SMS Student Loan Trust 1998-A
$150,000,000
Class A-1 Floating Rate Asset-Backed Senior Notes
$433,650,000
Class A-2 Floating Rate Asset-Backed Senior Notes
USA Group Secondary Market Services, Inc.
Seller
The SMS Student Loan Trust 1998-A (the "Trust") will issue $150,000,000
aggregate principal amount of Class A-1 Floating Rate Asset-Backed Senior Notes
(the "Class A-1 Notes"), $433,650,000 aggregate principal amount of Class A-2
Floating Rate Asset-Backed Senior Notes (the "Class A-2 Notes" and, together
with the Class A-1 Notes, the "Senior Notes") and $21,350,000 aggregate
principal amount of Floating Rate Asset-Backed Subordinate Notes (the
"Subordinate Notes" and, together with the Senior Notes, the "Notes"). Only the
Senior Notes are offered hereby. The assets of the Trust will include a pool of
guaranteed education loans to students and parents of students purchased by The
First National Bank of Chicago, as eligible lender trustee on behalf of the
Trust (the "Eligible Lender Trustee"), from USA Group Secondary Market Services,
Inc. (the "Seller") (such loans, together with any Additional Student Loans
acquired from the Seller or originated from time to time by the Eligible Lender
Trustee on behalf of the Trust, the "Financed Student Loans"), collections and
other payments with respect to the Financed Student Loans, and monies on deposit
in certain trust accounts (including the Collection Account, the Reserve Account
and the Collateral Reinvestment Account). As described herein, the Trust will
also have the benefit of an interest rate swap (the "Interest Rate Swap") until
the earliest of the July 2008 Quarterly Payment Date (the "Scheduled Swap
Termination Date"), the date on which the Notes have been paid in full, and the
date on which the Interest Rate Swap is terminated in accordance with its terms
pursuant to an early termination. The Notes will be collateralized by all of the
assets of the Trust as described herein. The rights of the Subordinate
Noteholders to receive payments of interest out of the Available Funds (as
defined herein) 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 out of the Available Funds will be subordinate to
the rights of the Senior Noteholders to receive payments of interest and
principal, in each case to the extent described herein. However, the Seller has
applied to MBIA Insurance Corporation (the "Subordinate Note Insurer") for a
note guaranty insurance policy relating to the Subordinate Notes (the
"Subordinate Note Insurance Policy") to guarantee payment, on each Quarterly
Payment Date, of the Subordinate Noteholders' Interest Distribution Amount and,
on the Subordinate Note Final Maturity Date, of the Subordinate Noteholders'
Principal Distribution Amount pursuant to the terms of such policy. Payments
under the Senior Notes will not be insured under the Subordinate Note Insurance
Policy or any other insurance policy. After the Closing Date, certain Additional
Fundings will be made from time to time during the Revolving Period, and in
certain cases after the Revolving Period as described herein, by or on behalf of
the Trust.
(Cover continued on next page)
For a discussion of certain significant matters affecting investments in the
Senior Notes, see "Risk Factors" herein at Page S-19 and in the Prospectus at
Page 10.
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.
THE SENIOR NOTES 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.
Underwriting
Price to Discounts and Proceeds to the
Public (1) Commissions Seller (1)(2)
------------ ---------- ------------
Per Class A-1 Note..... 100.00% 0.225% 99.775%
Per Class A-2 Note..... 100.00% 0.250% 99.750%
Total.................. $583,650,000 $1,421,625 $582,228,375
(1) Plus accrued interest, if any, at the applicable Note Rate from May 26,
1998.
(2) Before deducting expenses payable by the Seller, estimated to be $766,250.
The Senior Notes are offered by the Underwriters, when, as and if issued
by the Trust, delivered and accepted by the Underwriters and subject to their
right 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, Cedel Bank, societe anonyme, and the Euroclear System
on or about May 26, 1998, against payment in immediately available funds.
Credit Suisse First Boston
Bear, Stearns & Co. Inc.
Goldman, Sachs & Co.
Merrill Lynch & Co.
Prospectus Supplement dated May 20, 1998
<PAGE>
(Continued from preceding page)
The rate of interest per annum on the Notes for each Quarterly Interest
Period will, subject to certain limitations described herein, be equal to
Three-Month LIBOR (determined as described herein) plus 0.04% with respect to
the Class A-1 Notes, plus 0.12% with respect to the Class A-2 Notes and plus
0.27% with respect to the Subordinate Notes. Interest and principal on the Notes
will be payable quarterly on or about each January 28, April 28, July 28 and
October 28 of each year (or, if such day is not a business day, on the next
succeeding business day), commencing July 28, 1998 (each, a "Quarterly Payment
Date"); provided, however, that no principal payments will be made on the Notes
until after the end of the Revolving Period (as defined herein). Thereafter,
principal payments will be allocated between the Class A-1 Notes and the Class
A-2 Notes as described herein and no principal payments on the Subordinate Notes
will be made out of the Available Funds or the Reserve Account until the Senior
Notes are paid in full.
The final maturity date for the Class A-1 Notes will be the October 2005
Quarterly Payment Date, for the Class A-2 Notes will be the July 2026 Quarterly
Payment Date and for the Subordinate Notes will be the October 2033 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 Delaware 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, which option is exercisable when the aggregate principal
balance of the Financed Student Loans is reduced to 20% or less of the initial
aggregate principal amount of the Notes.
USA Group Loan Services, Inc., a Delaware non-profit corporation ("Loan
Services"), will service all the Financed Student Loans. All the Financed
Student Loans will be guaranteed to the extent described herein by United
Student Aid Funds, Inc., a Delaware non-profit corporation ("USA Funds" or the
"Initial Guarantor"). The Trust may include loans guaranteed to the extent
described herein by other Federal Guarantors, which Guarantors 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,
INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SHORT-COVERING TRANSACTIONS
AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING"
HEREIN.
REPORTS TO SECURITYHOLDERS
Unless and until Definitive Notes are issued, quarterly and annual
unaudited reports containing information concerning the Financed Student Loans
will be prepared by the Administrator and sent on behalf of the Trust only to
Cede & Co. ("Cede"), as nominee of The Depository Trust Company ("DTC") and
registered holder of the Senior Notes, and to the Subordinate Note Insurer, 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.
<PAGE>
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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" beginning on
page S-62 or, to the extent not defined herein, have the meanings assigned to
such terms in the Prospectus.
Issuer ............................. SMS Student Loan Trust 1998-A (the
"Trust").
Securities Offered ................. $150,000,000 aggregate principal amount
of Class A-1 Floating Rate Asset-Backed
Senior Notes (the "Class A-1 Notes")
and $433,650,000 aggregate principal
amount of Class A-2 Floating Rate
Asset-Backed Senior Notes (the "Class
A-2 Notes" and, together with the Class
A-1 Notes, the "Senior Notes").
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 depositaries
(together, the "Depositaries") of CEDEL
and Euroclear, respectively, and each a
participating member of DTC. See
"Description of the Notes--Book-Entry
Registration" herein.
Securities Other than the
Securities Offered ............... Inaddition to the Senior Notes, the
Trust will issue $21,350,000 aggregate
principal amount of Floating Rate
Asset-Backed Subordinate Notes (the
"Subordinate Notes" and, together with
the Senior Notes, the "Notes"). 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 February
24, 1993, 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 ........................... USA Group Loan Services, Inc., a Delaware
non-profit corporation, as servicer
(the "Servicer" or "Loan Services")
pursuant to a Servicing Agreement to be
dated as of May 1, 1998 (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
- --------------------------------------------------------------------------------
S-1
<PAGE>
- --------------------------------------------------------------------------------
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 ............ The First National Bank of Chicago, 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 .................. Bankers Trust Company, a New York banking
corporation (the "Indenture Trustee"),
as trustee under an Indenture to be
dated as of May 1, 1998 (as amended and
supplemented from time to time, the
"Indenture"), between the Trust and the
Indenture Trustee.
Administrator ...................... SMS, as administrator (the
"Administrator") on behalf of the
Trust, pursuant to an Administration
Agreement to be dated as of May 1, 1998
(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 May 1, 1998 (as
amended and supplemented from time to
time, the "Trust Agreement"), among the
Seller, Secondary Market Company, Inc.
(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, entering into the
Interest Rate Swap, obtaining the
Subordinate Note Insurance Policy 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 May 26, 1998 (the "Closing
Date"), the Seller will sell Student
Loans (the "Initial Financed Student
Loans") having an aggregate principal
balance of approximately
$579,395,357.38 (the "Initial Pool
Balance") as of May 1, 1998 (the
"Cutoff Date"), to the Eligible Lender
Trustee on behalf of the Trust pursuant
to a Loan Sale Agreement to be dated as
of May 1, 1998 (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. On the Closing Date,
the aggregate principal balance of the
Initial Financed Student Loans will be
reduced by an amount not to exceed
$5,000,000, as provided under "The
Financed Student Loan Pool" herein, and
an equal amount of cash will be
deposited into the Collection Account
on such date. Following the Closing
Date and during the Revolving Period
(as defined below), and in the case of
Serial Loans (as defined below) and
certain Add-on Consolidation Loans (as
defined below) continuing after the
Revolving Period, it is anticipated
that, subject to certain conditions
described herein, additional Student
- --------------------------------------------------------------------------------
S-2
<PAGE>
- --------------------------------------------------------------------------------
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 the
"Initial Guarantor"), which is
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. An Additional
Student Loan may be guaranteed, to the
extent described herein, by a Federal
Guarantor other than the Initial
Guarantor (each, an "Additional
Guarantor" and, collectively, the
"Additional Guarantors" and, together
with the Initial Guarantor, the
"Guarantors") provided certain
conditions are met. See "The Financed
Student Loan Pool--Guarantee of
Financed Student Loans" herein.
Financed Student Loans made before
October 1, 1993 are 100% guaranteed by
a Guarantor, and reinsured against
default by the Department 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 such 98% guarantee and 98%
maximum reinsurance coverage,
respectively, with respect to Financed
Student Loans made on or after October
1, 1993.
As of the Cutoff Date, the weighted
average interest rate per annum with
respect to the Initial Financed Student
Loans was approximately 8.49% (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 157.35
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 180.71
months. As of the Cutoff Date,
approximately 43.82%, 0.85%, 10.85% and
44.48% of the outstanding aggregate
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,
all of the Initial Financed Student
Loans are guaranteed by USA Funds. 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 July 2000 Quarterly
Payment Date, the Eligible Lender
Trustee on behalf of the Trust will be
obligated from time to time, subject to
certain conditions described herein, to
purchase from the Seller, and the
Seller, subject to the availability
thereof and to the availability of
funds therefor in the Collateral
Reinvestment Account, will be obligated
to tender to the Trust, 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
- --------------------------------------------------------------------------------
S-3
<PAGE>
- --------------------------------------------------------------------------------
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 June
30, 1998). 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") among 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 plus
accrued interest thereon expected to be
capitalized upon repayment (the
"Purchase Collateral Balance") and (ii)
an additional amount not to exceed 2.5%
of the principal balance owed by the
applicable borrower thereon (the
"Purchase Premium Amount" and, together
with the Purchase Collateral Balance,
the "Loan Purchase Amount"). 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, 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 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 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
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S-4
<PAGE>
- --------------------------------------------------------------------------------
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 (whether or not
all such loans are in the Trust) who is
also a borrower under one or more
Financed Student Loans 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 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.
As described under "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 final
payment date. 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 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, 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
$35,000,000; additionally, no Federal
Consolidation Loan may be originated by
the Trust having a scheduled maturity
date after October 28, 2029 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 October 28, 2029 exceeds or,
after giving effect to such
origination, would exceed $15,000,000;
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
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S-5
<PAGE>
- --------------------------------------------------------------------------------
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, 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 balances of
Federal Consolidation Loans in the
Trust by the addition of Add-on
Consolidation Loans.
As described under "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 the 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 balances 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 (x) by the
Eligible Lender Trustee on behalf of
the Trust to purchase Serial Loans, (y)
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 (z) 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 balances of the
Financed Student Loans, is referred to
herein as "Additional Fundings".
B. Collateral Reinvestment
Account ....................... During the Revolving Period an account
will be maintained in the name of the
Indenture Trustee (the "Collateral
Reinvestment Account"). No money will
be on deposit in the Collateral
Reinvestment Account on the Closing
Date. During the Revolving Period
deposits will be made to the Collateral
Reinvestment Account as described
herein under "Description
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S-6
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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 on the next
succeeding Quarterly Payment Date first
to the Swap Counterparty in respect of
any prior unpaid Net Trust Swap Payment
Carryover Shortfalls and then as a
payment of principal on the Notes. Any
such principal payments to the holders
of the Senior Notes (the "Senior
Noteholders") shall be allocated
between the holders of the Class A-1
Notes (the "Class A-1 Noteholders") and
the holders of the Class A-2 Notes (the
"Class A-2 Noteholders") as described
under "Description of the
Notes--Distributions of Principal"
herein and, if the Senior Notes have
been paid in full, shall be distributed
to the holders of the Subordinate Notes
(the "Subordinate Noteholders"). 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 after receipt
of freely available funds therefor, to
one or more accounts in the name of the
Indenture Trustee (collectively, the
"Collection Account").
Pursuant to the Administration Agreement,
the Administrator will have the power
to instruct the Indenture Trustee to
withdraw the 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 Class A-1
Noteholders' Interest Distribution
Amount to the Class A-1 Noteholders,
the Class A-2 Noteholders' Interest
Distribution Amount to the Class A-2
Noteholders and the Trust Swap Payment
Amount (as defined herein), if any, to
the Swap Counterparty (as defined
herein), pro rata, based on the ratio
of each such amount to the total of
such amounts; (iv) the Subordinate Note
Insurance Policy Premium (as defined
herein) and all overdue Subordinate
Note Insurance Policy Premiums to the
Subordinate Note Insurer; (v) the
Subordinate Noteholders' Interest
Distribution Amount to the Subordinate
Noteholders; (vi) if the Revolving
Period has terminated, the Senior
Noteholders' Principal Distribution
Amount to the Senior Noteholders as
described under "Description of the
Notes-- Distributions of Principal"
herein; (vii) if the Revolving Period
has terminated, the Subordinate
Noteholders' Principal Distribution
Amount to the Subordinate Noteholders;
and (viii) any amounts remaining after
application of clauses (i) through
(vii) above, to the Reserve Account.
"Monthly Payment Date" means the
twenty-eighth day of each month (or if
any such date is not a business day,
the next succeeding business day),
commencing June 29, 1998.
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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 $1,512,500 (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 the 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 the 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 first to pay to the Subordinate
Note Insurer amounts owed to the
Subordinate Note Insurer under the
Administration Agreement plus accrued
interest thereon, and thereafter any
remaining amounts will be applied (a)
during the Revolving Period, for
deposit to the Collateral Reinvestment
Account; provided, however, that 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 or Trust Swap Receipt
Amounts (as defined herein), such
amounts shall be applied in the order
of priority set forth in clauses
(b)(iii) through (vi) below; and (b) at
and after the termination of the
Revolving Period, to the following (in
the priority indicated): (i) any unpaid
Purchase Premium Amounts for any Serial
Loans purchased by the Trust prior to
the end of the related Collection
Period to the Seller; (ii) if such
Quarterly Payment Date is on or prior
to the Parity Date, payment of the
unpaid principal amount of the Senior
Notes (to be allocated between the
Class A-1 Noteholders and the Class A-2
Noteholders as described under
"Description of the
Notes--Distributions of Principal"
herein) or, if the Senior Notes have
been paid in full, of the Subordinate
Notes, until the aggregate principal
amount of the Notes is equal to the
Pool Balance as of the close of
business on the last day of the related
Collection Period; (iii) the aggregate
unpaid amount of the Class A-1
Noteholders' Interest Basis Carryover
and the Class A-2 Noteholders' Interest
Basis Carryover, if any, to the Senior
Noteholders, pro rata, based on the
ratio of each such amount to the total
of such amounts; (iv) the aggregate
unpaid amount of Subordinate
Noteholders' Interest Basis 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 the
Noteholders will have no claim thereto.
As of the Closing Date, the aggregate
principal amount of the Notes will
equal approximately 104.4% of the
Initial Pool Balance. See "Risk
Factors--Risks 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 amount 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, in the order of
priority set forth earlier in this
paragraph, 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
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S-8
<PAGE>
- --------------------------------------------------------------------------------
Premium Amounts as is necessary to
reduce the aggregate principal amount
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 shall
previously have 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 Class A-1 Noteholders' Interest
Basis Carryover, Class A-2 Noteholders'
Interest Basis Carryover or Subordinate
Noteholders' Interest Basis 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) 0.25% of the aggregate
principal amount of the Notes after
taking into account the effect of
distributions on such Quarterly Payment
Date, and (ii) $756,250; provided,
however, that the Specified Reserve
Account Balance shall in no event
exceed the aggregate outstanding
principal amount 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 the 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 Class A-1 Noteholders' Interest
Distribution Amount, the Class A-2
Noteholders' Interest Distribution
Amount and the Trust Swap Payment
Amount, if any, pro rata, based on the
ratio of each such amount to the total
of such amounts; (iv) the Subordinate
Note Insurance Policy Premium and all
overdue Subordinate Note Insurance
Policy Premiums; (v) the Subordinate
Noteholders' Interest Distribution
Amount; (vi) if the Revolving Period
has terminated, the Senior Noteholders'
Principal Distribution Amount; and
(vii) if the Revolving Period has
terminated, the Subordinate
Noteholders' Principal Distribution
Amount, in each case, for which the
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,
Class A-1 Noteholders' Interest Basis
Carryover, Class A-2 Noteholders'
Interest Basis Carryover, Subordinate
Noteholders' Interest Basis Carryover,
Servicing Fee Shortfall and prior
unpaid Servicing Fee Shortfalls or
(except in the case of shortfalls in
the Senior Noteholders'
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S-9
<PAGE>
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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
Class A-1 Noteholders, the Class A-2
Noteholders and the Subordinate
Noteholders on each Quarterly Payment
Date of the Class A-1 Noteholders'
Interest Distribution Amount, the Class
A-2 Noteholders' Interest Distribution
Amount and the Subordinate Noteholders'
Interest Distribution Amount,
respectively, 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. Interest Rate Swap ............ On the Closing Date, the Trust will enter
into an interest rate swap agreement
(the "Interest Rate Swap") with General
Re Financial Products Corpora-tion (the
"Swap Counterparty"), an indirect,
wholly-owned subsidiary of General Re
Corporation ("GRN"). The swap
obligations of the Swap Counterparty
are guaranteed by GRN. In accordance
with the terms of the Interest Rate
Swap, the Swap Counterparty will pay to
the Trust, on each Quarterly Payment
Date with respect to which the Interest
Rate Swap is in effect, an amount equal
to the product of (i) the Swap Rate for
the related Quarterly Interest Period,
(ii) the Notional Swap Amount for such
Quarterly Payment Date and (iii) the
quotient of the actual number of days
in such Quarterly Interest Period
divided by 360. The "Swap Rate" for any
Quarterly Interest Period during which
the Interest Rate Swap is in effect
will be a rate equal to Three-Month
LIBOR (determined as described herein)
for such Quarterly Interest Period. The
"Notional Swap Amount" for any
Quarterly Payment Date with respect to
which the Interest Rate Swap is in
effect will be an amount equal to the
aggregate outstanding principal amount
of the Notes as of such Quarterly
Payment Date (before giving effect to
distributions on such date).
In exchange for such payment, the Trust
will pay to the Swap Counterparty on
each Quarterly Payment Date with
respect to which the Interest Rate Swap
is in effect an amount equal to the
product of (i) the T-Bill Rate
(determined as described herein) for
the related Quarterly Interest Period
plus a predetermined spread, (ii) the
Notional Swap Amount and (iii) the
quotient of the actual number of days
in such Quarterly Interest Period
divided by 365 (or 366 in the case of
any such amount which is being
calculated with respect to a Quarterly
Payment Date in a leap year). On any
Quarterly Payment Date, the sum of the
amount which the Trust will be
obligated to pay the Swap Counterparty
pursuant to this paragraph (the "Gross
Trust Swap Payment") and the
Subordinate Note Insurance Policy
Premium (as defined herein) will not
exceed the product of (i) the T-Bill
Rate plus 1.1%, (ii) the Notional Swap
Amount and (iii) the quotient of the
actual number of days in the related
Quarterly Interest Period divided by
365 (or 366 in the case of any such
amount which is being calculated with
respect to such Quarterly Payment Date
in a leap year).
With respect to each Quarterly Payment
Date with respect to which the Interest
Rate Swap is in effect (and without
regard to any payments remaining unpaid
from a prior Quarterly Payment Date),
any difference between the payment by
the Swap Counterparty to the Trust and
the payment by the Trust to the Swap
Counterparty will be referred to as a
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S-10
<PAGE>
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"Net Trust Swap Receipt", if such
difference is a positive number, and a
"Net Trust Swap Payment", if such
difference is a negative number. The
Trust Swap Receipt Amount, if any, will
be distributed as part of the Available
Funds on such Quarterly Payment Date,
and the Trust Swap Payment Amount (as
defined herein), if any, will be paid
out of the Available Funds as described
herein. Any payments pursuant to the
Interest Rate Swap will be made solely
on a net basis, as described above. The
Swap Counterparty has a financial
programs rating of "AAA" from Standard
& Poor's Ratings Services, a division
of the McGraw-Hill Companies, Inc.
("S&P"), based on the guarantee of GRN.
GRN has a long-term senior debt rating
of "AAA" by S&P and "Aa1" by Moody's
Investors Service, Inc. ("Moody's" and,
together with S&P, the "Swap Rating
Agencies").
If, on or prior to the Swap Termination
Date, the rating of GRN (or any
successor credit support provider) is
withdrawn or reduced below A3 or its
equivalent by any Swap Rating Agency
(such withdrawal or reduction, a
"Rating Agency Downgrade"), the Swap
Counterparty is required, no later than
the 30th day following such Rating
Agency Downgrade, at the Swap
Counterparty's expense, either to (i)
obtain a substitute Swap Counterparty
that has a counterparty rating of at
least A3 or its equivalent by each Swap
Rating Agency or (ii) enter into
arrangements, including collateral
arrangements, guarantees or letters of
credit, which arrangements in the view
of such Swap Rating Agency will result
in the total negation of the effect or
impact of such Rating Agency Downgrade
on the Noteholders, the Subordinate
Note Insurer and the Seller.
The Interest Rate Swap will terminate on
the earlier to occur of the July 2008
Quarterly Payment Date (the "Scheduled
Swap Termination Date") and the date on
which the Notes have been paid in full.
In addition, in certain circumstances
following a Swap Default or Termination
Event, each as further described under
"Description of the Notes--Interest
Rate Swap", the Interest Rate Swap is
subject to early termination. In the
event of such early termination of the
Interest Rate Swap, the Trust or the
Swap Counterparty may be liable to pay
to the other a termination payment
(regardless, if applicable, of which of
the parties has caused such
termination), which will be based on
the value of the Interest Rate Swap
computed in accordance with the
procedures set forth in the Interest
Rate Swap. Any such termination payment
payable by the Trust could be
substantial and could reduce amounts
otherwise payable to Noteholders,
thereby resulting in shortfalls to
Noteholders. The earliest to occur of
the Scheduled Swap Termination Date,
the date on which the Notes have been
paid in full and the date on which the
Interest Rate Swap is terminated in
accordance with its terms pursuant to
an early termination is referred to
herein as the "Swap Termination Date".
See "Description of Notes--Interest
Rate Swap" herein.
F. 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)
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S-11
<PAGE>
- --------------------------------------------------------------------------------
will be obligated to purchase, any
Financed Student Loan if the interests
of the Noteholders or the Subordinate
Note Insurer 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" herein. The
Servicing Fee will be payable from (i)
in the case of each Monthly Payment
Date that is not a Quarterly Payment
Date, the Monthly Available Funds and
(ii) in the case of each Quarterly
Payment Date, the Available Funds, in
each case on deposit in the Collection
Account and, if such amounts are
insufficient, from amounts on deposit
in the Reserve Account. The Servicer
will also receive amounts related to
any Servicing Fee Shortfall, as defined
herein, on each Quarterly Payment Date.
Such amounts will be payable only from
any Reserve Account Excess available on
such Quarterly Payment Date after all
other amounts required to be paid from
such excess have been paid. See
"Description of the Transfer and
Servicing Agreements--Credit
Enhancement--Reserve Account" herein.
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
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S-12
<PAGE>
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on each Monthly Payment Date in an
amount equal to one-twelfth of the
product of (i) 0.05% 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.
G. The Subordinate Note
Insurance Policy .............. The Seller has applied to MBIA Insurance
Corporation (the "Subordinate Note
Insurer") for insurance pursuant to a
note guaranty insurance policy (the
"Subordinate Note Insurance Policy")
with respect to the Subordinate Notes.
Subject to the terms thereof, the
Subordinate Note Insurance Policy would
unconditionally and irrevocably
guarantee the obligation of the Trust
to pay, on each Quarterly Payment Date,
the Subordinate Noteholders' Interest
Distribution Amount and, on the
Subordinate Note Final Maturity Date,
the Subordinate Noteholders' Principal
Distribution Amount, in accordance with
the Subordinate Note Insurance Policy.
The Subordinate Note Insurance Policy
will not be cancelable for any reason.
The Subordinate Note Insurer will be
entitled to receive a premium (the
"Subordinate Note Insurance Policy
Premium") payable as provided herein on
each Quarterly Payment Date. On any
Quarterly Payment Date, the sum of the
Gross Trust Swap Payment and the
Subordinate Note Insurance Policy
Premium will not exceed the product of
(i) the T-Bill Rate plus 1.1%, (ii) the
Notional Swap Amount and (iii) the
quotient of the actual number of days
in the related Quarterly Interest
Period divided by 365 (or 366 in the
case of any such amount which is being
calculated with respect to such
Quarterly Payment Date in a leap year).
The Subordinate Note Insurance Policy
will be for the sole benefit of the
Subordinate Noteholders. Payments under
the Senior Notes will not be insured
under the Subordinate Note Insurance
Policy or any other insurance policy.
The Subordinate Note Insurance Policy is
not covered by the property/casualty
insurance security fund specified in
Article 76 of the New York Insurance
Law.
The Notes .......................... The Trust will issue the Notes pursuant
to the Indenture. The Notes will be
secured by the assets of the Trust as
described herein. The initial principal
amount of the Class A-1 Notes, the
Class A-2 Notes and the Subordinate
Notes will equal $150,000,000,
$433,650,000 and $21,350,000,
respectively.
