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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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NELLIE MAE EDUCATION LOAN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-3423352
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
1240 Pawtucket Avenue
Rumford, Rhode Island 02916
(401) 438-4500
(Address, including ZIP code, and telephone
number, including area code, of registrant's principal
executive offices)
Ann M. O'Rourke
Secretary
Nellie Mae Education Loan Corporation
1240 Pawtucket Avenue
Rumford, Rhode Island 02916
(401) 438-4500
(Name, address, including ZIP code, and telephone number,
including area code, of agent for service)
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Copy to:
Daniel M. Rossner
Brown & Wood LLP
One World Trade Center
New York, NY 10048-0057
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.
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If the only securities being registered on this Form are being
offered under 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 under Rule 415 under the
Securities Act of 1933, other than securities offered only in connection
with dividend or interest reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an
offering under 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 under 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 under Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed
Proposed Maximum
Amount Maximum Aggregate Amount of
Title of Each Class of to Be Offering Price Offering Price Registration
Securities to Be Registered Registered Per Unit(1) (1) Fee
---------------------------------------- ------------------ ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Asset-Backed Notes and
Certificates...................... $1,000,000 100% $1,000,000 $278
---------------------------------------- ------------------ ----------------- ----------------- ----------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
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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 the Registration
Statement shall become effective on such date as the Commission, acting
under said Section 8(a), may determine.
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The information in this prospectus supplement and the accompanying prospectus
is not complete and may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus supplement and the accompanying prospectus are not an
offer to sell these securities and they are not soliciting an offer to buy these
securities in any state where the offer or sale of them is not permitted.
SUBJECT TO COMPLETION, DATED MAY 18, 1999
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED MAY __, 1999
Nellie Mae Student Loan Trust 1999-A
Issuer
Nellie Mae Education Loan Corporation
Seller and Master Servicer
$________ Floating Rate Asset-Backed Senior Notes
We, the Nellie Mae Student Loan Trust 1999-A, will issue the senior
notes. The trust will include the following assets from which it will make
payments on the senior notes:
- a pool of education loans to students and parents of students,
substantially all of which are guaranteed by [Name of
Guarantors], and
- cash held by the trust.
The trust will issue the classes of senior notes shown on the table below.
<TABLE>
<CAPTION>
Original Interest Rate Final Maturity Price to
Principal (per year) Date Public(1)(2)
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<S> <C> <C> <C> <C>
Per Class A-1 Three-Month LIBOR plus
Note 0.__% annually, subject
to an interest rate cap
Per Class A-2 Three-Month LIBOR plus
Note 0.__% annually, subject
to an interest rate cap
</TABLE>
(1) Plus accrued interest, if any, from the date of initial issuance.
(2) Total underwriting discount : $_____________.
The underwriters will purchase the senior notes from the trust and
offer them to you at the prices set forth above. The aggregate proceeds to the
trust, before deducting expenses payable by or on behalf of the trust estimated
at $_______, will be $___________.
Interest and principal on the senior notes are scheduled to be paid
quarterly on the [ ]th day of each [ ], [ ], [ ] and [ ]. The first scheduled
payment date is [ ], 1999.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Consider carefully the risk factors beginning on page S-10 of this
prospectus supplement. The senior notes are asset-backed securities issued by a
trust. The senior notes are not interests in or obligations of Nellie Mae
Education Loan Corporation or any of its affiliates. This prospectus supplement
may be used to offer and sell the senior notes only if accompanied by the
related prospectus.
Delivery of the senior notes, in book-entry form only, will be made
through The Depository Trust Company in the United States, and Cedelbank and the
Euroclear System in Europe, on or about May __, 1999, against payment in
immediately available funds.
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Prospectus Supplement dated May __, 1999
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED
IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We provide information to you about the senior notes in two separate
documents that are progressively more detailed: (1) the accompanying prospectus,
which provides general information, some of which may not apply to your senior
notes and (2) this prospectus supplement, which describes the specific terms of
your senior notes.
If the description of the terms of the senior notes varies between this
prospectus supplement and the accompanying prospectus, you should rely on the
information in this prospectus supplement.
You should rely only on information contained in this prospectus
supplement, the accompanying prospectus or any other document to which we have
referred you. We have not authorized anyone to provide you with any other
information. This prospectus supplement may only be used where it is legal to
sell these securities. The information in this document may only be accurate on
the date shown on its cover.
This prospectus supplement and the accompanying prospectus include
cross-references to captions in these materials where you can find further
related discussions. The following table of contents and the table of contents
included in the accompanying prospectus indicate where those captions are
located.
We have filed with the SEC preliminary information that the
underwriters prepared for prospective investors regarding the trust's assets and
the senior notes. The information contained in this document supersedes all the
information contained in that filing.
Until 90 days after the date of this prospectus supplement, all dealers
that effect transactions in the senior notes, whether or not participating in
this offering, may be required to deliver a prospectus and prospectus
supplement. This requirement is in addition to the dealer's obligation to
deliver a prospectus and prospectus supplement when acting as underwriters with
respect to their unsold allotments or subscriptions.
We are not offering the senior notes in any state where offering them
is not permitted. We do not claim that all of the information in this prospectus
supplement and the accompanying prospectus is accurate as of any date other than
the dates stated on their respective covers.
Certain persons participating in the offering of the senior notes may
engage in transactions that stabilize, maintain or otherwise affect the prices
of the senior notes. Those transactions could cause the prices of the senior
notes to be higher than they might otherwise be. See "Underwriting" on page S-68
of this prospectus supplement.
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TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<S> <C>
Important Notice About Information Presented in This Prospectus Supplement and the
Accompanying Prospectus...............................................................S-2
Table of Contents.......................................................................S-2
Summary.................................................................................S-4
</TABLE>
S-2
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<TABLE>
<S> <C>
Risk Factors...........................................................................S-10
Formation of the Trust.................................................................S-21
The Financed Student Loan Pool.........................................................S-23
Description of the Notes...............................................................S-39
Description of the Transfer and Servicing Agreements...................................S-48
Federal Family Education Loan Program..................................................S-66
Certain Federal Income Tax and State Tax Consequences..................................S-67
ERISA Considerations...................................................................S-68
Underwriting...........................................................................S-68
Legal Matters..........................................................................S-69
Reports to Securityholders.............................................................S-70
Forward Looking Statements.............................................................S-70
Index of Principal Terms...............................................................S-71
Annex I................................................................................S-74
Prospectus
Formation of the Trusts................................................................5
The Seller, the Master Servicer and the Administrator..................................6
Use of Proceeds........................................................................7
The Student Loan Pools.................................................................7
Federal Family Education Loan Program.................................................10
Guarantors Under the FFELP............................................................20
Weighted Average Life of the Securities...............................................30
Pool Factors and Trading Information..................................................31
Description of the Notes..............................................................31
Description of the Certificates.......................................................38
Certain Information Regarding the Securities..........................................39
Description of the Transfer and Servicing Agreements..................................43
Certain Legal Aspects of the Student Loans............................................54
Certain U.S. Federal Income Tax Consequences..........................................56
ERISA Considerations..................................................................66
Available Information.................................................................68
Reports to Securityholders............................................................68
Incorporation of Certain Documents by Reference.......................................69
Plan of Distribution..................................................................69
Legal Matters.........................................................................70
Index of Principal Terms..............................................................72
</TABLE>
S-3
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SUMMARY
This summary highlights selected information contained in this
prospectus supplement. However, it does not provide all the information that you
need to consider in making your investment decision. Please read this entire
prospectus supplement and the accompanying prospectus carefully for important
additional information about the senior notes.
PRINCIPAL PARTIES
THE SELLER
Nellie Mae Education Loan Corporation, a Delaware corporation, will:
- organize the trust and
- sell to the trust the pool of student loans that will secure
the senior notes.
THE TRUST
Nellie Mae Student Loan Trust 1999-A, a Delaware business trust.
THE MASTER SERVICER
Nellie Mae Education Loan Corporation, as master servicer, will arrange
for the servicing of the student loans under a servicing agreement. The master
servicer will arrange for one or more other institutions to service the loans on
a daily basis.
THE ADMINISTRATOR
Nellie Mae Education Loan Corporation, as administrator, will provide
management and administrative services to the trust under an administration
agreement between Nellie Mae Education Loan Corporation and the trust.
THE TRUSTEES
ELIGIBLE LENDER TRUSTEE
The First National Bank of Chicago, a national banking association, is
the eligible lender trustee. One or more additional eligible lender trustees may
be added or substituted for The First National Bank of Chicago from time to
time.
OWNER TRUSTEE
The First National Bank of Chicago, a national banking association, as
the owner trustee will hold the trust's beneficial ownership in the student
loans.
INDENTURE TRUSTEE
State Street Bank and Trust Company, a Massachusetts banking
corporation, is the indenture trustee.
S-4
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SIGNIFICANT DATES
CLOSING DATE
We expect to issue the senior notes on ___________, 1999.
QUARTERLY PAYMENT DATES
We will make payments on the senior notes on the [ ]th day of each [ ],
[ ], [ ] and [ ]. If the [ ]th is not a business day, payments will be made to
you on the next business day. The first quarterly payment date is [ ], 1999.
CUTOFF DATE
[ ], 1999. The trust will receive payments made on the related student
loans on and after this date.
DESCRIPTION OF THE SECURITIES
GENERAL
We are offering the following floating rate asset-backed senior notes
under this prospectus supplement and the accompanying prospectus:
- Class A-1 Notes in the aggregate principal amount of
$__________ and
- Class A-2 Notes in the aggregate principal amount of
$__________.
We are also issuing $__________ aggregate principal amount of floating
rate asset-backed subordinate notes. However, we are not offering the
subordinate notes under this prospectus supplement and the accompanying
prospectus.
We will issue the senior notes in book-entry form in multiples of
$1,000.
Any senior notes that you purchase will be held through The Depository
Trust Company in the United States, and Cedelbank or the Euroclear System in
Europe.
INTEREST PAYMENTS
The note rate for each class of senior notes is specified on the cover
page of this prospectus supplement. The actual interest rate on a class of
senior notes, however, is subject to an interest rate cap. Interest on the
senior notes will be calculated on the basis of the actual number of days
elapsed in the related quarterly interest period and a 360-day year.
Since your senior notes are subject to an interest rate cap, you may
not receive interest on your senior notes at the note rate specified on the
cover page of this prospectus supplement. The difference between the amount of
interest payable at the note rate and the amount of interest that we actually
pay you on a quarterly payment date we may pay you on a future quarterly payment
date. The ratings of the notes do not address how likely it is that you will
receive this difference.
S-5
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PRINCIPAL PAYMENTS
We will not pay you any principal before the end of the revolving
period. The revolving period will begin on the date the senior notes are issued
and will end ________ (or earlier as described in this prospectus supplement).
Following the end of the revolving period and until the senior notes have been
paid in full, we will pay principal on the senior notes on each quarterly
payment date in an amount generally equal to the principal collections on the
related student loans for the preceding quarterly period. Principal payments on
the senior notes generally will be made sequentially. For example, no principal
will be paid on the Class A-2 Notes until the Class A-1 Notes have been paid in
full. In addition, we will not pay any principal on the subordinate notes until
the senior notes have been paid in full.
There is one exception to this rule. Following a default under the
indenture and the acceleration of the notes, we will pay principal to each class
of senior notes on a pro rata basis until they have been paid in full.
PRIORITY OF PAYMENTS
On each quarterly payment date, the indenture trustee will pay the
following amounts to the extent that funds are available:
- to the master servicer and administrator, certain fees;
- to the senior noteholders, pro rata, interest;
- to the subordinate noteholders, interest;
- to the senior noteholders, following the termination of the
revolving period, principal;
- to the subordinate noteholders, following payment in full of
the senior notes, principal; and
- to the reserve account, remaining funds.
FINAL MATURITY DATES
On the final scheduled quarterly payment dates listed on the cover page
of this prospectus supplement, we will pay any unpaid principal that remains
outstanding on each class of senior notes.
AUCTION SALE
Any student loans remaining in the trust at the end of the collection
period immediately preceding the _____ ___ quarterly payment date will be
offered for sale. We will use the proceeds of the sale to redeem your senior
notes. The auction price must at least equal the unpaid principal amount of both
the senior notes and the subordinate notes, plus the accrued and unpaid interest
on them.
OPTIONAL REDEMPTION
On any quarterly payment date on which the unpaid principal amount of
both the senior notes and the subordinate notes is no more than 20% of the
initial unpaid principal amount, Nellie Mae Funding, LLC, a subsidiary of the
seller, or its assignee will have the option to purchase all the student loans
in the trust. Any notes that remain outstanding on the date on which Nellie Mae
Funding, LLC or its assignee
S-6
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exercises this option will be prepaid in full on that date. The redemption price
for any class of notes will equal the unpaid principal amount of that class,
plus accrued and unpaid interest. However, it is possible that the redemption
price will not include payment of any interest that you may not have received
due to the effect of the interest rate cap.
TRUST PROPERTY
GENERAL
The primary property of the trust will be:
- the student loans;
- all amounts collected on the student loans on or after the
cutoff date; and
- amounts on deposit in certain accounts (including the reserve
account).
THE INITIAL STUDENT LOANS
The student loans will consist of certain guaranteed education loans to
students and parents of students made under the Federal Family Education Loan
Program. All the student loans are reinsured by the Department of Education. The
student loans to be transferred by the seller to the trust on the closing date
had the following characteristics as of _________, 1999:
<TABLE>
<S> <C> <C>
- Aggregate principal amount: $______
- Aggregate principal amount as a percentage of the
senior and subordinate notes: ____%
- Weighted average interest rate: ___%
- Weighted average original term: __ months
- Weighted average remaining term: __ months
- Stafford Loans (% by principal balance): ____%
- SLS Loans (% by principal balance): ____%
- PLUS Loans (% by principal balance): ____%
- Federal Consolidation Loans (% by principal balance): ____%
- Guaranteed by [Guarantor] (% by principal balance) ____%
- Guaranteed by [Guarantor] (% by principal balance) ____%
- Guaranteed by [Guarantor] (% by principal balance) ____%
</TABLE>
S-7
<PAGE>
ADDITIONAL STUDENT LOANS
From time to time after the closing date and before an early
amortization event or _______ __, ____, whichever occurs first, the trust will
acquire additional student loans. The trust will purchase additional student
loans with collections received on the student loans that it already owns to the
extent they are not used to cover certain fees and expenses of the trust,
payments on the senior and subordinate notes and deposits to the reserve
account. In addition, following the occurrence of the date referred to above,
the trust may acquire certain other additional student loans to borrowers whose
existing student loans are already owned by the trust.
CREDIT ENHANCEMENT
"Credit enhancement" refers to features of a note offering designed to
reduce delays in payments and losses on certain classes of notes. The credit
enhancement for the senior notes will consist primarily of the following:
- the reserve account and
- the subordination of the subordinate notes.
THE RESERVE ACCOUNT
The trust will establish a reserve account with the indenture trustee.
The reserve account will be funded as follows:
- On the closing date, the trust will make an initial deposit of
$__________ into the reserve account.
- On each quarterly payment date, any funds remaining after all
required payments have been made will be deposited into the
reserve account.
Funds on deposit in the reserve account on each quarterly payment date
will be available to cover shortfalls in interest and principal payments on the
senior notes to the extent described in this prospectus supplement. Amounts in
the reserve account on any quarterly payment date (after all required payments
have been made) in excess of the specified minimum reserve account balance will
be released to Nellie Mae Funding, LLC or its assignee.
SUBORDINATION OF THE SUBORDINATE NOTES
The subordination of the subordinate notes to the senior notes as
described in this prospectus supplement will provide additional credit
enhancement for the senior notes. Because no principal will be paid on the
subordinate notes until the senior notes have been paid in full, any losses on
the student loans not covered by amounts available in the reserve account will
be allocated to the subordinate notes before being allocated to the senior
notes.
TAX STATUS
Brown & Wood LLP, special federal income tax counsel to the trust
and counsel to the underwriters, is of the opinion that (i) the trust will
not be treated as an association or a publicly traded partnership taxable as
a corporation and (ii) the senior notes will be characterized as indebtedness
for federal income tax purposes. Each senior noteholder, by accepting a
senior note, will agree to treat the senior notes as indebtedness.
S-8
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ERISA CONSIDERATIONS
Subject to the considerations discussed under "ERISA Considerations,"
the senior notes may be purchased by employee benefit plans.
RATINGS
At least two nationally recognized rating agencies must rate the senior
notes in their highest long-term rating categories.
S-9
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RISK FACTORS
You should consider the following risk factors in deciding whether to
purchase any of the senior notes.
<TABLE>
<S> <C>
THE NOTES ARE NOT SUITABLE
INVESTMENTS FOR ALL INVESTORS The senior notes are not a suitable investment if you require
a regular or predictable schedule of payments or payment on
any specific date. Because the senior notes are complex
investments, you should only consider investing in them if you
have sufficient expertise, either alone or with your
financial, tax and legal advisors, to analyze the prepayment,
reinvestment, default and market risk, the tax consequences of
this investment, and the interaction of these factors.
YOUR ABILITY TO RESELL THE SENIOR
NOTES MAY BE LIMITED The senior notes will be a new issue of securities without any
established trading market. We do not currently intend to list
them on any national securities exchange or the Nasdaq Stock
Market. The underwriters may assist in resales of the senior
notes but are not required to do so. A secondary market for
the senior notes may not develop. If a secondary market does
develop, it might not continue or it might not be sufficiently
active or liquid for you to resell any of your senior notes.
[Name of Underwriters] have advised us that they intend to
attempt to make a secondary market in the senior notes;
however, they are not obligated to do so.
THE TRUST HAS LIMITED ASSETS TO MAKE
PAYMENTS ON THE SENIOR NOTES 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, the related guarantee agreements and the
reserve account. The notes represent obligations of the trust
alone and will not be insured or guaranteed by any entity.
Consequently, you must rely on payments on the student loans
(from borrowers, guarantors or both) and amounts on deposit in
the reserve account to repay your senior notes. Only a limited
amount of money will be deposited in the reserve account and
will be reduced, subject to a specified minimum, as the
aggregate principal amount of the notes is reduced. If the
reserve account is exhausted, the trust will depend solely on
payments on the student loans to make payments on the notes
and you could suffer a loss if those payments are inadequate.
You will have no claim to any amounts that the trust properly
distributes to the seller, the master servicer or any of their
affiliates from time to time.
</TABLE>
S-10
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<TABLE>
<S> <C>
LOSSES MAY OCCUR IF THE PRINCIPAL
BALANCE OF THE NOTES EXCEEDS THE
POOL BALANCE OF THE STUDENT LOANS As of the closing date, the aggregate principal amount of both
the senior notes and the subordinate notes will be equal to
approximately ___% of the outstanding principal balance of the
student loans as of the cutoff date. In addition, the trust
may acquire student loans during the revolving period for an
amount exceeding their principal balance.
During the revolving period, any collections on the student
loans that are not used to cover certain fees and expenses of
the trust, payments on the notes and deposits to the reserve
account will be deposited in a collateral reinvestment
account. The trust will use amounts in the collateral
reinvestment account to acquire additional student loans. If
the amount on deposit in the collateral reinvestment account
has not been reduced to zero by the end of the revolving
period or an early amortization event occurs, the amount
remaining in the collateral reinvestment account will be used
to pay principal on the notes on the quarterly payment date
that occurs immediately after the end of the revolving period.
If the aggregate principal amount of the senior notes and the
subordinate notes exceeds the outstanding principal balance of
the student loans in the trust, you may experience losses to
the extent that excess interest collections do not make up
this difference. Any of the following will increase the
likelihood of this sort of loss:
- a high rate of prepayments or
- a widening of the spread between the three-month
T-bill rate and three-month LIBOR.
In addition, you may experience losses if an event of default
should occur under the indenture and we were required to sell
the student loans at a time when the principal amount of the
senior notes and the subordinate notes exceeded the
outstanding balance of the student loans. Because, however,
the senior notes must be redeemed in full before any principal
is paid on the subordinate notes, your losses in this case
would be limited to the amount not absorbed by the subordinate
notes.
</TABLE>
S-11
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<TABLE>
<S> <C>
RISK OF CHANGE IN CHARACTERISTICS
OF THE STUDENT LOANS AFTER CLOSING When we add additional student loans to the trust after the
closing date, the characteristics of the overall pool of
student loans may vary significantly from the information
presented in this prospectus supplement. The composition of
the student loans and their borrowers, the related guarantors
(which may include additional guarantors whose ability to
fulfill their insurance obligations may vary from that of the
initial guarantors), the distribution by loan type, school
type, the distribution by interest rate, the distribution by
principal balance and the distribution by remaining term to
scheduled maturity all may vary. You should consider the
effect of these potential variances when making your
investment decision concerning the senior notes.
THE RETURN ON YOUR INVESTMENT
WILL CHANGE OVER TIME The pre-tax return on your investment will change from time to
time for a number of reasons including those listed below:
- THE RATE OF RETURN OF PRINCIPAL IS UNCERTAIN. The
amount of principal payments that you receive on
your senior notes and the time when you receive
them depend on how borrowers pay the principal of
their student loans. Principal payments on the
senior notes may be regularly scheduled payments
or unscheduled payments resulting from
prepayments, defaults or consolidations of the
student loans. In addition, if the trust is not
able to purchase sufficient additional student
loans during the revolving period, there will be a
principal prepayment on the senior notes
immediately after the end of the revolving period.
The revolving period may terminate earlier
than ______ ______ if:
- the student loans fail certain performance
tests,
- the amount of excess interest for two
successive quarterly payment dates is below a
certain level,
- an event of default occurs under the indenture
or other transaction documents or
- certain other events occur.
</TABLE>
S-12
<PAGE>
<TABLE>
<S> <C>
- YOU BEAR REINVESTMENT RISK. Asset-backed
securities, such as the senior notes, usually
produce increased principal payments to investors
when market interest rates fall below the interest
rates on the collateral (student loans in this
case) and result in decreased principal payments
when market interest rates are above the interest
rates on the collateral. As a result, you are
likely to receive more money to reinvest at a time
when other investments generally are producing
lower yields than the yield on the senior notes.
Similarly, you are likely to receive less money to
reinvest when other investments generally are
producing higher yields than the yield on the
senior notes. You will bear the risk that the
timing and amount of distributions on your senior
notes will prevent you from attaining your desired
yield.
- AN EARLY TERMINATION MAY AFFECT YOUR YIELD. The
senior notes may be repaid before you expect them
to be if:
- the indenture trustee successfully conducts
an auction sale or
- Nellie Mae Funding, LLC or its assignee
exercises its option to purchase all the
assets of the trust.
You will bear reinvestment risk following an early
termination.
CHANGES IN LEGISLATION MAY ADVERSELY
AFFECT STUDENT LOANS AND FEDERAL GUARANTORS The Higher Education Act or other relevant federal or state
laws, rules and regulations may be amended or modified in the
future in a manner that could adversely affect the federal
student loan programs described in this prospectus supplement
and the prospectus, the student loans made under these
programs or the financial condition of the federal guarantors.
Among other things, the level of guarantee payments may be
adjusted from time to time. We cannot predict whether any
changes will be adopted or, if adopted, what impact those
changes would have on the trust or on the senior notes.
INCREASED COMPETITION FROM THE
FEDERAL DIRECT STUDENT LOAN PROGRAM The Federal Direct Student Loan Program, established under the
Higher Education Act, could result in reductions in the volume
of loans made under the Federal Family Education Loan Program.
If so, the
</TABLE>
S-13
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<TABLE>
<S> <C>
seller, the administrator, the master servicer and the
subservicers may experience increased costs due to reduced
economies of scale. These cost increases could reduce the
ability of the master servicer or the subservicers to satisfy
their obligations to service the student loans. This increased
competition from the Federal Direct Student Loan Program could
also reduce revenues received by the guarantors available to
pay claims on defaulted student loans. The level of demand
currently existing in the secondary market for loans made
under the Federal Family Education Loan Program could be
reduced, resulting in fewer potential buyers of the student
loans and lower prices available in the secondary market for
those loans. The Department of Education also has implemented
a direct consolidation loan program, which may reduce the
volume of loans outstanding under the Federal Family Education
Loan Program and is expected to result in prepayments of
student loans as well. RISKS ASSOCIATED WITH SEQUENTIAL
PAYMENT OF PRINCIPAL ON THE NOTES Since generally we will not
pay any principal to the holders of the Class A-2 Notes until
the principal balance of the Class A-1 Notes has been reduced
to zero, the Class A-1 Noteholders would be more immediately
affected by a high rate of principal prepayments or an early
termination of the revolving period. In contrast, as a result
of the sequential payment of principal, it is likely that at
any time the Class A-2 Notes will have a greater percent of
their initial principal balance outstanding than the Class A-1
Notes and therefore, following a default under the indenture
more losses will be allocated to the Class A-2 than to the
Class A-1 Notes (as a relative percentage of their respective
initial principal balances).
YOU MAY NOT RECEIVE INTEREST AT
THE SPECIFIED NOTE RATE DUE TO THE
EFFECT OF THE INTEREST RATE CAP As specified on the cover of this prospectus supplement, the
interest rate for each class of the notes will be based on the
level of three-month LIBOR. However, in each quarterly
interest period after the first one, the interest rates on
each class of the notes will subject to an interest rate cap
that is equal to the adjusted student loan rate for that
period.
The interest rate cap may be triggered as a result of the
following:
</TABLE>
S-14
<PAGE>
<TABLE>
<S> <C>
- The student loans generally bear interest based on
the three-month T-Bill rate, while the note rate
for each class of senior notes is based on
three-month LIBOR. If the spread between these two
indices widens, the interest rate cap may be
triggered.
- The principal balance of the student loans
initially will be less than the aggregate
principal amount of the senior notes and the
subordinate notes. Consequently, the aggregate
principal balances of the student loans on which
interest will be collected will be less than the
principal amount of the senior notes and the
subordinate notes.
- The interest rate cap will be reduced as a result
of the trust's obligation to pay certain fees to
the Department of Education.
Any interest not paid on your senior notes due to the effect
of the interest rate cap may be paid later on a subordinated
basis. However, the existence of the interest rate cap may
reduce the market value and liquidity of your senior notes.
INDENTURE TRUSTEE MAY HAVE DIFFICULTY
LIQUIDATING STUDENT LOANS Generally, during an event of default, the indenture trustee
is authorized to sell the student loans. It is possible,
however, that the indenture trustee may not find a purchaser
for them. In addition, the market value of the student loans
might not equal the principal amount of the senior notes plus
accrued interest. In either event, you may suffer a loss.
INSUFFICIENT FUNDS FOR PRINCIPAL
DISTRIBUTIONS IS NOT AN EVENT OF DEFAULT The principal amount required to be paid on the senior notes
on any payment date generally is limited to amounts available
for payment. Therefore, our failure to pay principal may not
result in an event of default under the indenture until the
final maturity date of the notes shown on the cover of this
prospectus supplement.
STUDENT LOANS ARE ONLY
INSURED TO 98% The student loans are generally 98% insured by a guarantor. As
a result, in the event of a student loan default, the trust
will experience a loss on that loan generally in the amount of
2% of its outstanding principal and accrued interest. We will
assign a defaulted student loan to the applicable federal
guarantor
</TABLE>
S-15
<PAGE>
<TABLE>
<S> <C>
in exchange for a guarantee payment on the 98% guaranteed
portion. We may not have any right to pursue the borrower for
the remaining 2% unguaranteed portion. If the credit
enhancement described in this prospectus supplement is
insufficient to cover the unguaranteed portion, you may suffer
a loss.
YOUR INVESTMENT ALSO DEPENDS ON THE
FINANCIAL CONDITION OF THE GUARANTORS All the student loans are unsecured. As a result, the only
security for payment of the student loans are the guarantees
provided under the guarantee agreements between the eligible
lender trustee and the guarantors. Substantially all the
student loans that will be conveyed to the trust on the
closing date are guaranteed by guarantors as set forth in "The
Financed Student Loan Pool - Guarantee of Financed Student
Loans" below. The financial condition of a guarantor may be
adversely affected by a number of factors including:
- the amount of claims made against that guarantor
as result of borrower defaults;
- the amount of claims reimbursed to that guarantor
from the Department of Education (which range from
75% to 100%, depending on the date the student
loan was made and the performance of the
guarantor); and
- changes in legislation that may reduce
expenditures from the Department of Education that
support federal guarantors or that may require
federal guarantors to pay more of their reserves
to the Department of Education.
If the financial status of the guarantors deteriorates, they
may fail to make guarantee payments to the eligible lender
trustee. In that event, you may suffer delays in the payment
of principal and interest on the senior notes.
BANKRUPTCY OF THE SELLER COULD
AFFECT PAYMENTS ON THE SENIOR NOTES The transactions in this prospectus supplement have been
structured to assure the transfer of the student loans from
the seller to the trust will be treated as a sale of the
student loans to the trust, not as a pledge of the student
loans to secure a borrowing by the seller. In the event of the
bankruptcy of the seller, however, there can be no assurance
that the sale of student loans to the trust will not be
recharacterized as a pledge of the student loans to secure a
borrowing of the seller. Such a
</TABLE>
S-16
<PAGE>
<TABLE>
<S> <C>
recharacterization could result in delays and reductions in
the amount of collections on the student loans.
The seller will acquire the student loans from one or more of
its affiliates or from third parties. The seller views each of
these transfers as a "true sale" and not a secured borrowing
by any of its affiliates or third party, and will represent
that each student loan, on the date on which it is transferred
to the eligible lender trustee on behalf of the trust, is free
and clear of all security interests, charges and encumbrances.
However, if a court were to disagree and treat those transfers
as secured borrowings, other persons might be deemed to have
an interest in the student loans superior to that of the trust
and the eligible lender trustee. Any superior interest could
result in delays and reductions in the amount of collections
on the student loans.
FAILURE BY LOAN HOLDERS OR MASTER
SERVICER TO COMPLY WITH STUDENT
LOAN ORIGINATION AND SERVICING
PROCEDURES The Higher Education Act requires loan holders and servicers
to follow specified procedures, including certain due
diligence procedures, to ensure that the student loans are
properly originated and serviced. Failure to follow these
procedures may result in:
- the Department of Education's refusal to make
reinsurance payments to the guarantors or to make
interest subsidy payments and special allowance
payments to the eligible lender trustee for the
student loans; and
- the guarantors' inability or refusal to make
guarantee payments on the student loans.
The loss of any of these payments could adversely affect
payment of principal and interest on the senior notes.
OFFSETS BY GUARANTORS OR THE
DEPARTMENT OF EDUCATION COULD REDUCE
THE AMOUNT OF AVAILABLE FUNDS The eligible lender trustee may use the same Department of
Education lender identification number for student loans in
the trust which it has used for other student loans held by
the eligible lender trustee on behalf of other entities
established by the seller or its affiliates under other
indentures. If it does so, the billings submitted to the
Department of Education and the claims submitted to the
guarantors will be consolidated with the billings and claims
for payments for student loans under
</TABLE>
S-17
<PAGE>
<TABLE>
<S> <C>
other indentures using the same lender identification number.
Payments on those billings by the Department of Education as
well as claim payments by the applicable guarantors would be
made to the eligible lender trustee or the servicer on behalf
of the eligible lender trustee in lump sum form. Those
payments would be allocated by the eligible lender trustee
among the various indentures that reference the same lender
identification number.
If the Department of Education or a guarantor determines that
the eligible lender trustee owes it a liability on any Federal
Family Education Loan Program Loan for which the eligible
lender trustee is or was legal titleholder (including loans
held under your indenture or other indentures), the Department
of Education or the applicable guarantor might seek to collect
that liability by offsetting it against payments due to the
eligible lender trustee under the terms of the trust. Any
offsetting or shortfall of payments due to the eligible lender
trustee could adversely affect the amount of available funds
for any collection period and thus our ability to pay you
interest and principal on the senior notes.
The indenture for your senior notes and other indentures of
the seller and its affiliates entered into after [ ], 1999
will contain provisions for cross-indemnification concerning
these payments and offsets. Even with these
cross-indemnification provisions, however, there can be no
assurance that the amount of funds available to the trust with
respect to indemnification would be adequate to compensate the
trust and you for any previous reduction in the available
funds.
INABILITY OF THE SELLER OR MASTER
SERVICER TO MEET ITS REPURCHASE
OBLIGATIONS MAY ADVERSELY AFFECT
THE SENIOR NOTES Under certain circumstances, the eligible lender trustee on
behalf of the trust has the right to cause the seller or
master servicer to repurchase any student loan in the event of
a breach of its representations, warranties or covenants
regarding that student loan. There can be no assurance,
however, that the seller or the master servicer will have the
financial resources to do so.
</TABLE>
S-18
<PAGE>
<TABLE>
<S> <C>
COMPUTER PROBLEMS RELATED TO
THE YEAR 2000 MAY AFFECT THE
SENIOR NOTES The year 2000 problem arises from the use by software
developers of two digits rather than four to denote year dates
in software programs, computer hardware operating systems and
microprocessors - based embedded controls in automated
equipment. As a result, information systems that operate date
sensitive software or automated equipment that contains date
sensitive microprocessors may interpret "00" to signify 1900
rather than 2000, thereby impairing the ability of the
information systems or automated equipment to correctly
calculate, sequence or recognize dates. This could result in
serious malfunctions or even complete failures of affected
systems, including an inability to process transactions, issue
securities or checks, or engage in normal business activities.
Although Nellie Mae and its subsidiaries have assessed their
internal hardware and software and replaced and tested
substantially all their systems identified as non-Year 2000
compliant, there can be no assurance that the computer systems
of Nellie Mae and its subsidiaries will not be affected by
year 2000 problems. In addition, the subservicers, guarantors,
indenture trustee, owner trustee and eligible lender trustee
all rely heavily on computer programs and systems for
processing their transactions. They, too, may experience Year
2000 issues.
If the trust, the seller, the administrator, the master
servicer, any subservicers, the guarantors, the indenture
trustee, the owner trustee or the eligible lender trustees are
unable to modify their computer and electronic systems and
applications to resolve any year 2000 issues, or if any of
these parties are adversely affected by the inability or
failure of a third party on which they rely to resolve any
year 2000 issues, the receipt of collections on the student
loans may be delayed. As a consequence, you may experience a
delay in payment on your senior notes and/or suffer a loss.
COMPUTER PROBLEMS RELATED TO THE YEAR
2000 MAY AFFECT THE DEPARTMENT OF
EDUCATION The Department of Education has undertaken a year 2000
compliance project to address year 2000 issues. Information
regarding the Department of Education's year 2000 efforts can
be obtained at the Department of Education's site on the World
Wide Web at http://www.ed.gov. Any failure by the Department
of
</TABLE>
S-19
<PAGE>
<TABLE>
<S> <C>
Education to resolve any year 2000 issues or any adverse
effect on the Department of Education caused by a party on
which the Department of Education relies as a result of year
2000 issues may have a material adverse effect on the Federal
Family Education Loan Program, the guarantors and guarantee
payments on the student loans.
WITHDRAWAL OR DOWNGRADING OF
INITIAL RATINGS WILL AFFECT
THE PRICES FOR NOTES A security rating is not a recommendation to buy, sell or hold
securities. Similar ratings on different types of securities
do not necessarily mean the same thing. You should analyze the
significance of each rating independently from any other
rating. Any rating agency may change its rating of the senior
notes after they are issued if it believes that circumstances
have changed. Any subsequent change in rating is likely to
affect the price that a subsequent purchaser will be willing
to pay for the senior notes. In addition, the ratings do not
address the likelihood of (1) an early termination of the
revolving period or (2) the ultimate payment to you of any
interest not paid as a result of the interest rate cap having
been triggered.
</TABLE>
S-20
<PAGE>
FORMATION OF THE TRUST
THE TRUST
Nellie Mae Student Loan Trust 1999-A will be a business trust formed
under the laws of the State of Delaware and in accordance with the trust
agreement for the transactions described in this prospectus supplement and in
the accompanying prospectus. The trust will perform only the following
activities:
- acquire, hold and manage:
- the student loans (the "Initial Financed Student
Loans") to be sold to the trust on ________ __, 1999
(the "Closing Date") with effect from _________ ___,
1999 (the "Cutoff Date");
- the additional student loans to be acquired by the
trust after the Closing Date (the "Additional Student
Loans" and, together with the Initial Financed
Student Loans, the "Financed Student Loans");
- the other assets of the trust; and
- the proceeds from the Financed Student Loans and
other trust assets;
- issue the Notes (as described below);
- make payments on the Notes;
- originate Federal Consolidation Loans (as defined below)
during the Revolving Period (as defined below); and
- engage in other activities that are necessary, suitable or
convenient to accomplish these activities or that are related
to them.
