As filed with the Securities and Exchange Commission on September 9, 1998
Registration No. 333-
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
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. REED D. AUERBACH, ESQ.
Krieg DeVault Alexander Stroock & Stroock & Lavan LLP
& Capehart 180 Maiden Lane
One Indiana Square New York, New York 10038
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
<TABLE>
<CAPTION>
==============================================================================================================
Proposed
Maximum Proposed
Amount Offering Price Maximum
Title of Each Class of to be Per Aggregate Amount of
Securities to be Registered Registered Unit(1) Offering Price(1) Registration Fee
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset-Backed Notes......................... $1,000,000.00 100.00% $1,000,000.00 $295.00
- --------------------------------------------------------------------------------------------------------------
Asset-Backed Certificates.................. $1,000,000.00 100.00% $1,000,000.00 $295.00
==============================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
-----------------
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.
<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 __________ 1998
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED _____________ 1998
SMS Student Loan Trust 199___-___
$____________ Floating Rate Asset Backed Senior Notes
--------------------
USA Group Secondary Market Services, Inc.
Seller
--------------------
The SMS Student Loan Trust 199___-___ (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 _________________________________, 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-16 and in the accompanying Prospectus at page 9.
(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 SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------
<PAGE>
Price to the Underwriting Proceeds to the
Public(1) Discount Seller(1)(2)
--------- -------- ------------
Per Senior Note................. __________% __________% _____________%
Total........................... $__________ $__________ $_____________
(1) Plus accrued interest, if any, from __________.
(2) Before deducting expenses payable by the Seller, estimated at
$_____________.
--------------------
The Senior Notes are offered by the several Underwriters when and if
issued by the Trust, delivered and accepted by them and subject to their
respective rights to reject orders in whole or in part. It is expected
that delivery of the Senior Notes in book-entry form will be made through
the facilities of The Depository Trust Company on the Same Day Funds
Settlement System and Cedel Bank, societe anonyme, and the Euroclear
System on or about __________.
The date of this Prospectus Supplement is ____________.
(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 ________________ (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
_______% 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. All of the Financed Student Loans will
be 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
S-2
<PAGE>
Depository Trust Company ("DTC") and registered holder of the Senior Notes, and
will not be sent to the beneficial owners of the Senior Notes. Beneficial owners
of Senior Notes will, however, be able to obtain such reports by requesting them
from the Indenture Trustee. Such reports will contain the information described
under "Description of the Transfer and Servicing Agreements--Statements to
Indenture Trustee and Trust" in the Prospectus. Such reports will not constitute
financial statements prepared in accordance with generally accepted accounting
principles. See "Certain Information Regarding the Securities--Book-Entry
Registration" and "--Reports to Securityholders" in the Prospectus. The Trust
will file with the Commission such periodic reports as are required under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations of the Commission thereunder. Copies of such periodic reports
may be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, DC 20549, at prescribed rates.
S-2
<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 199____-___ (the "Trust").
Securities Offered....... Floating Rate Asset Backed Senior Notes (the "Senior
Notes") in the aggregate principal amount of
$____________.
Persons acquiring beneficial ownership interests in
the Senior Notes will hold their interests in the
Senior Notes through The Depository Trust Company
("DTC") in the United States or in Europe, through
Cedel Bank, societe anonyme ("CEDEL"), or the
Euroclear System ("Euroclear"). Transfers within DTC,
CEDEL or Euroclear, as the case may be, will be made
in accordance with the usual rules and operating
procedures of the relevant system. Cross-market
transfers between persons holding directly or
indirectly through DTC, on the one hand, and
counterparties holding directly or indirectly through
CEDEL or Euroclear, on the other, will be effected in
DTC through Citibank, N.A. ("Citibank") or Morgan
Guaranty Trust Company of New York ("Morgan"), the
relevant depositaries (collectively, the
"Depositaries") of CEDEL or Euroclear, respectively,
and each a participating member of DTC. See
"Description of the Notes--Book-Entry Registration"
herein.
Securities Other Than
the Securities 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
offered hereby and the information herein with
respect thereto is provided only to permit a better
understanding 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.
Because 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
Student Loans on behalf of the Seller pursuant to a
Trust Agreement, dated as of ____________, between
NBD and the Seller (the "NBD Trust Agreement").
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................. ____________________________, a ____________________
non-profit corporation, as servicer (the "Servicer"
or "Loan Services") pursuant to a Servicing Agreement
to be dated as of _____________________ (as amended
and supplemented from time to time, the "Servicing
Agreement") among the Trust, the Servicer, the Seller
and the Eligible Lender Trustee. 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 Trustee.. ______________________________, a national banking
association, as trustee under the Trust Agreement and
holder of legal title to the Financed Student 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........ ___________________________ a _________________
banking corporation (the "Indenture Trustee"), as
trustee under the Indenture.
S-3
<PAGE>
Administrator............ ________________, as administrator (the
"Administrator") on behalf of the Trust, pursuant to
an Administration Agreement to be dated as of
__________________ (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
Delaware by a Trust Agreement to be dated as of
__________________ (as amended and supplemented from
time to time, the "Trust Agreement"), among the
Seller, __________________ (the "Company"), a limited
purpose Delaware corporation which is an affiliate of
the Seller, and the Eligible Lender Trustee. The
activities of the Trust and the Eligible Lender
Trustee are limited by the terms of the Trust
Agreement 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 __________________ (the "Closing Date"), the
Seller will sell Student Loans (the "Initial Financed
Student Loans") having an aggregate principal balance
of approximately $_____________ (the "Initial Pool
Balance") as of ___________________ (the "Cutoff
Date"), to the Eligible Lender Trustee on behalf of
the Trust pursuant to a Loan Sale Agreement to be
dated as of _________________ (as amended and
supplemented from time to time, the "Loan Sale
Agreement"), among the Seller, the Trust and the
Eligible Lender Trustee. 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 of Serial Loans (described below) continuing
after the Revolving Period, it is anticipated that,
subject to certain conditions described herein,
additional Student Loans (the "Additional Student
Loans," and together with the Initial Financed
Student 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
"Department"). 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
several Federal Guarantors, including ICSAC. An
Additional Student Loan may be guaranteed, to the
extent described herein, by a Federal Guarantor other
than an Initial Guarantor (each an "Additional
Guarantor", collectively, the "Additional Guarantors"
and, together with the Initial Guarantors, the
"Guarantors") provided certain conditions are met.
See "The 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 Payments. 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.
S-4
<PAGE>
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
(exclusive of any future deferral or forbearance
periods and assuming expected graduation dates and
typical 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
Initial Financed Student Loans was approximately
______ months. As of the Cutoff Date, approximately
______%, _______%, ______% and ________% of the
outstanding principal balance of the Initial Financed
Student Loans consisted 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 and ____%
by principal balance of the Initial Financed Student
Loans are guaranteed by ICSAC, and all of the
Financed Student Loans are reinsured by the
Department, in each case, to the extent described
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
Agreements--Revolving Period and Additional Fundings"
or (ii) the last day of the Collection Period
preceding the ______________ Quarterly Payment Date,
the Eligible Lender Trustee on behalf of the Trust
will be obligated from time to time, subject to
certain conditions described herein, to purchase from
the 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"). "Collection Period" means each period of
three calendar months from and including the date
next following the end of the preceding Collection
Period (or with respect to the first Collection
Period, the period beginning on the Cutoff Date and
ending on _____________). 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 (each a "Transfer Agreement")
between the Seller, the Trust and the Eligible Lender
Trustee. During the Revolving Period, each purchase
of a New Loan will be funded by means of a transfer
from the Collateral Reinvestment Account of an amount
equal to the sum of (i) the principal balance owed by
the applicable borrower thereon plus accrued interest
thereon expected to be capitalized upon repayment
(the "Purchase Collateral Balance") and (ii) an
additional amount not to exceed ____% of the
principal balance owed by the applicable borrower
thereon (the "Purchase Premium Amount" and together
with the Purchase Collateral Balance, the "Loan
Purchase Amount"). The purchase of New Loans by the
Trust will be subject to the availability of funds
therefor in the Collateral Reinvestment Account.
Following the end of the Revolving Period, New Loans
may not be purchased by the Trust. See "Description
of the Transfer and Servicing Agreements--Revolving
Period and Additional Fundings" herein.
In addition, following the Closing Date and both
during and subsequent to the Revolving Period, the
Eligible Lender Trustee on behalf of the Trust will
be obligated from time to time, subject to certain
conditions described under "The Financed Student Loan
Pool" and "Description of the Transfer and Servicing
Agreements--Revolving Period and Additional Fundings"
herein, to purchase from the Seller, subject to the
availability thereof, 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. Each such purchase of a
Serial Loan will be made by the Eligible Lender
Trustee on behalf of the Trust pursuant to a Transfer
S-5
<PAGE>
Agreement. During the Revolving Period, each purchase
of a Serial Loan will be funded by means of a
transfer from the Collateral Reinvestment Account of
an amount equal to the Loan Purchase Amount of such
loan. Following the end of the Revolving Period, the
Purchase Collateral Balance for such purchases will
be funded by amounts representing distributions of
principal on the outstanding 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
option, following the end of the Revolving Period,
the Eligible Lender Trustee will, in lieu of
purchasing Serial Loans as described above, be
obligated to exchange with the 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 herein. See "Description of the Transfer
and Servicing Agreements--Revolving Period and
Additional Fundings" herein.
In addition, following the Closing Date and prior to
the end of the Revolving Period, in the event that a
borrower on a 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 discharged
in the consolidation process, which amount will be
paid by the Eligible Lender Trustee on behalf of the
Trust to the holder or holders of such Student Loans
to prepay such loans. No assurance can be given that
the 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.
Asdescribed 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
S-6
<PAGE>
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 qualifying
periods, interest on certain of the Financed Student
Loans is not required to be paid currently, but
instead is added to the outstanding principal balance
of the loan at the end of the qualifying period. In
order to minimize the possibility that the failure to
receive current interest payments on such loans
during such periods will result in a shortfall in the
amount required to be distributed on the Notes,
amounts on deposit in the Collateral Reinvestment
Account will be transferred during the Revolving
Period to make deposits to the Collection Account in
lieu of current interest payments on such loans as
described herein under "Description of the Transfer
and Servicing Agreements--Revolving Period and
Additional Fundings". Following the end of the
Revolving Period, the Collateral Reinvestment Account
will cease to be available as a source to fund such
interest payments to Noteholders and thereafter such
payments will be funded through the application of
amounts which would otherwise have been distributable
in respect of the Principal Distribution Amount for
the related Quarterly Payment Date, as described
herein under "Description of the Transfer and
Servicing Agreements--Distributions".
The application, during the Revolving Period, of
amounts in the Collateral Reinvestment Account (i) by
the Eligible Lender Trustee on behalf of the Trust to
purchase New Loans or Serial Loans, (ii) by the
Eligible Lender Trustee on behalf of the Trust to
fund the origination of Federal Consolidation Loans,
(iii) by the Eligible Lender Trustee on behalf 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
collections of interest on Financed Student Loans to
the extent such interest is not paid currently but
will be capitalized and added to the principal
balance of the Financed Student Loans, and the
application, 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 Consolidation Loans
and (iii) by the Trust to apply amounts that would
otherwise have been distributable in respect of the
Principal Distribution Amount for the related
Quarterly Payment Date to payments, in lieu of
collections, of interest on Financed Student Loans to
the extent such interest is not paid currently but
will be capitalized and added to the principal
balance of the Financed Student Loans, is referred to
herein as "Additional Fundings".
S-7
<PAGE>
B. Collateral Reinvestment
Account.............. During the Revolving Period, an account will be
maintained in the name of the Indenture Trustee (the
"Collateral Reinvestment Account"). No money will be
on deposit in the Collateral Reinvestment Account on
the Closing Date. During the Revolving Period,
deposits will be made to the Collateral Reinvestment
Account as described herein under "Description of the
Transfer and Servicing Agreements--Distributions" and
withdrawals will be made from time to time for
Additional Fundings in accordance with the Loan Sale
Agreement. Any amount remaining on deposit in the
Collateral Reinvestment Account at the end of the
Revolving Period will be distributed to Noteholders
on the next succeeding Quarterly Payment Date as a
payment of principal. Any such principal payments
shall be distributed first to the Senior Noteholders
until the Senior Notes have been paid in full, and
then to the Subordinate Noteholders until the
Subordinate Notes have been paid in full. See
"Description of the Transfer and Servicing
Agreements--Revolving Period and Additional Fundings"
herein.
C. Collection Account... The Servicer will be required to remit all
collections received with respect to the Financed
Student Loans, and the Eligible Lender Trustee will
be required to remit Interest Subsidy Payments and
Special Allowance Payments it receives with respect
to the 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
Administrator will have the power to instruct the
Indenture Trustee to withdraw Available Funds on
deposit in the Collection Account and to apply such
funds (a) on any date during the Revolving Period, to
the extent that such funds represent payments in
respect of principal on the Financed Student Loans,
to the Collateral Reinvestment Account for
application to make Additional Fundings, (b) on each
Monthly Payment Date that is not a Quarterly Payment
Date to the following (in the priority indicated):
(i) the Servicing Fee and all overdue Servicing Fees
to the Servicer and (ii) the Administration Fee and
all overdue Administration Fees to the Administrator
and (c) on each Quarterly Payment Date to the
following (in the priority indicated): (i) the
Servicing Fee and all overdue Servicing Fees to the
Servicer; (ii) the Administration Fee and all overdue
Administration Fees to the Administrator; (iii) the
Senior Noteholders' Interest Distribution Amount to
the Senior Noteholders; (iv) the Subordinate
Noteholders' Interest Distribution Amount to the
Subordinate Noteholders; (v) if the Revolving Period
has terminated, the Senior Noteholders' Principal
Distribution Amount to the Senior Noteholders ; (vi)
if the Revolving Period has terminated and 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 ________________.
D. Reserve Account...... Pursuant to the Administration Agreement, an account
in the name of the Indenture Trustee (the "Reserve
Account") will be established and maintained by the
Administrator with the Indenture Trustee and will be
an asset of the Trust. The Seller will make an
initial deposit into the Reserve Account on the
Closing Date of cash or Eligible Investments equal to
$________________ (the "Reserve Account Initial
Deposit"). The Reserve Account Initial Deposit will
be augmented on each Quarterly Payment Date by the
deposit into the Reserve Account of any Available
Funds for such Quarterly Payment Date remaining after
making all prior distributions required to be made
from Available Funds on such date. See "Description
of the Transfer and Servicing
Agreements--Distributions" herein.
Amounts in the Reserve Account on any Quarterly
Payment Date (after giving effect to all
distributions required to be made from Available
Funds on such Quarterly Payment Date) in excess of
the Specified Reserve Account Balance for such
Quarterly Payment Date (the "Reserve Account Excess")
will be applied (a) during the Revolving Period, for
deposit to the Collateral Reinvestment Account;
provided, however, if such date is on or after the
Parity Date (as defined below), to the extent that
such funds represent payments of interest with
respect to the Financed Student Loans, such funds
shall be
S-8
<PAGE>
applied in the order of priority set forth in clauses
(b)(iii) through (vi) below, and (b) at and after the
termination of the Revolving Period, to the following
(in the priority indicated): (i) any unpaid Purchase
Premium Amounts for any Serial Loans purchased by the
Trust prior to the end of the related Collection
Period to the Seller; (ii) if such Quarterly Payment
Date is on or prior to the Parity Date, payment of
the unpaid principal amount of the Senior Notes or,
if the Senior Notes have been paid in full, of the
Subordinate Notes, until the aggregate principal
balance of the Notes is equal to the Pool Balance as
of the close of business on the last day of the
related Collection Period; (iii) the aggregate unpaid
amount of Senior Noteholders' Interest T-Bill
Carryover, if any, to the Senior Noteholders; (iv)
the aggregate unpaid amount of Subordinate
Noteholders' Interest T-Bill Carryover, if any, to
the Subordinate 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--Risk
Resulting From Excess of Principal Balance of Notes
over Pool Balance" herein. The "Parity Date" is the
first Quarterly Payment Date on which the aggregate
principal balance of the Notes, after giving effect
to all distributions on such date, is no longer in
excess of the Pool Balance as of the last day of the
related Collection Period. As described in the first
sentence of this paragraph, if at the termination of
the Revolving Period the Parity Date has not yet
occurred, (i) all Reserve Account Excess, if any, for
each succeeding Quarterly Payment Date will, after
payment to the Seller of any unpaid Purchase Premium
Amounts for any Serial Loans purchased by the Trust
prior to the end of the related Collection Period, be
applied to pay principal of the Notes until the
Parity Date, (ii) on the Parity Date only such
portion of the Reserve Account Excess remaining after
payment of any such unpaid Purchase Premium Amounts
as is necessary to reduce the aggregate principal
balance of the Notes so that it is equal to the Pool
Balance will be applied to pay principal of the
Notes, and (iii) after the Parity Date no portion of
the Reserve Account Excess will be available to pay
principal of the Notes. Moreover, as further
described in the first sentence of this paragraph, if
at the termination of the Revolving Period the Parity
Date has previously occurred, no portion of Reserve
Account Excess will at any time be available to pay
principal of the Notes; and regardless of whether the
Parity Date occurs before or after the termination of
the Revolving Period, no funds will be applied to the
payment of any Senior Noteholders' Interest T-Bill
Carryover or Subordinate Noteholders' Interest T-Bill
Carryover until the Parity Date, and on and after the
Parity Date application of funds for such purposes
will be subject to the availability of Reserve
Account Excess therefor.