A. Interest ...................... The Notes will bear interest during each
Quarterly Interest Period at the rate
per annum (the "Class A-1 Note Rate",
the "Class A-2 Note Rate" and the
"Subordinate Note Rate", respectively,
and, collectively, the "Note Rates"),
except as described below, equal to
Three-Month LIBOR for the related
LIBOR Reset Period (determined as
described herein) plus 0.04% in the
case of the Class A-1 Notes, plus 0.12%
in the case of the Class A-2 Notes and
plus 0.27% in the case of the
Subordinate Notes (the "Class A-1 Note
LIBOR Rate", the "Class A-2 Note LIBOR
Rate" and the "Subordinate Note LIBOR
Rate", respectively, and, collectively,
the "Note LIBOR Rates") . See
"Description of the Notes--Calculation
of Three-Month LIBOR" herein. 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 28th 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
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S-13
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"Quarterly Payment Date"), commencing
July 28, 1998, to holders of record of
the Notes on the related Record Date.
"Record Date" means, with respect to
any Quarterly Payment Date, the 27th
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
360.
Notwithstanding the foregoing, if any
Note Rate for any Quarterly Interest
Period (after the first Quarterly
Interest Period) calculated on the
basis of the applicable Note LIBOR Rate
is greater than the Adjusted Student
Loan Rate for such Quarterly Interest
Period, then such Note Rate for the
applicable Quarterly Payment Date will
be the Adjusted Student Loan Rate. The
"Adjusted 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 the
sum of the Expected Interest
Collections and, if the Interest Rate
Swap is still in effect, the Net Trust
Swap Receipt, if any, for such
Quarterly Interest Period less the sum
of the Servicing Fee, the
Administration Fee, the Subordinate
Note Insurance Policy Premium and, if
the Interest Rate Swap is still in
effect, the Net Trust Swap Payment, if
any, with respect to such period and
(ii) the denominator of which is the
aggregate principal amount 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 a Note Rate for any Quarterly Payment
Date is based on the Adjusted Student
Loan Rate, the excess of (a) the amount
of interest on the related Notes that
would have accrued in respect of the
related Quarterly Interest Period had
interest been calculated based on the
related Note LIBOR Rate over (b) the
amount of interest on the related Notes
actually accrued in respect of such
Quarterly Interest Period based on the
Adjusted 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 LIBOR Rate) is referred to as the
"Class A-1 Noteholders' Interest Basis
Carryover" in the case of the Class A-1
Notes, the "Class A-2 Noteholders'
Interest Basis Carryover" in the case
of the Class A-2 Notes, and the
"Subordinate Noteholders' Interest
Basis 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
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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 Basis Carryover,
after paying any Class A-1 Noteholders'
Interest Basis Carryover and Class A-2
Noteholders' Interest Basis 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 Class A-1 Noteholders'
Interest Basis Carryover, Class A-2
Noteholders' Interest Basis Carryover
or Subordinate Noteholders' Interest
Basis Carryover will be paid until the
Parity Date. The ratings of the Notes
do not address the likelihood of the
payment of any Class A-1 Noteholders'
Interest Basis Carryover, Class A-2
Noteholders' Interest Basis Carryover
or Subordinate Noteholders' Interest
Basis 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 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 amount 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 Subordinate Note Insurer
of amounts owed to the Subordinate Note
Insurer under the Administration
Agreement and to the Seller of any
unpaid Purchase Premium Amounts for any
Serial Loans purchased by the Trust
prior to the end of such Collection
Period, be applied, as described
herein, to the unpaid principal amount
of the Senior Notes or, if the Senior
Notes have been paid in full, of the
Subordinate Notes.
On each Quarterly Payment Date the
aggregate amount distributable as
principal of the Senior Notes shall be
applied first to the Class A-1 Notes
until the aggregate principal amount
thereof has been reduced to zero and
then to the Class A-2 Notes until the
aggregate principal amount thereof has
been reduced to zero. No principal
payments on the Subordinate Notes will
be made out of the Available Funds or
the Reserve Account until the Senior
Notes have been paid in full.
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<PAGE>
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The outstanding principal amount, if any,
of the Class A-1 Notes will be payable
in full on the October 2005 Quarterly
Payment Date (the "Class A-1 Note Final
Maturity Date"), of the Class A-2 Notes
will be payable in full on the July
2026 Quarterly Payment Date (the "Class
A-2 Note Final Maturity Date") and of
the Subordinate Notes will be payable
on the October 2033 Quarterly Payment
Date (the "Subordinate Note Final
Maturity Date"). However, the actual
maturities of the classes of 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 first
to pay the Swap Counterparty any prior
unpaid Net Trust Swap Payment Carryover
Shortfalls and then to redeem the Notes
in the order of priority described
herein. The aggregate amount of the
Notes to be redeemed will be equal to
the amount on deposit in the Collateral
Reinvestment Account.
D. Subordination ................. While the Class A-1 and Class A-2 Notes
will have equal priority with respect
to the payment of interest, on any
Quarterly Payment Date on which
principal is due and to be paid on the
Senior Notes, the Class A-2 Notes will
receive no payments of principal until
the Class A-1 Notes have been paid in
full; provided, however, that from and
after any acceleration of the Notes
following an Event of Default (as
defined in the Prospectus), principal
will be allocated pro rata to the Class
A-1 Notes and the Class A-2 Notes based
on the ratio of the principal amount of
each such class of Notes to the
aggregate principal amount of the
Senior Notes until the aggregate
principal amount of the Senior Notes
has been reduced to zero. In addition,
the rights of the Subordinate
Noteholders to receive payments of
interest out of the Available Funds and
the Reserve Account 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 out of the Available Funds
and the Reserve Account will be
subordinate to the rights of the Senior
Noteholders to receive payments of
interest and principal, in each case to
the extent described herein. See "Risk
Factors--Subordination; Limited Assets"
and "Description of the Transfer and
Servicing Agreements--Credit
Enhancement--Subordination" herein.
However, the Seller has applied for the
Subordinate Note Insurance Policy to
guarantee payment, on each Quarterly
Payment Date, of the Subordinate
Noteholders' Interest Distribution
Amount and, on the Subordinate Note
Final Maturity Date, of the Subordinate
Noteholders' Principal Distribution
Amount, pursuant to the terms of such
policy. The Subordinate Note Insurance
Policy will be for the sole benefit of
the Subordinate Noteholders. Payments
under the Senior Notes will not be
insured under the Subordinate Note
Insurance Policy or any other insurance
policy.
Auction of Trust Assets ............ Any Financed Student Loans remaining in
the Trust as of the end of the
Collection Period immediately preceding
the July 2008 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 (at least one of
which is from a bidder other than the
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<PAGE>
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Seller and its affiliates), the
Indenture Trustee will accept the
highest bid equal to or in excess of
the greater of (x) the aggregate
Purchase Amounts of such Financed
Student Loans as of the end of the
Collection Period immediately preceding
such Quarterly Payment Date and (y) an
amount that would be sufficient to (i)
reduce the aggregate principal amount
of the Notes outstanding on such
Quarterly Payment Date to zero, (ii)
pay to the Noteholders the Noteholders'
Interest Distribution Amount payable on
such Quarterly Payment Date, (iii) pay
to the Subordinate Note Insurer all
amounts owed to the Subordinate Note
Insurer under the Administration
Agreement and (iv) pay to the Swap
Counterparty any prior unpaid Net Trust
Swap Payment Carryover Shortfalls and
any other amounts owed by the Trust to
the Swap Counterparty under the
Interest Rate Swap (such greater
amount, the "Minimum Purchase Price").
If at least two bids are not received
or the highest bid is not equal to or
in excess of the Minimum Purchase
Price, the Indenture Trustee will not
consummate such sale. The proceeds of
any such sale will be used to redeem
any Notes outstanding 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 Dates upon terms
similar to those described above. No
assurance can be given as to whether
the Indenture Trustee will be
successful in soliciting acceptable
bids to purchase the Financed Student
Loans on either the July 2008 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 plus
accrued interest thereon to the date of
purchase. See "Description of the
Transfer and Servicing
Agreements--Termination" herein.
Optional Purchase .................. The Company, or an assignee of the
Company, may, at its option, purchase
all remaining Financed Student Loans,
and thus effect the early retirement of
the Notes, on any Quarterly Payment
Date on or after which the Pool Balance
is equal to 20% or less of the
aggregate initial principal amount of
the Notes, at a price equal to the
greater of the aggregate Purchase
Amounts for such Financed Student Loans
as of the end of the preceding
Collection Period and the Minimum
Purchase Price. 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 equals the
aggregate principal balances 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, the
"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 ................. Brown & Wood 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
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S-17
<PAGE>
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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, the Trust will not be
characterized as an association (or
publicly traded partnership) taxable as
a corporation for federal income tax
purposes. The Company, as owner of all
amounts not otherwise required to be
distributed to the 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, the Class A-1 Noteholders and
the Class A-2 Noteholders may be
required to accrue any Class A-1
Noteholders' Interest Basis Carryover
or Class A-2 Noteholders' Interest
Basis Carryover, as applicable, in
income in advance of the receipt of
cash with respect to such amounts
regardless of whether such Noteholders
are on the cash or accrual method 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 income tax laws with
respect to the Senior Notes.
ERISA Considerations ............... Subject to the considerations discussed
under "ERISA Considerations" herein and
"ERISA Considerations--The Notes" in
the Prospectus, the Senior Notes are
eligible for purchase by employee
benefit plans.
Ratings of the Securities .......... It is a condition to the issuance and
sale of the Senior Notes that the Class
A-1 Notes, the Class A-2 Notes and the
Subordinate Notes be rated in the
highest investment rating category by
Moody's and Fitch IBCA, Inc. (the
"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 Class A-1 Notes, the
Class A-2 Notes and the Subordinate
Notes do not address, the likelihood of
payment of the Class A-1 Noteholders'
Interest Basis Carryover, the Class A-2
Noteholders' Interest Basis Carryover
or the Subordinate Noteholders'
Interest Basis Carryover, as
applicable. The ratings assigned to the
Subordinate Notes will be based, among
other things, on the rating assigned to
the claims-paying ability of the
Subordinate Note Insurer. Any reduction
in the rating of the Subordinate Note
Insurer would likely result in a
reduction of the ratings given to the
Subordinate Notes. There can be no
assurance as to whether any additional
rating agency will rate the Class A-1
Notes, the Class A-2 Notes or the
Subordinate Notes or, if one does, what
rating would be assigned by such other
rating agency.
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S-18
<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 prices
of the Senior Notes. Such transactions could cause the prices of the Senior
Notes to be higher than they might otherwise be in the absence of such
transactions. See "Underwriting" herein.
Subordination; Limited Assets. While the Class A-1 and the Class A-2 Notes
will have equal priority to the payment of interest, on any Quarterly Payment
Date on which principal is due to be paid on the Senior Notes, the Class A-2
Notes will receive no payments of principal until the Class A-1 Notes have been
paid in full. Thus, for any Quarterly Payment Date immediately prior to which
the outstanding principal amount of the Class A-1 Notes is greater than zero,
the Class A-2 Notes will be subordinated to the Class A-1 Notes as to payments
of principal to the extent necessary to reduce the principal amount of the Class
A-1 Notes to zero; provided, however, that from and after any acceleration of
the Notes following an Event of Default (as defined in the Prospectus),
principal will be allocated, pro rata, to the Class A-1 Notes and the Class A-2
Notes based on the ratio of the principal amount of each such class of Notes to
the aggregate principal amount of the Senior Notes until the aggregate principal
amount of the Senior Notes has been reduced to zero. In addition, the rights of
the Subordinate Noteholders to receive payments of interest out of the Available
Funds or the Reserve Account are 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 out of the Available Funds or the
Reserve Account are 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 Basis
Carryover that may exist from time to time. See "Description of the Transfer and
Servicing Agreements--Distributions" and "--Credit Enhancement--Subordination"
herein.
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, the Reserve Account and the Interest Rate Swap. In
addition, the Seller has applied for the Subordinate Note Insurance Policy which
shall be solely for the benefit of the Subordinate Noteholders. 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 and, in the case of the Subordinate
Noteholders only, the Subordinate Note Insurance Policy. Payments on the Senior
Notes will not be insured under the Subordinate Note Insurance Policy or under
any other insurance policy. 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, monies to be deposited in the Reserve Account are
limited in amount and will be reduced, subject to a specified minimum, as the
aggregate principal amount of the Notes is reduced. If the Reserve Account is
exhausted, except to the extent that the Subordinate Note Insurance Policy is
available to support payments on the Subordinate Notes, 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 Amount of Notes over Pool
Balance. As of the Closing Date, the aggregate principal amount of the Notes
will be equal to approximately 104.4% of the Initial Pool Balance. As a result,
the Noteholders will generally be reliant on the availability of Reserve Account
Excess to bring the aggregate principal amount 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
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<PAGE>
Excess that may reflect principal collections on the Financed Student Loans) to
fund the Purchase Collateral Balances 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 the 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,
(iii) the Senior Noteholders' Interest Distribution Amount and the Trust Swap
Payment Amount, if any, (iv) the Subordinate Note Insurance Policy Premium and
all overdue Subordinate Note Insurance Policy Premiums, and (v) the Subordinate
Noteholders' Interest Distribution Amount, each for such Quarterly Payment Date,
and/or (b) declines in the Specified Reserve Account Balance that exceed any
amounts required to be withdrawn on such Quarterly Payment Date from the Reserve
Account to make up shortfalls required to be paid therefrom. At such time as the
aggregate principal amount 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 the
Noteholders are reliant on excess interest collections on the Financed Student
Loans to repay a portion of the principal amount of the Notes, the Noteholders
could be adversely affected by an increase in the rate of prepayments on the
Financed Student Loans or an increase in Three-Month LIBOR or the T-Bill Rate
since any 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 Notes not issued in an aggregate principal
amount in excess of the Initial Pool Balance, particularly with respect to those
Financed Student Loans first disbursed after October 1, 1993 which are 98%
insured by a Guarantor (rather than 100% so insured, as is the case for such
loans first disbursed prior to such date). Additionally, payment of Purchase
Premium Amounts to the Seller for New Loans and Serial Loans purchased by the
Trust during the Revolving Period and Serial Loans acquired by the Trust after
the Revolving Period will decrease the amount of funds that would otherwise be
available to pay principal of the Notes and will thereby delay reduction of the
amount represented by the excess of the aggregate principal amount 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" herein, 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 that of the Initial
Guarantor), 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 Senior Noteholders' Interest Distribution Amount
and the Trust Swap Payment Amount, if any, (iv) the Subordinate Note Insurance
Policy Premium and all overdue Subordinate Note Insurance Policy Premiums, and
(v) the Subordinate Noteholders' Interest Distribution Amount, each for such
Quarterly Payment Date, and (vi) the amount, if any, necessary to cause the
amount on deposit in the Reserve Account on such Quarterly Payment Date to equal
the Specified Reserve Account Balance for such Quarterly Payment Date, shall be
deposited into the Collateral Reinvestment Account. If the sum of (i) the Loan
Purchase Amounts 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 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 related borrowers during the Revolving
Period is less than the amount
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<PAGE>
deposited in the Collateral Reinvestment Account, the Trust will have
insufficient opportunities to make Additional Fundings during the Revolving
Period, which circumstance would result in a prepayment of principal to the
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. In addition, the Trust will not be permitted to
acquire Student Loans originated after June 30, 1998 (unless such Student Loans
are 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 acquisition would not adversely affect the rating assigned by
such Rating Agency to any class of the Notes, without regard to the Subordinate
Note Insurance Policy. See "--Recent Developments--Changes in Formulas for
Determining Certain Interest Rates and Special Allowance Payments". 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 applied on
the next succeeding Quarterly Payment Date to pay to the Swap Counterparty any
prior unpaid Net Trust Swap Payment Carryover Shortfalls and then as a
prepayment of principal first to the Class A-1 Noteholders until the Class A-1
Notes have been paid in full, then to the Class A-2 Noteholders until the Class
A-2 Notes have been paid in full and then to the Subordinate Noteholders. 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 whether
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 more
than a nominal a 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 July 2000 Quarterly Payment Date. If, however, an Early
Amortization Event (as described under "Description of the Transfer and
Servicing Agreements--Revolving Period and Additional Fundings") occurs prior to
the last day of such Collection Period, the Revolving Period will terminate
early, principal will be payable on the Notes as described herein and the
average life and maturity of the Notes may be significantly reduced from what
they 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 to the related
loan. 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 the Noteholders are reliant on a portion
of the interest collections on the Financed Student Loans to pay the portion of
the initial principal amount 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.
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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 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 $35,000,000; additionally, no Federal
Consolidation Loan may be originated by the Trust having a scheduled maturity
date after October 28, 2029 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 October 28, 2029 exceeds or, after giving effect
to such origination, would exceed $15,000,000; 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, that 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 by the amount of
any related Add-on Consolidation Loans.
Furthermore, the Seller is obligated pursuant to the Loan Sale Agreement
to repurchase or substitute for any Financed Student Loan as a result of a
breach of any of its representations and warranties, and the Servicer is
obligated pursuant to the Servicing Agreement (subject to the limitations
described below) to purchase any Financed Student Loan 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 exceed an amount (the "Servicer Liability Limit") equal to 0.15% 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 May
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 of 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; provided, however, that the aggregate principal
balances of all Financed Student Loans purchased shall not exceed $6,050,000.
See "Description of the Transfer and Servicing Agreements--Sale of Student
Loans; Representations and Warranties" and "--Servicer Covenants" in the
Prospectus. See also "Description of the Transfer and Servicing
Agreements--Termination--Optional Redemption" herein, regarding the Company's,
or its assignee's, option to purchase the Financed Student Loans when the Pool
Balance is less than or equal to 20% of the initial aggregate principal amount
of the Notes.
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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 terms 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 will be funded by
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, and
certain classes thereof, over what it would have been had such amounts been
applied to amortize the Notes.
Any Financed Student Loans remaining in the Trust as of the end of the
Collection Period immediately preceding the July 2008 Quarterly Payment Date
will be offered for sale by the Indenture Trustee. If acceptable bids to
purchase such Financed Student Loans on such Quarterly Payment Date are received
as described herein, the proceeds of the sale will be applied on such Quarterly
Payment Date to redeem any outstanding Notes on such date. In addition, if
acceptable bids to purchase such Financed Student Loans on such Quarterly
Payment Date are not received, the sale of such Financial Student Loans may
occur on a subsequent Quarterly Payment Date as described herein, in which case
the proceeds thereof will be applied on such date to redeem any outstanding
Notes. No assurance can be given as to whether the Indenture Trustee will be
successful in soliciting acceptable bids to purchase the Financed Student Loans
on the July 2008 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 the 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 the Noteholders on any particular Quarterly Payment Date.
Certain Differences Between the Senior Notes and the Subordinate Notes.
Because the Subordinate Noteholders will receive no payments of principal out of
the Available Funds or the Reserve Account until the Senior Notes have been paid
in full, the Senior Noteholders (and the Class A-2 Noteholders to a greater
degree than the Class A-1 Noteholders) bear relatively greater risk than do the
Subordinate Noteholders of an increased rate of principal prepayments with
respect to the Financed Student Loans (whether as a result of voluntary
prepayments, Federal
S-23
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Consolidation Loans not made by the Eligible Lender Trustee on behalf of the
Trust or liquidations due to default or breach). In addition, the Senior
Noteholders generally bear the risk of principal prepayments as a result of any
mandatory redemption from amounts on deposit in the Collateral Reinvestment
Account at the end of Revolving Period or of such redemption occurring prior to
the scheduled end of the Revolving Period on the last day of the Collection
Period preceding the Quarterly Payment Date occurring in July 2000 due to an
Early Amortization Event. On the other hand, except to the extent covered by the
Subordinate Note Insurance Policy, Subordinate Noteholders bear a greater risk
of loss of principal than do the Senior Noteholders in the event of a shortfall
in the Available Funds and amounts on deposit in the Reserve Account because the
Subordinate Notes do not receive principal distributions out of the Available
Funds or the Reserve Account 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 aggregate principal amount of the Notes, and
therefore the aggregate principal balances of the Financed Student Loans on
which interest will be collected will be less than the principal amount of the
Notes on which interest must be paid. The Trust will have the benefit of the
Interest Rate Swap. However, it is possible that on any Quarterly Payment Date
there may not exist a positive spread between (a) the Adjusted Student Loan Rate
and (b) the Class A-1 Note LIBOR Rate, the Class A-2 Note LIBOR Rate or the
Subordinate Note LIBOR Rate, as the case may be. In such case, the Note Rate for
any affected class of Notes for such Quarterly Payment Date will be the Adjusted
Student Loan Rate. See "Description of the Notes--Distributions of Interest"
herein. Any Class A-1 Noteholders' Interest Basis Carryover, Class A-2
Noteholders' Interest Basis Carryover or Subordinate Noteholders' Interest Basis
Carryover arising as a result of any Note Rate with respect to a class of Senior
Notes or with respect to the Subordinate Notes, as applicable, being determined
on the basis of the Adjusted 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 then only out
of any Reserve Account Excess available after payment out of such excess of
amounts owed to the Subordinate Note Insurer under the Administration Agreement
and thereafter 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 amount of the Notes
exceeds the Pool Balance and (iii) in the case of the Subordinate Noteholders'
Interest Basis Carryover, payment of the Class A-1 Noteholders' Interest Basis
Carryover and the Class A-2 Noteholders' Interest Basis Carryover. See
"Description of the Transfer and Servicing Agreements--Credit
Enhancement--Reserve Account" herein.
Interest Rate Swap. The Interest Rate Swap will terminate on the Swap
Termination Date. In certain circumstances following a Swap Default or
Termination Event (each as further described under "Description of the
Notes--Interest Rate Swap"), the Interest Rate Swap is subject to early
termination. In the event of such early termination of the Interest Rate Swap,
the Trust or the Swap Counterparty may be liable to pay to the other a
termination payment (regardless, if applicable, of which of the parties has
caused such termination), which will be based on the value of the Interest Rate
Swap computed in accordance with the procedures set forth in the Interest Rate
Swap. Any such termination payment payable by the Trust could be substantial and
could reduce amounts otherwise payable to Noteholders, thereby resulting in
shortfalls to Noteholders. See "Description of Notes--Interest Rate Swap"
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.
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<PAGE>
Fees Payable on Certain Financed Student Loans. Under the Federal
Consolidation Program, the Trust will be obligated to pay to the Department a
monthly rebate fee (the "Monthly Rebate Fee") at an annualized rate of 1.05% of
the outstanding principal balance on the last day of each month plus accrued
interest thereon of each Federal Consolidation Loan which is a part of the
Trust, which rebate will be payable prior to distributions to the Noteholders
and which rebate will reduce the amount of funds which would otherwise be
available to make distributions on the Notes and will reduce the Adjusted
Student Loan Rate. In addition, the Trust must pay to the Department a 0.50%
origination fee (the "Federal Origination Fee") on the initial principal balance
of each Financed Student Loan which is originated on its behalf by the Eligible
Lender Trustee (i.e., each Federal Consolidation Loan originated on its behalf
by the Eligible Lender Trustee during the Revolving Period and each Add-on
Consolidation Loan added to a Federal Consolidation Loan in the Trust), which
fee will be deducted by the Department out of Interest Subsidy Payments and
Special Allowance Payments. If sufficient Interest Subsidy Payments and Special
Allowance Payments are not due to the Trust to cover the amount of the Federal
Origination Fee, the balance of such Federal Origination Fee may be deferred by
the Department until sufficient Interest Subsidy Payments and Special Allowance
Payments accrue to cover such fee or may be required to be paid immediately. If
such amounts never accrue, the Trust would be obligated to pay any remaining fee
from other assets of the Trust prior to making distributions to the Noteholders.
The offset of Interest Subsidy Payments and Special Allowance Payments, and the
payment of any remaining fee from other Trust assets will further reduce the
amount of the Available Funds from which payments to the Noteholders may be
made. Furthermore, any offset of Interest Subsidy Payments and Special Allowance
Payments will further reduce the Adjusted Student Loan Rate.
Recent Developments-Emergency Student Loan Consolidation Act of 1997. On
November 13, 1997, President Clinton signed into law the Emergency Student Loan
Consolidation Act of 1997, which made significant changes to the Federal
Consolidation Loan program. These changes include: (1) providing that federal
direct student loans are eligible to be included in a Federal Consolidation
Loan; (2) changing the borrower interest rate on new Federal Consolidation Loans
(previously a fixed rate based on the weighted average of the loans
consolidated, rounded up to the nearest whole percent) to the annually variable
rate applicable to Stafford Loans (i.e., the bond equivalent rate at the last
auction in May of 91-day Treasury Bills plus 3.10%, not to exceed 8.25% per
annum); (3) providing that the portion of a Federal Consolidated Loan that is
comprised of Subsidized Stafford Loans retains its subsidy benefits during
periods of deferment; and (4) establishing prohibitions against various forms of
discrimination in the making of 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.
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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 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 Class A-1 Notes, the Class A-2 Notes and the Subordinate
Notes be rated in the highest investment rating category of each of the 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 Class A-1 Noteholders'
Interest Basis Carryover, the Class A-2 Noteholders' Interest Basis Carryover or
the Subordinate Noteholders' Interest Basis Carryover, as the case may be. In
addition, the ratings do not address the likelihood of an Early Amortization
Event. The ratings assigned to the Subordinate Notes will be based, among other
things, on the rating assigned to the claims-paying ability of the Subordinate
Note Insurer. 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
Class A-1 Notes, the Class A-2 Notes or the Subordinate Notes or, if one does,
what rating would be assigned by such other rating agency.
S-26
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Consolidation of Federal Benefit Billings and Receipts with Other Trusts.
Due to a recent change in Department policy limiting the granting of new lender
identification numbers, the Eligible Lender Trustee is allowed under the Trust
Agreement to permit the Trust, and other trusts established by the Seller to
securitize Student Loans, to use a common Department lender identification
number. The billings submitted to the Department for Interest Subsidy Payments
and Special Allowance Payments on the Financed Student Loans will be
consolidated with the billings for such payments for Student Loans in such other
trusts using the same lender identification number and payments on such billings
will be made by the Department in lump sum form. Such lump sum payments will
then be allocated among the various trusts using the lender identification
number.
