16,000 to 17,999.......................................
18,000 to 19,999.......................................
20,000 to 21,999.......................................
22,000 to 23,999.......................................
24,000 to 25,999.......................................
26,000 to 27,999.......................................
28,000 and above.......................................
</TABLE>
- ------------------
(1) Includes net principal balance due from borrowers, plus accrued interest
thereon estimated to be $ as of the Cutoff Date to be capitalized
upon commencement of repayment.
DISTRIBUTION OF THE <INITIAL> PRIVATE STUDENT LOANS BY OUTSTANDING PRINCIPAL
BALANCE AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF POOL
NUMBER OF OUTSTANDING BY OUTSTANDING
RANGE OF OUTSTANDING PRINCIPAL BALANCES ($) STUDENT LOANS PRINCIPAL BALANCE(1) PRINCIPAL BALANCE
- ------------------------------------------------------- ------------- -------------------- ----------------------
<S> <C> <C> <C>
Less than 2,000.......................................
2,000 to 3,999.......................................
4,000 to 5,999.......................................
6,000 to 7,999.......................................
8,000 to 9,999.......................................
10,000 to 11,999.......................................
12,000 to 13,999.......................................
14,000 to 15,999.......................................
16,000 to 17,999.......................................
18,000 to 19,999.......................................
20,000 to 21,999.......................................
22,000 to 23,999.......................................
24,000 to 25,999.......................................
26,000 to 27,999.......................................
28,000 and above.......................................
</TABLE>
- ------------------
(1) Includes net principal balance due from borrowers, plus accrued interest
thereon estimated to be $ as of the Cutoff Date to be capitalized
upon commencement of repayment.
S-32
<PAGE>
DISTRIBUTION OF THE <INITIAL> FFELP STUDENT LOANS BY REMAINING TERM
TO SCHEDULED MATURITY AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF POOL
NUMBER OF OUTSTANDING BY OUTSTANDING
NUMBER OF MONTHS REMAINING TO SCHEDULED MATURITY(1) STUDENT LOANS PRINCIPAL BALANCE(2) PRINCIPAL BALANCE
- ------------------------------------------------------- ------------- -------------------- ----------------------
<S> <C> <C> <C>
Less than 24..........................................
24 to 35.............................................
36 to 47.............................................
48 to 59.............................................
60 to 71.............................................
72 to 83.............................................
84 to 95.............................................
96 to 107.............................................
108 to 119.............................................
120 to 131.............................................
132 to 143.............................................
144 to 155.............................................
156 to 167.............................................
168 to 179.............................................
180 to 191.............................................
192 and above..........................................
</TABLE>
- ------------------
(1) Determined from the Cutoff Date to the stated maturity date of the
applicable <Initial> Student Loan, assuming repayment commences promptly
upon expiration of the typical grace period following the expected
graduation date and without giving effect to any deferral or forbearance
periods that may be granted in the future. See "THE FEDERAL FAMILY EDUCATION
LOAN PROGRAM" in the Prospectus.
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon estimated to be $ as of the Cutoff Date to be capitalized
upon commencement of repayment.
DISTRIBUTION OF THE <INITIAL> PRIVATE STUDENT LOANS BY REMAINING TERM
TO SCHEDULED MATURITY AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF POOL
NUMBER OF OUTSTANDING BY OUTSTANDING
NUMBER OF MONTHS REMAINING TO SCHEDULED MATURITY(1) STUDENT LOANS PRINCIPAL BALANCE(2) PRINCIPAL BALANCE
- ------------------------------------------------------- ------------- -------------------- ----------------------
<S> <C> <C> <C>
Less than 24..........................................
24 to 35.............................................
36 to 47.............................................
48 to 59.............................................
60 to 71.............................................
72 to 83.............................................
84 to 95.............................................
96 to 107.............................................
108 to 119.............................................
120 to 131.............................................
132 to 143.............................................
144 to 155.............................................
156 to 167.............................................
168 to 179.............................................
180 to 191.............................................
192 and above..........................................
</TABLE>
- ------------------
(1) Determined from the Cutoff Date to the stated maturity date of the
applicable <Initial> Student Loan, assuming repayment commences promptly
upon expiration of the typical grace period following the expected
graduation date and without giving effect to any deferral or forbearance
periods that may be granted in the future. See "THE FEDERAL FAMILY EDUCATION
LOAN PROGRAM" in the Prospectus.
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon estimated to be $ as of the Cutoff Date to be capitalized
upon commencement of repayment.
S-33
<PAGE>
DISTRIBUTION OF THE <INITIAL> FFELP STUDENT LOANS BY BORROWER PAYMENT STATUS AS
OF THE CUTOFF DATE
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF POOL
NUMBER OF OUTSTANDING BY OUTSTANDING
BORROWER PAYMENT STATUS(1) STUDENT LOANS PRINCIPAL BALANCE(2) PRINCIPAL BALANCE
- ------------------------------------------------------- ------------- -------------------- ----------------------
<S> <C> <C> <C>
In-School..............................................
Grace..................................................
Deferral...............................................
Forbearance............................................
Repayment..............................................
</TABLE>
- ------------------
(1) Refers to the status of the borrower of each <Initial> Student Loan as of
the Cutoff Date: such borrower may still be attending school ("In-School"),
may be in a grace period prior to repayment commencing ("Grace"), may be
repaying such loan ("Repayment") or may have temporarily ceased repaying
such loan through a deferral ("Deferral") or a forbearance ("Forbearance")
period. See "The Federal Family Education Loan Program" in the Prospectus.
For purposes of this table, "In-School" excludes, and "Deferral" includes,
all SLS or PLUS Loans of borrowers still attending school.
(2) Includes net principal balance due from Obligors, plus accrued interest
thereon estimated to be $ as of the Cutoff Date to be capitalized
upon commencement of repayment.
S-34
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE <INITIAL> FFELP STUDENT LOANS AS OF
THE CUTOFF DATE
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF POOL
NUMBER OF OUTSTANDING BY OUTSTANDING
LOCATION STUDENT LOANS PRINCIPAL BALANCE(2) PRINCIPAL BALANCE
- ------------------------------------------------------- ------------- -------------------- ----------------------
<S> <C> <C> <C>
Alabama................................................
Alaska.................................................
Arizona................................................
Arkansas...............................................
California.............................................
Colorado...............................................
Connecticut............................................
Delaware...............................................
District of Columbia...................................
Florida................................................
Georgia................................................
Guam...................................................
Hawaii.................................................
Idaho..................................................
Illinois...............................................
Indiana................................................
Iowa...................................................
Kansas.................................................
Kentucky...............................................
Louisiana..............................................
Maine..................................................
Maryland...............................................
Massachusetts..........................................
Michigan...............................................
Minnesota..............................................
Mississippi............................................
Missouri...............................................
Montana................................................
Nebraska...............................................
Nevada.................................................
New Hampshire..........................................
New Jersey.............................................
New Mexico.............................................
New York...............................................
North Carolina.........................................
North Dakota...........................................
Ohio...................................................
Oklahoma...............................................
Oregon.................................................
Pennsylvania...........................................
Puerto Rico............................................
Rhode Island...........................................
South Carolina.........................................
South Dakota...........................................
Tennessee..............................................
Texas..................................................
Utah...................................................
Vermont................................................
Virgin Islands.........................................
Virginia...............................................
Washington.............................................
West Virginia..........................................
Wisconsin..............................................
Wyoming................................................
Other..................................................
Total..............................................
</TABLE>
- ------------------
(1) Based on the permanent billing addresses of the borrowers of the <Initial>
Student Loans shown on the Servicer's records as of the Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon estimated to be $ as of the Cutoff Date to be capitalized
upon commencement of repayment.
S-35
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE <INITIAL> PRIVATE STUDENT LOANS AS OF
THE CUTOFF DATE
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF POOL
NUMBER OF OUTSTANDING BY OUTSTANDING
LOCATION STUDENT LOANS PRINCIPAL BALANCE(2) PRINCIPAL BALANCE
- ------------------------------------------------------- ------------- -------------------- ----------------------
<S> <C> <C> <C>
Alabama................................................
Alaska.................................................
Arizona................................................
Arkansas...............................................
California.............................................
Colorado...............................................
Connecticut............................................
Delaware...............................................
District of Columbia...................................
Florida................................................
Georgia................................................
Guam...................................................
Hawaii.................................................
Idaho..................................................
Illinois...............................................
Indiana................................................
Iowa...................................................
Kansas.................................................
Kentucky...............................................
Louisiana..............................................
Maine..................................................
Maryland...............................................
Massachusetts..........................................
Michigan...............................................
Minnesota..............................................
Mississippi............................................
Missouri...............................................
Montana................................................
Nebraska...............................................
Nevada.................................................
New Hampshire..........................................
New Jersey.............................................
New Mexico.............................................
New York...............................................
North Carolina.........................................
North Dakota...........................................
Ohio...................................................
Oklahoma...............................................
Oregon.................................................
Pennsylvania...........................................
Puerto Rico............................................
Rhode Island...........................................
South Carolina.........................................
South Dakota...........................................
Tennessee..............................................
Texas..................................................
Utah...................................................
Vermont................................................
Virgin Islands.........................................
Virginia...............................................
Washington.............................................
West Virginia..........................................
Wisconsin..............................................
Wyoming................................................
Other..................................................
Total..............................................
</TABLE>
- ------------------
(1) Based on the permanent billing addresses of the borrowers of the <Initial>
Student Loans shown on the Servicer's records as of the Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon estimated to be $ as of the Cutoff Date to be capitalized
upon commencement of repayment.
S-36
<PAGE>
DISTRIBUTION OF <INITIAL> FFELP STUDENT LOANS BY DATE OF DISBURSEMENT
<TABLE>
<CAPTION>
AGGREGATE PERCENTAGE OF POOL
NUMBER OF OUTSTANDING BY OUTSTANDING
DISBURSEMENT DATE(1) STUDENT LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------------------------------- ------------- ----------------- ----------------------
<S> <C> <C> <C>
Pre-October 1, 1993.....................................
October 1, 1993 and thereafter..........................
Total.............................................. [100%]
</TABLE>
- ------------------
(1) FFELP Loans disbursed prior to October 1, 1993 are 100% guaranteed by the
applicable Guarantor, and reinsured against default by the Department up to
a maximum of 100% of the Guarantee Payments. FFELP Loans disbursed on or
after October 1, 1993 are 98% guaranteed by the applicable Guarantor, and
reinsured against default by the Department up to a maximum of 98% of the
Guarantee Payments.
(2) Includes net principal balance due from Obligors, plus accrued interest
thereon estimated to be $ as of the Cutoff Date to be capitalized
upon commencement of repayment.
DISTRIBUTION OF <INITIAL> FFELP STUDENT LOANS
BY NUMBER OF DAYS OF DELINQUENCY AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
% OF
AGGREGATE POOL BY PERCENT AGGREGATE WEIGHTED
NUMBER OUTSTANDING OUTSTANDING OF POOL ORIGINAL AVERAGE UNCAPITALIZED AVERAGE
OF PRINCIPAL PRINCIPAL BY NUMBER PRINCIPAL PRINCIPAL ACCRUED INTEREST
DAYS DELINQUENT LOANS BALANCE (1) BALANCE (2) OF LOANS BALANCE BALANCE INTEREST RATE (3)
- -------------------- ------ ----------- ----------- --------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current.............
31- 60..............
61- 90..............
91-120..............
Total...............
<CAPTION>
WEIGHTED
AVERAGE
MARGIN
DAYS DELINQUENT (3)
- -------------------- --------
<S> <C>
Current.............
31- 60..............
61- 90..............
91-120..............
Total...............
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
REMAINING TERM
WEIGHTED AVERAGE ORIGINAL TERM (IN MONTHS) (IN MONTHS)
- ------------------------------------------------------- ----------------
<S> <C>
Current................................................
31- 60.................................................
61- 90.................................................
91-120.................................................
Total..................................................
</TABLE>
- ------------------
(1) Current outstanding balance provided by [EFG Technologies].
(2) As a percent of current outstanding balance.
(3) Weighted by current outstanding balance.
(4) Original term defined as period from loan origination date until loan
maturity date.
(5) Remaining term defined as period from Cutoff Date until loan maturity date.
S-37
<PAGE>
DISTRIBUTION OF <INITIAL> PRIVATE STUDENT LOANS
BY NUMBER OF DAYS OF DELINQUENCY AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
% OF
AGGREGATE POOL BY PERCENT AGGREGATE WEIGHTED
NUMBER OUTSTANDING OUTSTANDING OF POOL ORIGINAL AVERAGE UNCAPITALIZED AVERAGE
OF PRINCIPAL PRINCIPAL BY NUMBER PRINCIPAL PRINCIPAL ACCRUED INTEREST
DAYS DELINQUENT LOANS BALANCE (1) BALANCE (2) OF LOANS BALANCE BALANCE INTEREST RATE (3)
- -------------------- ------ ----------- ----------- --------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current.............
31- 60..............
61- 90..............
91-120..............
Total...............
<CAPTION>
WEIGHTED
AVERAGE
MARGIN
DAYS DELINQUENT (3)
- -------------------- --------
<S> <C>
Current.............
31- 60..............
61- 90..............
91-120..............
Total...............
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
REMAINING TERM
WEIGHTED AVERAGE ORIGINAL TERM (IN MONTHS) (IN MONTHS)
- ------------------------------------------------------- ----------------
<S> <C>
Current................................................
31- 60.................................................
61- 90.................................................
91-120.................................................
Total..................................................
</TABLE>
- ------------------
(1) Current outstanding balance provided by [EFG Technologies].
(2) As a percent of current outstanding balance.
(3) Weighted by current outstanding balance.
(4) Original term defined as period from loan origination date until loan
maturity date.
(5) Remaining term defined as period from Cutoff Date until loan maturity date.
Each of the Student Loans provides or will provide for the amortization of
the outstanding principal balance of such Student Loan over a series of regular
payments. Each regular payment consists of an installment of interest which is
calculated on the basis of the outstanding principal balance of such Student
Loan multiplied by the applicable interest rate and further multiplied by the
period elapsed (as a fraction of a calendar year) since the preceding payment of
interest was made. As payments are received in respect of such Student Loan, the
amount received is applied first to interest accrued to the date of payment and
the balance is applied to reduce the unpaid principal balance. Accordingly, if a
borrower pays a regular installment before its scheduled due date, the portion
of the payment allocable to interest for the period since the preceding payment
was made will be less than it would have been had the payment been made as
scheduled, and the portion of the payment applied to reduce the unpaid principal
balance will be correspondingly greater. Conversely, if a borrower pays a
monthly installment after its scheduled due date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be greater than it would have been had the payment been made as scheduled, and
the portion of the payment applied to reduce the unpaid principal balance will
be correspondingly less. In either case, subject to any applicable Deferral
Periods or Forbearance Periods in the case of FFELP Student Loans, the borrower
pays a regular installment until the final scheduled payment date, at which time
the amount of the final installment is increased or decreased as necessary to
repay the then outstanding principal balance of such Student Loan.
From time to time the Depositor may exchange FFELP Loans (the "Exchange
Loans") for FFELP Student Loans in the Trust if the Exchange Loans are such that
they would qualify to stand in lieu of a cash repurchase price payable by the
Seller if the FFELP Student Loans to be exchanged for the Exchange Loans were
the subject of a repurchase obligation of the Seller under the Loan Sale
Agreement. See "DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Sale of
Student Loans; Representations and Warranties" in the Prospectus.
S-38
<PAGE>
GUARANTEE OF STUDENT LOANS
General. Each FFELP Student Loan is required to be guaranteed as to
principal and interest by one of the Federal Guarantors described below and
reinsured by the Department under the Act and must be eligible for Special
Allowance Payments and, with respect to certain Student Loans, Interest Subsidy
Payments paid by the Department. Each Private Student Loan is required to be
guaranteed by a Private Guarantor.
Federal Guarantors. The Eligible Lender Trustee has entered into a
separate Guarantee Agreement with each of the Guarantors listed below (each, a
"Federal Guarantor") pursuant to which each of the Federal Guarantors has agreed
to serve as guarantor for certain of the Student Loans.
Pursuant to the Higher Education Amendments of 1992 (the "1992
Amendments"), under Section 432(o) of the Act, if the Department has determined
that a Federal Guarantor is unable to meet its insurance obligations, the loan
holder may submit claims directly to the Department and the Department is
required to pay the full Guarantee Payment due with respect thereto in
accordance with guarantee claim processing standards no more stringent than
those of such Federal Guarantor. However, the Department's obligation to pay
guarantee claims directly in this fashion is contingent upon the Department
making the determination referred to above. There can be no assurance that the
Department would ever make such a determination with respect to a Federal
Guarantor or, if such a determination was made, whether such determination or
the ultimate payment of such guarantee claims would be made in a timely manner.
See "APPENDIX A--The Federal Family Education Loan Program--Federal Guarantors"
and "--Federal Insurance and Reinsurance of Federal Guarantors" in the
Prospectus.
The following table provides information with respect to the portion of the
Student Loans guaranteed by each Federal Guarantor under FFELP:
DISTRIBUTION OF THE FFELP STUDENT LOANS BY
FEDERAL GUARANTOR AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
AGGREGATE
OUTSTANDING
NUMBER PRINCIPAL BALANCE PERCENT OF POOL
OF LOANS OF LOANS BY OUTSTANDING
NAME OF FEDERAL GUARANTOR GUARANTEED GUARANTEED(1) PRINCIPAL BALANCE
- ------------------------------------------------------------- ---------- ------------------- -----------------
<S> <C> <C> <C>
$ %
------ ----------- -----
Total........................................................ $ $ 100.0%
------ ----------- -----
------ ----------- -----
</TABLE>
- ------------------
(1) Includes principal balance due from Obligors, plus accrued interest thereon
of $ as of the Cutoff Date to be capitalized upon commencement of
repayment.
Set forth below is certain historical information with respect to each of
the Federal Guarantors which guarantees FFELP Student Loans comprising greater
than 5% of the <Initial> Pool Balance (the "Significant Federal Guarantors").
The information shown for each Significant Federal Guarantor relates to all
Student Loans (including but not limited to Student Loans) guaranteed by such
Significant Federal Guarantor:
Guaranty Volume. The following table sets forth the approximate aggregate
principal amount of FFELP Student Loans (excluding Federal Consolidation Loans)
that first became guaranteed by each Significant Federal
S-39
<PAGE>
Guarantor and by all Federal Guarantors (including but not limited to those
guaranteeing Student Loans) in each of the five federal fiscal years shown for
which information is available:*
<TABLE>
<CAPTION>
LOANS GUARANTEED
--------------------------------------------------------
FEDERAL FISCAL YEAR
--------------------------------------------------------
NAME OF FEDERAL GUARANTORS 1992 1993 1994 1995 1996
- ----------------------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
All Federal Guarantors............................... $ $ $ $ $
</TABLE>
- ------------------
* The information set forth in the table above has been obtained from the
Department's FY 1993 Loan Programs Data Book ("DOE Data Book") (with respect
to fiscal years 1992 and 1993) and from the Department's quarterly Loan Volume
Updates (with respect to fiscal years 1994, 1995 and 1996), and has not been
audited or independently verified for accuracy or completeness by the Seller,
the Depositor, the Servicer or the Underwriters.
Reserve Ratio. Each Significant Federal Guarantor's reserve ratio is
determined by dividing its cumulative cash reserves by the original principal
amount of the outstanding loans it has agreed to guarantee. The term "cumulative
cash reserves" refers to cash reserves plus (i) sources of funds (including
insurance premiums, state appropriations, federal advances, federal reinsurance
payments, administrative cost allowances, collections on claims paid and
investment earnings) minus (ii) uses of funds (including claims paid to lenders,
operating expenses, lender fees, the Department's share of collections on claims
paid, returned advances and reinsurance fees). The "original principal amount of
outstanding loans" consists of the original principal amount of loans guaranteed
by such Significant Federal Guarantor minus the original principal amount of
loans canceled, claims paid, loans paid in full and loan guarantees transferred
to such Significant Federal Guarantor from other guarantors.
The following table sets forth the Significant Federal Guarantors' reserve
ratios and the national average reserve ratio for all guarantors for the five
federal fiscal years shown for which information is available:*
<TABLE>
<CAPTION>
RESERVE RATIO AS OF CLOSE OF
--------------------------------------------------------
FEDERAL FISCAL YEAR
--------------------------------------------------------
FEDERAL GUARANTORS 1992 1993 1994 1995 1996
- ----------------------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
All Federal Guarantors............................... % % % % %
</TABLE>
- ------------------
* The information set forth in the table above with respect to the Significant
Federal Guarantors and the national average has been obtained from the DOE
Data Book (with respect to fiscal years 1992 and 1993), from the Department's
FY94-96 FFELP Loan Programs Data Book (with respect to fiscal years 1994 and
1995) and from the latest available Department of Education quarterly reports
(with respect to fiscal year 1996).
The information set forth in the table above has not been audited or
independently verified for accuracy or completeness by the Seller, the
Depositor, the Servicer or the Underwriters.
Recovery Rates. A Federal Guarantor's recovery rate, which provides a
measure of the effectiveness of the collection efforts against defaulting
borrowers after the guarantee claim has been satisfied, is determined by
dividing the amount recovered from borrowers by the Federal Guarantor by the
aggregate amount of default claims paid by the Federal Guarantor during the
applicable federal fiscal year with respect to borrowers. The table below sets
forth the recovery rates for each of the Significant Federal Guarantors for the
five federal fiscal years shown:*
<TABLE>
<CAPTION>
RECOVERY RATE
--------------------------------------------------------
FEDERAL FISCAL YEAR
--------------------------------------------------------
FEDERAL GUARANTORS 1992 1993 1994 1995 1996
- ----------------------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
% % % % %
</TABLE>
- ------------------
* The information set forth in the table above has been obtained from the latest
available Department of Education quarterly reports and has not been audited
or independently verified for accuracy or completeness by EFG, the Depositor,
the Servicer or the Underwriters.
S-40
<PAGE>
Claims Rate.* The following table sets forth the claims rates of each
Significant Federal Guarantor for each of the five federal fiscal years shown:**
<TABLE>
<CAPTION>
CLAIMS RATE
--------------------------------------------------------
FEDERAL FISCAL YEAR
--------------------------------------------------------
FEDERAL GUARANTORS 1992 1993 1994 1995 1996
- ----------------------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
% % % % %
</TABLE>
- ------------------
* The Department is required to make reinsurance payments to Federal Guarantors
with respect to FFELP loans in default that are subject to specified
reductions when the Federal Guarantor's claims rate for a fiscal year equals
or exceeds certain trigger percentages of the aggregate original principal
amount of FFELP loans guaranteed by such Guarantor that are in repayment on
the last day of the prior fiscal year. See Appendix A to the Prospectus.
** The information set forth in the table above has been obtained from the
latest available Department of Education quarterly reports and has not been
audited or independently verified for accuracy or completeness by the Seller,
the Depositor, the Servicer or the Underwriters.
Unless otherwise indicated, all the above information relating to the
Significant Federal Guarantors has been obtained from the Significant Federal
Guarantors, is not guaranteed as to accuracy or completeness by the Seller, the
Depositor or the Underwriters and is not to be construed as a representation by
the Seller, the Depositor or the Underwriters.
Each of the Federal Guarantor's guarantee obligations with respect to any
FFELP Student Loan is conditioned upon the satisfaction of all the conditions
set forth in the applicable Guarantee Agreement. These conditions include, but
are not limited to, the following: (i) the origination and servicing of such
Student Loan being performed in accordance with FFELP, the Act, such Federal
Guarantor's rules and other applicable requirements, (ii) the timely payment to
the Federal Guarantor of the guarantee fee payable with respect to such Student
Loan, (iii) the timely submission to the Federal Guarantor of all required
pre-claim delinquency status notifications and of the claim with respect to such
Student Loan. Failure to comply with any of the applicable conditions, including
the foregoing, may result in the refusal of the Federal Guarantor to honor its
Guarantee Agreements with respect to such Student Loan, in the denial of
guarantee coverage with respect to certain accrued interest amounts with respect
thereto or in the loss of certain Interest Subsidy Payments and Special
Allowance Payments with respect thereto.
Prospective investors should consult the DOE Data Books for further
information concerning the Guarantors.
Private Guarantors. Payment of principal and interest with respect to the
Private Student Loans will be guaranteed against default, death, bankruptcy or
disability of the applicable borrower by one of the Private Guarantors pursuant
to a guarantee agreement to be entered into among such Private Guarantor, the
Seller [and the Trustee] (such agreements, as amended or supplemented from time
to time, the "Private Guarantee Agreements"). The Private Guarantors are
sometimes individually referred to herein as a "Private Guarantor" and
collectively as the "Private Guarantors".
A Private Guarantor is not entitled to any federal reinsurance or
assistance from the Department. Although each Private Guarantor maintains a loan
loss reserve intended to absorb losses arising from its guarantee commitments,
there can be no assurance that the amount of such reserve will be sufficient to
cover the obligations of the Private Guarantor over the term of the Private
Student Loans. There can be no assurance that the Private Guarantors will have
the financial resources to make all Guarantee Payments to the Trustee that may
arise from time to time. The inability of any Private Guarantor to meet its
guarantee obligations could reduce the amount of principal and interest paid to
the holders of the Securities.
S-41
<PAGE>
The following table provides information with respect to the portion of the
Private Student Loans guaranteed by each Private Guarantor.
DISTRIBUTION OF THE PRIVATE STUDENT LOANS
BY PRIVATE GUARANTOR AS OF THE CUT OFF DATE
<TABLE>
<CAPTION>
AGGREGATE
OUTSTANDING
NUMBER OF PRINCIPAL BALANCE PERCENT OF POOL
LOANS OF LOANS BY OUTSTANDING
PRIVATE GUARANTOR GUARANTEED GUARANTEED PRINCIPAL BALANCE
- ------------------------------------------------------------- ---------- --------------------- -----------------
<S> <C> <C> <C>
$ %
</TABLE>
Set forth below is information regarding the Private Guarantors that was
provided for use in this Prospectus Supplement by the Private Guarantors.
Description of the Business and Guaranty of , Private
Guarantor.
The following sets forth certain current and historical financial and
operating information with respect to [ ] in its capacity as a
Private Guarantor:
Financial and Operating Information Summary. The following table is a
summary of certain financial and operating information of [ ] for
the [ ] calendar years referred to below:
S-42
<PAGE>
DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued pursuant to the terms of the Indenture
substantially in the form filed as an exhibit to the Registration Statement. The
following summary describes certain terms of the Notes, the Indenture and the
Trust Agreement pursuant to which the Trust will be formed. The summary does not
purport to be complete and is qualified in its entirety by reference to the
provisions of the Notes, the Indenture and the Trust Agreement. The following
summary supplements, and to the extent inconsistent therewith, replaces the
description of the general terms and provisions of the Notes, the Indenture and
the Trust Agreement set forth in the Prospectus, to which description reference
is hereby made.
PAYMENTS OF INTEREST
Interest will accrue on the principal balance of the Senior Notes and the
Subordinate Notes at a rate per annum (calculated as provided below) equal to
the Senior Note Rate and the Subordinate Note Rate, respectively. Interest on
the Notes will accrue from and including the Closing Date or from the most
recent Quarterly Payment Date on which interest thereon has been paid to but
excluding the current Quarterly Payment Date (each a "Quarterly Interest
Period") and will be payable to the Senior Noteholders and the Subordinate
Noteholders, as the case may be, quarterly on each Quarterly Payment Date,
commencing , 199[_]. Interest accrued as of any Quarterly Payment
Date but not paid on such Quarterly Payment Date will be due on the next
Quarterly Payment Date, together with an amount equal to interest on such amount
at the applicable rate per annum specified above. Interest payments on the Notes
will generally be funded from Available Funds on deposit in the Collection
Account and from amounts on deposit in the Reserve Account remaining after the
distribution of the Servicing Fee and all overdue Servicing Fees and the
Administration Fee and all overdue Administration Fees for
such Quarterly Payment Date. See "DESCRIPTION OF THE TRANSFER AND SERVICING
AGREEMENTS--DISTRIBUTIONS" and "--Credit Enhancement" herein.
The "Senior Note Rate" for each Quarterly Interest Period will be the
lesser of (a) the Senior Note T-Bill Rate for such Quarterly Interest Period and
(b) the Student Loan Rate for such Quarterly Interest Period. The "Subordinate
Note Rate" for each Quarterly Interest Period will be the lesser of (a) the
Subordinate Note T-Bill Rate for such Quarterly Interest Period and (b) the
Student Loan Rate for such Quarterly Interest Period.
The "Senior Note T-Bill Rate" shall be equal to the weighted average of the
T-Bill Rates within the applicable Quarterly Interest Period (determined as
described herein) plus %.
The "Subordinate Note T-Bill Rate" shall be equal to the weighted average
of the T-Bill Rates within the applicable Quarterly Interest Period (determined
as described herein) plus %.
The "Student Loan Rate" for any Quarterly Interest Period will equal the
product of (a) the quotient obtained by dividing (i) 365 (or 366 in the case of
a leap year) by (ii) the actual number of days elapsed in such Quarterly
Interest Period and (b) the percentage equivalent of a fraction, (i) the
numerator of which is equal to Expected Interest Collections for such Quarterly
Interest Period less the Servicing Fee and the Administration Fee with respect
to such Quarterly Interest Period and (ii) the denominator of which is the
aggregate principal balance of the Notes as of the last day of such Quarterly
Interest Period.
"Expected Interest Collections" means, with respect to any Quarterly
Interest Period, the sum of (i) the amount of interest accrued, net of accrued
Monthly Rebate Fees and other amounts required by the Act to be paid to the
Department, with respect to the Student Loans for the related Student Loan Rate
Accrual Period (whether or not such interest is actually paid), (ii) all
Interest Subsidy Payments and Special Allowance Payments estimated to have
accrued for such Student Loan Rate Accrual Period whether or not actually
received (taking into account any expected deduction therefrom of the Federal
Origination Fees described under "RISK FACTORS--Fees Payable on Certain Student
Loans", above) and (iii) Investment Earnings for such Student Loan Rate Accrual
Period.
Senior Noteholders' Interest T-Bill Carryover and Subordinate Noteholders'
Interest T-Bill Carryover may be incurred on any Quarterly Payment Date (after
the first Quarterly Payment Date). Any Senior Noteholders' Interest T-Bill
Carryover and Subordinate Noteholders' Interest T- Bill Carryover so incurred
prior to the Parity
S-43
<PAGE>
Date will, however, not be payable until on or after the Parity Date. On each
Quarterly Payment Date from and after the Parity Date, any Senior Noteholders'
Interest T-Bill Carryover and Subordinate Noteholders' Interest T-Bill Carryover
incurred and unpaid to any including such Quarterly Payment Date will be payable
on such Quarterly Payment Date but only out of any Reserve Account Excess
remaining after payment out of such excess of (i) <if the Revolving Period has
terminated, any Purchase Premiums due the Seller for Serial Loans purchased by
the Trust prior to the end of the related Collection Period, (ii)> on the Parity
Date (if the Parity Date occurs after the end of the Revolving Period), any
amount necessary to reduce to zero the remaining amount by which the aggregate
principal balance of the Notes exceeds the Pool Balance and (<ii)> in the case
of the Subordinate Noteholders' Interest T-Bill Carryover, payment of the Senior
Noteholders' Interest T-Bill Carryover.
DISTRIBUTIONS OF PRINCIPAL
<No principal payments will be made on the Notes during the Revolving
Period.> Commencing with < >] <the end of the Revolving Period,>
principal payments will be made to the Noteholders in the order of priority set
forth below on each Quarterly Payment Date in an amount generally equal to the
Principal Distribution Amount for such Quarterly Payment Date, until the
aggregate principal balance of the Notes is reduced to zero. Payments of the
Principal Distribution Amount will generally be derived from Available Funds
remaining after the distribution of the Servicing Fee and all overdue Servicing
Fees, the Administration Fee and all overdue Administration Fees and the
Noteholders' Interest Distribution Amount and, if such Available Funds are
insufficient, from amounts on deposit in the Reserve Account. See "DESCRIPTION
OF THE TRANSFER AND SERVICING AGREEMENTS--Distributions" and "--Credit
Enhancement" herein. If such Available Funds and such amounts on deposit in the
Reserve Account are insufficient to pay the Senior Noteholders' Principal
Distribution Amount or, after the Senior Notes have been paid in full, the
Subordinate Noteholders' Principal Distribution Amount for a Quarterly Payment
Date, such shortfall will be added to the principal payable to the Senior or
Subordinate Noteholders, respectively, on subsequent Quarterly Payment Dates.
In addition, on each Quarterly Payment Date commencing with
< > <the end of the Revolving Period,> for so long as the
aggregate principal balance of the Notes is greater than the Pool Balance, any
Reserve Account Excess for such Quarterly Payment Date will<, after payment to
the Seller of any unpaid Purchase Premium Amounts for any Serial Loans purchased
by the Trust prior to the end of the related Collection Period,> be applied to
pay the principal of the Notes in the order of priority set forth below.
Amounts, if any, available to be distributed as set forth in the preceding
sentence will not be part of the Principal Distribution Amount or the Senior or
Subordinate Noteholders' Principal Distribution Amount for a Quarterly Payment
Date and Noteholders will have no entitlement thereto except to the extent of
any such excess in the Reserve Account of which there can be no assurance. See
"DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Credit
Enhancement--Reserve Account" herein.
On each Quarterly Payment Date on which principal payments are made on the
Notes (whether in respect of the Principal Distribution Amount, amounts on
deposit in the Reserve Account constituting Reserve Account Excess (as described
in the preceding paragraph) or amounts in respect of a mandatory redemption<, as
described below, or otherwise),> all payments of principal will be applied to
pay principal of the Senior Notes until the aggregate principal balance of the
Senior Notes has been reduced to zero, and then to pay principal of the
Subordinate Notes until the aggregate principal balance of the Subordinate Notes
has been reduced to zero.
The aggregate outstanding principal amount of the Senior Notes will be
payable in full on the Quarterly Payment Date (the "Senior Note
Final Maturity Date") and the aggregate outstanding principal amount of the
Subordinate Notes will be payable in full on the Quarterly
Payment Date (the "Subordinate Note Final Maturity Date"). However, the actual
maturity of the Senior or Subordinate Notes could occur other than on the Senior
Note Final Maturity Date or the Subordinate Note Final Maturity Date,
respectively, as a result of a variety of factors including those described
above under "RISK FACTORS--Maturity and Prepayment Considerations."
S-44
<PAGE>
<MANDATORY REDEMPTION
If any amount remains on deposit in the Collateral Reinvestment Account on
the last day of the Revolving Period after giving effect to all Additional
Fundings on or prior to such date, the entire amount remaining on deposit in the
Collateral Reinvestment Account will be used on the Quarterly Payment Date on or
immediately following such date to redeem the Senior Notes until the aggregate
principal balance thereof has been reduced to zero, and then to redeem the
Subordinate Notes until the aggregate principal balance thereof has been reduced
to zero. The aggregate principal amount of Notes to be redeemed will be an
amount equal to the amount then on deposit in the Collateral Reinvestment
Account.>
DETERMINATION OF T-BILL RATES
Pursuant to the Administration Agreement, the Administrator will act as
calculation agent and will use the T-Bill Rate to determine the Senior Note T-
Bill Rate and Subordinate Note T-Bill Rate for each Quarterly Interest Period.
"T-Bill Rate" means, on any day, the weighted average per annum discount rate
(expressed on a bond equivalent basis and applied on a daily basis) for direct
obligations of the United States with a maturity of thirteen weeks ("91-day
Treasury Bills") sold at the most recent 91-day Treasury Bill auction prior to
such date, as reported by the U.S. Department of the Treasury. In the event that
the results of the auctions of 91-day Treasury Bills cease to be reported as
provided above, or that no such auction is held in a particular week, then the
T-Bill Rate in effect as a result of the last such publication or report will
remain in effect until such time, if any, as the results of auctions of 91-day
Treasury Bills shall again be reported or such an auction is held, as the case
may be. The T-Bill Rate will be subject to a Lock-In Period of six business
days.
"Lock-In Period" means the period of days preceding any Quarterly Payment
Date during which the T-Bill Rate in effect on the first day of such period will
remain in effect until the end of the Quarterly Interest Period related to such
Quarterly Payment Date.
Accrued interest on each class of Notes from and including the Closing Date
or the preceding Quarterly Payment Date, as applicable, to but excluding the
current Quarterly Payment Date is calculated by multiplying the principal amount
of such Notes by an "accrued interest factor." This factor is calculated by
adding the interest rates applicable to each day on which each such Note has
been outstanding since the Closing Date or the preceding Quarterly Payment Date,
as applicable, and dividing the sum by 365 (or by 366 in the case of accrued
interest which is payable on a Quarterly Payment Date in a leap year) and
rounding the resulting number to nine decimal places.
The following table sets forth the accrued interest factors that would have
been applicable to any Note bearing interest at the indicated rates, assuming
the 365-day year.
<TABLE>
<CAPTION>
ASSUMED INTEREST
-----------------------------------
DAYS RATE ON ACCRUED INTEREST
SETTLEMENT DATE OUTSTANDING THE NOTES RECEIVABLE FACTOR
- --------------------------------------- ----------- --------- -----------------
<S> <C> <C> <C>
1st.................................... 0 5.50000% 0.000000000
2nd.................................... 1 5.50000 0.000150685
3rd.................................... 2 5.50000 0.000301370
4th.................................... 3 5.50000 0.000452055
5th*................................... 4 5.65000 0.000602740
6th.................................... 5 5.65000 0.000757534
7th.................................... 6 5.65000 0.000912329
8th.................................... 7 5.65000 0.001067123
9th.................................... 8 5.65000 0.001221918
10th................................... 9 5.65000 0.001376712
10
</TABLE>
- ------------------
* First interest rate adjustment (91-day Treasury Bills are generally auctioned
weekly).
The numbers in this table are examples given for informational purposes
only and are in no way a prediction of interest rates on either class of Notes.
S-45
<PAGE>
BOOK-ENTRY REGISTRATION
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the UCC and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participating organizations ("Participants") and to
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in their accounts, thereby
eliminating the need for physical movement of certificates. Participants include
the Underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations and may include certain other organizations. Indirect
access to the DTC system also is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
Senior Noteholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Senior Notes may do so only through Participants and Indirect Participants.
In addition, Senior Noteholders will receive all distributions of principal of
and interest on the Senior Notes from the Indenture Trustee through DTC and its
Participants. Under a book-entry format, Senior Noteholders will receive
payments after the related Quarterly Payment Date because, while payments are
required to be forwarded to Cede, as nominee for DTC, on each such date, DTC
will forward such payments to its Participants which thereafter will be required
to forward them to Indirect Participants or Senior Noteholders. It is
anticipated that the only "Senior Noteholder" will be Cede, as nominee for DTC
and that Senior Noteholders will not be recognized by the Indenture Trustee as
Noteholders, as such terms are used in the Indenture. Senior Noteholders will be
permitted to exercise the rights of Senior Noteholders indirectly through DTC
and its Participants (who in turn will exercise their rights through DTC).
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Senior Notes and is required to
receive and transmit distributions of principal of and interest on the Senior
Notes. Participants and Indirect Participants with which Senior Noteholders have
accounts with respect to the Senior Notes similarly are required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Senior Noteholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Senior
Noteholder to pledge Senior Notes to persons or entities that do not participate
in the DTC system, or otherwise take actions in respect of such Senior Notes,
may be limited due to the lack of a physical certificate for such Senior Notes.
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 28
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. 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.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 27 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of
S-46
<PAGE>
Morgan Guaranty Trust Company of New York (the "Euroclear Operator", under
contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear through
or maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear, withdrawals of securities
and cash from the Euroclear, and receipts of payments with respect to securities
in Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants and has no record of or relationship with persons holding
through Euroclear Participants.
Distributions with respect to Senior Notes held through Cedel or Euroclear
will be credited to the cash accounts of Cedel Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
Cedel or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Senior 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 Depositary's ability to effect such
actions on its behalf through DTC.
Senior Noteholders may hold their Senior Notes through DTC (in the United
States) or Cedel or Euroclear (in Europe) if they are participants of such
systems, or indirectly through organizations which are participants in such
systems.
The Senior Notes will initially be registered in the name of CEDE & Co.,
the nominee of DTC. Cedel and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Cedel's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank, N.A. ("Citibank") will act as depositary
for Cedel and Morgan Guaranty Trust Company of New York ("Morgan") will act as
depositary for Euroclear (in such capacities, individually the "Depositary" and
collectively the "Depositaries").
Transfers between Participants will occur in accordance with DTC Rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Because of time-zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
Cedel Participants on such business day. Cash received in Cedel or Euroclear as
a result of sales of securities by or through a Cedel Participant or Euroclear
Participant to a 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. For information with respect
to tax documentation procedures for the Senior Notes, see "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES--Tax Consequences to Holders of the Notes--Foreign
Holders" in the Prospectus.
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
S-47
<PAGE>
in accordance with DTC Rules on behalf of the relevant European international
clearing system by its Depositary; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Cedel Participants and Euroclear
Participants may not deliver instructions to the Depositaries.
DTC has advised the Administrator that it will take any action permitted to
be taken by a Senior Noteholder under the Indenture, only at the direction of
one or more Participants to whose accounts with DTC the Senior Notes are
credited.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of interests in the Senior 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.
NONE OF THE TRUST, THE SELLER, THE DEPOSITOR, THE SERVICER, THE
ADMINISTRATOR, THE ELIGIBLE LENDER TRUSTEE, THE INDENTURE TRUSTEE OR THE
UNDERWRITERS WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO ANY PARTICIPANTS,
CEDEL PARTICIPANTS OR EUROCLEAR PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS
NOMINEES WITH RESPECT TO (1) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC,
CEDEL OR EUROCLEAR OR ANY PARTICIPANT, (2) THE PAYMENT BY DTC, CEDEL OR
EUROCLEAR OR ANY PARTICIPANT OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN
RESPECT OF THE PRINCIPAL AMOUNT OR INTEREST ON THE SENIOR NOTES, (3) THE
DELIVERY BY ANY PARTICIPANT, CEDEL PARTICIPANT OR EUROCLEAR PARTICIPANT OF ANY
NOTICE TO ANY BENEFICIAL OWNER WHICH IS REQUIRED OR PERMITTED UNDER THE TERMS OF
THE INDENTURE OR THE TRUST AGREEMENT TO BE GIVEN TO SENIOR NOTEHOLDERS OR
(4) ANY OTHER ACTION TAKEN BY DTC AS THE SENIOR NOTEHOLDER.
S-48
<PAGE>
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
GENERAL
The following is a summary of certain terms of the Loan Sale Agreement,
pursuant to which the Depositor purchases the Student Loans from the Seller, the
Transfer Agreement pursuant to which the Depositor conveys the Student Loans
(together with all its rights and remedies under the Loan Sale Agreement) to the
Trust; the Servicing Agreements pursuant to which the Servicer will service the
Student Loans; the Administration Agreement, pursuant to which the Administrator
will undertake certain other administrative duties and functions with respect to
the Trust and the Student Loans; and the Trust Agreement, pursuant to which the
Trust will be created (collectively, the "Transfer and Servicing Agreements").
Forms of the Transfer and Servicing Agreements have been filed as exhibits to
the Registration Statement. A copy of the Transfer and Servicing Agreements will
be filed with the Commission following the issuance of the Notes. This summary
does not purport to be complete and is subject to, and qualified in its entirety
by reference to, all the provisions of the Transfer and Servicing Agreements.
The following summary supplements, and to the extent inconsistent therewith
replaces, the description of the general terms and provisions of the Transfer
and Servicing Agreements set forth in the Prospectus, to which description
reference is hereby made.
SALE OF STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
Information with respect to the sale of the <Initial> Student Loans from
the Seller to the Depositor on the Closing Date pursuant to the Loan Sale
Agreement and the representations and warranties made by the Seller in
connection therewith <and in connection with the purchase of Student Loans by
the Trust pursuant to Additional Fundings> is set forth under "DESCRIPTION OF
THE TRANSFER AND SERVICING AGREEMENTS" in the Prospectus. The Student Loans and
the Depositor's rights and remedies under the Loan Sale Agreement with respect
to the Student Loans will be conveyed to the Trust pursuant to the Transfer
Agreement. The net proceeds received from the sale of the Notes will be applied
to the purchase of the <Initial> Student Loans and to the deposit of the Reserve
Account Initial Deposit in the Reserve Account.
<REVOLVING PERIOD AND ADDITIONAL FUNDINGS
During the period (the "Revolving Period") from the Closing Date until the
first to occur of (i) an Early Amortization Event as described below or
(ii) the last day of the Collection Period preceding the
Quarterly Payment Date, the Trust will be obligated from time to time, subject
to certain conditions described herein, to purchase from the Depositor, and the
Depositor, subject to the availability thereof and to the availability of funds
therefor in the Collateral Reinvestment Account, will be obligated to tender to
the Trust, FFELP Student Loans which (i) are made to a borrower who is not a
borrower under any Student Loan, (ii) are made under loan programs which existed
as of the Closing Date, and (iii) are guaranteed by a Federal Guarantor (each a
"New Loan," and collectively the "New Loans"). New Loans may be acquired by the
Depositor, if available, from the Seller and are expected to be made or acquired
by the Seller at the discretion and in accordance with usual practices of the
Seller. Each such purchase of a New Loan will be made by the Eligible Lender
Trustee on behalf of the Depositor and the Trust pursuant to the Loan Sale
Agreement and the Transfer Agreement, respectively. During the Revolving Period,
each purchase of a New Loan will be funded by means of a transfer from the
Collateral Reinvestment Account of an amount equal to the sum of (i) the
principal balance owned by the applicable borrower thereon plus accrued interest
thereon expected to be capitalized upon repayment (the "Purchase Collateral
Balance") and (ii) an additional amount not to exceed % of the principal
balance owed by the applicable borrower thereon (the "Purchase Premium Amount"
and together with the Purchase Collateral Balance, the "Loan Purchase Amount").
Following the end of the Revolving Period, New Loans may not be purchased by the
Trust.
The term "Early Amortization Event" refers to any of the following events:
(i) an Event of Default occurring under the Indenture, a Servicer
Default occurring under the Servicing Agreement or an Administrator Default
occurring under the Administration Agreement;
(ii) certain events of insolvency occurring with respect to the
Seller;
(iii) the Trust becomes subject to registration as an investment
company under the Investment Company Act of 1940, as amended;
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(iv) as of the end of any Collection Period, the percentage by
principal balance of Student Loans the borrowers of which use such loans to
attend schools identified by the related Guarantor as proprietary or
vocational exceeds % of the Pool Balance;
(v) as of the end of any Collection Period, the percentage by
principal balance of Student Loans which are not in repayment and are not
eligible for Interest Subsidy Payments exceeds % of the Pool Balance;
(vi) the Excess Spread, with respect to each of any two successive
Quarterly Payment Dates, commencing with the Quarterly Payment Date in
199[_], is less than %; or
(vii) the arithmetic average of the Delinquency Percentage as of the
end of each of two successive Collection Periods exceeds %.
"Excess Spread" means, with respect to any Quarterly Payment Date, the
percentage equivalent of a fraction the numerator of which is the product of
(a) four and (b) the difference between (x) the Expected Interest Collections
for such Quarterly Payment Date and (y) the sum of (i) the Servicing Fee for
such Quarterly Payment Date and all prior unpaid Servicing Fees, (ii) the
Administration Fee for such Quarterly Payment Date and all prior unpaid
Administration Fees, and (iii) the Noteholders' Interest Distribution Amount for
such Quarterly Payment Date, and the denominator of which is the average of the
amount of the Pool Balance as of the first and the last day of the related
Collection Period.
"Delinquency Percentage" means, as of any date of determination, the
percentage equivalent of a fraction the numerator of which is the aggregate
principal balance of the Student Loans which are Repayment Loans and which
either (a) are over 120 days delinquent or (b) have had claims filed with the
Department for which payment is still awaited, and the denominator of which is
the aggregate principal balance of the Student Loans which are Repayment Loans.
In addition, following the Closing Date and both during and subsequent to
the Revolving Period, the Eligible Lender Trustee on behalf of the Trust will be
obligated from time to time, subject to the conditions described below, to
purchase from the Depositor FFELP Student Loans which (i) are made to a borrower
who is also a borrower under at least one outstanding Student Loan, (ii) are
made under the same loan program as such Student Loan, and (iii) are guaranteed
by the Guarantor that guaranteed such Student Loan (each a "Serial Loan" and
collectively, the "Serial Loans"). Serial Loans may be acquired, if available,
from the Seller by the Depositor.
During the Revolving Period, each purchase of a Serial Loan will be funded
by means of a transfer from the Collateral Reinvestment Account of an amount
equal to the Loan Purchase Amount of such loan. Following the end of the
Revolving Period, the Purchased Collateral Balance for such purchases will be
funded by amounts representing distributions of principal on the outstanding
Student Loans which otherwise would have been part of the Available Funds of the
Trust, as described under "DESCRIPTION OF THE TRANSFER AND SERVICING
AGREEMENTS--Distributions" herein, and Purchase Premium Amounts for such
purchases will be funded on the next succeeding Quarterly Payment Date from any
Reserve Account Excess for such Quarterly Payment Date as described under
"DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Credit
Enhancement--Reserve Account". Alternatively, at the Depositor's option,
following the end of the Revolving Period, the Eligible Lender Trustee will be
obligated, in lieu of purchasing Serial Loans as described above, to exchange
with the Depositor existing Student Loans owned by the Trust for Serial Loans
purchased by the Depositor from the Seller, provided that each Student Loan so
exchanged (an "Exchanged Student Loan") meets certain criteria including that
(i) the Exchanged Student Loan was originated under the same loan program and is
guaranteed by the same Guarantor as such Student Loan and entitles the holder
thereof to receive interest based on the same interest rate index as the Serial
Loan to be exchanged into the Trust (the "Exchanged Serial Loan"), and (ii) the
Exchanged Student Loan will not, at any level of such interest rate index, have
an interest rate that is greater than the Exchanged Serial Loan. In addition, if
the outstanding principal amount of an Exchanged Student Loan is less than that
of the related Exchanged Serial Loan, an additional amount equal to such
difference will be remitted to the Depositor from amounts which would otherwise
have been part of the Available Funds of the Trust, as described under
"DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Distributions" herein.