On behalf of the trust, The First National Bank of Chicago, the
eligible lender trustee, will use the proceeds from the sale of the notes for
the following purposes:
- to purchase the Initial Financed Student Loans from Nellie Mae
Education Loan Corporation, the seller under the loan sale
agreement;
- to make the initial deposit into the Reserve Account (as
defined below) on the Closing Date of cash or eligible
investments equal to $__________ (the "Reserve Account Initial
Deposit"); and
- to fund the costs of issuing the Notes.
After completing the above transactions, the property of the trust will consist
of:
- a pool of guaranteed education loans to students and parents
of students (the "FFELP Loans") made under the Federal Family
Education Loan Program (the "FFELP"), legal title to which is
held by the eligible lender trustee on behalf of the trust;
- all funds collected on the Financed Student Loans on or after
the Cutoff Date; and
S-21
<PAGE>
- all monies and investments on deposit in the Collection
Account (as defined below), the Collateral Reinvestment
Account (as defined below) and the Reserve Account.
The Notes will be secured by the assets of the trust. The indenture
trustee will maintain the Collection Account, the Reserve Account and the
Collateral Reinvestment Account in its name for the benefit of the Noteholders.
To facilitate servicing and to minimize administrative burden and expense, the
eligible lender trustee will appoint the master servicer as custodian of the
promissory notes representing the Financed Student Loans.
During the Revolving Period, the trust will use money in the Collateral
Reinvestment Account to make Additional Fundings (as defined below), which will
include acquiring Additional Student Loans for the trust. SEE "Description of
the Transfer and Servicing Agreements--Revolving Period and Additional Fundings"
below. In addition, Additional Student Loans will be added to the trust after
the end of the Revolving Period to the extent that:
- the eligible lender trustee, acting on behalf of the
trust, purchases Serial Loans (as defined below) from
the seller;
- the trust owns Financed Student Loans which are
exchanged for Serial Loans owned by the seller, as
described below; or
- for 210 days after the end of the Revolving Period,
Add-on Consolidation Loans (as defined below) are
added to Federal Consolidation Loans owned by the
trust.
Additional Student Loans may not be added to the trust unless the procedures
described in the loan sale agreement are complied with.
The seller expects that the amount of Additional Fundings during the
Revolving Period will approximate the amount that will be deposited into the
Collateral Reinvestment Account during the Revolving Period, and that the timing
of the Additional Fundings will sufficiently reduce the amount in the Collateral
Reinvestment Account so that no Early Amortization Event (as defined below) will
occur before the scheduled end of the Revolving Period. The Revolving Period is
scheduled to end on the last day of the Collection Period (as defined below)
preceding the [ ] Quarterly Payment Date (as defined below). The seller's
expectations, however, are based primarily upon current market conditions,
including conditions in the secondary market for FFELP Loans, and current
expectations concerning the time when it will be necessary to make Additional
Fundings (based, in part, on expectations as to the rate at which the Initial
Financed Student Loans will be repaid). Market conditions could change, however,
and actual repayment experience on the Initial Financed Student Loans could
differ from expectations. SEE "Risk Factors--The Return on Your Investment Will
Change Over Time" above. In addition, a material adverse change in the
operations, 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. SEE "Federal Family Education Loan Program--Recent
Developments--Changes in Formulas for Determining Certain Interest Rates and
Special Allowance Payments" below. Accordingly, there can be no assurance
regarding the amount or timing of Additional Fundings during the Revolving
Period.
If an Early Amortization Event occurs or if the amount on deposit in
the Collateral Reinvestment Account has not been reduced to zero by the end of
the Revolving Period, the amount 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:
S-22
<PAGE>
- FIRST, to the holders of the Class A-1 Notes (as
defined below) until the Class A-1 Notes have been
paid in full;
- SECOND, to the holders of the Class A-2 Notes (as
defined below) until the Class A-2 Notes have been
paid in full; and
- THIRD, to the holders of the Subordinate Notes (as
defined below).
No assurances can be made concerning 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" below.
The trust's principal offices are in Chicago, Illinois, in care of The
First National Bank of Chicago, as eligible lender trustee, at the address
listed below.
ELIGIBLE LENDER TRUSTEE
The First National Bank of Chicago will act as the eligible lender
trustee for the trust under the trust agreement to be dated as of [ ], 1999
among the seller, Nellie Mae Funding, LLC (the "Company"), a Delaware limited
liability company which is a subsidiary of the seller, and the eligible lender
trustee. The trust agreement may be amended from time to time. The First
National Bank of Chicago is a national banking association whose principal
offices are located at One First National Plaza, Suite 0216, Chicago, Illinois
60670, and whose New York offices are located at 14 Wall Street, New York, New
York 10005. On behalf of the trust, the eligible lender trustee will acquire
legal title to all the Financed Student Loans conveyed from time to time under
the loan sale agreement, and enter into a guarantee agreement (as discussed
below) with each of the guarantors of the related Financed Student Loans. The
eligible lender trustee qualifies as an eligible lender and owner of the
Financed Student Loans for all purposes under the Higher Education Act of 1965,
as amended (the "Act") and the guarantee agreements. Its failure to qualify as
an eligible lender would result in the loss of guarantee payments from any
guarantor and any federal assistance with respect the Financed Student Loans it
purchases on behalf of the trust. SEE "The Student Loan Pools" in the
accompanying prospectus. The eligible lender trustee's liability in connection
with the issuance and sale of the notes is limited solely to its express
obligations as set forth in the trust agreement, the loan sale agreement and the
servicing agreement. SEE "Description of the Notes" below and "Description of
the Transfer and Servicing Agreements" below and in the accompanying prospectus.
The seller and its affiliates may maintain normal commercial banking relations
with the eligible lender trustee.
THE FINANCED STUDENT LOAN POOL
The pool of Financed Student Loans will include the Initial Financed
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.
After the Closing Date and prior to the end of the Revolving Period,
the trust from time to time will be obligated to purchase from the seller
student loans ("New Loans") made to borrowers who are not borrowers under
Financed Student Loans already owned by the trust. Likewise, the seller from
time to time will be obligated to sell New Loans which it owns to the trust. In
addition, during and after the Revolving Period, the trust from time to time
will be obligated to purchase Serial Loans from the seller. The trust will use
money on deposit in the Collateral Reinvestment Account to fund its purchase of
New Loans and Serial Loans, as well as to pay a Purchase Premium Amount of up to
[ ]% of each loan's outstanding principal balance.
S-23
<PAGE>
After the Revolving Period, the trust will purchase Serial Loans by
using collections of principal on the outstanding Financed Student Loans that
would have been part of Available Funds (as defined below). Alternatively, the
seller will have the option to exchange its own Serial Loans for the trust's
Financed Student Loans, provided that both the Serial Loans and the Financed
Student Loans to be exchanged in this way meet certain criteria. On the
Quarterly Payment Date immediately after the end of the Collection Period during
which it has acquired the Serial Loans, the trust will use any amounts then in
the Reserve Account in excess of the Specified Reserve Account Balance (as
defined below) to pay any Purchase Premium Amounts (as defined below) for the
Serial Loans purchased after the Revolving Period. However, the trust will not
pay any Purchase Premium Amount for Serial Loans that it obtains in exchange for
its existing Financed Student Loans.
In addition, during the Revolving Period, the eligible lender trustee
may seek to consolidate the Financed Student Loans of the trust with other FFELP
Loans, whether or not they are owned by the trust, by making Federal
Consolidation Loans to the borrowers of the Financed Student Loans under the
Federal Consolidation Loan Program described in the accompanying prospectus
under "Federal Family Education Loan Program - Federal Consolidation Loan
Program" and in this prospectus supplement under "Federal Family Education Loan
Program". The trust will fund the new Federal Consolidation Loans by withdrawing
from the Collateral Reinvestment Account amounts sufficient to discharge the
FFELP Loans being consolidated. After the Revolving Period, the eligible lender
trustee will cease to make Federal Consolidation Loans on behalf of the trust,
and Additional Student Loans will consist solely of Serial Loans acquired in the
manner specified in the preceding paragraph. As described below, however, for up
to 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 in the trust by the amount of any related Add-on
Consolidation Loans (as defined below).
As described under "Federal Family Education Loan Program--Federal
Consolidation Loan Program" in the accompanying prospectus and under "Federal
Family Education Loan Program" in this prospectus supplement, 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; and in addition, the Act was amended in
1998 to permit loans made within the 180-day period after the date of
consolidation of the Federal Consolidation Loan to be added to that Federal
Consolidation Loan. As a result of the addition of any Add-on Consolidation
Loans, the related Federal Consolidation Loan may, in some cases, have a
different interest rate and a different final payment date. During the Revolving
Period, the trust will fund Add-on Consolidation Loans by withdrawing from the
Collateral Reinvestment Accounts amounts sufficient to discharge the FFELP Loans
that are being consolidated. The funds in the Collateral Reinvestment Account
will represent collections of principal on the outstanding Financed Student
Loans which would otherwise have been part of the Available Funds during the
Revolving Period. SEE "Description of the Transfer and Servicing Agreements -
Distributions" below. The trust will fund Add-on Consolidation Loans for a
maximum of 210 days following the end of the Revolving Period (of which 30 days
is for processing).
In selecting the Financed Student Loans, the seller has not used any
procedures that it believes to be adverse to the Noteholders nor will it do so
in the future. Nevertheless, you should note that the criteria that are
described in the preceding paragraphs and under "Description of the Transfer and
Servicing Agreements--Revolving Period and Additional Fundings" below or that
are contained in the loan sale agreement are the only 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 Financed Student Loans,
including the composition of the loans and their borrowers, the guarantors, the
distribution by loan type, the distribution by interest rate, the distribution
by principal balance, the distribution by school type and the distribution by
remaining term to scheduled maturity that are described in the following tables,
may vary significantly from those of
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<PAGE>
the Initial Financed Student Loans as of the Cutoff Date. In addition, the
distribution by weighted average interest rate applicable to the Financed
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 Financed Student Loans. Moreover,
the information described below regarding the original term to maturity and
remaining term of maturity of the Initial Financed Student Loans as of the
Cutoff Date may vary significantly from the actual term to maturity of any
Financed Student Loan whose borrower is granted a deferral or forbearance
period.
S-25
<PAGE>
The tables below set forth certain characteristics of the Initial
Financed Student Loans as of the Cutoff Date. Due to rounding, the percentages
set forth in the tables below may not always add to 100%.
COMPOSITION OF THE INITIAL FINANCED STUDENT LOANS
AS OF THE CUTOFF DATE
<TABLE>
<S> <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) ______ months
Weighted Average Remaining Term to Maturity(2) _____ months
Weighted Average Annual Interest Rate(3) ___%
</TABLE>
- -----------------------------------------
(1) Includes net principal balances due from borrowers, plus accrued
interest estimated to be $________ as of the Cutoff Date that will be
capitalized when repayment begins.
(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 Financed
Student Loans, assuming repayment begins promptly after 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 "Federal Family Education Loan Program"
below and in the accompanying prospectus.
(3) Determined using the interest rates applicable to the Initial Financed
Student Loans as of the Cutoff Date. However, because some of the
Initial Financed Student Loans bear interest at a variable annual rate,
there can be no assurance that the foregoing percentage will remain
applicable to the Initial Financed Student Loans at any time after the
Cutoff Date. SEE "Federal Family Education Loan Program" below and in
the prospectus.
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY LOAN TYPE AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF INITIAL
FINANCED STUDENT LOANS
NUMBER AGGREGATE OUTSTANDING BY OUTSTANDING
LOAN TYPE OF LOANS PRINCIPAL BALANCE(1) PRINCIPAL BALANCE
- --------- -------- -------------------- -----------------
<S> <C> <C> <C>
Federal Stafford Loans(2)
Federal SLS Loans
Federal PLUS Loans
Federal Consolidation Loans
-------- -------------------- -------------------
Total
</TABLE>
- -----------------------------------------
(1) Includes net principal balances due from borrowers, plus accrued
interest estimated to be $_________ as of the Cutoff Date that will be
capitalized when repayment begins.
(2) Includes Federal Unsubsidized Stafford Loans having aggregate
outstanding principal balances as of the Cutoff Date of $_________.
S-26
<PAGE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY BORROWER INTEREST RATES OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF INITIAL
FINANCED STUDENT LOANS
RANGE OF INTEREST NUMBER AGGREGATE OUTSTANDING BY OUTSTANDING
RATES(1) OF LOANS PRINCIPAL BALANCE(2) PRINCIPAL 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 Financed
Student Loans as of the Cutoff Date. However, because some of the
Initial Financed Student Loans bear interest at a variable annual rate,
there can be no assurance that the foregoing information will remain
applicable to the Initial Financed Student Loans at any time after the
Cutoff Date. SEE "Federal Family Education Loan Program" below and in
the accompanying prospectus.
(2) Includes net principal balances due from borrowers, plus accrued
interest estimated to be $____________ as of the Cutoff Date that will
be capitalized when repayment begins.
S-27
<PAGE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY OUTSTANDING PRINCIPAL BALANCE AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF INITIAL
FINANCED STUDENT LOANS
RANGE OF OUTSTANDING NUMBER AGGREGATE OUTSTANDING BY OUTSTANDING
PRINCIPAL BALANCE OF 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
Total
</TABLE>
- -----------------------------------------
(1) Includes net principal balances due from borrowers, plus accrued
interest estimated to be $_____________ as of the Cutoff Date that will
be capitalized when repayment begins.
S-28
<PAGE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY SCHOOL TYPE AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF INITIAL
FINANCED STUDENT LOANS
NUMBER AGGREGATE OUTSTANDING BY OUTSTANDING
SCHOOL TYPE(1) OF LOANS PRINCIPAL BALANCE(2) PRINCIPAL BALANCE
-------------- -------- -------------------- -----------------
<S> <C> <C> <C>
4-Year Public
4-Year Private
2-Year Public
2-Year Private
Proprietary/Vocational
Other/Unknown
Total
</TABLE>
- -----------------------------------------
(1) Determined using the school types applicable to the Initial Financed
Loans.
(2) Includes net principal balances due from borrowers, plus accrued
interest estimated to be $_____________ as of the Cutoff Date that will
be capitalized when repayment begins.
S-29
<PAGE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY REMAINING TERM TO SCHEDULED MATURITY
AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF INITIAL
RANGE OF REMAINING TERM TO SCHEDULED FINANCED STUDENT LOANS
MATURITY(1) NUMBER AGGREGATE OUTSTANDING BY OUTSTANDING
(IN MONTHS) OF 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
Total
</TABLE>
- -----------------------------------------
(1) Determined from the Cutoff Date to the stated maturity date of the
applicable Initial Financed Student Loans, assuming repayment begins
promptly after 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 "Federal
Family Education Loan Program" below and in the accompanying
prospectus.
(2) Includes net principal balances due from borrowers, plus accrued
interest estimated to be $___________ as of the Cutoff Date that will
be capitalized when repayment begins.
S-30
<PAGE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY BORROWER PAYMENT STATUS AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF INITIAL
FINANCED STUDENT LOANS
NUMBER AGGREGATE OUTSTANDING BY OUTSTANDING
BORROWER PAYMENT STATUS(1) OF LOANS PRINCIPAL BALANCE(2) PRINCIPAL BALANCE
- -------------------------- -------- -------------------- -----------------
<S> <C> <C> <C>
In-School
Grace
Deferral
Forbearance
Repayment
Total
</TABLE>
- -----------------------------------------
(1) Refers to the status of the borrower of each Initial Financed Student
Loan as of the Cutoff Date. A borrower still may be attending school
("In-School"), may be in a grace period prior to beginning repayment
("Grace"), may be repaying the loan ("Repayment") or may have
temporarily ceased repaying the loan through a deferral ("Deferral") or
a forbearance ("Forbearance") period. SEE "Federal Family Education
Loan Program" below and in the accompanying prospectus. For purposes of
this table, "In-School" excludes, and "Deferral" includes, all Federal
SLS Loans or Federal PLUS Loans to borrowers who are still attending
school.
(2) Includes net principal balances due from borrowers, plus accrued
interest estimated to be $____________ as of the Cutoff Date that will
be capitalized when repayment begins.
S-31
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE
INITIAL FINANCED STUDENT LOANS AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF INITIAL
FINANCED STUDENT LOANS
NUMBER AGGREGATE OUTSTANDING BY OUTSTANDING
LOCATION(1) OF LOANS PRINCIPAL BALANCE(2) PRINCIPAL BALANCE
- ----------- -------- -------------------- -----------------
<S> <C> <C> <C>
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Military
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Puerto Rico
</TABLE>
S-32
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL
FINANCED STUDENT LOANS
NUMBER AGGREGATE OUTSTANDING BY OUTSTANDING
LOCATION(1) OF LOANS PRINCIPAL BALANCE(2) PRINCIPAL BALANCE
- ----------- -------- -------------------- -----------------
<S> <C> <C> <C>
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Other
Total
</TABLE>
- -----------------------------------------
(1) Based on the permanent billing addresses of the borrowers of the
Initial Financed Student Loans as shown in the master servicer's
records as of the Cutoff Date.
(2) Includes net principal balances due from borrowers, plus accrued
interest estimated to be $__________ as of the Cutoff Date that will be
capitalized when repayment begins.
S-33
<PAGE>
DISTRIBUTION OF INITIAL FINANCED STUDENT LOANS BY DATE OF DISBURSEMENT
<TABLE>
<CAPTION>
PERCENT OF INITIAL
FINANCED STUDENT LOANS
NUMBER AGGREGATE OUTSTANDING BY OUTSTANDING
DATE OF DISBURSEMENT(1) OF LOANS PRINCIPAL BALANCE(2) PRINCIPAL BALANCE
- ----------------------- -------- -------------------- -----------------
<S> <C> <C> <C>
Before October 1, 1993
From October 1, 1993 through
September 30, 1998
From October 1, 1998 on
Total
</TABLE>
- -----------------------------------------
(1) Initial Financed Student Loans disbursed before October 1, 1993 are
100% guaranteed by the Initial Guarantors and reinsured against default
by the Department up to a maximum of 100% of the Guarantee Payments.
Initial Financed Student Loans disbursed from October 1, 1993 through
September 30, 1998 are 98% guaranteed by the Initial Guarantors and
reinsured against default by the Department up to a maximum of 98% of
the guarantee payments. Initial Financial Student Loans disbursed on or
after October 1, 1998 are 98% guaranteed by the Initial Guarantors and
reinsured against default by the Department up to a maximum of 95% of
the guarantee payments.
(2) Includes net principal balances due from borrowers, plus accrued
interest estimated to be $___________ as of the Cutoff Date that will
be capitalized when repayment begins.
S-34
<PAGE>
DISTRIBUTION OF INITIAL FINANCED STUDENT LOANS BY
NUMBER OF DAYS OF DELINQUENCY AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF INITIAL
FINANCED STUDENT
AGGREGATE LOANS
NUMBER OUTSTANDING BY OUTSTANDING
DAYS DELINQUENT OF LOANS PRINCIPAL BALANCE (1) PRINCIPAL BALANCE
- -------------------------- ----------- --------------------- ------------------
<S> <C> <C> <C>
0 - 30
31 - 60
61 - 90
91 - 120
Total
- --------------------------
</TABLE>
(1) Includes net principal balances due from borrowers, plus accrued interest
estimated to be $____________ as of the Cutoff Date to be capitalized when
repayment begins.
The outstanding principal balance of each Financed Student Loan will be
amortized over a series of regular payments. Each regular payment consists of an
installment of interest which is calculated on the basis of the loan's
outstanding principal balance 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. Payments received on each
Financed Student Loan are applied first to interest accrued to the date of
payment. The remainder 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 or forbearance periods, the borrower is obligated to pay regular
monthly installments until the final scheduled payment date for that Financed
Student Loan, at which time the amount of the final installment is increased or
decreased as necessary to repay the principal balance of the loan outstanding at
that time.
GUARANTEE OF FINANCED STUDENT LOANS
By the Closing Date, the eligible lender trustee will have entered into
guarantee agreements with [ ] (the "Initial Guarantors") under which each
Initial Guarantor has agreed to serve as guarantor for certain Initial Financed
Student Loans. As of the Cutoff Date, [ ]% by principal balance of the Initial
Financed Student Loans are guaranteed by [ ] and [ ]% by principal balance are
guaranteed by [ ].
During the Revolving Period, the trust may acquire Additional Student
Loans guaranteed by a federal guarantor (a "Federal Guarantor") other than the
Initial Guarantors (each, an "Additional Guarantor" and, together with the
Initial Guarantors, the "guarantors") provided that, at the time the trust
acquires the loans, each related Additional Guarantor is a Federal Guarantor and
has entered into a
S-35
<PAGE>
guarantee agreement with the eligible lender trustee. No more than 20% of the
Financed Student Loans (by principal balance) may have guarantees from
Additional Guarantors and no more than 5% of the Financed Student Loans (by
principal balance) may have guarantees from any one Additional Guarantor, unless
and to the extent that either of these limitations is exceeded solely because
the trust originates Federal Consolidation Loans or purchases Serial Loans that
are made with respect to Financed Student Loans guaranteed by an Additional
Guarantor.
Under its guarantee agreement, each guarantor guarantees to pay 100% of
the principal (including any interest that may be capitalized from time to time)
and accrued interest for the Financed Student Loan in the event any one of the
following events has occurred:
- the borrower under the loan fails to make monthly principal or
interest payments when due and the failure continues for a
statutorily determined period of time (at least 180 days for
student loans for which the first day of delinquency occurs
before October 7, 1998 or 270 days for student loans for which
the first day of delinquency occurs on or after October 7,
1998) except that the guarantee against the borrower's failure
to make payments will cover only 98% of unpaid principal and
accrued and unpaid interest for Financed Student Loans first
disbursed on or after October 1, 1993;
- a petition in bankruptcy under any chapter of the Federal
Bankruptcy Code is filed by or against the borrower;
- the borrower dies;
- the borrower becomes totally and permanently disabled to work
and earn money or attend school, as certified by a qualified
physician;
- the borrower cannot complete his program of study because his
school closes;
- the loan application is discovered to have been falsely
certified by the borrower's school; or
- a determination is made, based solely on the borrower's
actions in obtaining the loan, that the borrower was
ineligible for the loan.
When one of these conditions is satisfied, the Act requires the Federal
Guarantor generally to pay the claim within 90 days after the lender submits it.
The obligations of a Federal Guarantor under its guarantee agreement are
obligations solely of that guarantor and are not supported by the full faith and
credit of the federal government or any state government. However, the Act
provides that if the Secretary of Education (the "Secretary") determines that a
Federal Guarantor is unable to meet its insurance obligations, the Secretary
shall assume responsibility for all functions of that guarantor under the
guarantor's loan insurance program. The Secretary is authorized, among other
things, to take those actions that are necessary to ensure that:
- student loans continue to be available to residents of the
state or states in which the guarantor did business;
- all guarantees issued by the guarantor before the Secretary
assumed its functions are fully honored; and
- the student loans guaranteed by the guarantor are properly
serviced.
S-36
<PAGE>
For a further discussion of the Secretary's authority in the event that a
Federal Guarantor is unable to meet its insurance obligations, SEE "Federal
Family Education Loan Program--Federal Guarantors" and "--Federal Insurance and
Reinsurance of Federal Guarantors" in the accompanying prospectus and "Federal
Family Education Loan Program" below.
Each guarantor's obligations on any Financed Student Loan that it
guarantees are conditioned upon the satisfaction of all the conditions set forth
in the applicable guarantee agreement. These conditions generally include, but
are not limited to, the following:
- the Financed Student Loan was originated and serviced in
accordance
with the Act and other applicable requirements;
- the guarantee fee payable on the Financed Student Loan is
timely paid to the guarantor;
- all required pre-claim delinquency status notifications and
the claim for the guarantee payments on the Financed Student
Loan are timely submitted; and
- the promissory note evidencing the Financed Student Loan is
transferred and endorsed to the guarantor when a claim for
guarantee payments on the loan is made.
Failure to comply with any of the applicable conditions, including those listed
above, may result in:
- the guarantor's refusal to honor its guarantee agreement with
respect to the Financed Student Loan;
- the guarantor's denial of coverage on certain accrued interest
amounts on the loan; or
- the loss of certain interest subsidy payments and special
allowance payments with respect to the loan.
Under the loan servicing agreement, the master servicer's failure to
comply with any applicable conditions would constitute a breach of its covenants
and would obligate the master servicer to repurchase the affected Financed
Student Loans, subject to the limitations described under "Risk Factors--The
Return on Your Investment Will Change Over Time". SEE "Description of the
Transfer and Servicing Agreements--Master Servicer Covenants" in the
accompanying prospectus.
Under the loan sale agreement, the seller's failure to comply with any
applicable conditions would constitute a breach of its representations and
warranties, and would obligate the seller to repurchase (or provide a substitute
for) the affected Financed Student Loans and reimburse the trust for any
non-guaranteed interest amounts or lost interest subsidy payments or special
allowance payments that result from the breach. SEE "Description of the Transfer
and Servicing Agreements--Sale of Student Loans; Representations and Warranties"
in the accompanying prospectus.
Set forth below is certain current and historical information for each
Initial Guarantor concerning all the student loans that it guarantees. The
information set forth in the tables below has been obtained from the Initial
Guarantors indicated. Neither the seller nor the underwriters are able to make
any representation regarding the accuracy or completeness of the information.
GUARANTEE VOLUME. The following table sets forth the approximate
aggregate principal balance of federally reinsured education loans (including
loans under the Parent Loans to Undergraduate Students
S-37
<PAGE>
(PLUS) program but excluding Federal Consolidation Loans) that first became
guaranteed by the guarantors in each of the last five federal fiscal years:
<TABLE>
<CAPTION>
STAFFORD, SLS AND
PLUS LOANS
FEDERAL FISCAL YEAR GUARANTOR (DOLLARS IN MILLIONS)
------------------------------------ ------------------- ---------------------
<S> <C> <C>
</TABLE>
RESERVE RATIO. Each Initial Guarantor is and has been in compliance
with all provisions of the Act which require a Federal Guarantor to maintain a
reserve fund of assets in an amount equal to or greater than a percentage of
outstanding loans guaranteed by that Federal Guarantor.
RECOVERY RATES. The recovery rate provides a measure of the
effectiveness of a Federal Guarantor's collection efforts against defaulting
borrowers after the guarantee claims have been satisfied. It is determined by
dividing the amount recovered from borrowers by a guarantor by the aggregate
amount of default claims paid by that guarantor during the applicable federal
fiscal year. The table below sets forth the recovery rates for each Initial
Guarantor as of the end of each of the last five federal fiscal years:
<TABLE>
<CAPTION>
FEDERAL FISCAL YEAR GUARANTOR RECOVERY RATE
------------------------------------ ----------------- ---------------------
<S> <C> <C>
</TABLE>
CLAIMS RATE. Each Initial Guarantor's claims rate measures the amount
of federal reinsurance claims paid to it by the Department during a fiscal year
as a percentage of the original principal amount of guaranteed loans that were
in repayment at the end of the prior federal fiscal year. No assurance can be
made that any guarantor will receive full reimbursement for reinsurance claims
(or the full 98% maximum reimbursement for loans first disbursed on or after
October 1, 1993 before October 1, 1998 or the full 95% maximum reimbursement for
loans first disbursed on or after October 1, 1998). This reimbursement is
subject to reduction when the annual default claims rate of a Federal Guarantor
for a federal fiscal year exceeds 5%. SEE "Federal Family Education Loan
Program--Federal Insurance and Reinsurance of Federal Guarantors" in the
accompanying prospectus and "Federal Family Education Loan Program" below. The
following table sets forth the claims rate of each Initial Guarantor for each of
the last five federal fiscal years*:
S-38
<PAGE>
<TABLE>
<CAPTION>
FEDERAL FISCAL YEAR GUARANTOR CLAIMS RATE
- ------------------------------------------- ---------------- ------------------
<S> <C> <C>
</TABLE>
Unless otherwise indicated, all the above information relating to a
particular Initial Guarantor has been obtained from that guarantor, is not
guaranteed as to accuracy or completeness by the seller or the underwriters and
is not to be construed as a representation by the seller or the underwriters.
The guarantee volumes, reserve ratios, recovery rates and claim rates of
Additional Guarantors may vary from those of the Initial Guarantors. No
assurances can be given as to what the volumes, ratios or rates of any
Additional Guarantors will be or as to whether the Initial Guarantors or the
Additional Guarantors will be able to meet their insurance obligations. The DOE
Data Books contain information concerning all Federal Guarantors and therefore
may be consulted for additional information concerning the Initial Guarantors
and for information concerning Federal Guarantors that could become Additional
Guarantors.
DESCRIPTION OF THE NOTES
GENERAL
The Class A-1 Floating Rate Asset-Backed Senior Notes (the "Class A-1
Notes"), the Class A-2 Floating Rate Asset-Backed Senior Notes (the "Class A-2
Notes" and together with the Class A-1 Notes, the "Senior Notes") and the
Floating Rate Asset-Backed Subordinate Notes (the "Subordinate Notes") will be
issued under the terms of an indenture to be dated as of [ ], 1999 (as amended
and supplemented from time to time, the "indenture"), between the trust and
State Street Bank and Trust Company, a Massachusetts banking corporation (the
"indenture trustee"), substantially in the form filed as an exhibit to the
Registration Statement of which this prospectus supplement forms a part. The
following sections summarize certain terms of the notes, the indenture and the
trust agreement. This summary is not complete and is qualified in its entirety
by reference to the actual provisions of the notes, the indenture and the trust
agreement. It is intended to supplement and, to the extent of any inconsistency,
replace the description of the general terms and provisions of the notes, the
indenture and the trust agreement set forth in the accompanying prospectus.
S-39
<PAGE>
PAYMENTS OF INTEREST
We will pay interest on the Notes quarterly on or about [ ], [ ], [ ]
and [ ] of each year (or, if that day is not a business day, on the next
succeeding business day), beginning on [ ], 1999 (each, a "Quarterly Payment
Date"). Payment will be made to holders of record of the notes on the related
Record Date. "Record Date" means, with respect to any Quarterly Payment Date,
the [ ]th day of the month in which that Quarterly Payment Date occurs (whether
or not that day is a business day). Interest on the outstanding principal amount
of each class of notes will accrue from and including the Closing Date (in the
case of the first Quarterly Payment Date), or from and including the most recent
Quarterly Payment Date on which interest has been paid, to but excluding the
current Quarterly Payment Date (each, a "Quarterly Interest Period"). Interest
accrued as of any Quarterly Payment Date but not paid on that date will be due
on the next Quarterly Payment Date, together with an amount equal to interest on
the unpaid amount at the applicable annual rate described below. Interest
payments on the notes will generally be funded from the Available Funds on
deposit in the Collection Account and from amounts on deposit in the Reserve
Account that remain after we have paid the Servicing Fee (as defined below) and
all overdue Servicing Fees and the Administration Fee (as defined below) and all
overdue Administration Fees for that Quarterly Payment Date. SEE "Description of
the Transfer and Servicing Agreements--Distributions" and "--Credit Enhancement"
below.
The "Class A-1 Note Rate", the "Class A-2 Note Rate" and the
"Subordinate Note Rate" for each Quarterly Interest Period will equal THE LESSER
OF
(i) the Class A-1 Note LIBOR Rate, the Class A-2 Note LIBOR Rate or the
Subordinate Note LIBOR Rate, as applicable, and
(ii) the Adjusted Student Loan Rate for such Quarterly Interest Period.
The "Class A-1 Note LIBOR Rate", the "Class A-2 Note LIBOR Rate" and the
"Subordinate Note LIBOR Rate" shall be equal to Three-Month LIBOR (determined as
described below) for the related LIBOR Reset Period (as defined below) plus
0.__%, 0.__% and 0.__%, respectively. Interest on the Notes will be calculated
on the basis of the actual number of days elapsed in each Quarterly Interest
Period divided by 360.
The "Adjusted Student Loan Rate" for any Quarterly Interest Period will
equal the product of:
(i) the quotient obtained by dividing:
(a) 365 (or 366 in the case of a leap year) by
(b) the actual number of days elapsed in that Quarterly Interest
Period;
multiplied by
(ii) the percentage equivalent of a fraction
(a) whose numerator is equal to the sum of the Expected Interest
Collections less the sum of the Servicing Fee and the
Administration Fee for that Quarterly Interest Period; and
(b) whose denominator is the aggregate principal amount of the
Notes as of the last day of that Quarterly Interest Period.
S-40
<PAGE>
"Expected Interest Collections" means, with respect to any Quarterly
Interest Period, the sum of
(i) the amount of interest accrued and whether or not actually paid, net
of any accrued Monthly Rebate Fees and other amounts required by the
Act to be paid to the Department (as described under "Federal Family
Education Loan Program" below and in the accompanying prospectus)
with respect to the Financed Student Loans for the Collection Period
preceding the applicable Quarterly Payment Date (the "Student Loan
Rate Accrual Period");
(ii) interest subsidy payments and special allowance payments estimated
to have accrued for that Student Loan Rate Accrual Period whether or
not actually received (taking into account any expected deduction of
the Federal Origination Fees (as described under "Federal Family
Education Loan Program" below and in the accompanying prospectus);
and
(iii) investment earnings (as described in "Description of the Transfer
and Servicing Agreements--Accounts" in the accompanying prospectus)
for that Student Loan Rate Accrual Period.
Class A-1 Noteholders' Interest Basis Carryover (as defined below),
Class A-2 Noteholders' Interest Basis Carryover (as defined below) and
Subordinate Noteholders' Interest Basis Carryover (as defined below) may be
incurred on any Quarterly Payment Date (after the first Quarterly Payment Date).
However, any Class A-1 Noteholders' Interest Basis Carryover, Class A-2
Noteholders' Interest Basis Carryover and Subordinate Noteholders' Interest
Basis Carryover incurred prior to the Parity Date (as defined below) will not be
payable until on or after the Parity Date (as defined below).
On each Quarterly Payment Date from and after the Parity Date, any
Class A-1 Noteholders' Interest Basis Carryover, Class A-2 Noteholders' Interest
Basis Carryover and Subordinate Noteholders' Interest Basis Carryover incurred
and unpaid to and including that Quarterly Payment Date will be payable on that
Quarterly Payment Date but only out of any Reserve Account Excess (as defined
below) that remains after the following payments have first been made:
(i) if the Revolving Period has terminated, any Purchase Premiums due
the seller for Serial Loans purchased by the trust before 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 amount of the
Notes exceeds the Pool Balance; and
(iii) in the case of the Subordinate Noteholders' Interest Basis
Carryover, payment of the Class A-1 Noteholders' Interest Basis
Carryover and the Class A-2 Noteholders' Interest Basis Carryover.
The "Parity Date" is the first Quarterly Payment Date on which the
aggregate principal amount of the Notes, after all distributions on that date
are made, is no longer in excess of the Pool Balance as of the last day of the
related Collection Period.
The "Pool Balance" at any time equals the aggregate principal balances
of the Financed Student Loans at the end of the preceding Collection Period
(including accrued interest through the end of that Collection Period to the
extent that interest will be capitalized when repayment begins), after taking
into account each to the following, without duplication:
S-41
<PAGE>
(i) all payments received by the trust during that Collection Period
from borrowers, the guarantors and the Department;
(ii) all Purchase Amounts received by the trust for that Collection
Period from the seller or the master servicer;
(iii) all Additional Fundings made with respect to that Collection Period;
and
(iv) all losses realized on Financed Student Loans liquidated during that
Collection Period.
"Purchase Amount" with respect to a Financed Student Loan means the
unpaid balance owed by the applicable borrower plus accrued interest to the date
of purchase. SEE "Description of the Transfer and Servicing
Agreements--Termination" below.
DISTRIBUTIONS OF PRINCIPAL
No principal payments will be made on the Notes during the Revolving
Period. Beginning with the end of the Revolving Period, principal payments will
be made to the Noteholders, sequentially, in the order of priority set forth in
the second succeeding paragraph on each Quarterly Payment Date in an amount
generally equal to the Principal Distribution Amount for that Quarterly Payment
Date, until the aggregate principal amount of the Notes is reduced to zero.
Payments of the Principal Distribution Amount will generally be made from the
Available Funds remaining after distribution 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; and
(iv) the Subordinate Noteholders' Interest Distribution Amount;
and, if the available Funds are insufficient, from amounts on deposit in the
Reserve Account. SEE "Description of the Transfer and Servicing
Agreements--Distributions" and "--Credit Enhancement" below. If the Available
Funds and the 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 any Quarterly Payment Date, the shortfall will be added to the
principal payable to the Senior Noteholders or the Subordinate Noteholders, as
the case may be, on subsequent Quarterly Payment Dates.
In addition, on each Quarterly Payment Date beginning at the end of the
Revolving Period, for so long as the aggregate principal amount of the Notes
outstanding on that date 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 for that Quarterly Payment Date will be applied to pay the principal of
the Notes in the order of priority set forth in the following paragraph.
