<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 21, 1997
REGISTRATION NO. 333-23243
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------
USA GROUP SECONDARY MARKET SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 35-1872185
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
30 SOUTH MERIDIAN STREET
INDIANAPOLIS, INDIANA 46204-3503
(317) 951-5640
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
EDWARD R. SCHMIDT, ESQ.
GENERAL COUNSEL
USA GROUP SECONDARY MARKET SERVICES, INC.
30 SOUTH MERIDIAN STREET
INDIANAPOLIS, INDIANA 46204-3503
(317) 951-5123
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
TIMOTHY M. HARDEN, ESQ. DANIEL M. ROSSNER, ESQ.
KRIEG DEVAULT ALEXANDER BROWN & WOOD LLP
& CAPEHART ONE WORLD TRADE CENTER
ONE INDIANA SQUARE NEW YORK, NEW YORK 10048-0557
INDIANAPOLIS, INDIANA 46204
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this Registration Statement becomes effective as determined by
market conditions.
---------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act Registration Statement Number of the earlier
effective Registration Statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
Registration Statement Number of the earlier effective Registration Statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE(2)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset-Backed Notes and Asset-Backed
Certificates (collectively "Asset-
Backed Securities")................... $1,500,363,000 100.00% $1,500,363,000 $454,655.45
</TABLE>
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- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee.
(2) $125.00 of this Registration Fee was paid upon the initial filing.
---------------
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 PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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- -------------------------------------------------------------------------------
Pursuant to Rule 429 under the Securities Act of 1933, as amended, the
prospectus included in this Registration Statement also relates to
$117,326,000 in Asset-Backed Securities previously registered under the
Registrant's Registration Statement No. 333-2440 with respect to which a
Registration Fee of $35,553.33 was paid.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED WITHOUT THE DELIVERY OF A FINAL PROSPECTUS +
+SUPPLEMENT AND ACCOMPANYING PROSPECTUS. THIS PROSPECTUS SUPPLEMENT AND THE +
+ACCOMPANYING PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE +
+SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 21, 1997
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED , 1997
SMS Student Loan Trust 1997-A
$ Floating Rate Asset Backed Senior Notes
--------
USA GROUP SECONDARY MARKET SERVICES, INC.
Seller
--------
The SMS Student Loan Trust 1997-A (the "Trust") will issue $ aggregate
principal amount of Floating Rate Asset Backed Senior Notes (the "Senior
Notes") and $ aggregate principal amount of Floating Rate Asset Backed
Subordinate Notes (the "Subordinate Notes" and, together with the Senior
Notes, the "Notes"). Only the Senior Notes are offered hereby. The assets of
the Trust will include a pool of guaranteed education loans to students and
parents of students purchased by The First National Bank of Chicago, as
eligible lender trustee on behalf of the Trust (the "Eligible Lender
Trustee"), from USA Group Secondary Market Services, Inc. (the "Seller")
(such loans, together with any Additional Student Loans acquired from the
Seller or originated from time to time by the Eligible Lender Trustee on
behalf of the Trust, the "Financed Student Loans"), collections and other
payments with respect to the Financed Student Loans, and monies on deposit
in certain trust accounts (including the Collection Account, the Reserve
Account and the Collateral Reinvestment Account). The Notes will be
collateralized by the assets of the Trust. The rights of the Subordinate
Noteholders to receive payments of interest will be subordinate to the
rights of the Senior Noteholders to receive payments of interest and the
rights of the Subordinate Noteholders to receive payments of principal
will be subordinate to the rights of the Senior Noteholders to receive
payments of interest and principal to the extent described herein. After
the Closing Date, certain Additional Fundings will be made from time to
time during the Revolving Period described herein, and in certain cases
after the Revolving Period, by or on behalf of the Trust, as described
herein.
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK
FACTORS" HEREIN AT PAGE S-21 AND IN THE ACCOMPANYING PROSPECTUS AT PAGE 14.
(Continued on following page)
--------
THE NOTES REPRESENT OBLIGATIONS OF THE TRUST ONLY AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF THE SELLER, THE SERVICER OR ANY AFFILIATE
THEREOF. THE NOTES ARE NOT GUARANTEED OR INSURED BY ANY GOVERNMENTAL
AGENCY.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECU-
RITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPEC-
TUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------
<TABLE>
<CAPTION>
Price to the Underwriting Proceeds to the
Public(1) Discount Seller(1)(2)
------------ ------------ ---------------
<S> <C> <C> <C>
Per Senior Note............................ % % %
Total...................................... $ $ $
</TABLE>
(1) Plus accrued interest, if any, from , 1997.
(2) Before deducting expenses payable by the Seller, estimated at $281,035.
--------
The Senior Notes are offered by the several Underwriters when and if issued
by the Trust, delivered and accepted by them and subject to their respective
rights to reject orders in whole or in part. It is expected that delivery of
the Senior Notes in book-entry form will be made through the facilities of The
Depository Trust Company on the Same Day Funds Settlement System and Cedel
Bank, societe anonyme, and the Euroclear System on or about , 1997.
CREDIT SUISSE FIRST BOSTON
MORGAN STANLEY & CO.
INCORPORATED
PAINEWEBBER INCORPORATED
SMITH BARNEY INC.
The date of this Prospectus Supplement is , 1997.
<PAGE>
(Continued from preceding page)
The per annum rate of interest on the Notes for each Quarterly Interest Period
will, subject to certain limitations described herein, be equal to the T-
Bill Rate (determined as described herein) plus % with respect to the
Senior Notes and plus % with respect to the Subordinate Notes.
Interest and principal on the Notes will be payable quarterly on or
about each January 27, April 27, July 27 and October 27 of each year
(or, if such day is not a business day, on the next succeeding
business day), commencing July 28, 1997 (each, a "Quarterly
Payment Date"); provided, that no principal payments will be made
on the Notes until after the end of the Revolving Period (as
defined herein); and provided, further, that no principal
payments on the Subordinate Notes will be made until the
Senior Notes are paid in full.
The final maturity date for the Senior Notes will be the Quarterly
Payment Date and the final maturity date for the Subordinate Notes will be
the Quarterly Payment Date. However, payment in full of the Notes
could occur other than on such dates as described herein. In addition, the
outstanding Notes will be redeemed on any Quarterly Payment Date on which
Secondary Market Company, Inc., a limited purpose corporation which is
an affiliate of the Seller (the "Company"), or an assignee of the
Company, exercises its option to purchase the Financed Student
Loans, exercisable when the aggregate principal balance of the
Financed Student Loans is reduced to 20% or less of the initial
aggregate principal balance of the Notes.
USA Group Loan Services, Inc., a Delaware corporation ("Loan Services"), will
service all the Financed Student Loans. The Financed Student Loans will
include loans guaranteed to the extent described herein by United Student
Aid Funds, Inc. ("USA Funds"), a Delaware non-profit corporation or Iowa
College Student Aid Commission ("ICSAC") an Iowa state agency (each of USA
Funds and ICSAC, an "Initial Guarantor," and, collectively, the "Initial
Guarantors"), and may include loans guaranteed to the extent described
herein by other Federal Guarantors, which are in each case reinsured to
the extent described herein by the United States Department of
Education (the "Department").
------------
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE SENIOR NOTES. ADDITIONAL INFORMATION IS CONTAINED IN THE
PROSPECTUS, AND PROSPECTIVE INVESTORS ARE URGED TO READ BOTH THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE SENIOR
NOTES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
Certain persons participating in this Offering may engage in transactions
that stabilize, maintain, or otherwise affect the price of the
Senior Notes. Such transactions may include stabilizing, the
purchase of Senior Notes to cover syndicate short
positions and the imposition of penalty bids. For a
description of these activities, see
"Underwriting."
------------
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. ("Cede"), as nominee of The Depository Trust Company ("DTC") and registered
holder of the Senior Notes. Such reports will not constitute financial
statements prepared in accordance with generally accepted accounting
principles. See "Certain Information Regarding the Securities--Book-Entry
Registration" and "--Reports to Securityholders" in the Prospectus. The Trust
will file with the Commission such periodic reports as are required under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations of the Commission thereunder.
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus. Certain
capitalized terms used herein are defined elsewhere in this Prospectus
Supplement on the pages indicated in the "Index of Principal Terms" or, to the
extent not defined herein, have the meanings assigned to such terms in the
Prospectus.
Issuer.................. SMS Student Loan Trust 1997-A (the "Trust").
Securities Offered......
Floating Rate Asset Backed Senior Notes (the "Senior
Notes") in the aggregate principal amount of $ .
Persons acquiring beneficial ownership interests in
the Senior Notes will hold their interests in the
Senior Notes through The Depository Trust Company
("DTC") in the United States or in Europe, through
Cedel Bank, societe anonyme ("CEDEL"), or the
Euroclear System ("Euroclear"). Transfers within
DTC, CEDEL or Euroclear, as the case may be, will be
made in accordance with the usual rules and operat-
ing procedures of the relevant system. Cross-market
transfers between persons holding directly or indi-
rectly through DTC, on the one hand, and
counterparties holding directly or indirectly
through CEDEL or Euroclear, on the other, will be
effected in DTC through Citibank, N.A. ("Citibank")
or Morgan Guaranty Trust Company of New York ("Mor-
gan"), the relevant depositaries (collectively, the
"Depositaries") of CEDEL or Euroclear, respectively,
and each a participating member of DTC. See "De-
scription of the Notes--Book-Entry Registration"
herein.
Securities Other Than
the Securities
Offered................
In addition to the Senior Notes, the Trust will issue
Floating Rate Asset Backed Subordinate Notes (the
"Subordinate Notes" and, together with the Senior
Notes, the "Notes") in the aggregate principal
amount of $ . The Subordinate Notes are not of-
fered hereby and the information herein with respect
thereto is provided only to permit a better under-
standing of the Senior Notes.
Seller..................
USA Group Secondary Market Services, Inc., a Delaware
corporation ("SMS"), as seller (the "Seller"). SMS
is an affiliate of the Servicer, USA Funds, USA
Group Guarantee Services, Inc. ("USA Group Guarantee
Services") and USA Group, Inc. See "USA Group, SMS,
the Seller and the Servicer" in the Prospectus. Be-
cause the Seller is not eligible to hold legal title
to Federal Student Loans, NBD Bank, N.A., as trustee
for SMS ("NBD"), holds legal title to Federal Stu-
dent Loans on behalf of the Seller pursuant to a
Trust Agreement, dated as of February 24, 1993, be-
tween NBD and the Seller (the "NBD Trust Agree-
ment"). References to the "Seller" herein include
NBD, or, with respect to Additional Student Loans,
any other eligible lender acting in such capacity
for SMS, for all purposes involving the holding or
transfer of legal title to the Financed Student
Loans.
Servicer................
USA Group Loan Services, Inc., a Delaware non-profit
corporation, as servicer (the "Servicer" or "Loan
Services") pursuant to a Servicing
S-3
<PAGE>
Agreement to be dated as of April 1, 1997 (as
amended and supplemented from time to time, the
"Servicing Agreement") among the Trust, the
Servicer, the Seller and the Eligible Lender Trust-
ee. Loan Services is an affiliate of SMS, USA Funds,
USA Group Guarantee Services and USA Group, Inc. See
"USA Group, SMS, the Seller and the Servicer" in the
Prospectus.
Eligible Lender The First National Bank of Chicago, a national bank-
Trustee................ ing association, as trustee under the Trust Agree-
ment and holder of legal title to the Financed Stu-
dent Loans on behalf of the Trust (the "Eligible
Lender Trustee"). See "Formation of the Trust"
herein and "Formation of the Trusts--Eligible Lender
Trustee" in the Prospectus.
Indenture Trustee....... Bankers Trust Company, a New York banking corporation
(the "Indenture Trustee"), as trustee under the In-
denture.
Administrator...........
SMS, as administrator (the "Administrator") on behalf
of the Trust, pursuant to an Administration Agree-
ment to be dated as of April 1, 1997 (as amended and
supplemented from time to time, the "Administration
Agreement"), among the Administrator, the Trust and
the Indenture Trustee.
The Trust...............
The Trust will be established under the laws of Dela-
ware by a Trust Agreement to be dated as of April 1,
1997 (as amended and supplemented from time to time,
the "Trust Agreement"), among the Seller, Secondary
Market Company, Inc. (the "Company"), a limited pur-
pose Delaware corporation which is an affiliate of
the Seller, and the Eligible Lender Trustee. The ac-
tivities of the Trust and the Eligible Lender
Trustee are limited by the terms of the Trust Agree-
ment to acquiring, originating, owning and managing
the Financed Student Loans and the other assets of
the Trust as described herein, issuing the Notes,
making payments thereon and other activities related
thereto.
Assets of the Trust..... The assets of the Trust will include the following:
A. Financed Student
Loans.............. The Financed Student Loans will consist of certain
guaranteed education loans to students and parents
of students made under the Federal Family Education
Loan Program ("Student Loans") and will include
rights to receive payments made with respect to such
Financed Student Loans and the proceeds thereof. On
or prior to , 1997 (the "Closing Date"), the
Seller will sell Student Loans (the "Initial Fi-
nanced Student Loans") having an aggregate principal
balance of approximately $ (the "Initial Pool
Balance") as of April 7, 1997 (the "Cutoff Date"),
to the Eligible Lender Trustee on behalf of the
Trust pursuant to a Loan Sale Agreement to be dated
as of April 1, 1997 (as amended and supplemented
from time to time, the "Loan Sale Agreement"), among
the Seller, the Trust and the Eligible Lender Trust-
ee. Prior to their sale to the Trust, the Initial
Financed Student Loans will be held in trust for the
Seller by NBD, pursuant to the NBD Trust Agreement.
Following the Closing Date and during the Revolving
Period (described below), and in the case
S-4
<PAGE>
of Serial Loans (described below) continuing after
the Revolving Period, it is anticipated that, sub-
ject to certain conditions described herein, addi-
tional Student Loans (the "Additional Student
Loans," and together with the Initial Financed Stu-
dent Loans, the "Financed Student Loans") will be
acquired or originated by the Trust, as described
below.
The Initial Financed Student Loans are guaranteed to
the extent described herein as to the payment of
principal and interest by United Student Aid Funds,
Inc., a Delaware non-profit corporation ("USA
Funds"), or Iowa College Student Aid Commission
("ICSAC"), a Iowa State Agency (each of USA Funds
and ICSAC, an "Initial Guarantor" and, collectively,
the "Initial Guarantors"), which are in each case
reinsured to the extent described herein by the
United States Department of Education (the "Depart-
ment"). USA Funds is an affiliate of SMS, the
Servicer, USA Group, Inc. and USA Group Guarantee
Services. USA Group Guarantee Services, an affiliate
of SMS, provides varying degrees of services to sev-
eral Federal Guarantors, including ICSAC. An Addi-
tional Student Loan may be guaranteed, to the extent
described herein, by a Federal Guarantor other than
an Initial Guarantor (each an "Additional Guaran-
tor", collectively, the "Additional Guarantors" and,
together with the Initial Guarantors, the "Guaran-
tors") provided certain conditions are met. See "The
Financed Student Loan Pool--Guarantee of Financed
Student Loans". Financed Student Loans made before
October 1, 1993 are 100% guaranteed by a Guarantor,
and reinsured against default up to a maximum of
100% of Guarantee Payments. Financed Student Loans
made on or after October 1, 1993 are 98% guaranteed
by a Guarantor, and reinsured against default by the
Department up to a maximum of 98% of Guarantee Pay-
ments. All references herein to the guarantee and
reinsurance coverage with respect to the Financed
Student Loans should be understood to mean such 100%
guarantee, and 100% maximum reinsurance coverage,
respectively, with respect to Financed Student Loans
made before October 1, 1993 and 98% guarantee and
98% maximum reinsurance coverage, respectively, with
respect to Financed Student Loans made on or after
October 1, 1993.
As of the Cutoff Date, the weighted average interest
rate per annum with respect to the Initial Financed
Student Loans was approximately % (based on the
applicable interest rates as of the Cutoff Date),
the weighted average remaining term to maturity (ex-
clusive of any future deferral or forbearance peri-
ods and assuming expected graduation dates and typi-
cal grace periods) of the Initial Financed Student
Loans was approximately months and the weighted
average original term to maturity (exclusive of any
future deferral or forbearance periods) of the Ini-
tial Financed Student Loans was approximately
months. As of the Cutoff Date, approximately %,
%, % and % of the outstanding principal
balance of the Initial Financed Student Loans con-
sisted of Stafford Loans, SLS Loans, PLUS Loans and
Federal Consolidation Loans, respectively. As of the
Cutoff Date approximately % by principal balance
of the Initial Financed Student Loans are guaranteed
by USA Funds
S-5
<PAGE>
and % by principal balance of the Initial Fi-
nanced Student Loans are guaranteed by ICSAC, and
all of the Financed Student Loans are reinsured by
the Department, in each case, to the extent de-
scribed herein. See "The Financed Student Loan Pool"
herein.
During the period (the "Revolving Period") from the
Closing Date until the first to occur of (i) an
Early Amortization Event as described herein under
"Description of the Transfer and Servicing Agree-
ments--Revolving Period and Additional Fundings" or
(ii) the last day of the Collection Period preceding
the October 2000 Quarterly Payment Date, the Eligi-
ble Lender Trustee on behalf of the Trust will be
obligated from time to time, subject to certain con-
ditions described herein, to purchase from the Sell-
er, and the Seller, subject to the availability
thereof and to the availability of funds therefor in
the Collateral Reinvestment Account, will be obli-
gated to tender to the Trust, Federal Student Loans
which (i) are made to a borrower who is not a bor-
rower under any Financed Student Loan, (ii) are made
under loan programs which existed as of the Closing
Date, and (iii) are guaranteed by a Guarantor (each
a "New Loan," and collectively the "New Loans").
"Collection Period" means each period of three cal-
endar months from and including the date next fol-
lowing 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
June 30, 1997). New Loans will be made or acquired
by NBD or another eligible lender on behalf of the
Seller at the discretion and in accordance with
usual practices of the Seller. Each such purchase of
a New Loan will be made by the Eligible Lender
Trustee on behalf of the Trust pursuant to a trans-
fer agreement (each a "Transfer Agreement") between
the Seller, the Trust and the Eligible Lender Trust-
ee. During the Revolving Period, each purchase of a
New Loan will be funded by means of a transfer from
the Collateral Reinvestment Account of an amount
equal to the sum of (i) the principal balance owed
by the applicable borrower thereon plus accrued in-
terest thereon expected to be capitalized upon re-
payment (the "Purchase Collateral Balance") and (ii)
an additional amount not to exceed 2.5% of the prin-
cipal balance owed by the applicable borrower
thereon (the "Purchase Premium Amount" and together
with the Purchase Collateral Balance, the "Loan Pur-
chase Amount"). The purchase of New Loans by the
Trust will be subject to the availability of funds
therefor in the Collateral Reinvestment Account.
Following the end of the Revolving Period, New Loans
may not be purchased by the Trust. See "Description
of the Transfer and Servicing Agreements--Revolving
Period and Additional Fundings" herein.
In addition, following the Closing Date and both dur-
ing and subsequent to the Revolving Period, the Eli-
gible Lender Trustee on behalf of the Trust will be
obligated from time to time, subject to certain con-
ditions described under "The Financed Student Loan
Pool" and "Description of the Transfer and Servicing
Agreements--Revolving Period and Additional
Fundings" herein, to purchase from the Seller, sub-
ject to the availability thereof, Federal Student
Loans which (i) are made
S-6
<PAGE>
to a borrower who is also a borrower under at least
one outstanding Financed Student Loan, (ii) are made
under the same loan program as such Financed Student
Loan, and (iii) are guaranteed by the Guarantor that
guaranteed such Financed Student Loan (each a "Se-
rial Loan," and collectively the "Serial Loans").
Serial Loans will be made or acquired by NBD or an-
other eligible lender on behalf of the Seller at the
discretion and in accordance with usual business
practices of the Seller. Each such purchase of a Se-
rial Loan will be made by the Eligible Lender
Trustee on behalf of the Trust pursuant to a Trans-
fer Agreement. During the Revolving Period, each
purchase of a Serial Loan will be funded by means of
a transfer from the Collateral Reinvestment Account
of an amount equal to the Loan Purchase Amount of
such loan. Following the end of the Revolving Peri-
od, the Purchase Collateral Balance for such pur-
chases will be funded by amounts representing dis-
tributions of principal on the outstanding Financed
Student Loans which would otherwise have been part
of the Available Funds of the Trust, as described
under "Description of the Transfer and Servicing
Agreements--Distributions" herein and the Purchase
Premium Amounts for such purchases will be funded on
the next succeeding Quarterly Payment Date from
amounts, if any, on deposit in the Reserve Account
in excess of the Specified Reserve Account Balance
as described under "Description of the Transfer and
Servicing Agreements--Credit Enhancement--Reserve
Account" herein. Alternatively, at the Seller's op-
tion, following the end of the Revolving Period, the
Eligible Lender Trustee will, in lieu of purchasing
Serial Loans as described above, be obligated to ex-
change with the Seller existing Financed Student
Loans owned by the Trust for Serial Loans owned by
the Seller, provided such Serial Loans and Financed
Student Loans meet certain criteria described here-
in. See "Description of the Transfer and Servicing
Agreements--Revolving Period and Additional
Fundings" herein.
In addition, following the Closing Date and prior to
the end of the Revolving Period, in the event that a
borrower on a Financed Student Loan who is also a
borrower under one or more Federal Student Loans
(whether or not all such loans are in the Trust)
elects to consolidate such loans, the Eligible
Lender Trustee on behalf of the Trust will seek to
originate Federal Consolidation Loans pursuant to
the Federal Consolidation Loan Program described in
the Prospectus under "Federal Family Education Loan
Program--Federal Consolidation Loan Program". Any
such origination by the Eligible Lender Trustee on
behalf of the Trust will be funded by means of a
transfer from the Collateral Reinvestment Account of
the amount required to repay in full any Student
Loans not held by the Trust that are being dis-
charged in the consolidation process, which amount
will be paid by the Eligible Lender Trustee on be-
half of the Trust to the holder or holders of such
Student Loans to prepay such loans. No assurance can
be given that the Eligible Lender Trustee, rather
than another lender, will be the lender which makes
such Federal Consolidation Loan. In the event that
another lender makes such Federal Consoli-
S-7
<PAGE>
dation Loan, any Financed Student Loan which is be-
ing consolidated by such Federal Consolidation Loan
will be prepaid.
As described under "The Federal Family Education Loan
Program--Federal Consolidation Loan Program" in the
Prospectus, borrowers may consolidate additional
Student Loans ("Add-on Consolidation Loans") with an
existing Federal Consolidation Loan within 180 days
from the date that the existing Federal
Consolidation Loan was made. As a result of the
addition of any Add-on Consolidation Loans, the
related Federal Consolidation Loan may, in certain
cases, have a different interest rate and a
different loan term. Any Add-on Consolidation Loans
added to a Federal Consolidation Loan in the Trust
during the Revolving Period will be funded by means
of a transfer from the Collateral Reinvestment
Account of the amount required to repay in full any
Student Loans not held by the Trust that are being
discharged in the consolidation process, which
amount will be paid by the Eligible Lender Trustee
on behalf of the Trust to the holder or holders of
such Student Loans to prepay such loans. For a
maximum period of 210 days following the end of the
Revolving Period (30 days being attributed to the
processing of any such Add-on Consolidation Loans),
such amounts will be funded by amounts representing
distributions of principal on the outstanding
Financed Student Loans which would otherwise have
been part of the Available Funds of the Trust, as
described under "Description of the Transfer and
Servicing Agreements--Distributions" herein.
The Eligible Lender Trustee will not be permitted to
originate Federal Consolidation Loans (including the
addition of any Add-on Consolidation Loans) on
behalf of the Trust during the Revolving Period in
an aggregate principal amount in excess of
$ ; additionally, no Federal Consolidation
Loan may be originated by the Trust having a
scheduled maturity date after if at the time
of such origination the aggregate principal amount
of all Federal Consolidation Loans held by the Trust
that have a scheduled maturity date after
exceeds or, after giving effect to such origination,
would exceed $ ; provided, however, that
the Eligible Lender Trustee will be permitted to
fund the addition of Add-on Consolidation Loans in
excess of such amounts, as required by the Act.
After the Revolving Period, the Eligible Lender
Trustee on behalf of the Trust will cease to
originate Federal Consolidation Loans, and any
Federal Consolidation Loan made with respect to a
Financed Student Loan will be made by another
lender, thereby resulting in a prepayment of such
loan; provided, however, for a maximum period of 210
days following the end of the Revolving Period, the
Eligible Lender Trustee may be required to increase
the principal balance of Federal Consolidation Loans
existing in the Trust by the addition of Add-on
Consolidation Loans.
As described under "The Federal Family Education Loan
Program" in the Prospectus, during certain qualify-
ing periods, interest on certain
S-8
<PAGE>
of the Financed Student Loans is not required to be
paid currently, but instead is added to the out-
standing principal balance of the loan at the end of
the qualifying period. In order to minimize the pos-
sibility that the failure to receive current inter-
est payments on such loans during such periods will
result in a shortfall in the amount required to be
distributed on the Notes, amounts on deposit in the
Collateral Reinvestment Account will be transferred
during the Revolving Period to make deposits to the
Collection Account in lieu of current interest pay-
ments on such loans as described herein under "De-
scription of the Transfer and Servicing Agreements--
Revolving Period and Additional Fundings". Following
the end of the Revolving Period, the Collateral Re-
investment Account will cease to be available as a
source to fund such interest payments to Noteholders
and thereafter such payments will be funded through
the application of amounts which would otherwise
have been distributable in respect of the Principal
Distribution Amount for the related Quarterly Pay-
ment Date, as described herein under "Description of
the Transfer and Servicing Agreements--
Distributions".
The application, during the Revolving Period, of
amounts in the Collateral Reinvestment Account (i)
by the Eligible Lender Trustee on behalf of the
Trust to purchase New Loans or Serial Loans, (ii) by
the Eligible Lender Trustee on behalf of the Trust
to fund the origination of Federal Consolidation
Loans, (iii) by the Eligible Lender Trustee on be-
half of the Trust to fund the addition of any Add-on
Consolidation Loans and (iv) by the Trust to make
deposits to the Collection Account in lieu of col-
lections of interest on Financed Student Loans to
the extent such interest is not paid currently but
will be capitalized and added to the principal bal-
ance of the Financed Student Loans, and the applica-
tion, after the end of the Revolving Period, of
amounts representing distributions of principal on
the outstanding Financed Student Loans (i) by the
Eligible Lender Trustee on behalf of the Trust to
purchase Serial Loans, (ii) for a maximum period of
210 days following the end of the Revolving Period
by the Eligible Lender Trustee on behalf of the
Trust to fund the addition of any Add-on Consolida-
tion Loans and (iii) by the Trust to apply amounts
that would otherwise have been distributable in re-
spect of the Principal Distribution Amount for the
related Quarterly Payment Date to payments, in lieu
of collections, of interest on Financed Student
Loans to the extent such interest is not paid cur-
rently but will be capitalized and added to the
principal balance of the Financed Student Loans, is
referred to herein as "Additional Fundings".
B. Collateral
Reinvestment
Account............
During the Revolving Period, an account will be main-
tained in the name of the Indenture Trustee (the
"Collateral Reinvestment Account"). No money will be
on deposit in the Collateral Reinvestment Account on
the Closing Date. During the Revolving Period, de-
posits will be made to the Collateral Reinvestment
Account as described herein under "Description of
the Transfer and Servicing Agreements
S-9
<PAGE>
--Distributions" and withdrawals will be made from
time to time for Additional Fundings in accordance
with the Loan Sale Agreement. Any amount remaining
on deposit in the Collateral Reinvestment Account at
the end of the Revolving Period will be distributed
to Noteholders on the next succeeding Quarterly Pay-
ment Date as a payment of principal. Any such prin-
cipal payments shall be distributed first to the Se-
nior Noteholders until the Senior Notes have been
paid in full, and then to the Subordinate Notehold-
ers until the Subordinate Notes have been paid in
full. See "Description of the Transfer and Servicing
Agreements--Revolving Period and Additional
Fundings" herein.
C. Collection The Servicer will be required to remit all collec-
Account............ tions received with respect to the Financed Student
Loans, and the Eligible Lender Trustee will be re-
quired to remit Interest Subsidy Payments and Spe-
cial Allowance Payments it receives with respect to
the Financed Student Loans, in each case within two
business days of receipt of freely available funds
therefor to one or more accounts in the name of the
Indenture Trustee (the "Collection Account").
Pursuant to the Administration Agreement, the Admin-
istrator will have the power to instruct the Inden-
ture Trustee to withdraw Available Funds on deposit
in the Collection Account and to apply such funds
(a) on any date during the Revolving Period, to the
extent that such funds represent payments in respect
of principal on the Financed Student Loans, to the
Collateral Reinvestment Account for application to
make Additional Fundings, (b) on each Monthly Pay-
ment Date that is not a Quarterly Payment Date to
the following (in the priority indicated): (i) the
Servicing Fee and all overdue Servicing Fees to the
Servicer and (ii) the Administration Fee and all
overdue Administration Fees to the Administrator and
(c) on each Quarterly Payment Date to the following
(in the priority indicated): (i) the Servicing Fee
and all overdue Servicing Fees to the Servicer; (ii)
the Administration Fee and all overdue Administra-
tion Fees to the Administrator; (iii) the Senior
Noteholders' Interest Distribution Amount to the Se-
nior Noteholders; (iv) the Subordinate Noteholders'
Interest Distribution Amount to the Subordinate
Noteholders; (v) if the Revolving Period has termi-
nated, the Senior Noteholders' Principal Distribu-
tion Amount to the Senior Noteholders ; (vi) if the
Revolving Period has terminated and the Senior Notes
have been paid in full, the Subordinate Noteholders'
Principal Distribution Amount to the Subordinate
Noteholders; and (vii) any remaining amounts after
application of clauses (i) through (vi) above, to
the Reserve Account. "Monthly Payment Date" means
the twenty-seventh day of each month (or if any such
date is not a business day, the next succeeding
business day), commencing May 27, 1997.
D. Reserve Account.... Pursuant to the Administration Agreement, an account
in the name of the Indenture Trustee (the "Reserve
Account") will be established and maintained by the
Administrator with the Indenture Trustee and will be
an asset of the Trust. The Seller will make an ini-
tial deposit
S-10
<PAGE>
into the Reserve Account on the Closing Date of cash
or Eligible Investments equal to $ (the
"Reserve Account Initial Deposit"). The Reserve Ac-
count Initial Deposit will be augmented on each
Quarterly Payment Date by the deposit into the Re-
serve Account of any Available Funds for such Quar-
terly Payment Date remaining after making all prior
distributions required to be made from Available
Funds on such date. See "Description of the Transfer
and Servicing Agreements--Distributions" herein.
Amounts in the Reserve Account on any Quarterly Pay-
ment Date (after giving effect to all distributions
required to be made from Available Funds on such
Quarterly Payment Date) in excess of the Specified
Reserve Account Balance for such Quarterly Payment
Date (the "Reserve Account Excess") will be applied
(a) during the Revolving Period, for deposit to the
Collateral Reinvestment Account; provided, however,
if such date is on or after the Parity Date (as de-
fined below), to the extent that such funds repre-
sent payments of interest with respect to the Fi-
nanced Student Loans, such funds shall be applied in
the order of priority set forth in clauses (b)(iii)
through (vi) below, and (b) at and after the termi-
nation of the Revolving Period, to the following (in
the priority indicated): (i) any unpaid Purchase
Premium Amounts for any Serial Loans purchased by
the Trust prior to the end of the related Collection
Period to the Seller; (ii) if such Quarterly Payment
Date is on or prior to the Parity Date, payment of
the unpaid principal amount of the Senior Notes or,
if the Senior Notes have been paid in full, of the
Subordinate Notes, until the aggregate principal
balance of the Notes is equal to the Pool Balance as
of the close of business on the last day of the re-
lated Collection Period; (iii) the aggregate unpaid
amount of Senior Noteholders' Interest T-Bill Carry-
over, if any, to the Senior Noteholders; (iv) the
aggregate unpaid amount of Subordinate Noteholders'
Interest T-Bill Carryover, if any, to the Subordi-
nate Noteholders; (v) the Servicing Fee Shortfall
and all prior unpaid Servicing Fee Shortfalls, if
any, to the Servicer; and (vi) any remaining amounts
after application of clauses (i) through (v) above
will be released to the Company and Noteholders will
have no claim thereto. As of the Closing Date, the
aggregate principal balance of the Notes will equal
approximately % of the Initial Pool Balance.
See "Risk Factors--Excess of Principal Balance of
Notes over Pool Balance" herein. The "Parity Date"
is the first Quarterly Payment Date on which the ag-
gregate principal balance of the Notes, after giving
effect to all distributions on such date, is no
longer in excess of the Pool Balance as of the last
day of the related Collection Period. As described
in the first sentence of this paragraph, if at the
termination of the Revolving Period the Parity Date
has not yet occurred, (i) all Reserve Account Ex-
cess, if any, for each succeeding Quarterly Payment
Date will, after payment to the Seller of any unpaid
Purchase Premium Amounts for any Serial Loans pur-
chased by the Trust prior to the end of the related
Collection Period, be applied to pay principal of
the Notes until the Parity Date, (ii) on the Parity
Date only such portion of the Reserve Account Excess
remaining after payment of any such unpaid Purchase
Premium Amounts as is necessary to reduce the aggre-
gate principal
S-11
<PAGE>
balance of the Notes so that it is equal to the Pool
Balance will be applied to pay principal of the
Notes, and (iii) after the Parity Date no portion of
the Reserve Account Excess will be available to pay
principal of the Notes. Moreover, as further de-
scribed in the first sentence of this paragraph, if
at the termination of the Revolving Period the Par-
ity Date has previously occurred, no portion of Re-
serve Account Excess will at any time be available
to pay principal of the Notes; and regardless of
whether the Parity Date occurs before or after the
termination of the Revolving Period, no funds will
be applied to the payment of any Senior Noteholders'
Interest T-Bill Carryover or Subordinate Notehold-
ers' Interest T-Bill Carryover until the Parity
Date, and on and after the Parity Date application
of funds for such purposes will be subject to the
availability of Reserve Account Excess therefor.
The "Specified Reserve Account Balance" with respect
to any Quarterly Payment Date generally will be
equal to the greater of (i) % of the aggregate
principal balance of the Notes after taking into ac-
count the effect of distributions on such Quarterly
Payment Date, or (ii) $ ; provided, however,
that the Specified Reserve Account Balance shall in
no event exceed the sum of the outstanding principal
balance of the Notes. See "Description of the Trans-
fer and Servicing Agreements--Credit Enhancement--
Reserve Account" herein and "Description of the
Transfer and Servicing Agreements--Credit and Cash
Flow Enhancement--Reserve Account" in the Prospec-
tus.
Amounts on deposit in the Reserve Account will be
available (a) on each Monthly Payment Date that is
not a Quarterly Payment Date, to cover any
shortfalls (in the priority indicated) in payments
for such Monthly Payment Date of: (i) the Servicing
Fee and all overdue Servicing Fees and (ii) the Ad-
ministration Fee and all overdue Administration
Fees, in each case, for which Monthly Available
Funds for such Monthly Payment Date are insufficient
to make such payments and (b) on each Quarterly Pay-
ment Date to cover any shortfalls (in the priority
indicated) in payments for such Quarterly Payment
Date of: (i) the Servicing Fee and all overdue Ser-
vicing Fees; (ii) the Administration Fee and all
overdue Administration Fees; (iii) the Senior Note-
holders' Interest Distribution Amount; (iv) the Sub-
ordinate Noteholders' Interest Distribution Amount;
(v) if the Revolving Period has terminated, the Se-
nior Noteholders' Principal Distribution Amount; and
(vi) if the Revolving Period has terminated, the
Subordinate Noteholders' Principal Distribution
Amount, in each case, for which Available Funds for
such Quarterly Payment Date are insufficient to make
such payments and distributions. Amounts on deposit
in the Reserve Account (other than any Reserve Ac-
count Excess) will not be available to cover any un-
paid Purchase Premium Amount, Senior Noteholders'
Interest T-Bill Carryover, Subordinate Noteholders'
Interest T-Bill Carryover, Servicing Fee Shortfall
and prior unpaid Servicing Fee Shortfalls or (except
in the case of shortfalls in the Senior Noteholders'
Principal Distribution Amount or the Subordinate
Noteholders' Principal Distribution Amount as
S-12
<PAGE>
indicated in the preceding sentence) to make princi-
pal payments on the Notes.
The funding and maintenance of the Reserve Account is
intended to enhance the likelihood of timely payment
to the Senior Noteholders on each Quarterly Payment
Date of the Senior Noteholders' Interest Distribu-
tion Amount and to the Subordinate Noteholders on
each Quarterly Payment Date of the Subordinate Note-
holders' Interest Distribution Amount, and on each
Quarterly Payment Date at and after the termination
of the Revolving Period of the Senior Noteholders'
Principal Distribution Amount to the Senior Note-
holders and, after the Senior Notes have been paid
in full, of the Subordinate Noteholders' Principal
Distribution Amount to the Subordinate Noteholders.
In certain circumstances, however, the Reserve Ac-
count could be depleted and shortfalls in distribu-
tions and resulting losses to the Noteholders could
occur.
E. The Transfer and Under the Loan Sale Agreement, the Seller will sell
Servicing the Financed Student Loans to the Trust, with the
Agreements.... Eligible Lender Trustee holding legal title thereto.
Under the Servicing Agreement, the Servicer will
agree with the Trust to be responsible for servic-
ing, managing, maintaining custody of and making
collections on the Financed Student Loans.
Under the Loan Sale Agreement, the Seller will be ob-
ligated to repurchase or, in the alternative, sub-
stitute an eligible Student Loan for, and under the
Servicing Agreement, the Servicer (subject to the
limitations described under "Risk Factors--Maturity
and Prepayment Assumptions" herein) will be obli-
gated to purchase, any Financed Student Loan if the
interests of the Noteholders therein are materially
adversely affected by a breach of any representa-
tion, warranty or covenant (including the Servicer's
covenant to service all the Financed Student Loans
in accordance with applicable laws, restrictions and
guidelines) made by the Seller or the Servicer, as
the case may be, with respect to the Financed Stu-
dent Loan, if the breach has not been cured follow-
ing the discovery by or notice to the Seller or the
Servicer, as the case may be, of the breach (it be-
ing understood that any such breach that does not
affect a Guarantor's obligation to guarantee payment
of such Financed Student Loan will not be considered
to have a material adverse effect for this purpose).
In addition, the Seller will be obligated to reim-
burse the Trust with respect to a Financed Student
Loan for any accrued interest amounts not guaranteed
by a Guarantor due to, or any lost Interest Subsidy
Payments or Special Allowance Payments as a result
of, a breach of the Seller's representations and
warranties with respect to such Financed Student
Loan. The Servicer will not, however, have any simi-
lar obligation to reimburse the Trust for non-guar-
anteed interest amounts or lost Interest Subsidy
Payments or Special Allowance Payments which result
from a breach of its representations and warranties
with respect to
S-13
<PAGE>
the Financed Student Loans. In addition, the Seller
may, at its option, repurchase a Financed Student
Loan if there is a dispute with the related borrower
which in the Servicer's reasonable judgment would
call into question whether such Financed Student
Loan will be repaid by the borrower.
The Servicer will receive a monthly fee (the "Servic-
ing Fee") with respect to each Financed Student Loan
calculated as described under "Description of the
Transfer and Servicing Agreements--Servicing Compen-
sation; Administration Fee". The Servicing Fee will
be payable from (i) in the case of each Monthly Pay-
ment Date that is not a Quarterly Payment Date,
Monthly Available Funds and (ii) in the case of each
Quarterly Payment Date, Available Funds, in each
case on deposit in the Collection Account and, if
such amounts are insufficient, from amounts on de-
posit in the Reserve Account. The Servicer will also
receive amounts related to any Servicing Fee
Shortfall, as defined herein, on each Quarterly Pay-
ment Date. Such amounts will be payable only from
any Reserve Account Excess available on such Quar-
terly Payment Date after all other amounts required
to be paid from such excess have been paid. See "De-
scription of the Transfer and Servicing Agreements--
Credit Enhancement--Reserve Fund". The Servicer will
be obligated to perform its servicing obligations
whether or not it receives any amounts in respect of
Servicing Fee Shortfalls.
Pursuant to the Administration Agreement, the Admin-
istrator will agree with the Trust to be responsible
for, among other things, preparing and filing with
the Department all appropriate claims forms and
other documents and filings on behalf of the Eligi-
ble Lender Trustee in order to claim the Interest
Subsidy Payments and Special Allowance Payments from
the Department in respect of the Financed Student
Loans entitled thereto and preparing and providing
monthly, quarterly and annual statements to the In-
denture Trustee with respect to distributions to
Noteholders.
As compensation for the performance of the Adminis-
trator's obligations under the Administration Agree-
ment and as reimbursement for its expenses related
thereto, the Administrator will be entitled to re-
ceive a monthly administration fee (the "Administra-
tion Fee') payable as provided herein on each
Monthly Payment Date in an amount equal to one-
twelfth of the product of (i) 0.04% and (ii) the
Pool Balance as of the close of business on the last
day of the calendar month immediately preceding such
Monthly Payment Date.
The Notes...............
The Trust will issue the Notes pursuant to an inden-
ture to be dated as of April 1, 1997 (as amended and
supplemented from time to time, the "Indenture"),
between the Trust and the Indenture Trustee. The
Notes will be secured by the assets of the Trust.
The initial principal balance of the Senior and Sub-
ordinate Notes will equal $ and $ , respec-
tively.
S-14
<PAGE>
A. Interest........... The Notes will bear interest during each Quarterly
Interest Period at the respective rates per annum,
except as described below (the "Senior Note Rate" or
the "Subordinate Note Rate" and, collectively, the
"Note Rates"), equal to the weighted average of the
T-Bill Rates within such Quarterly Interest Period
(determined as described herein) plus %, in the
case of the Senior Notes (the "Senior Note T-Bill
Rate"), and plus %, in the case of the Subordinate
Notes (the "Subordinate Note T-Bill Rate" and, to-
gether with the Senior Note T-Bill Rate, the "Note
T-Bill Rates"). Each Note T-Bill Rate will be ad-
justed weekly on the calendar day following each
auction of 91-day Treasury Bills, except that (i)
each Note Rate in effect from the first day of each
Quarterly Interest Period, including the initial
Quarterly Interest Period, through the day of the
first 91-day Treasury Bill auction on or after the
first day of each Quarterly Interest Period will be
based on the results of the most recent 91-day Trea-
sury Bill auction prior to such day and (ii) each
Note Rate will be subject to a Lock-In Period of six
business days preceding each Quarterly Payment Date.
See "Description of the Notes--Determination of T-
Bill Rates". Interest on the outstanding principal
amount of each class of Notes will accrue from and
including the preceding Quarterly Payment Date (or
in the case of the first Quarterly Interest Period,
the Closing Date) to but excluding the following
Quarterly Payment Date (each a "Quarterly Interest
Period") and will be payable on the 27th day of each
January, April, July and October, or, if any such
date is not a business day, on the next succeeding
business day (each a "Quarterly Payment Date"), com-
mencing July 28, 1997, to holders of record of the
Senior Notes (the "Senior Noteholders") and the Sub-
ordinate Notes (the "Subordinate Noteholders" and,
together with the Senior Noteholders, the "Notehold-
ers") on the related Record Date. "Record Date"
means, with respect to any Quarterly Payment Date,
the twenty-sixth day of the month in which such
Quarterly Payment Date occurs (whether or not such
date is a business day). Interest on the Notes will
be calculated on the basis of the actual number of
days elapsed in each Quarterly Interest Period di-
vided by 365 (or 366 in the case of a leap year).
Notwithstanding the foregoing, if either Note Rate
for any Quarterly Interest Period (after the first
Quarterly Interest Period) calculated on the basis
of the applicable Note T-Bill Rate is greater than
the Student Loan Rate for such Quarterly Interest
Period, then such Note Rate for the applicable Quar-
terly Payment Date will be the Student Loan Rate.
The "Student Loan Rate" for any Quarterly Interest
Period will equal the product of (a) the quotient
obtained by dividing (i) 365 (or 366 in the case of
a leap year) by (ii) the actual number of days
elapsed in such Quarterly Interest Period and (b)
the percentage equivalent of a fraction, (i) the nu-
merator of which is equal to Expected Interest Col-
lections for such Quarterly Interest Period less the
Servicing Fee and the Administration Fee with re-
spect to such period and (ii) the denominator of
which is the aggregate principal balance of the
Notes as of the last day of such Quarterly Interest
Period.
S-15
<PAGE>
"Expected Interest Collections" means, with respect
to any Quarterly Interest Period, the sum of (i) the
amount of interest accrued, net of any accrued
Monthly Rebate Fees and other amounts required by
the Act to be paid to the Department (as described
under "Risk Factors--Fees Payable on Certain Fi-
nanced Student Loans" herein), with respect to the
Financed Student Loans during the Collection Period
preceding the applicable Quarterly Payment Date (the
"Student Loan Rate Accrual Period"), whether or not
such interest is actually paid, (ii) all Interest
Subsidy Payments and Special Allowance Payments es-
timated to have accrued for the applicable Student
Loan Rate Accrual Period whether or not actually re-
ceived (after taking into account any expected de-
duction therefrom of the Federal Origination Fee de-
scribed under "Risk Factors--Fees Payable on Certain
Financed Student Loans" herein) and (iii) Investment
Earnings (as defined in "Description of the Transfer
and Servicing Agreements--Accounts" in the Prospec-
tus) for the applicable Student Loan Rate Accrual
Period.
If either Note Rate for any Quarterly Payment Date is
based on the Student Loan Rate, the excess of (a)
the amount of interest on the related Notes that
would have accrued in respect of the related Quar-
terly Interest Period had interest been calculated
based on the related Note T-Bill Rate over (b) the
amount of interest on the related Notes actually ac-
crued in respect of such Quarterly Interest Period
based on the Student Loan Rate (such excess, to-
gether with the unpaid portion of any such excess
from prior Quarterly Payment Dates (and interest ac-
crued thereon at the applicable Note Rate calculated
based on the related Note T-Bill Rate) is referred
to as the "Senior Noteholders' Interest T-Bill Car-
ryover", in the case of the Senior Notes and the
"Subordinate Noteholders' Interest T-Bill Carryo-
ver", in the case of the Subordinate Notes) will be
payable on the Quarterly Payment Date when incurred
or on any subsequent Quarterly Payment Date to the
extent funds are available therefor out of the
amount of Reserve Account Excess, if any, for such
Quarterly Payment Date after making all required
prior distributions therefrom on such date (includ-
ing, in the case of the Subordinate Noteholders' In-
terest T-Bill Carryover, after paying any Senior
Noteholders' Interest T-Bill Carryover for such
date) as described herein under "Description of the
Transfer and Servicing Agreements--Credit Enhance-
ment--Reserve Account". Among other things, as de-
scribed under such heading, no Senior Noteholders'
Interest T-Bill Carryover or Subordinate Notehold-
ers' Interest T-Bill Carryover will be paid until
the Parity Date. The rating of the Notes does not
address the likelihood of the payment of any Senior
Noteholders' Interest T-Bill Carryover or Subordi-
nate Noteholders' Interest T-Bill Carryover, as the
case may be.
B. Principal.......... No principal will be payable on the Notes prior to
the end of the Revolving Period. Principal of the
Notes will be payable on each Quarterly Payment Date
at and after the termination of the Revolving
S-16
<PAGE>
Period in an amount generally equal to the Principal
Distribution Amount for such Quarterly Payment Date.
The "Principal Distribution Amount" at and after the
termination of the Revolving Period generally will
be equal to the amount of principal paid or, in cer-
tain cases, due to be paid with respect to the Fi-
nanced Student Loans (including any realized losses
thereon) during the related Collection Period less
the sum of (i) any such amount applied by the Eligi-
ble Lender Trustee on behalf of the Trust during
such Collection Period to purchase Serial Loans, as
described herein, (ii) for a maximum period of 210
days following the end of the Revolving Period, any
such amount applied by the Eligible Lender Trustee
on behalf of the Trust during such Collection Period
to fund the addition of any Add-on Consolidation
Loans and (iii) accrued and unpaid interest on the
Financed Student Loans for such Collection Period to
the extent such interest will be capitalized and
added to the principal balance of such Financed Stu-
dent Loans, upon the commencement of repayment of
such Financed Student Loans, as described herein.
See "Description of the Transfer and Servicing
Agreements--Distributions" herein.
In addition, on each Quarterly Payment Date at and
after the termination of the Revolving Period for so
long as the aggregate principal balance of the Notes
is greater than the Pool Balance as of the close of
business on the last day of the related Collection
Period, any Reserve Account Excess will, after pay-
ment to the Seller of any unpaid Purchase Premium
Amounts for any Serial Loans purchased by the Trust
prior to the end of the related Collection Period,
be applied, as described herein, to the unpaid prin-
cipal balance of the Senior Notes or, if the Senior
Notes have been paid in full, the Subordinate Notes.
On each Quarterly Payment Date the aggregate amount
distributable as principal to the Notes shall be ap-
plied first, to the Senior Notes until the aggregate
principal balance thereof has been reduced to zero
and then to the Subordinate Notes until the aggre-
gate principal balance thereof has been reduced to
zero.
The outstanding principal amount, if any, of the Se-
nior Notes will be payable in full on the
Quarterly Payment Date (the "Senior Note Final Matu-
rity Date") and the outstanding principal amount of
the Subordinate Notes will be payable in full on the
Quarterly Payment Date (the "Subordinate Note
Final Maturity Date"). However, the actual maturity
of the Notes could occur other than on such dates as
a result of a variety of factors including prepay-
ments of the Financed Student Loans. See "Risk Fac-
tors--Maturity and Prepayment Considerations" here-
in.
C.Mandatory
Redemption........... If any amount remains on deposit in the Collateral
Reinvestment Account on the last day of the Revolv-
ing Period after giving effect to all Additional
Fundings to be made on or prior to such date, such
amount will be used on the Quarterly Payment Date on
or immediately following such date to redeem the Se-
nior Notes until the aggregate principal balance
thereof has been reduced to zero, and then to
S-17
<PAGE>
redeem the Subordinate Notes until the aggregate
principal balance thereof has been reduced to zero.
The aggregate amount of the Notes to be redeemed
will be an amount equal to the amount on deposit in
the Collateral Reinvestment Account.
D.Subordination.......
The rights of the Subordinate Noteholders to receive
payments of interest will be subordinate to the
rights of the Senior Noteholders to receive payments
of interest and the rights of the Subordinate Note-
holders to receive payments of principal will be
subordinate to the rights of the Senior Noteholders
to receive payments of interest and principal to the
extent described herein. See "Risk Factors--
Subordination; Limited Assets" and "Description of
the Transfer and Servicing Agreements--Credit En-
hancement--Subordination of the Subordinate Notes"
herein.
Auction of Trust
Assets................. Any Financed Student Loans remaining in the Trust as
of the end of the Collection Period immediately pre-
ceding the July 2007 Quarterly Payment Date will be
offered for sale by the Indenture Trustee. The Sell-
er, its affiliates and unrelated third parties may
offer bids to purchase such Financed Student Loans
on such Quarterly Payment Date. If at least two bids
are received, the Indenture Trustee will accept the
highest bid equal to or in excess of the greater of
(x) the Purchase Amounts of such Financed Student
Loans as of the end of the Collection Period immedi-
ately preceding such Quarterly Payment Date or (y)
an amount that would be sufficient to (i) reduce the
outstanding principal amount of the Notes on such
Quarterly Payment Date to zero and (ii) pay to the
Noteholders the Noteholders' Interest Distribution
Amount payable on such Quarterly Payment Date (the
"Minimum Purchase Price"). If at least two bids are
not received or the highest bid is not equal to or
in excess of the Minimum Purchase Price, the Inden-
ture Trustee will not consummate such sale. The pro-
ceeds of any such sale will be used to redeem any
outstanding Notes on such Quarterly Payment Date. If
the sale is not consummated in accordance with the
foregoing, the Indenture Trustee may, but shall not
be under any obligation to, solicit bids for sale of
the Financed Student Loans on future Quarterly Pay-
ment 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 either the July 2007 Quarterly Payment Date
or any subsequent Quarterly Payment Date. "Purchase
Amount" with respect to a Financed Student Loan
means the unpaid balance owed by the applicable bor-
rower thereon plus accrued interest thereon to the
date of purchase. See "Description of the Transfer
and Servicing Agreements--Termination" herein.
Optional Purchase....... The Company, or an assignee of the Company, may, at
its option, purchase all remaining Financed Student
Loans, and thus effect the early retirement of the
Notes, on any Quarterly Payment Date on or after
which the Pool Balance is equal to 20% or less of
the aggregate
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<PAGE>
initial principal balance of the Notes, at a price
equal to the aggregate Purchase Amounts for such Fi-
nanced Student Loans as of the end of the preceding
Collection Period. See "Description of the Transfer
and Servicing Agreements--Termination" herein, and
"Description of the Transfer and Servicing Agree-
ments--Termination--Optional Redemption" in the Pro-
spectus.
The "Pool Balance" at any time represents the aggre-
gate principal balance of the Financed Student Loans
at the end of the preceding Collection Period (in-
cluding accrued interest thereon through the end of
such Collection Period to the extent such interest
will be capitalized upon commencement of repayment),
after giving effect to the following, without dupli-
cation: (i) all payments received by the Trust dur-
ing such Collection Period from or on behalf of bor-
rowers, the Guarantors and, with respect to certain
payments on certain Financed Student Loans, the De-
partment (collectively, "Obligors"), (ii) all Pur-
chase Amounts received by the Trust for such Collec-
tion Period from the Seller or the Servicer, (iii)
all Additional Fundings made with respect to such
Collection Period, and (iv) all losses realized on
Financed Student Loans liquidated during such Col-
lection Period.
Tax Considerations......
Although there is no specific authority with respect
to the characterization for federal or Indiana in-
come tax purposes of securities having the same
terms as the Senior Notes, in the opinion of Brown &
Wood llp, special federal tax counsel for the Trust
and counsel to the Underwriter, the Senior Notes
will be characterized as debt for federal income tax
purposes, and in the opinion of Krieg DeVault Alex-
ander & Capehart, special state tax counsel for the
Trust, the Senior Notes will be characterized as
debt for Indiana state income tax purposes.
In the opinion of special federal tax counsel for the
Trust, for federal income tax purposes the Trust
will not be characterized as an association (or pub-
licly traded partnership) taxable as a corporation.
The Company, as owner of all amounts not otherwise
required to be distributed to Noteholders or to pay
expenses of the Trust, will agree to treat the Trust
as a security arrangement for the issuance of debt
represented by the Notes. Alternative characteriza-
tions are possible, but would not result in materi-
ally adverse federal income tax consequences to the
Senior Noteholders. In the opinion of special state
tax counsel for the Trust, the same characteriza-
tions would apply for Indiana state income tax pur-
poses as for federal income tax purposes. However,
there are no cases or rulings on similar transac-
tions involving a trust that issues debt interests
with terms similar to those of the Senior Notes.
Finally, Senior Noteholders may be required to accrue
any Senior Noteholders' Interest Carryover in income
in advance of the receipt of cash with respect to
such amounts regardless of whether such Senior Note-
holders are on the cash or accrual methods of
accounting.
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<PAGE>
See "Certain Federal Income Tax and State Tax Conse-
quences" herein and "Certain Federal Income Tax Con-
sequences" and "Certain State Tax Consequences" in
the Prospectus for additional information concerning
the application of federal and Indiana state tax
laws with respect to the Senior Notes.