Any Purchase Premium Amount for an Exchanged Serial Loan will be paid in same
manner described above from Reserve Account Excess.
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<PAGE>
A purchase of Serial Loans or acquisition of Exchanged Serial Loans will be
prohibited at any time after (i) an Event of Default occurs under the Indenture,
a Servicer Default occurs under the Servicing Agreement or an Administrator
Default occurs under the Administration Agreement, or (ii) certain events of
insolvency occur with respect to the Seller if the Serial Loans are to be
acquired by the Depositor from the Seller.
Any purchase of New Loans, Serial Loans or exchange of Exchanged Student
Loans for Exchanged Serial Loans will be made by the Trust on a date designated
by the Depositor (each, a "Transfer Date") pursuant to one or more Transfer
Agreements. On such Transfer Date, the Depositor will assign without recourse
(except as otherwise set forth in the Transfer and Servicing Agreements) to the
Trustee on behalf of the Trust, the Depsitor's entire beneficial interest in the
New Loans, Serial Loans or Exchanged Serial Loans being transferred on such
Transfer Date, in exchange for the Loan Purchase Amount thereof or the Exchanged
Student Loans being exchanged therefor (with the payment of any Purchase Premium
Amount for Serial Loans acquired by the Trust after the Revolving Period being
deferred to the next succeeding Quarterly Payment Date on which amounts in
excess of the Specified Reserve Account Balance are available in the Reserve
Account as described above). Legal title in such loans will remain in the
Eligible Lender Trustee.
In addition, following the Closing Date and prior to the end of the
Revolving Period, in the event that a borrower of a Student Loan who is also a
borrower under one or more FFELP Loans (whether or not all such loans are part
of the Trust) elects to consolidate such loans, the Eligible Lender Trustee on
behalf of the Trust will seek to originate a Federal Consolidation Loan pursuant
to the Federal Consolidation Loan Program described in the Prospectus under
"FEDERAL FAMILY EDUCATION LOAN PROGRAM--Federal Consolidation Loan Program".
Such origination will be funded by means of a transfer from the Collateral
Reinvestment Account of the amount required to repay in full any FFELP Loans not
held by the Trust that are being discharged in the consolidation process, which
amount will be paid by the Trust to the holder or holders of such FFELP Loans to
prepay such loans. No assurance can be given that the Eligible Lender Trustee,
rather than another lender, will be the lender which makes such Federal
Consolidation Loan. In the event that another lender makes such Federal
Consolidation Loan, any Student Loan which is being consolidated by such Federal
Consolidation Loan will be prepaid. The Eligible Lender Trustee will not be
permitted to originate Federal Consolidation Loans (including the addition of
any Add-on Consolidation Loans) on behalf of the Trust during the Revolving
Period in an aggregate principal amount in excess of $ ; additionally,
no Federal Consolidation Loan may be originated by the Trust having a scheduled
maturity date after if at the time of such origination the
aggregate principal amount of all Federal Consolidation Loans held by the Trust
that have a scheduled maturity date after exceeds or, after
giving effect to such origination, would exceed $ ; provided, however,
that the Eligible Lender Trustee will be permitted to fund Add-on Consolidation
Loans in excess of such amounts if required to do so by the Act. After the
Revolving Period, the Eligible Lender Trustee on behalf of the Trust will cease
to originate Federal Consolidation Loans, and any Federal Consolidation Loan
made with respect to a Student Loan will be made by another lender, thereby
resulting in a prepayment of such Student Loan; provided, however, that for a
maximum period of 210 days following the end of the Revolving Period, the
Eligible Lender Trustee may be required to increase the principal balance of
Federal Consolidation Loans existing in the Trust by the amount of any related
Add-on Consolidation Loans, as described below.
As described under "THE FEDERAL FAMILY EDUCATION LOAN PROGRAM--Federal
Consolidation Loan Program" in the Prospectus, borrowers may consolidate
additional Student Loans ("Add-on Consolidation Loans") with an existing Federal
Consolidation Loan within 180 days from the date that the existing Federal
Consolidation Loan was made. As a result of the addition of any Add-on
Consolidation Loans, the related Federal Consolidation Loan may, in certain
cases, have a different interest rate and a different loan term.
Any Add-on Consolidation Loans added to a Federal Consolidation Loan in the
Trust during the Revolving Period will be funded by means of a transfer from the
Collateral Reinvestment Account of the amount required to repay in full any
Student Loans not held by the Trust that are being discharged in the
consolidation process, which amount will be paid by the Eligible Lender Trustee
on behalf of the Trust to the holder or holders of such Student Loans to prepay
such loans. For a maximum period of 210 days following the end of the Revolving
Period (30 days being attributed to the processing of any such Add-on
Consolidation Loans), such amounts will be funded by amounts representing
distributions of principal on the outstanding Student Loans which would
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otherwise have been part of the Available Funds of the Trust, as described under
"DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Distributions" herein.
As described under "THE FEDERAL FAMILY EDUCATION LOAN PROGRAM" in the
Prospectus, during certain qualifying periods, interest on certain Student Loans
is not required to be currently paid, but instead is added to the outstanding
principal balance of the loan at the end of the qualifying period. In order to
minimize the possibility that the failure to receive current interest payments
on such loans during such periods will result in a shortfall of the amount
required to be distributed on the Notes, amounts on deposit in the Collateral
Reinvestment Account will be applied during the Revolving Period to make
interest payments to Noteholders, in lieu of current collections of interest on
such loans. Following the end of the Revolving Period, the Collateral
Reinvestment Account will cease to be available as a source to fund such
interest payments to Noteholders, and thereafter such payments will be funded
through the application of amounts which would otherwise have been distributable
in respect of the Principal Distribution Amount for the related Quarterly
Payment Date, as described under "--Distributions" below.>
ACCOUNTS
In addition to the Collection Account referred to in the Prospectus under
"DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Accounts", the
Administrator will establish and maintain the Collateral Reinvestment Account
and the Reserve Account, in the name of the Indenture Trustee on behalf of the
Noteholders.
SERVICING COMPENSATION; ADMINISTRATION FEE
Under the FFELP Loan Servicing Agreement, the Servicer will be entitled to
receive from the Trust monthly on each Monthly Payment Date or Quarterly Payment
Date a servicing fee (the "FFELP Servicing Fee") in an amount equal to the
lesser of (I) one-twelfth of % of the aggregate principal balance of the FFELP
Student Loans as of the last day of the preceding calendar month and (II) the
sum of (i) one-twelfth of the In-School Percentage of the principal balance of
each FFELP Student Loan as of the last day of the preceding calendar month which
was an In-School Loan (as defined herein) on such date or, if the average
principal balance of In-School Loans as of such date was $2,500 or less, [$1.50]
per account for each such loan, (ii) one-twelfth of the GRDF Percentage of the
principal balance as of the last day of the preceding calendar month of each
FFELP Student Loan which was a Grace, Repayment, Deferral or Forbearance Student
Loan (each as defined herein) as of such date or, if the average principal
balance of such loans as of such date was $3,000 or less, [$3.00] per account
for each such loan, (iii) a fee of [$1.00] for each notification sent by the
Servicer during the preceding calendar month on behalf of the Trust to a
borrower providing information to such borrower with respect to Federal
Consolidation Loan programs, (iv) <a one-time fee of [$75.00] for each Federal
Consolidation Loan originated by the Eligible Lender Trustee on behalf of the
Trust during the preceding calendar month,> (<iv>) a fee of [$25.00] for each
FFELP Student Loan for which, during the preceding calendar month, claim
documentation was completed and provided to the Guarantor or for which the
Servicer performed bankruptcy or ineligible borrower account processing (that,
in the case of ineligible account processing, resulted in a demand letter being
sent to the borrower), in each case as required by the claims processing
requirements of the Guarantor, (<v>) a fee of [$.05] per FFELP Student Loan for
storing and warehousing the applicable loan documentation for each such loan
during the preceding calendar month, <(vii) a one-time fee of $2.00 for each
Serial Loan transferred by the Seller to the Trust during the preceding calendar
month,> (<vi>) a fee equal to the one-twelfth of the product of (a) the
aggregate outstanding principal balance of the FFELP Student Loans as of the
last day of the preceding calendar month and (b) [.05%], which fee will be
payable so long as certain servicing regulations of the Department remain in
effect and (<vii>) a fee of $70.00 per hour for system development requests made
by the Eligible Lender Trustee on behalf of the Trust and provided by the
Servicer during the preceding calendar month.
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<PAGE>
For purposes of making the determinations set forth in clauses (i) and
(ii) of the preceding sentence, the "In-School Percentage" and "GRDF Percentage"
shall each be determined based on the average principal balance of the In-School
Loans and the Grace, Repayment, Deferral and Forebearance Loans, respectively,
as of the last day of the preceding calendar month, as follows:
<TABLE>
<CAPTION>
AVERAGE
IN-SCHOOL PRINCIPAL GRDF
AVERAGE PRINCIPAL BALANCE PERCENTAGE BALANCE PERCENTAGE
- --------------------------------------------------------------------- ---------- --------- ----------
<S> <C> <C> <C>
$2,501-$3,000........................................................
$3,001-$3,500........................................................
$3,501-$4,000........................................................
$4,001-$4,750........................................................
$4,751-$5,500........................................................
$5,501-$6,250........................................................
$6,251 and above.....................................................
</TABLE>
[Under the Private Loan Servicing Agreement, the Servicer will be entitled
to receive from the Trust monthly on each Monthly Payment Date or Quarterly
Payment, a servicing fee (the "Private Loan Servicing Fee", and together with
the FFELP Servicing Fee, the "Servicing Fee") in an amount equal to
].
The Servicing Fee (together with any portion of the Servicing Fee that
remains unpaid from prior Monthly Payment Dates) will be payable on each Monthly
Payment Date and will be paid solely out of Monthly Available Funds in the case
of each Monthly Payment Date that is not a Quarterly Payment Date (and out of
Available Funds in the case of each Quarterly Payment Date) and amounts on
deposit in the Reserve Account on such date. To the extent that, for any Monthly
Payment Date, the Servicing Fee is the amount calculated as described in clause
(I) of the first sentence of the preceding paragraph, then an amount (the
"Servicing Fee Shortfall") equal to the excess of the amount described in clause
(II) of such sentence over the amount described in clause (I) of such sentence
shall be payable on the next succeeding Quarterly Payment Date (or if such
Monthly Payment Date is also a Quarterly Payment Date, on such Quarterly Payment
Date) from any remaining amounts on deposit in the Reserve Account that are in
excess of the Specified Reserve Account Balance, pursuant to the priorities
described under "--Credit Enhancement--Reserve Account" below. The Servicer will
be obligated to perform its servicing obligations whether or not it receives any
amounts in respect of Servicing Fee Shortfalls.
As compensation for the performance of the Administrator's obligations
under the Administration Agreement and as reimbursement for its expenses related
thereto, the Administrator will be entitled to receive monthly in arrears on
each Monthly Payment Date that is not a Quarterly Payment Date and on each
Quarterly Payment Date the Administration Fee in an amount equal to one-twelfth
of the product of (i) % and (ii) the Pool Balance as of the close of business
on the last day of the calendar month immediately preceding such date.
DISTRIBUTIONS
Deposits to Collection Account. On or about the third business day prior to
each Monthly Payment Date (the "Determination Date"), the Administrator will
provide the Indenture Trustee with certain information with respect to the
preceding Monthly Collection Period or, in the case of a Monthly Payment Date
that is also a Quarterly Payment Date, the preceding Collection Period,
including the amount of Monthly Available Funds or Available Funds, as the case
may be, received with respect to the Student Loans and the aggregate Purchase
Amount relating to the Student Loans to be repurchased by the Seller or to be
purchased by the Servicer.
"Monthly Collection Period" means, with respect to any Monthly Payment Date
that is not a Quarterly Payment Date, the calendar month immediately preceding
the month of such Monthly Payment Date.
For purposes hereof, the term "Monthly Available Funds" means, with respect
to each Monthly Payment Date that is not a Quarterly Payment Date, the sum of
the following amounts with respect to the related Monthly Collection Period:
(i) all collections received by the Servicer on the Student Loans
(including any Guarantee Payments received with respect to the Student
Loans);
(ii) any Interest Subsidy Payments and Special Allowance Payments
received by the Eligible Lender Trustee during such Monthly Collection
Period with respect to the Student Loans;
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<PAGE>
(iii) all proceeds of the liquidation of defaulted Student Loans
("Liquidated Student Loans"), which became Liquidated Student Loans during
such Monthly Collection Period in accordance with the Servicer's customary
servicing procedures, net of expenses incurred by the Servicer in
connection with such liquidation and any amounts required by law to be
remitted to the borrower on such Liquidated Student Loans ("Liquidation
Proceeds"), and all recoveries in respect of Liquidated Student Loans which
were written off in prior Monthly Collection Periods;
(iv) <that portion of amounts released from the Collateral
Reinvestment Account with respect to Additional Fundings relating to those
interest costs on the Student Loans which are or will be capitalized;
(v)> the aggregate amount received for those Student Loans repurchased
by the Seller or purchased by the Servicer under an obligation which arose
during the related Monthly Collection Period;
(<v>) Investment Earnings for such Monthly Payment Date; and
(<vi>) with respect to each Monthly Payment Date other than a
Quarterly Payment Date and other than a Monthly Payment Date immediately
succeeding a Quarterly Payment Date, Monthly Available Funds remaining on
deposit in the Collection Account from the Monthly Collection Period
relating to the preceding Monthly Payment Date, after giving effect to the
application of such Monthly Available Funds on such preceding Monthly
Payment Date; provided, however, that if with respect to any Monthly
Payment Date there would not be sufficient funds, after application of
Monthly Available Funds (as defined above) and amounts available from the
Reserve Account, to pay any of the items specified in clauses (i) and
(ii) respectively under the second paragraph of
"--Distributions--Distributions from Collection Account", then Monthly
Available Funds for such Monthly Payment Date will include, in addition to
the Monthly Available Funds (as defined above), amounts on deposit in the
Collection Account on the Determination Date relating to such Monthly
Payment Date which would have constituted Monthly Available Funds for the
Monthly Payment Date succeeding such Monthly Payment Date up to the amount
necessary to pay such items, and the Monthly Available Funds for such
succeeding Monthly Payment Date will be adjusted accordingly; and provided,
further, that Monthly Available Funds will exclude (A) all payments and
proceeds (including Liquidation Proceeds) of any Student Loans the Purchase
Amount of which has been included in Monthly Available Funds for a prior
Monthly Collection Period; <and> <(B) except as expressly included in
clause (iv) above, amounts released from the Collateral Reinvestment
Account;> (<B>) any Monthly Rebate Fees paid during the related Monthly
Collection Period by or on behalf of the Trust as described under "RISK
FACTORS--Fees Payable on Certain Student Loans" herein<.> <; and (D) any
collections in respect of principal on the Student Loans applied during the
related Monthly Collection Period by the Eligible Lender Trustee on behalf
of the Trust prior to the end of the Revolving Period to make deposits to
the Collateral Reinvestment Account, as described under "--Distributions
from Collection Account" below, and after the end of the Revolving Period
to fund the addition of any Add-on Consolidation Loans, to purchase Serial
Loans or to fund the acquisition of Exchanged Serial Loans as described
under "--Revolving Period and Additional Fundings" above.>
"Available Funds" means, with respect to a Quarterly Payment Date and the
related Collection Period, the sum of the amounts specified in clauses (i)-(<v>)
of the definition of Monthly Available Funds for each of the three Monthly
Collection Periods included in such Collection Period; provided, however, that
if with respect to any Quarterly Payment Date there would not be sufficient
funds, after application of Available Funds (as defined above) and amounts
available from the Reserve Account, to pay any of the items specified in clauses
(i) through (vi) respectively under the third paragraph of "--Distributions from
Collection Account," below, then Available Funds for such Quarterly Payment Date
will include, in addition to the Available Funds (as defined above), amounts on
deposit in the Collection Account on the Determination Date relating to such
Quarterly Payment Date which would have constituted Available Funds for the
Quarterly Payment Date succeeding such Quarterly Payment Date up to the amount
necessary to pay such items, and the Available Funds for such succeeding
Quarterly Payment Date will be adjusted accordingly; and provided, further, that
Available Funds will exclude (A) all payments and proceeds (including
Liquidation Proceeds) of any Student Loans the Purchase Amount of which has been
included in Available Funds for a prior Collection Period; <(B) except as
expressly included in clause (iv) of the definition of Monthly Available Funds,
amounts released from the Collateral Reinvestment Account;> (<B>) any Monthly
Rebate Fees paid during the related Collection Period by or on behalf of the
Trust; <(D) any collections in respect of principal on the Student Loans applied
by the Eligible Lender Trustee
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<PAGE>
on behalf of the Trust prior to the end of the Revolving Period to make deposits
to the Collateral Reinvestment Account, as described under "--Distributions from
Collection Account" below, and after the end of the Revolving Period to fund the
addition of any Add-on Consolidation Loans, to purchase Serial Loans or to fund
the acquisition of Exchanged Serial Loans during the related Collection Period;
and> ([C]) the Servicing Fee, all overdue Servicing Fees, the Administration Fee
and all overdue Administration Fees paid on each Monthly Payment Date that is
not a Quarterly Payment Date during the related Collection Period.
Distributions from Collection Account. <From time-to-time during the
Revolving Period, on any day therein, the Administrator may instruct the
Indenture Trustee to withdraw all collections in respect of principal on the
Student Loans then on deposit in the Collection Account and deposit such amounts
in the Collateral Reinvestment Account. In addition, from time to time during
the Revolving Period, the Administrator may instruct the Indenture Trustee to
withdraw funds on deposit in the Collateral Reinvestment Account to the extent
such funds are not needed to make Additional Fundings and redeposit such amounts
in the Collection Account.>
On each Monthly Payment Date that is not a Quarterly Payment Date, the
Administrator will instruct the Indenture Trustee to make the following deposits
and distributions to the extent of Monthly Available Funds for such Monthly
Payment Date in the Collection Account, in the following order of priority:
(i) to the Servicer, the Servicing Fee for such Monthly Payment Date
and all prior unpaid Servicing Fees (but not any Servicing Fee Shortfall or
prior unpaid Servicing Fee Shortfalls); and
(ii) to the Administrator, the Administration Fee for such Monthly
Payment Date and all prior unpaid Administration Fees.
On each Quarterly Payment Date, the Administrator will instruct the
Indenture Trustee to make the following deposits and distributions to the extent
of Available Funds for such Quarterly Payment Date in the Collection Account, in
the following order of priority:
(i) to the Servicer, the Servicing Fee for such Quarterly Payment Date
and all prior unpaid Servicing Fees (but not any Servicing Fee Shortfall or
prior unpaid Servicing Fee Shortfalls);
(ii) to the Administrator, the Administration Fee for such Quarterly
Payment Date and all prior unpaid Administration Fees;
(iii) to the Senior Noteholders, the Senior Noteholders' Interest
Distribution Amount;
(iv) to the Subordinate Noteholders, the Subordinate Noteholders'
Interest Distribution Amount;
(v) <if the Revolving Period has terminated,> to the Senior
Noteholders, the Senior Noteholders' Principal Distribution Amount;
(vi) after the Senior Notes have been paid in full, to the Subordinate
Noteholders, the Subordinate Noteholders' Principal Distribution Amount;
and
(vii) to the Reserve Account, any remaining amounts after application
of clauses (i) through (vi).
For purposes hereof, the following terms have the following meanings:
"Noteholders' Distribution Amount" means, with respect to any Quarterly
Payment Date, the sum of the Senior Noteholders' Distribution Amount and the
Subordinate Noteholders' Distribution Amount.
"Noteholders' Interest Distribution Amount" means, with respect to any
Quarterly Payment Date, the sum of the Senior Noteholders' Interest Distribution
Amount and the Subordinate Noteholders' Interest Distribution Amount.
"Principal Distribution Adjustment" means, with respect to any Quarterly
Payment Date <commencing ,> <if the Revolving Period has terminated,> the
amount of Available Funds on such Quarterly Payment Date to be used to make
additional principal distributions to Senior Noteholders (and, after the Senior
Notes have been paid in full, Subordinate Noteholders) to account for (i) the
amount of any insignificant balance remaining outstanding as of such Quarterly
Payment Date on a Student Loan after receipt of a final payment from a borrower
or Guarantor, when such insignificant balances are waived in the ordinary course
of business by the Servicer at the direction of the Administrator in accordance
with the Servicing Agreement or (ii) the amount of principal collections
erroneously treated as interest collections including, without limitation, by
reason of the failure by a borrower to capitalize interest that had been
expected to be capitalized; provided, however, that the
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<PAGE>
Principal Distribution Adjustment for any Quarterly Payment Date shall not
exceed the lesser of (x) $ and (y) the amount of any Reserve Account
Excess remaining after giving effect to all distributions to be made therefrom
on such Quarterly Payment Date other than distributions to the Seller out of
such excess.
"Principal Distribution Amount" means, with respect to any Quarterly
Payment Date commencing , <(if the Revolving Period has terminated
prior to the end of the related Collection Period with respect to such Quarterly
Payment Date),> the sum of the following amounts with respect to the related
Collection Period: (i) that portion of all collections received by the Servicer
on the Student Loans that is allocable to principal (including the portion of
any Guarantee Payments received that is allocable to principal of the Student
Loans) less <the sum of (A) any such collections which are applied by the Trust
during such Collection Period to purchase Serial Loans, (B) any such collections
which are applied by the Trust during such Collection Period to fund the
addition of any Add-on Consolidation Loans and (C)> accrued and unpaid interest
on the Student Loans for such Collection Period to the extent such interest is
not currently being paid but will be capitalized upon commencement of repayment
of such Student Loans; (ii) all Liquidation Proceeds attributable to the
principal amount of Student Loans which became Liquidated Student Loans during
such Collection Period in accordance with the Servicer's customary servicing
procedures, together with all Realized Losses on such Student Loans; (iii) to
the extent attributable to principal, the amount received with respect to each
Student Loan repurchased by the Seller or purchased by the Servicer as a result
of a breach of a representation, warranty or covenant under an obligation which
arose during the related Collection Period; and (iv) the Principal Distribution
Adjustment, if any, provided, however, that the Principal Distribution Amount
will exclude all payments and proceeds (including Liquidation Proceeds) of any
Student Loans the Purchase Amount of which has been included in Available Funds
for a prior Collection Period <and, if the Revolving Period terminated during
the related Collection Period, will exclude all amounts representing collections
in respect of principal on the Student Loans during such Collection Period that
were deposited in the Collateral Reinvestment Account>.
"Realized Losses" means the excess of the principal balance of the
Liquidated Student Loans over Liquidation Proceeds to the extent allocable to
principal.
"Senior Noteholders' Distribution Amount" means, with respect to any
Quarterly Payment Date, the sum of the Senior Noteholders' Interest Distribution
Amount and the Senior Noteholders' Principal Distribution Amount for such
Quarterly Payment Date.
"Senior Noteholders' Interest Carryover Shortfall" means, with respect to
any Quarterly Payment Date, the excess of (i) the Senior Noteholders' Interest
Distribution Amount on the preceding Quarterly Payment Date over (ii) the amount
of interest actually distributed to the Senior Noteholders on such preceding
Quarterly Payment Date, plus interest on the amount of such excess, to the
extent permitted by law, at the interest rate borne by the Senior Notes from
such preceding Quarterly Payment Date to the current Quarterly Payment Date.
"Senior Noteholders' Interest Distribution Amount" means, with respect to
any Quarterly Payment Date, the sum of (i) the amount of interest accrued at the
Senior Note Rate for the related Quarterly Interest Period on the outstanding
principal balance of the Senior Notes on the immediately preceding Quarterly
Payment Date after giving effect to all principal distributions to holders of
Senior Notes on such date (or, in the case of the first Quarterly Payment Date,
on the Closing Date) and (ii) the Senior Noteholders' Interest Carryover
Shortfall for such Quarterly Payment Date; provided, however, that the Senior
Noteholders' Interest Distribution Amount will not include any Senior
Noteholders' Interest T-Bill Carryover.
"Senior Noteholders' Principal Carryover Shortfall" means, as of the close
of any Quarterly Payment Date, the excess of (i) the Senior Noteholders'
Principal Distribution Amount on such Quarterly Payment Date over (ii) the
amount of principal actually distributed to the Senior Noteholders on such
Quarterly Payment Date.
"Senior Noteholders' Principal Distribution Amount" means, with respect to
any Quarterly Payment Date commencing <(if the Revolving Period has
terminated prior to the end of the related Collection Period with respect to
such Quarterly Payment Date)>, the Principal Distribution Amount for such
Quarterly Payment Date plus the Senior Noteholders' Principal Carryover
Shortfall as of the close of the preceding Quarterly Payment Date; provided,
however, that the Senior Noteholders' Principal Distribution Amount will not
exceed the outstanding aggregate principal balance of the Senior Notes. In
addition, on the Senior Note Final Maturity Date, the principal required to be
distributed to Senior Noteholders will include the amount required to reduce the
outstanding principal balance of the Senior Notes to zero.
S-56
<PAGE>
"Subordinate Noteholders' Distribution Amount" means, with respect to any
Quarterly Payment Date, the Subordinate Noteholders' Interest Distribution
Amount for such Quarterly Payment Date plus, with respect to any Quarterly
Payment Date on and after which the Senior Notes have been paid in full, the
Subordinate Noteholders' Principal Distribution Amount for such Quarterly
Payment Date.
"Subordinate Noteholders' Interest Carryover Shortfall" means, with respect
to any Quarterly Payment Date, the excess of (i) the Subordinate Noteholders'
Interest Distribution Amount on the preceding Quarterly Payment Date over
(ii) the amount of interest actually distributed to the Subordinate Noteholders
on such preceding Quarterly Payment Date, plus interest on the amount of such
excess, to the extent permitted by law, at the rate borne by the Subordinate
Notes from such preceding Quarterly Payment Date to the current Quarterly
Payment Date.
"Subordinate Noteholders' Interest Distribution Amount" means, with respect
to any Quarterly Payment Date, the sum of (i) the amount of interest accrued at
the Subordinate Note Rate for the related Quarterly Interest Period on the
outstanding principal balance of the Subordinate Notes on the immediately
preceding Quarterly Payment Date, after giving effect to all principal
distributions to Subordinate Noteholders on such Quarterly Payment Date (or, in
the case of the first Quarterly Payment Date, on the Closing Date) and (ii) the
Subordinate Noteholders' Interest Carryover Shortfall for such Quarterly Payment
Date; provided, however, that the Subordinate Noteholders' Interest Distribution
Amount will not include any Subordinate Noteholders' Interest T-Bill Carryover.
"Subordinate Noteholders' Principal Carryover Shortfall" means, as of the
close of any Quarterly Payment Date on or after which the Senior Notes have been
paid in full, the excess of (i) the Subordinate Noteholders' Principal
Distribution Amount on such Quarterly Payment Date over (ii) the amount of
principal actually distributed to the Subordinate Noteholders on such Quarterly
Payment Date.
"Subordinate Noteholders' Principal Distribution Amount" means, on each
Quarterly Payment Date on and after which the aggregate principal balance of the
Senior Notes has been paid in full, the sum of (a) the Principal Distribution
Amount for such Quarterly Payment Date (or, in the case of the Quarterly Payment
Date on which the aggregate principal balance of the Senior Notes is paid in
full, any remaining Principal Distribution Amount not otherwise distributed to
Senior Noteholders on such Quarterly Payment Date) and (b) the Subordinate
Noteholders' Principal Carryover Shortfall as of the close of the preceding
Quarterly Payment Date; provided, however, that the Subordinate Noteholders'
Principal Distribution Amount will in no event exceed the outstanding principal
balance of the Subordinate Notes. In addition, on the Subordinate Note Final
Maturity Date, the principal required to be distributed to the Subordinate
Noteholders will include the amount required to reduce the outstanding principal
balance of the Subordinate Notes to zero.
CREDIT ENHANCEMENT
Reserve Account. The Reserve Account will be created with an initial
deposit by the Depositor on the Closing Date of cash or Eligible Investments in
an amount equal to the Reserve Account Initial Deposit. The Reserve Account will
be augmented on each Quarterly Payment Date by the deposit therein of the amount
of Available Funds remaining after payment of the Servicing Fee and all overdue
Servicing Fees, the Administration Fee and all overdue Administration Fees, the
Senior Noteholders' Interest Distribution Amount and the Subordinate
Noteholders' Interest Distribution Amount, and, <if the Revolving Period has
terminated,> the Senior Noteholders' Principal Distribution Amount and the
Subordinate Noteholders' Principal Distribution Amount, all for such Quarterly
Payment Date. See "--Distributions" herein. As described below, subject to
certain limitations, amounts on deposit in the Reserve Account will be released
to the Depositor to the extent that the amount on deposit in the Reserve Account
exceeds the Specified Reserve Account Balance.
"Specified Reserve Account Balance" with respect to any Quarterly Payment
Date generally will be the greater of: (a) % of the aggregate principal
balance of the Notes after taking into account the effect of distributions on
such Quarterly Payment Date, or (b) $ ; provided, however, that the
Specified Reserve Account Balance shall in no event exceed the sum of the
outstanding principal balance of the Notes.
If the amount on deposit in the Reserve Account on any Quarterly Payment
Date (after giving effect to all distributions required to be made from
Available Funds on such Quarterly Payment Date) is greater than the Specified
Reserve Account Balance for such Quarterly Payment Date, the Administrator will
instruct the Indenture Trustee to apply the amount of such Reserve Account
Excess <(a) during the Revolving Period, for
S-57
<PAGE>
deposit to the Collateral Reinvestment Account; provided, however, if such date
is on or after the Parity Date, to the extent that such funds represent payments
of interest with respect to the Student Loans, such funds shall be applied in
the order of priority set forth in clauses (b)(iii) through (vi) below, and
(b) at and after the termination of the Revolving Period, to the following> (in
the priority indicated): (i) <to the Seller for any unpaid Purchase Premium
Amounts for any Serial Loans purchased by the Trust prior to the end of the
related Collection Period; (ii)> (i) if such Quarterly Payment Date is on or
prior to the Parity Date, to the payment of the unpaid principal amount of the
Senior Notes or, if the Senior Notes have been paid in full, of the Subordinate
Notes, until the aggregate principal balance of the Notes is equal to the Pool
Balance as of the close of business on the last day of the related Collection
Period; (ii) to the Senior Noteholders, the aggregate unpaid amount of any
Senior Noteholders' Interest T-Bill Carryover; (iii) to the Subordinate
Noteholders, the aggregate unpaid amount of any Subordinate Noteholders'
Interest T-Bill Carryover; (iv) to the Servicer, the Servicing Fee Shortfall and
all prior unpaid Servicing Fee Shortfalls, if any; and (v) to the Depositor, any
excess remaining after application of clauses (i) through (iv) (<v>) above, and,
upon such payment to the Depositor, the Noteholders will not have any rights in,
or claims to, such amounts.
Subject to the limitation described in the preceding paragraph, amounts
held from time to time in the Reserve Account will continue to be held for the
benefit of the Trust. Funds will be withdrawn from cash in the Reserve Account
(a) on each Monthly Payment Date that is not a Quarterly Payment Date, to the
extent the amount of Monthly Available Funds on such Monthly Payment Date is
insufficient to pay: (i) the Servicing Fee and all overdue Servicing Fees and
(ii) the Administration Fee and all overdue Administration Fees, and (b) on any
Quarterly Payment Date to the extent that the amount of Available Funds on such
Quarterly Payment Date is insufficient to pay any of the items specified in
clauses (i) through (vi), respectively, of the third paragraph under
"--Distributions--Distributions from Collection Account" herein on such date.
Such funds will be paid from the Reserve Account to the persons and in the order
of priority specified for distributions out of the Collection Account on such
dates. As a result of the subordination of the Subordinate Notes to the Senior
Notes described elsewhere herein, however, any amounts that the Subordinate
Noteholders would otherwise receive from the Reserve Account in respect of the
Subordinate Noteholders' Interest Distribution Amount on any Quarterly Payment
Date will be paid to Senior Noteholders until the Senior Noteholders' Interest
Distribution Amount for such Quarterly Payment Date has been paid in full. In
addition, as a result of such subordination, Subordinate Noteholders will not
receive any amounts from the Reserve Account in respect of the Subordinate
Noteholders' Principal Distribution Amount until the Senior Notes have been paid
in full. See "--Subordination" herein.
The Reserve Account is intended to enhance the likelihood of timely receipt
by the Senior Noteholders and the Subordinate Noteholders of the full amount of
principal and interest due them and to decrease the likelihood that the Senior
Noteholders or the Subordinate Noteholders will experience losses. In certain
circumstances, however, the Reserve Account could be depleted. If the amount
required to be withdrawn from the Reserve Account to cover shortfalls in the
amount of Available Funds exceeds the amount of cash in the Reserve Account,
Senior Noteholders or Subordinate Noteholders could incur losses or a temporary
shortfall in the amount of principal and interest distributed to the Senior
Noteholders or the Subordinate Noteholders could result which could, in turn,
increase the average life of the Senior Notes or the Subordinate Notes. Amounts
on deposit in the Reserve Account will not be available in any respect until the
Parity Date to cover any aggregate unpaid Senior Noteholders' Interest T-Bill
Carryover or Subordinate Noteholders' Interest T-Bill Carryover and after the
Parity Date only amounts on deposit in the Reserve Account that <(after paying,
for Quarterly Payment Dates occurring after the Revolving Period, any unpaid
Purchase Premium Amounts for any Serial Loans purchased by the Trust prior to
the end of the related Collection Period)> are in excess of the Specified
Reserve Account Balance will be available therefor.
Subordination. The rights of the Subordinate Noteholders to receive
payments of interest on any Quarterly Payment Date are subordinated to the
rights of the Senior Noteholders to receive payments of interest on such date,
and the rights of the Subordinate Noteholders to receive payments of principal
on any Quarterly Payment Date are subordinated to the rights of the Noteholders
to receive payments of interest and principal on such date. The Subordinate
Noteholders will not be entitled to any payments of principal until the Senior
Notes are paid in full.
S-58
<PAGE>
TERMINATION
Certain information regarding termination of the Trust is set forth in
"Description of the Transfer and Servicing Agreements--Termination" in the
Prospectus.
Any Student Loans remaining in the Trust as of the end of the Collection
Period immediately preceding the Quarterly Payment Date will be
offered for sale by the Indenture Trustee. The Depositor, its affiliates and
unrelated third parties may offer bids to purchase such Student Loans on such
Quarterly Payment Date. If at least two bids are received, the Indenture Trustee
will accept the highest bid equal to or in excess of the greater of (x) the
Purchase Amount of such Student Loans as of the end of the Collection Period
immediately preceding such Quarterly Payment Date or (y) an amount that would be
sufficient to (i) reduce the outstanding principal amount of the Notes on such
Quarterly Payment Date to zero and (ii) pay to the Noteholders the Noteholders'
Interest Distribution Amount payable on such Quarterly Payment Date, if any (the
"Minimum Purchase Price"). If at least two bids are not received or the highest
bid is not equal to or in excess of the Minimum Purchase Price, the Indenture
Trustee will not consummate such sale. The proceeds of any such sale will be
used to redeem any outstanding Notes on such Quarterly Payment Date. If the sale
is not consummated in accordance with the foregoing, the Indenture Trustee may,
but shall not be under any obligation to, solicit bids to purchase the Student
Loans on future Quarterly Payment Dates upon terms similar to those described
above. No assurance can be given as to whether the Trustee will be successful in
soliciting acceptable bids to purchase the Student Loans on either the
Quarterly Payment Date or any subsequent Quarterly Payment Date.
OPTIONAL REDEMPTION
The Depositor, or an assignee of the Depositor, may at its option purchase
from the Trust, as of the end of any Collection Period immediately preceding a
Quarterly Payment Date, if the then outstanding Pool Balance is % or less of
the aggregate initial principal balance of the Notes, all remaining Student
Loans at a price equal to the aggregate Purchase Amounts thereof as of the end
of such Collection Period, which amounts will be used to retire the Notes
concurrently therewith. Upon termination of the Trust, all right, title and
interest in the Student Loans and other funds of the Trust, after giving effect
to any final distributions to Noteholders therefrom, will be conveyed and
transferred to the Seller or such assignee.
From time to time the Depositor, or an assignee of the Depositor, may at
its option purchase from the Trust, as of the end of any Monthly Collection
Period immediately preceding a Monthly Payment Date, one or more Student Loans
that are to be refinanced by Federal Consolidation Loans. Such Student Loans
shall be purchased at a price equal to the aggregate Purchase Amounts thereof as
of the end of such Monthly Collection Period. The purchase price of the Student
Loans may be paid in cash or by delivery of a promissory note of the Depositor
secured by and payable solely from the Student Loans, including the amounts
received upon prepayment of the Student Loans with proceeds of the Federal
Consolidation Loans. If such amounts, together with other funds of the
Depositor, are not sufficient to retire the Depositor's note within three
(3) Business Days of release of the Student Loans, the Student Loans shall be
redeposited in the Trust and the note cancelled. Any such promissory note shall
bear interest at a rate that is equal to the yield on the Student Loans
purchased by the Depositor.
CERTAIN FEDERAL INCOME TAX AND STATE TAX CONSEQUENCES
Although as described in "SUMMARY OF TERMS--Tax Considerations," Special
Federal Tax Counsel will deliver its opinion that the Senior Notes will properly
be characterized as indebtedness, and that the Subordinate Notes (not offered
hereby) should be classified as indebtedness (or, if not, would be classified as
an interest in a partnership), for federal income tax purposes, such opinion is
not binding on the IRS and thus no assurance can be given that such
characterization will prevail. In the opinion of Special Federal Tax Counsel, if
the IRS were to contend successfully that the Subordinate Notes were not debt
for federal income tax purposes (assuming that the Senior Notes were not
recharacterized) the arrangement among the Depositor and the holders of the
Subordinate Notes would be classified as a partnership for federal income tax
purposes. If, however, the IRS were to contend successfully that the Subordinate
Notes and the Depositor Notes were not debt for federal income tax purposes, the
arrangement among Noteholders and the Seller might be classified for federal
income tax purposes as a publicly traded partnership taxable as a corporation.
If only the Subordinate Notes were treated as interests in a partnership,
it is Special Federal Tax Counsel's opinion that the partnership would not be
treated as a publicly traded partnership because it would qualify for an
S-59
<PAGE>
applicable "safe harbor" that the IRS has provided. Therefore, the partnership
would not be subject to federal income tax.
If, alternatively, the arrangement created by the Indenture were treated as
a publicly traded partnership taxable as a corporation, the resulting entity
would be subject to federal income taxes at corporate tax rates on its taxable
income generated by ownership of the Student Loans. Moreover, distributions by
the entity with respect to either or both classes of Notes would probably not be
deductible in computing the entity's taxable income and all or part of the
distributions to holders of Notes would probably be treated as dividends. Such
an entity-level tax could result in substantially reduced distributions to
Noteholders and the Noteholders could be liable for a share of such tax.
Because the Depositor will treat the Notes as indebtedness for federal
income tax purposes, the Trustee will not comply with the tax reporting
requirements that would apply under the foregoing alternative characterizations
of the Notes.
The Senior Notes provide for stated interest at a floating rate based upon
the T-Bill Rate, but are subject to certain restrictions on the maximum level of
the floating rate. Under Treasury regulations governing "original issue
discount" ("OID"), stated interest payable at a variable rate is not taxed as
original issue discount or contingent interest if the variable rate is a
qualified floating rate. The tax treatment of interest that is not based on a
qualified floating rate is not certain and the regulations do not address the
tax treatment of debt instruments bearing contingent interest, except in
circumstances not relevant to this discussion. While (because of the Senior
Noteholders' Interest T-Bill Carryover) the tax treatment of interest on the
Senior Notes, including, in particular, interest equal to the Senior
Noteholders' Interest T-Bill Carryover amounts, is not entirely clear under the
regulations, the Trust intends to treat the stated interest as a "qualified
floating rate" for OID purposes and thus such interest should not be taxable to
holders of Senior Notes as OID or as contingent interest.
Prospective purchasers should see "Certain Federal Income Tax Consequences"
and "Certain State Tax Consequences" in the Prospectus for a discussion of the
application of certain federal income tax laws and certain state tax laws to the
Trust and the Notes. For purposes of the discussion of certain state tax issues
under "Certain State Tax Consequences" in the Prospectus, the Applicable State
with respect to the Notes is [ ].
ERISA CONSIDERATIONS
The Senior Notes may be purchased by an employee benefit plan or an
individual retirement account (a "Plan") subject to ERISA or Section 4975 of the
Code. A fiduciary of a Plan must determine that the purchase of a Senior Note is
consistent with its fiduciary duties under ERISA, including the requirements of
investment prudence and diversification, and the requirement that a Plan's
investments be made in accordance with the documents governing the Plan, and
does not result in a nonexempt prohibited transaction as defined in Section 406
of ERISA or Section 4975 of the Code. Employee benefit plans which are
governmental plans (as defined in Section 3(32) of ERISA) or certain church
plans (as defined in Section 3(33) of ERISA) are not subject to the fiduciary
responsibility or prohibited transaction provisions of ERISA or the Code.
However, any such plan which is qualified under Section 401(a) of the Code and
exempt from tax under Section 501(a) of the Code is subject to the prohibited
transaction rules set forth in Section 503 of the Code.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
relating to the Senior Notes (the "Underwriting Agreement"), the Seller has
agreed to cause the Trust to sell to each of the Underwriters named below
(collectively, the "Underwriters"), and each of the Underwriters has severally
agreed to purchase, the
S-60
<PAGE>
principal amount of Senior Notes set forth opposite its name below. The
Underwriters have agreed to reimburse the Seller for certain expenses relating
to the issuance and distribution of the Senior Notes.
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT
- ---------------------------------------------------------------------------------- ---------
<S> <C>
...........................................................
...........................................................
...........................................................
...........................................................
Total............................................................................. [100%]
</TABLE>
The Seller has been advised by the Underwriters that they propose to offer
the Senior Notes to the public initially at the public offering prices set forth
on the cover page of this Prospectus Supplement, and to certain dealers at such
prices less a concession of % per Senior Note; that the Underwriters and such
dealers may allow a discount of % per Senior Note on sales to certain other
dealers; and that after the initial public offering of the Senior Notes, the
public offering prices and the concessions and discounts to dealers may be
changed by the Underwriters.
Until the distribution of the Senior Notes is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Senior Notes. As an exception to these
rules, the Representative is permitted to engage in certain transactions that
stabilize the price of the Senior Notes. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Senior Notes.
If the Underwriters create a short position in the Senior Notes in
connection with the offering, i.e., if they sell more Senior Notes than are set
forth on the cover page of this Prospectus Supplement, the Representative may
reduce that short position by purchasing Senior Notes in the open market.
The Representative may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representative purchases
Senior Notes in the open market to reduce the Underwriters' short position or to
stabilize the price of the Senior Notes, it may reclaim the amount of the
selling concession from the Underwriters and selling group members who sold
those Senior Notes as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it
discourages resales of the security.
Neither the Seller nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Senior Notes. In addition, neither
the Seller nor any of the Underwriters makes any representation that the
Representative will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Underwriting Agreement provides that the Depositor and the Seller will
jointly and severally indemnify the Underwriters against certain liabilities,
including liabilities under applicable securities laws, or contribute to
payments the Underwriters may be required to make in respect thereof.
The Trust may, from time to time, invest the funds in the Trust Accounts in
Eligible Investments acquired from the Underwriters.
LEGAL MATTERS
Certain legal matters relating to the Securities will be passed upon for
the Trust, the Depositor, the Seller, the Servicer and the Administrator by
Robert Vlach, Esq., General Counsel of the Seller, and by Willkie Farr &
Gallagher, New York, New York, as special counsel to the Seller and the
Depositor. Certain federal income tax and other matters will be passed upon for
the Trust by Willkie Farr & Gallagher. Certain Delaware state income tax matters
will be passed upon for the Trust by as Delaware tax counsel
for the Trust. Certain legal matters relating to the Securities will be passed
upon for the Underwriters by .
S-61
<PAGE>
INDEX OF TERMS
Set forth below is a list of the defined terms used in this Prospectus
Supplement and the pages on which the definitions of such terms may be found
herein.
<TABLE>
<CAPTION>
TERMS PAGE
- ----------------------------------------------------------------------------------------------- ---------------
<S> <C>
1992 Amendments................................................................................ S-39
91-day Treasury Bills.......................................................................... S-45
Add-on Consolidation Loans..................................................................... S-9, S-29, S-51
Additional Fundings............................................................................ S-10
Additional Guarantors.......................................................................... S-7
Additional Student Loans....................................................................... S-6
Administration Agreement....................................................................... S-6
Administration Fee............................................................................. S-14
Administrator.................................................................................. S-6
AFSA........................................................................................... S-5
Auto Advantage Repayment Plan.................................................................. S-25
Available Funds................................................................................ S-54
Cede........................................................................................... S-4
Cedel.......................................................................................... S-5
Cedel Participants............................................................................. S-46
Citibank....................................................................................... S-5, S-47
Closing Date................................................................................... S-6
Collateral Reinvestment Account................................................................ S-10
Collection Account............................................................................. S-10
Collection Period.............................................................................. S-7
Cooperative.................................................................................... S-47
Cutoff Date.................................................................................... S-6
Deferral....................................................................................... S-34
Delinquency Percentage......................................................................... S-50
Department..................................................................................... S-2, S-6
Depositaries................................................................................... S-5, S-47
Depositor...................................................................................... Cover, S-5
Determination Date............................................................................. S-53
DOE Data Book.................................................................................. S-40
DTC............................................................................................ S-4, S-5
Early Amortization Event....................................................................... S-49
EFG............................................................................................ Cover, S-6
EFG Eligible Lender Trustee.................................................................... S-6
Eligible Lender Trust.......................................................................... S-5
Eligible Lender Trust Agreement................................................................ S-5, S-28
Eligible Lender Trustee........................................................................ S-5
Euroclear...................................................................................... S-5
Euroclear Operator............................................................................. S-47
Euroclear Participants......................................................................... S-46
Excess Spread.................................................................................. S-50
Exchange Act................................................................................... S-4
Exchange Loans................................................................................. S-38
</TABLE>
S-62
<PAGE>
<TABLE>
<CAPTION>
TERMS PAGE
- ----------------------------------------------------------------------------------------------- ---------------
<S> <C>
Exchanged Serial Loan.......................................................................... S-50
Exchanged Student Loan......................................................................... S-50
Expected Interest Collections.................................................................. S-15, S-43
Federal Guarantor.............................................................................. S-39
Federal Origination Fee........................................................................ S-24
FFELP.......................................................................................... S-2, S-6
FFELP Loan Servicing Agreement................................................................. S-13
FFELP Loans.................................................................................... S-5
FFELP Servicing Fee............................................................................ S-52
FFELP Student Loans............................................................................ S-6
Forbearance.................................................................................... S-34
Future Trusts.................................................................................. S-5
Grace.......................................................................................... S-34
Grad Advantage Program......................................................................... S-25
GRDF Percentage................................................................................ S-53
Guarantors..................................................................................... S-7
In-School...................................................................................... S-34
Indenture...................................................................................... S-14
Indenture Trustee.............................................................................. S-6
Indirect Participants.......................................................................... S-46
Initial Guarantors............................................................................. S-7
Initial Pool Balance........................................................................... S-6
Initial Student Loans.......................................................................... S-6
Liquidated Student Loans....................................................................... S-54
Liquidation Proceeds........................................................................... S-54
Loan Purchase Amount........................................................................... S-8, S-49
Loan Sale Agreement............................................................................ S-13
Lock-In Period................................................................................. S-45
Minimum Purchase Price......................................................................... S-17, S-59
Monthly Available Funds........................................................................ S-53
Monthly Collection Period...................................................................... S-53
Monthly Payment Date........................................................................... S-11
Monthly Rebate Fee............................................................................. S-24
Morgan......................................................................................... S-5, S-47
New Loan....................................................................................... S-7, S-49
New Loans...................................................................................... S-7, S-49
Note Rates..................................................................................... S-14
Note T-Bill Rates.............................................................................. S-14
Noteholders.................................................................................... S-15
Noteholders' Distribution Amount............................................................... S-55
Noteholders' Interest Distribution Amount...................................................... S-55
Notes.......................................................................................... Cover, S-5
Obligors....................................................................................... S-18
OID............................................................................................ S-60
Parity Date.................................................................................... S-12
</TABLE>
S-63
<PAGE>
<TABLE>
<CAPTION>
TERMS PAGE
- ----------------------------------------------------------------------------------------------- ---------------
<S> <C>
Participants................................................................................... S-46
Plan........................................................................................... S-60
Pool Balance................................................................................... S-17
Principal Distribution Adjustment.............................................................. S-55
Principal Distribution Amount.................................................................. S-16, S-56
Private Guarantee Agreements................................................................... S-41
Private Guarantor.............................................................................. S-41
Private Loan Servicing Agreement............................................................... S-13
Private Loan Servicing Fee..................................................................... S-53
Private Student Loans.......................................................................... S-6
Purchase Amount................................................................................ S-17
Purchase Collateral Balance.................................................................... S-7, S-49
Purchase Premium Amount........................................................................ S-8, S-49
Quarterly Interest Period...................................................................... S-15, S-43
Quarterly Payment Date......................................................................... S-2, S-15
Realized Losses................................................................................ S-56
Record Date.................................................................................... S-15
Repayment...................................................................................... S-34
Reserve Account................................................................................ S-11
Reserve Account Excess......................................................................... S-11
Reserve Account Initial Deposit................................................................ S-11
Revolving Period............................................................................... S-7, S-49
Seller......................................................................................... Cover, S-6
Seller Trusts.................................................................................. S-25
Senior Note Final Maturity Date................................................................ S-16, S-44
Senior Note Rate............................................................................... S-14, S-43
Senior Note T-Bill Rate........................................................................ S-14
Senior Noteholders............................................................................. S-15
Senior Noteholders' Distribution Amount........................................................ S-56
Senior Noteholders' Interest Carryover Shortfall............................................... S-56
Senior Noteholders' Interest Distribution Amount............................................... S-56
Senior Noteholders' Interest T-Bill Carryover.................................................. S-15
Senior Noteholders' Principal Carryover Shortfall.............................................. S-56
Senior Noteholders' Principal Distribution Amount.............................................. S-56
Senior Notes................................................................................... Cover, S-5
Serial Loan.................................................................................... S-8, S-50
Serial Loans................................................................................... S-8, S-50
Servicer....................................................................................... S-2, S-5
Servicer Liability Limit....................................................................... S-22
Servicing Agreement............................................................................ S-13
Servicing Fee.................................................................................. S-14, S-53
Servicing Fee Shortfall........................................................................ S-53
Special Federal Tax Counsel.................................................................... S-18
Specified Reserve Account Balance.............................................................. S-12, S-57
Student Loan Rate.............................................................................. S-15, S-43
</TABLE>
S-64
<PAGE>
<TABLE>
<CAPTION>
TERMS PAGE
- ----------------------------------------------------------------------------------------------- ---------------
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Student Loan Rate Accrual Period............................................................... S-15
Student Loans.................................................................................. Cover, S-6
Subordinate Note Final Maturity Date........................................................... S-16, S-44
Subordinate Note Rate.......................................................................... S-14, S-43
Subordinate Note T-Bill Rate................................................................... S-14
Subordinate Noteholders........................................................................ S-15
Subordinate Noteholders' Distribution Amount................................................... S-57
Subordinate Noteholders' Interest Carryover Shortfall.......................................... S-57
Subordinate Noteholders' Interest Distribution Amount.......................................... S-57
Subordinate Noteholders' Interest T-Bill Carryover............................................. S-15
Subordinate Noteholders' Principal Carryover Shortfall......................................... S-57
Subordinate Noteholders' Principal Distribution Amount......................................... S-57
Subordinate Notes.............................................................................. Cover, S-5
Terms and Conditions........................................................................... S-47
Transfer Agreement............................................................................. S-7, S-13
Transfer and Servicing Agreements.............................................................. S-49
Transfer Date.................................................................................. S-51
Trust.......................................................................................... Cover, S-5,
S-26
Trust Agreement................................................................................ S-6
Underwriters................................................................................... S-60
Underwriting Agreement......................................................................... S-60
USAG........................................................................................... S-26
Year 2000 Problem..............................................................................