In addition, the sharing of the lender identification number by the Trust
with other trusts may result in the receipt of claim payments by Federal
Guarantors in lump sum form. In that event, such payments would be allocated
among the trusts in a manner similar to the allocation process for Interest
Subsidy Payments and Special Allowance Payments.
The Department regards the Eligible Lender Trustee as the party primarily
responsible to the Department for any liabilities owed to the Department or
Federal Guarantors resulting from the Eligible Lender Trustee's activities in
the FFELP. As a result, if the Department or a Federal Guarantor were to
determine that the Eligible Lender Trustee owes a liability to the Department or
a Federal Guarantor on any Student Loan for which the Eligible Lender Trustee is
or was legal titleholder, including loans held in the Trust or other trusts, the
Department or such Federal Guarantor may seek to collect that liability by
offset against payments due the Eligible Lender Trustee under the Trust. In the
event that the Department or a Federal Guarantor determines such a liability
exists in connection with a trust using the shared lender identification number,
the Department or such Federal Guarantor would be likely to collect that
liability by offset against amounts due the Eligible Lender Trustee under the
shared lender identification number, including amounts owed in connection with
the Trust.
In addition, other trusts using the shared lender identification number
may in a given quarter incur Federal Origination Fees that exceed the Interest
Subsidy Payments and Special Allowance Payments payable by the Department on the
loans in such other trusts, resulting in the consolidated payment from the
Department received by the Eligible Lender Trustee under such lender
identification number for that quarter being less than the amount owed by the
Department on the loans in the Trust for that quarter.
The Trust Agreement for the Trust and the trust agreements for other
trusts established by the Seller which share the lender identification number to
be used by the Trust (the Trust and such other trusts, collectively, the "Seller
Trusts") will require each Seller Trust (including the Trust) to indemnify the
other Seller Trusts for a shortfall or an offset by the Department or a Federal
Guarantor arising from the Student Loans held by the Eligible Lender Trustee on
such Seller 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, viz, the Choice Rates(TM) and Choice
Repay(TM) programs. Under the Choice Rates(TM) 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(TM) 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(TM) and the
Choice Repay(TM) 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(TM)
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.
FORMATION OF THE TRUST
The Trust
SMS Student Loan Trust 1998-A will be a trust formed under the laws of the
State of Delaware pursuant to the Trust Agreement for the transactions described
herein and in the Prospectus. The Trust will not engage in any activity other
than (i) acquiring, holding and managing the Financed Student Loans and the
other assets of the Trust and
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<PAGE>
proceeds therefrom, (ii) issuing the Notes, (iii) making payments thereon, (iv)
originating Federal Consolidation Loans during the Revolving Period, (v)
entering into the Interest Rate Swap, (vi) obtaining the Subordinate Note
Insurance Policy and (vii) 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, to fund the Reserve
Account Initial Deposit and to fund the costs of issuance. 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, (c) all monies and investments on deposit in the Collection
Account, the Collateral Reinvestment Account and the Reserve Account, (d) the
Interest Rate Swap and (e) solely for the benefit of the Subordinate
Noteholders, the Subordinate Note Insurance Policy. The Notes will be
collateralized by the assets of the Trust as described herein. The Collection
Account, the Reserve Account, the Collateral Reinvestment Account and the
Interest Rate Swap will be maintained in the name of the Indenture Trustee for
the benefit of the Noteholders and the Subordinate Note Insurer. To facilitate
servicing and to minimize administrative burden and expense, the Servicer will
be appointed by the Eligible Lender Trustee as custodian of the promissory notes
representing the Financed Student Loans.
The Trust will use funds on deposit in the Collateral Reinvestment Account
during the Revolving Period to make Additional Fundings, including to make or
acquire Additional Student Loans which will constitute property of the Trust.
See "Description of the Transfer and Servicing Agreements--Revolving Period and
Additional Fundings" herein. In addition, after the Revolving Period, Additional
Student Loans will be added to the Trust to the extent that (i) the Eligible
Lender Trustee on behalf of the Trust purchases Serial Loans from the 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 expected to be 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 July 2000 Quarterly
Payment Date. The Seller's expectations in this regard, based on current facts
and circumstances, but relating to future events, are inherently
forward-looking. These expectations are based primarily upon current market
conditions, including conditions in the secondary market for Student Loans, and
current expectations as to when Additional Fundings will need to be made (based,
in part, on expectations as to the rate at which the Initial Financed Student
Loans will repay). There is a risk that market conditions will change or that
the actual repayment experience on the Initial Financed Student Loans will be
other than as expected. See "Risk Factors--Maturity and Prepayment
Considerations" herein and 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. Further, the Trust will not be permitted to acquire
Student Loans originated after June 30, 1998 (unless such Student Loans are
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 acquisition would not adversely affect the rating assigned by such
Rating Agency to any class of the Notes, without regard to the Subordinate Note
Insurance Policy. See "Risk Factors--Recent Developments--Changes in Formulas
for Determining Certain Interest Rates and Special Allowance Payments" herein.
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 Class A-1 Noteholders until the Class A-1 Notes have
been paid in full, then to the Class A-2 Noteholders until the Class A-2 Notes
have been paid in full and then to the Subordinate Noteholders. There can also
be no assurance as to the amount of Additional Fundings that will occur after
the Revolving Period. See "Description of the Transfer and Servicing
Agreements--Revolving Period and Additional Fundings" herein.
The Trust's principal offices are in Chicago, Illinois, in care of The
First National Bank of Chicago, as Eligible Lender Trustee, at the address
listed below.
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<PAGE>
Eligible Lender Trustee
The First National Bank of Chicago is the Eligible Lender Trustee for the
Trust under the Trust Agreement. The First National Bank of Chicago is a
national banking association whose principal offices are located at One First
National Plaza, Suite 0126, Chicago, Illinois 60670 and whose New York offices
are located at First Chicago Trust Company of New York, 14 Wall Street, New
York, New York 10005. The Eligible Lender Trustee will acquire on behalf of the
Trust legal title to all the Financed Student Loans acquired from time to time
pursuant to the Loan Sale Agreement. The Eligible Lender Trustee on behalf of
the Trust will enter into a Guarantee Agreement with each of the Guarantors with
respect to such Financed Student Loans. The Eligible Lender Trustee qualifies as
an eligible lender and owner of all Financed Student Loans for all purposes
under the Higher Education Act and the Guarantee Agreements. Failure of the
Financed Student Loans to be owned by an eligible lender would result in the
loss of any Guarantee Payments from any Guarantor and any Federal Assistance
with respect to such Financed Student Loans. See "The Student Loan Pools" in the
Prospectus. The Eligible Lender Trustee's liability in connection with the
issuance and sale of the Notes is limited solely to the express obligations of
the Eligible Lender Trustee set forth in the Trust Agreement, the Loan Sale
Agreement and the Servicing Agreement. See "Description of the Notes" herein and
"Description of the Transfer and Servicing Agreements" herein and in the
Prospectus. The Seller and its affiliates may maintain normal commercial banking
relations with the Eligible Lender Trustee.
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.
On the Closing Date, the aggregate principal balances of the Initial
Financed Student Loans will be reduced by an amount not to exceed $5,000,000,
and an equal amount of cash will be deposited into the Collection Account on
such date, so that the aggregate principal balances of the Initial Financed
Student Loans which are delinquent between 31 and 120 days as of the Cutoff Date
will not exceed 10% of the aggregate principal balances of the Initial Financed
Student Loans after giving effect to such reduction.
Following the Closing Date and prior to the end of the Revolving Period,
the Trust will be obligated from time to time to purchase from the Seller, and
the Seller, subject to the availability thereof, will be obligated to tender to
the Trust, New Loans owned by the Seller each of which will have been made to a
borrower who is not a borrower under any Financed Student Loan. In addition,
following the Closing Date, and both during and after the Revolving Period, the
Trust will be obligated from time to time to purchase from the Seller, subject
to the availability thereof, Serial Loans owned by the Seller. During the
Revolving Period, the purchase of New Loans and Serial Loans, including a
Purchase Premium Amount for each New Loan or Serial Loan so purchased of up to
2.5% of the principal balance owed by the applicable borrower on such loan, will
be funded by means of a transfer of amounts on deposit in the Collateral
Reinvestment Account as described herein. Following the end of the Revolving
Period, the purchase of Serial Loans will be funded by amounts representing
distributions of principal on the outstanding Financed Student Loans which would
otherwise have been part of the Available Funds 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 that such Serial Loans and eligible Financed Student Loans meet
certain criteria described herein. Any Purchase Premium Amounts for Serial Loans
purchased 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, then
on deposit in the Reserve Account in excess of the Specified Reserve Account
Balance. No Purchase Premium Amounts will be payable for Serial Loans exchanged
for by the Trust.
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 under Financed Student
Loans who are also borrowers under one or more Student Loans (whether or not all
such loans are in the Trust) under 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 any
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<PAGE>
Student Loans that are being discharged in the consolidation process, which
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 $35,000,000; additionally, no Federal
Consolidation Loan may be originated by the Trust having a scheduled maturity
date after October 28, 2029 if at the time of such origination the aggregate
principal balances of all Federal Consolidation Loans held by the Trust that
have a scheduled maturity date after October 28, 2029 exceed or, after giving
effect to such origination, would exceed $15,000,000; 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 in the Trust by the amount of
any related Add-on Consolidation Loans as described below.
As described under "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 final payment date. 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
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 as
described under "Description of the Transfer and Servicing
Agreements--Distributions" herein.
No selection procedures believed by the Seller to be adverse to the
Noteholders were used or will be used in selecting the Financed Student Loans.
However, except for the criteria described in the preceding paragraphs and under
"Description of the Transfer and Servicing Agreements--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
characteristics of the Initial Financed Student Loans as of the Cutoff Date. The
percentages set forth in the tables below may not always add to 100% due to
rounding.
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<PAGE>
Composition of the Initial Financed Student Loans
as of the Cutoff Date
Aggregate Outstanding Principal Balance (1) .................. $579,395,357.38
Number of Borrowers .......................................... 63,514
Average Outstanding Principal Balance per Borrower ........... $9,122.33
Number of Loans .............................................. 126,322
Average Outstanding Principal Balance per Loan ............... $4,586.65
Weighted Average Original Term to Maturity (2) ............... 180.71 months
Weighted Average Remaining Term to Maturity (2) .............. 157.35 months
Weighted Average Annual Interest Rate (3) .................... 8.49%
- ----------
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $4,978,539.20 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 "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 some 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 "Federal Family Education Loan
Program" in the Prospectus.
Distribution of the Initial Financed Student Loans
by Loan Type as of the Cutoff Date
Percent of Initial
Financed Student
Aggregate Loans
Number of Outstanding by Outstanding
Loan Type Loans Principal Balance(1) Principal Balance
--------- --------- -------------------- ----------------
Stafford Loans (2) ......... 93,089 $253,885,698.30 43.82%
SLS Loans .................. 1,788 4,903,799.89 0.85%
PLUS Loans ................. 15,795 62,886,787.12 10.85%
Federal Consolidation Loans 15,650 257,719,072.07 44.48%
------- -------------- ------
Total ...................... 126,322 $579,395,357.38 100.00%
======= =============== ======
- ----------
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $4,978,539.20 as of the Cutoff Date to be
capitalized upon commencement of repayment.
(2) Includes Unsubsidized Stafford Loans having aggregate outstanding principal
balances as of the Cutoff Date of $78,385,558.72.
Distribution of the Initial Financed Student Loans
by Borrower Interest Rates of the Cutoff Date
Percent of Initial
Financed Student
Aggregate Loans
Number of Outstanding by Outstanding
Range of Interest Rates(1) Loans Principal Balance(2) Principal Balance
- -------------------------- ---------- -------------------- -----------------
7.00% to 7.49% .......... 289 $ 2,544,675.37 0.44%
7.50% to 7.99% .......... 22,085 60,864,673.96 10.50%
8.00% to 8.49% .......... 77,193 288,945,943.51 49.87%
8.50% to 8.99% .......... 13,734 59,566,800.24 10.28%
9.00% to 9.49% .......... 11,705 146,563,196.89 25.30%
9.50% and above ......... 1,316 20,910,067.41 3.61%
------- --------------- ------
126,322 $579,395,357.38 100.00%
======= =============== ======
- ----------
(1) Determined using the interest rates applicable to the Initial Financed
Student Loans as of the Cutoff Date. However, because some of the Initial
Financed Student Loans 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 "Federal Family Education Loan Program"
in the Prospectus.
(2) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $4,978,539.20 as of the Cutoff Date to be
capitalized upon commencement of repayment.
S-31
<PAGE>
Distribution of the Initial Financed Student Loans
by Outstanding Principal Balance as of the Cutoff Date
Percent of Initial
Financed Student
Aggregate Loans
Range of Outstanding Number of Outstanding by Outstanding
Principal Balance Loans Principal Balance(1) Principal Balance
- -------------------- --------- -------------------- -----------------
Less than $2,000 .......... 41,597 $ 46,708,262.65 8.06%
$ 2,000 to $ 3,999 ........ 45,406 129,605,095.85 22.37%
$ 4,000 to $ 5,999 ........ 17,007 83,244,296.81 14.37%
$ 6,000 to $ 7,999 ........ 4,883 33,845,593.81 5.84%
$ 8,000 to $ 9,999 ........ 4,639 40,782,353.89 7.04%
$10,000 to $11,999 ........ 3,345 36,697,938.10 6.33%
$12,000 to $13,999 ........ 2,248 29,044,961.35 5.01%
$14,000 to $15,999 ........ 1,444 21,565,081.66 3.72%
$16,000 to $17,999 ........ 1,183 20,078,065.44 3.47%
$18,000 to $19,999 ........ 827 15,698,606.00 2.71%
$20,000 to $21,999 ........ 685 14,355,885.22 2.48%
$22,000 to $23,999 ........ 538 12,364,848.77 2.13%
$24,000 to $25,999 ........ 399 9,957,143.08 1.72%
$26,000 to $27,999 ........ 321 8,657,530.82 1.49%
$28,000 and above ......... 1,800 76,789,693.93 13.25%
------- --------------- ------
Total ..................... 126,322 $579,395,357.38 100.00%
======= =============== ======
- -----------------
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $4,978,539.20 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
Percent of Initial
Financed Student
Number of Months Aggregate Loans
Remaining to Number of Outstanding by Outstanding
Scheduled Maturity(1) Loans Principal Balance(2) Principal Balance
- --------------------- --------- -------------------- ------------------
Less than 24 ........... 4,650 $ 2,697,150.93 0.47%
24 to 35 ............... 3,696 4,277,659.62 0.74%
36 to 47 ............... 3,654 5,433,789.26 0.94%
48 to 59 ............... 4,186 7,393,372.86 1.28%
60 to 71 ............... 5,733 12,392,964.78 2.14%
72 to 83 ............... 4,243 10,482,804.71 1.81%
84 to 95 ............... 6,101 17,390,322.42 3.00%
96 to 107 .............. 9,825 31,732,080.14 5.48%
108 to 119 ............. 36,814 135,849,679.76 23.45%
120 to 131 ............. 25,108 83,117,678.28 14.35%
132 to 143 ............. 4,157 19,558,638.23 3.38%
144 to 155 ............. 5,343 20,396,844.38 3.52%
156 to 167 ............. 912 8,961,372.64 1.55%
168 to 179 ............. 5,687 68,891,487.66 11.89%
180 to 191 ............. 1,431 20,101,436.31 3.47%
192 and above .......... 4,782 130,718,075.40 22.56%
------- --------------- ------
Total .................. 126,322 $579,395,357.38 100.00%
======= =============== ======
- ----------
(1) Determined from the Cutoff Date 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 "Federal Family Education
Loan Program" in the Prospectus.
(2) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $4,978,539.20 as of the Cutoff Date to be
capitalized upon commencement of repayment.
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<PAGE>
Distribution of the Initial Financed Student Loans
by Borrower Payment Status as of the Cutoff Date
Percent of Initial
Financed Student
Aggregate Loans
Borrower Payment Number of Outstanding by Outstanding
Status(1) Loans Principal Balance(2) Principal Balance
- ---------------- --------- -------------------- ------------------
In-School 2,088 $ 5,465,253.69 0.94%
Grace 19,160 51,790,155.15 8.94%
Deferral 7,788 33,855,802.75 5.84%
Forbearance 8,651 77,904,678.91 13.45%
Repayment 88,635 410,379,466.88 70.83%
------- -------------- ------
Total 126,322 $579,395,357.38 100.00%
======= =============== ======
- ----------
(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 "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 balances due from borrowers, plus accrued interest
thereon estimated to be $4,978,539.20 as of the Cutoff Date to be
capitalized upon commencement of repayment.
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<PAGE>
Geographic Distribution of the
Initial Financed Student Loans as of the Cutoff Date
Percent of Initial
Financed Student
Aggregate Loans
Number of Outstanding by Outstanding
Location (1) Loans Principal Balance(2) Principal Balance
------------ --------- ---------------------- ------------------
Alabama ........... 1,396 $ 6,679,575.25 1.15%
Alaska ............ 419 1,352,662.79 0.23%
Arizona ........... 4,773 27,963,884.58 4.83%
Arkansas .......... 809 4,114,467.30 0.71%
California ........ 3,765 24,822,416.56 4.28%
Colorado .......... 2,805 12,088,296.93 2.09%
Connecticut ....... 714 3,706,126.03 0.64%
Delaware .......... 172 904,007.97 0.16%
Florida ........... 9,420 48,945,292.12 8.45%
Georgia ........... 3,419 18,637,531.15 3.22%
Hawaii ............ 149 816,311.85 0.14%
Idaho ............. 304 1,488,527.31 0.26%
Illinois .......... 5,048 24,892,274.73 4.30%
Indiana ........... 30,839 109,662,164.89 18.93%
Iowa .............. 377 2,401,876.84 0.41%
Kansas ............ 5,931 21,538,382.25 3.72%
Kentucky .......... 870 3,980,805.42 0.69%
Louisiana ......... 3,232 17,809,130.46 3.07%
Maine ............. 124 722,724.50 0.12%
Maryland .......... 2,070 13,773,852.30 2.38%
Massachusetts ..... 1,085 5,380,399.46 0.93%
Michigan .......... 3,155 12,805,671.85 2.21%
Military .......... 143 707,633.84 0.12%
Minnesota ......... 998 5,308,940.19 0.92%
Mississippi ....... 760 5,023,260.20 0.87%
Missouri .......... 2,362 13,073,965.67 2.26%
Montana ........... 114 656,882.12 0.11%
Nebraska .......... 307 1,670,744.80 0.29%
Nevada ............ 466 3,347,134.92 0.58%
New Hampshire ..... 185 934,410.95 0.16%
New Jersey ........ 1,783 9,412,754.92 1.62%
New Mexico ........ 405 2,262,543.06 0.39%
New York .......... 2,468 14,967,835.95 2.58%
North Carolina .... 1,841 8,352,870.85 1.44%
North Dakota ...... 82 419,680.45 0.07%
Ohio .............. 4,957 21,579,203.11 3.72%
Oklahoma .......... 644 4,337,587.48 0.75%
Oregon ............ 717 4,522,308.26 0.78%
Pennsylvania ...... 3,287 12,862,925.83 2.22%
Puerto Rico ....... 1,121 4,873,244.87 0.84%
Rhode Island ...... 147 963,463.72 0.17%
South Carolina .... 2,399 9,608,078.59 1.66%
South Dakota ...... 87 427,758.49 0.07%
Tennessee ......... 1,678 7,007,980.95 1.21%
Texas ............. 9,460 42,838,330.64 7.39%
Utah .............. 189 1,670,538.88 0.29%
Vermont ........... 95 434,325.98 0.07%
Virginia .......... 2,632 12,206,827.57 2.11%
Washington ........ 2,105 9,540,245.59 1.65%
Washington, DC .... 318 1,938,884.16 0.33%
West Virginia ..... 2,194 6,767,189.61 1.17%
Wisconsin ......... 1,139 4,856,803.11 0.84%
Wyoming ........... 168 988,217.92 0.17%
Other ............. 195 1,346,402.16 0.23%
------ ------------- ------
Total ....... 126,322 $579,395,357.38 100.00%
======= =============== ======
- ----------
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 balances due from borrowers, plus accrued interest
thereon estimated to be $4,978,539.20 as of the Cutoff Date to be
capitalized upon commencement of repayment.
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<PAGE>
Distribution of Initial Financed Student Loans by Date of Disbursement
Percent of Initial
Financed Student
Aggregate Loans
Number of Outstanding by Outstanding
Borrower Payment Status Loans Principal Balance(2) Principal Balance
- ----------------------- -------- -------------------- -----------------
Pre-October 1, 1993 22,586 $ 66,175,076.97 11.42%
October 1, 1993
and thereafter 103,736 513,220,280.41 88.58%
------- -------------- -----
Total 126,322 $579,395,357.38 100.00%
======= =============== ======
- ----------
(1) Initial Financed Student Loans disbursed prior to October 1, 1993 are 100%
guaranteed by the Initial Guarantor and reinsured against default by the
Department up to a maximum of 100% of the Guarantee Payments. Initial
Financed Student Loans disbursed on or after October 1, 1993 are 98%
guaranteed by the Initial Guarantor and reinsured against default by the
Department up to a maximum of 98% of the Guarantee Payments.
(2) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $4,978,539.20 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
Percent of
Initial Financed
Aggregate Student Loans
Outstanding by Outstanding
Number of Principal Principal
Days Delinquent Loans Balance (1) Balance
- --------------- --------- --------------- -----------------
0 - 30 ................ 112,194 $518,042,654.79 89.41%
31 - 60 ............... 7,187 32,189,395.28 5.56%
61 - 90 ............... 3,957 17,469,926.95 3.02%
91 - 120 .............. 2,984 11,693,380.36 2.02%
------- --------------- -----
Total ........... 126,322 $579,395,357.38 100.00%
======= =============== ======
- ----------
1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $4,978,539.20 as of the Cutoff Date to be
capitalized upon commencement of repayment. On the Closing Date, the
aggregate principal balances of the Initial Financed Student Loans will be
reduced by an amount not to exceed $5,000,000, and an equal amount of cash
will be deposited into the Collection Account on such date, so that the
aggregate principal balances of the Initial Financed Student Loans which
are delinquent between 31 and 120 days as of the Cutoff Date will not
exceed 10% of the aggregate principal balances of the Initial Financed
Student Loans after giving effect to such reduction.
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.
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<PAGE>
Guarantee of Financed Student Loans
By the Closing Date, the Eligible Lender Trustee will have entered into a
Guarantee Agreement with the Initial Guarantor pursuant to which USA Funds has
agreed to serve as Guarantor for the Initial Financed Student Loans. As of the
Cutoff Date, all of the Initial Financed Student Loans are guaranteed by USA
Funds.
During the Revolving Period, the Trust may acquire Additional Student
Loans guaranteed by Additional Guarantors other than the Initial Guarantor
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 20% of the Financed Student Loans (by
principal balance) may, following any such addition, have guarantees from
Additional Guarantors and no more than 5% of the Financed Student Loans (by
principal balance) may, following any such addition, have guarantees from any
one 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 under a Financed Student Loan to make monthly
principal or interest payments 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 unpaid principal plus accrued and
unpaid interest in the case of Financed Student Loans first disbursed on or
after October 1, 1993);
(b) any filing by or against the borrower under a Financed Student Loan of
a petition in bankruptcy pursuant to any chapter of the Federal Bankruptcy Code,
as amended;
(c) the death of the borrower under a Financed Student Loan; or
(d) the total and permanent disability of the borrower under a Financed
Student Loan to work and earn money or attend school, as certified by a
qualified physician.
When these conditions are satisfied, the Act requires the Federal
Guarantor generally to pay the claim within 60 days after its submission by the
lender. The obligations of each Guarantor pursuant to its Guarantee Agreement
are obligations solely of such 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 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 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 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 a Federal Guarantor is unable to meet its insurance
obligations, see "Federal Family Education Loan Program--Federal Guarantors" and
"--Federal Insurance and Reinsurance of Federal Guarantors" in the 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
S-36
<PAGE>
with respect to certain accrued interest amounts with respect thereto or in the
loss of certain Interest Subsidy Payments and Special Allowance Payments with
respect thereto. Under the Servicing Agreement and the Loan Sale Agreement, such
failure to comply would constitute a breach of the Servicer's covenants or the
Seller's representations and warranties, as the case may be, and would create an
obligation of the Servicer (subject to the limitations described under "Risk
Factors--Maturity and Prepayment Considerations" herein) or the Seller, as the
case may be, to purchase or repurchase such Financed Student Loan or, in the
case of a breach by the Seller, to substitute for such loan and to reimburse the
Trust for such non-guaranteed interest amounts or such lost Interest Subsidy
Payments and Special Allowance Payments with respect thereto. The Servicer will
not, however, have any similar obligation to reimburse the Trust for
non-guaranteed interest amounts or lost Interest Subsidy Payments 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 Student Loans; Representations and Warranties" and
"--Servicer Covenants" in the Prospectus.
Set forth below is certain current and historical information with respect
to the 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 balance of federally reinsured education loans (including loans under
the Parent Loans to Undergraduate Students (PLUS) program but excluding Federal
Consolidation Loans) that first became guaranteed by the Initial Guarantor in
each of the last five federal fiscal years:*
Stafford, SLS and
PLUS Loans
Guaranteed by
USA Funds
Federal Fiscal Year (dollars in millions)
------------------- ---------------------
1993 .............................. $3,494
1994 .............................. 4,724
1995 .............................. 5,040
1996 .............................. 5,376
1997 .............................. 6,228
- -----------
* The information set forth in the table above has been obtained from the
Department of Education's Guaranteed Student Loan Programs Data Book (each,
a "DOE Data Book") for Fiscal Year 1993 (with respect to fiscal year 1993)
and from the Initial Guarantor (with respect to information for fiscal
years 1994 through 1997), and is not guaranteed as to accuracy or
completeness, and is not to be construed as a representation, by the Seller
or the Underwriters.
Reserve Ratio. The 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. The Initial Guarantor's recovery rate, which provides a
measure of the effectiveness of the collection efforts against defaulting
borrowers after the guarantee claims have 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 the Initial Guarantor as of the end of each of the last five federal
fiscal years:*
Recovery Rate
Federal Fiscal Year for USA Funds
------------------- -------------
1993 .................................... 26.58%
1994 .................................... 30.30
1995 .................................... 35.26
1996 .................................... 39.21
1997 .................................... 40.89
- ----------
* The information set forth in the table above with respect to the 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 Underwriters.