However, any amount to be applied to principal will first be reduced by paying
to the seller the unpaid Purchase Premium Amounts for any Serial Loans that the
trust purchased before the end of that Collection Period. Any amounts available
to be distributed as set forth in the two preceding sentences will not be part
of the Principal Distribution Amount for that Quarterly Payment Date. We cannot
give you any assurance that there will ever be a Reserve Account Excess or that
it will be available to be paid as principal on the Notes. SEE "Description of
the Transfer and Servicing Agreements--Credit Enhancement--Reserve Account"
below.
S-42
<PAGE>
On each Quarterly Payment Date on which principal payments are made to
the holders of the Senior Notes (whether in respect of the Senior Noteholders'
Principal Distribution Amount, amounts on deposit in the Reserve Account
constituting Reserve Account Excess or amounts in respect of a mandatory
redemption as described below, or otherwise), all payments of principal will be
applied to pay principal as follows:
- FIRST, to the Class A-1 Noteholders until the aggregate
principal amount of the Class A-1 Notes has been reduced to
zero; and
- SECOND, to Class A-2 Noteholders until the aggregate principal
amount of the Class A-2 Notes has been reduced to zero.
In addition, on each Quarterly Payment Date on which principal payments are made
on the Notes (whether in respect of the Principal Distribution Amount, Reserve
Account Excess, mandatory redemption amounts or otherwise), all payments of
principal will be applied to pay principal as follows:
- FIRST, to the Senior Noteholders until the aggregate principal
amount of the Senior Notes has been paid in full; and
- SECOND, to the Subordinate Noteholders until the Subordinate
Notes have been paid in full.
Any outstanding principal amount of the Class A-1 Notes will be payable
in full on the ______ Quarterly Payment Date (the "Class A-1 Note Final Maturity
Date"). Any outstanding principal amount of the Class A-2 Notes will be payable
in full on the ____ Quarterly Payment Due Date (the "Class A-2 Note Final
Maturity Date"). Any 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 any class of the Senior
Notes or of the Subordinate Notes could occur other than on dates other than
those listed in this paragraph as a result of a variety of factors including
those described under "Risk Factors--The Return on Your Investment Will Change
over Time".
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 before that date, the entire remaining amount will be used on the
Quarterly Payment Date on or immediately following that date to redeem the Notes
in the order of priority set forth in the second preceding paragraph. The
aggregate principal amount of the Notes to be redeemed will be equal to the
amount then on deposit in the Collateral Reinvestment Account, rounded to the
nearest $1,000.
CALCULATION OF THREE-MONTH LIBOR
For purposes of calculating the Class A-1 Note LIBOR Rate, the Class
A-2 Note LIBOR Rate and the Subordinate Note LIBOR Rate for each Quarterly
Interest Period, the trust agreement requires the indenture trustee to determine
Three-Month LIBOR on the second business day before the LIBOR Reset Period
within which that Quarterly Interest Period begins (or, in the case of the
initial LIBOR Reset Period, on the second business day before the Closing Date)
(each, a "LIBOR Determination Date"). For purposes of calculating Three-Month
LIBOR, a business day is any day on which banks in The City of New York and the
City of London are open for international business. Interest due for any
Quarterly Interest Period will be determined based on the actual number of days
in that Quarterly Interest Period over a 360-day year.
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"Three-Month LIBOR" means, for any LIBOR Reset Period, the London
interbank offered rate for deposits in U.S. dollars having a maturity of
three months commencing on the related LIBOR Determination Date (the "Index
Maturity") as it appears on Telerate Page 3750 as of 11:00 a.m., London time,
on that LIBOR Determination Date. If the rate does not appear on Telerate
Page 3750, the rate for that day will be determined on the basis of the rates
at which deposits in U.S. dollars, having the Index Maturity and in a
principal amount of at least U.S. $1,000,000, are offered at approximately
11:00 a.m., London time, on that LIBOR Determination Date, to prime banks in
the London interbank market by the Reference Banks. The indenture trustee
will request the principal London office of each Reference Bank to provide a
quotation of its rate. If at least two quotations are provided, the rate for
that day will be the arithmetic mean of the quotations. If at least two
quotations are not provided, the rate for that day will be the arithmetic
mean of the rates quoted at approximately 11:00 a.m., New York time, on that
LIBOR Determination Date by major banks in The City of New York that have
been selected by the indenture trustee for loans in U.S. dollars to leading
European banks having the Index Maturity and in a principal amount of at
least U.S. $1,000,000. However, if the banks selected by the indenture
trustee are not quoting rates, Three-Month LIBOR as in effect for the
previous LIBOR Reset Period will be used.
"LIBOR Reset Period" means the three-month period beginning on the [
]th day (or, if that day is not a business day, on the next succeeding business
day) of each [ ], [ ], [ ] and [ ] and ending on the day immediately preceding
the following LIBOR Reset Period; provided, however, that the initial LIBOR
Reset Period will begin on the Closing Date.
"Telerate Page 3750" means the display page so designated on the Bridge
Telerate, Inc. service (or such other page as may replace that page for the
purpose of displaying comparable rates or prices).
"Reference Banks" means four major banks in the London interbank market
selected by the indenture trustee.
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
under 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 (as defined below), 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 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 & Co., as nominee for DTC, on that
date, DTC will forward the payments to its Participants which will then be
required to forward them to Indirect Participants or Senior Noteholders. It is
anticipated that the only "Senior Noteholder" will be Cede & Co., as nominee for
DTC, and that Senior Noteholders will not be recognized by the indenture trustee
as a Noteholder under the indenture. Senior Noteholders will be permitted to
exercise their rights indirectly through DTC and its Participants (which in turn
will exercise their rights through DTC).
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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 and interest on the
Senior Notes. Participants and Indirect Participants with which Senior
Noteholders have accounts with respect to the Senior Notes are likewise required
to make book-entry transfers and receive and transmit payments on behalf of
their respective Senior Noteholders.
Because DTC can only act on behalf of Participants that in turn act on
behalf of Indirect Participants and certain banks, a Senior Noteholder may be
unable to pledge the Senior Notes to persons or entities that do not participate
in the DTC system or otherwise to take actions in respect of the Senior Notes
due to the lack of a physical certificate for the Notes.
Cedelbank ("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 36 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.
The Euroclear System ("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 34
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 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
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Conditions govern transfers of securities and cash within Euroclear, withdrawals
of securities and cash from 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 (as defined below). 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 the relevant rules and procedures and
subject to the relevant Depositary's ability to effect those 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
those systems, or indirectly through organizations which are participants in
those 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
(collectively, the "Depositaries").which in turn will hold those positions in
customers' securities accounts in the Depositaries' names on the books of DTC.
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. The credits or any transactions in the
securities settled during that processing will be reported to the relevant
Euroclear or CEDEL Participants on that 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--Trusts for Which a Partnership Election Is
Made--Tax Consequences to Holders of the Debt SECURITIES--FOREIGN DEBT SECURITY
HOLDERS" in the accompanying 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 in
accordance with DTC's 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 that 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
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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 those procedures, which may be discontinued at
any time.
DTC management is aware that some computer processing applications,
systems and the like for processing dates ("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 third party vendors on 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 information set forth in the preceding two
paragraphs about DTC has been provided to the Industry by DTC for informational
purposes only and is not intended to serve as a representation, warranty or
contract modification of any kind.
THERE WILL BE NO RESPONSIBILITY OR OBLIGATION ON THE PART OF ANY TRUST,
THE SELLER, THE MASTER SERVICER, THE ADMINISTRATOR, THE ELIGIBLE LENDER TRUSTEE,
THE INDENTURE TRUSTEE OR THE UNDERWRITERS TO ANY PARTICIPANTS, CEDEL
PARTICIPANTS OR EUROCLEAR PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS
NOMINEES WITH RESPECT TO (I) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC,
CEDEL OR EUROCLEAR OR ANY PARTICIPANT, (II) 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, (III) 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 (IV)
ANY OTHER ACTION TAKEN BY DTC AS THE SENIOR NOTEHOLDER.
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DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
AGREEMENTS COVERED
In the sections below certain terms of the following documents
(collectively, the "Transfer and Servicing Agreements") have been summarized:
- the loan sale agreement to be dated as of [ ], 1999 (as
amended and supplemented from time to time, the "loan sale
agreement"), among the seller, the trust and the eligible
lender trustee, under which the eligible lender trustee will
purchase the Financed Student Loans on behalf of the trust;
- the loan servicing agreement to be dated as of [ ], 1999 (as
amended and supplemented from time to time, the "servicing
agreement") among the trust, the eligible lender trustee and
Nellie Mae Education Loan Corporation in its capacity as
master servicer, under which the master servicer will be
responsible for servicing the Financed Student Loans on behalf
of the trust;
- the administration agreement to be dated as of [ ], 1999 (as
amended and supplemented from time to time, the
"administration agreement") among the trust, the indenture
trustee and Nellie Mae Education Loan Corporation in its
capacity as administrator, under which the administrator will
undertake certain other administrative duties and functions
with respect to the trust and the Financed Student Loans; and
- the trust agreement under which the trust will be created.
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 SEC after the Notes are issued. This summary
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Transfer and Servicing
Agreements. The following summary supplements the description of the general
terms and provisions of the Transfer and Servicing Agreements set forth in the
accompanying prospectus. To the extent the two are inconsistent, this summary
replaces information in the accompanying prospectus.
SALE OF FINANCED STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
Under the heading "Description of the Transfer and Servicing
Agreements" in the accompanying prospectus, you will find information about:
- the sale on the Closing Date, under the loan sale agreement,
of the Initial Financed Student Loans to the eligible lender
trustee on behalf of the trust; and
- the representations and warranties made by the seller in
connection with the sale and in connection with the purchase
of Additional Student Loans by the trust.
REVOLVING PERIOD AND ADDITIONAL FUNDINGS
The "Revolving Period" extends from the Closing Date until the FIRST to
occur of:
(i) an Early Amortization Event; and
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(ii) the last day of the Collection Period preceding the ______ ______
Quarterly Payment Date.
During the Revolving Period, the eligible lender trustee on behalf of the trust
will be obligated from time to time to acquire Additional Student Loans or to
increase the outstanding principal balance of the Financed Student Loans
("Additional Fundings").
The eligible lender trustee on behalf of the trust will be obligated
from time to time, subject to certain conditions described in this prospectus
supplement, to purchase from the seller, and the seller will be obligated to
tender to the trust, student loans (subject to loan availability and
availability of funds in the Collateral Reinvestment Account) that meet the
following criteria (each, a "New Loan"):
(i) the loan is made to a borrower who is not a borrower under any
Financed Student Loan;
(ii) the loan is made under a loan program in existence as of the Closing
Date; and
(iii) the loan is guaranteed by a Federal Guarantor (as defined in the
accompanying prospectus).
New Loans will be made or acquired by The First National Bank of
Chicago or another eligible lender on behalf of the seller at the seller's
discretion and in accordance with its usual practices. The eligible lender
trustee will purchase each New Loan on behalf of the trust under a transfer
agreement (each, a "Transfer Agreement") among the seller, the trust and the
eligible lender trustee. During the Revolving Period, each purchase of a New
Loan will be funded by a transfer from the Collateral Reinvestment Account of an
amount equal to the sum of:
- the principal balance owed by the related borrower plus
accrued interest (the "Purchase Collateral Balance"); and
- an additional amount not to exceed ___% of the principal
balance owed by the related borrower (the "Purchase Premium
Amount" and, together with the Purchase Collateral Balance,
the "Loan Purchase Amount").
Following the end of the Revolving Period, the trust may not purchase any New
Loans.
The term "Early Amortization Event" refers to any of the following:
- if an Event of Default occurs under the indenture, a Master
Servicer Default occurs under the loan servicing agreement or
an Administrator Default occurring under the administration
agreement;
- if certain events of insolvency occurs with respect to the
seller;
- if the trust becomes subject to registration as an investment
company under the Investment Company Act of 1940, as amended;
- if, as of the end of any Collection Period, more than [ ]% (by
principal balance) of the Pool Balance consists of Financed
Student Loans made to borrowers who use such loans to attend
proprietary or vocational schools (as identified by the
related guarantor);
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- if, as of the end of any Collection Period, the percentage (by
principal balance) of Financed Student Loans which are not in
repayment and are not eligible for interest subsidy payments
exceeds ___% of the Pool Balance;
- if the Excess Spread (as defined below), with respect to each
of any two successive Quarterly Payment Dates beginning with
the Quarterly Payment Date in ______ ______, is less than [
]%; or
- if the average of the Delinquency Percentage (as defined
below) 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 whose numerator is the product of four times
the difference between:
(i) the Expected Interest Collections for that Quarterly Payment Date
and
(ii) the sum of
(a) the Servicing Fee for that Quarterly Payment Date and all
prior unpaid Servicing Fees,
(b) the Administration Fee for that Quarterly Payment Date and all
prior unpaid Administration Fees,
(c) the Senior Noteholders' Interest Distribution Amount for that
Quarterly Payment Date, and
(d) the Subordinate Noteholders' Interest Distribution Amount for
that Quarterly Payment Date;
and whose denominator is the average of the Pool Balance calculated 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 whose numerator is the aggregate principal
balance of the Financed Student Loans which are Repayment Loans that either (a)
are delinquent over 210 days or (b) have had claims filed with the Department
for which payment is still awaited, and whose denominator is the aggregate
principal balance of the Financed Student Loans which are Repayment Loans.
In addition, following the Closing Date and both during and after 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 seller student loans which meet the following criteria (each,
a "Serial Loan"):
(i) the loan is made to a borrower who is also a borrower under at least
one outstanding Financed Student Loan;
(ii) the loan is made under the same loan program as the borrower's other
Financed Student Loan; and
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(iii) the loan is guaranteed by the guarantor that guaranteed the
borrower's other Financed Student Loan.
Serial Loans will be made or acquired by The First National Bank of Chicago or
another eligible lender on behalf of the seller at the seller's discretion and
in accordance with its usual business practices.
During the Revolving Period, each purchase of a Serial Loan will be
funded by transferring from the Collateral Reinvestment Account an amount equal
to the Loan Purchase Amount of that Serial Loan.
After the end of the Revolving Period, the Purchase Collateral Balance
for buying Serial Loans will be funded by amounts representing distributions of
principal on the outstanding Financed Student Loans which otherwise would have
been part of the Available Funds as described under "--Distributions" below. The
Purchase Premium Amounts for Serial Loans will be funded on the next Quarterly
Payment Date from any Reserve Account Excess on that Quarterly Payment Date as
described in this prospectus supplement under "--Credit Enhancement--Reserve
Account".
Alternatively, after the end of the Revolving Period, instead of the
trust's buying Serial Loans, the seller will have the option to require the
eligible lender trustee on behalf of the trust to exchange existing Financed
Student Loans that the trust owns for Serial Loans owned by the seller. However,
if the seller exercises its option, each exchange must meet certain criteria,
including the following:
(i) the Serial Loan to be exchanged into the trust (the "Exchanged
Serial Loan") was originated under the same loan program as the
Financed Student Loan to be exchanged out of the trust (the
"Exchanged Financed Student Loan");
(ii) the Exchanged Serial Loan entitles its holder to receive interest
based on the same interest rate index as the Exchanged Financed
Student Loan; and
(iii) the Exchanged Serial Loan will not, at any level of the interest
rate index, have an interest rate that is greater than that of the
Exchanged Financed Student Loan.
In addition, if the outstanding principal balance of an Exchanged Financed
Student Loan is less than that of the related Exchanged Serial Loan, the trust
will remit to the seller an additional amount equal to the difference from
moneys which would otherwise have been part of the Available Funds as described
under "--Distributions" below. No Purchase Premium Amounts will be payable for
an Exchanged Serial Loan.
The trust is prohibited from purchasing any Serial Loan or acquiring
any Exchanged Serial Loan in any of the following circumstances:
- if an Event of Default occurs under the indenture,
- if a Master Servicer Default occurs under the loan servicing
agreement,
- if an Administrator Default occurs under the administration
agreement, or
- if certain events of insolvency occur with respect to the
seller.
The seller will designate each date (a "Transfer Date") on which the
trust will purchase New Loans or Serial Loans or exchange Exchanged Financed
Student Loans for Exchanged Serial Loans under one or more Transfer Agreements.
On each Transfer Date, the seller will assign to the eligible lender
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trustee on behalf of the trust, without recourse (except as otherwise set forth
in the Transfer and Servicing Agreements), the seller's entire interest in the
New Loans, Serial Loans or Exchanged Serial Loans being transferred on that
date, in exchange for the Loan Purchase Amount in the case of New Loans or
Serial Loans or the Exchanged Financed Student Loans being exchanged in the case
of Exchanged Serial Loans. However, for Serial Loans purchased by the trust
after the end of the Revolving Period, the related Purchase Premium Amount will
be deferred to the next Quarterly Payment Date on which amounts in excess of the
Specified Reserve Account Balance are available in the Reserve Account.
In addition, following the Closing Date and before the end of the
Revolving Period, if a borrower under a Financed Student Loan who is also a
borrower under one or more student loans (whether or not the loans are part of
the trust) elects to consolidate his loans, the eligible lender trustee on
behalf of the trust will seek to originate a Federal Consolidation Loan under
the Federal Consolidation Loan Program described in the accompanying prospectus
under "Federal Family Education Loan Program--Federal Consolidation Loan
Program" and under "Federal Family Education Loan Program" in this prospectus
supplement. The origination will be funded by transferring from the Collateral
Reinvestment Account the amount required to repay in full any student loans
being discharged in the consolidation process. That amount will be paid by the
trust to the holders of those student loans to prepay them. No assurance can be
given that the eligible lender trustee, rather than another lender, will be the
lender that makes the Federal Consolidation Loan. If another lender makes the
Federal Consolidation Loan, any Financed Student Loan being consolidated by the
Federal Consolidation Loan will be prepaid.
After the Revolving Period the eligible lender trustee will cease to
originate Federal Consolidation Loans on behalf of the trust and any Federal
Consolidation Loan made with respect to a Financed Student Loan will be made by
another lender, resulting in a prepayment of that Financed Student Loan.
Nevertheless, for a maximum period of 210 days after the end of the Revolving
Period, the eligible lender trustee may be required to increase the principal
balance of any Federal Consolidation Loan by the amount of any related Add-on
Consolidation Loan, as described below.
As described under "Federal Family Education Loan Program--Federal
Consolidation Loan Program" in the accompanying prospectus and "Federal Family
Education Loan Program" below, 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; and in addition, the Act was amended in 1998 to permit loans made within
the 180-day period after the date of consolidation of the Federal Consolidation
Loan to be added to that Federal Consolidation Loan. 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 final payment
date. Any Add-on Consolidation Loan added to a Federal Consolidation Loan in the
trust during the Revolving Period will be funded by a transferring from the
Collateral Reinvestment Account the amount required to repay in full the student
loans being discharged in the consolidation process. The eligible lender trustee
on behalf of the trust will pay that amount to the holders of the student loans
to prepay them. For a maximum period of 210 days following the end of the
Revolving Period (30 days being attributed to the processing of any Add-on
Consolidation Loans), those amounts will be funded by distributions of principal
on the outstanding Financed Student Loans which would otherwise have been part
of the Available Funds as described under "--Distributions" below.
During certain qualifying periods as described under "Federal Family
Education Loan Program" below and in the accompanying prospectus, borrowers
under certain student loans are not required to pay interest currently; instead,
the interest is added to the outstanding principal balance of the loans at the
end of the qualifying period. In order to minimize the possibility that failure
to receive current interest payments on the loans during those periods would
result in a shortfall of the amount required to be distributed on the Notes,
amounts on deposit in the Collateral Reinvestment Account will be used during
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the Revolving Period to make interest payments to the Noteholders when current
collections of interest on the loans are inadequate. After the end of the
Revolving Period, the Collateral Reinvestment Account will no longer be a source
to fund interest payments to the Noteholders. At that time, when current
collections of interest on the loans are inadequate, any shortfalls in interest
payments to the Noteholders will be funded with amounts that would otherwise
have been distributable as part of the Principal Distribution Amount for the
related Quarterly Payment Date. See "--Distributions" below.
ACCOUNTS
In addition to the collection account (the "Collection Account")
referred to in the accompanying prospectus under "Description of the Transfer
and Servicing Agreements--Accounts," the administrator will establish and
maintain a collateral reinvestment account (the "Collateral Reinvestment
Account") and a reserve account (the "Reserve Account") in the name of the
indenture trustee on behalf of the Noteholders.
SERVICING COMPENSATION; ADMINISTRATION FEE
The master servicer will be entitled to receive from the trust monthly
in arrears, on each Monthly Payment Date that is not a Quarterly Payment Date
and on each Quarterly Payment Date, a servicing fee (the "Servicing Fee") equal
to one-twelfth of the product of [ ]% times the Pool Balance as of the close of
business on the last day of the preceding calendar month.
"Monthly Payment Date" means the [ ] day of each month (or if any such
date is not a business day, the next succeeding business day), beginning in [ ]
1999.
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 the Monthly Available Funds in the
case of each Monthly Payment Date that is not a Quarterly Payment Date (and out
of the Available Funds in the case of each Quarterly Payment Date) as well as
amounts on deposit in the Reserve Account on that date.
As compensation for performing its obligations under the administration
agreement and as reimbursement for its related expenses, 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, an
administration fee (the "Administration Fee") equal to one-twelfth of the
product of [ ]% times the Pool Balance as of the close of business on the first
day of the preceding calendar month.
DISTRIBUTIONS
DEPOSITS TO THE COLLECTION ACCOUNT. On or about the third business day
before each Monthly Payment Date (the "Determination Date"), the administrator
will provide the indenture trustee with certain information about 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 the Monthly Available Funds or the Available Funds, as the case may be,
received on the Financed Student Loans, and the aggregate Purchase Amounts
relating to the Financed Student Loans repurchased by the seller or purchased by
the master 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 in which that Monthly Payment Date occurs.
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"Collection Period" means each period of three calendar months from and
including the date next following the end of the preceding Collection Period (or
with respect to the first Collection Period, the period beginning on the Cutoff
Date and ending on [ ], 1999).
"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 master servicer on the Financed
Student Loans during that Collection Period and remitted to the
indenture trustee (including any guarantee payments received on the
Financed Student Loans);
(ii) interest subsidy payments and special allowance payments on the
Financed Student Loans received by the eligible lender trustee
during that Monthly Collection Period;
(iii) all proceeds received from the liquidation of defaulted Financed
Student Loans ("Liquidated Student Loans") which became Liquidated
Student Loans during that Monthly Collection Period in accordance
with the master servicer's customary servicing procedures, net of
expenses incurred by the master servicer in connection with the
liquidation and any amounts required by law to be remitted to the
borrowers on the Liquidated Student Loans (such net proceeds,
"Liquidation Proceeds");
(iv) all amounts in respect of Liquidated Student Loans written off in
prior Monthly Collection Periods that were received by the master
servicer during that Monthly Collection Period and remitted to the
indenture trustee;
(v) the amounts released from the Collateral Reinvestment Account for
Additional Fundings which relate to interest costs on the Financed
Student Loans that are or will be capitalized;
(vi) the aggregate amount received by the indenture trustee on the
Financed Student Loans repurchased by the seller or purchased by the
master servicer under an obligation which arose during the that
Monthly Collection Period;
(vii) Investment Earnings for that Monthly Payment Date; and
(viii) with respect to each Monthly Payment Date other than a Quarterly
Payment Date and other than a Monthly Payment Date immediately
following a Quarterly Payment Date, the 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 application of the Monthly Available Funds on
that preceding Monthly Payment Date.
However, if on any Monthly Payment Date there would not be sufficient
funds, after application of the Monthly Available Funds and amounts available in
the Reserve Account, to pay any of the items specified in clauses FIRST and
SECOND, respectively, under the second paragraph of "--Distributions
- --Distributions from the Collection Account" below, then the Monthly Available
Funds for that Monthly Payment Date will include, in addition to the Monthly
Available Funds, amounts on deposit in the Collection Account on the
Determination Date relating to that Monthly Payment Date which would have
constituted part of the Monthly Available Funds for the Monthly Payment Date
succeeding that Monthly Payment Date up to the amount necessary to pay such
those, and the Monthly Available Funds for that
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succeeding Monthly Payment Date will be adjusted accordingly; PROVIDED, HOWEVER,
that the Monthly Available Funds will exclude:
- all payments and proceeds (including Liquidation Proceeds) of
any Financed Student Loans if their the Purchase Amounts were
included in the Monthly Available Funds for a prior Monthly
Collection Period;
- except as expressly included in clause (v) above, amounts
released from the Collateral Reinvestment Account;
- any Monthly Rebate Fees paid by or for the trust during the
related Monthly Collection Period as described under "Federal
Family Education Loan Program--Fees Payable on Certain
Financed Student Loans" in this prospectus supplement; and
- any collections in respect of principal on the Financed
Student Loans applied during the related Monthly Collection
Period by the eligible lender trustee before the end of the
Revolving Period to make deposits into the Collateral
Reinvestment Account as described under "--Distributions from
the 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 any Quarterly Payment Date and
the related Collection Period, the sum of the amounts specified in clauses (i)
through (vii) of the definition of Monthly Available Funds for each of the three
Monthly Collection Periods included in that Collection Period; PROVIDED,
HOWEVER, that if with respect to any Quarterly Payment Date there would not be
sufficient funds, after application of the Available Funds and amounts available
in the Reserve Account, to pay any of the items specified in clauses FIRST
through SIXTH, respectively, under the third paragraph of "--Distributions from
the Collection Account" below, then the Available Funds for that Quarterly
Payment Date will include, in addition to the Available Funds, amounts on
deposit in the Collection Account on the Determination Date relating to that
Quarterly Payment Date which would have constituted part of the Available Funds
for the Quarterly Payment Date succeeding that Quarterly Payment Date up to the
amount necessary to pay those items, and the Available Funds for that succeeding
Quarterly Payment Date will be adjusted accordingly; and PROVIDED, FURTHER, that
the Available Funds will exclude:
- all payments and proceeds (including Liquidation Proceeds) of
any Financed Student Loans if their Purchase Amounts were
included in the Available Funds for a prior Collection Period;
- except as expressly included in clause (v) of the definition
of Monthly Available Funds, amounts released from the
Collateral Reinvestment Account;
- any Monthly Rebate Fees paid by or for the trust during the
related Collection Period as described under "Federal Family
Education Loan Program--Fees Payable on Certain Financed
Student Loans" in this prospectus supplement;
- any collections in respect of principal on the Financed
Student Loans applied during the related Collection Period by
the eligible lender trustee before the end of the Revolving
Period to make deposits into the Collateral Reinvestment
Account as described under "--
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Distributions from the 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; and
- 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 THE COLLECTION ACCOUNT. From time to time on any day
during the Revolving Period, the administrator may instruct the indenture
trustee to withdraw all collections of principal on the Financed Student Loans
then on deposit in the Collection Account and deposit them 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 that funds are
not needed to make Additional Fundings and to redeposit them 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
distributions to the extent of the Monthly Available Funds in the Collection
Account for that Monthly Payment Date, in the following order of priority:
- FIRST, to the master servicer, the Servicing Fee for that
Monthly Payment Date and all prior unpaid Servicing Fees; and
- SECOND, to the administrator, the Administration Fee for that
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 the Available Funds for that Quarterly Payment Date in the Collection
Account, in the following order of priority:
- FIRST, to the master servicer, the Servicing Fee for that
Quarterly Payment Date and all prior unpaid Servicing Fees;
- SECOND, to the administrator, the Administration Fee for that
Quarterly Payment Date and all prior unpaid Administration
Fees;
- THIRD, to the Class A-1 Noteholders, the Class A-1
Noteholders' Interest Distribution Amount and to the Class A-2
Noteholders, the Class A-2 Noteholders' Interest Distribution
Amount for that Quarterly Payment Date, PRO RATA, based on the
ratio of each of those amounts to the total of those amounts;
- FOURTH, to the Subordinate Noteholders, the Subordinate
Noteholders' Interest Distribution Amount for that Quarterly
Payment Date;
- FIFTH, if the Revolving Period has terminated, to the Senior
Noteholders, the Senior Noteholders' Principal Distribution
Amount for that Quarterly Payment Date (to be allocated
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among the Senior Noteholders as described above under
"Description of the Notes--Distributions of Principal");
- SIXTH, after the Senior Notes have been paid in full, to the
Subordinate Noteholders, the Subordinate Noteholders'
Principal Distribution Amount for that Quarterly Payment Date;
and
- SEVENTH, to the Reserve Account, any remaining amounts after
application of clauses FIRST through SIXTH.
For purposes of this prospectus supplement, the following terms have
the following meanings:
The "Class A-1 Noteholders' Interest Basis Carryover" means the sum of
(i) if the Class A-1 Note Rate for any Quarterly Payment Date is based
on the Adjusted Student Loan Rate, the EXCESS of
(a) the amount of interest on the Class A-1 Notes that would have
accrued in respect of the related Quarterly Interest Period
had interest been calculated based on the Class A-1 Note LIBOR
Rate, OVER
(b) the amount of interest on the Class A-1 Notes actually accrued
in respect of that Quarterly Interest Period based on the
Adjusted Student Loan Rate; and
(ii) the unpaid portion of any excess amount under clause (i) from prior
Quarterly Payment Dates and interest accrued on that amount at the
Class A-1 Note Rate calculated based on the Class A-1 Note LIBOR
Rate.
The "Class A-1 Noteholders' Interest Carryover Shortfall" means, with
respect to any Quarterly Payment Date, the EXCESS of
(i) the Class A-1 Noteholders' Interest Distribution Amount on the
preceding Quarterly Payment Date, OVER
(ii) the amount of interest actually distributed to the Class A-1
Noteholders on that preceding Quarterly Payment Date;
PLUS interest on the amount of that excess, to the extent permitted by law, at
the interest rate borne by the Class A-1 Notes from that preceding Quarterly
Payment Date to the current Quarterly Payment Date.
The "Class A-1 Noteholders' Interest Distribution Amount" means, with
respect to any Quarterly Payment Date, the sum of:
(i) the amount of interest accrued at the Class A-1 Note Rate for the
related Quarterly Interest Period on the aggregate principal amount
of the Class A-1 Notes outstanding on the immediately preceding
Quarterly Payment Date (after giving effect to all principal
distributions to the Class A-1 Noteholders on that date) or, in the
case of the first Quarterly Payment Date, on the Closing Date; and
(ii) the Class A-1 Noteholders' Interest Carryover Shortfall for such
Quarterly Payment Date;
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PROVIDED, HOWEVER, that the Class A-1 Noteholders' Interest Distribution Amount
will not include any Class A-1 Noteholders' Interest Basis Carryover.
The "Class A-2 Noteholders' Interest Basis Carryover" means the sum of:
(i) if the Class A-2 Note Rate for any Quarterly Payment Date is based
on the Adjusted Student Loan Rate, the EXCESS of
(a) the amount of interest on the Class A-2 Notes that would have
accrued in respect of the related Quarterly Interest Period
had interest been calculated based on the Class A-2 Note LIBOR
Rate, OVER
(b) the amount of interest on the Class A-2 Notes actually accrued
in respect of that Quarterly Interest Period based on the
Adjusted Student Loan Rate; and
(ii) the unpaid portion of any excess amount under clause (i) from prior
Quarterly Payment Dates and interest accrued on that amount at the
Class A-2 Note Rate calculated based on the Class A-2 Note LIBOR
Rate.
The "Class A-2 Noteholders' Interest Carryover Shortfall" means, with
respect to any Quarterly Payment Date, the EXCESS of:
(i) the Class A-2 Noteholders' Interest Distribution Amount on the
preceding Quarterly Payment Date, OVER
(ii) the amount of interest actually distributed to the Class A-2
Noteholders on that preceding Quarterly Payment Date;
PLUS interest on the amount of that excess, to the extent permitted by law, at
the interest rate borne by the Class A-2 Notes from that preceding Quarterly
Payment Date to the current Quarterly Payment Date.
The "Class A-2 Noteholders' Interest Distribution Amount" means, with
respect to any Quarterly Payment Date, the sum of:
(i) the amount of interest accrued at the Class A-2 Note Rate for the
related Quarterly Interest Period on the aggregate principal amount
of the Class A-2 Notes outstanding on the immediately preceding
Quarterly Payment Date (after giving effect to all principal
distributions to the Class A-2 Noteholders on that date) or, in the
case of the first Quarterly Payment Date, on the Closing Date; and
(ii) the Class A-2 Noteholders' Interest Carryover Shortfall for that
Quarterly Payment Date;
PROVIDED, HOWEVER, that the Class A-2 Noteholders' Interest Distribution Amount
will not include any Class A-2 Noteholders' Interest Basis Carryover.
The "Noteholders' Interest Distribution Amount" means, with respect to
any Quarterly Payment Date, the sum of the Class A-1 Noteholders' Interest
Distribution Amount, the Class A-2 Noteholders' Interest Distribution Amount and
the Subordinate Noteholders' Interest Distribution Amount for that Quarterly
Payment Date.
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"Principal Distribution Adjustment" means, with respect to any
Quarterly Payment Date after the end of the Revolving Period, the amount of the
Available Funds on that Quarterly Payment Date to be used to make additional
principal distributions to the Senior Noteholders (and, after the Senior Notes
have been paid in full, to the Subordinate Noteholders) to account for:
(i) the amount of any insignificant balances remaining outstanding as of
that Quarterly Payment Date on the Financed Student Loans after
receipt of a final payment from borrowers or guarantors, when such
insignificant balances are waived in the ordinary course of business
by the master servicer at the direction of the administrator in
accordance with the Servicing Agreement; and
(ii) the amount of principal collections erroneously treated as interest
collections including, without limitation, by reason of a borrower's
failure to capitalize interest that had been expected to be
capitalized;
PROVIDED, HOWEVER, that the Principal Distribution Adjustment for any Quarterly
Payment Date shall not exceed the lesser of (a) $100,000 and (b) the amount of
any Reserve Account Excess remaining after giving effect to all distributions to
be made from the Reserve Account on that Quarterly Payment Date other than
distributions to the Company or its assignee.
"Principal Distribution Amount" means, with respect to any Quarterly
Payment Date if the Revolving Period has terminated before the end of the
related Collection Period, the sum of the following amounts with respect to the
related Collection Period:
(i) that portion of all collections received by the master servicer on
the Financed Student Loans and remitted to the indenture trustee
that is allocable to principal (including the portion of any
guarantee payments received that is allocable to principal) of the
Financed Student Loans LESS the sum of:
(a) those collections which were applied by the trust during that
Collection Period to purchase Serial Loans,
(b) those collections which were applied by the trust during that
Collection Period to fund the addition of any Add-on
Consolidation Loans, and
(c) accrued and unpaid interest on the Financed Student Loans for
that Collection Period to the extent interest is not currently
being paid but will be capitalized when repayment begins on
those Financed Student Loans;
(ii) all Liquidation Proceeds attributable to the principal balances of
Financed Student Loans which became Liquidated Student Loans during
that Collection Period in accordance with the master servicer's
customary servicing procedures to the extent received by the master
servicer during the related Collection Period and remitted to the
indenture trustee, together with all Realized Losses on those
Financed Student Loans;
(iii) to the extent attributable to principal, the amount received by the
indenture trustee with respect to each Financed Student Loan
repurchased by the seller or purchased by the master 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;
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PROVIDED, HOWEVER, that the Principal Distribution Amount will exclude all
payments and proceeds (including Liquidation Proceeds) of any Financed Student
Loan if its Purchase Amount was included in the 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 Financed Student Loans during that Collection Period that
were deposited in the Collateral Reinvestment Account.
"Realized Losses" means the excess of the aggregate principal balances
of the Liquidated Student Loans over the related Liquidation Proceeds to the
extent allocable to principal.
The "Senior Noteholders' Distribution Amount" means, with respect to
any Quarterly Payment Date, the sum of the Class A-1 Noteholders' Interest
Distribution Amount, the Class A-2 Noteholders' Interest Distribution Amount and
the Senior Noteholders' Principal Distribution Amount for that Quarterly Payment
Date.
The "Senior Noteholders' Interest Distribution Amount" means, with
respect to any Quarterly Payment Date, the sum of:
(i) the Class A-1 Noteholders' Interest Distribution Amount, and
(ii) the Class A-2 Noteholders' Interest Distribution Amount for that
Quarterly Payment Date;
PROVIDED, HOWEVER, that the Senior Noteholders' Interest Distribution Amount
will not include any Class A-1 Noteholders' Interest Basis Carryover or Class
A-2 Noteholders' Interest Basis Carryover.
The "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 that
Quarterly Payment Date, OVER
(ii) the amount of principal actually distributed to the Senior
Noteholders on that Quarterly Payment Date.