</TABLE>
S-65
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Senior Notes
of EFG Student Loan Trust - (the "Global Securities") will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC, Cedel or Euroclear. The Global Securities will be
tradeable as home market instruments in both the European and U.S. domestic
markets. Initial settlements and all secondary trades will settle in same-day
funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior asset backed certificates issues.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Global Securities will be effected on a
delivery-against-payment basis through the respective Depositaries of Cedel and
Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
CEDE & CO. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to conventional asset backed securities.
Investor securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and Cedel or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel participant or Euroclear
Participant at
A-I-1
<PAGE>
least one business day prior to settlement. Cedel or Euroclear, as the case may
be, will instruct the respective Depositary to receive the Global Securities
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the settlement
date, on the basis of a calendar year consisting of twelve 30-day calendar
months. Payment will then be made by the respective Depositary of the DTC
Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedel Participant's or Euroclear Participant's account.
The securities credit will appear the next day (European time) and the cash
debit will be back-valued to, and the interest on the Global Securities will
accrue from, the value date (which would be the preceding day when settlement
occurred in New York). If settlement is not completed on the intended value date
(i.e., the trade fails), the Cedel or Euroclear cash debit will be valued
instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon to finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective Depositary for the benefit of Cedel Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participants a cross-market transaction will
settle no differently than a trade between two DTC Participants.
Trading between Cedel or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through
Euroclear Participants, to a DTC Participant. The seller will send instructions
to Cedel or Euroclear through a Cedel Participant or a Euroclear Participant at
least one business day prior to settlement. In these cases, Cedel or Euroclear
will instruct Euroclear Participants, to deliver the Global Securities to the
DTC Participant's account against payment. Payment will include interest accrued
on the Global Securities from and including the last coupon payment to and
excluding the settlement date, on the basis of a calendar year consisting of
twelve 30-day calendar months. The payment will then be reflected in the account
of the Cedel Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the Cedel Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Cedel Participant or
Euroclear Participant have a line of credit with its respective clearing system
and elect to be in debit in anticipation of receipt of the sale proceeds in its
account, the back-valuation will extinguish any overdraft incurred over that
one-day period. If settlement is not completed on the intended value date (i.e.,
the trade fails), receipt of the cash proceeds in the Cedel Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(1) borrowing through Cedel or Euroclear for one day (until the purchase
side of the day trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
A-I-2
<PAGE>
(2) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their Cedel or Euroclear account in order to
settle the sale side of the trade; or
(3) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the Cedel Participant or Euroclear
Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to 31% U.S. withholding tax that generally applies to payments of
interest on registered debt issued by U.S. Persons, 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 U.S. 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 Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on 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-U.S. corporation or bank with a
U.S. branch, for which the interest income is effectively connected with its
conduct of a trade or business in the United States, can obtain an exemption
from the 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 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) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, 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 or
his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payee's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Global Securities holder,
or in the case of a Form 1001 or a Form 4224 filer, his agent, files by
submitting the appropriate form to the person through whom he 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.
This summary does not deal with all aspects of foreign income tax
withholding that may be relevant to foreign holders of these Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of these Global Securities.
U.S. Person. As used herein the term "U.S. Person" means a beneficial
owner of a Senior Note that is for United States federal income tax purposes
(i) a citizen or resident of the United States, (ii) a corporation, partnership
or other entity created or organized in or under the laws of the United States
or of any political subdivision thereof, (iii) an estate the income of which is
subject to United States federal income taxation regardless of its source,
(iv) any other person whose income or gain in respect of a Senior Note is
effectively connected with the conduct of a United States trade or business, or
(v) a trust if a court within the United States is able to exercise primary
supervision of the administration of the trust and one or more United States
fiduciaries have the authority to control all substantial decisions of the
trust. As used herein, the term "Non-U.S. Person" means a beneficial owner of a
Senior Note that is not a U.S. Person.
A-I-3
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 24, 1999
PROSPECTUS
EFG STUDENT LOAN TRUSTS
STUDENT LOAN-BACKED NOTES
STUDENT LOAN-BACKED CERTIFICATES
EFG FUNDING CORPORATION, DEPOSITOR
The Student Loan-Backed Notes (the "Notes") and the Student Loan-Backed
Certificates (the "Certificates" and, together with the Notes, the "Securities")
described herein may be sold from time to time in one or more series, in
amounts, at prices and on terms to be determined at the time of sale and to be
set forth in a supplement to this Prospectus (a "Prospectus Supplement"). Each
series of Securities, which will include one or more classes of Notes and,
unless otherwise specified in the related Prospectus Supplement, one or more
classes of Certificates, will be issued by a trust to be formed with respect to
such series (each, a "Trust"). Each Trust will be formed pursuant to a Trust
Agreement to be entered into among EFG Funding Corporation, as depositor (the
"Depositor") and the Trustee specified in the related Prospectus Supplement (the
"Trustee"). The Notes of each series will be issued and secured pursuant to an
Indenture between the Trust and the Indenture Trustee specified in the related
Prospectus Supplement (the "Indenture Trustee") and will represent indebtedness
of the related Trust. The Certificates of a series will represent fractional
undivided interests in the related Trust. The property of each Trust will
include a pool of education loans to students and parents of students ("Student
Loans") sold to the Depositor by Educational Finance Group, Inc. (the "Seller")
and transferred to the Trust by the Depositor, certain monies due or received
thereunder on and after the applicable Cutoff Date set forth in the related
Prospectus Supplement, files to the Student Loans, the Depositor's rights and
remedies in respect of the Student Loans, and amounts on deposit in the related
trust accounts, all as described herein and in the related Prospectus
Supplement. However, in all events, legal title to loans originated under and
subject to the Federal Family Education Loan Program will be held by an eligible
lender under applicable law.
If so specified in the related Prospectus Supplement, each class of
Securities of any series will represent the right to receive a specified amount
of payments of principal and interest on the related Student Loans, at the
rates, on the dates and in the manner described herein and in the related
Prospectus Supplement. The right of each class of Securities to receive payments
may be senior or subordinate to the rights of one or more of the other classes
of such series. Distributions on Certificates of a series may be subordinated in
priority to payments due on the related Notes to the extent described herein and
in the related Prospectus Supplement. A series may include one or more classes
of Notes and Certificates which differ as to the timing and priority of payment,
interest rate or amount of distributions in respect of principal or interest or
both. The rate of payment in respect of principal of the Notes and distributions
in respect of the Certificate Balance of the Certificates of any class will
depend on the priority of payment of such class and the rate and timing of
payments (including prepayments, defaults, guarantee payments, liquidations and
repurchases of Student Loans) on the related Student Loans. A rate of payment
lower or higher than that anticipated may affect the weighted average life of
each class of Securities in the manner described herein and in the related
Prospectus Supplement. All Securities offered pursuant to this Prospectus will
be, at the time of initial offer and issuance, "investment grade securities" as
defined by the Securities Act.
EXCEPT AS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, THE
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND THE CERTIFICATES OF SUCH
SERIES REPRESENT BENEFICIAL INTERESTS IN, THE RELATED TRUST ONLY AND DO NOT
REPRESENT OBLIGATIONS OF OR INTERESTS IN, AND ARE NOT GUARANTEED OR INSURED BY,
EFG FUNDING CORPORATION. OR ANY OF ITS AFFILIATES.
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK
FACTORS" AT PAGE 15 AND IN THE RELATED PROSPECTUS SUPPLEMENT.
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.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of Securities offered hereby unless accompanied by a
Prospectus Supplement.
------------------------
The date of this Prospectus is [ ], 1999
<PAGE>
AVAILABLE INFORMATION
The Depositor, as the settlor of each Trust, has filed with the Securities
and Exchange Commission (the "Commission") a Registration Statement (together
with all amendments and exhibits thereto, the "Registration Statement") under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Securities offered hereby. This Prospectus, which forms part of the
Registration Statement, does not contain all the information contained therein.
For further information, reference is made to the Registration Statement which
may be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; and at the
Commission's regional offices at Seven World Trade Center, Suite 1300, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of the Registration Statement may be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition, the
Registration Statement may be accessed electronically at the Commission's site
on the world wide web located at http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Depositor, as the settlor of any Trust, pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, subsequent to the date of this Prospectus and prior to the termination
of the offering of the Securities shall be deemed to be incorporated by
reference in this Prospectus. Any statement contained herein or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any subsequently filed document which also is
to be incorporated by reference herein modifies or supersedes such statement.
The Depositor will provide without charge to each person, including any
beneficial owner of Securities, to whom a copy of this Prospectus is delivered,
on the written or oral request of any such person, a copy of any or all of the
documents incorporated herein or in any related Prospectus Supplement by
reference, except the exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to EFG Technologies, a division of Educational Finance
Group, Inc., 2400 Reynolds Blvd., Winston-Salem, North Carolina 27102
(Telephone: (336) 607-2828).
2
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TABLE OF CONTENTS
<TABLE>
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AVAILABLE INFORMATION...................................................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................................................ 2
TABLE OF CONTENTS.......................................................................................... 3
SUMMARY OF TERMS........................................................................................... 7
RISK FACTORS............................................................................................... 15
Risk that Failure to Comply with Student Loan Origination and Servicing Procedures for Student Loans
May Adversely Affect the Trust's Ability to Pay Principal and Interest on the Related Notes and
Certificates......................................................................................... 15
Risk That Third Party Servicer Regulations Could Impair Servicer...................................... 15
Risks Related to Breaches of Representations, Warranties and Covenants by the Seller and the
Servicer............................................................................................. 16
Variability of Actual Cash Flows; Risk of Shortfalls to Holders of Notes and Certificates Resulting
from Inability of Related Indenture Trustee to Liquidate Student Loans............................... 16
Unsecured Nature of Student Loans; Risk that Financial Status of a Federal Guarantor Will Affect Its
Ability to Make Guarantee Payments................................................................... 17
Default Risk on Certain FFELP Student Loans........................................................... 17
Fees Payable on Certain FFELP Student Loans May Reduce Funds Available to Pay Principal and Interest
on the Related Notes and Certificates................................................................ 18
Risk that Change in Law Will Adversely Affect Student Loans, Guarantors, EFG or the Servicer.......... 18
Increased Fees; Decreased Assistance.................................................................. 19
Impact of Direct Lending.............................................................................. 19
Reserves.............................................................................................. 19
Consolidation of Federal Benefit Billings and Receipts Under One Eligible Lender Number............... 19
Risk Relating to Private Guarantors................................................................... 20
Risk of Loss of Private Guarantor Payments for Failure to Comply with Loan Origination and Servicing
Procedures for Private Student Loans................................................................. 20
Risks Resulting from Subordination of Principal and Interest Payments; Limited Assets................. 20
Risk Resulting from Use of the Pre-Funding Account or Collateral Reinvestment Account to Make
Additional Fundings.................................................................................. 21
Maturity and Prepayment Considerations................................................................ 22
Incentive Programs.................................................................................... 23
Risk of Removal of Servicer Upon Servicer Default..................................................... 23
Insolvency Risks...................................................................................... 24
Book-Entry Registration............................................................................... 24
Limited Liquidity..................................................................................... 24
Risk of Year 2000..................................................................................... 25
Year 2000 Compliance of the Department................................................................ 25
Sub-Servicing......................................................................................... 25
THE SELLER................................................................................................. 26
THE DEPOSITOR.............................................................................................. 27
</TABLE>
3
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MANAGEMENT'S DISCUSSION AND ANALYSIS....................................................................... 28
THE TRUSTS................................................................................................. 29
General.................................................................................................. 29
Eligible Lender Trustee.................................................................................. 29
Trustee.................................................................................................. 30
Payment of Notes......................................................................................... 30
Termination.............................................................................................. 30
The Servicer............................................................................................. 31
USE OF PROCEEDS............................................................................................ 31
THE STUDENT LOAN POOLS..................................................................................... 31
General.................................................................................................. 31
Origination and Marketing Process........................................................................ 32
Servicing and Collections Process........................................................................ 32
Claims and Recovery Rates................................................................................ 33
FEDERAL FAMILY EDUCATION LOAN PROGRAM...................................................................... 33
PRIVATE LOAN PROGRAMS...................................................................................... 46
WEIGHTED AVERAGE LIFE OF THE SECURITIES.................................................................... 46
POOL FACTORS AND TRADING INFORMATION....................................................................... 47
DESCRIPTION OF THE NOTES................................................................................... 48
General.................................................................................................. 48
Principal and Interest on the Notes...................................................................... 48
The Indenture............................................................................................ 49
Modification of Indenture............................................................................. 49
Events of Default; Rights upon Event of Default....................................................... 49
Certain Covenants..................................................................................... 51
Annual Compliance Statement........................................................................... 51
Indenture Trustee's Annual Report..................................................................... 51
Satisfaction and Discharge of Indenture............................................................... 52
The Indenture Trustee................................................................................. 52
DESCRIPTION OF THE CERTIFICATES............................................................................ 52
General.................................................................................................. 52
Principal and Interest in Respect of the Certificates.................................................... 52
CERTAIN INFORMATION REGARDING THE SECURITIES............................................................... 53
Fixed Rate Securities.................................................................................... 53
Floating Rate Securities................................................................................. 53
Book-Entry Registration.................................................................................. 54
Definitive Securities.................................................................................... 55
List of Securityholders.................................................................................. 55
Reports to Securityholders............................................................................... 56
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS....................................................... 56
</TABLE>
4
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<S> <C>
General.................................................................................................. 56
Sale of Student Loans; Representations and Warranties.................................................... 56
Additional Fundings...................................................................................... 57
Accounts................................................................................................. 57
Servicing Procedures..................................................................................... 58
Payments on Student Loans................................................................................ 59
Servicer Covenants....................................................................................... 59
Servicer Compensation.................................................................................... 59
Evidence as to Compliance................................................................................ 60
Certain Matters Regarding the Servicer................................................................... 60
Servicer Default......................................................................................... 61
Rights Upon Servicer Default............................................................................. 61
Waiver of Past Defaults.................................................................................. 61
Distributions............................................................................................ 62
Credit and Cash Flow Enhancement......................................................................... 62
General............................................................................................... 62
Reserve Account....................................................................................... 62
Statements to Indenture Trustee and Trust................................................................ 63
Amendment................................................................................................ 63
Insolvency Event......................................................................................... 64
Payment of Notes......................................................................................... 64
Termination.............................................................................................. 64
Optional Redemption................................................................................... 64
Auction of Student Loans.............................................................................. 64
Administration Agreement................................................................................. 65
CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS................................................................. 65
Transfer of Student Loans................................................................................ 65
Consumer Protection Laws................................................................................. 66
Loan Origination and Servicing Procedures Applicable to Student Loans.................................... 66
FFELP Student Loans Generally Not Subject to Discharge in Bankruptcy..................................... 67
MATERIAL FEDERAL INCOME TAX CONSEQUENCES................................................................... 67
Trusts for Which a Partnership Election Is Made.......................................................... 68
Tax Characterization of the Trust..................................................................... 68
Tax Consequences to Holders of the Notes; Treatment of the Notes as Indebtedness...................... 68
Original Issue Discount............................................................................... 68
Interest Income on the Notes.......................................................................... 68
Optional Election..................................................................................... 69
Sale or Other Disposition............................................................................. 69
Foreign Holders....................................................................................... 69
Backup Withholding.................................................................................... 70
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5
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FASITs..................................................................................................... 71
Tax Consequences to Holders of the Certificates.......................................................... 71
Classification as a Partnership; Treatment of the Trust as a Partnership.............................. 71
Partnership Taxation.................................................................................. 71
Computation of Income................................................................................. 71
Determining the Bases of Trust Assets................................................................. 72
Discount and Premium.................................................................................. 72
Disposition of Certificates........................................................................... 73
Allocations Between Transferors and Transferees....................................................... 73
Section 754 Election.................................................................................. 73
Administrative Matters................................................................................ 73
Tax Consequences to Foreign Certificateholders........................................................ 74
Tax Consequences to Certain Tax-Exempt Certificateholders............................................. 74
Backup Withholding.................................................................................... 75
Trusts in Which All Residual Interests Are Retained by the Depositor or an Affiliate
of the Depositor...................................................................................... 75
Tax Characterization of the Trust..................................................................... 75
Treatment of the Notes as Indebtedness................................................................ 75
CERTAIN STATE TAX CONSEQUENCES............................................................................. 76
Tax Consequences with Respect to the Notes............................................................ 76
Tax Consequences with Respect to the Certificates..................................................... 76
ERISA CONSIDERATIONS....................................................................................... 76
The Notes................................................................................................ 76
The Certificates......................................................................................... 77
PLAN OF DISTRIBUTION....................................................................................... 77
LEGAL MATTERS.............................................................................................. 78
INDEX OF TERMS............................................................................................. 79
</TABLE>
6
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SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to the Securities of any series contained in the
related Prospectus Supplement to be prepared and delivered in connection with
the offering of such Securities. Certain capitalized terms used in this
Prospectus are defined elsewhere herein on the pages indicated in the "INDEX OF
TERMS" which begins on page 76 herein.
<TABLE>
<S> <C>
ISSUER............................. With respect to each series of Securities, the trust to be formed
pursuant to a Trust Agreement (as amended and supplemented from time
to time, a "Trust Agreement") between the Depositor and the Trustee
for such Trust (in each case the "Trust" or the "Issuer").
DEPOSITOR.......................... EFG Funding Corporation (the "Depositor"), a Delaware corporation. The
Depositor a wholly owned subsidiary of Educational Finance
Group, Inc., a Delaware corporation, (together with any successors
or assigns thereto, "EFG"). See "THE DEPOSITOR".
TRUSTEE............................ With respect to each Trust, the bank or trust company identified in
the related Prospectus Supplement that is serving as Trustee of such
Trust.
SERVICER........................... EFG Technologies (the "Servicer"), a division of Educational Finance
Group, Inc. The Servicer is expected to subcontract to sub-servicers
servicing and other duties for FFELP Student Loans (as defined
herein) and Private Student Loans (as defined herein). Under certain
circumstances described herein, the Servicer may transfer its
obligations as Servicer.
ELIGIBLE LENDER TRUST.............. The trust formed under the Eligible Lender Trust Agreement (defined
below) for the benefit of the Depositor and, unless the Trustee is
qualified as an eligible lender under FFELP, each Trust, and their
permitted assigns. Neither the Depositor nor any Trust, unless the
Trustee is qualified as an eligible lender under FFELP, is or will
be an institution eligible to hold legal title to guaranteed
education loans to students and parents of students made under the
Federal Family Education Loan Program ("FFELP Loans"); therefore,
the Eligible Lender Trustee will hold legal title to the FFELP
Student Loans through the Eligible Lender Trust on behalf of the
Depositor, each Trust and their permitted assigns pursuant to a
trust agreement between the Eligible Lender Trustee and the
Depositor (as amended and supplemented from time to time, "the
Eligible Lender Trust Agreement"). Investors in the Securities
assume certain risks because the Eligible Lender Trustee will act on
behalf of the Depositor and one or more Trusts. See "RISK
FACTORS--Consolidation of Federal Benefit Billings and Receipts with
Other Trusts". References to the Depositor or a Trust herein, unless
the Trustee is qualified as an eligible lender under FFELP, shall
mean the Eligible Lender Trustee for all purposes, where the context
so requires, involving the holding or transferring of legal title to
the FFELP Student Loans beneficially owned by the Depositor or a
Trust. If a Trustee is qualified as an eligible lender under FFELP,
which will be disclosed in the applicable Prospectus Supplement, it
will perform substantially the same function for the applicable
Trust as the Eligible Lender Trustee will perform for the Depositor
and would have performed for such Trust.
ELIGIBLE LENDER TRUSTEE............ The First National Bank of Chicago.
INDENTURE TRUSTEE.................. With respect to each series of Securities, the Indenture Trustee
specified in the related Prospectus Supplement.
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ADMINISTRATOR...................... EFG, as administrator (the "Administrator"). Under certain
circumstances described herein, EFG may transfer its obligations as
Administrator.
THE SELLER......................... Unless otherwise specified in the related Prospectus Supplement,
Educational Finance Group, Inc., a Delaware corporation, ("EFG") as
seller (the "Seller"). The Seller will sell Student Loans to the
Depositor pursuant to a Loan Sale Agreement. See "EFG" herein. EFG
owns 100% of the outstanding stock of the Depositor.
EFG ELIGIBLE LENDER TRUSTEE........ First National Bank of Chicago as trustee (the "EFG Eligible Lender
Trustee") on behalf of EFG pursuant to a trust agreement between EFG
and the EFG Eligible Lender Trustee (the "EFG Eligible Lender Trust
Agreement"). EFG is not an institution eligible to hold legal title
to FFELP Loans; therefore, the EFG Eligible Lender Trustee holds
legal title to the FFELP Student Loans owned by EFG. References to
EFG or the Seller herein shall mean the EFG Eligible Lender Trustee
for all purposes, where the context so requires, involving the
holding or transferring of legal title to the FFELP Student Loans
owned by EFG.
THE NOTES.......................... Each series of Securities will include one or more classes of Notes,
which will be issued pursuant to an Indenture between the related
Trust and the related Indenture Trustee (each, as amended and
supplemented from time to time, an "Indenture").
Unless otherwise specified in the related Prospectus Supplement, Notes
will be available for purchase in denominations of $1,000 and
integral multiples thereof and will be available in book-entry form
only. Unless otherwise specified in the related Prospectus
Supplement, Noteholders will be able to receive Definitive Notes
only in the limited circumstances described herein or in the related
Prospectus Supplement. See "CERTAIN INFORMATION REGARDING THE
SECURITIES--Definitive Securities."
Each class of Notes offered will have a stated principal amount
specified in the related Prospectus Supplement and will bear
interest at a specified rate or rates (with respect to each class of
Notes, the "Interest Rate"). Each class of Notes may have a
different Interest Rate, which may be a fixed, variable or
adjustable Interest Rate, or any combination of the foregoing. The
related Prospectus Supplement will specify the Interest Rate for
each class of Notes or the method for determining the Interest Rate.
With respect to a series that includes two or more classes of Notes,
each class may differ as to timing and priority of payments,
seniority, allocations of losses, Interest Rate or amount of
payments of principal or interest, or payments of principal or
interest in respect of any such class or classes may or may not be
made upon the occurrence of specified events.
THE CERTIFICATES................... Each series of Securities will, unless otherwise specified in the
related Prospectus Supplement, include one or more classes of
Certificates which will be issued pursuant to the related Trust
Agreement.
Unless otherwise specified in the related Prospectus Supplement,
Certificates will be available for purchase in a minimum
denomination of $1,000 and in integral multiples of $1,000 in excess
thereof and will
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be available in book-entry form. Unless otherwise specified in the
related Prospectus Supplement, Certificateholders will be able to
receive Definitive Certificates only in the limited circumstances
described herein or in the related Prospectus Supplement. See
"CERTAIN INFORMATION REGARDING THE SECURITIES--Definitive
Securities."
Each class of Certificates offered will have a stated Certificate
Balance specified in the related Prospectus Supplement (the
"Certificate Balance") and will accrue interest on such Certificate
Balance at a specified rate (with respect to each class of
Certificates, the "Pass-Through Rate"). Each class of Certificates
may have a different Pass-Through Rate, which may be a fixed,
variable or adjustable Pass-Through Rate or any combination of the
foregoing. The related Prospectus Supplement will specify the
Pass-Through Rate for each class of Certificates or the method for
determining the Pass-Through Rate.
With respect to a series that includes two or more classes of
Certificates, each class may differ as to timing and priority of
distributions, seniority, allocations of losses, Pass-Through Rate
or amount of distributions in respect of principal or interest, or
distributions in respect of principal or interest in respect of any
such class or classes may or may not be made upon the occurrence of
specified events.
To the extent specified in the related Prospectus Supplement,
distributions in respect of the Certificates may be subordinated in
priority of payment to payments on the Notes.
ASSETS OF THE TRUST................ The assets of each Trust will include a pool of student loans (the
"Student Loans") consisting of (i) FFELP Loans made under the
Federal Family Education Loan Program ("FFELP") (the "FFELP Student
Loans") and/or (ii) if so specified in a Prospectus Supplement,
Private Loans, being other student loans made under private loan
programs not related to FFELP (the "Private Student Loans") and
(iii) in either case, the rights to receive payments made with
respect to such Student Loans and the proceeds thereof. On or prior
to the Closing Date specified in the related Prospectus Supplement
with respect to a Trust (a "Closing Date"), the Seller will sell
Student Loans having an aggregate principal balance specified in the
related Prospectus Supplement as of the date specified therein (a
"Cutoff Date"), to the Depositor pursuant to a Loan Sale Agreement.
On or prior to the Closing Date, the Depositor will transfer such
Student Loans (together with all of its rights and remedies under
the Loan Sale Agreement with respect to such Student Loans) to the
Trustee on behalf of the Trust pursuant to a Transfer Agreement. The
property of each Trust will also include amounts on deposit in
certain trust accounts, including the related Collection Account,
any Reserve Account, any Pre-Funding Account, any Collateral
Reinvestment Account and any other account identified in the
applicable Prospectus Supplement.
If so provided in the related Prospectus Supplement, during the period
(the "Funding Period") from the Closing Date until the first to
occur of (a) the amount on deposit in the Pre-Funding Account being
less than an amount specified in the related Prospectus Supplement,
(b) an Event of Default occurring under the Indenture, a Servicer
Default
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occurring under the Loan Servicing Agreement or an Administrator
Default occurring under the Administration Agreement, (c) certain
events of insolvency occurring with respect to the Depositor, or
(d) the last day of the Collection Period preceding a Distribution
Date specified in the related Prospectus Supplement, an account will
be maintained in the name of the Indenture Trustee (the "Pre-Funding
Account"). The amount on deposit in the Pre-Funding Account (the
"Pre-Funding Amount") on the Closing Date will equal an amount
specified in the related Prospectus Supplement (which will be
deposited out of the net proceeds from the sale of the related
Securities) and, during the Funding Period, will be reduced from
time to time by the amount thereof used to make Additional Fundings
(as defined herein).
In addition, if so provided in the related Prospectus Supplement
during the period (the "Revolving Period") from the Closing Date
until the first to occur of (i) an event described in clauses
(b) or (c) of the preceding paragraph or of such additional event or
events as are described in the related Prospectus Supplement as
having such effect (each, an "Early Amortization Event") or
(ii) the last day of the Collection Period preceding a Distribution
Date specified in the related Prospectus Supplement, an account will
be maintained in the name of the Indenture Trustee (the "Collateral
Reinvestment Account"). The amount on deposit in the Collateral
Reinvestment Account on the Closing Date may, if so specified in the
related Prospectus Supplement, include an amount specified in the
related Prospectus Supplement (which will be deposited out of the
net proceeds from the sale of the related Securities) and, during
the Revolving Period principal will not be distributed on the
Securities of the related series and principal collections, together
with (if and to the extent described in the related Prospectus
Supplement) interest collections on the Student Loans that are in
excess of amounts required to be distributed therefrom will be
deposited from time to time in the Collateral Reinvestment Account
and will be used to make Additional Fundings.
"Additional Fundings" will consist of one or more of the following, in
each case if and to the extent specified in the related Prospectus
Supplement: (i) interest payments to Noteholders and
Certificateholders in lieu of collections of interest on certain of
the Student Loans to the extent such interest is not paid currently
but is capitalized and added to the principal balance of such
Student Loans; (ii) payments to purchase from the Depositor under
certain circumstances certain additional Student Loans during the
Funding Period or the Revolving Period; and (iii) payments to fund
the origination by the related Trust under certain circumstances of
certain additional Student Loans. If so provided in the related
Prospectus Supplement, Additional Fundings may continue to occur
after the Funding Period or Revolving Period. Additional Fundings
occurring after the Funding Period or Revolving Period will be
funded from collections on the related Student Loans in the manner
specified in the related Prospectus Supplement. See "DESCRIPTION OF
THE TRANSFER AND SERVICING AGREEMENTS--Additional Fundings."
If so provided in the related Prospectus Supplement, the Depositor may
substitute Student Loans for Student Loans in the Trust, or purchase
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certain Student Loans in the Trust, in the manner described in the
related Prospectus Supplement.
As of the related Cutoff Date for a Trust, Student Loans which are more
than 30 days delinquent will not equal or exceed 20% (by principal
balance) of the Student Loans included in such Trust and none of the
Student Loans included in such Trust will be non-performing Student
Loans. Non-performing Student Loans are Student Loans which are in
default and which the Seller expects to write off as a loss.
GUARANTORS......................... Each Student Loan will, subject to compliance with specific
origination and servicing procedures prescribed by federal and
guarantee agency regulations, be guaranteed as to the payment of
principal and interest by (i) with respect to the FFELP Student
Loans, a state or private non-profit guarantor (each, a "Federal
Guarantor") which agency is re-insured by the United States
Department of Education (the "Department") for between 80% and 100%
of the amount of default claims paid by such Federal Guarantor for a
given federal fiscal year for FFELP Loans disbursed prior to October
1, 1993, for 78% to 98% of default claims for FFELP Loans disbursed
on or after October 1, 1993, for 75% to 95% of default claims for
FFELP Loans disbursed on or after October 1, 1998, and for 100% of
death, disability, bankruptcy, closed school and false certification
claims paid, or (ii) with respect to Private Student Loans, a state
or private guarantor (each, a "Private Guarantor", and together with
the Federal Guarantors, a "Guarantor") that is not reinsured by the
Department. Amounts paid by a Guarantor pursuant to its guarantee
are herein referred to as "Guarantee Payments". See "FEDERAL FAMILY
EDUCATION LOAN PROGRAM--Federal Guarantors", "--Federal Insurance
and Reinsurance of Federal Guarantors" and "Private Student Loan
Programs".
CREDIT AND CASH FLOW ENHANCEMENT... If and to the extent specified in the related Prospectus Supplement,
credit or cash flow enhancement with respect to a Trust or any class
or classes of Securities may include any one or more of the
following: subordination of one or more other classes of Securities,
a Reserve Account, a cash collateral account,
over-collateralization, letters of credit, credit or liquidity
facilities, surety bonds, guaranteed investment contracts, swaps
(including without limitation interest rate and currency swaps)
repurchase obligations, put and/or call options, yield protection
agreements, other agreements with respect to third-party payments or
other support, cash deposits or other arrangements. Any form of
credit or cash flow enhancement may have certain limitations and
exclusions from coverage thereunder, which will be described in the
related Prospectus Supplement.
RESERVE ACCOUNT.................... If so specified in the related Prospectus Supplement, an account in
the name of the related Indenture Trustee (the "Reserve Account") will
be established and maintained by the Administrator with the
Indenture Trustee in accordance with the directions of the
Administrator and will be an asset of the applicable Trust. To the
extent specified in the related Prospectus Supplement, the Depositor
will make an initial deposit into the Reserve Account on the Closing
Date having a value equal to the amount specified in the Prospectus
Supplement (the "Reserve Account Initial Deposit"); the Reserve
Account Initial Deposit will be augmented on each Distribution Date
by the deposit into the Reserve Account of any remaining Available
Funds for such Distribution Date. See "DESCRIPTION OF THE TRANSFER
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AND SERVICING AGREEMENTS--Distributions" in the related Prospectus
Supplement.
Amounts in the Reserve Account will be available to cover shortfalls
in amounts due to the holders of those classes of Securities
specified in the related Prospectus Supplement in the manner and
under the circumstances specified therein. The related Prospectus
Supplement will also specify to whom and the manner and
circumstances under which amounts on deposit in the Reserve Account
(after giving effect to all other required distributions to be made
by the applicable Trust) in excess of the Specified Reserve Account
Balance (as defined in the related Prospectus Supplement) will be
distributed.
TRANSFER AND SERVICING
AGREEMENTS....................... With respect to each Trust, the Depositor will transfer the related
Student Loans (together with its rights and remedies under the Loan
Sale Agreement with respect to such Student Loans) to such Trust
pursuant to a transfer agreement between the Depositor and the
related Trustee (each "a Transfer Agreement"). The related Student
Loans and rights and benefits of such Trust and the Trustee under
the Loan Sale Agreement will be assigned to the Indenture Trustee as
collateral for the Notes of the related series. As specified in the
related Prospectus Supplement, each Trust, the Depositor, the
Servicer and the Eligible Lender Trustee will enter into a loan
servicing agreement with respect to the FFELP Student Loans and a
servicing agreement with respect to Private Student Loans (a "FFELP
Loan Servicing Agreement" and a "Private Loan Servicing Agreement",
respectively and each a "Loan Servicing Agreement"). Pursuant to the
related Loan Servicing Agreements, the Servicer will agree with such
Trust to be responsible for servicing, managing and maintaining the
custody of, and making collections on the pool of Student Loans, and
in the case of the FFELP Student Loans, preparing and filing with
the Department and the applicable Federal Guarantor all appropriate
claim forms and other documents and filings on behalf of the
Eligible Lender Trustee in order to claim the Interest Subsidy
Payments and Special Allowance Payments from the Department in
respect of the FFELP Student Loans. In addition, the Administrator
will undertake certain administrative duties with respect to such
Trust under an Administration Agreement.
The Seller will be obligated under the related Loan Sale Agreement to
repurchase any Student Loan, and the Servicer will be obligated
under the related FFELP Loan Servicing Agreement to purchase or
arrange for the purchase of any FFELP Student Loan, if the interest
of such Trust in such Student Loan is materially adversely affected
by a breach of any representation, warranty or covenant (including,
in the case of the Servicer to service all FFELP Student Loans in
accordance with applicable laws, restrictions and guidelines) made
by the Seller or the Servicer, as the case may be, if the breach has
not been cured following the discovery by or notice to the Seller or
the Servicer, as the case may be, of the breach (it being understood
that any such breach that does not affect any Guarantor's obligation
to guarantee payment of such Student Loan will not be considered to
have a material adverse effect for this purpose). In the event that
Notes of any series remain outstanding and there is a dispute
regarding whether the interests of the related Trust are materially
adversely affected by any such breach, the determination as to
whether the interests of such Trust are so affected will be made by
the Indenture Trustee. In such event, the determination
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of the Indenture Trustee will be dispositive. In the event only
Certificates remain outstanding, any such determination will be made
by the Eligible Lender Trustee and its determination will be
dispositive. In addition, if so specified in the related Prospectus
Supplement, the Seller or the Servicer, as the case may be, will be
obligated to reimburse such Trust for any accrued interest amounts
not guaranteed by a Federal Guarantor due to, or any Interest
Subsidy Payments or Special Allowance Payments lost as a result of,
a breach of the Seller's representations and warranties or the
Servicer's covenants, as the case may be, with respect to any FFELP
Student Loan. The liability of the Seller or the Servicer, as the
case may be, will not exceed the amount that the Federal Guarantor
would have paid if such FFELP Student Loan had been accepted and
paid by such Federal Guarantor as a claim.
The Servicer will receive a fee (the "Servicing Fee") equal to a
specified percentage of the Pool Balance or a fee per Student Loan,
as set forth in the related Prospectus Supplement, together with any
other administrative fees and charges specified in the related
Prospectus Supplement. The Servicing Fee will be payable out of
Available Funds and amounts on deposit in the Reserve Account on the
dates specified in the related Prospectus Supplement. See
"DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Servicer
Compensation" herein and in the related Prospectus Supplement.
TERMINATION........................ The obligations of the Seller, the Depositor, the Servicer, the
Administrator, the Trustee, the Eligible Lender Trustee and the
Indenture Trustee relating to a particular Trust will terminate upon
(i) the maturity or other liquidation of the last Student Loan in
such Trust and the disposition of any amount received upon
liquidation of any such remaining Student Loans and (ii) the payment
to the Noteholders and the Certificateholders of the related series
of all amounts required to be paid to them. See "DESCRIPTION OF THE
TRANSFER AND SERVICING AGREEMENTS--Termination."
OPTIONAL REDEMPTION................ If so specified in the related Prospectus Supplement, in order
primarily to avoid administrative expense, the Depositor or another
party that is named in the related Prospectus Supplement will be
permitted at its option to purchase the Student Loans of a Trust in
the manner and on the respective terms and conditions described
under "DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--
Termination-Optional Redemption." Following such a purchase, the
outstanding Notes will be redeemed and the Certificateholders will
receive a distribution as set forth in the related Prospectus
Supplement.
MANDATORY REDEMPTION............... To the extent that amounts on deposit in any Pre-Funding Account or
Collateral Reinvestment Account for a series have not been fully
applied to Additional Fundings by the Trust by the end of the
Funding Period or Revolving Period, respectively, the related
Noteholders may receive as a prepayment of principal an amount equal
to the amount remaining in such account on the Distribution Date
immediately following the end of such period. See "DESCRIPTION OF
THE NOTES--Principal and Interest on the Notes."
AUCTION OF STUDENT LOANS........... If so provided in the related Prospectus Supplement, all remaining
Student Loans held by a Trust will be offered for sale by the
Indenture Trustee on any Distribution Date occurring on or after a
date specified in such Prospectus Supplement. The Depositor and
related or unrelated third parties may offer bids for such Student
Loans. The Indenture
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Trustee will accept the highest bid equal to or in excess of the
aggregate Purchase Amounts of such Student Loans as of the end of
the Collection Period immediately preceding the related Distribution
Date. The proceeds of such sale will be used to redeem all related
Notes and to retire the related Certificates. The Trustee will not
accept any bid for the Student Loans that is not sufficient to
redeem all the related Notes and to retire the related Certificates.
See "DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--
Termination--Auction of Student Loans."
TAX CONSIDERATIONS................. Upon the issuance of each series of Securities, except as otherwise
provided in the related Prospectus Supplement, Willkie Farr &
Gallagher, federal tax counsel to the applicable Trust ("Federal Tax
Counsel"), will deliver an opinion to the effect that, for federal
income tax purposes: (i) the Notes of such series will be or, in
certain cases, should be, characterized as debt and (ii) the Trust
will not be characterized as an association (or a publicly traded
partnership) taxable as a corporation.
Unless otherwise specified in the applicable Prospectus Supplement,
each Noteholder, by the acceptance of a Note of a given series, will
agree to treat such Note as indebtedness, and each
Certificateholder, if any, by the acceptance of a Certificate of a
given series, will agree to treat the related Trust as a partnership
in which such Certificateholder is a partner for federal income and
state income tax and franchise tax purposes. Alternative
characterizations of such Trust and such Certificates are possible,
but would not result in materially adverse tax consequences to
Certificateholders.
Due to the method of allocation of Trust income to the
Certificateholders, cash-basis holders may, in effect be required to
report income from the Certificates on an accrual basis. In
addition, because tax allocations and tax reporting will be done on
a uniform basis, but Certificateholders may be purchasing
Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns
taxable income that is greater or less than the amount reported to
them by the Trust.
The Trust related to each series of Securities will be established
under the laws of the state specified in the related Prospectus
Supplement and will be managed by the Administrator in
[ ]. See "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES" for additional information concerning the application
of federal tax laws with respect to the Notes and the Certificates.
ERISA CONSIDERATIONS............... Unless otherwise specified in the related Prospectus Supplement and
subject to the considerations discussed under "ERISA CONSIDERATIONS"
herein and unless otherwise specified in the related Prospectus
Supplement, the Notes of each series are eligible for purchase by
employee benefit plans.
Unless otherwise specified in the related Prospectus Supplement, the
Certificates may not be acquired by any employee benefit plan
subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or by any individual retirement account. See
"ERISA CONSIDERATIONS" herein.
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RISK FACTORS
The payment of, and the timing of the payment of, the principal of and
interest on the Notes and distributions in respect of the Certificate Balance of
and return on the Certificates are subject to certain risks. Particular
attention should be given to the factors described below which, among others,
could materially and adversely affect the payment of, and the timing of the
payment of, the Notes and the Certificates, and which could also materially and
adversely affect the market price of the Notes and the Certificates to an extent
that cannot be determined. The items listed below do not include all risks to
which such payment is subject.
RISK THAT FAILURE TO COMPLY WITH STUDENT LOAN ORIGINATION AND SERVICING
PROCEDURES FOR STUDENT LOANS MAY ADVERSELY AFFECT THE TRUST'S ABILITY TO PAY
PRINCIPAL AND INTEREST ON THE RELATED NOTES AND CERTIFICATES. Title IV of the
Higher Education Act of 1965, as amended (the "Act"), including the implementing
regulations thereunder, requires lenders making and servicing FFELP Student
Loans and guarantors guaranteeing FFELP Loans to follow specified procedures,
including due diligence procedures, to ensure that the FFELP Loans are properly
made and disbursed to, and repaid on a timely basis by or on behalf of,
borrowers. Certain of those procedures, which are specifically set forth in the
Act, are summarized herein. See "FEDERAL FAMILY EDUCATION LOAN PROGRAM" and
"DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS." Generally, those
procedures require that completed loan applications be processed, a
determination of whether an applicant is an eligible borrower under the 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 then
that the loan proceeds be disbursed in a specified manner by the lender. After
the loan is made, the lender must establish repayment terms with the borrower,
properly administer deferrals and forbearances and credit the borrower for
payments made thereon. If a borrower becomes delinquent in repaying a loan, the
lender must perform certain collection procedures (primarily telephone calls and
demand letters) which vary depending upon the length of time a loan is
delinquent.
With respect to each series of Securities, the Servicer will agree pursuant
to the related Loan Servicing Agreements to perform servicing and collection
procedures on behalf of each Trust. However, failure to follow these procedures
or failure of the originator of the loan to follow procedures relating to the
origination of any FFELP Student Loans may result in the Department's refusal to
make reinsurance payments to the Federal Guarantor or to make Interest Subsidy
Payments and Special Allowance Payments to the related Eligible Lender Trustee
with respect to such FFELP Student Loans or in the Federal Guarantor's refusal
to honor its Guarantee Agreements with the related Eligible Lender Trustee with
respect to such FFELP Student Loans. Failure of the Federal Guarantor to receive
reinsurance payments from the Department could adversely affect the Federal
Guarantor's ability or legal obligation to make Guarantee Payments to the
related Eligible Lender Trustee. Loss of any such Guarantee Payments, Interest
Subsidy Payments or Special Allowance Payments could adversely affect the amount
of Available Funds for any Collection Period and the Trust's ability to pay
principal and interest on the related Notes and Certificates which, in turn,
would result in a loss to Securityholders. Private loan programs and Private
Guarantees also require that prescribed servicing and collection procedures be
followed in order for the owner of the related Private Loans to obtain the
benefits of the related Guarantee Agreements. As in the case of the FFELP
Student Loans, non-compliance with these procedures may result in denial of
claims with respect to such Private Loans and could adversely affect the amount
of Available Funds for any Collection Period and the Trust's ability to pay
principal and interest on the related Notes and Certificates which, in turn,
would result in a loss to Securityholders.
RISK THAT THIRD-PARTY SERVICER REGULATIONS COULD IMPAIR
SERVICER. Effective July 1, 1995, the Department adopted FFELP regulations
which, among other things, established (i) requirements governing contracts
between holders of FFELP Loans and third-party servicers, (ii) standards of
administrative and financial responsibility for third-party servicers that
administer any aspect of a guarantee agency's or lender's participation in the
FFELP and (iii) sanctions and liabilities for third-party servicers.
Under these regulations, a third-party servicer (such as the Servicer) is
jointly and severally liable with its client lenders for liabilities to the
Department arising from the servicer's violation of applicable requirements. In
addition, if the servicer fails to meet standards of financial responsibility or
administrative capability included in the new regulations, or violates other
FFELP requirements, the regulations authorize the Department to fine the
servicer and/or limit, suspend or terminate the servicer's eligibility to
contract to service FFELP Loans. The
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effect of such a limitation or termination on the Servicer's eligibility to
service loans already on its system, or to accept new loans for servicing under
existing contracts, is unclear, although the financial, operational and
regulatory well being of the Servicer is a material consideration for all
Securityholders. If the Servicer were fined or held liable by the Department for
liabilities arising out of its FFELP activities for the Trust or other client
lenders, or its eligibility were limited, suspended or terminated, its ability
to properly service FFELP Student Loans and to satisfy its obligation to
purchase loans with respect to which it had breached its representations,
warranties or covenants under the related Servicing Agreement could be adversely
affected. Such adverse effects could have the result of diminishing Available
Funds for any Collection Period and, therefore, the Trust's ability to pay
principal and interest on the related Notes and Certificates. However, in the
event of a termination of eligibility, each Loan Servicing Agreement will
provide for the removal of the Servicer and the appointment of a substitute
servicer. The Servicer will also agree in each FFELP Loan Servicing Agreement to
hold the related Trust harmless for liabilities of the related Trust to the
Department arising from any violation by the Servicer of applicable
requirements.
RISKS RELATED TO BREACHES OF REPRESENTATIONS, WARRANTIES AND COVENANTS BY
THE SELLER AND THE SERVICER. If a breach of the representations, warranties or
covenants of the Seller with respect to a Student Loan or of the Servicer with
respect to a FFELP Student Loan, has a material adverse effect on the interest
of the related Trust therein and such breach is not cured within any applicable
cure period, with respect to a given series of Securities, such Trust will have
the right under the related Loan Sale Agreement and the related FFELP Loan
Servicing Agreement to cause the Seller to repurchase such Student Loan or the
Servicer to purchase or arrange for the purchase of such FFELP Student Loan,
respectively. In addition, unless otherwise specified in the Prospectus
Supplement with respect to a given series of Securities, each Trust will have
the right, pursuant to the related Loan Sale Agreement and Loan Servicing
Agreement, to cause the Seller or the Servicer, as the case may be, to reimburse
such Trust for any accrued interest amounts not guaranteed by a Federal
Guarantor, or any Interest Subsidy Payments and Special Allowance Payments lost
with respect to a FFELP Student Loan as a result of a breach of the Seller's
representations and warranties or the Servicer's covenants, as the case may be,
with respect to such FFELP Student Loan. The repurchase and reimbursement
obligations of the Seller and the Servicer will constitute the sole remedy
available to or on behalf of a Trust, the related Certificateholders or the
related Noteholders for any such uncured breach. See "DESCRIPTION OF THE
TRANSFER AND SERVICING AGREEMENTS--Sale of Student Loans; Representations and
Warranties" and "--Servicer Covenants." There can be no assurance, however, that
the Seller will have the financial resources, or the Servicer will have the
ability, to meet these obligations. The failure of the Seller to so repurchase,
or the Servicer to arrange for the repurchase of, a FFELP Student Loan would
constitute a breach of the related Loan Sale Agreement and Loan Servicing
Agreement, enforceable by the related Eligible Lender Trustee on behalf of such
Trust or by the related Indenture Trustee on behalf of the Noteholders of the
related series, but would not constitute an Event of Default under each
Indenture or permit the exercise of remedies thereunder. A Trust that acquires
Private Student Loans from the Seller will have similar rights with respect to
the Seller and the Servicer in connection with breaches by such parties of
representations, warranties and covenants which will be similar to those
pertaining to FFELP Student Loans. The failure of the Seller and the Servicer to
effect the repurchase of a defective Student Loan could, depending on the nature
of the defect, adversely affect the Trust's ability to pay principal of and
interest on the related Notes and Certificates. For example, if the defect
resulted in the particular Student Loan being ineligible for the benefits of
FFELP in the case of FFELP Student Loans or a guarantee in the case of a Private
Student Loan, the Trust would be limited to only recoveries obtainable from the
borrower.
