As filed with the Securities and Exchange Commission on ________________, 1999
Registration No. 333-________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------------------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------------------------------------------------------
USA GROUP SECONDARY
MARKET SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 35-1872185
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
---------------------------------------------------------------
30 South Meridian Street
Indianapolis, Indiana 46204-3503
(317) 951-5640
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
EDWARD R. SCHMIDT, ESQ.
General Counsel
USA Group Secondary Market Services, Inc.
30 South Meridian Street
Indianapolis, Indiana 46204-3503
(317) 951-5123
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------------------------------------------------
Copies to:
TIMOTHY M. HARDEN, ESQ. REED D. AUERBACH, ESQ.
Krieg DeVault Alexander & Capehart, LLP Stroock & Stroock & Lavan LLP
2800 One Indiana Square 180 Maiden Lane
Indianapolis, Indiana 46204 New York, New York 10038
---------------------------------------------------------------
Approximate date of commencement of proposed sale to the public: From time to
time after this Registration Statement becomes effective as determined by
market conditions.
---------------------------------------------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act Registration Statement Number of the earlier
effective Registration Statement for the same offering. [_] ________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
Registration Statement Number of the earlier effective Registration Statement
for the same offering. |_| ________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. |_|
---------------------------------------------------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=======================================================================================================================
Amount Proposed Maximum Proposed Maximum
Title of Each Class of to be Offering Price Aggregate Amount of
Securities to be Registered Registered Per Unit(1) Offering Price(1) Registration Fee
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
Asset-Backed Notes and Asset $1,000,000 100% $1,000,000 $278
Backed Certificates
- -----------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee.
</TABLE>
---------------------------------------------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these Securities has been filed with the
Securities and Exchange Commission. These Securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these Securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities law of any such State.
<PAGE>
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED _________, _____
$--------------
SMS Student Loan Trust _____-__
USA Group Secondary Market Services, Inc.
Seller
Floating Rate Asset-Backed Senior Notes
--------------
The senior notes will be issued by a trust. The sources for payment of the
senior notes are a pool of education loans originated under the Federal Family
Education Loan Program to students and parents of students, substantially all of
which are guaranteed by United Student Aid Funds, Inc., held by the trust, cash
held by the trust and an interest rate swap.
Interest and principal on the senior notes are scheduled to be paid quarterly on
the 28th day of each January, April, July and October. The first scheduled
payment date is __________ 28, _______.
Consider carefully the Risk Factors beginning on page S-___ of this Prospectus
Supplement and page 10 of the Prospectus. The senior notes are asset backed
securities issued by a trust. The senior notes are not interests in or
obligations of USA Group Secondary Market Services, Inc. or any of its
affiliates. This Prospectus Supplement may be used to offer and sell the senior
notes only if accompanied by the Prospectus.
<TABLE>
<CAPTION>
Original Final
Principal Interest Rate Maturity Price to Underwriting Proceeds to the
Amount (per annum) Date(1) Public(1) Discount Seller(2)
--------- ------------- -------- --------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Per Class A-1 Note $ % % %
Per Class A-2 Note $ % % %
Total.......... $ $ $ $
</TABLE>
(1) Thequarterly payment date of ___________ and ___________, as applicable.
(2) Plus accrued interest, if any, from the date of initial issuance.
Delivery of the senior notes, in book-entry form only, will be made through The
Depository Trust Company, Cedelbank, societe anonyme and the Euroclear System on
or about ___________, ___________ against payment in immediately available
funds.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the prospectus to which it relates is truthful or
complete.Any representation to the contrary is a criminal offense.
[NAMES OF UNDERWRITERS]
Prospectus Supplement dated _____________, _________
<PAGE>
You should rely on information contained in this document. We have not
authorized anyone to provide you with information that is different. This
document may only be used where it is legal to sell these securities. The
information in this document may only be accurate on the date of this document.
We provide information to you about the senior notes in two separate documents
that progressively provide more detail: (1) the accompanying prospectus, which
provides general information, some of which may not apply to your senior notes
and (2) this prospectus supplement, which describes the specific terms of your
senior notes.
If there is a conflict between this prospectus supplement and the accompanying
prospectus, you should rely on the information in this prospectus supplement.
This prospectus supplement and the accompanying prospectus include
cross-references to captions in these materials where you can find further
related discussions. The following table of contents provides the pages on which
these captions are located.
Until ______________, _______ all dealers that effect transactions in the senior
notes, whether or not participating in this offering, may be required to deliver
a prospectus and prospectus supplement. This requirement is in addition to the
dealer's obligation to deliver a prospectus and prospectus supplement when
acting as underwriters with respect to their unsold allotments or subscriptions.