The "Senior Noteholders' Principal Distribution Amount" means, with
respect to any Quarterly Payment Date if the Revolving Period has terminated
prior to the end of the related Collection Period, the sum of:
(i) the Principal Distribution Amount for that Quarterly Payment Date,
and
(ii) 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 aggregate principal amount of the Senior Notes outstanding
on such date. In addition,
- on the Class A-1 Note Final Maturity Date, the principal
required to be distributed to the Class A-1 Noteholders will
include the amount required to reduce the outstanding
aggregate principal amount of the Class A-1 Notes to zero; and
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- on the Class A-2 Note Final Maturity Date, the principal
required to be distributed to the Class A-2 Noteholders will
include the amount required to reduce the outstanding
aggregate principal amount of the Class A-2 Notes to zero.
The "Subordinate Noteholders' Distribution Amount" means, with respect
to any Quarterly Payment Date, the Subordinate Noteholders' Interest
Distribution Amount for that 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 that
Quarterly Payment Date.
The "Subordinate Noteholders' Interest Basis Carryover" means the sum
of:
(i) if the Subordinate Note Rate for any Quarterly Payment Date is based
on the Adjusted Student Loan Rate, the EXCESS of
(a) the amount of interest on the Subordinate Notes that would
have accrued in respect of the related Quarterly Interest
Period had interest been calculated based on the Subordinate
Note LIBOR Rate, OVER
(b) the amount of interest on the Subordinate Notes actually
accrued in respect of that Quarterly Interest Period based on
the Adjusted Student Loan Rate; and
(ii) the unpaid portion of any excess amount under clause (i) from prior
Quarterly Payment Dates and interest accrued on that amount at the
Subordinate Note Rate calculated based on the Subordinate Note LIBOR
Rate.
The "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 that preceding Quarterly Payment
Date to the current Quarterly Payment Date.
The "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 aggregate principal amount
of the Subordinate Notes outstanding on the immediately preceding
Quarterly Payment Date (after giving effect to all principal
distributions to the Subordinate Noteholders on that 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 that
Quarterly Payment Date;
PROVIDED, HOWEVER, that the Subordinate Noteholders' Interest Distribution
Amount will not include any Subordinate Noteholders' Interest Basis Carryover.
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The "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 that
Quarterly Payment Date, OVER
(ii) the amount of principal actually distributed to the Subordinate
Noteholders on that Quarterly Payment Date.
The "Subordinate Noteholders' Principal Distribution Amount" means,
with respect to each Quarterly Payment Date on and after which the Senior Notes
have been paid in full, the sum of:
(i) the Principal Distribution Amount for that Quarterly Payment Date
(or, in the case of the Quarterly Payment Date on which the Senior
Notes are paid in full, any remaining Principal Distribution Amount
not otherwise distributed to the Senior Noteholders on that
Quarterly Payment Date); and
(ii) 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 aggregate principal amount of the Subordinate
Notes outstanding on that date. 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
amount of the Subordinate Notes to zero.
CREDIT ENHANCEMENT
RESERVE ACCOUNT. Under the Transfer and Servicing Agreements, the
Reserve Account will be created with an initial deposit by the trust on the
Closing Date of cash or Eligible Investments in an amount equal to the Reserve
Account Initial Deposit. The Available Funds remaining on each Quarterly Payment
Date 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, 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 for that date will be deposited in the Reserve Account on
that Quarterly Payment Date. See "--Distributions" above. As described below,
subject to certain limitations, any amount on deposit in the Reserve Account
that exceeds the Specified Reserve Account Balance will be released to the
Company or its assignee.
"Specified Reserve Account Balance" with respect to any Quarterly
Payment Date generally will be the GREATER of:
(i) ___% of the aggregate principal amount of the Notes outstanding on
such date after taking into account the effect of distributions on
that Quarterly Payment Date, and
(ii) $________;
PROVIDED, HOWEVER, that the Specified Reserve Account Balance shall in no event
exceed the aggregate principal amount of the Notes outstanding on such date.
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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
the Available Funds on that date) is greater than the Specified Reserve Account
Balance for that date, the administrator will instruct the indenture trustee to
apply the amount of that excess (the "Reserve Account Excess") as follows:
(i) during the Revolving Period, for deposit to the Collateral
Reinvestment Account; PROVIDED, HOWEVER, that if that Quarterly
Payment Date is on or after the Parity Date, to the extent the
Reserve Account Excess represents payments (other than principal
payments) collected on the Financed Student Loans, it shall be
applied in the order of priority set forth in subclauses THIRD
through FIFTH of clause (ii) below;
(ii) at and after the end of the Revolving Period in the priority
indicated:
- FIRST, to the seller, any unpaid Purchase Premium Amounts for
any Serial Loans purchased by the trust before the end of the
related Collection Period;
- SECOND, if such Quarterly Payment Date is on or before the
Parity Date, to the Senior Noteholders, the unpaid principal
amount of the Senior Notes (to be allocated between the Class
A-1 Noteholders and the Class A-2 Noteholders as described
above under "Description of the Notes--Distributions of
Principal") or, if the Senior Notes have been paid in full, to
the Subordinate Noteholders, until the aggregate principal
amount of the Notes is equal to the Pool Balance as of the
close of business on the last day of the related Collection
Period;
- THIRD, to the Class A-1 Noteholders and the Class A-2
Noteholders, PRO RATA, the aggregate unpaid amount of any
Class A-1 Noteholders' Interest Basis Carryover and Class A-2
Noteholders' Interest Basis Carryover based on the ratio of
each of those amounts to the total of those amounts;
- FOURTH, to the Subordinate Noteholders, the aggregate unpaid
amount of any Subordinate Noteholders' Interest Basis
Carryover; and
- FIFTH, to the Company or its assignee, any excess remaining
after application of subclauses FIRST through FOURTH above,
and, once that excess has been paid to the Company or its
assignee, the Noteholders will not have any rights in or
claims to it.
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 the Reserve Account as
follows:
(i) on each Monthly Payment Date that is not a Quarterly Payment Date,
to the extent that the amount of the Monthly Available Funds on
such Monthly Payment Date is insufficient to pay the Servicing Fee
and all overdue Servicing Fees and the Administration Fee and all
overdue Administration Fees; and
(ii) on any Quarterly Payment Date, to the extent that the amount of the
Available Funds on that Quarterly Payment Date is insufficient to
pay on that date any of the items specified in clauses FIRST through
SIXTH of the third paragraph under "--Distributions--Distributions
from the Collection Account" above.
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Funds withdrawn from the Reserve Account will be paid to the persons
and in the order of priority specified for distribution from the Collection
Account on that date. As a result of the subordination of the Subordinate Notes
to the Senior Notes described elsewhere in this prospectus supplement, 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 the Senior Noteholders
until the Senior Noteholders' Interest Distribution Amount for that Quarterly
Payment Date has been paid in full. In addition, by virtue of the 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" below.
The Reserve Account is intended to enhance the likelihood of timely
payment of principal and interest due to the Senior Noteholders and the
Subordinate Noteholders 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 the Available Funds (or the Monthly Available Funds) exceeds the
amount in the Reserve Account, the Senior Noteholders or the Subordinate
Noteholders could incur losses or a temporary shortfall in the amount of
principal and interest distributed to them. Such a temporary shortfall could, in
turn, increase the average life of the Senior Notes or the Subordinate Notes, as
the case may be. Amounts on deposit in the Reserve Account will not be available
until the Parity Date to cover any aggregate unpaid Class A-1 Noteholders'
Interest Basis Carryover, Class A-2 Noteholders' Interest Basis Carryover or
Subordinate Noteholders' Interest Basis Carryover. After the Parity Date only
amounts on deposit in the Reserve Account (after paying, for Quarterly Payment
Dates occurring after the end of the Revolving Period, any unpaid Purchase
Premium Amounts for any Serial Loans purchased by the trust before the end of
the related Collection Period) that are in excess of the Specified Reserve
Account Balance will be available for payment of the amounts listed in the
preceding sentence.
SUBORDINATION. The Class A-1 Noteholders and the Class A-2 Noteholders
will have equal priority to the payment of interest. However, on any Quarterly
Payment Date on which principal is due to be paid on the Senior Notes, the Class
A-2 Noteholders will receive no payments of principal until the Class A-1
Noteholders have received payments of principal so that the aggregate principal
amount of the Class A-1 Notes is reduced to zero; PROVIDED that from and after
any acceleration of the Notes following an Event of Default (as defined in the
accompanying prospectus), principal will be allocated PRO RATA between the Class
A-1 Notes and the Class A-2 Notes, based on the ratio of the aggregate principal
amount of each of those classes to the aggregate principal amount of the Senior
Notes, until the aggregate principal amount of the Senior Notes has been reduced
to zero. In addition, the rights of the Subordinate Noteholders to receive
payments of interest on any Quarterly Payment Date out of the Available Funds or
the Reserve Account are subordinated to the rights of the Senior Noteholders to
receive payments of interest on that date, and the rights of the Subordinate
Noteholders to receive payments of principal out of the Available Funds or the
Reserve Account on any Quarterly Payment Date are subordinated to the rights of
the Senior Noteholders to receive payments of principal on that date. The
Subordinate Noteholders will not be entitled to any payments of principal out of
the Available Funds or the Reserve Account until the Senior Notes have been paid
in full.
TERMINATION
Certain information regarding termination of the trust is set forth in
"Description of the Transfer and Servicing Agreements--Termination" in the
accompanying prospectus.
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Any Financed Student Loans remaining in the trust at 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 the Financed Student
Loans on that Quarterly Payment Date. If at least two bids (one of which from a
bidder other than the seller and its affiliates) are received, the indenture
trustee will accept the highest bid equal to or in excess of the GREATER of:
(i) the aggregate Purchase Amounts of the Financed Student Loans as of
the end of the Collection Period immediately preceding that
Quarterly Payment Date, and
(ii) an amount that would be sufficient to
- reduce the outstanding principal amount of the Notes to zero
on that Quarterly, and
- pay to the Noteholders, the Noteholders' Interest Distribution
Amount payable on that Quarterly Payment Date
(such greater amount, 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 the sale. The proceeds
of the sale will be used to redeem any Notes outstanding on that 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 Financed 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 Financed Student Loans on any date.
OPTIONAL REDEMPTION
As of the end of any Collection Period immediately preceding a
Quarterly Payment Date on which the then outstanding Pool Balance is 20% or less
of the aggregate initial principal amount of the Notes, the Company or an
assignee of the Company may at its option purchase from the eligible lender
trustee all remaining Financed Student Loans at a price equal to the greater of
the aggregate Purchase Amounts as of the end of that Collection Period and the
Minimum Purchase Price. That amount will be used to retire the Notes
concurrently with the sale of the Financed Student Loans. Upon termination of
the trust, all right, title and interest in the Financed Student Loans and other
funds of the trust, after giving effect to any final distributions to the
Noteholders, will be conveyed and transferred to the Company or its assignee.
FEDERAL FAMILY EDUCATION LOAN PROGRAM
A description of the Federal Family Education Loan Program is provided
in the accompanying prospectus under "Federal Family Education Loan Program".
The information provided below sets forth recent developments and additional
information with respect the Federal Family Education Loan Program.
RECENT DEVELOPMENTS--PRESIDENT CLINTON'S PROPOSED FY 2000 BUDGET. In
his proposed budget for fiscal year 2000, President Clinton has proposed
billions of dollars in funding cuts to FFELP. In addition, President Clinton has
again proposed a number of changes to the Act that would affect lenders and
Federal Guarantors. These proposals would, among other things:
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- deny lenders interest that accrues on Student Loans for which
payments are more than 180 days delinquent, representing as
much as a six month penalty for lenders on some loan defaults;
- reduce the share of default collections (from 24% to 18.5%)
that Federal Guarantors are allowed to retain; and
- recall an additional $1.6 billion in reserves held by Federal
Guarantors.
The President's proposed changes, if enacted, would increase the risk
that resources available to the Federal Guarantors to meet their guarantee
obligations will be significantly reduced.
CONSOLIDATION OF FEDERAL BENEFIT BILLINGS AND RECEIPTS WITH OTHER
TRUSTS. Due to a recent change in Department policy limiting the granting of new
lender identification numbers, the eligible lender trustee is allowed under the
trust agreement to permit the trust, and other trusts established by the seller
to securitize Student Loans, to use a common Department lender identification
number. The billings submitted to the Department for Interest Subsidy Payments
and Special Allowance Payments on the Financed Student Loans will be
consolidated with the billings for such payments for Student Loans in such other
trusts using the same lender identification number and payments on such billings
will be made by the Department in lump sum form. Such lump sum payments will
then be allocated among the various trusts using the lender identification
number.
In addition, the sharing of the lender identification number by the
trust with other trusts may result in the receipt of claim payments by Federal
Guarantors in lump sum form. In that event, such payments would be allocated
among the trusts in a manner similar to the allocation process for Interest
Subsidy Payments 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 Federal Guarantor
were to determine that the eligible lender trustee owes a liability to the
Department or a Federal Guarantor on any Student Loan for which the eligible
lender trustee is or was legal titleholder, including loans held in the trust or
other trusts, the Department or such Federal Guarantor may seek to collect that
liability by offset against payments due the eligible lender trustee under the
trust. In the event that the Department or a Federal Guarantor determines such a
liability exists in connection with a trust using the shared lender
identification number, the Department or such Federal Guarantor would be likely
to collect that liability by offset against amounts due the eligible lender
trustee under the shared lender identification number, including amounts owed in
connection with the trust.
In addition, other trusts using the shared lender identification number
may in a given quarter incur Federal Origination Fees that exceed the Interest
Subsidy Payments and Special Allowance Payments payable by the Department on the
loans in such other trusts, resulting in the consolidated payment from the
Department received by the eligible lender trustee under such lender
identification number for that quarter being less than the amount owed by the
Department on the loans in the trust for that quarter.
The trust agreement for the trust and the trust agreements for other
trusts established by the seller which share the lender identification number to
be used by the trust (the trust and such other trusts, collectively, the "
Trusts") will require each trust (including the trust) to indemnify the other
Trusts for a shortfall or an offset by the Department or a Federal Guarantor
arising from the Student Loans held by the eligible lender trustee on such
Trust's behalf.
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<PAGE>
FEES PAYABLE ON CERTAIN FINANCED 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 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 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 Adjusted
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 Financed 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 Payments and
Special Allowance Payments. If sufficient Interest Subsidy Payments 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 Payments 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 the Noteholders.
The offset of Interest Subsidy Payments and Special Allowance Payments, and the
payment of any remaining fee from other trust assets will further reduce the
amount of the Available Funds from which payments to the Noteholders may be
made. Furthermore, any offset of Interest Subsidy Payments and Special Allowance
Payments will further reduce the Adjusted Student Loan Rate.
CERTAIN FEDERAL INCOME TAX AND STATE TAX CONSEQUENCES
Although, Brown & Wood LLP (the "Special Federal Tax Counsel") is of
the opinion that the Senior Notes will properly be characterized as indebtedness
for federal income tax purposes, such opinion is not binding on the Internal
Revenue Service (the "IRS") and thus no assurance can be given that such
characterization will prevail.
The Senior Notes provide for stated interest at a floating rate based
upon Three-Month LIBOR, 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
OID 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 Class A-1 Noteholders' Interest Basis
Carryover and the Class A-2 Noteholders' Interest Basis Carryover) the tax
treatment of interest on the Senior Notes, including, in particular, interest
equal to the Class A-1 Noteholders' Interest Basis Carryover and the Class A-2
Noteholders' Interest Basis 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
the Senior Noteholders as OID or as contingent interest.
Prospective purchasers should read "Certain Federal Income Tax
Consequences" and "Certain State Tax Consequences" in the accompanying
prospectus for a discussion of the application of certain federal income tax
laws and certain state tax laws to the trust and the Notes.
ERISA CONSIDERATIONS
Subject to the applicable provisions of ERISA and the Code, the Senior
Notes may be purchased by an employee benefit plan or an individual retirement
account or other arrangement described in
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Section 3(3) of ERISA or Section 4975(e)(1) of the Code (a "Plan"). Fiduciaries
of a Plan subject to ERISA must first determine that the Plan's acquisition of a
Senior Note is consistent with their 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. Plan fiduciaries must also determine that the acquisition will 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") for which [ ] is acting as
representative (in such capacity, the "Representative"), and each of the
Underwriters has severally agreed to purchase, the principal amount of Senior
Notes set forth opposite its name below.
<TABLE>
<CAPTION>
Principal Amount
--------------------------------------------
Underwriter Class A-1 Notes Class A-2 Notes
--------------- ---------------
<S> <C> <C>
--------------- ---------------
Total
--------------- ---------------
--------------- ---------------
</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 0.___% per Class A-1 Note and 0.___% per Class
A-2 Note; that the Underwriters and such dealers may allow a discount of 0.___%
per Class A-1 Note and 0.___% per Class A-2 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 prices of the classes of Senior Notes. Such transactions consist
of bids or purchases for the purpose of pegging, fixing or maintaining the
prices of the classes of Senior Notes.
If the Underwriters create a short position in any class of 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.
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<PAGE>
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 any class of the Senior Notes, it may
reclaim the amount of the selling concession from the Underwriters and selling
group members which 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 seller will indemnify the
Underwriters against certain liabilities, including liabilities under applicable
securities laws, or contribute to payments the Underwriters may be required to
make in respect thereof.
The trust may, from time to time, invest the funds in the Collection
Account, the Collateral Reinvestment Account and the Reserve Account in Eligible
Investments acquired from the Underwriters.
LEGAL MATTERS
Ann M. O'Rourke, General Counsel of Nellie Mae Corporation, will pass
upon certain legal matters relating to the seller, the master servicer and the
administrator. As of the date of this prospectus supplement, Ms. O'Rourke has an
aggregate ownership interest in the total equity of Nellie Mae Corporation
(common and preferred stock on an as-converted basis), including equity
underlying options, in an amount that is less than 0.25% of that total equity.
Brown & Wood LLP will pass upon certain federal income tax matters on
behalf of the trust and upon certain legal matters relating to the Senior Notes
for the underwriters. From time to time, Brown & Wood LLP has provided and
expects to continue to provide legal services to Nellie Mae Corporation and its
affiliates.
REPORTS TO SECURITYHOLDERS
Unless and until Definitive Notes are issued, quarterly and annual
unaudited reports containing information concerning the Financed Student Loans
will be prepared by the administrator and sent on behalf of the trust only to
Cede & Co., as nominee of 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 accompanying 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
accompanying prospectus.
The trust will file with the SEC all periodic reports that are required
under the Securities Exchange Act of 1934, as amended, and the rules and
regulations of the SEC. These materials may be inspected and copied at the
public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Judiciary Plaza, Washington D.C. 20549 or at its regional offices at 500 West
Madison Street, Suite 1400,
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Chicago, Illinois 60661, and 7 World Trade Center, Suite 1300, New York, New
York 10048. Copies of these materials can also be obtained from the SEC's Public
Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. You may obtain information about the operation of the Public
Reference Section by calling the SEC at 1-800-SEC-0330. Certain information
about the trust is also available on the SEC's website at HTTP://WWW.SEC.GOV.
FORWARD LOOKING STATEMENTS
Information under the heading "Formation of the Trust" contains various
"forward looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act, which represent the 's expectations or
beliefs concerning future events. the seller cautions that these statements are
further qualified by important factors that could cause actual results to differ
materially from those in the forward looking statements.
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<PAGE>
INDEX OF PRINCIPAL 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 in
this prospectus supplement.
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Act............................................................................................................S-23
Additional Fundings............................................................................................S-49
Additional Guarantor...........................................................................................S-35
Additional Student Loans.......................................................................................S-21
Add-on Consolidation Loans...............................................................................S-24, S-52
Adjusted Student Loan Rate.....................................................................................S-40
Administration Fee.............................................................................................S-53
Available Funds................................................................................................S-55
CEDEL..........................................................................................................S-45
CEDEL Participants.............................................................................................S-45
Class A-1 Note Final Maturity Date.............................................................................S-43
Class A-1 Note LIBOR Rate......................................................................................S-40
Class A-1 Note Rate............................................................................................S-40
Class A-1 Noteholders' Interest Basis Carryover................................................................S-57
Class A-1 Noteholders' Interest Carryover Shortfall............................................................S-57
Class A-1 Noteholders' Interest Distribution Amount............................................................S-58
Class A-1 Notes................................................................................................S-39
Class A-2 Note Final Maturity Date.............................................................................S-43
Class A-2 Note LIBOR Rate......................................................................................S-40
Class A-2 Note Rate............................................................................................S-40
Class A-2 Noteholders..........................................................................................S-43
Class A-2 Noteholders' Interest Basis Carryover................................................................S-58
Class A-2 Noteholders' Interest Carryover Shortfall............................................................S-58
Class A-2 Noteholders' Interest Distribution Amount............................................................S-58
Closing Date...................................................................................................S-21
Collateral Reinvestment Account................................................................................S-53
Collection Account.............................................................................................S-53
Collection Period..............................................................................................S-54
Company........................................................................................................S-23
Cooperative....................................................................................................S-45
Cutoff Date....................................................................................................S-21
Deferral.......................................................................................................S-31
Delinquency Percentage.........................................................................................S-50
Depositaries...................................................................................................S-46
Determination Date.............................................................................................S-54
DTC Services...................................................................................................S-47
Early Amortization Event.......................................................................................S-49
Euroclear......................................................................................................S-45
Euroclear Operator,............................................................................................S-45
Euroclear Participants.........................................................................................S-45
Excess Spread..................................................................................................S-50
Exchange Serial Loan...........................................................................................S-51
Exchanged Financed Student Loan................................................................................S-51
Expected Interest Collections..................................................................................S-41
</TABLE>
S-71
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Federal Origination Fee........................................................................................S-67
FFELP..........................................................................................................S-22
FFELP Loans....................................................................................................S-21
Financed Student Loans.........................................................................................S-21
Forbearance....................................................................................................S-31
Global Securities..............................................................................................S-74
Grace..........................................................................................................S-31
Guarantors.....................................................................................................S-35
Index Maturity.................................................................................................S-44
Indirect Participants..........................................................................................S-44
Industry.......................................................................................................S-47
Initial Financed Student Loans.................................................................................S-21
Initial Guarantors.............................................................................................S-35
In-School......................................................................................................S-31
IRS............................................................................................................S-68
LIBOR Determination Date.......................................................................................S-44
LIBOR Reset Period.............................................................................................S-44
Liquidated Student Loans.......................................................................................S-54
Liquidation Proceeds...........................................................................................S-54
Loan Purchase Amount...........................................................................................S-49
Minimum Purchase Price.........................................................................................S-65
Monthly Available Funds........................................................................................S-54
Monthly Collection Period......................................................................................S-54
Monthly Rebate Fee.............................................................................................S-67
New Loan.......................................................................................................S-49
Non-U.S. Person................................................................................................S-77
Noteholders' Interest Distribution Amount......................................................................S-59
OID............................................................................................................S-68
Parity Date....................................................................................................S-41
Participants...................................................................................................S-44
Plan...........................................................................................................S-68
Pool Balance...................................................................................................S-42
Principal Distribution Adjustment..............................................................................S-59
Principal Distribution Amount..................................................................................S-59
Purchase Amount................................................................................................S-42
Purchase Collateral Balance....................................................................................S-49
Purchase Premium Amount........................................................................................S-49
Quarterly Interest Period......................................................................................S-40
Quarterly Payment Date.........................................................................................S-40
Realized Losses................................................................................................S-60
Record Date....................................................................................................S-40
Reference Banks................................................................................................S-44
Repayment......................................................................................................S-31
Representative.................................................................................................S-68
Reserve Account................................................................................................S-53
Reserve Account Excess.........................................................................................S-63
Reserve Account Initial Deposit................................................................................S-21
Secretary......................................................................................................S-36
Senior Noteholders' Distribution Amount........................................................................S-60
Senior Noteholders' Interest Distribution Amount...............................................................S-60
Senior Noteholders' Principal Carryover Shortfall..............................................................S-60
</TABLE>
S-72
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Senior Noteholders' Principal Distribution Amount..............................................................S-61
Senior Notes...................................................................................................S-39
Servicing Fee..................................................................................................S-53
Special Federal Tax Counsel....................................................................................S-67
Specified Reserve Account Balance..............................................................................S-63
Student Loan Rate Accrual Period...............................................................................S-41
Subordinate Note Final Maturity Date...........................................................................S-43
Subordinate Noteholders' Distribution Amount...................................................................S-61
Subordinate Noteholders' Interest Basis Carryover..............................................................S-61
Subordinate Noteholders' Interest Carryover Shortfall..........................................................S-61
Subordinate Noteholders' Interest Distribution Amount..........................................................S-62
Subordinate Noteholders' Principal Carryover Shortfall.........................................................S-62
Subordinate Noteholders' Principal Distribution Amount.........................................................S-62
Subordinate Notes..............................................................................................S-39
Systems........................................................................................................S-47
Telerate Page 3750.............................................................................................S-44
Terms and Conditions...........................................................................................S-46
Three-Month LIBOR..............................................................................................S-44
Transfer Agreement.............................................................................................S-49
Transfer and Servicing Agreements..............................................................................S-48
Trusts.........................................................................................................S-67
U.S. Person....................................................................................................S-77
Underwriters...................................................................................................S-68
Underwriting Agreement.........................................................................................S-68
</TABLE>
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<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Senior
Notes of Nellie Mae Student Loan Trust 1999-A (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 securities 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 applicable 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 the '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.
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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 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 least one business day prior to settlement. CEDEL or Euroclear,
as the case may be, will instruct the applicable 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 may 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 may employ their usual procedures for sending Global Securities
to the applicable Depositary for the benefit of CEDEL Participants or Euroclear
Participants. The sale proceeds will be available to the DTC on the settlement
date. Thus, to the DTC Participants a cross-market transaction will settle no
differently from a trade between two DTC Participants.
Trading between CEDEL or Euroclear 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
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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 will automatically fail on
the sale side unless affirmative action is 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;
(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 30% 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
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(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 (e.g., 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 in this prospectus supplement 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 in this prospectus supplement, the term
"Non-U.S. Person" means a beneficial owner of a Senior Note that is not a U.S.
Person.
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The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 18, 1999
PROSPECTUS
NELLIE MAE ASSET-BACKED FUNDING TRUSTS
ASSET-BACKED NOTES AND CERTIFICATES
(Issuable in Series)
NELLIE MAE EDUCATION LOAN CORPORATION,
SELLER AND MASTER SERVICER
----------------
Consider carefully the risk factors in the
prospectus supplement that accompanies
this prospectus.
Each issue of securities will represent obligations
of, or interests in, the applicable trust only.
They will not represent an obligation of, or
interest in, the seller, the master servicer, the
administrator or any of their affiliates. The
securities are not insured or guaranteed by any
entity.
This prospectus may be used to offer and sell any
series of securities only if accompanied by the
prospectus supplement for that series.
THE SECURITIES
Nellie Mae Education Loan Funding Corporation may
periodically form trusts which will issue securities.
The securities may be in the form of asset-backed
notes or asset-backed certificates. Each issue of
securities will have its own series designation and
will evidence obligations of or interests in the
trust established for that issue.
TRUST ASSETS
The assets of each trust will include:
- student loans, legal title to which will be
held by an eligible lender trustee on behalf
of the trust;
- moneys and investments; and
- other property described on the cover page of
the related prospectus supplement.
TYPES OF SECURITIES
Each series of securities may include one or more
classes of certificates that represent beneficial
ownership of the assets of the trust, and one or more
classes of notes that are secured by the assets of
the trust. A class of certificates or notes may:
- be senior or subordinate to other classes; and
- receive payments from one or more forms of credit
enhancement that are designed to reduce the harm
to investors caused by shortfalls in payments on
the related student loans.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
________________, 1999
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS
AND THE RELATED PROSPECTUS SUPPLEMENT
We provide information to you about the securities in two separate
documents that progressively provide more detail:
(a) this prospectus, which provides general information, some of which
may not apply to your series of securities; and
(b) the related prospectus supplement, which describes the specific
terms of your series of securities, including:
- the timing of interest and principal payments;
- financial and other information about the student loans;
- information about credit enhancement for each series; o the
ratings for each series; and
- the method of selling the securities.
IF THE TERMS OF A PARTICULAR SERIES OF SECURITIES ARE DESCRIBED
DIFFERENTLY IN THIS PROSPECTUS AND THE RELATED PROSPECTUS SUPPLEMENT, YOU SHOULD
RELY ON THE INFORMATION IN THE PROSPECTUS SUPPLEMENT.
You should rely only on the information provided in this prospectus and
the related prospectus supplement, including the information they incorporate by
reference. We have not authorized anyone to provide you with different
information. The securities are not offered in any state where offering them is
not permitted.
We have made cross-references to captions in this prospectus and the
accompanying prospectus supplement under which you can find further related
discussions. The following table of contents and the table of contents in the
related prospectus supplement indicate where these captions are located.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
FORMATION OF THE TRUSTS...........................................................................................5
Eligible Lender Trustee......................................................................................5
THE SELLER, THE MASTER SERVICER AND THE ADMINISTRATOR.............................................................6
The Seller...................................................................................................6
The Master Servicer and Administrator........................................................................7
USE OF PROCEEDS...................................................................................................7
THE STUDENT LOAN POOLS............................................................................................7
General......................................................................................................7
Origination and Marketing Process............................................................................8
Servicing and Collections Process............................................................................9
Claims and Recovery Rates....................................................................................9
FEDERAL FAMILY EDUCATION LOAN PROGRAM............................................................................10
General.....................................................................................................10
Eligible Lenders, Students and Educational Institutions.....................................................11
Financial Need Analysis.....................................................................................11
Special Allowance Payments..................................................................................11
Federal Stafford Loans......................................................................................13
Federal Unsubsidized Stafford Loans.........................................................................17
Federal PLUS and Federal SLS Loan Programs..................................................................17
Federal Consolidation Loan Program..........................................................................19
GUARANTORS UNDER THE FFELP.......................................................................................20
Loan Guarantees.............................................................................................21
Guarantor Reserve Funds.....................................................................................21
Federal Reimbursement Agreements............................................................................22
Eligibility for Federal Reimbursement.......................................................................23
Effect of Annual Claims Rate on Reimbursement of Guarantors.................................................23
Other Federal Agreements....................................................................................25
Rehabilitation of Defaulted Loans...........................................................................25
Federal Advances............................................................................................25
Changes to Federal Agreements...............................................................................25
Department of Education Oversight...........................................................................26
1998 Reauthorization Amendments.............................................................................26
WEIGHTED AVERAGE LIVES OF THE SECURITIES.........................................................................30
POOL FACTORS AND TRADING INFORMATION.............................................................................31
DESCRIPTION OF THE NOTES.........................................................................................31
General.....................................................................................................31
Principal and Interest on the Notes.........................................................................32
The Indenture...............................................................................................33
DESCRIPTION OF THE CERTIFICATES..................................................................................38
General.....................................................................................................38
Principal and Interest on the Certificates..................................................................39
CERTAIN INFORMATION REGARDING THE SECURITIES.....................................................................39
Fixed Rate Securities.......................................................................................39
Floating Rate Securities....................................................................................40
Book-Entry Registration.....................................................................................40
Definitive Securities.......................................................................................41
List of Securityholders.....................................................................................42
Reports to Securityholders..................................................................................42
</TABLE>
3
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<TABLE>
<CAPTION>
<S> <C>
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS.............................................................43
Agreements Covered..........................................................................................43
Sale of Student Loans; Representations and Warranties.......................................................43
Additional Fundings.........................................................................................44
Accounts....................................................................................................45
Servicing Procedures........................................................................................46
Payments on Student Loans...................................................................................47
Master Servicer Covenants...................................................................................47
Master Servicer Compensation................................................................................48
Payments of Principal and Interest..........................................................................48
Credit and Cash Flow Enhancement............................................................................48
Statements to the Indenture Trustee and the Trust...........................................................49
Evidence as to Compliance...................................................................................50
Certain Matters Regarding the Master Servicer...............................................................51
Master Servicer Default.....................................................................................51
Rights upon Master Servicer Default.........................................................................52
Waiver of Past Defaults.....................................................................................52
Amendment...................................................................................................52
Payment of Notes............................................................................................53
Termination.................................................................................................53
Optional Redemption.........................................................................................53
Auction of Student Loans....................................................................................54
Administration Agreement....................................................................................54
CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS.......................................................................54
Transfer of the Student Loans...............................................................................54
Consumer Protection Laws....................................................................................55
Loan Origination and Servicing Procedures Applicable to Student Loans.......................................55
Student Loans Generally Not Subject to Discharge in Bankruptcy..............................................56
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES.....................................................................56
Trusts for Which a Partnership Election Is Made.............................................................57
Tax Characterization of the Trust..................................................................57
Tax Consequences to Holders of Debt Securities.....................................................57
Tax Consequences to Holders of Equity Securities...................................................60
Trusts in Which All Residual Interests Are Retained by the Seller or an Affiliate of the Seller.............65
Tax Characterization of the Trust..................................................................65
ERISA CONSIDERATIONS.............................................................................................66
The Notes...................................................................................................67
The Certificates............................................................................................67
AVAILABLE INFORMATION............................................................................................68
REPORTS TO SECURITYHOLDERS.......................................................................................68
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..................................................................69
PLAN OF DISTRIBUTION.............................................................................................69
LEGAL MATTERS....................................................................................................70
INDEX OF PRINCIPAL TERMS.........................................................................................72
</TABLE>
4
<PAGE>
FORMATION OF THE TRUSTS
Each trust will be formed under the laws of the jurisdiction set forth
in the related prospectus supplement pursuant to a trust agreement. A trust will
perform only the following activities:
- acquire, hold, sell and manage student loans, the other trust
assets and proceeds from the student loans and other trust
assets;
- issue one or more classes of securities;
- make payments on the related securities; and
- engage in other activities that are necessary, suitable or
convenient to accomplish the foregoing or that are incidental
or related to them.
Each trust will be capitalized initially with a nominal cash payment.
The right to receive any amount remaining after payment of the securities will
be held by Nellie Mae Funding, LLC (the "Company"), a subsidiary of the seller.
On behalf of each trust, the related eligible lender trustee will use the
initial equity of the trust, together with the proceeds from the sale of the
related series of securities, to purchase student loans pursuant to a loan sale
agreement.
When the eligible lender trustee has purchased student loans, the
assets of the related trust will include:
- the student loans themselves, legal title to which is held by
the eligible lender trustee on behalf of the trust ;
- all funds collected on the student loans on or after the
applicable cutoff date;
- all moneys and investments on deposit in the Collection
Account (as defined below), any Reserve Account (as defined
below) and any other trust accounts or any other form of
credit enhancement that may be obtained for the benefit of one
or more classes of the securities; and
- any other property specified in the related prospectus
supplement.
To the extent provided in the applicable prospectus supplement, the
certificates will represent beneficial ownership of the assets of the trust, and
the notes of the related series will be secured by the assets of the trust. To
facilitate servicing and to minimize administrative burden and expense, the
master servicer, directly or through subservicers, will retain possession of the
promissory notes and other documents related to the student loans as custodian
for the trust and the related eligible lender trustee.
ELIGIBLE LENDER TRUSTEE
The eligible lender trustee for a trust will be the entity specified in
the related prospectus supplement. On behalf of that trust, the eligible lender
trustee will acquire legal title to all the related student loans pursuant to a
loan sale agreement and will enter into a guarantee agreement with each of the
guarantors of those student loans. The eligible lender trustee will qualify as
an eligible lender and owner of student loans for all purposes under the Higher
Education Act of 1965, as amended, and the related guarantee agreements. If
student loans are not owned by an eligible lender at any point in time, federal
guarantee payments from a guarantor and federal assistance would be lost for
those student loans. SEE "Federal Family Education Loan Program-Eligible
Lenders, Students and Educational Institutions" and "-Federal Insurance and
Reinsurance of Guarantors".
The liability of the eligible lender trustee in connection with the
issuance and sale of the securities is limited solely to its express obligations
contained in the related trust agreement and loan sale
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<PAGE>
agreement. An eligible lender trustee may resign at any time. If it does, the
administrator for that trust must appoint a successor eligible lender trustee.
The administrator of a trust may also remove the eligible lender trustee if the
eligible lender trustee becomes insolvent or ceases to be eligible to continue
as eligible lender trustee. In that event, the administrator must appoint a
successor eligible lender trustee. The resignation or removal of an eligible
lender trustee and appointment of a successor eligible lender trustee will not
become effective until a successor eligible lender trustee accepts the
appointment.
The principal office of each trust and eligible lender trustee will be
specified in the related prospectus supplement.
THE SELLER, THE MASTER SERVICER AND THE ADMINISTRATOR
THE SELLER
The Nellie Mae Education Loan Corporation ("NMELC"), a Delaware
corporation, is a wholly-owned subsidiary of Nellie Mae Corporation ("Nellie
Mae"). Nellie Mae originates and purchases student loans that it sells to NMELC.
NMELC is in the business of managing student loan assets and selling them to
trusts. In this prospectus, we refer to NMELC in its selling capacity as the
"seller."