VARIABILITY OF ACTUAL CASH FLOWS; RISK OF SHORTFALLS TO HOLDERS OF NOTES
AND CERTIFICATES RESULTING FROM INABILITY OF RELATED INDENTURE TRUSTEE TO
LIQUIDATE STUDENT LOANS. Amounts received with respect to the Student Loans for
a particular Collection Period may vary greatly in both timing and amount from
the payments actually due on the Student Loans as of such Collection Period for
a variety of economic, social and other factors, including both individual
factors, such as additional periods of deferral or forbearance prior to or after
a borrower's commencement of repayment, and general factors, such as a general
economic downturn which could increase the amount of defaulted Student Loans.
Failures by borrowers to pay timely the principal and interest on the Student
Loans will affect the amount of Available Funds on a Distribution Date, which
may reduce the amount of principal and interest paid to the Securityholders of
the related series on such Distribution Date. Moreover, failures by student loan
borrowers generally to pay timely the principal and interest due on their
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Student Loans could obligate the respective Federal Guarantor or Private
Guarantor to make payments thereon, which could adversely affect the solvency of
the Federal Guarantor or Private Guarantor and its ability to meet its guarantee
obligations (including with respect to the Student Loans). The inability of any
Guarantor to meet its guarantee obligations could reduce the amount of principal
and interest paid to the Securityholders of the related series on a Distribution
Date. The effect of such factors, including the effect on a Guarantor's ability
to meet its guarantee obligations with respect to the Student Loans, or a
Trust's ability to pay principal and interest with respect to the Securities, is
impossible to predict. Pursuant to the 1992 Amendments, under
Section 432(o) of the Act if the Department has determined that a Federal
Guarantor is unable to meet its insurance obligations, the loan holder may
submit claims directly to the Department and the Department is required to pay
the full Guarantee Payment due with respect thereto in accordance with guarantee
claim processing standards no more stringent than those of such Federal
Guarantor. However, the Department's obligation to pay guarantee claims directly
in this fashion is contingent upon the Department making the determination
referred to above. There can be no assurance that the Department would ever make
such a determination with respect to a Federal Guarantor or, if such a
determination was made, whether such determination or the ultimate payment of
such guarantee claims would be made in a timely manner.
If an Event of Default occurs under the related Indenture, subject to
certain conditions, the related Indenture Trustee is authorized, without the
consent of the Certificateholders of the related series, to sell the Student
Loans pledged thereunder. There can be no assurance, however, that the related
Indenture Trustee will be able to find a purchaser for the Student Loans in a
timely manner or that the market value of such Student Loans is equal to the
aggregate outstanding principal amount of the Securities and accrued interest
thereon. If the proceeds of any such sale, together with amounts then available
in any Reserve Account or pursuant to any other credit enhancement specified as
being available therefor in the related Prospectus Supplement, do not exceed the
aggregate outstanding principal amount of Notes and accrued interest thereon,
the Noteholders of the related series will suffer a loss. In such circumstances,
the Certificateholders, to the extent the Certificates of such series are
subordinated to the Notes of such series, will also suffer a loss.
UNSECURED NATURE OF STUDENT LOANS; RISK THAT FINANCIAL STATUS OF A FEDERAL
GUARANTOR WILL AFFECT ITS ABILITY TO MAKE GUARANTEE PAYMENTS. The Act requires
all FFELP Loans to be unsecured. As a result, the only security for payment of
the FFELP Student Loans are the Guarantee Agreements between the related
Eligible Lender Trustee and the Federal Guarantors. A deterioration in the
financial status of the Federal Guarantors and their ability to honor guarantee
claims with respect to the FFELP Student Loans could result in a failure by the
Federal Guarantor to make Guarantee Payments to such Eligible Lender Trustee.
One of the primary causes of a possible deterioration in a Guarantor's financial
status is the amount and percentage of defaulting FFELP Student Loans guaranteed
by a Federal Guarantor. Moreover, to the extent that default reimbursement
claims submitted by a Federal Guarantor for any fiscal year exceed certain
specified levels, the Department's obligation to reimburse the Federal Guarantor
for default claim losses is reduced on a sliding scale from 100% to a minimum of
80% (98% to 78%, respectively, for default claim losses for FFELP Student Loans
made on or after October 1, 1993; 95% to 75%, respectively, for default claim
losses for FFELP Student Loans made on or after October 1, 1998). Death,
disability, bankruptcy, closed school and false certification claims are
reimbursed 100% by the Department. No assurance exists that any Federal
Guarantor will have the financial resources to make all Guarantee Payments to a
given Trust in respect of the related FFELP Student Loans that may arise from
time to time. Failure by Federal Guarantors to make Guarantee Payments on
defaulted FFELP Student Loans will affect the amount of Available Funds on a
Distribution Date, which may reduce the amount of principal and interest paid to
Securityholders of a related series on such Distribution Date. See "THE FEDERAL
FAMILY EDUCATION LOAN PROGRAM" and "--Federal Insurance and Reinsurance of
Federal Guarantors."
DEFAULT RISK ON CERTAIN FFELP STUDENT LOANS. Under the 1993 Act, FFELP
Loans first disbursed on or after October 1, 1993 are 98% insured by the
applicable Guarantor. As a result, to the extent a borrower of such a Student
Loan defaults, each Trust will experience a loss of 2% of outstanding principal
and accrued interest on each such Student Loan. A defaulted loan will be fully
assigned to the applicable Guarantor in exchange for a guarantee payment on the
98% guaranteed portion and the Trust may have no right thereafter to pursue the
borrower for the 2% unguaranteed portion. Such 2% loss would diminish the amount
of Available Funds, which would in turn, absent adequate collateralization in a
Trust, adversely affect a Trust's ability to pay interest and principal on the
related Notes and Certificates. The 1998 Reauthorization Bill reduced the
guaranteed portion
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from 98% to 95%, thereby increasing the loss figure from 2% to 5% for FFELP
Loans first disbursed on or after October 1, 1998. FFELP Loans continue to be
100% guaranteed in the event of death, disability or bankruptcy of the borrower
and a closing of or false certification by the borrower's school regardless of
disbursement date.
FEES PAYABLE ON CERTAIN FFELP STUDENT LOANS MAY REDUCE FUNDS AVAILABLE TO
PAY PRINCIPAL AND INTEREST ON THE RELATED NOTES AND CERTIFICATES. Under the
Federal Consolidation Program, each Trust will be obligated to pay to the
Department a monthly rebate fee (the "Monthly Rebate Fee") at an annualized rate
of 1.05% (0.62% for applications received between October 1, 1998 and January
31, 1999) of the outstanding principal balance on the last day of each month
plus accrued interest thereon of each Federal Consolidation Loan which is a part
of such Trust, which rebate will be payable prior to distributions to the
Noteholders or the Certificateholders and which rebate will reduce the amount of
funds which would otherwise be available to make distributions on the Securities
and will reduce the Student Loan Rate. In addition, such Trust must pay to the
Department a 0.50% origination fee (the "Federal Origination Fee") on the
initial principal balance of each FFELP Student Loan which is originated on its
behalf by the related Eligible Lender Trustee (i.e., each Federal Consolidation
Loan originated on its behalf by such Eligible Lender Trustee during the Funding
Period), which fee will be deducted by the Department out of Interest Subsidy
and Special Allowance Payments. If sufficient Interest Subsidy and Special
Allowance Payments are not due to a Trust to cover the amount of the Federal
Origination Fee, the balance of such Federal Origination Fee will be deferred by
the Department until sufficient Interest Subsidy and Special Allowance Payments
accrue to cover such fee. If such amounts never accrue, which may occur as a
result of changes in the relevant interest rate indices on which such payments
are based or premature termination of a loan on account of default or otherwise,
a Trust would be obligated to pay any remaining fee from other assets of a
Trust, such as undisbursed proceeds of the issuance of Notes and Certificates
and principal payments on Student Loans received but not yet otherwise applied,
prior to making distributions to Noteholders or Certificateholders. The offset
of Interest Subsidy and Special Allowance Payments, and the payment of any
remaining fee from other Trust assets, will further reduce the amount of
Available Funds (or Monthly Available Funds) from which payments to Noteholders
and Certificateholders may be made. Also with respect to a series of floating
rate Notes or Certificates that is subject to the Student Loan Rate as described
under "CERTAIN INFORMATION REGARDING THE SECURITIES--Floating Rate Securities"
in this Prospectus, the Student Loan Rate, if so specified in the related
Prospectus Supplement, will be reduced by any offset of Interest Subsidy and
Special Allowance Payments. The effect of any such reduction in the Student Loan
Rate would be to reduce the minimum rate at which such Notes or Certificates
could bear interest. See "DESCRIPTION OF THE NOTES--Principal and Interest on
the Notes" and "CERTAIN INFORMATION REGARDING THE SECURITIES--Floating Rate
Securities" in this Prospectus.
RISK THAT CHANGE IN LAW WILL ADVERSELY AFFECT STUDENT LOANS, GUARANTORS,
EFG OR THE SERVICER. No assurance can be made that the Act or other relevant
federal or state laws, rules and regulations and the programs implemented
thereunder will not be amended or modified in the future in a manner that will
adversely impact the programs described in this Prospectus and the guaranteed
student loans made thereunder, including the Student Loans, the Guarantors, EFG
or the Servicer. In addition, existing legislation and future measures to reduce
the federal budget deficit or for other purposes may adversely affect the amount
and nature of federal financial assistance available with respect to these
programs. In recent years, federal budget legislation has provided for the
recovery of certain funds held by the Federal Guarantors in order to achieve
reductions in federal spending. No assurance can be made that future federal
budget legislation or administrative actions will not adversely affect
expenditures by the Department or the financial condition of the Federal
Guarantors, EFG or the Servicer. See "FEDERAL FAMILY EDUCATION LOAN
PROGRAM--Legislative and Administrative Matters" in this Prospectus.
For example, as described more fully under "FEDERAL FAMILY EDUCATION LOAN
PROGRAM--Legislative and Administrative Matters" (i) the Emergency Student Loan
Consolidation Act of 1997 changed, among other things, fixed interest rates to
variable interest rates and reduced the interest rate cap in the Federal
Consolidation Loan program, (ii) the 1997 Budget Reconciliation Act caused,
among other things, Federal Guarantors to return $1 Billion of reserves to the
U.S. Treasury, and (iii) the 1998 Reauthorization Bill (a) caused, among other
things, the recall of additional Federal Guarantor reserves and the reduction of
federal reinsurance from 98% to 95% for Federal Student Loans first disbursed on
or after October 1, 1998 and (b) made permanent reductions in borrower interest
rates and Special Allowance Payments for Stafford Loans that were
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introduced to FFELP by the 1998 Amendments. Changes in law such as those
described above generally reduce the amounts earned on FFELP Student Loans as
well as the resources of Federal Guarantors and therefore may adversely affect
the financial condition of Federal Guarantors, EFG or the Servicer which may, in
turn, adversely affect holders of Notes and Certificates by potentially reducing
any such party's ability to meet its obligations under the Guarantee Agreements
or Transfer and Servicing Agreements, as the case may be, with the result that
there may be a related reduction in the amounts paid to holders under the Notes
and Certificates. See "FEDERAL FAMILY EDUCATION LOAN PROGRAM" in this
Prospectus.
INCREASED FEES; DECREASED ASSISTANCE. The 1993 Act also made a number of
changes to the Federal Student Loan programs, including imposing on lenders or
holders of Student Loans certain fees and affecting the Department's financial
assistance to Federal Guarantors, including reducing the percentage of claim
payments the Department will reimburse to Federal Guarantors, reducing more
substantially the premiums and default collections that Federal Guarantors are
entitled to receive and/or retain and permitting the Department to reduce
administrative fees it pays to Federal Guarantors. These changes could affect a
Federal Guarantor's ability to make Guarantee Payments which in turn, could
adversely affect a Trust's ability to pay principal and interest on the related
Notes and Certificates.
IMPACT OF DIRECT LENDING. The 1993 Act made certain changes to the FFELP
and also provided for the implementation of a direct student loan program
("DSLP") pursuant to which the Department makes loans directly to students and
parents, which the statute contemplated would replace at least 60% of the FFELP
by the 1998-1999 academic year. The expansion of DSLP may involve increasing
reductions in the volume of loans made under the existing programs. The volume
of new FFELP Loans held and serviced by the Seller and the Servicer may decrease
due to DSLP. Such entities have not experienced a significant reduction to date
and any such reduction will not necessarily be equal to the percentage by which
existing Federal Student Loan programs are replaced by DSLP. As these reductions
occur, the Seller or the Servicer could experience increased costs due to
reduced economies of scale to the extent the volume of loans held and serviced
by the Seller and the Servicer is reduced. Such cost increases could affect the
ability of the Seller or the Servicer to satisfy their respective obligations to
repurchase or cause the repurchase of FFELP Student Loans in the event of
certain breaches of its representation and warranties as Seller or of its
covenants as Servicer and, in the case of the Servicer, to service the FFELP
Student Loans. See "DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Sale
of Student Loans; Representations and Warranties" and "--Servicer Covenants."
Such volume reductions could also reduce revenues received by the Federal
Guarantors that are available to pay claims on defaulted Federal Student Loans
which in turn, could adversely affect a Trust's ability to pay principal and
interest on the related Notes and Certificates. Finally, the level of
competition in existence in the secondary market for loans made under the
existing programs could be reduced, resulting in fewer potential buyers of the
Federal Student Loans and lower prices available in the secondary market for
those loans.
RESERVES. The 1993 Act granted the Department broad powers over Federal
Guarantors and their reserves. These powers include the authority to require a
Federal Guarantor to return all reserve funds to the Department if the
Department determines such action is necessary to ensure an orderly termination
of the Federal Guarantor, to serve the best interests of the student loan
programs or to ensure the proper maintenance of such Federal Guarantor's funds
or assets. The Department is also now authorized to direct a Federal Guarantor
to return a portion of its reserve funds which the Department determines is
unnecessary to pay the program expenses and contingent liabilities of the
Federal Guarantor and/or to cease any activities involving the use of the
Federal Guarantor's reserve funds or assets which the Department determines is a
misapplication or otherwise improper. The Department may also terminate a
Federal Guarantor's reinsurance agreement if the Department determines that such
action is necessary to protect the federal fiscal interest or to ensure an
orderly transition to full implementation of direct federal lending. These
various changes create a significant risk that the resources available to the
Federal Guarantors to meet their guarantee obligations will be significantly
reduced. If a Federal Guarantor is unable to make Guarantee Payments, a Trust's
ability to make timely payments of interest and principal to the related
Securityholders may be adversely affected.
CONSOLIDATION OF FEDERAL BENEFIT BILLINGS AND RECEIPTS UNDER ONE ELIGIBLE
LENDER NUMBER. The Department limits the granting of new lender identification
numbers. The Eligible Lender Trustee will hold a single Department lender
identification number under the Eligible Lender Trust on behalf of all of the
beneficiaries thereof, i.e., the Depositor and each Trust for which the Trustee
is not qualified as an eligible lender
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under FFELP, as well as their permitted assigns. The billings submitted to the
Department for Interest Subsidy and Special Allowance Payments on FFELP Student
Loans beneficially owned by a Trust will be consolidated with the billings for
such payments for FFELP Student Loans beneficially owned by other Trusts or the
Depositor, or such assigns, and payments on such billings will be made by the
Department in lump sum form. Such lump sum payments will then be allocated by
the Eligible Lender Trustee among the Trusts and the Depositor, and such
assigns.
In addition, sharing a common eligible lender identification number among
the beneficiaries of the Eligible Lender Trust, i.e., the Trusts and the
Depositor, and their permitted assigns, may result in the receipt of claim
payments from Federal guarantors in lump sum form. In that event, such payments
will be allocated among the Trusts and other beneficiaries in a manner similar
to the allocation process for Interest Subsidy and Special Allowance Payments.
The Department regards the Eligible Lender Trustee as the party primarily
responsible to the Department for any liabilities owed to the Department or
Federal Guarantors resulting from the Eligible Lender Trustee's activities in
the FFELP. As a result, if the Department or a Guarantor were to determine that
the Eligible Lender Trustee owed a liability to the Department or a Guarantor on
any FFELP Student Loan legally owned by the Eligible Lender Trustee, for
example, the Department or Guarantor may seek to collect that liability by
offset against payments due to the Eligible Lender Trustee with respect to any
FFELP Loans legally owned by the Eligible Lender Trustee without regard to their
beneficial ownership.
In addition, Trusts that are beneficiaries of the Eligible Lender Trust may
in a given quarter incur Federal Origination Fees that exceed the Interest
Subsidy and Special Allowance Payments payable by the Department on the loans
beneficially owned by such Trusts, resulting in the consolidated payment from
the Department received by the Eligible Lender Trustee under such lender
identification number for that quarter equaling an amount that is less than the
amount owed by the Department on all of the FFELP Student Loans in a Trust for
that quarter.
If a Trustee is qualified as an eligible lender under FFELP, which will be
disclosed in the applicable Prospectus Supplement, it will perform substantially
the same function for the applicable Trust as the Eligible Lender Trustee will
perform for the Depositor and would have performed for such Trust. The Trustee
for one or more Trusts may qualify as an eligible lender under FFELP and may
operate as such with a single lender identification number, thus presenting, as
among such Trusts, substantially the same risks as described immediately above
with respect to the Eligible Lender Trust and its multiple beneficiaries.
RISK RELATING TO PRIVATE GUARANTORS. Investors in Securities of any series
that finance Private Student Loans should evaluate the financial strength of
Private Guarantors and Federal Guarantors separately. As set forth in the
related Prospectus Supplement, Private Guarantors may be materially financially
weaker than Federal Guarantors. Most importantly, Private Guarantors will not
enjoy any federal support, unlike Federal Guarantors. Furthermore, the financial
condition of a Private Guarantor may material weaken after the Closing Date. The
inability of a Private Guarantor to pay any Guarantee Payments would likely have
a material adverse effect on payments of principal of and interest on the
Securities of a related series.
RISK OF LOSS OF PRIVATE GUARANTOR PAYMENTS FOR FAILURE TO COMPLY WITH LOAN
ORIGINATION AND SERVICING PROCEDURES FOR PRIVATE STUDENT LOANS. Certain rules
and procedures will govern originating and servicing Private Student Loans. In
many cases these procedures are analogous to those applicable to FFELP Loans.
Failure to make or service properly a Private Student Loan in accordance with
those procedures could adversely affect the Trustee's ability to obtain
guarantee payments from the applicable Private Guarantor. Loss of such guarantee
payments could adversely affect the Trust's ability to pay principal and
interest on the Notes and the Certificates. See "RISK FACTORS--Risk that Failure
to Comply with Student Loan Origination and Servicing Procedures for Student
Loans May Adversely Affect a Trust's Ability to Pay Principal and Interest on
the Related Notes and Certificates".
RISKS RESULTING FROM SUBORDINATION OF PRINCIPAL AND INTEREST PAYMENTS;
LIMITED ASSETS. To the extent specified in the related Prospectus Supplement,
distributions of interest and principal on the Certificates of a series may be
subordinated in priority of payment to interest and principal due on the Notes
of such series and distributions of interest and principal of certain classes of
Notes of a series may be subordinated in priority of payment to interest and
principal due on other classes of Notes of such series. Moreover, each Trust
will not
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have, nor is it permitted or expected to have, any significant assets or sources
of funds other than the Student Loans and, to the extent provided in the related
Prospectus Supplement, a Reserve Account and any other credit enhancement. The
Notes of any series will represent obligations solely of, and the Certificates
of such series will represent interests solely in, the related Trust and neither
the Notes nor the Certificates of such series will be insured or guaranteed by
the Seller, the Depositor, the Servicer, the Guarantors, the applicable Eligible
Lender Trustee, the applicable Indenture Trustee or any other person or entity.
Consequently, holders of the Securities of any series must rely for repayment
upon payments on the related Student Loans and, if and to the extent available,
amounts on deposit in the Reserve Account (if any) and other credit enhancement
(if any), all as specified in the related Prospectus Supplement.
RISK RESULTING FROM USE OF THE PRE-FUNDING ACCOUNT OR COLLATERAL
REINVESTMENT ACCOUNT TO MAKE ADDITIONAL FUNDINGS. The use of a Pre-Funding
Account or Collateral Reinvestment Account to add Student Loans to a Trust after
the applicable Closing Date will cause the aggregate characteristics of the
entire pool of Student Loans with respect to such Trust, including, if and to
the extent set forth in the related Prospectus Supplement, the composition of
such pool and of the borrowers thereof, the applicable Guarantors thereof (if,
as may be so specified in the related Prospectus Supplement, the Guarantors with
respect to Student Loans added after the Closing Date may include Guarantors
other than those represented in such pool as of the Closing Date and named in
such Prospectus Supplement) and the distribution by loan type, interest rate,
principal balance and remaining term to stated maturity to vary, from those of
the applicable pool as existing on the Closing Date and described in the related
Prospectus Supplement.
If, as to any series for which a Pre-Funding Account or Collateral
Reinvestment Account is provided, the sum of (i) the principal amount plus
accrued interest thereon to be capitalized upon repayment of eligible Student
Loans acquired by or originated on behalf of the related Trust during the
Funding Period or Revolving Period, as the case may be, less the principal
amount of the Student Loans sold to the Depositor or prepaid by the related
Trust during such applicable period in connection with the making of Federal
Consolidation Loans or such other types of Student Loans as may be specified in
the related Prospectus Supplement and (ii) the amount of interest on the Student
Loans capitalized and not paid currently by or on behalf of the borrowers during
such applicable period is less, in the case of the Funding Period, than the
Pre-Funding Amount or, in the case of the Revolving Period, than the amount on
deposit in the Collateral Reinvestment Account at the end of the Revolving
Period, the related Trust will have insufficient opportunities to make
Additional Fundings during the Funding Period or Revolving Period, as the case
may be, thereby resulting in a prepayment of principal to Noteholders or
Certificateholders as described in the following paragraph. In addition, as to
any series for which a Collateral Reinvestment Account is provided, the making
of Additional Fundings during the Revolving Period at a rate lower than that
expected by the Depositor could cause a buildup of funds in the Collateral
Reinvestment Account at such a level as to cause an Early Amortization Event,
also thereby resulting in a prepayment of principal to Noteholders as described
in the following paragraph. Also, any conveyance of Student Loans to a Trust
through Additional Fundings is subject to the following conditions, among
others: (i) each such Student Loan must satisfy the eligibility criteria
specified in the related Loan Sale Agreement; and (ii) the Depositor will not
select such Student Loans in a manner that it believes is materially adverse to
the interests of the related Noteholders or the Certificateholders.
To the extent that amounts on deposit in the Pre-Funding Account or
Collateral Reinvestment Account for a series have not been fully applied to
Additional Fundings by the Trust by the end of the Funding Period or Revolving
Period, as the case may be, the related Noteholders or Certificateholders may
receive as a prepayment of principal an amount equal to the amount remaining in
the Pre-Funding Account or Collateral Reinvestment Account, as the case may be,
on the Distribution Date immediately following the end of such period.
Prepayments of principal could affect the yield realized by Noteholders and
Certificateholders and could require such holders to secure alternative
investments for the amounts prepaid. See "RISK FACTORS--Maturity and Prepayment
Considerations" below. Noteholders and Certificateholders will bear all
reinvestment risk resulting from the rate of principal payments on their
Securities. It is anticipated that, in the case of each series, the amount of
Additional Fundings made by the Trust will not be exactly equal to the amount on
deposit in the Pre-Funding Account or Collateral Reinvestment Account, as the
case may be, and that therefore there may be at least a nominal amount of
principal prepaid to the Noteholders or Certificateholders. In addition, various
events (including, in the case of a Revolving Period, Early Amortization Events)
could cause any Funding Period or
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Revolving Period to end prior to the last day of the Collection Period set forth
in the related Prospectus Supplement. Also, see "RISK FACTORS--Maturity and
Prepayment Considerations" below regarding the risk to Noteholders and/or
Certificateholders of prepayments in connection with the making of Federal
Consolidation Loans both during and after the Funding Period or Revolving
Period, as the case may be in the related Prospectus Supplement.
In no event will the prefunded amount deposited in a Pre-Funding Account on
the Closing Date exceed 25% of the initial aggregate principal amount of the
Notes and the Certificates of the related series of Securities. No Funding
Period for a Pre-Funding Account will end more than one year after the related
Closing Date, except as may be provided in a Prospectus Supplement with respect
to Federal Consolidation Loans, Serial Loans and the funding of capitalized
interest.
MATURITY AND PREPAYMENT CONSIDERATIONS. All the Student Loans are
prepayable at any time. (For this purpose the term "prepayments" includes
prepayments in full or in part (including pursuant to Federal Consolidation
Loans) and liquidations due to default (including receipt of Guarantee
Payments). The rate of prepayments on the Student Loans may be influenced by a
variety of economic, social and other factors affecting borrowers, including
interest rates and the availability of alternative financing. In addition,
unless otherwise specified in the Prospectus Supplement for a given series of
Securities, under certain circumstances, the Seller or the Servicer will be
obligated to purchase or arrange for the purchase of Student Loans from the
Trust pursuant to the related Loan Sale Agreement or Loan Servicing Agreement,
as applicable, as a result of breaches of their respective representations,
warranties or covenants. See "DESCRIPTION OF THE TRANSFER AND SERVICING
AGREEMENTS--Sale of Student Loans; Representations and Warranties" and
"--Servicer Covenants." Moreover, a borrower of Student Loans may elect to
borrow a Federal Consolidation Loan to consolidate and refinance such Student
Loans. The related Prospectus Supplement will describe the circumstances under
which such Trust may originate or acquire the resulting Federal Consolidation
Loan. No assurance can be made that borrowers with FFELP Student Loans will not
seek to obtain Federal Consolidation Loans with respect to such FFELP Student
Loans or, if they do so, that such Federal Consolidation Loans will be held by
the related Eligible Lender Trustee on behalf of the Trust. See "THE FEDERAL
FAMILY EDUCATION LOAN PROGRAM."
On the other hand, scheduled payments with respect to, and maturities of,
the FFELP Student Loans may be extended as a result of Grace Periods, Deferral
Periods and, under certain circumstances, Forbearance Periods, which may
lengthen the remaining term of the FFELP Student Loans and the average life of
the Notes and the Certificates. See "THE FEDERAL FAMILY EDUCATION LOAN PROGRAM."
Any reinvestment risks resulting from a faster or slower incidence of prepayment
of Student Loans will be borne entirely by the Noteholders and the
Certificateholders. See also "DESCRIPTION OF THE TRANSFER AND SERVICING
AGREEMENTS --Termination" regarding the Depositor's option to repurchase the
Student Loans.
Noteholders and Certificateholders should consider, in the case of Notes or
Certificates, as the case may be, purchased at a discount, the risk that a
slower than anticipated rate of principal payments on the Student Loans could
result in a longer average life of the Notes and Certificates and an actual
yield that is less than the anticipated yield and, in the case of Notes or
Certificates, as the case may be, purchased at a premium, the risk that a faster
than anticipated rate of principal payments on the Student Loans, as well as the
inability to apply funds on deposit in a Pre-funding Account or a Collateral
Reinvestment Account to the acquisition of Student Loans during a Funding Period
or a Revolving Period, as the case may be, could result in a shorter average
life of the Notes and Certificates and an actual yield that is less than the
anticipated yield. See "WEIGHTED AVERAGE LIFE OF THE SECURITIES."
On July 8, 1998, the Secretary published a notice in the Federal Register
reducing the interest rates on direct Federal Consolidation Loans for which
applications are received between July 1, 1998 and September 30, 1998 to a rate
equal to 91-day T-bill plus 2.3%, which rate was extended to applications
received by January 31, 1999 under the 1998 Reauthorization Bill. This
represents a reduction of 0.8% in the interest rate compared to direct Federal
Consolidation Loans for which applications were received prior to that time.
This interest rate reduction could result in a higher incidence of prepayment of
FFELP Student Loans due to borrowers of such loans obtaining direct Federal
Consolidation Loans to pay off their outstanding indebtedness. The volume of
such prepayments cannot be determined at this time.
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INCENTIVE PROGRAMS. EFG, the Seller, has offered, and intends to continue
to offer, incentive programs to borrowers of certain Student Loans. Two such
programs are currently made available by EFG and may apply to Student Loans
owned by the Trusts. The applicability of incentive programs to Student Loans to
be owned by particular Trusts will be disclosed in the Prospectus Supplements
relating to such Trusts. Under the "Grad Advantage Program," which is made
available for all Federal Stafford Loans which enter repayment after July 1993,
if a borrower makes 36 consecutive scheduled payments in a timely fashion, the
effective interest rate charged to the borrower will be permanently reduced by
2% per annum thereafter. Pursuant to the Grad Advantage Program, a borrower who
graduates will be entitled to a reduction in the principal of the borrower's
student loan equal to the amount of the borrower's origination and guarantee fee
on subsidized Federal Stafford Loans (not to exceed 4% of the principal), and an
amount equal to the guarantee fee on unsubsidized Federal Stafford Loans (not to
exceed 1% of the principal amount of the loan). Pursuant to the "direct repay
plan" or "Auto Advantage Repayment Plan," borrowers who make student loan
payments on Federal Stafford Loans electronically through automatic monthly
deductions from a savings or checking account receive a 0.25% effective interest
rate reduction as long as they continue the Auto Advantage repayment plan. The
effect of such principal and interest rate reductions will be to reduce the
amount of Available Funds held by a Trust to pay principal and interest to the
related Securityholders. The incentive programs currently or hereafter made
available by EFG to borrowers may also be made available by the Servicer to
borrowers of eligible Student Loans. The current terms of these incentive
programs will be changed in the near future to accommodate recently enacted
changes under FFELP.
EFG has held loans for its own account only since 1998 and thus has only
very recent experience with incentive programs for such loans. Moreover, the
nature of both the Grad Advantage Program and the Auto Advantage Repayment Plan
requires that a student graduate from school and enter repayment before he or
she will be eligible for participation in one of these incentive programs if it
applies to his or her loan. These incentive programs apply only to Federal
Stafford Loans and not all FFELP Loans. As a result of these facts, EFG does not
have at this time any statistically meaningful participation experience with
borrower incentive programs and, therefore, cannot predict with certainty the
extent to which borrowers will decide to participate in these programs. In
addition, EFG reserves the right to alter or eliminate its incentive programs in
the future and is currently updating its programs to accommodate changes to
FFELP interest rates.
Any borrower incentive program that can potentially reduce borrower
payments or principal balances on Student Loans and is not required by the Act
will be applicable to Student Loans only if and to the extent that the Trust
that beneficially owns the subject Student Loan has received an amount that is
adequate to offset such potential reductions or it is otherwise determined that
the assets of such Trust are sufficient to accommodate such potential
reductions.
RISK OF REMOVAL OF SERVICER UPON SERVICER DEFAULT. Unless otherwise
specified in the related Prospectus Supplement with respect to a given series of
Securities, in the event of (a) any failure by the Servicer to deliver to the
Indenture Trustee for deposit in any of the Trust Accounts any required payment
or to direct such Indenture Trustee to make any required distributions
therefrom, which failure continues unremedied for three business days after
written notice from such Indenture Trustee or the related Trustee is received by
the Servicer or after discovery by the Servicer, (b) any failure by the Servicer
to observe or perform in any material respect any other covenant or agreement of
the Servicer under the related Loan Servicing Agreement, (c) with respect to the
FFELP Student Loans, any limitation, suspension or termination by the Secretary
of Education (the "Secretary") of the Servicer's eligibility to service FFELP
Student Loans which materially and adversely affects its ability to service the
FFELP Student Loans in the related Trust or (d) any Insolvency Event with
respect to the Servicer (collectively, a "Servicer Default"), (x) pursuant to
the FFELP Loan Servicing Agreement, the Indenture Trustee or 75% (by principal
amount) of the Noteholders with respect to the series of Notes issued
thereunder, as described under "DESCRIPTION OF THE TRANSFER AND SERVICING
AGREEMENTS--Rights Upon Servicer Default," and (y) pursuant to the Private Loan
Servicing Agreement, the Trustee, may remove the Servicer without the consent of
the Eligible Lender Trustee or any of the Certificateholders. Moreover, for so
long as the Notes of any Series are outstanding, only the Indenture Trustee or
the Noteholders with respect to such series, and not the Eligible Lender Trustee
or the Certificateholders, have the ability to remove the Servicer if a Servicer
Default occurs. In addition, the Noteholders with respect to the FFELP Loan
Servicing Agreement or the Trustee under the Private Loan Servicing Agreement,
have the ability, with certain specified exceptions, to waive defaults by the
Servicer, including defaults that could materially adversely affect
Certificateholders. See "DESCRIPTION OF THE TRANSFER AND SERVICING
AGREEMENTS--Waiver of Past Defaults."
INSOLVENCY RISKS. The Depositor has taken steps in structuring the
transactions contemplated hereby that are intended to ensure that the voluntary
or involuntary application for relief by EFG under the United States
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Bankruptcy Code or other insolvency laws ("Insolvency Laws") will not result in
consolidation of the assets and liabilities of the Depositor with those of EFG.
These steps include the creation of the Depositor as a separate, limited-purpose
entity pursuant to articles of incorporation containing certain limitations
(including restrictions on the nature of the Depositor's business and a
restriction on the Depositor's ability to commence a voluntary case or
proceeding under any Insolvency Law without the prior affirmative vote of all of
the Depositor's directors, including at least two directors who must be
independent of the Depositor and affiliates). However, there can be no assurance
that the activities of the Depositor would not result in a court concluding that
the assets and liabilities of the Depositor should be consolidated with those of
EFG in a proceeding under any Insolvency Law. If a court were to reach such a
conclusion or a filing were made under any Insolvency Law by or against the
Depositor, or if an attempt were made to litigate any of the foregoing issues,
then delays in distributions on the Securities could occur or reductions in the
amounts of such distributions could result. See "THE DEPOSITOR."
It is intended by the Seller and the Depositor that the transfer of the
Student Loans by the Seller to the Depositor constitute a true sale of the
Student Loans to the Depositor. The Seller and Depositor expect to receive
advice of counsel substantially to this effect. If the transfer constitutes such
a true sale, the Student Loans and the proceeds thereof would not be property of
the Seller should it become the subject of any Insolvency Law subsequent to the
transfer of the Student Loans to the Depositor.
The Seller will warrant to the Depositor in the related Loan Sale Agreement
that the sale of the Student Loans by the Seller to the Depositor is a valid
sale of the Student Loans by the Seller to the Depositor. Notwithstanding the
foregoing, if the Seller were to become subject to an Insolvency Law and a
creditor or trustee-in-bankruptcy of the Seller or the Seller itself were to
take the position that the sale of Student Loans by the Seller to the Depositor
should instead be treated as a pledge of such Student Loans to secure a
borrowing of the Seller, delays in payments of collections of Student Loans to
the related Securityholders could occur or (should the court rule in favor of
the Seller or such trustee or creditor) reductions in the amounts of such
payments could result. If the transfer of Student Loans by the Seller to the
Depositor is treated as a pledge instead of a sale, a tax or government lien on
the property of the Seller arising before the transfer of such Student Loans to
the Depositor may have priority over such Trust's interest in such Student
Loans.
Numerous federal and state consumer protection laws and related regulations
impose substantial requirements upon lenders and servicers involved in consumer
finance. Also, some state laws impose finance charge ceilings and other
restrictions on certain consumer transactions and require contract disclosures
in addition to those required under federal law. To the extent these
requirements may be applicable to Student Loans, these requirements impose
specific statutory liability that could affect an assignee's ability to enforce
consumer finance contracts. In addition, the remedies available to the related
Indenture Trustee or the Noteholders of the related series upon an Event of
Default under the Indenture may not be readily available or may be limited by
applicable state and federal laws.
BOOK-ENTRY REGISTRATION. If so provided in the related Prospectus
Supplement, each class of the Notes and the Certificates of a given series will
be initially represented by one or more certificates registered in the name of
Cede & Co. ("Cede"), or any other nominee for DTC set forth in the related
Prospectus Supplement (Cede, or such other nominee, "DTC's Nominee"), and will
not be registered in the names of the holders of the Securities of such series
or their nominees. Because of this, unless and until Definitive Securities (as
defined below) for such series are issued, holders of such Securities will not
be recognized by the applicable Indenture Trustee or Trustee as "Noteholders,"
"Certificateholders" or "Securityholders," as the case may be (as such terms are
used herein or in the related Indenture and Trust Agreement, as the case may
be). Hence, unless and until Definitive Securities are issued, holders of such
Securities will only be able to exercise the rights of Securityholders
indirectly through DTC and its participating organizations. See "CERTAIN
INFORMATION REGARDING THE SECURITIES--Book-Entry Registration" and "--Definitive
Securities."
LIMITED LIQUIDITY. There can be no assurance that a secondary market for
the Notes or the Certificates will develop or, if it does develop, that it will
provide a Noteholder or a Certificateholder with liquidity of investment or will
continue for the life of the Notes or the Certificates. The related Prospectus
Supplement will indicate whether any of the underwriters identified therein
intends to make a secondary market in the Notes or the Certificates offered
thereby. No underwriter will be obligated to make any such secondary market.
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RISK OF YEAR 2000. The Servicer (including any sub-servicer), the
Guarantors, the Seller, the Administrator, the Eligible Lender Trustee and the
Indenture Trustee utilize a significant number of computer software programs and
operating systems. They are also highly dependent on computer systems operated
by third parties which include, but are not limited to, their suppliers,
customers, brokers and agents and the telephone, electric and utility companies.
To the extent that any computer system relied upon by any such party has
software applications and contains source codes that are unable to appropriately
interpret the upcoming calendar year 2000, some level of modification or
replacement of such applications or hardware may be necessary. The year 2000
issue is the result of prior computer programs being written using two digits,
rather than four digits, to define the applicable year. Any computer program
that has time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. Any such occurrence could result in a major
computer system failure or miscalculation. Several federal regulatory agencies,
including the Commission, require the entities which they regulate to take steps
to address problems which may arise in relation to the year 2000.
No assurance can be given that (i) any or all of the systems of the
Servicer (including any sub-servicer), the Guarantors, the Seller, the
Administrator, the Eligible Lender Trustee and the Indenture Trustee, or any
third party on which any of them relies, are or will be year 2000 compliant or
that (ii) the degree to which such systems are year 2000 non-compliant and the
costs required to address year 2000 issues will not adversely affect the
business, financial condition or results of operations of the respective party
or the performance of its obligations under any of the Transfer and Servicing
Agreements or an Indenture to the extent that the Securityholders are adversely
affected thereby.
YEAR 2000 COMPLIANCE OF THE DEPARTMENT. The Department has undertaken a
year 2000 compliance project to address year 2000 issues. Information regarding
the Department's year 2000 efforts can be obtained at the Department's site on
the World Wide Web at http://www/ed.gov. Officials at the Department have made
statements to the public acknowledging that the Department has been placed on
the Office of Management and Budget's "watch list" for not meeting certain
milestones toward year 2000 compliance, but have further indicated that
compliance for the Department's mission-critical systems relating to FFELP are
on schedule for completion by the Office of Management and Budget's March 1999
deadline. Any failure by the Department to resolve any year 2000 issues or any
adverse effect on the Department caused by a party on which the Department
relies as a result of year 2000 issues may have a material adverse effect on
FFELP, the Federal Guarantors and the Securityholders.
SUB-SERVICING. The Depositor expects that the Servicer for the Student
Loans held under one or more Trusts will be EFG Technologies. In such cases, the
Depositor further expects that one or more sub-servicers will be engaged to
carry out all or a substantial portion of the Servicer's duties. The initial
servicing arrangements for a particular Trust will be described in the related
Prospectus Supplement. EFG Technologies will not be substantially capitalized or
guaranteed by any affiliate. Its ability to honor any Servicer purchase or
indemnification requirement under the Loan Servicing Agreement may not be
adequate for all purposes. In such circumstances a Trust would look to the
Sub-Servicer and any additional source of security for the satisfaction of any
purchase or other indemnification responsibility which the Servicer may have
under a Loan Servicing Agreement. There can be no assurance that any
Sub-Servicer or any such additional source of security would be adequate to
satisfy the purchase or indemnification obligations imposed on the Servicer by
the Loan Servicing Agreement. Moreover, a Sub-Servicer may not be fully
obligated under the Loan Servicing Agreement to honor all of the Servicer's
purchase and indemnification obligations, in which case the source of funds to
satisfy any such omitted obligations would be either EFG Technologies or the
additional source of security, if any. Any such additional source of security
would normally be in the form of an insurance, or surety, policy issued by an
insurance carrier. In the event that the Trust were to look to a Sub-Servicer
for purchase or other indemnification obligations and such Sub-Servicer were
unable or not obligated to satisfy such purchase or other indemnification
obligations, the holder of Certificates and Notes may be adversely affected
because, among other things, Available Funds to make payments in respect of
Notes and Certificates would be diminished.
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THE SELLER
Educational Finance Group, Inc. is a Delaware corporation ("EFG") and the
ultimate successor to the business of Education Funding Services, Inc., which
was founded in 1992 as a student loan marketing firm, providing
discipline-specific loan programs for graduate health professionals. These loan
programs have generated $1.5 billion in federal and privately insured student
loans through a series of lender-guarantor-servicer partnerships.
In May 1997, EFG became a subsidiary of UICI (NASDAQ: UICI), a diversified
financial services company based in Dallas, Texas. Following the investment by
UICI, a series of acquisitions expanded the base of financial services that EFG
offers to include FFELP Loans, student health insurance, and campus-based loan
servicing. EFG markets its products to over 3,000 schools nationwide through its
25 person sales force, its direct mail and telemarketing division, and carefully
constructed affinity based relationships.
As of the date of this Prospectus the Seller is not aware of any legal
proceedings that would have a material impact on the Seller, its operations or
its ability to service Student Loans.
Student Loan Division EFG markets its loan products under various
programs, including ChiroLoan and Platinum Loan Programs, The National
Association for Equal Opportunity Loan Program and the American Medical Student
Association Loan Program. These student loan programs have generated over $1.5
billion dollars in government guaranteed and privately insured alternative
loans. EFG has made loans available to students at approximately 350
universities.
Student Health Insurance Division Through its relationship with UICI, EFG
now operates a student health insurance division in St. Petersburg Florida. The
Student Health Insurance Division is the leading provider of student health
insurance nationwide, providing coverage to 450 colleges and universities.
Loan Servicing Division EFG also acquired the campus-based loan servicing
division and part of the private loan servicing division of EduServ
Technologies. Located in Winston-Salem, North Carolina, these businesses include
servicing campus based federal Perkins loans and privately insured loans, as
well as tuition installment plans, for approximately 700 client schools.
Direct Mail & Telemarketing Division Education Loan Administration Group
("ELA") was acquired by EFG in 1997. ELA, one of the country's largest providers
of Federal Parent Loans for Undergraduate Students (PLUS Loans), is a leader in
marketing PLUS loans. Headquartered in San Diego, CA, this division of EFG
handles the marketing for PLUS Loans, as well as direct mail and phone contact
with prospective student borrowers.
CONSOLIDATION/REPAYMENT PROGRAMS
Consolidation and repayment programs are generally made available by EFG to
Student Loan borrowers. EFG has elected to participate through the EFG Eligible
Lender Trustee in the Federal Consolidation Loan Program, but maintains the
right to alter or cease such participation in the future if conditions dictate
exiting the market.
EFG offers the following repayment options via its "DebtMinder" Federal
Consolidation Loan Program. Through the "graduated repayment" feature, certain
Student Loans provide for an "interest only" period. During such period, the
borrower is required to make payment of accrued interest only; no payment of the
principal of the loan is required during such a period. At the conclusion of the
"interest only" period, such loan is required to be amortized through level
payments over the remaining term of the loan.
In other cases, EFG offers certain borrowers a "graduated phased in"
amortization of the principal of the loans. For such loans, a greater portion of
the principal amortization of the loan is required in the later stages of the
loan than would be the case if amortization were on a level payment basis.
EFG also offers an income sensitive repayment plan, pursuant to which
repayments are based on the borrower's income. Under the plan, ultimate
repayment may be delayed for up to five years.
It cannot be predicted with certainty to what extent borrowers will decide
to participate in the programs described above.
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INCENTIVE PROGRAMS
EFG has offered, and intends to continue to offer, incentive programs to
certain Student Loan borrowers. Two such programs are currently made available
by EFG and may apply to Student Loans owned by the Trusts. Under the "Grad
Advantage Program," which is made available for all FFELP Loans which enter
repayment after July 1993, if a borrower makes 36 consecutive scheduled payments
in a timely fashion, the effective interest rate charged to the borrower will be
permanently reduced by 2% per annum thereafter. Pursuant to the Grad Advantage
program, a borrower who graduates will be entitled to a reduction in the
principal of the borrower's student loan equal to the amount of the borrower's
origination and guarantee fee on subsidized loans (not to exceed 4% of the
principal), and an amount equal to the guarantee fee on unsubsidized loans (not
to exceed 1% of the principal amount of the loan). Pursuant to the "direct
repayment plan" or the "Auto Advantage Repayment Plan" borrowers who make
student loan payments electronically through automatic monthly deductions from a
savings or checking account receive a 0.25% effective interest rate reduction as
long as they continue the Auto Advantage repayment plan. It cannot be predicted
with certainty the extent to which borrowers will decide to participate in these
programs. EFG reserves the right to alter its incentive programs in the future,
and is currently updating its offerings to accommodate changes to FFELP Loan
interest rates.
The incentive programs currently or hereafter made available by EFG to
borrowers may also be made available by the Servicer to borrowers of eligible
Student Loans. Any such incentive program that effectively reduces borrower
payments or principal balances on Student Loans and is not required by the Act
will be applicable to Student Loans only if and to the extent that the Trust
that beneficially owns the subject Student Loan has received an amount that is
adequate to offset such effective yield reductions.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware in July, 1998. The
Depositor is a wholly owned subsidiary of the Seller. The Depositor was
organized for limited purposes, which include purchasing student loans from the
Seller and transferring such student loans to third parties and any activities
incidental to and necessary or convenient for the accomplishment of such
purposes. The principal executive offices of the Depositor are located at 297
North Street, Hyannis, Massachusetts 02601. The telephone number of such offices
is (508) 862-2524.
The Depositor has taken steps in structuring the transactions contemplated
hereby that are intended to prevent any voluntary or involuntary application for
relief by the Seller under any Insolvency Law from resulting in consolidation of
the assets and liabilities of the Depositor with those of the Seller. These
steps include the creation of the Depositor as a separate, limited-purpose
entity pursuant to a certificate of incorporation containing certain limitations
(including restrictions on the nature of the Depositor's business and a
restriction on the Depositor's ability to commence a voluntary case or
proceeding under any Insolvency Law). However, there can be no assurance that
the activities of the Depositor would not result in a court concluding that the
assets and the liabilities of the Depositor should be consolidated with those of
the Seller in a proceeding under any Insolvency Law.
The Depositor has received the advice of its counsel to the effect that,
subject to certain facts, assumptions and qualifications, a court would not
disregard the separate corporate existence of the Depositor and require the
consolidation of the assets and liabilities of the Depositor with the assets and
liabilities of the Seller in the event of the application of the United States
Bankruptcy Code to the Seller. Among other things, it is assumed by counsel that
the Depositor will follow certain procedures in the conduct of its affairs,
including maintaining records and books of accounts separate from those of the
Seller, refraining from commingling its assets with those of the Seller and
refraining from holding itself out as having agreed to pay, or being liable for,
the debts of the Seller. The Depositor intends to follow and has represented to
such counsel that it will follow these and other procedures related to
maintaining its separate identity. However, there can be no assurance that a
court would not conclude that the assets and liabilities of the Depositor should
be consolidated with those of the Seller. If a court were to reach such a
conclusion, or a filing were made under any Insolvency Law by or against the
Depositor, or if an attempt were made to litigate any of the foregoing issues,
delays in distributions on the Notes and the Certificates could occur or
reductions in the amounts of such distributions could result.
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It is intended by the Seller and the Depositor that the transfer of the
Student Loans by the Seller to the Depositor under the Loan Sale Agreements
constitutes a "true sale" or "contribution of capital" of the Student Loans to
the Depositor. If the transfer constitutes such a "true sale" or "contribution
of capital," the Student Loans and the proceeds thereof would not be property of
the Seller should the Seller become subject to any Insolvency Law subsequent to
the transfer of the Student Loans to the Depositor.
It will be a condition to the issuance of Securities by a Trust that the
Depositor receives the advice of counsel to the effect that, subject to certain
facts, assumptions and qualifications, in the event the Seller were to become
the subject of a proceeding under the United States Bankruptcy Code subsequent
to the transfer of Student Loans to the Depositor pursuant to the related Loan
Sale Agreement, the transfer of the Student Loans by the Seller to the Depositor
pursuant to such Loan Sale Agreement would be characterized as a "true sale" or
"contribution of capital" of the Student Loans by the Seller to the Depositor
and the Student Loans and the proceeds thereof would not be property of the
Seller under the United States Bankruptcy Code.