ERISA Considerations.... Subject to the considerations discussed under "ERISA
Considerations" herein and "ERISA Considerations--
The Notes" in the Prospectus, the Senior Notes are
eligible for purchase by employee benefit plans.
Rating of the
Securities.............
It is a condition to the issuance and sale of the Se-
nior Notes that the Senior Notes be rated in the
highest investment rating category by at least two
nationally recognized rating agencies and that the
Subordinate Notes be rated in the "BBB" or equiva-
lent rating category by at least two such rating
agencies. A rating is not a recommendation to buy,
sell or hold securities and may be subject to revi-
sion or withdrawal at any time by the assigning rat-
ing agency. The rating agencies do not evaluate, and
the ratings of the Senior Notes do not address, the
likelihood of payment of the Senior Noteholders' In-
terest T-Bill Carryover or the Subordinate Notehold-
ers' Interest T-Bill Carryover. There can be no as-
surance as to whether any additional rating agency
will rate the Senior Notes or the Subordinate Notes,
or if one does, what rating would be assigned by
such other rating agency.
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<PAGE>
RISK FACTORS
Prospective purchasers of the Senior Notes should consider, among other
things, the following factors (as well as the factors set forth under "Risk
Factors" in the Prospectus) in connection with an investment therein:
Limited Liquidity; Stabilization. There is currently no secondary market for
the Senior Notes. The Underwriter currently intends, but is not obligated, to
make a market in the Senior Notes. There can be no assurance that a secondary
market will develop or, if a secondary market does develop, that it will
provide the Senior Noteholders with liquidity of investment or that it will
continue for the life of the Senior Notes.
Certain persons participating in the offering of the Senior Notes may engage
in transactions that stabilize, maintain, or otherwise affect the price of the
Senior Notes. Such transactions could cause the price of the Senior Notes to be
higher than it might otherwise be in the absence of such transactions. See
"Underwriting" herein.
Subordination; Limited Assets. The rights of the Subordinate Noteholders to
receive payments of interest are subordinated to the rights of the Senior
Noteholders to receive payments of interest and the rights of the Subordinate
Noteholders to receive payments of principal will be subordinate to the rights
of the Senior Noteholders to receive payments of interest and principal.
Payment to Subordinate Noteholders of amounts representing the Subordinate
Noteholders' Distribution Amount will not be subordinated to the payment of any
Senior Noteholders' Interest T-Bill Carryover that may exist from time to time.
See "Description of the Transfer and Servicing Agreements--Distributions" and
"--Credit Enhancement--Subordination" herein.
Moreover, the Trust does not have, nor is it permitted or expected to have,
any significant assets or sources of funds other than the Financed Student
Loans (and the related Guarantee Agreements), the Collection Account, the
Collateral Reinvestment Account and the Reserve Account. The Notes represent
obligations solely of the Trust and will not be insured or guaranteed by the
Seller, the Servicer, the Administrator, the Guarantors, the Eligible Lender
Trustee or the Department. Consequently, holders of the Notes must rely for
repayment upon payments with respect to the Financed Student Loans and, if and
to the extent available under the circumstances described herein, amounts on
deposit in the accounts described above. The Collateral Reinvestment Account
will only be available during the Revolving Period to cover obligations of the
Trust relating to Additional Fundings and is not intended to cover losses on
the Financed Student Loans. Similarly, amounts to be deposited in the Reserve
Account are limited in amount and will be reduced, subject to a specified
minimum, as the principal balance of the Notes is reduced. If the Reserve
Account is exhausted, the Trust will depend solely on payments with respect to
the Financed Student Loans to make payments on the Notes and Noteholders could
suffer a loss. Noteholders will have no claim to any amounts properly
distributed to the Seller, the Servicer or the Company from time to time as
described herein and in the Prospectus and the Seller, the Servicer and the
Company shall in no event be required to refund such distributed amounts. See
"Description of the Transfer and Servicing Agreements--Distributions" and "--
Credit Enhancement" herein.
Risks Resulting From Excess of Principal Balance of Notes over Pool
Balance. As of the Closing Date, the aggregate principal balance of the Notes
will be equal to approximately % of the Initial Pool Balance. As a result,
Noteholders will generally be reliant on the availability of Reserve Account
Excess to bring the aggregate principal balance of the Notes into parity with
the Pool Balance by (a) during the Revolving Period, the application of Reserve
Account Excess deposited into the Collateral Reinvestment Account (other than
any Reserve Account Excess that may reflect principal collections on the
Financed Student Loans) to fund the Purchase Collateral Balance of New Loans or
Serial Loans acquired by the Trust or to fund the origination of Federal
Consolidation Loans or any additions to the principal balances thereof caused
by the addition of Add-on Consolidation Loans or (b) after the Revolving
Period, the application thereof to pay principal of the Notes until the Parity
Date. The availability of Reserve Account Excess will in turn generally be
dependent on (a) the interest component of Available Funds for any Quarterly
Payment Date being in
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<PAGE>
excess of the amount necessary to pay (i) the Servicing Fee and all prior
unpaid Servicing Fees, (ii) the Administration Fee and all prior unpaid
Administration Fees and (iii) the Noteholders' Interest Distribution Amount for
such Quarterly Payment Date, and/or (b) declines in the Specified Reserve
Account Balance that exceed any amounts required to be withdrawn for any
Quarterly Payment Date from the Reserve Account to make up shortfalls required
to be paid therefrom. At such time as the aggregate principal balance of the
Notes has been reduced so that it equals the Pool Balance, any Reserve Account
Excess will no longer be available to pay principal of the Notes. See
"Description of the Transfer and Servicing Agreements--Credit Enhancement--
Reserve Account" herein. To the extent that Noteholders are reliant on excess
interest collections on the Financed Student Loans to repay a portion of the
principal balance of the Notes, Noteholders could be adversely affected by an
increase in the rate of prepayments on the Financed Student Loans or an
increase in the T-Bill Rate, since either such increase would diminish the
amount of such excess interest that would subsequently be available to pay such
principal. In addition, payments on the Notes may be more sensitive to rates of
default on the Financed Student Loans than would be the case were the principal
balance of the Notes not issued in an amount in excess of the Initial Pool
Balance, particularly with respect to those Financed Student Loans first
disbursed after October 1, 1993 which are 98% insured by a Guarantor (rather
than 100% so insured as is the case for such loans first disbursed prior to
such date). Additionally, payment of Purchase Premium Amounts to the Seller for
New Loans and Serial Loans purchased by the Trust during the Revolving Period
and Serial Loans acquired by the Trust after the Revolving Period will decrease
the amount of funds that would otherwise be available to pay principal of the
Notes and will thereby delay reduction of the amount represented by the excess
of the aggregate principal balance of the Notes over the Pool Balance and
could, to the extent that during the Revolving Period the amount expended on
such Purchase Premium Amounts exceeds those amounts on deposit in the
Collateral Reinvestment Account that are other than amounts in respect of
principal collections on the Financed Student Loans, cause such excess to
increase.
Additional Fundings; Risk of Change in Characteristics of the Financed
Student Loan Pool. Except for the criteria described under "The Financed
Student Loan Pool", there will be no other required characteristics of the
Additional Student Loans. Therefore, upon the transfer of the Additional
Student Loans to 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 Financed Student Loans and of the borrowers
thereof, the Guarantors thereof (which may include Additional Guarantors whose
ability to fulfill their insurance obligations may vary from the Initial
Guarantors), the distribution by loan type, the distribution by interest rate,
the distribution by principal balance and the distribution by remaining term to
scheduled maturity may vary significantly from those of the Initial Financed
Student Loans as of the Cutoff Date. See "The Financed Student Loan Pool"
herein.
Maturity and Prepayment Considerations. During the Revolving Period, amounts
in respect of principal collections on the Financed Student Loans and, so long
as the Parity Date has not occurred, other amounts constituting Available Funds
that are in excess, on each Quarterly Payment Date during the Revolving Period,
of the amounts necessary to pay (i) the Servicing Fee and all prior unpaid
Servicing Fees, (ii) the Administration Fee and all prior unpaid Administration
Fees, (iii) the Noteholders' Interest Distribution Amount for such Quarterly
Payment Date and (iv) the amount, if any, necessary to cause the amount on
deposit in the Reserve Account to equal the Specified Reserve Account Balance,
shall be deposited into the Collateral Reinvestment Account. If the sum of (i)
the Loan Purchase Amount of New Loans and Serial Loans available to be acquired
from the Seller during the Revolving Period, (ii) the amount required by the
Trust to fund the origination by the Eligible Lender Trustee on behalf of the
Trust of Federal Consolidation Loans or to fund increases in the principal
balances of Federal Consolidation Loans existing in the Trust by the addition
of Add-on Consolidation Loans and (iii) the amount of interest on the Financed
Student Loans capitalized and not paid currently by or on behalf of the
borrowers during the Revolving Period is less than the amount deposited in the
Collateral Reinvestment Account, the Trust will have insufficient opportunities
to make Additional Fundings during the Revolving Period, thereby resulting in a
prepayment of principal to Noteholders as described in the following paragraph.
The extent to which the Trustee will be able, during
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<PAGE>
the Revolving Period, to apply amounts in the Collateral Reinvestment Account
to Additional Fundings consisting of the purchase of New Loans and Serial Loans
will be dependent, in part, upon the ability of the Seller to originate or
acquire and sell such loans to the Trust and upon the opportunities the Trust
may have to originate Federal Consolidation Loans. A material adverse change in
the operations or business or financial condition of the Seller or in
conditions in the market for Student Loans could have a material adverse impact
on the Seller's ability to originate or acquire and sell such loans to the
Trust, which could, in turn, result in the Trust being unable to apply some or
all of the amounts in the Collateral Reinvestment Account to Additional
Fundings. If funds in the Collateral Reinvestment Account cannot be invested in
sufficient purchases of New Loans and Serial Loans or originations of Federal
Consolidation Loans, funds in the Collateral Reinvestment Account may not be
able to be invested at a sufficiently high yield to avoid an Early Amortization
Event.
To the extent that amounts on deposit in the Collateral Reinvestment Account
have not been fully applied to Additional Fundings by the Trust by the end of
the Revolving Period, whether on its scheduled termination date or earlier
following an Early Amortization Event, an amount equal to the entire amount
then on deposit in the Collateral Reinvestment Account will be paid on the next
succeeding Quarterly Payment Date as a prepayment of principal first to the
Senior Noteholders, until the aggregate principal balance of the Senior Notes
has been reduced to zero, and then to the Subordinate Noteholders, until the
aggregate principal balance of the Subordinate Notes has been reduced to zero.
It is anticipated that the amount of Additional Fundings made by the Trust will
not be exactly equal to the amount on deposit in the Collateral Reinvestment
Account and that therefore there will be at least a nominal amount of principal
prepaid to the Noteholders at the end of the Revolving Period.
There can be no assurance as to the amount of Additional Fundings that will
be available to be made by the Trust during the Revolving Period or that the
amount and timing of Additional Fundings will be sufficient to avoid the
occurrence of an Early Amortization Event or of a mandatory redemption of a
more than nominal portion of the Notes at the end of the Revolving Period.
No principal payments will be made on the Notes until after the end of the
Revolving Period which is scheduled to occur on the last day of the Collection
Period preceding the October 2000 Quarterly Payment Date. If, however, an Early
Amortization Event, as described under "Description of the Transfer and
Servicing Agreements--Revolving Period and Additional Fundings," occurs prior
to the last day of such Collection Period, the Revolving Period will terminate
early, principal will be payable on the Notes as described herein, and the
average life and maturity of the Notes may be significantly reduced from what
it would have been had no such Early Amortization Event occurred.
The rate of payment of principal of the Notes, after the end of the Revolving
Period, and the yield on the Notes will be affected by prepayments of the
Financed Student Loans that may occur as described below. All the Financed
Student Loans are prepayable in whole or in part by the borrowers at any time
(including by means of Federal Consolidation Loans as discussed below) or as a
result of a borrower default, death, disability or bankruptcy and subsequent
liquidation or collection of Guarantee Payments with respect thereto. The rate
of such prepayments cannot be predicted and may be influenced by a variety of
economic, social and other factors, including those described below. In
general, the rate of prepayments may tend to increase to the extent that
alternative financing becomes available at prevailing interest rates which fall
significantly below the interest rates applicable to the Financed Student
Loans. However, because a portion of the Financed Student Loans bear interest
at a rate that either actually or effectively is floating to the borrower, it
is impossible to determine whether changes in prevailing interest rates will be
similar to or vary from changes in the interest rates on the Financed Student
Loans. In addition, to the extent that Noteholders are reliant on a portion of
the interest collections on the Financial Student Loans to pay the portion of
the initial principal balance of the Notes that is in excess of the Initial
Pool Balance, Noteholders could be adversely affected by increased rates of
prepayment on the Financed Student Loans, since upon any such prepayment no
further interest would be collected on the loan so prepaid. To the extent
borrowers of Financed Student Loans elect to borrow Federal Consolidation
Loans, such Financed Student Loans will be prepaid; provided, however,
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<PAGE>
that if the Eligible Lender Trustee on behalf of the Trust makes any such
Federal Consolidation Loan during the Revolving Period, the aggregate
outstanding principal balance of Financed Student Loans (after giving effect to
the addition of such Federal Consolidation Loan and, if applicable the addition
thereto of any Add-on Consolidation Loans) will be at least equal to and in
most cases greater than such balance prior to such prepayment, although the
guaranteed portion of the Federal Consolidation Loan may be less than the
Financed Student Loan that is discharged as a result of such consolidation. See
"Federal Family Education Loan Program--Federal Consolidation Loan Program" in
the Prospectus. There can be no assurance that the Eligible Lender Trustee on
behalf of the Trust rather than another lender will make any particular Federal
Consolidation Loan with respect to borrowers with Financed Student Loans during
the Revolving Period. The Department in administering the Federal Direct
Consolidation Loan Program (See "Federal Family Education Loan Program--
Legislative and Administrative Matters" in the Prospectus) permits borrowers
with Federal Student Loans to consolidate their outstanding student loans at
interest rates below those which would apply if they consolidated their
outstanding student loans by means of a Federal Consolidation Loan under the
Federal Consolidation Loan Program. The availability of such lower-rate
consolidation loans may decrease the likelihood that the Eligible Lender
Trustee will be the originator of Federal Consolidation Loans with respect to
borrowers of Financed Student Loans and may increase the likelihood that a
Financed Student Loan will be prepaid. The Eligible Lender Trustee will not be
permitted to originate Federal Consolidation Loans (including the addition of
any Add-on Consolidation Loans) on behalf of the Trust during the Revolving
Period in an aggregate principal amount in excess of $ ; additionally, no
Federal Consolidation Loan may be originated by the Trust having a scheduled
maturity date after if at the time of such origination the aggregate
principal amount of all Federal Consolidation Loans held by the Trust that have
a scheduled maturity date after exceeds or, after giving effect to such
origination, would exceed $ ; provided, however, that the Eligible Lender
Trustee will be permitted to fund Add-on Consolidation Loans in excess of such
amounts if required to do so by the Act. In addition, after the end of the
Revolving Period, the Eligible Lender Trustee will not make Federal
Consolidation Loans; provided, however, for a maximum period of 210 days
following the end of the Revolving Period, the Eligible Lender Trustee may
increase the principal balance of Federal Consolidation Loans existing in the
Trust by the amount of any related Add-on Consolidation Loans. Furthermore, the
Seller is obligated to repurchase or substitute for any Financed Student Loan
pursuant to the Loan Sale Agreement as a result of a breach of any of its
representations and warranties, and the Servicer (subject to the limitations
described below) is obligated to purchase any Financed Student Loan pursuant to
the Servicing Agreement as a result of a breach of certain covenants with
respect to such Financed Student Loan, in each case where such breach
materially adversely affects the interests of the Noteholders in that Financed
Student Loan and is not cured within the applicable cure period (it being
understood that any such breach that does not affect the applicable Guarantor's
obligation to guarantee payment of such Financed Student Loan will not be
considered to have a material adverse effect for this purpose); provided,
however, that, during each 12-month period following the Cutoff Date or an
anniversary of the Cutoff Date, the Servicer will be obligated to purchase
Financed Student Loans only to the extent its total liability incurred during
such period for such purchases and any other liabilities under the Servicing
Agreement exceeds an amount (the "Servicer Liability Limit") equal to % of
the outstanding principal balance of the Financed Student Loans as of the
Cutoff Date or, after the first anniversary of the Cutoff Date, as of the
preceding , and, after the Servicer Liability Limit for any such period
has been exceeded, the Servicer's total liability during such period for losses
for rejected claims by a Guarantor for any Financed Student Loan based on a
breach of its representations, warranties or covenants (including, but not
limited to, any such losses caused by negligence or willful misfeasance by the
Servicer) will not exceed that amount which such Guarantor would have been
obligated to pay with respect to such loan had its obligation to guarantee
payment thereof not been affected by the Servicer's breach. In addition, the
Seller may, at its option, repurchase a Financed Student Loan if there is a
dispute with the related borrower which in the Servicer's reasonable judgment
would call into question whether such Financed Student Loan will be repaid by
the borrower. See "Description of the Transfer and Servicing Agreements--Sale
of Student Loans; Representations and Warranties" and "--Servicer Covenants" in
the Prospectus. See also "Description of the Transfer and Servicing
Agreements--Termination", herein, regarding the Company's, or its assignee's,
option to purchase the Financed Student Loans when the aggregate Pool
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<PAGE>
Balance is less than or equal to 20% of the initial aggregate principal balance
of the Notes and "Description of the Transfer and Servicing Agreements--
Insolvency Event", in the Prospectus regarding the sale of Financed Student
Loans if an Insolvency Event occurs with respect to the Company.
On the other hand, scheduled payments with respect to, and maturities of, the
Financed Student Loans may be extended, including pursuant to Grace Periods,
Deferral Periods and Forbearance Periods, as a result of the conveyance of New
Loans to the Eligible Lender Trustee on behalf of the Trust during the
Revolving Period or as a result of the conveyance of Serial Loans to the
Eligible Lender Trustee on behalf of the Trust during or after the Revolving
Period as described herein or of refinancings through Federal Consolidation
Loans to the extent such Federal Consolidation Loans are originated by the
Eligible Lender Trustee on behalf of the Trust during the Revolving Period as
described herein. In that event, the fact that such New Loans and Serial Loans
will have varying maturities, the fact that New Loans will be made to borrowers
who were not borrowers on any of the Financed Student Loans and such new
borrowers may themselves become borrowers under Serial Loans or consolidate
such loans by electing to borrow Federal Consolidation Loans, the fact that
Additional Student Loans purchased or originated during the Revolving Period
may, and Serial Loans purchased after the termination of the Revolving Period
will, be purchased with principal distributions on the Financed Student Loans
which may otherwise have been applied to amortize the Notes and the fact that
such Federal Consolidation Loans will likely have longer maturities than the
Financed Student Loans they are replacing may lengthen the remaining term of
the Financed Student Loans and the average life of the Notes. In addition, any
Add-on Consolidation Loans added to the principal balance of a related Federal
Consolidation Loan may lengthen the remaining term of such Federal
Consolidation Loan and after the Revolving Period will be funded with principal
distributions on Financed Student Loans which may otherwise have been applied
to amortize the Notes. In addition, such New Loans, Serial Loans or Federal
Consolidation Loans may have, and certain of the Initial Financed Student Loans
have, stated maturities which occur after the Subordinate Note Final Maturity
Date. The application, after the end of the Revolving Period, of amounts which
would otherwise have been distributable in respect of the Principal
Distribution Amount for a related Quarterly Payment Date to make interest
distributions to Noteholders and in lieu of collections of interest on certain
Financed Student Loans on which interest is not currently required to be paid
will also have the effect of lengthening the average life of the Notes over
what it would have been had such amounts been applied to amortize the Notes.
Any Financed Student Loans remaining in the Trust as of the end of the
Collection Period immediately preceding the July 2007 Quarterly Payment Date
will be offered for sale by the Indenture Trustee. If acceptable bids to
purchase such Financed Student Loans on such Quarterly Payment Date are
received, as described herein, the proceeds of the sale will be applied on such
Quarterly Payment Date to redeem any outstanding Notes on such date. In
addition, if acceptable bids to purchase such Financed Student Loans on such
Quarterly Payment Date are not received, the sale of such Financial Student
Loans may occur on a subsequent Quarterly Payment Date, as described herein, in
which case the proceeds thereof will be applied on such date to redeem any
outstanding Notes. No assurance can be given as to whether the Indenture
Trustee will be successful in soliciting acceptable bids to purchase the
Financed Student Loans on the July 2007 Quarterly Payment Date or any
subsequent Quarterly Payment Date. See "Description of the Transfer and
Servicing Agreements--Termination" herein.
The rate of payment of principal of the Notes after the end of the Revolving
Period and the yield on the Notes may also be affected by the rate of defaults
resulting in losses on Liquidated Student Loans, by the severity of those
losses and by the timing of those losses, which may affect the ability of the
Guarantors to make Guarantee Payments with respect thereto and such default
rates may be affected, among other things, by the conveyance to the Trust
during the Revolving Period of New Loans made to borrowers who are not
borrowers under any of the Financed Student Loans. The rate of prepayment on
the Financed Student Loans cannot be predicted, and any reinvestment risks
resulting from a faster or slower incidence of prepayment of Financed Student
Loans will be borne entirely by the Noteholders. Such reinvestment risks may
include the risk that interest rates and the relevant spreads above particular
interest rate bases are lower at the time
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Noteholders receive payments from the Trust than such interest rates and such
spreads would otherwise have been had such prepayments not been made or had
such prepayments been made at a different time.
Because of the factors discussed above, and because of the number and
variability of the determinants affecting the rate of principal payments on the
Financed Student Loans, no assurances can be given as to the timing of payments
of principal to Noteholders.
Certain Differences Between the Senior Notes and the Subordinate
Notes. Because the Subordinate Noteholders will receive no payments of
principal until the Senior Notes have been paid in full, the Senior Notes bear
relatively greater risk than do the Subordinate Notes of an increased rate of
principal prepayments with respect to the Financed Student Loans (whether as a
result of voluntary prepayments, Federal Consolidation Loans not made by the
Eligible Lender Trustee on behalf of the Trust or liquidations due to default
or breach). In addition, the Senior Noteholders generally bear the risk of
principal prepayments as a result of any mandatory redemption from amounts on
deposit in the Collateral Reinvestment Account at the end of Revolving Period
or of such redemption occurring prior to the scheduled end of the Revolving
Period on the last day of the Collection Period preceding the Quarterly Payment
Date occurring in October 2000 due to an Early Amortization Event. On the other
hand, Subordinate Noteholders bear a greater risk of loss of principal than do
Senior Noteholders in the event of a shortfall in Available Funds and amounts
on deposit in the Reserve Account because the Subordinate Notes do not receive
principal distributions until the Senior Notes are paid in full.
Basis Risk. Financed Student Loans generally bear interest at an effective
rate (taking into account any Special Allowance Payments) equal to the average
bond equivalent rates of 91-day Treasury Bills auctioned for each quarter (or,
in certain circumstances, 52-week Treasury bills) plus margins specified for
such Financed Student Loans described under "Federal Family Education Loan
Program" in the Prospectus calculated on the basis of the actual number of days
since the last day through which interest on such Financed Student Loan was
paid in full and the actual number of days in the year. Moreover, the Pool
Balance will initially be less than the principal balance of the Notes, and
therefore the principal amount of Financed Student Loans on which interest will
be collected will be less than the principal amount of Notes on which interest
must be paid. Although the Senior Note Rate and the Subordinate Note Rate are
generally based on the weighted average bond equivalent rates of 91-day
Treasury Bills, it is possible that on any Quarterly Payment Date there may not
exist a positive spread between (a) the Student Loan Rate and (b) the Senior
Note Rate or the Subordinate Note Rate based on the Senior Note T-Bill Rate or
the Subordinate Note T-Bill Rate, as the case may be. In such case, the Senior
Note Rate or the Subordinate Note Rate, as applicable, for such Quarterly
Payment Date will be the Student Loan Rate. See "Description of the Notes--
Distributions of Interest" herein. Any Senior Noteholders' Interest T-Bill
Carryover or Subordinate Noteholders' Interest T-Bill Carryover arising as a
result of the Senior Note Rate or the Subordinate Note Rate being determined on
the basis of the Student Loan Rate will be paid on any succeeding Quarterly
Payment Date (including, if incurred on a Quarterly Payment Date, such
Quarterly Payment Date) but only on or after the Parity Date and only then out
of any Reserve Account Excess available after payment out of such excess of (i)
if the Revolving Period has terminated, any Purchase Premiums due the Seller
for Serial Loans purchased by the Trust prior to the end of the related
Collection Period, (ii) on the Parity Date (if the Parity Date occurs after the
end of the Revolving Period), any amount necessary to reduce to zero the
remaining amount by which the aggregate principal balance of the Notes exceeds
the Pool Balance and (iii) in the case of the Subordinate Noteholders' Interest
T-Bill Carryover, payment of the Senior Noteholders' Interest T-Bill Carryover.
See "Description of the Transfer and Servicing Agreements--Credit Enhancement--
Reserve Account" herein.
Default Risk on Certain Financed Student Loans. Under the Omnibus Budget
Reconciliation Act of 1993, Financed Student Loans first disbursed on or after
October 1, 1993 are 98% insured by the applicable Guarantor. As a result, to
the extent a borrower of such a Financed Student Loan defaults, the Trust will
experience a loss of 2% of outstanding principal and accrued interest on each
such Financed Student Loan. A defaulted loan will be fully assigned to the
applicable Guarantor in exchange for a guarantee payment on the 98% guaranteed
portion and the Trust may have no right thereafter to pursue the borrower for
the 2%
S-26
<PAGE>
unguaranteed portion. Financed Student Loans continue to be 100% guaranteed in
the event of death, disability or bankruptcy of the borrower and a closing of
or false certification by the borrower's school regardless of disbursement
date.
Fees Payable on Certain 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% of
the outstanding principal balance on the last day of each month plus accrued
interest thereon of each Federal Consolidation Loan which is a part of the
Trust, which rebate will be payable prior to distributions to the Noteholders
and which rebate will reduce the amount of funds which would otherwise be
available to make distributions on the Notes and will reduce the Student Loan
Rate. In addition, the Trust must pay to the Department a 0.50% origination fee
(the "Federal Origination Fee") on the initial principal balance of each
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 and Special
Allowance Payments. If sufficient Interest Subsidy and Special Allowance
Payments are not due to the Trust to cover the amount of the Federal
Origination Fee, the balance of such Federal Origination Fee may be deferred by
the Department until sufficient Interest Subsidy and Special Allowance Payments
accrue to cover such fee or may be required to be paid immediately. If such
amounts never accrue, the Trust would be obligated to pay any remaining fee
from other assets of the Trust prior to making distributions to Noteholders.
The offset of Interest Subsidy and Special Allowance Payments, and the payment
of any remaining fee from other Trust assets, will further reduce the amount of
Available Funds from which payments to Noteholders may be made. Furthermore,
any offset of Interest Subsidy and Special Allowance Payments will further
reduce the Student Loan Rate.
Recent Developments--President Clinton's Proposed FY 1998 Budget. In his
proposed FY 1998 Budget, President Clinton has proposed a number of changes to
the Act affecting lenders and guarantors. These proposals would, among other
things, increase lender risk-sharing, reduce the yield on certain FFELP loans
while the student is in school, require certain new payments to be made by
lenders to guarantors in connection with default aversion, eliminate guarantor
risk-sharing, reduce guarantor reserve fund levels, reduce guarantor retention
rates on post-default payments, and institute performance-based contracts for
guarantors. These proposals are likely to encounter strenuous opposition from
lenders and guarantors, and their prospects for enactment by the Congress are
uncertain. No assurance can be made that some or all of these proposals will
not be enacted, or that other amendments to the Act adverse to lenders or
guarantors will not be included in the final FY 1998 Budget or related
legislation.
Ratings of the Notes. It is a condition to the issuance and sale of the
Senior Notes that the Senior Notes be rated in the highest investment rating
category by at least two nationally recognized rating agencies and that the
Subordinate Notes be rated in the "BBB" or equivalent rating category by at
least two such rating agencies. A rating is not a recommendation to purchase,
hold or sell securities, inasmuch as such rating does not comment as to market
price or suitability for a particular investor. The ratings of the Notes
address the likelihood of the ultimate payment of principal of and interest on
such Notes pursuant to their terms. However, the Rating Agencies do not
evaluate, and the ratings of the Notes do not address, the likelihood of
payment of the Senior Noteholders' Interest T-Bill Carryover or the Subordinate
Noteholders' Interest T-Bill Carryover, as the case may be. In addition, the
ratings do not address the likelihood of an Early Amortization Event. There can
be no assurance that a rating will remain for any given period of time or that
a rating will not be lowered or withdrawn entirely by a Rating Agency if in its
judgment circumstances in the future so warrant. There can be no assurance as
to whether any additional rating agency will rate the Senior Notes or the
Subordinate Notes, or if one does, what rating would be assigned by such other
rating agency.
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
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<PAGE>
Department for Interest Subsidy and Special Allowance Payments on loans in the
Trust 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 guarantors in
lump sum form. In that event, such payments would be allocated among the trusts
in a manner similar to the allocation process for Interest Subsidy and Special
Allowance Payments.
The Department regards the Eligible Lender Trustee as the party primarily
responsible to the Department for any liabilities owed to the Department or
guarantors resulting from the Eligible Lender Trustee's activities in the
FFELP. As a result, if the Department or a guarantor were to determine that the
Eligible Lender Trustee owes a liability to the Department or a guarantor on
any Student Loan for which the Eligible Lender Trustee is or was legal
titleholder, including loans held in the Trust or other trusts, the Department
or guarantor 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 guarantor determines such a liability exists in connection with a trust
using the shared lender identification number, the Department or a guarantor
would be likely to collect that liability by offset against amounts due the
Eligible Lender Trustee under the shared lender identification number,
including amounts owed in connection with the Trust.
In addition, other trusts using the shared lender identification number may
in a given quarter incur Federal Origination Fees that exceed the Interest
Subsidy and Special Allowance Payments payable by the Department on the loans
in such other trusts, resulting in the consolidated payment from the Department
received by the Eligible Lender Trustee under such lender identification number
for that quarter equalling an amount that is less than the amount owed by the
Department on the loans in the Trust for that quarter.
The Trust Agreement for the Trust and the trust agreement for other trusts
established by the Seller which share the lender identification number to be
used by the Trust (the Trust and such other trusts, collectively, the "Seller
Trusts") will require a Seller Trust (including the Trust) to indemnify the
other Seller Trusts for a shortfall or an offset by the Department or a
guarantor arising from the Student Loans held by the Eligible Lender Trustee on
such trust's behalf.
Incentive Programs. The Seller currently makes available and may hereafter
make available certain incentive programs to borrowers. Two such programs are
currently made available to borrowers of Stafford Loans whose loans were
disbursed on or after January 1, 1996, the Choice Rates (TM) and Choice
Repay (TM) programs. Under the Choice Rates program, borrowers who make their
first 48 payments on time receive a 2% per annum interest rate reduction for
the remaining term of their loan repayment. Under the Choice Repay program,
borrowers who use the USA Group Loan Services AutoCheck (R) auto-debit system
to remit payments directly from their bank accounts receive a 0.25% per annum
interest rate reduction on their loans. Under the Choice Rates and the Choice
Repay programs, the Seller retains the option to terminate or change the terms
of the incentives with respect to any or all of the borrower's loans, including
loans originated prior to the termination or change which have been or will be
assigned to the Trust. It cannot be predicted with certainty which borrowers
will qualify or decide to participate in these programs.
The effect of these incentive programs may be to reduce the yield on the
Initial Financed Student Loans or on Additional Student Loans which may be
added to the Trust. If any such incentive program (other than the Choice Repay
program) does reduce the yield on the affected Student Loan and is not required
by the Act, such program will be applicable to Student Loans in the Trust only
if and to the extent that the Trust receives payment from the Seller in an
amount sufficient to offset such yield reduction.
S-28
<PAGE>
FORMATION OF THE TRUST
THE TRUST
SMS Student Loan Trust 1997-A will be a trust formed under the laws of the
State of Delaware pursuant to the Trust Agreement for the transactions
described herein and in the Prospectus. The Trust will not engage in any
activity other than (i) acquiring, holding and managing the Financed Student
Loans and the other assets of the Trust and proceeds therefrom, (ii) issuing
the Notes, (iii) making payments thereon, (iv) originating Federal
Consolidation Loans during the Revolving Period, and (v) engaging in other
activities that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto or connected therewith.
The proceeds from the sale of the Notes will be used by the Eligible Lender
Trustee to purchase on behalf of the Trust the Initial Financed Student Loans
from the Seller pursuant to the Loan Sale Agreement and to fund the Reserve
Account Initial Deposit. Upon the consummation of such transactions, the
property of the Trust will consist of (a) a pool of Student Loans, legal title
to which is held by the Eligible Lender Trustee on behalf of the Trust, (b) all
funds collected in respect thereof on or after the Cutoff Date, and (c) all
moneys and investments on deposit in the Collection Account and the Reserve
Account. The Notes will be collateralized by the property of the Trust. The
Collection Account, the Reserve Account and the Collateral Reinvestment Account
will be maintained in the name of the Indenture Trustee for the benefit of the
Noteholders. To facilitate servicing and to minimize administrative burden and
expense, the Servicer will be appointed custodian of the promissory notes
representing the Financed Student Loans by the Eligible Lender Trustee.
The Trust will use funds on deposit in the Collateral Reinvestment Account
during the Revolving Period to make Additional Fundings, including to make or
acquire Additional Student Loans which will constitute property of the Trust.
See "Description of the Transfer and Servicing Agreements--Revolving Period and
Additional Fundings" herein. In addition, after the Revolving Period,
Additional Student Loans will be added to the Trust to the extent that (i) the
Eligible Lender Trustee on behalf of the Trust purchases Serial Loans from the
Seller, (ii) the Trust owns Financed Student Loans which are exchanged for
Serial Loans owned by the Seller as described herein or (iii) for 210 days
after the end of the Revolving Period, Add-on Consolidation Loans are added to
Federal Consolidation Loans owned by the Trust. Any such origination or
conveyance during or after the Revolving Period of Additional Student Loans is
conditioned on compliance with the procedures described in the Loan Sale
Agreement. The Seller expects that the amount of Additional Fundings during the
Revolving Period will approximately equal the amount deposited during the
Revolving Period into the Collateral Reinvestment Account and that the timing
of such Additional Fundings will be sufficient so as not to cause a build-up of
funds in the Collateral Reinvestment Account that would cause an Early
Amortization Event to occur prior to the scheduled end of the Revolving Period
on the last day of the Collection Period preceding the October 2000 Quarterly
Payment Date. The Seller's expectations in this regard, based on current facts
and circumstances, but relating to future events, are inherently forward
looking. These expectations are based primarily upon current market conditions,
including conditions in the secondary market for Student Loans, and current
expectations as to when Additional Fundings will need to be made (based, in
part, on expectations as to the rate at which the Initial Financed Student
Loans will repay). There is a risk that market conditions will change or that
the actual repayment experience on the Initial Financed Student Loans will be
other than as expected. See "Risk Factors--Maturity and Prepayment
Considerations" herein and "Risk Factors--Maturity and Prepayment Assumptions"
in the Prospectus. In addition, a material adverse change in the operations or
business or financial condition of the Seller could affect the amount or timing
of Additional Fundings of New Loans or Serial Loans during the Revolving
Period. Accordingly, there can be no assurance as to the amount or timing of
Additional Fundings during the Revolving Period. Upon an Early Amortization
Event or in any event if the amount on deposit in the Collateral Reinvestment
Account has not been reduced to zero by the end of the Revolving Period, any
amounts remaining on deposit in the Collateral Reinvestment Account will be
paid on the Quarterly Payment
S-29
<PAGE>
Date immediately following the end of the Revolving Period as a payment of
principal first to the Senior Noteholders, until the aggregate principal
balance of the Senior Notes has been reduced to zero, and then to the
Subordinate Noteholders, until the aggregate principal balance of the
Subordinate Notes has been reduced to zero. There can also be no assurance as
to the amount of Additional Fundings that will occur after the Revolving
Period. See "Description of the Transfer and Servicing Agreements--Revolving
Period and Additional Fundings" herein.
The Trust's principal offices are in 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 is the Eligible Lender Trustee for the
Trust under the Trust Agreement. The First National Bank of Chicago is a
national banking association whose principal offices are located at One First
National Plaza, Suite 0126, Chicago, Illinois 60670 and whose New York offices
are located at First Chicago Trust Company of New York, 14 Wall Street, New
York, New York 10005. The Eligible Lender Trustee will acquire on behalf of the
Trust legal title to all the Financed Student Loans acquired from time to time
pursuant to the Loan Sale Agreement. The Eligible Lender Trustee on behalf of
the Trust will enter into a Guarantee Agreement with each of the Guarantors
with respect to such Financed Student Loans. The Eligible Lender Trustee
qualifies as an eligible lender and owner of all Financed Student Loans for all
purposes under the Higher Education Act and the Guarantee Agreements. Failure
of the Financed Student Loans to be owned by an eligible lender would result in
the loss of any Guarantee Payments from any Guarantor and any Federal
Assistance with respect to such Financed Student Loans. See "The Student Loan
Pools" in the Prospectus. The Eligible Lender Trustee's liability in connection
with the issuance and sale of the Notes is limited solely to the express
obligations of the Eligible Lender Trustee set forth in the Trust Agreement,
the Loan Sale Agreement and the Servicing Agreement. See "Description of the
Notes" herein and "Description of the Transfer and Servicing Agreements" herein
and in the Prospectus. The Seller and its affiliates may maintain normal
commercial banking relations with the Eligible Lender Trustee.
S-30
<PAGE>
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.
No Initial Financed Student Loan as of the Cutoff Date consists of a Student
Loan that was subject to the Seller's prior obligation to sell such loan to a
third party.
Following the Closing Date and prior to the end of the Revolving Period, the
Trust will be obligated from time to time to purchase from the Seller, and the
Seller, subject to the availability thereof, will be obligated to tender to the
Trust, New Loans owned by the Seller each of which will have been made to a
borrower who is not a borrower under any Financed Student Loan. In addition,
following the Closing Date, and both during and after the Revolving Period, the
Trust will be obligated from time to time to purchase from the Seller, subject
to the availability thereof, Serial Loans owned by the Seller. During the
Revolving Period, the purchase of New Loans and Serial Loans, including a
Purchase Premium Amount for each New Loan or Serial Loan so purchased of up to
2.5% of the principal balance owed by the applicable borrower on such loan,
will be funded by means of a transfer of amounts on deposit in the Collateral
Reinvestment Account as described herein. Following the end of the Revolving
Period, the purchase of Serial Loans will be funded by amounts representing
distributions of principal on the outstanding Financed Student Loans which
would otherwise have been part of the Available Funds of the Trust or,
alternatively, at the Seller's option, the Eligible Lender Trustee will be
obligated to exchange with the Seller existing Financed Student Loans owned by
the Trust for such Serial Loans, provided such Serial Loans and eligible
Financed Student Loans meet certain criteria described herein. Any Purchase
Premium Amounts for Serial Loans purchased or exchanged for by the Trust after
the Revolving Period will be funded on the Quarterly Payment Date next
succeeding the end of the Collection Period during which such Serial Loan has
been acquired by the Trust from amounts, if any, on deposit in the Reserve
Account in excess of the Specified Reserve Account Balance.
In addition, following the Closing Date, and prior to the end of the
Revolving Period, the Eligible Lender Trustee on behalf of the Trust will seek
to originate Federal Consolidation Loans to borrowers on Financed Student Loans
who are also borrowers under one or more Federal Student Loans (whether or not
all such loans are in the Trust), which origination will be funded by means of
a transfer from the Collateral Reinvestment Account of the amount required to
repay any Student Loans not held by the Trust that are being consolidated with
the Financed Student Loans in the Trust. Such amount will be paid by the Trust
to the holder or holders of such Student Loans to prepay such loans. The
Eligible Lender Trustee will not be permitted to originate Federal
Consolidation Loans (including the addition of any Add-on Consolidation Loans)
on behalf of the Trust during the Revolving Period in an aggregate principal
amount in excess of $ ; additionally, no Federal Consolidation Loan may be
originated by the Trust having a scheduled maturity date after if at the
time of such origination the aggregate principal amount of all Federal
Consolidation Loans held by the Trust that have a scheduled maturity date after
exceeds or, after giving effect to such origination, would exceed
$ ; provided, however, that the Eligible Lender Trustee will be permitted
to fund the addition of Add-on Consolidation Loans in excess of such amounts if
required to do so by the Act. After the Revolving Period, the Eligible Lender
Trustee on behalf of the Trust will cease to make Federal Consolidation Loans
and Additional Student Loans will consist solely of Serial Loans acquired in
the manner specified above; provided, however, that for a maximum period of 210
days following the end of the Revolving Period, the Eligible Lender Trustee may
be required to increase the principal balance of Federal Consolidation Loans
existing in the Trust by the amount of any related Add-on Consolidation Loans,
as described below.
As described under "The Federal Family Education Loan Program--Federal
Consolidation Loan Program" in the Prospectus, borrowers may consolidate
additional loans ("Add-on Consolidation Loans") with an existing Federal
Consolidation Loan within 180 days from the date that the existing Federal
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<PAGE>
Consolidation Loan was made. As a result of the addition of any Add-on
Consolidation Loans, the related Federal Consolidation Loan may, in certain
cases, have a different interest rate and a different loan term. Any Add-on
Consolidation Loans added to a Federal Consolidation Loan in the Trust during
the Revolving Period will be funded by means of a transfer from the Collateral
Reinvestment Account of the amount required to repay in full any Student Loans
not held by the Trust that are being discharged in the consolidation process,
which amount will be paid by the Eligible Lender Trustee on behalf of the Trust
to the holder or holders of such Student Loans to prepay such loans. For a
maximum period of 210 days following the end of the Revolving Period (30 days
being attributed to the processing of any such Add-on Consolidation loans),
such amounts will be funded by amounts representing distributions of principal
on the outstanding Financed Student Loans which would otherwise have been part
of the Available Funds of the Trust, as described under "Description of the
Transfer and Servicing Agreements--Distributions" herein.
No selection procedures believed by the Seller to be adverse to the
Noteholders were used or will be used in selecting the Financed Student Loans.
However, except for the criteria described in the preceding paragraphs and
under "Description of the Transfer and Servicing Agreements--Additional
Fundings" herein or contained in the Loan Sale Agreement, there will be no
required characteristics of the Additional Student Loans. Therefore, following
the transfer of Additional Student Loans to the Eligible Lender Trustee on
behalf of the Trust, the aggregate characteristics of the entire pool of
Financed Student Loans, including the composition of the Financed Student Loans
and of the borrowers thereof, the Guarantors thereof, the distribution by loan
type, the distribution by interest rate, the distribution by principal balance
and the distribution by remaining term to scheduled maturity described in the
following tables, may vary significantly from those of the Initial 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 with respect to 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 of the Financed Student
Loans as a result of the granting of deferral and forbearance periods with
respect thereto.
Set forth below in the following tables is a description of certain
additional characteristics of the Initial Financed Student Loans as of the
Cutoff Date:
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 balance due from Obligors, plus accrued interest
thereon estimated to be $ as of the Cutoff Date to be capitalized
upon commencement of repayment.
(2) Determined from the date of origination or the Cutoff Date, as the case may
be, to the stated maturity date of the applicable Initial Financed Student
Loans, assuming repayment commences promptly upon expiration of the typical
grace period following the expected graduation date and without giving
effect to any deferral or forbearance periods that may be granted in the
future. See "The Federal Family Education Loan Program" in the Prospectus.
(3) Determined using the interest rates applicable to the Initial Financed
Student Loans as of the Cutoff Date. However, because a portion of the
Initial Financed Student Loans effectively bear interest generally at a
variable rate per annum to the borrower, there can be no assurance that the
foregoing percentage will remain applicable to the Initial Financed Student
Loans at any time after the Cutoff Date. See "The Federal Family Education
Loan Program" in the Prospectus.
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<PAGE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY LOAN TYPE AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF POOL
NUMBER OF OUTSTANDING BY OUTSTANDING
LOAN TYPE LOANS PRINCIPAL BALANCE(1) PRINCIPAL BALANCE
--------- --------- -------------------- -----------------
<S> <C> <C> <C>
Stafford Loans(2).............. $ %
SLS Loans......................
PLUS Loans.....................
Federal Consolidation Loans....
------ --------- ---
Total........................ $ %
====== ========= ===
</TABLE>
- --------
(1) Includes net principal balance due from Obligors, plus accrued interest
thereon estimated to be $ as of the Cutoff Date to be
capitalized upon commencement of repayment.
(2) Includes Unsubsidized Stafford Loans having an aggregate outstanding
principal balance as of the Cutoff Date of $ .
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY BORROWER INTEREST RATES AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF POOL
NUMBER OF OUTSTANDING BY OUTSTANDING
RANGE OF INTEREST RATES (1) LOANS PRINCIPAL BALANCE (2) PRINCIPAL BALANCE
--------------------------- --------- --------------------- -----------------
<S> <C> <C> <C>
7.00% to 7.49%............... $ %
8.00% to 8.49%...............
8.50% to 8.99%...............
9.00% to 9.49%...............
9.50% and above..............
------ ------ ---
$ %
====== ====== ===
</TABLE>
- --------
(1) Determined using the interest rates applicable to the Initial Financed
Student Loans as of the Cutoff Date. However, because a portion of the
Initial Financed Student Loans effectively bear interest at a variable rate
per annum to the borrower, there can be no assurance that the foregoing
information will remain applicable to the Initial Financed Student Loans at
any time after the Cutoff Date. See "The Federal Family Education Loan
Program" in the Prospectus.
(2) Includes net principal balance due from Obligors, plus accrued interest
thereon estimated to be $ as of the Cutoff Date to be capitalized upon
commencement of repayment.
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<PAGE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY OUTSTANDING PRINCIPAL BALANCE AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF POOL BY
RANGE OF OUTSTANDING NUMBER OF OUTSTANDING OUTSTANDING
PRINCIPAL BALANCES LOANS PRINCIPAL BALANCE (1) PRINCIPAL BALANCE
-------------------- --------- --------------------- ------------------
<S> <C> <C> <C>
Less than $2,000............. $ %
$ 2,000 to $ 3,999...........
$ 4,000 to $ 5,999...........
$ 6,000 to $ 7,999...........
$ 8,000 to $ 9,999...........
$10,000 to $11,999...........
$12,000 to $13,999...........
$14,000 to $15,999...........
$16,000 to $17,999...........
$18,000 to $19,999...........
$20,000 to $21,999...........
$22,000 to $23,999...........
$24,000 to $25,999...........
$26,000 to $27,999...........
$28,000 and above............
------ ----------- ----
$ %
====== =========== ====
</TABLE>
- --------
(1) Includes net principal balance due from Obligors, plus accrued interest
thereon estimated to be $ as of the Cutoff Date to be capitalized
upon commencement of repayment.
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY REMAINING TERM TO
SCHEDULED MATURITY AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF POOL BY
NUMBER OF MONTHS REMAINING NUMBER OF OUTSTANDING OUTSTANDING
TO SCHEDULED MATURITY(1) LOANS PRINCIPAL BALANCE(2) PRINCIPAL BALANCE
-------------------------- --------- -------------------- ------------------
<S> <C> <C> <C>
Less than 24................. $ %
24 to 35....................
36 to 47....................
48 to 59....................
60 to 71....................
72 to 83....................
84 to 95....................
96 to 107...................
108 to 119...................
120 to 131...................
132 to 143...................
144 to 155...................
156 to 167...................
168 to 179...................
180 to 191...................
192 and above................
------ ----------- ----
$ %
====== =========== ====
</TABLE>
- --------
(1) Determined from the Cutoff Date to the stated maturity date of the
applicable Initial Financed Student Loan, assuming repayment commences
promptly upon expiration of the typical grace period following the expected
graduation date and without giving effect to any deferral or forbearance
periods that may be granted in the future. See "The Federal Family
Education Loan Program" in the Prospectus.
(2) Includes net principal balance due from Obligors, plus accrued interest
thereon estimated to be $ as of the Cutoff Date to be capitalized
upon commencement of repayment.
S-34
<PAGE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS BY BORROWER PAYMENT STATUS
AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF POOL
NUMBER OF OUTSTANDING BY OUTSTANDING
BORROWER PAYMENT STATUS(1) LOANS PRINCIPAL BALANCE(2) PRINCIPAL BALANCE
-------------------------- --------- -------------------- -----------------
<S> <C> <C> <C>
In-School..................... $ %
Grace.........................
Deferral......................
Forbearance...................
Repayment.....................
------ --------------- ------
$ %
====== =============== ======
</TABLE>
- --------
(1) Refers to the status of the borrower of each Initial Financed Student Loan
as of the Cutoff Date: such borrower may still be attending school ("In-
School"), may be in a grace period prior to repayment commencing ("Grace"),
may be repaying such loan ("Repayment") or may have temporarily ceased
repaying such loan through a deferral ("Deferral") or a forbearance
("Forbearance") period. See "The Federal Family Education Loan Program" in
the Prospectus. For purposes of this table, "In-School" excludes, and
"Deferral" includes, all SLS or PLUS Loans of borrowers still attending
school.
(2) Includes net principal balance due from Obligors, plus accrued interest
thereon estimated to be $ as of the Cutoff Date to be
capitalized upon commencement of repayment.
S-35
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS AS OF THE CUTOFF
DATE
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF POOL
NUMBER OF OUTSTANDING BY OUTSTANDING
LOCATION (1) LOANS PRINCIPAL BALANCE(2) PRINCIPAL BALANCE
------------ --------- -------------------- -----------------
<S> <C> <C> <C>
Alabama........................ $ %
Alaska.........................
Arizona........................
Arkansas.......................
California.....................
Colorado.......................
Connecticut....................
Delaware.......................
District of Columbia...........
Florida........................
Georgia........................
Guam...........................
Hawaii.........................
Idaho..........................
Illinois.......................
Indiana........................
Iowa...........................
Kansas.........................
Kentucky.......................
Louisiana......................
Maine..........................
Maryland.......................
Massachusetts..................
Michigan.......................
Minnesota......................
Mississippi....................
Missouri.......................
Montana........................
Nebraska.......................
Nevada.........................
New Hampshire..................
New Jersey.....................
New Mexico.....................
New York.......................
North Carolina.................
North Dakota...................
Ohio...........................
Oklahoma.......................
Oregon.........................
Pennsylvania...................
Puerto Rico....................
Rhode Island...................
South Carolina.................
South Dakota...................
Tennessee......................
Texas..........................
Utah...........................
Vermont........................
Virgin Islands.................
Virginia.......................
Washington.....................
West Virginia..................
Wisconsin......................
Wyoming........................
Other..........................
--- --------------- ------
Total........................ $ %
=== =============== ======
</TABLE>
- --------
(1) Based on the permanent billing addresses of the borrowers of the Initial
Financed Student Loans shown on the Servicer's records as of the Cutoff
Date.
(2) Includes net principal balance due from Obligors, plus accrued interest
thereon estimated to be $ as of the Cutoff Date to be capitalized upon
commencement of repayment.
S-36
<PAGE>
DISTRIBUTION OF INITIAL FINANCED STUDENT
LOANS BY DATE OF DISBURSEMENT
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE POOL BY
OUTSTANDING OUTSTANDING
NUMBER OF PRINCIPAL PRINCIPAL
DISBURSEMENT DATE (1) LOANS BALANCE (2) BALANCE
--------------------- --------- --------------- -----------
<S> <C> <C> <C>
Pre-October 1, 1993....................... $ %
October 1, 1993 and thereafter............
------ --------------- ------
Total................................... $ %
====== =============== ======
</TABLE>
- --------
(1) Student Loans disbursed prior to October 1, 1993 are 100% guaranteed by the
applicable Guarantor, and reinsured against default by the Department up to
a maximum of 100% of the Guarantee Payments. Student Loans disbursed on or
after October 1, 1993 are 98% guaranteed by the applicable Guarantor, and
reinsured against default by the Department up to a maximum of 98% of the
Guarantee Payments.
(2) Includes net principal balance due from Obligors, plus accrued interest
thereon estimated to be $ as of the Cutoff Date to be capitalized upon
commencement of repayment.
Each of the Financed Student Loans provides or will provide for the
amortization of the outstanding principal balance of such Financed Student Loan
over a series of regular payments. Each regular payment consists of an
installment of interest which is calculated on the basis of the outstanding
principal balance of such Financed Student Loan multiplied by the applicable
interest rate and further multiplied by the period elapsed (as a fraction of a
calendar year) since the preceding payment of interest was made. As payments
are received in respect of such Financed Student Loan, the amount received is
applied first to interest accrued to the date of payment and the balance is
applied to reduce the unpaid principal balance. Accordingly, if a borrower pays
a regular installment before its scheduled due date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be less than it would have been had the payment been made as scheduled, and the
portion of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if a borrower pays a monthly installment
after its scheduled due date, the portion of the payment allocable to interest
for the period since the preceding payment was made will be greater than it
would have been had the payment been made as scheduled, and the portion of the
payment applied to reduce the unpaid principal balance will be correspondingly
less. In either case, subject to any applicable Deferral Periods or Forbearance
Periods, the borrower pays a regular installment until the final scheduled
payment date, at which time the amount of the final installment is increased or
decreased as necessary to repay the then outstanding principal balance of such
Financed Student Loan.
GUARANTEE OF FINANCED STUDENT LOANS
By the Closing Date, the Eligible Lender Trustee will have entered into a
Guarantee Agreement with each of the Initial Guarantors pursuant to which each
of such Guarantors has agreed to serve as Guarantor for certain of the Financed
Student Loans. As of the Cutoff Date, approximately % by principal balance of
the Initial Financed Student Loans are guaranteed by USA Funds and
approximately % by ICSAC.
During the Revolving Period, the Trust may acquire Additional Student Loans
guaranteed by Additional Guarantors other than the Initial Guarantors provided
that, at the time of such acquisition, such Guarantors are Federal Guarantors
and enter into a Guarantee Agreement with the Eligible Lender Trustee. In the
aggregate no more than % by principal balance of the Financed Student Loans
may, following any such addition, have guarantees from Additional Guarantors
and no more than % by principal balance of the Financed Student Loans may,
following any such addition, have guarantees from the related Additional
Guarantor (unless and to the extent that either such limitation is exceeded
solely though the origination on behalf of the Trust of Federal Consolidations
Loans or the purchase by the Trust of Serial Loans, in either case, that are
made with respect to Financed Student Loans guaranteed by an Additional
Guarantor).
Pursuant to its Guarantee Agreement, each of the Guarantors guarantees
payment of 100% of the principal (including any interest capitalized from time
to time) and accrued interest for the Financed Student
S-37
<PAGE>
Loans as to which any one of the following events has occurred:
(a) failure by the borrower thereof to make monthly principal or interest
payments on such Financed Student Loan when due, provided such failure
continues for a statutorily determined period of time of at least 180 days
(except that such guarantee against such failures will be 98% of principal
and at least 98% of accrued interest for loans first disbursed on or after
October 1, 1993);
(b) any filing by or against the borrower thereof of a petition in
bankruptcy pursuant to any chapter of the Federal bankruptcy code, as
amended;
(c) the death of the borrower thereof; or
(d) the total and permanent disability of the borrower thereof to work
and earn money or attend school, as certified by a qualified physician.