We are not offering the senior notes in any state where the offer is not
permitted. We do not claim the accuracy of the information in this prospectus
supplement and the accompanying prospectus as of any date other than the dates
stated on their respective covers.
Certain persons participating in the offering of the senior notes may engage in
transactions that stabilize, maintain or otherwise affect the prices of the
senior notes. 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.
TABLE OF CONTENTS
Prospectus Supplement
SUMMARY OF TERMS......................................3
RISK FACTORS..........................................7
FORMATION OF THE TRUST...............................12
THE FINANCED STUDENT LOAN POOL.......................13
DESCRIPTION OF THE NOTES.............................26
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS.32
FEDERAL FAMILY EDUCATION LOAN PROGRAM................45
CERTAIN FEDERAL INCOME TAX AND STATE TAX CONSEQUENCES48
ERISA CONSIDERATIONS.................................49
UNDERWRITING.........................................49
LEGAL MATTERS........................................50
REPORTS TO SECURITYHOLDERS...........................50
FORWARD LOOKING STATEMENTS...........................50
ANNEX I..............................................55
INDEX OF PRINCIPAL TERMS.............................58
EXHIBIT A............................................62
Prospectus
SUMMARY OF TERMS......................................1
RISK FACTORS..........................................7
FORMATION OF THE TRUSTEES............................44
USE OF PROCEEDS......................................12
USA GROUP, SMS, THE SELLER AND
THE SERVICER....................................12
THE STUDENT LOAN POOLS...............................14
FEDERAL FAMILY EDUCATION LOAN
PROGRAM.........................................17
WEIGHTED AVERAGE LIVES OF
THE SECURITIES..................................29
POOL FACTORS AND
TRADING INFORMATION.............................30
DESCRIPTIONS OF THE NOTES............................30
DESCRIPTION OF THE CERTIFICATES......................35
CERTAIN INFORMATION REGARDING
THE SECURITIES..................................36
DESCRIPTION OF THE TRANSFER
AND SERVICING AGREEMENTS.........................40
CERTAIN LEGAL ASPECTS
OF THE STUDENT LOANS............................49
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES................................52
TRUSTS FOR WHICH A PARTNERSHIP
ELECTION IS MADE................................52
TRUSTS IN WHICH ALL RESIDUAL INTERESTS
ARE RETAINED BY THE SELLER OR AN
AFFILIATE OF THE SELLER..............................60
CERTAIN STATE TAX
CONSEQUENCES....................................61
ERISA CONSIDERATIONS.................................61
PLAN OF DISTRIBUTION.................................63
LEGAL MATTERS........................................64
AVAILABLE INFORMATION................................64
INCORPORATION OF CERTAIN DOCUMENTS
BY REFERENCE....................................64
INDEX OF PRINCIPAL TERMS.............................64
S-2
<PAGE>
SUMMARY OF TERMS
o This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to
consider in making your investment decision. To understand all of the
terms of the offering of the senior notes, you should carefully read this
entire prospectus supplement and the accompanying prospectus.
o This summary provides an overview of certain information to aid your
understanding and is qualified by the full description of this other
information in this prospectus supplement and the accompanying prospectus.
o You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under the caption "Index of Principal
Terms" beginning on page S-__ in this prospectus supplement.
PRINCIPAL PARTIES
The Trust
o SMS Student Loan Trust ____-___
The Seller and Administrator
o USA Group Secondary Market Services, Inc.
The Servicer
o USA Group Loan Services, Inc.
The Eligible Lender Trustee
o -----------------------
The Indenture Trustee
o -----------------------
The Swap Counterparty
o ------------------------
Dates
Quarterly Payment Dates
Payments on the senior notes will be made to you on the 28th day of each
January, April, July and October. If the 28th is not a business day, payments
will be made to you on the next business day. The first quarterly payment date
is _________ 28th, _____.
Cutoff Date
_______ __________ for the initial student loans and _______ __________ for the
delayed delivery student loans. The trust will receive payments made on the
related student loans on and after this date.
Closing Date
On or about __________.
DESCRIPTION OF THE SECURITIES
General
The Trust is offering the following student loan floating rate asset-backed
senior notes pursuant to this prospectus:
o Class A-1 Notes in the aggregate principal amount of
$________________; and
o Class A-2 Notes in the aggregate principal amount of
$________________.
The trust is also issuing $_______________ aggregate principal amount of
floating rate asset backed subordinate notes. The trust is not offering the
subordinate notes pursuant to this prospectus.
The trust will issue the senior notes in book-entry form in minimum
denominations of $1,000 and in multiples of $1,000 in excess thereof.