The principal executive offices of NMELC are located at 1240 Pautucket
Avenue, Rumford, Rhode Island 02916. Its telephone number is (401) 438-4500.
Nellie Mae is a Delaware business corporation created in 1998 as the
successor to the business of The New England Education Loan Marketing
Corporation ("NEELMC"). Nellie Mae acquires and originates student loans under
the Federal Family Education Loan Program ("FFELP Loans") that are either
guaranteed and reinsured under the Higher Education Act of 1965, as amended, and
its implementing regulations (the "Act") or directly insured by the Secretary of
the Department of Education pursuant to the Act. Nellie Mae also acquires
student loans made under its private loan programs that are not guaranteed or
insured under the Act. All references in this prospectus to "student loans" that
are included as assets of any trust are to FFELP Loans.
On June 30, 1998, NEELMC made a one-time election, permitted under
Section 150(d)(3) of the Internal Revenue Code of 1986, as amended (the "Code"),
to transfer its assets and liabilities to Nellie Mae. As a for-profit
corporation, Nellie Mae operates without the Code's restrictions on activities
to which NEELMC was subject. In return for the transfers, NEELMC received all of
the outstanding equity of Nellie Mae. Nellie Mae also assumed the private,
nongovernmental loan operations previously operated by Nellie Mae, Inc.,
NEELMC's sister corporation.
During calendar year 1998, Nellie Mae purchased or originated $698
million of FFELP Loans and private student loans. As of March 31, 1999, Nellie
Mae held FFELP Loans and private student loans with an aggregate principal
balance of approximately $2.53 billion.
The principal executive offices of Nellie Mae are located at 50
Braintree Hill Park, Braintree, MA 02184 and its telephone number is (781)
849-1325.
The structure of the transactions described in this prospectus seeks to
assure that the transfer of student loans from the seller to each trust will be
treated as a sale of the student loans to that trust and not, in the event of a
bankruptcy of the seller, as a pledge of the student loans to secure a borrowing
by the seller. In the event of the seller's bankruptcy, however, there can be no
assurance that the sale of student loans by the seller to a trust will not be
recharacterized as a pledge of the student loans to secure a
6
<PAGE>
borrowing of the seller. If the sale were to be recharacterized in that way,
delays and reductions in payments to holders of the related notes and
certificates could occur.
THE MASTER SERVICER AND ADMINISTRATOR
If specified in the prospectus supplement for a series of securities,
NMELC will provide management and administrative services to the trust as
administrator. The administrator will receive an administration fee as
compensation for performing its obligations and as reimbursement for its
expenses as administrator.
If specified in the prospectus supplement for a series of securities,
NMELC will service the student loans owned by the related trust pursuant to a
servicing agreement between NMELC, as master servicer, and that trust. The
master servicer will receive a master servicing fee as compensation for
performing its obligations and reimbursement for its expenses as master
servicer.
The prospectus supplement for a series of securities may set forth
certain additional information with respect to the administrator and the master
servicer. SEE "Description of the Transfer and Servicing Agreements--Servicing
Procedures."
An administrator or master servicer other than, or in addition to,
NMELC may be specified for a series of securities in the related prospectus
supplement.
USE OF PROCEEDS
On the closing date specified in the applicable prospectus supplement,
the related trust will purchase student loans from the seller and make an
initial deposit into the Reserve Account or Pre-Funding Account (as defined
below), if any, with the net proceeds from the sale of that issue of securities.
The seller will use the money it receives for general corporate purposes, which
may include purchasing student loans from its affiliates.
THE STUDENT LOAN POOLS
GENERAL
The eligible lender trustee, acting on behalf of the related trust,
will buy a pool of FFELP Loans made to students (or their parents) which the
seller will have selected in accordance with the related loan sale agreement.
The student loans will have been originated under the Federal Family Education
Loan Program (the "FFELP") to meet several criteria, including the following:
- Each student loan is guaranteed as to principal and interest by a
guarantor that is reinsured by the Department of Education (the
"Department") in accordance with the FFELP.
- Each student loan was originated in the United States, its
territories or its possessions in accordance with the FFELP.
- Each student loan contains the terms required by the FFELP, the
applicable guarantee agreements and any other required terms.
- Each student loan provides for regular payments that fully amortize
the amount financed over its original term to maturity (exclusive of
any deferral or forbearance periods).
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- Each student loan satisfies any other criteria that are set forth in
the related prospectus supplement.
The seller will not select student loans for inclusion in a trust according to
procedures that it believes would adversely affect the interests of the
securityholders of the related series.
The student loans comprising the assets of each trust will be held by
the related eligible lender trustee, as trustee on behalf of that trust. The
eligible lender trustee will also enter into guarantee agreements with the
related guarantors. Under the guarantee agreements, each student loan will be
guaranteed by a guarantor. SEE "Formation of the Trusts".
The prospectus supplement for each series of securities will provide
information about the student loans in the related trust that will include, to
the extent appropriate:
- the composition of the pool,
- the distribution of the pool by loan type and payment status,
- the borrowers' states of residence, and
- the portion of the student loans guaranteed by the applicable
guarantors.
In the case of certain series of securities, the applicable trust may
be allowed to acquire or originate student loans after the related cutoff date.
Where this is the case, the prospectus supplement will set forth the criteria
that those student loans must meet. In addition, the prospectus supplement will
provide information regarding:
- the duration and conditions of any related Funding Period (as
defined below) or Revolving Period (as defined below), and
- the circumstances under which Additional Fundings (as defined below)
will be made during and, if applicable, after the Revolving Period.
In addition, if specified in the related prospectus supplement, the
assets of the trust may include certain rights of the seller to receive Excess
Cashflow Rights (as defined below) in respect of student loans that are owned by
one or more other trusts established or sponsored by the seller. The related
prospectus supplement will disclose certain summary data relating to any Excess
Cashflow Rights.
ORIGINATION AND MARKETING PROCESS
In order for student loans to be guaranteed and eligible for federal
assistance, lenders must comply with certain rules set forth in the Act that
govern loan origination practices. A lender that makes student loans may not
offer points, premiums, payments or other inducements, directly or indirectly,
to any educational institution or individual in an attempt to secure student
loan applications, nor may it mail a student loan application to a student to
whom it has not previously made a student loan unless the student requests one.
Generally, the student and the educational institution complete the
application, which is accompanied by a promissory note. The application is then
mailed or electronically transmitted directly to either a lender or the
applicable guarantor. Both the lender and the guarantor must approve the
application, confirm that it is complete and that it (as well as the prospective
borrower and educational
8
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institution) complies with all applicable requirements of both the Act and the
guarantor. The Act requires that each guarantor have procedures designed to
assure that it guarantees student loans only to students attending institutions
which meet the requirements of the Act. Each lender will only make loans that
the applicable guarantor has approved according to its own requirements and the
requirements of the Act. For each application it approves, the guarantor will
issue a guarantee certificate to the lender. The lender will then disburse the
loan (typically in multiple installments) and send a disclosure statement
confirming the terms of the student loan to the borrower.
These procedures differ slightly for Consolidation Loans (as defined
below).
SERVICING AND COLLECTIONS PROCESS
To ensure that student loans are repaid on a timely basis, the
applicable guarantee agreements and the Act require that the holders of student
loans see to it that specified due diligence procedures are performed. In the
related servicing agreement, the master servicer agrees to perform these
procedures, as well as certain collection procedures, for the student loans. For
example, if a payment is late, the master servicer may be required to attempt to
contact the delinquent borrower by mail within ten days after the delinquency
and at further specified times by mail and by telephone. All telephone calls and
letters, as well as a synopsis of each, will be noted in the borrower's loan
file that the master servicer maintains. If a delinquent borrower cannot be
located, the master servicer must perform "skip tracing" procedures, which
include contacting the borrower's school and references. If the master servicer
fails to comply with these procedures, the related eligible lender trustee, as
holder of legal title to the student loans on behalf of the related trust, may
find it difficult to obtain the benefits of any guarantee agreement or to
receive the benefits of federal assistance from the Department in connection
with those loans. Even if the master servicer's failure to comply with the
procedures has not caused the loss of the guarantee of the principal of a
student loan, failure to comply with certain procedures may nonetheless
jeopardize coverage under a guarantee agreement for certain accrued interest
amounts.
The master servicer is required at certain prescribed times to notify
the applicable guarantor that a student loan is delinquent before it submits a
claim for payment under the related guarantee agreement. This requirement
enables the guarantor to be aware of seriously delinquent accounts and to be
able to make additional attempts to collect the loan before receiving a claim.
Any student loan that is delinquent beyond a certain number of days is
considered to be in default. When a student loan is in default, the master
servicer will submit a claim for reimbursement to the applicable guarantor. If
the master servicer fails to file a claim within specified times of delinquency,
the guarantor may deny the claim. A failure by the master servicer to file a
guarantee claim in a timely fashion would constitute a breach of its covenants.
If, as a result of a failure of this type, the related guarantee payment is no
longer available to the trust, the master servicer must arrange for the purchase
of that student loan from the trust, unless the prospectus supplement for that
series provides otherwise. The securityholders and the eligible lender trustee
will have no further remedies against the master servicer in this situation. SEE
"Description of the Transfer and Servicing Agreements--Master Servicer
Covenants".
CLAIMS AND RECOVERY RATES
Each prospectus supplement will contain certain historical information
concerning guarantee claims and recovery rates of the guarantors that guarantee
the student loans held by the related trust as of the applicable closing date.
Because the characteristics of pools of student loans differ, however, the claim
and recovery experience of any series may differ from that of prior series.
9
<PAGE>
FEDERAL FAMILY EDUCATION LOAN PROGRAM
GENERAL
The Federal Family Education Loan Program under Title IV of the Act
provides for loans to be made to students who are enrolled in eligible
institutions (or their parents) to finance a portion of the cost of attendance.
Payment of principal and interest on the student loans is guaranteed by the
applicable guarantor against:
- default of the borrower;
- the death, bankruptcy or disability of the borrower;
- closing of the borrower's school, a false certification by the
borrower's school or an unpaid school refund; or
- a determination that the borrower was not eligible for the loan.
Subject to certain conditions, a program of federal reinsurance under the Act
entitles guarantors to be reimbursed by the Department for between 75% and 100%
of the amount of each guarantee payment. In addition, the eligible lender
trustee, as a holder of the student loans on behalf of the related trust, is
entitled to receive from the Department certain interest subsidy payments and
special allowance payments (as defined below) for certain student loans.
The FFELP provides for loans to students (and their parents) which are
guaranteed by a guarantor and either reinsured or directly insured by the
federal government. Several types of student loans are currently authorized
under the Act:
- loans to students who demonstrate need ("Federal Stafford Loans");
- loans to students who either do not demonstrate need or need
additional loans to supplement their Federal Stafford Loans
("Federal Unsubsidized Stafford Loans");
- loans to parents of students ("Federal PLUS Loans") who are
dependents and whose estimated costs of attending school exceed
other available financial aid; and
- loans to consolidate into a single loan the borrower's obligations
under various federally authorized student loan programs (each, a
"Federal Consolidation Loan").
Before 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").
Although the description and summaries of the Act, the FFELP, the
guarantee agreements and the other statutes, regulations and amendments referred
to in this prospectus describe or summarize the material provisions of those
statutes, regulations and agreements, they do not purport to be comprehensive
and are qualified in their entirety by reference to each actual statute,
regulation or document. Both the Act and the regulations promulgated under the
Act have been the subject of extensive amendments in recent years. Accordingly,
there can be no assurance that future amendments or modifications will not
materially
10
<PAGE>
change any of the terms or provisions of the programs described in this
prospectus or of the statutes and regulations that implement them.
ELIGIBLE LENDERS, STUDENTS AND EDUCATIONAL INSTITUTIONS
Lenders eligible to make loans under the FFELP generally include banks,
savings and loan associations, credit unions, pension funds, insurance companies
and, under certain conditions, schools and guarantors. A student loan may only
be made to, or on behalf of, a "qualified student". The term "qualified student"
is defined as a United States citizen or national (or otherwise eligible
individual under federal regulations) who:
- has been accepted for enrollment or is enrolled and is maintaining
satisfactory academic progress at a participating educational
institution;
- 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 the institution;
- has agreed to notify the holder of the loan promptly of any address
change; and
- meets the "need" requirements described in the application for the
particular loan program, in the case of Federal Stafford Loans.
Eligible schools include institutions of higher education and
proprietary institutions meeting the standards set forth in the Act. In order
for a school to participate in the program, its eligibility must be approved by
the Department under standards established by regulation.
FINANCIAL NEED ANALYSIS
Subject to certain limits and conditions, student loans generally may
be made in amounts sufficient to cover the student's estimated costs of
attending school, 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
applicant (and parents, in the case of a dependent child) must undergo a
financial need analysis. This requires the applicant (and parents, in the case
of a dependent child) to submit a financial need analysis form to a federal
processor. The federal processor evaluates the parents' and student's financial
condition under federal guidelines and calculates the amount that the student
and/or the family is expected to contribute towards the student's cost of
education (the "family contribution"). After receiving information on the family
contribution, the institution then subtracts the family contribution from the
student's costs to attend the 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
with their own resources or with Federal PLUS Loans.
SPECIAL ALLOWANCE PAYMENTS
The Act provides for quarterly special allowance payments to be made by
the Department to holders of student loans to the extent necessary to ensure
that they receive at least specified market interest rates of return on the
loans. The rates for special allowance payments are based on formulas that vary
according to the type of loan, the date the loan was originally made and the
type of funds (tax-
11
<PAGE>
exempt or taxable) used to finance the loan. A special allowance payment is made
for each of the 3-month periods ending March 31, June 30, September 30 and
December 31.
The special allowance payment equals the average unpaid principal
balance (including interest permitted to be capitalized) of all eligible loans
held by a holder during a quarterly period multiplied by the special allowance
percentage. The special allowance percentage is computed by:
(i) determining the average of the bond equivalent rates of 3-month
Treasury bills auctioned for that quarter;
(ii) subtracting the applicable borrower interest rate on the loan from
the average determined under clause (i);
(iii) adding the applicable special allowance margin (described in the
table) to the resultant percentage determined under clause (ii); 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 FIRST DISBURSEMENT SPECIAL ALLOWANCE MARGIN
- -------------------------- --------------------------------------------------------
<S> <C>
Before 10/17/86 3.50%
From 10/17/86 through 09/30/92 3.25%
From 10/01/92 through 06/30/95 3.10%
From 07/01/95 through 06/30/98 2.50% (Federal Stafford Loans and Federal Unsubsidized
Stafford Loans that are In-School, Grace or Deferment);
3.10% (Federal Stafford Loans and Federal Unsubsidized
Stafford Loans that are in repayment and all other
loans)
From 07/01/98 through 06/30/03 2.20% (Federal Stafford Loans and Federal Unsubsidized
Stafford Loans that are In-School, Grace or Deferment);
2.80% (Federal Stafford Loans and Federal Unsubsidized
Stafford Loans that are in repayment) and 3.10% for all
other loans
</TABLE>
Special allowance payments are available on variable rate Federal PLUS
Loans and Federal SLS Loans made on or after July 1, 1987 and before July 1,
1994 and on any Federal PLUS Loans made on or after July 1, 1998, only if the
variable rate, which is reset annually based on the 1-year Treasury bill (for
loans made before July 1, 1998) or based on the 3-month Treasury bill (for loans
made on or after July 1, 1998), exceeds the applicable maximum borrower rate.
The maximum borrower rate is between 9% and 12%.
FEDERAL STAFFORD LOANS
With respect to Federal Stafford Loans, the Act provides for :
12
<PAGE>
(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 borrowers' 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.
In this prospectus we refer to all three types of assistance 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 BORROWER RATE INTEREST RATE MARGIN
- ------------------------------ ------------------ --------------------- --------------------
<S> <C> <C> <C>
Before 01/01/81............... 7% 7% N/A
From 01/01/81 through
09/12/83................. 9% 9% N/A
From 09/13/83 through
06/30/88................. 8% 8% N/A
From 07/01/88 through
09/30/92................. 8% for 48 months; thereafter, 8% for 48 months, 3.25% for loans made
3-month Treasury + Interest then 10% before 7/23/92 and for
Rate Margin loans made on or after
7/23/92 and before 10/1/92 to
new student loan borrowers;
3.10% for loans made after
7/23/92 and before 7/1/94 to
borrowers with outstanding FFELP
loans
From 10/01/92 through
06/30/94................. 3-month Treasury + Interest 9% 3.10%
Rate Margin
From 07/01/94 through
06/30/95................. 3-month Treasury + Interest 8.25% 3.10%
Rate Margin
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
TRIGGER DATE (1) BORROWER RATE (2) MAXIMUM BORROWER RATE INTEREST RATE MARGIN
- ------------------------------ ------------------ --------------------- --------------------
<S> <C> <C> <C>
From 07/01/95 through
06/30/98................. 3-month Treasury + Interest 8.25% 2.50% (In-School, Grace
Rate Margin or Deferment);3.10% (in
repayment)
From 07/01/98................. 3-month Treasury + Interest 8.25% 1.70% (In-School, Grace
Rate Margin or Deferment); 2.30% (in
repayment)
</TABLE>
- ---------------------
(1) The Trigger Date for Federal Stafford Loans made before October 1, 1992 is
the first day of the enrollment period for which the borrower's first
Federal Stafford Loan is made. The Trigger Date for Federal Stafford Loans
made on or after October 1, 1992 is the date of the disbursement of the
borrower's first Federal Stafford Loan. All Federal Stafford Loans made on
or after July 1, 1994 are variable, regardless of the applicable rate on
any prior loans.
(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 and
(b) the sum of
(i) the bond equivalent rate of 3-month Treasury bills
auctioned at the final auction held before that June 1,
and
(ii) the applicable interest rate margin.
In 1992 the Act was amended to provide that, for fixed rate Federal
Stafford Loans made on or after July 23, 1992 and certain loans made to
new borrowers on or after July 1, 1988, the lender must have converted the
interest rate on those loans (by January 1, 1995) to an annual variable
interest rate adjusted each July 1 equal to:
(a) for certain fixed rate Federal Stafford Loans made between
July 1, 1988 and July 23, 1992, and for certain fixed rate
Federal Stafford Loans made to new FFELP Loan borrowers on or
after July 23, 1992 and before October 1, 1992, the 3-month
Treasury bill rate at the final auction before the preceding
June 1 plus 3.25%; and
(b) for fixed rate Federal Stafford Loans made on or after July
23, 1992 to borrowers with outstanding FFELP Loans, the
3-month Treasury bill rate at the final auction before the
preceding June 1 PLUS 3.10%,
in each case capped at the applicable interest rate for the loan that
existed before the conversion. The variable interest rate conversion
requirement does not apply to loans made before 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 and
- during certain deferral periods.
The Department makes quarterly interest subsidy payments to the owner of a
Federal Stafford Loan in an amount equal to the interest that accrues on the
unpaid balance of that loan before repayment begins or
14
<PAGE>
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 to receive interest subsidy payments (and special allowance
payments) in accordance with its provisions. However, 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
the loan for federal reinsurance. If the loan is not held by an eligible lender
in accordance with the requirements of the Act and the applicable federal
guarantee agreements, the loan may lose its eligibility. SEE "--Eligible
Lenders, Students and Educational Institutions" above, "Formation of the
Trusts--Eligible Lender Trustee" and "Description of the Transfer and Servicing
Agreements--Servicing Procedures". The seller 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 the master servicer submits to the
Department the applicable forms for any given calendar quarter. However, there
can be no assurance that payments will, in fact, be received from the Department
within that period. The master servicer has agreed to prepare and file with the
Department claim forms and any other required documents or filings on behalf of
each eligible lender trustee as owner of the related student loans on behalf of
the related trust. The master servicer has also agreed to assist each eligible
lender trustee to monitor, pursue and obtain any interest subsidy payments and
special allowance payments with respect to the student loans. Each eligible
lender trustee will be required to deposit in the related Collection Account the
interest subsidy payments and special allowance payments for the related student
loans within two business days after it receives them.
LOAN LIMITS. The Act generally requires that eligible lenders disburse
student loans in at least two equal disbursements. The Act limits the amount a
student can borrow in any academic year. The following chart sets forth the
current and historic loan limits.
<TABLE>
<CAPTION>
ALL STUDENTS (1) INDEPENDENT STUDENTS
-----------------------------------------------------
BASE AMOUNT ADDITIONAL MAXIMUM
SUBSIDIZED AND UNSUBSIDIZED ANNUAL
BORROWER'S SUBSIDIZED SUBSIDIZED ON UNSUBSIDIZED ON OR ONLY ON OR TOTAL
ACADEMIC LEVEL PRE-1/1/87 OR AFTER 1/1/87 AFTER 10/1/93 (2) AFTER 7/1/94(3) AMOUNT
- ---------------------------- ---------- --------------- ------------------ ----------------- ------------
<S> <C> <C> <C> <C> <C>
Undergraduate (per year):
1st year $ 2,500 $ 2,625 $ 2,625 $ 4,000 $ 6,625
2nd year $ 2,500 $ 2,625 $ 3,500 $ 4,000 $ 7,500
3rd year and above $ 2,500 $ 4,000 $ 5,500 $ 5,000 $ 10,000
Graduate (per year) $ 5,000 $ 7,500 $ 8,500 $10,000 $ 18,500
Aggregate Limit:
Undergraduate $12,500 $17,250 $23,000 $23,000 $ 46,000
Graduate (including $25,000 $54,750 $65,500 $73,000 $138,500
undergraduate)
</TABLE>
- -------------------------
(1) The loan limits include both Federal Stafford Loans and federal direct
student loans.
15
<PAGE>
(2) These amounts represent the combined maximum loan amount per year for
Federal Stafford Loans 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. Moreover, dependent
undergraduate students may also receive these additional loan amounts if
their parents 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 sometimes reduced when the student is
enrolled in a program of less than one academic year or has less than a full
academic year remaining in his program. The Department has discretion to raise
these limits to accommodate highly specialized or exceptionally expensive
courses of study.
REPAYMENT. In general, repayment of principal on a Federal Stafford
Loan does not begin while the borrower remains a qualified student, but only
after the applicable grace period, as described below. Any borrower may prepay a
loan voluntarily (without premium or penalty), and may waive any grace period or
deferral period related to his loan. In general, each loan must be scheduled for
repayment over a period of not more than ten years after repayment begins. New
borrowers on or after October 7, 1998 who accumulate outstanding loans under the
FFELP totaling more than $30,000 are entitled to extend repayment for up to 25
years, subject to certain scheduled 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 lower
payments. The Act and related regulations require lenders to offer the choice of
a standard, graduated, income-sensitive or extended (if applicable) repayment
schedule to all borrowers entering repayment.
GRACE PERIODS, DEFERRAL PERIODS AND FORBEARANCE PERIODS. After the
borrower stops pursuing at least a half-time course of study, he generally must
begin to repay principal of a Federal Stafford Loan following a grace period.
The grace period is:
- at least 9 months but not more than 12 months, if the loan's
interest rate is 7% per year; and
- not more than 6 months for loans made to first-time borrowers under
the FFELP on or after July 1, 1988.
In addition, no principal repayments need be made, subject to certain
conditions, during certain deferral periods.
For new borrowers whose loans are first disbursed on or after July 1,
1993, repayment of principal may be deferred, subject to a maximum deferment of
three years, only:
- while the borrower is at least a half-time student or is enrolled in
an approved graduate fellowship program or rehabilitation program;
or
- when the borrower is seeking, but unable to find, full-time
employment; or
- when for any reason the lender determines that payment of principal
will cause the borrower economic hardship.
In 1992 the Act was amended to permit, and in some cases require,
forbearance of loan collection in certain circumstances (each, a "forbearance
period").
16
<PAGE>
FEDERAL UNSUBSIDIZED STAFFORD LOANS
The Federal Unsubsidized Stafford Loan program 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 or who need funds in
excess of the maximum permitted under Federal Stafford Loans in order to finance
their education. The basic requirements for Federal Unsubsidized Stafford Loans
are essentially the same as those for Federal Stafford Loans, including interest
rate provisions, annual loan limits and special allowance payments.
The terms of the Federal Unsubsidized Stafford Loans do, however,
differ in some respects. The federal government does not make interest subsidy
payments on Federal Unsubsidized Stafford Loans. The borrower must begin making
interest payments on a monthly or quarterly basis or the interest will be
capitalized. Subject to the same loan limits as those established for Federal
Stafford Loans, a student may borrow up to the amount of his Unmet Need.
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. Since July 1, 1993, only parents who have no
adverse credit history or who are able to secure an endorser without an adverse
credit history are eligible for Federal PLUS Loans. The basic provisions
applicable to Federal PLUS Loans and Federal SLS Loans are similar to those of
Federal Stafford Loans with respect to the federal insurance and reinsurance.
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 Loans and Federal SLS Loans disbursed before
July 1, 1993 were limited to $4,000 per academic year with a maximum aggregate
amount of $20,000. Limits for Federal SLS Loans disbursed on or after July 1,
1993 depend upon the class year of the student and the length of the academic
year. The annual loan limits for Federal SLS Loans first disbursed on or after
July 1, 1993 range 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, the Federal SLS Loan program was merged with the
Federal Unsubsidized Stafford Loan program, with the borrowing limits reflecting
the combined eligibility under both programs. The annual and aggregate amounts
of Federal PLUS Loans first disbursed on or after July 1, 1993 are limited only
to the difference between the cost of the student's education and other
financial aid received (including scholarship, grants and other student loans).
INTEREST. The interest rate for a Federal PLUS Loan or a Federal SLS
Loan depends both on the date of disbursement and the period of enrollment. The
interest rates for Federal PLUS Loans and Federal SLS Loans are summarized in
the following chart.
17
<PAGE>
<TABLE>
<CAPTION>
INTEREST RATE
TRIGGER DATE (1) BORROWER RATE (2) MAXIMUM BORROWER RATE MARGIN
- ------------------------------- ----------------- --------------------- -------------
<S> <C> <C> <C>
Before 10/01/81............. 9% 9% N/A
From 10/01/81 through N/A
10/30/82................. 14% 14%
From 11/01/82 through
06/30/87................. 12% 12% N/A
From 07/01/87 through
09/30/92................. 1-year Treasury + Interest Rate Margin 12% 3.25%
From 10/01/92 through PLUS 10%,
06/30/94................. 1-year Treasury + Interest Rate Margin SLS 11% 3.10%
(SLS repealed 07/01/94)
From 07/01/94 through
06/30/98................. 1-year Treasury + Interest Rate Margin 9% 3.10%
After 6/30/98............... 3-month Treasury + Interest Rate Margin 9% 3.10%
</TABLE>
(1) For Federal PLUS Loans and Federal SLS Loans made before October 1, 1992,
the trigger date is the first day of the enrollment period for which the
loan was made; and for Federal PLUS Loans and Federal SLS Loans made on or
after October 1, 1992, the trigger date is the date of the disbursement of
the loan.
(2) For Federal PLUS Loans or Federal 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 to be equal to the LESSER OF:
(a) the applicable maximum borrower rate and
(b) the sum of
(i) the bond equivalent rate of 1-year Treasury bills or 3-month
Treasury bills, as applicable, auctioned at the final auction
held before that June 1, and
(ii) the applicable interest rate margin.
A holder of a Federal PLUS Loan or Federal SLS Loan is eligible to
receive special allowance payments during any quarter if the sum of the average
of the bond equivalent rates of 3-month Treasury bills auctioned during that
quarter and the interest rate margin exceeds the maximum rate.
REPAYMENT, DEFERMENTS. In 1992 the Act was amended to grant to each
borrower under a Federal SLS Loan the option to defer repaying principal until
he begins to repay his Federal Stafford Loans. Otherwise, borrowers must begin
to repay principal of their Federal PLUS Loans and Federal SLS Loans no later
than 60 days after the date of disbursement, subject to certain deferral and
forbearance provisions. The deferral provisions which apply to Federal PLUS
Loans and Federal SLS Loans are more limited than those applicable to Federal
Stafford Loans. However, borrowers may defer and capitalize repayment of
interest during certain periods of educational enrollment and periods of
unemployment or hardship, as
18
<PAGE>
specified under the Act. Further, while interest subsidy payments are not
available while repayment is being deferred, interest may be capitalized during
the deferral period if the borrower does not pay the interest. Maximum loan
repayment periods and minimum payment amounts for Federal PLUS Loans and Federal
SLS Loans are the same as those for Federal Stafford Loans.
FEDERAL CONSOLIDATION LOAN PROGRAM
The Act also authorizes a program under which certain borrowers may
consolidate one or more of their student loans into a single Federal
Consolidation Loan that is 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 the FFELP
that the borrower selects for consolidation, as well as loans made under various
other student loan programs and student loans made by different lenders. Under
this program, a lender may make a Federal Consolidation Loan to an eligible
borrower who requests it so long as the lender holds an outstanding loan of the
borrower or the borrower certifies that he has been unable to obtain a Federal
Consolidation Loan from the holders of his outstanding student loans. In 1998
the Act was amended to allow a lender to make a Federal Consolidation Loans to a
borrower whose loans are held by multiple lenders even if the lender making the
Federal Consolidation Loan does not hold any of the borrower's outstanding
loans. 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 before 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 were available only to borrowers who had aggregate outstanding student
loan balances of at least $5,000.
To be eligible to obtain a Federal Consolidation Loan, the borrower
must be either in repayment status or in a grace period before repayment begins.
In addition, for applications received before January 1, 1993, the borrower must
not have been delinquent by more than 90 days on any student loan payment; and
for applications received on or after January 1, 1993, delinquent or defaulted
borrowers are eligible to obtain Federal Consolidation Loans only if they
reenter repayment through loan consolidation.
In connection with applications received on or after January 1, 1993,
borrowers may, within 180 days after the origination of a Federal Consolidation
Loan, add additional loans ("Add-on Consolidation Loans") made before the
origination of that Federal Consolidation Loan that will be consolidated with
it; and in addition, in 1998, the Act was amended to permit student loans made
within the 180-day period after the date of consolidation to be added to that
Federal Consolidation Loan. If the borrower obtains student loans after the
Federal Consolidation Loan is originated (except as provided above), he may
consolidate the new loans and the existing Federal Consolidation Loan into a new
Federal Consolidation Loan. After a Federal Consolidation Loan is consolidated
with any Add-on Consolidation Loans, the interest rate and term of the Federal
Consolidation Loan 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, borrowers may include federal direct loans in Federal
Consolidation Loans.
Federal Consolidation Loans bear interest at a rate equal to the
greater of the weighted average of the interest rates on the unpaid principal
balances of the consolidated loans and 9% for loans originated
19
<PAGE>
before July 1, 1994. For Federal Consolidation Loans made on or after July 1,
1994 and for which applications were received before November 13, 1997, the
weighted average interest rate must be rounded up to the nearest whole percent.
Federal Consolidation Loans made on or after July 1, 1994 for which applications
were received on or after November 13, 1997 through September 30, 1998 bear
interest at the annual variable rate applicable to Federal Stafford Loans
subject to a cap of 8.25%. 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 being consolidated (rounded up to
the nearest one-eighth of one percent) subject to a cap of 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 deferral periods. 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
a Federal Consolidation Loan that is comprised of Subsidized Stafford Loans will
retain its subsidy benefits during deferral periods. Borrowers may elect to
accelerate principal payments without penalty.
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 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 to the Department at an
annualized rate of 1.05% on principal of and interest on Federal Consolidation
Loans for loans disbursed on or after October 1, 1993 (0.62% for Federal
Consolidation Loan applications received between October 1, 1998 and January 31,
1999). The rate for special allowance payments for Federal Consolidation Loans
is determined in the same manner as for Federal Stafford Loans.
A borrower must begin to repay his Federal Consolidation Loan within 60
days after his prior consolidated loans have been discharged. For applications
received on or after January 1, 1993, repayment schedule options must include
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 graduated and income-sensitive repayment plans in
connection with student loans for which the applications were received prior to
that date. Generally, depending on the total loans outstanding, repayment may be
scheduled over periods no less than ten and not more than 25 years. 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 student loans of a borrower paid in full through
consolidation are discharged in the consolidation process when the new Federal
Consolidation Loan is made.
GUARANTORS UNDER THE FFELP
The student loans for a series of securities may be guaranteed by one
or more guarantors that will be identified in the related prospectus supplement.
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LOAN GUARANTEES
Under the FFELP, guarantors guarantee loans made by lending
institutions such as banks, credit unions, savings and loan associations,
certain schools, pension funds and insurance companies to students or their
parents. Student loans made before October 1, 1993 are guaranteed by guarantors
as to 100% of principal and accrued interest against default, death, disability
or bankruptcy. Student loans made on or after October 1, 1993 are guaranteed as
to 100 percent of principal and accrued interest against death, disability or
bankruptcy and 98% of principal and accrued interest against default. The
Guarantor is reimbursed by the Secretary for amounts paid to lenders pursuant to
agreements for reimbursement. See "--Federal Reimbursement Agreements" below.
A lender may submit a default claim to the guarantor after the related
student loan has been delinquent for at least 270 days (unless the first day of
delinquency occurred prior to October 7, 1998, in which case it may be submitted
after 180 days of delinquency). The lender must submit a default claim package
that includes all information and documentation required under the FFELP
regulations and the guarantor's policies and procedures. Under current
procedures, assuming that the default claim package complies with the
guarantor's loan procedures manual and regulations, the guarantor will pay the
lender for a default claim within 90 days after the lender has filed the claim
(which generally is expected to be 390 days following the date a loan became
delinquent). The guarantor will pay the lender interest accrued on the loan for
up to 450 days after delinquency. The guarantor must file a reimbursement claim
with the Secretary within 45 days after the guarantor has paid the lender for
the default claim.
GUARANTOR RESERVE FUNDS
A guarantor generally pays claims to lenders for student loans that it
has guaranteed using the cash and reserves that comprise its guarantee funds. In
general, these funds have been funded principally by administrative cost
allowances paid by the Secretary, guarantee fees paid by lenders (the cost of
which may be passed on to borrowers - up to 1% of the principal amount of the
student loan), investment income on moneys in the guarantee fund, and a portion
of the moneys collected from borrowers on guaranteed loans that have been
reimbursed by the Secretary to cover the guarantor's administrative expenses.
The Secretary is required to demand payment on September 1, 2002 of a
total of one billion dollars from the funds of all the guarantors participating
in the FFELP. The amounts demanded of each guarantor will be determined in
accordance with formulas included in the Act. Each guarantor is required to
deposit funds in a restricted account in installments, beginning in the federal
fiscal year ending September 30, 1998, to provide for its payment. The Secretary
has made the determination, and advised each guarantor, of the amount required
to be transferred by that guarantor. The Act was amended in 1998 to include
significant changes affecting the financial structure of guarantors in the FFELP
and their sources of revenue. These changes will affect the guarantors and their
guarantee funds. SEE "--1998 Reauthorization Amendments" below.
The adequacy of a guarantor's guarantee fund to meet its guarantee
obligations for existing student loans also depends, in significant part, on its
ability to collect revenues generated by guarantees of new student loans. The
federal direct student loan program may adversely affect the volume of new
guarantees. Future legislation may make additional changes to the Act that could
significantly affect the revenues received by guarantors and the structure of
the guarantor program. There can be no assurance that relevant federal laws,
including the Act, will not be further changed in a manner that may adversely
affect the ability of a guarantor to meet its guarantee obligations
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Information about the particular guarantors that guarantee the initial
student loans in a trust will be set forth in the related prospectus supplement.
The information will be provided by the respective guarantors. However, neither
the seller nor the underwriters will be able to make any representation as to
its accuracy or completeness.
FEDERAL REIMBURSEMENT AGREEMENTS
GENERAL
Each guarantor and the Secretary have entered into a federal
reimbursement contracts. Each contract provides that the guarantor will be
reimbursed for a portion of the insurance payments that it makes to eligible
lenders for loans guaranteed by the guarantor before the termination of its
contract or expiration of the authority of the Act. Under certain circumstances,
the Secretary can terminate federal reimbursement contracts or take other
actions short of termination to protect the federal interest. SEE "--Department
of Education Oversight" below.
Under the Act and the federal reimbursement contracts, the Secretary
currently agrees to reimburse a guarantor for the amounts it expends in the
discharge of its guarantee obligation (I.E., the unpaid principal balance and
accrued interest on the guaranteed loans) as a result of borrower default. The
Secretary currently agrees to reimburse each guarantor for up to 100% of the
amounts it expends for guaranteed loans made prior to October 1, 1993; up to 98%
of the amounts expends for guaranteed loans made on or after October 1, 1993 but
before October 1, 1998; and up to 95% of the amounts expends for guaranteed
loans made on or after October 1, 1998. Depending on the claims rate of a
guarantor, the 100%, 98% or 95% reimbursement may be reduced as described in
"--Effect of Annual Claims Rate" below.