The "Specified Reserve Account Balance" with respect
to any Quarterly Payment Date generally will be equal
to the greater of (i) ________% of the aggregate
principal balance of the Notes after taking into
account the effect of distributions on such Quarterly
Payment Date, or (ii) $_____________; provided,
however, that the Specified Reserve Account Balance
shall in no event exceed the sum of the outstanding
principal balance of the Notes. See "Description of
the Transfer and Servicing Agreements--Credit
Enhancement--Reserve Account" herein and "Description
of the Transfer and Servicing Agreements--Credit and
Cash Flow Enhancement--Reserve Account" in the
Prospectus.
Amounts on deposit in the Reserve Account will be
available (a) on each Monthly Payment Date that is
not a Quarterly Payment Date, to cover any shortfalls
(in the priority indicated) in payments for such
Monthly Payment Date of: (i) the Servicing Fee and
all overdue Servicing Fees and (ii) the
Administration Fee and all overdue Administration
Fees, in each case, for which Monthly Available Funds
for such Monthly Payment Date are insufficient to
make such payments and (b) on each Quarterly Payment
Date to cover any shortfalls (in the priority
indicated) in payments for such Quarterly Payment
Date of: (i) the Servicing Fee and all overdue
Servicing Fees; (ii) the Administration Fee and all
overdue Administration Fees; (iii) the Senior
Noteholders' Interest Distribution Amount; (iv) the
Subordinate Noteholders' Interest Distribution
Amount; (v) if the Revolving Period has terminated,
the Senior Noteholders' Principal Distribution
Amount; and (vi) if the Revolving Period has
terminated, the Subordinate Noteholders' Principal
Distribution Amount, in
S-9
<PAGE>
each case, for which Available Funds for such
Quarterly Payment Date are insufficient to make such
payments and distributions. Amounts on deposit in the
Reserve Account (other than any Reserve Account
Excess) will not be available to cover any unpaid
Purchase Premium Amount, Senior Noteholders' Interest
T-Bill Carryover, Subordinate Noteholders' Interest
T-Bill Carryover, Servicing Fee Shortfall and prior
unpaid Servicing Fee Shortfalls or (except in the
case of shortfalls in the Senior Noteholders'
Principal Distribution Amount or the Subordinate
Noteholders' Principal Distribution Amount as
indicated in the preceding sentence) to make
principal payments on the Notes.
The funding and maintenance of the Reserve Account is
intended to enhance the likelihood of timely payment
to the Senior Noteholders on each Quarterly Payment
Date of the Senior Noteholders' Interest Distribution
Amount and to the Subordinate Noteholders on each
Quarterly Payment Date of the Subordinate
Noteholders' Interest Distribution Amount, and on
each Quarterly Payment Date at and after the
termination of the Revolving Period of the Senior
Noteholders' Principal Distribution Amount to the
Senior Noteholders and, after the Senior Notes have
been paid in full, of the Subordinate Noteholders'
Principal Distribution Amount to the Subordinate
Noteholders. In certain circumstances, however, the
Reserve Account could be depleted and shortfalls in
distributions and resulting losses to the Noteholders
could occur.
E. The Transfer and
Servicing Agreements.. Under the Loan Sale Agreement, the Seller will sell
the Financed Student Loans to the Trust, with the
Eligible Lender Trustee holding legal title thereto.
Under the Servicing Agreement, the Servicer will
agree with the Trust to be responsible for servicing,
managing, maintaining custody of and making
collections on the Financed Student Loans.
Under the Loan Sale Agreement, the Seller will be
obligated to repurchase or, in the alternative,
substitute an eligible Student Loan for, and under
the Servicing Agreement, the Servicer (subject to the
limitations described under "Risk Factors--Maturity
and Prepayment Considerations" herein) will be
obligated to purchase, any Financed Student Loan if
the interests of the Noteholders therein are
materially adversely affected by a breach of any
representation, warranty or covenant (including the
Servicer's covenant to service all the 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 Student Loan, if the breach has not been
cured following the discovery by or notice to the
Seller or the Servicer, as the case may be, of the
breach (it being understood that any such breach that
does not affect a Guarantor's obligation to guarantee
payment of such Financed Student Loan will not be
considered to have a material adverse effect for this
purpose). In addition, the Seller will be obligated
to reimburse the Trust with respect to a 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 similar obligation to reimburse the
Trust for non-guaranteed interest amounts or lost
Interest Subsidy Payments or Special Allowance
Payments which result from a breach of its
representations and warranties with respect to the
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
"Servicing Fee") with respect to each Financed
Student Loan calculated as described under
"Description of the Transfer and Servicing
Agreements--Servicing Compensation; Administration
Fee". The Servicing Fee will be payable from (i) in
the case of each Monthly Payment Date that is not a
Quarterly Payment Date, Monthly Available Funds and
(ii) in the case of each Quarterly Payment Date,
Available Funds, in each case on deposit in the
Collection Account and, if such amounts are
insufficient, from amounts on deposit in the Reserve
Account. The Servicer will also receive amounts
related to any Servicing Fee Shortfall, as defined
S-10
<PAGE>
herein, on each Quarterly Payment Date. Such amounts
will be payable only from any Reserve Account Excess
available on such Quarterly Payment Date after all
other amounts required to be paid from such excess
have been paid. See "Description of the Transfer and
Servicing Agreements--Credit Enhancement--Reserve
Fund". The Servicer will be obligated to perform its
servicing obligations whether or not it receives any
amounts in respect of Servicing Fee Shortfalls.
Pursuant to the Administration Agreement, the
Administrator will agree with the Trust to be
responsible for, among other things, preparing and
filing with the Department all appropriate claims
forms and other documents and filings on behalf of
the Eligible Lender Trustee in order to claim the
Interest Subsidy Payments and Special Allowance
Payments from the Department in respect of the
Financed Student Loans entitled thereto and preparing
and providing monthly, quarterly and annual
statements to the Indenture Trustee with respect to
distributions to Noteholders.
As compensation for the performance of the
Administrator's obligations under the Administration
Agreement and as reimbursement for its expenses
related thereto, the Administrator will be entitled
to receive a monthly administration fee (the
"Administration Fee') payable as provided herein on
each Monthly Payment Date in an amount equal to
one-twelfth of the product of (i) ______% and (ii)
the Pool Balance as of the close of business on the
last day of the calendar month immediately preceding
such Monthly Payment Date.
The Notes................ The Trust will issue the Notes pursuant to an
indenture to be dated as of ________________ (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 Subordinate Notes will equal
$________________ and $_______________, respectively.
A. Interest............ The Notes will bear interest during each Quarterly
Interest Period at the respective rates per annum,
except as described below (the "Senior Note Rate" or
the "Subordinate Note Rate" and, collectively, the
"Note Rates"), equal to the weighted average of the
T-Bill Rates within such Quarterly Interest Period
(determined as described herein) plus ______%, in the
case of the Senior Notes (the "Senior Note T-Bill
Rate"), and plus ______%, in the case of the
Subordinate Notes (the "Subordinate Note T-Bill Rate"
and, together with the Senior Note T-Bill Rate, the
"Note T-Bill Rates"). Each Note T-Bill Rate will be
adjusted weekly on the calendar day following each
auction of 91-day Treasury Bills, except that (i)
each Note Rate in effect from the first day of each
Quarterly Interest Period, including the initial
Quarterly Interest Period, through the day of the
first 91-day Treasury Bill auction on or after the
first day of each Quarterly Interest Period will be
based on the results of the most recent 91-day
Treasury Bill auction prior to such day and (ii) each
Note Rate will be subject to a Lock-In Period of six
business days preceding each Quarterly Payment Date.
See "Description of the Notes--Determination of
T-Bill Rates". Interest on the outstanding principal
amount of each class of Notes will accrue from and
including the 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"),
commencing __________________, to holders of record
of the Senior Notes (the "Senior Noteholders") and
the Subordinate Notes (the "Subordinate Noteholders"
and, together with the Senior Noteholders, the
"Noteholders") on the related Record Date. "Record
Date" means, with respect to any Quarterly Payment
Date, the 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
divided by 365 (or 366 in the case of a leap year).
Notwithstanding the foregoing, if either Note Rate
for any Quarterly Interest Period (after the first
Quarterly Interest Period) calculated on the basis of
the applicable Note T-Bill Rate is greater than the
Student Loan Rate for such Quarterly Interest Period,
then such Note Rate for the applicable Quarterly
S-11
<PAGE>
Payment Date will be the Student Loan Rate. The
"Student Loan Rate" for any Quarterly Interest Period
will equal the product of (a) the quotient obtained
by dividing (i) 365 (or 366 in the case of a leap
year) by (ii) the actual number of days elapsed in
such Quarterly Interest Period and (b) the percentage
equivalent of a fraction, (i) the numerator of which
is equal to Expected Interest Collections for such
Quarterly Interest Period less the Servicing Fee and
the Administration Fee with respect to such period
and (ii) the denominator of which is the aggregate
principal balance of the Notes as of the last day of
such Quarterly Interest Period. "Expected Interest
Collections" means, with respect to any Quarterly
Interest Period, the sum of (i) the amount of
interest accrued, net of any accrued Monthly Rebate
Fees and other amounts required by the Act to be paid
to the Department (as described under "Risk
Factors--Fees Payable on Certain Financed 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 estimated to have
accrued for the applicable Student Loan Rate Accrual
Period whether or not actually received (after taking
into account any expected deduction therefrom of the
Federal Origination Fee described under "Risk
Factors--Fees Payable on Certain Financed Student
Loans" herein) and (iii) Investment Earnings (as
defined in "Description of the Transfer and Servicing
Agreements--Accounts" in the Prospectus) for the
applicable Student Loan Rate Accrual Period.
If either Note Rate for any Quarterly Payment Date is
based on the Student Loan Rate, the excess of (a) the
amount of interest on the related Notes that would
have accrued in respect of the related Quarterly
Interest Period had interest been calculated based on
the related Note T-Bill Rate over (b) the amount of
interest on the related Notes actually accrued in
respect of such Quarterly Interest Period based on
the Student Loan Rate (such excess, together with the
unpaid portion of any such excess from prior
Quarterly Payment Dates (and interest accrued thereon
at the applicable Note Rate calculated based on the
related Note T-Bill Rate) is referred to as the
"Senior Noteholders' Interest T-Bill Carryover", in
the case of the Senior Notes and the "Subordinate
Noteholders' Interest T-Bill Carryover", in the case
of the Subordinate Notes) will be payable on the
Quarterly Payment Date when incurred or on any
subsequent Quarterly Payment Date to the extent funds
are available therefor out of the amount of Reserve
Account Excess, if any, for such Quarterly Payment
Date after making all required prior distributions
therefrom on such date (including, in the case of the
Subordinate Noteholders' Interest T-Bill Carryover,
after paying any Senior Noteholders' Interest T-Bill
Carryover for such date) as described herein under
"Description of the Transfer and Servicing
Agreements--Credit Enhancement--Reserve Account".
Among other things, as described under such heading,
no Senior Noteholders' Interest T-Bill Carryover or
Subordinate Noteholders' Interest T-Bill Carryover
will be paid until the Parity Date. The rating of the
Notes does not address the likelihood of the payment
of any Senior Noteholders' Interest T-Bill Carryover
or Subordinate Noteholders' Interest T-Bill
Carryover, as the case may be.
B. Principal........... No principal will be payable on the Notes prior to
the end of the Revolving Period. Principal of the
Notes will be payable on each Quarterly Payment Date
at and after the termination of the Revolving Period
in an amount generally equal to the Principal
Distribution Amount for such Quarterly Payment Date.
The "Principal Distribution Amount" at and after the
termination of the Revolving Period generally will be
equal to the amount of principal paid or, in certain
cases, due to be paid with respect to the Financed
Student Loans (including any realized losses thereon)
during the related Collection Period less the sum of
(i) any such amount applied by the Eligible Lender
Trustee on behalf of the Trust during such Collection
Period to purchase Serial Loans, as described herein,
(ii) for a maximum period of 210 days following the
end of the Revolving Period, any such amount applied
by the Eligible Lender Trustee on behalf of the Trust
during such Collection Period to fund the addition of
any Add-on Consolidation Loans and (iii) accrued and
unpaid interest on the Financed Student Loans for
such Collection Period to the extent such interest
will be capitalized and added to the principal
balance of such Financed Student Loans, upon the
commencement of repayment of such Financed Student
Loans,
S-12
<PAGE>
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
payment to the Seller of any unpaid Purchase Premium
Amounts for any Serial Loans purchased by the Trust
prior to the end of the related Collection Period, be
applied, as described herein, to the unpaid principal
balance of the Senior Notes or, if the Senior Notes
have been paid in full, the Subordinate Notes.
On each Quarterly Payment Date the aggregate amount
distributable as principal to the Notes shall be
applied first, to the Senior Notes until the
aggregate principal balance thereof has been reduced
to zero and then to the Subordinate Notes until the
aggregate principal balance thereof has been reduced
to zero.
The outstanding principal amount, if any, of the
Senior Notes will be payable in full on the
_________________ Quarterly Payment Date (the "Senior
Note Final Maturity Date") and the outstanding
principal amount of the Subordinate Notes will be
payable in full on the ___________________ Quarterly
Payment Date (the "Subordinate Note Final Maturity
Date"). However, the actual maturity of the Notes
could occur other than on such dates as a result of a
variety of factors including prepayments of the
Financed Student Loans. See "Risk Factors--Maturity
and Prepayment Considerations" herein.
C. Mandatory Redemption If any amount remains on deposit in the Collateral
Reinvestment Account on the last day of the Revolving
Period after giving effect to all Additional Fundings
to be made on or prior to such date, such amount will
be used on the Quarterly Payment Date on or
immediately following such date to redeem the Senior
Notes until the aggregate principal balance thereof
has been reduced to zero, and then to redeem the
Subordinate Notes until the aggregate principal
balance thereof has been reduced to zero. The
aggregate amount of the Notes to be redeemed will be
an amount equal to the amount on deposit in the
Collateral Reinvestment Account.
D. Subordination...... The rights of the Subordinate Noteholders to receive
payments of interest will be subordinate to the
rights of the Senior Noteholders to receive payments
of interest and the rights of the Subordinate
Noteholders to receive payments of principal will be
subordinate to the rights of the Senior Noteholders
to receive payments of interest and principal to the
extent described herein. See "Risk
Factors--Subordination; Limited Assets" and
"Description of the Transfer and Servicing
Agreements--Credit Enhancement--Subordination of the
Subordinate Notes" herein.
Auction of Trust Assets.. Any Financed Student Loans remaining in the Trust as
of the end of the Collection Period immediately
preceding the ______________ Quarterly Payment Date
will be offered for sale by the Indenture Trustee.
The Seller, its affiliates and unrelated third
parties may offer bids to purchase such 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 immediately preceding such
Quarterly Payment Date or (y) an amount that would be
sufficient to (i) reduce the outstanding principal
amount of the Notes on such Quarterly Payment Date to
zero and (ii) pay to the Noteholders the Noteholders'
Interest Distribution Amount payable on such
Quarterly Payment Date (the "Minimum Purchase
Price"). If at least two bids are not received or the
highest bid is not equal to or in excess of the
Minimum Purchase Price, the Indenture Trustee will
not consummate such sale. The proceeds of any such
sale will be used to redeem any outstanding Notes on
such Quarterly Payment Date. If the sale is not
consummated in accordance with the foregoing, the
Indenture Trustee may, but shall not be under any
obligation to, solicit bids for sale of the Financed
Student Loans on future Quarterly Payment
S-13
<PAGE>
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 ______________ 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
borrower 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 ___% or less of
the aggregate initial principal balance of the Notes,
at a price equal to the aggregate Purchase Amounts
for such Financed 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 Agreements--Termination--Optional
Redemption" in the Prospectus.
The "Pool Balance" at any time represents the
aggregate principal balance of the Financed Student
Loans at the end of the preceding Collection Period
(including accrued interest thereon through the end
of such Collection Period to the extent such interest
will be capitalized upon commencement of repayment),
after giving effect to the following, without
duplication: (i) all payments received by the Trust
during such Collection Period from or on behalf of
borrowers, the Guarantors and, with respect to
certain payments on certain Financed Student Loans,
the Department (collectively, "Obligors"), (ii) all
Purchase Amounts received by the Trust for such
Collection Period from the Seller or the Servicer,
(iii) all Additional Fundings made with respect to
such Collection Period, and (iv) all losses realized
on Financed Student Loans liquidated during such
Collection Period.
Tax Considerations....... Stroock & Stroock & Lavan LLP, special federal tax
counsel for the Trust and counsel to the Underwriters
("Special Federal Tax Counsel"), is of the opinion
that, although there is no specific authority with
respect to the characterization for federal or
Indiana income tax purposes of securities having the
same terms as the Senior Notes, the Senior Notes will
be characterized as debt for federal income tax
purposes, and Krieg DeVault Alexander & Capehart,
special state tax counsel for the Trust, is of the
opinion that the Senior Notes will be characterized
as debt for Indiana state income tax purposes.
In the opinion of Special Federal Tax Counsel, for
federal income tax purposes the Trust will not be
characterized as an association (or publicly traded
partnership) taxable as a corporation. The 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 characterizations are
possible, but would not result in materially adverse
federal income tax consequences to the Senior
Noteholders. In the opinion of special state tax
counsel for the Trust, the same characterizations
would apply for Indiana state income tax purposes as
for federal income tax purposes. However, there are
no cases or rulings on similar transactions involving
a trust that issues debt interests with terms similar
to those of the Senior Notes.
Finally, Senior Noteholders may be required to accrue
any Senior Noteholders' Interest Carryover in income
in advance of the receipt of cash with respect to
such amounts regardless of whether such Senior
Noteholders are on the cash or accrual methods of
accounting.