S-37
<PAGE>
Claims Rate. The Initial 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 the Initial Guarantor (excluding Arizona, Hawaii and certain Pacific
islands in the case of federal fiscal years 1993 through 1996) for each of the
last five federal fiscal years*:
Claims Rate of
Federal Fiscal Year USA Funds
------------------- ---------
1993 ................................................. 6.89%
1994 ................................................. 4.99
1995 ................................................. 4.69
1996 ................................................. 4.65
1997 ................................................. 4.65
- ----------
* The information set forth in the table above with respect to the Initial
Grantor 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 Underwriters.
Unless otherwise indicated, all the above information relating to the
Initial Guarantor has been obtained from such Guarantor, is not guaranteed as to
accuracy or completeness by the Seller or the Underwriters and is not to be
construed as a representation by the Seller or the Underwriters. The guarantee
volumes, reserve ratios, recovery rates and claim rates of Additional Guarantors
may vary from those of the Initial Guarantor. No assurances can be given as to
what such volumes, ratios or rates will be or as to whether the Initial
Guarantor 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 Guarantor and for information concerning certain Federal Guarantors
that could become Additional Guarantors.
S-38
<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 on the outstanding principal amount of each class of Notes will
accrue from and including the Closing Date (in the case of the first Quarterly
Payment Date), or from and including the most recent Quarterly Payment Date on
which interest thereon has been paid, to but excluding the current Quarterly
Payment Date (each, a "Quarterly Interest Period") and will be payable to the
Class A-1 Noteholders, the Class A-2 Noteholders and the Subordinate
Noteholders, as the case may be, quarterly on each Quarterly Payment Date,
commencing July 28, 1998. 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 described below. Interest payments on the Notes will
generally be funded from the Available Funds on deposit in the Collection
Account and from amounts on deposit in the Reserve Account remaining after the
distribution of the Servicing Fee and all overdue Servicing Fees, the
Administration Fee and all overdue Administration Fees and the Subordinate Note
Insurance Policy Premium and all overdue Subordinate Note Insurance Policy
Premiums for such Quarterly Payment Date. See "Description of the Transfer and
Servicing Agreements--Distributions" and "--Credit Enhancement" herein.
The "Class A-1 Note Rate", the "Class A-2 Note Rate" and the "Subordinate
Note Rate" for each Quarterly Interest Period will equal the lesser of (a) the
Class A-1 Note LIBOR Rate, the Class A-2 Note LIBOR Rate or the Subordinate Note
LIBOR Rate, as applicable, and (b) the Adjusted Student Loan Rate for such
Quarterly Interest Period. The "Class A-1 Note LIBOR Rate", the "Class A-2 Note
LIBOR Rate" and the "Subordinate Note LIBOR Rate" shall be equal to Three-Month
LIBOR for the related LIBOR Reset Period (determined as described herein) plus
0.04%, 0.12% and 0.27%, respectively.
Interest on the Notes will be calculated on the basis of the actual number
of days elapsed in each Quarterly Interest Period divided by 360.
The "Adjusted Student Loan Rate" for any Quarterly Interest Period will
equal the product of (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 the sum of the Expected Interest Collections
and, if the Interest Rate Swap is still in effect, the Net Trust Swap Receipt,
if any, for such Quarterly Interest Period less the sum of the Servicing Fee,
the Administration Fee, the Subordinate Note Insurance Policy Premium and, if
the Interest Rate Swap is still in effect, the Net Trust Swap Payment, if any,
with respect to such Quarterly Interest Period and (ii) the denominator of which
is the aggregate principal amount 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
Financial Student Loans" herein) 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" herein) and (iii) Investment Earnings
for such Student Loan Rate Accrual Period.
Class A-1 Noteholders' Interest Basis Carryover, Class A-2 Noteholders'
Interest Basis Carryover and Subordinate Noteholders' Interest Basis Carryover
may be incurred on any Quarterly Payment Date (after the first Quarterly Payment
Date). Any Class A-1 Noteholders' Interest Basis Carryover, Class A-2
Noteholders' Interest
S-39
<PAGE>
Basis Carryover and Subordinate Noteholders' Interest Basis 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 Class A-1 Noteholders' Interest Basis Carryover, Class A-2
Noteholders' Interest Basis Carryover and Subordinate Noteholders' Interest
Basis Carryover incurred and unpaid to and including 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 amounts owed to the
Subordinate Note Insurer under the Administration Agreement and thereafter 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 amount of the Notes exceeds
the Pool Balance and (iii) in the case of the Subordinate Noteholders' Interest
Basis Carryover, payment of the Class A-1 Noteholders' Interest Basis Carryover
and the Class A-2 Noteholders' Interest Basis Carryover.
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, sequentially, in the order of priority set forth in
the second succeeding paragraph on each Quarterly Payment Date in an amount
generally equal to the Principal Distribution Amount for such Quarterly Payment
Date, until the aggregate principal amount of the Notes is reduced to zero.
Payments of the Principal Distribution Amount will generally be derived from the
Available Funds remaining after the distribution of (i) the Servicing Fee and
all overdue Servicing Fees, (ii) the Administration Fee and all overdue
Administration Fees, (iii) the Senior Noteholders' Interest Distribution Amount
and the Trust Swap Payment Amount, if any, (iv) the Subordinate Note Insurance
Policy Premium and all overdue Subordinate Note Insurance Policy Premiums, and
(v) the Subordinate 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, for
a Quarterly Payment Date, such shortfall will be added to the principal payable
to the Senior Noteholders or the 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 amount of the Notes
outstanding on such date is greater than the Pool Balance as of the close of
business on the last day of the related Collection Period, any Reserve Account
Excess for such Quarterly Payment Date will, after payment to the Subordinate
Note Insurer of amounts owed to the Subordinate Note Insurer under the
Administration Agreement and 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 for such Quarterly Payment Date and the 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
Senior Notes (whether in respect of the Senior Noteholders' 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 Class A-1 Notes
until the aggregate principal amount of the Class A-1 Notes has been reduced to
zero and then of the Class A-2 Notes until the aggregate principal amount of the
Class A-2 Notes has been reduced to zero. In addition, on each Quarterly Payment
Date on which principal payments are made on the Notes (whether in respect of
the Principal Distribution Amount, 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 amount of the Senior Notes has been paid in full,
and then to pay principal of the Subordinate Notes until the Subordinate Notes
have been paid in full.
S-40
<PAGE>
The aggregate outstanding principal amount, if any, of the Class A-1 Notes
will be payable in full on the October 2005 Quarterly Payment Date (the "Class
A-1 Note Final Maturity Date"), of the Class A-2 Notes will be payable in full
on the July 2026 Quarterly Payment Due Date (the "Class A-2 Note Final Maturity
Date") and of the Subordinate Notes on the October 2033 Quarterly Payment Date
(the "Subordinate Note Final Maturity Date"). However, the actual maturity of
any class of the Senior Notes or of the Subordinate Notes could occur other than
on such dates as a result of a variety of factors including those described
under "Risk Factors--Maturity and Prepayment Considerations" herein.
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 first to pay the Swap Counterparty any prior
unpaid Net Trust Swap Payment Carryover Shortfalls and then to redeem the Notes
in the order of priority set forth in the second preceding paragraph. 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 after giving
effect to the payment to the Swap Counterparty of any prior Net Trust Swap
Payment Carryover Shortfalls on such date.
Calculation of Three-Month LIBOR
Pursuant to the Administration Agreement, the Administrator will determine
Three-Month LIBOR for purposes of calculating the Class A-1 Note LIBOR Rate, the
Class A-2 Note LIBOR Rate and the Subordinate Note LIBOR Rate for each Quarterly
Interest Period on the second business day prior to the commencement of the
LIBOR Reset Period within such Quarterly Interest Period (or, in the case of the
initial LIBOR Reset Period, on the second business day prior to the Closing
Date) (each, a "LIBOR Determination Date"). For purposes of calculating
Three-Month LIBOR, a business day is any day on which banks in The City of New
York and the City of London are open for the transaction of international
business. Interest due for any Quarterly Interest Period will be determined
based on the actual number of days in such Quarterly Interest Period over a
360-day year.
"Three-Month LIBOR" means, with respect to any LIBOR Reset Period, the
London interbank offered rate for deposits in U.S. dollars having a maturity of
three months commencing on the related LIBOR Determination Date (the "Index
Maturity") which appears on Telerate Page 3750 as of 11:00 a.m. London time, on
such LIBOR Determination Date. If such rate does not appear on Telerate Page
3750, the rate for that day will be determined on the basis of the rates at
which deposits in U.S. dollars, having the Index Maturity and in a principal
amount of not less than U.S. $1,000,000, are offered at approximately 11:00 a.m.
London time, on such LIBOR Determination Date, to prime banks in the London
interbank market by the Reference Banks. The Administrator will request the
principal London office of each Reference Bank to provide a quotation of its
rate. If at least two such quotations are provided, the rate for that day will
be the arithmetic mean of the quotations. If fewer than two quotations are
provided, the rate for that day will be the arithmetic mean of the rates quoted
by major banks in The City of New York, selected by the Administrator, at
approximately 11:00 a.m. New York time, on such LIBOR Determination Date, for
loans in U.S. dollars to leading European banks having the Index Maturity and in
a principal amount equal to an amount of not less than U.S.$1,000,000; provided,
however, that if the banks selected as aforesaid are not quoting as mentioned in
this sentence, Three-Month LIBOR in effect for the applicable LIBOR Reset Period
will be Three-Month LIBOR in effect for the previous LIBOR Reset Period.
"LIBOR Reset Period" means the three-month period commencing on the 28th
day (or, if any such date is not a business day, on the next succeeding business
day) of each January, April, July and October and ending on the day immediately
preceding the following LIBOR Reset Period; provided, however, that the initial
LIBOR Reset Period will commence on the Closing Date.
"Telerate Page 3750" means the display page so designated on the Dow Jones
Telerate Service (or such other page as may replace that page on that service
for the purpose of displaying comparable rates or prices).
"Reference Banks" means four major banks in the London interbank market
selected by the Administrator.
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
S-41
<PAGE>
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 (which in turn will exercise their rights through DTC).
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Senior Notes and is required to
receive and transmit distributions of principal of and interest on the Senior
Notes. Participants and Indirect Participants with which Senior Noteholders have
accounts with respect to the Senior Notes similarly are required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Senior Noteholders.
Because DTC can only act on behalf of Participants, which 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 to 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
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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 (as defined below). Such distributions
will be subject to tax reporting in accordance with relevant United States tax
laws and regulations. CEDEL or the Euroclear Operator, as the case may be, will
take any other action permitted to be taken by a Senior Noteholder under the
Indenture on behalf of a CEDEL Participant or Euroclear Participant only in
accordance with the relevant rules and procedures and subject to the relevant
Depositary's ability to effect such actions on its behalf through DTC.
Senior Noteholders may hold their Senior Notes through DTC (in the United
States) or CEDEL or Euroclear (in Europe) if they are participants of such
systems, or indirectly through organizations which are participants in such
systems.
The Senior Notes will initially be registered in the name of Cede & Co.,
the nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank, N.A. ("Citibank") will act as depositary
for CEDEL and Morgan Guaranty Trust Company of New York ("Morgan") will act as
depositary for Euroclear (in such capacities, individually, the "Depositary"
and, collectively, the "Depositaries").
Transfers between Participants will occur in accordance with DTC Rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Because of time-zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant or Euroclear
Participant to a Participant will be received with value on the DTC settlement
date but will be available in the relevant CEDEL or Euroclear cash account only
as of the business day following settlement in DTC. For information with respect
to tax documentation procedures for the Senior Notes, see "Certain Federal
Income Tax Consequences--Trusts for Which a Partnership Election Is Made--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
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procedures for same-day funds settlement applicable to DTC. CEDEL Participants
and Euroclear Participants may not deliver instructions to the Depositaries.
DTC has advised the Administrator that it will take any action permitted
to be taken by a Senior Noteholder under the Indenture, only at the direction of
one or more Participants to whose accounts with DTC the Senior Notes are
credited.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of interests in the Senior Notes among
participants of DTC, CEDEL and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
NONE OF THE TRUST, THE SELLER, THE SERVICER, THE ADMINISTRATOR, THE
ELIGIBLE LENDER TRUSTEE, THE INDENTURE TRUSTEE OR THE UNDERWRITERS WILL HAVE ANY
RESPONSIBILITY OR OBLIGATION TO ANY PARTICIPANTS, CEDEL PARTICIPANTS OR
EUROCLEAR PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS NOMINEES WITH RESPECT
TO (1) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC, CEDEL OR EUROCLEAR OR ANY
PARTICIPANT, (2) THE PAYMENT BY DTC, CEDEL OR EUROCLEAR OR ANY PARTICIPANT OF
ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE PRINCIPAL AMOUNT OR
INTEREST ON THE SENIOR NOTES, (3) THE DELIVERY BY ANY PARTICIPANT, CEDEL
PARTICIPANT OR EUROCLEAR PARTICIPANT OF ANY NOTICE TO ANY BENEFICIAL OWNER WHICH
IS REQUIRED OR PERMITTED UNDER THE TERMS OF THE INDENTURE OR THE TRUST AGREEMENT
TO BE GIVEN TO SENIOR NOTEHOLDERS OR (4) ANY OTHER ACTION TAKEN BY DTC AS THE
SENIOR NOTEHOLDER.
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.
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 July 2000 Quarterly Payment
Date, the Eligible Lender Trustee on behalf of the Trust will be obligated from
time to time, subject to certain conditions described herein, to purchase from
the Seller, and the Seller, subject to the availability thereof and to the
availability of funds therefor in the Collateral Reinvestment Account, will be
obligated to tender to the Trust, 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
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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 owed by the related borrower plus accrued interest
thereon expected to be capitalized upon repayment (the "Purchase Collateral
Balance") and (ii) an additional amount not to exceed 2.5% of the principal
balance owed by the related borrower (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 30% 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 40% 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 October
1998, is less than 1%; or
(vii) the arithmetic average of the Delinquency Percentage as of the end
of each of two successive Collection Periods exceeds 20%.
"Excess Spread" means, with respect to any Quarterly Payment Date, the
percentage equivalent of a fraction the numerator of which is the product of (a)
four and (b) the difference between (x) the sum of (i) the Expected Interest
Collections for such Quarterly Payment Date and (ii) the Trust Swap Receipt
Amount, if any, 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, (iii) the Senior Noteholders' Interest Distribution
Amount and the Trust Swap Payment Amount, if any, for such Quarterly Payment
Date, (iv) the Subordinate Note Insurance Policy Premium for such Quarterly
Payment Date and all prior unpaid Subordinate Note Insurance Policy Premiums,
and (v) the Subordinate Noteholders' Interest Distribution Amount for such
Quarterly Payment Date, and the denominator of which is the average of the Pool
Balance calculated as of the first and the last day of the related Collection
Period.
"Delinquency Percentage" means, as of any date of determination, the
percentage equivalent of a fraction the numerator of which is the aggregate
principal balances of the Financed Student Loans which are Repayment Loans that
either (a) are delinquent over 120 days or (b) have had claims filed with the
Department for which payment is still awaited, and the denominator of which is
the aggregate principal balances 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 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 Serial Loan. Following the end of the
Revolving Period, the Purchased Collateral Balance for purchases of Serial Loans
will be funded by amounts representing distributions of principal on the
outstanding Financed Student Loans which otherwise would have been part of the
Available Funds as described under "--Distributions" below, and Purchase Premium
Amounts for such purchases will be funded on the next succeeding Quarterly
Payment Date from any Reserve Account Excess
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for such Quarterly Payment Date as described herein 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,
however, 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 (an "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 that of the Exchanged Serial Loan. In
addition, if the outstanding principal balance 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 as described under
"--Distributions" below. No Purchase Premium Amounts will be payable for an
Exchanged Serial Loan.
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 or Serial Loans or exchange of Exchanged
Financed Student Loans for Exchanged Serial Loans will be made by the Trust on a
date designated by the Seller (each, a "Transfer Date") pursuant to one or more
Transfer Agreements. On such Transfer Date, the Seller will assign without
recourse (except as otherwise set forth in the Transfer and Servicing
Agreements) to the Eligible Lender Trustee on behalf of the Trust the Seller's
entire interest in the New Loans, Serial Loans or Exchanged Serial Loans being
transferred on such Transfer Date, in exchange for the Loan Purchase Amount
thereof or the Exchanged Financed Student Loans being exchanged therefor (with
the payment of any Purchase Premium Amount for Serial Loans acquired by the
Trust after the Revolving Period being deferred to the next succeeding Quarterly
Payment Date on which amounts in excess of the Specified Reserve Account Balance
are available in the Reserve Account as described above).
In addition, following the Closing Date and prior to the end of the
Revolving Period, in the event that a borrower under a Financed Student Loan who
is also a borrower under one or more 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 Student Loans that are being discharged in the consolidation
process, which amount will be paid by 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. 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 $35,000,000;
additionally, no Federal Consolidation Loan may be originated by the Trust
having a scheduled maturity date after October 28, 2029 if at the time of such
origination the aggregate principal balances of all Federal Consolidation Loans
held by the Trust that have a scheduled maturity date after October 28, 2029
exceed or, after giving effect to such origination, would exceed $15,000,000;
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 any Federal Consolidation Loan by the amount of any
related Add-on Consolidation Loan, as described below.
As described under "Federal Family Education Loan Program--Federal
Consolidation Loan Program" in the 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.
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As a result of the addition of any Add-on Consolidation Loans, the related
Federal Consolidation Loan may, in certain cases, have a different interest rate
and a different final payment date. Any Add-on Consolidation Loan added during
the Revolving Period to a Federal Consolidation Loan in 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 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 as described under
"--Distributions" below.
As described under "Federal Family Education Loan Program" in the
Prospectus, during certain qualifying periods, interest on certain 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
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 the 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 the 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 (a) one-twelfth of 1.00% (or of 0.50% if such Monthly
Payment Date or Quarterly Payment Date is on or after the July 2008 Quarterly
Payment Date) of the aggregate principal balances of the Financed Student Loans
as of the last day of the preceding calendar month and (b) 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 Student Loan (as defined herein) on such date or, if the
average principal balance of In-School Student Loans as of such date was $2,500
or less, $1.50 per account for each such loan, (ii) one-twelfth of the GRDF
Percentage of the principal balance as of the last day of the preceding calendar
month of each Financed Student Loan which was a Grace, Repayment, Deferral or
Forbearance Student Loan (each, as defined herein) as of such date or, if the
average principal balance of such loans as of such date was $3,000 or less,
$3.00 per account for each such loan, (iii) a fee of $1.00 for each notification
sent by the Servicer during the preceding calendar month on behalf of the Trust
to a borrower providing information to such borrower with respect to Federal
Consolidation Loan programs, (iv) a one-time fee of $75.00 for each Federal
Consolidation Loan originated by the Eligible Lender Trustee on behalf of the
Trust during the preceding calendar month, (v) a fee of $25.00 for each Financed
Student Loan for which, during the preceding calendar month, claim documentation
was completed and provided to the Guarantor or for which the Servicer performed
bankruptcy or ineligible borrower account processing (that, in the case of
ineligible account processing, resulted in a demand letter being sent to the
borrower), in each case as required by the claims-processing requirements of the
related Guarantor, (vi) a fee of $0.05 per Financed Student Loan for storing and
warehousing the applicable loan documentation for each such loan during the
preceding calendar month, (vii) a one-time fee of $2.00 for each Serial Loan
transferred by the Seller to the Trust during the preceding calendar month,
(viii) a fee equal to one-twelfth of the product of (A) the aggregate principal
balances of the Financed Student Loans outstanding as of the last day of the
preceding calendar month and (B) 0.05%, which fee will be payable so long as
certain servicing regulations of the Department remain in effect, and (ix) a fee
of $70.00 per hour for system development requests made by the Eligible Lender
Trustee on behalf of the Trust and provided by the Servicer during the preceding
calendar month.
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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
Student Loans and the Grace, Repayment, Deferral and Forbearance Student 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
- ---------------- -------- ----------------- ----------
$2,501 - $3,000 ..... 0.625% $ 3,001 - $ 3,400 ........... 1.100%
$3,001 - $3,500 ..... 0.525% $ 3,401 - $ 3,900 ........... 0.950%
$3,501 - $4,000 ..... 0.450% $ 3,901 - $ 4,400 ........... 0.830%
$4,001 - $4,750 ..... 0.375% $ 4,401 - $ 4,800 ........... 0.740%
$4,751 - $5,500 ..... 0.310% $ 4,801 - $ 5,400 ........... 0.650%
$5,501 - $6,250 ..... 0.260% $ 5,401 - $ 6,000 ........... 0.575%
$6,251 and above .... 0.230% $ 6,001 - $ 6,600 ........... 0.510%
$ 6,601 - $ 7,200 ........... 0.475%
$ 7,201 - $ 10,000 ........... 0.450%
$10,001 - $ 13,000 ........... 0.350%
$13,001 and above ............ 0.300%
The Servicing Fee (together with any portion of the Servicing Fee that
remains unpaid from prior Monthly Payment Dates) will be payable on each Monthly
Payment Date and will be paid solely out of the Monthly Available Funds in the
case of each Monthly Payment Date that is not a Quarterly Payment Date (and out
of the Available Funds in the case of each Quarterly Payment Date) 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 (a) of the first sentence of the second preceding paragraph, then an
amount (the "Servicing Fee Shortfall") equal to the excess of the amount
described in clause (b) of such sentence over the amount described in clause (a)
of such sentence shall be payable on the next succeeding Monthly Payment Date
(or if such Monthly Payment Date is also a Quarterly Payment Date, on such
Quarterly Payment Date) from any remaining amounts on deposit in the Reserve
Account that are in excess of the Specified Reserve Account Balance, pursuant to
the priorities described under "--Credit Enhancement--Reserve Account" below.
The Servicer will be obligated to perform its servicing obligations whether or
not it receives any amounts in respect of Servicing Fee Shortfalls.
As compensation for the performance of the Administrator's obligations
under the Administration Agreement and as reimbursement for its expenses related
thereto, the Administrator will be entitled to receive monthly in arrears, on
each Monthly Payment Date that is not a Quarterly Payment Date and on each
Quarterly Payment Date, the Administration Fee in an amount equal to one-twelfth
of the product of (i) 0.05% and (ii) the Pool Balance as of the close of
business on the last day of the calendar month immediately preceding such date.
Distributions
Deposits to the 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 the Monthly Available Funds or the Available Funds, as
the case may be, received with respect to the Financed Student Loans and the
aggregate Purchase Amounts 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, "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 during such
Collection Period and remitted to the Indenture Trustee (including any Guarantee
Payments received with respect to the Financed Student Loans); (ii) 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
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remitted to the borrowers on such Liquidated Student Loans (such net proceeds,
"Liquidation Proceeds"), and all recoveries in respect of Liquidated Student
Loans which were written off in prior Monthly Collection Periods and have been
received by the Servicer during such Monthly Collection Period and remitted to
the Indenture Trustee; (iv) that portion of amounts released from the Collateral
Reinvestment Account with respect to Additional Fundings relating to interest
costs on the Financed Student Loans which are or will be capitalized; (v) the
aggregate amount received by the Indenture Trustee on the 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, the Monthly Available Funds
remaining on deposit in the Collection Account from the Monthly Collection
Period relating to the preceding Monthly Payment Date after giving effect to
application of 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 the Monthly Available Funds
(as defined above) and amounts available in the Reserve Account, to pay any of
the items specified in clauses (i) and (ii), respectively, under the second
paragraph of "--Distributions--Distributions from the Collection Account" below,
then the 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 part of the 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 the Monthly Available Funds will exclude (A) all payments and
proceeds (including Liquidation Proceeds) of any Financed Student Loans the
Purchase Amount of which was included in the 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 the Collection Account" below and, after
the end of the Revolving Period, to fund the addition of any Add-on
Consolidation Loans, to purchase Serial Loans or to fund the acquisition of
Exchanged Serial Loans as described under "--Revolving Period and Additional
Fundings" above.
"Available Funds" means, with respect to any Quarterly Payment Date and
the related Collection Period, the sum of the amounts specified in clauses (i)
though (vi) of the definition of Monthly Available Funds for each of the three
Monthly Collection Periods included in such Collection Period plus any Trust
Swap Receipt Amount received by the Trust with respect to such Quarterly Payment
Date; provided, however, that if with respect to any Quarterly Payment Date
there would not be sufficient funds, after application of the Available Funds
(as defined above) and amounts available in the Reserve Account, to pay any of
the items specified in clauses (i) through (vii), respectively, under the third
paragraph of "--Distributions from the Collection Account" below, then the
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 part of the 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 the Available Funds will
exclude (A) all payments and proceeds (including Liquidation Proceeds) of any
Financed Student Loans the Purchase Amounts of which were included in the
Available Funds for a prior Collection Period; (B) except as expressly included
in clause (iv) of the definition of Monthly Available Funds, amounts released
from the Collateral Reinvestment Account; (C) any Monthly Rebate Fees paid
during the related Collection Period by or on behalf of the Trust; (D) any
collections in respect of principal on the Financed Student Loans applied by the
Eligible Lender Trustee on behalf of the Trust prior to the end of the Revolving
Period as described under "--Distributions from the Collection Account" below
and, after the end of the Revolving Period, to fund the addition of any Add-on
Consolidation Loans, to purchase Serial Loans or to fund the acquisition of
Exchanged Serial Loans 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.
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Distributions from the 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
distributions to the extent of the Monthly Available Funds in the Collection
Account for such Monthly Payment Date, 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 the 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 Class A-1 Noteholders, the Class A-1 Noteholders' Interest
Distribution Amount, to the Class A-2 Noteholders, the Class A-2 Noteholders'
Interest Distribution Amount, and to the Swap Counterparty, the Trust Swap
Payment Amount, if any, for such Quarterly Payment Date, pro rata, based on the
ratio of each such amount to the total of such amounts;
(iv) to the Subordinate Note Insurer, the Subordinate Note Insurance
Policy Premium for such Quarterly Payment Date and all prior unpaid Subordinate
Note Insurance Policy Premiums;
(v) to the Subordinate Noteholders, the Subordinate Noteholders' Interest
Distribution Amount for such Quarterly Payment Date;
(vi) if the Revolving Period has terminated, to the Senior Noteholders,
the Senior Noteholders' Principal Distribution Amount for such Quarterly Payment
Date (such amount to be allocated among the Senior Noteholders as described
herein under "Description of the Notes--Distributions of Principal");
(vii) after the Senior Notes have been paid in full, to the Subordinate
Noteholders, the Subordinate Noteholders' Principal Distribution Amount for such
Quarterly Payment Date; and
(viii) to the Reserve Account, any remaining amounts after application of
clauses (i) through (vii) hereof.