The Secretary also agrees to repay 100% of the unpaid principal balance
and accrued interest on guaranteed loans that the guarantor expends in
discharging its guarantee obligation as a result of the bankruptcy, death, or
total and permanent disability of a borrower (or in the case of a Federal PLUS
Loan, the death of the student on whose behalf the loan was borrowed), or in
certain circumstances, as a result of school closure, or if a school fails to
make a refund of loan proceeds which the school owed to the student's lender.
The latter reimbursements are not included in the calculations of the
guarantor's claims rate experience for the purpose of federal reimbursement
under the contracts.
Under present practice, after the Secretary reimburses a guarantor for
a default claim paid on a guaranteed loan, the guarantor continues to seek
repayment from the borrower. The guarantor returns to the Secretary any payments
that it receives from the borrower after deducting and retaining:
- a percentage amount equal to the complement of the
reimbursement percentage in effect at the time the loan was
reimbursed, PLUS
- an amount equal to 24% (or 23% beginning on October 1, 2003,
and 18 1/2% in the case of a payment from the proceeds of a
Federal Consolidation Loan) of those payments for certain
administrative costs.
However, the Secretary may require that the defaulted guaranteed loans be
assigned to the Department. In that case, no further collections activity would
be undertaken by the guarantor, and no recoveries could be paid to the
guarantor.
A guarantor may enter into an addendum to its interest subsidy
agreement under which the guarantor would refer certain defaulted guaranteed
loans to the Secretary. Those loans would then be
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reported to the Internal Revenue Service to "offset" any tax refunds which may
be due the defaulted borrowers. To the extent that a guarantor originally
received less than 100% reimbursement from the Secretary with respect to a
referred loan, it will not recover any amounts subsequently collected by the
federal government which are attributable to that portion of the defaulted loan
for which the guarantor was not reimbursed.
ELIGIBILITY FOR FEDERAL REIMBURSEMENT
To be eligible for federal reimbursement payments, guaranteed loans
must be made by an eligible lender under the applicable guarantor's guarantee
program and meet the requirements prescribed by the rules and regulations
promulgated under the Act, including the borrower eligibility, loan amount,
disbursement, interest rate, repayment period and guarantee fee provisions and
the other requirements set forth in the Act.
Generally, these procedures require that the lender process the
applicant's completed loan application, determine whether the applicant is an
eligible borrower attending a school that is an eligible institution under the
Act, explain to the borrower his responsibilities under the loan, ensure that
the promissory note evidencing the loan is executed by the borrower and disburse
the loan proceeds as required. 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. If a borrower becomes
delinquent in repaying a loan, a lender must perform certain collection
procedures (primarily telephone calls, demand letters, skiptracing procedures
and requesting assistance from the applicable guarantor) that vary depending
upon the length of time a loan is delinquent.
Under the Act, a guaranteed loan (for which the first day of
delinquency is on or after October 7, 1998) must be delinquent for 270 days if
it is repayable in monthly installments or 330 days if it is payable in less
frequent installments before a lender may obtain payment on the guarantor's
guarantee. (These time periods are 180 days and 240 days, respectively, for
loans for which the first day of delinquency was before October 7, 1998.) The
guarantor must submit a reimbursement claim to the Secretary within 45 days
after it has paid the lender's default claim. The lender must have exercised
reasonable care and diligence in making, servicing and collecting the guaranteed
loan in order for the lender to be entitled to the guarantor's payment on the
guarantee and for the guarantor to be entitled to reimbursement by the
Secretary.
EFFECT OF ANNUAL CLAIMS RATE ON REIMBURSEMENT OF GUARANTORS
A guarantor's ability to meet its obligations to pay default claims on
student loans that it has guaranteed will depend on the adequacy of its
guarantee fund. That, in turn, will be affected by the default experience of all
the lenders participating in the guarantor's guarantee program. A high default
experience among participating lenders may cause the guarantor's claims rate to
exceed the 5% and 9% levels described below, with the result that the Secretary
would reimburse the guarantor's default claims payment at lower percentages.
In general, guarantors are currently entitled to receive reimbursement
payments under federal reimbursement contracts in amounts that vary depending on
their claims rate experience. A guarantor's "claims rate" is computed by
dividing the total amount of its default claims since the previous September 30
by the total original principal amount of student loans in repayment on that
date that it had guaranteed. The formula for computing the percentage of federal
reimbursement under the federal reimbursement contracts is not accumulated over
a period of years but is measured by the amount of federal reimbursement
payments in any one federal fiscal year (October 1 through September 30) as a
percentage of the original principal amount of loans under the FFELP guaranteed
by the guarantor and in repayment
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at the end of the preceding fiscal year. For purposes of computing reimbursement
payments to a guarantor, the original principal amount of loans in repayment
means the original principal amount of all loans guaranteed by that guarantor
less the sum of:
- the guarantee payments made on those loans;
- the original principal amount of those loans that have been fully
repaid; and
- the original principal amount of those loans for which the first
principal installment payment has not become due or the first
installment need not be paid because of a deferral period.
On October 1 of each year the claims rate begins again at zero, regardless of a
guarantor's experience in preceding years.
Under the formula,
(i) if a guarantor has a claims rate throughout any fiscal year that
does not exceed 5%, the Secretary will make federal reimbursement
payment to that guarantor at
100% for loans made before October 1, 1993;
98% for loans made on or after October 1, 1993 but before October 1,
1998; and
95% for loans made on or after October 1, 1998;
(ii) if, beginning at any time in a fiscal year, a guarantor has a claims
rate that is greater than 5% but does not exceed 9%, the Secretary
will make federal reimbursement payments to that guarantor at
90% for loans made before October 1, 1993;
88% for loans made on or after October 1, 1993 but before October 1,
1998; and
85% for loans made on or after October 1, 1998;
(iii) if, beginning at any time in a fiscal year, a guarantor has a claims
rate that is greater than 9%, the Secretary will make federal
reimbursement payments to that guarantor at
80% for loans made before October 1, 1993;
78% for loans made on or after October 1, 1993 but before October 1,
1998; and
75% for loans made on or after October 1, 1998.
For loans made before October 1, 1993, each guarantor is currently
entitled to at least 80% reimbursement from the Secretary on default claims that
it purchases, regardless of its claims rate.
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OTHER FEDERAL AGREEMENTS
INTEREST SUBSIDY CONTRACTS
In addition to guarantees, qualified Federal Stafford Loans (and
certain Federal Consolidation Loans) acquired under the FFELP benefit from
certain federal subsidies. Each guarantor and the Secretary have entered into an
interest subsidy agreement, which entitles the holders of eligible loans
guaranteed by the guarantor to receive interest subsidy payments from the
Secretary on behalf of certain students while the student is in school, during a
six- to twelve-month grace period after the student leaves school, and during
certain deferral periods, subject to the holders' compliance with all the
requirements of the Act. SEE "Federal Family Education Loan Program -- Federal
Stafford Loans -- Interest Subsidiary Payments" above for a more detailed
description of the interest subsidy payments.
REHABILITATION OF DEFAULTED LOANS
The Secretary is authorized to enter into an agreement with a guarantor
under which the guarantor may sell defaulted loans that are eligible for
rehabilitation to an eligible lender. The guarantor must repay the Secretary an
amount equal to 81.5% of the then current principal balance of the sold
defaulted loan, multiplied by the reimbursement percentage in effect for the
guarantor at the time the loan was reimbursed. The amount of the repayment is
deducted from the amount of federal reimbursement payments for the fiscal year
in which the repayment occurs, for purposes of determining the guarantor's
reimbursement rate for that fiscal year.
For a loan to be eligible for rehabilitation, the guarantor must have
received consecutive payments for 12 months of amounts owed on the loan. Upon
rehabilitation, a loan is eligible for all the benefits under the Act that it
would have been eligible for had no default occurred. However, no student loan
may be rehabilitated more than once.
FEDERAL ADVANCES
Pursuant to agreements entered into between the guarantors and the
Secretary under the Act, the Secretary was authorized to advance moneys from
time to time to guarantors for the purpose of establishing and strengthening
their reserves. If the Secretary seeks to terminate a guarantor's federal
reimbursement contract or to assume its functions, the Act currently authorizes
the Secretary to make advances to the guarantor to assist it in meeting its
immediate cash needs or ensuring the uninterrupted payment of claims.
CHANGES TO FEDERAL AGREEMENTS
United States Courts of Appeals have held that the federal government,
through subsequent legislation, has the right unilaterally to amend the federal
reimbursement contracts between the Secretary and the guarantors. Amendments to
the Act since 1986 have had the following effects:
(i) certain rights of guarantors under their contracts with the
Secretary relating to the repayment of certain advances from the
Secretary were abrogated;
(ii) the Secretary was authorized to withhold reimbursement payments
otherwise due to certain guarantors until specified amounts of their
reserves had been eliminated;
(iii) new reserve level requirements were added for guarantors; and
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(iv) the Secretary's authority to terminate federal reimbursement
contracts and to seize guarantors' reserves was expanded.
There can be no assurance that future legislation will not further
adversely affect the rights of guarantors or holders of loans guaranteed by a
guarantor under a federal reimbursement contract.
DEPARTMENT OF EDUCATION OVERSIGHT
The Secretary has certain oversight powers over guarantors. Guarantors
are required to maintain their Federal Funds (as defined below) at a current
minimum reserve level of at least 0.25 % of the total amount of all outstanding
student loans guaranteed by that guarantor (excluding certain loans transferred
to that guarantor from an insolvent guarantor pursuant to a plan of the
Secretary). The Secretary can require the guarantor to submit and implement a
corrective plan in the following circumstances:
- if the guarantor falls below its minimum reserve level in two
consecutive years; or
- if the guarantor's claims rate exceeds 5% in any year; or
- if the secretary determines that the guarantor's administrative or
financial condition jeopardizes its ability to meet its obligations.
The Secretary of Education may terminate a guarantor's reimbursement contract in
the following circumstances:
- if the guarantor fails to timely submit an acceptable plan to
improve its condition;
- if the Secretary determines that it is in danger of collapse; or
- if the Secretary determines that termination is necessary to protect
the federal fiscal interest or to ensure the continued availability
of student loans.
If the Department has determined that a guarantor is unable to meet its
insurance obligations, the holders of loans guaranteed by that guarantor may
submit claims directly to the Department and the Department is required to pay
the full guarantee payments due, in accordance with guarantee claim processing
standards no more stringent than those applied by the terminated guarantor.
However the Department's obligation to pay guarantee claims directly in this
fashion is contingent upon its making the determination referred to above. There
can be no assurance that the Department would ever make such a determination
with respect to any guarantor or, if it did, that the determination or the
ultimate payment of the guarantee claims would be made in a timely manner.
No assurances can be given as to the Secretary's actions if a guarantor
encounters administrative or financial difficulties or that the Secretary will
not demand that a guarantor transfer additional portions, or all, of its
guarantee fund to the Secretary.
1998 REAUTHORIZATION AMENDMENTS
GENERAL
The 1998 Reauthorization Amendments, enacted October 7, 1998, made
various changes to the Act that affect guarantors, including the following:
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- Each guarantor must establish a federal student loan reserve fund
(the "Federal Fund") and an operating fund (the "Operating Fund")
before December 7, 1998, which must be funded, invested and used as
prescribed by the 1998 Reauthorization Amendments.
- Each guarantor's sources of revenue have been modified.
- Guarantors' additional reserves have been recalled.
- The Secretary and each guarantor may enter into voluntary flexible
agreements in lieu of existing agreements.
THE FEDERAL FUND AND THE OPERATING FUND
Each guarantor was required to deposit prior to December 7, 1998, all
funds, securities and other liquid assets contained in its reserve fund into the
Federal Fund that it established. Each Federal Fund is an account selected by
the guarantor with the approval of the Secretary. The Federal Fund, as well as
any nonliquid assets (such as building or equipment) developed or purchased by
the guarantor in whole or in part with federal reserve funds of the guarantor,
is considered to be property of the United States (prorated to the extent that
an asset was developed or purchased with federal reserve funds) and must be used
in the operation of the FFELP to pay lender guarantee claims, to pay Default
Aversion Fees ( as defined below) into the guarantor's Operating Fund and, to
the extent permitted, to make certain transition payments into the Operating
Fund. The Secretary may direct a guarantor, or its officers and directors, to
cease any activity involving expenditures, use or transfer of the Federal Fund
that the Secretary determines is a misapplication, misuse or improper
expenditure of the Federal Fund or the Secretary's share of any asset. A
guarantor is required to maintain a current minimum reserve level in the Federal
Fund of at least 0.25% of the total amount of all outstanding loans that it has
guaranteed (excluding certain loans transferred to the guarantor from an
insolvent guarantor pursuant to a plan of the Secretary).
After the Federal Fund is established, the guarantor is required to
deposit into the Federal Fund:
- all reinsurance payments received from the Secretary;
- a percentage of all amounts collected from defaulted borrowers equal
to the complement of the reinsurance percentage in effect when the
guarantee payment was made;
- all insurance premiums collected from borrowers;
- all amounts received from the Secretary as payment for supplemental
preclaims assistance activity performed before October 7, 1998;
- 70% of administrative cost allowances received from the Secretary
after October 7, 1998 for loans guaranteed prior to that date; and
- other receipts specified in regulations of the Secretary.
Funds transferred to the Federal Fund are required to be invested in low-risk
securities and all earnings from the Federal Fund are the sole property of the
United States.
In addition, each guarantor was required to establish an Operating Fund
prior to December 7, 1998. The 1998 Reauthorization Amendments include various
transition rules allowing a guarantor to transfer certain transition amounts
from its Federal Fund to its Operating Fund from time to time during
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the first three years following the establishment of the Operating Fund for use
in the performance of its duties under the FFELP. In determining the amounts
that it may transfer, the guarantor must ensure that sufficient funds remain in
the Federal Fund to pay lender claims within the required time periods and to
meet reserve recall requirements. In general, the transition rules require that
the Federal Fund be repaid any transition amounts transferred from it to the
Operating Fund.
The Operating Fund shall be considered to be the property of the
guarantor, except for any transition amounts transferred from the Federal Fund.
The Secretary may not regulate the uses or expenditure of moneys in the
Operating Fund (but may require necessary reports and audits), except during any
period in which transition funds are owed to the Federal Fund. Moreover, during
that period, moneys in the Operating Fund may only be used for expenses related
to the FFELP.
Funds deposited into the Operating Fund must be invested at the
discretion of the guarantor in accordance with prudent investor standards
(except that transition amounts transferred to the Operating Fund from the
Federal Fund must be invested in the same manner as amounts in the Federal
Fund). After establishing the Operating Fund, the guarantor shall make the
following deposits into the Operating Fund:
- Loan Processing and Issuance Fees and Account Maintenance Fees (each
as defined below) paid by the Secretary;
- Default Aversion Fees;
- 30% of administrative cost allowances received from the Secretary
after October 7, 1998 for loans guaranteed prior to that date;
- 24% (decreasing to 23 percent on and after October 1, 2003) of
amounts collected on defaulted loans, excluding collected amounts
required to be transferred to the Federal Fund; and
- other receipts specified in regulations of the Secretary.
In general, funds in the Operating Fund shall be used by the guarantor
for application processing, loan disbursement, enrollment and repayment status
management, default aversion activities, default collection activities, school
and lender training, financial aid awareness and related outreach activities,
compliance monitoring, and other student financial aid related activities, as
selected by the guarantor. The guarantor may transfer funds from the Operating
Fund to the Federal Fund, but any transfers are irrevocable and transferred
funds become the property of the United States.
MODIFICATIONS IN SOURCES OF REVENUE
The 1998 Reauthorization Amendments made the following modifications
with respect to the principal sources of guarantor revenues:
(i) Reinsurance payment percentages for loans made on and after October
1, 1998 were reduced as described under "--Effect of Annual Claims
Rate" above.
(ii) The percentage of the amount of collections on defaulted loans that
may be retained by a guarantor was reduced from 27% to 24%, with a
further reduction to 23% on and after October 1, 2003.
(iii) A loan processing and issuance fee (the "Loan Processing and
Issuance Fee"), payable by the Secretary on a quarterly basis, was
established equal to:
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- for loans originated during fiscal years beginning on or after
October 1, 1998 and before October 1, 2003, 0.65% of the total
principal amount of loans on which insurance was issued under the
FFELP during the fiscal year by the guarantor;
- for loans originated during fiscal years beginning on or after
October 1, 2003, 0.40% of the total principal amount of loans on
which insurance was issued under the FFELP during the fiscal year by
the guarantor; and
- for loans originated during fiscal years beginning on or after
October 1, 2003, 0.40% of the total principal amount of loans on
which insurance was issued under the FFELP during the fiscal year by
the guarantor.
(iv) The discretionary administrative cost allowances or expenses that
had been paid at a rate of 0.85% of the loans originated in each
fiscal year was eliminated.
(v) A default aversion fee (the "Default Aversion Fee") was established.
This fee, which is related to the default aversion activities that
each guarantor is required to perform, is payable on a monthly basis
from the Federal Fund to the Operating Fund, in an amount equal to
1% of the total unpaid principal and accrued interest on a loan for
which a default claim has not been paid as a result of the loan
being brought into current repayment status on or before the 300th
day after the loan became 60 days delinquent.
(vi) An account maintenance fee (the "Account Maintenance Fee") was
established equal to
- for fiscal years 1999 and 2000, 0.12% of the original principal
amount of outstanding loans on which insurance was issued under the
FFELP; and
- for fiscal years 2001, 2002 and 2003, 0.10% of the original
principal amount of outstanding loans on which insurance was issued
under the FFELP.
- This fee is payable quarterly to the Secretary. If, however, certain
nationwide caps are met, the Account Maintenance Fee will be
transferred from the Federal Fund to the Operating Fund.
ADDITIONAL RECALLS OF RESERVES
The 1998 Reauthorization Amendments direct the Secretary to demand that
all guarantors participating in the FFELP pay the following amounts held in
their respective Federal Funds:
- in fiscal year 2002, an aggregate of $85 million;
- in fiscal year 2006, an aggregate $82.5 million; and
- in fiscal year 2007, an aggregate $82.5 million.
The amounts demanded of each guarantor are determined in accordance with
formulas included in Section 422(i) of the Act. If a guarantor charges the
maximum permitted 1% insurance premium, however, the recall may not result in
the depletion of its reserve funds below an amount equal to the amount of lender
claim payments paid during the 90 days before the date of return.
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VOLUNTARY FLEXIBLE AGREEMENTS
The 1998 Reauthorization Amendments authorize the Secretary to enter
into agreements with guarantors which modify or waive many of the requirements
of the FFELP covered under existing agreements and otherwise required by the
Act.
WEIGHTED AVERAGE LIVES OF THE SECURITIES
The weighted average lives of the notes and the certificates of any
series generally will be influenced by the rate at which the principal balances
of the related student loans are paid. 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 the discharge of student loans by
Federal Consolidation Loans) as a result of:
(i) borrower default, death, disability or bankruptcy;
(ii) the closing of the borrower's school;
(iii) the school's false certification of borrower eligibility;
(iv) subsequent liquidation of the student loan or collection of the
related guarantee payments; and
(v) repurchase of a student loan by the seller or the master servicer
for administrative reasons.
All of the student loans are prepayable at any time without penalty to the
borrower.
A variety of economic, social and other factors, including the factors
described below and in the applicable prospectus supplement, influence the rate
at which student loans are prepaid. In general, the rate of prepayments may tend
to increase when cheaper alternative financing becomes available at interest
rates below those applicable to the student loans. However, because many student
loans bear interest at a rate that is either actually or effectively floating,
it is impossible to predict whether changes in prevailing interest rates will
correspond to changes in the interest rates on student loans. In addition, under
certain circumstances, the seller or the master servicer will be obligated to
repurchase (or arrange for the repurchase of) student loans from a given trust
under the related loan sale agreement or servicing agreement, as applicable, as
a result of the breach of applicable representations and warranties or
covenants. SEE "Description of the Transfer and Servicing Agreements--Sale of
Student Loans; Representations and Warranties" and "--Master Servicer
Covenants". See ALSO "Description of the Transfer and Servicing
Agreements--Termination--Optional Redemption" regarding the option of the seller
or other party to purchase the student loans from a given trust . Moreover, in
the case of a trust having a Funding Period or Revolving Period, the addition of
student loans to the trust during such a period could affect the weighted
average lives of the securities of the related series. SEE "Description of the
Transfer and Servicing Agreements--Additional Fundings".
On the other hand, scheduled payments on the student loans, as well as
their maturities, may be extended pursuant to applicable grace, deferral and
forbearance periods, and for other reasons. The rate of defaults resulting in
losses on student loans, as well as the severity and timing of those losses, may
affect the rate of payment of the principal of, and the yield on, the notes and
the certificates. The rate of default factors may, in turn, affect the ability
of the guarantors to make necessary guarantee payments.
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In light of the above considerations, there can be no assurance
regarding the amount of principal payments which will be made on the notes or
the certificates of a given series on each distribution date, since that 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 risk
resulting from a faster or slower rate of prepayment of the loans will be borne
entirely by the noteholders and the certificateholders of the related series.
The related prospectus supplement may set forth certain additional information
with respect to the maturity and prepayment considerations applicable to that
pool of student loans and series of securities.
POOL FACTORS AND TRADING INFORMATION
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 computed by the indenture trustee before each distribution
date. Each pool factor will indicate the remaining outstanding principal amount
of the related class of notes or certificates as of that distribution date
(after giving effect to payments to be made on that distribution date), as a
fraction of the initial outstanding principal amount of the related class of
notes or the initial certificate balance of the related class of certificates.
Each pool factor will be 1.0000000 as of the closing date of the related series,
and thereafter will decline to reflect reductions in the outstanding principal
amount of the related class of notes or certificates, as applicable. A
securityholder's portion of the aggregate outstanding principal amount of the
related class of notes or certificates, as applicable, is the product of (i) the
original denomination of the securityholder's note or certificate and (ii) the
applicable pool factor.
If so provided in the related prospectus supplement with respect to a
trust, the securityholders will receive reports on or about each distribution
date concerning various matters including the payments the trust has received on
the student loans, the pool balance and the applicable pool factor.
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".
DESCRIPTION OF THE NOTES
GENERAL
Each trust may issue one or more classes of notes of a given series
under an indenture. A form of the indenture has been filed as an exhibit to the
Registration Statement of which this prospectus is a part. The following
summarizes certain terms of the notes and the indenture. It does not purport to
be complete and is qualified in its entirety by reference to the actual
provisions of the notes and the indenture.
Unless otherwise specified in the related prospectus supplement, each
class of notes initially will be represented by one or more notes registered in
the name of the nominee of The Depository Trust Company ("DTC") except as set
forth below. In this prospectus we refer to DTC and any successor depository
selected by the administrator as the "Depository". Unless otherwise specified in
the related prospectus supplement, the notes will be available for purchase, in
denominations of $1,000 and integral multiple increments in book-entry form
only. DTC has informed the seller that its nominee will be Cede & Co., unless
another nominee is specified in the related prospectus supplement. Thus, either
Cede & Co. or another specified 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 in this prospectus or the related prospectus
supplement, no noteholder will be entitled to receive a physical instrument
representing a note.
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All references in this prospectus or in the related prospectus supplement to
actions by holders of notes held in book-entry form refer to actions taken by
DTC upon instructions from its participating organizations for each class of
notes of the related series and all references in this prospectus to
distributions, notices, reports and statements to noteholders refer to
distributions, notices, reports and statements to DTC or its nominee, as the
case may be, as the registered holder of the notes for distribution to
noteholders in accordance with DTC's procedures. SEE "Certain Information
Regarding the Securities--Book-Entry Registration" and "--Definitive
Securities".
PRINCIPAL AND INTEREST ON THE NOTES
The related prospectus supplement will describe for each class of notes
of the related series the timing and priority of payment, seniority, allocations
of losses, interest rate, amount of principal payments (or method for
determining those payments) and amount of interest payments (or method for
determining those payments). The right of holders of any class of notes to
receive payments of principal and interest may be senior or subordinate to the
holders of any other class or classes of notes of that series, as described in
the related prospectus supplement. Unless otherwise provided in the related
prospectus supplement, payments of interest on the notes of each series will be
made prior to payments of principal. 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 three. The related prospectus supplement will specify the
interest rate, or the method for determining the interest rate, for each class
of notes of the related series. SEE ALSO "Certain Information Regarding the
Securities--Fixed Rate Securities" and "--Floating Rate Securities". One or more
classes of the notes of a series may be redeemable in whole or in part under the
circumstances specified in the prospectus supplement. Those circumstances may
include the exercise by the seller, or any other party that the related
prospectus supplement may name, of an option to purchase the related student
loans.
Unless otherwise specified in the related prospectus supplement, all
classes of notes within a series will have the same priority as to interest
payments. Under certain circumstances, however, the amount available for
interest 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 that case, each class of notes will receive
its ratable share (based upon the aggregate amount of interest due on that
class) of the aggregate amount available for payment of interest on the notes of
that 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 of principal and interest,
and any schedule or formula or other provisions determining principal and
interest payments, on each class will be set forth in the related prospectus
supplement. Payments of principal and interest on any class of notes will be
made on a pro rata basis among all the notes of that class.
In the case of a series of notes relating to a trust that has a
Pre-Funding Account or Collateral Reinvestment Account, any amount that remains
on deposit in the applicable account on the distribution date that occurs on or
immediately after the last day of the related Funding Period or Collection
Period, as applicable, after giving effect to all Additional Fundings on or
prior to that date, will be distributed as principal of the notes 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).
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THE INDENTURE
MODIFICATION OF INDENTURE. If a majority of the holders of the
outstanding notes of a series give their consent, the indenture trustee and the
related trust may execute a supplemental indenture to add to, change or
eliminate any provisions relating to the notes in the indenture and, in so
doing, may modify in any manner the rights of the related noteholders, except as
provided below.
Without the consent of the holder of each outstanding note in a series
that would be affected (unless otherwise specified in the related prospectus
supplement), no supplemental indenture will:
- change the due date of any installment of principal or
interest on that note or reduce its principal amount, interest
rate or redemption price;
- change the place of payment where, or the currency in which,
interest or principal on that note is payable;
- impair the right of the holder of that note to sue to enforce
certain payment provisions of the indenture;
- change the provisions of the indenture regarding how the
trust, the seller, any of their affiliates, or any obligor on
the notes may, as a holder of a note, vote;
- permit the creation of any lien ranking before or on a parity
with the lien of the indenture with respect to any of the
collateral for the notes of that series;
- terminate the lien of the indenture on the collateral; or
- deprive the holder of any note of the security created by the
lien of the indenture.
In addition, holders of certain percentages of the aggregate amount of
the outstanding notes of a given series must:
- approve any supplemental indenture;
- consent to waiving compliance with certain provisions of the
indenture concerning defaults and the consequences of
defaults;
- approve giving direction to the related eligible lender
trustee to sell or liquidate the student loans in the related
trust, if the proceeds of the sale would be insufficient to
pay the principal amount and accrued but unpaid interest on
the outstanding notes of that series; and
- consent to amending sections of the indenture to alter any
percentages required for consent.
Without the consent of the holder of each outstanding note affected (unless
otherwise specified in the related prospectus supplement with respect to a
series of notes), no supplemental indenture will reduce any percentages required
for consent.
Unless otherwise specified in the applicable prospectus supplement, the
related trust and indenture trustee may also enter into supplemental indentures,
without obtaining the consent of noteholders of that series, in order to:
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- add any provisions to or change in any manner or eliminate any
of the provisions of the related indenture, or
- modify in any manner the rights of noteholders of that series,
so long as doing so will not, in the opinion of counsel
satisfactory to the indenture trustee, materially and
adversely affect the interest of any noteholder of that
series.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. Each indenture will
list certain "Events of Default with respect to the notes of the related series.
Events of Default will impact interest and principal payments on those notes.
Unless otherwise specified in the related prospectus supplement, "Events of
Default" under the indenture will consist of the following:
- a default for five days or more on any interest payment on a
note of that series after the interest payment first becomes
due and payable;
- a default on either the principal payment or an installment of
the principal of a note of that series when it first becomes
due and payable;
- a default in the observance or performance of any covenant or
agreement of the applicable trust made in the related
indenture that continues for 30 days after
(i) the trust has been notified by the indenture trustee,
or
(ii) the trust and the indenture trustee have been
notified by the holders of at least 25% in
principal amount of the notes then outstanding (if,
however, the trust demonstrates that it is making a
good faith attempt to cure the default, the 30-day
period may be extended to 90 days by the indenture
trustee); or
- the discovery that any representation or warranty made by the
applicable trust in the indenture or in any certificate
delivered in connection with the indenture was incorrect in a
material respect as of the time made, if not cured within 30
days after
(i) the trust has been notified by the indenture trustee,
or
(ii) the trust and indenture trustee have been notified by
the holders of at least 25% in principal amount of
the Notes then outstanding (if, however, the trust
demonstrates that it is making a good faith attempt
to cure such default, the 30-day period may be
extended to 90 days by the indenture trustee); or
- certain events of bankruptcy, insolvency, receivership or
liquidation of the trust.
However, the amount of principal required to be distributed on any
distribution date to noteholders of a series under the related indenture will
generally be limited to amounts available after payment of all prior obligations
of the related 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 that class of notes. With respect to any
series of notes, if interest is paid at a variable rate based on an index, the
related prospectus supplement may provide that, if for any distribution date the
interest rate on those notes as calculated based on the index is greater than an
alternate rate calculated for that distribution date based on interest
collections on the student loans (the amount of such difference, the "index
shortfall carryover"), the interest rate for that distribution date shall be the
alternate rate and the index shortfall carryover shall be
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payable as described in the prospectus supplement. Unless otherwise provided in
the prospectus supplement, payment of the index shortfall carryover shall be
lower in priority than payment of interest on the notes at their interest rate
(whether the interest rate is based on the index or on the alternate rate).
Accordingly, the failure to pay the index shortfall carryover on any
distribution date generally shall not constitute a default in the payment of
interest on the 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 the notes of that series then outstanding, may declare
the principal of the notes to be immediately due and payable. Unless otherwise
specified in the related prospectus supplement, the declaration may be rescinded
by the holders of a majority in principal amount of the notes of that series
then outstanding if:
- the eligible lender trustee on behalf of the related trust has
paid (or deposited with the indenture trustee) a sum
sufficient to pay
(i) all principal and interest on the notes and all other
amounts that would then be due under the related
indenture or on the notes if the Event of Default
giving rise to the acceleration had not occurred, and
(ii) all sums paid or advanced by the indenture trustee
under the indenture and the reasonable compensation,
expenses, disbursements and advances of the indenture
trustee and its agents and counsel; and
- all Events of Default, other than failure to pay the principal
of the notes that became due solely as a result of the
acceleration, have been cured or, under the circumstances
described below, have been waived.
If the notes of any series have been declared to be due and payable
following an Event of Default, the related indenture trustee in its discretion
may:
- exercise remedies as a secured party,
- require the related eligible lender trustee to sell the
student loans, or
- elect to have the related eligible lender trustee maintain
possession of the student loans and continue to apply
collections on the student loans as if there had been no
declaration of acceleration.
Unless otherwise specified in the related prospectus supplement, however, the
indenture trustee is prohibited from directing the eligible lender trustee to
sell the student loans in the related trust 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 of that series, unless:
- the holders of all the outstanding notes of that series
consent to the sale;
- the proceeds of the sale are sufficient to pay in full the
principal and accrued interest on the outstanding notes at the
date of the sale; or
- the indenture trustee determines that the collections on the
student loans would not be sufficient on an ongoing basis to
make all payments on the notes as they would have become due
if the obligations had not been declared due and payable, and
the indenture trustee
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obtains the consent of the holders of 66 2/3% of the aggregate
principal amount of the notes of that series then outstanding.
Subject to the provisions of the applicable indenture relating to the
duties of the indenture trustee, if an Event of Default should occur and be
continuing with respect to a series of notes, the indenture trustee will be
under no obligation to exercise any of the rights or powers under the indenture
at the request or direction of any of the holders of the notes, if the indenture
trustee reasonably believes that it will not be adequately indemnified against
the related costs, expenses and liabilities that it might incur. Subject to the
indemnification provisions and certain limitations contained in the 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 the indenture trustee, and
the holders of a majority in principal amount of the notes of that series then
outstanding may, in certain cases, waive any default with respect to those
notes, EXCEPT:
- a default in the payment of principal or interest or
- a default in respect of a covenant or provision of the
indenture that cannot be modified without the waiver or
consent of all the holders of the outstanding notes.
Unless otherwise specified in the related prospectus supplement, no
holder of notes of any series will have the right to institute any proceeding
with respect to the related indenture, unless:
- the holder has previously notified the applicable indenture
trustee in writing of a continuing Event of Default;
- the holders of at least 25% in principal amount of the
outstanding notes of that series have requested in writing
that the indenture trustee institute a proceeding in its own
name as indenture trustee;
- the holder or holders have offered the indenture trustee
reasonable indemnity;
- the indenture trustee has for 60 days failed to institute the
proceeding; and
- no direction inconsistent with the written request has been
given to the indenture trustee during the 60-day period by the
holders of a majority in principal amount of the outstanding
notes of that series.
In addition, each indenture trustee and the holders of the related
notes will covenant that they will not at any time institute against the trust
any bankruptcy, reorganization or other proceeding under any federal or state
bankruptcy or similar law.
In the absence of an express agreement to the contrary, none of the
following parties will be personally liable for the payment of principal or
interest on the notes of any series or for the agreements of the trust contained
in the related indenture: the indenture trustee, the seller, the administrator,
the master servicer, the eligible lender trustee in its individual capacity, any
holder of a certificate, or any of their respective owners, beneficiaries,
agents, officers, directors, employees, successors or assigns.
CERTAIN COVENANTS. Each indenture will provide that the related trust
may not consolidate with or merge into any other entity, unless:
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- the resulting or surviving entity is organized under the laws
of the United States, any of the several states or the
District of Columbia;
- the resulting or surviving entity expressly assumes the
trust's obligation to make due and punctual payments on the
notes of the related series and to perform every agreement and
covenant of the trust under the indenture;
- no Event of Default shall have occurred and be continuing
immediately after the merger or consolidation;
- the trust has been advised that the ratings of the notes and
the certificates of that series would not be reduced or
withdrawn by the applicable rating agencies as a result of the
merger or consolidation; and
- the trust has received an opinion of counsel to the effect
that the consolidation or merger would have no material
adverse federal or Rhode Island state tax consequence to the
trust or to the holder of any note or certificate of that
series.
Each trust is prohibited from taking various actions, including the
following:
- to sell, transfer, exchange or otherwise dispose of any of the
assets of the trust except as expressly permitted by the
applicable indenture, Transfer and Servicing Agreements or
related documents (collectively, the "Related Documents");
- to claim any credit on, or make any deduction from, the
principal and interest payable on the notes of that series
(other than amounts withheld under the Code or applicable
state law) or to assert any claim against any present or
former holder of the notes because of the payment of taxes
levied or assessed upon the trust ;
- to dissolve or liquidate in whole or in part except as
contemplated by the Related Documents;
- to permit the validity or effectiveness of the applicable
indenture to be impaired or to permit any person to be
released from any covenants or obligations with respect to the
notes under the indenture except as may be expressly permitted
by the terms of the indenture; or
- to 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 interest in those assets or the proceeds of those assets,
except as expressly permitted by the Related Documents.
No trust may engage in any activity other than those 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 under the notes of the related series and the 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 that it has
fulfilled its obligations under the related indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT. Each indenture trustee will be
required to mail each year to the related noteholders a brief report about,
among other things, its eligibility and qualification to continue as indenture
trustee under the indenture; any amounts it advanced under the indenture; the
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amount, interest rate and maturity date of certain indebtedness that the trust
may owe to the indenture trustee in its individual capacity; the property and
funds physically held by the indenture trustee in its capacity as indenture
trustee; and any action taken that materially affects the notes but has not
previously been reported.
SATISFACTION AND DISCHARGE OF THE INDENTURE. The indenture will be
discharged with respect to the collateral securing the related notes when all
the notes have been delivered to the indenture trustee for cancellation or, with
certain limitations, when funds sufficient to pay the notes in full have been
deposited with the indenture trustee.
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 trust will be obligated to
appoint a indenture successor indenture trustee for that series. A trust may
also remove the indenture trustee if it ceases to be eligible to continue as
indenture trustee under the indenture or if it becomes insolvent. In that event,
the trust must appoint a successor indenture trustee for the notes of that
series. Any resignation or removal of the indenture trustee and appointment of a
successor trustee for any series of notes does not become effective until the
successor indenture trustee has accepted its appointment.