See "Certain Federal Income Tax and State Tax
Consequences" herein and "Certain Federal Income Tax
Consequences" and "Certain State Tax Consequences" in
the Prospectus for additional information concerning
the application of federal and Indiana state tax laws
with respect to the Senior Notes.
S-14
<PAGE>
ERISA Considerations..... Subject to the considerations discussed under "ERISA
Considerations" herein and "ERISA Considerations--The
Notes" in the Prospectus, the Senior Notes are
eligible for purchase by employee benefit plans.
Rating of the Securities. It is a condition to the issuance and sale of the
Senior Notes that the Senior Notes be rated in the
highest investment rating category by at least two
nationally recognized rating agencies and that the
Subordinate Notes be rated in the "BBB" or equivalent
rating category by at least two such rating agencies.
A rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or
withdrawal at any time by the assigning rating
agency. The rating agencies do not evaluate, and the
ratings of the Senior Notes do not address, the
likelihood of payment of the Senior Noteholders'
Interest T-Bill Carryover or the Subordinate
Noteholders' Interest T-Bill Carryover. There can be
no assurance as to whether any additional rating
agency will rate the Senior Notes or the Subordinate
Notes, or if one does, what rating would be assigned
by such other rating agency.
S-15
<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 Underwriters currently intend, but are 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 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
S-16
<PAGE>
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 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 ______________ 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
S-17
<PAGE>
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, 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 April 1, 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
S-18
<PAGE>
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 Balance is less than or equal to ____% 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 _____________ 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 _____________ 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 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
S-19
<PAGE>
Senior Noteholders generally bear the risk of principal prepayments as a result
of any mandatory redemption from amounts on deposit in the Collateral
Reinvestment Account at the end of Revolving Period or of such redemption
occurring prior to the scheduled end of the Revolving Period on the last day of
the Collection Period preceding the Quarterly Payment Date occurring in
_________________ due to an Early Amortization Event. On the other hand,
Subordinate Noteholders bear a greater risk of loss of principal than do Senior
Noteholders in the event of a shortfall in Available Funds and amounts on
deposit in the Reserve Account because the Subordinate Notes do not receive
principal distributions until the Senior Notes are paid in full.
Basis Risk. 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% 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 ______%
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 _____% 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-Emergency Student Loan Consolidation Act of 1997. On
November 13, 1997, President Clinton signed into law the Emergency Student Loan
Consolidation Act of 1997, which made significant changes to the Federal
Consolidation Loan program. These
S-20
<PAGE>
changes include: (1) providing that federal direct student loans are eligible to
be included in a Federal Consolidation Loan; (2) changing the borrower interest
rate on new Federal Consolidation Loans (previously a fixed rate based on the
weighted average of the loans consolidated, rounded up to the nearest whole
percent) to the annually variable rate applicable to Stafford Loans (i.e., the
bond equivalent rate at the last auction in May of 91-day Treasury Bills plus
3.10%, not to exceed 8.25% per annum); (3) providing that the portion of a
Federal Consolidated Loan that is comprised of Subsidized Stafford Loans retains
its subsidy benefits during periods of deferment; and (4) establishing
prohibitions against various forms of discrimination in the making of
Consolidation Loans. Except for the last of the above changes, all such
provisions expire on September 30, 1998. The combination of the change to a
variable rate and the 8.25% interest cap reduces the lender's yield in most
cases below the rate that would have been applicable under the previous weighted
average formula.
Recent Developments--Changes in Formulas for Determining Certain Interest
Rates and Special Allowance Payments. The formulas for determining the interest
rates on Stafford Loans and PLUS Loans and the formula for determining Special
Allowance Payments will change for loans disbursed on and after July 1, 1998.
The Act currently provides that Stafford Loans disbursed on or after July 1,
1998 will bear interest at the bond equivalent yield of a security of comparable
maturity as established by the Secretary of Education (the "Secretary") plus 1%,
not to exceed 8.25% per annum, regardless of payment status, and PLUS Loans
disbursed on or after July 1, 1998 will bear interest at the bond equivalent
yield of a security of a comparable maturity as established by the Secretary
plus 2.1%, not to exceed 9% per annum. In addition, for loans disbursed on or
after July 1, 1998, Special Allowance Payments for all loans (including PLUS
Loans) will be based on the bond equivalent yield of a security of comparable
maturity established by the Secretary plus 1%. Various proposals are being
considered by Congress to repeal or amend the new formulas for determining the
interest rates and Special Allowance Payment rates before the July 1, 1998
effective date. Such proposals could result in, among other things: (i) the
current Treasury Bill formula being maintained, with reductions in the
applicable margins (currently a bipartisan compromise proposal that would cut
lenders' yields by 0.3% has been opposed by the Administration which is seeking
a substantially larger reduction), or (ii) the adoption of a new formula based
upon an alternate short-term market index. Because it is not yet clear how the
student loan interest rate issue will be resolved, the Trust will not purchase
any Student Loan originated after June 30, 1998 (unless such Student Loans would
be Serial Loans) unless the Trust, the Indenture Trustee and the Subordinate
Note Insurer first receive confirmation in writing from each of the Rating
Agencies that such purchase would not adversely affect the ratings assigned by
such Rating Agency to the Notes, without regard to the Subordinate Note
Insurance Policy. See "--Maturity and Prepayment Considerations" above for a
discussion of certain consequences to Noteholders in the event that, as a result
of such limitation, the Trust is unable to fully apply amounts in the Collateral
Reinvestment Account to make Additional Fundings.
Recent Developments--FY 1998 Budget. In the 1997 Budget Reconciliation Act
(P.L. 105-33), several changes were made to the Act impacting the FFELP. These
provisions include, among other things, requiring Federal Guarantors to return
$1 billion of their reserves to the U.S. Treasury by September 1, 2002 (to be
paid in annual installments), greater restrictions on use of reserves by Federal
Guarantors and a continuation of the Administrative Cost Allowance payable to
Federal Guarantors (which is a fee paid to Guarantors equal to 0.85% of new
loans guaranteed). While the Administration had proposed additional provisions,
including increased lender risk-sharing, yield reductions through decreased
borrower interest rates, greater risk-sharing by Federal Guarantors, reduced
retention rates on post-default payments and implementation of a
performance-based contract system for Federal Guarantors, those provisions were
not enacted. However, many of those same proposals have been made by the
Administration during subsequent federal budget discussions and as part of the
reauthorization process of the Act. No assurance can be given that similar
proposals will not be included in future budget or the pending reauthorization
legislation.
Recent Developments--President Clinton's Proposed FY 1999 Budget. In his
proposed budget for fiscal year 1999, President Clinton has again proposed a
number of changes to the Act that would affect lenders and Federal Guarantors.
These proposals would, among other things, require all reserves by Federal
Guarantors to be returned, impose a performance-based lender payment to guaranty
agencies tied to the agency's success in bringing delinquent borrowers current,
replace the current Administrative Cost Allowance paid to guaranty agencies with
a performance-based fee and reduce retention on default collections by Federal
Guarantors from 27% to 18.5%. In addition, Student Loans would no longer be
dischargeable in bankruptcy under any circumstances. Many of these proposals are
included in the Administration's recommendations to Congress related to the 1998
reauthorization of the Act.
Recent Developments--1998 Reauthorization. The Act is expected to be
reauthorized during calendar year 1998. Numerous proposals from the
Administration and members of Congress are being considered for inclusion in
this legislation. The House of Representatives recently passed a reauthorization
bill. The Senate is expected to act on a reauthorization bill shortly. Those
bills contain provisions that would, among other things, reduce lender yields
through borrower interest rate reductions, re-engineer the manner in which
Federal Guarantors are funded (by establishing a federal reserve fund and a
separate operating fund), extend the date of default on a Student Loan from the
180th day to the 270th day of delinquency, replace the current supplemental
pre-claims fee payable to guaranty agencies with a fee for bringing a borrower's
loan
S-21
<PAGE>
current, authorize the use of a master promissory note to evidence borrowings
under Student Loans incurred in multiple years, provide extended repayment terms
for some borrowers with student loan debts in excess of $30,000, reduce
reinsurance payments to guaranty agencies from 98%, 88% or 78% to 95%, 85% or
75%, respectively, reduce the default collection retention amount on defaulted
loan payments from 27% to 24%, authorize the Secretary to enter into voluntary
flexible agreements with guaranty agencies in lieu of their current Guaranty
Agreements with the Secretary, and change the interest rate on any new Federal
Consolidation Loan to a weighted average of the interest rates of the loans
being consolidated rounded up to the nearest 0.125% with a cap of 8.25% per
annum. While these bills enjoy significant bipartisan support in Congress, the
Administration does not agree with some of the provisions, particularly as they
relate to borrower interest rates. No assurance can be made that some or all of
these proposals will be enacted, or that other amendments adverse to lenders or
the Federal Guarantors will not be included in this reauthorization or other
legislative action.
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 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
S-22
<PAGE>
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-23
<PAGE>
FORMATION OF THE TRUST
The Trust
SMS Student Loan Trust 199__-___ 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 ________________ 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
in the Prospectus. In addition, a material adverse change in the operations or
business or financial condition of the Seller could affect the amount or timing
of Additional Fundings of New Loans or Serial Loans during the Revolving Period.
Accordingly, there can be no assurance as to the amount or timing of Additional
Fundings during the Revolving Period. Upon an Early Amortization Event or in any
event if the amount on deposit in the Collateral Reinvestment Account has not
been reduced to zero by the end of the Revolving Period, any amounts remaining
on deposit in the Collateral Reinvestment Account will be paid on the Quarterly
Payment Date immediately following the end of the Revolving Period as a payment
of principal first to the Senior Noteholders, until the aggregate principal
balance of the Senior Notes has been reduced to zero, and then to the
Subordinate Noteholders, until the aggregate principal balance of the
Subordinate Notes has been reduced to zero. There can also be no assurance as to
the amount of Additional Fundings that will occur after the Revolving Period.
See "Description of the Transfer and Servicing Agreements--Revolving Period and
Additional Fundings" herein.
The Trust's principal offices are in ______________, ________________, in
care of ________________________, as Eligible Lender Trustee, at the address
listed below.
Eligible Lender Trustee
The ______________________ is the Eligible Lender Trustee for the Trust
under the Trust Agreement. _________________________ is a national banking
association whose principal offices are located at _____________________________
and whose New York offices are
S-24
<PAGE>
located at ____________________________. 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-25
<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
____% 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
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.
S-26
<PAGE>
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--Revolving Period and
Additional Fundings" herein or contained in the Loan Sale Agreement, there will
be no required characteristics of the Additional Student Loans. Therefore,
following the transfer of Additional Student Loans to the Eligible Lender
Trustee on behalf of the Trust, the aggregate characteristics of the entire pool
of 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
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)...................... ______________%
- ---------
(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.
S-27
<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>
</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.
S-28
<PAGE>
Distribution of the Initial Financed Student Loans
by Outstanding Principal Balance as of the Cutoff Date
<TABLE>
<CAPTION>
Aggregate Percent of Pool
Range of Outstanding Number of Outstanding by Outstanding
Principal Balances Loans Principal Balance(1) Principal Balance
------------------- ----- -------------------- -----------------
<S> <C> <C> <C>
</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
Number of Months Remaining Number of Outstanding by Outstanding
to Scheduled Maturity(1) Loans Principal Balance(2) Principal Balance
------------------------ ----- -------------------- -----------------
<S> <C> <C> <C>
</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-29
<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>
</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-30
<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(1) Principal Balance
------------ ----- -------------------- -----------------
<S> <C> <C> <C>
</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-31
<PAGE>
Distribution of Initial Financed Student
Loans by Date of Disbursement
<TABLE>
<CAPTION>
Aggregate Percent of Pool
Number of Outstanding by Outstanding
Disbursement Date (1) Loans Principal Balance(2) Principal Balance
---------------------- ----- -------------------- -----------------
<S> <C> <C> <C>
</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.
Distribution of Initial Financed Student Loans by
Number of Days of Delinquency as of the Cutoff Date
<TABLE>
<CAPTION>
Aggregate Percent of Pool
Number of Outstanding by Outstanding
Days Delinquent Loans Principal Balance(1) Principal Balance
--------------- ----- -------------------- -----------------
<S> <C> <C> <C>
</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.
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.
S-32
<PAGE>
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 Consolidation 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 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 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 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 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,
S-33
<PAGE>
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.
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:*
Stafford, SLS and PLUS
Loans Guaranteed
(dollars in millions)
---------------------
Federal Fiscal Year USA Funds ICSAC
------------------- --------- -----
1992
1993
1994
1995
1996
- ---------
* 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:*
Recovery Rate
-------------
Federal Fiscal Year USA Funds ICSAC
------------------- --------- -----
1992
1993
1994
1995
1996
- ----------
* 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-34
<PAGE>
Claims Rate
-----------
Federal Fiscal Year USA Funds ICSAC
------------------- --------- -----
1992
1993
1994
1995
1996
* 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-35
<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 ______________. 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 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
S-36
<PAGE>
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."
Mandatory Redemption
If any amount remains on deposit in the Collateral Reinvestment Account on
the last day of the Revolving Period after giving effect to all Additional
Fundings on or prior to such date, the entire amount remaining on deposit in the
Collateral Reinvestment Account will be used on the Quarterly Payment Date on or
immediately following such date to redeem the Senior Notes until the aggregate
principal balance thereof has been reduced to zero, and then to redeem the
Subordinate Notes until the aggregate principal balance thereof has been reduced
to zero. The aggregate principal amount of Notes to be redeemed will be an
amount equal to the amount then on deposit in the Collateral Reinvestment
Account.
Determination of T-Bill Rates
Pursuant to the Administration Agreement, the Administrator will act as
calculation agent and will use the T-Bill Rate to determine the Senior Note
T-Bill Rate and Subordinate Note T-Bill Rate for each Quarterly Interest Period.
"T-Bill Rate" means, on any day, the weighted average per annum discount rate
(expressed on a bond equivalent basis and applied on a daily basis) for direct
obligations of the United States
S-37
<PAGE>
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
Settlement Date Outstanding Notes Interest 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 numbers in this table are examples given for informational purposes
only and are in no way a prediction of interest rates on either class of Notes.
Book-Entry Registration
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the UCC and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participating organizations ("Participants") and to
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in their accounts, thereby
eliminating the need for physical movement of certificates. Participants include
the Underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations and may include certain other organizations. Indirect
access to the DTC system also is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
Senior Noteholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Senior Notes may do so only through Participants and Indirect Participants.
In addition, Senior Noteholders will receive all distributions of principal of
and interest on the Senior Notes from the Indenture Trustee through DTC and its
Participants. Under a book-entry format, Senior Noteholders will receive
payments after the related Quarterly Payment Date because, while payments are
required to be forwarded to Cede, as nominee for DTC, on each such date, DTC
will forward such payments to its Participants which thereafter will be required
to forward them to Indirect Participants or Senior Noteholders. It is
anticipated that the only "Senior Noteholder" will be Cede, as nominee for DTC
and that Senior Noteholders will not be recognized by the Indenture Trustee as
Noteholders, as such terms are used in the Indenture. Senior Noteholders will be
permitted to exercise the rights of Senior Noteholders indirectly through DTC
and its Participants (who in turn will exercise their rights through DTC).
S-38
<PAGE>
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Senior Notes and is required to
receive and transmit distributions of principal of and interest on the Senior
Notes. Participants and Indirect Participants with which Senior Noteholders have
accounts with respect to the Senior Notes similarly are required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Senior Noteholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Senior
Noteholder to pledge Senior Notes to persons or entities that do not participate
in the DTC system, or otherwise take actions in respect of such Senior Notes,
may be limited due to the lack of a physical certificate for such Senior Notes.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 27 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of 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.
S-39
<PAGE>
Senior Noteholders may hold their Senior Notes through DTC (in the United
States) or CEDEL or Euroclear (in Europe) if they are participants of such
systems, or indirectly through organizations which are participants in such
systems.
The Senior Notes will initially be registered in the name of CEDE & Co.,
the nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank, N.A. ("Citibank") will act as depositary
for CEDEL and Morgan Guaranty Trust Company of New York ("Morgan") will act as
depositary for Euroclear (in such capacities, individually the "Depositary" and
collectively the "Depositaries").
Transfers between Participants will occur in accordance with DTC Rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Because of time-zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant or Euroclear
Participant to a Participant will be received with value on the DTC settlement
date but will be available in the relevant CEDEL or Euroclear cash account only
as of the business day following settlement in DTC. For information with respect
to tax documentation procedures for the Senior Notes, see "Certain Federal
Income Tax Consequences--Tax Consequences to Holders of the Notes--Foreign
Holders" in the Prospectus.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC 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 UNDERWRITERS WILL HAVE
ANY RESPONSIBILITY OR OBLIGATION TO ANY PARTICIPANTS, CEDEL PARTICIPANTS OR
EUROCLEAR PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS NOMINEES WITH RESPECT
TO (1) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC, CEDEL OR EUROCLEAR OR ANY
PARTICIPANT, (2) THE PAYMENT BY DTC, CEDEL OR EUROCLEAR OR ANY PARTICIPANT OF
ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE PRINCIPAL AMOUNT OR
INTEREST ON THE SENIOR NOTES, (3) THE DELIVERY BY ANY PARTICIPANT, CEDEL
PARTICIPANT OR EUROCLEAR PARTICIPANT OF ANY NOTICE TO ANY BENEFICIAL OWNER WHICH
IS REQUIRED OR PERMITTED UNDER THE TERMS OF THE INDENTURE OR THE TRUST AGREEMENT
TO BE GIVEN TO SENIOR NOTEHOLDERS OR (4) ANY OTHER ACTION TAKEN BY DTC AS THE
SENIOR NOTEHOLDER.