For purposes hereof, the following terms have the following meanings:
The "Class A-1 Noteholders' Interest Carryover Shortfall" means, with
respect to any Quarterly Payment Date, the excess of (i) the Class A-1
Noteholders' Interest Distribution Amount on the preceding Quarterly Payment
Date over (ii) the amount of interest actually distributed to the Class A-1
Noteholders on 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 Class A-1 Notes from such preceding Quarterly Payment Date to the
current Quarterly Payment Date.
The "Class A-1 Noteholders' Interest Distribution Amount" means, with
respect to any Quarterly Payment Date, the sum of (i) the amount of interest
accrued at the Class A-1 Note Rate for the related Quarterly Interest Period on
the aggregate principal amount of the Class A-1 Notes outstanding on the
immediately preceding Quarterly Payment Date (after giving effect to all
principal distributions to the Class A-1 Noteholders on such date) or, in the
case of the first Quarterly Payment Date, on the Closing Date and (ii) the Class
A-1 Noteholders' Interest Carryover Shortfall for such Quarterly Payment Date;
provided, however, that the Class A-1 Noteholders' Interest Distribution Amount
will not include any Class A-1 Noteholders' Interest Basis Carryover.
The "Class A-2 Noteholders' Interest Carryover Shortfall" means, with
respect to any Quarterly Payment Date, the excess of (i) the Class A-2
Noteholders' Interest Distribution Amount on the preceding Quarterly Payment
Date over (ii) the amount of interest actually distributed to the Class A-2
Noteholders on 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 Class A-2 Notes from such preceding Quarterly Payment Date to the
current Quarterly Payment Date.
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The "Class A-2 Noteholders' Interest Distribution Amount" means, with
respect to any Quarterly Payment Date, the sum of (i) the amount of interest
accrued at the Class A-2 Note Rate for the related Quarterly Interest Period on
the aggregate principal amount of the Class A-2 Notes outstanding on the
immediately preceding Quarterly Payment Date (after giving effect to all
principal distributions to the Class A-2 Noteholders on such date) or, in the
case of the first Quarterly Payment Date, on the Closing Date and (ii) the Class
A-2 Noteholders' Interest Carryover Shortfall for such Quarterly Payment Date;
provided, however, that the Class A-2 Noteholders' Interest Distribution Amount
will not include any Class A-2 Noteholders' Interest Basis Carryover.
The "Net Trust Swap Payment Carryover Shortfall" means, with respect to
any Quarterly Payment Date with respect to which there shall be an amount owed
by the Trust to the Swap Counterparty under the Interest Rate Swap, the excess
of (i) the Trust Swap Payment Amount on the preceding Quarterly Payment Date
over (ii) the amount actually paid to the Swap Counterparty out of Available
Funds on such preceding Quarterly Payment Date, plus interest on such excess
from such preceding Quarterly Payment Date to the current Quarterly Payment Date
at the rate of Three Month LIBOR for the related Quarterly Interest Period.
The "Net Trust Swap Receipt Carryover Shortfall" means, with respect to
any Quarterly Payment Date with respect to which there shall be an amount owed
by the Swap Counterparty to the Trust under the Interest Rate Swap, the excess
of (i) the Trust Swap Receipt Amount on the preceding Quarterly Payment Date
over (ii) the amount actually paid by the Swap Counterparty to the Trust on such
preceding Quarterly Payment Date, plus interest on such excess from such
preceding Quarterly Payment Date to the current Quarterly Payment Date at the
rate of Three Month LIBOR for the related Quarterly Interest Period.
The "Noteholders' Interest Distribution Amount" means, with respect to any
Quarterly Payment Date, the sum of the Class A-1 Noteholders' Interest
Distribution Amount, the Class A-2 Noteholders' Interest Distribution Amount and
the Subordinate Noteholders' Interest Distribution Amount for such Quarterly
Payment Date.
"Principal Distribution Adjustment" means, with respect to any Quarterly
Payment Date if the Revolving Period has terminated, the amount of the Available
Funds on such Quarterly Payment Date to be used to make additional principal
distributions to the Senior Noteholders (and, after the Senior Notes have been
paid in full, to the Subordinate Noteholders) to account for (i) the amount of
any insignificant balance remaining outstanding as of such Quarterly Payment
Date on a Financed Student Loan after receipt of a final payment from a borrower
or a Guarantor, when such insignificant balances are waived in the ordinary
course of business by the Servicer at the direction of the Administrator in
accordance with the Servicing Agreement, or (ii) the amount of principal
collections erroneously treated as interest collections including, without
limitation, by reason of the failure by a borrower to capitalize interest that
had been expected to be capitalized; provided, however, that the Principal
Distribution Adjustment for any Quarterly Payment Date shall not exceed the
lesser of (x) $100,000 and (y) the amount of any Reserve Account Excess
remaining after giving effect to all distributions to be made therefrom on such
Quarterly Payment Date other than distributions to the Company out of such
excess.
"Principal Distribution Amount" means, with respect to any Quarterly
Payment Date (if the Revolving Period has terminated prior to the end of the
related Collection Period with respect to such Quarterly Payment Date), the sum
of the following amounts with respect to the related Collection Period: (i) that
portion of all collections received by the Servicer on the Financed Student
Loans and remitted to the Indenture Trustee that is allocable to principal
(including the portion of any Guarantee Payments received that is allocable to
principal) of the Financed Student Loans less the sum of (A) 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 balances of
Financed Student Loans which became Liquidated Student Loans during such
Collection Period in accordance with the Servicer's customary servicing
procedures to the extent received the Servicer during the related Collection
Period and remitted to the Indenture Trustee, together with all Realized Losses
on such Financed Student Loans; (iii) to the extent attributable to principal,
the amount received by the Indenture Trustee with respect to each Financed
Student Loan repurchased by the Seller or purchased by the 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 Loan the Purchase Amount of which was included in the Available
Funds for a prior Collection Period and, if the Revolving
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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 aggregate principal balances of
the Liquidated Student Loans over the related Liquidation Proceeds to the extent
allocable to principal.
The "Senior Noteholders' Distribution Amount" means, with respect to any
Quarterly Payment Date, the sum of the Class A-1 Noteholders' Interest
Distribution Amount, the Class A-2 Noteholders' Interest Distribution Amount and
the Senior Noteholders' Principal Distribution Amount for such Quarterly Payment
Date.
The "Senior Noteholders' Interest Distribution Amount" means, with respect
to any Quarterly Payment Date, the sum of (i) the Class A-1 Noteholders'
Interest Distribution Amount and (ii) the Class A-2 Noteholders' Interest
Distribution Amount for such Quarterly Payment Date; provided, however, that the
Senior Noteholders' Interest Distribution Amount will not include any Class A-1
Noteholders' Interest Basis Carryover or Class A-2 Noteholders' Interest Basis
Carryover.
The "Senior Noteholders' Principal Carryover Shortfall" means, as of the
close of any Quarterly Payment Date, the excess of (i) the Senior Noteholders'
Principal Distribution Amount on such Quarterly Payment Date over (ii) the
amount of principal actually distributed to the Senior Noteholders on such
Quarterly Payment Date.
The "Senior Noteholders' Principal Distribution Amount" means, with
respect to any Quarterly Payment Date (if the Revolving Period has terminated
prior to the end of the related Collection Period with respect to such Quarterly
Payments 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 aggregate
principal amount of the Senior Notes outstanding on such date. In addition, (i)
on the Class A-1 Note Final Maturity Date, the principal required to be
distributed to the Class A-1 Noteholders will include the amount required to
reduce the outstanding aggregate principal amount of the Class A-1 Notes to zero
and (ii) on the Class A-2 Note Final Maturity Date, the principal required to be
distributed to the Class A-2 Noteholders will include the amount required to
reduce the outstanding aggregate principal amount of the Class A-2 Notes to
zero.
The "Subordinate Noteholders' Distribution Amount" means, with respect to
any Quarterly Payment Date, the Subordinate Noteholders' Interest Distribution
Amount for 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.
The "Subordinate Noteholders' Interest Carryover Shortfall" means, with
respect to any Quarterly Payment Date, the excess of (i) the Subordinate
Noteholders' Interest Distribution Amount on the preceding Quarterly Payment
Date over (ii) the amount of interest actually distributed to the Subordinate
Noteholders on such preceding Quarterly Payment Date, plus interest on the
amount of such excess, to the extent permitted by law, at the rate borne by the
Subordinate Notes from such preceding Quarterly Payment Date to the current
Quarterly Payment Date.
The "Subordinate Noteholders' Interest Distribution Amount" means, with
respect to any Quarterly Payment Date, the sum of (i) the amount of interest
accrued at the Subordinate Note Rate for the related Quarterly Interest Period
on the aggregate principal amount of the Subordinate Notes outstanding on the
immediately preceding Quarterly Payment Date (after giving effect to all
principal distributions to the Subordinate Noteholders on 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 Basis Carryover.
The "Subordinate Noteholders' Principal Carryover Shortfall" means, as of
the close of any Quarterly Payment Date on or after which the Senior Notes have
been paid in full, the excess of (i) the Subordinate Noteholders' Principal
Distribution Amount on such Quarterly Payment Date over (ii) the amount of
principal actually distributed to the Subordinate Noteholders on such Quarterly
Payment Date.
The "Subordinate Noteholders' Principal Distribution Amount" means, with
respect to each Quarterly Payment Date on and after which the aggregate
principal amount 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 amount of the
Senior Notes is paid in full, any remaining Principal Distribution
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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 aggregate principal amount of the Subordinate Notes outstanding on such
date. In addition, on the Subordinate Note Final Maturity Date, the principal
required to be distributed to the Subordinate Noteholders will include the
amount required to reduce the outstanding principal amount of the Subordinate
Notes to zero.
The "Trust Swap Payment Amount" means, with respect to any Quarterly
Payment Date, the sum of (i) if the Interest Rate Swap is still in effect, the
Net Trust Swap Payment for such Quarterly Payment Date and (ii) the Net Trust
Swap Payment Carryover Shortfall for such Quarterly Payment Date.
The "Trust Swap Receipt Amount" means, with respect to any Quarterly
Payment Date, the sum of (i) if the Interest Rate Swap is still in effect, the
Net Trust Swap Receipt for such Quarterly Payment Date and (ii) the Net Trust
Swap Receipt Carryover Shortfall for such Quarterly Payment Date.
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
the 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 Trust Swap Payment
Amount, if any, the Subordinate Note Insurance Policy Premium and all overdue
Subordinate Note Insurance Policy Premiums, 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" above. As described below, subject to certain limitations,
amounts on deposit in the Reserve Account will be released to the Company to the
extent that the amount on deposit in the Reserve Account exceeds the Specified
Reserve Account Balance.
"Specified Reserve Account Balance" with respect to any Quarterly Payment
Date generally will be the greater of:
(a) 0.25% of the aggregate principal amount of the Notes outstanding on
such date after taking into account the effect of distributions on such
Quarterly Payment Date, or
(b) $756,250; provided, however, that the Specified Reserve Account
Balance shall in no event exceed the aggregate principal amount of the Notes
outstanding on such date.
If the amount on deposit in the Reserve Account on any Quarterly Payment
Date (after giving effect to all distributions required to be made from the
Available Funds on 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 first to pay to the Subordinate Note Insurer amounts owed to the
Subordinate Note Insurer under the Administration Agreement and thereafter any
remaining amounts will be applied (a) during the Revolving Period, for deposit
to the Collateral Reinvestment Account; provided, however, that if such date is
on or after the Parity Date, to the extent that such funds represent payments
(other than principal payments) 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 (to be allocated between the Class A-1
Noteholders and the Class A-2 Noteholders as described herein under "Description
of the Notes--Distributions of Principal") or, if the Senior Notes have been
paid in full, of the Subordinate Notes, until the aggregate principal amount of
the Notes is equal to the Pool Balance as of the close of business on the last
day of the related Collection Period; (iii) to the Class A-1 Noteholders and the
Class A-2 Noteholders, pro rata, the aggregate unpaid amount of any Class A-1
Noteholders' Interest Basis Carryover and Class A-2 Noteholders' Interest Basis
Carryover based on the ratio of each such amount to the total of such amounts;
(iv) to the Subordinate Noteholders, the aggregate unpaid amount of any
Subordinate Noteholders' Interest Basis Carryover; (v) to the Servicer, the
Servicing Fee
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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 the Reserve Account (a) on
each Monthly Payment Date that is not a Quarterly Payment Date, to the extent
that the 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 the Available Funds on such
Quarterly Payment Date is insufficient to pay any of the items specified in
clauses (i) through (vii), respectively, of the third paragraph under
"--Distributions--Distributions from the Collection Account" above on such date.
Such funds will be paid from the Reserve Account to the persons and in the order
of priority specified for distribution from the Collection Account on such date.
As a result of the subordination of the Subordinate Notes to the Senior Notes
described elsewhere herein, any amounts that the Subordinate Noteholders would
otherwise receive from the Reserve Account in respect of the Subordinate
Noteholders' Interest Distribution Amount on any Quarterly Payment Date will be
paid to the Senior Noteholders until the Senior Noteholders' Interest
Distribution Amount for 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" below.
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 the Available Funds (or the Monthly Available Funds) exceeds the
amount of cash in the Reserve Account, the Senior Noteholders or the Subordinate
Noteholders could incur losses or a temporary shortfall in the amount of
principal and interest distributed to the Senior Noteholders or the Subordinate
Noteholders, which result 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 Class A-1 Noteholders' Interest Basis Carryover, Class A-2
Noteholders' Interest Basis Carryover or Subordinate Noteholders' Interest Basis
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 amounts owed to the Subordinate Note Insurer under the
Administration Agreement and 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. While the Class A-1 Noteholders and the Class A-2
Noteholders will have equal priority to the payment of interest, on any
Quarterly Payment Date on which principal is due to be paid on the Senior Notes,
the Class A-2 Noteholders will receive no payments of principal until the Class
A-1 Noteholders have received payments of principal in an amount sufficient to
reduce the aggregate principal amount of the Class A-1 Notes to zero; provided,
however, that from and after any acceleration of the Notes following an Event of
Default (as defined in the Prospectus), principal will be allocated pro rata
between the Class A-1 Notes and the Class A-2 Notes, based on the ratio of the
aggregate principal amount of each such class of Notes to the aggregate
principal amount of the Senior Notes, until the aggregate principal amount of
the Senior Notes has been reduced to zero. In addition, the rights of the
Subordinate Noteholders to receive payments of interest on any Quarterly Payment
Date out of the Available Funds or the Reserve Account are subordinated to the
rights of the Senior Noteholders to receive payments of interest on such date,
and the rights of the Subordinate Noteholders to receive payments of principal
out of the Available Funds or the Reserve Account on any Quarterly Payment Date
are subordinated to the rights of the Senior Noteholders to receive payments of
interest and principal on such date. The Subordinate Noteholders will not be
entitled to any payments of principal out of the Available Funds or the Reserve
Account until the Senior Notes are paid in full. However, the Seller has applied
for the Subordinate Note Insurance Policy to guarantee payment, on each
Quarterly Payment Date, of the Subordinate Noteholders' Interest Distribution
Amount and, on the Subordinate Note Final Maturity Date, of the Subordinate
Noteholders' Principal Distribution Amount pursuant to the terms of such policy.
The Subordinated Note Insurance Policy will be for the sole benefit of the
Subordinated Noteholders. Payments under the Senior Notes will not be insured
under the Subordinate Note Insurance Policy or any other insurance policy.
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Interest Rate Swap
Payments Under the Swap Agreement. On the Closing Date, the Trust will
enter into an interest rate swap agreement (the "Interest Rate Swap") with
General Re Products Financial Corporation (the "Swap Counterparty"). The
Interest Rate Swap will be documented according to a 1992 ISDA Master Agreement
(Multicurrency-Cross Border) ("1992 Master Agreement") modified to reflect the
terms of the Notes, the Indenture and the Interest Rate Swap. The Interest Rate
Swap will terminate on the Swap Termination Date.
In accordance with the terms of the Interest Rate Swap, the Swap
Counterparty will pay to the Trust, on each Quarterly Payment Date with respect
to which the Interest Rate Swap is still in effect, an amount equal to the
product of (i) the Swap Rate for the related Quarterly Interest Period, (ii) the
Notional Swap Amount for such Quarterly Payment Date and (iii) the quotient of
the number of days in the related Quarterly Interest Period divided by 360. The
"Swap Rate" for any Quarterly Interest Period will be a rate equal to
Three-Month LIBOR (determined as described herein under "Description of the
Notes--Calculation of Three-Month LIBOR") for such Quarterly Interest Period.
The "Notional Swap Amount" for any Quarterly Payment Date will be an amount
equal to the aggregate principal amount of the Notes outstanding on such
Quarterly Payment Date (before giving effect to distributions on such date).
In exchange for such payment, the Trust will pay to the Swap Counterparty,
on each Quarterly Payment Date with respect to which the Interest Rate Swap is
still in effect, an amount equal to the product of (i) the T-Bill Rate
(determined as described below) for the related Quarterly Interest Period plus a
predetermined spread, (ii) the aggregate outstanding principal amount of the
Notes as of such Quarterly Payment Date (before giving effect to distributions
on such date) and (iii) the quotient of the actual number of days in such
Quarterly Interest Period divided by 365 (or 366 in the case of any such amount
which is being calculated with respect to a Quarterly Payment Date in a leap
year). On any Quarterly Payment Date, the sum of the Gross Trust Swap Payment
and the Subordinate Note Insurance Policy Premium will not exceed the product of
(i) the T-Bill Rate plus 1.1%, (ii) the Notional Swap Amount and (iii) the
quotient of the actual number of days in such Quarterly Interest Period divided
by 365 (or 366 in the case of any such amount which is being calculated with
respect to such Quarterly Payment Date in a leap year). With respect to each
Quarterly Payment Date with respect to which the Interest Rate Swap is still in
effect (and without regard to any payments remaining unpaid from a prior
Quarterly Payment Date), any difference between the payment by the Swap
Counterparty to the Trust and the payment by the Trust to the Swap Counterparty
will be referred to as a "Net Trust Swap Receipt", if such difference is a
positive number, and a "Net Trust Swap Payment", if such difference is a
negative number. Any payments pursuant to the Interest Rate Swap will be made
solely on a net basis, as described above. The Trust Swap Receipt Amount, if
any, will be distributed as part of the Available Funds on such Quarterly
Payment Date and the Trust Swap Payment Amount, if any, will be paid out of the
Available Funds.
The "T-Bill Rate", with respect to any Quarterly Interest Period, means
the weighted average of the T-Bill Rates for each day within such Quarterly
Interest Period and, with respect to any date within a Quarterly Interest
Period, means the weighted average discount rate per annum (expressed on a bond
equivalent basis and applied on a daily basis) for direct obligations of the
United States with a maturity of 13 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 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.
Modification and Amendment of the Swap Agreement and Transfer and
Servicing Agreements. The Trust Agreement and the Indenture will contain
provisions permitting the Eligible Lender Trustee, with the consent of the
Indenture Trustee and the Subordinate Note Insurer, to enter into any amendment
to the Swap Agreement requested by the Swap Counterparty to cure any ambiguity
in, or correct or supplement any provision of, the Swap Agreement, so long as
the Eligible Lender Trustee determines, and the Indenture Trustee and the
Subordinate Note Insurer agree in writing, that such amendment will not
adversely affect the interests of the Noteholders and the Subordinate Note
Insurer. The written consent of the Swap Counterparty will be required before
any amendment is made to the Indenture or the Transfer and Servicing Agreements.
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Conditions Precedent. The respective obligations of the Swap Counterparty
and the Trust to pay certain amounts due under the Swap Agreement will be
subject to the following conditions precedent: (i) no Swap Default (as defined
below) or event that with the giving of notice or lapse of time or both would
become a Swap Default shall have occurred and be continuing and (ii) no
Termination Event (as defined below) has occurred or been effectively
designated; provided, however, that the Swap Counterparty's obligation to pay
such amounts will not be subject to such conditions unless principal of the
Notes has been accelerated following an Event of Default under the Indenture.
Defaults Under the Swap. "Events of Default" under the Swap Agreement
(each a "Swap Default") are limited to (i) the failure of the Trust or the Swap
Counterparty to pay any amount when due under the Interest Rate Swap after
giving effect to the applicable grace period; provided, however, that, in the
case of the Trust, the Trust has funds available after all prior obligations of
the Trust to make such payment, (ii) the occurrence of certain events of
insolvency or bankruptcy of the Trust or the Swap Counterparty, (iii) an
acceleration of the principal of the Notes following an Event of Default under
the Indenture, and (iv) the following other standard events of default under the
1992 Master Agreement: "Breach of Agreement" (not applicable to the Trust),
"Credit Support Default" (not applicable to the Trust), "Misrepresentation" (not
applicable to the Trust), and "Merger without Assumption" (not applicable to the
Trust), as described in Sections 5(a)(ii), 5(a)(iii), 5(a)(iv) and 5(a)(viii) of
the 1992 Master Agreement.
Termination Events. "Termination Events" under the Swap Agreement consist
of the following standard events under the 1992 Master Agreement: "Illegality"
(which generally relates to changes in law causing it to become unlawful for
either party to perform its obligations under the Interest Rate Swap) and "Tax
Event" (which generally relates to either party to the Interest Rate Swap
receiving a payment under the Interest Rate Swap from which an amount has been
deducted or withheld for or on account of taxes), as described in Sections
5(b)(i) and 5(b)(ii) of the 1992 Master Agreement.
Early Termination of the Swap. Upon the occurrence of any Swap Default
under the Swap Agreement, the non-defaulting party will have the right to
designate an Early Termination Date (as defined in the Swap Agreement) upon the
occurrence of such Swap Default. With respect to Termination Events, an Early
Termination Date may be designated by one of the parties (as specified in the
Swap Agreement) and will occur only upon notice and, in certain circumstances,
after any Affected Party has used reasonable efforts to transfer it rights and
obligations under the Swap Agreement to a related entity within a limited period
after notice has been given of such Termination Event, all as set forth in the
Swap Agreement. The occurrence of an Early Termination Date under the Swap
Agreement will constitute a "Swap Early Termination".
Upon any Swap Early Termination of the Swap Agreement, the Trust or the
Swap Counterparty may be liable to make a termination payment to the other
(regardless, if applicable, of which of the parties has caused such
termination). The amount of such termination payment will be based on the value
of the Interest Rate Swap computed in accordance with the procedures set forth
in the Interest Rate Swap. Any such payment could be substantial. In the event
that the trust is required to make such a termination payment, such payment will
be payable in the same order of priority as any Trust Swap Payment Amount
payable to the Swap Counterparty (which is payable pari passu with the Class A-1
Noteholders' Interest Distribution Amount and the Class A-2 Noteholders'
Interest Distribution Amount); provided, however, that, in the event that a
termination payment is owed to the Swap Counterparty following a Swap Default
resulting from a default of the Swap Counterparty or a Termination Event, such
termination payment will be subordinate to the right of the Noteholders to
receive full payment of principal of and interest on the Notes. Accordingly,
termination payments, if required to be made by the Trust, could result in
shortfalls to Noteholders.
If, following an Early Termination Date, a Termination Payment is owed by
the Trust to the Swap Counterparty and the Trust receives a payment ("Assumption
Payment") from a successor swap counterparty to assume the position of the Swap
Counterparty, the portion of the Assumption Payment that does not exceed the
amount of the Termination Payment owed by the Trust to the Swap Counterparty
will be paid by the Trust to the Swap Counterparty and will not be available to
make distributions to Noteholders. Following such payment, the amount of the
Termination Payment owed by the Trust to the Swap Counterparty will be reduced
by the amount of such payment.
Rating Agency Downgrade. If the rating of GRN (or any successor credit
support provider) is withdrawn or reduced below A3 or its equivalent by any Swap
Rating Agency (such withdrawal or reduction, a "Rating Agency Downgrade"), the
Swap Counterparty is required, no later than the 30th day following such Rating
Agency Downgrade, at the Swap Counterparty's expense, either to (i) obtain a
substitute Swap Counterparty that has a
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counterparty rating of at least A3 or its equivalent by each Swap Rating Agency
or (ii) enter into arrangements reasonably satisfactory to the Trustee,
including collateral arrangements, guarantees or letters of credit, which
arrangements in the view of such Swap Rating Agency will result in the total
negation of the effect or impact of such Rating Agency Downgrade on the
Noteholders, the Subordinate Note Insurer and the Seller.
The Swap Counterparty. The Swap Counterparty will be General Re Financial
Products Corporation ("GRFP"). GRFP is an indirect, wholly-owned subsidiary of
General Re Corporation. GRFP is a dealer in interest rate and cross-currency
swaps and other derivative products in all major currencies from offices or
affiliates in New York, London, Tokyo and Toronto. Its executive offices are
located at 630 Fifth Avenue, Suite 450, New York, New York 10111 and its
telephone number is (212) 307-2300. General Re Corporation ("GRN") was
established in 1980 to serve as the parent company of General Reinsurance
Corporation (formed in 1921) and its affiliates. The swap obligations of GRFP
are guaranteed by GRN. GRN and its subsidiaries ("General Re") operate four
principal businesses: North American property/casualty reinsurance,
international property/casualty reinsurance, life/health reinsurance and
financial services. General Re's principal reinsurance operations are based in
North America and Germany, with other major operations in Asia, Australia,
Europe and South America. General Re's principal financial services operations
are located in New York, London, Tokyo, Hong Kong and Toronto. The common stock
of GRN is traded on the New York Stock Exchange. Its executive offices are
located at 695 East Main Street, Stamford, Connecticut 06901 and its telephone
number is (203) 328-5000. GRFP has a financial programs rating of "AAA" by S&P,
based upon the guarantee of GRN. GRN has a long-term senior debt rating of "AAA"
by S&P and "Aa1" by Moody's.