The Seller will also represent and warrant to the Depositor in the related
Sale Agreement that the sale of the applicable Student Loans by the Seller to
the Depositor is a valid sale of such Student Loans. In addition, the Seller,
the Depositor, the Trustee and such Trust will treat the conveyance by the
Depositor of the applicable Student Loans as a sale of such Student Loans by the
Depositor to the Trustee on behalf of such Trust, although counsel will not
render any opinion to that effect and there can be no assurance that a court
would view such conveyance as a valid and complete sale. Notwithstanding the
foregoing, if the Depositor or the Seller were to become a debtor in a
bankruptcy case and a creditor or trustee in bankruptcy of such debtor or such
debtor itself were to take the position that the sale of Student Loans by the
Seller to the Depositor or by the Depositor to a Trust should instead be treated
as a pledge of such Student Loans to secure a borrowing of such debtor, then
delays in payments of collections of such Student Loans could occur or (should
the court rule in favor of any such trustee, debtor or creditor) reductions in
the amount of such payments could result. If the transfer of Student Loans by
the Seller to the Depositor or by the Depositor to the Trustee on behalf of a
Trust is treated as a pledge instead of a sale, a tax or government lien on the
property of Seller or the Depositor arising before the transfer of Student Loans
to the Trustee on behalf of such Trust may have priority over such Trustee's
interest in such Student Loans. If for any reason the Depositor should desire
that, in the opinion of counsel, the assets of any Trust would not be considered
property of the estate of the Depositor were the Depositor to become the subject
of a proceeding under any Insolvency Law, the Depositor may elect to take steps
necessary to achieve that result, including the following steps. The Depositor
would seek to have the Seller establish an additional wholly owned special
purpose corporation that would be dedicated solely to the Trust in question. The
Depositor would sell all of its right, title and interest in and to the Trust to
the new, dedicated special purpose corporation in return for cash equal to the
fair value of such property. The Depositor would remain a party to the
applicable Trust Agreement but it would not retain any economic interest in the
assets of the Trust.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Descriptions of current trends having a material impact or expected to have
a material impact on FFELP Student Loans are set forth herein under the headings
"RISK FACTORS" AND "FEDERAL FAMILY EDUCATION LOAN PROGRAM". Descriptions of
current trends having a material impact or expected to have a material impact on
Private Student Loans will be set forth in the related Prospectus Supplement and
also herein under "RISK FACTORS".
As in the case of all companies, the Depositor must consider its year 2000
compliance. Year 2000 compliance efforts are designed to identify, address and
resolve issues that may arise because many existing computer programs use only
the last two digits rather than four digits to refer to a year. Therefore, these
computer programs may recognize a date using "00" as the year 1900 rather than
the year 2000 (the "Year 2000 Problem"). The extent of the potential impact of
the Year 2000 Problem is not yet known; however, the problem could result in
system failures or miscalculations causing disruptions of operations. See "RISK
FACTORS--Risk of Year 2000" and "--Year 2000 Compliance of the Department."
The Depositor is a special purpose entity designed for the limited purposes
of effecting the transfers of Student Loans to Trusts and the activities
incidental to or necessary or convenient for the accomplishment of such
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transfers. The Depositor currently does not have, and does not expect to have,
any information technology systems or embedded technology systems which may be
affected by the Year 2000 Problem.
Notwithstanding the foregoing, each Securityholder must rely on the
activities of third parties such as the Servicer (including any sub-servicer),
the Administrator, the Seller, the Eligible Lender Trustee, the Indenture
Trustee, the Guarantors, and the Department. Each of these parties relies on
computer software and operating systems which may be affected by the Year 2000
Problem. The Year 2000 Problem may cause Securityholders to suffer delays, or
possibly even reductions, in the receipt of principal and interest payments. See
"RISK FACTORS--Risk of Year 2000" and "--Year 2000 Compliance of the
Department". The Depositor is not in a position to evaluate, validate or certify
as to the year 2000 readiness of such parties, the costs of each party to remedy
its Year 2000 Problem, or each party's contingency plans for worst case
scenarios. If applicable, year 2000 risks and/or issues specific to a
series of Securities will be disclosed in the related Prospectus Supplement.
THE TRUSTS
GENERAL
With respect to each series of Securities, the Depositor will establish a
separate Trust pursuant to the respective Trust Agreement for the transactions
described herein and in the related Prospectus Supplement. The property of each
Trust will consist of (a) a pool of Student Loans, legal title to which is held
on behalf of each Trust by the related Eligible Lender Trustee (or the Trustee
of the Trust if the Trustee has qualified as an eligible lender under FFELP) in
the case of FFELP Student Loans and the Trustee in the case of Private Student
Loans, (b) all the rights and remedies of the Depositor as purchaser of the
Student Loans under the related Loan Sale Agreement with respect to such Student
Loans, (c) all funds collected or to be collected in respect thereof (including
any Guarantee Payments with respect thereto) on or after the applicable Cutoff
Date and (d) all moneys and investments on deposit in the Collection Account,
any Reserve Account, any Pre-Funding Account, any Collateral Reinvestment
Account, or any similar trust account identified in the related Prospectus
Supplement or any other form of credit or cash flow enhancement that may be
obtained for the benefit of holders of one or more classes of such Securities.
To the extent provided in the applicable Prospectus Supplement, the Notes will
be collateralized by the property of the related Trust. To facilitate servicing
and to minimize administrative burden and expense, one or more custodians may be
appointed to retain possession of the promissory notes representing the Student
Loans and the other documents related thereto as custodian for each Trust and
the related Indenture Trustee.
The principal offices of each Trust, the related Trustee and the Eligible
Lender Trustee will be specified in the applicable Prospectus Supplement.
ELIGIBLE LENDER TRUSTEE
The Eligible Lender Trustee for the Depositor and (unless a Trustee has
qualified as an eligible lender under FFELP) each Trust, and their permitted
assigns, will be such entity as is specified in the related Prospectus
Supplement. The Eligible Lender Trustee on behalf of the related Trust will
acquire legal title to all the related FFELP Student Loans acquired pursuant to
the related Loan Sale Agreement and will enter into a Guarantee Agreement with
each of the Federal Guarantors with respect to such FFELP Student Loans. The
Eligible Lender Trustee will qualify as an eligible lender and owner of legal
title to all FFELP Student Loans for all purposes under the Act and the Federal
Guarantee Agreements. Failure of the FFELP Student Loans to be owned by an
eligible lender would result in the loss of any Federal Guarantee Payments from
any Federal Guarantor and any federal assistance with respect to such Student
Loans. See "THE FEDERAL FAMILY EDUCATION LOAN PROGRAM--Eligible Lenders,
Students and Institutions" and "--Federal Insurance and Reinsurance of Federal
Guarantors."
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If a Trustee is qualified as an eligible lender under FFELP, which will be
disclosed in the applicable Prospectus Supplement, it will perform substantially
the same function for the applicable Trust as the Eligible Lender Trustee will
perform for the Depositor and would have performed for such Trust.
TRUSTEE
The Trustee for each Trust will be such entity as is specified in the
related Prospectus Supplement. The Trustee may also serve as the Eligible Lender
Trustee or itself be qualified as an eligible lender under FFELP. The Trustee's
liability in connection with the issuance and sale of the Notes and the
Certificates is limited solely to the express obligations of the Trustee set
forth in the related Trust Agreement. A Trustee may resign at any time, in which
event the Administrator, or its successor, will be obligated to appoint a
successor trustee. The Administrator of a Trust may also remove the Trustee if
the Trustee becomes insolvent. In such circumstances, the Administrator will be
obligated to appoint a qualified successor trustee. Any resignation or removal
of a Trustee and appointment of a successor trustee will not become effective
until acceptance of the appointment by the successor trustee.
PAYMENT OF NOTES
Upon the payment in full of all outstanding Notes of a given series and the
satisfaction and discharge of the related Indenture, the Trustee will succeed to
all the rights of the Indenture Trustee, and the Certificateholders of such
series will succeed to all the rights of the Noteholders of such series, under
the related Loan and Sale Agreement, or as otherwise provided therein.
TERMINATION
With respect to each Trust, the obligations of the Servicer, the Depositor,
the Administrator, the related Trustee and the related Indenture Trustee
pursuant to the related Transfer and Loan Servicing Agreements will terminate
upon (i) the maturity or other liquidation of the last related Student Loan and
the disposition of any amount received upon liquidation of any such remaining
Student Loan and (ii) the payment to the Noteholders and the Certificateholders
of the related series of all amounts required to be paid to them pursuant to
such Transfer and Loan Servicing Agreements.
The Depositor or any party named in the related Prospectus Supplement will
be permitted at its option to repurchase from, or arrange for the purchase from,
the related Trustee, as of the end of any Collection Period immediately
preceding a Distribution Date, if the then outstanding Pool Balance is a
percentage specified in the related Prospectus Supplement or less of the Initial
Pool Balance (as defined in the related Prospectus Supplement), all remaining
related Student Loans at a price equal to the aggregate Purchase Amounts thereof
(but not less than the minimum purchase amount specified in the related
Prospectus Supplement) as of the end of such Collection Period, which amounts
will be used to retire the related Notes and Certificates concurrently
therewith, as set forth in the related Prospectus Supplement. Upon termination
of a Trust, any remaining assets of such Trust, after giving effect to any final
distributions to Noteholders and Certificateholders of the related series, will
be transferred to the related Reserve Account and any assets credited to the
related Reserve Account will be transferred to the Depositor.
If so provided in the related Prospectus Supplement, any Student Loans
remaining in the Trust as of the end of the Collection Period immediately
preceding the Date specified in the related Prospectus Supplement will be
offered for sale by the Indenture Trustee in accordance with the auction
procedures set forth in the related Prospectus Supplement. EFG, its affiliates,
the Depositor, the Servicer and unrelated third parties may offer bids to
purchase such Student Loans on such Date, The Indenture Trustee will accept the
highest bid equal to or in excess of the aggregate Purchase Amounts of such
Student Loans as of the end of such Collection Period. The proceeds of such sale
will be used to redeem all related Notes and to retire the relatedCertificates.
The Trustee will not accept any bid for the Student Loans that is not sufficient
to redeem all related Notes and to retire the related Certificates.
From time to time the Depositor, or an assignee of the the Depositor, may
at its option purchase from the Trust, as of the end of any Monthly Collection
Period immediately preceding a Monthly Payment Date, one or more Student Loans
that are to be refinanced by Federal Consolidation Loans. Such Student Loans
shall be
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purchased at a price equal to the aggregate Purchase Amounts thereof as of the
end of such Monthly Collection Period. The purchase price of the Student Loans
may be paid in cash or by delivery of a promissory note of the Depositor secured
by and payable soley from the Student Loans, including the amounts received upon
prepayment of the Student Loans with proceeds of the Federal Consolidation
Loans. If such amounts, together with other funds of the Depositor, are not
sufficient to retire the Depositor's note within three (3) Business Days of
release of the Student Loans, the Student Loans shall be redeposited in the
Trust and the note cancelled. Any such promissory note shall bear interest at a
rate that is equal to the yield on the Student Loans purchased by the Depositor.
THE SERVICER
EFG Technologies (the "Servicer") is a division of EFG. If so specified in
the Prospectus Supplement for a series of Securities, pursuant to the related
Loan Servicing Agreements, the Servicer will agree to service and perform all
other related tasks with respect to all the Student Loans acquired by the
Trustee on behalf of the related Trust. The Servicer is required to perform in
accordance with the related Loan Servicing Agreements all services and duties
customary to the servicing of Student Loans and to do so in the same manner as
the Servicer has serviced Student Loans on behalf of other lenders and in
compliance with all applicable standards and procedures. See "THE SELLER--Loan
Servicing Division" and "RISK FACTORS" in this Prospectus.
The related Prospectus Supplement may set forth certain additional
information with respect to the Servicer. The Servicer is expected to act as a
master servicer and is expected to perform its servicing obligations under the
applicable Loan Servicing Agreements through subservicing agreements with
affiliated or unrelated third-party loan servicers. See "DESCRIPTION OF THE
TRANSFER AND SERVICING AGREEMENTS--Servicing Procedures" and "RISK
FACTORS--Sub-Servicing" in this Prospectus.
A Servicer in addition to or other than EFG Technologies may be specified
for a series of Securities in the related Prospectus Supplement. Moreover, EFG
Technologies may be moved into a separate subsidiary corporation by EFG.
USE OF PROCEEDS
The net proceeds from the sale of Securities of a given series will be
applied by the applicable Trust to purchase the related Student Loans on the
Closing Date from the Depositor and to make the initial deposit into the Reserve
Account or Pre-Funding Account, if any. The Depositor will use such net proceeds
paid to it with respect to any such Trust to purchase the Student Loans from the
Seller.
THE STUDENT LOAN POOLS
GENERAL
The Student Loans to be sold by the Seller to the Depositor (or the
Eligible Lender Trustee on behalf of the Depositor in the case of the FFELP
Student Loans) pursuant to the related Loan Sale Agreement will be selected from
Student Loans originated under FFELP or a Private Loan program by several
criteria, including that each Student Loan (i) is guaranteed as to principal and
interest by a Guarantor (and, in the case of FFELP Student Loans, that Guarantor
is a Federal Guarantor and is in turn reinsured by the Department in accordance
with the terms of FFELP), (ii) was originated in the United States of America,
its territories or its possessions under and in accordance with FFELP or a
Private Loan program, (iii) contains terms in accordance with those required by
FFELP or a Private Loan program, the applicable Guarantee Agreements and other
applicable requirements, (iv) provides for regular payments that fully amortize
the amount financed over its original term to maturity (exclusive of any
deferral or forbearance periods) and (v) satisfies the other criteria, if any,
set forth in the related Prospectus Supplement. No selection procedures believed
by the Depositor to be adverse to the Securityholders of any series will be used
in selecting the related Student Loans.
The Student Loans that comprise assets of each Trust will be owned by the
related Trustee, as trustee on behalf of such Trust (although legal title to
FFELP Student Loans will be held by the Eligible Lender Trustee). The Eligible
Lender Trustee will also enter into Guarantee Agreements with the Federal
Guarantors pursuant to
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which each of such FFELP Student Loans will be guaranteed by one of such
Guarantors. See "THE TRUSTS--Eligible Lender Trustee."
Information with respect to each pool of Student Loans for a given Trust
will be set forth in the related Prospectus Supplement, including, to the extent
appropriate, the composition, the distribution by loan type, loan payment
status, and states of borrowers' residence and the portion of such Student Loans
guaranteed by the specified Guarantors.
In the case of each series for which the related Trust may acquire or
originate Student Loans after the related Cutoff Date, information with respect
to the Student Loans eligible to be acquired or originated by the related Trust
will be set forth in the related Prospectus Supplement as will information
regarding the duration and conditions of any related Funding Period or Revolving
Period, the circumstances under which Additional Fundings will be made during
such period, and, if Additional Fundings may continue to be made after such
period, the circumstances under which such Additional Fundings will be made.
As of the related Cutoff Date for a Trust, Student Loans which are more
than 30 days delinquent will not equal or exceed 20% (by principal balance) of
the Student Loans included in such Trust and none of the Student Loans included
in such Trust will be non-performing Student Loans. Non-performing Student Loans
are Student Loans which are in default and which the Seller expects to write off
as a loss.
ORIGINATION AND MARKETING PROCESS
The Act and the Private Loan programs specify rules regarding loan
origination practices which lenders must comply with in order for the Student
Loans to be guaranteed and to be eligible to receive federal assistance in the
case of FFELP Student Loans and the benefits of a private guarantee program, in
the case of Private Student Loans. Lenders of FFELP Student Loans are prohibited
from offering points, premiums, payments or other inducements, directly or
indirectly, to any educational institution, guarantor or individual in order to
secure FFELP Loan applications, and no lender may conduct unsolicited mailings
of FFELP Loan applications to students who have not previously received student
loans from that lender.
Generally in the case of FFELP Loans the student and school complete the
combined application with promissory note and mail or electronically transmit it
either to a lender or directly to the applicable Federal Guarantor. Both the
lender and such Guarantor must approve such application, including confirming
that such application is complete and that it (and the prospective borrower and
institution) complies with all applicable requirements of the Act and the
requirements of such Guarantor. The Act requires that each Federal Guarantor
have procedures designed to assure that it guarantees FFELP Loans only to
students attending institutions which meet the requirements of the Act. Certain
lenders establish maximum default rates for institutions whose students they
will serve. Each lender will only make loans that are approved by the applicable
Guarantor (consistent with the approval requirements of the Act and the
Guarantor). For each such application that is approved, the applicable Guarantor
will issue a guarantee certificate to the lender, which will then cause the loan
to be disbursed (typically in multiple installments) and a disclosure statement
confirming the terms of the FFELP Loan to be sent to the student borrower.
These procedures differ slightly for Federal Consolidation Loans. Private
Loan programs have established origination processes which will be described in
the related Prospectus Supplements.
SERVICING AND COLLECTIONS PROCESS
The applicable Federal Guarantee Agreements and the Act require the holder
of FFELP Loans to cause specified procedures, including due diligence procedures
and the taking of specific steps at specific intervals, to be performed with
respect to the servicing of the FFELP Loans. These procedures are designed to
ensure that such FFELP Loans are repaid on a timely basis by or on behalf of
borrowers. The Servicer agrees to perform such servicing and collection
procedures wth respect to the FFELP Student Loans on behalf of each Trust
pursuant to the related FFELP Loan Servicing Agreement. Such procedures
generally include periodic attempts to contact any delinquent borrower by
telephone and by mail, commencing with one written notice within the first ten
days of delinquency and including multiple written notices and telephone calls
to the borrower thereafter at specified times during any such delinquency. All
telephone calls and letters are automatically registered, and a synopsis of each
call or the mailing of each letter is noted in the Servicer's loan file for the
borrower. The Servicer is also required to perform skip tracing procedures on
delinquent borrowers whose current location is
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unknown, including contacting such borrowers' schools and references. Failure to
comply with the established procedures could adversely affect the ability of the
Eligible Lender Trustee, as holder of legal title to the FFELP Student Loans on
behalf of the related Trust, to realize the benefits of any Federal Guarantee
Agreement or, to receive the benefits of federal assistance from the Department
with respect thereto. Failure to comply with certain of the established
procedures with respect to a FFELP Student Loan may also result in the denial of
coverage under a Federal Guarantee Agreement for certain accrued interest
amounts, in circumstances where such failure has not caused the loss of the
guarantee of the principal of such FFELP Student Loan. Private Loan programs and
Private Guarantees require that prescribed servicing and collection processes be
followed in order for the owner of the related Private Loans to obtain the
benefits of the Private Guarantees. As described herein in the case of FFELP,
non-compliance with these processes may result in denial of claims with respect
to Private Loans and a loss of revenue to the related Trust. See "RISK
FACTORS--Risk That Failure to Comply with Student Loan Origination and Servicing
Procedures for Student Loans May Adversely Affect the Trust's Ability to Pay
Principal and Interest on the Related Notes and Certificates."
At prescribed times prior to submitting a claim for payment under a
Guarantee Agreement for a delinquent Student Loan, the Servicer generally is
required to notify the applicable Guarantor of the existence of such
delinquency. These notices advise the Guarantor of seriously delinquent accounts
and allow the Guarantor to make additional attempts to collect on such loans
prior to the filing of claims. Any Student Loan which is delinquent beyond a
certain number of days is considered to be in default, after which the Servicer
will submit a claim for reimbursement therefor to the applicable Guarantor.
Failure to file a claim within specified time frames of delinquency may result
in denial of the guarantee claim with respect to such Student Loan and failure
to file such a claim within certain shorter specified time frames may result in
a denial of certain interest amounts included in such claims. With respect to
FFELP Student Loans, the Servicer's failure to file a guarantee claim in a
timely fashion would constitute a breach of its covenants under the related
FFELP Loan Servicing Agreement and, unless otherwise specified in the Prospectus
Supplement for a given series of Securities, would, if as a result of such
failure the related guaranty payment is no longer available to the related
Trust, create an obligation of the Servicer to purchase or arrange for the
purchase of the applicable FFELP Student Loan from the applicable Trustee (and
also the Eligible Lender Trustee) on behalf of the related Trust. With respect
to FFELP Student Loans, the obligation of the Servicer to purchase or arrange
for such a purchase will constitute the sole remedy available to Securityholders
or the Trustee for such a failure by the Servicer. See "DESCRIPTION OF THE
TRANSFER AND SERVICING AGREEMENTS--Servicer Covenants."
CLAIMS AND RECOVERY RATES
Certain historical information concerning guarantee claims and recovery
rates of the Guarantors for the Student Loans held by the related Trust as of
the applicable Closing Date with respect to each series of Securities will be
set forth in each Prospectus Supplement. There can be no assurance that the
claim and recovery experience on any pool of Student Loans with respect to a
given Trust will be comparable to prior experience or to any such information.
FEDERAL FAMILY EDUCATION LOAN PROGRAM
GENERAL
The Federal Family Education Loan Program ("FFELP") under Title IV of the
Higher Education Act of 1965, as amended (such Act, together with all rules and
regulations promulgated thereunder by the Department and/or the Guarantors, the
"Act"), provides for loans to be made to students or parents of students
enrolled in eligible institutions to finance a portion of the costs of attending
school. As described herein, payment of principal and interest with respect to
the FFELP Loans is guaranteed by the applicable Guarantor against default,
death, bankruptcy or disability of the applicable borrower and a closing of or a
false certification by such borrower's school. The Guarantors are entitled,
subject to certain conditions, to be reimbursed by the Department for from 100%
to 75% of the amount of each Guarantee Payment made pursuant to a program of
federal reinsurance under the Act. In addition, the related Eligible Lender
Trustee, as a holder of legal title to the FFELP Student Loans on behalf of a
Trust, is entitled to receive from the Department certain interest subsidy
payments and special allowance payments with respect to certain of such FFELP
Student Loans as described herein.
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FFELP provides for loans to students and parents of students which are
(i) guaranteed by a Guarantor and reinsured by the federal government or (ii)
directly insured by the federal government. Several types of FFELP Loans are
currently authorized under the Act: (i) loans to students who demonstrate need
("Federal Stafford Loans"); (ii) loans to students who do not demonstrate need
or who need additional loans to supplement their Federal Stafford Loans
("Federal Unsubsidized Stafford Loans"); (iii) loans to parents of students
("Federal PLUS Loans") who are dependents and whose estimated costs of
attendance exceed the available Federal Unsubsidized Stafford Loans, Federal
Stafford Loans and other financial aid; and (iv) loans to consolidate the
borrower's obligations under various federally authorized student loan programs
into a single loan (each, a "Federal Consolidation Loan"). Prior to July 1,
1994, the Act also authorized loans to graduate and professional students,
independent undergraduate students and, under certain circumstances, dependent
undergraduate students, to supplement their Federal Stafford Loans ("Federal
Supplemental Loans to Students" or "Federal SLS Loans"). The description and
summaries of the Act, FFELP, the Guarantee Agreements and the other statutes,
regulations and amendments referred to in this Prospectus describe or summarize
the material provisions of such statutes, regulations and agreements but do not
purport to be comprehensive and are qualified in their entirety by reference to
each such statute, regulation or document. There can be no assurance that future
amendments or modifications will not materially change any of the terms or
provisions of the programs described in this Prospectus or of the statutes and
regulations implementing these programs. See "RISK FACTORS--Risk that Change in
Law Will Adversely Affect Student Loans, Guarantors, the Depositor or the
Servicer."
LEGISLATIVE AND ADMINISTRATIVE MATTERS
Both the Act and the regulations promulgated thereunder have been the
subject of extensive amendments in recent years and there can be no assurance
that further amendment will not materially change the provisions described
herein or the effect thereof. The 1992 Amendments to the Act (the "1992
Amendments") extended the principal provisions of FFELP to September 30, 1998
(or, in the case of borrowers who have received loans prior to that date,
September 30, 2002, except that authority to make Federal Consolidation Loans
expired on September 30, 1998). The Higher Education Amendments of 1998 (the
"1998 Reauthorization Bill") further extended the principal provisions of FFELP
through June 30, 2003.
The 1993 Act made a number of changes to the Federal Student Loan programs,
including imposing on lenders or holders of FFELP Loans certain fees and
affecting the Department's financial assistance to Federal Guarantors by
reducing the percentage of claim payments the Department will reimburse to
Federal Guarantors, reducing more substantially the insurance premiums and
default collections that Federal Guarantors are entitled to receive and/or
retain and allowing the Department to reduce the administrative fees it pays to
Federal Guarantors. In addition, such legislation contemplated replacement of a
minimum of approximately 60% of the Federal Student Loan programs with direct
lending by the Department by 1998. The expansion of the new program may involve
increasing reductions in the volume of loans made under the existing programs,
which could result in increased costs for EFG and the Servicer due to reduced
economies of scale. It is expected that the volume of new loans held and
serviced by EFG and the Servicer will decrease due to the new program, although
such entities have not experienced a significant reduction to date and any such
reduction will not necessarily be equal to the percentage by which existing
Federal Student Loan programs are replaced by the new program. As these
reductions occur, EFG and the Servicer could experience increased costs due to
reduced economies of scale to the extent the volume of loans held by EFG and the
Servicer is reduced. Such cost increases could affect the ability of the
Servicer to satisfy its obligations to service the Student Loans or the
obligations of the Seller and the Servicer to repurchase Student Loans in the
event of certain breaches of their respective representations and warranties or
covenants. See "DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Sale of
Student Loans; Representations and Warranties" and "--Servicer Covenants." Such
volume reductions could also reduce revenues received by Federal Guarantors that
are available to pay claims on defaulted Student Loans. Finally, the level of
competition in existence in the secondary market for loans made under the
existing programs could be reduced, resulting in fewer potential buyers of the
FFELP Loans and lower prices available in the secondary market for those loans.
Further, the Department is implementing a direct Federal Consolidation Loan
program, which may further reduce the volume of FFELP Loans and increase the
prepayment of existing FFELP Loans. The volume of existing loans that may be
prepaid in this fashion is not determinable at this time.
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RECENT DEVELOPMENTS--EMERGENCY STUDENT LOAN CONSOLIDATION ACT OF 1997. On
November 13, 1997, President Clinton signed into law the Emergency Student Loan
Consolidation Act of 1997, which made significant changes to the Federal
Consolidation Loan Program. These changes include: (1) providing that federal
direct student loans are eligible to be included in a Federal Consolidation
Loan; (2) changing the borrower interest rate on new Federal Consolidation Loans
(previously a fixed rate based on the weighted average of the loans
consolidated, rounded up to the nearest whole percent) to the annually variable
rate applicable to Stafford Loans (i.e., the bond equivalent rate at the last
auction in May of 91-day Treasury Bills plus 3.10%, not to exceed 8.25% per
annum); (3) providing that the portion of a Federal Consolidated Loan that is
comprised of Subsidized Stafford Loans retains its subsidy benefits during
periods of deferment; and (4) establishing prohibitions against various forms of
discrimination in the making of Federal Consolidation Loans. Except for the last
of the above changes, all such provisions expired on September 30, 1998. The
combination of the change to a variable rate and the 8.25% interest cap reduced
the lender's yield in most cases below the rate that would have been applicable
under the previous weighted average formula.
RECENT DEVELOPMENTS--FY 1998 BUDGET. In the 1997 Budget Reconciliation Act
(P.L. 105-33), several changes were made to the Higher Education Act that impact
the FFELP. These provisions include, among other things, requiring federal
guarantors to return $1 billion of their reserves to the U.S. Treasury by
September 1, 2002 (to be paid in annual installments), greater restrictions on
use of reserves by federal guarantors and a continuation of the Administrative
Cost Allowance payable to federal guarantors (which is a fee paid to federal
guarantors equal to 0.85% of new loans guaranteed).
RECENT DEVELOPMENTS--1998 AMENDMENTS. On May 22, 1998, Congress passed,
and on June 9, 1998, the President signed into law, a temporary measure relating
to the Higher Education Act and FFELP loans as part of the Intermodal Surface
Transportation Efficiency Act of 1998 (the "1998 Amendments") that revised
interest rate changes under the FFELP that were scheduled to become effective on
July 1, 1998. For loans made during the period July 1, 1998 through
September 30, 1998, the borrower interest rate for Stafford Loans and
Unsubsidized Stafford Loans is reduced to a rate of 91-day Treasury Bill Rate
plus 2.30% (1.70% during school, grace and deferment), subject to a maximum rate
of 8.25%. As described below, the formula for Special Allowance Payments on
Stafford Loans and Unsubsidized Stafford Loans is calculated to produce a yield
to the loan holder of 91-day Treasury Bill Rate plus 2.80% (2.20% during school,
grace and deferment).
RECENT DEVELOPMENTS--1998 REAUTHORIZATION BILL. On October 7, 1998,
President Clinton signed into law the Higher Eduction Amendments of 1998 (the
"1998 Reauthorization Bill"), which enacted significant reforms in FFELP. The
major provisions of the 1998 Reauthorization Bill include the following:
o All references to a "transition" to full implementation of the Federal
Direct Student Loan Program were deleted from the FFELP statute.
o Guarantor reserve funds were restructured so that federal guarantors are
provided with additional flexibility in choosing how to spend certain
funds they receive.
o Additional recall of reserve funds by the Secretary of Education (the
"Secretary") was mandated, amounting to $85 million in fiscal year 2002,
$82.5 million in fiscal year 2006, and $82.5 million in fiscal year 2007.
However, certain minimum reserve levels are protected from recall.
o The administrative cost allowance was replaced by two (2) new payments, a
Student Loan processing and issuance fee equal to 65 basis points (40
basis points for loans made on or after October 1, 1993) paid at the time
a loan is guaranteed, and an account maintenance fee of 12 basis points
(10 basis points for fiscal years 2001-2003) paid annually on outstanding
guaranteed Student Loans.
o The percentage of collections on defaulted Student Loans a federal
guarantor is permitted to retain is reduced from 27% to 24% (23%
beginning on October 1, 2003) plus the complement of the reinsurance
percentage applicable at the time a claim was paid to the lender on the
Student Loan.
o Federal reinsurance provided to federal guarantors is reduced from 98% to
95% for Student Loans first disbursed on or after October 1, 1998.
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o The delinquency period required for a loan to be declared in default is
increased from 180 days to 270 days for loans on which the first day of
delinquency occurs on or after the date of enactment of the 1998
Reauthorization Bill.
o Interest rates charged to borrowers on Stafford Loans, and the yield for
Stafford Loan holders established by the 1998 Amendments, were made
permanent.
o Federal Consolidation Loan interest rates were revised to equal the
weighted average of the loans consolidated rounded up to the nearest
one-eighth of 1%, capped at 8.25%. When the 91-day Treasury Bill Rate
plus 3.1% exceeds the borrower's interest rate, Special Allowance
Payments are made to make up the difference.
o The lender-paid offset fee on Federal Consolidation Loans of 1.05% is
reduced to 0.62% for Loans made pursuant to applications received on or
after October 1, 1998 and on or before January 31, 1999.
o The Federal Consolidation Loan interest rate calculation was revised to
reflect the rate for Federal Consolidation Loans, and will be effective
for loans on which applications are received on or after February 1,
1999.
o Lenders are required to offer extended repayment schedules to new
borrowers after the enactment of the 1998 Reauthorization Bill who
accumulate after such date outstanding loans under FFELP totaling more
than $30,000, under these extended schedules the repayment period may
extend up to 25 years subject to certain minimum repayment amounts.
o The Secretary is authorized to enter into six (6) voluntary flexible
agreements with federal guarantors under which various statutory and
regulatory provisions can be waived.
o Federal Consolidation Loan lending restrictions are revised to allow
lenders who do not hold one of the borrower's Underlying Federal Loans to
issue a Federal Consolidation Loan to a borrower whose Underlying Federal
Loans are held by multiple holders.
o Inducement restrictions were revised to permit federal guarantors and
lenders to provide assistance to schools comparable to that provided to
schools by the Secretary under the Federal Direct Student Loan Program.
o The Secretary is now required to pay off Student Loan amounts owed by
borrowers due to failure of the borrower's school to make a tuition
refund allocable to the Student Loan.
o Discharge of FFELP and certain other Student Loans in bankruptcy is now
limited to cases of undue hardship regardless of whether the Student Loan
has been due for more than seven (7) years prior to the bankruptcy
filing.
The new recall of reserves and reduced reinsurance for federal guarantors
increases the risk that resources available to the Federal Guarantors to meet
their guarantee obligations will be signficantly reduced.
ELIGIBLE LENDERS, STUDENTS AND EDUCATIONAL INSTITUTIONS
Lenders eligible to make loans under FFELP generally include banks, savings
and loan associations, credit unions, pension funds, insurance companies, and
under certain conditions, schools and guarantors. FFELP Loans may only be made
to a "qualified student", generally defined as a United States citizen or
national or otherwise eligible individual under federal regulations who (a) has
been accepted for enrollment or is enrolled and is maintaining satisfactory
progress at a participating educational institution, (b) is carrying at least
one-half of the normal full-time academic workload for the course of study the
student is pursuing, as determined by such institution, (c) has agreed to notify
promptly the holder of the loan of any address change, and (d) for Federal
Stafford Loans, meets the application "need" requirements for the particular
loan program. Each loan is to be evidenced by an unsecured promissory note.
Eligible schools include institutions of higher education and proprietary
institutions. Institutions of higher education must meet certain standards,
which generally provide that the institution (i) only admits persons who have a
high school diploma or its equivalent, (ii) is legally authorized to operate
within a state, (iii) provides not
36
<PAGE>
less than a two-year program with credit acceptable toward a bachelor's degree,
(iv) is a public or non-profit institution and (v) is accredited by a nationally
recognized accrediting agency or is determined by the Department to meet the
standards of an accredited institution. Eligible proprietary institutions of
higher education include business, trade and vocational schools meeting
standards which provide that the institution (i) only admits persons who have a
high school diploma or its equivalent, or persons who are beyond the age of
compulsory school attendance and have the ability to benefit from the training
offered (as defined in the Act), (ii) is authorized by a state to provide a
program of vocational education designed to fit individuals for useful
employment in recognized occupations, (iii) has been in existence for at least
two years, (iv) provides at least a six-month training program to prepare
students for gainful employment in a recognized occupation and (v) is accredited
by a nationally recognized accrediting agency or is specially accredited by the
Department.
With specified exceptions, institutions are excluded from consideration as
educational institutions if the institution (i) offers more than 50 percent of
its courses by correspondence, (ii) enrolls 50 percent or more of its students
in correspondence courses, (iii) has a student enrollment in which more than 25
percent of the students are incarcerated or (iv) has a student enrollment in
which more than 50 percent of the students are admitted without a high school
diploma or its equivalent on the basis of their ability to benefit from the
education provided (as defined by statute and regulation). Further, schools are
specifically excluded from participation if (i) the educational institution has
filed for bankruptcy, (ii) the owner, or its chief executive officer, has been
convicted or pleaded "nolo contendere" or "guilty" to a crime involving the
acquisition, use or expenditure of federal student aid funds, or has been
judicially determined to have committed fraud involving funds under the student
aid program or (iii) the educational institution has a cohort default rate in
excess of the rate prescribed by the Act. In order to participate in the
program, the eligibility of a school must be approved by the Department under
standards established by regulation.
FINANCIAL NEED ANALYSIS
Student Loans may generally be made in amounts, subject to certain limits
and conditions, to cover the student's estimated costs of attendance, including
tuition and fees, books, supplies, room and board, transportation and
miscellaneous personal expenses (as determined by the institution). Each Federal
Stafford Loan and Federal Unsubsidized Stafford Loan borrower must undergo a
financial need analysis, which requires the borrower to submit a financial need
analysis form to a multiple data entry processor that forwards the information
to the federal central processor. The central processor evaluates the parents'
and student's financial condition under federal guidelines and calculates the
amount that the student and/or the family must contribute towards the student's
cost of education (the "family contribution"). After receiving information on
the family contribution, the institution then subtracts the family contribution
from the cost for the student to attend such institution to determine the
student's eligibility for grants, loans, and work assistance. The difference
between the amount of grants and Federal Stafford Loans for which the borrower
is eligible and the student's estimated cost of attendance (the "Unmet Need")
may be borrowed through Federal Unsubsidized Stafford Loans subject to annual
and aggregate loan limits prescribed in the Act. Parents may finance the family
contribution amount through their own resources or through Federal PLUS Loans.
SPECIAL ALLOWANCE PAYMENTS
The Act provides for quarterly special allowance payments ("Special
Allowance Payments") to be made by the Department to holders of FFELP Loans to
the extent necessary to ensure that such holder receives at least a specified
market interest rate of return on such loans. The rates for Special Allowance
Payments are based on formulas that differ according to the type of loan, the
date the loan was originally made or insured and the type of funds used to
finance such loan (tax-exempt or taxable). A Special Allowance Payment is made
for each of the 3-month periods ending March 31, June 30, September 30 and
December 31. The Special Allowance Payment equals the average unpaid principal
balance (including interest permitted to be capitalized) of all eligible loans
held by such holder during such period multiplied by the special allowance
percentage. The special allowance percentage is computed by (i) determining the
average of the bond equivalent rates of 91-Day Treasury bills auctioned for such
3-month period ("91-Day T-Bill"), (ii) subtracting the applicable borrower
interest rate on such loan from such average, (iii) adding the applicable
Special Allowance Margin (as set forth below) to the
37
<PAGE>
resultant percentage and (iv) dividing the resultant percentage by 4; provided,
however, that, if the amount determined by the application of clauses (i),
(ii) and (iii) is in the negative, the Special Allowance Margin is zero.
<TABLE>
<CAPTION>
DATE OF DISBURSEMENT SPECIAL ALLOWANCE MARGIN
- ----------------------- ---------------------------------------------------------------------
<S> <C>
Prior to 10/17/86 3.50%
10/17/86 - 09/30/92 3.25%
10/01/92 - 06/30/95 3.10%
07/01/95 - 06/30/98 2.50% (Federal Stafford Loans and Federal Unsubsidized Stafford Loans
that are In-School, Grace or Deferment); 3.10% (Federal Loans and
Federal Unsubsidized Stafford Loans that are in repayment and all
other loans)
07/01/98 - 06/30/03 2.2% (During In-School, Grace or Deferment Status); 2.8% (During
repayment periods)
</TABLE>
Special Allowance Payments are available on variable rate Federal PLUS and
Federal SLS Loans only if the variable rate, which is reset annually based on
the 52-week Treasury Bill, exceeds the applicable maximum rate. Such maximum is
generally between 9% and 12%.
FEDERAL STAFFORD LOANS
The Act provides for (i) federal insurance or reinsurance of Federal
Stafford Loans made by eligible lenders to qualified students, (ii) federal
interest subsidy payments on certain eligible Federal Stafford Loans to be paid
by the Department to holders of the loans in lieu of the borrower making
interest payments ("Interest Subsidy Payments") and (iii) Special Allowance
Payments representing an additional subsidy paid by the Department to the
holders of eligible Federal Stafford Loans (such federal reinsurance
obligations, together with those obligations referred to in clauses (ii) and
(iii) above, being collectively referred to herein as "Federal Assistance").
Interest. The borrower's interest rate on a Federal Stafford Loan may be
fixed or variable. Federal Stafford Loan interest rates are summarized in the
chart below.
<TABLE>
<CAPTION>
TRIGGER DATE(1) BORROWER RATE(2) MAXIMUM RATE INTEREST RATE MARGIN
- ------------------------ ----------------------------------- ------------------------ ------------------------
<S> <C> <C> <C>
Prior to 01/01/81....... 7% 7% N/A
01/01/81 - 09/12/83..... 9% 9% N/A
09/13/83 - 06/30/88..... 8% 8% N/A
07/01/88 - 09/30/92..... 8% for 48 months; thereafter, 8% for 48 months, 3.25%
91-Day T-Bill + Interest Rate then 10%
Margin
10/01/92 - 06/30/94..... 91-Day T-Bill + Interest Rate 9% 3.10%
Margin
07/01/94 - 06/30/95..... 91-Day T-Bill + Interest Rate 8.25% 3.10%
Margin
07/01/95 - 06/30/98..... 91-Day T-Bill + Interest Rate 8.25% 2.50% (During In-
Margin School, Grace or
Deferment status);
3.10% (in repayment)
07/01/98 - 06/30/03..... 91-Day T-Bill + Interest Rate 8.25% 1.7% (During In-School
Margin(3) Grace or Deferment
status); 2.3% (in
repayment)
</TABLE>
- ------------------
(1) The Trigger Date for Federal Stafford Loans made before October 1, 1992 is
the first day of enrollment period for which a borrower's first Federal
Stafford Loan is made and for Federal Stafford Loans made on October 1, 1992
and after the Trigger Date is the date of the disbursement of a borrower's
first Federal Stafford Loan.
(Footnotes continued on next page)
38
<PAGE>
(Footnotes continued from previous page)
(2) The rate for variable rate Federal Stafford Loans applicable for any
12-month period beginning on July 1 and ending on June 30, is determined on
the preceding June 1 and is equal to the lesser of (a) the applicable
Maximum Rate or (b) the sum of (i) the bond equivalent rate of 91-day
T-Bills auctioned at the final auction held prior to such June 1 and
(ii) the applicable Interest Rate Margin.
(3) Lenders will receive Special Allowance on these Federal Stafford Loans to
ensure a yield equal to 91-Day T-Bill plus 2.2% (In-School; Grace or
Deferment) or 2.8% (in repayment).
The 1992 Amendments provide that, for fixed rate loans made on or after
July 23, 1992 and for certain loans made to new borrowers on or after July 1,
1988, the lender must have converted by January 1, 1995 the interest rate on
such loans to an annual interest rate adjusted each July 1 equal to (a) for
certain loans made between July 1, 1988 and July 23, 1992, the 91-day T-Bill
rate at the final auction prior to the preceding June 1 plus 3.25% and (b) for
loans made on or after July 23, 1992, the 91-day T-Bill rate at the final
auction prior to the preceding June 1 plus 3.10%, in each case capped at the
applicable interest rate for such loan existing prior to the conversion. The
variable interest rate does not apply to loans made prior to July 23, 1992
during the first 48 months of repayment.
Interest Subsidy Payments. The Department is responsible for paying
interest on Federal Stafford Loans while the borrower is a qualified student,
during a Grace Period or during certain Deferral Periods. The Department makes
quarterly Interest Subsidy Payments to the owner of Federal Stafford Loans in
the amount of interest accruing on the unpaid balance thereof prior to the
commencement of repayment or during any Deferral Periods. The Act provides that
the owner of an eligible Federal Stafford Loan shall be deemed to have a
contractual right against the United States of America to receive Interest
Subsidy Payments (and Special Allowance Payments) in accordance with its
provisions. Receipt of Interest Subsidy Payments and Special Allowance Payments
is conditioned on compliance with the requirements of the Act, including
satisfaction of certain need-based criteria (and the delivery of sufficient
information by the borrower and the lender to the Department to confirm the
foregoing) and continued eligibility of such loan for federal reinsurance. Such
eligibility may be lost, however, if the loans are not held by an eligible
lender, in accordance with the requirement of the Act and the applicable Federal
Guarantee Agreements. See "--Eligible Lenders, Students and Educational
Institutions" above, "RISK FACTORS--Risk that Failure to Comply with Student
Loan Origination and Servicing Procedures for Student Loans May Adversely Affect
the Trust's Ability to Pay Principal and Interest on the Related Notes and
Certificates," "FORMATION OF THE TRUSTS--Eligible Lender Trustee" and
"DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Servicing Procedures."
The Depositor expects that substantially all of the Federal Stafford Loans that
are to be conveyed to a Trust will be eligible to receive Interest Subsidy
Payments and Special Allowance Payments.
Interest Subsidy Payments and Special Allowance Payments are generally
received within 45 days to 60 days after submission to the Department of the
applicable claim forms for any given calendar quarter, although there can be no
assurance that such payments will in fact be received from the Department within
that period. See "RISK FACTORS--Variability of Actual Cash Flows; Risk of
Shortfalls to Holders of Notes and Certificates Resulting from Inability of
Related Indenture Trustee to Liquidate Student Loans." The Servicer has agreed
to prepare and file with the Department all such claims forms and any other
required documents or filings on behalf of each Eligible Lender Trustee as owner
of the related FFELP Student Loans on behalf of each Trust. The Servicer has
also agreed to assist the Eligible Lender Trustee in monitoring, pursuing and
obtaining such Interest Subsidy Payments and Special Allowance Payments, if any,
with respect to such FFELP Student Loans. The Eligible Lender Trustee will be
required to remit Interest Subsidy Payments and Special Allowance Payments it
receives with respect to such FFELP Student Loans within two business days of
receipt thereof to the related Collection Account.
39
<PAGE>
Loan Limits. The Act requires that loans be disbursed by eligible lenders
in at least two separate and equal disbursements. The Act limited the amount a
student can borrow in any academic year and the amount he or she can have
outstanding in the aggregate. The following chart sets forth the current and
historic loan limits.
<TABLE>
<CAPTION>
ALL STUDENTS(1) INDEPENDENT STUDENTS(1)
--------------- ------------------------
BASE AMOUNT ADDITIONAL MAXIMUM
SUBSIDIZED AND UNSUBSIDIZED AGGREGATE
SUBSIDIZED UNSUBSIDIZED ON ONLY ON OR TOTAL
SUBSIDIZED ON OR AFTER OR AFTER AFTER AMOUNT
BORROWER'S ACADEMIC LEVEL PRE-1/1/87 1/1/87 10/1/93(2) 7/1/94(3) IN
- --------------------------------------------- ---------- ----------- --------------- ------------ --------
<S> <C> <C> <C> <C> <C>
Undergraduate (per year)
1st year................................... $ 2,500 $ 2,625 $ 2,625 $ 4,000 $ 6,625
2nd year................................... $ 2,500 $ 2,625 $ 3,500 $ 4,000 $ 7,500
3rd year and above......................... $ 2,500 $ 4,000 $ 5,500 $ 5,000 $ 10,500
Graduate (per year).......................... $ 5,000 $ 7,500 $ 8,500 $ 10,000 $ 18,500
Aggregate Limited
Undergraduate.............................. $ 12,500 $17,250 $23,000 $ 23,000 $ 46,000
Graduate (including undergraduate)......... $ 25,000 $54,000 $65,000 $ 73,000 $138,500
</TABLE>
- ------------------
(1) The loan limits are inclusive of both Federal Stafford Loans and Federal
Direct Student Loans.
(2) These amounts represent the combined maximum loan amount per year for
Federal Stafford and Federal Unsubsidized Stafford Loans. Accordingly, the
maximum amount that a student may borrow under a Federal Unsubsidized
Stafford Loan is the difference between the combined maximum loan amount and
the amount the student received in the form of a Federal Stafford Loan.
(3) Independent undergraduate students, graduate students or professional
students may borrow these additional amounts. In addition, dependent
undergraduate students may also receive these additional loan amounts if the
parents of such students are unable to provide the family contribution
amount and it is unlikely that the student's parents will qualify for a
Federal PLUS Loan.
The annual loan limits are reduced in some instances where the student has
less than a full academic year remaining in his or her program. The Department
has discretion to raise these limits to accommodate highly specialized or
exceptionally expensive courses of study.
Repayment. Repayment of principal on a Federal Stafford Loan generally
does not commence while a student remains a qualified student, but generally
begins upon expiration of the applicable Grace Period, as described below. Any
borrower may voluntarily prepay without premium or penalty any loan and in
connection therewith may waive any Grace Period or Deferral Period. In general,
each loan must be scheduled for repayment over a period of not more than ten
years after the commencement of repayment. New borrowers on or after October 7,
1998 who accumulate outstanding loans under FFELP totaling more than $30,000,
are entitled to extended repayment schedules of up to 25 years subject to
certain minimum repayment amounts. The Act currently requires minimum annual
payments of $600 or, if greater, the amount of accrued interest for that year,
unless the borrower and the lender agree to lesser payments. Effective July 1,
1993, the Act and regulations promulgated thereunder require lenders to offer
the choice of a standard, graduated or income-sensitive repayment schedule to
all borrowers who receive a loan on or after that date. For Stafford Loans
entering repayment on or after October 1, 1995, borrowers may choose among
several repayment options, including the option to make interest only payments
for limited periods.
Grace Periods, Deferral Periods and Forbearance Periods. Repayment of
principal on a Federal Stafford Loan must generally commence following a period
of (a) not less than 9 months or more than 12 months (with respect to loans for
which the applicable interest rate is 7% per annum) and (b) not more than 6
months (with respect to loans for which the applicable interest rate is 9% per
annum or 8% per annum and for loans to first-time borrowers on or after July 1,
1988) after the borrower ceases to pursue at least a half-time course of study
(a "Grace Period"). However, during certain other periods (each, a "Deferral
Period") and subject to certain conditions, no principal repayments need be
made, including periods when the student has returned to an eligible educational
institution on a full-time basis or is pursuing studies pursuant to an approved
graduate fellowship program, or when the student is a member of the United
States Armed Forces or a volunteer under the Peace
40
<PAGE>
Corps Act or the Domestic Volunteer Service Act of 1973, or when the borrower is
temporarily totally disabled, or periods during which the borrower may defer
principal payments because of temporary financial hardship. For new borrowers to
whom loans are first disbursed on or after July 1, 1993, payment of principal
may be deferred only while the borrower is at least a half-time student or is in
an approved graduate fellowship program or is enrolled in a rehabilitation
program, or when the borrower is seeking but unable to find full-time
employment, subject to a maximum deferment of three years, or when for any
reason the lender determines that payment of principal will cause the borrower
economic hardship, also subject to a maximum deferment of three years. The 1992
Amendments also permit and in some cases require forbearance of loan collection
in certain circumstances (each such period, a "Forbearance Period").
FEDERAL UNSUBSIDIZED STAFFORD LOANS
The Federal Unsubsidized Stafford Loan program created under the 1992
Amendments is designed for students who do not qualify for the maximum Federal
Stafford Loan due to parental and/or student income and assets in excess of
permitted amounts. The basic requirements for Federal Unsubsidized Stafford
Loans are essentially the same as those for the Federal Stafford Loans,
including with respect to provisions governing the interest rate, the annual
loan limits and the Special Allowance Payments. The terms of the Federal
Unsubsidized Stafford Loans, however, differ in some respects. The federal
government does not make Interest Subsidy Payments on Federal Unsubsidized
Stafford Loans. The borrower must either begin making interest payments within
60 days after the time the loan is disbursed or permit capitalization of the
interest by the lender until repayment begins. Federal Unsubsidized Stafford
Loan borrowers are required to pay, upon disbursement, a 6.5% insurance fee to
the Department, though no guarantee fee may be charged by the applicable Federal
Guarantor. Effective July 1, 1994, the maximum insurance premium charged by the
Federal Guarantor is reduced to 1% and the origination fee is 3%. Subject to the
same loan limits established for Federal Stafford Loans, the student may borrow
up to the amount of such student's Unmet Need. Lenders are authorized to make
Federal Unsubsidized Stafford Loans applicable for periods of enrollment
beginning on or after October 1, 1992.