DESCRIPTION OF THE CERTIFICATES
GENERAL
Unless otherwise specified in the related prospectus supplement, each
trust will issue one or more classes of certificates of a given series under a
trust agreement. A form of the trust agreement has been filed as an exhibit to
the Registration Statement of which this prospectus is a part. The following
summarizes certain terms of the certificates and the trust agreement. It does
not purport to be complete and is qualified in its entirety by reference to the
actual 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 that are purchased by the Company, the
certificates will be available for purchase in book-entry form only in minimum
denominations of $1,000 and integral multiple increments of $1,000.
The seller has been informed by DTC that DTC's nominee will be Cede &
Co., unless another nominee is specified in the related prospectus supplement.
Accordingly, Cede & Co. is expected to be the holder of record of the
certificates of each series except for those purchased by the Company. Unless
and until Definitive Certificates (as defined below) are issued under the
limited circumstances described in this prospectus or in the related prospectus
supplement, no certificateholder (other than the Company) will be entitled to
receive a physical certificate representing a certificate. All references in
this prospectus and in the related prospectus supplement to actions by
certificateholders (other than the Company) refer to actions taken by DTC upon
instructions from its participating organizations and all references in this
prospectus and in the related prospectus supplement to distributions, notices,
reports and statements to certificateholders (other than the Company) refer to
distributions, notices, reports and statements to DTC or its nominee, as the
case may be, as the registered holder of the certificates, for distribution to
certificateholders in accordance with DTC's procedures. SEE "Certain Information
Regarding the Securities--Book-Entry Registration" and "--Definitive
Securities".
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Unless otherwise specified in the related prospectus supplement,
certificates of a given series that are owned by NMELC or its affiliates will be
entitled to equal and proportionate benefits under the applicable trust
agreement, except that the certificates owned by NMELC and its affiliates will
be deemed not to be outstanding for the purpose of determining whether the
required percentage of certificateholders has given any request, demand,
authorization, direction, notice, consent or other action under the Related
Documents. However, if NMELC or its affiliates own all the certificates of given
series, their certificates will be deemed outstanding for all purposes
PRINCIPAL AND INTEREST ON THE CERTIFICATES
The related prospectus supplement will describe for each class of
certificates of a given series the timing and priority of distributions,
seniority, allocations of losses, pass-through rate and amount of principal
payments (or method for determining those payments), and amount of interest
payments (or method for determining those payments). Payments of interest on the
certificates will be made on each distribution date and will be made prior to
payments of principal on the 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 three. The related prospectus
supplement will specify the pass-through rate for each class of certificates of
a given series or the method for determining the 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, payments on the certificates of a given series will be
subordinate to payments on the notes of that series as more fully described in
the prospectus supplement. Payments of interest and principal on any class of
certificates will be made on a pro rata basis among all the certificates of that
class.
In the case of a series of certificates that includes two or more
classes, the timing, sequential order, priority of payment or amount of interest
and principal payments, and any schedule or formula or other provisions for
determining principal and interest payments for each class of certificates shall
be 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 year
("fixed rate securities") or at a variable or adjustable rate per year
("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 annual interest rate (if a note) or pass-through rate (if a
certificate) 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 on the
Certificates".
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FLOATING RATE SECURITIES
Each class of floating rate securities will bear interest during each
Interest Reset Period (as defined in the related prospectus supplement) at an
annual rate determined by reference to an interest rate basis, 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 being equal to one one-hundredth of a percentage
point) that may be specified in the applicable prospectus supplement for a
particular class, and the "Spread Multiplier" is the percentage that may be
specified in the prospectus supplement for a class.
The applicable prospectus supplement will designate the interest rate
basis for a given floating rate security based on LIBOR, commercial paper rate,
federal funds rate, U.S. Treasury securities rate, negotiable certificates of
deposit rate or other rates set forth in the prospectus supplement.
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 an annual rate):
(i) a maximum limitation, or 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 not exceed the maximum rate permitted by applicable law.
Each trust that issues a class of floating rate securities will
appoint, and enter into agreements with, a calculation agent to calculate
interest on that class. The applicable prospectus supplement will identify the
calculation agent which may be the administrator, the eligible lender trustee or
the indenture trustee for that series. In the absence of manifest error, all
determinations of interest by the calculation agent shall be conclusive for all
purposes and binding on the holders of the floating rate securities. 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 being 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 Uniform Commercial Code (the "UCC") and a
"clearing agency" registered pursuant to Section 17A of the Securities Exchange
Act of 1934, as amended. DTC was created to hold securities for its
participating organizations ("Participants") and to facilitate the clearance and
settlement of securities transactions between Participants through electronic
book-entries, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations. Indirect access to the DTC system also is
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participants").
Securityholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, securities held through DTC may do so only
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through Participants and Indirect Participants. In addition, securityholders
will receive all distributions of principal and interest from the related
indenture trustee or the related eligible lender trustee, as applicable, through
Participants and Indirect Participants. Under a book-entry format,
securityholders may experience some delay in their receipt of payments, since
payments will be forwarded by the applicable trustee to DTC's nominee. DTC will
forward those payments to its Participants, which thereafter will forward them
to Indirect Participants or securityholders. It is anticipated that, except for
the Company, the only "securityholder", "certificateholder" and "noteholder"
with respect to any series will be DTC's nominee. Securityholders will not be
recognized by the applicable trustee as noteholders or certificateholders under
the indenture or trust agreement, as the case may be, 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 DTC and affecting
its operations (the "DTC 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 principal and interest payments on the
securities. Participants and Indirect Participants with which securityholders
have accounts with respect to the securities are likewise required to make
book-entry transfers and receive and transmit payments of principal and interest
on the securities on behalf of their respective securityholders. Accordingly,
although securityholders will not possess securities, the DTC 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, which 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 the
securities, may be limited since securityholders will not possess physical
certificates for their securities.
DTC has advised the seller that it will take any action that a
securityholder is permitted to take under the related indenture or 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 those
actions are taken on behalf of Participants whose holdings include such
undivided interests.
Except as required by law, neither the administrator nor the applicable
trustee for any trust will have any liability for any aspect of the records
relating to payments, or the payments themselves 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 those 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 Company, the notes and the certificates of a given series will be issued
in fully registered, certificated form ("definitive notes" and "definitive
certificates", respectively, and "definitive securities", collectively) to
noteholders or certificateholders or their respective nominees, rather than to
DTC or its nominee, only in any of the following circumstances:
- if the administrator advises the applicable trustee in writing
that DTC is no longer willing or able to discharge properly
its responsibilities as depository for the securities and the
administrator is unable to locate a qualified successor;
- if the administrator, at its option, elects to terminate the
book-entry system through DTC; or
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- if after the occurrence of an Event of Default or a Master
Servicer Default (as defined below), securityholders
representing at least a majority of the outstanding principal
amount of the notes or the certificates, as the case may be,
of that series give written notice to the applicable trustee
through DTC that the continuation of a book-entry system for
the notes or certificates through DTC (or its successor) is no
longer in the best interest of the securityholders.
Upon the occurrence of any event described in the immediately preceding
paragraph, the applicable trustee will be required to notify all applicable
securityholders through Participants of the availability of definitive
securities. When DTC surrenders the definitive securities, the applicable
trustee will reissue to the securityholders the corresponding securities as
definitive securities upon receipt of instructions for re-registration. From
then on, payments of principal and interest on the definitive securities will
thereafter be made by the applicable trustee (in accordance with the procedures
set forth in the related indenture or trust agreement, as the case may be)
directly to the holders of definitive securities in whose names the definitive
securities were registered at the close of business on the applicable record
date specified in the related prospectus supplement. Payments will be made by
check mailed to the address of each holder as it appears on the register
maintained by the applicable trustee. However, the final payment on any
definitive security will be made only upon presentation and surrender of that
definitive security at the office or agency specified in the notice of final
distribution.
Definitive securities will be transferable and exchangeable at the
offices of the applicable trustee or of a registrar named in a notice delivered
to the 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 related tax or other governmental
charge that may be imposed.
LIST OF SECURITYHOLDERS
Unless otherwise specified in the related prospectus supplement,
holders of the notes of a series evidencing at least 25% of the aggregate
outstanding principal balance of those notes may, by written request to the
related indenture trustee, obtain access to the list of all noteholders
maintained by the indenture trustee for the purpose of communicating with other
noteholders with respect to their rights under the indenture or under the notes.
The indenture trustee may elect not to afford the requesting noteholders access
to the list if it agrees to mail the desired communication or proxy, for and at
the expense of the requesting noteholders, to all noteholders of that series.
Unless otherwise specified in the related prospectus supplement, three
or more certificateholders of any series or one or more holders of certificates
of that series evidencing at least 25% of the certificate balance of those
certificates may, by written request to the related eligible lender trustee,
obtain access to the list of all certificateholders for the purpose of
communicating with other certificateholders with respect to their rights under
the related trust agreement or under the certificates.
REPORTS TO SECURITYHOLDERS
With respect to each series of securities, on each distribution date,
the administrator 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 to the indenture trustee and the
trust described under "Description of Transfer and Servicing
Agreements--Statements to the Indenture Trustee and the Trust". Those statements
will be filed with the SEC during the period required by Rule 15d-1 under the
Securities Exchange Act of 1934, as amended. The statements provided to
securityholders will not constitute financial statements prepared in accordance
with generally accepted accounting principles.
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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 that calendar year was
a holder of securities issued by that trust and received any payment, a
statement containing certain information to enable the securityholder to prepare
its federal income tax return. SEE "Certain Federal Income Tax Consequences".
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
AGREEMENTS COVERED
In the sections that follow, we have summarized certain terms of the
following agreements (collectively, the "Transfer and Servicing Agreements"):
- the loan sale agreement, under which the related eligible
lender trustee will purchase student loans from the seller on
behalf of the applicable trust;
- the loan servicing agreement, under which the master servicer
will service the student loans for the trust;
- the administration agreement, under which the administrator
will undertake certain administrative duties for the trust and
the student loans; and
- the trust agreement, under which a trust will be created and
the related certificates will be issued.
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 following summaries do not purport to be complete and are qualified
in their entirety by reference to the actual 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 seller will sell and assign to the related
eligible lender trustee on behalf of the trust, without recourse (except as
provided in the loan sale agreement), its entire interest in those student loans
as well as in all collections received and to be received on the loans on and
after the cutoff date specified in the related prospectus supplement. The sale
will be effected under the related loan sale agreement. Each student loan will
be identified in either a schedule appearing as an exhibit to the loan sale
agreement which may be in electronic form. Concurrently with the sale and
assignment of the student loans, the eligible lender trustee will execute,
authenticate and deliver the related certificates and notes. The net proceeds
received from the sale of the related certificates and notes will be applied to
the purchase of the student loans.
In each loan sale agreement, the seller will make certain
representations and warranties to the related trust with respect to the student
loans for the benefit of the certificateholders and the noteholders of that
series, including the following:
- Each student loan, on the date it is transferred to the trust,
is free and clear of all security interests, liens, charges
and encumbrances and no offsets, defenses or counterclaims
with respect to any loan have been asserted or threatened.
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- The information provided with respect to the student loans is
true and correct as of the cutoff date.
- 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 the Act and
applicable restrictions imposed by the FFELP or any guarantee
agreement.
Unless otherwise provided in the related prospectus supplement,
following the discovery by (or notice to) the seller of a breach of any
representation or warranty with respect to a student loan that materially and
adversely affects the interests of the related certificateholders or noteholders
in that loan, the seller will repurchase that loan from the eligible lender
trustee unless the breach is cured within 60 days. However, if a breach does not
affect any guarantor's obligation to guarantee payment of that loan, it will be
deemed not to have a material adverse effect on the certificateholders' or
noteholders' interests.
Any required repurchase will be made as of the first day following the
end of the 60-day cure period that is the last day of a Collection Period (as
defined in the related prospectus supplement). The repurchase price will be
equal to the unpaid principal balance of that loan plus accrued and unpaid
interest 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 loan sale agreement as a replacement for the student loan as to
which the breach occurred. In addition, the seller will reimburse the related
trust for any accrued interest amounts that a guarantor refuses to pay under its
guarantee agreement, or for any interest subsidy payments and special allowance
payments that are lost or that must be repaid to the Department as a result of a
breach of the seller's representations or warranties with respect to that loan.
The repurchase, substitution and reimbursement obligations of the seller will
constitute the sole remedy available to the trust, the related
certificateholders and the related noteholders for an uncured breach. The
seller's repurchase and reimbursement obligations are contractual obligations
under the related loan sale agreement and they may be enforced against the
seller. However, a breach of those obligations by the seller will not constitute
an Event of Default.
To assure uniform quality in servicing and reduce administrative costs,
the applicable eligible lender trustee on behalf of the trust will appoint the
master servicer as custodian of the promissory notes and other documents related
to the student loans. The records and computer systems of the seller and the
master servicer will reflect the sale and assignment by the seller of the
student loans to the related eligible lender trustee on behalf of the trust. The
administrator will file UCC financing statements reflecting the sale and
assignment.
ADDITIONAL FUNDINGS
In the case of a trust that has a Pre-Funding Account or a Collateral
Reinvestment Account, it will use funds on deposit in that account from time to
time during the related Funding Period or Revolving Period, as applicable, for
the following purposes ("Additional Fundings"):
(i) to make interest payments to noteholders and
certificateholders in lieu of collections of interest on
certain of the student loans to the extent that interest is
not paid currently but is capitalized and added to the
principal balance of those loans; and
(ii) to fund the addition of student loans to the trust as
described in the related prospectus supplement.
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The additional student loans may be purchased by the trust from the
seller 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. 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 will be distributed to the related securityholders as described in the
related prospectus supplement.
If and to the extent specified in the related prospectus supplement,
the trust may use payments on the student loans, or may exchange student loans
with the seller, 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 (the
"Collection Account"). The Collection Account will be in the name of the
indenture trustee on behalf of the related noteholders and certificateholders,
and all payments made on the related student loans will be deposited in it. 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.
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 in the related prospectus supplement
(collectively, the "Issuer Accounts") will be invested in "eligible investments"
as provided in the applicable trust indenture. "Eligible investments" are
generally limited to investments acceptable to the applicable rating agencies as
being consistent with their ratings of the securities. Except as described below
or in the related prospectus supplement, eligible investments are limited to
financial obligations or instruments that mature not later than the business day
immediately before the next applicable distribution date. However, to the extent
permitted by the rating agencies, funds in any Reserve Account may be invested
in instruments that will not mature before the next distribution date 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 paid to the related noteholders or certificateholders
could result. Such a shortfall could, in turn, increase the average lives of the
notes or certificates of that series. Except as otherwise specified in the
related prospectus supplement, investment earnings on funds deposited in the
Issuer 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 Issuer Accounts will be maintained as eligible deposit accounts. An
"eligible deposit account" is either:
(i) a segregated account with an eligible institution, or
(ii) a segregated trust account with the corporate trust department
of a depository institution organized under the laws of the
United States, any of the several states 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 that account, so long as any of
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the securities of that depository institution have a credit
rating from each applicable rating agency in one of its
generic rating categories that signifies investment grade.
An "eligible institution" is a depository institution organized under the laws
of the United States, any one of the several states or the District of Columbia
(or any domestic branch of a foreign bank), that meets both the following
criteria:
(i) it has a long-term unsecured debt rating acceptable to the
rating agencies or a short-term unsecured debt rating or
certificate of deposit rating acceptable to the rating
agencies, and
(ii) its deposits are insured by the Federal Deposit Insurance
Corporation.
SERVICING PROCEDURES
Under each loan servicing agreement, the master servicer will agree to
service and otherwise manage the student loans acquired from time to time for
the related trust. Each loan servicing agreement requires the master servicer
- to perform all services and duties customary to the servicing
of student loans (including all collection practices),
- to do so in the same manner in which the master servicer
services student loans in its own portfolio, and
- to comply with all standards and procedures provided for in
the Act, the guarantee agreements and all other applicable
federal and state laws.
Without limiting the foregoing, the duties of the master servicer with respect
to each trust under the related loan servicing agreement include, but are not
limited to, the following:
- collect and deposit into the Collection Account all payments
on the student loans (including to claim and obtain any
guarantee payments, interest subsidy payments and special
allowance payments with respect to the loans);
- to respond to borrower inquiries, investigate delinquencies;
and
- to send out statements and payment coupons.
In addition, the master servicer will keep ongoing collection and other records
with respect to the student loans and will furnish monthly and annual statements
to the administrator, in accordance with the master servicer's customary
practices and as otherwise required in the related loan servicing agreement.
The master servicer may from time to time perform its servicing
obligations under any loan servicing agreement through subservicing agreements
with affiliated or unrelated third-party loan servicers. Details with respect to
any subservicing agreements and third-party servicers will be provided in the
applicable prospectus supplement.
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PAYMENTS ON STUDENT LOANS
With respect to each trust, the master servicer will deposit into the
related Collection Account, within two business days after receipt of freely
available funds, all payments and other proceeds on the related student loans
that it receives during each Collection Period specified in the related
prospectus supplement. The master servicer will deposit into the Collection
Account, within two business days after receipt, all interest subsidy payments
and all special allowance payments for the student loans during the related
Collection Period.
MASTER SERVICER COVENANTS
With respect to each trust, the master servicer will make the following
covenants in the related loan servicing agreement:
- to fulfill all its obligations regarding the student loans;
- to maintain in effect all qualifications required in order to
service the student loans and to 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;
- not to permit any student loan to be rescinded or cancelled
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 any related indenture
trustee;
- to do nothing to impair the rights of the related
certificateholders and the related noteholders in the student
loans; and
- not to reschedule, revise, defer or otherwise compromise
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.
Each loan servicing agreement (unless otherwise specified in the
related prospectus supplement) provides that if the administrator or the master
servicer discovers, or receives written notice, that any covenant of the master
servicer set forth above has not been complied with in all material respects
(and the noncompliance has not been cured within 60 days and has a materially
adverse effect on the interest of the certificateholders or noteholders in a
student loan), the master servicer must arrange for the purchase of that loan as
of the first day following the end of the 60-day period that is the last day of
a Collection Period. In that event, the master servicer will deposit into the
Collection Account an amount equal to the Purchase Amount of the loan. At the
same time, the trust's interest in the purchased student loan will automatically
be assigned to the master servicer or its designee, which will then be entitled
to all payments made on that loan. In addition, if so specified in the related
prospectus supplement, the master servicer will reimburse the related trust for
any related accrued interest amounts that a guarantor refuses to pay under its
guarantee agreement, or for any prior related interest subsidy payments and
special allowance payments that are lost or that must be repaid to the
Department as a result of the master servicer's breach.
If, because of a breach of the seller's representations and warranties
contained in the loan sale agreement, the seller must repurchase a student loan
that would otherwise have to be purchased by the
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master servicer in the circumstances described in the preceding paragraph, the
master servicer will not be required to do so.
MASTER SERVICER COMPENSATION
Unless otherwise specified in the related prospectus supplement, the
master servicer will be entitled to receive a servicing fee for each Collection
Period at the annual percentage (specified in the related prospectus supplement)
of the pool balance as of the last day of the related Collection Period,
together with any other administrative fees and similar charges specified in the
related prospectus supplement, as compensation for servicing the related student
loans in that trust (the "Servicing Fee"). Unless otherwise provided in the
related prospectus supplement, the Servicing Fee (together with any portion of
the Servicing Fee that remains unpaid from prior distribution dates) will be
paid before any payment on the related securities.
The Servicing Fee will compensate the master servicer for performing
the functions of a third-party servicer of student loans as an agent for their
beneficial owner. Those functions include collecting and posting all payments,
responding to inquiries of borrowers, investigating delinquencies, pursuing,
filing and directing the payment of any guarantee payments, interest subsidy
payments or special allowance payments, accounting for collections and
furnishing periodic accounting reports to the related administrator.
PAYMENTS OF PRINCIPAL AND INTEREST
With respect to each series of securities, beginning on the
distribution date specified in the related prospectus supplement, payments of
principal and interest on each class of the securities will be made by the
applicable trustee to the noteholders and the certificateholders of that series.
The timing, calculation, allocation, order, source, priorities of and
requirements for all payments to each class of notes and all payments to each
class of certificates of that series will be set forth in the related prospectus
supplement.
With respect to each trust, collections on the related student loans
will be distributed from the Collection Account on each distribution date 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
payment on that date to the extent specified in the related prospectus
supplement. As more fully described (and unless otherwise specified) in the
related prospectus supplement, payments of principal and/or interest on a class
of securities of a given series will be subordinate to payments of interest on
one or more other classes of that series, and payments on the certificates of
that series may be subordinate to payments on the notes of that series.
CREDIT AND CASH FLOW ENHANCEMENT
GENERAL. Each prospectus supplement will specify the amounts and types
of any applicable credit enhancement arrangements and identify any third-party
credit enhancement provider. 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, interest rate swaps, interest rate
caps, interest rate floors, currency swaps, other agreements with respect to
third-party payments or other support, cash deposits or any other arrangements
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.
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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 that class or series of the full
amount of principal and interest due them and to decrease the likelihood that
they 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 related accrued
interest. If losses occur which exceed the amount covered by the credit
enhancement or which are not covered by any credit enhancement, securityholders
of the affected 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
those series will be subject to the risk that the credit enhancement could be
exhausted by the claims of securityholders of the other series.
RESERVE ACCOUNT. If so provided in the related prospectus supplement,
the loan sale agreement will require the seller to establish a reserve account
(the "Reserve Account") for a series or class of securities. The Reserve Account
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 from proceeds of the sale of the securities on the closing date
in the amount stated 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 subsequent distribution date up to the
Specified Reserve Account Balance (as defined in the related prospectus
supplement) by depositing in the Reserve Account the amount of collections on
the related student loans remaining on each distribution date after all other
required payments on that date have been made. Amounts in the Reserve Account
will be available to cover shortfalls in amounts due to the holders of those
classes of securities as specified in the related prospectus supplement. The
related prospectus supplement will also specify how amounts on deposit in the
Reserve Account in excess of the Specified Reserve Account Balance (after giving
effect to all other payments required to be made by the applicable trust) will
be distributed.
STATEMENTS TO THE INDENTURE TRUSTEE AND THE 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 an information statement as of
the close of business on the last day of the preceding Collection Period. The
statement will include the following information (and any other information
specified in the related prospectus supplement) for the related distribution
date or the preceding Collection Period, to the extent applicable:
(i) the amount of the principal payment on each class of the notes
and the certificates;
(ii) the amount of the interest payment on each class of the notes
and the certificates, together with the applicable interest
rates;
(iii) the Pool Balance (as defined in the prospectus supplement) as
of the close of business on the last day of the preceding
Collection Period;
(iv) the aggregate outstanding principal amount and the note pool
factor of each class of the notes, and the Certificate Balance
(as defined in the prospectus supplement) and the certificate
pool factor for each class of the certificates, each after
giving effect to principal payments reported under clause (i)
above;
(v) the amount of the Servicing Fee paid to the master servicer
and the Administration Fee (as defined below) paid to the
administrator for that Collection Period;
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(vi) the interest rate for each class of floating rate notes and
the pass-through rate for each class of floating rate
certificates in effect for the next Collection Period;
(vii) the amount of aggregate realized losses, if any, for that
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
changes in those amounts from the preceding statement;
(ix) the aggregate Purchase Amounts for any related student loans
that were repurchased in that Collection Period;
(x) the balance of the Reserve Account (if any) on that
distribution date, after giving effect to changes on that
date;
(xi) for each date during the Funding Period (if any), the
remaining Pre-Funding 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 that Collection Period.
Each amount set forth above under clauses (i), (ii), (v) and (viii) above for
the notes or certificates of any series will be expressed as a dollar amount per
$1,000 of the initial principal amount of the notes or the initial Certificate
Balance of the certificates, as applicable.
EVIDENCE AS TO COMPLIANCE
Each loan sub-servicing agreement will require that a firm of
independent public accountants furnish to the related trust and indenture
trustee annually a statement (based on their examination of certain documents
and records and on such accounting and auditing procedures as they consider
appropriate under the circumstances) as to the sub-servicer's compliance during
the preceding twelve months with all applicable loan servicing standards under
the loan servicing agreement and as to its related accounting records and
computer files and certain other matters. (The first annual accountants'
statement will cover the period beginning on the applicable closing date.)
Each loan servicing agreement will also require that a master servicer
certificate be delivered to the related trust and indenture trustee concurrently
with the delivery of each annual accountants' statement of compliance. The
master servicer certificate shall be signed by an officer of the master servicer
in which he will state that, to his knowledge, the master servicer has fulfilled
its obligations under the loan servicing agreement throughout the preceding
twelve months or, if there has been a default in the fulfillment of any of its
obligations, he will describe each default. (The first annual master servicer
certificate will cover the period beginning on the applicable closing date.) The
master servicer has agreed to give the administrator, the related indenture
trustee and eligible lender trustee notice of certain Master Servicer Defaults
under each loan servicing agreement.
Copies of the above statements and certificates may be obtained by
securityholders by a request in writing addressed to the applicable trustee.
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CERTAIN MATTERS REGARDING THE MASTER SERVICER
Each loan servicing agreement will provide that the master servicer may
not resign from its duties as master servicer, except upon determination that
the master servicer is no longer permitted to perform those duties under
applicable law. No resignation of the master servicer will become effective
until the related indenture trustee or a successor servicer has assumed the
master servicer's servicing obligations and duties under the loan servicing
agreement.
Each loan servicing agreement will further provide that neither the
master servicer nor any of its directors, officers, employees or agents will be
under any liability to the related trust or the related noteholders or
certificateholders for taking any action or for refraining from taking any
action under the loan servicing agreement, or for errors in judgment.
Nevertheless, unless otherwise limited in the related prospectus supplement,
neither the master servicer nor any of the foregoing persons 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 master servicer's
duties or for reckless disregard of its duties. In addition, each loan servicing
agreement will provide that the master servicer is under no obligation to appear
in, prosecute or defend any legal action that is not incidental to its servicing
responsibilities under the 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 master servicer may undertake any reasonable
action that it deems necessary or desirable in the interests of the
securityholders.
Under the circumstances specified in each loan servicing agreement, any
entity into which the master servicer may be merged or consolidated, or any
entity resulting from any merger or consolidation to which the master servicer
is a party, or any entity succeeding to the business of the master servicer will
be the successor of the master servicer under the loan servicing agreement so
long as that corporation or other entity assumes the obligations of the master
servicer.
MASTER SERVICER DEFAULT
Except as otherwise provided in the related prospectus supplement, a
"Master Servicer Default" will occur under the related loan servicing agreement
in the following circumstances:
- if the master servicer fails to deliver to the indenture
trustee for deposit in any of the Issuer Accounts any required
payment, and its failure continues unremedied for three
business days after written notice from the indenture trustee
or the related eligible lender trustee is received by the
master servicer or after discovery by the master servicer;
- if the master servicer fails to observe or perform in any
material respect any of its other covenants or agreements
under the loan servicing agreement; or
- if an insolvency event with respect to the master servicer
occurs.
An "insolvency event" means, with respect to any person, any of the following:
certain events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings with respect to that person and certain
actions by that person indicating its insolvency, reorganization pursuant to
bankruptcy proceedings or inability to pay its obligations.
RIGHTS UPON MASTER SERVICER DEFAULT
Unless otherwise specified in the related prospectus supplement, as
long as a Master Servicer Default under a loan servicing agreement remains
unremedied, the related indenture trustee, or holders of
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notes of the related series evidencing not less than 75% in principal amount of
the then outstanding notes, may terminate all the rights and obligations of the
master servicer under that loan servicing agreement. Thereupon a successor
servicer will be appointed by the related indenture trustee or the indenture
trustee will succeed to all the responsibilities, duties and liabilities of the
master servicer under that agreement, and will be entitled to similar
compensation arrangements. If, however, a bankruptcy trustee or similar official
has been appointed for the master servicer, and no Master Servicer Default other
than the appointment itself has occurred, the bankruptcy trustee or official may
have the power to prevent the indenture trustee or the noteholders from
effecting a transfer. In the event that the indenture trustee is unwilling or
unable to act, it may appoint, or petition a court of competent jurisdiction to
appoint, a successor master servicer whose regular business includes the
servicing of student loans. The indenture trustee may provide for compensation
to be paid but in no event more than the servicing compensation payable to the
master servicer under that loan servicing agreement, unless a greater amount
will not result in a downgrading of the notes and certificates by any applicable
rating agency.
In the event a Master Servicer Default occurs and is continuing, the
indenture trustee or the noteholders, as described above, may remove the master
servicer, without the consent of the related eligible lender trustee or any of
the certificateholders of the related series. Moreover, only the indenture
trustee or the noteholders, and not the eligible lender trustee or the
certificateholders, have the ability to remove the master servicer if a Master
Servicer Default occurs and is continuing.
WAIVER OF PAST DEFAULTS
With respect to each trust, unless otherwise specified in the related
prospectus supplement, 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 Master Servicer Default which does not adversely affect the
indenture trustee or the noteholders of the related series), may, on behalf of
all the noteholders and certificateholders, waive any default by the master
servicer in the performance of its obligations under the related loan servicing
agreement and the consequences of that default, except a default in making any
required deposits to, or payments from, any of the Issuer Accounts in accordance
with the loan servicing agreement. In this way, the noteholders have the
ability, except as noted above, to waive defaults by the master servicer which
could materially adversely affect the related certificateholders. However, no
waiver will impair the noteholders' or the certificateholders' rights with
respect to subsequent defaults.
AMENDMENT
Unless otherwise provided in the related prospectus supplement, each of
the Transfer and Servicing Agreements may be amended by the parties, without the
consent of the related noteholders or certificateholders, for the purpose of
adding, changing or eliminating any provisions of the Transfer and Servicing
Agreements or modifying any rights of noteholders or certificateholders so long
as that action will not, in the opinion of counsel satisfactory to the indenture
trustee and eligible lender trustee, materially and adversely affect the
interest of any noteholder or certificateholder. Unless otherwise provided in
the related prospectus supplement, each of the Transfer and Servicing Agreements
also may be amended by the seller, the administrator, the master servicer, the
related eligible lender trustee and the related indenture trustee, as
applicable, with the consent of the holders of notes of the related series that
represent at least a majority in principal amount of the 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, changing or
eliminating any provisions of the Transfer and Servicing Agreements or modifying
any rights of the noteholders or certificateholders. Nevertheless, no amendment
may:
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- increase or reduce in any manner the amount of, or accelerate
or delay the timing of, collections of payments (including any
guarantee payments) on the student loans or required payments
to the noteholders or certificateholders; or
- reduce the percentage of the notes or certificates which are
required to consent to any amendment, without the consent of
the holders of all the outstanding notes and certificates.
Each trust agreement will provide that the related eligible lender
trustee has no power to commence a voluntary proceeding in bankruptcy relating
to that trust without the unanimous prior approval of all certificateholders
(including the Company) of the related series and the delivery to the eligible
lender trustee by each certificateholder (including the Company) of a
certificate certifying that the certificateholder reasonably believes that the
trust is insolvent.
PAYMENT OF NOTES
Upon the payment in full of all the outstanding notes of a given series
and the satisfaction and discharge of the related indenture, the eligible lender
trustee will succeed to all the rights of the indenture trustee, and the
certificateholders of that series will succeed to all the rights of the
noteholders of that series, under the related loan servicing agreement, except
as otherwise provided in the applicable prospectus supplement.
TERMINATION
With respect to each trust, the obligations of the seller, the master
servicer, the administrator, the related eligible lender trustee and the
indenture trustee under the related Transfer and Servicing Agreements will
terminate upon:
- the maturity or other liquidation of the last student loan in
that trust and the disposition of any amount received upon
liquidation of any remaining student loans; and
- the payment to the noteholders and the certificateholders of
the related series of all amounts required to be paid to them
under the Transfer and Servicing Agreements.
OPTIONAL REDEMPTION
If so specified in the prospectus supplement for a given trust, the
seller or another party will have the option to avoid excessive administrative
expenses by purchasing from the related eligible lender trustee all the
remaining student loans in that trust. The option can only be exercised when, as
of the end of any Collection Period immediately before a distribution date, the
then outstanding pool balance has declined to the level specified in the
prospectus supplement. If the option is exercised, the remaining student loans
will be purchased at a price equal to the aggregate Purchase Amounts of those
loans as of the end of that Collection Period. The funds will be used to retire
the related notes and certificates concurrently with receipt of the funds. 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 that trust, after giving effect to any final distributions to noteholders and
certificateholders of the related series, will be conveyed and transferred to
the seller or the other party named in the prospectus supplement.
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
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specified in such prospectus supplement. The seller and unrelated third parties
may offer bids for the student loans. The indenture trustee will accept the
highest bid equal to or greater than the aggregate Purchase Amounts of the
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
the related notes and to retire all the related certificates.
ADMINISTRATION AGREEMENT
The administrator will enter into an administration agreement with each
trust and the related indenture trustee under which the administrator will
provide the notices and perform other administrative obligations required by the
related indenture, the trust agreement, loan sale agreement and loan servicing
agreement. Unless otherwise specified in the related prospectus supplement with
respect to any trust, the administrator will be entitled to an administration
fee as specified in the related prospectus supplement (the "Administration Fee")
as compensation for the performance of its obligations under the administration
agreement and as reimbursement for its expenses. Unless otherwise specified by
the related prospectus supplement, the administrator under each administration
agreement will be NMELC.
Except as otherwise provided in the related prospectus supplement, an
"Administrator Default" will occur under an administration agreement in the
following circumstances:
- if the administrator fails to direct the indenture trustee to
make any required distributions from any of the Issuer
Accounts, and the failure continues unremedied for three
business days after the indenture trustee or the eligible
lender trustee has given written notice;
- if the administrator fails to observe or perform in any
material respect any of its other covenants or agreements in
the administration agreement; or
- if an insolvency event occurs with respect to the
administrator.
Unless otherwise specified in the related prospectus supplement, 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
identical to those for replacing the master servicer and appointing a successor
master servicer following the occurrence of a Master Servicer Default under the
loan servicing agreement and for waiving defaults by the master servicer under
the loan servicing agreement, except that those procedures will apply to the
administrator and the administration agreement rather than the master servicer
and the loan servicing agreement.
CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS
TRANSFER OF THE STUDENT LOANS
The seller intends that its transfer of the student loans to the
related eligible lender trustee on behalf of the related trust will constitute a
valid sale and assignment of those student loans. Nevertheless, if the transfer
of the student loans is deemed to be an assignment of collateral as security for
the benefit of a trust, a security interest in the student loans may be
perfected under the provisions of 20 U.S.C. ss. 1087-2(d)(3), either through the
taking of possession of the student loans or by the filing of notice of the
security interest in the manner provided by the applicable UCC for perfection of
security interests in accounts. One or more financing statements covering the
student loans will be filed under the UCC to protect the interest of the
eligible lender trustee in the event the transfer by the seller is deemed to be
an assignment of collateral as security for the benefit of the trust.
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If the transfer of the student loans is deemed to be an assignment as
security for the benefit of a trust, there are certain limited circumstances
under the UCC in which prior or subsequent transferees of student loans coming
into existence after the related closing date could have an interest in the
loans with priority over the interest of the eligible lender trustee. A tax or
other government lien on property of the seller that arises before a student
loan comes into existence may also have priority over the interest of the
related eligible lender trustee in that loan. Under the loan sale agreement,
however, the seller will warrant that it has caused the student loans to be
transferred to the related eligible lender trustee on behalf of the trust free
and clear of the lien of any third party. In addition, the seller will covenant
that it will not sell, pledge, assign, transfer or grant any lien on any student
loan held by a trust (or any interest in a loan held by a trust) other than to
the eligible lender trustee on behalf of that trust, except as provided below.
Under each loan servicing agreement, the master servicer, or its
designee, as custodian for the related trust, will have custody of the
promissory notes evidencing the student loans following their sale to the
related eligible lender trustee. Although the accounts and computer records of
the seller and master servicer will be marked to indicate the sale and although
the seller 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 they have been sold to the eligible lender
trustee. If, through inadvertence or otherwise, any of the student loans were to
be sold to another party, or a security interest in them were to be granted to
another party, and that party purchased (or took a security interest in) the
loans in the ordinary course of its business and took possession of the loans,
then the purchaser (or secured party) might acquire an interest in those student
loans that would be superior to the interest of the eligible lender trustee,
provided that the purchaser (or secured party) acquired (or took a security
interest in) the student loans for new value and without actual knowledge of the
interest of the eligible lender trustee in them. SEE "Description of the
Transfer and Servicing Agreements--Sale of Student Loans; Representations and
Warranties".
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon lenders and servicers involved
in consumer finance. Also, some state laws impose finance charge ceilings and
other restrictions on certain consumer transactions and require contract
disclosures in addition to those required under federal law. Those requirements
impose specific statutory liabilities upon lenders who fail to comply with their
provisions. Although those requirements are generally do not apply to student
loans, in certain circumstances a trust may be liable for certain violations of
consumer protection laws that may apply to the student loans, either as assignee
or as the party directly responsible for obligations arising after the transfer.