When these conditions are satisfied, the Higher Education Act requires the
Guarantor generally to pay the claim within 60 days of its submission by the
lender. The obligations of each Guarantor pursuant to its Guarantee Agreement
are obligations solely of each Guarantor, and are not supported by the full
faith and credit of the federal or any state government. However, the Higher
Education 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
such guarantor under the loan insurance program of such guarantor. The
Secretary is authorized, among other things, to take those actions necessary to
ensure the continued availability of Federal Student Loans to residents of the
state or states in which such guarantor did business, the full honoring of all
guarantees issued by such guarantor prior to the assumption by the Secretary of
the functions of such guarantor, and the proper servicing of Federal Student
Loans guaranteed by such guarantor prior to the Secretary's assumption of the
functions of such guarantor. For a further discussion of the Secretary's
authority in the event that the 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
Prospectus.
Each Guarantor's guarantee obligations with respect to any Financed Student
Loan guaranteed by it 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: (i) the origination
and servicing of such Financed Student Loan being performed in accordance with
the Higher Education Act and other applicable requirements, (ii) the timely
payment to the Guarantor of the guarantee fee payable with respect to such
Financed Student Loan, (iii) the timely submission to the Guarantor of all
required pre-claim delinquency status notifications and of the claim with
respect to such Financed Student Loan, and (iv) the transfer and endorsement of
the promissory note evidencing such Financed Student Loan to the Guarantor upon
and in connection with making a claim for Guarantee Payments thereon. Failure
to comply with any of the applicable conditions, including the foregoing, may
result in the refusal of the Guarantor to honor its Guarantee Agreement with
respect to such Financed Student Loan, in the denial of guarantee coverage with
respect to certain accrued interest amounts with respect thereto, or in the
loss of certain Interest Subsidy Payments and Special Allowance Payments with
respect thereto. Under the Servicing Agreement and the Loan Sale Agreement,
such failure to comply would constitute a breach of the Servicer's covenants or
the Seller's representations and warranties, as the case may be, and would
create an obligation of the Servicer (subject to the limitations described
under "Risk Factors--Maturity and Prepayment Considerations" herein) or the
Seller, as the case may be, to purchase or repurchase such Financed Student
Loan or, in the case of a breach by the Seller, to substitute for such loan and
to reimburse the Trust for such non-guaranteed interest amounts or such lost
Interest Subsidy Payments and Special Allowance Payments with respect thereto.
The Servicer will not, however, have any similar obligation to reimburse the
Trust for non-guaranteed interest amounts or lost Interest Subsidy or Special
Allowance Payments which result from a breach of its covenants with respect to
the Financed Student Loans. See "Description of the Transfer and Servicing
Agreements--Sale of Financed Student Loans; Representations and Warranties" and
"--Servicer Covenants" in the Prospectus.
S-38
<PAGE>
Set forth below is certain current and historical information with respect
to each Initial Guarantor in its capacity as a Guarantor of all education
loans guaranteed by it:
Guarantee Volume. The following table sets forth the approximate aggregate
principal amount of federally reinsured education loans (including loans under
the Parent Loans to Undergraduate Students (PLUS) program but excluding
Federal Consolidation Loans) that have first become guaranteed by each of the
Guarantors in each of the last five federal fiscal years:*
<TABLE>
<CAPTION>
STAFFORD, SLS AND PLUS LOANS GUARANTEED
(DOLLARS IN MILLIONS)
-------------------------------------------------
FEDERAL FISCAL YEAR USA FUNDS ICSAC
------------------- --------------------- ------------------
<S> <C> <C>
1992 $ 2,864 $ 256
1993 3,494 294
1994 4,724 336
1995 5,040 214
1996 -- --
</TABLE>
- --------
* The information set forth in the table above has been obtained from the
Department of Education's Guaranteed Student Loan Programs Data Books
(each, a "DOE Data Book") for Fiscal Years 1992 and 1993 (with respect to
fiscal years 1992 and 1993) and from each Initial Guarantor (with respect
to information regarding such Guarantor for fiscal years 1994 through
1996), and is not guaranteed as to accuracy or completeness, and is not to
be construed as a representation, by the Seller or the Underwriter.
Reserve Ratio. Each Initial Guarantor is and has been in compliance with all
provisions of the Act which require the Guarantor to maintain a reserve fund
of assets in an amount equal to or greater than a percentage of outstanding
loans guaranteed by the Guarantor.
Recovery Rates. Each Guarantor's recovery rate, which provides a measure of
the effectiveness of the collection efforts against defaulting borrowers after
the guarantee claim has been satisfied, is determined by dividing the amount
recovered from borrowers by such Guarantor by the aggregate amount of default
claims paid by such Guarantor during the applicable federal fiscal year with
respect to borrowers. 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>
RECOVERY RATE
----------------------------------------------
FEDERAL FISCAL YEAR USA FUNDS ICSAC
------------------- --------- -----
<S> <C> <C>
1992 24.12% 41.45%
1993 26.58 43.36
1994 30.30 54.47
1995 25.26 48.97
1996 -- --
</TABLE>
- --------
* The information set forth in the table above with respect to each Initial
Guarantor has been obtained from such Guarantor, and is not guaranteed as to
accuracy or completeness, and is not to be construed as a representation, by
the Seller or the Underwriter.
Claims Rate. Each Guarantor's claims rate measures the amount of federal
reinsurance claims paid by the Department to such Guarantor during a fiscal
year as a percentage of the original principal amount of guaranteed loans in
repayment at the end of the prior federal fiscal year. No assurance can be
made that such Guarantor will receive full reimbursement for reinsurance
claims (or the full 98% maximum reimbursement for loans first disbursed on or
after October 1, 1993). Such reimbursement is subject to reduction where 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 Prospectus. The following table sets
forth the claims rate of each Initial Guarantor (excluding, with respect to
USA Funds, Arizona, Hawaii and certain Pacific islands) for each of the last
five federal fiscal years*:
S-39
<PAGE>
<TABLE>
<CAPTION>
CLAIMS RATE
---------------------------------------------
FEDERAL FISCAL YEAR USA FUNDS ICSAC
------------------- --------- -----
<S> <C> <C>
1992 4.99% 1.67%
1993 6.89 1.81
1994 4.99 1.99
1995 4.69 2.17
1996 4.65 --
</TABLE>
- --------
* The information set forth in the table above has been obtained from the
Department (with respect to fiscal year 1992) and from each Initial
Guarantor (with respect to information regarding such Guarantor for fiscal
years 1993, 1994, 1995 and 1996), and is not guaranteed as to accuracy or
completeness, and is not to be construed as a representation by the Seller
or the Underwriter.
Unless otherwise indicated, all the above information relating to each
Initial Guarantor has been obtained from such Initial Guarantor, is not
guaranteed as to accuracy or completeness by the Seller or the Underwriter and
is not to be construed as a representation by the Seller or the Underwriter.
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 such volume, ratios, or rates will be or as
to whether the Initial Guarantors or such 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 certain Federal Guarantors who could become Additional Guarantors.
S-40
<PAGE>
DESCRIPTION OF THE NOTES
GENERAL
The Notes will be issued pursuant to the terms of the Indenture substantially
in the form filed as an exhibit to the Registration Statement. The following
summary describes certain terms of the Notes, the Indenture and the Trust
Agreement pursuant to which the Trust will be formed. The summary does not
purport to be complete and is qualified in its entirety by reference to the
provisions of the Notes, the Indenture and the Trust Agreement. The following
summary supplements, and to the extent inconsistent therewith, replaces the
description of the general terms and provisions of the Notes, the Indenture and
the Trust Agreement set forth in the Prospectus, to which description reference
is hereby made.
PAYMENTS OF INTEREST
Interest will accrue on the principal balance of the Senior Notes and the
Subordinate Notes at a rate per annum (calculated as provided below) equal to
the Senior Note Rate and the Subordinate Note Rate, respectively. Interest on
the Notes will accrue from and including the Closing Date or from the most
recent Quarterly Payment Date on which interest thereon has been paid to but
excluding the current Quarterly Payment Date (each a "Quarterly Interest
Period") and will be payable to the Senior Noteholders and the Subordinate
Noteholders, as the case may be, quarterly on each Quarterly Payment Date,
commencing July 28, 1997. Interest accrued as of any Quarterly Payment Date but
not paid on such Quarterly Payment Date will be due on the next Quarterly
Payment Date, together with an amount equal to interest on such amount at the
applicable rate per annum specified above. Interest payments on the Notes will
generally be funded from Available Funds on deposit in the Collection Account
and from amounts on deposit in the Reserve Account remaining after the
distribution of the Servicing Fee and all overdue Servicing Fees and the
Administration Fee and all overdue Administration Fees for such Quarterly
Payment Date. See "Description of the Transfer and Servicing Agreements--
Distributions" and "--Credit Enhancement" herein.
The "Senior Note Rate" for each Quarterly Interest Period will be the lesser
of (a) the Senior Note T-Bill Rate for such Quarterly Interest Period and (b)
the Student Loan Rate for such Quarterly Interest Period. The "Subordinate Note
Rate" for each Quarterly Interest Period will be the lesser of (a) the
Subordinate Note T-Bill Rate for such Quarterly Interest Period and (b) the
Student Loan Rate for such Quarterly Interest Period.
The "Senior Note T-Bill Rate" shall be equal to the weighted average of the
T-Bill Rates within the applicable Quarterly Interest Period (determined as
described herein) plus %.
The "Subordinate Note T-Bill Rate" shall be equal to the weighted average of
the T-Bill Rates within the applicable Quarterly Interest Period (determined as
described herein) plus %.
The "Student Loan Rate" for any Quarterly Interest Period will equal the
product of (a) the quotient obtained by dividing (i) 365 (or 366 in the case of
a leap year) by (ii) the actual number of days elapsed in such Quarterly
Interest Period and (b) the percentage equivalent of a fraction, (i) the
numerator of which is equal to Expected Interest Collections for such Quarterly
Interest Period less the Servicing Fee and the Administration Fee with respect
to such Quarterly Interest Period and (ii) the denominator of which is the
aggregate principal balance of the Notes as of the last day of such Quarterly
Interest Period.
"Expected Interest Collections" means, with respect to any Quarterly Interest
Period, the sum of (i) the amount of interest accrued, net of accrued Monthly
Rebate Fees and other amounts required by the Act to be paid to the Department,
with respect to the Financed Student Loans for the related Student Loan Rate
Accrual Period (whether or not such interest is actually paid), (ii) all
Interest Subsidy Payments and Special Allowance Payments estimated to have
accrued for such Student Loan Rate Accrual Period whether or not actually
received (taking into account any expected deduction therefrom of the Federal
Origination Fees described under "Risk Factors--Fees Payable on Certain
Financed Student Loans", above) and (iii) Investment Earnings for such Student
Loan Rate Accrual Period.
Senior Noteholders' Interest T-Bill Carryover and Subordinate Noteholders'
Interest T-Bill Carryover may be incurred on any Quarterly Payment Date (after
the first Quarterly Payment Date). Any Senior
S-41
<PAGE>
Noteholders' Interest T-Bill Carryover and Subordinate Noteholders' Interest T-
Bill Carryover so incurred prior to the Parity Date will, however, not be
payable until on or after the Parity Date. On each Quarterly Payment Date from
and after the Parity Date, any Senior Noteholders' Interest T-Bill Carryover
and Subordinate Noteholders' Interest T-Bill Carryover incurred and unpaid to
any including such Quarterly Payment Date will be payable on such Quarterly
Payment Date but only out of any Reserve Account Excess remaining after payment
out of such excess of (i) if the Revolving Period has terminated, any Purchase
Premiums due the Seller for Serial Loans purchased by the Trust prior to the
end of the related Collection Period, (ii) on the Parity Date (if the Parity
Date occurs after the end of the Revolving Period), any amount necessary to
reduce to zero the remaining amount by which the aggregate principal balance of
the Notes exceeds the Pool Balance and (iii) in the case of the Subordinate
Noteholders' Interest T-Bill Carryover, payment of the Senior Noteholders'
Interest T-Bill Carryover.
DISTRIBUTIONS OF PRINCIPAL
No principal payments will be made on the Notes during the Revolving Period.
Commencing with the end of the Revolving Period, principal payments will be
made to the Noteholders in the order of priority set forth below on each
Quarterly Payment Date in an amount generally equal to the Principal
Distribution Amount for such Quarterly Payment Date, until the aggregate
principal balance of the Notes is reduced to zero. Payments of the Principal
Distribution Amount will generally be derived from Available Funds remaining
after the distribution of the Servicing Fee and all overdue Servicing Fees, the
Administration Fee and all overdue Administration Fees and the Noteholders'
Interest Distribution Amount and, if such Available Funds are insufficient,
from amounts on deposit in the Reserve Account. See "Description of the
Transfer and Servicing Agreements--Distributions" and "--Credit Enhancement"
herein. If such Available Funds and such amounts on deposit in the Reserve
Account are insufficient to pay the Senior Noteholders' Principal Distribution
Amount or, after the Senior Notes have been paid in full, the Subordinate
Noteholders' Principal Distribution Amount for a Quarterly Payment Date, such
shortfall will be added to the principal payable to the Senior or Subordinate
Noteholders, respectively, on subsequent Quarterly Payment Dates.
In addition, on each Quarterly Payment Date commencing with the end of the
Revolving Period, for so long as the aggregate principal balance of the Notes
is greater than the Pool Balance, any Reserve Account Excess for such Quarterly
Payment Date will, after payment to the Seller of any unpaid Purchase Premium
Amounts for any Serial Loans purchased by the Trust prior to the end of the
related Collection Period, be applied to pay the principal of the Notes in the
order of priority set forth below. Amounts, if any, available to be distributed
as set forth in the preceding sentence will not be part of the Principal
Distribution Amount or the Senior or Subordinate Noteholders' Principal
Distribution Amount for a Quarterly Payment Date and Noteholders will have no
entitlement thereto except to the extent of any such excess in the Reserve
Account of which there can be no assurance. See "Description of the Transfer
and Servicing Agreements--Credit Enhancement--Reserve Account" herein.
On each Quarterly Payment Date on which principal payments are made on the
Notes (whether in respect of the Principal Distribution Amount, amounts on
deposit in the Reserve Account constituting Reserve Account Excess (as
described in the preceding paragraph) or amounts in respect of a mandatory
redemption, as described below, or otherwise), all payments of principal will
be applied to pay principal of the Senior Notes until the aggregate principal
balance of the Senior Notes has been reduced to zero, and then to pay principal
of the Subordinate Notes until the aggregate principal balance of the
Subordinate Notes has been reduced to zero.
The aggregate outstanding principal amount of the Senior Notes will be
payable in full on the Quarterly Payment Date (the "Senior Note
Final Maturity Date") and the aggregate outstanding principal amount of the
Subordinate Notes will be payable in full on the Quarterly Payment
Date (the "Subordinate Note Final Maturity Date"). However, the actual maturity
of the Senior or Subordinate Notes could occur other than on the Senior Note
Final Maturity Date or the Subordinate Note Final Maturity Date, respectively,
as a result of a variety of factors including those described above under "Risk
Factors--Maturity and Prepayment Considerations."
S-42
<PAGE>
MANDATORY REDEMPTION
If any amount remains on deposit in the Collateral Reinvestment Account on
the last day of the Revolving Period after giving effect to all Additional
Fundings on or prior to such date, the entire amount remaining on deposit in
the Collateral Reinvestment Account will be used on the Quarterly Payment Date
on or immediately following such date to redeem the Senior Notes until the
aggregate principal balance thereof has been reduced to zero, and then to
redeem the Subordinate Notes until the aggregate principal balance thereof has
been reduced to zero.. The aggregate principal amount of Notes to be redeemed
will be an amount equal to the amount then on deposit in the Collateral
Reinvestment Account.
DETERMINATION OF T-BILL RATES
Pursuant to the Administration Agreement, the Administrator will use the T-
Bill Rate to determine the Senior Note T-Bill Rate and Subordinate Note T-Bill
Rate for each Quarterly Interest Period. "T-Bill Rate" means, on any day, the
weighted average per annum discount rate (expressed on a bond equivalent basis
and applied on a daily basis) for direct obligations of the United States with
a maturity of thirteen weeks ("91-day Treasury Bills") sold at the most recent
91-day Treasury Bill auction prior to such date, as reported by the U.S.
Department of the Treasury. In the event that the results of the auctions of
91-day Treasury Bills cease to be reported as provided above, or that no such
auction is held in a particular week, then the T-Bill Rate in effect as a
result of the last such publication or report will remain in effect until such
time, if any, as the results of auctions of 91-day Treasury Bills shall again
be reported or such an auction is held, as the case may be. The T-Bill Rate
will be subject to a Lock-In Period of six business days.
"Lock-In Period" means the period of days preceding any Quarterly Payment
Date during which the T-Bill Rate in effect on the first day of such period
will remain in effect until the end of the Quarterly Interest Period related to
such Quarterly Payment Date.
Accrued interest on each class of Notes from and including the Closing Date
or the preceding Quarterly Payment Date, as applicable, to but excluding the
current Quarterly Payment Date is calculated by multiplying the principal
amount of such Notes by an "accrued interest factor." This factor is calculated
by adding the interest rates applicable to each day on which each such Note has
been outstanding since the Closing Date or the preceding Quarterly Payment
Date, as applicable, and dividing the sum by 365 (or by 366 in the case of
accrued interest which is payable on a Quarterly Payment Date in a leap year)
and rounding the resulting number to nine decimal places.
The following table sets forth the accrued interest factors that would have
been applicable to any Note bearing interest at the indicated rates, assuming
the 365-day year.
<TABLE>
<CAPTION>
ASSUMED INTEREST
-----------------------
DAYS RATE ON THE INTEREST
SETTLEMENT DATE OUTSTANDING NOTES FACTOR
--------------- ----------- ----------- -----------
<S> <C> <C> <C>
1st......................................... 0 %
2nd......................................... 1
3rd......................................... 2
4th......................................... 3
5th*........................................ 4
6th......................................... 5
7th......................................... 6
8th......................................... 7
9th......................................... 8
10th ....................................... 9
</TABLE>
- --------
* First interest rate adjustment (91-day Treasury Bills are generally
auctioned weekly).
The number in this table are examples given for informational purposes only
and are in no way a prediction of interest rates on either class of Notes.
S-43
<PAGE>
BOOK-ENTRY REGISTRATION
DTC is a limited-purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the UCC and a "clearing agency" registered pursuant to
the provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participating organizations ("Participants") and to
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in their accounts, thereby
eliminating the need for physical movement of certificates. Participants
include the Underwriter, securities brokers and dealers, banks, trust companies
and clearing corporations and may include certain other organizations. Indirect
access to the DTC system also is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
Senior Noteholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Senior Notes may do so only through Participants and Indirect Participants.
In addition, Senior Noteholders will receive all distributions of principal of
and interest on the Senior Notes from the Indenture Trustee through DTC and its
Participants. Under a book-entry format, Senior Noteholders will receive
payments after the related Quarterly Payment Date because, while payments are
required to be forwarded to Cede, as nominee for DTC, on each such date, DTC
will forward such payments to its Participants which thereafter will be
required to forward them to Indirect Participants or Senior Noteholders. It is
anticipated that the only "Senior Noteholder" will be Cede, as nominee for DTC
and that Senior Noteholders will not be recognized by the Indenture Trustee as
Noteholders, as such terms are used in the Indenture. Senior Noteholders will
be permitted to exercise the rights of Senior Noteholders indirectly through
DTC and its Participants (who in turn will exercise their rights through DTC).
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Senior Notes and is required to
receive and transmit distributions of principal of and interest on the Senior
Notes. Participants and Indirect Participants with which Senior Noteholders
have accounts with respect to the Senior Notes similarly are required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Senior Noteholders.
Because DTC can only act on behalf of Participants, who in turn act on behalf
of Indirect Participants and certain banks, the ability of a Senior Noteholder
to pledge Senior Notes to persons or entities that do not participate in the
DTC system, or otherwise take actions in respect of such Senior Notes, may be
limited due to the lack of a physical certificate for such Senior Notes.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes
in accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 27
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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 Conditions govern
transfers of securities and cash within the Euroclear, withdrawals of
securities and cash from the Euroclear, and receipts of payments with respect
to securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and Conditions
only on behalf of Euroclear Participants and has no record of or relationship
with persons holding through Euroclear Participants.
Distributions with respect to Senior Notes held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to
tax reporting in accordance with relevant United States tax laws and
regulations. CEDEL or the Euroclear Operator, as the case may be, will take any
other action permitted to be taken by a Senior Noteholder under the Indenture
on behalf of a CEDEL Participant or Euroclear Participant only in accordance
with its relevant rules and procedures and subject to its Depositary's ability
to effect such actions on its behalf through DTC.
Senior Noteholders may hold their Senior Notes through DTC (in the United
States) or CEDEL or Euroclear (in Europe) if they are participants of such
systems, or indirectly through organizations which are participants in such
systems.
The Senior Notes will initially be registered in the name of CEDE & Co., the
nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank, N.A. ("Citibank") will act as depositary
for CEDEL and Morgan Guaranty Trust Company of New York ("Morgan") will act as
depositary for Euroclear (in such capacities, individually the "Depositary" and
collectively the "Depositaries").
Transfers between Participants will occur in accordance with DTC Rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Because of time-zone differences, credits of securities received in CEDEL or
Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL
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Participant or Euroclear Participant to a Participant will be received with
value on the DTC settlement date but will be available in the relevant CEDEL or
Euroclear cash account only as of the business day following settlement in DTC.
For information with respect to tax documentation procedures for the Senior
Notes, see "Certain Federal Income Tax Consequences--Tax Consequences to
Holders of the Notes--Foreign Holders" in the Prospectus.
Cross-market transfers between persons holding directly or indirectly through
DTC, on the one hand, and directly or indirectly through CEDEL Participants or
Euroclear Participants, on the other, will be effected in DTC in accordance
with DTC Rules on behalf of the relevant European international clearing system
by its Depositary; however, such cross-market transactions will require
delivery of instructions to the relevant European international clearing system
by the counterparty in such system in accordance with its rules and procedures
and within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its Depositary to take action to effect
final settlement on its behalf by delivering or receiving securities in DTC,
and making or receiving payment in accordance with normal procedures for same-
day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions to the Depositaries.
DTC has advised the Administrator that it will take any action permitted to
be taken by a Senior Noteholder under the Indenture, only at the direction of
one or more Participants to whose accounts with DTC the Senior Notes are
credited.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of interests in the Senior Notes among
participants of DTC, CEDEL and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
NEITHER THE TRUST, THE SELLER, THE SERVICER, THE ADMINISTRATOR, THE ELIGIBLE
LENDER TRUSTEE, THE INDENTURE TRUSTEE NOR THE UNDERWRITER WILL HAVE ANY
RESPONSIBILITY OR OBLIGATION TO ANY PARTICIPANTS, CEDEL PARTICIPANTS OR
EUROCLEAR PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS NOMINEES WITH
RESPECT TO (1) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC, CEDEL OR
EUROCLEAR OR ANY PARTICIPANT, (2) THE PAYMENT BY DTC, CEDEL OR EUROCLEAR OR ANY
PARTICIPANT OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE
PRINCIPAL AMOUNT OR INTEREST ON THE SENIOR NOTES, (3) THE DELIVERY BY ANY
PARTICIPANT, CEDEL PARTICIPANT OR EUROCLEAR PARTICIPANT OF ANY NOTICE TO ANY
BENEFICIAL OWNER WHICH IS REQUIRED OR PERMITTED UNDER THE TERMS OF THE
INDENTURE OR THE TRUST AGREEMENT TO BE GIVEN TO SENIOR NOTEHOLDERS OR (4) ANY
OTHER ACTION TAKEN BY DTC AS THE SENIOR NOTEHOLDER.
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DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
GENERAL
The following is a summary of certain terms of the Loan Sale Agreement,
pursuant to which the Eligible Lender Trustee on behalf of the Trust will
purchase the Financed Student Loans; the Servicing Agreement pursuant to which
the Servicer will service the Financed Student Loans; the Administration
Agreement, pursuant to which the Administrator will undertake certain other
administrative duties and functions with respect to the Trust and the Financed
Student Loans; and the Trust Agreement, pursuant to which the Trust will be
created (collectively, the "Transfer and Servicing Agreements"). Forms of the
Transfer and Servicing Agreements have been filed as exhibits to the
Registration Statement. A copy of the Transfer and Servicing Agreements will be
filed with the Commission following the issuance of the Notes. This summary
does not purport to be complete and is subject to, and qualified in its
entirety by reference to, all the provisions of the Transfer and Servicing
Agreements. The following summary supplements, and to the extent inconsistent
therewith replaces, the description of the general terms and provisions of the
Transfer and Servicing Agreements set forth in the Prospectus, to which
description reference is hereby made.
SALE OF FINANCED STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
Information with respect to the sale of the Initial Financed Student Loans
from the Seller to the Eligible Lender Trustee on behalf of the Trust on the
Closing Date pursuant to the Loan Sale Agreement and the representations and
warranties made by the Seller in connection therewith and in connection with
the purchase of Student Loans by the Trust pursuant to Additional Fundings is
set forth under "Description of the Transfer and Servicing Agreements" in the
Prospectus. The net proceeds received from the sale of the Notes will be
applied to the purchase of the Initial Financed Student Loans and to the
deposit of the Reserve Account Initial Deposit in the Reserve Account.
REVOLVING PERIOD AND ADDITIONAL FUNDINGS
During the period (the "Revolving Period") from the Closing Date until the
first to occur of (i) an Early Amortization Event as described below or (ii)
the last day of the Collection Period preceding the October 2000 Quarterly
Payment Date, the Eligible Lender Trustee on behalf of the Trust will be
obligated from time to time, subject to certain conditions described herein, to
purchase from the Seller, and the Seller, subject to the availability thereof
and to the availability of funds therefor in the Collateral Reinvestment
Account, will be obligated to tender to the Trust, Federal Student Loans which
(i) are made to a borrower who is not a borrower under any Financed Student
Loan, (ii) are made under loan programs which existed as of the Closing Date,
and (iii) are guaranteed by a Guarantor (each a "New Loan," and collectively
the "New Loans"). New Loans will be made or acquired by NBD or another eligible
lender on behalf of the Seller at the discretion and in accordance with usual
practices of the Seller. Each such purchase of a New Loan will be made by the
Eligible Lender Trustee on behalf of the Trust pursuant to a Transfer
Agreement. During the Revolving Period, each purchase of a New Loan will be
funded by means of a transfer from the Collateral Reinvestment Account of an
amount equal to the sum of (i) the principal balance owned by the applicable
borrower thereon plus accrued interest thereon expected to be capitalized upon
repayment (the "Purchase Collateral Balance") and (ii) an additional amount not
to exceed 2.5% of the principal balance owed by the applicable borrower thereon
(the "Purchase Premium Amount" and together with the Purchase Collateral
Balance, the "Loan Purchase Amount"). Following the end of the Revolving
Period, New Loans may not be purchased by the Trust.
The term "Early Amortization Event" refers to any of the following events:
(i) an Event of Default occurring under the Indenture, a Servicer Default
occurring under the Servicing Agreement or an Administrator Default
occurring under the Administration Agreement;
(ii) certain events of insolvency occurring with respect to the Seller;
(iii) the Trust becomes subject to registration as an investment company
under the Investment Company Act of 1940, as amended;
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(iv) as of the end of any Collection Period, the percentage by principal
balance of Financed Student Loans the borrowers of which use such loans to
attend schools identified by the related Guarantor as proprietary or
vocational exceeds % of the Pool Balance;
(v) as of the end of any Collection Period, the percentage by principal
balance of Financed Student Loans which are not in repayment and are not
eligible for Interest Subsidy Payments exceeds % of the Pool Balance;
(vi) the Excess Spread, with respect to each of any two successive
Quarterly Payment Dates, commencing with the Quarterly Payment Date in
, is less than %; or
(vii) the arithmetic average of the Delinquency Percentage as of the end
of each of two successive Collection Periods exceeds 20%.
"Excess Spread" means, with respect to any Quarterly Payment Date, the
percentage equivalent of a fraction the numerator of which is the product of
(a) four and (b) the difference between (x) the Expected Interest Collections
for such Quarterly Payment Date and (y) the sum of (i) the Servicing Fee for
such Quarterly Payment Date and all prior unpaid Servicing Fees, (ii) the
Administration Fee for such Quarterly Payment Date and all prior unpaid
Administration Fees, and (iii) the Noteholders' Interest Distribution Amount
for such Quarterly Payment Date, and the denominator of which is the average of
the amount of the Pool Balance as of the first and the last day of the related
Collection Period.
"Delinquency Percentage" means, as of any date of determination, the
percentage equivalent of a fraction the numerator of which is the aggregate
principal balance of the Financed Student Loans which are Repayment Loans and
which either (a) are over 120 days delinquent or (b) have had claims filed with
the Department for which payment is still awaited, and the denominator of which
is the aggregate principal balance of the Financed Student Loans which are
Repayment Loans.
In addition, following the Closing Date and both during and subsequent to the
Revolving Period, the Eligible Lender Trustee on behalf of the Trust will be
obligated from time to time, subject to the conditions described below, to
purchase from the Seller Federal Student Loans which (i) are made to a borrower
who is also a borrower under at least one outstanding Financed Student Loan,
(ii) are made under the same loan program as such Financed Student Loan, and
(iii) are guaranteed by the Guarantor that guaranteed such Financed Student
Loan (each a "Serial Loan" and collectively, the "Serial Loans"). Serial Loans
will be made or acquired by NBD or another eligible lender on behalf of the
Seller at the discretion and in accordance with usual business practices of the
Seller.
During the Revolving Period, each purchase of a Serial Loan will be funded by
means of a transfer from the Collateral Reinvestment Account of an amount equal
to the Loan Purchase Amount of such loan. Following the end of the Revolving
Period, the Purchased Collateral Balance for such purchases will be funded by
amounts representing distributions of principal on the outstanding Financed
Student Loans which otherwise would have been part of the Available Funds of
the Trust, as described under "Description of the Transfer and Servicing
Agreements--Distributions", herein and Purchase Premium Amounts for such
purchases will be funded on the next succeeding Quarterly Payment Date from any
Reserve Account Excess for such Quarterly Payment Date as described under
"Description of the Transfer and Servicing Agreements--Credit Enhancement--
Reserve Account". Alternatively, at the Seller's option, following the end of
the Revolving Period, the Eligible Lender Trustee will be obligated, in lieu of
purchasing Serial Loans as described above, to exchange with the Seller
existing Financed Student Loans owned by the Trust for Serial Loans owned by
the Seller, provided that each Financed Student Loan so exchanged (an
"Exchanged Financed Student Loan") meets certain criteria including that (i)
the Exchanged Financed Student Loan was originated under the same loan program
and is guaranteed by the same Guarantor as such Financed Student Loan and
entitles the holder thereof to receive interest based on the same interest rate
index as the Serial Loan to be exchanged into the Trust (the "Exchanged Serial
Loan"), and (ii) the Exchanged Financed Student Loan will not, at any level of
such interest rate index, have an interest rate that is greater than the
Exchanged Serial Loan. In addition, if the outstanding principal amount of an
Exchanged Financed Student Loan is less than that of the related Exchanged
Serial Loan, an additional amount equal to such difference will be remitted
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to the Seller from amounts which would otherwise have been part of the
Available Funds of the Trust, as described under "Description of the Transfer
and Servicing Agreements--Distributions" herein. Any Purchase Premium Amount
for an Exchanged Serial Loan will be paid in same manner described above from
Reserve Account Excess.
A purchase of Serial Loans or acquisition of Exchanged Serial Loans will be
prohibited at any time after (i) an Event of Default occurs under the
Indenture, a Servicer Default occurs under the Servicing Agreement or an
Administrator Default occurs under the Administration Agreement, or (ii)
certain events of insolvency occur with respect to the Seller.
Any purchase of New Loans, Serial Loans or exchange of Exchanged Financed
Student Loans for Exchanged Serial Loans will be made by the Trust on a date
designated by the Seller (each, a "Transfer Date") pursuant to one or more
Transfer Agreements. On such Transfer Date, the Seller will assign without
recourse (except as otherwise set forth in the Transfer and Servicing
Agreements) to the Eligible Lender Trustee on behalf of the Trust, the Seller's
entire interest in the New Loans, Serial Loans or Exchanged Serial Loans being
transferred on such Transfer Date, in exchange for the Loan Purchase Amount
thereof or the Exchanged Financed Student Loans being exchanged therefor (with
the payment of any Purchase Premium Amount for Serial Loans acquired by the
Trust after the Revolving Period being deferred to the next succeeding
Quarterly Payment Date on which amounts in excess of the Specified Reserve
Account Balance are available in the Reserve Account as described above).
In addition, following the Closing Date and prior to the end of the Revolving
Period, in the event that a borrower of a Financed Student Loan who is also a
borrower under one or more Federal Student Loans (whether or not all such loans
are part of the Trust) elects to consolidate such loans, the Eligible Lender
Trustee on behalf of the Trust will seek to originate a Federal Consolidation
Loan pursuant to the Federal Consolidation Loan Program described in the
Prospectus under "Federal Family Education Loan Program--Federal Consolidation
Loan Program". Such origination will be funded by means of a transfer from the
Collateral Reinvestment Account of the amount required to repay in full any
Federal Student Loans not held by the Trust that are being discharged in the
consolidation process, which amount will be paid by the Trust to the holder or
holders of such Federal Student Loans to prepay such loans. No assurance can be
given that the Eligible Lender Trustee, rather than another lender, will be the
lender which makes such Federal Consolidation Loan. In the event that another
lender makes such Federal Consolidation Loan, any Financed Student Loan which
is being consolidated by such Federal Consolidation Loan will be prepaid. The
Eligible Lender Trustee will not be permitted to originate Federal
Consolidation Loans (including the addition of any Add-on Consolidation Loans)
on behalf of the Trust during the Revolving Period in an aggregate principal
amount in excess of $ ; additionally, no Federal Consolidation Loan may be
originated by the Trust having a scheduled maturity date after if at the
time of such origination the aggregate principal amount of all Federal
Consolidation Loans held by the Trust that have a scheduled maturity date after
exceeds or, after giving effect to such origination, would exceed $ ;
provided, however, that the Eligible Lender Trustee will be permitted to fund
Add-on Consolidation Loans in excess of such amounts if required to do so by
the Act. After the Revolving Period, the Eligible Lender Trustee on behalf of
the Trust will cease to originate Federal Consolidation Loans, and any Federal
Consolidation Loan made with respect to a Financed Student Loan will be made by
another lender, thereby resulting in a prepayment of such Financed Student
Loan; provided, however, that for a maximum period of 210 days following the
end of the Revolving Period, the Eligible Lender Trustee may be required to
increase the principal balance of Federal Consolidation Loans existing in the
Trust by the amount of any related Add-on Consolidation Loans, as described
below.
As described under "The Federal Family Education Loan Program--Federal
Consolidation Loan Program" in the Prospectus, borrowers may consolidate
additional Student Loans ("Add-on Consolidation Loans") with an existing
Federal Consolidation Loan within 180 days from the date that the existing
Federal Consolidation Loan was made. As a result of the addition of any Add-on
Consolidation Loans, the related Federal Consolidation Loan may, in certain
cases, have a different interest rate and a different loan term.
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Any Add-on Consolidation Loans added to a Federal Consolidation Loan in the
Trust during the Revolving Period will be funded by means of a transfer from
the Collateral Reinvestment Account of the amount required to repay in full any
Student Loans not held by the Trust that are being discharged in the
consolidation process, which amount will be paid by the Eligible Lender Trustee
on behalf of the Trust to the holder or holders of such Student Loans to prepay
such loans. For a maximum period of 210 days following the end of the Revolving
Period (30 days being attributed to the processing of any such Add-on
Consolidation Loans), such amounts will be funded by amounts representing
distributions of principal on the outstanding Financed Student Loans which
would otherwise have been part of the Available Funds of the Trust, as
described under "Description of the Transfer and Servicing Agreements--
Distributions" herein.
As described under "The Federal Family Education Loan Program" in the
Prospectus, during certain qualifying periods, interest on certain Financed
Student Loans is not required to be currently paid, but instead is added to the
outstanding principal balance of the loan at the end of the qualifying period.
In order to minimize the possibility that the failure to receive current
interest payments on such loans during such periods will result in a shortfall
of the amount required to be distributed on the Notes, amounts on deposit in
the Collateral Reinvestment Account will be applied during the Revolving Period
to make interest payments to Noteholders, in lieu of current collections of
interest on such loans. Following the end of the Revolving Period, the
Collateral Reinvestment Account will cease to be available as a source to fund
such interest payments to Noteholders, and thereafter such payments will be
funded through the application of amounts which would otherwise have been
distributable in respect of the Principal Distribution Amount for the related
Quarterly Payment Date, as described under "--Distributions" below.
ACCOUNTS
In addition to the Collection Account referred to in the Prospectus under
"Description of the Transfer and Servicing Agreements--Accounts", the
Administrator will establish and maintain the Collateral Reinvestment Account
and the Reserve Account, in the name of the Indenture Trustee on behalf of
the Noteholders.
SERVICING COMPENSATION; ADMINISTRATION FEE
The Servicer will be entitled to receive from the Trust monthly on each
Monthly Payment Date or Quarterly Payment Date the Servicing Fee in an amount
equal to the lesser of (I) one-twelfth of 1.00% of the aggregate principal
balance of the Financed Student Loans as of the last day of the preceding
calendar month and (II) the sum of (i) one-twelfth of the In-School Percentage
of the principal balance of each Financed Student Loan as of the last day of
the preceding calendar month which was an In-School Loan (as defined herein) on
such date or, if the average principal balance of In-School Loans as of such
date was $2,500 or less, $1.50 per account for each such loan, (ii) one-twelfth
of the GRDF Percentage of the principal balance as of the last day of the
preceding calendar month of each Financed Student Loan which was a Grace,
Repayment, Deferral or Forbearance Student Loan (each as defined herein) as of
such date or, if the average principal balance of such loans as of such date
was $3,000 or less, $3.00 per account for each such loan, (iii) a fee of $1.00
for each notification sent by the Servicer during the preceding calendar month
on behalf of the Trust to a borrower providing information to such borrower
with respect to Federal Consolidation Loan programs, (iv) a one-time fee of
$75.00 for each Federal Consolidation Loan originated by the Eligible Lender
Trustee on behalf of the Trust during the preceding calendar month, (v) a fee
of $25.00 for each Financed Student Loan for which, during the preceding
calendar month, claim documentation was completed and provided to the Guarantor
or for which the Servicer performed bankruptcy or ineligible borrower account
processing (that, in the case of ineligible account processing, resulted in a
demand letter being sent to the borrower), in each case as required by the
claims processing requirements of the Guarantor, (vi) a fee of $.05 per
Financed Student Loan for storing and warehousing the applicable loan
documentation for each such loan during the preceding calendar month, (vii) a
one-time fee of $2.00 for each Serial Loan transferred by the Seller to the
Trust during the preceding calendar month, (viii) a fee equal to the one-
twelfth of the product of (a) the aggregate outstanding principal balance of
the Financed Student Loans as of the last day of the
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preceding calendar month and (b) .05%, which fee will be payable so long as
certain servicing regulations of the Department remain in effect and (ix) a fee
of $70.00 per hour for system development requests made by the Eligible Lender
Trustee on behalf of the Trust and provided by the Servicer during the
preceding calendar month.
For purposes of making the determinations set forth in clauses (i) and (ii)
of the preceding sentence, the "In-School Percentage" and "GRDF Percentage"
shall each be determined based on the average principal balance of the In-
School Loans and the Grace, Repayment, Deferral and Forebearance Loans,
respectively, as of the last day of the preceding calendar month, as follows:
<TABLE>
<CAPTION>
AVERAGE
PRINCIPAL IN-SCHOOL AVERAGE PRINCIPAL
BALANCE PERCENTAGE BALANCE GRDF PERCENTAGE
----------- ---------- ----------------- ---------------
<S> <C> <C> <C>
$2,501 - $3,000 .625% $3,001 - $3,400 1.100%
$3,001 - $3,500 .525% $3,401 - $3,900 .950%
$3,501 - $4,000 .450% $3,901 - $4,400 .830%
$4,001 - $4,750 .375% $4,401 - $4,800 .740%
$4,751 - $5,500 .310% $4,801 - $5,400 .650%
$5,501 - $6,250 .260% $5,401 - $6,000 .575%
$6,251 and above .230% $6,001 - $6,600 .510%
$6,601 - $7,200 .475%
$7,201 - $10,000 .450%
$10,001 - $13,000 .350%
$13,001 and above .300%
</TABLE>
The Servicing Fee (together with any portion of the Servicing Fee that
remains unpaid from prior Monthly Payment Dates) will be payable on each
Monthly Payment Date and will be paid solely out of Monthly Available Funds in
the case of each Monthly Payment Date that is not a Quarterly Payment Date (and
out of Available Funds in the case of each Quarterly Payment Date) and amounts
on deposit in the Reserve Account on such date. To the extent that, for any
Monthly Payment Date, the Servicing Fee is the amount calculated as described
in clause (I) of the first sentence of the preceding paragraph, then an amount
(the "Servicing Fee Shortfall") equal to the excess of the amount described in
clause (II) of such sentence over the amount described in clause (I) of such
sentence shall be payable on the next succeeding Quarterly Payment Date (or if
such Monthly Payment Date is also a Quarterly Payment Date, on such Quarterly
Payment Date) from any remaining amounts on deposit in the Reserve Account that
are in excess of the Specified Reserve Account Balance, pursuant to the
priorities described under "--Credit Enhancement--Reserve Account" below. The
Servicer will be obligated to perform its servicing obligations whether or not
it receives any amounts in respect of Servicing Fee Shortfalls.
As compensation for the performance of the Administrator's obligations under
the Administration Agreement and as reimbursement for its expenses related
thereto, the Administrator will be entitled to receive monthly in arrears on
each Monthly Payment Date that is not a Quarterly Payment Date and on each
Quarterly Payment Date the Administration Fee in an amount equal to one-twelfth
of the product of (i) 0.04% and (ii) the Pool Balance as of the close of
business on the last day of the calendar month immediately preceding such date.
DISTRIBUTIONS
Deposits to Collection Account. On or about the third business day prior to
each Monthly Payment Date (the "Determination Date"), the Administrator will
provide the Indenture Trustee with certain information with respect to the
preceding Monthly Collection Period or, in the case of a Monthly Payment Date
that is also a Quarterly Payment Date, the preceding Collection Period,
including the amount of Monthly Available Funds or Available Funds, as the case
may be, received with respect to the Financed Student Loans and the aggregate
Purchase Amount relating to the Financed Student Loans to be repurchased by the
Seller or to be purchased by the Servicer.
"Monthly Collection Period" means, with respect to any Monthly Payment Date
that is not a Quarterly Payment Date, the calendar month immediately preceding
the month of such Monthly Payment Date.
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For purposes hereof, the term "Monthly Available Funds" means, with respect
to each Monthly Payment Date that is not a Quarterly Payment Date, the sum of
the following amounts with respect to the related Monthly Collection Period:
(i) all collections received by the Servicer on the Financed Student Loans
(including any Guarantee Payments received with respect to the Financed Student
Loans); (ii) any Interest Subsidy Payments and Special Allowance Payments
received by the Eligible Lender Trustee during such Monthly Collection Period
with respect to the Financed Student Loans; (iii) all proceeds of the
liquidation of defaulted Financed Student Loans ("Liquidated Student Loans"),
which became Liquidated Student Loans during such Monthly Collection Period in
accordance with the Servicer's customary servicing procedures, net of expenses
incurred by the Servicer in connection with such liquidation and any amounts
required by law to be remitted to the borrower on such Liquidated Student Loans
("Liquidation Proceeds"), and all recoveries in respect of Liquidated Student
Loans which were written off in prior Monthly Collection Periods; (iv) that
portion of amounts released from the Collateral Reinvestment Account with
respect to Additional Fundings relating to those interest costs on the Financed
Student Loans which are or will be capitalized; (v) the aggregate amount
received for those Financed Student Loans repurchased by the Seller or
purchased by the Servicer under an obligation which arose during the related
Monthly Collection Period; (vi) Investment Earnings for such Monthly Payment
Date; and (vii) with respect to each Monthly Payment Date other than a
Quarterly Payment Date and other than a Monthly Payment Date immediately
succeeding a Quarterly Payment Date, Monthly Available Funds remaining on
deposit in the Collection Account from the Monthly Collection Period relating
to the preceding Monthly Payment Date, after giving effect to the application
of such Monthly Available Funds on such preceding Monthly Payment Date;
provided, however, that if with respect to any Monthly Payment Date there would
not be sufficient funds, after application of Monthly Available Funds (as
defined above) and amounts available from the Reserve Account, to pay any of
the items specified in clauses (i) and (ii) respectively under the second
paragraph of "--Distributions--Distributions from Collection Account", then
Monthly Available Funds for such Monthly Payment Date will include, in addition
to the Monthly Available Funds (as defined above), amounts on deposit in the
Collection Account on the Determination Date relating to such Monthly Payment
Date which would have constituted Monthly Available Funds for the Monthly
Payment Date succeeding such Monthly Payment Date up to the amount necessary to
pay such items, and the Monthly Available Funds for such succeeding Monthly
Payment Date will be adjusted accordingly; and provided, further, that Monthly
Available Funds will exclude (A) all payments and proceeds (including
Liquidation Proceeds) of any Financed Student Loans the Purchase Amount of
which has been included in Monthly Available Funds for a prior Monthly
Collection Period; (B) except as expressly included in clause (iv) above,
amounts released from the Collateral Reinvestment Account; (C) any Monthly
Rebate Fees paid during the related Monthly Collection Period by or on behalf
of the Trust as described under "Risk Factors--Fees Payable on Certain Financed
Student Loans" herein; and (D) any collections in respect of principal on the
Financed Student Loans applied during the related Monthly Collection Period by
the Eligible Lender Trustee on behalf of the Trust prior to the end of the
Revolving Period to make deposits to the Collateral Reinvestment Account, as
described under "--Distributions from Collection Account" below, and after the
end of the Revolving Period to fund the addition of any Add-on Consolidation
Loans, to purchase Serial Loans or to fund the acquisition of Exchanged Serial
Loans as described under "--Revolving Period and Additional Fundings" above.
"Available Funds" means, with respect to a Quarterly Payment Date and the
related Collection Period, the sum of the amounts specified in clauses (i)-(vi)
of the definition of Monthly Available Funds for each of the three Monthly
Collection Periods included in such Collection Period; provided, however, that
if with respect to any Quarterly Payment Date there would not be sufficient
funds, after application of Available Funds (as defined above) and amounts
available from the Reserve Account, to pay any of the items specified in
clauses (i) through (vi) respectively under the third paragraph of "--
Distributions from Collection Account," below, then Available Funds for such
Quarterly Payment Date will include, in addition to the Available Funds (as
defined above), amounts on deposit in the Collection Account on the
Determination Date relating to such Quarterly Payment Date which would have
constituted Available Funds for the Quarterly Payment Date succeeding such
Quarterly Payment Date up to the amount necessary to pay such items, and the
Available Funds for such succeeding Quarterly Payment Date will be adjusted
accordingly; and provided,
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further, that Available Funds will exclude (A) all payments and proceeds
(including Liquidation Proceeds) of any Financed Student Loans the Purchase
Amount of which has been included in Available Funds for a prior Collection
Period; (B) except as expressly included in clause (iv) of the definition of
Monthly Available Funds, amounts released from the Collateral Reinvestment
Account; (C) any Monthly Rebate Fees paid during the related Collection Period
by or on behalf of the Trust; (D) any collections in respect of principal on
the Financed Student Loans applied by the Eligible Lender Trustee on behalf of
the Trust prior to the end of the Revolving Period to make deposits to the
Collateral Reinvestment Account, as described under "--Distributions from
Collection Account" below, and after the end of the Revolving Period to fund
the addition of any Add-on Consolidation Loans, to purchase Serial Loans or to
fund the acquisition of Exchanged Serial Loans during the related Collection
Period; and (E) the Servicing Fee, all overdue Servicing Fees, the
Administration Fee and all overdue Administration Fees paid on each Monthly
Payment Date that is not a Quarterly Payment Date during the related Collection
Period.
Distributions from Collection Account. From time-to-time during the Revolving
Period, on any day therein, the Administrator may instruct the Indenture
Trustee to withdraw all collections in respect of principal on the Financed
Student Loans then on deposit in the Collection Account and deposit such
amounts in the Collateral Reinvestment Account. In addition, from time to time
during the Revolving Period, the Administrator may instruct the Indenture
Trustee to withdraw funds on deposit in the Collateral Reinvestment Account to
the extent such funds are not needed to make Additional Fundings and redeposit
such amounts in the Collection Account.
On each Monthly Payment Date that is not a Quarterly Payment Date, the
Administrator will instruct the Indenture Trustee to make the following
deposits and distributions to the extent of Monthly Available Funds for such
Monthly Payment Date in the Collection Account, in the following order of
priority:
(i) to the Servicer, the Servicing Fee for such Monthly Payment Date and
all prior unpaid Servicing Fees (but not any Servicing Fee Shortfall or
prior unpaid Servicing Fee Shortfalls); and
(ii) to the Administrator, the Administration Fee for such Monthly
Payment Date and all prior unpaid Administration Fees.
On each Quarterly Payment Date, the Administrator will instruct the Indenture
Trustee to make the following deposits and distributions to the extent of
Available Funds for such Quarterly Payment Date in the Collection Account, in
the following order of priority:
(i) to the Servicer, the Servicing Fee for such Quarterly Payment Date
and all prior unpaid Servicing Fees (but not any Servicing Fee Shortfall or
prior unpaid Servicing Fee Shortfalls);
(ii) to the Administrator, the Administration Fee for such Quarterly
Payment Date and all prior unpaid Administration Fees;
(iii) to the Senior Noteholders, the Senior Noteholders' Interest
Distribution Amount;
(iv) to the Subordinate Noteholders, the Subordinate Noteholders'
Interest Distribution Amount;
(v) if the Revolving Period has terminated, to the Senior Noteholders,
the Senior Noteholders' Principal Distribution Amount;
(vi) after the Senior Notes have been paid in full, to the Subordinate
Noteholders, the Subordinate Noteholders' Principal Distribution Amount;
and
(vii) to the Reserve Account, any remaining amounts after application of
clauses (i) through (vi).
For purposes hereof, the following terms have the following meanings:
"Noteholders' Distribution Amount" means, with respect to any Quarterly
Payment Date, the sum of the Senior Noteholders' Distribution Amount and the
Subordinate Noteholders' Distribution Amount.
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"Noteholders' Interest Distribution Amount" means, with respect to any
Quarterly Payment Date, the sum of the Senior Noteholders' Interest
Distribution Amount and the Subordinate Noteholders' Interest Distribution
Amount.
"Principal Distribution Adjustment" means, with respect to any Quarterly
Payment Date if the Revolving Period has terminated, the amount of Available
Funds on such Quarterly Payment Date to be used to make additional principal
distributions to Senior Noteholders (and, after the Senior Notes have been
paid in full, Subordinate Noteholders) to account for (i) the amount of any
insignificant balance remaining outstanding as of such Quarterly Payment Date
on a Financed Student Loan after receipt of a final payment from a borrower or
Guarantor, when such insignificant balances are waived in the ordinary course
of business by the Servicer at the direction of the Administrator in
accordance with the Servicing Agreement or (ii) the amount of principal
collections erroneously treated as interest collections including, without
limitation, by reason of the failure by a borrower to capitalize interest that
had been expected to be capitalized; provided, however, that the Principal
Distribution Adjustment for any Quarterly Payment Date shall not exceed the
lesser of (x) $100,000 and (y) the amount of any Reserve Account Excess
remaining after giving effect to all distributions to be made therefrom on
such Quarterly Payment Date other than distributions to the Company out of
such excess.
"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 with respect to such Quarterly Payment Date), the sum of the
following amounts with respect to the related Collection Period: (i) that
portion of all collections received by the Servicer on the Financed Student
Loans 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) any such collections which are applied by the Trust
during such Collection Period to purchase Serial Loans, (B) any such
collections which are applied by the Trust during such Collection Period to
fund the addition of any Add-on Consolidation Loans and (C) accrued and unpaid
interest on the Financed Student Loans for such Collection Period to the
extent such interest is not currently being paid but will be capitalized upon
commencement of repayment of such Financed Student Loans; (ii) all Liquidation
Proceeds attributable to the principal amount of Financed Student Loans which
became Liquidated Student Loans during such Collection Period in accordance
with the Servicer's customary servicing procedures, together with all Realized
Losses on such Financed Student Loans; (iii) to the extent attributable to
principal, the amount received with respect to each Financed Student Loan
repurchased by the Seller or purchased by the Servicer as a result of a breach
of a representation, warranty or covenant under an obligation which arose
during the related Collection Period; and (iv) the Principal Distribution
Adjustment, if any, provided, however, that the Principal Distribution Amount
will exclude all payments and proceeds (including Liquidation Proceeds) of any
Financed Student Loans the Purchase Amount of which has been included in
Available Funds for a prior Collection Period and, if the Revolving Period
terminated during the related Collection Period, will exclude all amounts
representing collections in respect of principal on the Financed Student Loans
during such Collection Period that were deposited in the Collateral
Reinvestment Account.
"Realized Losses" means the excess of the principal balance of the
Liquidated Student Loans over Liquidation Proceeds to the extent allocable to
principal.
"Senior Noteholders' Distribution Amount" means, with respect to any
Quarterly Payment Date, the sum of the Senior Noteholders' Interest
Distribution Amount and the Senior Noteholders' Principal Distribution Amount
for such Quarterly Payment Date.
"Senior Noteholders' Interest Carryover Shortfall" means, with respect to
any Quarterly Payment Date, the excess of (i) the Senior Noteholders' Interest
Distribution Amount on the preceding Quarterly Payment Date over (ii) the
amount of interest actually distributed to the Senior Noteholders on such
preceding Quarterly Payment Date, plus interest on the amount of such excess,
to the extent permitted by law, at the
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interest rate borne by the Senior Notes from such preceding Quarterly Payment
Date to the current Quarterly Payment Date.
"Senior Noteholders' Interest Distribution Amount" means, with respect to any
Quarterly Payment Date, the sum of (i) the amount of interest accrued at the
Senior Note Rate for the related Quarterly Interest Period on the outstanding
principal balance of the Senior Notes on the immediately preceding Quarterly
Payment Date after giving effect to all principal distributions to holders of
Senior Notes on such date (or, in the case of the first Quarterly Payment Date,
on the Closing Date) and (ii) the Senior Noteholders' Interest Carryover
Shortfall for such Quarterly Payment Date; provided, however, that the Senior
Noteholders' Interest Distribution Amount will not include any Senior
Noteholders' Interest T-Bill Carryover.
"Senior Noteholders' Principal Carryover Shortfall" means, as of the close of
any Quarterly Payment Date, the excess of (i) the Senior Noteholders' Principal
Distribution Amount on such Quarterly Payment Date over (ii) the amount of
principal actually distributed to the Senior Noteholders on such Quarterly
Payment Date.
"Senior Noteholders' Principal Distribution Amount" means, with respect to
any Quarterly Payment Date (if the Revolving Period has terminated prior to the
end of the related Collection Period with respect to such Quarterly Payment
Date), the Principal Distribution Amount for such Quarterly Payment Date plus
the Senior Noteholders' Principal Carryover Shortfall as of the close of the
preceding Quarterly Payment Date; provided, however, that the Senior
Noteholders' Principal Distribution Amount will not exceed the outstanding
aggregate principal balance of the Senior Notes. In addition, on the Senior
Note Final Maturity Date, the principal required to be distributed to Senior
Noteholders will include the amount required to reduce the outstanding
principal balance of the Senior Notes to zero.
"Subordinate Noteholders' Distribution Amount" means, with respect to any
Quarterly Payment Date, the Subordinate Noteholders' Interest Distribution
Amount for such Quarterly Payment Date plus, with respect to any Quarterly
Payment Date on and after which the Senior Notes have been paid in full, the
Subordinate Noteholders' Principal Distribution Amount for such Quarterly
Payment Date.