FEDERAL PLUS AND FEDERAL SLS LOAN PROGRAMS
The Act authorizes Federal PLUS Loans to be made to parents of eligible
dependent students and previously authorized Federal SLS Loans to be made to
certain categories of students. After July 1, 1993, only parents who do not have
an adverse credit history or who can secure an endorser without an adverse
credit history are eligible for Federal PLUS Loans. The basic provisions
applicable to Federal PLUS and Federal SLS Loans are similar to those of Federal
Stafford Loans with respect to the federal insurance and reinsurance on the
loans. However, Federal PLUS and Federal SLS Loans differ from Federal Stafford
Loans, particularly because Interest Subsidy Payments are not available under
the Federal PLUS and Federal SLS Programs and in some instances Special
Allowance Payments are more restricted.
Loan Limits. Federal PLUS and Federal SLS Loans disbursed prior to July 1,
1993 are limited to $4,000 per academic year with a maximum aggregate amount of
$20,000. Federal SLS Loan limits for loans disbursed on or after July 1, 1993
depended upon the class year of the student and the length of the academic year.
The annual loan limit for Federal SLS Loans first disbursed on or after July 1,
1993 ranged from $4,000 for first and second year undergraduate borrowers to
$10,000 for graduate borrowers, with a maximum aggregate amount of $23,000 for
undergraduate borrowers and $73,000 for graduate and professional borrowers.
After July 1, 1994, for purposes of new loans being originated, the Federal SLS
programs were merged with the Federal Unsubsidized Stafford Loan program with
the borrowing limits reflecting the combined eligibility under both programs.
The only limit on the annual and aggregate amounts of Federal PLUS Loans first
disbursed on or after July 1, 1993 is the cost of the student's education less
other financial aid received, including scholarship, grants and other student
loans.
41
<PAGE>
Interest. The interest rate determination for a PLUS or SLS loan is
dependent on when the loan was originally made and disbursed and the period of
enrollment. The interest rates for PLUS and SLS loans are summarized in the
following chart.
<TABLE>
<CAPTION>
INTEREST
TRIGGER DATE BORROWER RATE(1) MAXIMUM RATE(2) RATE MARGIN
- ---------------------------- ---------------------------------------- ----------------- -----------
<S> <C> <C> <C>
Prior to 10/01/81........... 9% 9% N/A
10/01/81-10/30/82........... 14% 14% N/A
11/01/82-06/30/87........... 12% 12% N/A
07/01/87-09/30/92........... 52-Week Treasury + Interest Rate Margin 12% 3.25%
10/01/92-6/30/94............ 52-Week Treasury + Interest Rate Margin PLUS 10%, SLS 11% 3.10%
07/01/94-06/30/98........... 52-Week Treasury + Interest Rate Margin 9% 3.10%
(SLS repealed 07/01/94)
07/01/98-06/30/03........... 91-Day T-Bill + Interest Rate Margin 9% 3.10%
</TABLE>
- ------------------
(1) The Trigger Date for PLUS and SLS loans made before October 1, 1992 is the
first day of enrollment period for which the loan is made, and for PLUS and
SLS loans made on October 1, 1992 and after the Trigger Date is the date of
the disbursement of the loan, respectively.
(2) For PLUS or SLS loans that carry a variable rate, the rate is set annually
for 12-month periods beginning on July 1 and ending on June 30 on the
preceding June 1 and is equal to the lesser of (a) the applicable maximum
rate and (b) the sum of (i) the bond equivalent rate of 52-week Treasury
bills auctioned at the final auction held prior to such June 1, and (ii) the
applicable Interest Rate Margin.
A holder of a PLUS or SLS Loan is eligible to receive Special Allowance
Payments during any quarter if (a) the sum of (i) the average of the bond
equivalent rates of 91-day Treasury bills auctioned during such quarter and (ii)
the Interest Rate Margin exceeds (b) the Maximum Rate.
Repayment, Deferments. The 1992 Amendments provide Federal SLS borrowers
with the option to defer commencement of repayment of principal until the
commencement of repayment of Federal Stafford Loans. Otherwise, repayment of
principal of Federal PLUS and Federal SLS Loans is required to commence no later
than 60 days after the date of disbursement of such loan, subject to certain
deferral and forbearance provisions. The deferral provisions which apply are
more limited than those which apply to Federal Stafford Loans. Repayment of
interest, however, may be deferred and capitalized during certain periods of
educational enrollments and periods of unemployment or hardship as specified
under the Act. Further, whereas Interest Subsidy Payments are not available for
such deferments, interest may be capitalized during such periods upon agreement
of the lender and borrower. Maximum loan repayment periods and minimum payment
amounts are the same as for Federal Stafford Loans.
A borrower may refinance all outstanding Federal PLUS Loans under a single
repayment schedule for principal and interest, with the new repayment period
calculated from the date of repayment of the most recent included loan. The
interest rate of such refinanced loan shall be the weighted average of the rates
of all Federal PLUS Loans being refinanced. A second type of refinancing enables
an eligible lender to reissue a Federal PLUS Loan which was initially originated
at a fixed rate prior to July 1, 1987 in order to permit the borrower to obtain
the variable interest rate available on Federal PLUS Loans on and after July 1,
1987. If a lender is unwilling to refinance the original Federal PLUS Loan, the
borrower may obtain a loan from another lender for the purpose of discharging
the loan and obtaining a variable interest rate.
FEDERAL CONSOLIDATION LOAN PROGRAM
The Act authorizes a program under which certain borrowers may consolidate
one or more of their Student Loans into a single loan (each, a "Federal
Consolidation Loan") insured and reinsured on a basis similar to Federal
Stafford Loans. Federal Consolidation Loans may be made in an amount sufficient
to pay outstanding principal, unpaid interest, late charges and collection costs
on all federally insured or reinsured student loans incurred under FFELP
selected by the borrower, as well as loans made pursuant to various other
federal student loan programs and which may have been made by different lenders.
Under this program, a lender may make a Federal Consolidation Loan to an
eligible borrower at the request of the borrower if the lender holds an
42
<PAGE>
outstanding loan of the borrower or the borrower certifies that he has been
unable to obtain a Federal Consolidation Loan from the holders of the
outstanding loans made to him. A borrower who is unable to obtain a Federal
Consolidation Loan from an eligible lender or a Federal Consolidation Loan with
an income-sensitive repayment plan acceptable to the borrower may obtain a
Federal Consolidation Loan under the direct loan program. Federal Consolidation
Loans that were made on or after July 1, 1994 have no minimum loan amount,
although Federal Consolidation Loans for less than $7,500 must be repaid in ten
years. Applications for Federal Consolidation Loans received on or after January
1, 1993 but prior to July 1, 1994, were available only to borrowers who had
aggregate outstanding student loan balances of at least $7,500; for applications
received before January 1, 1993, Federal Consolidation Loans are available only
to borrowers who have aggregate outstanding student loan balances of at least
$5,000. The borrowers must be either in repayment status or in a grace period
preceding repayment and, for applications received prior to January 1, 1993, the
borrower must not have been delinquent by more than 90 days on any student loan
payment; for applications received on or after January 1, 1993, delinquent or
defaulted borrowers are eligible to obtain Federal Consolidation Loans if they
will reenter repayment through loan consolidation. For applications received on
or after January 1, 1993, borrowers may, within 180 days of the origination of a
Federal Consolidation Loan, add additional loans made prior to consolidation
("Add-on Federal Consolidation Loans") for consolidation therewith. If the
borrower obtains loans subsequent to the Federal Consolidation Loan, the
borrower may consolidate the new loans and the Federal Consolidation Loan. The
interest rate and term of such Federal Consolidation Loan, following the
consolidation with the related Add-on Federal Consolidation Loans, may be
recomputed within the parameters permitted by the Act. For applications received
on or after January 1, 1993, married couples who agree to be jointly and
severally liable will be treated as one borrower for purposes of loan
consolidation eligibility. For applications received on or after November 13,
1997 through September 30, 1998, student loan borrowers may include federal
direct loans in Federal Consolidation Loans.
Federal Consolidation Loans bear interest at a rate which equals the
weighted average of interest rates on the unpaid principal balances of
outstanding loans, rounded to the nearest whole percent, with a minimum rate of
9% for loans originated prior to July 1, 1994. For Federal Consolidation Loans
made on or after July 1, 1994, such weighted average interest rate must be
rounded up to the nearest whole percent. However, Federal Consolidation Loans
made on or after November 13, 1997 through September 30, 1998 will bear interest
at the annual variable rate applicable to Stafford Loans. Federal Consolidation
Loans for which the application is received on or after October 1, 1998, bear
interest at a rate equal to the weighted average interest rate of the loans
consolidated, rounded up to the nearest one-eighth percent and capped at 8.25%.
Interest on Federal Consolidation Loans accrues and, for applications received
prior to January 1, 1993, is to be paid without Interest Subsidy by the
Department. For Federal Consolidation Loans received on or after January 1,
1993, all interest of the borrower is paid during all periods of Deferment.
However, Federal Consolidation Loan applications received on or after
August 10, 1993 will only be subsidized if all of the underlying loans being
consolidated were subsidized Federal Stafford Loans; provided, however, that in
the case of Federal Consolidation Loans made on or after November 13, 1997, that
portion of the Federal Consolidation Loan that is comprised of Subsidized
Stafford Loans will retain its subsidy benefits during periods of deferment.
Borrowers may elect to accelerate principal payments without penalty. Further,
no insurance premium may be charged to a borrower and no insurance premium may
be charged to a lender in connection with a Federal Consolidation Loan. However,
a fee may be charged to the lender by a Federal Guarantor to cover the costs of
increased or extended liability with respect to a Federal Consolidation Loan,
and lenders must pay a monthly rebate fee at an annualized rate of 1.05% for
Federal Consolidation Loans disbursed on or after October 1, 1993 (or 0.62% per
annum for loans on which applications are received between October 1, 1998 and
January 31, 1999.) Special Allowance Payments are made on Consolidation Loans
whenever the rate charged by the borrower is limited by the 9%/8.25% cap.
However, for applications received on or after October 1, 1998, Special
Allowance Payments are paid in order to afford the lender a yield equal to the
91-day T-Bill plus 3.1% whenever that formula exceeds the borrower's interest
rate.
Repayment of Federal Consolidation Loans begins within 60 days after
discharge of all prior loans which are consolidated. Repayment schedule options
must include, for applications received on or after January 1, 1993, the
establishment of graduated or income sensitive repayment plans, subject to
certain limits applicable to the sum of the Federal Consolidation Loan and the
amount of the borrower's other eligible student loans outstanding. The lender
may, at its option, include such graduated and income sensitive repayment plans
for applications received prior to that date. Generally, depending on the total
of loans outstanding, repayment may be scheduled
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over periods no shorter than ten but not more than 25 years in length. For
applications received on or after January 1, 1993, the maximum maturity schedule
is 30 years for Federal Consolidation Loans of $60,000 or more.
All eligible loans of a borrower paid in full through consolidation are
discharged in the consolidation process when the new Federal Consolidation Loan
is issued.
FEDERAL GUARANTORS
The Act authorizes Federal Guarantors to support education financing and
credit needs of students at post-secondary schools. The Act encourages every
state either to establish its own agency or to designate another Federal
Guarantor in cooperation with the Secretary. Under various programs throughout
the United States of America, Federal Guarantors insure and sometimes service
guaranteed student loans. The Federal Guarantors are reinsured by the federal
government for from 80% to 100% of each default claim paid, depending on their
claims experience, for loans disbursed prior to October 1, 1993, from 78% to 98%
of each default claim paid for loans disbursed on or after October 1, 1993, and
from 75% to 95% of each default claim paid for loans disbursed on or after
October 1, 1998. Federal Guarantors are reinsured by the federal government for
100% of death, disability, bankruptcy, closed school and false certification
claims paid. Loans guaranteed under the lender of last resort provisions of the
Act are also 100% guaranteed and reinsured. See "--Federal Insurance and
Reinsurance of Federal Guarantors" below.
Federal Guarantors collect a one-time insurance premium ranging from 0% to
3% of the principal amount of each guaranteed loan, depending on the Federal
Guarantor. Federal Guarantors are prohibited from charging insurance premiums on
loans made under the Federal Unsubsidized Stafford Loan program prior to July 1,
1994. On such loans made prior to July 1, 1994, the Act requires that a 6.5%
combined loan origination fee and insurance premium be paid by the borrower on
Federal Unsubsidized Stafford Loans. This fee is passed through to the
Department by the originating lender. Effective July 1, 1994, the maximum
insurance premium and origination fee for Federal Stafford Loans and Federal
Unsubsidized Stafford Loans are 1% and 3%, respectively.
Each Federal Student Loan to be sold to an Eligible Lender Trustee on
behalf of a Trust will be guaranteed as to principal and interest by a Federal
Guarantor pursuant to a guarantee agreement (each, a "Guarantee Agreement")
between such Federal Guarantor and the applicable Eligible Lender Trustee. The
applicable Prospectus Supplement for each Trust will identify each related
Federal Guarantor for the FFELP Student Loans held by such Trust as of the
applicable Closing Date and the amount of such FFELP Student Loans it is
guaranteeing for such Trust.
The 1993 Act granted the Department broad powers over Federal Guarantors
and their reserves. These powers include the authority to require a Federal
Guarantor to return all reserve funds to the Department if the Department
determines such action is necessary to ensure an orderly termination of the
Federal Guarantor, to serve the best interests of the student loan programs or
to ensure the proper maintenance of such Federal Guarantor's funds or assets.
The Department is also now authorized to direct a Federal Guarantor to return a
portion of its reserve funds which the Department determines is unnecessary to
pay the program expenses and contingent liabilities of the Federal Guarantor
and/or to cease any activities involving the use of the Federal Guarantor's
reserve funds or assets which the Department determines is a misapplication or
otherwise improper. The Department may also terminate a Federal Guarantor's
reinsurance agreement if the Department determines that such action is necessary
to protect the federal fiscal interest. These various changes create a
significant risk that the resources available to the Federal Guarantors to meet
their guarantee obligations will be significantly reduced.
The 1998 Reauthorization Bill created additional risks that the resources
available to Federal Guarantors to meet their guarantee obligations will be
further reduced in the future by mandating additional recall of guarantor
reserves and reducing reinsurance to guarantors from 98% to 95%.
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FEDERAL INSURANCE AND REINSURANCE OF FEDERAL GUARANTORS
A Federal Student Loan is considered to be in default for purposes of the
Act when the borrower fails to make an installment payment when due or to comply
with other terms of the loan, and if the failure persists for a certain period
of time as specified by the Act. Under certain circumstances a loan deemed
ineligible for Federal Reinsurance may be restored to eligibility. Procedures
for such restoration of eligibility are discussed below. If the loan in default
is covered by federal loan insurance in accordance with the provisions of the
Act, the Department is to pay the applicable Federal Guarantor, as insurance
beneficiary, the amount of the loss sustained thereby, upon notice and
determination of such amount, within 90 days of such notification, subject to
reduction as described below.
If the loan is guaranteed by a Federal Guarantor, the eligible lender is
reimbursed by the Federal Guarantor for 100% (or not less than 98% for loans
disbursed on or after October 1, 1993, or 95% for loans disbursed on or after
October 1, 1998) of the unpaid principal balance of the defaulted loan plus
accrued and unpaid interest thereon so long as the eligible lender has properly
originated and serviced such loan. Under the Act, the Department enters into a
guarantee agreement with each Federal Guarantor, which provides for federal
reinsurance for amounts paid to eligible lenders by the Federal Guarantor with
respect to defaulted loans.
Pursuant to such agreements, the Department also agrees to reimburse a
Federal Guarantor for 100% of the amounts expended in connection with a claim
resulting from the death, bankruptcy, total and permanent disability of a
borrower, the death of a student whose parent is the borrower of a Federal PLUS
Loan or claims by borrowers who received loans on or after January 1, 1986 and
who are unable to complete the programs in which they are enrolled due to school
closure or borrowers whose borrowing eligibility was falsely certified by the
eligible institution; such claims are not included in calculating a Federal
Guarantor's claims rate experience for federal reinsurance purposes. The
Department also agrees to reimburse a Federal Guarantor for 100% of the amounts
expended in connection with claims on loans made under the lender of last resort
provisions. The Department is also required to repay the unpaid balance of any
loan if the borrower files for relief under Chapter 12 or 13 of the Bankruptcy
Code or files for relief under Chapter 7 or 11 of the Bankruptcy Code and
commences an action for a determination of dischargeability under
Section 523(a)(8)(b) of the Bankruptcy Code, and is authorized to acquire the
loans of borrowers who are at high risk of default and who request an
alternative repayment option from the Department.
The amount of such reinsurance payment to the Federal Guarantor for default
claims is subject to reduction based upon the annual default claims rate of the
Federal Guarantor, calculated to equal the amount of federal reinsurance claims
paid by the Department to the Federal Guarantor during any fiscal year as a
percentage of the original principal amount of guaranteed loans in repayment at
the end of the prior federal fiscal year. The formula is summarized as follows:
<TABLE>
<CAPTION>
CLAIMS RATE OF FEDERAL GUARANTOR REIMBURSEMENT TO FEDERAL GUARANTOR BY THE DEPARTMENT OF EDUCATION(1)
- ------------------------------------- --------------------------------------------------------------------------
<S> <C>
0% to and including 5%............... 100%
Greater than 5% to and including 9%.. 100% of claims to and including 5%; 90% of claims greater than 5%
Greater than 9%...................... 100% of claims to and including 5%; 90% of claims greater than 5%
to and including 9%; and 80% of claims greater than 9%
</TABLE>
- ------------------
(1) The federal reimbursement has been reduced to 98%, 88% and 78% for loans
disbursed on or after October 1, 1993, and to 95%, 85% and 75% for loans
disbursed on or after October 1, 1998.
The claims experience is not accumulated from year to year, but is
determined solely on the basis of claims in any one federal fiscal year compared
with the original principal balance of loans in repayment at the beginning of
that year.
Pursuant to the 1992 Amendments and additional changes made in 1997 and
1998, Federal Guarantors are required to maintain a current minimum reserve
level of at least 0.25% of the total attributable amount of all outstanding
loans guaranteed by the Federal Guarantor. If the Federal Guarantor fails to
achieve the minimum reserve level in any two consecutive years, if the Federal
Guarantor's federal annual claims rate equals or exceeds 5% or if the Department
determines the Federal Guarantor's administrative or financial condition
jeopardizes its continued ability to perform its responsibilities, the
Department may require the Federal Guarantor to submit and
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implement a management plan to address the deficiencies. The Department may
terminate the Federal Guarantor's agreements with the Department if the
Guarantor fails to submit the required plan, or fails to improve its
administrative or financial condition substantially, or if the Department
determines the Federal Guarantor is in danger of financial collapse. In such
event, the Department is required to assume responsibility for the functions of
such Federal Guarantor and in connection therewith is authorized to undertake
specified actions to assure the continued payment of claims, including maturity
advances to Federal Guarantors to cover immediate cash needs, transferring of
guarantees to another Federal Guarantor, or transfer of guarantees to the
Department itself. No assurance can be made that the Department will under any
given circumstance exercise its right to terminate a reimbursement agreement
with a Federal Guarantor or make a determination that such Federal Guarantor is
unable to meet its guarantee obligations.
The Act requires that, subject to compliance with the Act, the Secretary
must pay all amounts which may be required to be paid under the Act as a result
of certain events of death, disability, bankruptcy, school closure or false
certification by the educational institution described therein. It further
provides that Federal Guarantors shall be deemed to have a contractual right
against the United States of America to receive reinsurance in accordance with
its provisions. In addition, the 1992 Amendments provide that if the Department
determines that a Federal Guarantor is unable to meet its insurance obligations,
holders of loans may submit insurance claims directly to the Department until
such time as the obligations are transferred to a new Federal Guarantor capable
of meeting such obligations or until a successor Federal Guarantor assumes such
obligations. No assurance can be made that the Department would under any given
circumstances assume such obligation to assure satisfaction of a guarantee
obligation by exercising its right to terminate a reimbursement agreement with a
Federal Guarantor or by making a determination that such Federal Guarantor is
unable to meet its guarantee obligations.
PRIVATE LOAN PROGRAMS
Descriptions of each Private Guarantor and the Private Loan programs
relating to the Private Student Loans in a Trust will be set forth in the
related Prospectus Supplement.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
The weighted average life of the Notes and the Certificates of any series
will generally be influenced by the rate at which the principal balances of the
related Student Loans are paid, which payment may be in the form of scheduled
amortization or prepayments. (For this purpose, the term "prepayments" includes
prepayments in full or in part (including pursuant to Federal Consolidation
Loans), as a result of (i) borrower default, death, disability or bankruptcy,
(ii) a closing of or a false certification by the borrower's school and
(iii) subsequent liquidation or collection of Guarantee Payments with respect
thereto and as a result of Student Loans being repurchased by the Seller or the
Servicer (with respect to FFELP Student Loans) for administrative reasons.) All
of the Student Loans are prepayable at any time without penalty to the borrower.
The rate of prepayment of Student Loans is influenced by a variety of economic,
social and other factors, including as described below and in the applicable
Prospectus Supplement. In general, the rate of prepayments may tend to increase
to the extent that alternative financing becomes available at prevailing
interest rates which fall significantly below the interest rates applicable to
the Student Loans. However, because many of the Student Loans bear interest that
either actually or effectively is floating, it is impossible to predict whether
changes in prevailing interest rates will be similar to or will vary from
changes in the interest rates on the Student Loans. In addition, under certain
circumstances, the Seller or the Servicer (with respect to FFELP Student Loans)
will be obligated to repurchase or arrange for the repurchase of Student Loans
from a given Trust pursuant to the related Loan Sale Agreement or FFELP Loan
Servicing Agreement, as applicable, as a result of breaches of applicable
representations and warranties or covenants. See "DESCRIPTION OF THE TRANSFER
AND SERVICING AGREEMENTS--Sale of Student Loans; Representations and Warranties"
and "--Servicer Covenants." See also "DESCRIPTION OF THE TRANSFER AND SERVICING
AGREEMENTS--Termination" regarding the Servicer's option to purchase the Student
Loans from a given Trust. Also, in the case of a Trust having a Funding Period
or Revolving Period, the addition of Student Loans to the Trust during such
period could affect the weighted average life of the Securities of the related
series. See "DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Additional
Fundings" herein.
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On the other hand, scheduled payments with respect to, and maturities of,
the Student Loans may be extended, including pursuant to applicable grace,
deferral and forbearance periods. The rate of payment of principal of the Notes
and the Certificates and the yield on the Notes and the Certificates may also be
affected by the rate of defaults resulting in losses on Student Loans, by the
severity of those losses and by the timing of those losses, which may affect the
ability of the Guarantors to make Guarantee Payments with respect thereto.
In light of the above considerations, there can be no assurance as to the
amount of principal payments to be made on the Notes or the Certificates of a
given series on each Distribution Date, since such amount will depend, in part,
on the amount of principal collected on the related pool of Student Loans during
the applicable Collection Period. Any reinvestment risks resulting from a faster
or slower incidence of prepayment of Student Loans will be borne entirely by the
Noteholders and the Certificateholders of a given series. The related Prospectus
Supplement may set forth certain additional information with respect to the
maturity and prepayment considerations applicable to the particular pool of
Student Loans and the related series of Securities.
POOL FACTORS AND TRADING INFORMATION
Each of the "Note Pool Factor" for each class of Notes and the "Certificate
Pool Factor" for each class of Certificates (each, a "Pool Factor") will be a
seven-digit decimal which the Servicer will compute prior to each Distribution
Date indicating the remaining outstanding principal balance of such class of
Notes or the remaining Certificate Balance for such class of Certificates,
respectively, as of that Distribution Date (after giving effect to distributions
to be made on such Distribution Date), as a fraction of the initial outstanding
principal balance of such class of the Notes or the initial Certificate Balance,
for such class of Certificates, respectively. Each Pool Factor will be 1.0000000
as of the Closing Date, and thereafter will decline to reflect reductions in the
outstanding principal balance of the applicable class of Notes or reductions of
the Certificate Balance of the applicable class of Certificates, as applicable.
A Securityholder's portion of the aggregate outstanding principal balance of the
related class of Notes or of the aggregate outstanding Certificate Balance for
the related class of Certificates, as applicable, is the product of (i) the
original denomination of that Securityholder's Note or Certificate and (ii) the
applicable Pool Factor.
If so provided in the related Prospectus Supplement with respect to each
Trust, the Securityholders will receive reports on or about each Distribution
Date concerning the payments received on the Student Loans, the Pool Balance (as
such term is defined in the related Prospectus Supplement, the "Pool Balance"),
the applicable Pool Factor and various other items of information.
Securityholders of record during any calendar year will be furnished information
for tax reporting purposes not later than the latest date permitted by law. See
"CERTAIN INFORMATION REGARDING THE SECURITIES--Reports to Securityholders."
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DESCRIPTION OF THE NOTES
GENERAL
With respect to each Trust, one or more classes of Notes of a given series
will be issued pursuant to the terms of an Indenture, a form of which has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. The following summary describes certain terms of the Notes and the
Indenture. The summary does not purport to be complete and is qualified in its
entirety by reference to all the provisions of the Notes and the Indenture.
Unless otherwise specified in the related Prospectus Supplement, each class
of Notes will initially be represented by one or more Notes, in each case
registered in the name of the nominee of DTC (together with any successor
depository selected by the Administrator, the "Depository") except as set forth
below. Unless otherwise specified in the related Prospectus Supplement, the
Notes will be available for purchase in denominations of $1,000 and integral
multiples thereof in book-entry form only. The Depositor has been informed by
DTC that DTC's nominee will be Cede, unless another nominee is specified in the
related Prospectus Supplement. Accordingly, such nominee is expected to be the
holder of record of the Notes of each class. Unless and until Definitive Notes
are issued under the limited circumstances described herein or in the related
Prospectus Supplement, no Noteholder will be entitled to receive a physical
certificate representing a Note. All references herein and in the related
Prospectus Supplement to actions by Noteholders of Notes held in book-entry form
refer to actions taken by DTC upon instructions from its participating
organizations (the "Participants") and all references herein to distributions,
notices, reports and statements to Noteholders refer to distributions, notices,
reports and statements to DTC or its nominee, as the registered holder of the
Notes, as the case may be, for distribution to Noteholders in accordance with
DTC's procedures with respect thereto. See "CERTAIN INFORMATION REGARDING THE
SECURITIES--Book-Entry Registration" and "--Definitive Securities."
PRINCIPAL AND INTEREST ON THE NOTES
The timing and priority of payment, seniority, allocations of losses,
Interest Rate and amount of or method of determining payments of principal and
interest on each class of Notes of a given series will be described in the
related Prospectus Supplement. The right of holders of any class of Notes to
receive payments of principal and interest may be senior or subordinate to the
rights of holders of any other class or classes of Notes of such series, as
described in the related Prospectus Supplement. Unless otherwise provided in the
related Prospectus Supplement, payments of interest on the Notes of such series
will be made prior to payments of principal thereon. Each class of Notes may
have a different Interest Rate, which may be a fixed, variable or adjustable
Interest Rate or any combination of the foregoing. The related Prospectus
Supplement will specify the Interest Rate for each class of Notes of a given
series or the method for determining such Interest Rate. See also "CERTAIN
INFORMATION REGARDING THE SECURITIES--Fixed Rate Securities" and "--Floating
Rate Securities." One or more classes of Notes of a series may be redeemable in
whole or in part under the circumstances specified in the related Prospectus
Supplement, including as a result of the Depositor's, or such other party's as
may be named in the related Prospectus Supplement, exercising its option to
purchase the related Student Loans.
Unless otherwise specified in the related Prospectus Supplement, payments
to Noteholders of all classes within a series in respect of interest will have
the same priority. Under certain circumstances, the amount available for such
payments could be less than the amount of interest payable on the Notes on any
of the dates specified for payments in the related Prospectus Supplement (each,
a "Distribution Date"), in which case each class of Noteholders will receive its
ratable share (based upon the aggregate amount of interest due to such class of
Noteholders) of the aggregate amount available to be distributed in respect of
interest on the Notes of such series. See "DESCRIPTION OF THE TRANSFER AND
SERVICING AGREEMENTS--Distributions" and "--Credit and Cash Flow Enhancement."
In the case of a series of Notes which includes two or more classes of
Notes, the sequential order and priority of payment in respect of principal and
interest, and any schedule or formula or other provisions applicable to the
determination thereof, of each such class will be set forth in the related
Prospectus Supplement. Payments in respect of principal and interest of any
class of Notes will be made on a pro rata basis among all the Noteholders of
such class.
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In the case of a series of Notes relating to a Trust having a Pre-Funding
Account or Collateral Reinvestment Account, the Notes of such series will be
redeemed in part on the Distribution Date on or immediately following the last
day of the related Funding Period or Revolving Period, respectively, in the
event that any amount remains on deposit in the applicable account after giving
effect to all Additional Fundings on or prior to such date, in an aggregate
principal amount described in the related Prospectus Supplement.
See "DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Credit and Cash
Flow Enhancement--Reserve Account" for a description of the Reserve Account and
the distribution of amounts in excess of the Specified Reserve Account Balance
(as defined in the related Prospectus Supplement).
THE INDENTURE
Modification of Indenture. With respect to each Trust, with the consent of
the holders of a majority of the outstanding Notes of the related series, the
Indenture Trustee and the Trust may execute a supplemental indenture to add
provisions to, or change in any manner or eliminate any provisions of, the
Indenture with respect to the Notes, or to modify (except as provided below) in
any manner the rights of the related Noteholders.
Without the consent of the holder of each such outstanding Note affected
thereby, however, no supplemental indenture will (i) change the due date of any
installment of principal of or interest on any such Note or reduce the principal
amount thereof, the interest rate specified thereon or the redemption price with
respect thereto or change any place of payment where or the coin or currency in
which any such Note or any interest thereon is payable, (ii) impair the right to
institute suit for the enforcement of certain provisions of the related
Indenture regarding payment, (iii) reduce the percentage of the aggregate amount
of the outstanding Notes of such series, the consent of the holders of which is
required for any such supplemental indenture or the consent of the holders of
which is required for any waiver of compliance with certain provisions of the
related Indenture or of certain defaults thereunder and their consequences as
provided for in such Indenture, (iv) modify or alter the provisions of the
related Indenture regarding the voting of Notes held by the applicable Trust,
the Depositor, an affiliate of either of them or any obligor on such Notes,
(v) reduce the percentage of the aggregate outstanding amount of such Notes, the
consent of the holders of which is required to direct the related Trustee on
behalf of the applicable Trust to sell or liquidate the Student Loans if the
proceeds of such sale would be insufficient to pay the principal amount and
accrued but unpaid interest on the outstanding Notes of such series,
(vi) decrease the percentage of the aggregate principal amount of such Notes
required to amend the sections of the related Indenture which specify the
applicable percentage of aggregate principal amount of such Notes necessary to
amend the related Indenture or certain other related agreements or (vii) permit
the creation of any lien ranking prior to or on a parity with the lien of the
related Indenture with respect to any of the collateral for the Notes of such
series or, except as otherwise permitted or contemplated in such Indenture,
terminate the lien of such Indenture on any such collateral or deprive the
holder of any Note of the security afforded by the lien of such Indenture.
The applicable Trust and the related Indenture Trustee may also enter into
supplemental indentures, without obtaining the consent of Noteholders of such
series, for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the related Indenture or of modifying in
any manner the rights of Noteholders of such series so long as such action will
not, in the opinion of counsel satisfactory to the applicable Indenture Trustee,
materially and adversely affect the interest of any Noteholder of such series.
Events of Default; Rights upon Event of Default. With respect to the Notes
of a given series, unless otherwise specified in the related Prospectus
Supplement, an "Event of Default" under the related indenture will consist of
the following: (i) a default for five days or more in the payment of any
interest on any such Note after the same becomes due and payable; (ii) a default
in the payment of the principal of or any installment of the principal of any
such Note when the same becomes due and payable; (iii) a default in the
observance or performance of any covenant or agreement of the applicable Trust
made in the related Indenture and the continuation of any such default for a
period of 30 days after notice thereof is given to the applicable Trust by the
applicable Indenture Trustee or to the applicable Trust and the applicable
Indenture Trustee by the holders of at least 25% in principal amount of such
Notes then outstanding; provided, however, that if the Trust demonstrates that
it is making a good-faith attempt to cure such default, such 30-day period may
be extended by the Indenture Trustee to 90 days; (iv) any representation or
warranty made by the applicable Trust in the related Indenture or in any
certificate delivered pursuant thereto or in connection therewith having been
incorrect in a material respect as of the time made, and such breach not having
been cured within 30 days after notice thereof is given to such Trust by the
applicable Indenture Trustee or to such Trust and the applicable Indenture
Trustee by the holders of
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at least 25% in principal amount of the Notes of such series then outstanding;
provided, however, that if the Trust demonstrates that it is making a good-faith
attempt to cure such breach, such 30-day period may be extended by the Indenture
Trustee to 90 days, or (v) certain events of bankruptcy, insolvency,
receivership or liquidation of such Trust. However, the amount of principal
required to be distributed to Noteholders of such series under the related
Indenture on any Distribution Date will generally be limited to amounts
available after payment of all prior obligations of such Trust. Therefore,
unless otherwise specified in the related Prospectus Supplement, the failure to
pay principal on a class of Notes generally will not result in the occurrence of
an Event of Default until the final scheduled Distribution Date for such class
of Notes. If, with respect to any series of Notes, interest is paid at a
variable rate based on an index, the related Prospectus Supplement may provide
that, in the event that, for any Distribution Date, the Interest Rate as
calculated based on the index is greater than an alternate rate calculated for
such Distribution Date based on interest collections on the Student Loans (the
amount of such difference, the "Index Shortfall Carryover"), the Interest Rate
for such Distribution Date shall be such alternate rate and the Interest
Shortfall Carryover shall be payable as described in such Prospectus Supplement.
Unless otherwise provided in such Prospectus Supplement, payment of the Index
Shortfall Carryover shall be lower in priority than payment of interest on the
Notes at the Interest Rate (whether the Interest Rate is based on the index or
such alternate rate) and, accordingly, the nonpayment of the Interest Shortfall
Carryover on any Distribution Date shall not generally constitute a default in
the payment of interest on such Notes.
If an Event of Default should occur and be continuing with respect to the
Notes of any series, the related Indenture Trustee or holders of a majority in
principal amount of such Notes then outstanding may declare the principal of
such Notes to be immediately due and payable. Such declaration may be rescinded
by the holders of a majority in principal amount of such Notes then outstanding
if (i) the Trustee on behalf of the related Trust has paid or deposited with the
Indenture Trustee a sum sufficient to pay (A) all payments of principal of and
interest on all Notes and all other amounts that would then be due under the
related Indenture or upon such Notes if the Event of Default giving rise to such
acceleration had not occurred and (B) all sums paid or advanced by the Indenture
Trustee under the related Indenture and the reasonable compensation, expenses,
disbursements and advances of the Indenture Trustee and its agents and counsel
and (ii) all Events of Default, other than the nonpayment of the principal of
the Notes that has become due solely by such acceleration, have been cured or,
under the circumstances described below, waived.
If the Notes of any series have been declared to be due and payable
following an Event of Default with respect thereto, the related Indenture
Trustee may, in its discretion, exercise remedies as a secured party, require
the related Trustee (and Eligible Lender Trustee) to sell the Student Loans or
elect to have the related Trustee (and Eligible Lender Trustee) maintain
possession of the Student Loans and continue to apply collections with respect
to such Student Loans as if there had been no declaration of acceleration. The
related Indenture Trustee is prohibited from directing the related Trustee (and
Eligible Lender Trustee) to sell the Student Loans following an Event of
Default, other than a default in the payment of any principal or a default for
five days or more in the payment of any interest on any Note with respect to any
series, unless (i) the holders of all such outstanding Notes consent to such
sale, (ii) the proceeds of such sale are sufficient to pay in full the principal
of and the accrued interest on such outstanding Notes at the date of such sale
or (iii) the related Indenture Trustee determines that the collections on the
Student Loans would not be sufficient on an ongoing basis to make all payments
on such Notes as such payments would have become due if such obligations had not
been declared due and payable, and the related Indenture Trustee obtains the
consent of the holders of 66 2/3% of the aggregate principal amount of such
Notes then outstanding.
Subject to the provisions of the applicable Indenture relating to the
duties of the related Indenture Trustee, if an Event of Default should occur and
be continuing with respect to a series of Notes, the related Indenture Trustee
will be under no obligation to exercise any of the rights or powers under the
applicable Indenture at the request or direction of any of the holders of such
Notes, if such Indenture Trustee reasonably believes it will not be adequately
indemnified against the costs, expenses and liabilities which might be incurred
by it in complying with such request. Subject to such provisions for
indemnification and certain limitations contained in the related Indenture, the
holders of a majority in principal amount of the outstanding Notes of a given
series will have the right to direct the time, method and place of conducting
any proceeding or any remedy available to such Indenture Trustee and the holders
of a majority in principal amount of such Notes then outstanding may, in certain
cases, waive any default with respect thereto, except a default in the payment
of principal or interest or a
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default in respect of a covenant or provision of the applicable Indenture that
cannot be modified without the waiver or consent of all the holders of such
outstanding Notes.
No holder of Notes of any series will have the right to institute any
proceeding with respect to the related Indenture, unless (i) such holder
previously has given to the applicable Indenture Trustee written notice of a
continuing Event of Default, (ii) the holders of not less than 25% in principal
amount of such outstanding Notes have requested in writing that such Indenture
Trustee institute such proceeding in its own name as Indenture Trustee,
(iii) such holder or holders have offered such Indenture Trustee reasonable
indemnity, (iv) such Indenture Trustee has for 60 days failed to institute such
proceeding and (v) no direction inconsistent with such written request has been
given to such Indenture Trustee during such 60-day period by the holders of a
majority in principal amount of such outstanding Notes.
In addition, each Indenture Trustee and the related Noteholders will
covenant that they will not at any time institute against the applicable Trust
any bankruptcy, reorganization or other proceeding under any federal or state
bankruptcy or similar law.
With respect to any Trust, none of the related Indenture Trustee, the
Depositor, EFG, the Administrator, the Servicer, the Trustee or the Eligible
Lender Trustee in its individual capacity, nor any holder of a Certificate
representing an ownership interest in the applicable Trust, nor any of their
respective owners, beneficiaries, agents, officers, directors, employees,
successors or assigns will, in the absence of an express agreement to the
contrary, be personally liable for the payment of the principal of or interest
on the Notes or for the agreements of the Trust contained in the Indenture.
Certain Covenants. Each Indenture will provide that the related Trust may
not consolidate with or merge into any other entity, unless (i) the entity
formed by or surviving such consolidation or merger is organized under the laws
of the United States of America, any state or the District of Columbia, (ii)
such entity expressly assumes such Trust's obligation to make due and punctual
payments upon the Notes of the related series and the performance or observance
of every agreement and covenant of such Trust under the related Indenture, (iii)
no Event of Default shall have occurred and be continuing immediately after such
merger or consolidation, (iv) such Trust has been advised that the rating of the
Notes and the Certificates of the related series would not be reduced or
withdrawn by the Rating Agencies as a result of such merger or consolidation and
(v) such Trust has received an opinion of counsel to the effect that such
consolidation or merger would have no material adverse federal or applicable
state tax consequence to such Trust or to any Certificateholder or Noteholder of
the related series.
Each Trust will not, among other things, (i) except as expressly permitted
by the applicable Indenture, the applicable Transfer and Servicing Agreements or
certain related documents (collectively, the "Related Documents"), sell,
transfer, exchange or otherwise dispose of any of the assets of such Trust,
(ii) claim any credit on or make any deduction from the principal and interest
payable in respect of the Notes of the related series (other than amounts
withheld under the Code or applicable state law) or assert any claim against any
present or former holder of such Notes because of the payment of taxes levied or
assessed upon such Trust, (iii) except as contemplated by the Related Documents,
dissolve or liquidate in whole or in part, (iv) permit the validity or
effectiveness of the applicable Indenture to be impaired or permit any person to
be released from any covenants or obligations with respect to such Notes under
the applicable Indenture except as may be expressly permitted thereby or
(v) permit any lien, charge, excise, claim, security interest, mortgage or other
encumbrance to be created on or extend to or otherwise arise upon or burden the
assets of the Trust or any part thereof, or any interest therein or the proceeds
thereof, except as expressly permitted by the Related Documents.
No Trust may engage in any activity other than as specified under the
section of the related Prospectus Supplement entitled "Formation of the Trust."
No Trust will incur, assume or guarantee any indebtedness other than
indebtedness incurred pursuant to the Notes of a related series and the
applicable Indenture or otherwise in accordance with the Related Documents.
Annual Compliance Statement. Each Trust will be required to file annually
with the applicable Indenture Trustee a written statement as to the fulfillment
of its obligations under the related Indenture.
Indenture Trustee's Annual Report. Each Indenture Trustee will be required
to mail each year to all related Noteholders a brief report relating to, among
other things, its eligibility and qualification to continue as such Indenture
Trustee under the applicable Indenture, any amounts advanced by it under the
Indenture, the amount, interest rate and maturity date of certain indebtedness
owing by such Trust to the applicable Indenture Trustee in
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its individual capacity, the property and funds physically held by the
applicable Indenture Trustee as such and any action taken by it that materially
affects the related Notes and that has not been previously reported.
Satisfaction and Discharge of Indenture. An Indenture will be discharged
with respect to the collateral securing the related Notes upon the delivery to
the related Indenture Trustee for cancellation of all such Notes or, with
certain limitations, upon deposit with such Indenture Trustee of funds
sufficient for the payment in full of all such Notes.
The Indenture Trustee. The Indenture Trustee for a series of Notes will be
specified in the related Prospectus Supplement. The Indenture Trustee for any
series may resign at any time, in which event the Issuer will be obligated to
appoint a successor trustee for such series. The Issuer may also remove any such
Indenture Trustee if such Indenture Trustee ceases to be eligible to continue as
such under the related Indenture or if such Indenture Trustee becomes insolvent.
In such circumstances, the Issuer will be obligated to appoint a successor
trustee for the applicable series of Notes. Any resignation or removal of the
Indenture Trustee and appointment of a successor trustee for any series of Notes
does not become effective until acceptance of the appointment by the successor
trustee for such series.
DESCRIPTION OF THE CERTIFICATES
GENERAL
With respect to each Trust, one or more classes of Certificates of a given
series will, unless otherwise specified in the related Prospectus Supplement, be
issued pursuant to the terms of a Trust Agreement, a form of which has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. The following summary describes certain terms of the Certificates and the
Trust Agreement. The summary does not purport to be complete and is qualified in
its entirety by reference to all the provisions of the Certificates and the
Trust Agreement.
Unless otherwise specified in the related Prospectus Supplement, each class
of Certificates will initially be represented by a single Certificate registered
in the name of the Depository, except as set forth below. Unless otherwise
specified in the related Prospectus Supplement and except for the Certificates
of a given series purchased by the applicable Company, the Certificates will be
available for purchase in minimum denominations of $1,000 and integral multiples
of $1,000 in excess thereof in book-entry form only. The Depositor has been
informed by DTC that DTC's nominee will be Cede, unless another nominee is
specified in the related Prospectus Supplement. Accordingly, such nominee is
expected to be the holder of record of the Certificates of any series that are
not purchased by the applicable Company. Unless and until Definitive
Certificates are issued under the limited circumstances described herein or in
the related Prospectus Supplement, no Certificateholder (other than the
applicable Company) will be entitled to receive a physical certificate
representing a Certificate. All references herein and in the related Prospectus
Supplement to actions by Certificateholders (other than the applicable Company)
refer to actions taken by DTC upon instructions from the Participants and all
references herein and in the related Prospectus Supplement to distributions,
notices, reports and statements to Certificateholders (other than the applicable
Company) refer to distributions, notices, reports and statements to DTC or its
nominee, as the registered holder of the Certificates, as the case may be, for
distribution to Certificateholders in accordance with DTC's procedures with
respect thereto. See "CERTAIN INFORMATION REGARDING THE SECURITIES--Book-Entry
Registration" and "--Definitive Securities." Unless otherwise specified in the
related Prospectus Supplement, Certificates of a given series owned by EFG or
its affiliates will be entitled to equal and proportionate benefits under the
applicable Trust Agreement, except that, assuming that all Certificates of a
given series are not all owned by EFG and its affiliates, such Certificates will
be deemed not to be outstanding for the purpose of determining whether the
requisite percentage of Certificateholders have given any request, demand,
authorization, direction, notice, consent or other action under the Related
Documents (other than the commencement by the related Trust of a voluntary
proceeding in bankruptcy as described under "DESCRIPTION OF THE TRANSFER AND
SERVICING AGREEMENTS--Insolvency Event").
PRINCIPAL AND INTEREST IN RESPECT OF THE CERTIFICATES
The timing and priority of distributions, seniority, allocations of losses,
Pass-Through Rate and amount of or method of determining distributions with
respect to principal and interest of each class of Certificates of a given
series will be described in the related Prospectus Supplement. Distributions of
interest on such Certificates will be made on each Distribution Date and will be
made prior to distributions with respect to principal of such
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Certificates. Each class of Certificates may have a different Pass-Through Rate,
which may be a fixed, variable or adjustable Pass-Through Rate or any
combination of the foregoing. The related Prospectus Supplement will specify the
Pass-Through Rate for each class of Certificates of a given series or the method
for determining such Pass-Through Rate. See also "CERTAIN INFORMATION REGARDING
THE SECURITIES--Fixed Rate Securities" and "--Floating Rate Securities." Unless
otherwise provided in the related Prospectus Supplement, distributions in
respect of the Certificates of a given series may be subordinate to payments in
respect of the Notes of such series as more fully described in the related
Prospectus Supplement. Distributions in respect of interest on and principal of
any class of Certificates will be made on a pro rata basis among all the
Certificateholders of such class.
In the case of a series of Certificates which includes two or more classes
of Certificates, the timing, sequential order, priority of payment or amount of
distributions in respect of interest and principal, and any schedule or formula
or other provisions applicable to the determination thereof, of each such class
shall be as set forth in the related Prospectus Supplement.
See "DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Credit and Cash
Flow Enhancement--Reserve Account" for a description of the Reserve Account and
the distribution of amounts in excess of the Specified Reserve Account Balance
(as defined in the related Prospectus Supplement).
CERTAIN INFORMATION REGARDING THE SECURITIES
FIXED RATE SECURITIES
Each class of Securities may bear interest at a fixed rate per annum
("Fixed Rate Securities") or at a variable or adjustable rate per annum
("Floating Rate Securities"), as more fully described below and in the
applicable Prospectus Supplement. Each class of Fixed Rate Securities will bear
interest at the applicable per annum Interest Rate or Pass-Through Rate, as the
case may be, specified in the applicable Prospectus Supplement. Unless otherwise
set forth in the applicable Prospectus Supplement, interest on each class of
Fixed Rate Securities will be computed on the basis of a 360-day year of twelve
30-day months. See "DESCRIPTION OF THE NOTES--Principal and Interest on the
Notes" and "DESCRIPTION OF THE CERTIFICATES--Principal and Interest in Respect
of the Certificates."
FLOATING RATE SECURITIES
Each class of Floating Rate Securities will bear interest for each
applicable Interest Reset Period (as such term is defined in the related
Prospectus Supplement with respect to a class of Floating Rate Securities,
"Interest Reset Period") at a rate per annum determined by reference to an
interest rate basis (the "Base Rate"), plus or minus the Spread, if any, or
multiplied by the Spread Multiplier, if any, in each case as specified in the
related Prospectus Supplement. The "Spread" is the number of basis points (one
basis point equals one one-hundredth of a percentage point) that may be
specified in the applicable Prospectus Supplement as being applicable to such
class, and the "Spread Multiplier" is the percentage that may be specified in
the applicable Prospectus Supplement as being applicable to such class.
The applicable Prospectus Supplement will designate a Base Rate for a given
Floating Rate Security based on LIBOR, commercial paper rates, Federal funds
rates, U.S. Government treasury securities rates, negotiable certificates of
deposit rates or another rate or rates as set forth in such Prospectus
Supplement.
If so specified in the related Prospectus Supplement, the interest due on
any Floating Rate Securities on any Distribution Date will not exceed a ratio
that is based upon interest accrued on the Student Loans and other investments
during the requisite collection period. That amount expressed as a rate, subject
to a more precise formulation in the related Prospectus Supplement, is referred
to as the "Student Loan Rate." Where Floating Rate Securities are issued subject
to the Student Loan Rate, in the event that the interest rate on such Securities
calculated by reference to the applicable Base Rate and Spread is greater than
the Student Loan Rate, such securities would bear interest for the applicable
Interest Reset Period at the Student Loan Rate. All Floating Rate Securities
that are subject to the Student Loan Rate are expected to be rated on the basis
of the ability of the Trust to make payments on the Securities at the Student
Loan Rate rather than at the rate based on the Base Rate and Spread.
As specified in the applicable Prospectus Supplement, Floating Rate
Securities of a given class may also have either or both of the following (in
each case expressed as a rate per annum): (i) a maximum limitation, or
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ceiling, on the rate at which interest may accrue during any interest period and
(ii) a minimum limitation, or floor, on the rate at which interest may accrue
during any interest period. In addition to any maximum interest rate that may be
applicable to any class of Floating Rate Securities, the interest rate
applicable to any class of Floating Rate Securities will in no event be higher
than the maximum rate permitted by applicable law, as the same may be modified
by United States law of general application.