S-40
<PAGE>
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
General
The following is a summary of certain terms of the Loan Sale Agreement,
pursuant to which the 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 ____________ 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
______% 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;
(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
S-41
<PAGE>
(vii) the arithmetic average of the Delinquency Percentage as of the
end of each of two successive Collection Periods exceeds _____%.
"Excess Spread" means, with respect to any Quarterly Payment Date, the
percentage equivalent of a fraction the numerator of which is the product of (a)
four and (b) the difference between (x) the Expected Interest Collections for
such Quarterly Payment Date and (y) the sum of (i) the Servicing Fee for such
Quarterly Payment Date and all prior unpaid Servicing Fees, (ii) the
Administration Fee for such Quarterly Payment Date and all prior unpaid
Administration Fees, and (iii) the Noteholders' Interest Distribution Amount for
such Quarterly Payment Date, and the denominator of which is the average of the
amount of the Pool Balance as of the first and the last day of the related
Collection Period.
"Delinquency Percentage" means, as of any date of determination, the
percentage equivalent of a fraction the numerator of which is the aggregate
principal balance of the 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 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).
S-42
<PAGE>
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. 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 ________% of the aggregate principal
balance of the Financed Student Loans as of
S-43
<PAGE>
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 $________ or less, $________ 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 $________ or less, $________ per account for each such
loan, (iii) a fee of $________ 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 $________ 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 $________ 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 $________ 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 $________ 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 preceding calendar month and (b) ________%, which fee will be payable so
long as certain servicing regulations of the Department remain in effect and
(ix) a fee of $________ 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:
Average Principal In-School Average Principal GRDF
Balance Percentage Balance Percentage
------- ---------- ------- ----------
The Servicing Fee (together with any portion of the Servicing Fee that
remains unpaid from prior Monthly Payment Dates) will be payable on each Monthly
Payment Date and will be paid solely out of Monthly Available Funds in the case
of each Monthly Payment Date that is not a Quarterly Payment Date (and out of
Available Funds in the case of each Quarterly Payment Date) and amounts on
deposit in the Reserve Account on such date. To the extent that, for any Monthly
Payment Date, the Servicing Fee is the amount calculated as described in clause
(I) of the first sentence of the preceding paragraph, then an amount (the
"Servicing Fee Shortfall") equal to the excess of the amount described in clause
(II) of such sentence over the amount described in clause (I) of such sentence
shall be payable on the next succeeding Quarterly Payment Date (or if such
Monthly Payment Date is also a Quarterly Payment Date, on such Quarterly Payment
Date) from any remaining amounts on deposit in the Reserve Account that are in
excess of the Specified Reserve Account Balance, pursuant to the priorities
described under "--Credit Enhancement--Reserve Account" below. The Servicer will
be obligated to perform its servicing obligations whether or not it receives any
amounts in respect of Servicing Fee Shortfalls.
As compensation for the performance of the Administrator's obligations
under the Administration Agreement and as reimbursement for its expenses related
thereto, the Administrator will be entitled to receive monthly in arrears on
each Monthly Payment Date that is not a Quarterly Payment Date and on each
Quarterly Payment Date the Administration Fee in an amount equal to one-twelfth
of the product of (i) ________% and (ii) the Pool Balance as of the close of
business on the last day of the calendar month immediately preceding such date.
S-44
<PAGE>
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.
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, 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
S-45
<PAGE>
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.
"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
S-46
<PAGE>
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 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.
S-47
<PAGE>
"Subordinate Noteholders' Distribution Amount" means, with respect to any
Quarterly Payment Date, the Subordinate Noteholders' Interest Distribution
Amount for such Quarterly Payment Date plus, with respect to any Quarterly
Payment Date on and after which the Senior Notes have been paid in full, the
Subordinate Noteholders' Principal Distribution Amount for such Quarterly
Payment Date.
"Subordinate Noteholders' Interest Carryover Shortfall" means, with
respect to any Quarterly Payment Date, the excess of (i) the Subordinate
Noteholders' Interest Distribution Amount on the preceding Quarterly Payment
Date over (ii) the amount of interest actually distributed to the Subordinate
Noteholders on such preceding Quarterly Payment Date, plus interest on the
amount of such excess, to the extent permitted by law, at the rate borne by the
Subordinate Notes from such preceding Quarterly Payment Date to the current
Quarterly Payment Date.
"Subordinate Noteholders' Interest Distribution Amount" means, with
respect to any Quarterly Payment Date, the sum of (i) the amount of interest
accrued at the Subordinate Note Rate for the related Quarterly Interest Period
on the outstanding principal balance of the Subordinate Notes on the immediately
preceding Quarterly Payment Date, after giving effect to all principal
distributions to Subordinate Noteholders on such Quarterly Payment Date (or, in
the case of the first Quarterly Payment Date, on the Closing Date) and (ii) the
Subordinate Noteholders' Interest Carryover Shortfall for such Quarterly Payment
Date; provided, however, that the Subordinate Noteholders' Interest Distribution
Amount will not include any Subordinate Noteholders' Interest T-Bill Carryover.
"Subordinate Noteholders' Principal Carryover Shortfall" means, as of the
close of any Quarterly Payment Date on or after which the Senior Notes have been
paid in full, the excess of (i) the Subordinate Noteholders' Principal
Distribution Amount on such Quarterly Payment Date over (ii) the amount of
principal actually distributed to the Subordinate Noteholders on such Quarterly
Payment Date.
"Subordinate Noteholders' Principal Distribution Amount" means, on each
Quarterly Payment Date on and after which the aggregate principal balance of the
Senior Notes has been paid in full, the sum of (a) the Principal Distribution
Amount for such Quarterly Payment Date (or, in the case of the Quarterly Payment
Date on which the aggregate principal balance of the Senior Notes is paid in
full, any remaining Principal Distribution Amount not otherwise distributed to
Senior Noteholders on such Quarterly Payment Date) and (b) the Subordinate
Noteholders' Principal Carryover Shortfall as of the close of the preceding
Quarterly Payment Date; provided, however, that the Subordinate Noteholders'
Principal Distribution Amount will in no event exceed the outstanding principal
balance of the Subordinate Notes. In addition, on the Subordinate Note Final
Maturity Date, the principal required to be distributed to the Subordinate
Noteholders will include the amount required to reduce the outstanding principal
balance of the Subordinate Notes to zero.
Credit Enhancement
Reserve Account. 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.
S-48
<PAGE>
"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 the Reserve Account
(a) on each Monthly Payment Date that is not a Quarterly Payment Date, to the
extent the amount of Monthly Available Funds on such Monthly Payment Date is
insufficient to pay: (i) the Servicing Fee and all overdue Servicing Fees and
(ii) the Administration Fee and all overdue Administration Fees, and (b) on any
Quarterly Payment Date to the extent that the amount of Available Funds on such
Quarterly Payment Date is insufficient to pay any of the items specified in
clauses (i) through (vi), respectively, of the third paragraph under
"--Distributions--Distributions from Collection Account" herein on such date.
Such funds will be paid from the Reserve Account to the persons and in the order
of priority specified for distributions out of the Collection Account on such
dates. As a result of the subordination of the Subordinate Notes to the Senior
Notes described elsewhere herein, however, any amounts that the Subordinate
Noteholders would otherwise receive from the Reserve Account in respect of the
Subordinate Noteholders' Interest Distribution Amount on any Quarterly Payment
Date will be paid to Senior Noteholders until the Senior Noteholders' Interest
Distribution Amount for such Quarterly Payment Date has been paid in full. In
addition, as a result of such subordination, Subordinate Noteholders will not
receive any amounts from the Reserve Account in respect of the Subordinate
Noteholders' Principal Distribution Amount until the Senior Notes have been paid
in full. See "--Subordination" herein.
The Reserve Account is intended to enhance the likelihood of timely
receipt by the Senior Noteholders and the Subordinate Noteholders of the full
amount of principal and interest due them and to decrease the likelihood that
the Senior Noteholders or the Subordinate Noteholders will experience losses. In
certain circumstances, however, the Reserve Account could be depleted. If the
amount required to be withdrawn from the Reserve Account to cover shortfalls in
the amount of Available Funds exceeds the amount of cash in the Reserve Account,
Senior Noteholders or Subordinate Noteholders could incur losses or a temporary
shortfall in the amount of principal and interest distributed to the Senior
Noteholders or the Subordinate Noteholders could result which could, in turn,
increase the average life of the Senior Notes or the Subordinate Notes. Amounts
on deposit in the Reserve Account will not be available in any respect until the
Parity Date to cover any aggregate unpaid Senior Noteholders' Interest T-Bill
Carryover or Subordinate Noteholders' Interest T-Bill Carryover and after the
Parity Date only amounts on deposit in the Reserve Account that (after paying,
for Quarterly Payment Dates occurring after the Revolving Period, any unpaid
Purchase Premium Amounts for any Serial Loans purchased by the Trust prior to
the end of the related Collection Period) are in excess of the Specified Reserve
Account Balance will be available therefor.
Subordination. The rights of the Subordinate Noteholders to receive
payments of interest on any Quarterly Payment Date are subordinated to the
rights of the Senior Noteholders to receive payments of interest on such date,
and the rights of the Subordinate Noteholders to receive payments of principal
on any Quarterly Payment Date are subordinated to the rights of the Noteholders
to receive payments of interest and principal on such date. The Subordinate
Noteholders will not be entitled to any payments of principal until the Senior
Notes are paid in full.
S-49
<PAGE>
Termination
Certain information regarding termination of the Trust is set forth in
"Description of the Transfer and Servicing Agreements--Termination" in the
Prospectus.
Any Financed Student Loans remaining in the Trust as of the end of the
Collection Period immediately preceding the ______________ Quarterly Payment
Date will be offered for sale by the Indenture Trustee. The Seller, its
affiliates and unrelated third parties may offer bids to purchase such 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 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 _____________ 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 ______% 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," Special
Federal Tax Counsel is of the opinion that the Senior Notes will properly be
characterized as indebtedness, and that the Subordinate Notes (not offered
hereby) should be classified as indebtedness (or, if not, would be classified as
an interest in a partnership), for federal income tax purposes, such opinion is
not binding on the IRS and thus no assurance can be given that such
characterization will prevail. In the opinion of Special Federal Tax Counsel, if
the IRS were to contend successfully that the Subordinate Notes were not debt
for federal income tax purposes (assuming that the Senior Notes were not
recharacterized) the arrangement among the 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 Federal 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.
S-50
<PAGE>
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 "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.
S-51
<PAGE>
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 _____________________ 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.
Principal
Underwriter Amount
- ----------- ------
Total.......................................................... $
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.
The Seller has also agreed to pay __________________ a structuring fee
equal to $_____________.
S-52
<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 Underwriters by Stroock
& Stroock & Lavan 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 Stroock &
Stroock & Lavan 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-53
<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.
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
S-54
<PAGE>
Securities from and including the last coupon payment date to and excluding the
settlement date, on the basis of a calendar year consisting of twelve 30-day
calendar months. Payment will then be made by the respective Depositary of the
DTC Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the CEDEL Participant's or Euroclear Participant's account.
The securities credit will appear the next day (European time) and the cash
debit will be back-valued to, and the interest on the Global Securities will
accrue from, the value date (which would be the preceding day when settlement
occurred in New York). If settlement is not completed on the intended value date
(i.e., the trade fails), the CEDEL or Euroclear cash debit will be valued
instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon to finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each CEDEL Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective Depositary for the benefit of CEDEL Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participants a cross-market transaction will
settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through
Euroclear Participants, to a DTC Participant. The seller will send instructions
to CEDEL or Euroclear through a CEDEL Participant or a Euroclear Participant at
least one business day prior to settlement. In these cases, CEDEL or Euroclear
will instruct Euroclear Participants, to deliver the Global Securities to the
DTC Participant's account against payment. Payment will include interest accrued
on the Global Securities from and including the last coupon payment to and
excluding the settlement date, on the basis of a calendar year consisting of
twelve 30-day calendar months. The payment will then be reflected in the account
of the CEDEL Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the CEDEL Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the CEDEL Participant or
Euroclear Participant have a line of credit with its respective clearing system
and elect to be in debit in anticipation of receipt of the sale proceeds in its
account, the back-valuation will extinguish any overdraft incurred over that
one-day period. If settlement is not completed on the intended value date (i.e.,
the trade fails), receipt of the cash proceeds in the CEDEL Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(1) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(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.
S-55
<PAGE>
FundsCertain 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).
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-56
<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.
Page
----
91-day Treasury Bills................................................S-37
Additional Fundings...................................................S-6
Additional Guarantor..................................................S-3
Additional Guarantors.................................................S-3
Additional Student Loans..............................................S-3
Add-on Consolidation Loans............................................S-5
Administration Agreement..............................................S-3
Administration Fee...................................................S-10
Administrator.........................................................S-3
Available Funds......................................................S-44
Cede..................................................................S-1
CEDEL.................................................................S-2
CEDEL Participants...................................................S-38
Citibank..............................................................S-2
Closing Date..........................................................S-3
Collateral Reinvestment Account.......................................S-7
Collection Account....................................................S-7
Collection Period.....................................................S-4
Company...............................................................S-1
Cooperative..........................................................S-38
Cutoff Date...........................................................S-3
Deferral.............................................................S-29
Delinquency Percentage...............................................S-41
Department............................................................S-1
Depositaries..........................................................S-2
Determination Date...................................................S-44
DOE Data Book........................................................S-33
DTC...................................................................S-1
Early Amortization Event.............................................S-40
Eligible Lender Trustee...............................................S-1
Euroclear.............................................................S-2
Euroclear Operator...................................................S-38
Euroclear Participants...............................................S-38
Excess Spread........................................................S-41
Exchange Act..........................................................S-1
Exchanged Financed Student Loan......................................S-41
Exchanged Serial Loan................................................S-41
Expected Interest Collections........................................S-11
Federal Origination Fee..............................................S-19
Financed Student Loans................................................S-1
Forbearance..........................................................S-29
Global Securities....................................................S-53
Grace................................................................S-29
Guarantors............................................................S-3
ICSAC.................................................................S-1
S-57
<PAGE>
Indenture............................................................S-10
Indenture Trustee.....................................................S-2
Indirect Participants................................................S-37
Initial Financed Student Loans........................................S-3
Initial Guarantor.....................................................S-1
Initial Guarantors....................................................S-1
Initial Pool Balance..................................................S-3
In-School............................................................S-29
Liquidated Student Loans.............................................S-44
Liquidation Proceeds.................................................S-44
Loan Purchase Amount..................................................S-4
Loan Sale Agreement...................................................S-3
Loan Services.........................................................S-1
Lock-In Period.......................................................S-37
Minimum Purchase Price...............................................S-13
Monthly Available Funds..............................................S-44
Monthly Collection Period............................................S-44
Monthly Payment Date..................................................S-7
Monthly Rebate Fee...................................................S-19
Morgan................................................................S-2
NBD...................................................................S-2
NBD Trust Agreement...................................................S-2
New Loan..............................................................S-4
New Loans.............................................................S-4
Non-U.S. Person......................................................S-55
Note Rates...........................................................S-10
Note T-Bill Rates....................................................S-10
Noteholders..........................................................S-10
Noteholders' Distribution Amount.....................................S-45
Noteholders' Interest Distribution Amount............................S-45
Notes.................................................................S-1
Obligors.............................................................S-13
OID..................................................................S-50
Parity Date...........................................................S-8
Participants.........................................................S-37
Plan.................................................................S-50
Pool Balance.........................................................S-13
Principal Distribution Adjustment....................................S-45
Principal Distribution Amount........................................S-11
Purchase Amount......................................................S-13
Purchase Collateral Balance...........................................S-4
Purchase Premium Amount...............................................S-4
Quarterly Interest Period............................................S-10
Quarterly Payment Date................................................S-1
Realized Losses......................................................S-46
Record Date..........................................................S-11
Repayment............................................................S-29
Representative.......................................................S-51
Reserve Account.......................................................S-7
Reserve Account Excess................................................S-7
Reserve Account Initial Deposit.......................................S-7
Revolving Period......................................................S-4
Secretary............................................................S-20
S-58
<PAGE>
Seller................................................................S-1
Seller Trusts........................................................S-21
Senior Note Final Maturity Date......................................S-12
Senior Note Rate.....................................................S-10
Senior Note T-Bill Rate..............................................S-10
Senior Noteholders...................................................S-10
Senior Noteholders' Distribution Amount..............................S-46
Senior Noteholders' Interest Carryover Shortfall.....................S-46
Senior Noteholders' Interest Distribution Amount.....................S-46
Senior Noteholders' Interest T-Bill Carryover........................S-11
Senior Noteholders' Principal Carryover Shortfall....................S-46
Senior Noteholders' Principal Distribution Amount....................S-46
Senior Notes..........................................................S-1
Serial Loan...........................................................S-5
Serial Loans..........................................................S-5
Servicer..............................................................S-2
Servicer Liability Limit.............................................S-17
Servicing Agreement...................................................S-2
Servicing Fee.........................................................S-9
Servicing Fee Shortfall..............................................S-43
SMS...................................................................S-2
Special Federal Tax Counsel..........................................S-13
Specified Reserve Account Balance.....................................S-8
Student Loan Rate....................................................S-11
Student Loan Rate Accrual Period.....................................S-11
Student Loans.........................................................S-3
Subordinate Note Final Maturity Date.................................S-12
Subordinate Note Rate................................................S-10
Subordinate Note T-Bill Rate.........................................S-10
Subordinate Noteholders..............................................S-10
Subordinate Noteholders' Distribution Amount.........................S-47
Subordinate Noteholders' Interest Carryover Shortfall................S-47
Subordinate Noteholders' Interest Distribution Amount................S-47
Subordinate Noteholders' Interest T-Bill Carryover...................S-11
Subordinate Noteholders' Principal Carryover Shortfall...............S-47
Subordinate Noteholders' Principal Distribution Amount...............S-47
Subordinate Notes.....................................................S-1
T-Bill Rate..........................................................S-36
Terms and Conditions.................................................S-38
Transfer Agreement....................................................S-4
Transfer and Servicing Agreements....................................S-40
Transfer Date........................................................S-41
Trust.................................................................S-1
Trust Agreement.......................................................S-3
U.S. Person..........................................................S-55
Underwriters.........................................................S-51
Underwriting Agreement...............................................S-51
USA Funds.............................................................S-1
USA Group Guarantee Services..........................................S-2
S-59
<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 ______, 1998
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" BEGINNING
AT PAGE 10 AND IN THE RELATED PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Retain this Prospectus for future reference. This Prospectus may not be used to
consummate sales of Securities offered hereby unless accompanied by a Prospectus
Supplement.