You may hold your senior notes through The Depository Trust Company, Cedelbank,
societe anonyme or the Euroclear System.
Interest Payments
The note rate for each class of senior notes is specified on the cover page of
this prospectus supplement. The interest rate on a class of senior notes is
subject to an interest rate cap. Interest with respect to the senior notes will
be calculated on the basis of the actual number of days elapsed in the related
quarterly interest period and a 360-day year.
The first step in computing the interest rate cap for any quarterly interest
period is to determine the percent equivalent of (1) the sum of expected
interest collections and any net trust swap receipt less any net trust swap
payment, the administration fee and the servicing fee divided by (2) the
aggregate principal amount of the notes as of the last day of such quarterly
interest period. The servicer determines the interest rate cap by multiplying
the percent obtained in the preceding sentence by 365 (or 366 in the case of a
leap year) and then dividing it by the number of days in the related quarterly
interest period.
Expected interest collections equal the sum of:
o the amount of interest accrued on the student loans, net of any
monthly rebate fees and other amounts required to be remitted to the
Department of Education;
S-3
<PAGE>
o all interest subsidy payments and special allowance payments
accrued; and
o certain investment earnings.
Since your senior notes are subject to an interest rate cap, you may not receive
interest on your senior notes at the applicable note rate. The difference
between interest payable at the note rate and interest actually paid to you on a
quarterly payment date may be paid to you on a future quarterly payment date.
The ratings of the notes do not address the likelihood of the payment to you of
any such amounts.
Principal Payments
No principal will be paid to you prior to the end of the revolving period.
However, a portion of your notes may be redeemed on the _____________ quarterly
payment if the trust does not acquire as many delayed delivery student loans as
it expects to acquire.
The revolving period will begin on the date the senior notes are issued and will
end _____________ (or earlier as described in this prospectus supplement).
Following the end of the revolving period, principal will be paid on the senior
notes on each quarterly payment date in an amount generally equal to the
principal collections with respect to the related student loans for the
preceding quarterly period until the senior notes have been paid in full.
Principal payments on the senior notes generally will be made to the holders of
the senior notes sequentially. No principal will be paid on the Class A-2 Notes
until the Class A-1 Notes have been paid in full. No principal will be paid on
the subordinate notes until the senior notes have been paid in full.
An exception to this rule is that following a default under the indenture and
the acceleration of the notes, principal will be paid first on a pro rata basis,
to each class of senior notes until they have been paid in full, and second, to
the subordinate notes until they have been paid in full.
Priority of Payments
On each quarterly payment date, the indenture trustee will make the following
distributions to the extent of available funds:
o to the servicer and administrator, certain fees;
o pro rata, to the senior noteholders, interest and to the swap
counterparty, any net swap payment;
o to the subordinate noteholders, interest;
o following the termination of the revolving period to the senior
noteholders, principal; and
o to the reserve account, remaining funds.
Any shortfalls in funds available to make interest and principal distributions
required to be made on the notes on a quarterly payment date may be paid on
future quarterly payment dates.
Final Maturity Dates
To the extent not previously paid prior to such dates, the unpaid principal
amount of each class of senior notes will be payable in full on the final
maturity date listed on the cover page of this prospectus supplement.
Auction Sale
Any student loans remaining in the trust as of the end of the collection period
immediately preceding the __________ quarterly payment date will be offered for
sale. The proceeds of any sale will be used to redeem your senior notes. The
auction price must at least equal the unpaid principal amount of the notes, plus
accrued and unpaid interest thereon.
Optional Redemption
Any notes that remain outstanding on any quarterly payment date on which
Secondary Market Company, Inc., or an assignee of Secondary Market Company,
Inc., exercises its option to purchase all of the assets of the trust will be
prepaid in whole at the applicable redemption price on such quarterly payment
date. The redemption price for any class of notes will equal the unpaid
principal amount of that class, plus accrued and unpaid interest thereon. The
redemption price may not include payment of all interest that you did not
receive as a result of the interest rate cap. Secondary Market Company, Inc. may
not exercise this option until the unpaid principal amount of the senior notes
and the subordinate notes is less than or equal to __% of the initial unpaid
principal amount of the senior notes plus the subordinate notes.
TRUST PROPERTY
General
The primary property of the trust will include:
o the student loans;
o all amounts collected on the student loans on or after the cutoff
date; (net of interest accrued prior to the cutoff date);
o amounts on deposit in the accounts of the trust; and
o the interest rate swap.