"Subordinate Noteholders' Interest Carryover Shortfall" means, with respect
to any Quarterly Payment Date, the excess of (i) the Subordinate Noteholders'
Interest Distribution Amount on the preceding Quarterly Payment Date over
(ii) the amount of interest actually distributed to the Subordinate Noteholders
on such preceding Quarterly Payment Date, plus interest on the amount of such
excess, to the extent permitted by law, at the rate borne by the Subordinate
Notes from such preceding Quarterly Payment Date to the current Quarterly
Payment Date.
"Subordinate Noteholders' Interest Distribution Amount" means, with respect
to any Quarterly Payment Date, the sum of (i) the amount of interest accrued at
the Subordinate Note Rate for the related Quarterly Interest Period on the
outstanding principal balance of the Subordinate Notes on the immediately
preceding Quarterly Payment Date, after giving effect to all principal
distributions to Subordinate Noteholders on such Quarterly Payment Date (or, in
the case of the first Quarterly Payment Date, on the Closing Date) and (ii) the
Subordinate Noteholders' Interest Carryover Shortfall for such Quarterly
Payment Date; provided, however, that the Subordinate Noteholders' Interest
Distribution Amount will not include any Subordinate Noteholders' Interest T-
Bill Carryover.
"Subordinate Noteholders' Principal Carryover Shortfall" means, as of the
close of any Quarterly Payment Date on or after which the Senior Notes have
been paid in full, the excess of (i) the Subordinate Noteholders' Principal
Distribution Amount on such Quarterly Payment Date over (ii) the amount of
principal actually distributed to the Subordinate Noteholders on such Quarterly
Payment Date.
"Subordinate Noteholders' Principal Distribution Amount" means, on each
Quarterly Payment Date on and after which the aggregate principal balance of
the Senior Notes has been paid in full, the sum of (a)
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the Principal Distribution Amount for such Quarterly Payment Date (or, in the
case of the Quarterly Payment Date on which the aggregate principal balance of
the Senior Notes is paid in full, any remaining Principal Distribution Amount
not otherwise distributed to Senior Noteholders on such Quarterly Payment Date)
and (b) the Subordinate Noteholders' Principal Carryover Shortfall as of the
close of the preceding Quarterly Payment Date; provided, however, that the
Subordinate Noteholders' Principal Distribution Amount will in no event exceed
the outstanding principal balance of the Subordinate Notes. In addition, on the
Subordinate Note Final Maturity Date, the principal required to be distributed
to the Subordinate Noteholders will include the amount required to reduce the
outstanding principal balance of the Subordinate Notes to zero.
CREDIT ENHANCEMENT
Reserve Account. Pursuant to the Administration Agreement and the Loan Sale
Agreement, the Reserve Account will be created with an initial deposit by the
Seller on the Closing Date of cash or Eligible Investments in an amount equal
to the Reserve Account Initial Deposit. The Reserve Account will be augmented
on each Quarterly Payment Date by the deposit therein of the amount of
Available Funds remaining after payment of the Servicing Fee and all overdue
Servicing Fees, the Administration Fee and all overdue Administration Fees, the
Senior Noteholders' Interest Distribution Amount and the Subordinate
Noteholders' Interest Distribution Amount, and, if the Revolving Period has
terminated, the Senior Noteholders' Principal Distribution Amount and the
Subordinate Noteholders' Principal Distribution Amount, all for such Quarterly
Payment Date. See "--Distributions" herein. As described below, subject to
certain limitations, amounts on deposit in the Reserve Account will be released
to the Company to the extent that the amount on deposit in the Reserve Account
exceeds the Specified Reserve Account Balance.
"Specified Reserve Account Balance" with respect to any Quarterly Payment
Date generally will be the greater of:
(a) % of the aggregate principal balance of the Notes after taking
into account the effect of distributions on such Quarterly Payment Date, or
(b) $ ; provided, however, that the Specified Reserve Account
Balance shall in no event exceed the sum of the outstanding principal
balance of the Notes.
If the amount on deposit in the Reserve Account on any Quarterly Payment Date
(after giving effect to all distributions required to be made from Available
Funds on such Quarterly Payment Date) is greater than the Specified Reserve
Account Balance for such Quarterly Payment Date, the Administrator will
instruct the Indenture Trustee to apply the amount of such Reserve Account
Excess (a) during the Revolving Period, for deposit to the Collateral
Reinvestment Account; provided, however, if such date is on or after the Parity
Date, to the extent that such funds represent payments of interest with respect
to the Financed Student Loans, such funds shall be applied in the order of
priority set forth in clauses (b)(iii) through (vi) below, and (b) at and after
the termination of the Revolving Period, to the following (in the priority
indicated): (i) to the Seller for any unpaid Purchase Premium Amounts for any
Serial Loans purchased by the Trust prior to the end of the related Collection
Period; (ii) if such Quarterly Payment Date is on or prior to the Parity Date,
to the payment of the unpaid principal amount of the Senior Notes or, if the
Senior Notes have been paid in full, of the Subordinate Notes, until the
aggregate principal balance of the Notes is equal to the Pool Balance as of the
close of business on the last day of the related Collection Period; (iii) to
the Senior Noteholders, the aggregate unpaid amount of any Senior Noteholders'
Interest T-Bill Carryover; (iv) to the Subordinate Noteholders, the aggregate
unpaid amount of any Subordinate Noteholders' Interest T-Bill Carryover; (v) to
the Servicer, the Servicing Fee Shortfall and all prior unpaid Servicing Fee
Shortfalls, if any; and (vi) to the Company, any excess remaining after
application of clauses (i) through (v) above, and, upon such payment to the
Company, the Noteholders will not have any rights in, or claims to, such
amounts.
Subject to the limitation described in the preceding paragraph, amounts held
from time to time in the Reserve Account will continue to be held for the
benefit of the Trust. Funds will be withdrawn from cash in
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the Reserve Account (a) on each Monthly Payment Date that is not a Quarterly
Payment Date, to the extent the amount of Monthly Available Funds on such
Monthly Payment Date is insufficient to pay: (i) the Servicing Fee and all
overdue Servicing Fees and (ii) the Administration Fee and all overdue
Administration Fees, and (b) on any Quarterly Payment Date to the extent that
the amount of Available Funds on such Quarterly Payment Date is insufficient to
pay any of the items specified in clauses (i) through (vi), respectively, of
the third paragraph under "--Distributions--Distributions from Collection
Account" herein on such date. Such funds will be paid from the Reserve Account
to the persons and in the order of priority specified for distributions out of
the Collection Account on such dates. As a result of the subordination of the
Subordinate Notes to the Senior Notes described elsewhere herein, however, any
amounts that the Subordinate Noteholders would otherwise receive from the
Reserve Account in respect of the Subordinate Noteholders' Interest
Distribution Amount on any Quarterly Payment Date will be paid to Senior
Noteholders until the Senior Noteholders' Interest Distribution Amount for such
Quarterly Payment Date has been paid in full. In addition, as a result of such
subordination, Subordinate Noteholders will not receive any amounts from the
Reserve Account in respect of the Subordinate Noteholders' Principal
Distribution Amount until the Senior Notes have been paid in full. See "--
Subordination" herein.
The Reserve Account is intended to enhance the likelihood of timely receipt
by the Senior Noteholders and the Subordinate Noteholders of the full amount of
principal and interest due them and to decrease the likelihood that the Senior
Noteholders or the Subordinate Noteholders will experience losses. In certain
circumstances, however, the Reserve Account could be depleted. If the amount
required to be withdrawn from the Reserve Account to cover shortfalls in the
amount of Available Funds exceeds the amount of cash in the Reserve Account,
Senior Noteholders or Subordinate Noteholders could incur losses or a temporary
shortfall in the amount of principal and interest distributed to the Senior
Noteholders or the Subordinate Noteholders could result which could, in turn,
increase the average life of the Senior Notes or the Subordinate Notes. Amounts
on deposit in the Reserve Account will not be available in any respect until
the Parity Date to cover any aggregate unpaid Senior Noteholders' Interest T-
Bill Carryover or Subordinate Noteholders' Interest T-Bill Carryover and after
the Parity Date only amounts on deposit in the Reserve Account that (after
paying, for Quarterly Payment Dates occurring after the Revolving Period, any
unpaid Purchase Premium Amounts for any Serial Loans purchased by the Trust
prior to the end of the related Collection Period) are in excess of the
Specified Reserve Account Balance will be available therefor.
Subordination. The rights of the Subordinate Noteholders to receive payments
of interest on any Quarterly Payment Date are subordinated to the rights of the
Senior Noteholders to receive payments of interest on such date, and the rights
of the Subordinate Noteholders to receive payments of principal on any
Quarterly Payment Date are subordinated to the rights of the Noteholders to
receive payments of interest and principal on such date. The Subordinate
Noteholders will not be entitled to any payments of principal until the Senior
Notes are paid in full.
TERMINATION
Certain information regarding termination of the Trust is set forth in
"Description of the Transfer and Servicing Agreements--Termination" in the
Prospectus.
Any Financed Student Loans remaining in the Trust as of the end of the
Collection Period immediately preceding the July 2007 Quarterly Payment Date
will be offered for sale by the Indenture Trustee. The Seller, its affiliates
and unrelated third parties may offer bids to purchase such Financed Student
Loans on such Quarterly Payment Date. If at least two bids are received, the
Indenture Trustee will accept the highest bid equal to or in excess of the
greater of (x) the Purchase Amount of such Financed Student Loans as of the end
of the Collection Period immediately preceding such Quarterly Payment Date or
(y) an amount that would be sufficient to (i) reduce the outstanding principal
amount of the Notes on such Quarterly Payment Date to zero and (ii) pay to the
Noteholders the Noteholders' Interest Distribution Amount payable on such
Quarterly Payment Date, if any (the "Minimum Purchase Price"). If at least two
bids are not received or the highest bid is not equal to or in excess of the
Minimum Purchase Price, the Indenture Trustee will not
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consummate such sale. The proceeds of any such sale will be used to redeem any
outstanding Notes on such Quarterly Payment Date. If the sale is not
consummated in accordance with the foregoing, the Indenture Trustee may, but
shall not be under any obligation to, solicit bids to purchase the Financed
Student Loans on future Quarterly Payment Dates upon terms similar to those
described above. No assurance can be given as to whether the Trustee will be
successful in soliciting acceptable bids to purchase the Financed Student Loans
on either the July 2007 Quarterly Payment Date or any subsequent Quarterly
Payment Date.
Optional Redemption
The Company, or an assignee of the Company, may at its option purchase from
the Eligible Lender Trustee, as of the end of any Collection Period immediately
preceding a Quarterly Payment Date, if the then outstanding Pool Balance is 20%
or less of the aggregate initial principal balance of the Notes, all remaining
Financed Student Loans at a price equal to the aggregate Purchase Amounts
thereof as of the end of such Collection Period, which amounts will be used to
retire the Notes concurrently therewith. Upon termination of the Trust, all
right, title and interest in the Financed Student Loans and other funds of the
Trust, after giving effect to any final distributions to Noteholders therefrom,
will be conveyed and transferred to the Company or such assignee.
CERTAIN FEDERAL
INCOME TAX AND STATE TAX CONSEQUENCES
Although as described in "Summary of Terms--Tax Considerations," it is the
opinion of Special Tax Counsel that the Senior Notes will properly be
characterized as indebtedness, and that the Subordinate Notes (not offered
hereby) should be classified as indebtedness (or, if not, would be classified
as an interest in a partnership), for federal income tax purposes, such opinion
is not binding on the IRS and thus no assurance can be given that such
characterization will prevail. In the opinion of Special Tax Counsel, if the
IRS were to contend successfully that the Subordinate Notes were not debt for
federal income tax purposes (assuming that the Senior Notes were not
recharacterized) the arrangement among the Seller and the holders of the
Subordinate Notes would be classified as a partnership for federal income tax
purposes. If, however, the IRS were to contend successfully that the
Subordinate Notes and the Senior Notes were not debt for federal income tax
purposes, the arrangement among Noteholders and the Seller might be classified
for federal income tax purposes as a publicly traded partnership taxable as a
corporation.
If only the Subordinate Notes were treated as interests in a partnership, it
is Special Tax Counsel's opinion that the partnership would not be treated as a
publicly traded partnership because it would qualify for an applicable "safe
harbor" that the IRS has provided. Therefore, the partnership would not be
subject to federal income tax.
If, alternatively, the arrangement created by the Indenture were treated as a
publicly traded partnership taxable as a corporation, the resulting entity
would be subject to federal income taxes at corporate tax rates on its taxable
income generated by ownership of the Student Loans. Moreover, distributions by
the entity to all or some of the classes of Notes would probably not be
deductible in computing the entity's taxable income and all or part of the
distributions to holders of Notes would probably be treated as dividends. Such
an entity-level tax could result in reduced distributions to Noteholders and
the Noteholders could be liable for a share of such tax.
Because the Seller will treat the Notes as indebtedness for federal income
tax purposes, the Trustee will not comply with the tax reporting requirements
that would apply under the foregoing alternative characterizations of the
Notes.
The Senior Notes provide for stated interest at a floating rate based upon
the T-Bill Rate, but are subject to certain restrictions on the maximum level
of the floating rate. Under Treasury regulations governing
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"original issue discount" ("OID"), stated interest payable at a variable rate
is not taxed as original issue discount or contingent interest if the variable
rate is a qualified floating rate. The tax treatment of interest that is not
based on a qualified floating rate is not certain and the regulations do not
address the tax treatment of debt instruments bearing contingent interest,
except in circumstances not relevant to this discussion. While (because of the
Senior Noteholders' Interest T-Bill Carryover) the tax treatment of interest on
the Senior Notes, including, in particular, interest equal to the Senior
Noteholders' Interest T-Bill Carryover amounts, is not entirely clear under the
regulations, the Trust intends to treat the stated interest as a "qualified
floating rate" for OID purposes and thus such interest should not be taxable to
holders of Senior Notes as OID or as contingent interest.
Prospective purchasers should see "Certain Federal Income Tax Consequences"
and "Certain State Tax Consequences" in the Prospectus for a discussion of the
application of certain federal income tax laws and certain state tax laws to
the Trust and the Notes.
ERISA CONSIDERATIONS
The Senior Notes may be purchased by an employee benefit plan or an
individual retirement account (a "Plan") subject to ERISA or Section 4975 of
the Code. A fiduciary of a Plan must determine that the purchase of a Senior
Note is consistent with its fiduciary duties under ERISA and does not result in
a nonexempt prohibited transaction as defined in Section 406 of ERISA or
Section 4975 of the Code. Employee benefit plans which are governmental plans
(as defined in Section 3(32) of ERISA) and 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.
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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 whom Credit Suisse First Boston
Corporation 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. The Underwriter has agreed to reimburse the Seller for certain expenses
relating to the issuance and distribution of the Senior Notes.
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT
- ----------- ------------
<S> <C>
Credit Suisse First Boston Corporation............................ $
Morgan Stanley & Co. Incorporated.................................
PaineWebber Incorporated..........................................
Smith Barney Inc. ................................................
------------
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 % per Senior Note; that the Underwriters
and such dealers may allow a discount of % per Senior Note on sales to
certain other dealers; and that after the initial public offering of the Senior
Notes, the public offering prices and the concessions and discounts to dealers
may be changed by the Underwriters.
Until the distribution of the Senior Notes is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Senior Notes. As an exception to these
rules, the Representative is permitted to engage in certain transactions that
stabilize the price of the Senior Notes. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
Senior Notes.
If the Underwriters create a short position in the Senior Notes in connection
with the offering, i.e., if they sell more Senior Notes than are set forth on
the cover page of this Prospectus Supplement, the Representative may reduce
that short position by purchasing Senior Notes in the open market.
The Representative may also impose a penalty bid on certain Underwriters and
selling group members. This means that if the Representative purchases Senior
Notes in the open market to reduce the Underwriters' short position or to
stabilize the price of the Senior Notes, it may reclaim the amount of the
selling concession from the Underwriters and selling group members who sold
those Senior Notes as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it
discourages resales of the security.
Neither the Seller nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Senior Notes. In addition,
neither the Seller nor any of the Underwriters makes any representation that
the Representative will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.
The Underwriting Agreement provides that the 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 Trust Accounts in
Eligible Investments acquired from the Underwriters.
S-60
<PAGE>
LEGAL MATTERS
Certain legal matters relating to the Senior Notes will be passed upon for
the Trust, the Seller, the Servicer and the Administrator by Krieg DeVault
Alexander & Capehart, Indianapolis, Indiana and for the Underwriter by Brown &
Wood LLP, New York, New York. Edward R. Schmidt, general counsel of SMS and an
executive officer of and general counsel for USA Group, USA Funds and Loan
Services and a member of the board of directors of USA Group and a member of
the board of trustees of Loan Services, USA Group Guarantee Services, Inc. and
USA Funds, was formerly a partner of, and of counsel to, the firm of Krieg
DeVault Alexander & Capehart and William R. Neale, a member of the board of
directors of USA Group and a member of the board of trustees of USA Funds, is a
partner of the firm of Krieg DeVault Alexander & Capehart. Certain federal
income tax and other matters will be passed upon for the Trust by Brown & Wood
LLP and certain Indiana state income and corporate income tax and other matters
will be passed upon for the Trust by Krieg DeVault Alexander & Capehart.
S-61
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Senior Notes of
SMS Student Loan Trust 1997-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 certificates issues.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Global Securities will be effected on a delivery-against-
payment basis through the respective Depositaries of CEDEL and Euroclear (in
such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject to
U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
CEDE & CO. as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. As a result, CEDEL and Euroclear will
hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to conventional asset backed securities.
Investor securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or Euroclear
accounts will follow the settlement procedures applicable to conventional
eurobonds, except that there will be no temporary global security and no "lock-
up" or restricted period. Global Securities will be credited to the securities
custody accounts on the settlement date against payment in same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled in same-day funds.
S-62
<PAGE>
Trading between CEDEL and/or Euroclear Participants. Secondary market trading
between CEDEL Participants or Euroclear Participants will be settled using the
procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and CEDEL or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear, as the case may be, will instruct the respective Depositary to
receive the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment
date to and excluding the settlement date, on the basis of a calendar year
consisting of twelve 30-day calendar months. Payment will then be made by the
respective Depositary of the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the CEDEL Participant's or
Euroclear Participant's account. The securities credit will appear the next day
(European time) and the cash debit will be back-valued to, and the interest on
the Global Securities will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the CEDEL or
Euroclear cash debit will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available to
the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon to finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each CEDEL Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective Depositary for the benefit of CEDEL Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participants a cross-market transaction will
settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear seller and DTC purchaser. Due to time zone
differences in their favor, CEDEL Participants and Euroclear Participants may
employ their customary procedures for transactions in which Global Securities
are to be transferred by the respective clearing system, through Euroclear
Participants, to a DTC Participant. The seller will send instructions to CEDEL
or Euroclear through a CEDEL Participant or a Euroclear Participant at least
one business day prior to settlement. In these cases, CEDEL or Euroclear will
instruct Euroclear Participants, to deliver the Global Securities to the DTC
Participant's account against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment to and
excluding the settlement date, on the basis of a calendar year consisting of
twelve 30-day calendar months. The payment will then be reflected in the
account of the CEDEL Participant or Euroclear Participant the following day,
and receipt of the cash proceeds in the CEDEL Participant's or Euroclear
Participant's account would be back-valued to the value date (which would be
the preceding day, when settlement occurred in New York). Should the CEDEL
Participant or
S-63
<PAGE>
Euroclear Participant have a line of credit with its respective clearing system
and elect to be in debit in anticipation of receipt of the sale proceeds in its
account, the back-valuation will extinguish any overdraft incurred over that
one-day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the CEDEL
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem:
(1) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the day trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(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 (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).
S-64
<PAGE>
U.S. Federal Income Tax Reporting Procedure. The Global Securities holder, or
in the case of a Form 1001 or a Form 4224 filer, his agent, files by submitting
the appropriate form to the person through whom he holds (the clearing agency,
in the case of persons holding directly on the books of the clearing agency).
Form W-8 and Form 1001 are effective for three calendar years and Form 4224 is
effective for one calendar year.
This summary does not deal with all aspects of foreign income tax withholding
that may be relevant to foreign holders of these Global Securities. Investors
are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of these Global Securities.
U.S. Person. As used herein the term "U.S. Person" means a beneficial owner
of a Senior Note that is for United States federal income tax purposes (i) a
citizen or resident of the United States, (ii) a corporation, partnership or
other entity created or organized in or under the laws of the United States or
of any political subdivision thereof, (iii) an estate the income of which is
subject to United States federal income taxation regardless of its source, (iv)
any other person whose income or gain in respect of a Senior Note is
effectively connected with the conduct of a United States trade or business, or
(v) a trust if a court within the United States is able to exercise primary
supervision of the administration of the trust and one or more United States
fiduciaries have the authority to control all substantial decisions of the
trust. As used herein, the term "Non-U.S. Person" means a beneficial owner of a
Senior Note that is not a U.S. Person.
S-65
<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
herein.
<TABLE>
<CAPTION>
PAGE
-------------
<S> <C>
Add-on Consolidation Loans........................................ S-8,S-35,S-56
Additional Fundings............................................... S-9
Additional Guarantor.............................................. S-5
Additional Student Loans.......................................... S-5
Administration Agreement.......................................... S-4
Administration Fee................................................ S-15
Administrator..................................................... S-4
Available Funds................................................... S-59
Cede.............................................................. S-2
CEDEL............................................................. S-3
CEDEL Participants................................................ S-51
Citibank.......................................................... S-3,S-50,S-52
Closing Date...................................................... S-4
Collateral Reinvestment Account................................... S-9
Collection Account................................................ S-10
Collection Period................................................. S-6
Company........................................................... S-2,S-4
Cooperative....................................................... S-52
Cutoff Date....................................................... S-4
Deferral.......................................................... S-39
Delinquency Percentage............................................ S-55
Department........................................................ S-2,S-5
Depositaries...................................................... S-52
Determination Date................................................ S-58
DOE Data Book..................................................... S-43
DTC............................................................... S-2,S-3
Early Amortization Event.......................................... S-54
Eligible Lender Trustee........................................... S-1,S-4
Euroclear......................................................... S-3
Euroclear Participants............................................ S-52
Euroclear Operator................................................ S-52
Excess Spread..................................................... S-55
Exchange Act...................................................... S-2
Exchanged Financed Student Loan................................... S-55
Exchanged Serial Loan............................................. S-55
Expected Interest Collections..................................... S-17,S-46
Federal Origination Fee........................................... S-30
Financed Student Loans............................................ S-1,S-5
Forbearance....................................................... S-39
Global Securities................................................. S-68
Grace............................................................. S-39
Guarantors........................................................ S-5
ICSAC............................................................. S-2,S-5
In-School......................................................... S-39
Indenture......................................................... S-15
</TABLE>
S-66
<PAGE>
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Indenture Trustee.................................................... S-4
Indirect Participants................................................ S-51
Initial Financed Student Loans....................................... S-4
Initial Guarantor.................................................... S-2,S-5
Initial Guarantors................................................... S-2,S-5
Initial Pool Balance................................................. S-4
Liquidated Student Loans............................................. S-59
Liquidation Proceeds................................................. S-59
Loan Purchase Amount................................................. S-6,S-54
Loan Sale Agreement.................................................. S-4
Loan Services........................................................ S-2,S-4
Lock-In Period....................................................... S-49
Minimum Purchase Price............................................... S-21,S-66
Monthly Available Funds.............................................. S-59
Monthly Collection Period............................................ S-58
Monthly Payment Date................................................. S-10
Monthly Rebate Fee................................................... S-30
Morgan............................................................... S-3, S-52
NBD.................................................................. S-3
NBD Trust Agreement.................................................. S-3
New Loan............................................................. S-6,S-54
New Loans............................................................ S-6,S-54
91-day Treasury Bills................................................ S-49
Non-U.S. Person...................................................... S-71
Note Rates........................................................... S-15
Note T-Bill Rates.................................................... S-15
Noteholders.......................................................... S-16
Noteholders' Distribution Amount..................................... S-61
Noteholders' Interest Distribution Amount............................ S-62
Notes................................................................ S-1,S-3
OID.................................................................. S-66
Obligors............................................................. S-22
Parity Date.......................................................... S-11
Participants......................................................... S-51
Plan................................................................. S-67
Pool Balance......................................................... S-21
Principal Distribution Adjustment.................................... S-62
Principal Distribution Amount........................................ S-19,S-62
Purchase Amount...................................................... S-21
Purchase Collateral Balance.......................................... S-6,S-54
Purchase Premium Amount.............................................. S-6,S-54
Quarterly Interest Period............................................ S-16, S-43
Quarterly Payment Date............................................... S-2,S-16
Realized Losses...................................................... S-62
Record Date.......................................................... S-16
Reference Banks...................................................... S-51
Repayment............................................................ S-37
Representative....................................................... S-59
Reserve Account...................................................... S-11
Reserve Account Excess............................................... S-11
Reserve Account Initial Deposit...................................... S-11
</TABLE>
S-67
<PAGE>
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Revolving Period..................................................... S-6,S-54
Secretary............................................................ S-42
Seller............................................................... S-1,S-3
Seller Trusts........................................................ S-32
Senior Note Final Maturity Date...................................... S-20,S-49
Senior Noteholders................................................... S-16
Senior Noteholders' Distribution Amount.............................. S-62
Senior Noteholders' Interest Carryover Shortfall..................... S-61
Senior Noteholders' Interest Distribution Amount..................... S-61
Senior Noteholders' Interest T-Bill Carryover........................ S-18
Senior Noteholders' Principal Carryover Shortfall.................... S-62
Senior Noteholders' Principal Distribution Amount ................... S-63
Senior Note Rate..................................................... S-15,S-45
Senior Note T-Bill Rate.............................................. S-15,S-45
Senior Notes......................................................... S-1,S-3
Serial Loan.......................................................... S-6,S-55
Serial Loans......................................................... S-6,S-55
Servicer............................................................. S-4
Servicer Liability Limit............................................. S-27
Servicing Agreement.................................................. S-4
Servicing Fee........................................................ S-14
Servicing Fee Shortfall.............................................. S-58
SMS.................................................................. S-3
Specified Reserve Account Balance.................................... S-12,S-64
Student Loans........................................................ S-4
Student Loan Rate.................................................... S-17,S-46
Student Loan Rate Accrual Period..................................... S-17
Subordinate Note Final Maturity Date................................. S-20,S-49
Subordinate Noteholders.............................................. S-16
Subordinate Noteholders' Distribution Amount......................... S-63
Subordinate Noteholders' Interest Carryover Shortfall................ S-63
Subordinate Noteholders' Interest Distribution Amount................ S-63
Subordinate Noteholders' Interest T-Bill Carryover .................. S-18
Subordinate Noteholders' Principal Carryover Shortfall............... S-63
Subordinate Noteholders' Principal Distribution Amount............... S-63
Subordinate Note Rate................................................ S-14, S-41
Subordinate Note T-Bill Rate......................................... S-16,S-46
Subordinate Notes.................................................... S-1,S-3
T-Bill Rate.......................................................... S-49
Terms and Conditions................................................. S-52
Transfer Agreement................................................... S-6
Transfer and Servicing Agreements.................................... S-54
Transfer Date........................................................ S-56
Trust................................................................ S-1,S-3
Trust Agreement...................................................... S-4
Underwriters......................................................... S-67
Underwriting Agreement............................................... S-67
USA Funds............................................................ S-2,S-5
USA Group Guarantee Services......................................... S-3
U.S. Person.......................................................... S-71
</TABLE>
S-68
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 21, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
PROSPECTUS
THE SMS STUDENT LOAN TRUSTS
ASSET-BACKED NOTES
ASSET-BACKED CERTIFICATES
-----------
USA GROUP SECONDARY MARKET SERVICES, INC.,
SELLER
-----------
The Asset-Backed Notes (the "Notes") and the Asset-Backed Certificates (the
"Certificates" and, together with the Notes, the "Securities") described herein
may be sold from time to time in one or more series, in amounts, at prices and
on terms to be determined at the time of sale and to be set forth in a
supplement to this Prospectus (a "Prospectus Supplement"). Each series of
Securities, which will include one or more classes of Notes and, unless
otherwise specified in the related Prospectus Supplement, one or more classes
of Certificates, will be issued by a trust to be formed with respect to such
series (each, a "Trust"). Each Trust will be formed pursuant to a Trust
Agreement to be entered into among USA Group Secondary Market Services, Inc.,
as seller of the Student Loans (as defined below) (the "Seller"), an affiliate
of the Seller specified in the related Prospectus Supplement (the "Company")
and the Eligible Lender Trustee specified in the related Prospectus Supplement
(the "Eligible Lender Trustee"). The Notes of each series will be issued and
secured pursuant to an Indenture between the Trust and the Indenture Trustee
specified in the related Prospectus Supplement (the "Indenture Trustee") and
will represent indebtedness of the related Trust. The Certificates of a series
will represent fractional undivided interests in the related Trust. The
property of each Trust will include a pool of education loans to students and
parents of students (the "Student Loans"), certain monies due or received
thereunder on and after the applicable Cutoff Date set forth in the related
Prospectus Supplement and certain other property, all as described herein and
in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, each class of
Securities of any series will represent the right to receive a specified amount
of payments of principal and interest on the related Student Loans, at the
rates, on the dates and in the manner described herein and in the related
Prospectus Supplement. The right of each class of Securities to receive
payments may be senior or subordinate to the rights of one or more of the other
classes of such series. Distributions on Certificates of a series may be
subordinated in priority to payments due on the related Notes to the extent
described herein and in the related Prospectus Supplement. A series may include
one or more classes of Notes and Certificates which differ as to the timing and
priority of payment, interest rate or amount of distributions in respect of
principal or interest or both. The rate of payment in respect of principal of
the Notes and distributions in respect of the Certificate Balance of the
Certificates of any class will depend on the priority of payment of such class
and the rate and timing of payments (including prepayments, defaults, guarantee
payments, liquidations and repurchases of Student Loans) on the related Student
Loans. A rate of payment lower or higher than that anticipated may affect the
weighted average life of each class of Securities in the manner described
herein and in the related Prospectus Supplement.
EXCEPT AS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, THE NOTES
OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND THE CERTIFICATES OF SUCH SERIES
REPRESENT BENEFICIAL INTERESTS IN, THE RELATED TRUST ONLY AND DO NOT REPRESENT
OBLIGATIONS OF OR INTERESTS IN, AND ARE NOT GUARANTEED OR INSURED BY, USA GROUP
SECONDARY MARKET SERVICES, INC. OR ANY OF ITS AFFILIATES. PROSPECTIVE INVESTORS
SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS" AT PAGE 14 AND IN
THE RELATED PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESEN-
TATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Retain this Prospectus for future reference. This Prospectus may not be used to
consummate sales of Securities offered hereby unless accompanied by a
Prospectus Supplement.
-----------
The date of this Prospectus is , 1997.
<PAGE>
AVAILABLE INFORMATION
USA Group Secondary Market Services, Inc. ("SMS"), as originator of each
Trust, has filed with the Securities and Exchange Commission (the "Commission")
a Registration Statement (together with all amendments and exhibits thereto,
the "Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Securities offered hereby. This
Prospectus, which forms part of the Registration Statement, does not contain
all the information contained therein. For further information, reference is
made to the Registration Statement which may be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549; and at the Commission's regional offices at Seven
World Trade Center, New York, New York 10048, and 500 West Madison Street, 14th
Floor, Chicago, Illinois 60661. Copies of the Registration Statement may be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Web site at http://www.sec.gov containing reports, proxy and
information statements and other information regarding registrants, including
SMS, that file electronically with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by SMS, as originator of any Trust, pursuant to Section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of this Prospectus and prior to the termination of the
offering of the Securities shall be deemed to be incorporated by reference in
this Prospectus. Any statement contained herein or in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document which also is to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
SMS will provide without charge to each person, including any beneficial
owner of Securities, to whom a copy of this Prospectus is delivered, on the
written or oral request of any such person, a copy of any or all of the
documents incorporated herein or in any related Prospectus Supplement by
reference, except the exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to President, USA Group Secondary Market Services,
Inc., 8350 Craig Street, Indianapolis, Indiana 46250 (Telephone: (317) 594-
1981).
2
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TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION...................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................ 2
SUMMARY OF TERMS........................................................... 6
RISK FACTORS............................................................... 15
Risk that Failure to Comply with Student Loan Origination and Servicing
Procedures for Federal Student Loans may Adversely Affect the Trust's
Ability to Pay Principal and Interest on the Related Notes and
Certificates ........................................................... 15
Risk that Failure to Comply with Student Loan Origination and Servicing
Procedures for Private Student Loans Could Adversely Affect the Trust's
Ability to Pay Principal and Interest on the Notes and Certificates .... 16
Variability of Actual Cash Flows; Risk of Shortfalls to Holders of Notes
and Certificates Resulting From Inability of Related Indenture Trustee
to Liquidate Student Loans.............................................. 16
Unsecured Nature of Student Loans; Risk that Financial Status of Federal
Guarantor will Affect its Ability to Make Guarantee Payments ........... 17
Default Risk on Certain Financed Student Loans .......................... 17
Fees Payable on Certain Financed Student Loans........................... 18
Risk that Change in Law will Adversely Affect Student Loans, Guarantors,
the Seller or the Servicer ............................................. 18
Adverse Affect of Recent Legislation..................................... 18
Increased Fees; Decreased Assistance..................................... 18
Impact of Direct Lending................................................. 18
Reserves................................................................. 19
Risk Resulting from Subordination of Principal and Interest Payments;
Limited Assets.......................................................... 19
Risk Resulting from use of the Pre-Funding Account or Collateral
Reinvestment Account to Make Additional Fundings........................ 19
Maturity and Prepayment Considerations................................... 20
Risk of Removal of Servicer Upon Servicer Default........................ 21
Risks of Insolvency...................................................... 21
Book-Entry Registration.................................................. 22
FORMATION OF THE TRUSTS.................................................... 22
The Trusts............................................................... 22
Eligible Lender Trustee.................................................. 22
USE OF PROCEEDS............................................................ 23
USA GROUP, SMS, THE SELLER AND THE SERVICER................................ 23
USA Group................................................................ 23
SMS...................................................................... 24
The Seller............................................................... 24
The Servicer............................................................. 25
THE STUDENT LOAN POOLS..................................................... 26
General.................................................................. 26
Origination and Marketing Process........................................ 26
Servicing and Collections Process........................................ 27
Claims and Recovery Rates................................................ 27
FEDERAL FAMILY EDUCATION LOAN PROGRAM...................................... 28
General.................................................................. 28
Legislative and Administrative Matters................................... 28
Eligible Lenders, Students and Educational Institutions.................. 29
Financial Need Analysis.................................................. 30
Special Allowance Payments............................................... 30
Federal Stafford Loans................................................... 30
Interest............................................................... 31
Interest Subsidy Payments.............................................. 31
Loan Limits............................................................ 32
</TABLE>
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<TABLE>
<S> <C>
Repayment............................................................... 30
Grace Periods, Deferral Periods, Forbearance Periods.................... 30
Federal Unsubsidized Stafford Loans....................................... 30
Federal PLUS and Federal SLS Loan Programs................................ 31
Loan Limits............................................................. 31
Interest................................................................ 31
Repayment, Deferments................................................... 31
Federal Consolidation Loan Program........................................ 33
Federal Guarantors........................................................ 34
Federal Insurance and Reinsurance of Federal Guarantors................... 35
PRIVATE STUDENT LOAN PROGRAMS............................................... 36
WEIGHTED AVERAGE LIFE OF THE SECURITIES..................................... 36
POOL FACTORS AND TRADING INFORMATION........................................ 37
DESCRIPTION OF THE NOTES.................................................... 37
General................................................................... 37
Principal and Interest on the Notes....................................... 37
The Indenture............................................................. 38
Modification of Indenture............................................... 38
Events of Default; Rights Upon Event of Default......................... 39
Certain Covenants....................................................... 40
Annual Compliance Statement............................................. 41
Indenture Trustee's Annual Report....................................... 41
Satisfaction and Discharge of Indenture................................. 41
The Indenture Trustee................................................... 41
DESCRIPTION OF THE CERTIFICATES............................................. 41
General................................................................... 41
Principal and Interest in Respect of the Certificates..................... 42
CERTAIN INFORMATION REGARDING THE SECURITIES................................ 43
Fixed Rate Securities..................................................... 43
Floating Rate Securities.................................................. 43
Book-Entry Registration................................................... 43
Definitive Securities..................................................... 44
List of Securityholders................................................... 45
Reports to Securityholders................................................ 45
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS........................ 46
General................................................................... 46
Sale of Student Loans; Representations and Warranties..................... 46
Additional Fundings....................................................... 47
Accounts.................................................................. 47
Servicing Procedures...................................................... 48
Payments on Student Loans................................................. 48
Servicer Covenants........................................................ 49
Servicer Compensation..................................................... 49
Distributions............................................................. 49
Credit and Cash Flow Enhancement.......................................... 50
General................................................................. 50
Reserve Account......................................................... 50
Statements to Indenture Trustee and Trust................................. 51
Evidence as to Compliance................................................. 51
Certain Matters Regarding the Servicer.................................... 52
Servicer Default.......................................................... 52
Rights Upon Servicer Default.............................................. 53
</TABLE>
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<TABLE>
<S> <C>
Waiver of Past Defaults................................................... 53
Amendment................................................................. 53
Insolvency Event.......................................................... 54
Payment of Notes.......................................................... 54
Company Liability......................................................... 54
Termination............................................................... 55
Optional Redemption..................................................... 55
Auction of Student Loans................................................ 55
Administration Agreement.................................................. 56
CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS.................................. 56
Transfer of Student Loans................................................. 56
Consumer Protection Laws.................................................. 57
Loan Origination and Servicing Procedures Applicable to Student Loans..... 57
Student Loans Generally Not Subject to Discharge In Bankruptcy............ 58
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..................................... 59
Trusts for which a Partnership Election is made........................... 60
Tax Characterization of the Trust......................................... 60
Tax Consequences to Holders of the Notes.................................. 60
Treatment of the Notes as Indebtedness.................................. 60
Original Issue Discount................................................. 60
Interest Income on the Notes............................................ 60
Optional Election....................................................... 61
Sale or Other Disposition............................................... 61
Foreign Holders......................................................... 62
Backup Withholding...................................................... 62
Recent Legislation........................................................ 62
Other Possible Characterizations of the Trust and the Notes...............
Tax Consequences to Holders of the Certificates........................... 63
Treatment of the Trust as a Partnership................................. 61
Partnership Taxation.................................................... 61
Computation of Income................................................... 62
Recent Legislation...................................................... 62
Determining the Bases of Trust Assets................................... 63
Discount and Premium.................................................... 63
Disposition of Certificates............................................. 63
Allocations Between Transferors and Transferees......................... 64
Section 754 Election.................................................... 64
Administrative Matters.................................................. 64
Tax Consequences to Foreign Certificateholders.......................... 65
Backup Withholding...................................................... 65
CERTAIN STATE TAX CONSEQUENCES.............................................. 69
Tax Consequences with Respect to the Notes................................ 69
Tax Consequences with Respect to the Certificates......................... 69
ERISA CONSIDERATIONS........................................................ 70
The Notes................................................................. 70
The Certificates.......................................................... 70
PLAN OF DISTRIBUTION........................................................ 70
LEGAL MATTERS............................................................... 71
INDEX OF PRINCIPAL TERMS.................................................... 72
</TABLE>
5
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SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to the Securities of any series contained in the
related Prospectus Supplement to be prepared and delivered in connection with
the offering of such Securities. Certain capitalized terms used in this
Prospectus are defined elsewhere herein on the pages indicated in the "Index of
Principal Terms" which begins on page 72 herein.
Issuer...................... With respect to each series of Securities, the
trust to be formed pursuant to a Trust Agreement
(as amended and supplemented from time to time,
a "Trust Agreement") among the Seller, the
Company and the Eligible Lender Trustee for such
Trust (the "Trust" or the "Issuer").
Seller...................... USA Group Secondary Market Services, Inc., a
Delaware corporation ("SMS") as seller (the
"Seller"). SMS is an affiliate of the Servicer
and USA Group, Inc. Because the Seller is not
eligible to hold legal title to Federal Student
Loans, an eligible lender will hold legal title
to Federal Student Loans on behalf of the Seller
pursuant to a trust agreement between such
eligible lender and the Seller. References to
the "Seller" herein include the related eligible
lender for all purposes involving the holding or
transfer of legal title to the Student Loans.
Servicer.................... USA Group Loan Services, Inc., a Delaware non-
profit corporation ("Loan Services"), as
servicer, or such other servicer as is specified
in the related Prospectus Supplement (the
"Servicer"). Loan Services is an affiliate of
SMS and USA Group, Inc.
Eligible Lender Trustee..... For each trust, such entity as is specified as
the Eligible Lender Trustee in the related
Prospectus Supplement.
Indenture Trustee........... With respect to each series of Securities, the
Indenture Trustee specified in the related
Prospectus Supplement.
Administrator............... SMS in its capacity as administrator (the
"Administrator").
Company................ An affiliate of the Seller to be specified in the
related Prospectus Supplement.
The Notes................... Each series of Securities will include one or
more classes of Notes, which will be issued
pursuant to an Indenture between the Trust and
the related Indenture Trustee (as amended and
supplemented from time to time, an "Indenture").
Unless otherwise specified in the related
Prospectus Supplement, Notes will be available
for purchase in denominations of $1,000 and
integral multiples thereof and will be available
in book-entry form only. Unless otherwise
specified in the related Prospectus Supplement,
Noteholders will be able to receive Definitive
Notes only in the limited circumstances
described herein or in the related Prospectus
Supplement. See "Certain Information Regarding
the Securities--Definitive Securities".
Unless otherwise specified in the related
Prospectus Supplement, each class of Notes will
have a stated principal amount and will bear
interest at a specified rate or rates (with
respect to each
6
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class of Notes, the "Interest Rate"). Each class
of Notes may have a different Interest Rate,
which may be a fixed, variable or adjustable
Interest Rate, or any combination of the
foregoing. The related Prospectus Supplement
will specify the Interest Rate for each class of
Notes, or the method for determining the
Interest Rate.
With respect to a series that includes two or
more classes of Notes, each class may differ as
to timing and priority of payments, seniority,
allocations of losses, Interest Rate or amount
of payments of principal or interest, or
payments of principal or interest in respect of
any such class or classes may or may not be made
upon the occurrence of specified events.
The Certificates............ Each series of Securities will, unless otherwise
specified in the related Prospectus Supplement,
include one or more classes of Certificates
which will be issued pursuant to the related
Trust Agreement.
Unless otherwise specified in the related
Prospectus Supplement, Certificates will be
available for purchase in a minimum denomination
of $1,000 and in integral multiples of $1,000 in
excess thereof and will be available in book-
entry form. Unless otherwise specified in the
related Prospectus Supplement,
Certificateholders will be able to receive
Definitive Certificates only in the limited
circumstances described herein or in the related
Prospectus Supplement. See "Certain Information
Regarding the Securities--Definitive
Securities".
Unless otherwise specified in the related
Prospectus Supplement, each class of
Certificates will have a stated Certificate
Balance specified in the related Prospectus
Supplement (the "Certificate Balance") and will
accrue interest on such Certificate Balance at a
specified rate (with respect to each class of
Certificates, the "Pass-Through Rate"). Each
class of Certificates may have a different Pass-
Through Rate, which may be a fixed, variable or
adjustable Pass-Through Rate or any combination
of the foregoing. The related Prospectus
Supplement will specify the Pass-Through Rate
for each class of Certificates or the method for
determining the Pass-Through Rate.
With respect to a series that includes two or
more classes of Certificates, each class may
differ as to timing and priority of
distributions, seniority, allocations of losses,
Pass-Through Rate or amount of distributions in
respect of principal or interest, or
distributions in respect of principal or
interest in respect of any such class or classes
may or may not be made upon the occurrence of
specified events.
To the extent specified in the related Prospectus
Supplement, distributions in respect of the
Certificates may be subordinated in priority of
payment to payments on the Notes.
Assets of the Trust......... The assets of each Trust will include a pool of
Student Loans consisting of education loans to
students and parents of students
7
<PAGE>
("Student Loans"), which will include rights to
receive payments made with respect to such
Student Loans and the proceeds thereof. On or
prior to the Closing Date specified in the
related Prospectus Supplement with respect to a
Trust (a "Closing Date"), the Seller will sell
Student Loans having an aggregate principal
balance specified in the related Prospectus
Supplement as of the date specified therein (a
"Cutoff Date"), to the Eligible Lender Trustee
on behalf of the Trust pursuant to a Loan Sale
Agreement (as amended and supplemented from time
to time, a "Loan Sale Agreement") among the
Seller, the related Trust and the related
Eligible Lender Trustee. The property of each
Trust will also include amounts on deposit in
certain trust accounts, including the related
Collection Account, any Reserve Account, any
Pre-Funding Account, any Collateral Reinvestment
Account and any other account identified in the
applicable Prospectus Supplement.
The Student Loans sold to any Trust will be
selected from Student Loans owned or controlled
by the Seller based on criteria specified in the
applicable Loan Sale Agreement and described
herein and in the related Prospectus Supplement.
Each Student Loan sold to any Trust will, subject
to compliance with specific origination and
servicing procedures prescribed by federal and
guarantor regulations, be guaranteed as to the
payment of principal and interest by either (i)
a state or private non-profit guarantor (each, a
"Federal Guarantor"), which agency is reinsured
by the Department of Education (the
"Department") for between 80% and 100% of the
amount of default claims paid by such Federal
Guarantor for a given federal fiscal year for
loans disbursed prior to October 1, 1993, for
78% to 98% of default claims paid for loans
disbursed on or after October 1, 1993, and for
100% of death, disability, bankruptcy, closed
school and false certification claims paid
("Federal Student Loans"), or (ii) a state or
private guarantor (each, a "Private Guarantor"
and together with the Federal Guarantors, the
"Guarantors") that is not reinsured by the
Department ("Private Student Loans"). Amounts
paid by a Guarantor pursuant to its guarantee
are herein referred to as "Guarantee Payments".
See "Federal Family Education Loan Program--
Federal Guarantors", "--Federal Insurance and
Reinsurance of Federal Guarantors" and "Private
Student Loan Programs".
If so provided in the related Prospectus
Supplement, during the period (the "Funding
Period") from the Closing Date until the first
to occur of (i) the amount on deposit in the
Pre-Funding Account being less than an amount
specified in the related Prospectus Supplement,
(ii) an Event of Default occurring under the
Indenture, a Servicer Default occurring under
the Loan Servicing Agreement or an Administrator
Default
8
<PAGE>
occurring under the Administration Agreement,
(iii) certain events of insolvency occurring
with respect to SMS, or (iv) the last day of the
Collection Period preceding a Distribution Date
specified in the related Prospectus Supplement,
an account will be maintained in the name of the
Indenture Trustee (the "Pre-Funding Account").
The amount on deposit in the Pre-Funding Account
(the "Pre-Funding Amount") on the Closing Date
will equal an amount specified in the related
Prospectus Supplement (which will be deposited
out of the net proceeds of the sale of the
related Securities) and, during the Funding
Period, will be reduced from time to time by the
amount thereof used to make Additional Fundings.
In addition, if so provided in the related
Prospectus Supplement, in lieu of a Funding
Period, during the period (the "Revolving
Period") from the Closing Date until the first
to occur of (i) an event described in clauses
(ii) or (iii) of the preceding paragraph or of
such additional event or events as are described
in the related Prospectus Supplement as having
such effect (each, an "Early Amortization
Event") or (ii) the last day of the Collection
Period preceding a Distribution Date specified
in the related Prospectus Supplement, an account
will be maintained in the name of the Indenture
Trustee (the "Collateral Reinvestment Account").
The amount on deposit in the Collateral
Reinvestment Account on the Closing Date may, if
so specified in the related Prospectus
Supplement, include an amount specified in the
related Prospectus Supplement (which will be
deposited out of the net proceeds of the sale of
the related Securities) and, during the
Revolving Period principal will not be
distributed on the Securities of the related
series and principal collections, together with
(if and to the extent described in the related
Prospectus Supplement) interest collections on
the Student Loans that are in excess of amounts
required to be distributed therefrom will be
deposited from time to time in the Collateral
Reinvestment Account and will be used to make
Additional Fundings.
Additional Fundings will consist of one or more
of the following, in each case if and to the
extent specified in the related Prospectus
Supplement: (i) interest payments to Noteholders
and Certificateholders in lieu of collections of
interest on certain of the Student Loans to the
extent such interest is not paid currently but
is capitalized and added to the principal
balance of such Student Loans; (ii) payments to
purchase from the Seller under certain
circumstances certain additional Student Loans,
in the case of a Funding Period, made to
borrowers who have existing Student Loans that
are part of the pool of Student Loans of a
series as of the Cutoff Date ("Existing
Borrowers") and, in the case of a Revolving
Period, made to borrowers which may include, but
will not be limited to, borrowers who at the
time of such purchase by the Trust have existing
Student
9
<PAGE>
Loans that are part of such pool; and (iii)
payments to fund the origination by the related
Trust under certain circumstances of certain
additional Student Loans, in the case of a
Funding Period, made to Existing Borrowers and,
in the case of a Revolving Period, made to
borrowers who at the time of such origination
have existing Student Loans that are part of the
related pool. If so provided in the related
Prospectus Supplement, Additional Fundings may
continue to occur after the Funding Period or
Revolving Period. Additional Fundings occurring
after the Funding Period or Revolving Period
will be funded from distributions on the related
Student Loans in the manner specified in the
related Prospectus Supplement. See "Description
of the Transfer and Servicing Agreements--
Additional Fundings".
Guarantors............. Each Student Loan sold to any Trust will, subject
to compliance with specific origination and
servicing procedures prescribed by federal and
guarantor regulations, be guaranteed as to the
payment of principal and interest by either (a)
a Federal Guarantor, which agency is reinsured
by the Department for between 80% and 100% of
the amount of default claims paid by Federal
Guarantor for a given federal fiscal year for
loans disbursed prior to October 1, 1993, for
78% to 98% of default claims for loans disbursed
on or after October 1, 1993, and for 100% of
death, disability, bankruptcy, closed school and
false certification claims paid or (b) a Private
Guarantor. See "Federal Family Education Loan
Program--Federal Guarantors," "--Federal
Insurance and Reinsurance of Federal Guarantors"
and "Private Student Loan Programs."
Credit and Cash Flow If and to the extent specified in the related
Enhancement................. Prospectus Supplement, credit or cash flow
enhancement with respect to a Trust or any class
or classes of Securities may include any one or
more of the following: subordination of one or
more other classes of Securities, a Reserve
Account, over-collateralization, letters of
credit, credit or liquidity facilities, surety
bonds, guaranteed investment contracts,
repurchase obligations, other agreements with
respect to third party payments or other
support, cash deposits or other arrangements.
Any form of credit or cash flow enhancement may
have certain limitations and exclusions from
coverage thereunder, which will be described in
the related Prospectus Supplement.
Reserve Account.............
If so specified in the related Prospectus
Supplement, an account in the name of the
related Indenture Trustee (the "Reserve
Account") will be established and maintained by
the Administrator with the Indenture Trustee in
accordance with the directions of the
Administrator and will be an asset of the
applicable Trust. To the extent specified in the
related Prospectus Supplement, the Seller will
make an initial deposit into the Reserve Account
on the Closing Date having a value
10
<PAGE>
equal to the amount specified in the Prospectus
Supplement (the "Reserve Account Initial
Deposit"); the Reserve Account Initial Deposit
will be augmented on each Distribution Date by
the deposit into the Reserve Account of any
remaining Available Funds for such Distribution
Date. See "Description of the Transfer and
Servicing Agreements--Distributions" in the
related Prospectus Supplement.
Amounts in the Reserve Account will be available
to cover shortfalls in amounts due to the
holders of those classes of Securities specified
in the related Prospectus Supplement in the
manner and under the circumstances specified
therein. The related Prospectus Supplement will
also specify to whom and the manner and
circumstances under which amounts on deposit in
the Reserve Account (after giving effect to all
other required distributions to be made by the
applicable Trust) in excess of the Specified
Reserve Account Balance (as defined in the
related Prospectus Supplement) will be
distributed.
Transfer and Servicing With respect to each Trust, the Seller will sell
Agreements.................. the related Student Loans to such Trust pursuant
to a Loan Sale Agreement, with the related
Eligible Lender Trustee holding legal title
thereto. The rights and benefits of such Trust
and the Eligible Lender Trustee under the Loan
Sale Agreement will be assigned to the Indenture
Trustee as collateral for the Notes of the
related series. Pursuant to a Loan Servicing
Agreement between the Servicer and the Eligible
Lender Trustee (the "Loan Servicing Agreement"),
the Servicer will agree with such Trust to be
responsible for servicing, managing and
maintaining the custody of, and making
collections on, the pool of Student Loans and
preparing and filing with the Department and the
applicable Federal Guarantor all appropriate
claim forms and other documents and filings on
behalf of the Eligible Lender Trustee in order
to claim the Interest Subsidy Payments and
Special Allowance Payments from the Department
in respect of the Federal Student Loans entitled
thereto. In addition, the Administrator will
undertake certain administrative duties with
respect to such Trust under an Administration
Agreement.
Unless otherwise specified in the related
Prospectus Supplement, the Seller will be
obligated under the related Loan Sale Agreement
to repurchase, and the Servicer will be
obligated under the related Loan Servicing
Agreement to arrange for the purchase of, any
Student Loan if the interest of such Trust
therein is materially adversely affected by a
breach of any representation, warranty or
covenant (including the Servicer's covenant to
service all the Student Loans in accordance with
applicable laws, restrictions and guidelines)
made by the Seller or the Servicer, as the case
may be, with respect to the Student Loans, if
the breach has not been cured following the
discovery by or notice to the Seller or the
Servicer, as the case may be, of
11
<PAGE>
the breach (it being understood that any such
breach that does not affect any Guarantor's
obligation to guarantee payment of such Student
Loan will not be considered to have a material
adverse effect for this purpose). In the event
that Notes of any series remain outstanding and
there is a dispute regarding whether the
interests of the related Trust are materially
adversely affected by any such breach, the
determination as to whether the interests of
such Trust are so affected will be made by the
Indenture Trustee. In such event, the
determination of the Indenture Trustee will be
dispositive. In the event only Certificates
remain outstanding, any such determination will
be made by the Eligible Lender Trustee and its
determination will be dispositive. In addition,
if so specified in the related Prospectus
Supplement, the Seller or the Servicer, as the
case may be, will be obligated to reimburse such
Trust for any accrued interest amounts not
guaranteed by a Guarantor due to, or any
Interest Subsidy Payments or Special Allowance
Payments lost as a result of, a breach of the
Seller's representations and warranties or the
Servicer's covenants, as the case may be, with
respect to any Student Loan. The liability of
the Seller or the Servicer, as the case may be,
will not exceed the amount that the Guarantor
would have paid if the Student Loan had been
accepted and paid by the Guarantor as a claim.
Unless otherwise specified in the related
Prospectus Supplement, the Servicer will receive
a fee (the "Servicing Fee") equal to a specified
percentage of the Pool Balance, as set forth in
the related Prospectus Supplement, together with
any other administrative fees and similar
charges specified in the related Prospectus
Supplement. The Servicing Fee will be payable
out of Available Funds and amounts on deposit in
the Reserve Account on the dates specified in
the related Prospectus Supplement. See
"Description of the Transfer and Servicing
Agreements--Servicing Compensation" herein and
in the related Prospectus Supplement.