The date of this Prospectus is ______, 1998.
<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 registration 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., 30 South Meridian, Indianapolis, Indiana 46204-3503 (Telephone: (317)
951-5640).
-ii-
<PAGE>
TABLE OF CONTENTS
AVAILABLE INFORMATION........................................................iii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..............................iii
SUMMARY OF TERMS...............................................................1
RISK FACTORS...................................................................9
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.............................................................9
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..............................................10
Unsecured Nature of Student Loans; Risk that Financial Status of a
Federal Guarantor Will Affect Its Ability to Make Guarantee Payments....10
Default Risk on Certain Financed Student Loans............................11
Fees Payable on Certain Financed Student Loans............................11
Risk that Change in Law Will Adversely Affect Student Loans, Guarantors,
the Seller or the Servicer..............................................11
Increased Fees; Decreased Assistance......................................11
Impact of Direct Lending..................................................12
Reserves..................................................................12
Risks Resulting from Subordination of Principal and Interest Payments;
Limited Assets..........................................................12
Risk Resulting from Use of the Pre-Funding Account or Collateral
Reinvestment Account to Make Additional Funding.........................12
Maturity and Prepayment Considerations....................................14
Risk of Removal of Servicer upon Servicer Default.........................14
Insolvency Risk...........................................................15
Book-Entry Registration...................................................15
FORMATION OF THE TRUSTS.......................................................15
The Trusts................................................................15
Eligible Lender Trustee...................................................16
USE OF PROCEEDS...............................................................16
USA GROUP, SMS, THE SELLER AND THE SERVICER...................................17
USA Group.................................................................17
SMS.......................................................................17
The Seller................................................................18
The Servicer..............................................................18
THE STUDENT LOAN POOLS........................................................18
General...................................................................18
Origination and Marketing Process.........................................19
Servicing and Collections Process.........................................19
Claims and Recovery Rates.................................................20
FEDERAL FAMILY EDUCATION LOAN PROGRAM.........................................20
-iii-
<PAGE>
General...................................................................20
Legislative and Administrative Matters....................................21
Eligible Lenders, Students and Educational Institutions...................21
Financial Need Analysis...................................................22
Special Allowance Payments................................................22
Federal Stafford Loans....................................................23
Interest...............................................................23
Interest Subsidy Payments..............................................23
Loan Limits............................................................24
Repayment..............................................................25
Grace Periods, Deferral Periods and Forbearance Periods................25
Federal Unsubsidized Stafford Loans.......................................25
Federal PLUS and Federal SLS Loan Programs................................25
Loan Limits............................................................26
Interest...............................................................26
Repayment, Deferments..................................................26
Federal Consolidation Loan Program........................................27
Federal Guarantors........................................................28
Federal Insurance and Reinsurance of Federal Guarantors...................28
WEIGHTED AVERAGE LIVES OF THE SECURITIES......................................30
POOL FACTORS AND TRADING INFORMATION..........................................30
DESCRIPTION OF THE NOTES......................................................31
General...................................................................31
Principal of and Interest on the Notes....................................31
The Indenture.............................................................32
Modification of Indenture..............................................32
Events of Default; Rights upon Event of Default........................32
Certain Covenants......................................................34
Annual Compliance Statement............................................34
Indenture Trustee's Annual Report......................................34
Satisfaction and Discharge of Indenture................................35
The Indenture Trustee..................................................35
DESCRIPTION OF THE CERTIFICATES...............................................35
General...................................................................35
Principal and Interest in Respect of the Certificates.....................35
CERTAIN INFORMATION REGARDING THE SECURITIES..................................36
Fixed Rate Securities.....................................................36
Floating Rate Securities..................................................36
Book-Entry Registration...................................................37
Definitive Securities.....................................................37
List of Securityholders...................................................38
Reports to Securityholders................................................38
-iv-
<PAGE>
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS..........................38
General...................................................................38
Sale of Student Loans; Representations and Warranties.....................39
Additional Fundings.......................................................39
Accounts..................................................................40
Servicing Procedures......................................................40
Payments on Student Loans.................................................41
Servicer Covenants........................................................41
Servicer Compensation.....................................................41
Distributions.............................................................42
Credit and Cash Flow Enhancement..........................................42
General................................................................42
Reserve Account........................................................42
Statements to Indenture Trustee and Trust.................................43
Evidence as to Compliance.................................................43
Certain Matters Regarding the Servicer....................................44
Servicer Default..........................................................44
Rights upon Servicer Default..............................................44
Waiver of Past Defaults...................................................45
Amendment.................................................................45
Payment of Notes..........................................................46
Termination...............................................................46
Optional Redemption....................................................46
Auction of Student Loans...............................................46
Administration Agreement..................................................46
CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS....................................47
Transfer of Student Loans.................................................47
Consumer Protection Laws..................................................47
Loan Origination and Servicing Procedures Applicable to Student Loans.....48
Student Loans Generally Not Subject to Discharge in Bankruptcy............48
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.......................................48
TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE...............................49
Tax Characterization of the Trust.........................................49
Tax Consequences to Holders of the Notes..................................49
Treatment of the Notes as Indebtedness.................................49
Original Issue Discount................................................49
Interest Income on the Notes...........................................50
Sale or Other Disposition..............................................50
Foreign Holders........................................................50
Backup Withholding.....................................................51
Recent Legislation........................................................51
Tax Consequences to Holders of the Certificates...........................51
-v-
<PAGE>
Classification as a Partnership........................................51
Treatment of the Trust as a Partnership................................52
Partnership Taxation...................................................52
Computation of Income..................................................53
Determining the Bases of Trust Assets..................................53
Discount and Premium...................................................53
Disposition of Certificates............................................53
Allocations Between Transferors and Transferees........................54
Section 754 Election...................................................54
Administrative Matters.................................................54
Tax Consequences to Foreign Certificateholders.........................55
Backup Withholding.....................................................55
TRUSTS IN WHICH ALL RESIDUAL INTERESTS ARE RETAINED BY THE SELLER OR AN
AFFILIATE OF THE SELLER...................................................55
Tax Characterization of the Trust.........................................55
Tax Consequences to Holders of the Notes..................................55
Treatment of the Notes as Indebtedness.................................56
Possible Alternative Treatments of the Notes...........................56
CERTAIN STATE TAX CONSEQUENCES................................................56
Tax Consequences with Respect to the Notes.............................56
Tax Consequences with Respect to the Certificates......................56
ERISA CONSIDERATIONS..........................................................57
The Notes.................................................................57
The Certificates..........................................................57
PLAN OF DISTRIBUTION..........................................................58
LEGAL MATTERS.................................................................59
INDEX OF PRINCIPAL TERMS......................................................60
-vi-
<PAGE>
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 62 hereof.
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 under an Indenture between
the Trust and the related Indenture
Trustee (as amended and supplemented
from time to time, an "Indenture").
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 the
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 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.
-1-
<PAGE>
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 ("Federal Student Loans" or
"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.
-2-
<PAGE>
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 a state or private
non-profit guarantor (each, a "Federal
Guarantor" or "Guarantor"), which
Guarantor 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. Amounts paid
by a Guarantor pursuant to its
guarantee are herein referred to as
"Guarantee Payments". See "Federal
Family Education Loan Program--Federal
Guarantors" and "--Federal Insurance
and Reinsurance of Federal Guarantors".
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 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 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
(a) 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
(b) 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
-3-
<PAGE>
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 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".
In addition, if specified in the
related Prospectus Supplement, the
assets of the related Trust may include
certain rights of the Seller to receive
excess cashflow ("Excess Cashflow
Rights") in respect of Student Loans
that are owned by one or more other
Trusts established or sponsored by the
Seller. Excess Cashflow Rights will not
exceed [10%] of the assets of any
Trust. The related Prospectus
Supplement will disclose certain
summary data relating to the Excess
Cashflow Rights comparable to the
information set forth under the heading
"Description of the Transfer and
Servicing Agents - Statements to
Indenture Trustee and Trust" herein.
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 a Federal Guarantor, which
Federal Guarantor is reinsured by 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 for loans
disbursed on or after October 1, 1993,
and for 100% of death, disability,
bankruptcy, closed school and false
certification claims paid. See "Federal
Family Education Loan Program--Federal
Guarantors" and "--Federal Insurance
and Reinsurance of Federal Guarantors".
Credit and Cash Flow
Enhancement......................... If and to the extent specified in the
related Prospectus Supplement, credit
or cash flow enhancement with respect
to a Trust or any class or classes of
Securities may include any one or more
of the following: subordination of one
or more other classes of Securities, a
Reserve Account, over-
-4-
<PAGE>
collateralization, letters of credit,
credit or liquidity facilities, surety
bonds, guaranteed investment contracts,
repurchase obligations, interest rate
swaps, interest rate caps, interest
rate floors, currency swaps, other
agreements with respect to third party
payments or other support, cash
deposits or 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 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
Agreements......................... With respect to each Trust, the Seller
will sell 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
-5-
<PAGE>
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 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", the outstanding Notes will
be redeemed and the Certificateholders
will receive a distribution as set
forth in the related Prospectus
Supplement.
-6-
<PAGE>
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 of
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, Stroock & Stroock & Lavan
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 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, the
Notes of each series are eligible for
purchase by employee benefit plans.
-7-
<PAGE>
Unless otherwise specified in the
related Prospectus Supplement, the
Certificates may not be acquired by any
employee benefit plan subject to the
Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or by
any individual retirement account. See
"ERISA Considerations".
-8-
<PAGE>
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 Federal Student Loans and guarantors guaranteeing Federal Student
Loans to follow specified procedures, including due diligence procedures, to
ensure that the Federal 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--Servicing and Collections Process", "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 so to repurchase, or the Servicer so 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 such Indenture or permit the exercise of
remedies thereunder.
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
-9-
<PAGE>
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".
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 related 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 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 would be equal to
the aggregate outstanding principal amount of the Securities and accrued
interest thereon. If the proceeds of any such sale, together with amounts then
available in any Reserve Account or pursuant to any other credit enhancement
specified as being available therefor in the related Prospectus Supplement, do
not exceed the aggregate outstanding principal amount of Notes and accrued
interest thereon, the Noteholders of the related series will suffer a loss. In
such circumstances, the Certificateholders, to the extent the Certificates of
such series are subordinated to the Notes of such series, will also suffer a
loss.
Unsecured Nature of Student Loans; Risk that Financial Status of a Federal
Guarantor Will Affect Its Ability to Make Guarantee Payments. The Act requires
all 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
-10-
<PAGE>
made on or after October 1, 1993). Death, disability, bankruptcy, closed school
and false certification claims are reimbursed 100% by the Department. 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 "Federal Family Education Loan
Program--Federal Guarantors" and "--Federal Insurance and Reinsurance of Federal
Guarantors".
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 under 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 related
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 or
the Certificateholders, 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 Payments and Special Allowance
Payments. If sufficient Interest Subsidy Payments and Special Allowance Payments
are not due to the Trust to cover the amount of the Federal Origination Fee, the
balance of such Federal Origination Fee will be deferred by the Department until
sufficient Interest Subsidy Payments 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 Payments 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
Payments 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 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, the Seller or the Servicer.
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, the 1993 Act contemplated
replacement of a minimum of approximately 60% of the Federal Student Loan
programs with direct lending by the Department by 1998. The expansion of the new
program may involve increasing reductions in the volume of loans made under the
existing programs. 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
-11-
<PAGE>
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
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 Guarantors, the applicable
Eligible Lender Trustee, the applicable Indenture Trustee or any other person or
entity. Consequently, holders of the Securities of any series must rely for
repayment upon payments on the related Student Loans and, if and to the extent
available, amounts on deposit in the Reserve Account (if any) and other credit
enhancement (if any), all as specified in the related Prospectus Supplement.
Risk Resulting from Use of the Pre-Funding Account or Collateral
Reinvestment Account to Make Additional Fundings. The use of a Pre-Funding
Account or Collateral Reinvestment Account to add Student Loans to a Trust after
the applicable Closing Date will cause the aggregate characteristics of the
entire pool of Student Loans with respect to such Trust, including, if and to
the extent set forth in the related Prospectus Supplement, the composition of
such pool and, 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 such
pool as of the Closing Date and named in such Prospectus Supplement) and the
distribution by loan type, interest rate, principal balance and remaining term
to stated maturity to vary, 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 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
-12-
<PAGE>
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 "Risk
Factors--Maturity and Prepayment Considerations" in the related Prospectus
Supplement regarding the risk to Noteholders and/or Certificateholders of
prepayments in connection with the making of Federal Consolidation Loans both
during and after the Funding Period or Revolving Period, as the case may be.
In 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.
Risks Associated with Year 2000 Compliance. The Seller, the Servicer and
United Student Aid Funds, Inc. ("USA Funds") utilize a significant number of
computer software programs and operating systems and are highly dependent on
computer systems operated by third parties which include, but are not limited
to, the Department, their suppliers, customers, brokers and agents and the
telephone, electric and utility companies. To the extent that any computer
system relied upon by the Seller, the Servicer and USA Funds or any third party,
has software applications and contains source codes that are unable to
appropriately interpret the upcoming calendar year 2000, some level of
modification or replacement of such applications or hardware may be necessary.
The year 2000 issue is the result of prior computer programs being written using
two digits, rather than four digits, to define the applicable year. Any computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. Any such occurrence could result in a
major computer system failure or miscalculations.
The Seller, the Servicer and USA Funds currently are assessing the impact
of modifications or replacements required to adjust for the year 2000. The
Seller, the Servicer and USA Funds are utilizing both internal and external
resources to identify, correct or reprogram and test their systems for year 2000
compliance. It is anticipated that all reprogramming efforts and necessary
testing will be completed prior to the year 2000. The Seller, the Servicer and
USA Funds have initiated formal communications with those third parties on whom
they will rely to determine the extent to which the Seller, the Servicer and USA
Funds are vulnerable to the failure of these third parties to remediate their
own year 2000 issue. However, there can be no assurance that the systems of
third parties on which the systems of the Seller, the Servicer and USA Funds
rely will be converted in a timely fashion, or that a failure to convert by a
third party, or a conversion that is incompatible with the systems of the
Seller, the Servicer and USA Funds, would not have an adverse effect on the
business, financial condition or results of operations of the Seller, the
Servicer and USA Funds. The dates on which the Seller, the Servicer and USA
Funds plan to complete their year 2000 modifications are based on their best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans (including, the Department) and other factors. However, there
can be no assurance that these estimates will be achieved and actual results
could differ materially from such estimates. Specific factors that might cause
such material differences include, but are not limited to: (i) the availability
and cost of personnel trained in this area, (ii) the ability to locate and
correct all relevant computer codes, and (iii) similar uncertainties.
No assurance can be given that any or all of the systems discussed above,
including the systems of the Seller, the Servicer and USA Funds, are or will be
year 2000 compliant or that the costs required to address year 2000 issues will
not adversely affect the business, financial condition or results of operations
of the respective party or the performance of their obligations under the
Agreements. Year 2000 compliance pertaining to the Indenture Trustee, the
Eligible Lender Trustee and other Guarantors shall be
-13-
<PAGE>
set forth in the related Prospectus Supplement. No representation is made with
respect to whether other entities involved with the Seller, Servicer or USA
Funds are or will be year 2000 compliant. Such entities include, among others,
the Department. Failure of any such entities to be year 2000 compliance may
effect the timely receipt of payments by the Trust and the Securityholders.
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, the Seller or the Servicer will be obligated, under certain
circumstances, 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 under 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 "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 Periods, which may lengthen the
remaining term of the Student Loans and the average life of the Notes and the
Certificates. See "Federal Family Education Loan Program". Any reinvestment
risks resulting from a faster or slower incidence of prepayment of Student Loans
will be borne entirely by the Noteholders and the Certificateholders. See also
"Description of the Transfer and Servicing Agreements--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
-14-
<PAGE>
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 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. To the extent these
requirements may be applicable to Student Loans, these requirements impose
specific statutory liability that could affect an assignee's ability to enforce
consumer finance contracts. In addition, the remedies available to the related
Indenture Trustee or the Noteholders of the related series upon an Event of
Default under the Indenture may not be readily available or may be limited by
applicable state and federal laws.
Book-Entry Registration. If so provided in the related Prospectus
Supplement, each class of the Notes and the Certificates of a given series will
be initially represented by one or more certificates registered in the name of
Cede & Co. ("Cede"), or any other nominee for DTC set forth in the related
Prospectus Supplement (Cede, or such other nominee, "DTC's Nominee"), and will
not be registered in the names of the holders of the Securities of such series
or their nominees. Because of this, unless and until Definitive Securities 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
-15-
<PAGE>
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 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 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 "Federal Family Education Loan Program--Eligible Lenders,
Students and Educational 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 Pre-Funding Account, if any. The Seller will use such net proceeds
paid to it with respect to any such Trust for general corporate purposes.