Reports and other documents filed pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act with the Commission on behalf of GRN are available for
inspection by prospective investors without charge at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549; Seven World Trade Center, New York, New York 10048; and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Prospective investors may also obtain copies of such materials from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
The information set out in the preceding two paragraphs has been provided
by GRFP and is not guaranteed as to accuracy or completeness, and is not to be
construed as representations, by the Seller or the Underwriters. Except for the
foregoing two paragraphs, GRFP, GRN and their respective affiliates have not
been involved in the preparation of, and do not accept responsibility for, this
Prospectus Supplement and the Prospectus.
Company Liability
Anything to the contrary in the Prospectus notwithstanding, the Company
will not be liable to any person or entity for the amount of any losses, claims,
damages or liabilities arising out of or based on the Trust Agreement.
Termination
Certain information regarding termination of the Trust is set forth in
"Description of the Transfer and Servicing Agreements--Termination" in the
Prospectus; provided, however, that the information set forth under the heading
"Description of the Transfer and Servicing Agreements--Insolvency Event" is not
applicable in connection with the Trust.
Any Financed Student Loans remaining in the Trust as of the end of the
Collection Period immediately preceding the July 2008 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 (one of which is from
a bidder other than the Seller and its affiliates) are received, the Indenture
Trustee will accept the highest bid equal to or in excess of the greater of (x)
the aggregate Purchase Amounts of such Financed Student Loans as of the end of
the Collection Period immediately preceding such Quarterly Payment Date and (y)
an amount that would be sufficient to (i) reduce the outstanding principal
amount of the Notes on such Quarterly Payment Date to zero, (ii) pay to the
Noteholders, the Noteholders' Interest Distribution Amount payable on such
Quarterly Payment Date, (iii) pay to the Subordinate Note Insurer all amounts
owed to the Subordinate Note Insurer under the Administration Agreement and (iv)
pay to the Swap Counterparty any prior unpaid Net Trust Swap Payment Carryover
Shortfalls and any other amounts owed by the Trust to the Swap Counterparty
under the Interest Rate Swap (such greater amount, the "Minimum Purchase
Price"). If at least two bids are not received or the highest bid is not equal
to or in excess of the Minimum Purchase Price, the Indenture Trustee will not
consummate such sale. The proceeds of any such sale will be used to redeem any
Notes outstanding 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
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Quarterly Payment Dates upon terms similar to those described above. No
assurance can be given as to whether the Trustee will be successful in
soliciting acceptable bids to purchase the Financed Student Loans on either the
July 2008 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 on which the then outstanding
Pool Balance is 20% or less of the aggregate initial principal amount of the
Notes, all remaining Financed Student Loans at a price equal to the greater of
the aggregate Purchase Amounts thereof as of the end of such Collection Period
and the Minimum Purchase Price, which amount 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 the Noteholders therefrom, will be
conveyed and transferred to the Company or such assignee.
Certain Rights of the Subordinate Note Insurer
Anything to the contrary in the Prospectus notwithstanding, so long as the
Subordinate Note Insurer is not in default under the Subordinate Note Insurance
Policy, (i) the Notes may not be accelerated following an Event of Default under
the Indenture without the prior written consent of the Subordinate Note Insurer,
(ii) the Servicer may not be removed following a Servicer Default, as provided
under "Description of the Transfer and Servicing Agreements--Rights upon
Servicer Default" in the Prospectus, without the prior written consent of the
Subordinate Note Insurer; provided, however, that if the Senior Notes are not
outstanding, then the Subordinate Note Insurer shall have the exclusive right to
terminate the Servicer after a Servicer Default, and (iii) the written consent
of the Subordinate Note Insurer will be required before any amendment is made to
the Indenture or the Transfer and Servicing Agreements.
CERTAIN FEDERAL INCOME TAX AND STATE TAX CONSEQUENCES
Although, as described herein under the heading "Summary of Terms--Tax
Considerations", the 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 Internal Revenue Service (the
"IRS") and thus no assurance can be given that such characterization will
prevail. In the opinion of the 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 the 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 Financed 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 the Notes would probably be treated as
dividends. Such an entity-level tax could result in reduced distributions to the
Noteholders and the Noteholders could be liable for a share of such tax.
Because the Seller will treat the Notes as indebtedness for federal income
tax purposes, the Trustee will not comply with the tax reporting requirements
that would apply under the foregoing alternative characterizations of the Notes.
The Senior Notes provide for stated interest at a floating rate based upon
Three-Month LIBOR, but are subject to certain restrictions on the maximum level
of the floating rate. Under Treasury regulations governing "original issue
discount" ("OID"), stated interest payable at a variable rate is not taxed as
OID or contingent interest if the
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variable rate is a qualified floating rate. The tax treatment of interest that
is not based on a qualified floating rate is not certain and the regulations do
not address the tax treatment of debt instruments bearing contingent interest
except in circumstances not relevant to this discussion. While (because of the
Class A-1 Noteholders' Interest Basis Carryover and the Class A-2 Noteholders'
Interest Basis Carryover) the tax treatment of interest on the Senior Notes,
including, in particular, interest equal to the Class A-1 Noteholders' Interest
Basis Carryover and the Class A-2 Noteholders' Interest Basis Carryover amounts,
is not entirely clear under the regulations, the Trust intends to treat the
stated interest as a "qualified floating rate" for OID purposes and thus such
interest should not be taxable to the Senior Noteholders as OID or as contingent
interest.
Prospective purchasers should read "Certain Federal Income Tax
Consequences" and "Certain State Tax Consequences" in the Prospectus for a
discussion of the application of certain federal income tax laws and certain
state tax laws to the Trust and the Notes.
ERISA CONSIDERATIONS
Subject to the applicable provisions of ERISA and the Code, the Senior
Notes may be purchased by an employee benefit plan or an individual retirement
account or other arrangement described in Section 3(3) of ERISA or Section
4975(e)(1) of the Code (a "Plan"). Fiduciaries of a Plan subject to ERISA must
first determine that the Plan's acquisition of a Senior Note is consistent with
their fiduciary duties under ERISA, including the requirements of investment
prudence and diversification and the requirement that a Plan's investments be
made in accordance with the documents governing the Plan. Plan fiduciaries must
also determine that the acquisition will not result in a nonexempt prohibited
transaction as defined in Section 406 of ERISA or Section 4975 of the Code.
Employee benefit plans which are governmental plans (as defined in Section 3(32)
of ERISA) or certain church plans (as defined in Section 3(33) of ERISA) are not
subject to the fiduciary responsibility or prohibited transaction provisions of
ERISA or the Code. However, any such plan which is qualified under Section
401(a) of the Code and exempt from tax under Section 501(a) of the Code is
subject to the prohibited transaction rules set forth in Section 503 of the
Code.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement relating to the Senior Notes (the "Underwriting Agreement"), the
Seller has agreed to cause the Trust to sell to each of the Underwriters named
below (collectively, the "Underwriters") for which Credit Suisse First Boston
Corporation is acting as representative (in such capacity, the
"Representative"), and each of the Underwriters has severally agreed to
purchase, the principal amount of Senior Notes set forth opposite its name
below.
Principal Amount
-------------------------------
Underwriter Class A-1 Notes Class A-2 Notes
- ----------- --------------- ---------------
Credit Suisse First Boston Corporation ....... $ 37,500,000 $108,450,000
Bear, Stearns & Co. Inc. ..................... 37,500,000 108,400,000
Goldman, Sachs & Co. ......................... 37,500,000 108,400,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ............................... 37,500,000 108,400,000
------------ ------------
Total .................................. $150,000,000 $433,650,000
============ ============
The Seller has been advised by the Underwriters that they propose to offer
the Senior Notes to the public initially at the public offering prices set forth
on the cover page of this Prospectus Supplement, and to certain dealers at such
prices less a concession of 0.135% per Class A-1 Note and 0.150% per Class A-2
Note; that the Underwriters and such dealers may allow a discount of 0.125% per
Class A-1 Note and 0.125% per Class A-2 Note on sales to certain other dealers;
and that after the initial public offering of the Senior Notes, the public
offering prices and the concessions and discounts to dealers may be changed by
the Underwriters.
Until the distribution of the Senior Notes is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Senior Notes. As an exception to these
rules, the Representative is permitted to engage in certain transactions that
stabilize the prices of the classes of Senior Notes. Such transactions consist
of bids or purchases for the purpose of pegging, fixing or maintaining the
prices of the classes of Senior Notes.
If the Underwriters create a short position in any class of the Senior
Notes in connection with the offering (i.e., if they sell more Senior Notes than
are set forth on the cover page of this Prospectus Supplement), the
Representative may reduce that short position by purchasing Senior Notes in the
open market.
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The Representative may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representative purchases
Senior Notes in the open market to reduce the Underwriters' short position or to
stabilize the price of any class of the Senior Notes, it may reclaim the amount
of the selling concession from the Underwriters and selling group members which
sold those Senior Notes as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it
discourages resales of the security.
Neither the Seller nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Senior Notes. In addition, neither
the Seller nor any of the Underwriters makes any representation that the
Representative will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Underwriting Agreement provides that the Seller will indemnify the
Underwriters against certain liabilities, including liabilities under applicable
securities laws, or contribute to payments the Underwriters may be required to
make in respect thereof.
The Trust may, from time to time, invest the funds in the Collection
Account, the Collateral Reinvestment Account and the Reserve Account in Eligible
Investments acquired from the Underwriters.
The Seller has also agreed to pay Credit Suisse First Boston Corporation a
structuring fee equal to $453,750.
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 Brown &
Wood LLP, New York, New York. Edward R. Schmidt, general counsel of SMS and an
executive officer of and general counsel for USA Group, USA Funds and Loan
Services and a member of the board of directors of USA Group and a member of the
board of trustees of Loan Services, USA Group Guarantee Services 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
matters will be passed upon for the Trust by Brown & Wood LLP and certain
Indiana state income and corporate income tax matters will be passed upon for
the Trust by Krieg DeVault Alexander & Capehart.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Senior Notes
of SMS Student Loan Trust 1998-A (the "Global Securities") will be available
only in book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC, CEDEL or Euroclear. The Global Securities will be
tradeable as home market instruments in both the European and U.S. domestic
markets. Initial settlements and all secondary trades will settle in same-day
funds.
Secondary market trading between investors holding Global Securities
through CEDEL and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior asset-backed securities issues.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Global Securities will be effected on a
delivery-against-payment basis through the applicable Depositaries of CEDEL and
Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the name
of CEDE & CO. as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. As a result, CEDEL and Euroclear will
hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to conventional asset-backed securities.
Investor securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and the 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
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least one business day prior to settlement. CEDEL or Euroclear, as the case may
be, will instruct the applicable Depositary to receive the Global Securities
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the settlement
date, on the basis of a calendar year consisting of twelve 30-day calendar
months. Payment will then be made by the respective Depositary of the DTC
Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the CEDEL Participant's or Euroclear Participant's account.
The securities credit will appear the next day (European time) and the cash
debit will be back-valued to, and the interest on the Global Securities will
accrue from, the value date (which would be the preceding day when settlement
occurred in New York). If settlement is not completed on the intended value date
(i.e., the trade fails), the CEDEL or Euroclear cash debit will be valued
instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants may elect not to preposition
funds and allow that credit line to be drawn upon to finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each CEDEL Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants may employ their usual procedures for sending Global Securities to
the applicable Depositary for the benefit of CEDEL Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participants a cross-market transaction will
settle no differently from a trade between two DTC Participants.
Trading between CEDEL or Euroclear 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 will automatically fail on the sale
side unless affirmative action is taken. At least three techniques should be
readily available to eliminate this potential problem:
(1) borrowing through CEDEL or Euroclear for one day (until the purchase
side of the day trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
S-62
<PAGE>
(2) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their CEDEL or Euroclear account in order to
settle the sale side of the trade; or
(3) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the CEDEL Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through CEDEL
or Euroclear (or through DTC if the holder has an address outside the U.S.) will
be subject to 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 (e.g., the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
This summary does not deal with all aspects of foreign income tax
withholding that may be relevant to foreign holders of these Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of these Global Securities.
U.S. Person. As used 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-63
<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-55
1992 Master Agreement ..................................................... S-54
Add-on Consolidation Loans ......................................S-5, S-30, S-46
Additional Fundings ........................................................ S-7
Additional Guarantor ....................................................... S-3
Additional Guarantors ...................................................... S-3
Additional Student Loans ................................................... S-3
Adjusted Student Loan Rate .......................................... S-14, S-39
Administration Agreement ................................................... S-2
Administration Fee ........................................................ S-12
Administrator .............................................................. S-2
Assumption Payment ........................................................ S-56
Available Funds ........................................................... S-49
Cede ........................................................................ ii
CEDEL ...................................................................... S-1
CEDEL Participants ........................................................ S-42
Citibank ............................................................. S-1, S-43
Class A-1 Note Final Maturity Date .................................. S-15, S-41
Class A-1 Note LIBOR Rate ........................................... S-13, S-39
Class A-1 Note Rate ................................................. S-13, S-39
Class A-1 Noteholders ...................................................... S-7
Class A-1 Noteholders' Interest Basis Carryover ........................... S-14
Class A-1 Noteholders' Interest Carryover Shortfall ....................... S-50
Class A-1 Noteholders' Interest Distribution Amount ....................... S-50
Class A-1 Notes ......................................................... i, S-1
Class A-2 Note Final Maturity Date .................................. S-15, S-41
Class A-2 Note LIBOR Rate ........................................... S-13, S-39
Class A-2 Note Rate ................................................. S-13, S-39
Class A-2 Noteholders ...................................................... S-7
Class A-2 Noteholders' Interest Basis Carryover ........................... S-14
Class A-2 Noteholders' Interest Carryover Shortfall ....................... S-50
Class A-2 Noteholders' Interest Distribution Amount ....................... S-51
Class A-2 Notes ......................................................... i, S-1
Closing Date ............................................................... S-2
Collateral Reinvestment Account ............................................ S-7
Collection Account ......................................................... S-7
Collection Period .......................................................... S-4
Company ................................................................ ii, S-2
Cooperative ............................................................... S-42
Cutoff Date ................................................................ S-2
Deferral .................................................................. S-33
Delinquency Percentage .................................................... S-45
Department ............................................................. ii, S-3
Depositaries ......................................................... S-1, S-43
Depositary ................................................................ S-43
Determination Date ........................................................ S-48
DOE Data Book ............................................................. S-37
S-64
<PAGE>
Page
----
DTC .................................................................... ii, S-1
Early Amortization Event .................................................. S-45
Eligible Lender Trustee ................................................. i, S-2
Euroclear .................................................................. S-1
Euroclear Operator ........................................................ S-42
Euroclear Participants .................................................... S-42
Excess Spread ............................................................. S-45
Exchange Act ................................................................ ii
Exchanged Financed Student Loan ........................................... S-46
Exchanged Serial Loan ..................................................... S-46
Expected Interest Collections ....................................... S-14, S-39
Federal Origination Fee ................................................... S-25
Financed Student Loans .................................................. i, S-3
Fitch ..................................................................... S-11
Forbearance ............................................................... S-33
Global Securities ......................................................... S-59
Grace ..................................................................... S-33
GRDF Percentage ........................................................... S-48
GRFP ...................................................................... S-55
GRN ....................................................................... S-55
Gross Trust Swap Payment .................................................. S-10
Guarantors ................................................................. S-3
In-School ................................................................. S-33
In-School Percentage ...................................................... S-48
Indenture .................................................................. S-2
Indenture Trustee .......................................................... S-2
Index Maturity ............................................................ S-41
Indirect Participants ..................................................... S-42
Initial Financed Student Loans ............................................. S-2
Initial Guarantor ...................................................... ii, S-3
Initial Pool Balance ....................................................... S-2
Interest Rate Swap ................................................i, S-10, S-54
IRS ....................................................................... S-57
LIBOR Determination Date .................................................. S-41
LIBOR Reset Period ........................................................ S-41
Liquidated Student Loans .................................................. S-48
Liquidation Proceeds ...................................................... S-49
Loan Purchase Amount ................................................. S-4, S-45
Loan Sale Agreement ........................................................ S-2
Loan Services .......................................................... ii, S-1
Lock-In Period ............................................................ S-55
Minimum Purchase Price .............................................. S-17, S-56
Monthly Available Funds ................................................... S-48
Monthly Collection Period ................................................. S-48
Monthly Payment Date ....................................................... S-8
Monthly Rebate Fee ........................................................ S-24
Moody's ................................................................... S-11
Morgan ............................................................... S-1, S-43
S-65
<PAGE>
Page
----
NBD ........................................................................ S-1
NBD Trust Agreement ........................................................ S-1
Net Trust Swap Payment ...............................................S-11, S-55
Net Trust Swap Payment Carryover Shortfall ................................ S-51
Net Trust Swap Receipt ...............................................S-11, S-55
Net Trust Swap Receipt Carryover Shortfall ................................ S-51
New Loan ............................................................. S-4, S-44
New Loans ............................................................ S-4, S-44
Non-U.S. Person ........................................................... S-61
Note LIBOR Rates .......................................................... S-13
Note Rates ................................................................ S-13
Noteholders' Interest Distribution Amount ................................. S-51
Notes ................................................................... i, S-1
Notional Swap Amount .................................................S-10, S-55
Obligors .................................................................. S-17
OID ....................................................................... S-57
Parity Date ................................................................ S-9
Participants .............................................................. S-41
Plan ...................................................................... S-57
Pool Balance .............................................................. S-17
Principal Distribution Adjustment ......................................... S-51
Principal Distribution Amount ........................................S-15, S-51
Purchase Amount ........................................................... S-17
Purchase Collateral Balance .......................................... S-4, S-45
Purchase Premium Amount .............................................. S-4, S-45
Quarterly Interest Period ............................................S-13, S-39
Quarterly Payment Date ................................................ ii, S-13
Rating Agencies ........................................................... S-18
Rating Agency Downgrade ..............................................S-11, S-55
Realized Losses ........................................................... S-51
Record Date ............................................................... S-13
Reference Banks ........................................................... S-41
Repayment ................................................................. S-33
Representative ............................................................ S-58
Reserve Account ............................................................ S-8
Reserve Account Excess ..................................................... S-8
Reserve Account Initial Deposit ............................................ S-8
Revolving Period ..................................................... S-3, S-44
Scheduled Swap Termination Date ...................................... S-1, S-11
Secretary ................................................................. S-25
Seller .................................................................. i, S-1
Seller Trusts ............................................................. S-27
Senior Noteholders ......................................................... S-7
Senior Noteholders' Distribution Amount ................................... S-52
Senior Noteholders' Interest Distribution Amount .......................... S-52
Senior Noteholders' Principal Carryover Shortfall ......................... S-52
Senior Noteholders' Principal Distribution Amount ......................... S-52
Senior Notes ............................................................ i, S-1
Serial Loan .......................................................... S-4, S-45
Serial Loans ......................................................... S-4, S-45
Servicer ................................................................... S-1
S-66
<PAGE>
Page
----
Servicer Liability Limit .................................................. S-22
Servicing Agreement ........................................................ S-1
Servicing Fee ............................................................. S-12
Servicing Fee Shortfall ................................................... S-48
SMS ........................................................................ S-1
S&P ....................................................................... S-11
Special Federal Tax Counsel ............................................... S-17
Specified Reserve Account Balance .................................... S-9, S-53
Student Loan Rate Accrual Period .......................................... S-14
Student Loans .............................................................. S-2
Subordinate Note Final Maturity Date .................................S-15, S-41
Subordinate Note Insurance Policy ...................................... i, S-13
Subordinate Note Insurance Policy Premium ................................. S-13
Subordinate Note Insurer ............................................... i, S-13
Subordinate Note LIBOR Rate ..........................................S-13, S-39
Subordinate Note Rate ................................................S-13, S-39
Subordinate Noteholders .................................................... S-7
Subordinate Noteholders' Distribution Amount .............................. S-52
Subordinate Noteholders' Interest Basis Carryover ......................... S-14
Subordinate Noteholders' Interest Carryover Shortfall ..................... S-52
Subordinate Noteholders' Interest Distribution Amount ..................... S-52
Subordinate Noteholders' Principal Carryover Shortfall .................... S-52
Subordinate Noteholders' Principal Distribution Amount .................... S-52
Subordinate Notes ....................................................... i, S-1
Swap Event of Default ..................................................... S-55
Swap Counterparty ....................................................S-10, S-54
Swap Default .............................................................. S-55
Swap Rate ............................................................S-10, S-54
Swap Rating Agencies ...................................................... S-11
Swap Termination Date ..................................................... S-11
T-Bill Rate ............................................................... S-55
Telerate Page 3750 ........................................................ S-41
Terms and Conditions ...................................................... S-43
Three-Month LIBOR ......................................................... S-41
Transfer Agreement ......................................................... S-4
Transfer and Servicing Agreements ......................................... S-44
Transfer Date ............................................................. S-46
Trust ................................................................... i, S-1
Trust Agreement ............................................................ S-2
Trust Swap Payment Amount ................................................. S-53
Trust Swap Receipt Amount ................................................. S-53
U.S. Person ............................................................... S-61
Underwriters .............................................................. S-57
Underwriting Agreement .................................................... S-57
USA Funds .............................................................. ii, S-3
USA Group Guarantee Services ............................................... S-1
S-67
<PAGE>
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 May 15, 1998.
<PAGE>
AVAILABLE INFORMATION 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 ...................................................... ii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE ............................ ii
SUMMARY OF TERMS ........................................................... 1
RISK FACTORS ............................................................... 10
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 ................................ 10
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 ........................................................ 11
Unsecured Nature of Student Loans; Risk that Financial Status
of a Federal Guarantor Will Affect Its Ability to Make
Guarantee Payments ................................................... 12
Default Risk on Certain Student Loans ................................... 12
Fees Payable on Certain Student Loans ................................... 12
Risk that Change in Law Will Adversely Affect Student
Loans, Guarantors, the Seller or the Servicer ........................ 12
Increased Fees; Decreased Assistance .................................... 13
Impact of Direct Lending ................................................ 13
Reserves ................................................................ 13
Risks Resulting from Subordination of Principal and
Interest Payments; Limited Assets .................................... 13
Risk Resulting from Use of the Pre-Funding Account
or Collateral Reinvestment Account to Make
Additional Fundings .................................................. 13
Maturity and Prepayment Considerations .................................. 14
Risk of Removal of Servicer upon Servicer Default ....................... 15
Insolvency Risk ......................................................... 15
Book-Entry Registration ................................................. 16
FORMATION OF THE TRUSTS .................................................... 16
The Trusts .............................................................. 16
Eligible Lender Trustee ................................................. 16
USE OF PROCEEDS ............................................................ 17
USA GROUP, SMS, THE SELLER AND THE SERVICER ................................ 17
USA Group ............................................................... 17
SMS ..................................................................... 18
The Seller .............................................................. 18
The Servicer ............................................................ 18
THE STUDENT LOAN POOLS ..................................................... 19
General ................................................................. 19
Origination and Marketing Process ....................................... 19
Servicing and Collections Process ....................................... 20
Claims and Recovery Rates ............................................... 20
FEDERAL FAMILY EDUCATION LOAN PROGRAM ...................................... 20
General ................................................................. 20
Legislative and Administrative Matters .................................. 21
Eligible Lenders, Students and Educational Institutions ................. 22
iii
<PAGE>
Financial Need Analysis ................................................. 22
Special Allowance Payments .............................................. 23
Federal Stafford Loans .................................................. 23
Interest ............................................................. 23
Interest Subsidy Payments ............................................ 24
Loan Limits .......................................................... 25
Repayment ............................................................ 25
Grace Periods, Deferral Periods and Forbearance Periods .............. 25
Federal Unsubsidized Stafford Loans ..................................... 26
Federal PLUS and Federal SLS Loan Programs .............................. 26
Loan Limits .......................................................... 26
Interest ............................................................. 27
Repayment, Deferments ................................................ 27
Federal Consolidation Loan Program ...................................... 27
Federal Guarantors ...................................................... 28
Federal Insurance and Reinsurance of Federal Guarantors ................. 29
WEIGHTED AVERAGE LIVES OF THE SECURITIES ................................... 31
POOL FACTORS AND TRADING INFORMATION ....................................... 31
DESCRIPTION OF THE NOTES ................................................... 32
General ................................................................. 32
Principal of and Interest on the Notes .................................. 32
The Indenture ........................................................... 33
Modification of Indenture ............................................ 33
Events of Default; Rights upon Event of Default 33
Certain Covenants .................................................... 35
Annual Compliance Statement .......................................... 36
Indenture Trustee's Annual Report .................................... 36
Satisfaction and Discharge of Indenture. ............................. 36
The Indenture Trustee ................................................ 36
DESCRIPTION OF THE CERTIFICATES ............................................ 36
General ................................................................. 36
Principal and Interest in Respect of the Certificates ................... 37
CERTAIN INFORMATION REGARDING THE SECURITIES ............................... 37
Fixed Rate Securities ................................................... 37
Floating Rate Securities ................................................ 37
Book-Entry Registration ................................................. 38
Definitive Securities ................................................... 39
List of Securityholders ................................................. 39
Reports to Securityholders .............................................. 39
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS ....................... 40
General ................................................................. 40
Sale of Student Loans; Representations and Warranties ................... 40
Additional Fundings ..................................................... 41
Accounts ................................................................ 41
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Servicing Procedures .................................................... 42
Payments on Student Loans ............................................... 42
Servicer Covenants ...................................................... 42
Servicer Compensation ................................................... 43
Distributions ........................................................... 43
Credit and Cash Flow Enhancement ........................................ 44
General .............................................................. 44
Reserve Account ...................................................... 44
Statements to Indenture Trustee and Trust ............................... 44
Evidence as to Compliance ............................................... 45
Certain Matters Regarding the Servicer ................................... 45
Servicer Default ......................................................... 46
Rights upon Servicer Default ............................................. 46
Waiver of Past Defaults .................................................. 46
Amendment ................................................................ 47
Insolvency Event ......................................................... 47
Payment of Notes ......................................................... 48
Company Liability ........................................................ 48
Termination .............................................................. 48
Optional Redemption ................................................... 48
Auction of Student Loans .............................................. 48
Administration Agreement ................................................. 49
CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS .................................. 49
Transfer of Student Loans ................................................ 49
Consumer Protection Laws ................................................. 50
Loan Origination and Servicing Procedures Applicable to Student Loans 50
Student Loans Generally Not Subject to Discharge in Bankruptcy ........... 51
CERTAIN FEDERAL INCOME TAX CONSEQUENCES ..................................... 51
TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE ............................. 52
Tax Characterization of the Trust ........................................ 52
Tax Consequences to Holders of the Notes ................................. 52
Treatment of the Notes as Indebtedness ................................ 52
Original Issue Discount ............................................... 52
Interest Income on the Notes .......................................... 52
Optional Election ..................................................... 53
Sale or Other Disposition ............................................. 53
Foreign Holders ....................................................... 53
Backup Withholding .................................................... 54
Recent Legislation ....................................................... 54
Tax Consequences to Holders of the Certificates .......................... 54
Classification as a Partnership ....................................... 54
Treatment of the Trust as a Partnership ............................... 54
Partnership Taxation .................................................. 55
Computation of Income ................................................. 56
Determining the Bases of Trust Assets ................................. 56
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Discount and Premium .................................................. 56
Disposition of Certificates ........................................... 56
Allocations Between Transferors and Transferees ....................... 57
Section 754 Election .................................................. 57
Administrative Matters ................................................ 57
Tax Consequences to Foreign Certificateholders ........................ 58
Backup Withholding .................................................... 58
TRUSTS IN WHICH ALL RESIDUAL INTERESTS ARE RETAINED BY THE SELLER OR
AN AFFILIATE OF THE SELLER ............................................... 58
Tax Characterization of the Trust ........................................ 58
Tax Consequences to Holders of the Notes ................................. 58
Treatment of the Notes as Indebtedness ................................ 58
CERTAIN STATE TAX CONSEQUENCES .............................................. 59
Tax Consequences with Respect to the Notes ............................ 59
Tax Consequences with Respect to the Certificates ..................... 59
ERISA CONSIDERATIONS ........................................................ 60
The Notes ................................................................ 60
The Certificates ......................................................... 61
PLAN OF DISTRIBUTION ........................................................ 61
LEGAL MATTERS ............................................................... 62
INDEX OF PRINCIPAL DEFINED TERMS ............................................ 63
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SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to the Securities of any series contained in the
related Prospectus Supplement to be prepared and delivered in connection with
the offering of such Securities. Certain capitalized terms used in this
Prospectus are defined elsewhere herein on the pages indicated in the "Index of
Principal Terms" which begins on page 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".