Each Trust with respect to which a class of Floating Rate Securities will
be issued will appoint, and enter into agreements with, a calculation agent
(each, a "Calculation Agent") to calculate interest rates on each such class of
Floating Rate Securities issued with respect thereto. The applicable Prospectus
Supplement will set forth the identity of the Calculation Agent for each such
class of Floating Rate Securities of a given series, which may be the
Administrator, the Eligible Lender Trustee or the Indenture Trustee with respect
to such series. All determinations of interest by the Calculation Agent shall,
in the absence of manifest error, be conclusive for all purposes and binding on
the holders of Floating Rate Securities of a given class. Unless otherwise
specified in the applicable Prospectus Supplement, all percentages resulting
from any calculation of the rate of interest on a Floating Rate Security will be
rounded, if necessary, to the nearest 1/100,000 of 1% (.0000001), with five one-
millionths of a percentage point rounded upward.
BOOK-ENTRY REGISTRATION
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the UCC and a "clearing agency" registered
pursuant to Section 17A of the Exchange Act. DTC was created to hold securities
for its Participants and to facilitate the clearance and settlement of
securities transactions between Participants through electronic book entries,
thereby eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations. Indirect access to the DTC system also is available to others such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
("Indirect Participants").
Securityholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Securities held through DTC may do so only through Participants and Indirect
Participants. In addition, Securityholders will receive all distributions of
principal and interest from the Indenture Trustee for the Indenture under which
the Securities were issued (the "Applicable Trustee"), through Participants and
Indirect Participants. Under a book-entry format, Securityholders may experience
some delay in their receipt of payments, since such payments will be forwarded
by the Applicable Trustee to DTC's nominee. DTC will forward such payments to
its Participants, which thereafter will forward them to Indirect Participants or
Securityholders. Except for the applicable Company with respect to any series of
Securities, it is anticipated that the only "Securityholder,"
"Certificateholder" and "Noteholder" will be DTC's nominee. Securityholders will
not be recognized by the Applicable Trustee as Noteholders or
Certificateholders, as such terms are used in each Indenture and each Trust
Agreement, respectively, and Securityholders will be permitted to exercise the
rights of Securityholders only indirectly through DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Securities among Participants on whose behalf it acts with respect to the
Securities and to receive and transmit distributions of principal of, and
interest on, the Securities. Participants and Indirect Participants with which
Securityholders have accounts with respect to the Securities similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Securityholders. Accordingly, although
Securityholders will not possess Securities, the Rules provide a mechanism by
which Participants will receive payments and will be able to transfer their
interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to such
Securities, may be limited due to the lack of a physical certificate for such
Securities.
DTC has advised the Depositor that it will take any action permitted to be
taken by a Securityholder under the related Indenture or the related Trust
Agreement, as the case may be, only at the direction of one or more Participants
to whose accounts with DTC the Securities are credited. DTC may take conflicting
actions with respect to other undivided interests to the extent that such
actions are taken on behalf of Participants whose holdings include such
undivided interests.
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Except as required by law, neither the Administrator nor the Applicable
Trustee will have any liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the Securities
held by DTC's nominee or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
DEFINITIVE SECURITIES
Unless otherwise specified in the related Prospectus Supplement and except
with respect to the Certificates of a given series that may be purchased by the
Depositor or an affiliate, the Notes and the Certificates of a given series will
be issued in fully registered, certificated form ("Definitive Notes" and
"Definitive Certificates," respectively, and collectively referred to herein as
"Definitive Securities") to Noteholders or Certificateholders or their
respective nominees, rather than to DTC or its nominee, only if (i) the related
Administrator advises the Applicable Trustee in writing that DTC is no longer
willing or able to discharge properly its responsibilities as depository with
respect to the Securities and the Administrator is unable to locate a qualified
successor, (ii) the Administrator, at its option, elects to terminate the
book-entry system through DTC or (iii) after the occurrence of an Event of
Default or a Servicer Default, Securityholders representing at least a majority
of the outstanding principal amount of the Notes or the Certificates, as the
case may be, of such series advise the Applicable Trustee through DTC in writing
that the continuation of a book-entry system through DTC (or a successor
thereto) with respect to such Notes or Certificates is no longer in the best
interest of the holders of such Securities.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Applicable Trustee will be required to notify all applicable
Securityholders of a given series through Participants of the availability of
Definitive Securities. Upon surrender by DTC of the Definitive Securities
representing the corresponding Securities and receipt of instructions for
re-registration, the Applicable Trustee will reissue such Securities as
Definitive Securities to such Securityholders.
Distributions of principal of, and interest on, such Definitive Securities
will thereafter be made by the Applicable Trustee in accordance with the
procedures set forth in the related Indenture or the related Trust Agreement, as
the case may be, directly to holders of Definitive Securities in whose names the
Definitive Securities were registered at the close of business on the applicable
Record Date specified for such Securities in the related Prospectus Supplement.
Such distributions will be made by check mailed to the address of such holder as
it appears on the register maintained by the Applicable Trustee. The final
payment on any such Definitive Security, however, will be made only upon
presentation and surrender of such Definitive Security at the office or agency
specified in the notice of final distribution to applicable Securityholders.
Definitive Securities will be transferable and exchangeable at the offices
of the Applicable Trustee or of a registrar named in a notice delivered to
holders of Definitive Securities. No service charge will be imposed for any
registration of transfer or exchange, but the Applicable Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
LIST OF SECURITYHOLDERS
Unless otherwise specified in the related Prospectus Supplement, holders of
Notes evidencing not less than 25% of the aggregate outstanding principal
balance of such Notes may, by written request to the related Indenture Trustee,
obtain access to the list of all Noteholders maintained by such Indenture
Trustee for the purpose of communicating with other Noteholders with respect to
their rights under the related Indenture or such Notes. Such Indenture Trustee
may elect not to afford the requesting Noteholders access to the list of
Noteholders if it agrees to mail the desired communication or proxy, on behalf
and at the expense of the requesting Noteholders, to all Noteholders of such
series.
Unless otherwise specified in the related Prospectus Supplement, three or
more Certificateholders of such series or one or more holders of such
Certificates evidencing not less than 25% of the Certificate Balance of such
Certificates may, by written request to the related Trustee, obtain access to
the list of all Certificateholders for the purpose of communicating with other
Certificateholders with respect to their rights under the related Trust
Agreement or under such Certificates.
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REPORTS TO SECURITYHOLDERS
With respect to each series of Securities, on each Distribution Date, the
Applicable Trustee will provide to Securityholders of record as of the related
Record Date a statement setting forth substantially the same information as is
required to be provided on the periodic report provided to the related Indenture
Trustee and the related Trust described under "Description of Transfer and
Servicing Agreements--Statements to Indenture Trustee and Trust." Such
statements will be filed with the Commission during the period required by Rule
15d-1 under the Securities Exchange Act of 1934, as amended, and will not be
filed with the Commission thereafter. The statements provided to Securityholders
will not constitute financial statements prepared in accordance with generally
accepted accounting principles.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of each Trust, the Applicable Trustee
will mail to each person who at any time during such calendar year was a
Securityholder with respect to such Trust and received any payment thereon, a
statement containing certain information for the purposes of such
Securityholder's preparation of federal income tax returns. See "MATERIAL
FEDERAL INCOME TAX CONSEQUENCES."
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
GENERAL
The following is a summary of the material terms of each Loan Sale
Agreement, each FFELP Loan Servicing Agreement and each Private Loan Servicing
Agreement, pursuant to which the Depositor will purchase Student Loans from the
Seller (or the Eligible Lender Trustee on behalf of the Seller) and the Servicer
will service the same; each Administration Agreement, pursuant to which the
Administrator will undertake certain administrative duties with respect to a
Trust and the Student Loans; each Trust Agreement, pursuant to which a Trust
will be created and the related Certificates will be issued; and each Transfer
Agreement, pursuant to which the Depositor will transfer Student Loans to the
related Trust (collectively, the "Transfer and Servicing Agreements"). Forms of
each of the Transfer and Servicing Agreements have been filed as exhibits to the
Registration Statement of which this Prospectus is a part. However, the summary
does not purport to be complete and is qualified in its entirety by reference to
all of the provisions of the Transfer and Servicing Agreements.
SALE OF STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
On the Closing Date specified with respect to any given Trust in the
related Prospectus Supplement (the "Closing Date"), pursuant to a Loan Sale
Agreement the Depositor will acquire the Student Loans from EFG (or the Eligible
Lender Trustee on behalf of the Seller) as seller, and pursuant to a Transfer
Agreement the Depositor will transfer to the related Trustee on behalf of such
Trust, without recourse, its entire interest in the Student Loans and all
collections received and to be received with respect thereto for the period on
and after the Cutoff Date pursuant to the Loan Sale Agreement as well as its
interest in The Loan Sale Agreement with respect to The Student Loans. Each
Student Loan will be identified in schedules appearing as an exhibit to such
Loan Sale Agreement. Each Trustee will, concurrently with such sale and
assignment, execute, authenticate and deliver the related Certificates and
Notes. The net proceeds received from the sale of the related Notes and
Certificates will be applied to the purchase of the Student Loans.
In each Loan Sale Agreement, EFG will make representations and warranties
with respect to the Student Loans which representations and warranties will be
assigned to a Trust for the benefit of the Certificateholders and the
Noteholders of a given series, including, among other things, that (i) each
Student Loan, on the date on which it is transferred to the Depositor, is free
and clear of all security interests, liens, charges and encumbrances and no
offsets, defenses or counterclaims have been asserted or threatened; (ii) the
information provided with respect to the Student Loans is true and correct as of
the Cutoff Date; (iii) each Student Loan, at the time it was originated,
complied and, at the Closing Date, complies in all material respects with
applicable federal and state laws (including, without limitation, the Act in the
case of FFELP Student Loans) and applicable restrictions imposed by FFELP, a
Private Guarantor or any Guarantee Agreement; (iv) each Student Loan is the
legal, valid and binding obligation of the related borrower; and (v) no Student
Loan, at the time of transfer, has a payment that is more than 120 days
delinquent in the case of a FFELP Student Loan or 90 days in the case of a
Private Student Loan.
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Following the discovery by or notice to the Seller of a breach of any
representation or warranty with respect to any Student Loan that materially and
adversely affects the interests of the related Certificateholders or the
Noteholders in such Student Loan (it being understood that any such breach that
does not affect any Guarantor's obligation to guarantee payment of such Student
Loan will not be considered to have such a material adverse effect), the Seller
will, unless such breach is cured within 60 days, repurchase such Student Loan
from the related Eligible Lender Trustee, as of the first day following the end
of such 60-day period that is the last day of a Collection Period, at a price
equal to the unpaid principal balance owed by the applicable borrower thereon
plus accrued interest thereon to the day of repurchase (the "Purchase Amount").
Alternatively, the Seller may, at its option, remit all or a portion of the
Purchase Amount by substituting into the related Trust a Student Loan that meets
certain criteria set forth in the related Loan Sale Agreement for the Student
Loan as to which the breach has occurred. In addition, the Seller will reimburse
the related Trust for any accrued interest amounts that a Guarantor refuses to
pay pursuant to its Guarantee Agreement, or for any Interest Subsidy Payments
and Special Allowance Payments that are lost or that must be repaid to the
Department with respect to a FFELP Student Loan as a result of a breach of any
such representation or warranty by the Seller. The repurchase, substitution and
reimbursement obligations of the Seller will constitute the sole remedy
available to or on behalf of a Trust, the related Certificateholders and the
related Noteholders for any such uncured breach. The Seller's repurchase and
reimbursement obligations are contractual obligations pursuant to a Loan Sale
Agreement that may be enforced against the Seller, but the breach of which will
not constitute an Event of Default.
To assure uniform quality in servicing and to reduce administrative costs,
the Servicer (or an independent fiduciary in the case of Private Loans) will be
appointed custodian of the promissory notes representing the Student Loans and
any other related documents by the related Trustee on behalf of each Trust. The
Depositor's and the Servicer's records and computer systems will reflect the
sale and assignment by the Depositor of the Student Loans to the related Trustee
on behalf of the related Trust, and UCC financing statements reflecting such
sale and assignment will be filed by the Administrator.
ADDITIONAL FUNDINGS
In the case of a Trust having a Pre-Funding Account or a Collateral
Reinvestment Account, such Trust will use funds on deposit in such account from
time to time during the related Funding Period or Revolving Period,
respectively, (i) to make interest payments to Noteholders and
Certificateholders in lieu of collections of interest on certain of the Student
Loans to the extent such interest is not paid currently but is capitalized and
added to the principal balance of such Student Loans and (ii) to fund the
addition of Student Loans to the Trust under the circumstances and having the
characteristics described in the related Prospectus Supplement ("Additional
Fundings"). Such additional Student Loans may be purchased by the Trust from the
Depositor or may be originated by the Trust, if and to the extent specified in
the related Prospectus Supplement.
There can be no assurance that substantially all of the amounts on deposit
in any Pre-Funding Account or Collateral Reinvestment Account will be expended
during the related Funding Period or Revolving Period, respectively. If the
amount initially deposited into a Pre-Funding Account or a Collateral
Reinvestment Account for a series has not been reduced to zero by the end of the
related Funding Period or Revolving Period, respectively, the amounts remaining
on deposit therein will be distributed to the related Securityholders in the
amounts described in the related Prospectus Supplement.
If and to the extent specified in the related Prospectus Supplement, the
related Trust may use distributions on the Student Loans, or may exchange
Student Loans with the Depositor, in order to pay for Additional Fundings after
any Funding Period or Revolving Period.
ACCOUNTS
With respect to each Trust, the Administrator will establish and maintain
with the applicable Indenture Trustee one or more accounts, in the name of the
Indenture Trustee on behalf of the related Noteholders and Certificateholders,
into which all payments made on or with respect to the related Student Loans
will be deposited (the "Collection Account"). Any other accounts to be
established with respect to a Trust, including any Reserve Account, any
Pre-Funding Account and any Collateral Reinvestment Account, will be described
in the related Prospectus Supplement.
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For any series of Securities, funds in the Collection Account, any Reserve
Account, any Pre-Funding Account, any Collateral Reinvestment Account and any
other accounts identified as such in the related Prospectus Supplement
(collectively, the "Trust Accounts") will be invested as provided in the
applicable Trust Indenture in Eligible Investments. "Eligible Investments" are
generally limited to investments acceptable to the Rating Agencies as being
consistent with the rating of such Securities. Except as described below or in
the related Prospectus Supplement, Eligible Investments are limited to
obligations or securities that mature not later than the business day
immediately preceding the next applicable Distribution Date. However, to the
extent permitted by the Rating Agencies, funds in any Reserve Account may be
invested in securities that will not mature prior to the date of the next
distribution with respect to such Securities and will not be sold to meet any
shortfalls. Thus, the amount of cash in any Reserve Account at any time may be
less than the balance of the Reserve Account. If the amount required to be
withdrawn from any Reserve Account to cover shortfalls in collections on the
related Student Loans (as provided in the related Prospectus Supplement) exceeds
the amount of cash in the Reserve Account, a temporary shortfall in the amounts
distributed to the related Noteholders or Certificateholders could result, which
could, in turn, increase the average life of the Notes or the Certificates of
such series. Except as otherwise specified in the related Prospectus Supplement,
investment earnings on funds deposited in the Trust Accounts, net of losses and
investment expenses (collectively, "Investment Earnings"), will be deposited in
the Collection Account on each Distribution Date and will be treated as
collections of interest on the related Student Loans.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in such account, so long as any of the
securities of such depository institution have a credit rating from each Rating
Agency in one of its generic rating categories which signifies investment grade.
"Eligible Institution" means a depository institution organized under the laws
of the United States of America or any one of the states thereof or the District
of Columbia (or any domestic branch of a foreign bank), (i) which has either (A)
a long-term unsecured debt rating acceptable to the Rating Agencies or (B) a
short-term unsecured debt rating or certificate of deposit rating acceptable to
the Rating Agencies and (ii) whose deposits are insured by the Federal Deposit
Insurance Corporation.
SERVICING PROCEDURES
Pursuant to each Loan Servicing Agreement, the Servicer has agreed to
service, and perform all other related tasks with respect to, all the Student
Loans acquired from time to time on behalf of each Trust. The Servicer is
required pursuant to the related Loan Servicing Agreement to perform all
services and duties customary to the servicing of Student Loans (including all
collection practices), and to do so in the same manner as the Servicer has
serviced student loans for parties other than the Seller and to do so in
compliance with, and to otherwise comply with, the Guarantee Agreements; all
other applicable federal and state laws and with respect to the FFELP Student
Loans, all standards and procedures provided for in the Act.
Without limiting the foregoing, the duties of the Servicer with respect to
each Trust under the related Loan Servicing Agreement include, but are not
limited to, the following: collecting and depositing into the Collection Account
all payments with respect to the Student Loans, including claiming and obtaining
any Guarantee Payments, any Interest Subsidy Payments and Special Allowance
Payments with respect to Student Loans entitled thereto, responding to inquiries
from borrowers on the Student Loans, investigating delinquencies and sending out
statements and payment coupons. In addition, the Servicer will keep ongoing
records with respect to such Student Loans and collections thereon and will
furnish monthly and annual statements with respect to such information to the
Administrator, in accordance with the Servicer's customary practices with
respect to the Seller and as otherwise required in the related Loan Servicing
Agreement.
If so provided in the related Prospectus Supplement, the Servicer may act
as a master servicer and may from time to time perform its servicing obligations
under the applicable Loan Servicing Agreement through subservicing agreements
with affiliated or unrelated third-party loan servicers.
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PAYMENTS ON STUDENT LOANS
With respect to each Trust, the Servicer will deposit all payments on
Student Loans and all proceeds of Student Loans received by it during each
collection period specified in the related Prospectus Supplement (each, a
"Collection Period") into the related Collection Account within two business
days of receipt of freely available funds therefor. The Eligible Lender Trustee
will deposit all Interest Subsidy Payments and all Special Allowance Payments
with respect to the Student Loans received by it during each Collection Period
into the Collection Account within two business days of receipt thereof.
SERVICER COVENANTS
With respect to each Trust, in the related Loan Servicing Agreement, the
Servicer will covenant that: (a) it will duly satisfy all obligations on its
part to be fulfilled under or in connection with the Student Loans, maintain in
effect all qualifications required in order to service the Student Loans and
comply in all material respects with all requirements of law in connection with
servicing the Student Loans, the failure to comply with which would have a
materially adverse effect on the related Certificateholders or Noteholders; (b)
it will not permit any rescission or cancellation of a Student Loan except as
ordered by a court of competent jurisdiction or other government authority or as
otherwise consented to by the related Eligible Lender Trustee and the related
Indenture Trustee, provided that the Servicer may write off any delinquent Trust
Student Loan if the remaining balance of the borrower's account is less than
$50; (c) it will do nothing to impair the rights of the related
Certificateholders and the related Noteholders in the Student Loans; and (d) it
will not reschedule, revise, defer or otherwise compromise with respect to
payments due on any Student Loan except pursuant to any applicable deferral or
forbearance periods or otherwise in accordance with its guidelines for servicing
student loans in general and those of the Seller in particular and any
applicable FFELP or Guarantor requirements.
Under the terms of each FFELP Loan Servicing Agreement, if the
Administrator or the Servicer discovers, or receives written notice,
that any covenant of the Servicer set forth above has not been complied
with in all material respects and such noncompliance has not been cured
within 60 days thereafter and has a materially adverse effect on the
interest of the related Certificateholders or Noteholders in any FFELP
Student Loan, unless such breach is cured or unless the Seller is
otherwise required to purchase the related FFELP Student Loan as a
result of a breach of the Seller's warranties in the related Loan Sale
Agreement, the Servicer will be obligated to purchase or arrange for the
purchase of such FFELP Student Loan as of the first day following the
end of such 60-day period that is the last day of a Collection Period.
In that event, the Servicer will be obligated to arrange to be deposited
into the Collection Account an amount equal to the Purchase Amount of
such FFELP Student Loan and the related Trust's interest in any such
purchased FFELP Student Loan will be automatically assigned to the
Servicer or its designee. Upon such assignment, the Servicer or its
designee will be entitled to all payments made on the Student Loan. In
addition, if so specified in the related Prospectus Supplement, the
Servicer will reimburse the related Trust for any accrued interest
amounts that a Federal Guarantor refuses to pay pursuant to its
Guarantee Agreement, or for any prior Interest Subsidy Payments and
Special Allowance Payments that are lost or that must be repaid to the
Department with respect to a FFELP Student Loan as a result of a breach
of any such covenant of the Servicer.
SERVICER COMPENSATION
The Servicer will be entitled to receive the Servicing Fee for each
Collection Period (as set forth in the related Prospectus Supplement) at a
specified percentage per annum (as set forth in the related Prospectus
Supplement) of the average Pool Balance for the related Collection Period or a
specified fee per Student Loan, together with any other administrative fees and
similar charges specified in the related Prospectus Supplement, as compensation
for performing the functions as servicer for the related Trust described above
(the "Servicing Fee"). The Servicing Fee (together with any portion of the
Servicing Fee that remains unpaid from prior Distribution Dates) will be paid
prior to any payment in respect of the related Securities, as specified in the
applicable Prospectus Supplement. The Servicing Fee will compensate the Servicer
for performing the functions of a third-party servicer of student loans as an
agent for their beneficial owner, including collecting and posting all payments,
responding to inquiries of borrowers on the Student Loans, investigating
delinquencies, pursuing, filing and directing the payment of any Guarantee
Payments, and, with respect to FFELP Student Loans, Interest
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Subsidy Payments or Special Allowance Payments, accounting for collections and
furnishing periodic accounting reports to the Administrator.
EVIDENCE AS TO COMPLIANCE
Each FFELP Loan Servicing Agreement will provide that a firm of independent
public accountants will furnish to the related Trust and Indenture Trustee
annually a statement (based on the examination of certain documents and records
and on such accounting and auditing procedures considered appropriate under the
circumstances) as to compliance by the Servicer during the preceding twelve
months (or, in the case of the first such certificate, the period from the
applicable Closing Date) with all applicable standards under the FFELP Loan
Servicing Agreement relating to the servicing of student loans, the Servicer's
accounting records and computer files with respect thereto and certain other
matters.
Each FFELP Loan Servicing Agreement will also provide for delivery to the
related Trust and Indenture Trustee, concurrently with the delivery of each
statement of compliance referred to above, of a certificate signed by an officer
of the Servicer stating that, to his knowledge, the Servicer has fulfilled its
obligations under such FFELP Loan Servicing Agreement throughout the preceding
twelve months (or, in the case of the first such certificate, the period from
the applicable Closing Date) or, if there has been a default in the fulfillment
of any such obligation, describing each such default. The Servicer has agreed to
give the Administrator, the related Indenture Trustee and Eligible Lender
Trustee notice of certain Servicer Defaults under such FFELP Loan Servicing
Agreement.
Copies of such statements and certificates may be obtained by
Securityholders by a request in writing addressed to the applicable Trustee.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will not be required to deliver such statements and certificates under
the related Private Loan Servicing Agreement.
CERTAIN MATTERS REGARDING THE SERVICER
Each Loan Servicing Agreement will provide that the Servicer may not resign
from its obligations and duties as Servicer thereunder, except upon
determination that the Servicer's performance of such duties is no longer
permissible under applicable law. Unless specified otherwise in the related
Prospectus Supplement each Private Loan Servicing Agreement also permits the
Servicer to resign if the Servicing Fee under such Private Loan Servicing
Agreement remains unpaid for 90 days. No such resignation will become effective
until the related Indenture Trustee or a successor servicer has assumed the
Servicer's servicing obligations and duties under the Loan Servicing Agreement.
Each Loan Servicing Agreement will further provide that neither the
Servicer nor any of its directors, officers, employees or agents will be under
any liability to the related Trust or the related Noteholders or
Certificateholders for taking any action or for refraining from taking any
action pursuant to the related Loan Servicing Agreement, or for errors in
judgment; provided, however, that, with respect to the FFELP Loan Servicing
Agreement unless otherwise limited in the related Prospectus Supplement, neither
the Servicer nor any such person will be protected against any liability that
would otherwise be imposed by reason of willful misfeasance, bad faith or
negligence in the performance of the Servicer's duties thereunder or by reason
of reckless disregard of its obligations and duties thereunder. In addition,
each Loan Servicing Agreement will provide that the Servicer is under no
obligation to appear in, prosecute, or defend any legal action that is not
incidental to its servicing responsibilities under such Loan Servicing Agreement
and that, in its opinion, may cause it to incur any expense or liability. Each
Loan Servicing Agreement will, however, provide that the Servicer may undertake
any reasonable action that it deems necessary or desirable in respect of the
Loan Servicing Agreement and the interests of the Securityholders.
Under the circumstances specified in each Loan Servicing Agreement, any
entity into which the Servicer may be merged or consolidated, or any entity
resulting from any merger or consolidation to which the Servicer is a party, or
any entity succeeding to the business of the Servicer, which corporation or
other entity in each of the foregoing cases assumes the obligations of the
Servicer, will be the successor of the Servicer under such Loan Servicing
Agreement.
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SERVICER DEFAULT
Except as otherwise provided in the related Prospectus Supplement,
"Servicer Default" under each Loan Servicing Agreement will occur in the event
of (a) any failure by the Servicer to deliver to the Indenture Trustee for
deposit in any of the Trust Accounts any required payment, which failure
continues unremedied for three business days after written notice from such
Indenture Trustee or the related Trustee is received by the Servicer or after
discovery by the Servicer, (b) any failure by the Servicer to observe or perform
in any material respect any other covenant or agreement of the Servicer under
the related Loan Servicing Agreement, (c) with respect to the FFELP Student
Loans, any limitation, suspension or termination by the Secretary of the
Servicer's eligibility to service FFELP Student Loans which materially and
adversely affects its ability to service the FFELP Student Loans in the related
Trust, or (d) an Insolvency Event with respect to the Servicer occurs.
"Insolvency Event" means, with respect to any Person, any of the following
events or actions: certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings with respect to
such Person and certain actions by such Person indicating its insolvency,
reorganization pursuant to bankruptcy proceedings or inability to pay its
obligations.
RIGHTS UPON SERVICER DEFAULT
As long as a Servicer Default under a Loan Servicing Agreement remains
unremedied, (i) under the related FFELP Loan Servicing Agreement, the related
Indenture Trustee or holders of Notes of the related series evidencing not less
than 75% in principal amount of such then outstanding Notes, and (ii) under the
related Private Loan Servicing Agreement, the Trust, may terminate all the
rights and obligations of the Servicer under such Loan Servicing Agreement,
whereupon a successor servicer appointed by the related Indenture Trustee or
such Indenture Trustee will succeed to all the responsibilities, duties and
liabilities of the Servicer under such Loan Servicing Agreement, and will be
entitled to similar compensation arrangements. If, however, a bankruptcy trustee
or similar official has been appointed for the Servicer, and Servicer Default
other than such appointment has occurred, such trustee or official may have the
power to prevent such Indenture Trustee or such Noteholders from effecting such
a transfer. In the event that such Indenture Trustee is unwilling or unable to
so act, it may appoint, or petition a court of competent jurisdiction for the
appointment of, a successor whose regular business includes the servicing of
student loans. Such Indenture Trustee may make such arrangements for
compensation to be paid, which in no event may be greater than the servicing
compensation to the Servicer under such Loan Servicing Agreement, unless such
compensation arrangements will not result in a downgrading of such Notes and
Certificates by any Rating Agency. In the event a Servicer Default occurs and is
continuing, such Indenture Trustee or such Noteholders, as described above, may
remove the Servicer, without the consent of the related Trustee or any of the
Certificateholders of the related series. Moreover, for so long as the Notes are
outstanding, only the Indenture Trustee or the Noteholders, and not the Trustee
or the Certificateholders, have the ability to remove the Servicer if a Servicer
Default occurs and is continuing.
WAIVER OF PAST DEFAULTS
With respect to each Trust, the holders of Notes evidencing at least a
majority in principal amount of the then outstanding Notes (or the holders of
Certificates evidencing not less than a majority of the outstanding Certificate
Balance, in the case of any Servicer Default under a FFELP Loan Servicing
Agreement which does not adversely affect the Indenture Trustee or the
Noteholders) of the related series may, on behalf of all such Noteholders and
Certificateholders, waive any default by the Servicer in the performance of its
obligations under the related FFELP Loan Servicing Agreement and its
consequences, except a default in making any required deposits to or payments
from any of the Trust Accounts in accordance with such Loan Servicing Agreement.
Therefore, such Noteholders have the ability, except as noted above, to waive
defaults by the Servicer which could materially adversely affect such
Certificateholders. No such waiver will impair such Noteholders' or
Certificateholders' rights with respect to subsequent defaults. The Trust may
waive any Servicing Default under a Private Loan Servicing Agreement and any
consequences thereof.
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DISTRIBUTIONS
With respect to each series of Securities, beginning on the Distribution
Date specified in the related Prospectus Supplement, distributions of principal
and interest on each class of such Securities entitled thereto will be made by
the applicable Trustee to the Noteholders and the Certificateholders of such
series. The timing, calculation, allocation, order, source, priorities of and
requirements for all payments to each class of Noteholders and all distributions
to each class of Certificateholders of such series will be set forth in the
related Prospectus Supplement.
With respect to each Trust, on each Distribution Date, collections on the
related Student Loans will be distributed from the Collection Account to
Noteholders and Certificateholders to the extent provided in the related
Prospectus Supplement. Credit and cash flow enhancement, such as a Reserve
Account, will be available to cover any shortfalls in the amount available for
distribution on such date to the extent specified in the related Prospectus
Supplement. As more fully described in the related Prospectus Supplement, and
unless otherwise specified therein, distributions in respect of principal and/or
interest of a class of Securities of a given series will be subordinate to
distributions in respect of interest on such class, and distributions in respect
of the Certificates of such series may be subordinate to payments in respect of
the Notes of such series.
CREDIT AND CASH FLOW ENHANCEMENT
General. The amounts and types of credit enhancement arrangements and the
provider thereof, if applicable, with respect to each class of Securities of a
given series, if any, will be set forth in the related Prospectus Supplement. If
and to the extent provided in the related Prospectus Supplement, credit
enhancement may be in the form of subordination of one or more classes of
Securities, Reserve Accounts, over-collateralization, letters of credit, credit
or liquidity facilities, surety bonds, guaranteed investment contracts,
repurchase obligations, other agreements with respect to third-party payments or
other support, cash deposits or such other arrangements as may be described in
the related Prospectus Supplement or any combination of two or more of the
foregoing. If specified in the applicable Prospectus Supplement, credit
enhancement for a class of Securities may cover one or more other classes of
Securities of the same series, and credit enhancement for a series of Securities
may cover one or more other series of Securities.
The presence of a Reserve Account and other forms of credit enhancement for
the benefit of any class or series of Securities is intended to enhance the
likelihood of receipt by the Securityholders of such class or series of the full
amount of principal and interest due thereon and to decrease the likelihood that
such Securityholders will experience losses. Unless otherwise specified in the
related Prospectus Supplement, the credit enhancement for a class or series of
Securities will not provide protection against all risks of loss and will not
guarantee repayment of the entire principal balance and interest thereon. If
losses occur which exceed the amount covered by any credit enhancement or which
are not covered by any credit enhancement, Securityholders of any class or
series will bear their allocable share of deficiencies, as described in the
related Prospectus Supplement. In addition, if a form of credit enhancement
covers more than one series of Securities, Securityholders of any such series
will be subject to the risk that such credit enhancement will be exhausted by
the claims of Securityholders of other series.
Reserve Account. If so provided in the related Prospectus Supplement, the
Depositor will establish for a series or class of Securities an account, as
specified in the related Prospectus Supplement (the "Reserve Account"), which
will be maintained in the name of the applicable Indenture Trustee. Unless
otherwise provided in the related Prospectus Supplement, the Reserve Account
will be funded by an initial deposit by the Depositor on the Closing Date in the
amount set forth in the related Prospectus Supplement. As further described in
the related Prospectus Supplement, the amount on deposit in the Reserve Account
will be increased on each Distribution Date thereafter up to the Specified
Reserve Account Balance (as defined in the related Prospectus Supplement) by the
deposit therein of the amount of collections on the related Student Loans
remaining on each such Distribution Date after the payment of all other required
payments and distributions on such date. Amounts in the Reserve Account will be
available to cover shortfalls in amounts due to the holders of those classes of
Securities specified in the related Prospectus Supplement in the manner and
under the circumstances specified therein. The related Prospectus Supplement
will also specify to whom and the manner and circumstances under which amounts
on deposit in the Reserve Account (after giving effect to all other required
distributions to be
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made by the applicable Trust) in excess of the Specified Reserve Account Balance
(as defined in the related Prospectus Supplement) will be distributed.
STATEMENTS TO INDENTURE TRUSTEE AND TRUST
Prior to each Distribution Date with respect to each series of Securities,
the Administrator will prepare and provide to the related Indenture Trustee and
the related Eligible Lender Trustee as of the close of business on the last day
of the preceding Collection Period a statement which will include the following
information (and any other information so specified in the related Prospectus
Supplement) with respect to such Distribution Date or the preceding Collection
Period as to the Notes and the Certificates of such series, to the extent
applicable:
(i) the amount of the distribution allocable to principal of each
class of the Notes and the Certificates;
(ii) the amount of the distribution allocable to interest on each
class of the Notes and the Certificates, together with the interest rates
applicable with respect thereto;
(iii) the Pool Balance as of the close of business on the last day of
the preceding Collection Period;
(iv) the aggregate outstanding principal balance and the Note Pool
Factor of each class of the Notes, and the Certificate Balance and the
Certificate Pool Factor for each class of the Certificates as of such
Distribution Date, each after giving effect to payments allocated to
principal reported under clause (i) above;
(v) the amount of the Servicing Fee and the Administration Fee paid to
the Servicer and the Administrator, respectively, with respect to such
Collection Period;
(vi) the Interest Rate or Pass-Through Rate for the next period, if
available, for any class of Notes or Certificates of such series with
variable or adjustable rates;
(vii) the amount of the aggregate realized losses, if any, for such
Collection Period;
(viii) the Noteholders' Interest Carryover Shortfall, the Noteholders'
Principal Carryover Shortfall, the Certificateholders' Interest Carryover
Shortfall and the Certificateholders' Principal Carryover Shortfall (each
as defined in the related Prospectus Supplement), if any, in each case as
applicable to each class of Securities, and the change in such amounts from
the preceding statement;
(ix) the aggregate Purchase Amounts for Student Loans, if any, that
were repurchased in such Collection Period;
(x) the balance of the Reserve Account (if any) on such Distribution
Date, after giving effect to changes therein on such Distribution Date;
(xi) for each date during the Funding Period (if any), the remaining
Pre-Funded Amount or, for each date during the Revolving Period (if any),
the amount on deposit in the Collateral Reinvestment Account; and
(xii) the principal balance and number of Student Loans conveyed to or
originated by the Trust during such Collection Period.
Each amount set forth pursuant to subclauses (i), (ii) and (viii) with
respect to the Notes or the Certificates of any series will be expressed as a
dollar amount per $1,000 of the initial principal balance of such Notes or the
initial Certificate Balance of such Certificates, as applicable.
AMENDMENT
Each of the Transfer and Servicing Agreements may be amended by the parties
thereto, without the consent of the related Noteholders or Certificateholders,
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of such Transfer and Servicing Agreements or
of modifying in any manner the rights of such Noteholders or Certificateholders;
provided that such action will not, in the opinion of counsel satisfactory to
the related Indenture Trustee and Trustee, materially and adversely affect the
interest of any such Noteholder or Certificateholder. Each of the Transfer and
Servicing Agreements may also be amended by the Depositor, the Administrator,
the Servicer, the related Trustee and the related Indenture Trustee, as
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applicable, with the consent of the holders of Notes of the related series
evidencing at least a majority in principal amount of such then outstanding
Notes and the holders of Certificates of the related series evidencing at least
a majority of the Certificate Balance for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of such
Transfer and Servicing Agreements or of modifying in any manner the rights of
such Noteholders or Certificateholders; provided, however, that no such
amendment may (i) increase or reduce in any manner the amount of, or accelerate
or delay the timing of, collections of payments (including any Guarantee
Payments) with respect to the Student Loans or distributions that are required
to be made for the benefit of such Noteholders or Certificateholders, or
(ii) reduce the aforesaid percentage of such Notes or Certificates which are
required to consent to any such amendment, without the consent of the holders of
all such outstanding Notes and Certificates.
INSOLVENCY EVENT
Each Trust Agreement will provide that the related Trustee does not have
the power to commence a voluntary proceeding in bankruptcy relating to such
Trust without the unanimous prior approval of all Certificateholders (including
the applicable Company) of the related series and the delivery to such Trustee
by each such Certificateholder (including such Company) of a certificate
certifying that such Certificateholder reasonably believes that the related
Trust is insolvent.
PAYMENT OF NOTES
Upon the payment in full of all outstanding Notes of a given series and the
satisfaction and discharge of the related Indenture, the Trustee will succeed to
all the rights of the Indenture Trustee, and the Certificateholders of such
series will succeed to all the rights of the Noteholders of such series, under
the related Loan Servicing Agreement, except as otherwise provided therein.
TERMINATION
With respect to each Trust, the obligations of the Depositor, the Servicer,
the Administrator, the related Trustee and the related Indenture Trustee
pursuant to the related Transfer and Servicing Agreements will terminate upon
(i) the maturity or other liquidation of the last related Student Loan and the
disposition of any amount received upon liquidation of any such remaining
Student Loans and (ii) the payment to the Noteholders and the Certificateholders
of the related series of all amounts required to be paid to them pursuant to
such Transfer and Servicing Agreements.
Optional Redemption. If so specified in the related Prospectus Supplement,
in order to avoid excessive administrative expense, the Depositor or another
party will be permitted at its option to purchase from the related Trustee, as
of the end of any Collection Period immediately preceding a Distribution Date,
if the then outstanding Pool Balance is a percentage specified in the related
Prospectus Supplement (not to exceed 30%) of the Initial Pool Balance (as
defined in the related Prospectus Supplement, the "Initial Pool Balance"), all
remaining related Student Loans at a price equal to the aggregate Purchase
Amounts thereof as of the end of such Collection Period, which amounts will be
used to retire the related Notes and Certificates concurrently therewith. Upon
termination of a Trust, as more fully described in the related Prospectus
Supplement, all right, title and interest in the Student Loans and other funds
of such Trust, after giving effect to any final distributions to Noteholders and
Certificateholders of the related series therefrom, will be conveyed and
transferred to the Depositor or such other party.
Auction of Student Loans. If so provided in the related Prospectus
Supplement, all remaining Student Loans held by a Trust will be offered for sale
by the Indenture Trustee on any Distribution Date occurring on or after a date
specified in such Prospectus Supplement. The Depositor and unrelated third
parties may offer bids for such Student Loans. The Indenture Trustee will accept
the highest bid equal to or in excess of the aggregate Purchase Amounts of such
Student Loans as of the end of the Collection Period immediately preceding the
related Distribution Date. The proceeds of such sale will be used to redeem all
related Notes and to retire the related Certificates. The Trustee will not
accept any bid for the Student Loans that is not sufficient to redeem all
related Notes and to retire the related Certificates.
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ADMINISTRATION AGREEMENT
The Administrator will enter into an agreement (as amended and supplemented
from time to time, an "Administration Agreement") with each Trust and the
related Indenture Trustee pursuant to which the Administrator will agree, to the
extent provided therein, to provide the notices and to perform other
administrative obligations required by the related Indenture, the related Trust
Agreement, the related Loan Sale Agreement, the related Transfer Agreement and
the related Loan Servicing Agreements. As compensation for the performance of
the Administrator's obligations under the applicable Administration Agreement
and as reimbursement for its expenses related to a Trust, the Administrator will
be entitled to an administration fee as specified in the related Prospectus
Supplement (the "Administration Fee"). The Administrator under each
Administration Agreement will be EFG. EFG Technologies is a division of EFG and
EFG Funding Corporation is a wholly owned subsidiary of EFG.
An "Administrator Default" will occur under an Administration Agreement in
the event of (a) a failure by the Administrator to direct the Indenture Trustee
to make any required distributions from any of the Trust Accounts, which failure
continues unremedied for three business days after written notice from the
Indenture Trustee or the Trustee of such failure, (b) any failure by the
Administrator to observe or perform in any material respect any other covenant
or agreement of the Administrator in the Administration Agreement or (c) an
Insolvency Event with respect to the Administrator occurs.
The procedures for terminating the rights and obligations of the
Administrator and appointing a successor Administrator following the occurrence
of an Administrator Default under the Administration Agreement and for waiving
defaults by the Administrator under the Administration Agreement will be
substantially similar to those for replacing the Servicer and appointing a
successor Servicer following the occurrence of a Servicer Default under the
FFELP Loan Servicing Agreement and for waiving defaults by the Servicer under
the FFELP Loan Servicing Agreement, except that such procedures will apply to
the Administrator and the Administration Agreement rather than the Servicer and
the FFELP Loan Servicing Agreement.
CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS
TRANSFER OF STUDENT LOANS
EFG intends that the transfer of the Student Loans by it to the Depositor,
and the Depositor intends that the transfer of the Student Loans by it to the
related Eligible Lender Trustee on behalf of each Trust, will constitute a valid
sale and assignment of such Student Loans. Notwithstanding the foregoing, if the
transfer of the Student Loans by EFG (or by the Eligible Lender Trustee on its
behalf) to the Depositor and/or the transfer of the Student Loans by the
Depositor to the Trustee on behalf of each Trust is deemed to be an assignment
of collateral as security, then a security interest in the FFELP Student Loans
may, pursuant to the provisions of 20 U.S.C. sec. 1087-2(d)(3), be perfected by,
among other things, the filing of notice of such security interest in the manner
provided by the applicable Uniform Commercial Code ("UCC") for perfection of
security interests in accounts and a security interest in Private Student Loans
may be perfected under applicable state law by the secured party or its agent
taking possession of the loan notes. A financing statement or statements naming
EFG as debtor will be filed under the UCC to protect the interest of the
Depositor in the event that the transfer by EFG (or by the Eligible Lender
Trustee on its behalf) is deemed to be an assignment of collateral as security,
and a financing statement or statements naming the Depositor as debtor will be
filed under the UCC to protect the interest of the Trustee in the event that the
transfer by the Depositor is deemed to be an assignment of collateral as
security. Similarly, loan notes evidencing Private Loans will be held by a
custodian on behalf of the secured parties.
If the transfer of the Student Loans is deemed to be an assignment as
security for the benefit of the Depositor or a Trust, there are certain limited
circumstances in which prior or subsequent transferees of Student Loans could
have an interest in such Student Loans with priority over the related Trustee's
interest. A tax or other government lien on property of EFG or the Depositor
arising prior to the time a Student Loan comes into existence may also have
priority over the interest of the Depositor or the related Trustee in such
Student Loan. Under the related Loan Sale Agreement, however, the Seller will
warrant that it has transferred the Student Loans to the Depositor clear of the
lien of any third party. In addition, each of the Seller and the Depositor will
covenant
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that it will not sell, pledge, assign, transfer or grant any lien on any Student
Loan (or any interest therein) other than to the Depositor or the related
Trustee on behalf of a Trust, respectively, except as provided below.
Pursuant to each Loan Servicing Agreement, the Servicer (or an independent
party in the case of Private Student Loans unless there is a Sub-Servicer that
is not affiliated with the Depositor and the Seller) as custodian on behalf of
the related Trust will have custody of the promissory notes evidencing the
Student Loans following the transfer of the Student Loans to Depositor and the
related Trustee. Although the records of EFG, the Depositor and Servicer will be
marked to indicate the sale and although EFG and the Depositor will cause UCC
financing statements to be filed with the appropriate authorities, the Student
Loans will not be physically segregated, stamped or otherwise marked to indicate
that such Student Loans have been sold to the Depositor and to such Eligible
Lender Trustee. If, through inadvertence or otherwise, any of such Student Loans
were sold to another party that (i) purchased such Student Loans in the ordinary
course of its business, (ii) took possession of such Student Loans, and
(iii) acquired the Student Loans for new value and without actual knowledge of
the related Eligible Lender Trustee's interest, then such purchaser would
acquire an interest in the Student Loans superior to the interest of the Seller,
the Depositor and the Trustee. See "DESCRIPTION OF THE TRANSFER AND SERVICING
AGREEMENTS--Sale of Student Loans; Representations and Warranties."
With respect to each Trust, in the event of a Servicer Default resulting
solely from certain events of insolvency or bankruptcy that may occur with
respect to the Servicer, a court, conservator, receiver or liquidator may have
the power to prevent either the related Indenture Trustee or Noteholders of the
related series from appointing a successor Servicer. See "DESCRIPTION OF THE
TRANSFER AND SERVICING AGREEMENTS--Rights upon Servicer Default."
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related regulations
impose substantial requirements upon lenders and servicers involved in consumer
finance. Also, unless preempted by federal law, some state laws impose finance
charge ceilings and other restrictions on certain consumer transactions and
require contract disclosures in addition to those required under federal law.
These requirements impose specific statutory liabilities upon lenders who fail
to comply with their provisions. In certain circumstances, the Depositor or a
Trust may be liable for certain violations of consumer protection laws that
apply to the Student Loans, either as assignee from EFG or the Depositor or as
the party directly responsible for obligations arising after the transfer. For a
discussion of a Trust's rights if the Student Loans were not originated or
serviced in compliance in all material respects with applicable laws, see
"DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS--Sale of Student Loans;
Representations and Warranties" and "DESCRIPTION OF THE TRANSFER AND SERVICING
AGREEMENTS--Servicer Covenants."
LOAN ORIGINATION AND SERVICING PROCEDURES APPLICABLE TO STUDENT LOANS
The Act, including the implementing regulations thereunder, imposes
specified requirements with respect to originating and servicing student loans
such as the FFELP Student Loans. Generally, those procedures require that a
determination of whether an applicant is an eligible borrower under applicable
standards (including financial need analysis) be made, the borrower's
responsibilities under the loan be explained to him or her, the promissory note
evidencing the loan be executed by the borrower and that the loan proceeds then
be disbursed in a specified manner by the lender. After the loan is made, the
lender must establish repayment terms with the borrower, properly administer
deferrals and forbearance and credit the borrower for payments made thereon. If
a borrower becomes delinquent in repaying a loan, a lender or a servicing agent
must perform certain collection procedures (primarily telephone calls and demand
letters) which vary depending upon the length of time a loan is delinquent. The
Servicer has agreed pursuant to the related FFELP Loan Servicing Agreement to
Guarantee perform collection and servicing procedures on behalf of the related
Trust. However, failure to follow these procedures or failure of the Depositor
to follow procedures relating to the origination of the FFELP Student Loans
could result in adverse consequences. Any such failure could result in the
Department's refusal to make reinsurance payments to the Federal Guarantors or
the Department's or the Federal Guarantors' refusal to make Guarantee Payments
to the Eligible Lender Trustee with respect to such FFELP Student Loans. Failure
of the Federal Guarantors to receive reinsurance payments from the Department
could adversely affect the Federal Guarantors' ability or legal obligation to
make Guarantee Payments to the related Eligible Lender Trustee with
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respect to such FFELP Student Loans. Private Guarantors impose similar
requirements on Private Student Loans, noncompliance with which could adversely
affect the income of a Trust containing such Private Student Loans.
Loss of any such payments could adversely affect the amount of Available
Funds on any Distribution Date and the related Trust's ability to pay principal
and interest on the Notes of the related series and to make distributions in
respect of the Certificates of the related series. Under certain circumstances,
the related Trust has the right, pursuant to the related Loan Sale Agreement and
the related Loan Servicing Agreement, to cause EFG or the Servicer to purchase
or substitute any Student Loan, if a breach of the representations, warranties
or covenants of the Seller or the Servicer, as the case may be, with respect to
such Student Loan has a material adverse effect on the interest of the Trust
therein where such breach would result in nonpayment of Program Payments and
such breach is not cured within any applicable cure period. See "DESCRIPTION OF
THE TRANSFER AND SERVICING AGREEMENTS--Sale of Student Loans; Representations
and Warranties" and "DESCRIPTION OF THE TRANSFER AND SERVICING
AGREEMENTS--Servicer Covenants." The failure of the Seller or the Servicer to so
purchase or substitute a Student Loan would constitute a breach of the related
Sale Agreement or related Servicing Agreement, enforceable by the related
Trustee on behalf of the related Trust or by the related Indenture Trustee on
behalf of the Noteholders of the related series, but would not constitute an
Event of Default under the Indenture.
FFELP STUDENT LOANS GENERALLY NOT SUBJECT TO DISCHARGE IN BANKRUPTCY
FFELP Student Loans are generally not dischargeable by a borrower in
bankruptcy pursuant to the U.S. Bankruptcy Code, unless excepting such debt from
discharge will impose an undue hardship on the debtor and the debtor's
dependents.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The statements of federal income tax law and the legal conclusions as to
federal income tax consequences of the purchase, ownership and disposition of
the Notes and the Certificates that are set forth below express the opinion of
Willkie Farr & Gallagher ("Federal Tax Counsel"). The summary does not purport
to deal with federal income tax consequences applicable to all categories of
holders, some of which may be subject to special rules. For example, it does not
discuss the tax treatment of Noteholders or Certificateholders that are
insurance companies, regulated investment companies or dealers in securities.
Moreover, there are no cases or Internal Revenue Service ("IRS") rulings on
similar transactions involving debt and/or equity interests issued by a trust
with terms similar to those of the Notes and/or the Certificates. As a result,
the IRS may disagree with all or a part of the discussion below. It is
recommended that prospective investors consult with their own tax advisors in
determining the federal, state, local, foreign and any other tax consequences to
them of the purchase, ownership and disposition of the Notes and the
Certificates.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder and judicial or ruling authority, all of which are
subject to change, which change may be retroactive. Each Trust will be provided
with an opinion of Federal Tax Counsel regarding certain federal income tax
matters discussed below, which opinion will be filed with the Commission prior
to the Closing Date for the securities issued by such Trust. An opinion of
Federal Tax Counsel, however, is not binding on the IRS or the courts. No ruling
on any of the issues discussed below will be sought from the IRS. For purposes
of the following summary, references to the Trust, the Notes, the Certificates
and related terms, parties and documents shall be deemed to refer, unless
otherwise specified herein, to each Trust and the Notes, Certificates and
related terms, parties and documents applicable to such Trust. Taxpayers and
preparers of tax returns (including those filed by any partnership or other
issuer) should be aware that under applicable Treasury regulations a provider of
advice on specific issues of law is not considered an income tax return preparer
unless the advice is (i) given with respect to events that have occurred at the
time the advice is rendered and is not given with respect to the consequences of
contemplated actions, and (ii) is directly relevant to the determination of an
entry on a tax return. Accordingly, it is recommended that taxpayers consult
with their respective tax advisors and tax return preparers regarding the
preparation of any item on a tax return, even where the anticipated tax
treatment of such item has been discussed herein.