-16-
<PAGE>
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.
The affiliated 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).
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
directors or officers of USA Group Guarantee Services.
SMS
SMS was organized on November 19, 1992, and is 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
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
-17-
<PAGE>
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.
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.
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 by several criteria, including that each Student Loan (i)
is guaranteed as to principal and interest by a Guarantor 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, (iii) contains terms in accordance with those required by the Federal
Family Education Loan Program, the applicable Guarantee Agreements and other
applicable requirements, (iv) provides for regular payments that fully amortize
the amount financed over its original term to maturity (exclusive of any
deferral or forbearance periods) and (v) satisfies the other criteria, if any,
set forth in the related Prospectus Supplement. No selection procedures believed
by the 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".
-18-
<PAGE>
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.
In addition, if specified in the related Prospectus Supplement, the assets
of the related Trust may include certain rights of the Seller to receive Excess
Cashflow Rights in respect of Student Loans that are owned by one or more other
Trusts established or sponsored by the Seller. Excess Cashflow Rights will not
exceed [10%] of the assets of any Trust. The related Prospectus Supplement will
disclose certain summary data relating to the Excess Cashflow Rights.
Origination and Marketing Process
The Act specifies 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. 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 (as well as 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. 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 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 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--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".
-19-
<PAGE>
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 times of delinquency may result in
denial of the guarantee claim with respect to such Student Loan. 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.
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 (each, a "Federal Consolidation Loan"). Prior to July 1,
1994, the Act also authorized loans to graduate and professional students,
independent undergraduate students and, under certain circumstances, dependent
undergraduate students, to supplement their Federal Stafford Loans ("Federal
Supplemental Loans to Students" or "Federal SLS Loans"). The description and
summaries of the Act, FFELP, the Guarantee Agreements and the other statutes,
regulations and amendments referred to in this Prospectus describe or summarize
the material provisions of such statutes, regulations and agreements but do not
purport to be comprehensive and are qualified in their entirety by reference to
each such statute, regulation or document. There can be no assurance that future
amendments or modifications will not materially change any of the terms or
provisions of the programs described in this Prospectus or of the statutes and
regulations implementing these programs. See "Risk Factors--Risk that Change in
Law Will Adversely Affect Student Loans, Guarantors, the Seller or the
Servicer".
-20-
<PAGE>
Legislative and Administrative Matters
Both the Act and the regulations promulgated thereunder have been the
subject of extensive amendments in recent years and there can be no assurance
that further amendment will not materially change the provisions described
herein or the effect thereof. The 1992 Amendments to the Act (the "1992
Amendments") extended the principal provisions of FFELP to 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 contemplated
replacement of a minimum of approximately 60% of the Federal Student Loan
programs with direct lending by the Department by 1998. The expansion of the new
program may involve increasing reductions in the volume of loans made under the
existing programs, which could result in increased costs for 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 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. The
Emergency Student Loan Consolidation Act of 1997 authorizes FFELP loan
originators to consolidate direct loans into Federal Consolidated Loans. This
provision applies to loan applications received on or after November 13, 1997
through September 30, 1998.
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 who 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 who have a high school diploma or its
equivalent, or persons who are beyond the age of compulsory school attendance
and have the ability to benefit from the training offered (as defined in the
Act), (ii) is authorized by a state to provide a program of vocational education
designed to fit individuals for useful employment in recognized occupations,
(iii) has been in existence for at least two years, (iv) provides at least a
six-month training program to prepare students for gainful employment in a
recognized occupation and (v) is accredited by a nationally recognized
accrediting agency or is specially accredited by the Department.
-21-
<PAGE>
With specified exceptions, institutions are excluded from consideration as
educational institutions if the institution (i) offers more than 50 percent of
its courses by correspondence, (ii) enrolls 50 percent or more of its students
in correspondence courses, (iii) has a student enrollment in which more than 25
percent of the students are incarcerated or (iv) has a student enrollment in
which more than 50 percent of the students are admitted without a high school
diploma or its equivalent on the basis of their ability to benefit from the
education provided (as defined by statute and regulation). Further, schools are
specifically excluded from participation if (i) the educational institution has
filed for bankruptcy, (ii) the owner, or its chief executive officer, has been
convicted or pleaded "nolo contendere" or "guilty" to a crime involving the
acquisition, use or expenditure of federal student aid funds, or has been
judicially determined to have committed fraud involving funds under the student
aid program or (iii) the educational institution has a cohort default rate in
excess of the rate prescribed by the Act. In order to participate in the
program, the eligibility of a school must be approved by the Department under
standards established by regulation.
Financial Need Analysis
Student Loans may generally be made in amounts, subject to certain limits
and conditions, to cover the student's estimated costs of attendance, including
tuition and fees, books, supplies, room and board, transportation and
miscellaneous personal expenses (as determined by the institution). Each Federal
Stafford Loan and Federal Unsubsidized Stafford Loan borrower must undergo a
financial need analysis, which requires the borrower to submit a financial need
analysis form to a multiple data entry processor that forwards the information
to the federal central processor. The central processor evaluates the parents'
and student's financial condition under federal guidelines and calculates the
amount that the student and/or the family must contribute towards the student's
cost of education (the "family contribution"). After receiving information on
the family contribution, the institution then subtracts the family contribution
from the cost for the student to attend such institution to determine the
student's eligibility for grants, loans, and work assistance. The difference
between the amount of grants and Federal Stafford Loans for which the borrower
is eligible and the student's estimated cost of attendance (the "Unmet Need")
may be borrowed through Federal Unsubsidized Stafford Loans subject to annual
and aggregate loan limits prescribed in the Act. Parents may finance the family
contribution amount through their own resources or through Federal PLUS Loans.
Special Allowance Payments
The Act provides for quarterly special allowance payments ("Special
Allowance Payments") to be made by the Department to holders of 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, however, that, if the
amount determined by the application of clauses (i), (ii) and (iii) is in the
negative, the Special Allowance Margin is zero.
Date of Disbursement Special Allowance Margin
- ------------------- ---------------------------------------------------
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)
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%.
-22-
<PAGE>
Federal Stafford Loans
The Act provides for (i) federal insurance or reinsurance of Federal
Stafford Loans made by eligible lenders to qualified students, (ii) federal
interest subsidy payments on certain eligible Federal Stafford Loans to be paid
by the Department to holders of the loans in lieu of the borrower making
interest payments ("Interest Subsidy Payments") and (iii) Special Allowance
Payments representing an additional subsidy paid by the Department to the
holders of eligible Federal Stafford Loans (such federal reinsurance
obligations, together with those obligations referred to in clauses (ii) and
(iii) above, being collectively referred to herein as "Federal Assistance").
Interest. The borrower's interest rate on a Federal Stafford Loan may be
fixed or variable. Federal Stafford Loan interest rates are summarized in the
chart below.
Trigger Date(1) Borrower Rate(2) Maximum Rate Interest Rate Margin
- ----------------- ------------------------ ------------ --------------------
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; 8% for 3.25%
thereafter, 91-Day 48 months
Treasury + Interest then 10%
Rate Margin
10/01/92-06/30/94 91-Day Treasury + 9% 3.10%
Interest Rate Margin
07/01/94-06/30/95 91-Day Treasury + 8.25% 3.10%
Interest Rate Margin
07/01/95-06/30/98 91-Day Treasury + 8.25% 2.50% (In-School,
Interest Rate Margin Grace or Deferment);
3.10% (in repayment)
After 6/30/98 A security of comparable 8.25% 1.0%
maturity + Interest Rate
Margin
- --------------------------------------------------------------------------------
(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 (a) 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 (b)
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 Educational
Institutions" above, "Risk Factors--Risk that Failure to Comply with Student
Loan Origination and Servicing Procedures for Student Loans May Adversely Affect
the Trust's Ability to Pay Principal and Interest on the Related Notes and
Certificates", "Formation of the Trusts--Eligible Lender Trustee" and
"Description of the Transfer and Servicing
-23-
<PAGE>
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; Risk of
Shortfalls to Holders of Notes and Certificates Resulting from Inability of
Related Indenture Trustee to Liquidate Student Loans". The Servicer has agreed
to prepare and file with the Department all such claims forms and any other
required documents or filings on behalf of each Eligible Lender Trustee as owner
of the related 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>
All
Students(1) Independent 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-1/1/871/1/87 10/1/93(2) 7/1/94(3) Amount in
- ------------------------------------------------------- ----------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Undergraduate (per year)
1st year $ 2,500 $ 2,625 $ 2,625 $ 4,000 $ 6,625
2nd year $ 2,500 $ 2,625 $ 3,500 $ 4,000 $ 7,500
3rd year and above $ 2,500 $ 4,000 $ 5,500 $ 5,000 $ 10,500
Graduate (per year) $ 5,000 $ 7,500 $ 8,500 $10,000 $ 18,500
Aggregate Limited
Undergraduate $12,500 $17,250 $23,000 $23,000 $ 46,000
Graduate (including
undergraduate) $25,000 $54,750 $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 for that
year, unless the borrower and the lender agree to lesser payments. Effective
July 1, 1993, the Act and regulations promulgated
-24-
<PAGE>
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 United
States 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 charged by the
Federal Guarantor is reduced to 1% and the origination fee is 3%. Subject to the
same loan limits established for Federal Stafford Loans, the student may borrow
up to the amount of such student's Unmet Need. Lenders are authorized to make
Federal Unsubsidized Stafford Loans applicable for periods of enrollment
beginning on or after October 1, 1992.
Federal PLUS and Federal SLS Loan Programs
The Act authorizes Federal PLUS Loans to be made to parents of eligible
dependent students and previously authorized Federal SLS Loans to be made to
certain categories of students. After July 1, 1993, only parents who do not have
an adverse credit history or who can secure an endorser without an adverse
credit history are eligible for Federal PLUS Loans. The basic provisions
applicable to Federal PLUS and Federal SLS Loans are similar to those of Federal
Stafford Loans with respect to the federal insurance and reinsurance on the
loans. However, Federal PLUS and Federal SLS Loans differ from Federal Stafford
Loans, particularly because Interest Subsidy Payments are not available under
the Federal PLUS and Federal SLS Programs and in some instances Special
Allowance Payments are more restricted.
Loan Limits. Federal PLUS and Federal SLS Loans disbursed prior to July 1,
1993 are limited to $4,000 per academic year with a maximum aggregate amount of
$20,000. Federal SLS Loan limits for loans disbursed on or after July 1, 1993
depended upon the class year of the student and the length of the academic year.
The annual loan limit for Federal SLS Loans first disbursed on or after July 1,
1993 ranged from $4,000 for first and second year undergraduate borrowers to
$10,000 for graduate borrowers, with a maximum aggregate amount of $23,000 for
undergraduate borrowers and $73,000 for graduate and professional borrowers.
After July 1, 1994, for purposes of new loans being originated, the Federal SLS
programs were merged with the Federal Unsubsidized Stafford Loan program with
the borrowing limits reflecting the combined eligibility under both programs.
The only limit on the annual and aggregate amounts of Federal PLUS Loans first
disbursed on or after July 1, 1993 is the cost of the student's education less
other financial aid received, including scholarship, grants and other student
loans.
-25-
<PAGE>
Interest. The interest rate determination for a PLUS or SLS loan is
dependent on when the loan was originally made and disbursed and the period of
enrollment. The interest rates for PLUS and SLS loans are summarized in the
following chart.
<TABLE>
<CAPTION>
Interest
Trigger Date Borrower Rate(1) Maximum Rate(2) Rate Margin
- ------------------------ --------------------------------------- ------------------ --------------
<S> <C> <C> <C>
Prior to 10/01/81 9% 9% N/A
10/01/81-10/30/82 14% 14% N/A
11/01/82-06/30/87 12% 12% N/A
07/01/87-09/30/92 52-Week Treasury + Interest Rate Margin 12% 3.25%
10/01/92-06/30/94 52-Week Treasury + Interest Rate Margin PLUS 10%, SLS 11% 3.10%
07/01/94-06/30/98 52-Week Treasury + Interest Rate Margin 9% 3.10%
(SLS repealed 07/01/94)
After 6/30/98 A 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 and (b) the sum of (i) the bond equivalent rate of 52-week Treasury
bills auctioned at the final auction held prior to such June 1, and (ii) the
applicable Interest Rate Margin.
A holder of a PLUS or SLS Loan is eligible to receive Special Allowance
Payments during any quarter if (a) the sum of (i) the average of the bond
equivalent rates of 91-day Treasury bills auctioned during such quarter and (ii)
the Interest Rate Margin exceeds (b) the Maximum Rate.
Repayment, Deferments. The 1992 Amendments provide Federal SLS borrowers
with the option to defer commencement of repayment of principal until the
commencement of repayment of Federal Stafford Loans. Otherwise, repayment of
principal of Federal PLUS and Federal SLS Loans is required to commence no later
than 60 days after the date of disbursement of such loan, subject to certain
deferral and forbearance provisions. The deferral provisions which apply are
more limited than those which apply to Federal Stafford Loans. Repayment of
interest, however, may be deferred and capitalized during certain periods of
educational enrollments and periods of unemployment or hardship as specified
under the Act. Further, whereas Interest Subsidy Payments are not available for
such deferments, interest may be capitalized during such periods upon agreement
of the lender and borrower. Maximum loan repayment periods and minimum payment
amounts are the same as for Federal Stafford Loans.
A borrower may refinance all outstanding Federal PLUS Loans under a single
repayment schedule for principal and interest, with the new repayment period
calculated from the date of repayment of the most recent included loan. The
interest rate of such refinanced loan shall be the weighted average of the rates
of all Federal PLUS Loans being refinanced. A second type of refinancing enables
an eligible lender to reissue a Federal PLUS Loan which was initially originated
at a fixed rate prior to July 1, 1987 in order to permit the borrower to obtain
the variable interest rate available on Federal PLUS Loans on and after July 1,
1987. If a lender is unwilling to refinance the original Federal PLUS Loan, the
borrower may obtain a loan from another lender for the purpose of discharging
the loan and obtaining a variable interest rate.
Federal Consolidation Loan Program
The Act authorizes a program under which certain borrowers may consolidate
one or more of their Student Loans into a single loan (each, a "Federal
Consolidation Loan") insured and reinsured on a basis similar to Federal
Stafford Loans. Federal Consolidation Loans may be made in an amount sufficient
to pay outstanding principal, unpaid interest, late charges and collection costs
on all federally insured or reinsured student loans incurred under FFELP
selected by the borrower, as well as loans made pursuant to various other
federal student loan programs and which may have been made by different lenders.
Under this program, a lender may make a Federal Consolidation Loan to an
eligible borrower at the request of the borrower if the lender holds an
outstanding loan of the borrower or the borrower certifies that he has been
unable to obtain a Federal Consolidation Loan from the holders of the
outstanding loans made to him. A borrower who is unable to obtain a Federal
Consolidation Loan from an eligible lender or a Federal Consolidation Loan with
an income-sensitive repayment plan acceptable to the borrower may obtain a
Federal Consolidation Loan under the direct loan program. Federal Consolidation
Loans that were made on or after July 1, 1994 have no minimum loan amount,
although Federal Consolidation Loans for less than $7,500 must be repaid in ten
years. Applications for Federal Consolidation Loans received on or after January
1, 1993 but prior to July 1, 1994, were available only to borrowers who
-26-
<PAGE>
had aggregate outstanding student loan balances of at least $7,500; for
applications received before January 1, 1993, Federal Consolidation Loans are
available only to borrowers who have aggregate outstanding student loan balances
of at least $5,000. The borrowers must be either in repayment status or in a
grace period preceding repayment and, for applications received prior to January
1, 1993, the borrower must not have been delinquent by more than 90 days on any
student loan payment; for applications received on or after January 1, 1993,
delinquent or defaulted borrowers are eligible to obtain Federal Consolidation
Loans if they will reenter repayment through loan consolidation. For
applications received on or after January 1, 1993, borrowers may, within 180
days of the origination of a Federal Consolidation Loan, add additional loans
made prior to consolidation ("Add-on 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. For applications received on or after November 13, 1997 through
September 30, 1998, student loan borrowers may include federal direct loans in
Federal Consolidation Loans.
Federal Consolidation Loans bear interest at a rate which equals the
weighted average of interest rates on the unpaid principal balances of
outstanding loans, rounded to the nearest whole percent, with a minimum rate of
9% for loans originated prior to July 1, 1994. For Federal Consolidation Loans
made on or after July 1, 1994, such weighted average interest rate must be
rounded up to the nearest whole percent. However, Federal Consolidation Loans
made on or after November 13, 1997 through September 30, 1998 will bear interest
at the annual variable rate applicable to Stafford Loans. Interest on Federal
Consolidation Loans accrues and, for applications received prior to January 1,
1993, is to be paid without Interest Subsidy by the Department. For Federal
Consolidation Loans received on or after January 1, 1993, all interest of the
borrower is paid during all periods of Deferment. However, Federal Consolidation
Loan applications received on or after August 10, 1993 will only be subsidized
if all of the underlying loans being consolidated were subsidized Federal
Stafford Loans; provided, however, that in the case of Federal Consolidation
Loans made on or after November 13, 1997 through September 30, 1998, that
portion of the Federal Consolidation Loan that is comprised of Subsidized
Stafford Loans will retain its subsidy benefits during periods of deferment.
Borrowers may elect to accelerate principal payments without penalty. Further,
no insurance premium may be charged to a borrower and no insurance premium may
be charged to a lender in connection with a Federal Consolidation Loan. However,
a fee may be charged to the lender by a Federal Guarantor to cover the costs of
increased or extended liability with respect to a 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.
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 25 years in length. For applications received on or after
January 1, 1993, the maximum maturity schedule is 30 years for Federal
Consolidation Loans of $60,000 or more.