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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.
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.
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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.
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
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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 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;
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and (iii) payments to fund the origination
by the related Trust under certain
circumstances of certain additional Student
Loans, in the case of a Funding Period, made
to Existing Borrowers and, in the case of a
Revolving Period, made to borrowers who at
the time of such origination have existing
Student Loans that are part of the related
pool. If so provided in the related
Prospectus Supplement, Additional Fundings
may continue to occur after the Funding
Period or Revolving Period. Additional
Fundings occurring after the Funding Period
or Revolving Period will be funded from
distributions on the related Student Loans
in the manner specified in the related
Prospectus Supplement. See "Description of
the Transfer and Servicing
Agreements--Additional Fundings".
Guarantors ................... Each Student Loan sold to any Trust will,
subject to compliance with specific
origination and servicing procedures
prescribed by federal and guarantor
regulations, be guaranteed as to the payment
of principal and interest by 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-collateralization, letters of credit,
credit or liquidity facilities, surety
bonds, guaranteed investment contracts,
repurchase obligations, other agreements
with respect to third party payments or
other support, cash deposits or other
arrangements. Any form of credit or cash
flow enhancement may have certain
limitations and exclusions from coverage
thereunder, which will be described in the
related Prospectus Supplement.
Reserve Account .............. If so specified in the related Prospectus
Supplement, an account in the name of the
related Indenture Trustee (the "Reserve
Account") will be established and maintained
by the Administrator with the Indenture
Trustee in accordance with the directions of
the Administrator and will be an asset of
the applicable Trust. To the extent
specified in the related Prospectus
Supplement, the Seller will make an initial
deposit into the Reserve Account on the
Closing Date having a value 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
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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 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
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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.
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
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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, Brown & Wood LLP,
federal tax counsel to the applicable Trust
and counsel to the Underwriters ("Federal
Tax Counsel"), will deliver an opinion to
the effect that, for federal income tax
purposes: (i) the Notes of such series will
be or, in certain cases, should be,
characterized as debt, and (ii) the Trust
will not be characterized as an association
(or a publicly traded partnership) taxable
as a corporation.
Unless otherwise specified in the applicable
Prospectus Supplement, each Noteholder, by
the acceptance of a Note of a given series,
will agree to treat such Note as
indebtedness, and each Certificateholder, if
any, by the acceptance of a Certificate of a
given series, will agree to treat the
related Trust as a partnership in which such
Certificateholder is a partner for federal
income and state income tax and franchise
tax purposes. Alternative characterizations
of such Trust and such Certificates are
possible, but would not result in materially
adverse tax consequences to
Certificateholders.
Due to the method of allocation of Trust income
to the Certificateholders, cash basis
holders may, in effect be required to report
income from the Certificates on an accrual
basis. In addition, because tax allocations
and tax reporting will be done on a uniform
basis, but Certificateholders may be
purchasing 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
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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.
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".
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RISK FACTORS
Risk that Failure to Comply with Student Loan Origination and Servicing
Procedures for Federal Student Loans May Adversely Affect the Trust's Ability to
Pay Principal and Interest on the Related Notes and Certificates. The Act,
including the implementing regulations thereunder, requires lenders making and
servicing 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
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financial responsibility for third-party servicers that administer any aspect of
a guarantor's or lender's participation in the Federal Family Education Loan
Program, and establish sanctions for third-party servicers.
Under these regulations, a third-party servicer such as the Servicer is
jointly and severally liable with its client lenders for liabilities to the
Department arising from the servicer's violation of applicable requirements. In
addition, if a servicer fails to meet standards of financial responsibility or
administrative capability included in the new regulations, or violates other
Federal Family Education Loan Program requirements, the new regulations may
authorize the Department to fine the servicer or limit, suspend or terminate the
servicer's eligibility to contract to service Federal Student Loans. The effect
of such a limitation, suspension or termination on a servicer's eligibility to
service loans already on its system, or to accept new loans for servicing under
existing contracts, is unclear. No assurance exists that the Servicer will not
be held liable by the Department for liabilities arising out of its Federal
Family Education Loan Program activities for a Trust or other client lenders, or
that its eligibility will not be limited, suspended, or terminated in the
future. If the Servicer were so held liable or its eligibility limited,
suspended or terminated, its ability to properly service Student Loans and to
satisfy its obligation to arrange the purchase of loans as to which it breaches
its covenants under the applicable Servicing Agreement could be adversely
affected. In such event, a Servicer Default under the related Servicing
Agreement could occur resulting in the removal of the Servicer and the
appointment of a substitute Servicer by the Indenture Trustee or the holders of
Notes of the related series evidencing not less than 75% in principal amount of
such then outstanding Notes. See "Description of the Transfer and Servicing
Agreements--Rights Upon Servicer Default".
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.
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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 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.
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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
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,
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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 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.
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
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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 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
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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
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
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"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.
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
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<PAGE>
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
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.
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<PAGE>
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".
Information with respect to each pool of Student Loans for a given Trust
will be set forth in the related Prospectus Supplement, including, to the extent
appropriate, the composition, the distribution by loan type, loan payment
status, and states of borrowers' residence and the portion of such Student Loans
guaranteed by the specified Guarantors.
In the case of each series for which the related Trust may acquire or
originate Student Loans after the related Cutoff Date, information with respect
to the Student Loans eligible to be acquired or originated by the related Trust
will be set forth in the related Prospectus Supplement as will information
regarding the duration and conditions of any related Funding Period or Revolving
Period, the circumstances under which Additional Fundings will be made during
such period, and, if Additional Fundings may continue to be made after such
period, the circumstances under which such Additional Fundings will be made.
Origination and Marketing Process
The Act 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.
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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".
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
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<PAGE>
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".
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
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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.
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 aggregage loan limits prescribed in the Act. Parents may finance the family
contribution amount through their own resources or through Federal PLUS Loans.
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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%.
Federal Stafford Loans
The Act provides for (i) federal insurance or reinsurance of Federal
Stafford Loans made by eligible lenders to qualified students, (ii) federal
interest subsidy payments on certain eligible Federal Stafford Loans to be paid
by the Department to holders of the loans in lieu of the borrower making
interest payments ("Interest Subsidy Payments") and (iii) Special Allowance
Payments representing an additional subsidy paid by the Department to the
holders of eligible Federal Stafford Loans (such federal reinsurance
obligations, together with those obligations referred to in clauses (ii) and
(iii) above, being collectively referred to herein as "Federal Assistance").
Interest. The borrower's interest rate on a Federal Stafford Loan may be
fixed or variable. Federal Stafford Loan interest rates are summarized in the
chart below.
<TABLE>
<CAPTION>
Trigger Date(1) Borrower Rate(2) Maximum Rate Interest Rate Margin
- ------------------------- ----------------------------- ----------------- ---------------------------------
<S> <C> <C> <C>
Prior to 01/01/81 ...... 7% 7% N/A
01/01/81-09/12/83 ...... 9% 9% N/A
09/13/83-06/30/88 ...... 8% 8% N/A
07/01/88-09/30/92 ...... 8% for 48 months; thereafter, 8% for 48 months, 3.25%
91-Day Treasury + Interest then 10%
Rate Margin
10/01/92-06/30/94 ...... 91-Day Treasury + Interest 9% 3.10%
Rate Margin
07/01/94-06/30/95 ...... 91-Day Treasury + Interest 8.25% 3.10%
Rate Margin
07/01/95-06/30/98 ...... 91-Day Treasury + Interest 8.25% 2.50% (In-School, Grace or Rate
Rate Margin Deferment); 3.10% (in repayment)
After 6/30/98 .......... A security of comparable 8.25% 1.0%
maturity + Interest Rate Margin
</TABLE>
- -------------
(1) The Trigger Date for Federal Stafford Loans made before October 1, 1992 is
the first day of enrollment period for which a borrower's first Federal
Stafford Loan is made and for Federal Stafford Loans made on October 1,
1992 and after the Trigger Date is the date of the disbursement of a
borrower's first Federal Stafford Loan.
(2) The rate for variable rate Federal Stafford Loans applicable for any
12-month period beginning on July 1 and ending on June 30, is determined on
the preceding June 1 and is equal to the lesser of (a) the applicable
Maximum Rate or (b) the sum of (i) the bond equivalent rate of 91-day
Treasury bills auctioned at the final auction held prior to such June 1 and
(ii) the applicable Interest Rate Margin.
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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 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.
24
<PAGE>
Loan Limits. The Act requires that loans be disbursed by eligible lenders
in at least two separate and equal disbursements. The Act limited the amount a
student can borrow in any academic year and the amount he or she can have
outstanding in the aggregate. The following chart sets forth the current and
historic loan limits.
<TABLE>
<CAPTION>
All
Students(1) Independent Students(1)
----------- --------------------------
Base Amount Additional
Subsidized and Unsubsidized Maximum
Subsidized Unsubsidized on only on or Aggregate
Subsidized on or after or after after Total
Borrower's Academic Level Pre-1/1/87 1/1/87 10/1/93(2) 7/1/94(3) Amount 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 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,
25
<PAGE>
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.
26
<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
27
<PAGE>
obtain a Federal Consolidation Loan under the direct loan program. Federal
Consolidation Loans that were made on or after July 1, 1994 have no minimum loan
amount, although Federal Consolidation Loans for less than $7,500 must be repaid
in ten years. Applications for Federal Consolidation Loans received on or after
January 1, 1993 but prior to July 1, 1994, were available only to borrowers who
had aggregate outstanding student loan balances of at least $7,500; for
applications received before January 1, 1993, Federal Consolidation Loans are
available only to borrowers who have aggregate outstanding student loan balances
of at least $5,000. The borrowers must be either in repayment status or in a
grace period preceding repayment and, for applications received prior to January
1, 1993, the borrower must not have been delinquent by more than 90 days on any
student loan payment; for applications received on or after January 1, 1993,
delinquent or defaulted borrowers are eligible to obtain Federal Consolidation
Loans if they will reenter repayment through loan consolidation. For
applications received on or after January 1, 1993, borrowers may, within 180
days of the origination of a Federal Consolidation Loan, add additional loans
made prior to consolidation ("Add-on 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 applicaable 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
28
<PAGE>
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.
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
29
<PAGE>
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 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:
Reimbursement to Federal Guarantor
Claims Rate of Federal Guarantor by the Department of Education(1)
- ----------------------------------- ------------------------------------
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%
- ----------
(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.
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<PAGE>
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 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
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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 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".
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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 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
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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 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
66 2/3% of the aggregate principal amount of such Notes then outstanding.
Subject to the provisions of the applicable Indenture relating to the
duties of the related Indenture Trustee, if an Event of Default should occur and
be continuing with respect to a series of Notes, the related Indenture Trustee
will be under no obligation to exercise any of the rights or powers under the
applicable Indenture at the request or
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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 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.
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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 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").
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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 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.
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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.
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.
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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.
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
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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
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the breach has occurred. In addition, the Seller will reimburse the related
Trust for any accrued interest amounts that a Guarantor refuses to pay pursuant
to its Guarantee Agreement, or for any Interest Subsidy Payments and Special
Allowance Payments that are lost or that must be repaid to the Department with
respect to a 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
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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 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
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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.
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.
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Credit and Cash Flow Enhancement
General. The amounts and types of credit enhancement arrangements and the
provider thereof, if applicable, with respect to each class of Securities of a
given series, if any, will be set forth in the related Prospectus Supplement. If
and to the extent provided in the related Prospectus Supplement, credit
enhancement may be in the form of subordination of one or more classes of
Securities, Reserve Accounts, over-collateralization, letters of credit, credit
or liquidity facilities, surety bonds, guaranteed investment contracts,
repurchase obligations, other agreements with respect to third party payments or
other support, cash deposits or such other arrangements as may be described in
the related Prospectus Supplement or any combination of two or more of the
foregoing. If specified in the applicable Prospectus Supplement, credit
enhancement for a class of Securities may cover one or more other classes of
Securities of the same series, and credit enhancement for a series of Securities
may cover one or more other series of Securities.
The presence of a Reserve Account and other forms of credit enhancement
for the benefit of any class or series of Securities is intended to enhance the
likelihood of receipt by the Securityholders of such class or series of the full
amount of principal and interest due thereon and to decrease the likelihood that
such Securityholders will experience losses. Unless otherwise specified in the
related Prospectus Supplement, the credit enhancement for a class or series of
Securities will not provide protection against all risks of loss and will not
guarantee repayment of the entire principal balance and interest thereon. If
losses occur which exceed the amount covered by any credit enhancement or which
are not covered by any credit enhancement, Securityholders of any class or
series will bear their allocable share of deficiencies, as described in the
related Prospectus Supplement. In addition, if a form of credit enhancement
covers more than one series of Securities, Securityholders of any such series
will be subject to the risk that such credit enhancement will be exhausted by
the claims of Securityholders of other series.
Reserve Account. If so provided in the related Prospectus Supplement,
pursuant to the related Loan Sale Agreement, the Seller will establish for a
series or class of Securities an account, as specified in the related Prospectus
Supplement (the "Reserve Account"), which will be maintained in the name of the
applicable Indenture Trustee. Unless otherwise provided in the related
Prospectus Supplement, the Reserve Account 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;
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(v) the amount of the Servicing Fee and the Administration Fee paid to the
Servicer and the Administrator, respectively, with respect to such Collection
Period;
(vi) the Interest Rate or Pass-Through Rate for the next period for any
class of Notes or Certificates of such series with variable or adjustable rates;
(vii) the amount of the aggregate realized losses, if any, for such
Collection Period;
(viii) the Noteholders' Interest Carryover Shortfall, the Noteholders'
Principal Carryover Shortfall, the Certificateholders' Interest Carryover
Shortfall and the Certificateholders' Principal Carryover Shortfall (each as
defined in the related Prospectus Supplement), if any, in each case as
applicable to each class of Securities, and the change in such amounts from the
preceding statement;
(ix) the aggregate Purchase Amounts for Student Loans, if any, that were
repurchased in such Collection Period;
(x) the balance of the Reserve Account (if any) on such Distribution Date,
after giving effect to changes therein on such Distribution Date;
(xi) for each date during the Funding Period (if any), the remaining
Pre-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
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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.
Servicer Default
Except as otherwise provided in the related Prospectus Supplement,
"Servicer Default" under each Loan Servicing Agreement will occur in the event
of (a) any failure by the Servicer to deliver to the Indenture Trustee for
deposit in any of the Trust Accounts any required payment, which failure
continues unremedied for three business days after written notice from such
Indenture Trustee or the related Eligible Lender Trustee is received by the
Servicer or after discovery by the Servicer, (b) any failure by the Servicer to
observe or perform in any material respect any other covenant or agreement of
the Servicer under the related Loan Servicing Agreement, (c) any limitation,
suspension or termination by the Secretary of the Servicer's eligibility to
service Student Loans which materially and adversely affects its ability to
service the Student Loans in the related Trust, or (d) an Insolvency Event with
respect to the Servicer occurs. "Insolvency Event" means, with respect to any
person, any of the following events or actions: certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings with respect to such person and certain actions by such person
indicating its insolvency, reorganization pursuant to bankruptcy proceedings or
inability to pay its obligations.
Rights upon Servicer Default
Unless otherwise specified in the related Prospectus Supplement, as long
as a Servicer Default under a Loan Servicing Agreement remains unremedied, the
related Indenture Trustee, or holders of Notes of the related series evidencing
not less than 75% in principal amount of such then outstanding Notes, may
terminate all the rights and obligations of the Servicer under such Loan
Servicing Agreement, whereupon a successor servicer appointed by the related
Indenture Trustee or such Indenture Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under such Loan
Servicing Agreement, and will be entitled to similar compensation arrangements.
If, however, a bankruptcy trustee or similar official has been appointed for the
Servicer, and no Servicer Default other than such appointment has occurred, such
trustee or official may have the power to prevent such Indenture Trustee or such
Noteholders from effecting such a transfer. In the event that such Indenture
Trustee is unwilling or unable to so act, it may appoint, or petition a court of
competent jurisdiction for the appointment of, a successor whose regular
business includes the servicing of student loans. Such Indenture Trustee may
make such arrangements for compensation to be paid, which in no event may be
greater than the servicing compensation to the Servicer under such Loan
Servicing Agreement, unless such compensation arrangements will not result in a
downgrading of such Notes and Certificates by any Rating Agency. In the event a
Servicer Default occurs and is continuing, such Indenture Trustee or such
Noteholders, as described above, may remove the Servicer, without the consent of
the related Eligible Lender Trustee or any of the Certificateholders of the
related series. Moreover, only the Indenture Trustee or the Noteholders, and not
the Eligible Lender Trustee or the Certificateholders, have the ability to
remove the Servicer if a Servicer Default occurs and is continuing.
Waiver of Past Defaults
With respect to each Trust, unless otherwise specified in the related
Prospectus Supplement, the holders of Notes evidencing at least a majority in
principal amount of the then outstanding Notes (or the holders of Certificates
evidencing not less than a majority of the outstanding Certificate Balance), in
the case of any Servicer Default which
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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 majority in principal amount of such then outstanding
Notes and the holders of Certificates of the related series evidencing at least
a majority of the Certificate Balance for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of such
Transfer and Servicing Agreements or of modifying in any manner the rights of
such Noteholders or Certificateholders; provided, however, that no such
amendment may (i) increase or reduce in any manner the amount of, or accelerate
or delay the timing of, collections of payments (including any Guarantee
Payments) with respect to the Student Loans or distributions that are required
to be made for the benefit of such Noteholders or Certificateholders, or (ii)
reduce the aforesaid percentage of such Notes or Certificates which are required
to consent to any such amendment, without the consent of the holders of all such
outstanding Notes and Certificates.
Insolvency Event
If an Insolvency Event occurs with respect to the Company of a given
Trust, the Student Loans of such Trust will be liquidated and the Trust will be
terminated 90 days after the date of such Insolvency Event, unless, before the
end of such 90-day period, the related Eligible Lender Trustee shall have
received written instructions from (i) the holders of each class of Notes with
respect to such Trust representing more than 50% of the aggregate unpaid
principal amount of each such class of Notes or (ii) the holders of each class
of Certificates (other than such Company) with respect to such Trust
representing more than 50% of the aggregate unpaid principal balance of each
such class (not including the principal balance of Certificates held by such
Company), in each case to the effect that each such group disapproves of the
liquidation of the related Student Loans and termination of such Trust. Promptly
after the occurrence of an Insolvency Event with respect to such Company, notice
thereof is required to be given such Noteholders and Certificateholders;
provided, however, that any failure to give such required notice will not
prevent or delay termination of such Trust. Upon termination of such Trust, the
related Eligible Lender Trustee will direct the related Indenture Trustee
promptly to sell the assets of the Trust (other than the Trust Accounts) in a
commercially reasonable manner and on commercially reasonable terms. The
proceeds from any such sale, disposition or liquidation of the Student Loans
will be treated as collections thereon and deposited in the related Collection
Account. If the proceeds from the liquidation of the Student Loans and any
amounts on deposit in the Reserve Account (if any) and any other credit or cash
flow enhancement specified in the related Prospectus Supplement as being
available therefor are not sufficient to pay the Notes and the Certificates of a
related series in full, the amount of principal returned to such Noteholders and
Certificateholders will be reduced and some or all of such Noteholders and such
Certificateholders will incur a loss. Notwithstanding the foregoing, if such
Company provides the related Indenture Trustee and the related Eligible Lender
Trustee an opinion of special tax counsel in form and substance satisfactory to
such Indenture Trustee and such Eligible Lender Trustee that the foregoing
provisions are not necessary for such Trust to be treated as a partnership for
federal income and Indiana state tax purposes, then such provisions shall be of
no force or effect as of the date of the delivery of such opinion.
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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.
Company Liability
Under each Trust Agreement, the applicable Company of a given Trust will
agree to be liable directly to an injured party for the entire amount of any
losses, claims, damages or liabilities (other than those incurred by a
Noteholder or a Certificateholder in the capacity of an investor with respect to
such Trust) arising out of or based on the arrangement created by such Trust
Agreement as though such arrangement created a partnership under the Delaware
Revised Uniform Limited Partnership Act in which such Company was a general
partner. Notwithstanding the foregoing, if such Company provides the related
Indenture Trustee and the related Eligible Lender Trustee an opinion of special
tax counsel in form and substance satisfactory to such Indenture Trustee and
such Eligible Lender Trustee that the foregoing provisions are not necessary for
such Trust to be treated as a partnership for federal income and Indiana state
tax purposes, then such provisions shall be of no force or effect as of the date
of the delivery of such opinion.
Termination
With respect to each Trust, the obligations of the Seller, the Servicer,
the Administrator, the related Eligible Lender Trustee and the related Indenture
Trustee pursuant to the related Transfer and Servicing Agreements will terminate
upon (i) the maturity or other liquidation of the last related Student Loan and
the disposition of any amount received upon liquidation of any such remaining
Student Loans and (ii) the payment to the Noteholders and the Certificateholders
of the related series of all amounts required to be paid to them pursuant to
such Transfer and Servicing Agreements.
Optional Redemption
If so specified in the related Prospectus Supplement, in order to avoid
excessive administrative expense, the Seller or 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.
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Administration Agreement
The Administrator will enter into an agreement (as amended and
supplemented from time to time, an "Administration Agreement") with each Trust
and the related Indenture Trustee pursuant to which the Administrator will
agree, to the extent provided therein, to provide the notices and to perform
other administrative obligations required by the related Indenture, the related
Trust Agreement, the related Loan Sale Agreement 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
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authorities, the Student Loans will not be physically segregated, stamped or
otherwise marked to indicate that such Student Loans have been sold to such
Eligible Lender Trustee. If, through inadvertence or otherwise, any of the
Student Loans were sold to another party, or a security interest therein were
granted to another party, that purchased (or took such security interest in) any
of such Student Loans in the ordinary course of its business and took possession
of such Student Loans, then the purchaser (or secured party) might acquire an
interest in the Student Loans superior to the interest of the Eligible Lender
Trustee if the purchaser (or secured party) acquired (or took a security
interest in) the Student Loans for new value and without actual knowledge of the
related Eligible Lender Trustee's interest. See "Description of the Transfer and
Servicing Agreements--Sale of Student Loans; Representations and Warranties".
With respect to each Trust, in the event of a Servicer Default resulting
solely from certain events of insolvency or bankruptcy that may occur with
respect to the Seller or the Servicer, a court, trustee-in-bankruptcy,
conservator, receiver or liquidator may have the power to prevent either the
related Indenture Trustee or Noteholders of the related series from appointing a
successor Servicer. See "Description of the Transfer and Servicing
Agreements--Rights upon Servicer Default".
Consumer Protection Laws
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon lenders and servicers involved
in consumer finance. Also, some state laws impose finance charge ceilings and
other restrictions on certain consumer transactions and require contract
disclosures in addition to those required under federal law. These requirements
impose specific statutory liabilities upon lenders who fail to comply with their
provisions. 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
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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.
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 Brown & Wood 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. Taxpayers and
preparers of tax returns (including those filed by any partnership or other
issuer) should be aware that under applicable Treasury Regulations a provider of
advice on specific issues of law is not considered an income tax return preparer
unless the advice is (i) given with respect to events that have occurred at the
time the advice is rendered and is not given with respect to the consequences of
contemplated actions and (ii) is directly relevant to the determination of an
entry on a tax return. Accordingly, taxpayers should consult their respective
tax advisors and tax return preparers regarding the preparation of any item on a
tax return, even where the anticipated tax treatment has been discussed herein.
EACH PROSPECTIVE INVESTOR SHOULD CONSULT WITH ITS TAX ADVISOR AS TO THE FEDERAL,
STATE, LOCAL, FOREIGN AND ANY OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF SECURITIES SPECIFIC TO SUCH PROSPECTIVE INVESTOR.
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TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE
Tax Characterization of the Trust
Federal Tax Counsel will deliver its opinion that the Trust will not be an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Trust Agreement and related documents will be complied with and
on counsel's conclusions that the nature of the income of the Trust will exempt
it from the rule that certain publicly traded partnerships are taxable as
corporations.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The Seller will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Federal Tax Counsel will, except as otherwise
provided in the related Prospectus Supplement, deliver an opinion to the Trust
that the Notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the Notes is correct.