Termination................. The obligations of the Seller, the Servicer, the
Administrator, the Eligible Lender Trustee and
the Indenture Trustee relating to a particular
Trust will terminate upon (i) the maturity or
other liquidation of the last Student Loan in
such Trust and the disposition of any amount
received upon liquidation of any such remaining
Student Loans, and (ii) the payment to the
Noteholders and the Certificateholders of the
related series of all amounts required to be
paid to them. See "Description of the Transfer
and Servicing Agreements--Termination".
Optional Redemption........ If the Seller or any other party named in the
related Prospectus Supplement exercises its
option to purchase the Student Loans of a Trust
in the manner and on the respective terms and
conditions described under "Description of the
Transfer and Servicing Agreements--Termination--
Optional Redemption",
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<PAGE>
the outstanding Notes will be redeemed and the
Certificateholders will receive a distribution
as set forth in the related Prospectus
Supplement.
Mandatory Redemption....... To the extent that amounts on deposit in any Pre-
Funding Account or Collateral Reinvestment
Account for a series have not been fully applied
to Additional Fundings by the Trust by the end
of the Funding Period or Revolving Period,
respectively, the related Noteholders may
receive as a prepayment of principal an amount
equal to the amount remaining in such account on
the Distribution Date immediately following the
end of such period. See "Description of the
Notes--Principal and Interest on the Notes".
Auction of Student Loans... If so provided in the related Prospectus
Supplement, all remaining Student Loans held by
a Trust will be offered for sale by the
Indenture Trustee on any Distribution Date
occurring on or after a date specified in such
Prospectus Supplement. The Seller and related or
unrelated third parties may offer bids for such
Student Loans. The Indenture Trustee will accept
the highest bid equal to or in excess of the
aggregate Purchase Amounts of such Student Loans
as of the end of the Collection Period
immediately preceding the related Distribution
Date. The proceeds of such sale will be used to
redeem all related Notes and to retire the
related Certificates. See "Description of the
Transfer and Servicing Agreements--Termination--
Auction of Student Loans".
Tax Considerations..........
Upon the issuance of each series of Securities,
except as otherwise provided in the related
Prospectus Supplement, Brown & Wood LLP, federal
tax counsel to the applicable Trust and counsel
to the Underwriters ("Federal Tax Counsel"),
will deliver an opinion to the effect that, for
federal income tax purposes: (i) the Notes of
such series will be or, in certain cases, should
be, characterized as debt, and (ii) the Trust
will not be characterized as an association (or
a publicly traded partnership) taxable as a
corporation.
Unless otherwise specified in the applicable
Prospectus Supplement, each Noteholder, by the
acceptance of a Note of a given series, will
agree to treat such Note as indebtedness, and
each Certificateholder, if any, by the
acceptance of a Certificate of a given series,
will agree to treat the related Trust as a
partnership in which such Certificateholder is a
partner for federal income and state income tax
and franchise tax purposes. Alternative
characterizations of such Trust and such
Certificates are possible, but would not result
in materially adverse tax consequences to
Certificateholders.
Due to the method of allocation of Trust income
to the Certificateholders, cash basis holders
may, in effect be required to report income from
the Certificates on an accrual basis. In
addition, because tax allocations and tax
reporting will be done on a uniform basis, but
Certificateholders may be purchasing
13
<PAGE>
Certificates at different times and at different
prices, Certificateholders may be required to
report on their tax returns taxable income that
is greater or less than the amount reported to
them by the Trust.
The Trust with respect to each series of
Securities will be established under the laws of
the state specified in the related Prospectus
Supplement and will be managed by the
Administrator in the State of Indiana. See
"Certain Federal Income Tax Consequences" for
additional information concerning the
application of federal tax laws with respect to
the Notes and the Certificates.
ERISA Considerations........ Unless otherwise specified in the related
Prospectus Supplement, subject to the
considerations discussed under "ERISA
Considerations" herein and unless otherwise
specified in the related Prospectus Supplement,
the Notes of each series are eligible for
purchase by employee benefit plans.
The Certificates may not be acquired by any
employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as
amended ("ERISA"), or by any individual
retirement account. See "ERISA Considerations"
herein.
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RISK FACTORS
Risk That Failure to Comply with Student Loan Origination and Servicing
Procedures for Federal Student Loans May Adversely Affect the Trust's Ability
to Pay Principal and Interest on the Related Notes and Certificates. The Act,
including the implementing regulations thereunder, requires lenders making and
servicing student loans and guarantors guaranteeing student loans to follow
specified procedures, including due diligence procedures, to ensure that the
student loans are properly made and disbursed to, and repaid on a timely basis
by or on behalf of, borrowers. Certain of those procedures, which are
specifically set forth in the Act, are summarized herein. See "The Student Loan
Pools--The Student Loan Financing Business", "Federal Family Education Loan
Program" and "Description of the Transfer and Servicing Agreements--Servicing
Procedures". Generally, those procedures require that completed loan
applications be processed, a determination of whether an applicant is an
eligible borrower under the Act be made, the borrower's responsibilities under
the loan be explained to him or her, the promissory note evidencing the loan be
executed by the borrower and then that the loan proceeds be disbursed in a
specified manner by the lender. After the loan is made, the lender must
establish repayment terms with the borrower, properly administer deferrals and
forbearances and credit the borrower for payments made thereon. If a borrower
becomes delinquent in repaying a loan, the lender must perform certain
collection procedures (primarily telephone calls and demand letters) which vary
depending upon the length of time a loan is delinquent.
With respect to each series of Securities, the Servicer will agree pursuant
to the related Loan Servicing Agreement to perform servicing and collection
procedures on behalf of each Trust. However, failure to follow these procedures
or failure of the originator of the loan to follow procedures relating to the
origination of any Federal Student Loans may result in the Department's refusal
to make reinsurance payments to the Federal Guarantor or to make Interest
Subsidy Payments and Special Allowance Payments to the related Eligible Lender
Trustee with respect to such Federal Student Loans or in the Federal
Guarantor's refusal to honor its Guarantee Agreements with the related Eligible
Lender Trustee with respect to such Federal Student Loans. Failure of the
Federal Guarantor to receive reinsurance payments from the Department could
adversely affect the Federal Guarantor's ability or legal obligation to make
Guarantee Payments to the related Eligible Lender Trustee. Loss of any such
Guarantee Payments, Interest Subsidy Payments or Special Allowance Payments
could adversely affect the amount of Available Funds for any Collection Period
and the Trust's ability to pay principal and interest on the related Notes and
Certificates.
If a breach of the representations, warranties or covenants of the Seller or
the Servicer, as the case may be, with respect to a Federal Student Loan has a
material adverse effect on the interest of the related Trust therein and such
breach is not cured within any applicable cure period, unless otherwise
specified in the Prospectus Supplement, with respect to a given series of
Securities such Trust will have the right under the related Loan Sale Agreement
and Loan Servicing Agreement to cause the Seller to repurchase, or the Servicer
to arrange for the purchase of, such Federal Student Loan. In addition, unless
otherwise specified in the Prospectus Supplement with respect to a given series
of Securities, each Trust will have the right, under certain circumstances
specified in the related Loan Sale Agreement and Loan Servicing Agreement, to
cause the Seller or the Servicer, as the case may be, to reimburse such Trust
for any accrued interest amounts not guaranteed by a Federal Guarantor, or any
Interest Subsidy Payments and Special Allowance Payments lost with respect to a
Federal Student Loan as a result of a breach of the Seller's representations
and warranties or the Servicer's covenants, as the case may be, with respect to
such Federal Student Loan. The repurchase and reimbursement obligations of the
Seller and the Servicer will constitute the sole remedy available to or on
behalf of a Trust, the related Certificateholders or the related Noteholders
for any such uncured breach. See "Description of the Transfer and Servicing
Agreements--Sale of Student Loans; Representations and Warranties" and "--
Servicer Covenants". There can be no assurance, however, that the Seller will
have the financial resources, or the Servicer will have the ability, to meet
these obligations. The failure of the Seller to so repurchase, or the Servicer
to arrange for the repurchase of, a Federal Student Loan would constitute a
breach of the related Loan Sale Agreement and Loan Servicing Agreement,
enforceable by the related Eligible Lender Trustee on behalf of such Trust or
by the related Indenture Trustee on behalf of the Noteholders of the related
series, but would not constitute an Event of Default under each Indenture or
permit the exercise of remedies thereunder.
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<PAGE>
On April 29, 1994, the Department published regulations amending the Student
Assistance General Provisions and Federal Family Education Loan Program
regulations effective July 1, 1994. These regulations (which were published in
final form on November 29, 1994), among other things, establish requirements
governing contracts between holders of Federal Student Loans and third-party
servicers, establish standards of administrative and financial responsibility
for third-party servicers that administer any aspect of a guarantor's or
lender's participation in the Federal Family Education Loan Program, and
establish sanctions for third-party servicers.
Under these regulations, a third-party servicer such as the Servicer is
jointly and severally liable with its client lenders for liabilities to the
Department arising from the servicer's violation of applicable requirements. In
addition, if a servicer fails to meet standards of financial responsibility or
administrative capability included in the new regulations, or violates other
Federal Family Education Loan Program requirements, the new regulations may
authorize the Department to fine the servicer or limit, suspend, or terminate
the servicer's eligibility to contract to service Federal Student Loans. The
effect of such a limitation, suspension, or termination on a servicer's
eligibility to service loans already on its system, or to accept new loans for
servicing under existing contracts, is unclear. No assurance exists that the
Servicer will not be held liable by the Department for liabilities arising out
of its Federal Family Education Loan Program activities for a Trust or other
client lenders, or that its eligibility will not be limited, suspended, or
terminated in the future. If the Servicer were so held liable or its
eligibility limited, suspended, or terminated, its ability to properly service
Student Loans and to satisfy its obligation to arrange the purchase of loans as
to which it breaches its covenants under the applicable Servicing Agreement
could be adversely affected. In such event, a Servicer Default under the
related Servicing Agreement could occur resulting in the removal of the
Servicer and the appointment of a substitute Servicer by the Indenture Trustee
or the holders of Notes of the related series evidencing not less than 75% in
principal amount of such then outstanding Notes. See "Description of the
Transfer and Servicing Agreements--Rights Upon Servicer Default".
Risk That Failure to Comply with Student Loan Origination and Servicing
Procedures for Private Student Loans Could Adversely Affect the Trust's Ability
to Pay Principal and Interest on the Notes and Certificates. The programs under
which Private Student Loans will be insured prescribe rules and procedures
applicable to originating and servicing Private Student Loans, which procedures
will be similar to those set forth above with respect to Federal Student Loans.
Failure to make or service properly a Private Student Loan in accordance with
those procedures could adversely affect the Eligible Lender Trustee's ability
to obtain Guarantee Payments from the Private Guarantor. Loss of such Guarantee
Payments could adversely affect the amount of Available Funds for any
Collection Period and the Trust's ability to pay principal and interest on the
Notes and the Certificates. Under certain circumstances the Trust has the
right, pursuant to the related Loan Sale Agreement or Loan Servicing Agreement,
as applicable, to cause the Seller to repurchase, or the Servicer to purchase,
a Private Student Loan. See "Description of the Transfer and Servicing
Agreements--Sale of Student Loans; Representations and Warranties" and "--
Servicer Covenants". There can be no assurance, however, that the Seller or the
Servicer will have the financial resources to do so.
Variability of Actual Cash Flows; Risk of Shortfalls to Holders of Notes and
Certificates Resulting from Inability of Related Indenture Trustee to Liquidate
Student Loans. Amounts received with respect to the Student Loans for a
particular Collection Period may vary greatly in both timing and amount from
the payments actually due on the Student Loans as of such Collection Period for
a variety of economic, social and other factors, including both individual
factors, such as additional periods of deferral or forbearance prior to or
after a borrower's commencement of repayment, and general factors, such as a
general economic downturn which could increase the amount of defaulted Student
Loans. Failures by borrowers to pay timely the principal and interest on the
Student Loans will affect the amount of Available Funds on a Distribution Date,
which may reduce the amount of principal and interest paid to the
Securityholders of the related series on such Distribution Date. Moreover,
failures by student loan borrowers generally to pay timely the principal and
interest due on their student loans could obligate the respective Federal
Guarantor to make payments thereon, which could adversely affect the solvency
of the Federal Guarantor and its ability to meet its guarantee obligations
(including with respect to the Student Loans). The inability of any Federal
Guarantor
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<PAGE>
to meet its guarantee obligations could reduce the amount of principal and
interest paid to the Securityholders of the related series on a Distribution
Date. The effect of such factors, including the effect on a Federal Guarantor's
ability to meet its guarantee obligations with respect to the Student Loans, on
a Trust's ability to pay principal and interest with respect to the Securities,
is impossible to predict. Pursuant to the 1992 Amendments, under Section 432(o)
of the Act if the Department has determined that a Federal Guarantor is unable
to meet its insurance obligations, the loan holder may submit claims directly
to the Department and the Department is required to pay the full Guarantee
Payment due with respect thereto in accordance with guarantee claim processing
standards no more stringent than those of the Federal Guarantor. However, the
Department's obligation to pay guarantee claims directly in this fashion is
contingent upon the Department making the determination referred to above.
There can be no assurance that the Department would ever make such a
determination with respect to a Federal Guarantor or, if such a determination
was made, whether such determination or the ultimate payment of such guarantee
claims would be made in a timely manner.
If an Event of Default occurs under the related Indenture, subject to certain
conditions, the related Indenture Trustee is authorized, without the consent of
the Certificateholders of the related series, to sell the Student Loans pledged
thereunder. There can be no assurance, however, that the related Indenture
Trustee will be able to find a purchaser for the Student Loans in a timely
manner or that the market value of such Student Loans is equal to the aggregate
outstanding principal amount of the Securities and accrued interest thereon. If
the proceeds of any such sale, together with amounts then available in any
Reserve Account or pursuant to any other credit enhancement specified as being
available therefor in the related Prospectus Supplement, do not exceed the
aggregate outstanding principal amount of Notes and accrued interest thereon,
the Noteholders of the related series will suffer a loss. In such
circumstances, the Certificateholders, to the extent the Certificates of such
series are subordinated to the Notes of such series, will also suffer a loss.
Unsecured Nature of Student Loans; Risk That Financial Status of a Federal
Guarantor Will Affect Its Ability to Make Guarantee Payments. The Act and the
programs under which Private Student Loans are insured require all Student
Loans to be unsecured. As a result, the only security for payment of the
Student Loans are the Guarantee Agreements between the related Eligible Lender
Trustee and the Guarantors. A deterioration in the financial status of the
Guarantors and their ability to honor guarantee claims with respect to the
Student Loans could result in a failure by the Guarantor to make Guarantee
Payments to such Eligible Lender Trustee. One of the primary causes of a
possible deterioration in a Guarantor's financial status is the amount and
percentage of defaulting Student Loans guaranteed by a Federal Guarantor.
Moreover, to the extent that default reimbursement claims submitted by a
Federal Guarantor for any fiscal year exceed certain specified levels, the
Department's obligation to reimburse the Federal Guarantor for default claim
losses is reduced on a sliding scale from 100% to a minimum of 80% (98% to 78%,
respectively, for default claim losses for Federal Student Loans made on or
after October 1, 1993). Death, disability, bankruptcy, closed school and false
certification claims are reimbursed 100% by the Department. Private Guarantors
are not entitled to any federal reinsurance or assistance from the Department.
Although each Private Guarantor maintains a loan loss reserve intended to
absorb losses arising from its guarantee commitments, there can be no assurance
that the amount of such reserve will be sufficient to cover the obligations of
such Private Guarantor over the term of the Private Student Loans. No assurance
exists that any Guarantor will have the financial resources to make all
Guarantee Payments to a given Trust in respect of the related Student Loans
that may arise from time to time. See "The Federal Family Education Loan
Program--Guarantors" and "--Federal Insurance and Reinsurance of Guarantee
Federal Agencies".
Default Risk on Certain Financed Student Loans. Under the Omnibus Budget
Reconciliation Act of 1993, Financed Student Loans first disbursed on or after
October 1, 1993 are 98% insured by the applicable Guarantor. As a result, to
the extent a borrower of such a Financed Student Loan defaults, the Trust will
experience a loss of 2% of outstanding principal and accrued interest on each
such Financed Student Loan. A defaulted loan will be fully assigned to the
applicable Guarantor in exchange for a guarantee payment on the 98% guaranteed
portion and the Trust may have no right thereafter to pursue the borrower for
the 2% unguaranteed portion. Financed Student Loans continue to be 100%
guaranteed in the event of death, disability or bankruptcy of the borrower and
a closing of or false certification by the borrower's school regardless of
disbursement date.
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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% 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
or the Certificateholders and which rebate will reduce the amount of funds
which would otherwise be available to make distributions on the Securities and
will reduce the Student Loan Rate. In addition, 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 Funding
Period), which fee will be deducted by the Department out of Interest Subsidy
and Special Allowance Payments. If sufficient Interest Subsidy and Special
Allowance Payments are not due to the Trust to cover the amount of the Federal
Origination Fee, the balance of such Federal Origination Fee will be deferred
by the Department until sufficient Interest Subsidy and Special Allowance
Payments accrue to cover such fee. If such amounts never accrue, the Trust
would be obligated to pay any remaining fee from other assets of the Trust
prior to making distributions to Noteholders or Certificateholders. The offset
of Interest Subsidy and Special Allowance Payments, and the payment of any
remaining fee from other Trust assets, will further reduce the amount of
Available Funds (or Monthly Available Funds) from which payments to Noteholders
and Certificateholders may be made. Furthermore, any offset of Interest Subsidy
and Special Allowance Payments will further reduce the Student Loan Rate.
Risk That Change in Law will Adversely Affect Student Loans, Guarantors, the
Seller or the Servicer. No assurance can be made that the Higher Education Act
or other relevant federal or state laws, rules and regulations and the programs
implemented thereunder will not be amended or modified in the future in a
manner that will adversely impact the programs described in this Prospectus and
the guaranteed student loans made thereunder, including the Student Loans, the
Guarantors, the Seller or the Servicer. In addition, existing legislation and
future measures to reduce the federal budget deficit or for other purposes may
adversely affect the amount and nature of federal financial assistance
available with respect to these programs. In recent years, federal budget
legislation has provided for the recovery of certain funds held by the Federal
Guarantors in order to achieve reductions in federal spending. No assurance can
be made that future federal budget legislation or administrative actions will
not adversely affect expenditures by the Department or the financial condition
of the Federal Guarantors.
Adverse Affect of Recent Legislation.
Increased Fees; Decreased Assistance. On August 10, 1993, President Clinton
signed the Omnibus Budget Reconciliation Act of 1993 (the "1993 Act"), which
made a number of changes to the Federal Student Loan programs, including
imposing on lenders or holders of Student Loans certain fees and affecting the
Department's financial assistance to Federal Guarantors, including reducing the
percentage of claim payments the Department will reimburse to Federal
Guarantors, reducing more substantially the premiums and default collections
that Federal Guarantors are entitled to receive and/or retain and permitting the
Department to reduce administrative fees it pays to Federal Guarantors.
Impact of Direct Lending. In addition, such legislation contemplates
replacement of a minimum of approximately 60% of the Federal Student Loan
programs with direct lending by the Department by 1998. The expansion of the
new program may involve increasing reductions in the volume of loans made under
the existing programs. The volume of new Student Loans held and serviced by SMS
and the Servicer may decrease due to the new program. Such entities have not
experienced such a reduction to date and any such reduction will not
necessarily be equal to the percentage by which existing Federal Student Loan
programs are replaced by the new program. As these reductions occur, SMS or the
Servicer could experience increased costs due to reduced economies of scale to
the extent the volume of loans held and serviced by SMS and the Servicer is
reduced. Such cost increases could affect the ability of the Seller or the
Servicer to satisfy their respective obligations to repurchase Student Loans in
the event of certain breaches of its representations and warranties as Seller
or of its covenants as Servicer and, in the case of the Servicer, to service
the Student Loans. See "Description of the Transfer and Servicing Agreements--
Sale of Student Loans; Representations and Warranties" and "--Servicer
Covenants". Such volume reductions could also reduce revenues received by the
Federal Guarantors that are available to pay claims on defaulted Federal
Student Loans. Finally, the
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<PAGE>
level of competition in existence in the secondary market for loans made under
the existing programs could be reduced, resulting in fewer potential buyers of
the Federal Student Loans and lower prices available in the secondary market
for those loans.
Reserves. The 1993 Act granted the Department broad powers over Federal
Guarantors and their reserves. These powers include the authority to require a
Federal Guarantor to return all reserve funds to the Department if the
Department determines such action is necessary to ensure an orderly termination
of the Federal Guarantor, to serve the best interests of the student loan
programs or to ensure the proper maintenance of such Federal Guarantor's funds
or assets. The Department is also now authorized to direct a Federal Guarantor
to return a portion of its reserve funds which the Department determines is
unnecessary to pay the program expenses and contingent liabilities of the
Federal Guarantor and/or to cease any activities involving the use of the
Federal Guarantor's reserve funds or assets which the Department determines is
a misapplication or otherwise improper. The Department may also terminate a
Federal Guarantor's reinsurance agreement if the Department determines that
such action is necessary to protect the federal fiscal interest or to ensure an
orderly transition to full implementation of direct federal lending. These
various changes create a significant risk that the resources available to the
Federal Guarantors to meet their guarantee obligations will be significantly
reduced.
Risks Resulting from Subordination of Principal and Interest Payments;
Limited Assets. To the extent specified in the related Prospectus Supplement,
distributions of interest and principal on the Certificates of a series may be
subordinated in priority of payment to interest and principal due on the Notes
of such series and distributions of interest and principal of certain classes
of Notes of a series may be subordinated in priority of payment to interest and
principal due on other classes of Notes of such series. Moreover, each Trust
will not have, nor is it permitted or expected to have, any significant assets
or sources of funds other than the Student Loans and, to the extent provided in
the related Prospectus Supplement, a Reserve Account and any other credit
enhancement. The Notes of any series will represent obligations solely of, and
the Certificates of such series will represent interests solely in, the related
Trust and neither the Notes nor the Certificates of such series will be insured
or guaranteed by the Seller, the Servicer, the applicable Eligible Lender
Trustee, the applicable Indenture Trustee or any other person or entity.
Consequently, holders of the Securities of any series must rely for repayment
upon payments on the related Student Loans and, if and to the extent available,
amounts on deposit in the Reserve Account (if any) and other credit enhancement
(if any), all as specified in the related Prospectus Supplement.
Risk Resulting from Use of the Pre-Funding Account or Collateral Reinvestment
Account to Make Additional Fundings. The use of a Pre-Funding Account or
Collateral Reinvestment Account to add Student Loans to a Trust after the
applicable Closing Date will cause the aggregate characteristics of the entire
pool of Student Loans with respect to such Trust, including, if and to the
extent set forth in the related Prospectus Supplement, the composition of such
pool and in the case of a Revolving Period, of the borrowers thereof, the
applicable Guarantors thereof (if, as may be so specified in the related
Prospectus Supplement, the Guarantors with respect to Student Loans added after
the Closing Date may include Guarantors other than those represented in pool as
of the Closing Date and named in such Prospectus Supplement) and the
distribution by loan type, interest rate, principal balance and remaining term
to stated maturity to vary, possibly significantly, from those of the
applicable pool as existing on the Closing Date and described in the related
Prospectus Supplement.
If, as to any series for which a Pre-Funding Account or Collateral
Reinvestment Account is provided, the sum of (i) the principal amount plus
accrued interest thereon to be capitalized upon repayment of eligible Student
Loans acquired by or originated on behalf of the related Trust during the
Funding Period or Revolving Period, as the case may be, less the principal
amount of the Student Loans sold to the Seller or prepaid by the related Trust
during such applicable period in connection with the making of Federal
Consolidation Loans or such other types of Student Loans as may be specified in
the related Prospectus Supplement, and (ii) the amount of interest on the
Student Loans capitalized and not paid currently by or on behalf of the
borrowers during such applicable period is less, in the case of the Funding
Period, than the Pre-Funded Amount or, in the case of the Revolving Period,
than the amount on deposit in the Collateral
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<PAGE>
Reinvestment Account at the end of the Revolving Period, the related Trust will
have insufficient opportunities to make Additional Fundings during the Funding
Period or Revolving Period, as the case may be, thereby resulting in a
prepayment of principal to Noteholders or Certificateholders as described in
the following paragraph. In addition, as to any series for which a Collateral
Reinvestment Account is provided, the making of Additional Fundings during the
Revolving Period at a rate lower than that expected by the Seller could cause a
build-up of funds in the Collateral Reinvestment Account at such a level as to
cause an Early Amortization Event, also thereby resulting in a prepayment of
principal to Noteholders as described in the following paragraph. Also, any
conveyance of Student Loans to a Trust through Additional Fundings is subject
to the following conditions, among others: (i) each such Student Loan must
satisfy the eligibility criteria specified in the related Loan Sale Agreement;
and (ii) the Seller will not select such Student Loans in a manner that it
believes is materially adverse to the interests of the related Noteholders or
the Certificateholders.
To the extent that amounts on deposit in the Pre-Funding Account or
Collateral Reinvestment Account for a series have not been fully applied to
Additional Fundings by the Trust by the end of the Funding Period or Revolving
Period, as the case may be, the related Noteholders or Certificateholders may
receive as a prepayment of principal an amount equal to the amount remaining in
the Pre-Funding Account or Collateral Reinvestment Account, as the case may be,
on the Distribution Date immediately following the end of such period. It is
anticipated that, in the case of each series, the amount of Additional Fundings
made by the Trust will not be exactly equal to the amount on deposit in the
Pre-Funding Account or Collateral Reinvestment Account, as the case may be, and
that therefore there may be at least a nominal amount of principal prepaid to
the Noteholders or Certificateholders. In addition, various events (including,
in the case of a Revolving Period, Early Amortization Events) could cause any
Funding Period or Revolving Period to end prior to the last day of the
Collection Period set forth in the related Prospectus Supplement. See also
"Maturity and Prepayment Assumptions" in the related Prospectus Supplement
regarding the risk to Noteholders and Certificateholders of prepayments in
connection with the making of Federal Consolidation Loans both during and after
the Funding Period.
In no event will the prefunded amount deposited in a Pre-Funding Account on
the Closing Date exceed 25% of the initial aggregate principal amount of the
Notes and the Certificates of the related series of Securities. No Funding
Period for a Pre-Funding Account will end more than one year after the related
Closing Date.
Maturity and Prepayment Considerations. All the Student Loans are prepayable
at any time. (For this purpose the term "prepayments" includes prepayments in
full or in part (including pursuant to Federal Consolidation Loans) and
liquidations due to default (including receipt of Guarantee Payments).) The
rate of prepayments on the Student Loans may be influenced by a variety of
economic, social and other factors affecting borrowers, including interest
rates and the availability of alternative financing. In addition, unless
otherwise specified in the Prospectus Supplement for a given series of
Securities, under certain circumstances, the Seller or the Servicer will be
obligated to purchase or arrange for the purchase of Student Loans from the
Trust pursuant to the related Loan Sale Agreement or Loan Servicing Agreement,
as applicable, as a result of breaches of their respective representations,
warranties or covenants. See "Description of the Transfer and Servicing
Agreements--Sale of Student Loans; Representations and Warranties" and "--
Servicer Covenants". Moreover, a borrower of Federal Student Loans may elect to
borrow a Federal Consolidation Loan to consolidate and refinance such Federal
Student Loans. The related Prospectus Supplement will describe the
circumstances under which such Trust may originate or acquire the resulting
Federal Consolidation Loan. No assurance can be made that borrowers with
Federal Student Loans will not seek to obtain Federal Consolidation Loans with
respect to such Federal Student Loans or, if they do so, that such Federal
Consolidation Loans will be held by the related Eligible Lender Trustee on
behalf of the Trust. See "The Federal Family Education Loan Program".
On the other hand, scheduled payments with respect to, and maturities of, the
Student Loans may be extended as a result of Grace Periods, Deferral Periods
and, under certain circumstances, Forbearance
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<PAGE>
Periods, which may lengthen the remaining term of the Student Loans and the
average life of the Notes and the Certificates. See "The Federal Family
Education Loan Program" and "Private Student Loan Programs". Any reinvestment
risks resulting from a faster or slower incidence of prepayment of Student
Loans will be borne entirely by the Noteholders and the Certificateholders. See
also "Description of the Transfer and Servicing Agreements--Insolvency Event"
regarding the sale of the Student Loans if an Insolvency Event occurs with
respect to the Company and "--Termination" regarding the Seller's option to
repurchase the Student Loans.
Noteholders and Certificateholders should consider, in the case of Notes or
Certificates, as the case may be, purchased at a discount, the risk that a
slower than anticipated rate of principal payments on the Student Loans could
result in an actual yield that is less than the anticipated yield and, in the
case of Notes or Certificates, as the case may be, purchased at a premium, the
risk that a faster than anticipated rate of principal payments on the Student
Loans could result in an actual yield that is less than the anticipated yield.
See "Weighted Average Life of the Securities".
Risk of Removal of Servicer Upon Servicer Default. Unless otherwise specified
in the related Prospectus Supplement with respect to a given series of
Securities, in the event of (a) any failure by the Servicer to deliver to the
Indenture Trustee for deposit in any of the Trust Accounts any required payment
or to direct such Indenture Trustee to make any required distributions
therefrom, which failure continues unremedied for three business days after
written notice from such Indenture Trustee or the related Eligible Lender
Trustee is received by the Servicer or after discovery by the Servicer, (b) any
failure by the Servicer to observe or perform in any material respect any other
covenant or agreement of the Servicer under the related Loan Servicing
Agreement, (c) any limitation, suspension or termination by the Secretary of
Education (the "Secretary") of the Servicer's eligibility to service Student
Loans which materially and adversely affects its ability to service the Student
Loans in the related Trust, or (d) an Insolvency Event with respect to the
Servicer occurs (collectively, a "Servicer Default"), the Indenture Trustee or
75% (by principal amount) of the Noteholders with respect to such series, as
described under "Description of the Transfer and Servicing Agreements--Rights
upon Servicer Default", may remove the Servicer without the consent of the
Eligible Lender Trustee or any of the Certificateholders with respect to such
series. Moreover, only the Indenture Trustee or the Noteholders with respect to
such series, and not the Eligible Lender Trustee or the Certificateholders,
have the ability to remove the Servicer if a Servicer Default occurs. In
addition, the Noteholders with respect to such series have the ability, with
certain specified exceptions, to waive defaults by the Servicer, including
defaults that could materially adversely affect the Certificateholders with
respect to such series. See "Description of the Transfer and Servicing
Agreements--Waiver of Past Defaults".
Insolvency Risk. The Seller will warrant to each Trust in the related Loan
Sale Agreement that the sale of the Student Loans by the Seller to such Trust
is a valid sale of the Student Loans by the Seller to such Trust.
Notwithstanding the foregoing, if the Seller were to become a debtor in a
bankruptcy case and a creditor or trustee-in-bankruptcy of such debtor or such
debtor itself were to take the position that the sale of Student Loans by the
Seller to such Trust should instead be treated as a pledge of such Student
Loans to secure a borrowing of such debtor, delays in payments of collections
of Student Loans to the related Securityholders could occur or (should the
court rule in favor of any such trustee, debtor or creditor) reductions in the
amounts of such payments could result. If the transfer of Student Loans by the
Seller to a Trust is treated as a pledge instead of a sale, a tax or government
lien on the property of the Seller arising before the transfer of the Student
Loans to such Trust may have priority over such Trust's interest in such
Student Loans. If the conveyance of the Student Loans by the Seller is treated
as a sale, the Student Loans would not be part of the Seller's bankruptcy
estate and would not be available to the Seller's creditors. See "Certain Legal
Aspects of the Student Loans--Transfer of Student Loans".
If an Insolvency Event with respect to the Company (which will be, unless
otherwise specified in the related Prospectus Supplement, an affiliate of SMS,
as set forth in such Prospectus Supplement) occurs, the Indenture Trustee will,
except under certain limited circumstances, promptly sell, dispose of or
otherwise
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liquidate the related Student Loans in a commercially reasonable manner on
commercially reasonable terms. The proceeds from any such sale, disposition or
liquidation of Student Loans will be treated as collections on the Student
Loans and deposited in the Collection Account of the related Trust. If the
proceeds from the liquidation of the Student Loans and any amounts on deposit
in the Reserve Account (if any) with respect to any Trust and any amounts
available from any credit enhancement, if any, are not sufficient to pay the
Notes and Certificates of the related series in full, the amount of principal
returned to Noteholders or Certificateholders will be reduced and Noteholders
and Certificateholders will incur a loss. See "Description of the Transfer and
Servicing Agreements--Insolvency Event".
Numerous federal and state consumer protection laws and related regulations
impose substantial requirements upon lenders and servicers involved in consumer
finance. Also, some state laws impose finance charge ceilings and other
restrictions on certain consumer transactions and require contract disclosures
in addition to those required under federal law. These requirements impose
specific statutory liability that could affect an assignee's ability to enforce
consumer finance contracts such as the Student Loans. In addition, the remedies
available to the related Indenture Trustee or the Noteholders of the related
series upon an Event of Default under the Indenture may not be readily
available or may be limited by applicable state and federal laws.
Book-Entry Registration. Each class of the Notes and the Certificates of a
given series will be initially represented by one or more certificates
registered in the name of Cede & Co. ("Cede"), or any other nominee for DTC set
forth in the related Prospectus Supplement (Cede, or such other nominee, "DTC's
Nominee"), and will not be registered in the names of the holders of the
Securities of such series or their nominees. Because of this, unless and until
Definitive Securities for such series are issued, holders of such Securities
will not be recognized by the applicable Indenture Trustee or Eligible Lender
Trustee as "Noteholders", "Certificateholders" or "Securityholders", as the
case may be (as such terms are used herein or in the related Indenture and
Trust Agreement, as the case may be). Hence, unless and until Definitive
Securities (as defined below) are issued, holders of such Securities will only
be able to exercise the rights of Securityholders indirectly through DTC and
its participating organizations. See "Certain Information Regarding the
Securities--Book-Entry Registration" and "--Definitive Securities".
FORMATION OF THE TRUSTS
THE TRUSTS
With respect to each series of Securities, the Seller will establish a
separate Trust pursuant to the respective Trust Agreement for the transactions
described herein and in the related Prospectus Supplement. The property of each
Trust will consist of (a) a pool of Student Loans, legal title to which is held
by the related Eligible Lender Trustee on behalf of each Trust, (b) all funds
collected or to be collected in respect thereof (including any Guarantee
Payments with respect thereto) on or after the applicable Cutoff Date and (c)
all moneys and investments on deposit in the Collection Account, any Reserve
Account and any other trust accounts or any other form of credit or cash flow
enhancement that may be obtained for the benefit of holders of one or more
classes of such Securities. To the extent provided in the applicable Prospectus
Supplement, the Notes will be collateralized by the property of the related
Trust. To facilitate servicing and to minimize administrative burden and
expense, the Servicer will retain possession of the promissory notes
representing the Student Loans and the other documents related thereto as
custodian for each Trust and the related Eligible Lender Trustee.
The principal offices of each Trust and the related Eligible Lender Trustee
will be specified in the applicable Prospectus Supplement.
ELIGIBLE LENDER TRUSTEE
The Eligible Lender Trustee for each Trust will be such entity as is
specified in the related Prospectus Supplement. The Eligible Lender Trustee on
behalf of the related Trust will acquire legal title to all the related Student
Loans acquired pursuant to the related Loan Sale Agreement and will enter into
a Guarantee
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Agreement with each of the Guarantors with respect to such Student Loans. Each
Eligible Lender Trustee will qualify as an eligible lender and owner of all
Federal Student Loans and Private Student Loans for all purposes under the Act
and the Guarantee Agreements. Failure of the Federal Student Loans to be owned
by an eligible lender would result in the loss of any Federal Guarantee
Payments from any Federal Guarantor and any Federal Assistance with respect to
such Federal Student Loans. See "The Federal Family Education Loan Program--
Eligible Lenders, Students and Institutions" and "--Federal Insurance and
Reinsurance of Federal Guarantors". An Eligible Lender Trustee's liability in
connection with the issuance and sale of the Notes and the Certificates is
limited solely to the express obligations of the Eligible Lender Trustee set
forth in the related Trust Agreement and the related Loan Sale Agreement. An
Eligible Lender Trustee may resign at any time, in which event the
Administrator, or its successor, will be obligated to appoint a successor
trustee. The Administrator of a Trust may also remove the Eligible Lender
Trustee if the Eligible Lender Trustee ceases to be eligible to continue as
Eligible Lender Trustee under the related Trust Agreement or if the Eligible
Lender Trustee becomes insolvent. In such circumstances, the Administrator will
be obligated to appoint a qualified successor trustee. Any resignation or
removal of an Eligible Lender Trustee and appointment of a successor trustee
will not become effective until acceptance of the appointment by the successor
trustee.
USE OF PROCEEDS
The net proceeds from the sale of Securities of a given series will be
applied by the applicable Trust to purchase the related Student Loans on the
Closing Date from the Seller and to make the initial deposit into the Reserve
Account or Prefunding Account, if any, or as otherwise specified in the related
Prospectus Supplement. The Seller will use such net proceeds paid to it with
respect to any such Trust for general corporate purposes or as otherwise
specified in the related Prospectus Supplement.
USA GROUP, SMS, THE SELLER AND THE SERVICER
USA GROUP
USA Group, Inc. ("USA Group"), a Delaware nonprofit corporation, is the
indirect or direct parent corporation of United Student Aid Funds, Inc. ("USA
Funds"), which is a Federal Guarantor, Loan Services, SMS, USA Group Guarantee
Services, Inc. ("USA Group Guarantee Services"), and USA Group Enterprises,
Inc.
The purposes of USA Group are exclusively charitable and educational. The
primary mission of USA Group is to provide overall direction and strategic
planning to its nonprofit member corporations and its for profit subsidiaries.
USA Group's corporate objectives are:
--to foster education and encourage the continuation of studies;
--to promote, provide, and participate in means for the attainment of
higher education;
--to establish, maintain, administer, and expend funds in furtherance and
in support of education objectives, activities, and projects;
--to provide a central clearing point for information, conferences, and
other exchanges;
--to perform servicing functions for the holders of loans that enable
students to attend universities, colleges, and schools;
--to otherwise advance the cause of education finance and support to
students at universities, colleges, and schools.
To fulfill its corporate mission and objectives, USA Group provides
administrative, financial, and various other corporate support services to its
member corporations and subsidiaries.
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The affiliate corporations of USA Group provide education finance services in
a variety of forms. Those education finance services provided by USA Group
affiliated corporations currently include (i) maintaining facilities for the
provision of guarantee services with respect to approved education loans made
to or for the benefit of eligible students who are enrolled at or plan to
attend approved educational institutions; (ii) providing guarantees for
education loans made pursuant to the Act as well as for loans made under
Private Loan Programs; (iii) assisting guarantee agencies in managing and
maintaining their education loan programs; (iv) serving pursuant to designation
by the state or territory as guarantor for the education loan programs of
Alaska, Arizona, Hawaii, Indiana, Kansas, Maryland, Mississippi, Nevada,
Wyoming, and certain Pacific Islands; (v) performing achievement and need-based
scholarship processing for corporations, foundations and benefit societies;
(vi) offering financial management services to certain guarantee agencies to
assist them in planning for the future and in meeting the financial challenges
facing guarantors; (vii) providing and performing education loan purchase
functions for the holders of loans made to facilitate attendance of students at
universities, colleges and schools; (viii) providing conversion services, data
processing, and other assistance necessary in connection with the acquisition
and servicing of education loans by primary lenders and secondary markets; and
(ix) acquiring student loan notes held by eligible lenders under the Federal
Family Education Loan Program (as defined below) as well as loans made under
the Private Loan Programs.
In addition to the above activities, USA Funds is affiliated with USA Group
Guarantee Services, a Delaware private, non-profit corporation, which provides
varying degrees of services to the following guarantee agencies: Student Loan
Guarantee Foundation of Arkansas, Iowa College Student Aid Commission,
Louisiana Office of Student Financial Assistance, Finance Authority of Maine,
Michigan Guaranty Agency, Montana Guaranteed Student Loan Program, New Mexico
Student Loan Guarantee Corporation, Oklahoma Guaranteed Student Loan Program,
Oregon State Scholarship Commission and Rhode Island Higher Education
Assistance Authority. Certain trustees and officers of USA Funds are also
trustees or officers of USA Group Guarantee Services.
SMS
SMS was organized on November 19, 1992, and is existing as a Delaware
corporation. SMS is an affiliate of USA Group.
The related Prospectus Supplement may set forth certain additional
information with respect to SMS. See also "The Student Loan Pools--The Student
Loan Financing Business" below. The principal executive offices of SMS are
located at 30 South Meridian Street, Indianapolis, Indiana 46204-3503 and its
telephone number is (317) 951-5640.
THE SELLER
The Seller will warrant to each Trust in the related Loan Sale Agreement that
the sale of the applicable Student Loans by the Seller to the Eligible Lender
Trustee on behalf of such Trust is a valid sale of such Student Loans.
Notwithstanding the foregoing, if the Seller were to become a debtor in a
bankruptcy case and a creditor or trustee in bankruptcy of such debtor or such
debtor itself were to take the position that the sale of Student Loans by the
Seller to a Trust should instead be treated as a pledge of such Student Loans
to secure a borrowing of such debtor, then delays in payments of collections of
such Student Loans could occur or (should the court rule in favor of any such
trustee, debtor or creditor) reductions in the amount of such payments could
result. If the transfer of Student Loans by the Seller to the Eligible Lender
Trustee on behalf of a Trust is treated as a pledge instead of a sale, a tax or
government lien on the property of the Seller arising before the transfer of
Student Loans to the Eligible Lender Trustee on behalf of such Trust may have
priority over such Eligible Lender Trustee's interest in such Student Loans. If
the conveyance by the Seller of the Student Loans is treated as a sale, the
Student Loans would not be part of the Seller's bankruptcy estate and would not
be available to the Seller's creditors.
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Because the Seller is not eligible to hold legal title to Federal Student
Loans, all Federal Student Loans will, prior to their transfer by the Seller to
a Trust, be held in trust for the Seller by an eligible lender to be named in
the related Prospectus Supplement as trustee for the Seller, pursuant to a
trust agreement between the Seller and such trustee.
THE SERVICER
USA Group Loan Services, Inc. ("Loan Services") was incorporated in 1982 as a
nonprofit Delaware corporation and is an affiliate of USA Group. If so
specified in the Prospectus Supplement for a series of Securities, pursuant to
the related Loan Servicing Agreement, Loan Services will agree to service and
perform all other related tasks with respect to all the Student Loans acquired
by the Eligible Lender Trustee on behalf of the related Trust. The Servicer is
required to perform in accordance with the Loan Servicing Agreement all
services and duties customary to the servicing of Student Loans and to do so in
the same manner as the Servicer has serviced Student Loans on behalf of other
lenders and in compliance with all applicable standards and procedures.
The related Prospectus Supplement may set forth certain additional
information with respect to the Servicer. The principal executive offices of
Loan Services are located at 30 South Meridian Street, Indianapolis, Indiana
46204-3503 and its telephone number is (317) 849-6510. See "Description of the
Transfer and Servicing Agreements--Servicing Procedures".
A Servicer in addition to or other than Loan Services may be specified for a
series of Securities in the related Prospectus Supplement.
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THE STUDENT LOAN POOLS
GENERAL
The Student Loans to be sold by the Seller to the Eligible Lender Trustee on
behalf of a Trust pursuant to the related Loan Sale Agreement will be selected
from the portfolio of Student Loans originated under the Federal Family
Education Loan Program or a private guarantee program by several criteria,
including that, unless otherwise provided in the related Prospectus Supplement,
each Student Loan (i) is guaranteed as to principal and interest by a Guarantor
(and, in the case of Federal Student Loans, that Guarantor is a Federal
Guarantor and is in turn reinsured by the Department in accordance with the
terms of the Federal Family Education Loan Program), (ii) was originated in the
United States of America, its territories or its possessions under and in
accordance with the Federal Family Education Loan Program or a specified
private guarantee program, (iii) contains terms in accordance with those
required by the Federal Family Education Loan Program or a specified private
guarantee program, the applicable Guarantee Agreements and other applicable
requirements, (iv) provides for regular payments that fully amortize the amount
financed over its original term to maturity (exclusive of any deferral or
forbearance periods) and (v) satisfies the other criteria, if any, set forth in
the related Prospectus Supplement. No selection procedures believed by the
Seller to be adverse to the Securityholders of any series will be used in
selecting the related Student Loans.
No more than 10% by principal balance of the Student Loans comprising a Trust
will be more than 30 days delinquent as of the Cutoff Date for such Trust and
none will be more than 120 days delinquent as of such date.
The Student Loans that comprise assets of each Trust will be held by the
related Eligible Lender Trustee, as trustee on behalf of such Trust. The
Eligible Lender Trustee will also enter into, on behalf of such Trust,
Guarantee Agreements with the Guarantors pursuant to which each of such Student
Loans will be guaranteed by one of such Guarantors. See "Formation of the
Trusts--Eligible Lender Trustee".
Information with respect to each pool of Student Loans for a given Trust will
be set forth in the related Prospectus Supplement, including, to the extent
appropriate, the composition, the distribution by loan type, loan payment
status, and states of borrowers' residence and the portion of such Student
Loans guaranteed by the specified Guarantors.
In the case of each series for which the related Trust may acquire or
originate Student Loans after the related Cutoff Date, information with respect
to the Student Loans eligible to be acquired or originated by the related Trust
will be set forth in the related Prospectus Supplement as will information
regarding the duration and conditions of any related Funding Period or
Revolving Period, the circumstances under which Additional Fundings will be
made during such period, and, if Additional Fundings may continue to be made
after such period, the circumstances under which such Additional Fundings will
be made.
ORIGINATION AND MARKETING PROCESS
The Act and the private guarantee programs specify rules regarding loan
origination practices, which lenders must comply with in order for the Student
Loans to be guaranteed and to be eligible to receive Federal Assistance, in the
case of Federal Student Loans, and the benefits of the private guarantee
program, in the case of Private Student Loans. Lenders of Federal Student Loans
are prohibited from offering points, premiums, payments or other inducements,
directly or indirectly, to any educational institution, guarantor or individual
in order to secure Federal Student Loan applications, and no lender may conduct
unsolicited mailings of Federal Student Loan applications to students who have
not previously received student loans from that lender.
Generally the student and school complete the combined application with
promissory note and mail or electronically transmit it either to a lender or
directly to the applicable Guarantor. Both the lender and such Guarantor must
approve such application, including confirming that such application is
complete and that it (and the prospective borrower and institution) complies
with all applicable requirements of the Act and the requirements of such
Guarantor. The Act requires that each Guarantor have procedures designed to
assure that it guarantees Federal Student Loans only to students attending
institutions which meet the requirements of the Act. Certain lenders establish
maximum default rates for institutions whose students they will serve.
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Each lender will only make loans that are approved by the applicable Guarantor
(consistent with the approval requirements of the Act and the Guarantor). For
each such application that is approved, the applicable Guarantor will issue a
guarantee certificate to the lender, which will then cause the loan to be
disbursed (typically in multiple installments) and a disclosure statement
confirming the terms of the Student Loan to be sent to the student borrower.
These procedures differ slightly for Consolidation Loans.
SERVICING AND COLLECTIONS PROCESS
The applicable Guarantee Agreements, and the Act in the case of Federal
Student Loans, require the holder of Student Loans to cause specified
procedures, including due diligence procedures and the taking of specific steps
at specific intervals, to be performed with respect to the servicing of the
Student Loans. These procedures are designed to ensure that such Student Loans
are repaid on a timely basis by or on behalf of borrowers. The Servicer agrees
to perform such servicing and collection procedures with respect to the Student
Loans on behalf of each Trust pursuant to the related Loan Servicing Agreement.
Such procedures generally include periodic attempts to contact any delinquent
borrower by telephone and by mail, commencing with one written notice within
the first ten days of delinquency and including multiple written notices and
telephone calls to the borrower thereafter at specified times during any such
delinquency. All telephone calls and letters are automatically registered, and
a synopsis of each call or the mailing of each letter is noted in the
Servicer's loan file for the borrower. The Servicer is also required to perform
skip tracing procedures on delinquent borrowers whose current location is
unknown, including contacting such borrowers' schools and references. Failure
to comply with the established procedures could adversely affect the ability of
a given Eligible Lender Trustee, as holder of legal title to the Student Loans
on behalf of the related Trust, to realize the benefits of any Guarantee
Agreement or, in the case of Federal Student Loans, to receive the benefits of
Federal Assistance from the Department with respect thereto. Failure to comply
with certain of the established procedures with respect to a Student Loan may
also result in the denial of coverage under a Guarantee Agreement for certain
accrued interest amounts, in circumstances where such failure has not caused
the loss of the guarantee of the principal of such Student Loan. See "Risk
Factors--Failure to Comply with Student Loan Origination and Servicing
Procedures for Federal Student Loans" and "--Failure to Comply with Student
Loan Origination and Servicing Procedures for Private Student Loans".
At prescribed times prior to submitting a claim for payment under a Guarantee
Agreement for a delinquent Student Loan, the Servicer generally is required to
notify the applicable Guarantor of the existence of such delinquency. These
notices advise the Guarantor of seriously delinquent accounts and allow the
Guarantor to make additional attempts to collect on such loans prior to the
filing of claims. Any Student Loan which is delinquent beyond a certain number
of days is considered to be in default, after which the Servicer will submit a
claim for reimbursement therefor to the applicable Guarantor. Failure to file a
claim within specified time frames of delinquency may result in denial of the
guarantee claim with respect to such Student Loan and failure to file such a
claim within certain shorter specified time frames may result in a denial of
certain interest amounts included in such claims. The Servicer's failure to
file a guarantee claim in a timely fashion would constitute a breach of its
covenants and, unless otherwise specified in the Prospectus Supplement for a
given series of Securities, would, if as a result of such failure the related
guaranty payment is no longer available to the related Trust, create an
obligation of the Servicer to arrange for the purchase of the applicable
Student Loan from the applicable Eligible Lender Trustee on behalf of the
related Trust. The obligation of the Servicer to arrange for such a purchase
will constitute the sole remedy available to Securityholders or the Eligible
Lender Trustee for such a failure by the Servicer. See "Description of the
Transfer and Servicing Agreements--Servicer Covenants".
CLAIMS AND RECOVERY RATES
Certain historical information concerning guarantee claims and recovery rates
of the Guarantors for the Student Loans held by the related Trust as of the
applicable Closing Date with respect to each series of Securities will be set
forth in each Prospectus Supplement. There can be no assurance that the claim
and recovery experience on any pool of Student Loans with respect to a given
Trust will be comparable to prior experience or to any such information.
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FEDERAL FAMILY EDUCATION LOAN PROGRAM
GENERAL
The Federal Family Education Loan Program ("FFELP") under Title IV of the
Higher Education Act of 1965, as amended (such Act, together with all rules and
regulations promulgated thereunder by the Department and/or the Guarantors, the
"Act"), provides for loans to be made to students or parents of students
enrolled in eligible institutions to finance a portion of the costs of
attending school. As described herein, payment of principal and interest with
respect to the Federal Student Loans is guaranteed by the applicable Guarantor
against default, death, bankruptcy or disability of the applicable borrower and
a closing of or a false certification by such borrower's school. The Guarantors
are entitled, subject to certain conditions, to be reimbursed by the Department
for from 100% to 78% of the amount of each Guarantee Payment made pursuant to a
program of federal reinsurance under the Act. In addition, the related Eligible
Lender Trustee, as a holder of the Federal Student Loans on behalf of a Trust,
is entitled to receive from the Department certain interest subsidy payments
and special allowance payments with respect to certain of such Federal Student
Loans as described herein.
FFELP provides for loans to students and parents of students which are (i)
guaranteed by a Guarantor and reinsured by the federal government, or (ii)
directly insured by the federal government. Several types of Federal Student
Loans are currently authorized under the Act: (i) loans to students who
demonstrate need ("Federal Stafford Loans"); (ii) loans to students who do not
demonstrate need or who need additional loans to supplement their Federal
Stafford Loans ("Federal Unsubsidized Stafford Loans"); (iii) loans to parents
of students ("Federal PLUS Loans") who are dependents and whose estimated costs
of attendance exceed the available Federal Unsubsidized Stafford Loans, Federal
Stafford Loans and other financial aid; and (iv) loans to consolidate the
borrower's obligations under various federally authorized student loan programs
into a single loan ("Federal Consolidation Loans"). Prior to July 1, 1994, the
Act also authorized loans to graduate and professional students, independent
undergraduate students and, under certain circumstances, dependent
undergraduate students, to supplement their Federal Stafford Loans ("Federal
Supplemental Loans to Students" or "Federal SLS Loans"). The description and
summaries of the Act, FFELP, the Guarantee Agreements and the other statutes,
regulations and amendments referred to in this Prospectus describe or summarize
the material provisions of such statutes, regulations and agreements but do not
purport to be comprehensive and are qualified in their entirety by reference to
each such statute, regulation or document. There can be no assurance that
future amendments or modifications will not materially change any of the terms
or provisions of the programs described in this Prospectus or of the statutes
and regulations implementing these programs. See "Risk Factors--Change in Law".
LEGISLATIVE AND ADMINISTRATIVE MATTERS
Both the Act and the regulations promulgated thereunder have been the subject
of extensive amendments in recent years and there can be no assurance that
further amendment will not materially change the provisions described herein or
the effect thereof. The 1992 Amendments to the Act extended the principal
provisions of FFELP to October 1, 1998 (or in the case of borrowers who have
received loans prior to that date, September 30, 2002, except that authority to
make Federal Consolidation Loans expires on September 30, 1998).
The 1993 Act made a number of changes to the Federal Student Loan programs,
including imposing on lenders or holders of Federal Student Loans certain fees
and affecting the Department's financial assistance to Federal Guarantors by
reducing the percentage of claim payments the Department will reimburse to
Federal Guarantors, reducing more substantially the insurance premiums and
default collections that Federal Guarantors are entitled to receive and/or
retain and allowing the Department to reduce the administrative fees it pays to
Federal Guarantors. In addition, such legislation contemplates replacement of a
minimum of approximately 60% of the Federal Student Loan programs with direct
lending by the Department by 1998. The expansion of the new program may involve
increasing reductions in the volume of loans made under the existing programs,
which could result in increased costs for SMS and the Servicer due to reduced
economies of scale. It is expected that the volume of new loans held and
serviced by SMS and the Servicer will decrease due to the new program, although
such entities have not experienced
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such a reduction to date and any such reduction will not necessarily be equal
to the percentage by which existing Federal Student Loan programs are replaced
by the new program. As these reductions occur, SMS and the Servicer could
experience increased costs due to reduced economies of scale to the extent the
volume of loans held by SMS and the Servicer is reduced. Such cost increases
could affect the ability of the Servicer to satisfy its obligations to service
the Student Loans or the obligations of the Seller and the Servicer to
repurchase Student Loans in the event of certain breaches of their respective
representations and warranties or covenants. See "Description of the Transfer
and Servicing Agreements--Sale of Student Loans; Representations and
Warranties" and "--Servicer Covenants". Such volume reductions could also
reduce revenues received by Federal Guarantors that are available to pay claims
on defaulted Student Loans. Finally, the level of competition in existence in
the secondary market for loans made under the existing programs could be
reduced, resulting in fewer potential buyers of the Federal Student Loans and
lower prices available in the secondary market for those loans. Further, the
Department is implementing a direct consolidation loan program, which may
further reduce the volume of Federal Student Loans and increase the prepayment
of existing FFELP Loans. The volume of existing loans that may be prepaid in
this fashion is not determinable at this time.