All eligible loans of a borrower paid in full through consolidation are
discharged in the consolidation process when the new Federal Consolidation Loan
is issued.
Federal Guarantors
The Act authorizes Federal Guarantors to support education financing and
credit needs of students at post-secondary schools. The Act encourages every
state either to establish its own agency or to designate another Federal
Guarantor in cooperation with the Secretary. Under various programs throughout
the United States of America, Federal Guarantors insure and sometimes service
guaranteed student loans. The Federal Guarantors are reinsured by the federal
government for from 80% to 100% of each default claim paid, depending on their
claims experience, for loans disbursed prior to October 1, 1993 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. Loans
guaranteed under the lender of last resort provisions of the Act are also 100%
guaranteed and reinsured. See "--Federal Insurance and Reinsurance of Federal
Guarantors" below.
-27-
<PAGE>
Federal Guarantors collect a one-time insurance premium ranging from 0% to
3% of the principal amount of each guaranteed loan, depending on the Federal
Guarantor. Federal Guarantors are prohibited from charging insurance premiums on
loans made under the Federal Unsubsidized Stafford Loan program prior to July 1,
1994. On such loans made prior to July 1, 1994, the Act requires that a 6.5%
combined loan origination fee and insurance premium be paid by the borrower on
Federal Unsubsidized Stafford Loans. This fee is passed through to the
Department by the originating lender. Effective July 1, 1994, the maximum
insurance premium and origination fee for Federal Stafford Loans and Federal
Unsubsidized Stafford Loans are 1% and 3%, respectively.
Each Federal Student Loan to be sold to an Eligible Lender Trustee on
behalf of a Trust will be guaranteed as to principal and interest by a Federal
Guarantor pursuant to a guarantee agreement (each, a "Guarantee Agreement")
between such Federal Guarantor and the applicable Eligible Lender Trustee. The
applicable Prospectus Supplement for each Trust will identify each related
Federal Guarantor for the 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 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
defaulted loan plus accrued and unpaid interest thereon so long as the eligible
lender has properly originated and serviced such loan. Under the Act, the
Department enters into a guarantee agreement with each Federal Guarantor, which
provides for federal reinsurance for amounts paid to eligible lenders by the
Federal Guarantor with respect to defaulted loans.
Pursuant to such agreements, the Department also agrees to reimburse a
Federal Guarantor for 100% of the amounts expended in connection with a claim
resulting from the death, bankruptcy, total and permanent disability of a
borrower, the death of a student whose parent is the borrower of a Federal PLUS
Loan or claims by borrowers who received loans on or after January 1, 1986 and
who are unable to complete the programs in which they are enrolled due to school
closure or borrowers whose borrowing eligibility was falsely certified by the
eligible institution; such claims are not included in calculating a Federal
Guarantor's claims rate experience for federal reinsurance purposes. The
Department also agrees to reimburse a Federal Guarantor for 100% of the amounts
expended in connection with claims on loans made under the lender of last resort
provisions. The Department is also required to repay the unpaid balance of any
loan if the borrower files for relief under Chapter 12 or 13 of the Bankruptcy
Code or files for relief under Chapter 7 or 11 of the Bankruptcy Code and 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
-28-
<PAGE>
Department to the Federal Guarantor during any fiscal year as a percentage of
the original principal amount of guaranteed loans in repayment at the end of the
prior federal fiscal year. The formula is summarized as follows:
<TABLE>
<CAPTION>
Claims Rate of Federal Guarantor Reimbursement to Federal Guarantor by the Department of Education(1)
- ------------------------------------- --------------------------------------------------------------------
<S> <C>
0% to and including 5% 100%
Greater than 5% to and including 9% 100% of claims to and including 5%; 90% of claims greater than 5%
Greater than 9% 100% of claims to and including 5%; 90% of claims greater than 5%
to and including 9%; and 80% of claims greater than 9%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) The federal reimbursement has been reduced to 98%, 88% and 78% for loans
disbursed on or after October 1, 1993.
The claims experience is not accumulated from year to year, but is
determined solely on the basis of claims in any one federal fiscal year compared
with the original principal balance of loans in repayment at the beginning of
that year.
The 1992 Amendments 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% 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% for the Federal Guarantor's fiscal year beginning in 1994, 0.9% for
the Federal Guarantor's fiscal year beginning in 1995, and 1.1% 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.
WEIGHTED AVERAGE LIVES OF THE SECURITIES
The weighted average lives 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 of the loans 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 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
-29-
<PAGE>
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--Optional Redemption" 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 lives of the Securities of the related series. See
"Description of the Transfer and Servicing Agreements--Additional Fundings".
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 amount 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 amount 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 amount 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 amount 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 a
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".
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 "Depositary") 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
-30-
<PAGE>
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 of Notes held in book-entry form
refer to actions taken by DTC upon instructions from its participating
organizations (the "Participants") and all references herein to distributions,
notices, reports and statements to Noteholders refer to distributions, notices,
reports and statements to DTC or its nominee, as the case may be, as the
registered holder of the Notes 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 of 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 the 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 exercise by the Seller, or such other
party as may be named in the related Prospectus Supplement, of its option to
purchase the related Student Loans.
Unless otherwise specified in the related Prospectus Supplement,
Noteholders of all classes within a series will have the same priority with
respect to payments of interest. Under certain circumstances, the amount
available for such payments could be less than the amount of interest payable on
the Notes on any of the dates specified for payments in the related Prospectus
Supplement (each, a "Distribution Date"), in which case each class of
Noteholders will receive its ratable share (based upon the aggregate amount of
interest due to such class of Noteholders) of the aggregate amount available to
be distributed in respect of interest on the Notes of such series. See
"Description of the Transfer and Servicing Agreements--Distributions" and
"--Credit and Cash Flow Enhancement".
In the case of a series of Notes which includes two or more classes of
Notes, the sequential order and priority of payment in respect of principal and
interest, and any schedule or formula or other provisions applicable to the
determination thereof, of each such class will be set forth in the related
Prospectus Supplement. Payments in respect of principal and interest of any
class of Notes will be made on a pro rata basis among all the Noteholders of
such class.
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, however, without the consent of the holder of each
such outstanding Note affected thereby, no supplemental indenture will (i)
change the due date of
-31-
<PAGE>
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.
Events of Default; Rights upon Event of Default. With respect to the Notes
of a given series, unless otherwise specified in the related Prospectus
Supplement, an "Event of Default" under the related Indenture will consist of
the following: (i) a default for five days or more in the payment of any
interest on any such Note after the same becomes due and payable; (ii) a default
in the payment of the principal of or any installment of the principal of any
such Note when the same becomes due and payable; (iii) a default in the
observance or performance of any covenant or agreement of the applicable Trust
made in the related Indenture and the continuation of any such default for a
period of 30 days after notice thereof is given to the applicable Trust by the
applicable Indenture Trustee or to the applicable Trust and the applicable
Indenture Trustee by the holders of at least 25% in principal amount of such
Notes then outstanding; provided, however, that if the Trust demonstrates that
it is making a good faith attempt to cure such default, such 30-day period may
be extended by the Indenture Trustee to 90 days; (iv) any representation or
warranty made by the applicable Trust in the related Indenture or in any
certificate delivered pursuant thereto or in connection therewith having been
incorrect in a material respect as of the time made, and such breach is not
cured within 30 days after notice thereof is given to such Trust by the
applicable Indenture Trustee or to such Trust and the applicable Indenture
Trustee by the holders of at least 25% in principal amount of the Notes of such
series then outstanding; provided, however, that if the Trust demonstrates that
it is making a good faith attempt to cure such breach, such 30-day period may be
extended by the Indenture Trustee to 90 days, or (v) certain events of
bankruptcy, insolvency, receivership or liquidation of such Trust. However, the
amount of principal required to be distributed to Noteholders of such series
under the related Indenture on any Distribution Date will generally be limited
to amounts available after payment of all prior obligations of such Trust.
Therefore, unless otherwise specified in the related Prospectus Supplement, the
failure to pay principal on a class of Notes generally will not result in the
occurrence of an Event of Default until the final scheduled Distribution Date
for such class of Notes. If, with respect to any series of Notes, interest is
paid at a variable rate based on an index, the related Prospectus Supplement may
provide that, in the event that, for any Distribution Date, the Interest Rate as
calculated based on the index is 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
-32-
<PAGE>
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 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
662/3% 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, or any holder of a Certificate representing an
ownership interest in the applicable Trust, or 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 thereof or the District of Columbia,
(ii) such entity expressly assumes such Trust's obligation to make due and
punctual payments upon the Notes of the related series and the performance or
observance of every agreement and covenant of such Trust under the related
Indenture, (iii) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation, (iv) such Trust has been advised
that the ratings of the Notes and the Certificates of the related series
-33-
<PAGE>
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 the 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.
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
-34-
<PAGE>
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 case may be, as
the registered holder of the Certificates, 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, the Certificates owned by SMS and its
affiliates will be deemed not to be outstanding for the purpose of determining
whether the requisite percentage of Certificateholders has 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.
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 of 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
-35-
<PAGE>
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.
Book-Entry Registration
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the UCC and a "clearing agency" registered
pursuant to Section 17A of the Exchange Act. DTC was created to hold securities
for its Participants and to facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entries,
thereby eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations. Indirect access to the DTC system also is available to others such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
("Indirect Participants").
Securityholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Securities held through DTC may do so only through Participants and Indirect
Participants. In addition, Securityholders will receive all distributions of
principal and interest from the 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, which in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to such
Securities, may be limited due to the lack of a physical certificate for such
Securities.
-36-
<PAGE>
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 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.
-37-
<PAGE>
Reports to Securityholders
With respect to each series of Securities, on each Distribution Date, the
Applicable Trustee will provide to Securityholders of record as of the related
Record Date a statement setting forth substantially the same information as is
required to be provided on the periodic report provided to the related Indenture
Trustee and the related Trust described under "Description of Transfer and
Servicing Agreements--Statements to Indenture Trustee and Trust". Such
statements will be filed with the Commission during the period required by Rule
15d-1 under the Securities Exchange Act of 1934, as amended, and will not be
filed with the Commission thereafter. The statements provided to Securityholders
will not constitute financial statements prepared in accordance with generally
accepted accounting principles.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of each Trust, the Applicable Trustee
will mail to each person who at any time during such calendar year was a
Securityholder with respect to such Trust and received any payment thereon, a
statement containing certain information for the purposes of such
Securityholder's preparation of federal income tax returns. See "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, this 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 a schedule 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 with respect thereto 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,
without limitation, the Act) and applicable restrictions imposed by FFELP or any
Guarantee Agreement.
Unless otherwise provided in the related Prospectus Supplement, following
the discovery by or notice to the Seller of a breach of any representation or
warranty with respect to any Student Loan that materially and adversely affects
the interests of the related Certificateholders or the Noteholders in such
Student Loan (it being understood that any such breach that does not affect any
Guarantor's obligation to guarantee payment of such Student Loan will not be
considered to have such a material adverse effect), the Seller will, unless such
breach is cured within 60 days, repurchase such Student Loan from the related
Eligible Lender Trustee, as of the first day following the end of such 60-day
period that is the last day of a Collection Period, at a price equal to the
unpaid principal balance owed by the applicable borrower 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
-38-
<PAGE>
Guarantor refuses to pay pursuant to its Guarantee Agreement, or for any
Interest Subsidy Payments and Special Allowance Payments that are lost or that
must be repaid to the Department with respect to a 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.
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 lives 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
-39-
<PAGE>
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), 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 the Student Loans, responding to inquiries from
borrowers under the Student Loans, investigating delinquencies and sending out
statements and payment coupons. In addition, the Servicer will keep ongoing
records with respect to such Student Loans and collections thereon and will
furnish monthly and annual statements with respect to such information to the
Administrator, in accordance with the Servicer's customary practices with
respect to the Seller and as otherwise required in the related Loan Servicing
Agreement.
If so provided in the related Prospectus Supplement, the Servicer may act
as a master servicer and may from time to time perform its servicing obligations
under the applicable Loan 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 into the related
Collection Account, within two business days after receipt of freely available
funds, 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"). The Eligible Lender Trustee will
deposit into the Collection Account, within two business days after receipt, all
Interest Subsidy Payments and all Special Allowance Payments with respect to the
Student Loans received by it during each Collection Period.
Servicer Covenants
With respect to each Trust, the Servicer will covenant in the related Loan
Servicing Agreement 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 or Guarantor requirements.
-40-
<PAGE>
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 Guarantor refuses to pay pursuant to its Guarantee Agreement, or for any
prior Interest Subsidy Payments and Special Allowance Payments that are lost or
that must be repaid to the Department with respect to a 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.
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, collections on the related Student Loans will
be distributed from the Collection Account on each Distribution Date to
Noteholders and Certificateholders to the extent provided in the related
Prospectus Supplement. Credit and cash flow enhancement, such as a Reserve
Account, will be available to cover any shortfalls in the amount available for
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 one or more other classes of such
series, 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, interest rates swaps, interest rate caps, interest rate
floors, currency swaps, 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
-41-
<PAGE>
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 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 amount 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;
-42-
<PAGE>
(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-Funding Amount or, for each date during the Revolving Period (if any), the
amount on deposit in the Collateral Reinvestment Account; and
(xii) the principal balance and number of Student Loans conveyed to or
originated by the Trust during such Collection Period.
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 amount 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.
-43-
<PAGE>
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, marshaling 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 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
-44-
<PAGE>
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.
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.
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.
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 another 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 Administrator will
agree, to the extent
-45-
<PAGE>
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 Student Loans
may, pursuant to the provisions of 20 U.S.C. ss. 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.
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".
-46-
<PAGE>
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. These requirements are generally inapplicable to Federal Student
Loans, but in certain circumstances, a Trust may be liable for certain
violations of consumer protection laws that may apply to the Student Loans,
either as assignee or as the party directly responsible for obligations arising
after the transfer. For a discussion of a Trust's rights 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, imposes
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) 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.
Any such failure could result in the Department's refusal to make reinsurance
payments to 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.
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 of the Seller to so purchase, or of the
Servicer to arrange for the purchase of, a Student Loan, if so required, 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.
-47-
<PAGE>
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, in the opinion of Stroock & Stroock & Lavan LLP
("Federal Tax Counsel"), a summary of all material federal income tax
consequences of the purchase, ownership and disposition of the Notes and the
Certificates. This 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 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 sale of the securities issued by such Trust. An opinion of
Federal Tax Counsel, however, is not binding on the IRS or the courts. No ruling
on any of the issues discussed below will be sought from the IRS. For purposes
of the following summary, references to the Trust, the 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. 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 securities 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) is less than a de minimis amount (i.e., 0.25% of their
principal amount multiplied by the weighted 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
-48-
<PAGE>
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, are to be
determined under regulations yet to be issued, the legislative history of these
Code provisions provides that the same prepayment assumption used to calculate
OID, whether or not the debt instrument is issued with OID, should be used.
Interest Income on the 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 at the beginning of the first taxable
year to which the election applies or acquires thereafter. 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., payments cam be compelled or the debt instrument provides terms and
conditions that make the likelihood of late payment or nonpayment remote) at
least annually at a single fixed rate (or certain variable rates). 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 (each, 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. 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, and 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.
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. Any such
gain or loss would be long-term capital gain or loss if the Noteholder's holding
period exceeded one year. Capital losses generally may be used only to offset
capital gains.
Foreign Holders. Interest paid (or accrued) to a Noteholder who is a
nonresident alien, foreign corporation or other person that is not a United
States person as such term is defined in the Code and the Treasury regulations
thereunder (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) or 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
-49-
<PAGE>
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 penalty 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).
Final regulations dealing with backup withholding and information
reporting on income paid to foreign persons and related matters (the "New
Withholding Regulations") were published in the Federal Register on October 14,
1997. In general, the New Withholding Regulations do not significantly alter the
substantive withholding and information reporting requirements, but do unify
current certification procedures and forms and clarify reliance standards. As
set forth in Notice 98-16, 1998-15 I.R.B. 1, the New Withholding Regulations
generally will be effective for payments made after December 31, 1999, subject
to certain transition rules. The discussion set forth above does not take the
New Withholding Regulations into account. Prospective Noteholders who are
foreign persons are strongly urged to consult their own tax advisors with
respect to the New Withholding Regulations.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalty 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 related Trust will be
required to withhold 31% of the amount otherwise payable to the holder and remit
the withheld amount to the IRS as a credit against the holder's federal income
tax liability. As previously mentioned, the New Withholding Regulations
generally will be effective for payments made after December 31, 1999, subject
to certain transition rules.
Recent Legislation
Sections 860H through 860L to the Code (the "FASIT Provisions") 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, did not become 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 enables trusts such as the
Trust to elect 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. If a Trust is intended to qualify as a FASIT for federal income tax
purposes, the Prospectus Supplement will so indicate.
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.
-50-
<PAGE>
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. Losses will generally be allocated in
the manner in which they are borne. Based on the economic arrangement of the
parties, this approach for allocating Trust income should be permissible under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to
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 make (or 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 only to the extent they exceed two percent of the
individual's adjusted gross income (and not at all for alternative minimum tax
purposes). 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. Such deductions may also be subject to reduction under
Section 68 of the Code if an individual taxpayers adjusted gross income exceeds
certain limits.
-51-
<PAGE>
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 the portion allocated to the Trust Certificateholders will be
allocated to them pro rata. 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. An owner of a Trust
Certificate is 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 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 Section 704(c) of the
Code to account for such variations.