Original Issue Discount. The discussion below assumes that all payments on
the Notes are denominated in U.S. dollars, that the interest formula for the
Notes meets the requirements for "qualified stated interest" under Treasury
regulations (the "OID Regulations") relating to original issue discount ("OID"),
and that any OID on the Notes (i.e., any excess of the stated redemption price
at maturity of the Notes, generally the principal amount of the Notes, over
their issue price) does not exceed a de minimis amount (i.e., 0.25% of their
principal amount multiplied by the number of full years included in their term),
all within the meaning of the OID regulations. If these conditions are not
satisfied with respect to any given series of Notes, additional tax
considerations with respect to such Notes will be disclosed in the Related
Prospectus Supplement. The OID Regulations do not address their application to
debt instruments such as the Notes that are subject to prepayment based on the
prepayment of other debt instruments. The legislative history of the OID
provisions of the Code provides, however, that the calculation and accrual of
OID should be based on the prepayment assumption used by the parties in pricing
the transaction. In the event that any of the notes are issued with OID, the
prepayment assumption will be set forth in the related Prospectus Supplement.
Furthermore, although premium amortization and accrued market discount on debt
instruments such as the Notes, which are subject to prepayment based on the
payments on other debt instruments, is to be determined under regulations yet to
be issued, the legislative history of these Code provisions provides that the
same prepayment assumption used to calculate OID, whether or not the debt
instrument is issued with OID, should be used. The OID Regulations are effective
for debt instruments, such as the Notes, issued on or after April 4, 1994.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID Regulations, a holder of a
Note that was issued with a de minimis amount of OID must include such OID in
income, on a pro rata basis, as principal payments are made on the Note.
Alternatively, a Noteholder may elect to accrue all interest, discount
(including de minimis market discount or OID) and premium in income as interest,
based on a constant yield method. If such an election were made with respect to
a Note with market discount, the Noteholder would be deemed to have made an
election to include in income currently market discount with respect to all debt
instruments having market discount that such Noteholder acquires during the year
of the election and thereafter. Similarly, a Noteholder that makes this election
for a Note that is acquired at a premium will be deemed to have made an election
to amortize bond premium with respect to all debt instruments having amortizable
bond premium that such Noteholder owns or acquires. The election to accrue
interest, discount and premium under a constant yield method with respect to a
Note is irrevocable. A purchaser who buys a Note for more or less than its
principal amount will generally be subject, respectively, to the premium
amortization or market discount rules of the Code.
Qualified Stated Interest, which is taxable in accordance with the
holder's method of accounting, is interest that is unconditionally payable
(i.e., late payments are penalized) at least annually at a single fixed rate.
The Company intends to treat the interest paid on the Notes as Qualified Stated
Interest.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (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
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in Section 1281 of the Code) generally will be required to report interest
income as interest accrues on a ratable basis over the term of each interest
period or, at the election of the holder, on a constant yield basis (i.e.,
treating the instrument as accruing interest at a single rate). Cash basis
holders of a Short-Term Note will, in general, be required to report interest
income as interest is paid (or, if earlier, upon the taxable disposition of the
Short-Term Note). However, a cash basis holder of a Short-Term Note reporting
interest income as it is paid may be required to defer a portion of any interest
expense otherwise deductible on indebtedness incurred to purchase or carry the
Short-Term Note until the taxable disposition of the Short-Term Note. A cash
basis taxpayer may elect under Section 1282 of the Code to accrue interest
income on all nongovernment debt obligations with a term of one year or less, in
which case the taxpayer would include interest on the Short-Term Note in income
as it accrues, but would not be subject to the interest expense deferral rule
referred to in the preceding sentence. Certain special rules apply if a
Short-Term Note is purchased for more or less than its principal amount.
Optional Election. As an alternative to the above treatments, accrual
method holders may elect to include in gross income all interest with respect to
a Note, including stated interest, acquisition discount, OID, de minimis OID,
market discount, de minimis market discount, and unstated interest, as adjusted
by any amortizable bond premium or acquisition premium, using the constant yield
method described above.
Sale or Other Disposition. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect to the
Note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by such Noteholder
with respect to such Note. Any such gain or loss will be capital gain or loss if
the Note was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in income. Capital
losses generally may be used only to offset capital gains. The Taxpayer Relief
Act of 1997 includes substantial changes to the federal taxation of capital
gains recognized by individuals, including a 20% rate for gains from the sale of
certain assets held more than 18 months and further reductions in the maximum
rate scheduled to take effect after the year 2000 for certain assets held more
than five years.
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 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
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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. 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.
Recent Legislation
Recent legislation passed by Congress and signed into law by the President
on August 20, 1996 adds Sections 860H through 860L to the Code (the "FASIT
Provisions") which will provide for a new type of entity for federal income tax
purposes known as a "financial asset securitization investment trust" (a
"FASIT"). The legislation providing for the new FASIT entity, however, 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 be treated as a pass-through
entity not subject to federal entity-level income tax (except with respect to
certain prohibited transactions) and to issue securities that would be treated
as debt for federal income tax purposes. Transition rules provided for the FASIT
legislation contemplate that entities in existence on August 31, 1997 may elect
to be taxed under the FASIT Provisions; however, how such election would be made
and how outstanding interests of such entity are to be treated subsequent to the
election is not explained in the FASIT legislation.
Tax Consequences to Holders of the Certificates
The following discussion only applies to a Trust which issues one or more
classes of Certificates and assumes that all payments on the Certificates are
denominated in U.S. dollars, that a series of Securities includes a single class
of Certificates and that any such Certificates are sold to persons other than
the Company. If these conditions are not satisfied with respect to any given
series of Certificates, any additional tax considerations with respect to such
Certificates will be disclosed in the applicable Prospectus Supplement.
Classification as a Partnership
Treatment of the Trust as a Partnership. The Seller and the Servicer will
agree, and the Certificateholders will agree by their purchase of Certificates,
to treat the Trust as a partnership for purposes of federal and state income
tax, franchise tax and any other tax measured in whole or in part by income,
with the assets of the partnership being the assets held by the Trust, the
partners of the partnership being the Certificateholders (including the Company
in its capacity as recipient of distributions from the Reserve Account, if any),
and the Notes being debt of the partnership. However, the proper
characterization of the arrangement involving the Trust, the Certificateholders,
the
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Noteholders, the Seller and the Servicer is not clear because there is no
authority on transactions comparable to that contemplated herein.
Under the provisions of Subchapter K, a partnership is not considered a
separate taxable entity. Instead, partnership income is taxed directly to the
partners and each partner generally is viewed as owning a direct undivided
interest in each partnership asset. The partnership is generally treated as an
entity, however, for computing partnership income, determining the tax
consequences of transactions between a partner and the partnership, and
characterizing the gain on the sale or exchange of a partnership interest. The
following discussion is a summary of some of the material federal income tax
consequences of classifying the Trust as a partnership. Prospective owners of
Trust Certificates should consult their own tax advisors regarding the federal
income tax consequences discussed below, as well as any other material federal
income tax consequences that may result from applying the provisions of
Subchapter K to the ownership and transfer of a Trust Certificate.
Partnership Taxation. As a partnership, the Trust will not be subject to
federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest and finance charges earned on the Student Loans (including
appropriate adjustments for market discount, OID and bond premium), investment
income from investments of amounts on deposit in any related Trust Accounts and
any gain upon collection or disposition of Student Loans. The Trust's deductions
will consist primarily of interest accruing with respect to the Notes, servicing
and other fees, and losses or deductions upon collection or disposition of
Student Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust for each Interest Period (as defined in the applicable Prospectus
Supplement, an "Interest Period") equal to the sum of (i) the interest that
accrues on the Certificates in accordance with their terms for such Interest
Period, including interest accruing at the Pass-Through Rate for such Interest
Period and interest on amounts previously due on the Certificates but not yet
distributed; (ii) any Trust income attributable to discount on the Student Loans
that corresponds to any excess of the principal amount of the Certificates over
their initial issue price; and (iii) all other amounts of income payable to the
Certificateholders for such Interest Period. All remaining taxable income of the
Trust will be allocated to the Company. Based on the economic arrangement of the
parties, this approach for allocating Trust income should be permissible under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to
Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire amount of
interest accruing on the Certificates for an Interest Period, based on the
Pass-Through Rate plus the other items described above, even though the Trust
might not have sufficient cash to make current cash distributions of such
amount. Thus, cash basis holders will in effect be required to report income
from the Certificates on the accrual basis and Certificateholders may become
liable for taxes on Trust income even if they have not received cash from the
Trust to pay such taxes. In addition, because tax allocations and tax reporting
will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices, Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust.
An individual taxpayer's share of expenses of the Trust (including fees to
the Servicer but not interest expenses) are miscellaneous itemized deductions
which are deductible to the extent they exceed two percent of the individual's
adjusted gross income. Accordingly, such deductions might be disallowed to the
individual in whole or in part and might result in such holder being taxed on an
amount of income that exceeds the amount of cash actually distributed to such
holder over the life of the Trust.
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each of the Student Loans,
the Trust might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
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Computation of Income. Taxable income of the Trust will be computed at the
Trust level and then allocated pro rata to the Trust Certificateholders.
Consequently, the method of accounting for taxable income will be chosen by, and
any elections (such as those described above with respect to the market discount
rules) will be made by, the Trust rather than the Trust Certificateholders. The
Trust intends, to the extent possible, to (i) have the taxable income of the
Trust computed under the accrual method of accounting and (ii) adopt a
calendar-year taxable year for computing the taxable income of the Trust. The
tax year of the Trust, however, is generally determined by reference to the tax
years of the Certificateholders. As a result, an owner of a Trust Certificate
would be required to include its pro rata share of Trust income for a taxable
year as determined by the Trust in such Trust Certificateholder's gross income
for its taxable year in which the taxable year of the Trust ends.
Determining the Bases of Trust Assets. The Trust will become a partnership
on the first date when Trust Certificates are held by more than one person. On
that date, each of the Trust Certificateholders should be treated as having
purchased a pro rata share of the assets of the Trust (subject to the liability
for the Notes) followed immediately by a deemed contribution of such assets to
the newly formed partnership. The partnership's basis in the Trust's assets
would therefore equal the sum of the Trust Certificateholders' bases in their
respective interests in the Trust's assets immediately prior to the deemed
contribution to the partnership. To the extent that the fair market value of the
assets deemed contributed to the partnership varied from the bases of such
assets to the partnership, the allocation of taxable income to the Trust
Certificateholders would be adjusted in accordance with 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.
To the extent the Trust is characterized as a partnership, a Certificateholder's
tax basis in a Certificate will generally equal the holder's cost increased by
the holder's share of Trust income (includible in gross income) and decreased by
any distributions received with respect to such Certificate. In addition, both
the tax basis in the Certificate and the amount realized on a sale of a
Certificate would include the holder's share of the Notes and other liabilities
of the Trust. A holder acquiring Certificates at different prices may be
required to maintain a single aggregate adjusted tax basis in such Certificates
and, upon sale or other disposition of some of the Certificates, allocate a pro
rata portion of such aggregate tax basis to the Certificates sold (rather than
maintaining a separate tax basis in each Certificate for purposes of computing
gain or loss on a sale of that Certificate).
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Any gain on the sale of a Certificate attributable to the holder's share
of unrecognized accrued market discount on the Student Loans would generally be
treated as ordinary income to the holder and could give rise to special tax
reporting requirements. The Trust does not expect to have any other assets that
would give rise to such special reporting requirements.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the close
of the last day of such month. As a result, a holder purchasing Certificates may
be allocated tax items (which will affect the tax liability and tax basis of the
holder) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing laws
and regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust might be reallocated among the Certificateholders. SMS and the
Company are authorized to revise the Trust's method of allocation between
transferors and transferees to conform to a method permitted by future laws,
regulations or other IRS guidance.
Section 754 Election. In the event that a Certificateholder sells a
Certificate at a profit (or loss), the purchasing Certificateholder will have a
higher (or lower) basis in the Certificate than the selling Certificateholder
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust were to file an election under Section
754 of the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust will not make such election. As a
result, Certificateholders might be allocated a greater or lesser amount of
Trust income than would be appropriate based on their own purchase price for
Certificates.
Administrative Matters. The Eligible Lender Trustee is required to keep or
cause to be kept complete and accurate books of the Trust. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and the
taxable year of the Trust will be the calendar year. The Eligible Lender Trustee
will file a partnership information return (IRS Form 1065) with the IRS for each
taxable year of the Trust and will report each Certificateholder's allocable
share of items of Trust income and expense to holders and the IRS on Schedule
K-1. The Trust will provide the Schedule K-1 information to nominees that fail
to provide the Trust with the information statement described below and such
nominees will be required to forward such information to the beneficial owners
of the Certificates. Generally, holders must file tax returns that are
consistent with the information returns filed by the Trust or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust with
a statement containing certain information on the nominee, the beneficial owners
and the Certificates so held. Such information includes (i) the name, address
and taxpayer identification number of the nominee and (ii) as to each beneficial
owner (x) the name, address and identification number of such person, (y)
whether such person is a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust information as
to themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act that holds Certificates as a nominee is
not required to furnish any such information statement to the Trust. The
information referred to above for any calendar year must be furnished to the
Trust on or before the following January 31. Nominees, brokers and financial
institutions that fail to provide the Trust with the information described above
may be subject to penalties.
The Company will be designated as "tax matters partner" in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of
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limitations for partnership items does not expire before three years after the
date on which the partnership information return is filed. Any adverse
determination following an audit of the return of the Trust by the appropriate
taxing authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may be
precluded from separately litigating a proposed adjustment to the items of the
Trust. An adjustment could also result in an audit of a Certificateholder's
returns and adjustments of items not related to the income and losses of the
Trust.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust would be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust would be engaged in a trade or business in the United States for
such purposes, the Trust will withhold as if it were so engaged in order to
protect the Trust from possible adverse consequences of a failure to withhold.
The Trust expects to withhold on the portion of its taxable income that is
allocable to foreign Certificateholders pursuant to Section 1446 of the Code, as
if such income were effectively connected to a U.S. trade or business, at a rate
of 34% for foreign holders that are taxable as corporations and 39.6% for all
other foreign holders. These rates may be increased by proposed tax legislation.
Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Trust to change its withholding
procedures. In determining 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
on Form W-8 in order to assure appropriate crediting of the taxes withheld. A
foreign holder generally would be entitled to file with the IRS a claim for
refund with respect to taxes withheld by the Trust, taking the position that no
taxes were due because the Trust was not engaged in a U.S. trade or business.
However, interest payments made (or accrued) to a Certificateholder who is a
foreign person generally will be considered guaranteed payments to the extent
such payments are determined without regard to the income of the Trust. If these
interest payments are properly characterized as guaranteed payments, then the
interest will not be considered "portfolio interest." As a result,
Certificateholders will be subject to United States federal income tax and
withholding tax at a rate of 30 percent, unless reduced or eliminated pursuant
to an applicable treaty. In such case, a foreign holder would only be entitled
to claim a refund for that portion of the taxes in excess of the taxes that
should be withheld with respect to the guaranteed payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code. 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.
TRUSTS IN WHICH ALL RESIDUAL INTERESTS ARE RETAINED BY THE SELLER OR AN
AFFILIATE OF THE SELLER
Tax Characterization of the Trust
Federal Tax Counsel will deliver its opinion that a Trust which issues one
or more classes of Notes to investors and all the Residual Interests of which
are retained by the Seller or an affiliate thereof will not be an association
(or publicly traded partnership) taxable as a corporation for federal income tax
purposes. This opinion will be based on the assumption that the terms of the
Trust Agreement and related documents will be complied with and on Federal Tax
Counsel's conclusions that the Trust will constitute a mere security arrangement
for the issuance of debt by the single holder of a Residual Interest.
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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, advise the Trust that the Notes
will be (or, in certain cases, should be) classified as debt for federal income
tax purposes. Assuming such characterization of the Notes is correct, the
federal income tax consequences to Noteholders described above under "--TRUSTS
FOR WHICH A PARTNERSHIP ELECTION IS MADE--Tax Consequences to Holders of the
Notes" would apply to the Noteholders.
If, contrary to the opinion of Federal Tax Counsel, the IRS successfully
asserted that one or more classes of Notes did not represent debt for federal
income tax purposes, such class or classes of Notes might be treated as equity
interests in the Trust. If so treated, the Trust would, in the view of Federal
Tax Counsel, most likely be treated as a publicly traded partnership that would
not be taxable as a corporation because it would qualify for an applicable "safe
harbor" that the IRS has provided. Therefore, the partnership would not be
subject to federal income tax.
Nonetheless, treatment of Notes as equity interests in such a partnership
could have adverse tax consequences to certain holders of such Notes. For
example, income to certain tax-exempt entities (including pension funds) would
be "unrelated business taxable income", income to foreign holders may be subject
to U.S. withholding tax and U.S. tax return filing requirements, and individual
holders might be subject to certain limitations on their ability to deduct their
share of Trust expenses. In the event one or more classes of Notes were treated
as interests in a partnership, the consequences governing the Certificates as
equity interests in a partnership described above under "--TRUSTS FOR WHICH A
PARTNERSHIP ELECTION IS MADE--Tax Consequences to Holders of the Certificates"
would apply to the holders of such Notes.
If the Notes, contrary to the opinion of Federal Tax Counsel, were not
treated as debt for federal income tax purposes, the Trust might be treated, for
federal income tax purposes, as a publicly traded partnership taxable as a
corporation. In such case, the entity would be subject to federal income taxes
at corporate tax rates on its taxable income generated by Student Loans. Such an
entity-level tax could result in reduced distribution to Noteholders and
Noteholders could be liable for a share of such tax.
THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A NOTEHOLDER'S OR
CERTIFICATEHOLDER'S PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF 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 impossible to predict tax consequences to holders of
Notes and Certificates in all of the state taxing jurisdictions in which they
are already subject to tax. Noteholders and Certificateholders are urged to
consult their own tax advisors with respect to state tax consequences arising
out of the purchase, ownership and disposition of Notes and Certificates.
The State of Indiana imposes an individual income tax and a corporate
income tax including a corporate gross income tax. This discussion is based upon
present provisions of Indiana statutes and the regulations promulgated
thereunder and applicable judicial or ruling authority, all of which are subject
to change, which change may be retroactive. No ruling on any of the issues
discussed below will be sought from the Indiana Department of Revenue.
Tax Consequences with Respect to the Notes. It is expected that Krieg
DeVault Alexander & Capehart ("Indiana Tax Counsel") will deliver an opinion to
the Trust that, assuming the Notes are treated as debt for federal income tax
purposes, the Notes will be treated as debt for Indiana individual income and
corporate income tax purposes. Accordingly, Noteholders not otherwise subject to
taxation in Indiana should not become subject to taxation in Indiana solely
because of a holder's ownership of Notes. However, a Noteholder already subject
to Indiana's individual income tax or corporate income tax could be required to
pay additional Indiana tax as a result of the holder's ownership or disposition
of Notes.
59
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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 publicy trade
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 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 Adminstrator, 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 adminstrative
exemptions.
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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.
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.
61
<PAGE>
If an underwriter creates a short position in the Securities in connection
with the offering (i.e., if it sells more Securities than are set forth on the
cover page of the related Prospectus Supplement), the underwriter may reduce
that short position by purchasing Securities in the open market.
An underwriter may also impose a penalty bid on certain underwriters and
selling group members. This means that if the underwriter purchases Securities
in the open market to reduce the underwriters' short position or to stabilize
the price of the Securities, it may reclaim the amount of the selling concession
from the underwriters and selling group members who sold those Securities as
part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it
discourages resales of the security.
Neither the Seller nor the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Securities. In addition, neither
the Seller nor the underwriters make any representation that the underwriters
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
Each Underwriting Agreement will provide that the Seller will indemnify
the underwriters against certain civil liabilities, including liabilities under
the Securities Act, or contribute to payments the several underwriters may be
required to make in respect thereof.
Each Trust may, from time to time, invest the funds in its Trust Accounts
in Eligible Investments acquired from such underwriters.
Pursuant to each of the Underwriting Agreements with respect to a given
series of Securities, the closing of the sale of any class of Securities subject
to either thereof will be conditioned on the closing of the sale of all other
such classes subject to either thereof.
The place and time of delivery for the Securities in respect of which this
Prospectus is delivered will be set forth in the related Prospectus Supplement.
LEGAL MATTERS
Certain legal matters relating to the Securities of any series will be
passed upon for the related Trust, the Seller, the Servicer and the
Administrator by Krieg DeVault Alexander & Capehart, Indianapolis, Indiana, and
for the underwriters for such series by Brown & Wood LLP, New York, New York.
Edward R. Schmidt, general counsel of SMS and an executive officer of and
general counsel for USA Group, USA Funds and Loan Services and a member of the
board of directors of USA Group and a member of the board of trustees of USA
Funds, USA Group Guarantee Services and Loan Services was formerly a partner of,
and of counsel to, the firm of Krieg DeVault Alexander & Capehart and William R.
Neale, a member of the board of directors of USA Group and a member of the board
of trustees of USA Funds, is a partner of the firm of Krieg DeVault Alexander &
Capehart. Certain federal income tax matters will be passed upon for each Trust
by Brown & Wood LLP and certain Indiana State income and corporate income tax
matters by Krieg DeVault Alexander & Capehart.
62
<PAGE>
INDEX OF PRINCIPAL TERMS
Page
----
1992 Amendments ........................................................ 21
1993 Act ............................................................... 13
Act .................................................................... 20
Add-on Consolidation Loans ............................................. 28
Additional Fundings .................................................... 41
Administration Agreement ............................................... 49
Administration Fee ..................................................... 49
Administrator .......................................................... 1
Administrator Default .................................................. 49
Applicable Trustee ..................................................... 38
Base Rate .............................................................. 37
Benefit Plan ........................................................... 59
Calculation Agent ...................................................... 38
Cede ................................................................... 16
Certificate Balance .................................................... 2
Certificate Pool Factor ................................................ 31
Certificates ........................................................... i
Closing Date ........................................................... 3, 40
Code ................................................................... 51
Collateral Reinvestment Account ........................................ 4
Collection Account ..................................................... 41
Collection Period ...................................................... 42
Commission ............................................................. ii
Company ................................................................ i
Cutoff Date ............................................................ 3
Deferral Period ........................................................ 25
Definitive Certificates ................................................ 39
Definitive Notes ....................................................... 39
Definitive Securities .................................................. 39
Department ............................................................. 3
Depositary ............................................................. 32
Distribution Date ...................................................... 32
DTC's Nominee .......................................................... 16
Early Amortization Event ............................................... 4
Eligible Deposit Account ............................................... 42
Eligible Institution ................................................... 42
Eligible Investments ................................................... 41
Eligible Lender Trustee ................................................ i
ERISA .................................................................. 9
Event of Default ....................................................... 33
Existing Borrowers ..................................................... 4
FASIT .................................................................. 54
FASIT Provisions ....................................................... 54
63
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Page
----
Federal Assistance ..................................................... 23
Federal Consolidation Loan ............................................. 21, 27
Federal Guarantor ...................................................... 3
Federal Origination Fee ................................................ 12
Federal PLUS Loans ..................................................... 21
Federal SLS Loans ...................................................... 21
Federal Stafford Loans ................................................. 21
Federal Student Loans .................................................. 3
Federal Supplemental Loans to Students ................................. 21
Federal Tax Counsel .................................................... 8, 51
Federal Unsubsidized Stafford Loans .................................... 21
FFELP .................................................................. 20
Fixed Rate Securities .................................................. 37
Floating Rate Securities ............................................... 37
Forbearance Period ..................................................... 26
Funding Period ......................................................... 3
Grace Period ........................................................... 25
Guarantee Agreement .................................................... 29
Guarantee Payments ..................................................... 3
Guarantor .............................................................. 3
Indenture .............................................................. 1
Indenture Trustee ...................................................... i
Index Shortfall Carryover .............................................. 34
Indiana Tax Counsel .................................................... 59
Indirect Participants .................................................. 38
Initial Pool Balance ................................................... 48
Insolvency Event ....................................................... 46
Interest Period ........................................................ 55
Interest Rate .......................................................... 2
Interest Reset Period .................................................. 37
Interest Subsidy Payments .............................................. 22
Investment Earnings .................................................... 42
IRS .................................................................... 51
Issuer ................................................................. 1
Loan Sale Agreement .................................................... 3
Loan Services .......................................................... 1, 18
Loan Servicing Agreement ............................................... 6
Monthly Rebate Fee ..................................................... 13
Note Pool Factor ....................................................... 31
Notes .................................................................. i
OID .................................................................... 52
OID Regulations ........................................................ 52
Participants ........................................................... 32
Pass-Through Rate ...................................................... 2
Plan ................................................................... 59
64
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Page
----
Pool Factor ............................................................ 31
Pre-Funding Account .................................................... 4
Pre-Funding Amount ..................................................... 4
Prospectus Supplement .................................................. i
Purchase Amount ........................................................ 40
Registration Statement ................................................. ii
Related Documents ...................................................... 35
Reserve Account ........................................................ 5, 44
Reserve Account Initial Deposit ........................................ 5
Revolving Period ....................................................... 4
Rules .................................................................. 38
Secretary .............................................................. 15
Securities ............................................................. i
Securities Act ......................................................... ii
Seller ................................................................. i, 1
Servicer ............................................................... 1
Servicer Default ....................................................... 15, 46
Servicing Fee .......................................................... 7, 43
Short-Term Note ........................................................ 52
SMS .................................................................... ii, 1
Special Allowance Payments ............................................. 23
Spread ................................................................. 37
Spread Multiplier ...................................................... 37
Student Loans .......................................................... i, 3
Transfer and Servicing Agreements ...................................... 40
Trust .................................................................. i, 1
Trust Accounts ......................................................... 41
Trust Agreement ........................................................ 1
UCC .................................................................... 49
Underwriting Agreements ................................................ 60
Unmet Need ............................................................. 22
USA Funds .............................................................. 17
USA Group .............................................................. 17
USA Group Guarantee Services ........................................... 17
65
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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.
----------
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
----------
Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Securities described in this Prospectus
Supplement, whether or not participating in this distribution, may be required
to deliver this Prospectus Supplement and the Prospectus. This is in addition to
the obligation of dealers to deliver this Prospectus Supplement and the
Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SMS Student Loan
Trust 1998-A
$150,000,000
Class A-1 Floating Rate
Asset-Backed Senior Notes
$433,650,000
Class A-2 Floating Rate
Asset-Backed Senior Notes
USA Group Secondary
Market Services, Inc.
Seller
PROSPECTUS SUPPLEMENT
Credit Suisse First Boston
Bear, Stearns & Co. Inc.
Goldman, Sachs & Co.
Merrill Lynch & Co.
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