ELIGIBLE LENDERS, STUDENTS AND EDUCATIONAL INSTITUTIONS
Lenders eligible to make loans under FFELP generally include banks, savings
and loan associations, credit unions, pension funds, insurance companies, and
under certain conditions, schools and guarantors. Federal Student Loans may
only be made to a "qualified student", generally defined as a United States
citizen or national or otherwise eligible individual under federal regulations
who (a) has been accepted for enrollment or is enrolled and is maintaining
satisfactory progress at a participating educational institution, (b) is
carrying at least one-half of the normal full-time academic workload for the
course of study the student is pursuing, as determined by such institution, (c)
has agreed to notify promptly the holder of the loan of any address change, and
(d) for Federal Stafford Loans, meets the application "need" requirements for
the particular loan program. Each loan is to be evidenced by an unsecured
promissory note.
Eligible schools include institutions of higher education and proprietary
institutions. Institutions of higher education must meet certain standards,
which generally provide that the institution (i) only admits persons that have
a high school diploma or its equivalent; (ii) is legally authorized to operate
within a state; (iii) provides not less than a two-year program with credit
acceptable toward a bachelor's degree; (iv) is a public or non-profit
institution; and (v) is accredited by a nationally recognized accrediting
agency or is determined by the Department to meet the standards of an
accredited institution. Eligible proprietary institutions of higher education
include business, trade and vocational schools meeting standards which provide
that the institution (i) only admits persons that have a high school diploma or
its equivalent, or persons that are beyond the age of compulsory school
attendance and have the ability to benefit from the training offered (as
defined in the Act); (ii) is authorized by a state to provide a program of
vocational education designed to fit individuals for useful employment in
recognized occupations; (iii) has been in existence for at least two years;
(iv) provides at least a six-month training program to prepare students for
gainful employment in a recognized occupation; and (v) is accredited by a
nationally recognized accrediting agency or is specially accredited by the
Department.
With specified exceptions, institutions are excluded from consideration as
educational institutions if the institution (i) offers more than 50 percent of
its courses by correspondence, (ii) enrolls 50 percent or more of its students
in correspondence courses, (iii) has a student enrollment in which more than 25
percent of the students are incarcerated, or (iv) has a student enrollment in
which more than 50 percent of the students are admitted without a high school
diploma or its equivalent on the basis of their ability to benefit from the
education provided (as defined by statute and regulation). Further, schools are
specifically excluded from participation if (i) the educational institution has
filed for bankruptcy, (ii) the owner, or its chief executive officer, has been
convicted or pleaded nolo contendere or guilty to a crime involving the
acquisition, use or expenditure of federal student aid funds, or has been
judicially determined to have committed fraud involving
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funds under the student aid program, or (iii) the educational institution has a
cohort default rate in excess of the rate prescribed by the Act. In order to
participate in the program, the eligibility of a school must be approved by the
Department under standards established by regulation.
FINANCIAL NEED ANALYSIS
Federal Student Loans may generally be made in amounts, subject to certain
limits and conditions, to cover the student's estimated costs of attendance,
including tuition and fees, books, supplies, room and board, transportation and
miscellaneous personal expenses (as determined by the institution). Each
Federal Stafford Loan and Federal Unsubsidized Stafford Loan borrower must
undergo a financial need analysis, which requires the borrower to submit a
financial need analysis form to a multiple data entry processor which forwards
the information to the federal central processor. The central processor
evaluates the parents' and student's financial condition under federal
guidelines and calculates the amount that the student and/or the family must
contribute towards the student's cost of education (the "family contribution").
After receiving information on the family contribution, the institution then
subtracts the family contribution from the cost for the student to attend such
institution to determine the student's eligibility for grants, loans, and work
assistance. The difference between the amount of grants and Federal Stafford
Loans for which the borrower is eligible and the student's estimated cost of
attendance (the "Unmet Need") may be borrowed through Federal Unsubsidized
Stafford Loans. Parents may finance the family contribution amount through
their own resources or through Federal PLUS Loans.
SPECIAL ALLOWANCE PAYMENTS
The Act provides for quarterly special allowance payments ("Special Allowance
Payments") to be made by the Department to holders of Federal Student Loans to
the extent necessary to ensure that such holder receives at least a specified
market interest rate of return on such loans. The rates for Special Allowance
Payments are based on formulas that differ according to the type of loan, the
date the loan was originally made or insured and the type of funds used to
finance such loan (tax-exempt or taxable). A Special Allowance Payment is made
for each of the 3-month periods ending March 31, June 30, September 30, and
December 31. The Special Allowance Payment equals the average unpaid principal
balance (including interest permitted to be capitalized) of all eligible loans
held by such holder during such period multiplied by the special allowance
percentage. The special allowance percentage is computed by (i) determining the
average of the bond equivalent rates of 91-day Treasury bills auctioned for
such 3-month period, (ii) subtracting the applicable borrower interest rate on
such loan from such average, (iii) adding the applicable Special Allowance
Margin (as set forth below) to the resultant percentage, and (iv) dividing the
resultant percentage by 4, provided, that, if the amount determined by the
application of clauses (i), (ii) and (iii) is in the negative, the Special
Allowance Margin is zero.
<TABLE>
<CAPTION>
DATE OF DISBURSEMENT SPECIAL ALLOWANCE MARGIN
-------------------- ------------------------
<S> <C>
Prior to 10/17/86........... 3.50%
10/17/86-09/30/92........... 3.25%
10/01/92-06/30/95........... 3.10%
07/01/95-06/30/98........... 2.50% (Federal Stafford Loans and Federal
Unsubsidized Stafford Loans that are in school,
grace or deferment); 3.10% (Federal Stafford Loans
and Federal Unsubsidized Stafford Loans that are in
repayment and all other loans)
</TABLE>
Special Allowance Payments are available on variable rate Federal PLUS and
Federal SLS Loans only if the variable rate, which is reset annually based on
the 52-week Treasury Bill, exceeds the applicable maximum rate. Such maximum is
generally between 9% and 12%.
FEDERAL STAFFORD LOANS
The Act provides for (i) federal insurance or reinsurance of Federal Stafford
Loans made by eligible lenders to qualified students, (ii) federal interest
subsidy payments on certain eligible Federal Stafford Loans
30
<PAGE>
to be paid by the Department to holders of the loans in lieu of the borrower
making interest payments ("Interest Subsidy Payments"), and (iii) Special
Allowance Payments representing an additional subsidy paid by the Department to
the holders of eligible Federal Stafford Loans (such federal reinsurance
obligations, together with those obligations referred to in clauses (ii) and
(iii) above, being collectively referred to herein as "Federal Assistance").
Interest. The borrower's interest rate on a Federal Stafford Loan may be
fixed or variable. Federal Stafford Loan interest rates are summarized in the
chart below.
<TABLE>
<CAPTION>
INTEREST RATE
TRIGGER DATE(1) BORROWER RATE(2) MAXIMUM RATE MARGIN
- ------------------------ -------------------------------- ---------------- -------------------
<S> <C> <C> <C>
Prior to 01/01/81....... 7% 7% N/A
01/01/81-09/12/83....... 9% 9% N/A
09/13/83-06/30/88....... 8% 8% N/A
07/01/88-09/30/92....... 8% for 48 months; thereafter,
91-Day Treasury + Interest Rate 8% for 48 3.25%
Margin months, then 10%
10/01/92-06/30/94....... 91-Day Treasury + Interest Rate
Margin 9% 3.10%
07/01/94-06/30/95....... 91-Day Treasury + Interest Rate
Margin 8.25% 3.10%
07/01/95-06/30/98....... 91-Day Treasury + Interest Rate 8.25% 2.50% (in school,
Margin grace or
deferment); 3.10%
(in repayment)
After 6/30/98........... Treasury security of comparable 8.25% 1.0%
maturity + Interest Rate Margin
</TABLE>
- --------
(1) The Trigger Date for Federal Stafford Loans made before October 1, 1992 is
the first day of enrollment period for which a borrower's first Federal
Stafford Loan is made and for Federal Stafford Loans made on October 1,
1992 and after the Trigger Date is the date of the disbursement of a
borrower's first Federal Stafford Loan.
(2) The rate for variable rate Federal Stafford Loans applicable for any 12-
month period beginning on July 1 and ending on June 30, is determined on
the preceding June 1 and is equal to the lesser of (a) the applicable
Maximum Rate or (b) the sum of (i) the bond equivalent rate of 91-day
Treasury bills auctioned at the final auction held prior to such June 1 and
(ii) the applicable Interest Rate Margin.
The 1992 Amendments provide that, for fixed rate loans made on or after July
23, 1992 and for certain loans made to new borrowers on or after July 1, 1988,
the lender must have converted by January 1, 1995 the interest rate on such
loans to an annual interest rate adjusted each July 1 equal to (1) for certain
loans made between July 1, 1988 and July 23, 1992, the 91-day Treasury bill
rate at the final auction prior to the preceding June 1 plus 3.25% and (2) for
loans made on or after July 23, 1992, the 91-day Treasury bill rate at the
final auction prior to the preceding June 1 plus 3.10%, in each case capped at
the applicable interest rate for such loan existing prior to the conversion.
The variable interest rate does not apply to loans made prior to July 23, 1992
during the first 48 months of repayment.
Interest Subsidy Payments. The Department is responsible for paying interest
on Federal Stafford Loans while the borrower is a qualified student, during a
Grace Period or during certain Deferral Periods. The Department makes quarterly
Interest Subsidy Payments to the owner of Federal Stafford Loans in the amount
of interest accruing on the unpaid balance thereof prior to the commencement of
repayment or during any Deferral Periods. The Act provides that the owner of an
eligible Federal Stafford Loan shall be deemed to have a contractual right
against the United States of America to receive Interest Subsidy Payments (and
Special Allowance Payments) in accordance with its provisions. Receipt of
Interest Subsidy Payments and Special Allowance Payments is conditioned on
compliance with the requirements of the Act, including satisfaction of certain
need-based criteria (and the delivery of sufficient information by the borrower
and the lender to the Department to confirm the foregoing) and continued
eligibility of such loan for federal reinsurance. Such eligibility may be lost,
however, if the loans are not held by an eligible lender, in accordance with
the requirement of the Act and the applicable Federal Guarantee Agreements. See
"--Eligible Lenders, Students and Institutions" above; "Risk Factors--Failure
to Comply with Student Loan Origination and Servicing Procedures for Federal
Student Loans"; "Formation of the Trusts--Eligible Lender Trustee" and
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<PAGE>
"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 submission to the Department of the
applicable claim forms for any given calendar quarter, although there can be no
assurance that such payments will in fact be received from the Department
within that period. See "Risk Factors--Variability of Actual Cash Flows;
Inability of Related Indenture Trustee to Liquidate Student Loans". The
Servicer has agreed to prepare and file with the Department all such claims
forms and any other required documents or filings on behalf of each Eligible
Lender Trustee as owner of the related Federal Student Loans on behalf of each
Trust. The Servicer has also agreed to assist each Eligible Lender Trustee in
monitoring, pursuing and obtaining such Interest Subsidy Payments and Special
Allowance Payments, if any, with respect to such Federal Student Loans. Each
Eligible Lender Trustee will be required to remit Interest Subsidy Payments and
Special Allowance Payments it receives with respect to such Federal Student
Loans within two business days of receipt thereof to the related Collection
Account.
Loan Limits. The Act requires that loans be disbursed by eligible lenders in
at least two separate and equal disbursements. The Act limited the amount a
student can borrow in any academic year and the amount he or she can have
outstanding in the aggregate. The following chart sets forth the current and
historic loan limits.
<TABLE>
<CAPTION>
INDEPENDENT
ALL STUDENTS (1) STUDENTS (1)
---------------- ----------------------
BASE AMOUNT ADDITIONAL
SUBSIDIZED AND UNSUBSIDIZED MAXIMUM
SUBSIDIZED UNSUBSIDIZED ON ONLY ON OR AGGREGATE
SUBSIDIZED ON OR AFTER OR AFTER AFTER TOTAL
BORROWER'S ACADEMIC LEVEL PRE-1/1/87 1/1/87 10/1/93(2) 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 $ 10,500
Graduate (per year)...... $ 5,000 $ 7,500 $ 8,500 $10,000 $ 18,500
Aggregate Limited
Undergraduate.......... $12,500 $17,250 $23,000 $23,000 $ 46,000
Graduate (including un-
dergraduate).......... $25,000 $54,750 $65,500 $73,000 $138,500
</TABLE>
- --------
(1) The loan limits are inclusive of both Federal Stafford Loans and Federal
Direct Student Loans.
(2) These amounts represent the combined maximum loan amount per year for
Federal Stafford and Federal Unsubsidized Stafford Loans. Accordingly, the
maximum amount that a student may borrow under a Federal Unsubsidized
Stafford Loan is the difference between the combined maximum loan amount
and the amount the student received in the form of a Federal Stafford Loan.
(3) Independent undergraduate students, graduate students or professional
students may borrow these additional amounts. In addition, dependent
undergraduate students may also receive these additional loan amounts if
the parents of such students are unable to provide the family contribution
amount and it is unlikely that the student's parents will qualify for a
Federal PLUS Loan.
The annual loan limits are reduced in some instances where the student has
less than a full academic year remaining in his or her program. The Department
has discretion to raise these limits to accommodate highly specialized or
exceptionally expensive courses of study.
Repayment. Repayment of principal on a Federal Stafford Loan generally does
not commence while a student remains a qualified student, but generally begins
upon expiration of the applicable Grace Period, as described below. Any
borrower may voluntarily prepay without premium or penalty any loan and in
connection therewith may waive any Grace Period or Deferral Period. In general,
each loan must be scheduled for repayment over a period of not more than ten
years after the commencement of repayment. The Act currently requires minimum
annual payments of $600 or, if greater, the amount of accrued interest
32
<PAGE>
for that year, unless the borrower and the lender agree to lesser payments.
Effective July 1, 1993, the Act and regulations promulgated thereunder require
lenders to offer the choice of a standard, graduated or income-sensitive
repayment schedule to all borrowers who receive a loan on or after that date.
Grace Periods, Deferral Periods and Forbearance Periods. Repayment of
principal on a Federal Stafford Loan must generally commence following a period
of (a) not less than 9 months or more than 12 months (with respect to loans for
which the applicable interest rate is 7% per annum) and (b) not more than 6
months (with respect to loans for which the applicable interest rate is 9% per
annum or 8% per annum and for loans to first time borrowers on or after July 1,
1988) after the borrower ceases to pursue at least a half-time course of study
(a "Grace Period"). However, during certain other periods (each, a "Deferral
Period") and subject to certain conditions, no principal repayments need be
made, including periods when the student has returned to an eligible
educational institution on a full-time basis or is pursuing studies pursuant to
an approved graduate fellowship program, or when the student is a member of the
Armed Forces or a volunteer under the Peace Corps Act or the Domestic Volunteer
Service Act of 1973, or when the borrower is temporarily totally disabled, or
periods during which the borrower may defer principal payments because of
temporary financial hardship. For new borrowers to whom loans are first
disbursed on or after July 1, 1993, payment of principal may be deferred only
while the borrower is at least a half-time student or is in an approved
graduate fellowship program or is enrolled in a rehabilitation program, or when
the borrower is seeking but unable to find full-time employment, subject to a
maximum deferment of three years, or when for any reason the lender determines
that payment of principal will cause the borrower economic hardship, also
subject to a maximum deferment of three years. The 1992 Amendments also permit
and in some cases require forbearance of loan collection in certain
circumstances (each such period, a "Forbearance Period").
FEDERAL UNSUBSIDIZED STAFFORD LOANS
The Federal Unsubsidized Stafford Loan program created under the 1992
Amendments is designed for students who do not qualify for the maximum Federal
Stafford Loan due to parental and/or student income and assets in excess of
permitted amounts. The basic requirements for Federal Unsubsidized Stafford
Loans are essentially the same as those for the Federal Stafford Loans,
including with respect to provisions governing the interest rate, the annual
loan limits and the Special Allowance Payments. The terms of the Federal
Unsubsidized Stafford Loans, however, differ in some respects. The federal
government does not make Interest Subsidy Payments on Federal Unsubsidized
Stafford Loans. The borrower must either begin making interest payments within
60 days after the time the loan is disbursed or permit capitalization of the
interest by the lender until repayment begins. Federal Unsubsidized Stafford
Loan borrowers are required to pay, upon disbursement, a 6.5% insurance fee to
the Department, though no guarantee fee may be charged by the applicable
Federal Guarantor. Effective July 1, 1994, the maximum insurance premium is
reduced to 1% and the origination fee is 3%. Subject to the same loan limits
established for Federal Stafford Loans, the student may borrow up to the amount
of such student's Unmet Need. Lenders are authorized to make Federal
Unsubsidized Stafford Loans applicable for periods of enrollment beginning on
or after October 1, 1992.
FEDERAL PLUS AND FEDERAL SLS LOAN PROGRAMS
The Act authorizes Federal PLUS Loans to be made to parents of eligible
dependent students and previously authorized Federal SLS Loans to be made to
certain categories of students. After July 1, 1993, only parents who do not
have an adverse credit history or who can secure an endorser without an adverse
credit history are eligible for Federal PLUS Loans. The basic provisions
applicable to Federal PLUS and Federal SLS Loans are similar to those of
Federal Stafford Loans with respect to the federal insurance and reinsurance on
the loans. However, Federal PLUS and Federal SLS Loans differ from Federal
Stafford Loans, particularly because Interest Subsidy Payments are not
available under the Federal PLUS and Federal SLS Programs and in some instances
Special Allowance Payments are more restricted.
Loan Limits. Federal PLUS and Federal SLS Loans disbursed prior to July 1,
1993 are limited to $4,000 per academic year with a maximum aggregate amount of
$20,000. Federal SLS Loan limits for loans
33
<PAGE>
disbursed on or after July 1, 1993 depended upon the class year of the student
and the length of the academic year. The annual loan limit for Federal SLS
Loans first disbursed on or after July 1, 1993 ranged from $4,000 for first and
second year undergraduate borrowers to $10,000 for graduate borrowers, with a
maximum aggregate amount of $23,000 for undergraduate borrowers and $73,000 for
graduate and professional borrowers. After July 1, 1994, for purposes of new
loans being originated, the Federal SLS programs were merged with the Federal
Unsubsidized Stafford Loan program with the borrowing limits reflecting the
combined eligibility under both programs. The only limit on the annual and
aggregate amounts of Federal PLUS Loans first disbursed on or after July 1,
1993 is the cost of the student's education less other financial aid received,
including scholarship, grants and other student loans.
Interest. The interest rate determination for a PLUS or SLS loan is dependent
on when the loan was originally made and disbursed and the period of
enrollment. The interest rates for PLUS and SLS loans are summarized in the
following chart.
<TABLE>
<CAPTION>
INTEREST
TRIGGER DATE BORROWER RATE(1) MAXIMUM RATE(2) RATE MARGIN
- ------------------------ -------------------------------------- ---------------- -----------
<S> <C> <C> <C>
Prior to 10/01/81....... 9% 9% N/A
10/01/81-10/30/82....... 14% 14% N/A
11/01/82-06/30/87....... 12% 12% N/A
52-Week Treasury + Interest Rate
07/01/87-09/30/92....... Margin 12% 3.25%
52-Week Treasury + Interest Rate
10/01/92-06/30/94....... Margin PLUS 10% SLS 11% 3.10%
52-Week Treasury + Interest Rate
06/30/94-06/30/98....... Margin 9% 3.10%
(SLS repealed 07/01/94)
After 6/30/98........... Treasury security of comparable 9% 2.10%
maturity + Interest Rate Margin
</TABLE>
- --------
(1) The Trigger Date for PLUS and SLS loans made before October 1, 1992 is the
first day of enrollment period for which the loan is made, and for PLUS and
SLS loans made on October 1, 1992 and after the Trigger Date is the date of
the disbursement of the loan, respectively.
(2) For PLUS or SLS loans that carry a variable rate, the rate is set annually
for 12-month periods beginning on July 1 and ending on June 30 on the
preceding June 1 and is equal to the lessor of (a) the applicable maximum
rate or (b) the sum of (i) the bond equivalent rate of 52-week Treasury
bills auctioned at the final auction held prior to such June 1, and (ii)
the applicable Interest Rate Margin.
A holder of a PLUS or SLS loan is eligible to receive Special Allowance
Payments during any such 12-month period if (a) the sum of (i) the bond
equivalent rate of 52-week Treasury bills auctioned at the final auction held
prior to such June 1 and (ii) the Interest Rate Margin exceeds (b) the Maximum
Rate.
Repayment, Deferments. The 1992 Amendments provide Federal SLS borrowers with
the option to defer commencement of repayment of principal until the
commencement of repayment of Federal Stafford Loans. Otherwise, repayment of
principal of Federal PLUS and Federal SLS Loans is required to commence no
later than 60 days after the date of disbursement of such loan, subject to
certain deferral and forbearance provisions. The deferral provisions which
apply are more limited than those which apply to Federal Stafford Loans.
Repayment of interest, however, may be deferred and capitalized during certain
periods of educational enrollments and periods of unemployment or hardship as
specified under the Act. Further, whereas Interest Subsidy Payments are not
available for such deferments, interest may be capitalized during such periods
upon agreement of the lender and borrower. Maximum loan repayment periods and
minimum payment amounts are the same as for Federal Stafford Loans.
A borrower may refinance all outstanding Federal PLUS Loans under a single
repayment schedule for principal and interest, with the new repayment period
calculated from the date of repayment of the most recent included loan. The
interest rate of such refinanced loan shall be the weighted average of the
rates of all Federal PLUS Loans being refinanced. A second type of refinancing
enables an eligible lender to reissue a
34
<PAGE>
Federal PLUS Loan which was initially originated at a fixed rate prior to July
1, 1987 in order to permit the borrower to obtain the variable interest rate
available on Federal PLUS Loans on and after July 1, 1987. If a lender is
unwilling to refinance the original Federal PLUS Loan, the borrower may obtain
a loan from another lender for the purpose of discharging the loan and
obtaining a variable interest rate.
FEDERAL CONSOLIDATION LOAN PROGRAM
The Act authorizes a program under which certain borrowers may consolidate
one or more of their Federal Student Loans into a single loan (a "Federal
Consolidation Loan") insured and reinsured on a basis similar to Federal
Stafford Loans. Federal Consolidation Loans may be made in an amount
sufficient to pay outstanding principal, unpaid interest, late charges and
collection costs on all federally insured or reinsured student loans incurred
under FFELP selected by the borrower, as well as loans made pursuant to
various other federal student loan programs and which may have been made by
different lenders. Under this program, a lender may make a Federal
Consolidation Loan to an eligible borrower at the request of the borrower if
the lender holds an outstanding loan of the borrower or the borrower certifies
that he has been unable to obtain a Federal Consolidation Loan from the
holders of the outstanding loans made to the borrower. Borrowers that are
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 are made on or after July 1, 1994
will have no minimum loan amount, although Federal Consolidation Loans for
less than $7,500 must be repaid in ten years. Applications for Federal
Consolidation Loans received on or after January 1, 1993 but prior to July 1,
1994, are available only to borrowers who have aggregate outstanding student
loan balances of at least $7,500; for applications received before January 1,
1993, Federal Consolidation Loans are available only to borrowers who have
aggregate outstanding student loan balances of at least $5,000. The borrowers
must be either in repayment status or in a grace period preceding repayment
and, for applications received prior to January 1, 1993 the borrower must not
be delinquent by more than 90 days on any student loan payment; for
applications received on or after January 1, 1993 delinquent or defaulted
borrowers are eligible to obtain Federal Consolidation Loans if they will
reenter repayment through loan consolidation. For applications received on or
after January 1, 1993, borrowers may within 180 days of the origination of a
Federal Consolidation Loan add additional loans made prior to consolidation
("Add-on Consolidation Loans") for consolidation therewith. If the borrower
obtains loans subsequent to the Federal Consolidation Loan, the borrower may
consolidate the new loans and the Federal Consolidation Loan. The interest
rate and term of such Federal Consolidation Loan, following the consolidation
with the related Add-on Consolidation Loans, may be recomputed within the
parameters permitted by the Act. For applications received on or after January
1, 1993, married couples who agree to be jointly and severally liable will be
treated as one borrower for purposes of loan consolidation eligibility.
Federal Consolidation Loans bear interest at a rate which equals the
weighted average of interest rates on the unpaid principal balance of
outstanding loans, rounded to the nearest whole percent, with a minimum rate
of 9% for loans originated prior to July 1, 1994. For Federal Consolidation
Loans made on or after July 1, 1994, such weighted average interest rate must
be rounded up to the nearest whole percent. Interest on Federal Consolidation
Loans accrues and, for applications received prior to January 1, 1993, is to
be paid without Interest Subsidy by the Department. For Federal Consolidation
Loans received on or after January 1, 1993, all interest of the borrower is
paid during all periods of Deferment. However, Federal Consolidation Loan
applications received on or after August 10, 1993 will only be subsidized if
all of the underlying loans being consolidated were subsidized Federal
Stafford Loans. Borrowers may elect to accelerate principal payments without
penalty. Further, no insurance premium may be charged to a borrower and no
insurance premium may be charged to a lender in connection with a Federal
Consolidation Loan. However, a fee may be charged to the lender by a Federal
Guarantor to cover the costs of increased or extended liability with respect
to a Consolidation Loan, and lenders must pay a monthly rebate fee at an
annualized rate of 1.05% for loans disbursed on or after October 1, 1993. The
rate for Special Allowance Payments for Federal Consolidation Loans is
determined in the same manner as for Federal Stafford Loans.
35
<PAGE>
Repayment of Federal Consolidation Loans begins within 60 days after
discharge of all prior loans which are consolidated. Repayment schedule options
must include, for applications received on or after January 1, 1993, the
establishment of graduated or income sensitive repayment plans, subject to
certain limits applicable to the sum of the Federal Consolidation Loan and the
amount of the borrower's other eligible student loans outstanding. The lender
may, at its option, include such graduated and income sensitive repayment plans
for applications received prior to that date. Generally, depending on the total
of loans outstanding, repayment may be scheduled over periods no shorter than
ten but not more than twenty-five years in length. For applications received on
or after January 1, 1993, the maximum maturity schedule is 30 years for Federal
Consolidation Loans of $60,000 or more.
All eligible loans of a borrower paid in full through consolidation are
discharged in the consolidation process when the new Federal Consolidation Loan
is issued.
FEDERAL GUARANTORS
The Act authorizes Federal Guarantors to support education financing and
credit needs of students at post-secondary schools. The Act encourages every
state either to establish its own agency or to designate another Federal
Guarantor in cooperation with the Secretary. Under various programs throughout
the United States of America, Federal Guarantors insure and sometimes service
guaranteed student loans. The Federal Guarantors are reinsured by the federal
government for from 80% to 100% of each default claim paid, depending on their
claims experience, for loans disbursed prior to October 1, 1993 and from 78% to
98% of each default claim paid for loans disbursed on or after October 1, 1993.
Federal Guarantors are reinsured by the federal government for 100% of death,
disability, bankruptcy, closed school and false certification claims paid. See
"--Federal Insurance and Reinsurance of Federal Guarantors" below.
Federal Guarantors collect a one-time insurance premium ranging from 0% to 3%
of the principal amount of each guaranteed loan, depending on the Federal
Guarantor. Federal Guarantors are prohibited from charging insurance premiums
on loans made under the Federal Unsubsidized Stafford Loan program prior to
July 1, 1994. On such loans made prior to July 1, 1994, the Act requires that a
6.5% combined loan origination fee and insurance premium be paid by the
borrower on Federal Unsubsidized Stafford Loans. This fee is passed through to
the Department by the originating lender. Effective July 1, 1994, the maximum
insurance premium and origination fee for Federal Stafford Loans and Federal
Unsubsidized Stafford Loans will be 1% and 3%, respectively.
Each Federal Student Loan to be sold to an Eligible Lender Trustee on behalf
of a Trust will be guaranteed as to principal and interest by a Federal
Guarantor pursuant to a Guarantee Agreement between such Federal Guarantor and
the applicable Eligible Lender Trustee. The applicable Prospectus Supplement
for each Trust will identify each related Federal Guarantor for the Federal
Student Loans held by such Trust as of the applicable Closing Date and the
amount of such Federal Student Loans it is guaranteeing for such Trust.
The 1993 Act granted the Department broad powers over Federal Guarantors and
their reserves. These powers include the authority to require a Federal
Guarantor to return all reserve funds to the Department if the Department
determines such action is necessary to ensure an orderly termination of the
Federal Guarantor, to serve the best interests of the student loan programs or
to ensure the proper maintenance of such Federal Guarantor's funds or assets.
The Department is also now authorized to direct a Federal Guarantor to return a
portion of its reserve funds which the Department determines is unnecessary to
pay the program expenses and contingent liabilities of the Federal Guarantor
and/or to cease any activities involving the use of the Federal Guarantor's
reserve funds or assets which the Department determines is a misapplication or
otherwise improper. The Department may also terminate a Federal Guarantor's
reinsurance agreement if the Department determines that such action is
necessary to protect the federal fiscal interest or to ensure an orderly
transition to full implementation of direct federal lending. These various
36
<PAGE>
changes create a significant risk that the resources available to the Federal
Guarantors to meet their guarantee obligations will be significantly reduced.
FEDERAL INSURANCE AND REINSURANCE OF FEDERAL GUARANTORS
A Federal Student Loan is considered to be in default for purposes of the Act
when the borrower fails to make an installment payment when due, or to comply
with other terms of the loan, and if the failure persists for a certain period
of time as specified by the Act. Under certain circumstances a loan deemed
ineligible for Federal Reinsurance may be restored to eligibility. Procedures
for such restoration of eligibility are discussed below.
If the loan in default is covered by federal loan insurance in accordance
with the provisions of the Act, the Department is to pay the applicable Federal
Guarantor, as insurance beneficiary, the amount of the loss sustained thereby,
upon notice and determination of such amount, within 90 days of such
notification, subject to reduction as described below.
If the loan is guaranteed by a Federal Guarantor, the eligible lender is
reimbursed by the Federal Guarantor for 100% (or not less than 98% for loans
disbursed on or after October 1, 1993) of the unpaid principal balance of the
loan plus accrued and unpaid interest on any loan defaulted so long as the
eligible lender has properly originated and serviced such loan. Under the Act,
the Department enters into a guarantee agreement with each Federal Guarantor,
which provides for federal reinsurance for amounts paid to eligible lenders by
the Federal Guarantor with respect to defaulted loans.
Pursuant to such agreements, the Department also agrees to reimburse a
Federal Guarantor for 100% of the amounts expended in connection with a claim
resulting from the death, bankruptcy, total and permanent disability of a
borrower, the death of a student whose parent is the borrower of a Federal PLUS
Loan or claims by borrowers who received loans on or after January 1, 1986 and
who are unable to complete the programs in which they are enrolled due to
school closure or borrowers whose borrowing eligibility was falsely certified
by the eligible institution; such claims are not included in calculating a
Federal Guarantor's claims rate experience for federal reinsurance purposes.
The Department is also required to repay the unpaid balance of any loan if the
borrower files for relief under Chapter 12 or 13 of the Bankruptcy Code or
files for relief under Chapter 7 or 11 of the Bankruptcy Code and has been in
repayment for more than 7 years or commences an action for a determination of
dischargeability under Section 523(a)(8)(b) of the Bankruptcy Code, and is
authorized to acquire the loans of borrowers who are at high risk of default
and who request an alternative repayment option from the Department.
The amount of such reinsurance payment to the Federal Guarantor for default
claims is subject to reduction based upon the annual default claims rate of the
Federal Guarantor, calculated to equal the amount of federal reinsurance claims
paid by the Department to the Federal Guarantor during any fiscal year as a
percentage of the original principal amount of guaranteed loans in repayment at
the end of the prior federal fiscal year. The formula is summarized as follows:
<TABLE>
<CAPTION>
CLAIMS RATE OF FEDERAL REIMBURSEMENT TO FEDERAL GUARANTOR BY THE DEPARTMENT OF
GUARANTOR EDUCATION(1)
- ---------------------- -----------------------------------------------------------------
<S> <C>
0% to and including 5%; 100%
Greater than 5% to and
including 9%; 100% of claims to and including 5%; 90% of claims greater than 5%
Greater than 9% 100% of claims to and including 5%; 90% of claims greater than 5%
to and including 9%; and 80% of claims greater than 9%
</TABLE>
- --------
(1)The federal reimbursement is reduced to 98%, 88% and 78% for loans disbursed
on or after October 1, 1993.
The claims experience is not accumulated from year to year, but is determined
solely on the basis of claims in any one federal fiscal year compared with the
original principal amount of loans in repayment at the beginning of that year.
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The 1992 Amendments to the Act addressed education loan industry concerns
regarding the Department's commitment to providing support in the event of
Federal Guarantor failures. Pursuant to the 1992 Amendments, Federal Guarantors
are required to maintain specified reserve fund levels. Such levels are defined
as 0.5 percent of the total attributable amount of all outstanding loans
guaranteed by the Federal Guarantor for the fiscal year of the Federal
Guarantor that begins in 1993, 0.7 percent for the Federal Guarantor's fiscal
year beginning in 1994, 0.9 percent for the Federal Guarantor's fiscal year
beginning in 1995, and 1.1 percent for the Federal Guarantor's fiscal year
beginning on or after January 1, 1996. If the Federal Guarantor fails to
achieve the minimum reserve level in any two consecutive years, if the Federal
Guarantor's federal annual claims rate equals or exceeds 9% or if the
Department determines the Federal Guarantor's administrative or financial
condition jeopardizes its continued ability to perform its responsibilities,
the Department may require the Federal Guarantor to submit and implement a
management plan to address the deficiencies. The Department may terminate the
Federal Guarantor's agreements with the Department if the Guarantor fails to
submit the required plan, or fails to improve its administrative or financial
condition substantially, or if the Department determines the Federal Guarantor
is in danger of financial collapse. In such event, the Department is required
to assume responsibility for the functions of such Federal Guarantor and in
connection therewith is authorized to undertake specified actions to assure the
continued payment of claims, including maturity advances to Federal Guarantors
to cover immediate cash needs, transferring of guarantees to another Federal
Guarantor, or transfer of guarantees to the Department itself. No assurance can
be made that the Department will under any given circumstance exercise its
right to terminate a reimbursement agreement with a Federal Guarantor or make a
determination that such Federal Guarantor is unable to meet its guarantee
obligations.
The Act requires that, subject to compliance with the Act, the Secretary must
pay all amounts which may be required to be paid under the Act as a result of
certain events of death, disability, bankruptcy, school closure or false
certification by the educational institution described therein. It further
provides that Federal Guarantors shall be deemed to have a contractual right
against the United States of America to receive reinsurance in accordance with
its provisions. In addition, the 1992 Amendments provide that if the Department
determines that a Federal Guarantor is unable to meet its insurance
obligations, holders of loans may submit insurance claims directly to the
Department until such time as the obligations are transferred to a new Federal
Guarantor capable of meeting such obligations or until a successor Federal
Guarantor assumes such obligations. No assurance can be made that the
Department would under any given circumstances assume such obligation to assure
satisfaction of a guarantee obligation by exercising its right to terminate a
reimbursement agreement with a Federal Guarantor or by making a determination
that such Federal Guarantor is unable to meet its guarantee obligations.
PRIVATE STUDENT LOAN PROGRAMS
A description of each private guarantee or other student loan program
relating to the Private Student Loans in a Trust will be set forth in the
related Prospectus Supplement.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
The weighted average life of the Notes and the Certificates of any series
will generally be influenced by the rate at which the principal balances of the
related Student Loans are paid, which payment may be in the form of scheduled
amortization or prepayments. (For this purpose, the term "prepayments" includes
prepayments in full or in part (including pursuant to Federal Consolidation
Loans), as a result of (i) borrower default, death, disability or bankruptcy,
(ii) a closing of or a false certification by the borrower's school and (iii)
subsequent liquidation or collection of Guarantee Payments with respect thereto
and as a result of Student Loans being repurchased by the Seller or the
Servicer for administrative reasons.) All of the Student Loans are prepayable
at any time without penalty to the borrower. The rate of prepayment of Student
Loans is influenced by a variety of economic, social and other factors,
including as described below and in the
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applicable Prospectus Supplement. In general, the rate of prepayments may tend
to increase to the extent that alternative financing becomes available at
prevailing interest rates which fall significantly below the interest rates
applicable to the Student Loans. However, because many of the Student Loans
bear interest that either actually or effectively is floating, it is impossible
to predict whether changes in prevailing interest rates will be similar to or
will vary from changes in the interest rates on the Student Loans. In addition,
under certain circumstances, the Seller or the Servicer will be obligated to
repurchase or arrange for the repurchase of Student Loans from a given Trust
pursuant to the related Loan Sale Agreement or Loan Servicing Agreement, as
applicable, as a result of breaches of applicable representations and
warranties or covenants. See "Description of the Transfer and Servicing
Agreements--Sale of Student Loans; Representations and Warranties" and "--
Servicer Covenants". See also "Description of the Transfer and Servicing
Agreements--Termination" regarding the Servicer's option to purchase the
Student Loans from a given Trust and "--Insolvency Event" regarding the sale of
the Student Loans if an Insolvency Event with respect to the Company occurs.
Also, in the case of a Trust having a Funding Period or Revolving Period, the
addition of Student Loans to the Trust during such period could affect the
weighted average life of the Securities of the related series. See "Description
of the Transfer and Servicing Agreements--Additional Fundings" herein.
On the other hand, scheduled payments with respect to, and maturities of, the
Student Loans may be extended, including pursuant to applicable grace, deferral
and forbearance periods. The rate of payment of principal of the Notes and the
Certificates and the yield on the Notes and the Certificates may also be
affected by the rate of defaults resulting in losses on Student Loans, by the
severity of those losses and by the timing of those losses, which may affect
the ability of the Guarantors to make Guarantee Payments with respect thereto.
In light of the above considerations, there can be no assurance as to the
amount of principal payments to be made on the Notes or the Certificates of a
given series on each Distribution Date, since such amount will depend, in part,
on the amount of principal collected on the related pool of Student Loans
during the applicable Collection Period. Any reinvestment risks resulting from
a faster or slower incidence of prepayment of Student Loans will be borne
entirely by the Noteholders and the Certificateholders of a given series. The
related Prospectus Supplement may set forth certain additional information with
respect to the maturity and prepayment considerations applicable to the
particular pool of Student Loans and the related series of Securities.
POOL FACTORS AND TRADING INFORMATION
Each of the "Note Pool Factor" for each class of Notes and the "Certificate
Pool Factor" for each class of Certificates (each, a "Pool Factor") will be a
seven-digit decimal which the Servicer will compute prior to each Distribution
Date indicating the remaining outstanding principal balance of such class of
Notes or the remaining Certificate Balance for such class of Certificates,
respectively, as of that Distribution Date (after giving effect to
distributions to be made on such Distribution Date), as a fraction of the
initial outstanding principal balance of such class of the Notes or the initial
Certificate Balance, for such class of Certificates, respectively. Each Pool
Factor will be 1.0000000 as of the Closing Date, and thereafter will decline to
reflect reductions in the outstanding principal balance of the applicable class
of Notes or reductions of the Certificate Balance of the applicable class of
Certificates, as applicable. A Securityholder's portion of the aggregate
outstanding principal balance of the related class of Notes or of the aggregate
outstanding Certificate Balance for the related class of Certificates, as
applicable, is the product of (i) the original denomination of that
Securityholder's Note or Certificate, and (ii) the applicable Pool Factor.
If so provided in the related Prospectus Supplement with respect to each
Trust, the Securityholders will receive reports on or about each Distribution
Date concerning the payments received on the Student Loans, the Pool Balance
(as such term is defined in the related Prospectus Supplement, the "Pool
Balance"), the applicable Pool Factor and various other items of information.
Securityholders of record during any calendar year will be furnished
information for tax reporting purposes not later than the latest date permitted
by law. See "Certain Information Regarding the Securities--Reports to
Securityholders".
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DESCRIPTION OF THE NOTES
GENERAL
With respect to each Trust, one or more classes of Notes of a given series
will be issued pursuant to the terms of an Indenture, a form of which has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. The following summary describes certain terms of the Notes and the
Indenture. The summary does not purport to be complete and is qualified in its
entirety by reference to all the provisions of the Notes and the Indenture.
Unless otherwise specified in the related Prospectus Supplement, each class
of Notes will initially be represented by one or more Notes, in each case
registered in the name of the nominee of DTC (together with any successor
depository selected by the Administrator, the "Depository") except as set forth
below. Unless otherwise specified in the related Prospectus Supplement, the
Notes will be available for purchase in denominations of $1,000 and integral
multiples thereof in book-entry form only. The Seller has been informed by DTC
that DTC's nominee will be Cede, unless another nominee is specified in the
related Prospectus Supplement. Accordingly, such nominee is expected to be the
holder of record of the Notes of each class. Unless and until Definitive Notes
(as defined below) are issued under the limited circumstances described herein
or in the related Prospectus Supplement, no Noteholder will be entitled to
receive a physical certificate representing a Note. All references herein and
in the related Prospectus Supplement to actions by Noteholders refer to actions
taken by DTC upon instructions from its participating organizations (the
"Participants") and all references herein to distributions, notices, reports
and statements to Noteholders refer to distributions, notices, reports and
statements to DTC or its nominee, as the registered holder of the Notes, as the
case may be, for distribution to Noteholders in accordance with DTC's
procedures with respect thereto. See "Certain Information Regarding the
Securities--Book-Entry Registration" and "--Definitive Securities".
PRINCIPAL AND INTEREST ON THE NOTES
The timing and priority of payment, seniority, allocations of losses,
Interest Rate and amount of or method of determining payments of principal and
interest on each class of Notes of a given series will be described in the
related Prospectus Supplement. The right of holders of any class of Notes to
receive payments of principal and interest may be senior or subordinate to the
rights of holders of any other class or classes of Notes of such series, as
described in the related Prospectus Supplement. Unless otherwise provided in
the related Prospectus Supplement, payments of interest on the Notes of such
series will be made prior to payments of principal thereon. Each class of Notes
may have a different Interest Rate, which may be a fixed, variable or
adjustable Interest Rate or any combination of the foregoing. The related
Prospectus Supplement will specify the Interest Rate for each class of Notes of
a given series or the method for determining such Interest Rate. See also
"Certain Information Regarding the Securities--Fixed Rate Securities" and "--
Floating Rate Securities". One or more classes of Notes of a series may be
redeemable in whole or in part under the circumstances specified in the related
Prospectus Supplement, including as a result of the Seller's, or such other
party's as may be named in the related Prospectus Supplement, exercising its
option to purchase the related Student Loans.
Unless otherwise specified in the related Prospectus Supplement, payments to
Noteholders of all classes within a series in respect of interest will have the
same priority. Under certain circumstances, the amount available for such
payments could be less than the amount of interest payable on the Notes on any
of the dates specified for payments in the related Prospectus Supplement (each,
a "Distribution Date"), in which case each class of Noteholders will receive
its ratable share (based upon the aggregate amount of interest due to such
class of Noteholders) of the aggregate amount available to be distributed in
respect of interest on the Notes of such series. See "Description of the
Transfer and Servicing Agreements--Distributions" and "--Credit and Cash Flow
Enhancement".
In the case of a series of Notes which includes two or more classes of Notes,
the sequential order and priority of payment in respect of principal and
interest, and any schedule or formula or other provisions
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<PAGE>
applicable to the determination thereof, of each such class will be set forth
in the related Prospectus Supplement. Payments in respect of principal and
interest of any class of Notes will be made on a pro rata basis among all the
Noteholders of such class.
In the case of a series of Notes relating to a Trust having a Pre-Funding
Account or Collateral Reinvestment Account, the Notes of such series will be
redeemed in part on the Distribution Date on or immediately following the last
day of the related Funding Period or Revolving Period, respectively, in the
event that any amount remains on deposit in the applicable account after giving
effect to all Additional Fundings on or prior to such date, in an aggregate
principal amount described in the related Prospectus Supplement.
See "Description of the Transfer and Servicing Agreements--Credit and Cash
Flow Enhancement--Reserve Account" for a description of the Reserve Account and
the distribution of amounts in excess of the Specified Reserve Account Balance
(as defined in the related Prospectus Supplement).
THE INDENTURE
Modification of Indenture. With respect to each Trust, with the consent of
the holders of a majority of the outstanding Notes of the related series, the
Indenture Trustee and the Trust may execute a supplemental indenture to add
provisions to, or change in any manner or eliminate any provisions of, the
Indenture with respect to the Notes, or to modify (except as provided below) in
any manner the rights of the related Noteholders.
Unless otherwise specified in the related Prospectus Supplement with respect
to a series of Notes, without the consent of the holder of each such
outstanding Note affected thereby, however, no supplemental indenture will (i)
change the due date of any installment of principal of or interest on any such
Note or reduce the principal amount thereof, the interest rate specified
thereon or the redemption price with respect thereto or change any place of
payment where or the coin or currency in which any such Note or any interest
thereon is payable, (ii) impair the right to institute suit for the enforcement
of certain provisions of the related Indenture regarding payment, (iii) reduce
the percentage of the aggregate amount of the outstanding Notes of such series,
the consent of the holders of which is required for any such supplemental
indenture or the consent of the holders of which is required for any waiver of
compliance with certain provisions of the related Indenture or of certain
defaults thereunder and their consequences as provided for in such Indenture,
(iv) modify or alter the provisions of the related Indenture regarding the
voting of Notes held by the applicable Trust, the Seller, an affiliate of
either of them or any obligor on such Notes, (v) reduce the percentage of the
aggregate outstanding amount of such Notes, the consent of the holders of which
is required to direct the related Eligible Lender Trustee on behalf of the
applicable Trust to sell or liquidate the Student Loans if the proceeds of such
sale would be insufficient to pay the principal amount and accrued but unpaid
interest on the outstanding Notes of such series, (vi) decrease the percentage
of the aggregate principal amount of such Notes required to amend the sections
of the related Indenture which specify the applicable percentage of aggregate
principal amount of such Notes necessary to amend the related Indenture or
certain other related agreements, or (vii) permit the creation of any lien
ranking prior to or on a parity with the lien of the related Indenture with
respect to any of the collateral for the Notes of such series or, except as
otherwise permitted or contemplated in such Indenture, terminate the lien of
such Indenture on any such collateral or deprive the holder of any Note of the
security afforded by the lien of such Indenture.
Unless otherwise specified in the applicable Prospectus Supplement, the
applicable Trust and the related Indenture Trustee may also enter into
supplemental indentures without obtaining the consent of Noteholders of such
series, for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of the related Indenture or of modifying
in any manner the rights of Noteholders of such series so long as such action
will not, in the opinion of counsel satisfactory to the applicable Indenture
Trustee, materially and adversely affect the interest of any Noteholder of such
series.
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Events of Default; Rights Upon Event of Default. With respect to the Notes
of a given series, unless otherwise specified in the related Prospectus
Supplement, an "Event of Default" under the related indenture will consist of
the following: (i) a default for five days or more in the payment of any
interest on any such Note after the same becomes due and payable; (ii) a
default in the payment of the principal of or any installment of the principal
of any such Note when the same becomes due and payable; (iii) a default in the
observance or performance of any covenant or agreement of the applicable Trust
made in the related Indenture and the continuation of any such default for a
period of thirty days after notice thereof is given to the applicable Trust by
the applicable Indenture Trustee or to the applicable Trust and the applicable
Indenture Trustee by the holders of at least 25% in principal amount of such
Notes then outstanding; provided, however, that if the Trust demonstrates that
it is making a good faith attempt to cure such default, such thirty-day period
may be extended by the Indenture Trustee to ninety days; (iv) any
representation or warranty made by the applicable Trust in the related
Indenture or in any certificate delivered pursuant thereto or in connection
therewith having been incorrect in a material respect as of the time made, and
such breach not having been cured within thirty days after notice thereof is
given to such Trust by the applicable Indenture Trustee or to such Trust and
the applicable Indenture Trustee by the holders of at least 25% in principal
amount of the Notes of such series then outstanding; provided, however, that
if the Trust demonstrates that it is making a good faith attempt to cure such
breach, such thirty-day period may be extended by the Indenture Trustee to
ninety days, or (v) certain events of bankruptcy, insolvency, receivership or
liquidation of such Trust. However, the amount of principal required to be
distributed to Noteholders of such series under the related Indenture on any
Distribution Date will generally be limited to amounts available after payment
of all prior obligations of such Trust. Therefore, unless otherwise specified
in the related Prospectus Supplement, the failure to pay principal on a class
of Notes generally will not result in the occurrence of an Event of Default
until the final scheduled Distribution Date for such class of Notes. If, with
respect to any series of Notes, interest is paid at a variable rate based on
an index, the related Prospectus Supplement may provide that, in the event
that, for any Distribution Date, the Interest Rate as calculated based on the
index is less than an alternate rate calculated for such Distribution Date
based on interest collections on the Student Loans (the amount of such
difference, the "Index Shortfall Carryover"), the Interest Rate for such
Distribution Date shall be such alternate rate and the Interest Shortfall
Carryover shall be payable as described in such Prospectus Supplement. Unless
otherwise provided in such Prospectus Supplement, payment of the Index
Shortfall Carryover shall be lower in priority than payment of interest on the
Notes at the Interest Rate (whether the Interest Rate is based on the index or
such alternate rate) and, accordingly, the nonpayment of the Interest
Shortfall Carryover on any Distribution Date shall not generally constitute a
default in the payment of interest on such Notes.
If an Event of Default should occur and be continuing with respect to the
Notes of any series, the related Indenture Trustee or holders of a majority in
principal amount of such Notes then outstanding may declare the principal of
such Notes to be immediately due and payable. Unless otherwise specified in
the related Prospectus Supplement, such declaration may be rescinded by the
holders of a majority in principal amount of such Notes then outstanding if
(i) the Eligible Lender Trustee on behalf of the related Trust has paid or
deposited with the Indenture Trustee a sum sufficient to pay (A) all payments
of principal of and interest on all Notes and all other amounts that would
then be due under the related Indenture or upon such Notes if the Event of
Default giving rise to such acceleration had not occurred, and (B) all sums
paid or advanced by the Indenture Trustee under the related Indenture and the
reasonable compensation, expenses, disbursements and advances of the Indenture
Trustee and its agents and counsel, and (ii) all Events of Default, other than
the nonpayment of the principal of the Notes that has become due solely by
such acceleration, have been cured or, under the circumstances described
below, waived.
If the Notes of any series have been declared to be due and payable
following an Event of Default with respect thereto, the related Indenture
Trustee may, in its discretion, exercise remedies as a secured party, require
the related 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 with respect to such Student Loans as if
there had been no declaration of acceleration. Unless otherwise specified in
the
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related Prospectus Supplement, however, the related Indenture Trustee is
prohibited from directing the related Eligible Lender Trustee to sell the
Student Loans following an Event of Default, other than a default in the
payment of any principal or a default for five days or more in the payment of
any interest on any Note with respect to any series, unless (i) the holders of
all such outstanding Notes consent to such sale, (ii) the proceeds of such sale
are sufficient to pay in full the principal of and the accrued interest on such
outstanding Notes at the date of such sale, or (iii) the related Indenture
Trustee determines that the collections on the Student Loans would not be
sufficient on an ongoing basis to make all payments on such Notes as such
payments would have become due if such obligations had not been declared due
and payable, and the related Indenture Trustee obtains the consent of the
holders of 66 2/3% of the aggregate principal amount of such Notes then
outstanding.
Subject to the provisions of the applicable Indenture relating to the duties
of the related Indenture Trustee, if an Event of Default should occur and be
continuing with respect to a series of Notes, the related Indenture Trustee
will be under no obligation to exercise any of the rights or powers under the
applicable Indenture at the request or direction of any of the holders of such
Notes, if such Indenture Trustee reasonably believes it will not be adequately
indemnified against the costs, expenses and liabilities which might be incurred
by it in complying with such request. Subject to such provisions for
indemnification and certain limitations contained in the related Indenture, the
holders of a majority in principal amount of the outstanding Notes of a given
series will have the right to direct the time, method and place of conducting
any proceeding or any remedy available to such Indenture Trustee and the
holders of a majority in principal amount of such Notes then outstanding may,
in certain cases, waive any default with respect thereto, except a default in
the payment of principal or interest or a default in respect of a covenant or
provision of the applicable Indenture that cannot be modified without the
waiver or consent of all the holders of such outstanding Notes.
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 (i) such holder previously has given
to the applicable Indenture Trustee written notice of a continuing Event of
Default, (ii) the holders of not less than 25% in principal amount of such
Outstanding Notes have requested in writing that such Indenture Trustee
institute such proceeding in its own name as Indenture Trustee, (iii) such
holder or holders have offered such Indenture Trustee reasonable indemnity,
(iv) such Indenture Trustee has for 60 days failed to institute such
proceeding, and (v) no direction inconsistent with such written request has
been given to such Indenture Trustee during such 60-day period by the holders
of a majority in principal amount of such outstanding Notes.
In addition, each Indenture Trustee and the related Noteholders will covenant
that they will not at any time institute against the applicable Trust any
bankruptcy, reorganization or other proceeding under any federal or state
bankruptcy or similar law.
With respect to any Trust, none of the related Indenture Trustee, the Seller,
SMS, the Administrator, the Servicer or the Eligible Lender Trustee in its
individual capacity, nor any holder of a Certificate representing an ownership
interest in the applicable Trust, nor any of their respective owners,
beneficiaries, agents, officers, directors, employees, successors or assigns
will, in the absence of an express agreement to the contrary, be personally
liable for the payment of the principal of or interest on the Notes or for the
agreements of the Trust contained in the Indenture.
Certain Covenants. Each Indenture will provide that the related Trust may not
consolidate with or merge into any other entity, unless (i) the entity formed
by or surviving such consolidation or merger is organized under the laws of the
United States of America, any state or the District of Columbia, (ii) such
entity expressly assumes such Trust's obligation to make due and punctual
payments upon the Notes of the related series and the performance or observance
of every agreement and covenant of such Trust under the related Indenture,
(iii) no Event of Default shall have occurred and be continuing immediately
after such
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merger or consolidation, (iv) such Trust has been advised that the rating of
the Notes and the Certificates of the related series would not be reduced or
withdrawn by the Rating Agencies as a result of such merger or consolidation,
and (v) such Trust has received an opinion of counsel to the effect that such
consolidation or merger would have no material adverse federal or Indiana state
tax consequence to such Trust or to any Certificateholder or Noteholder of the
related series.
Each Trust will not, among other things, (i) except as expressly permitted by
the applicable Indenture, the applicable Transfer and Servicing Agreements or
certain related documents (collectively, the "Related Documents"), sell,
transfer, exchange or otherwise dispose of any of the assets of such Trust,
(ii) claim any credit on or make any deduction from the principal and interest
payable in respect of the Notes of the related series (other than amounts
withheld under the Code or applicable state law) or assert any claim against
any present or former holder of such Notes because of the payment of taxes
levied or assessed upon such Trust, (iii) except as contemplated by the Related
Documents, dissolve or liquidate in whole or in part, (iv) permit the validity
or effectiveness of the applicable Indenture to be impaired or permit any
person to be released from any covenants or obligations with respect to such
Notes under the applicable Indenture except as may be expressly permitted
thereby, or (v) permit any lien, charge, excise, claim, security interest,
mortgage or other encumbrance to be created on or extend to or otherwise arise
upon or burden the assets of the Trust or any part thereof, or any interest
therein or the proceeds thereof, except as expressly permitted by the Related
Documents.
No Trust may engage in any activity other than as specified under the section
of the related Prospectus Supplement entitled "Formation of the Trust". No
Trust will incur, assume or guarantee any indebtedness other than indebtedness
incurred pursuant to the Notes of a related series and the applicable Indenture
or otherwise in accordance with the Related Documents.
Annual Compliance Statement. Each Trust will be required to file annually
with the applicable Indenture Trustee a written statement as to the fulfillment
of its obligations under the related Indenture.