For a discussion of a trust's rights in the event that the student loans were
not originated or serviced in all material respects in compliance with
applicable laws, SEE "Description of the Transfer and Servicing Agreements--Sale
of Student Loans; Representations and Warranties" and "--Master Servicer
Covenants".
LOAN ORIGINATION AND SERVICING PROCEDURES APPLICABLE TO STUDENT LOANS
The Act, including its implementing regulations, imposes specified
requirements, guidelines and procedures for originating and servicing student
loans. Generally, those procedures require, among other things, processing of
completed loans applications, determining whether an applicant is an eligible
borrower under applicable standards (including a review of a financial need
analysis), explaining to the borrower his responsibilities under the loan,
confirming that the related promissory note is executed by the borrower, and
disbursing the loan proceeds. 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. If a borrower becomes
delinquent, a lender or servicing agent must perform certain collection
procedures (primarily by telephone calls and demand letters) which vary
depending
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upon the length of time the loan is delinquent. The master servicer has agreed
under the loan servicing agreement to perform collection and servicing
procedures for the related trust. However, failure to follow these procedures or
failure of the originator of the loan to follow loan origination procedures
could result in adverse consequences, including the Department's refusal to make
reinsurance payments to the guarantors or to make interest subsidy payments and
special allowance payments to the eligible lender trustee for those loans or the
guarantors' refusal to honor their guarantee agreements with the eligible lender
trustee for those loans. Failure of the guarantors to receive reinsurance
payments from the Department could adversely affect their ability or legal
obligation to make guarantee payments to the related eligible lender trustee for
those loans.
Loss of any guarantee payments, interest subsidy payments or special
allowance payments could adversely affect the amount of Available Funds (as
defined in the prospectus supplement) on any distribution date and the related
trust's ability to pay principal and interest on the notes and certificates of
that series. Under certain circumstances, unless otherwise specified in the
related prospectus supplement, the loan sale agreement and loan servicing
agreement grant the related trust the right to cause the seller to repurchase
any student loan, or to cause the master servicer to arrange for the purchase of
any student loan, if a breach of the representations, warranties or covenants of
the seller or the master servicer, as the case may be, with respect to that loan
has a material adverse effect on the interest of the trust and the 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
"--Master Servicer Covenants". The failure of the seller to make a required
repurchase, or the failure of the master servicer to make a required purchase
arrangement, would constitute a breach of the related loan sale agreement and
loan servicing agreement, enforceable by the related eligible lender trustee on
behalf of the related trust or by the related indenture trustee on behalf of the
noteholders of that series. However, such a failure would not constitute an
Event of Default under the indenture.
STUDENT LOANS GENERALLY NOT SUBJECT TO DISCHARGE IN BANKRUPTCY
Student loans are generally not dischargeable by a borrower in
bankruptcy pursuant to the U.S. Bankruptcy Code, unless (a) the loan first
became due more than seven years (exclusive of any applicable suspension of the
repayment period) before the date of the bankruptcy, or (b) excepting the debt
from discharge will impose an undue hardship on the debtor and the debtor's
dependents.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is, in the opinion of Brown & Wood LLP ("Federal Tax
Counsel"), special tax counsel to each trust and counsel to the Underwriters, a
summary of material U.S. federal income tax consequences of the purchase,
ownership and disposition of the securities. The summary does not purport to
deal with U.S. federal income tax consequences applicable to all categories of
securityholders, some of which may be subject to special rules. For example, it
does not discuss the tax treatment of securityholders 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 securities. As a result, the IRS may disagree with all
or a part of the discussion below. Prospective investors are urged to consult
their own tax advisors in determining the federal, state, local, foreign and any
other tax consequences to them of the purchase, ownership and disposition of the
securities.
The following summary is based upon current provisions of 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
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U.S. federal income tax matters discussed below, which will be filed with the
Commission on a Form 8-K prior to the sale of 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
securities and related terms, parties and documents shall be deemed to refer,
unless otherwise specified herein, to each trust and the securities 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, taxpayers should consult their respective
tax advisors and tax return preparers regarding the preparation of any item on a
tax return, even where the anticipated tax treatment has been discussed herein.
EACH PROSPECTIVE INVESTOR SHOULD CONSULT WITH ITS TAX ADVISOR AS TO THE
FEDERAL, STATE, LOCAL, FOREIGN AND ANY OTHER TAX CONSEQUENCES OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF OFFERED SECURITIES SPECIFIC TO THAT PROSPECTIVE
INVESTOR.
TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE
TAX CHARACTERIZATION OF THE TRUST
Federal Tax Counsel will deliver its opinion to the trust that the
trust will not be an association (or publicly traded partnership) taxable as a
corporation for U.S. 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 the nature of the income of
the trust will exempt it from the rule that certain publicly traded partnerships
are taxable as corporations.
TAX CONSEQUENCES TO HOLDERS OF DEBT SECURITIES
Treatment of the Securities as Indebtedness. Federal Tax Counsel will
deliver its opinion to the trust that certain classes of securities will qualify
as debt for U.S. federal income tax purposes ("Debt Securities"). The seller
will agree, and the Debt Security holders will agree by their purchase of the
Debt Securities, to treat the Debt Securities as debt for U.S. federal income
tax purposes. The discussion below assumes this characterization of such Debt
Securities is correct. If, contrary to the opinion of counsel, the IRS
successfully asserted that any class of Debt Securities is not debt for U.S.
federal income tax purposes such Securities would be equity interests in the
trust ("Equity Securities") and would be treated in the manner described below.
ORIGINAL ISSUE DISCOUNT. The discussion below assumes that all payments
on the Debt Securities are denominated in U.S. dollars, that the interest rate
formula for the Debt Securities meets the requirements for "qualified stated
interest" under Treasury regulations (the "OID regulations") relating to
original issue discount ("OID"), and that any OID on the Debt Securities (I.E.,
any excess of the stated redemption price at maturity of the Debt Securities,
generally the principal amount of the Debt Securities, 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 Debt Securities, additional tax considerations
with respect to such Debt Securities will be disclosed in the related prospectus
supplement. The Code requires that a prepayment assumption be used in computing
the accrual of OID. The prepayment assumption is to be determined under Treasury
regulations that have yet to be issued. The legislative history of the OID
provisions of the Code provides, however, that the calculation and accrual
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of OID should be based on the prepayment assumption used by the parties in
pricing the transaction. In the event that any of the Debt Securities 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 Debt Securities, 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 these 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 DEBT SECURITIES. Based on the above assumptions,
except as discussed in the following paragraph, the Debt Securities will not be
considered issued with OID. The stated interest thereon will be taxable to a
Debt Security holder as ordinary interest income when received or accrued in
accordance with such Debt Security holder's method of tax accounting. Under the
OID regulations, a holder of a Debt Security that was issued with a DE MINIMIS
amount of OID must include such OID in income, on a pro rata basis, as principal
payments are made on the Debt Security . Alternatively, a Debt Security holder
may elect to accrue all interest, discount (including DE MINIMIS market discount
or OID) and premium in income as interest, based on a constant yield method. If
such an election were made with respect to a Debt Security with market discount,
the Debt Security holder would be deemed to have made an election to include in
income currently market discount with respect to all debt instruments having
market discount that such Debt Security holder acquires during the year of the
election and thereafter. Similarly, a Debt Security holder that makes this
election for a Debt Security 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 Debt Security holder owns
or acquires. The election to accrue interest, discount and premium under a
constant yield method with respect to a Debt Security is irrevocable. A
purchaser who buys a Debt Security for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
Qualified Stated Interest, which is taxable in accordance with the
holder's method of accounting, is interest that is unconditionally payable
(I.E., late payments are penalized) at least annually at a single fixed rate.
The trust intends to treat the interest paid on the Debt Securities as Qualified
Stated Interest.
A holder of a Debt Security that has a fixed maturity date of not more
than one year from the issue date of such Debt Security (a "Short-Term
Security") may be subject to special rules. An accrual basis holder of a
Short-Term Security (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
Security will, in general, be required to report interest income as interest is
paid (or, if earlier, upon the taxable disposition of the Short-Term Security).
However, a cash basis holder of a Short-Term Security 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 Security until the taxable disposition of the Short-Term Security. A
cash basis taxpayer may elect under Section 1282 of the Code to accrue interest
income on all nongovernment debt obligations with a term of one year or less, in
which case the taxpayer would include interest on the Short-Term Security 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 Security 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 Debt Security, including stated interest, acquisition discount, OID, de
minimis OID, market discount, de minimis market discount, and unstated interest,
as
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adjusted by any amortizable bond premium or acquisition premium, using the
constant yield method described above.
SALE OR OTHER DISPOSITION. If a Debt Security holder sells a Debt
Security, 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 Debt Security. The adjusted tax basis of a Debt Security to a
particular Debt Security holder will equal the holder's cost for the Debt
Security, increased by any market discount, acquisition discount, OID and gain
previously included by the Debt Security holder in income with respect to the
Debt Security and decreased by the amount of bond premium (if any) previously
amortized and by the amount of principal payments previously received by the
Debt Security holder with respect to the Debt Security. Any such gain or loss
will be capital gain or loss if the Debt Security 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 DEBT SECURITY HOLDERS. Interest paid (or accrued) to a Debt
Security holder who is a nonresident alien, foreign corporation or other
non-U.S. person (a "foreign person") generally will be considered "portfolio
interest", and generally will not be subject to U.S. 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 U.S. by the foreign person,
(ii) the foreign person is not actually or constructively a "10 percent
shareholder" of the trust, the Seller or the Company (including a holder of 10%
of the outstanding Equity Securities) nor a "controlled foreign corporation"
with respect to which the trust, the Seller or the Company is a "related person"
within the meaning of the Code, and (iii) the foreign person provides the person
who is required to withhold U.S. tax with respect to the Debt Securities with an
appropriate statement (on Form W-8 or a similar form), signed under penalties of
perjury, certifying that the beneficial owner of the Debt Security is a foreign
person and providing the foreign person's name and address. If a Debt Security
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 signed statement
must be accompanied by a Form W-8 or substitute form provided by the foreign
person that owns the Debt Security . If such interest is not portfolio interest,
then it will be subject to U.S. 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 Debt Security by a foreign person generally will be
exempt from U.S. federal income and withholding tax, provided that (i) such gain
is not effectively connected with the conduct of a trade or business in the U.S.
by the foreign person, and (ii) in the case of an individual foreign person, the
foreign person is not present in the U.S. for 183 days or more in the taxable
year.
If the interest, gain or income on a Debt Security held by a foreign
person is effectively connected with the conduct of a trade or business in the
U.S. 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 U.S. federal income tax on the interest, gain or income at
regular U.S. 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 Non-U.S. Holder 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
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procedures and forms and clarify reliance standards. The New Withholding
Regulations generally will be effective for payments made after December 31,
2000, subject to certain transaction rules. THE DISCUSSION SET FORTH ABOVE DOES
NOT TAKE THE NEW WITHHOLDING REGULATIONS INTO ACCOUNT. PROSPECTIVE INVESTORS IN
THE DEBT SECURITIES WHO WOULD BE NON-U.S. HOLDERS ARE STRONGLY URGED TO CONSULT
THEIR OWN TAX ADVISOR WITH RESPECT TO THE NEW WITHHOLDING REGULATIONS.
BACKUP WITHHOLDING. Each holder of a Debt Security (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 Debt Security 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 Debt
Security holder 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 U.S.
federal income tax liability.
TAX CONSEQUENCES TO HOLDERS OF EQUITY SECURITIES
The following discussion only applies to securities treated as equity
for U.S. federal income tax purposes and assumes that all payments on the Equity
Securities are denominated in U.S. dollars, that a series of securities includes
a single class of Equity Securities and that any such Equity Securities are sold
to persons other than the Company. If these conditions are not satisfied with
respect to any given series of securities, any additional tax considerations
with respect to such Equity Securities will be disclosed in the applicable
prospectus supplement.
CLASSIFICATION AS A PARTNERSHIP
TREATMENT OF THE TRUST AS A PARTNERSHIP. The Seller and the Servicer
will agree, and the Equity Security holders will agree by their purchase of
Equity Securities, 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 Equity Security holders
(including the Company in its capacity as recipient of distributions from the
Reserve Account, if any), and certain other Securities being treated as debt of
the partnership. However, the proper characterization of the arrangement
involving the trust, the Equity Security holders, the Seller and the Servicer is
not clear because there is no authority on transactions comparable to that
contemplated herein.
Under the provisions of Subchapter K, 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 U.S. federal income
tax consequences of classifying the trust as a partnership. Prospective owners
of Equity Securities should consult their own tax advisors regarding the U.S.
federal income tax consequences discussed below, as well as any other material
U.S. federal income tax consequences that may result from applying the
provisions of Subchapter K to the ownership and transfer of a Equity Security.
PARTNERSHIP TAXATION. As a partnership, the trust will not be subject
to U.S. federal income tax. Rather, each Equity Security holder will be required
to separately take into account its 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
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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 Equity Securities, 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 Equity Security holders will be allocated taxable
income of the trust for each interest period (as described in the applicable
prospectus supplement) equal to the sum of (i) the interest that accrues on the
Equity Securities 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 Equity Securities 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 Equity Securities
over their initial issue price; and (iii) all other amounts of income payable to
the Equity Security holders for such interest period. All remaining taxable
income of the trust will be allocated to the Company. Based on the economic
arrangement of the parties, this approach for allocating trust income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to Equity Security holders. Moreover, even under the foregoing method of
allocation, Equity Security holders may be allocated income equal to the entire
amount of interest accruing on the Equity Securities 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 Equity Securities on the accrual basis and Equity Security
holders 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 Equity
Security holders but Equity Security holders may be purchasing Equity Securities
at different times and at different prices, Equity Security holders may be
required to report on their tax returns taxable income that is greater or less
than the amount reported to them by the applicable trust.
An individual taxpayer's share of expenses of the trust (including fees
to the Servicer but not interest expenses) are miscellaneous itemized deductions
which are deductible 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 Equity Security holders 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 Equity Security holders.
COMPUTATION OF INCOME. Taxable income of the trust will be computed at
the trust level and then allocated pro rata to the Equity Security holders.
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 Equity Security holders. The
trust intends, to the extent possible, to (i) have its taxable income computed
under the accrual method of accounting, and (ii) adopt a calendar-year taxable
year for computing its taxable income. The tax year of the trust, however, is
generally determined by reference to the tax years of the Equity Security
holders. As a result, an owner of an Equity Security would be required to
include its pro rata share of trust income for a taxable year as determined by
the trust in such Equity Security holder's gross income for its taxable year in
which the trust's taxable year ends.
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DETERMINING THE BASES OF TRUST ASSETS. The trust will become a
partnership on the first date when Equity Securities are held by more than one
person. On that date, each of the Equity Security holders should be treated as
having purchased a pro rata share of the assets of the trust (subject to the
liability for the Equity Securities) 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 Equity Security
holders' 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
Equity Security holders would be adjusted in accordance with Section 704(c) of
the Code to account for such variations.
Under Section 708 of the Code 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 transferee partner, the
Company) 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 Equity Securities terminated the
partnership under Section 708 of the Code, 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 Equity Security
holders.
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 discount, as the case may be. (As indicated above, the trust will
make this calculation on an aggregate basis, but might be required to recompute
it on a loan by loan basis.)
If the trust acquires the student loans at a market discount or
premium, it 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 Equity Security
holders.
DISPOSITION OF EQUITY SECURITIES. Generally, capital gain or loss will
be recognized on a sale of Equity Securities in an amount equal to the
difference between the amount realized and the seller's tax basis in the Equity
Securities sold. To the extent the trust is characterized as a partnership, an
Equity Security holder's tax basis in an Equity Security will generally equal
the holder's cost increased by the holder's share of trust income (includible in
gross income) and decreased by any distributions received with respect to such
Equity Security. In addition, both the tax basis in the Equity Security and the
amount realized on a sale of an Equity Security would include the holder's share
of the Equity Securities and other liabilities of the trust. A securityholder
acquiring Equity Securities at different prices may be required to maintain a
single aggregate adjusted tax basis in such Equity Securities and, upon sale or
other disposition of some of the Equity Securities, allocate a pro rata portion
of such aggregate tax basis to the Equity Securities sold (rather than
maintaining a separate tax basis in each Equity Security for purposes of
computing gain or loss on a sale of that Equity Security).
Any gain on the sale of an Equity Security attributable to the
securityholder'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.
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If an Equity Security holder is required to recognize an aggregate
amount of income (not including income attributable to disallowed itemized
deductions described above) over the life of the Equity Securities that exceeds
the aggregate cash distributions with respect thereto, such excess will
generally give rise to a capital loss upon the retirement of the Equity
Securities.
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 Equity Security
holders in proportion to the principal amount of Equity Securities owned by them
as of the close of the last day of such month. As a result, a holder purchasing
Equity Securities 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 Equity Security holders. The Company
is 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 an Equity Security holder sells
an Equity Security at a profit (or loss), the purchasing Equity Security holder
will have a higher (or lower) basis in the Equity Security than the selling
Equity Security holder 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 an election. As a result, Equity Security holders might be
allocated a greater or lesser amount of trust income than would be appropriate
based on their own purchase price for Equity Securities.
ADMINISTRATIVE MATTERS. The Eligible Lender Trustee is required to keep
or cause to be kept complete and accurate books of the trust. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and the
taxable year of the trust will be the calendar year. The Eligible Lender Trustee
will file a partnership information return (IRS Form 1065) with the IRS for each
taxable year of the trusts and will report each Equity Security holder'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 it with the information statement described below and such
nominees will be required to forward such information to the beneficial owners
of the Equity Securities. Generally, securityholders must file tax returns that
are consistent with the information returns filed by the trust or be subject to
penalties unless the securityholder notifies the IRS of all such
inconsistencies.
Under Section 6031 of the Code, any person that holds Equity Securities
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 Equity Securities 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 U.S. 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
Equity Securities that were held, bought or sold on behalf of such person
throughout the year. In addition, brokers and financial institutions that hold
Equity Securities through a nominee are required to furnish directly to the
trust information as to themselves and their ownership of Equity Securities. A
clearing agency registered under Section 17A of the Exchange Act that holds
Equity Securities 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
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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.
Unless otherwise provided by the Code, applicable Treasury regulations
or other pronouncements, the Company will be designated as the "tax matters
partner" in the related trust Agreement and, as such, will be responsible for
representing the Equity Security holders 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 Equity Security holders, and,
under certain circumstances, an Equity Security holder may be precluded from
separately litigating a proposed adjustment to the items of the trust. An
adjustment could also result in an audit of an Equity Security holder's returns
and adjustments of items not related to the income and losses of the trust.
TAX CONSEQUENCES TO FOREIGN EQUITY SECURITYHOLDERS. It is not clear
whether a trust would be considered to be engaged in a trade or business in the
U.S. for purposes of U.S. federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described in this prospectus. Although it is not
expected that the trust would be engaged in a trade or business in the U.S. for
such purposes, the trust will withhold as if it were so engaged in order to
protect itself 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 foreign Equity Security holders 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. Subsequent adoption of Treasury regulations or the issuance of
other administrative pronouncements may require a trust to change its
withholding procedures. In determining a holder's withholding status, a trust
may rely on IRS Form W-8, IRS Form W-9 or other forms as specified by applicable
Treasury regulations or other Treasury or IRS pronouncements.
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 of an
Equity Security must obtain a taxpayer identification number from the IRS and
submit that number to the trust on IRS Form W-8 (or other applicable form), 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, interest
payments made (or accrued) to an Equity Security holder 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, Equity Security holders will be
subject to U.S. 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.
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, 2000, subject to certain transaction rules. THE DISCUSSION SET
FORTH ABOVE DOES NOT TAKE THE NEW WITHHOLDING REGULATIONS INTO ACCOUNT.
PROSPECTIVE INVESTORS IN THE
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EQUITY SECURITIES WHO WOULD BE NON-U.S. HOLDERS ARE STRONGLY URGED TO CONSULT
THEIR OWN TAX ADVISOR WITH RESPECT TO THE NEW WITHHOLDING REGULATIONS.
BACKUP WITHHOLDING. Distributions made on the Equity Securities and
proceeds from the sale of the Equity Securities will be subject to a "backup"
withholding tax of 31% if, in general, the Equity Security holder 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 SELLER OR AN
AFFILIATE OF THE SELLER
TAX CHARACTERIZATION OF THE TRUST
Federal Tax Counsel will deliver its opinion that a trust which issues
one or more classes of Securities properly treated as debt for U.S. federal
income tax purposes to investors and all the Residual Interests of which are
retained by the seller 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 SECURITIES AS INDEBTEDNESS. The seller will agree, and
the securityholders will agree by their purchase of securities, to treat the
securities as debt for U.S. federal income tax purposes. Federal Tax Counsel
will, except as otherwise provided in the related prospectus supplement, advise
the trust that the securities will be (or, in certain cases, should be)
classified as debt for U.S. federal income tax purposes. Assuming that the
characterization of the securities as debt for U.S. federal income tax purposes
is correct, the U.S. federal income tax consequences to securityholders
described above under the heading "Trusts for Which a Partnership Election Is
Made--Tax Consequences to Holders of the Debt Securities" would apply to the
securityholders.
If, contrary to the opinion of Federal Tax Counsel, the IRS
successfully asserted that one or more classes of securities did not represent
debt for U.S. federal income tax purposes, such class or classes of securities
might be treated as equity interests in the trust. If so treated, the trust
would, most likely in the view of Federal Tax Counsel, be treated as a publicly
traded partnership that would not be taxable as a corporation because it would
qualify for an applicable "safe harbor" that the IRS has provided. Therefore,
the partnership would not be subject to U.S. federal income tax. Assuming such
characterization of the securities is correct, the U.S. federal income tax
consequences to Security holders described above under the heading "Trusts for
Which a Partnership Election Is Made--Tax Consequences to Holders of the Equity
Securities" would apply to the securityholders.
Nonetheless, treatment of securities as equity interests in such a
partnership could have adverse tax consequences to certain holders of such
securities. For example, income to certain tax-exempt entities (including
pension funds) would be "unrelated business taxable income", income to foreign
holders may 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.
THE U.S. FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON EACH
SECURITYHOLDER'S PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT
THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF THE SECURITIES, INCLUDING THE TAX CONSEQUENCES
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UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain requirements on:
(i) employee benefit plans;
(ii) 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 those plans, accounts or
arrangements are invested that are subject to the
fiduciary responsibility provisions of ERISA and
Section 4975 of the Code ; and
(iii) persons who are fiduciaries with respect to the Plans in
connection with the investment of Plan assets.
The term "Plans" includes the plans and arrangements listed in clauses (i) and
(ii) above.
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 plans not subject to ERISA
requirements may be invested in notes without regard to the ERISA considerations
described below, subject to the provisions of other applicable federal and state
law. However, if a plan is not subject to ERISA requirements but is qualified
and exempt from taxation under Sections 401(a) and 501(a) of the Code, the
prohibited transaction rules set forth in Section 503 of the Code will apply.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that the 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. A trust, the seller, any
underwriter, the eligible lender trustee, the indenture trustee, the master
servicer, the administrator, any provider of credit support or any of their
affiliates may be considered to be or may become Parties in Interest with
respect to certain Plans. Prohibited
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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 any of the foregoing are
Parties in Interest unless the 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's 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 the investment. Accordingly, prior to making
an investment in the notes, investing Plans should determine whether the
applicable trust, [the Company], any underwriter, the eligible lender trustee,
the indenture trustee, the master servicer, the administrator, or any provider
of credit support or any of their affiliates is a Party in Interest with respect
to that Plan and, if so, whether the 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 the 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 the investment is permitted under the Plan's
governing instruments.
THE CERTIFICATES
Unless otherwise specified in the prospectus supplement, no
certificates of any series may be purchased by a Plan or by any entity whose
underlying assets include Plan assets by reason of a plan's investment in that
entity (each, a "Benefit Plan"). The purchase of an equity interest in a trust
will result in the assets of that trust being deemed assets of a Benefit Plan
for the purposes of ERISA and the Code and certain transactions involving the
trust may 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 the Code.
By its acceptance of a certificate, each certificateholder will be
deemed to have represented and warranted that it is not a Benefit Plan.
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If a given series of certificates may be acquired by a Benefit Plan
because of the application of an exception contained in a regulation or
administrative exemption issued by the United States Department of Labor, the
exception will be discussed in the related prospectus supplement.
* * *
A Plan fiduciary considering the purchase of the 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.
AVAILABLE INFORMATION
The seller has filed with the SEC a registration statement for the
securities (together with all amendments and related exhibits, the "Registration
Statement") under the Securities Act of 1933, as amended. This prospectus and
the accompanying prospectus supplement, both of which form part of the
Registration Statement, do not contain all the information contained in the
Registration Statement. For further information, you may inspect and copy the
Registration Statement at the public reference facilities maintained by the SEC
at
- 450 Fifth Street, N.W., Washington, D.C. 20549;
and at the SEC's regional offices at
- Seven World Trade Center, Suite 1300, New York, New York
10048; and
- 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
In addition, copies of the Registration Statement may be obtained from the
Public Reference Branch of the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549 upon payment of certain prescribed fees.
You may obtain information on the operation of the SEC's public
reference facilities by calling the SEC at 1-800-732-0330. In addition, the
Registration Statement may be accessed electronically through the SEC's
Electronic Data Gathering, Analysis and Retrieval system at the SEC's World Wide
Website located at HTTP://WWW.SEC.GOV.
REPORTS TO SECURITYHOLDERS
Unless definitive securities are issued for an series of securities,
periodic unaudited reports as described in the related prospectus supplement
containing information concerning the student loans in the related trust will be
prepared by the administrator on behalf of the trust and sent only to Cede &
Co., as nominee of DTC and registered holder of the securities. Reports will not
be sent to any beneficial holder of the securities. The reports will not
constitute financial statements prepared under generally accepted accounting
principles. See "Description of the Notes -- Book-entry Registration".
The master servicer will file with the SEC such periodic reports as are
required under the Securities Exchange Act of 1934, as amended, and the related
rules and regulations. Each trust intends to suspend the filing of reports under
the Exchange, when and if filing is no longer required.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by or for a trust, pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, after the date of this prospectus and before the termination of the
offering of any series of securities shall be deemed to be incorporated by
reference into this prospectus. Any statement contained in this prospectus or in
a document incorporated or deemed to be incorporated by reference shall be
deemed to be modified or superseded for purposes of this prospectus to the
extent that a statement contained in this prospectus or in any subsequently
filed document that also is or is deemed to be incorporated by reference in this
prospectus modifies or supersedes that statement. Any such statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus.
The administrator will provide without charge to each person to whom a
copy of this prospectus is delivered, on the written or oral request of that
person, a copy of any or all of the documents incorporated in this prospectus by
reference, except the exhibits to such documents (unless the exhibits are
specifically incorporated by reference). Written requests for such copies should
be directed to Nellie Mae Education Loan Corporation, 1240 Pawtucket Avenue,
Rumford, Rhode Island 02916, Attention: Mary Jo Feldman. Telephone requests for
such copies should be directed to (401) 438-4500.
PLAN OF DISTRIBUTION
The seller and the underwriters named in each prospectus supplement
will enter into an underwriting agreement for the notes of the related series
and an underwriting agreement for the certificates of that series. Under the
terms of the underwriting agreements, the seller will agree to cause the related
trust to sell to the underwriters, and each of the 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 in the agreements and in the
prospectus supplement.
In each of the underwriting agreements with respect to any given series
of securities, the several underwriters will agree, subject to the applicable
terms and conditions, to purchase all the notes and certificates, as the case
may be, which are described in the agreements and offered by this prospectus and
the related prospectus supplement if any of 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 will be
offered to the public and any concessions that may be offered
to certain dealers participating in the offering of the notes
and certificates, as the case may be; or
(ii) specify that the 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
sale. After the initial public offering of any the notes and
certificates, as the case may be, the public offering prices
and concessions may be changed.
Until the distribution of the securities is completed, SEC rules 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. These consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the securities.
69
<PAGE>
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 those 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 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 seller nor the underwriters make any representation that the underwriters
will engage in those transactions or that those transactions, once commenced,
will not be discontinued without notice.
Each underwriting agreement will provide that the seller will indemnify
the underwriters against certain civil liabilities, including liabilities under
the Securities Act of 1933, as amended, or contribute to the payments that the
several underwriters may be required to make.
Each trust may, from time to time, invest the funds in its Issuer
Accounts in eligible investments acquired from the underwriters.
Under 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 agreement will be conditioned on the closing of the sale of all the
other classes subject to either agreement.
The place and time of delivery of the securities for which this
prospectus is delivered will be set forth in the related prospectus supplement.
LEGAL MATTERS
Ann M. O'Rourke, General Counsel of Nellie Mae, will pass upon certain
legal matters relating to the securities of each series for the related trust,
the seller, the master servicer and the administrator. As of the date of this
prospectus, Ms. O'Rourke has an aggregate ownership interest in the total equity
of Nellie Mae Corporation (common and preferred stock on an as-converted basis),
including equity underlying options, in an amount that is less than 0.25% of
that total equity.
Brown & Wood LLP will pass upon certain federal income tax matters on
behalf of each trust and upon certain legal matters relating to the securities
of each series for the underwriters. From time to time, Brown & Wood LLP has
provided and expects to continue to provide legal services to Nellie Mae
Corporation and its affiliates.
70
<PAGE>
INDEX OF PRINCIPAL TERMS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Act...............................................................................................................6
Additional Fundings..............................................................................................44
Add-on Consolidation Loans.......................................................................................19
Administration Fee...............................................................................................54
Administrator Default............................................................................................54
Benefit Plan.....................................................................................................67
Certificate Pool Factor..........................................................................................31
Collection Account...............................................................................................45
Debt Securities..................................................................................................57
Department........................................................................................................7
Depository.......................................................................................................31
Distribution Date................................................................................................32
DTC..............................................................................................................31
DTC Rules........................................................................................................41
Eligible Deposit Account.........................................................................................45
Eligible Institution.............................................................................................46
Equity Securities................................................................................................57
ERISA............................................................................................................66
Federal Assistance...............................................................................................13
Federal Consolidation Loan.......................................................................................10
Federal PLUS Loans...............................................................................................10
Federal SLS Loans................................................................................................10
Federal Stafford Loans...........................................................................................10
Federal Supplemental Loans to Students...........................................................................10
Federal Tax Counsel..............................................................................................56
Federal Unsubsidized Stafford Loans..............................................................................10
FFELP.............................................................................................................7
FFELP Loans.......................................................................................................6
fixed rate securities............................................................................................39
floating rate securities.........................................................................................39
Forbearance Period...............................................................................................16
Index Shortfall Carryover........................................................................................34
Indirect Participants............................................................................................40
Insolvency Event.................................................................................................51
Interest Subsidy Payments........................................................................................13
Investment Earnings..............................................................................................45
IRS..............................................................................................................56
Issuer Accounts..................................................................................................45
Master Servicer Default..........................................................................................51
NEELMC............................................................................................................6
Nellie Mae........................................................................................................6
New Withholding Regulations......................................................................................59
NMELC.............................................................................................................6
Note Pool Factor.................................................................................................31
OID..............................................................................................................57
OID regulations..................................................................................................57
</TABLE>
71
<PAGE>
<TABLE>
<S> <C>
Participants.....................................................................................................40
Parties in Interest..............................................................................................66
Plans............................................................................................................66
Pool Factor......................................................................................................31
PTCE.............................................................................................................67
Purchase Amount..................................................................................................44
Related Documents................................................................................................37
Reserve Account..................................................................................................49
Seller............................................................................................................6
Servicing Fee....................................................................................................48
Short-Term Security..............................................................................................58
Spread...........................................................................................................40
Spread Multiplier................................................................................................40
UCC..............................................................................................................40
Unmet Need.......................................................................................................11
</TABLE>
72
<PAGE>
Nellie Mae Student Loan
Trust 1999-A
$
-----------
Class A-1 Floating Rate
Asset-Backed Senior Notes
$
-----------
Class A-2 Floating Rate
Asset-Backed Senior Notes
Nellie Mae Education
Loan Corporation
Nellie Mae Corporation
Master Servicer
PROSPECTUS SUPPLEMENT
[Names of Underwriters]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses in connection
with the offering of $1,000,000 of the Asset-Backed Notes and Asset-Backed
Certificates under this Registration Statement, other than underwriting
discounts and commissions:
<TABLE>
<S> <C>
SEC registration fee.............................. $ 278
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........................... $ *
-------
-------
</TABLE>
- -----------------------
* To be provided by amendment
Item 15. Indemnification of Directors and Officers.
The By-Laws of Nellie Mae Education Loan Corporation specify that
Nellie Mae Education Loan Corporation shall indemnify 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 Corporation) by
reason of the fact that he or she is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of 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 or her in connection with such action, suit or proceeding if he
or she acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceedings, had no reasonable cause to believe his or
her 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 or she reasonably believed to be
in or not opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that his or
her conduct was unlawful.
The By-Laws of Nellie Mae Education Loan Corporation further specify
that Nellie Mae Education Loan Corporation shall indemnify any person who was or
is a party or is threatened to
II-1
<PAGE>
be made a party to any threatened, pending or completed action or sit by or in
the right of the Corporation to procure a judgment in its favor by reason of the
fact that he or she is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him or her in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
or she reasonably believed to be in or not opposed to the best interests of the
Corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery of the State of Delaware or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery of the State of Delaware or such other court shall deem proper.
Item 16. Exhibits.
1.1 Form of underwriting agreement for notes*
1.2 Form of underwriting agreement for certificates*
3.1 Certificate of Incorporation of the Registrant*
3.2 By-laws of the Registrant*
3.3 Form of certificate of trust (to be included as an exhibit to
Exhibit 4.2)*
4.1 Form of indenture between the trust and the indenture trustee
(including a form of note as an exhibit to the indenture)*
4.2 Form of trust agreement among the seller, the trust and the
eligible lender trustee (including a form of certificate as an
exhibit to the trust agreement)*
4.3 Form of note (to be included as an exhibit to Exhibit 4.1)*
4.4 Form of certificate (to be included as an exhibit to
Exhibit 4.2)*
5.1 Opinion of Ann M. O'Rourke, General Counsel of Nellie Mae
Corporation, the corporate parent of the Registrant, as to the
legality of the notes and certificates*
8.1 Opinion of Brown & Wood LLP with respect to certain tax
matters*
23.1 Consent of Ann M. O'Rourke (included as part of 5.1)*
23.2 Consent of Brown & Wood LLP (included as part of 8.1)*
II-2
<PAGE>
24.1 Powers of Attorney (included on page II-6 of this Registration
Statement)
25.1 Statement of eligibility of the indenture trustee under the
Trust Indenture Act of 1939 *
99.1 Form of loan sale agreement among the seller, the trust and
the eligible lender trustee*
99.2 Form of loan servicing agreement among the master servicer,
the trust and the eligible lender trustee*
99.3 Form of administration agreement among the trust, the
indenture trustee and the Registrant, as administrator*
- -----------------------
*To be provided 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 the
aggregate, represent a fundamental change in the
information set forth in this Registration Statement;
and
(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
II-3
<PAGE>
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 HEREIN 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) AS TO THE INDENTURES:
The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreements, Notes and
Certificates in such denominations and registered in such names as required by
the underwriters 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) AS TO LIABILITY:
(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) under the Act shall be deemed to be part of this Registration Statement as
of the time it was declared effective.
II-4
<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) AS TO THE INDENTURE TRUSTEE:
To file an application for the purpose of determining the eligibility
of the indenture trustee to act under subsection (a) of Section 310 of the Trust
Indenture Act of 1939, as amended, in accordance with the rules and regulations
prescribed by the Commission under Section 305(b)(2) of the Trust Indenture Act
of 1939, as amended.
II-5
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements (including, without limitation, the security rating
requirement at time of sale) for filing on Form S-3 and has duly caused this
Registration Statement on Form S-3 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Rumford, State of Rhode
Island, on the 18th day of May, 1999.
NELLIE MAE EDUCATION LOAN CORPORATION
(Registrant)
By: /s/ Lawrence W. O'Toole
-------------------------------
Name: Lawrence W. O'Toole
Title: President
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
Lawrence W. O'Toole, John F. Remondi and Ann M. O'Rourke, and each of them, his
true and lawful attorneys-in-fact and agents, acting together or alone, with
full powers of substitution and resubstitution, for him and in his name, place
and stead, to sign any or all amendments to this Registration Statement
(including any pre-effective or post-effective amendment), and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, acting together or alone, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, acting together or alone, or other substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement on Form S-3 has been signed by the following persons
in the capacities indicated.
SIGNATURE CAPACITY DATE
/s/Lawrence W. O'Toole President (and chief executive May 18, 1999
- ---------------------- officer), Director
Lawrence W. O'Toole
/s/John F. Remondi Treasurer (chief financial officer May 18, 1999
- ------------------ and chief accounting officer),
John F. Remondi Director
II-6