Under Section 708 of the Code, if 50% or more of the outstanding interests
in a partnership are sold or exchanged within any 12-month period, such
partnership will be deemed to terminate and then be reconstituted for federal
income tax purposes. If such a termination occurs, the assets of the terminated
partnership are deemed to be constructively contributed to a reconstituted
partnership in exchange for interests in such reconstituted partnership. Such
interests would be deemed distributed to the partners of the terminated
partnership in liquidation thereof, which distribution would not constitute a
sale or exchange. Accordingly, if the sale of the Trust Certificates terminates
the partnership under Section 708 of the Code, a Certificateholder's basis in
its ownership interest would not change. The Trust's taxable year would also
terminate as a result of a constructive termination and, if the
Certificateholder's taxable year is different from the Trust's, the termination
could result in the "bunching" of more than 12 months' income or loss of the
Trust in such Certificateholder's income tax return for the year in which the
Trust was deemed to terminate. A redemption of interests is not considered a
sale or exchange of interests for purposes of applying this constructive
termination rule.
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 aggregate principal balances 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.
Any such gain or loss would be long-term capital gain or loss if the
Certificateholder's holding period exceeded one year. 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 or losses allocated 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
-52-
<PAGE>
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.
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 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. 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 timely 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 "tax matters partner" in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in certain disputes 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 the later of three years after the date
on which the partnership information return is filed or the last day for filing
such return for such year (determined without regard to extensions). 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,
-53-
<PAGE>
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 35% for foreign holders that are taxable as corporations and 39.6% for all
other foreign holders. Subsequent adoption of Treasury regulations or the
issuance of other administrative pronouncements may require the Trust to change
its withholding procedures. In determining a holder's withholding status, the
Trust may rely on IRS Form W-8, IRS Form W-9 or the holder's certification of
nonforeign status signed under penalty of perjury. As previously mentioned, the
New Withholding Regulations generally will be effective for payments made after
December 31, 1999, subject to certain transition rules. The discussion set forth
above does not take into account the New Withholding Regulations. Prospective
Certificateholders who are foreign persons are strongly urged to consult their
own tax advisors with respect to the New Withholding Regulations.
Each foreign holder may 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
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 may 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
on the Trust's gross income, 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, if any, in excess of the taxes
that should be withheld with respect to the guaranteed payments. As a result,
each potential foreign Certificateholder should consult its tax advisor as to
whether the tax consequences of holding a Certificate make it an unsuitable
investment.
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. As previously mentioned, the New Withholding
Regulations generally will be effective for payments made after December 31,
1999, subject to certain transition rules.
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 be treated as a division
of its owner and as such will be disregarded as an entity separate from its
owner for federal income tax purposes, assuming no election will be made to
treat the Trust as a corporation for federal income tax purposes.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. As discussed above, 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 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 "--TRUSTS FOR WHICH A
PARTNERSHIP ELECTION IS MADE--Tax Consequences to Holders of the Notes" would
apply to the Noteholders.
-54-
<PAGE>
Possible Alternative Treatments of the Notes. 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 could, in the view of Federal Tax Counsel, be treated as a
publicly traded partnership that would be 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.
Furthermore, even if the Trust were not taxable as a corporate, the
treatment of Notes as equity interests in such a partnership could have adverse
tax consequences to certain holders of such Notes. For example, income from
certain classes of Notes to certain tax-exempt entities (including pension
funds) might 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.
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 SECURITIES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
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 not feasible 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 be taxable for Indiana income tax purposes in
the same manner as it is taxed for federal income tax purposes. As a result, if
the Trust should be treated as a partnership which is not a publicly traded
partnership, the Trust should not be subject to Indiana corporate income taxes.
(If such taxes were applicable, however, they could result in reduced
distributions to Certificateholders.) Moreover, Certificateholders that are not
otherwise subject to tax in Indiana should not be subject to Indiana individual
income or corporate income taxes with respect to income from the partnership,
unless in the event the Trust is considered to be carrying on business in
Indiana.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain requirements on employee benefit plans and on
certain other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and separate
accounts (and, as applicable, insurance company general accounts) in which such
plans, accounts or arrangements are invested that are subject to the fiduciary
responsibility provisions of ERISA and Section 4975 of the Code ("Plans") and on
persons who are fiduciaries with respect to such Plans in connection with
-55-
<PAGE>
the investment of Plan assets. Certain employee benefit plans, such as
governmental plans (as defined in ERISA Section 3(32)), and, if no election has
been made under Section 410(d) of the Code, church plans (as defined in Section
3(33) of ERISA) are not subject to ERISA requirements. Accordingly, assets of
such plans may be invested in Notes without regard to the ERISA considerations
described below, subject to the provisions of other applicable federal and state
law. Any such plan which is qualified and exempt from taxation under Sections
401(a) and 501(a) of the Code, however, is subject to the prohibited transaction
rules set forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, Section 406 of ERISA and Section 4975 of the
Code prohibit a broad range of transactions involving assets of Plan and persons
(parties in interest under ERISA and disqualified persons under the Code,
collectively, "Parties in Interest") who have certain specified relationships to
the Plan unless a statutory, regulatory or administrative exemption is
available. Certain Parties in Interest that participate in a prohibited
transaction may be subject to an excise tax imposed pursuant to Section 4975 of
the Code or a penalty imposed pursuant to Section 502(i) of ERISA, unless a
statutory or administrative exemption is available. These prohibited
transactions generally are set forth in Section 406 of ERISA and Section 4975 of
the Code.
The Notes
Unless otherwise specified in the related Prospectus Supplement, the Notes
of each series may be purchased by a Plan. The Issuer, the Company, any
underwriter, the Eligible Lender Trustee, the Indenture Trustee, the Servicer,
the Administrator, any provider of credit support or any of their affiliates may
be considered to be or may become Parties in Interest with respect to certain
Plans. Prohibited transactions under Section 406 of ERISA and Section 4975 of
the Code may arise if a Note is acquired by a Plan with respect to which such
persons are Parties in Interest unless such transactions are subject to one or
more statutory or administrative exemptions, such as: Prohibited Transaction
Class Exemption ("PTCE") 96-23, which exempts certain transactions effected on
behalf of a Plan by an "in-house asset manager"; PTCE 90-1, which exempts
certain transactions between insurance company separate accounts and Parties in
Interest; PTCE 91-38, which exempts certain transactions between bank collective
investment funds and Parties in Interest; PTCE 95-60, which exempts certain
transactions between insurance company general accounts and Parties in Interest;
or PTCE 84-14, which exempts certain transactions effected on behalf of a Plan
by a "qualified professional asset manager". There can be no assurance that any
of these class exemptions will apply with respect to any particular Plan
investment in Notes or, even if it were deemed to apply, that any exemption
would apply to all prohibited transactions that may occur in connection with
such investment. Accordingly, prior to making an investment in the Notes,
investing Plans should determine whether the Issuer, the Company, any
underwriter, the Eligible Lender Trustee, the Indenture Trustee, the Servicer,
the Administrator, or any provider of credit support or any of their affiliates
is a Party in Interest with respect to such Plan and, if so, whether such
transaction is subject to one or more statutory, regulatory or administrative
exemptions.
Any Plan fiduciary considering whether to invest in Notes on behalf of a
Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment. Each Plan fiduciary also should determine whether,
under the general fiduciary standards of investment prudence and
diversification, an investment in the Notes is appropriate for the Plan,
considering the overall investment policy of the Plan and the composition of the
Plan's investment portfolio, as well as whether such investment is permitted
under the governing Plan instruments.
The Certificates
Unless otherwise specified in the Prospectus Supplement, the Certificates
of each series may not be purchased by a Plan or by any entity whose underlying
assets include plan assets by reason of a plan's investment in the entity (each,
a "Benefit Plan"). Such purchase of an equity interest in the Trust 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.
-56-
<PAGE>
If a given series of Certificates may be acquired by a Benefit Plan
because of the application of an exception contained in a regulation or
administrative exemption issued by the United States Department of Labor, 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.
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.
-57-
<PAGE>
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 Stroock & Stroock & Lavan 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 matters will be passed upon for each Trust
by Stroock & Stroock & Lavan LLP and certain Indiana State income and corporate
income tax matters by Krieg DeVault Alexander & Capehart.
-58-
<PAGE>
INDEX OF PRINCIPAL TERMS
Page
1992 Amendments..............................................................20
1993 Act.....................................................................11
Act..........................................................................19
Additional Fundings..........................................................38
Add-on Consolidation Loans...................................................26
Administration Agreement.....................................................44
Administration Fee...........................................................45
Administrator.................................................................1
Administrator Default........................................................45
Applicable Trustee...........................................................35
Base Rate....................................................................34
Benefit Plan.................................................................55
Calculation Agent............................................................35
Cede.........................................................................14
Certificate Balance...........................................................2
Certificate Pool Factor......................................................29
Certificates..................................................................i
Closing Date..................................................................2
Code.........................................................................47
Collateral Reinvestment Account...............................................3
Collection Account...........................................................38
Collection Period............................................................39
Commission...................................................................ii
Company.......................................................................i
Cutoff Date...................................................................2
Deferral Period..............................................................24
Definitive Certificates......................................................36
Definitive Notes.............................................................36
Definitive Securities........................................................36
Department....................................................................3
Depository...................................................................29
Distribution Date............................................................30
DTC's Nominee................................................................14
Early Amortization Event......................................................3
Eligible Deposit Account.....................................................39
Eligible Institution.........................................................39
Eligible Investments.........................................................38
Eligible Lender Trustee.......................................................i
ERISA.........................................................................8
Event of Default.............................................................31
Existing Borrowers............................................................4
FASIT........................................................................49
FASIT Provisions.............................................................49
Federal Assistance...........................................................22
Federal Consolidation Loan...................................................19
Federal Guarantor.............................................................3
Federal Origination Fee......................................................11
Federal PLUS Loans...........................................................19
Federal SLS Loans............................................................19
Federal Stafford Loans.......................................................19
-59-
<PAGE>
Federal Student Loans.........................................................2
Federal Supplemental Loans to Students.......................................19
Federal Tax Counsel...........................................................7
Federal Unsubsidized Stafford Loans..........................................19
FFELP........................................................................19
Fixed Rate Securities........................................................34
Floating Rate Securities.....................................................34
Forbearance Period...........................................................24
Funding Period................................................................3
Grace Period.................................................................24
Guarantee Agreement..........................................................27
Guarantee Payments............................................................3
Guarantor.....................................................................3
Indenture.....................................................................1
Indenture Trustee.............................................................i
Index Shortfall Carryover....................................................31
Indiana Tax Counsel..........................................................54
Indirect Participants........................................................35
Initial Pool Balance.........................................................44
Insolvency Event.............................................................43
Interest Period..............................................................50
Interest Rate.................................................................1
Interest Reset Period........................................................34
Interest Subsidy Payments....................................................22
Investment Earnings..........................................................39
IRS..........................................................................47
Issuer........................................................................1
Loan Sale Agreement...........................................................2
Loan Services.................................................................1
Loan Servicing Agreement......................................................5
Monthly Rebate Fee...........................................................11
Note Pool Factor.............................................................29
Notes.........................................................................i
OID..........................................................................47
OID Regulations..............................................................47
Participants.................................................................30
Pass-Through Rate.............................................................2
Pool Factor..................................................................29
Pre-Funding Account...........................................................3
Pre-Funding Amount............................................................3
Prospectus Supplement.........................................................i
Purchase Amount..............................................................37
Registration Statement.......................................................ii
Related Documents............................................................33
Reserve Account...............................................................5
Reserve Account Initial Deposit...............................................5
Revolving Period..............................................................3
Rules........................................................................35
Secretary....................................................................14
Securities....................................................................i
Securities Act...............................................................ii
Seller........................................................................i
Servicer......................................................................1
Servicer Default.............................................................14
-60-
<PAGE>
Servicing Fee.................................................................6
Short-Term Note..............................................................48
SMS..........................................................................ii
Special Allowance Payments...................................................21
Spread.......................................................................34
Spread Multiplier............................................................35
Student Loans.................................................................i
Transfer and Servicing Agreements............................................37
Trust.........................................................................i
Trust Accounts...............................................................38
Trust Agreement...............................................................1
UCC..........................................................................45
Underwriting Agreements......................................................56
Unmet Need...................................................................21
USA Funds....................................................................16
USA Group....................................................................16
USA Group Guarantee Services.................................................16
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained or
incorporated by reference in this Prospectus Supplement and the Prospectus in
connection 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 offer
or solicitation is not qualified to do so or to anyone to whom it is unlawful to
make such offer or solicitation. Neither the delivery of this Prospectus
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.
-61-
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
-----
Prospectus Supplement
Reports to Securityholders ii
Summary of Terms S-1
Risk Factors S-19
Formation of the Trust S-27
The Financed Student Loan Pool S-29
Description of the Notes S-39
Description of the Transfer and Servicing Agreements S-44
Certain Federal Income Tax and State Tax
Consequences S-58
ERISA Considerations S-59
Underwriting S-59
Legal Matters S-60
Annex I S-61
Index of Principal Terms S-64
Prospectus
Available Information ii
Incorporation of Certain Documents by Reference ii
Table of Contents iii
Summary of Terms 1
Risk Factors 10
Formation of the Trusts 16
Use of Proceeds 17
USA Group, SMS, the Seller and the Servicer 17
The Student Loan Pools 19
Federal Family Education Loan Program 20
Weighted Average Life of the Securities 31
Pool Factors and Trading Information 31
Description of the Notes 32
Description of the Certificates 36
Certain Information Regarding the Securities 37
Description of the Transfer and Servicing
Agreements 40
Certain Legal Aspects of the Student Loans 49
Certain Federal Income Tax Consequences 51
Certain State Tax Consequences 59
ERISA Considerations 60
Plan of Distribution 61
Legal Matters 62
Index of Principal Terms 63
- --------------------------------------------------------------------------------
-62-
<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:
SEC registration fee.......................................... $ *
Legal fees and expenses....................................... *
Accounting fees and expenses.................................. *
Blue Sky fees and expenses.................................... *
Rating agency fees............................................ *
Eligible Lender Trustee fees and expenses..................... *
Indenture Trustee fees and expenses........................... *
Printing expenses............................................. *
Miscellaneous................................................. *
---------
Total................................................... $ *
=========
* To be filed by Amendment
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.
1.1 --Form of Underwriting Agreement for Notes**
1.2 --Form of Underwriting Agreement for Certificates**
3.1 --Restated Certificate of Incorporation of USA Group Secondary Market
Services, Inc.*
3.2 --By-laws of USA Group Secondary Market Services, Inc.*
3.3 --Form of Certificate of Trust for the Trusts (included as an exhibit
to 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, 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)**
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 Stroock & Stroock & Lavan LLP with respect to tax
matters***
8.2 --Opinion of Krieg DeVault Alexander & Capehart with respect to tax
matters***
8.3 --Opinion of Stroock & Stroock & Lavan LLP with respect to tax
matters***
23.1 --Consent of Krieg DeVault Alexander & Capehart (included as part of
Exhibit 5.1)***
23.2 --Consent of Stroock & Stroock & Lavan LLP (included as part of
Exhibits 8.1 and 8.3)***
II-1
<PAGE>
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**
- ----------
* 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 by Amendment.
Item 17. Undertakings.
(a) As to Rule 415:
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made of
the securities registered hereby, a post-effective amendment to this
Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment hereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement or
any material change to such information in this Registration Statement;
provided, however, that the undertakings set forth in clauses (i) and (ii) above
do not apply if the information required to be included in a post-effective
amendment by those clauses is contained in periodic reports filed by the
Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934, as amended, that are incorporated by reference in this Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(b) As to documents subsequently filed that are incorporated by reference:
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended, that is incorporated
by reference in this Registration Statement shall be deemed to be a new
registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreements Notes and
Certificates in such denominations and registered in such names as required by
the Underwriter to permit prompt delivery to each purchaser.
(d) As to indemnification:
II-2
<PAGE>
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 September 9, 1998.
USA GROUP SECONDARY MARKET SERVICES, INC., as
originator of the Trust (Registrant)
By: /S/ CHERYL E. WATSON
------------------------------------------
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 September 9, 1998
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
--------- --------
/S/ STEPHEN W. CLINTON Chairman of the Board, President,
- --------------------------------- Chief Executive Officer (Principal
Stephen W. Clinton Executive Officer) and Director
/S/ CHERYL E. WATSON Senior Vice President (Principal Accounting
- --------------------------------- Officer)
Cheryl E. Watson
/S/ VINCENT J. OTTO Executive Vice President and Chief Financial
- --------------------------------- Officer (Principal Financial Officer)
Vincent J. Otto
/S/ ERNEST J. NEWBORN, JR. Director
- ---------------------------------
Ernest J. Newborn, Jr.
/S/ IKE G. BATALIS Director
- ---------------------------------
Ike G. Batalis
II-4
<PAGE>
EXHIBIT INDEX
Sequential
Exhibit Page
No. Description No.
--- ----------- ---
1.1 --Form of Underwriting Agreement for Notes**
1.2 --Form of Underwriting Agreement for Certificates**
3.1 --Restated Certificate of Incorporation of USA Group Secondary
Market Services, Inc.*
3.2 --By-laws of USA Group Secondary Market Services, Inc.*
3.3 --Form of Certificate of Trust for the Trusts (included as an
exhibit to 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 Stroock & Stroock & Lavan LLP with respect to tax
matters***
8.2 --Opinion of Krieg DeVault Alexander & Capehart with respect to
tax matters***
8.3 --Opinion of Stroock & Stroock & Lavan LLP with respect to tax
matters***
23.1 --Consent of Krieg DeVault Alexander & Capehart (included as part
of Exhibit 5.1)***
23.2 --Consent of Stroock & Stroock & Lavan LLP (included as part of
Exhibits 8.1 and 8.3)***
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**
- ----------
* 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 by Amendment.
II-5