Indenture Trustee's Annual Report. Each Indenture Trustee will be required to
mail each year to all related Noteholders a brief report relating to, among
other things, its eligibility and qualification to continue as such Indenture
Trustee under the applicable Indenture, any amounts advanced by it under the
Indenture, the amount, interest rate and maturity date of certain indebtedness
owing by such Trust to the applicable Indenture Trustee in its individual
capacity, the property and funds physically held by the applicable Indenture
Trustee as such and any action taken by it that materially affects the related
Notes and that has not been previously reported.
Satisfaction and Discharge of Indenture. An Indenture will be discharged with
respect to the collateral securing the related Notes upon the delivery to the
related Indenture Trustee for cancellation of all such Notes or, with certain
limitations, upon deposit with such Indenture Trustee of funds sufficient for
the payment in full of all such Notes.
The Indenture Trustee. The Indenture Trustee for a series of Notes will be
specified in the related Prospectus Supplement. The Indenture Trustee for any
series may resign at any time, in which event the Issuer will be obligated to
appoint a successor trustee for such series. The Issuer may also remove any
such Indenture Trustee if such Indenture Trustee ceases to be eligible to
continue as such under the related Indenture or if such Indenture Trustee
becomes insolvent. In such circumstances, the Issuer will be obligated to
appoint a successor trustee for the applicable series of Notes. Any resignation
or removal of the Indenture Trustee and appointment of a successor trustee for
any series of Notes does not become effective until acceptance of the
appointment by the successor trustee for such series.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
With respect to each Trust, one or more classes of Certificates of a given
series will, unless otherwise specified in the related Prospectus Supplement,
be issued pursuant to the terms of a Trust Agreement, a form of which has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. The following summary describes certain terms of the Certificates and the
Trust Agreement. The summary does not purport to be complete and is qualified
in its entirety by reference to all the provisions of the Certificates and the
Trust Agreement.
Unless otherwise specified in the related Prospectus Supplement, each class
of Certificates will initially be represented by a single Certificate
registered in the name of the Depository, except as set forth below. Unless
otherwise specified in the related Prospectus Supplement and except for the
Certificates of a given series purchased by the applicable Company, the
Certificates will be available for purchase in minimum denominations of $1,000
and integral multiples of $1,000 in excess thereof in book-entry form only. The
Seller has been informed by DTC that DTC's nominee will be Cede, unless another
nominee is specified in the related Prospectus Supplement. Accordingly, such
nominee is expected to be the holder of record of the Certificates of any
series that are not purchased by the applicable Company. Unless and until
Definitive Certificates (as defined below) are issued under the limited
circumstances described herein or in the related Prospectus Supplement, no
Certificateholder (other than the applicable Company) will be entitled to
receive a physical certificate representing a Certificate. All references
herein and in the related Prospectus Supplement to actions by
Certificateholders (other than the applicable Company) refer to actions taken
by DTC upon instructions from the Participants and all references herein and in
the related Prospectus Supplement to distributions, notices, reports and
statements to Certificateholders (other than the applicable Company) refer to
distributions, notices, reports and statements to DTC or its nominee, as the
registered holder of the Certificates, as the case may be, for distribution to
Certificateholders in accordance with DTC's procedures with respect thereto.
See "Certain Information Regarding the Securities--Book-Entry Registration" and
"--Definitive Securities". Unless otherwise specified in the related Prospectus
Supplement, Certificates of a given series owned by SMS or its affiliates will
be entitled to equal and proportionate benefits under the applicable Trust
Agreement, except that, assuming that all Certificates of a given series are
not all owned by SMS and its affiliates, such Certificates will be deemed not
to be outstanding for the purpose of determining whether the requisite
percentage of Certificateholders have given any request, demand, authorization,
direction, notice, consent or other action under the Related Documents (other
than the commencement by the related Trust of a voluntary proceeding in
bankruptcy as described under "Description of the Transfer and Servicing
Agreements--Insolvency Event").
PRINCIPAL AND INTEREST IN RESPECT OF THE CERTIFICATES
The timing and priority of distributions, seniority, allocations of losses,
Pass-Through Rate and amount of or method of determining distributions with
respect to principal and interest of each class of Certificates of a given
series will be described in the related Prospectus Supplement. Distributions of
interest on such Certificates will be made on each Distribution Date and will
be made prior to distributions with respect to principal of such Certificates.
Each class of Certificates may have a different Pass-Through Rate, which may be
a fixed, variable or adjustable Pass-Through Rate or any combination of the
foregoing. The related Prospectus Supplement will specify the Pass-Through Rate
for each class of Certificates of a given series or the method for determining
such Pass-Through Rate. See also "Certain Information Regarding the
Securities--Fixed Rate Securities" and "--Floating Rate Securities". Unless
otherwise provided in the related Prospectus Supplement, distributions in
respect of the Certificates of a given series may be subordinate to payments in
respect of the Notes of such series as more fully described in the related
Prospectus Supplement. Distributions in respect of interest on and principal of
any class of Certificates will be made on a pro rata basis among all the
Certificateholders of such class.
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In the case of a series of Certificates which includes two or more classes of
Certificates, the timing, sequential order, priority of payment or amount of
distributions in respect of interest and principal, and any schedule or formula
or other provisions applicable to the determination thereof, of each such class
shall be as set forth in the related Prospectus Supplement.
See "Description of the Transfer and Servicing Agreements--Credit and Cash
Flow Enhancement--Reserve Account" for a description of the Reserve Account and
the distribution of amounts in excess of the Specified Reserve Account Balance
(as defined in the related Prospectus Supplement).
CERTAIN INFORMATION REGARDING THE SECURITIES
FIXED RATE SECURITIES
Each class of Securities may bear interest at a fixed rate per annum ("Fixed
Rate Securities") or at a variable or adjustable rate per annum ("Floating Rate
Securities"), as more fully described below and in the applicable Prospectus
Supplement. Each class of Fixed Rate Securities will bear interest at the
applicable per annum Interest Rate or Pass-Through Rate, as the case may be,
specified in the applicable Prospectus Supplement. Unless otherwise set forth
in the applicable Prospectus Supplement, interest on each class of Fixed Rate
Securities will be computed on the basis of a 360-day year of twelve 30-day
months. See "Description of the Notes--Principal and Interest on the Notes" and
"Description of the Certificates--Principal and Interest in Respect of the
Certificates".
FLOATING RATE SECURITIES
Each class of Floating Rate Securities will bear interest for each applicable
Interest Reset Period (as such term is defined in the related Prospectus
Supplement with respect to a class of Floating Rate Securities, "Interest Reset
Period") at a rate per annum determined by reference to an interest rate basis
(the "Base Rate"), plus or minus the Spread, if any, or multiplied by the
Spread Multiplier, if any, in each case as specified in the related Prospectus
Supplement. The "Spread" is the number of basis points (one basis point equals
one one-hundredth of a percentage point) that may be specified in the
applicable Prospectus Supplement as being applicable to such class, and the
"Spread Multiplier" is the percentage that may be specified in the applicable
Prospectus Supplement as being applicable to such class.
The applicable Prospectus Supplement will designate a Base Rate for a given
Floating Rate Security based on LIBOR, commercial paper rates, Federal funds
rates, U.S. Government treasury securities rates, negotiable certificates of
deposit rates or another rate or rates as set forth in such Prospectus
Supplement.
As specified in the applicable Prospectus Supplement, Floating Rate
Securities of a given class may also have either or both of the following (in
each case expressed as a rate per annum): (i) a maximum limitation, or ceiling,
on the rate at which interest may accrue during any interest period, and (ii) a
minimum limitation, or floor, on the rate at which interest may accrue during
any interest period. In addition to any maximum interest rate that may be
applicable to any class of Floating Rate Securities, the interest rate
applicable to any class of Floating Rate Securities will in no event be higher
than the maximum rate permitted by applicable law, as the same may be modified
by United States law of general application.
Each Trust with respect to which a class of Floating Rate Securities will be
issued will appoint, and enter into agreements with, a calculation agent (each,
a "Calculation Agent") to calculate interest rates on each such class of
Floating Rate Securities issued with respect thereto. The applicable Prospectus
Supplement will set forth the identity of the Calculation Agent for each such
class of Floating Rate Securities of a given series, which may be the
Administrator, the Eligible Lender Trustee or the Indenture Trustee with
respect to such series. All determinations of interest by the Calculation Agent
shall, in the absence of manifest error, be conclusive for all purposes and
binding on the holders of Floating Rate Securities of a given class. Unless
otherwise specified in the applicable Prospectus Supplement, all percentages
resulting from any calculation of the rate of interest on a Floating Rate
Security will be rounded, if necessary, to the nearest 1/100,000 of 1%
(.0000001), with five one-millionths of a percentage point rounded upward.
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BOOK-ENTRY REGISTRATION
DTC is a limited purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the UCC and a "clearing agency" registered pursuant to
Section 17A of the Exchange Act. DTC was created to hold securities for its
Participants and to facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entries, thereby
eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations. Indirect access to the DTC system also is available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Securityholders that are not Participants or Indirect Participants but desire
to purchase, sell or otherwise transfer ownership of, or other interests in,
Securities may do so only 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 (the "Applicable Trustee"), through Participants and
Indirect Participants. Under a book-entry format, Securityholders may
experience some delay in their receipt of payments, since such payments will be
forwarded by the Applicable Trustee to DTC's nominee. DTC will forward such
payments to its Participants, which thereafter will forward them to Indirect
Participants or Securityholders. Except for the applicable Company with respect
to any series of Securities, it is anticipated that the only "Securityholder",
"Certificateholder" and "Noteholder" will be DTC's nominee. Securityholders
will not be recognized by the Applicable Trustee as Noteholders or
Certificateholders, as such terms are used in each Indenture and each Trust
Agreement, respectively, and Securityholders will be permitted to exercise the
rights of Securityholders only indirectly through DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Securities among Participants on whose behalf it acts with respect to the
Securities and to receive and transmit distributions of principal of, and
interest on, the Securities. Participants and Indirect Participants with which
Securityholders have accounts with respect to the Securities similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Securityholders. Accordingly, although
Securityholders will not possess Securities, the Rules provide a mechanism by
which Participants will receive payments and will be able to transfer their
interests.
Because DTC can only act on behalf of Participants, who in turn act on behalf
of Indirect Participants and certain banks, the ability of a Securityholder to
pledge Securities to persons or entities that do not participate in the DTC
system, or to otherwise act with respect to such Securities, may be limited due
to the lack of a physical certificate for such Securities.
DTC has advised the Seller that it will take any action permitted to be taken
by a Securityholder under the related Indenture or the related Trust Agreement,
as the case may be, only at the direction of one or more Participants to whose
accounts with DTC the Securities are credited. DTC may take conflicting actions
with respect to other undivided interests to the extent that such actions are
taken on behalf of Participants whose holdings include such undivided
interests.
Except as required by law, neither the Administrator nor the Applicable
Trustee will have any liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the Securities
held by DTC's nominee or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
DEFINITIVE SECURITIES
Unless otherwise specified in the related Prospectus Supplement and except
with respect to the Certificates of a given series that may be purchased by the
applicable Company, the Notes and the Certificates
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of a given series will be issued in fully registered, certificated form
("Definitive Notes" and "Definitive Certificates", respectively, and
collectively referred to herein as "Definitive Securities") to Noteholders or
Certificateholders or their respective nominees, rather than to DTC or its
nominee, only if (i) the related Administrator advises the Applicable Trustee
in writing that DTC is no longer willing or able to discharge properly its
responsibilities as depository with respect to the Securities and the
Administrator is unable to locate a qualified successor, (ii) the
Administrator, at its option, elects to terminate the book-entry system through
DTC, or (iii) after the occurrence of an Event of Default or a Servicer
Default, Securityholders representing at least a majority of the outstanding
principal amount of the Notes or the Certificates, as the case may be, of such
series advise the Applicable Trustee through DTC in writing that the
continuation of a book-entry system through DTC (or a successor thereto) with
respect to such Notes or Certificates is no longer in the best interest of the
holders of such Securities.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Applicable Trustee will be required to notify all applicable
Securityholders of a given series through Participants of the availability of
Definitive Securities. Upon surrender by DTC of the Definitive Securities
representing the corresponding Securities and receipt of instructions for re-
registration, the Applicable Trustee will reissue such Securities as Definitive
Securities to such Securityholders.
Distributions of principal of, and interest on, such Definitive Securities
will thereafter be made by the Applicable Trustee in accordance with the
procedures set forth in the related Indenture or the related Trust Agreement,
as the case may be, directly to holders of Definitive Securities in whose names
the Definitive Securities were registered at the close of business on the
applicable Record Date specified for such Securities in the related Prospectus
Supplement. Such distributions will be made by check mailed to the address of
such holder as it appears on the register maintained by the Applicable Trustee.
The final payment on any such Definitive Security, however, will be made only
upon presentation and surrender of such Definitive Security at the office or
agency specified in the notice of final distribution to applicable
Securityholders.
Definitive Securities will be transferable and exchangeable at the offices of
the Applicable Trustee or of a registrar named in a notice delivered to holders
of Definitive Securities. No service charge will be imposed for any
registration of transfer or exchange, but the Applicable Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
LIST OF SECURITYHOLDERS
Unless otherwise specified in the related Prospectus Supplement, holders of
Notes evidencing not less than 25% of the aggregate outstanding principal
balance of such Notes may, by written request to the related Indenture Trustee,
obtain access to the list of all Noteholders maintained by such Indenture
Trustee for the purpose of communicating with other Noteholders with respect to
their rights under the related Indenture or such Notes. Such Indenture Trustee
may elect not to afford the requesting Noteholders access to the list of
Noteholders if it agrees to mail the desired communication or proxy, on behalf
and at the expense of the requesting Noteholders, to all Noteholders of such
series.
Unless otherwise specified in the related Prospectus Supplement, three or
more Certificateholders of such series or one or more holders of such
Certificates evidencing not less than 25% of the Certificate Balance of such
Certificates may, by written request to the related 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 such Certificates.
REPORTS TO SECURITYHOLDERS
With respect to each series of Securities, on each Distribution Date, the
Applicable Trustee will provide to Securityholders of record as of the related
Record Date a statement setting forth substantially the same information as is
required to be provided on the periodic report provided to the related
Indenture Trustee
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and the related Trust described under "Description of Transfer and Servicing
Agreements--Statements to Indenture Trustee and Trust". The statements
provided to Securityholders will not constitute financial statements prepared
in accordance with generally accepted accounting principles.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of each Trust, the Applicable
Trustee will mail to each person who at any time during such calendar year was
a Securityholder with respect to such Trust and received any payment thereon,
a statement containing certain information for the purposes of such
Securityholder's preparation of federal income tax returns. See "Certain
Federal Income Tax Consequences".
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
GENERAL
The following is a summary of certain terms of each Loan Sale Agreement and
Loan Servicing Agreement, pursuant to which the related Eligible Lender
Trustee on behalf of a Trust will purchase Student Loans from the Seller and
the Servicer will service the same; each Administration Agreement, pursuant to
which the Administrator will undertake certain administrative duties with
respect to a Trust and the Student Loans; and each Trust Agreement, pursuant
to which a Trust will be created and the related Certificates will be issued
(collectively, the "Transfer and Servicing Agreements"). Forms of each of the
Transfer and Servicing Agreements have been filed as exhibits to the
Registration Statement of which this Prospectus is a part. However, the
summary does not purport to be complete and is qualified in its entirety by
reference to all of the provisions of the Transfer and Servicing Agreements.
SALE OF STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
On the Closing Date specified with respect to any given Trust in the related
Prospectus Supplement (the "Closing Date"), the Seller will sell and assign to
the related Eligible Lender Trustee on behalf of such Trust, without recourse,
except as provided in the Loan Sale Agreement, its entire interest in the
Student Loans and all collections received and to be received with respect
thereto for the period on and after the Cutoff Date pursuant to the Loan Sale
Agreement. Each Student Loan will be identified in schedules appearing as an
exhibit to such Loan Sale Agreement. Each Eligible Lender Trustee will,
concurrently with such sale and assignment, execute, authenticate and deliver
the related Certificates and Notes. The net proceeds received from the sale of
the related Notes and Certificates will be applied to the purchase of the
Student Loans.
In each Loan Sale Agreement, the Seller will make certain representations
and warranties with respect to the Student Loans to a Trust for the benefit of
the Certificateholders and the Noteholders of a given series, including, among
other things, that (i) each Student Loan, on the date on which it is
transferred to such Trust, is free and clear of all security interests, liens,
charges and encumbrances and no offsets, defenses or counterclaims have been
asserted or threatened; (ii) the information provided with respect to the
Student Loans is true and correct as of the Cutoff Date; and (iii) each
Student Loan, at the time it was originated, complied and, at the Closing
Date, complies in all material respects with applicable federal and state laws
(including, to the extent applicable, without limitation, the Act (in the case
of Federal Student Loans), consumer credit, truth in lending, equal credit
opportunity and disclosure laws) and applicable restrictions imposed by FFELP,
in the case of Federal Student Loans, the applicable private guarantee
program, in the case of Private Student Loans, or, in all cases, 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 any Student Loan that materially and adversely
affects the interests of the related Certificateholders or the Noteholders in
such Student Loan (it being understood that any such breach that does not
affect any Guarantor's obligation to guarantee payment of such Student Loan
will not be considered to have such a material adverse effect), the Seller
will, unless such breach is cured within 60 days, repurchase such Student Loan
from the related Eligible Lender Trustee, as of
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the first day following the end of such 60-day period that is the last day of
a Collection Period, at a price equal to the unpaid principal balance owed by
the applicable borrower thereon plus accrued interest thereon to the day of
repurchase (the "Purchase Amount"). Alternatively, the Seller may, at its
option, remit all or a portion of the Purchase Amount by substituting into the
related Trust a Student Loan that meets certain criteria set forth in the
related Loan Sale Agreement for the Student Loan as to which the breach has
occurred. In addition, the Seller will reimburse the related Trust for any
accrued interest amounts that a Guarantor refuses to pay pursuant to its
Guarantee Agreement, or for any Interest Subsidy Payments and Special
Allowance Payments that are lost or that must be repaid to the Department in
the case of Federal Student Loans, with respect to a Student Loan as a result
of a breach of any such representation or warranty by the Seller. The
repurchase, substitution and reimbursement obligations of the Seller will
constitute the sole remedy available to or on behalf of a Trust, the related
Certificateholders and the related Noteholders for any such uncured breach.
The Seller's repurchase and reimbursement obligations are contractual
obligations pursuant to a Loan Sale Agreement that may be enforced against the
Seller, but the breach of which will not constitute an Event of Default.
To assure uniform quality in servicing and to reduce administrative costs,
the Servicer will be appointed custodian of the promissory notes representing
the Student Loans and any other related documents by the related Eligible
Lender Trustee on behalf of each Trust. The Seller's and the Servicer's
records and computer systems will reflect the sale and assignment by the
Seller of the Student Loans to the related Eligible Lender Trustee on behalf
of the related Trust, and Uniform Commercial Code financing statements
reflecting such sale and assignment will be filed by the Administrator.
ADDITIONAL FUNDINGS
In the case of a Trust having a Pre-Funding Account or a Collateral
Reinvestment Account, such Trust will use funds on deposit in such account
from time to time during the related Funding Period or Revolving Period,
respectively, (i) to make interest payments to Noteholders and
Certificateholders in lieu of collections of interest on certain of the
Student Loans to the extent such interest is not paid currently but is
capitalized and added to the principal balance of such Student Loans, and (ii)
to fund the addition of Student Loans to the Trust under the circumstances and
having the characteristics described in the related Prospectus Supplement
("Additional Fundings"). Such additional Student Loans may be purchased by the
Trust from the 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, respectively. If the
amount initially deposited into a Pre-Funding Account or a Collateral
Reinvestment Account for a series has not been reduced to zero by the end of
the related Funding Period or Revolving Period, respectively, the amounts
remaining on deposit therein will be distributed to the related
Securityholders in the amounts described in the related Prospectus Supplement.
If and to the extent specified in the related Prospectus Supplement, the
related Trust may use distributions on the Student Loans, or may exchange
Student Loans with the 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, in the name of the
Indenture Trustee on behalf of the related Noteholders and Certificateholders,
into which all payments made on or with respect to the related Student Loans
will be deposited (the "Collection Account"). Any other accounts to be
established with respect to a Trust, including any Reserve Account, any Pre-
Funding Account and any Collateral Reinvestment Account, will be described in
the related Prospectus Supplement.
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For any series of Securities, funds in the Collection Account, any Reserve
Account, any Pre-Funding Account, any Collateral Reinvestment Account and any
other accounts identified as such in the related Prospectus Supplement
(collectively, the "Trust Accounts") will be invested as provided in the
applicable Trust Indenture in Eligible Investments. "Eligible Investments" are
generally limited to investments acceptable to the Rating Agencies as being
consistent with the rating of such Securities. Except as described below or in
the related Prospectus Supplement, Eligible Investments are limited to
obligations or securities that mature not later than the business day
immediately preceding the next applicable Distribution Date. However, to the
extent permitted by the Rating Agencies, funds in any Reserve Account may be
invested in securities that will not mature prior to the date of the next
distribution with respect to such Securities and will not be sold to meet any
shortfalls. Thus, the amount of cash in any Reserve Account at any time may be
less than the balance of the Reserve Account. If the amount required to be
withdrawn from any Reserve Account to cover shortfalls in collections on the
related Student Loans (as provided in the related Prospectus Supplement)
exceeds the amount of cash in the Reserve Account, a temporary shortfall in the
amounts distributed to the related Noteholders or Certificateholders could
result, which could, in turn, increase the average life of the Notes or the
Certificates of such series. Except as otherwise specified in the related
Prospectus Supplement, investment earnings on funds deposited in the Trust
Accounts, net of losses and investment expenses (collectively, "Investment
Earnings"), will be deposited in the Collection Account on each Distribution
Date and will be treated as collections of interest on the related Student
Loans.
The Trust Accounts will be maintained as Eligible Deposit Accounts. "Eligible
Deposit Account" means either (a) a segregated account with an Eligible
Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in such account, so long as any of the
securities of such depository institution have a credit rating from each Rating
Agency in one of its generic rating categories which signifies investment
grade. "Eligible Institution" means a depository institution organized under
the laws of the United States of America or any one of the states thereof or
the District of Columbia (or any domestic branch of a foreign bank), (i) which
has either (A) a long-term unsecured debt rating acceptable to the Rating
Agencies, or (B) a short-term unsecured debt rating or certificate of deposit
rating acceptable to the Rating Agencies, and (ii) whose deposits are insured
by the Federal Deposit Insurance Corporation.
SERVICING PROCEDURES
Pursuant to each Loan Servicing Agreement, the Servicer has agreed to
service, and perform all other related tasks with respect to, all the Student
Loans acquired from time to time on behalf of each Trust. The Servicer is
required pursuant to the related Loan Servicing Agreement to perform all
services and duties customary to the servicing of Student Loans (including all
collection practices), and to do so in the same manner as the Servicer has
serviced student loans for parties other than the Seller and to do so in
compliance with, and to otherwise comply with, 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 Servicer with respect to
each Trust under the related Loan Servicing Agreement include, but are not
limited to, the following: collecting and depositing into the Collection
Account all payments with respect to the Student Loans, including claiming and
obtaining any Guarantee Payments, any Interest Subsidy Payments and Special
Allowance Payments with respect to Federal Student Loans, responding to
inquiries from borrowers on the Student Loans, investigating delinquencies and
sending out statements and payment coupons. In addition, the Servicer will keep
ongoing records with respect to such Student Loans and collections thereon and
will furnish monthly and annual statements with respect to such information to
the Administrator, in accordance with the Servicer's customary practices with
respect to the Seller and as otherwise required in the related Loan Servicing
Agreement.
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If so provided in the related Prospectus Supplement, the Servicer may act as
a master servicer and may from time to time perform its servicing obligations
under the applicable Loan Sale Agreement through subservicing agreements with
affiliated or unrelated third-party loan servicers.
PAYMENTS ON STUDENT LOANS
With respect to each Trust, the Servicer will deposit all payments on Student
Loans and all proceeds of Student Loans received by it during each collection
period specified in the related Prospectus Supplement (each, a "Collection
Period") into the related Collection Account within two business days of
receipt of freely available funds therefor. The Eligible Lender Trustee will
deposit all Interest Subsidy Payments and all Special Allowance Payments with
respect to the Federal Student Loans received by it during each Collection
Period into the Collection Account within two business days of receipt thereof.
SERVICER COVENANTS
With respect to each Trust, in the related Loan Servicing Agreement, the
Servicer will covenant that: (a) it will duly satisfy all obligations on its
part to be fulfilled under or in connection with the Student Loans, maintain in
effect all qualifications required in order to service the Student Loans and
comply in all material respects with all requirements of law in connection with
servicing the Student Loans, the failure to comply with which would have a
materially adverse effect on the related Certificateholders or Noteholders; (b)
it will not permit any rescission or cancellation of a Student Loan except as
ordered by a court of competent jurisdiction or other government authority or
as otherwise consented to by the related Eligible Lender Trustee and the
related Indenture Trustee; (c) it will do nothing to impair the rights of the
related Certificateholders and the related Noteholders in the Student Loans;
and (d) it will not reschedule, revise, defer or otherwise compromise with
respect to payments due on any Student Loan except pursuant to any applicable
deferral or forbearance periods or otherwise in accordance with its guidelines
for servicing student loans in general and those of the Seller in particular
and any applicable FFELP, private guarantee program or Guarantor requirements.
Under the terms of each Loan Servicing Agreement, unless otherwise specified
in the related Prospectus Supplement, if the Administrator or the Servicer
discovers, or receives written notice, that any covenant of the Servicer set
forth above has not been complied with in all material respects and such
noncompliance has not been cured within 60 days thereafter and has a materially
adverse effect on the interest of the related Certificateholders or Noteholders
in any Student Loan, unless such breach is cured or unless the Seller is
otherwise required to purchase the related Student Loan as a result of a breach
of the Seller's warranties in the related Loan Sale Agreement, the Servicer
will arrange for the purchase of such Student Loan as of the first day
following the end of such 60-day period that is the last day of a Collection
Period. In that event, the Servicer will arrange to be deposited into the
Collection Account an amount equal to the Purchase Amount of such Student Loan
and the related Trust's interest in any such purchased Student Loan will be
automatically assigned to the Servicer or its designee. Upon such assignment,
the Servicer or its designee will be entitled to all payments made on the
Student Loan. In addition, if so specified in the related Prospectus
Supplement, the Servicer will reimburse the related Trust for any accrued
interest amounts that a Federal Guarantor refuses to pay pursuant to its
Federal Guarantee Agreement, or for any prior Interest Subsidy Payments and
Special Allowance Payments that are lost or that must be repaid to the
Department, with respect to a Federal Student Loan as a result of a breach of
any such covenant of the Servicer.
SERVICER COMPENSATION
Unless otherwise specified in the related Prospectus Supplement with respect
to any Trust, the Servicer will be entitled to receive the Servicing Fee for
each Collection Period at the specified percentage per annum (as set forth in
the related Prospectus Supplement) of the average Pool Balance for the related
Collection Period together with any other administrative fees and similar
charges specified in the related Prospectus Supplement, as compensation for
performing the functions as servicer for the related Trust described above (the
"Servicing Fee"). The Servicing Fee (together with any portion of the Servicing
Fee that remains unpaid from prior Distribution Dates) will be paid prior to
any payment in respect of the related Securities, as specified in the
applicable Prospectus Supplement.
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The Servicing Fee will compensate the Servicer for performing the functions
of a third party servicer of student loans as an agent for their beneficial
owner, including collecting and posting all payments, responding to inquiries
of borrowers on the Student Loans, investigating delinquencies, pursuing,
filing and directing the payment of any Guarantee Payments, Interest Subsidy
Payments or Special Allowance Payments, accounting for collections and
furnishing periodic accounting reports to the Administrator.
DISTRIBUTIONS
With respect to each series of Securities, beginning on the Distribution Date
specified in the related Prospectus Supplement, distributions of principal and
interest on each class of such Securities entitled thereto will be made by the
applicable Trustee to the Noteholders and the Certificateholders of such
series. The timing, calculation, allocation, order, source, priorities of and
requirements for all payments to each class of Noteholders and all
distributions to each class of Certificateholders of such series will be set
forth in the related Prospectus Supplement.
With respect to each Trust, on each Distribution Date, collections on the
related Student Loans will be distributed from the Collection Account to
Noteholders and Certificateholders to the extent provided in the related
Prospectus Supplement. Credit and cash flow enhancement, such as a Reserve
Account, will be available to cover any shortfalls in the amount available for
distribution on such date to the extent specified in the related Prospectus
Supplement. As more fully described in the related Prospectus Supplement, and
unless otherwise specified therein, distributions in respect of principal
and/or interest of a class of Securities of a given series will be subordinate
to distributions in respect of interest on such class, and distributions in
respect of the Certificates of such series may be subordinate to payments in
respect of the Notes of such series.
CREDIT AND CASH FLOW ENHANCEMENT
General. The amounts and types of credit enhancement arrangements and the
provider thereof, if applicable, with respect to each class of Securities of a
given series, if any, will be set forth in the related Prospectus Supplement.
If and to the extent provided in the related Prospectus Supplement, credit
enhancement may be in the form of subordination of one or more classes of
Securities, Reserve Accounts, over-collateralization, letters of credit, credit
or liquidity facilities, surety bonds, guaranteed investment contracts,
repurchase obligations, other agreements with respect to third party payments
or other support, cash deposits or such other arrangements as may be described
in the related Prospectus Supplement or any combination of two or more of the
foregoing. If specified in the applicable Prospectus Supplement, credit
enhancement for a class of Securities may cover one or more other classes of
Securities of the same series, and credit enhancement for a series of
Securities may cover one or more other series of Securities.
The presence of a Reserve Account and other forms of credit enhancement for
the benefit of any class or series of Securities is intended to enhance the
likelihood of receipt by the Securityholders of such class or series of the
full amount of principal and interest due thereon and to decrease the
likelihood that such Securityholders will experience losses. Unless otherwise
specified in the related Prospectus Supplement, the credit enhancement for a
class or series of Securities will not provide protection against all risks of
loss and will not guarantee repayment of the entire principal balance and
interest thereon. If losses occur which exceed the amount covered by any credit
enhancement or which are not covered by any credit enhancement, Securityholders
of any class or series will bear their allocable share of deficiencies, as
described in the related Prospectus Supplement. In addition, if a form of
credit enhancement covers more than one series of Securities, Securityholders
of any such series will be subject to the risk that such credit enhancement
will be exhausted by the claims of Securityholders of other series.
Reserve Account. If so provided in the related Prospectus Supplement,
pursuant to the related Loan Sale Agreement, the Seller will establish for a
series or class of Securities an account, as specified in the related
Prospectus Supplement (the "Reserve Account"), which will be maintained in the
name of the applicable Indenture Trustee. Unless otherwise provided in the
related Prospectus Supplement, the Reserve Account
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will be funded by an initial deposit by the Seller on the Closing Date in the
amount set forth in the related Prospectus Supplement. As further described in
the related Prospectus Supplement, the amount on deposit in the Reserve Account
will be increased on each Distribution Date thereafter up to the Specified
Reserve Account Balance (as defined in the related Prospectus Supplement) by
the deposit therein of the amount of collections on the related Student Loans
remaining on each such Distribution Date after the payment of all other
required payments and distributions on such date. Amounts in the Reserve
Account will be available to cover shortfalls in amounts due to the holders of
those classes of Securities specified in the related Prospectus Supplement in
the manner and under the circumstances specified therein. The related
Prospectus Supplement will also specify to whom and the manner and
circumstances under which amounts on deposit in the Reserve Account (after
giving effect to all other required distributions to be made by the applicable
Trust) in excess of the Specified Reserve Account Balance (as defined in the
related Prospectus Supplement) will be distributed.
STATEMENTS TO INDENTURE TRUSTEE AND TRUST
Prior to each Distribution Date with respect to each series of Securities,
the Administrator will prepare and provide to the related Indenture Trustee and
the related Eligible Lender Trustee as of the close of business on the last day
of the preceding Collection Period a statement, which will include the
following information (and any other information so specified in the related
Prospectus Supplement) with respect to such Distribution Date or the preceding
Collection Period as to the Notes and the Certificates of such series, to the
extent applicable:
(i) the amount of the distribution allocable to principal of each class
of the Notes and the Certificates;
(ii) the amount of the distribution allocable to interest on each class
of the Notes and the Certificates, together with the interest rates
applicable with respect thereto;
(iii) the Pool Balance as of the close of business on the last day of the
preceding Collection Period;
(iv) the aggregate outstanding principal balance and the Note Pool Factor
of each class of the Notes, and the Certificate Balance and the Certificate
Pool Factor for each class of the Certificates as of such Distribution
Date, each after giving effect to payments allocated to principal reported
under clause (i) above;
(v) the amount of the Servicing Fee and the Administration Fee paid to
the Servicer and the Administrator, respectively, with respect to such
Collection Period;
(vi) the Interest Rate or Pass-Through Rate for the next period for any
class of Notes or Certificates of such series with variable or adjustable
rates;
(vii) the amount of the aggregate realized losses, if any, for such
Collection Period;
(viii) the Noteholders' Interest Carryover Shortfall, the Noteholders'
Principal Carryover Shortfall, the Certificateholders' Interest Carryover
Shortfall and the Certificateholders' Principal Carryover Shortfall (each
as defined in the related Prospectus Supplement), if any, in each case as
applicable to each class of Securities, and the change in such amounts from
the preceding statement;
(ix) the aggregate Purchase Amounts for Student Loans, if any, that were
repurchased in such Collection Period;
(x) the balance of the Reserve Account (if any) on such Distribution
Date, after giving effect to changes therein on such Distribution Date;
(xi) for each date during the Funding Period (if any), the remaining Pre-
Funded Amount or, for each date during the Revolving Period (if any), the
amount on deposit in the Collateral Reinvestment Account; and
(xii) the principal balance and number of Student Loans conveyed to or
originated by the Trust during such Collection Period.
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Each amount set forth pursuant to subclauses (i), (ii), (v) and (viii) with
respect to the Notes or the Certificates of any series will be expressed as a
dollar amount per $1,000 of the initial principal balance of such Notes or the
initial Certificate Balance of such Certificates, as applicable.
EVIDENCE AS TO COMPLIANCE
Each Loan Servicing Agreement will provide that a firm of independent public
accountants will furnish to the related Trust and Indenture Trustee annually a
statement (based on the examination of certain documents and records and on
such accounting and auditing procedures considered appropriate under the
circumstances) as to compliance by the Servicer during the preceding twelve
months (or, in the case of the first such certificate, the period from the
applicable Closing Date) with all applicable standards under the Loan Servicing
Agreement relating to the servicing of student loans, the Servicer's accounting
records and computer files with respect thereto and certain other matters.
Each Loan Servicing Agreement will also provide for delivery to the related
Trust and Indenture Trustee, concurrently with the delivery of each statement
of compliance referred to above, of a certificate signed by an officer of the
Servicer stating that, to his knowledge, the Servicer has fulfilled its
obligations under such Loan Servicing Agreement throughout the preceding twelve
months (or, in the case of the first such certificate, the period from the
applicable Closing Date) or, if there has been a default in the fulfillment of
any such obligation, describing each such default. The Servicer has agreed to
give the Administrator, the related Indenture Trustee and Eligible Lender
Trustee notice of certain Servicer Defaults under such Loan Servicing
Agreement.
Copies of such statements and certificates may be obtained by Securityholders
by a request in writing addressed to the applicable Trustee.
CERTAIN MATTERS REGARDING THE SERVICER
Each Loan Servicing Agreement will provide that the Servicer may not resign
from its obligations and duties as Servicer thereunder, except upon
determination that the Servicer's performance of such duties is no longer
permissible under applicable law. No such resignation will become effective
until the related Indenture Trustee or a successor servicer has assumed the
Servicer's servicing obligations and duties under the Loan Servicing Agreement.
Each Loan Servicing Agreement will further provide that neither the Servicer
nor any of its directors, officers, employees or agents will be under any
liability to the related Trust or the related Noteholders or Certificateholders
for taking any action or for refraining from taking any action pursuant to the
related Loan Servicing Agreement, or for errors in judgment; provided, however,
that, unless otherwise limited in the related Prospectus Supplement, neither
the Servicer nor any such person will be protected against any liability that
would otherwise be imposed by reason of willful misfeasance, bad faith or
negligence in the performance of the Servicer's duties thereunder or by reason
of reckless disregard of its obligations and duties thereunder. In addition,
each Loan Servicing Agreement will provide that the Servicer is under no
obligation to appear in, prosecute, or defend any legal action that is not
incidental to its servicing responsibilities under such Loan Servicing
Agreement and that, in its opinion, may cause it to incur any expense or
liability. Each Loan Servicing Agreement will, however, provide that the
Servicer may undertake any reasonable action that it deems necessary or
desirable in respect of the Loan Servicing Agreement and the interests of the
Securityholders.
Under the circumstances specified in each Loan Servicing Agreement, any
entity into which the Servicer may be merged or consolidated, or any entity
resulting from any merger or consolidation to which the Servicer is a party, or
any entity succeeding to the business of the Servicer, which corporation or
other entity in each of the foregoing cases assumes the obligations of the
Servicer, will be the successor of the Servicer under such Loan Servicing
Agreement.
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SERVICER DEFAULT
Except as otherwise provided in the related Prospectus Supplement, "Servicer
Default" under each Loan Servicing Agreement will occur in the event of (a) any
failure by the Servicer to deliver to the Indenture Trustee for deposit in any
of the Trust Accounts any required payment, which failure continues unremedied
for three business days after written notice from such Indenture Trustee or the
related Eligible Lender Trustee is received by the Servicer or after discovery
by the Servicer, (b) any failure by the Servicer to observe or perform in any
material respect any other covenant or agreement of the Servicer under the
related Loan Servicing Agreement, (c) any limitation, suspension or termination
by the Secretary of the Servicer's eligibility to service Student Loans which
materially and adversely affects its ability to service the Student Loans in
the related Trust, or (d) an Insolvency Event with respect to the Servicer
occurs. "Insolvency Event" means, with respect to any Person, any of the
following events or actions: certain events of insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings with respect
to such Person and certain actions by such Person indicating its insolvency,
reorganization pursuant to bankruptcy proceedings or inability to pay its
obligations.
RIGHTS UPON SERVICER DEFAULT
Unless otherwise specified in the related Prospectus Supplement, as long as a
Servicer Default under a Loan Servicing Agreement remains unremedied, the
related Indenture Trustee or holders of Notes of the related series evidencing
not less than 75% in principal amount of such then outstanding Notes may
terminate all the rights and obligations of the Servicer under such Loan
Servicing Agreement, whereupon a successor servicer appointed by the related
Indenture Trustee or such Indenture Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under such Loan
Servicing Agreement, and will be entitled to similar compensation arrangements.
If, however, a bankruptcy trustee or similar official has been appointed for
the Servicer, and no Servicer Default other than such appointment has occurred,
such trustee or official may have the power to prevent such Indenture Trustee
or such Noteholders from effecting such a transfer. In the event that such
Indenture Trustee is unwilling or unable to so act, it may appoint, or petition
a court of competent jurisdiction for the appointment of, a successor whose
regular business includes the servicing of student loans. Such Indenture
Trustee may make such arrangements for compensation to be paid, which in no
event may be greater than the servicing compensation to the Servicer under such
Loan Servicing Agreement, unless such compensation arrangements will not result
in a downgrading of such Notes and Certificates by any Rating Agency. In the
event a Servicer Default occurs and is continuing, such Indenture Trustee or
such Noteholders, as described above, may remove the Servicer, without the
consent of the related 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 Servicer if a 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 any Servicer Default which does not adversely affect the Indenture
Trustee or the Noteholders) of the related series may, on behalf of all such
Noteholders and Certificateholders, waive any default by the Servicer in the
performance of its obligations under the related Loan Servicing Agreement and
its consequences, except a default in making any required deposits to or
payments from any of the Trust Accounts in accordance with such Loan Servicing
Agreement. Therefore, such Noteholders have the ability, except as noted above,
to waive defaults by the Servicer which could materially adversely affect such
Certificateholders. No such waiver will impair such Noteholders' or
Certificateholders' rights with respect to subsequent defaults.
AMENDMENT
Unless otherwise provided in the related Prospectus Supplement, each of the
Transfer and Servicing Agreements may be amended by the parties thereto,
without the consent of the related Noteholders or
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Certificateholders, for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of such Transfer and Servicing
Agreements or of modifying in any manner the rights of such Noteholders or
Certificateholders; provided that such action will not, in the opinion of
counsel satisfactory to the related Indenture Trustee and Eligible Lender
Trustee, materially and adversely affect the interest of any such Noteholder or
Certificateholder. Unless otherwise provided in the related Prospectus
Supplement, each of the Transfer and Servicing Agreements may also be amended
by the Seller, the Administrator, the 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 evidencing at least a majority in
principal amount of such then outstanding Notes and the holders of Certificates
of the related series evidencing at least a majority of the Certificate Balance
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of such Transfer and Servicing Agreements or
of modifying in any manner the rights of such Noteholders or
Certificateholders; provided, however, that no such amendment may (i) increase
or reduce in any manner the amount of, or accelerate or delay the timing of,
collections of payments (including any Guarantee Payments) with respect to the
Student Loans or distributions that are required to be made for the benefit of
such Noteholders or Certificateholders, or (ii) reduce the aforesaid percentage
of such Notes or Certificates which are required to consent to any such
amendment, without the consent of the holders of all such outstanding Notes and
Certificates.
INSOLVENCY EVENT
If an Insolvency Event occurs with respect to the Company of a given Trust,
the Student Loans of such Trust will be liquidated and the Trust will be
terminated 90 days after the date of such Insolvency Event, unless, before the
end of such 90-day period, the related Eligible Lender Trustee shall have
received written instructions from (i) the holders of each class of Notes with
respect to such Trust representing more than 50% of the aggregate unpaid
principal amount of each such class of Notes or (ii) the holders of each class
of Certificates (other than such Company) with respect to such Trust
representing more than 50% of the aggregate unpaid principal amount of each
such class (not including the principal amount of Certificates held by such
Company), in each case to the effect that each such group disapproves of the
liquidation of the related Student Loans and termination of such Trust.
Promptly after the occurrence of an Insolvency Event with respect to such
Company, notice thereof is required to be given such Noteholders and
Certificateholders; provided, however, that any failure to give such required
notice will not prevent or delay termination of such Trust. Upon termination of
such Trust, the related Eligible Lender Trustee will direct the related
Indenture Trustee promptly to sell the assets of the Trust (other than the
Trust Accounts) in a commercially reasonable manner and on commercially
reasonable terms. The proceeds from any such sale, disposition or liquidation
of the Student Loans will be treated as collections thereon and deposited in
the related Collection Account. If the proceeds from the liquidation of the
Student Loans and any amounts on deposit in the Reserve Account (if any) and
any other credit or cash flow enhancement specified in the related Prospectus
Supplement as being available therefor are not sufficient to pay the Notes and
the Certificates of a related series in full, the amount of principal returned
to such Noteholders and Certificateholders will be reduced and some or all of
such Noteholders and such Certificateholders will incur a loss. Notwithstanding
the foregoing, if such Company provides the related Indenture Trustee and the
related Eligible Lender Trustee an opinion of special tax counsel in form and
substance satisfactory to such Indenture Trustee and such Eligible Lender
Trustee that the foregoing provisions are not necessary for such Trust to be
treated as a partnership for federal income and Indiana state tax purposes,
then such provisions shall be of no force or effect as of the date of the
delivery of such opinion.
Each Trust Agreement will provide that the related Eligible Lender Trustee
does not have the power to commence a voluntary proceeding in bankruptcy
relating to such Trust without the unanimous prior approval of all
Certificateholders (including the applicable Company) of the related series and
the delivery to such Eligible Lender Trustee by each such Certificateholder
(including such Company) of a certificate certifying that such
Certificateholder reasonably believes that the related Trust is insolvent.
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PAYMENT OF NOTES
Upon the payment in full of all outstanding Notes of a given series and the
satisfaction and discharge of the related Indenture, the Eligible Lender
Trustee will succeed to all the rights of the Indenture Trustee, and the
Certificateholders of such series will succeed to all the rights of the
Noteholders of such series, under the related Loan Servicing Agreement, except
as otherwise provided therein.
COMPANY LIABILITY
Under each Trust Agreement, the applicable Company of a given Trust will
agree to be liable directly to an injured party for the entire amount of any
losses, claims, damages or liabilities (other than those incurred by a
Noteholder or a Certificateholder in the capacity of an investor with respect
to such Trust) arising out of or based on the arrangement created by such Trust
Agreement as though such arrangement created a partnership under the Delaware
Revised Uniform Limited Partnership Act in which such Company was a general
partner. Notwithstanding the foregoing, if such Company provides the related
Indenture Trustee and the related Eligible Lender Trustee an opinion of special
tax counsel in form and substance satisfactory to such Indenture Trustee and
such Eligible Lender Trustee that the foregoing provisions are not necessary
for such Trust to be treated as a partnership for federal income and Indiana
state tax purposes, then such provisions shall be of no force or effect as of
the date of the delivery of such opinion.
TERMINATION
With respect to each Trust, the obligations of the Seller, the Servicer, the
Administrator, the related Eligible Lender Trustee and the related Indenture
Trustee pursuant to the related Transfer and Servicing Agreements will
terminate upon (i) the maturity or other liquidation of the last related
Student Loan and the disposition of any amount received upon liquidation of any
such remaining Student Loans, and (ii) the payment to the Noteholders and the
Certificateholders of the related series of all amounts required to be paid to
them pursuant to such Transfer and Servicing Agreements.
Optional Redemption
If so specified in the related Prospectus Supplement, in order to avoid
excessive administrative expense, the Seller or other party will be permitted
at its option to purchase from the related Eligible Lender Trustee, as of the
end of any Collection Period immediately preceding a Distribution Date, if the
then outstanding Pool Balance is a percentage specified in the related
Prospectus Supplement (not to exceed 30%) of the Initial Pool Balance (as
defined in the related Prospectus Supplement, the "Initial Pool Balance"), all
remaining related Student Loans at a price equal to the aggregate Purchase
Amounts thereof as of the end of such Collection Period, which amounts will be
used to retire the related Notes and Certificates concurrently therewith. Upon
termination of a Trust, as more fully described in the related Prospectus
Supplement, all right, title and interest in the Student Loans and other funds
of such Trust, after giving effect to any final distributions to Noteholders
and Certificateholders of the related series therefrom, will be conveyed and
transferred to the Seller or such other party.
Auction of Student Loans
If so provided in the related Prospectus Supplement, all remaining Student
Loans held by a Trust will be offered for sale by the Indenture Trustee on any
Distribution Date occurring on or after a date specified in such Prospectus
Supplement. The Seller and unrelated third parties may offer bids for such
Student Loans. The Indenture Trustee will accept the highest bid equal to or in
excess of the aggregate Purchase Amounts of such Student Loans as of the end of
the Collection Period immediately preceding the related Distribution Date. The
proceeds of such sale will be used to redeem all related Notes and to retire
the Certificates.
ADMINISTRATION AGREEMENT
The Administrator will enter into an agreement (as amended and supplemented
from time to time, an "Administration Agreement") with each Trust and the
related Indenture Trustee pursuant to which the
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Administrator will agree, to the extent provided therein, to provide the
notices and to perform other administrative obligations required by the related
Indenture, the related Trust Agreement, the related Loan Sale Agreement and the
related Loan Servicing Agreement. Unless otherwise specified in the related
Prospectus Supplement with respect to any Trust, as compensation for the
performance of the Administrator's obligations under the applicable
Administration Agreement and as reimbursement for its expenses related thereto,
the Administrator will be entitled to an administration fee as specified in the
related Prospectus Supplement (the "Administration Fee"). The Administrator
under each Administration Agreement will be SMS. SMS is an affiliate of Loan
Services, USA Funds and USA Group.
Except as otherwise provided in the related Prospectus Supplement, an
"Administrator Default" will occur under an Administration Agreement in the
event of (a) a failure by the Administrator to direct the Indenture Trustee to
make any required distributions from any of the Trust Accounts, which failure
continues unremedied for three business days after written notice from the
Indenture Trustee or the Eligible Lender Trustee of such failure, (b) any
failure by the Administrator to observe or perform in any material respect any
other covenant or agreement of the Administrator in the Administration
Agreement, or (c) an Insolvency Event with respect to the Administrator occurs.
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 Servicer and appointing a successor
Servicer following the occurrence of a Servicer Default under the Loan
Servicing Agreement and for waiving defaults by the Servicer under the Loan
Servicing Agreement, except that such procedures will apply to the
Administrator and the Administration Agreement rather than the Servicer and the
Loan Servicing Agreement.
CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS
TRANSFER OF STUDENT LOANS
The Seller intends that the transfer of the Student Loans by it to the
related Eligible Lender Trustee on behalf of each Trust will constitute a valid
sale and assignment of such Student Loans. Notwithstanding the foregoing, if
the transfer of the Student Loans is deemed to be an assignment of collateral
as security for the benefit of a Trust, a security interest in the Federal
Student Loans may, pursuant to the provisions of 20 U.S.C. (S) 1087-2(d)(3), be
perfected either through the taking of possession of such loans or by the
filing of notice of such security interest in the manner provided by the
applicable Uniform Commercial Code ("UCC") for perfection of security interests
in accounts. A financing statement or 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.
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 Closing Date could have an interest in such Student
Loans with priority over the related Eligible Lender Trustee's interest. A tax
or other government lien on property of the Seller arising prior to the time a
Student Loan comes into existence may also have priority over the interest of
the related Eligible Lender Trustee in such Student Loan. Under the related
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 a 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 therein)
other than to the related Eligible Lender Trustee on behalf of a Trust, except
as provided below.
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Pursuant to each Loan Servicing Agreement, the Servicer as custodian on
behalf of the related Trust will have custody of the promissory notes
evidencing the Student Loans following the sale of the Student Loans to the
related Eligible Lender Trustee. Although the accounts and computer records of
the Seller and 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 such Student Loans have been sold to such
Eligible Lender Trustee. If, through inadvertence or otherwise, any of the
Student Loans were sold to another party, or a security interest therein were
granted to another party, that purchased (or took such security interest in)
any of such Student Loans in the ordinary course of its business and took
possession of such Student Loans, then the purchaser (or secured party) might
acquire an interest in the Student Loans superior to the interest of the
Eligible Lender Trustee if the purchaser (or secured party) acquired (or took a
security interest in) the Student Loans for new value and without actual
knowledge of the related Eligible Lender Trustee's interest. See "Description
of the Transfer and Servicing Agreements--Sale of Student Loans;
Representations and Warranties".
With respect to each Trust, in the event of a Servicer Default resulting
solely from certain events of insolvency or bankruptcy that may occur with
respect to the Seller or the Servicer, a court, trustee-in-bankruptcy,
conservator, receiver or liquidator may have the power to prevent either the
related Indenture Trustee or Noteholders of the related series from appointing
a successor Servicer. See "Description of the Transfer and Servicing
Agreements--Rights Upon Servicer Default".
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related regulations
impose substantial requirements upon lenders and servicers involved in consumer
finance. Also, some state laws impose finance charge ceilings and other
restrictions on certain consumer transactions and require contract disclosures
in addition to those required under federal law. These requirements impose
specific statutory liabilities upon lenders who fail to comply with their
provisions. In certain circumstances, a Trust may be liable for certain
violations of consumer protection laws that 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 if the Student Loans were
not originated or serviced in compliance in all material respects with
applicable laws, see "Description of the Transfer and Servicing Agreements--
Sale of Student Loans; Representations and Warranties" and "--Servicer
Covenants".
LOAN ORIGINATION AND SERVICING PROCEDURES APPLICABLE TO STUDENT LOANS
The Act, including the implementing regulations thereunder (in the case of
Federal Student Loans) and the private guarantee programs (in the case of
Private Student Loans) impose specified requirements, guidelines and procedures
with respect to originating and servicing student loans such as the Student
Loans. Generally, those procedures require that completed loan applications be
processed, a determination of whether an applicant is an eligible borrower
under applicable standards (including a review of a financial need analysis in
the case of Federal Student Loans and the performance of a creditworthiness
evaluation in the case of Private Student Loans) be made, the borrower's
responsibilities under the loan be explained to him or her, the promissory note
evidencing the loan be executed by the borrower and then that the loan proceeds
be disbursed in a specified manner by the lender. After the loan is made, the
lender must establish repayment terms with the borrower, properly administer
deferrals and forbearances and credit the borrower for payments made thereon.
If a borrower becomes delinquent in repaying a loan, a lender or a servicing
agent must perform certain collection procedures (primarily telephone calls and
demand letters) which vary depending upon the length of time a loan is
delinquent. The Servicer has agreed pursuant to the related Loan Servicing
Agreement to perform collection and servicing procedures on behalf of the
related Trust. However, failure to follow these procedures or failure of the
originator of the loan to follow procedures relating to the origination of any
Federal Student Loans could result in adverse consequences. In the case of the
Federal Student Loans, any such failure could result in the Department's
refusal to make reinsurance payments to
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the Federal Guarantors or to make Interest Subsidy Payments and Special
Allowance Payments to the Eligible Lender Trustee with respect to such Federal
Student Loans or in the Federal Guarantors' refusal to honor their Guarantee
Agreements with the Eligible Lender Trustee with respect to such Federal
Student Loans. Failure of the Federal Guarantors to receive reinsurance
payments from the Department could adversely affect the Federal Guarantors'
ability or legal obligation to make Guarantee Payments to the related Eligible
Lender Trustee with respect to such Federal Student Loans. In the case of the
Private Student Loans, failure to make or service properly such Private Student
Loans in accordance with such procedures could adversely affect the related
Eligible Lender Trustee's ability to obtain Guarantee Payments from the Private
Guarantors.
Loss of any such Guarantee Payments, Interest Subsidy Payments or Special
Allowance Payments could adversely affect the amount of Available Funds on any
Distribution Date and the related Trust's ability to pay principal and interest
on the Notes of the related series and to make distributions in respect of the
Certificates of the related series. Under certain circumstances, unless
otherwise specified in the related Prospectus Supplement, the related Trust has
the right, pursuant to the related Loan Sale Agreement and Loan Servicing
Agreement, to cause the Seller to repurchase any Student Loan, or to cause the
Servicer to arrange for the purchase of any Student Loan, if a breach of the
representations, warranties or covenants of the Seller or the Servicer, as the
case may be, with respect to such Student Loan has a material adverse effect on
the interest of the Trust therein and such breach is not cured within any
applicable cure period. See "Description of the Transfer and Servicing
Agreements--Sale of Student Loans; Representations and Warranties" and "--
Servicer Covenants". The failure, if so required, of the Seller to so purchase,
or of the Servicer to arrange for the purchase of, a Student Loan would
constitute a breach of the related Loan Sale Agreement and Loan Servicing
Agreement, enforceable by the related Eligible Lender Trustee on behalf of the
related Trust or by the related Indenture Trustee on behalf of the Noteholders
of the related series, but would not constitute an Event of Default under the
Indenture.