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IT IS RECOMMENDED THAT EACH PROSPECTIVE INVESTOR CONSULT WITH ITS TAX
ADVISOR AS TO THE FEDERAL, STATE, LOCAL, FOREIGN AND ANY OTHER TAX CONSEQUENCES
OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES AND THE CERTIFICATES
SPECIFIC TO SUCH PROSPECTIVE INVESTOR.
TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE
Tax Characterization of the Trust. Federal Tax Counsel will deliver its
opinion that the Trust will not be an association (or a publicly traded
partnership) taxable as a corporation for federal income tax purposes. This
opinion will be based on the assumption that the terms of the Trust Agreement
and related documents will be complied with, and on counsel's conclusions that
(i) the nature of the income of the Trust will exempt it from the rule that
certain publicly traded partnerships are taxable as corporations, or (ii) the
Trust, if characterized as a tax partnership, will qualify under safe harbor
provisions applicable to publicly traded partnerships exempting it from
treatment as a publicly traded partnership taxable as a corporation.
Tax Consequences to Holders of the Notes; Treatment of the Notes as
Indebtedness. The Depositor will agree, and the Noteholders will agree by their
purchase of Notes, to treat the Notes as debt for federal income tax purposes.
Federal Tax Counsel will, except as otherwise provided in the related Prospectus
Supplement, deliver an opinion to the Trust that the Notes will be classified as
debt for federal income tax purposes. The discussion below assumes such
characterization of the Notes is correct.
Original Issue Discount. The discussion below assumes that all payments on
the Notes are denominated in U.S. dollars, that the interest formula for the
Notes meets the requirements for "qualified stated interest" ("Qualified Stated
Interest") under Treasury regulations (the "OID Regulations") relating to
original issue discount ("OID"), and that any OID on the Notes (i.e., any excess
of the stated redemption price at maturity of the Notes, generally the principal
amount of the Notes, over their issue price) does not exceed a de minimis amount
(i.e., 1/4% of their principal amount multiplied by the number of full years
included in their term), all within the meaning of the OID Regulations. If these
conditions are not satisfied with respect to any given series of Notes,
additional tax considerations with respect to such Notes will be disclosed in
the related Prospectus Supplement. The OID Regulations do not address their
application to debt instruments such as the Notes that are subject to prepayment
based on the prepayment of other debt instruments. The legislative history of
the OID provisions of the Code provides, however, that the calculation and
accrual of OID should be based on the prepayment assumption used by the parties
in pricing the transaction. In the event that any of the Notes are issued with
OID, the prepayment assumption will be set forth in the related Prospectus
Supplement. Furthermore, although premium amortization and accrued market
discount on debt instruments such as the Notes, which are subject to prepayment
based on the payments on other debt instruments, is to be determined under
regulations yet to be issued, the legislative history of the applicable Code
provisions provides that the same prepayment assumption used to calculate OID,
whether or not the debt instrument is issued with OID, should be used.
Interest Income on the Notes. Based on the above assumptions, and except
as disclosed in the related Prospectus Supplement or as discussed in the second
succeeding paragraph, the Notes will not be considered issued with OID. The
stated interest thereon will thus be taxable to a Noteholder as ordinary
interest income when received or accrued in accordance with such Noteholder's
general method of tax accounting. Under the OID Regulations, a holder of a Note
that was issued with a de minimis amount of OID must generally include such OID
in income, on a pro rata basis, as principal payments are made on the Note.
Alternatively, a Noteholder may elect to accrue de minimis all interest and
discount (including de minimis market discount and de minimis OID) in income as
interest, based on a constant yield method. If such an election were made with
respect to a Note with market discount, the Noteholder would be deemed to have
made an election to include currently in income market discount with respect to
all debt instruments having market discount that such Noteholder acquires during
the year of the election and thereafter. Similarly, a Noteholder that makes this
election for a Note that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Noteholder owns or acquires. The election to
accrue interest, discount and premium under a constant yield method with respect
to a Note is irrevocable. A purchaser who buys a Note for more or less than its
principal amount will generally be subject, respectively, to the premium
amortization or market discount rules of the Code.
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Qualified Stated Interest, which is taxable in accordance with the holder's
general method of tax accounting, is interest that is unconditionally payable
(i.e., late payments are penalized) at least annually at a single fixed rate or
at certain qualified variable rates. The Depositor intends to treat the interest
paid on the Notes as Qualified Stated Interest.
A holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a "Short-Term Note") may be subject to special
rules. An accrual basis holder of a Short-Term Note (and certain cash method
holders, including regulated investment companies, banks and securities dealers,
as set forth in Section 1281 of the Code) generally will be required to report
interest income as interest accrues on a ratable basis over the term of each
interest period or, at the election of the holder, on a constant yield basis
(i.e. , treating the instrument as accruing interest at a single rate). Cash
basis holders of a Short-Term Note will, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1282 of the Code
to accrue interest income on all nongovernmental debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Optional Election. As an alternative to the above treatments, accrual
method holders may elect to include in gross income all interest with respect to
a Note, including stated interest, acquisition discount, OID, de minimis OID,
market discount, de minimis market discount, and unstated interest, as adjusted
by any amortizable bond premium or acquisition premium, using the constant yield
method described above.
Sale or Other Disposition. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will generally equal the
holder's cost for the Note, increased by any market discount, acquisition
discount, OID and gain previously included by such Noteholder in income with
respect to the Note and decreased by the amount of bond premium (if any)
previously amortized and by the amount of principal payments previously received
by such Noteholder with respect to such Note. Any such gain or loss will be
capital gain or loss if the Note was held as a capital asset, except for gain
representing accrued interest and accrued market discount not previously
included in income. Capital losses generally may be used only to offset capital
gains.
Foreign Holders. Interest paid (or accrued) to a Noteholder who is a
Foreign Person (as hereinafter defined) generally will not be subject to United
States federal income tax and withholding tax, provided, that (i) the interest
is not effectively connected with the conduct of a trade or business within the
United States by the Foreign Person, (ii) the Foreign Person is not actually or
constructively a "10 percent shareholder" of the Trust, the Depositor or the
Seller (including a holder of 10% of the outstanding Certificates) nor a
"controlled foreign corporation" with respect to which the Trust, the Depositor
or the Seller is a "related person" within the meaning of the Code, and (iii)
the Foreign Person provides the Trustee or other person who is otherwise
required to withhold U.S. tax with respect to the Notes with an appropriate
statement (on Form W-8 or a similar form), signed under penalties of perjury,
certifying that the beneficial owner of the Note is a Foreign Person and
providing the Foreign Person's name and address. As used herein, "Foreign
Person" shall mean any individual, corporation, partnership or other entity for
United States federal income tax purposes other than (i) any individual who is a
citizen or resident of the United States, (ii) a corporation or partnership
(including any entity treated as a corporation or partnership for United States
federal income tax purposes) created or organized in or under the laws of the
United States, any state thereof or the District of Columbia unless, in the case
of a partnership, Treasury regulations provide otherwise, (iii) an estate the
income of which is subject to United States federal income tax regardless of its
source, (iv) a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more United
States persons have authority to control all substantial decisions of the trust,
or (vi) certain trusts in existence on August 20, 1996, and treated as United
States persons (as defined in Code Section 7701(a)(30)) prior to such date that
elect to continue to be so treated. If a Note is held through a securities
clearing organization or certain other financial institutions, the organization
or institution may provide the relevant signed statement to the withholding
agent; in that case, however, the
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signed statement must be accompanied by a Form W-8 or substitute form provided
by the Foreign Person that owns the Note. If such interest is not portfolio
interest, then it will be subject to United States federal income and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a Foreign Person generally will be exempt from
United States federal income and withholding tax, provided that (i) such gain is
not effectively connected with the conduct of a trade or business in the United
States by the Foreign Person, and (ii) in the case of an individual Foreign
Person, the Foreign Person is not present in the United States for 183 days or
more in the taxable year.
If the interest, gain or income on a Note held by a Foreign Person is
effectively connected with the conduct of a trade or business in the United
States by the Foreign Person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement), the
holder generally will be subject to United States federal income tax on the
interest, gain or income at regular federal income tax rates. In addition, if
the Foreign Person is a foreign corporation, it may be subject to a branch
profits tax equal to 30% of its "effectively connected earnings and profits"
within the meaning of the Code for the taxable year, as adjusted for certain
items, unless it qualifies for a lower rate under an applicable tax treaty (as
modified by the branch profits tax rules).
Final regulations dealing with backup withholding and information reporting
on income paid to a Foreign Person and related matters (the "New Withholding
Regulations") were published in the Federal Register on October 14, 1997. In
general, the New Withholding Regulations do not significantly alter the
substantive withholding and information reporting requirements, but do unify
current certification procedures and forms and clarify reliance standards. The
New Withholding Regulations generally will be effective for payments made after
December 31, 1999, subject to certain transition rules. The discussion set forth
above does not take the New Withholding Regulations into account. Prospective
Purchasers of the Notes who are Foreign Persons are strongly urged to consult
their own tax advisor with respect to the New Withholding Regulations.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate setting forth the holder's
name, address, correct federal taxpayer identification number and a statement
that the holder is not subject to backup withholding. Should a nonexempt
Noteholder fail to provide the required certification, the Trust will be
required to withhold 31% of the amount otherwise payable to the holder, and
remit the withheld amount to the IRS as a credit against the holder's federal
income tax liability.
As previously mentioned, the New Withholding Regulations were published in
the Federal Register on October 14, 1997, and generally will be effective for
payments made after December 31, 1999, subject to certain transition rules. The
discussion set forth above does not take the New Withholding Regulations into
account. It is recommended that prospective Noteholders consult their own tax
advisors with respect to the New Withholding Regulations.
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FASITs
The Trust may elect to be treated as a new type of entity for federal
income tax purposes known as a "financial asset securitization investment trust"
(a "FASIT"). In general, the FASIT provisions of the Code enable trusts such as
the Trust to be treated as pass-through entities that are not subject to federal
entity-level income tax (except with respect to certain prohibited transactions)
and to issue securities that are treated as debt for federal income tax
purposes. The Prospectus Supplement relating to any Trust for which a FASIT
election has been made will describe the requirements for the classification of
the Trust as a FASIT and the consequences to a holder of owning interests in a
FASIT.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
The following discussion only applies to a Trust which issues at least a
single class of Certificates and assumes that all payments on the Certificates
are denominated in U.S. dollars and that any such Certificates are sold to
persons other than the Company. If these conditions are not satisfied with
respect to any given series of Certificates, any additional tax considerations
with respect to such Certificates will be disclosed in the applicable Prospectus
Supplement.
Classification as a Partnership; Treatment of the Trust as a
Partnership. The Depositor and the Servicer will agree, and the
Certificateholders will agree by their purchase of Certificates, to treat the
Trust as a partnership for purposes of federal and state income tax, franchise
tax and any other tax measured in whole or in part by income, with the assets of
the partnership being the assets held by the Trust, the partners of the
partnership being the Certificateholders (including the Depositor in its
capacity as recipient of distributions from the Reserve Account, if any), and
the Notes being debt of the partnership. However, the proper characterization of
the arrangement involving the Trust, the Certificateholders, the Noteholders,
the Depositor and the Servicer is not clear because there is no authority on
transactions comparable to that contemplated herein.
Under the provisions of Subchapter K of the Code, a partnership is not
considered a separate taxable entity. Instead, partnership income is taxed
directly to the partners and each partner generally is viewed as owning a direct
undivided interest in each partnership asset. The partnership is generally
treated as an entity, however, for computing partnership income, determining the
tax consequences of transactions between a partner and the partnership, and
characterizing the gain on the sale or exchange of a partnership interest. The
following discussion is a summary of some of the material federal income tax
consequences of classifying the Trust as a partnership. It is recommended that
prospective owners of Certificates consult with their own tax advisors regarding
the federal income tax consequences discussed below, as well as any other
material federal income tax consequences that may result from applying the
provisions of Subchapter K to the ownership and transfer of a Certificate.
Partnership Taxation. As a partnership, the Trust will not be subject to
federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest and finance charges earned on the Student Loans (including
appropriate adjustments for market discount, OID and bond premium), investment
income from investments of amounts on deposit in any related Trust Accounts and
any gain upon collection or disposition of Student Loans. The Trust's deductions
will consist primarily of interest accruing with respect to the Notes, servicing
and other fees, and losses or deductions upon collection or disposition of
Student Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust for each Interest Period (as defined in the applicable Prospectus
Supplement, an "Interest Period") equal to the sum of (i) the interest that
accrues on the Certificates in accordance with their terms for such Interest
Period, including interest accruing at the Pass-Through Rate for such Interest
Period and interest on amounts previously due on the Certificates but not yet
distributed; (ii) any Trust income attributable to discount on the Student Loans
that corresponds to any excess of the principal amount of the Certificates over
their initial issue price; and (iii) all other amounts of income payable to the
Certificateholders for such Interest Period. All remaining taxable income of the
Trust will be allocated to the Depositor. Based on the economic arrangement of
the parties, this approach for allocating Trust income should be permissible
under applicable Treasury regulations, although no assurance
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can be given that the IRS would not require a greater amount of income to be
allocated to Certificateholders. Moreover, even under the foregoing method of
allocation, Certificateholders may be allocated income equal to the entire
amount of interest accruing on the Certificates for an Interest Period, based on
the Pass-Through Rate plus the other items described above, even though the
Trust might not have sufficient cash to make current cash distributions of such
amount. Thus, cash basis holders will in effect be required to report income
from the Certificates on the accrual basis and Certificateholders may become
liable for taxes on Trust income even if they have not received cash from the
Trust to pay such taxes. In addition, because tax allocations and tax reporting
will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices, Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust.
An individual Certificateholder's share of expenses of the Trust (including
fees to the Servicer but not interest expenses) are miscellaneous itemized
deductions which are deductible only to the extent they exceed two percent of
the individual's adjusted gross income. Accordingly, such deductions might be
disallowed to the individual in whole or in part and might result in such holder
being taxed on an amount of income that exceeds the amount of cash actually
distributed to such holder over the life of the Trust.
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each of the Student Loans,
the Trust might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
Computation of Income. Taxable income of the Trust will be computed at the
Trust level and then allocated pro rata to the Certificateholders. Consequently,
the method of accounting for taxable income will be chosen by, and any elections
(such as those described above with respect to the market discount rules) will
be made by, the Trust rather than the Certificateholders. The Trust intends, to
the extent possible, to (i) have the taxable income of the Trust computed under
the accrual method of accounting, and (ii) adopt a calendar-year taxable year
for computing the taxable income of the Trust. The tax year of the Trust,
however, is generally determined by reference to the tax years of the
Certificateholders. As a result, an owner of a Certificate would be required to
include its pro rata share of Trust income for a taxable year as determined by
the Trust in such Certificateholder's gross income for its taxable year in which
the taxable year of the Trust ends.
Determining the Bases of Trust Assets. The Trust will become a partnership
on the first date when Certificates are held by more than one person. On that
date, each of the Certificateholders should be treated as having purchased a pro
rata share of the assets of the Trust (subject to the liability for the Notes)
followed immediately by a deemed contribution of such assets to the newly formed
partnership. The partnership's basis in the Trust's assets would therefore equal
the sum of the Certificateholders' bases in their respective interests in the
Trust's assets immediately prior to the deemed contribution to the partnership.
To the extent that the fair market value of the assets deemed contributed to the
partnership varied from the bases of such assets to the partnership, the
allocation of taxable income to the Certificateholders would be adjusted in
accordance with Code Section 704(c) to account for such variations.
Under Code Section 708 a partnership is considered to terminate if 50% or
more of the partnership interests are sold or exchanged within a 12-month
period. If such a termination occurs, the partnership is deemed to distribute
its assets to its partners (including the Depositor) who are then deemed to
recontribute those assets to a new partnership. The new partnership would have a
basis in those assets equal to the basis of the contributing partners in their
partnership interests. If the Trust were characterized as a partnership and a
sale of Certificates terminated the partnership under Code Section 708, the
purchaser's basis in its ownership interest would automatically be reflected in
its pro rata portion of the Trust's assets.
Discount and Premium. To the extent that OID, if any, on the Student Loans
exceeds a de minimis amount, the Trust would have OID income. As indicated
above, a portion of such OID income may be allocated to the Certificateholders.
Moreover, the purchase price paid by the Trust for the Student Loans may be
greater or less than the remaining principal balance of the Student Loans at the
time of purchase. If so, the Student Loans will have been acquired at a premium
or with market discount, as the case may be. (As indicated above, the Trust will
make this calculation on an aggregate basis, but might be required to recompute
it on a loan-by-loan basis.)
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If the Trust acquires the Student Loans at a market discount or premium,
the Trust will elect to include any such discount in income currently as it
accrues over the life of the Student Loans or to offset any such premium against
interest income on the Student Loans. As indicated above, a portion of such
market discount income or premium deduction may be allocated to
Certificateholders.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
To the extent the Trust is characterized as a partnership, a Certificateholder's
tax basis in a Certificate will generally equal the holder's cost increased by
the holder's allocable share of Trust income (includible in gross income) and
decreased by any distributions received with respect to such Certificate. In
addition both the tax basis in the Certificate and the amount realized on a sale
of a Certificate would include the holder's allocable share of the Notes and
other liabilities of the Trust. A holder acquiring Certificates at different
prices may be required to maintain a single aggregate adjusted tax basis in such
Certificates, and, upon sale or other disposition of some of the Certificates,
allocate a pro rata portion of such aggregate tax basis to the Certificates sold
(rather than maintaining a separate tax basis in each Certificate for purposes
of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Student Loans would generally be
treated as ordinary income to the holder and could give rise to special tax
reporting requirements. The Trust does not expect to have any other assets that
would give rise to such special reporting requirements.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the close
of the last day of such month. As a result, a holder purchasing Certificates may
be allocated tax items (which will affect the tax liability and tax basis of the
holder) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing laws
and regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust might be reallocated among the Certificateholders. EFG and the
Company are authorized to revise the Trust's method of allocation between
transferors and transferees to conform to a method permitted by future laws,
regulations or other IRS guidance.
Section 754 Election. In the event that a Certificateholder sells a
Certificate at a profit (or loss), the purchasing Certificateholder will have a
higher (or lower) basis in the Certificate than the selling Certificateholder
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust were to file an election under Section
754 of the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust will not make such election. As a
result, Certificateholders might be allocated a greater or lesser amount of
Trust income than would be appropriate based on their own purchase price for
Certificates.
Administrative Matters. The Trustee is required to keep or cause to be
kept complete and accurate books of the Trust. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the taxable year of
the Trust will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust and will report each Certificateholder's allocable share of items of Trust
income and expense to holders and the IRS on Schedule K-1. The Trust will
provide the Schedule K-1 information to nominees that fail to provide the Trust
with the information statement described below and such nominees will be
required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information returns filed by the Trust or be subject to penalties unless the
holder notifies the IRS of all such inconsistencies.
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Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust with
a statement containing certain information on the nominee, the beneficial owners
and the Certificates so held. Such information includes (i) the name, address
and taxpayer identification number of the nominee, and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust information as
to themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act that holds Certificates as a nominee is
not required to furnish any such information statement to the Trust. The
information referred to above for any calendar year must be furnished to the
Trust on or before the following January 31. Nominees, brokers and financial
institutions that fail to provide the Trust with the information described above
may be subject to penalties.
The Depositor will be designated as the "tax matters partner" in the
related Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust by the appropriate taxing authorities could
result in an adjustment of the returns of the Certificateholders, and, under
certain circumstances, a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Trust. An adjustment could
also result in an audit of a Certificateholder's returns and adjustments of
items not related to the income and losses of the Trust.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust would be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to Foreign Persons
because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust would be engaged in a trade or business in the United States for
such purposes, the Trust will withhold as if it were so engaged in order to
protect the Trust from possible adverse consequences of a failure to withhold.
The Trust expects to withhold on the portion of its taxable income that is
allocable to Certificateholders that are Foreign Persons pursuant to Section
1446 of the Code, as if such income were effectively connected to a U.S. trade
or business, at a rate of 34% for foreign holders that are taxable as
corporations and 39.6% for all other foreign holders. These rates may be
increased by proposed tax legislation. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust to change its withholding procedures. In determining a holder's
withholding status, the Trust may rely on IRS Form W-8, IRS Form W-9 or the
holder's certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including in the case of a corporation, the branch
profits tax) on its share of the Trust's income. Each foreign holder must obtain
a taxpayer identification number from the IRS and submit that number to the
Trust on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust, taking the
position that no taxes were due because the Trust was not engaged in a U.S.
trade or business. However, there can be no assurance that any such claim for
refund would be accepted by the IRS or upheld by a court. Moreover, interest
payments made (or accrued) to a Certificateholder who is a Foreign Person
generally will be considered guaranteed payments to the extent such payments are
determined without regard to the income of the Trust. If these interest payments
are properly characterized as guaranteed payments, then the interest will not be
considered "portfolio interest." As a result, Certificateholders who are Foreign
Persons will be subject to United States federal income tax and withholding tax
at a rate of 30 percent, unless reduced or eliminated pursuant to an applicable
treaty. In such case, a foreign holder would only be entitled to claim a refund
for that portion of the taxes in excess of the taxes that should be withheld
with respect to the guaranteed payments.
Tax Consequences to Certain Tax-Exempt Certificateholders. Income earned
with respect to Certificates held by certain entities which generally are not
subject to federal income taxation, such as pension plans, charities
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or individual retirement accounts, will constitute "unrelated business taxable
income" within the meaning of Section 512 of the Code and will thus be subject
to tax at regular federal corporate income tax rates. Certificates may thus not
be an appropriate investment for tax-exempt entities of this type.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
TRUSTS IN WHICH ALL RESIDUAL INTERESTS ARE RETAINED BY THE DEPOSITOR
OR AN AFFILIATE OF THE DEPOSITOR
Tax Characterization of the Trust. Federal Tax Counsel will deliver its
opinion that a Trust which issues one or more classes of Notes to investors and
all the Residual Interests of which are retained by the Depositor or an
affiliate thereof will not be an association (or publicly traded partnership)
taxable as a corporation for federal income tax purposes. This opinion will be
based on the assumption that the terms of the Trust Agreement and related
documents will be complied with, and on Federal Tax Counsel's conclusions that
the Trust will constitute a mere security arrangement for the issuance of debt
by the single holder of a Residual Interest.
Treatment of the Notes as Indebtedness. The Depositor will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Federal Tax Counsel will, except as otherwise
provided in the related Prospectus Supplement, advise the Trust that the Notes
will be (or, in certain cases, should be) classified as debt for federal income
tax purposes. Assuming such characterization of the Notes is correct, the
federal income tax consequences to Noteholders described above under the heading
"TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE--Tax Consequences to Holders of
the Notes" would apply to the Noteholders.
If, contrary to the opinion of Federal Tax Counsel, the IRS successfully
asserted that one or more classes of Notes did not represent debt for federal
income tax purposes, such class or classes of Notes might be treated as equity
interests in the Trust. If such Notes were so treated, the Trust would most
likely, in the view of Federal Tax Counsel, nevertheless be treated as a
publicly traded partnership that was not taxable as a corporation due to
(i) the character of the income earned by the Trust, or (ii) the qualification
of the Trust under other safe harbor provisions applicable to publicly traded
partnerships exempting it from treatment as a publicly traded partnership
taxable as a corporation. Therefore, the partnership would not be subject to
federal income tax.
Nonetheless, treatment of Notes as equity interests in such a partnership
could have adverse tax consequences to certain holders of such Notes. For
example, income to certain tax-exempt entities (including pension funds) would
be "unrelated business taxable income," income to foreign holders might be
subject to U.S. withholding tax and U.S. tax return filing requirements, and
individual holders might be subject to certain limitations on their ability to
deduct their share of Trust expenses. In the event one or more classes of Notes
were treated as interests in a partnership, the consequences governing the
Certificates as equity interests in a partnership described above under "TRUSTS
FOR WHICH A PARTNERSHIP ELECTION IS MADE--Tax Consequences to Holders of the
Certificates" would apply to the holders of such Notes.
Moreover, if, contrary to the opinion of Federal Tax Counsel, the Notes
were not treated as debt for federal income tax purposes and the Trust was
treated as a publicly traded partnership taxable as a corporation, the Trust
would be subject to federal income taxes at corporate tax rates on its taxable
income generated by Student Loans. Such an entity-level tax could result in
substantially reduced distribution to Noteholders and Noteholders could be
liable for a share of such tax.
THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A NOTEHOLDER'S OR
CERTIFICATEHOLDER'S PARTICULAR TAX SITUATION. IT IS RECOMMENDED THAT PROSPECTIVE
PURCHASERS CONSULT WITH THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES
TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES AND CERTIFICATES,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS
AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
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CERTAIN STATE TAX CONSEQUENCES
The state in which the principal loan servicing activities of the Servicer
or the Sub-Servicer, as the case may be, for the Student Loans beneficially
owned by a particular Trust take place is referred to as the "Applicable State."
Because of the variation in each state's tax laws, it is impossible to
predict state and local tax consequences to holders of Notes and Certificates in
all state taxing jurisdictions. IT IS RECOMMENDED THAT NOTEHOLDERS AND
CERTIFICATEHOLDERS CONSULT WITH THEIR OWN TAX ADVISORS WITH RESPECT TO STATE TAX
CONSEQUENCES ARISING OUT OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES AND
CERTIFICATES.
Tax Consequences with Respect to the Notes. It is expected that tax
counsel for the Applicable State in which the Student Loan servicing activities
take place ("State Tax Counsel") will deliver its opinion to the Trust that,
assuming the Notes are treated as debt for federal income tax purposes, the
Notes will be treated as debt for an Applicable State individual income and
corporate income tax purposes. Accordingly, Noteholders not otherwise subject to
taxation in the Applicable State should not become subject to taxation in the
Applicable State solely because of a holder's ownership of Notes. However, a
Noteholder already subject to the Applicable State's individual income tax or
corporate income tax could be required to pay additional tax as a result of the
holder's ownership or disposition of Notes.
Tax Consequences with Respect to the Certificates. State Tax Counsel will
render its opinion that the Trust will not be taxable as a separate entity for
Applicable State tax purposes. As a result, if the Trust should be treated as a
partnership, the Trust should not be subject to Applicable State corporate
income taxes (if such taxes were applicable, however, they could result in
reduced distributions to Certificateholders). Moreover, Certificateholders that
are not otherwise subject to tax in the Applicable State should not be subject
to any Applicable State individual income or corporate income taxes with respect
to income from the partnership, unless the Trust is considered to be carrying on
business in the Applicable State.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain requirements on employee benefit plans and on
certain other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and separate
accounts (and, as applicable, insurance company general accounts) in which such
plans, accounts or arrangements are invested that are subject to the fiduciary
responsibility provisions of ERISA and Section 4975 of the Code ("Plans") and on
persons who are fiduciaries with respect to such Plans in connection with the
investment of Plan assets. Certain employee benefit plans, such as governmental
plans (as defined in ERISA Section 3(32)), 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 Notes without regard to the ERISA considerations described
below, subject to the provisions of other applicable federal and state law. Any
such plan which is qualified and exempt from taxation under
Sections 401(a) and 501(a) of the Code, however, is subject to the prohibited
transactions rules set forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, Section 406 of ERISA and Section 4975 of the
Code prohibit a broad range of transactions involving assets of a Plan and
persons (parties in interest under ERISA and disqualified persons under the
Code, collectively, "Parties in Interest") who have certain specified
relationships to the Plan unless a statutory, regulatory or administrative
exemption is available. Certain Parties in Interest that participate in a
prohibited transaction may be subject to an excise tax imposed pursuant to
Section 4975 of the Code or a penalty imposed pursuant to Section 502(i) of
ERISA, unless a statutory or administrative exemption is available. These
prohibited transactions generally are set forth in Section 406 of ERISA and
Section 4975 of the Code.
THE NOTES
Unless otherwise specified in the related Prospectus Supplement, the Notes
of each series may be purchased by a Plan. The Issuer, the Company, any
underwriter, the Eligible Lender Trustee, the Indenture Trustee, the Servicer,
the Administrator, any provider of credit support or any of their affiliates may
be considered to be or
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may become Parties in Interest with respect to certain Plans. Prohibited
transactions under Section 406 of ERISA and Section 4975 of the Code may arise
if a Note is acquired by a Plan with respect to which such persons are Parties
in Interest unless such transactions are subject to one or more statutory or
administrative exemptions, such as: Prohibited Transaction Class Exemption
("PTCE") 96-23, which exempts certain transactions effected on behalf of a Plan
by an "in-house asset manager"; PTCE 90-1 which exempts certain transactions
between insurance company separate accounts and Parties in Interest' PTCE 91-38,
which exempts certain transactions between bank collective investment funds and
Parties in Interest; PTCE 95-60, which exempts certain transactions between
insurance company general accounts and Parties in Interest; or PTCE 84-14, which
exempts certain transactions effected on behalf of a Plan by a "qualified
professional asset manager". There can be no assurance that any of these class
exemptions will apply with respect to any particular Plan investment in Notes,
or, even if it were deemed to apply, that any exemption would apply to all
prohibited transactions that may occur in connection with such investment.
Accordingly, prior to making an investment in the Notes, investing Plans should
determine whether the Issuer, the Company, any underwriter, the Eligible Lender
Trustee, the Indenture Trustee, the Servicer, the Administrator, or any provider
of credit support or any of their affiliates is a Party in Interest with respect
to such Plan and, if so, whether such transaction is subject to one or more
statutory, regulatory or administrative exemptions.
Any Plan fiduciary considering whether to invest in Notes on behalf of a
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. Each Plan fiduciary also should determine whether,
under the general fiduciary standards of investment prudence and
diversification, an investment in the Notes is appropriate for the Plan,
considering the overall investment policy of the Plan and the composition of the
Plan's investment portfolio, as well as whether such investment is permitted
under the governing Plan instruments.
THE CERTIFICATES
Unless otherwise specified in the Prospectus Supplement, the Certificates
of each series may not be purchased by a Plan or by any entity whose underlying
assets include plan assets by reason of a plan's investment in the entity (each,
a "Benefit Plan"). Such purchase of an equity interest in the Trust could result
in the assets of the Trust being deemed assets of a Benefit Plan for the
purposes of ERISA and Section 4975 of the Code, and certain transactions
involving the Trust could then be deemed to constitute prohibited transactions
under Section 406 of ERISA and Section 4975 of the Code. A violation of the
"prohibited transaction" rules may result in an excise tax or other penalties
and liabilities under ERISA and Section 4975 of the Code imposed on fiduciaries
of Plans, as well as persons who are "parties in interest" (as defined in
Section 3(14) of ERISA) or "disqualified persons" (as defined in Section 4975 of
the Code) with respect to such Plans.
By its acceptance of a Certificate, each Certificateholder will be deemed
to have represented and warranted that it is not a Benefit Plan.
If a given series of Certificates may be acquired by a Benefit Plan because
of the application of an exception contained in regulations issued by the United
States Department of Labor (the "Plan Assets Regulation"), such exception will
be discussed in the related Prospectus Supplement.
* * *
A Plan fiduciary considering the purchase of Securities of a given series
should consult its tax and/or legal advisors regarding whether the assets of the
related Trust would be considered plan assets, the possibility of exemptive
relief from the prohibited transaction rules and other issues and their
potential consequences.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement with
respect to the Notes of a given series and an underwriting agreement with
respect to the Certificates of such series (collectively, the "Underwriting
Agreements"), the Depositor will agree to cause the related Trust to sell to the
underwriters named therein and in the related Prospectus Supplement, and each of
such underwriters will severally agree to purchase, the principal amount of each
class of Notes and Certificates, as the case may be, of the related series set
forth therein and in the related Prospectus Supplement.
In each of the Underwriting Agreements with respect to any given series of
Securities, the several underwriters will agree, subject to the terms and
conditions set forth therein, to purchase all the Notes and
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Certificates, as the case may be, described therein which are offered hereby and
by the related Prospectus Supplement if any of such Notes and Certificates, as
the case may be, are purchased.
Each Prospectus Supplement will either (i) set forth the price at which
each class of Notes and Certificates, as the case may be, being offered thereby
will be offered to the public and any concessions that may be offered to certain
dealers participating in the offering of such Notes and Certificates, as the
case may be, or (ii) specify that the related Notes and Certificates, as the
case may be, are to be resold by the underwriters in negotiated transactions at
varying prices to be determined at the time of such sale. After the initial
public offering of any such Notes and Certificates, as the case may be, such
public offering prices and such concessions may be changed.
Until the distribution of the Securities is completed, rules of the
Commission may limit the ability of the underwriters and certain selling group
members to bid for and purchase the Securities. As an exception to these rules,
the underwriters are permitted to engage in certain transactions that stabilize
the price of the Securities. Such transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of the Securities.
If an underwriter creates a short position in the Securities in connection
with the offering, i.e., if it sells more Securities than are set forth on the
cover page of the related Prospectus Supplement, the underwriter may reduce that
short position by purchasing Securities in the open market.
An underwriter may also impose a penalty bid on certain underwriters and
selling group members. This means that if the underwriter purchases Securities
in the open market to reduce the underwriters' short position or to stabilize
the price of the Securities, it may reclaim the amount of the selling concession
from the underwriters and selling group members who sold those Securities as
part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it
discourages resales of the security.
Neither the Depositor nor the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Securities. In addition, neither
the Depositor nor the underwriters make any representation that the underwriters
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
Each Underwriting Agreement will provide that the Depositor or EFG will
indemnify the underwriters against certain civil liabilities, including
liabilities under the Securities Act, or contribute to payments the several
underwriters may be required to make in respect thereof.
Each Trust may, from time to time, invest the funds in its Trust Accounts
in eligible investments acquired from such underwriters.
Pursuant to each of the Underwriting Agreements with respect to a given
series of Securities, the closing of the sale of any class of Securities subject
to either thereof will be conditioned on the closing of the sale of all other
such classes subject to either thereof.
The place and time of delivery for the Securities in respect of which this
Prospectus is delivered will be set forth in the related Prospectus Supplement.
LEGAL MATTERS
Certain legal matters relating to the Securities of any series will be
passed upon for EFG, the Depositor, the Servicer and the Administrator by Robert
Vlach, Esq., General Counsel of EFG, and by Willkie Farr & Gallagher, New York,
New York, special counsel to EFG and the Depositor, and for the underwriters for
such series by the firm identified in the related Prospectus Supplement. Certain
federal income tax and other matters will be passed upon for each Trust by
Willkie Farr & Gallagher, New York, New York. Certain Delaware and Applicable
State tax matters will be passed upon for each Trust by the firm or firms
identified in the related Prospectus Supplement.
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INDEX OF TERMS
Set forth below is a list of the defined terms used in this Prospectus and
the pages on which the definitions of such terms may be found herein.
<TABLE>
<CAPTION>
TERMS PAGE
- ---------------------------------------------------------------------------------------------------
<S> <C>
1992 Amendments.................................................................................... 34
1998 Amendments.................................................................................... 35
91-Day T-Bill...................................................................................... 37
Act................................................................................................ 15, 33
Add-on Federal Consolidation Loans................................................................. 43
Additional Fundings................................................................................ 10, 57
Administration Agreement........................................................................... 65
Administration Fee................................................................................. 65
Administrator...................................................................................... 8
Applicable State................................................................................... 76
Applicable Trustee................................................................................. 54
Auto Advantage Repayment Plan...................................................................... 23, 27
Base Rate.......................................................................................... 53
Benefit Plan....................................................................................... 77
Calculation Agent.................................................................................. 54
Cede............................................................................................... 24
Certificate Balance................................................................................ 9
Certificate Pool Factor............................................................................ 47
Certificateholders................................................................................. 24
Certificates....................................................................................... Cover
Closing Date....................................................................................... 9, 56
Code............................................................................................... 67
Collateral Reinvestment Account.................................................................... 10
Collection Account................................................................................. 57
Collection Period.................................................................................. 59
Commission......................................................................................... 2
Cutoff Date........................................................................................ 9
Deferral Period.................................................................................... 40
Definitive Certificates............................................................................ 55
Definitive Notes................................................................................... 55
Definitive Securities.............................................................................. 55
Department......................................................................................... 11
Depositor.......................................................................................... Cover, 7
Depository......................................................................................... 48
Distribution Date.................................................................................. 48
DSLP............................................................................................... 19
DTC's Nominee...................................................................................... 24
Early Amortization Event........................................................................... 10
EFG................................................................................................ 7, 8, 26
EFG Eligible Lender Trustee........................................................................ 8
Eligible Deposit Account........................................................................... 58
Eligible Institution............................................................................... 58
Eligible Investments............................................................................... 58
</TABLE>
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<TABLE>
<CAPTION>
TERMS PAGE
- ---------------------------------------------------------------------------------------------------
<S> <C>
ERISA.............................................................................................. 14, 76
Event of Default................................................................................... 49
family contribution................................................................................ 37
FASIT.............................................................................................. 71
Federal Assistance................................................................................. 38
Federal Consolidation Loan......................................................................... 34, 42
Federal Guarantor.................................................................................. 11
Federal Origination Fee............................................................................ 18
Federal PLUS Loans................................................................................. 34
Federal SLS Loans.................................................................................. 34
Federal Stafford Loans............................................................................. 34
Federal Supplemental Loans to Students............................................................. 34
Federal Tax Counsel................................................................................ 14, 67
Federal Unsubsidized Stafford Loans................................................................ 34
FFELP.............................................................................................. 9, 33
FFELP Loan Servicing Agreement..................................................................... 12
FFELP Loans........................................................................................ 7
FFELP Student Loans................................................................................ 9
Fixed Rate Securities.............................................................................. 53
Floating Rate Securities........................................................................... 53
Forbearance Period................................................................................. 41
Foreign Person..................................................................................... 69
Funding Period..................................................................................... 9
Grace Period....................................................................................... 40
Grad Advantage Program............................................................................. 23, 27
Guarantee Agreement................................................................................ 44
Guarantee Payments................................................................................. 11
Indenture.......................................................................................... 8
Indenture Trustee.................................................................................. Cover
Index Shortfall Carryover.......................................................................... 50
Indirect Participants.............................................................................. 54
Initial Pool Balance............................................................................... 64
Insolvency Event................................................................................... 61
Insolvency Laws.................................................................................... 24
Interest Period.................................................................................... 71
Interest Rate...................................................................................... 8
Interest Reset Period.............................................................................. 53
Interest Subsidy Payments.......................................................................... 38
Investment Earnings................................................................................ 58
IRS................................................................................................ 67
Issuer............................................................................................. 7
Loan Servicing Agreement........................................................................... 12
Monthly Rebate Fee................................................................................. 18
New Withholding Regulations........................................................................ 70
Note Pool Factor................................................................................... 47
Noteholders........................................................................................ 24
Notes.............................................................................................. Cover
</TABLE>
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<TABLE>
<CAPTION>
TERMS PAGE
- ---------------------------------------------------------------------------------------------------
<S> <C>
OID................................................................................................ 68
Participants....................................................................................... 48
Parties in Interest................................................................................ 76
Pass-Through Rate.................................................................................. 9
Plan Assets Regulation............................................................................. 77
Plans.............................................................................................. 76
Pool Balance....................................................................................... 47
Pool Factor........................................................................................ 47
Pre-Funding Account................................................................................ 10
Pre-Funding Amount................................................................................. 10
prepayments........................................................................................ 22, 46
Private Guarantor.................................................................................. 11
Private Loan Servicing Agreement................................................................... 12
Private Student Loans.............................................................................. 9
Prospectus Supplement.............................................................................. Cover
PTCE............................................................................................... 77
Purchase Amount.................................................................................... 57
Qualified Stated Interest.......................................................................... 68
Registration Statement............................................................................. 2
Related Documents.................................................................................. 51
Reserve Account.................................................................................... 11, 62
Reserve Account Initial Deposit.................................................................... 11
Revolving Period................................................................................... 10
Rules.............................................................................................. 54
Secretary.......................................................................................... 23, 35
Securities......................................................................................... Cover
Securities Act..................................................................................... 2
Securityholders.................................................................................... 24
Seller............................................................................................. Cover, 8
Servicer........................................................................................... 7, 31
Servicer Default................................................................................... 23, 61
Servicing Fee...................................................................................... 13, 59
Short-Term Note.................................................................................... 69
Special Allowance Payments......................................................................... 37
Spread............................................................................................. 53
State Tax Counsel.................................................................................. 76
Student Loan Rate.................................................................................. 53
Student Loans...................................................................................... Cover, 9
Transfer and Servicing Agreements.................................................................. 56
Trust.............................................................................................. Cover, 7
Trust Accounts..................................................................................... 58
Trust Agreement.................................................................................... 7
Trustee............................................................................................ Cover
UCC................................................................................................ 65
Underwriting Agreements............................................................................ 77
Unmet Need......................................................................................... 37
Year 2000 Problem.................................................................................. 28
</TABLE>
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses in connection with the offering of the Notes and the Certificates
being registered herein are estimated as follows:*
SEC registration fee........................................................
Legal fees and expenses.....................................................
Accounting fees and expenses................................................
Blue Sky fees and expenses..................................................
Rating agency fees..........................................................
Eligible Lender Trustee fees and expenses...................................
Indenture Trustee fees and expenses.........................................
Printing expenses...........................................................
Miscellaneous...............................................................
Total..................................................................
- ------------------
* To be completed by amendment.
ITEM 15. INDEMNIFICATION OF REGISTRANT
As authorized by Section 145 of the General Corporation Law of Delaware,
the Articles of Incorporation of the Registrant provide that the Registrant
shall indemnify to the fullest extent permitted under and in accordance with the
laws of the State of Delaware any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the Registrant) by reason of the fact that he is
or was a director, officer, incorporator, employee or agent of the Registrant,
or is or was serving at the request of the Registrant as a director, officer,
trustee, employee or agent of or in any other similar capacity with another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Registrant, and, with respect to any original action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceedings, shall not,
of itself, create a presumption that the person had reasonable cause to believe
that his conduct was unlawful.
Expenses (including attorneys' fees) incurred in defending any civil,
criminal, administrative or investigative action, suit or proceeding shall (in
the case of any action, suit or proceeding against a director of the Registrant)
or may (in the case of any action, suit or proceeding against an officer,
trustee, employee or agent) be paid by the Registrant in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking by
or on behalf of the indemnified person to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
Registrant.
II-1
<PAGE>
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ---------- -------------------------------------------------------------------------------------------- ----------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement for Notes and Certificates.+
3.1 -- Certificate of Incorporation of EFG Funding Corporation.*
3.2 -- By-Laws of EFG Funding Corporation.*
3.3 -- Form of Certificate of Trust for the EFG Student Loan Trusts.+
4.1 -- Form of Indenture between the Trust and the Indenture Trustee (including as an exhibit
thereto a form of Note).+
4.2 -- Form of Trust Agreement between EFG Funding Corporation and the Trustee (including as
an exhibit thereto a form of Certificate).+
4.3 -- Form of Eligible Lender Trust Agreement between EFG Funding Corporation and the
Eligible Lender Trustee.+
4.4 -- Form of Note (included as an exhibit to Exhibit 4.1).+
4.5 -- Form of Certificate (included as an exhibit to Exhibit 4.2).+
5 -- Opinion of [ ], Esq. with respect to legality.+
8.1 -- Opinion of Willkie Farr & Gallagher with respect to tax matters.+
8.2 -- Opinion of Delaware tax counsel with respect to certain Delaware tax matters.+
23.1 -- Consent of [ ], Esq. (included as part of Exhibit 5).+
23.2 -- Consent of Willkie Farr & Gallagher (included as part of Exhibit 8.1).+
23.3 -- Consent of Delaware tax counsel (included as part of Exhibit 8.2).+
25 -- Statement of Eligibility under the Trust Indenture Act of 1939 of the Indenture
Trustee.+
99.1 -- Form of Transfer Agreement among EFG Funding Corporation, the Trust and the Eligible
Lender Trustee.+
99.2 -- Form of Servicing Agreement among EFG Technologies, a division of Educational Finance
Group, Inc., the Trust, EFG Funding Corporation and the Eligible Lender Trustee.+
99.3 -- Form of Private Loan Servicing Agreement between the Trust and EFG Technologies.+
99.4 -- Form of Administration Agreement between the EFG Funding Corporation, the Indenture
Trustee and Educational Finance Group, Inc., as Administrator.+
99.5 -- Form of Loan Sale Agreement between EFG Funding Corporation, Educational Finance
Group, Inc., Eligible Lender Trustee and EFG Trustee.+
</TABLE>
- ------------------
* Previously filed.
+ To be filed by amendment.
ITEM 17. UNDERTAKINGS
(a) As to Rule 415:
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made
of the securities registered hereby, a post-effective amendment to this
Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment hereof) which, individually or in
II-2
<PAGE>
the aggregate, represent a fundamental change in the information set
forth in this Registration Statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of the prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than a 20% change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement;
provided, however, that the undertakings set forth in clauses (i) and
(ii) above do not apply if the information required to be included in a
post-effective amendment by those clauses is contained in periodic
reports filed by the Registrant pursuant to Section 13 or Section
15(d) of the Securities Exchange Act of 1934, as amended, that are
incorporated by reference in this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) As to documents subsequently filed that are incorporated by reference:
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended,
each filing of the Registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as
amended, that is incorporated by reference in this Registration Statement
shall be deemed to be a new registration statement relating to the
securities offered herein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreements, Notes and
Certificates in such denominations and registered in such names as required by
the Underwriter to permit prompt delivery to each purchaser.
(d) As to indemnification:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the provisions
described under Item 15, or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable. In the event that a claim for indemnification
against such liabilities (other than payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of such
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, such Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.
(e) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, as amended, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
II-3
<PAGE>
(2) For the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new Registration Statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(f) The Registrant hereby undertakes to file an application for the
purposes of determining the eligibility of the Indenture Trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Securities and Exchange Commission under
Section 305(b)(2) of the Securities Act of 1933, as amended.
(g) The Registrant reasonably believes that the security rating requirement
for the eligibility of this Form S-3 will be met at the time of sale for each
series of Notes and Certificates.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, EFG FUNDING
CORPORATION CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL OF THE REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS
AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT (NO. 333-64009) TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN HYANNIS,
MASSACHUSETTS ON FEBRUARY 24, 1999.
EFG FUNDING CORPORATION
By: /s/ STEPHEN J. GALVIN
----------------------------------
Stephen J. Galvin
President and Assistant Secretary
(Principal Executive Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO THE REGISTRATION STATEMENT (NO. 333-64009) HAS BEEN SIGNED BELOW ON
FEBRUARY 24, 1999 BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
- ------------------------------------------ --------------------------------------------
<S> <C>
/s/ STEPHEN J. GALVIN Director, President and Assistant Secretary
- ------------------------------------------ (Principal Executive Officer)
Stephen J. Galvin
* Director, Vice President, Secretary and
- ------------------------------------------ Treasurer (Principal Accounting Officer and
Michael R. Hartwig Principal Financial Officer)
* Director, Assistant Secretary
- ------------------------------------------ and Assistant Treasurer
Vernon Woelke
* By: /s/ STEPHEN J. GALVIN
Stephen J. Galvin
Attorney-in-fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ---------- ----------- ----------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement for Notes and Certificates.+
3.1 -- Certificate of Incorporation of EFG Funding Corporation.*
3.2 -- By-Laws of EFG Funding Corporation.*
3.3 -- Form of Certificate of Trust for the EFG Student Loan Trusts.+
4.1 -- Form of Indenture between the Trust and the Indenture Trustee (including as an exhibit
thereto a form of Note).+
4.2 -- Form of Trust Agreement between EFG Funding Corporation and the Trustee (including as
an exhibit thereto a form of Certificate).+
4.3 -- Form of Eligible Lender Trust Agreement between EFG Funding Corporation and the
Eligible Lender Trustee.+
4.4 -- Form of Note (included as an exhibit to Exhibit 4.1).+
4.5 -- Form of Certificate (included as an exhibit to Exhibit 4.2).+
5 -- Opinion of [ ], Esq. with respect to legality.+
8.1 -- Opinion of Willkie Farr & Gallagher with respect to tax matters.+
8.2 -- Opinion of Delaware tax counsel with respect to certain Delaware tax matters.+
23.1 -- Consent of [ ], Esq. (included as part of Exhibit 5).+
23.2 -- Consent of Willkie Farr & Gallagher (included as part of Exhibit 8.1).+
23.3 -- Consent of Delaware tax counsel (included as part of Exhibit 8.2).+
25 -- Statement of Eligibility under the Trust Indenture Act of 1939 of the Indenture
Trustee.+
99.1 -- Form of Transfer Agreement among EFG Funding Corporation, the Trust and the Eligible
Lender Trustee.+
99.2 -- Form of Servicing Agreement among EFG Technologies, a division of Educational Finance
Group, Inc., the Trust, EFG Funding Corporation and the Eligible Lender Trustee.+
99.3 -- Form of Private Loan Servicing Agreement between the Trust and EFG Technologies.+
99.4 -- Form of Administration Agreement between the EFG Funding Corporation, the Indenture
Trustee and Educational Finance Group, Inc., as Administrator.+
99.5 -- Form of Loan Sale Agreement between EFG Funding Corporation, Educational Finance
Group, Inc., Eligible Lender Trustee and EFG Trustee.+
</TABLE>
- ------------------
* Previously filed.
+ To be filed by amendment.