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) such Student Loan first became
due before seven years (exclusive of any applicable suspension of the repayment
period) before the date of the bankruptcy, or (b) excepting such debt from
discharge will impose an undue hardship on the debtor and the debtor's
dependents.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of all material federal income tax consequences of
the purchase, ownership and disposition of the Notes and the Certificates. The
summary does not purport to deal with federal income tax consequences
applicable to all categories of holders, some of which may be subject to
special rules. For example, it does not discuss the tax treatment of
Noteholders or Certificateholders that are insurance companies, regulated
investment companies or dealers in securities. Moreover, there are no cases or
Internal Revenue Service ("IRS") rulings on similar transactions involving debt
and/or equity interests issued by a trust with terms similar to those of the
Notes and/or the Certificates. As a result, the IRS may disagree with all or a
part of the discussion below. Prospective investors are urged to consult their
own tax advisors in determining the federal, state, local, foreign and any
other tax consequences to them of the purchase, ownership and disposition of
the Notes and the Certificates.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder and judicial or ruling authority, all of which are
subject to change, which change may be retroactive. Each Trust will be provided
with an opinion of Brown & Wood llp ("Federal Tax Counsel") regarding certain
federal income tax matters discussed below, which opinion will be filed with
the Commission on a Form 8-K prior to the Closing Date for the securities
issued by such Trust. An opinion of Federal Tax Counsel, however, is not
binding on the IRS or
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the courts. No ruling on any of the issues discussed below will be sought from
the IRS. For purposes of the following summary, references to the Trust, the
Notes, the Certificates and related terms, parties and documents shall be
deemed to refer, unless otherwise specified herein, to each Trust and the
Notes, Certificates and related terms, parties and documents applicable to such
Trust. Taxpayers and preparers of tax returns (including those filed by any
partnership or other issuer) should be aware that under applicable Treasury
Regulations a provider of advice on specific issues of law is not considered an
income tax return preparer unless the advice is (i) given with respect to
events that have occurred at the time the advice is rendered and is not given
with respect to the consequences of contemplated actions, and (ii) is directly
relevant to the determination of an entry on a tax return. Accordingly,
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 CERTIFICATES SPECIFIC TO SUCH PROSPECTIVE INVESTOR.
TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE
TAX CHARACTERIZATION OF THE TRUST
Federal Tax Counsel will deliver its opinion that the Trust will not be an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Trust Agreement and related documents will be complied with,
and on counsel's conclusions that 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 THE NOTES
Treatment of the Notes as Indebtedness. The Seller will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Federal Tax Counsel will, except as otherwise
provided in the related Prospectus Supplement, deliver an opinion to the Trust
that the Notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the Notes is correct.
Original Issue Discount. The discussion below assumes that all payments on
the Notes are denominated in U.S. dollars, that the interest formula for the
Notes meets the requirements for "qualified stated interest" under Treasury
regulations (the "OID regulations") relating to original issue discount
("OID"), and that any OID on the Notes (i.e., any excess of the stated
redemption price at maturity of the Notes, generally the principal amount of
the Notes, over their issue price) does not exceed a de minimis amount (i.e.,
1/4% of their principal amount multiplied by the number of full years included
in their term), all within the meaning of the OID regulations. If these
conditions are not satisfied with respect to any given series of Notes,
additional tax considerations with respect to such Notes will be disclosed in
the Related Prospectus Supplement. The OID Regulations do not address their
application to debt instruments such as the Notes that are subject to
prepayment based on the prepayment of other debt instruments. The legislative
history of the OID provisions of the Code provides, however, that the
calculation and accrual of OID should be based on the prepayment assumption
used by the parties in pricing the transaction. In the event that any of the
notes are issued with OID, the prepayment assumption will be set forth in the
related Prospectus Supplement. Furthermore, although premium amortization and
accrued market discount on debt instruments such as the Notes, which are
subject to prepayment based on the payments on other debt instruments, is to be
determined under regulations yet to be issued, the legislative history of 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. The
OID Regulations are effective for debt instruments, such as the Notes, issued
on or after April 4, 1994.
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Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder of a
Note 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 Note.
Alternatively, a Noteholder 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 Note with market discount, the Noteholder 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 Noteholder acquires
during the year of the election and thereafter. Similarly, a Noteholder that
makes this election for a Note that is acquired at a premium will be deemed to
have made an election to amortize bond premium with respect to all debt
instruments having amortizable bond premium that such Noteholder owns or
acquires. The election to accrue interest, discount and premium under a
constant yield method with respect to a Note is irrevocable. A purchaser who
buys a Note for more or less than its principal amount will generally be
subject, respectively, to the premium amortization or market discount rules of
the Code.
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 Company
intends to treat the interest paid on the Notes as Qualified Stated Interest.
A holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a "Short-Term Note") may be subject to
special rules. An accrual basis holder of a Short-Term Note (and certain cash
method holders, including regulated investment companies, banks and securities
dealers, as set forth in Section 1281 of the Code) generally will be required
to report interest income as interest accrues on a ratable basis over the term
of each interest period or, at the election of the holder, on a constant yield
basis (i.e., treating the instrument as accruing interest at a single rate).
Cash basis holders of a Short-Term Note will, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis holder of a Short-
Term Note reporting interest income as it is paid may be required to defer a
portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1282 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Optional Election. As an alternative to the above treatments, accrual method
holders may elect to include in gross income all interest with respect to a
Note, including stated interest, acquisition discount, OID, de minimis OID,
market discount, de minimis market discount, and unstated interest, as adjusted
by any amortizable bond premium or acquisition premium, using the constant
yield method described above.
Sale or Other Disposition. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect to the
Note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by such Noteholder
with respect to such Note. Any such gain or loss will be capital gain or loss
if the Note was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in income. Capital
losses generally may be used only to offset capital gains.
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Foreign Holders. Interest paid (or accrued) to a Noteholder who is a
nonresident alien, foreign corporation or other non-United States person (a
"foreign person") generally will be considered "portfolio interest", and
generally will not be subject to United States federal income tax and
withholding tax, provided, that (i) the interest is not effectively connected
with the conduct of a trade or business within the United States by the foreign
person, (ii) the foreign person is not actually or constructively a "10 percent
shareholder" of the Trust, the Seller or the Company (including a holder of 10%
of the outstanding Certificates) 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
Trustee or other person who is otherwise required to withhold U.S. tax with
respect to the Notes with an appropriate statement (on Form W-8 or a similar
form), signed under penalties of perjury, certifying that the beneficial owner
of the Note is a foreign person and providing the foreign person's name and
address. If a Note is held through a securities clearing organization or
certain other financial institutions, the organization or institution may
provide the relevant signed statement to the withholding agent; in that case,
however, the signed statement must be accompanied by a Form W-8 or substitute
form provided by the foreign person that owns the Note. If such interest is not
portfolio interest, then it will be subject to United States federal income and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person generally will be exempt from
United States federal income and withholding tax, provided that (i) such gain
is not effectively connected with the conduct of a trade or business in the
United States by the foreign person, and (ii) in the case of an individual
foreign person, the foreign person is not present in the United States for 183
days or more in the taxable year.
If the interest, gain or income on a Note held by a foreign person is
effectively connected with the conduct of a trade or business in the United
States by the foreign person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement), the
holder generally will be subject to United States federal income tax on the
interest, gain or income at regular federal income tax rates. In addition, if
the foreign person is a foreign corporation, it may be subject to a branch
profits tax equal to 30% of its "effectively connected earnings and profits"
within the meaning of the Code for the taxable year, as adjusted for certain
items, unless it qualifies for a lower rate under an applicable tax treaty (as
modified by the branch profits tax rules).
Backup Withholding. Each holder of a Note (other than an exempt holder such
as a corporation, tax-exempt organization, qualified pension and profit-sharing
trust, individual retirement account or nonresident alien who provides
certification as to status as a nonresident) will be required to provide, under
penalties of perjury, a certificate setting forth the holder's name, address,
correct federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt Noteholder fail to
provide the required certification, the Trust will be required to withhold 31%
of the amount otherwise payable to the holder, and remit the withheld amount to
the IRS as a credit against the holder's federal income tax liability.
RECENT LEGISLATION
Recent legislation passed by Congress and signed into law by the President on
August 20, 1996 adds Sections 860H through 860L to the Code (the "FASIT
Provisions") which will provide for a new type of entity for federal income tax
purposes known as a "financial asset securitization investment trust" (a
"FASIT"). The legislation providing for the new FASIT entity, however, is not
to be effective until September 1, 1997, and many technical issues are to be
addressed in Treasury regulations yet to be drafted. In general, the FASIT
legislation will enable trusts such as the Trust to be treated as a pass-
through entity not subject to federal entity-level income tax (except with
respect to certain prohibited transactions) and to issue securities that would
be treated as debt for federal income tax purposes. Transition rules provided
for the FASIT legislation contemplate that entities in existence on August 31,
1997 may elect to be taxed under the FASIT
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Provisions; however, how such election would be made and how outstanding
interests of such entity are to be treated subsequent to the election is not
explained in the FASIT legislation.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
The following discussion only applies to a Trust which issues one or more
classes of Certificates and assumes that all payments on the Certificates are
denominated in U.S. dollars, that a series of Securities includes a single
class of Certificates and that any such Certificates are sold to persons other
than the Company. If these conditions are not satisfied with respect to any
given series of Certificates, any additional tax considerations with respect to
such Certificates will be disclosed in the applicable Prospectus Supplement.
Classification as a Partnership
Treatment of the Trust as a Partnership. The Seller and the Servicer will
agree, and the Certificateholders will agree by their purchase of Certificates,
to treat the Trust as a partnership for purposes of federal and state income
tax, franchise tax and any other tax measured in whole or in part by income,
with the assets of the partnership being the assets held by the Trust, the
partners of the partnership being the Certificateholders (including the Company
in its capacity as recipient of distributions from the Reserve Account, if
any), and the Notes being debt of the partnership. However, the proper
characterization of the arrangement involving the Trust, the
Certificateholders, the Noteholders, the 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 federal income tax
consequences of classifying the Trust as a partnership. Prospective owners of
Trust Certificates should consult their own tax advisors regarding the federal
income tax consequences discussed below, as well as any other material federal
income tax consequences that may result from applying the provisions of
Subchapter K to the ownership and transfer of a Trust Certificate.
Partnership Taxation. As a partnership, the Trust will not be subject to
federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest and finance charges earned on the Student Loans
(including appropriate adjustments for market discount, OID and bond premium),
investment income from investments of amounts on deposit in any related Trust
Accounts and any gain upon collection or disposition of Student Loans. The
Trust's deductions will consist primarily of interest accruing with respect to
the Notes, servicing and other fees, and losses or deductions upon collection
or disposition of Student Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust for each Interest Period (as defined in the applicable Prospectus
Supplement, an "Interest Period") equal to the sum of (i) the interest that
accrues on the Certificates in accordance with their terms for such Interest
Period, including interest accruing at the Pass-Through Rate for such Interest
Period and interest on amounts previously due on the Certificates but not yet
distributed; (ii) any Trust income attributable to discount on the Student
Loans that corresponds to any excess of the principal amount of the
Certificates over their initial issue price; and (iii) all other amounts of
income payable to the Certificateholders for such Interest Period. All
remaining taxable income of the Trust will be allocated to the Company. Based
on the economic arrangement of the parties, this approach for allocating Trust
income should be permissible under applicable
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Treasury regulations, although no assurance can be given that the IRS would not
require a greater amount of income to be allocated to Certificateholders.
Moreover, even under the foregoing method of allocation, Certificateholders may
be allocated income equal to the entire amount of interest accruing on the
Certificates for an Interest Period, based on the Pass-Through Rate plus the
other items described above, even though the Trust might not have sufficient
cash to make current cash distributions of such amount. Thus, cash basis
holders will in effect be required to report income from the Certificates on
the accrual basis and Certificateholders may become liable for taxes on Trust
income even if they have not received cash from the Trust to pay such taxes. In
addition, because tax allocations and tax reporting will be done on a uniform
basis for all Certificateholders but Certificateholders may be purchasing
Certificates at different times and at different prices, Certificateholders may
be required to report on their tax returns taxable income that is greater or
less than the amount reported to them by the Trust.
An individual 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 Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each of the Student
Loans, the Trust might be required to incur additional expense but it is
believed that there would not be a material adverse effect on
Certificateholders.
Computation of Income. Taxable income of the Trust will be computed at the
Trust level and then allocated pro rata to the Trust Certificateholders.
Consequently, the method of accounting for taxable income will be chosen by,
and any elections (such as those described above with respect to the market
discount rules) will be made by, the Trust rather than the Trust
Certificateholders. The Trust intends, to the extent possible, to (i) have the
taxable income of the Trust computed under the accrual method of accounting,
and (ii) adopt a calendar-year taxable year for computing the taxable income of
the Trust. The tax year of the Trust, however, is generally determined by
reference to the tax years of the Certificateholders. As a result, an owner of
a Trust Certificate would be required to include its pro rata share of Trust
income for a taxable year as determined by the Trust in such Trust
Certificateholder's gross income for its taxable year in which the taxable year
of the Trust ends.
Determining the Bases of Trust Assets. The Trust will become a partnership on
the first date when Trust Certificates are held by more than one person. On
that date, each of the Trust Certificateholders should be treated as having
purchased a pro rata share of the assets of the Trust (subject to the liability
for the Notes) followed immediately by a deemed contribution of such assets to
the newly formed partnership. The partnership' s basis in the Trust's assets
would therefore equal the sum of the Trust Certificateholders' bases in their
respective interests in the Trust's assets immediately prior to the deemed
contribution to the partnership. To the extent that the fair market value of
the assets deemed contributed to the partnership varied from the bases of such
assets to the partnership, the allocation of taxable income to the Trust
Certificateholders would be adjusted in accordance with Code Section 704(c) to
account for such variations.
Under Code Section 708 a partnership is considered to terminate if 50% or
more of the partnership interests are sold or exchanged within a 12-month
period. If such a termination occurs, the partnership is deemed to distribute
its assets to its partners (including the 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 Trust Certificates terminated the
partnership under Code Section 708, the purchaser's basis in its ownership
interest would automatically be reflected in its pro rata portion of the
Trust's assets.
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Discount and Premium. To the extent that OID, if any, on the Student Loans
exceeds a de minimis amount, the Trust would have OID income. As indicated
above, a portion of such OID income may be allocated to the Certificateholders.
Moreover, the purchase price paid by the Trust for the Student Loans may be
greater or less than the remaining principal balance of the Student Loans at
the time of purchase. If so, the Student Loans will have been acquired at a
premium or 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, the
Trust will elect to include any such discount in income currently as it accrues
over the life of the Student Loans or to offset any such premium against
interest income on the Student Loans. As indicated above, a portion of such
market discount income or premium deduction may be allocated to
Certificateholders.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates
sold. To the extent the Trust is characterized as a partnership, a
Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust income (includible in
gross income) and decreased by any distributions received with respect to such
Certificate. In addition both the tax basis in the Certificate and the amount
realized on a sale of a Certificate would include the holder's share of the
Notes and other liabilities of the Trust. A holder acquiring Certificates at
different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a pro rata portion of such aggregate tax basis to the
Certificates sold (rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Student Loans would generally be
treated as ordinary income to the holder and could give rise to special tax
reporting requirements. The Trust does not expect to have any other assets that
would give rise to such special reporting requirements.
If a Certificateholder is required to recognize an aggregate amount of income
(not including income attributable to disallowed itemized deductions described
above) over the life of the Certificates that exceeds the aggregate cash
distributions with respect thereto, such excess will generally give rise to a
capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect the tax liability
and tax basis of the holder) attributable to periods before the actual
transaction.
The use of such a monthly convention may not be permitted by existing laws
and regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust might be reallocated among the Certificateholders. SMS and the
Company are authorized to revise the Trust's method of allocation between
transferors and transferees to conform to a method permitted by future laws,
regulations or other IRS guidance.
Section 754 Election. In the event that a Certificateholder sells a
Certificate at a profit (or loss), the purchasing Certificateholder will have a
higher (or lower) basis in the Certificate than the selling Certificateholder
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust were to file an election under Section
754 of the Code. In order to avoid the administrative complexities that would
be involved in keeping accurate accounting records, as well as
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potentially onerous information reporting requirements, the Trust will not make
such election. As a result, Certificateholders might be allocated a greater or
lesser amount of Trust income than would be appropriate based on their own
purchase price for Certificates.
Administrative Matters. The 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 Trust and will report each Certificateholder's
allocable share of items of Trust income and expense to holders and the IRS on
Schedule K-1. The Trust will provide the Schedule K-1 information to nominees
that fail to provide the Trust with the information statement described below
and such nominees will be required to forward such information to the
beneficial owners of the Certificates. Generally, holders must file tax returns
that are consistent with the information returns filed by the Trust or be
subject to penalties unless the holder notifies the IRS of all such
inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee, and (ii) as to each
beneficial owner (x) the name, address and identification number of such
person, (y) whether such person is a United States person, a tax-exempt entity
or a foreign government, an international organization, or any wholly owned
agency or instrumentality of either of the foregoing, and (z) certain
information on Certificates that were held, bought or sold on behalf of such
person throughout the year. In addition, brokers and financial institutions
that hold Certificates through a nominee are required to furnish directly to
the Trust information as to themselves and their ownership of Certificates. A
clearing agency registered under Section 17A of the Exchange Act that holds
Certificates as a nominee is not required to furnish any such information
statement to the Trust. The information referred to above for any calendar year
must be furnished to the Trust on or before the following January 31. Nominees,
brokers and financial institutions that fail to provide the Trust with the
information described above may be subject to penalties.
The Company will be designated as the "tax matters partner" in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which
the partnership information return is filed. Any adverse determination
following an audit of the return of the Trust by the appropriate taxing
authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may
be precluded from separately litigating a proposed adjustment to the items of
the Trust. An adjustment could also result in an audit of a Certificateholder's
returns and adjustments of items not related to the income and losses of the
Trust.
Tax Consequences to Foreign Certificateholders. It is not clear whether the
Trust would be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust would be engaged in a trade or business in the United States for
such purposes, the Trust will withhold as if it were so engaged in order to
protect the Trust from possible adverse consequences of a failure to withhold.
The Trust expects to withhold on the portion of its taxable income that is
allocable to foreign Certificateholders pursuant to Section 1446 of the Code,
as if such income were effectively connected to a U.S. trade or business, at a
rate of 34% for foreign holders that are taxable as corporations and 39.6% for
all other foreign holders. These rates may be increased by proposed tax
legislation. Subsequent adoption of Treasury regulations or the issuance of
other administrative pronouncements may require the Trust to change its
withholding procedures. In determining
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a holder's withholding status, the Trust may rely on IRS Form W-8, IRS Form W-9
or the holder's certification of nonforeign status signed under penalties of
perjury.
Each foreign holder might be required to file a U.S. individual or corporate
income tax return (including in the case of a corporation, the branch profits
tax) on its share of the Trust's income. Each foreign holder must obtain a
taxpayer identification number from the IRS and submit that number to the Trust
on Form W-8 in order to assure appropriate crediting of the taxes withheld. A
foreign holder generally would be entitled to file with the IRS a claim for
refund with respect to taxes withheld by the Trust, taking the position that no
taxes were due because the Trust was not engaged in a U.S. trade or business.
However, interest payments made (or accrued) to a Certificateholder who is a
foreign person generally will be considered guaranteed payments to the extent
such payments are determined without regard to the income of the Trust. If
these interest payments are properly characterized as guaranteed payments, then
the interest will not be considered "portfolio interest." As a result,
Certificateholders will be subject to United States federal income tax and
withholding tax at a rate of 30 percent, unless reduced or eliminated pursuant
to an applicable treaty. In such case, a foreign holder would only be entitled
to claim a refund for that portion of the taxes in excess of the taxes that
should be withheld with respect to the guaranteed payments.
Backup Withholding. Distributions made on the Certificates and proceeds from
the sale of the Certificates will be subject to a "backup" withholding tax of
31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
69
<PAGE>
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 Notes 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 Notes as Indebtedness. The Seller will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Federal Tax Counsel will, except as otherwise
provided in the related Prospectus Supplement, advise the Trust that the Notes
will be (or, in certain cases, should be) classified as debt for federal income
tax purposes. Assuming such characterization of the Notes is correct, the
federal income tax consequences to Noteholders described above under the
heading "TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE--Tax Consequences to
Holders of the Notes" would apply to the Noteholders.
If, contrary to the opinion of Federal Tax Counsel, the IRS successfully
asserted that one or more classes of Notes did not represent debt for federal
income tax purposes, such class or classes of Notes might be treated as equity
interests in the Trust. If 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 federal income tax.
Nonetheless, treatment of Notes as equity interests in such a partnership
could have adverse tax consequences to certain holders of such Notes. For
example, income to certain tax-exempt entities (including pension funds) would
be "unrelated business taxable income", income to foreign holders 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. In the event one or more classes of Notes
were treated as interests in a partnership, the consequences governing the
Certificates as equity interests in a partnership described above under "TRUSTS
FOR WHICH A PARTNERSHIP ELECTION IS MADE--Tax Consequences to Holders of the
Certificates" would apply to the holders of such Notes.
If the Notes, contrary to the opinion of Federal Tax Counsel, were not
treated as debt for federal income tax purposes, the Trust might be treated,
for federal income tax purposes, as a publicly traded partnership taxable as a
corporation. In such case, the entity would be subject to federal income taxes
at corporate tax rates on its taxable income generated by Student Loans. Such
an entity-level tax could result in reduced distribution to Noteholders and
Noteholders could be liable for a share of such tax.
THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A NOTEHOLDER'S OR
CERTIFICATEHOLDER'S PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES AND CERTIFICATES, INCLUDING THE
TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE
POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
70
<PAGE>
CERTAIN STATE TAX CONSEQUENCES
The loan servicing activities to be undertaken by the Servicer will
predominantly take place in Indiana.
Because of the variation in each state's tax laws based in whole or in part
upon income, it is impossible to predict tax consequences to holders of Notes
and Certificates in all of the state taxing jurisdictions in which they are
already subject to tax. Noteholders and Certificateholders are urged to consult
their own tax advisors with respect to state tax consequences arising out of
the purchase, ownership and disposition of Notes and Certificates.
The State of Indiana imposes an individual income tax and a corporate income
tax including a corporate gross income tax. This discussion is based upon
present provisions of Indiana statutes and the regulations promulgated
thereunder, and applicable judicial or ruling authority, all of which are
subject to change, which change may be retroactive. No ruling on any of the
issues discussed below will be sought from the Indiana Department of Revenue.
Tax Consequences with Respect to the Notes. It is expected that Krieg DeVault
Alexander & Capehart ("Indiana Tax Counsel") will deliver an opinion to the
Trust that, assuming the Notes are treated as debt for federal income tax
purposes, the Notes will be treated as debt for Indiana individual income and
corporate income tax purposes. Accordingly, Noteholders not otherwise subject
to taxation in Indiana should not become subject to taxation in Indiana solely
because of a holder's ownership of Notes. However, a Noteholder already subject
to Indiana's individual income tax or corporate income tax could be required to
pay additional Indiana tax as a result of the holder's ownership or disposition
of Notes.
Tax Consequences with Respect to the Certificates. Indiana Tax Counsel is of
the opinion that the Trust will not be taxable as a separate entity for Indiana
tax purposes. As a result, the partnership should not be subject to the Indiana
corporate income tax (if such taxes were applicable, however, they could result
in reduced distributions to Certificateholders). Moreover, Certificateholders
that are not otherwise subject to tax in Indiana should not be subject to
Indiana individual income or corporate income tax with respect to income from
the partnership, unless in the event the Trust is considered to be carrying on
business in Indiana.
71
<PAGE>
ERISA CONSIDERATIONS
THE NOTES
Unless otherwise specified in the Prospectus Supplement, the Notes of each
series may be purchased by an employee benefit plan (as defined in Section 3(3)
of ERISA) that is subject to the provisions of Title I of ERISA and by a plan
described in Section 4975(e)(1) of the Code, including an individual retirement
account (a "Plan"). A fiduciary of the Plan must determine that the purchase of
a Note is consistent with its fiduciary duties under ERISA and does not result
in a nonexempt prohibited transaction (as defined in Section 3(32) of ERISA).
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.
THE CERTIFICATES
Unless otherwise specified in the Prospectus Supplement, the Certificates of
each series may not be purchased by a Plan or by any entity whose underlying
assets include plan assets by reason of a plan's investment in the entity
(each, a "Benefit Plan"). Such purchase of an equity interest in the Trust will
result in the assets of the 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 for such persons.
By its acceptance of a Certificate, each Certificateholder will be deemed to
have represented and warranted that it is not a Benefit Plan.
If a given series of Certificates may be acquired by a Benefit Plan because
of the application of an exception contained in a regulation issued by the
United States Department of Labor (the "Plan Assets Regulation"), such
exception will be discussed in the related Prospectus Supplement.
* * *
A plan fiduciary considering the purchase of Securities of a given series
should consult its tax and/or legal advisors regarding whether the assets of
the related Trust would be considered plan assets, the possibility of exemptive
relief from the prohibited transaction rules and other issues and their
potential consequences.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement with
respect to the Notes of a given series and an underwriting agreement with
respect to the Certificates of such series (collectively, the "Underwriting
Agreements"), the Seller will agree to cause the related Trust to sell to the
underwriters named therein and in the related Prospectus Supplement, and each
of such underwriters will severally agree to purchase, the principal amount of
each class of Notes and Certificates, as the case may be, of the related series
set forth therein and in the related Prospectus Supplement.
In each of the Underwriting Agreements with respect to any given series of
Securities, the several underwriters will agree, subject to the terms and
conditions set forth therein, to purchase all the Notes and Certificates, as
the case may be, described therein which are offered hereby and by the related
Prospectus Supplement if any of such Notes and Certificates, as the case may
be, are purchased.
Each Prospectus Supplement will either (i) set forth the price at which each
class of Notes and Certificates, as the case may be, being offered thereby will
be offered to the public and any concessions that may be offered to certain
dealers participating in the offering of such Notes and Certificates, as the
case may be, or (ii) specify that the related Notes and Certificates, as the
case may be, are to be resold by the underwriters in negotiated transactions at
varying prices to be determined at the time of such sale. After the initial
public offering of any such Notes and Certificates, as the case may be, such
public offering prices and such concessions may be changed.
72
<PAGE>
Until the distribution of the Securities is completed, rules of the
Commission may limit the ability of the underwriters and certain selling group
members to bid for and purchase the Securities. As an exception to these rules,
the underwriters are permitted to engage in certain transactions that stabilize
the price of the Securities. Such transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of the Securities.
If an underwriter creates a short position in the Securities in connection
with the offering, i.e., if it sells more Securities than are set forth on the
cover page of the related Prospectus Supplement, the underwriter may reduce
that short position by purchasing Securities in the open market.
An underwriter may also impose a penalty bid on certain underwriters and
selling group members. This means that if the underwriter purchases Securities
in the open market to reduce the underwriters' short position or to stabilize
the price of the Securities, it may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
Securities as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it
discourages resales of the security.
Neither the 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 such transactions or that such 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, or contribute to payments the several underwriters may be
required to make in respect thereof.
Each Trust may, from time to time, invest the funds in its Trust Accounts in
Eligible Investments acquired from such underwriters.
Pursuant to each of the Underwriting Agreements with respect to a given
series of Securities, the closing of the sale of any class of Securities
subject to either thereof will be conditioned on the closing of the sale of all
other such classes subject to either thereof.
The place and time of delivery for the Securities in respect of which this
Prospectus is delivered will be set forth in the related Prospectus Supplement.
LEGAL MATTERS
Certain legal matters relating to the Securities of any series will be passed
upon for the related Trust, the Seller, the Servicer and the Administrator by
Krieg DeVault Alexander & Capehart, Indianapolis, Indiana, and for the
underwriters for such series by Brown & Wood LLP, New York, New York. Edward R.
Schmidt, general counsel of SMS and an executive officer of and general counsel
for USA Group, USA Funds and Loan Services and a member of the board of
directors of USA Group and a member of the board of trustees of USA Funds, USA
Group Guarantee Services and Loan Services was formerly a partner of, and of
counsel to, the firm of Krieg DeVault Alexander & Capehart and William R.
Neale, a member of the board of directors of USA Group and a member of the
board of trustees of USA Funds, is a partner of the firm of Krieg DeVault
Alexander & Capehart. Certain federal income tax and other matters will be
passed upon for each Trust by Brown & Wood LLP and certain Indiana State income
and corporate income tax and other matters by Krieg DeVault Alexander &
Capehart.
73
<PAGE>
INDEX OF PRINCIPAL TERMS
Set forth below is a list of the defined terms used in this Prospectus and
the pages on which the definitions of such terms may be found herein.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1993 Act.................................................................. 17
Act....................................................................... 26
Additional Fundings....................................................... 47
Add-on Consolidation Loan................................................. 32
Administration Agreement.................................................. 55
Administration Fee........................................................ 55
Administrator............................................................. 6
Administrator Default..................................................... 55
Applicable Trustee........................................................ 44
Base Rate................................................................. 43
Benefit Plan.............................................................. 67
Calculation Agent......................................................... 43
Cede...................................................................... 21
Certificate Balance....................................................... 7
Certificate Pool Factor................................................... 36
Certificates.............................................................. 1
Closing Date.............................................................. 8, 46
Code...................................................................... 58
Collateral Reinvestment Account........................................... 9
Collection Account........................................................ 47
Collection Period......................................................... 48
Commission................................................................ 2
Company................................................................... 1
Cutoff Date............................................................... 8
Deferral Period........................................................... 30
Definitive Certificates................................................... 44
Definitive Notes.......................................................... 44
Definitive Securities..................................................... 44
Department................................................................ 8
Depository................................................................ 37
Distribution Dates........................................................ 37
DTC's Nominee............................................................. 21
Early Amortization Event.................................................. 9
Eligible Deposit Account.................................................. 48
Eligible Institution...................................................... 48
Eligible Investments...................................................... 47
Eligible Lender Trustee................................................... 1
ERISA..................................................................... 13
Event of Default.......................................................... 39
Existing Borrowers........................................................ 9
family contribution....................................................... 28
Federal Assistance........................................................ 28
Federal Consolidation Loan................................................ 32
Federal Consolidation Loans............................................... 26
Federal Guarantor......................................................... 8
Federal Origination Fee................................................... 17
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Federal PLUS Loans........................................................ 26
Federal SLS Loans......................................................... 26
Federal Stafford Loans.................................................... 26
Federal Student Loans..................................................... 8
Federal Supplemental Loans for Students................................... 26
Federal Tax Counsel....................................................... 13
Federal Unsubsidized Stafford Loans....................................... 26
FFELP..................................................................... 26
Fixed Rate Securities..................................................... 43
Floating Rate Securities.................................................. 43
Forbearance Period........................................................ 30
foreign person............................................................ 60
Funding Period............................................................ 8
Grace Period.............................................................. 30
Guarantors................................................................ 8
Indenture................................................................. 6
Indenture Trustee......................................................... 1
Index Shortfall Carryover................................................. 39
Indiana Tax Counsel....................................................... 68
Indirect Participants..................................................... 44
Initial Pool Balance...................................................... 55
Insolvency Event.......................................................... 52
Interest Period........................................................... 62
Interest Rate............................................................. 7
Interest Reset Period..................................................... 43
Interest Subsidy Payments................................................. 28
Investment Earnings....................................................... 47
IRS....................................................................... 58
Issuer.................................................................... 6
Loan Sale Agreement....................................................... 8
Loan Services............................................................. 6, 23
Loan Servicing Agreement.................................................. 11
Monthly Rebate Fee........................................................ 17
Note Pool Factor.......................................................... 36
Notes..................................................................... 1
OID....................................................................... 59
OID regulations........................................................... 59
Participants.............................................................. 37
Pass-Through Rate......................................................... 7
Plan...................................................................... 67
Plan Assets Regulation.................................................... 67
Pool Balance.............................................................. 36
Pool Factor............................................................... 36
Pre-Funding Account....................................................... 9
Pre-Funding Amount........................................................ 9
Private Guarantor......................................................... 8
Private Student Loans..................................................... 8
Prospectus Supplement..................................................... 1
Purchase Amount........................................................... 46
Registration Statement.................................................... 2
Related Documents......................................................... 41
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reserve Account.......................................................... 10, 50
Reserve Account Initial Deposit.......................................... 10
Revolving Period......................................................... 9
Rules.................................................................... 44
Secretary................................................................ 20
Securities............................................................... 1
Securities Act........................................................... 2
Seller................................................................... 1, 6
Servicer................................................................. 6
Servicer Default......................................................... 20, 52
Servicing Fee............................................................ 12, 49
Short-Term Note.......................................................... 59
SMS...................................................................... 2, 6
Special Allowance Payments............................................... 28
Spread................................................................... 43
Spread Multiplier........................................................ 43
Student Loans............................................................ 1, 8
Transfer and Servicing Agreements........................................ 46
Trust.................................................................... 1, 6
Trust Accounts........................................................... 47
Trust Agreement.......................................................... 6
UCC...................................................................... 56
Underwriting Agreements.................................................. 67
Unmet Need............................................................... 28
USA Funds................................................................ 22
USA Group................................................................ 22
USA Group Guarantee Services............................................. 22
</TABLE>
76
<PAGE>
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPO-
RATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN CONNEC-
TION WITH THE OFFER MADE BY THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO
NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OF-
FER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UN-
LAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION HEREIN OR THEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS SUPPLEMENT OR
PROSPECTUS.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Reports to Securityholders................................................ S-2
Summary of Terms.......................................................... S-3
Risk Factors.............................................................. S-21
The Financed Student Loan Pool............................................ S-31
Formation of the Trust.................................................... S-33
Description of the Notes.................................................. S-41
Description of the Transfer and Servicing Agreements...................... S-54
Certain Federal Income Tax and State Tax Consequences..................... S-58
ERISA Considerations...................................................... S-58
Underwriting.............................................................. S-60
Legal Matters............................................................. S-61
Annex I................................................................... S-62
Index of Principal Terms.................................................. S-66
PROSPECTUS
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 2
Table of Contents......................................................... 3
Summary of Terms.......................................................... 6
Risk Factors.............................................................. 15
Formation of the Trusts................................................... 22
Use of Proceeds........................................................... 23
USA Group, SMS, the Seller and the Servicer............................... 23
The Student Loan Pools.................................................... 26
Federal Family Education Loan Program..................................... 28
Private Student Loan Programs............................................. 38
Weighted Average Life of the Securities................................... 38
Pool Factors and Trading Information...................................... 39
Description of the Notes.................................................. 40
Description of the Certificates........................................... 45
Certain Information Regarding the Securities.............................. 46
Description of the Transfer and Servicing Agreements...................... 49
Certain Legal Aspects of the Student Loans................................ 49
Certain Federal Income Tax Consequences................................... 61
Trusts for which a Partnership Election is Made........................... 62
Trusts in which all Residual Interests are retained by the Seller or an
Affiliate of the Seller.................................................. 70
Certain State Tax Consequences............................................ 71
ERISA Considerations...................................................... 72
Plan of Distribution...................................................... 72
Legal Matters............................................................. 73
Index of Principal Terms.................................................. 74
</TABLE>
------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS EF-
FECTING TRANSACTIONS IN THE SECURITIES DESCRIBED IN THIS PROSPECTUS SUPPLE-
MENT, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER THIS PROSPECTUS SUPPLEMENT AND THE PRO-
SPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT-
MENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SMS Student Loan Trust 1997-A
$ Floating Rate Asset Backed Senior Notes
USA GROUP SECONDARY
MARKET SERVICES, INC.
SELLER
PROSPECTUS SUPPLEMENT
CREDIT SUISSE FIRST BOSTON
MORGAN STANLEY & CO.
INCORPORATED
PAINEWEBBER INCORPORATED
SMITH BARNEY INC.
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses in connection with the offering of the Notes and the Certificates
being registered herein are estimated as follows:
<TABLE>
<S> <C>
SEC registration fee............................................ $454,780.45
Legal fees and expenses......................................... 65,000.00
Accounting fees and expenses.................................... 3,000.00
Blue Sky fees and expenses...................................... 18,500.00
Rating agency fees.............................................. 206,825.00
Eligible Lender Trustee fees and expenses....................... 14,000.00
Indenture Trustee fees and expenses............................. 11,000.00
Printing expenses............................................... 50,000.00
Miscellaneous................................................... 20,000.00
-----------
Total....................................................... $843,105.45
===========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As authorized by Section 145 of the General Corporation Law of Delaware (the
"Delaware Corporation Law") and the By-Laws of SMS, each director and officer
of SMS may be indemnified by SMS against expenses (including attorney's fees,
judgments, fines and amounts paid in settlement) actually and reasonably
incurred in connection with the defense or settlement of any threatened,
pending or completed legal proceedings in which he is involved by reason of the
fact that he is or was a director or officer of SMS if he acted in good faith
and in a manner that he reasonably believed to be in or not opposed to the best
interest of SMS, and, with respect to any criminal action or proceeding, if he
had no reasonable cause to believe that his conduct was unlawful. If the legal
proceeding, however, is by or in the right of SMS, the director or officer may
not be indemnified in respect of any claim, issue or matter as to which he
shall have been adjudged to be liable for negligence or misconduct in the
performance of his duty to SMS unless a court determines otherwise.
There are directors' and officers' liability insurance policies outstanding
which insure directors and officers of SMS. The policies insure SMS against
losses for which SMS shall be required or permitted by law to indemnify
directors and officers and which result from claims made against such directors
or officers based upon the commission of wrongful acts in the performance of
their duties. The losses covered by the policies are subject to certain
exclusions and do not include fines or penalties imposed by law or other
matters deemed uninsurable under the law. The policies contain certain self-
insured retention provisions.
ITEM 16. EXHIBITS.
<TABLE>
<C> <S>
1.1 --Form of Underwriting Agreement for Notes**
1.2 --Form of Underwriting Agreement for Certificates**
--Restated Certificate of Incorporation of USA Group Secondary Market
3.1 Services, Inc.*
3.2 --By-laws of USA Group Secondary Market Services, Inc.*
--Form of Certificate of Trust for the Trusts (included as an exhibit to
3.3 Exhibit 4.2)**
4.1 --Form of Indenture between the Trust and the Indenture Trustee
(included as an exhibit thereto a form of Note)**
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
4.2 --Form of Trust Agreement among the Seller, the Company and the
Eligible Lender Trustee (included as an exhibit thereto a form of
Certificate)**
4.3 --Form of Note (included as an exhibit to Exhibit 4.1)**
4.4 --Form of Certificate (included as an exhibit to Exhibit 4.2)**
--Opinion of Krieg DeVault Alexander & Capehart with respect to
5.1 legality
5.2 --Opinion of Richards, Layton & Finger with respect to legality
8.1 --Opinion of Brown & Wood llp with respect to tax matters
--Opinion of Krieg DeVault Alexander & Capehart with respect to tax
8.2 matters
--Consent of Krieg DeVault Alexander & Capehart (included as part of
23.1 Exhibit 5.1)
23.2 --Consent of Brown & Wood llp (included as part of Exhibit 8.1)
--Consent of Richards, Layton & Finger (included as part of Exhibit
23.3 5.2)
25 --Statement of Eligibility under the Trust Indenture Act of 1939 of the
Indenture Trustee***
--Form of Loan Sale Agreement among the Seller, the Trust and the
99.1 Eligible Lender Trustee**
99.2 --Form of Loan Servicing Agreement among the Servicer, the Trust and
the Eligible Lender Trustee**
99.3 --Form of Administration Agreement among the Trust, the Indenture
Trustee and USA Group Secondary Market Services, Inc., as
Administrator**
</TABLE>
- --------
* Previously filed in Registration Statement on Form S-3 (Reg. No. 33-94952,
filed with the Commission by the Registrant on July 25, 1995).
** Previously filed in Amendment No. 2 to Registration Statement on Form S-3
(Reg. No. 33-76784, filed with the Commission by the Registrant on June 7,
1994).
*** To be filed.
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 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.
II-2
<PAGE>
(b) As to documents subsequently filed that are incorporated by reference:
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended, that is incorporated
by reference in this Registration Statement shall be deemed to be a new
registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreements Notes and
Certificates in such denominations and registered in such names as required by
the Underwriter to permit prompt delivery to each purchaser.
(d) As to indemnification:
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described under Item 15,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of such Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, such Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(e) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, as amended, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(f) The undersigned Registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the 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-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT OR AMENDMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
INDIANAPOLIS, STATE OF INDIANA, ON APRIL 21, 1997.
USA Group Secondary Market Services,
Inc., as originator of the Trust
(Registrant)
/s/ Cheryl E. Watson
By: __________________________________
CHERYL E. WATSON SENIOR VICE
PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT OR AMENDMENT HAS BEEN SIGNED BELOW ON APRIL 21, 1997 BY THE FOLLOWING
PERSONS IN THE CAPACITIES INDICATED.
Each person signing below hereby appoints Stephen W. Clinton and Cheryl E.
Watson and each of them as his or her attorney-in-fact to execute and file such
amendments to this Registration Statement as such attorney-in-fact may deem
appropriate.
SIGNATURE CAPACITY
President, Chief Executive Officer
Stephen W. Clinton* (Principal Executive Officer) and
- ------------------------------------- Director
STEPHEN W. CLINTON
/s/ Cheryl E. Watson
- ------------------------------------- Senior Vice President (Principal
CHERYL E. WATSON Accounting Officer)
Vincent J. Otto* Senior Vice President and Chief
- ------------------------------------- Financial Officer (Principal
VINCENT J. OTTO Financial Officer)
James C. Lintzenich* Chairman of the Board and Director
- -------------------------------------
JAMES C. LINTZENICH
Director
Ernest J. Newborn, Jr.*
- -------------------------------------
ERNEST J. NEWBORN, JR.
Director
Ike G. Batalis*
- -------------------------------------
IKE G. BATALIS
/s/ Cheryl E. Watson
*By: ___________________________
CHERYL E. WATSON ATTORNEY-IN-FACT
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NO. DESCRIPTION NO.
------- ----------- ----------
<C> <S> <C>
1.1 --Form of Underwriting Agreement for Notes**
1.2 --Form of Underwriting Agreement for Certificates**
--Restated Certificate of Incorporation of USA Group Secondary Market
3.1 Services, Inc.*
3.2 --By-laws of USA Group Secondary Market Services, Inc.*
--Form of Certificate of Trust for the Trusts (included as an exhibit to
3.3 Exhibit 4.2)**
4.1 --Form of Indenture between the Trust and the Indenture Trustee (included
as an exhibit thereto a form of Note)**
4.2 --Form of Trust Agreement among the Seller, SMS and the Eligible Lender
Trustee (included as an exhibit thereto a form of Certificate)**
4.3 --Form of Note (included as an exhibit to Exhibit 4.1)**
4.4 --Form of Certificate (included as an exhibit to Exhibit 4.2)**
5.1 --Opinion of Krieg DeVault Alexander & Capehart with respect to legality
5.2 --Opinion of Richards, Layton & Finger with respect to legality
8.1 --Opinion of Brown & Wood llp with respect to tax matters
8.2 --Opinion of Krieg DeVault Alexander & Capehart with respect to tax matters
--Consent of Krieg DeVault Alexander & Capehart (included as part of
23.1 Exhibit 5.1)
23.2 --Consent of Brown & Wood llp (included as part of Exhibit 8.1)
23.3 --Consent of Richards, Layton & Finger (included as part of Exhibit 5.2)
25 --Statement of Eligibility under the Trust Indenture Act of 1939 of the
Indenture Trustee***
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 Servicer, the Trust and the
Eligible Lender Trustee**
99.3 --Form of Administration Agreement among the Trust, the Indenture Trustee
and USA Group Secondary Market Services, Inc., as Administrator**
</TABLE>
- --------
* Previously filed in Registration Statement on Form S-3 (Reg. No. 33-94952,
filed with the Commission by the Registrant on July 25, 1995).
** Previously filed in Amendment No. 2 to Registration Statement on Form S-3
(Reg. No. 33-76784, filed with the Commission by the Registrant on June 7,
1994).
*** To be filed.
<PAGE>
[Letterhead of Krieg DeVault Alexander & Capehart]
EXHIBIT 5.1
April 21, 1997
USA Group Secondary Market Services, Inc.
8350 Craig Street
Indianapolis, Indiana 46250
Ladies and Gentlemen:
We have acted as counsel to USA Group Secondary Market Services, Inc. ("SMS")
as originator, in connection with a Registration Statement (No. 333-24243) on
Form S-3 (the "Registration Statement") filed with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended,
relating to the registration of the Asset Backed Notes (the "Notes") and Asset
Backed Certificates (the" Certificates", and together with the Notes the
"Securities"). The Securities will be issued from time to time in series, with
each series to be issued by a trust (each a "Trust") to be formed among SMS,
and an Eligible Lender Trustee (the "Eligible Lender Trustee"), pursuant to a
Trust Agreement (each a "Trust Agreement"), in connection with the sale of
certain Student Loans (the "Student Loans") by SMS, as Seller, to the Trust.
With respect to each series, the Notes are to be issued pursuant to an Indenture
(each an "Indenture") between the Trust and an Indenture Trustee (the "Indenture
Trustee"), and the Certificates are to be issued pursuant to a Trust Agreement.
The Securities will be sold from time to time pursuant to underwriting
agreements (each an "Underwriting Agreement") between SMS and the various
underwriters named therein.
We are familiar with the corporate proceedings of SMS to date and have
examined and relied upon the forms of the Trust Agreement, the Indenture and the
Underwriting Agreements (collectively the "Operative Documents") filed with the
Commission as exhibits to the Registration Statement. In addition, we have
examined such corporate records of the SMS and such other documents as we have
deemed relevant and necessary as a basis for the opinions hereinafter expressed.
Based on the foregoing, we are of the opinion that:
1. Assuming due authorization of the Indenture by the Trust and due
authorization, execution and delivery thereof by the Indenture Trustee,
the Indenture, when executed and delivered by the Indenture Trustee,
will constitute a valid and legally binding instrument of the Trust.
<PAGE>
April 21, 1997
USA Group Secondary Marketing Services, Inc.
Page 2
2. When appropriate corporate action has been taken to authorize the
issuance of the Notes, the Operative Documents relating to such
series have been duly completed, executed and delivered by the
parties thereto, and such Notes have been duly completed, executed,
authenticated, sold and delivered in the applicable form filed as an
exhibit to the Registration Statement, in accordance with the
applicable Indenture and in the manner described in the Registration
Statement, any amendment thereto, the Prospectus and any Prospectus
Supplement relating thereto such Notes will be legal valid and
binding obligations of the Trust entitled to the benefits of the
Indenture.
The opinions set forth above are subject, as to enforcement, to (i) bankruptcy,
insolvency (including, without limitation, all laws relating to fraudulent
transfers), reorganization, moratorium or other similar laws relating to or
affecting the enforcement of creditors' rights generally and (ii) general
equitable principles (regardless of whether enforcement is considered in a
proceeding in equity or at law). With respect to matters of Delaware law
affecting this opinion, we have relied on the opinion of Richards, Layton &
Finger filed as an exhibit to the Registration Statement.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the use of our name under the heading "Legal
Opinions" in the Prospectus which constitutes a part of the Registration
Statement. In giving the foregoing consent, we do not thereby admit that we
come within the category of Persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder. Except as stated above, without
our prior written consent, this opinion may not be furnished or quoted to, or
relied upon by, any other person or for any other purpose.
Very truly yours,
KRIEG DEVAULT ALEXANDER & CAPEHART
<PAGE>
EXHIBIT 5.2
LETTERHEAD OF RICHARDS, LAYTON & FINGER
April 21, 1997
USA Group Secondary Market Services, Inc.
8350 Craig Street
Indianapolis, Indiana 46250
Re: USA Group Secondary Market Services, Inc.
Registration Statement on Form S-3
(Registration No. 333-23243)
-------------------------------------
Ladies and Gentlemen:
We have acted as special Delaware counsel to USA Group Secondary
Market Services, Inc., a Delaware corporation (the "Seller"), in connection with
the above-captioned Registration Statement (such registration statement together
with the exhibits and any amendments thereto, the "Registration Statement"),
filed by the Seller with the Securities and Exchange Commission in connection
with the registration by the Seller of Asset Backed Notes (the "Notes") and
Asset Backed Certificates (the "Certificates").
As described in the Registration Statement, the Notes and the
Certificates will be issued from time to time in series, with each series to be
issued by a Delaware business trust (each, a "Trust") to be formed by the Seller
pursuant to a Trust Agreement (each, a "Trust Agreement") among the Seller,
Secondary Market Company, Inc., a Delaware corporation (the "Company") and an
Eligible Lender Trustee. With respect to each series, the Certificates will be
issued pursuant to a Trust Agreement, the Notes will be issued pursuant to an
Indenture (each, an "Indenture") between the related Trust and an Indenture
Trustee and the Notes and Certificates will be sold from time to time pursuant
to certain underwriting agreements (the "Underwriting
<PAGE>
USA Group Secondary Market Services, Inc.
April 21, 1997
Page 2
Agreements") between the Seller and the various underwriters named therein. At
your request, this opinion is being furnished to you.
For purposes of giving the opinions hereinafter set forth, we have
examined and relied upon the Registration Statement and, in each case as filed
with the Registration Statement, the form of Servicing Agreement among a Trust,
the Eligible Lender Trustee and the Servicer, the form of Indenture (including
forms of Notes included as exhibits thereto), the form of Trust Agreement
(including the form of Certificate of Trust to be filed pursuant to the Delaware
Business Trust Act and the form of Certificate filed as an exhibit thereto) and
the forms of Underwriting Agreements for the Notes and the Certificates (the
"Operative Documents"). Terms used herein without definition have the meanings
given to such terms in the Registration Statement.
For purposes of this opinion, we have not reviewed any documents other
than the documents listed above, and we assume that there exists no provision in
any document not listed above that bears upon or is inconsistent with the
opinions stated herein. We have conducted no independent factual investigation
of our own but rather have relied solely upon the foregoing documents, the
statements and information set forth therein and the additional matters recited
or assumed herein, all of which we assume to be true, complete and accurate in
all material respects.
Based upon the foregoing, and upon our examination of such questions
of law and statutes of the State of Delaware as we have considered necessary or
appropriate, and subject to the assumptions, qualifications, limitations and
exceptions set forth herein, we are of the opinion that, with respect to the
Certificates of any series, when (i) the final terms of such Certificates have
been duly established and approved by or pursuant to authorization of the Board
of Directors of the Seller, (ii) the Operative Documents relating to such series
have each been duly completed, executed and delivered by the parties thereto
substantially in the form filed as an exhibit to the Registration Statement
reflecting the terms established as described above, (iii) the Certificate of
Trust for the related Trust has been duly executed by the Eligible Lender
Trustee and the Delaware Trustee (as defined in the Trust Agreement) and filed
with the Secretary of State of the State of Delaware, and (iv) such Certificates
have been duly authorized, executed and issued by the related Trust and
authenticated by the Eligible Lender Trustee, and delivered to and paid for by
the purchasers thereof, all in accordance with the terms and conditions of the
related Operative Documents and in the manner described in the Registration
Statement, such Certificates will be valid, fully paid and nonassessable
beneficial interests in the Trust (subject to the obligation of the Company
under Section 2.07(a) of the Trust Agreement).
<PAGE>
USA Group Secondary Market Services, Inc.
April 21, 1997
Page 3
The foregoing opinion is subject to the following exceptions,
qualifications, limitations and assumptions:
A. This opinion is limited to the laws of the State of Delaware
(excluding the securities laws of the State of Delaware), and we have not
considered and express no opinion on the laws of any other jurisdiction,
including federal laws and rules and regulations relating thereto. Our opinions
are rendered only with respect to Delaware laws and rules, regulations and
orders thereunder which are currently in effect.
B. We have not participated in the preparation of the Registration
Statement or any offering materials with respect to the Certificates and assume
no responsibility for their contents.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement. In giving the foregoing consent, we do not thereby
admit that we come within the category of Persons whose consent is required
under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder. Except as
stated above, without our prior written consent, this opinion may not be
furnished or quoted to, or relied upon by, any other Person or for any other
purpose.
Very truly yours,
Richards, Layton & Finger
EAM
<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF BROWN & WOOD LLP]
April 21, 1997
USA Group Secondary Market Services, Inc.
8350 Craig Street
Indianapolis, Indiana 46250
Re: USA Group Secondary Market Services, Inc.
Registration Statement on Form S-3 (No. 333-23243)
--------------------------------------------------
Ladies and Gentlemen:
We have acted as special federal tax counsel to USA Group Secondary Market
Services, Inc., a Delaware corporation (the "Registrant"), in connection with
the issuance and sale of its Asset Backed Notes (the "Notes") and Asset Backed
Certificates (the "Certificates" and, together with the Notes, the
"Securities"), to be issued from time to time in one or more series. Each
series of Securities will be issued by a trust to be formed with respect to such
series (each, a "Trust"). The property of each Trust will include education
loans to students and parents of dependent students. Each Trust will be formed,
and each series of Certificates will be issued, pursuant to a Trust Agreement to
be entered into among the Registrant, an affiliate of the Registrant, and a
trustee to be specified in the prospectus supplement for such series of
Certificates. Each series of Notes will be issued pursuant to an Indenture
between the Registrant and a separate trustee to be specified in the prospectus
supplement for such series of Notes. We have advised the Registrant with
respect to certain federal income tax consequences of the proposed issuance of
the Securities. This advice is summarized under the headings "Summary of Terms
- -- Tax Considerations" and "Certain Federal Income Tax Consequences" in the
Prospectus relating to the Securities, all a part of the Registration Statement
on Form S-3 (the "Registration Statement") filed with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"), for the registration of the Securities under the Act. Such
description does not purport to discuss all possible federal income tax
ramifications of the proposed issuance, but with respect to those tax
consequences that are discussed, in our opinion, the description is accurate in
all material respects.
<PAGE>
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to a reference to this firm (as counsel to the
Registrant) under the headings "Summary of Terms -- Tax Considerations" and
"Legal Matters" in the Prospectus forming a part of the Registration Statement,
without implying or admitting that we are "experts" within the meaning of the
Act or the rules and regulations of the Commission issued thereunder, with
respect to any part of the Registration Statement, including this exhibit.
Very truly yours,
Brown & Wood, LLP
2
<PAGE>
EXHIBIT 8.2
[Letterhead of Krieg DeVault Alexander & Capehart]
April 21, 1997
USA Group Secondary Market Services, Inc.
8350 Craig Street
Indianapolis, Indiana 46250
Re: USA Group Secondary Market Services, Inc.
Registration Statement on Form S-3 (No. 333-23243)
Ladies and Gentlemen:
We have acted as special Indiana tax counsel to USA Group Secondary Market
Services, Inc., a Delaware corporation (the "Registrant"), in connection with
the issuance and sale of its Asset Backed Notes (the "Notes") and Asset Backed
Certificates (the "Certificates" and, together with the Notes, the
"Securities"), to be issued from time to time in one or more series. Each
series of Securities will be issued by a trust to be formed with respect to such
loans to students and parents of dependant students. Each Trust will be formed,
and each series of Certificates will be issues, pursuant to a Trust Agreement to
be entered into among the Registrant, an affiliate of the Registrant, and a
trustee to be specified in the prospectus supplement for such series of
Certificates. Each series of Notes will be issued pursuant to an Indenture
between the Registrant and a separate trustee to be specified in the prospectus
supplement for such series of Notes. We have advised the Registrant with
respect to certain federal income tax consequences of the proposed issuance of
the Securities. This advice is summarized under the headings "Summary of Terms
- -- Tax Considerations" and "Certain Indiana Income Tax Consequences" in the
Prospectus relating to the Securities, all a part of the Registration Statement
on Form S-3 (the "Registration Statement") filed with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"), for the registration of the Securities under the Act. Such
description does not purport to discuss all possible Indiana income tax
ramifications of the proposed issuance, but with respect to those tax
consequences that are discussed, in our opinion, the description is accurate in
all material respects.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to a reference to this firm (as counsel to the
Registrant) under the headings "Summary of Terms --Tax Considerations" and
"Legal Matters" in the Prospectus forming a part of the Registration Statement,
without implying or admitting that we are "experts" within the meaning of the
Act or the rules and regulations of the Commission issued thereunder, with
respect to any part of the Registration Statement, including this exhibit.
Very truly yours,
KRIEG DEVAULT ALEXANDER & CAPEHART
SS-114092-1