S-4
<PAGE>
The Initial Student Loans
The student loans consist of certain guaranteed education loans to students and
parents of students made under the Federal Family Education Loan Program. All of
the student loans are reinsured by the Department of Education. The student
loans to be transferred by USA Group Secondary Market Services, Inc. to the
trust on the closing date have the following characteristics as of ________,
_____:
o Aggregate principal
amount: $______________
o Weighted average original term: _________ mths
o Weighted average remaining term: _________ mths
o Stafford Loans (%): ________%
o Federal Consolidation Loans (%): ________%
o PLUS Loans (%): ________%
o SLS Loans (%): ________%
o Percent guaranteed by
United Student Aid Funds, Inc.: ________%
Delayed Delivery Student Loan Funding Account
On the date of issuance of the notes, USA Group Secondary Market Services, Inc.
will deposit $_______________ into an account of the trust held with the
indenture trustee. The trust expects to use such amounts to purchase a pool of
delayed delivery student loans on ________, ____ from USA Group Secondary Market
Services, Inc. This pool of student loans is currently owned by USA Group
Secondary Market Services, Inc. through its eligible lender trustee but cannot
be transferred to the trust on the closing date for administrative reasons.
Delayed Delivery Student Loans
The delayed delivery student loans were made under the Federal Family Education
Loan Program and are reinsured by the Department of Education. The delayed
delivery student loans have the following characteristics as of ____________,
____:
o Aggregate principal amount: $_______________
o Weighted average APR: ____%
o Weighted average original term: ______ mths
o Weighted average remaining term: ______ mths
o Serial Loans (%): ______%
o Stafford Loans (%): ______%
o SLS Loans (%): ______%
o PLUS Loans (%): ______%
o Federal Consolidation Loans (%): ______%
o Percent guaranteed by
United Student Aid Funds, Inc.: ______%
Additional Student Loans; Revolving Period
From time to time after the closing date and before the earlier of the
occurrence of an early amortization event and ________, ____, the trust will
acquire additional student loans (not including the delayed delivery student
loans). The trust will purchase additional student loans from collections
received on the student loans owned by the trust that are not used to cover
certain fees and expenses of the trust, distributions on the notes, deposits to
the reserve account and payments due to the swap counterparty.
Additional Student Loans; Serial Loans
Following the earlier of the occurrence of an early amortization event and
_______, ____, the trust may acquire additional student loans relating to
borrowers with student loans already owned by the trust. The trust will purchase
such additional student loans from collections received on the student loans
owned by the trust that are not used to cover certain fees and expenses of the
trust, distributions on the notes, deposits to the reserve account and payments
due to the swap counterparty.
The Collection Account
On the closing date, USA Group Secondary Market Services, Inc. will make an
initial deposit of $______________ into the collection account.
CREDIT ENHANCEMENT
The credit enhancement for the senior notes will consist primarily of the
following:
o reserve account; and
o subordination of the subordinate notes.
The Reserve Account
USA Group Secondary Market Services, Inc. will establish a reserve account with
the indenture trustee. Funds on deposit in the reserve account on each quarterly
payment date will be available to cover shortfalls in distributions of interest
and principal on the senior notes to the extent described herein. The reserve
account will be funded as follows:
o On the closing date, USA Group Secondary Market Services, Inc. will
make an initial deposit of $_______________ into the reserve
account.
o On each quarterly payment date, any available funds remaining after
making all prior distributions required to be made, will be
deposited into the reserve account.
S-5
<PAGE>
Amounts in the reserve account on any quarterly payment date (after giving
effect to all distributions to be made on such date) in excess of the specified
reserve account balance will be released to Secondary Market Company, Inc. or an
affiliate. The specified reserve account balance for any quarterly payment date
will be the greater of (1) ____% of the outstanding principal balance of the
notes and (2) $________.
Subordination of the Subordinate Notes
The subordination of the subordinate notes to the senior notes as described
herein will provide additional credit enhancement for the senior notes. Any
losses on the student loans not covered by other forms of credit enhancement
will be allocated to the subordinate notes before being allocated to the senior
notes.
INTEREST RATE SWAP
The trust and the swap counterparty have entered into an interest rate swap.
Unless terminated earlier, the interest rate swap will terminate on the ______
____ quarterly payment date. The trust will owe the swap counterparty a net swap
payment when (1) the weighted average discount rate per annum for direct
obligations of the United States with a maturity of 13 weeks plus a specified
percentage is greater than (2) the London interbank offered rate for deposits in
U.S. dollars having a maturity of three months. The swap counterparty will owe
the trust a net swap receipt when the calculation described in the immediately
preceding sentence is negative.
The amount of a net swap payment or a net swap receipt is the product of the
difference in the rates described in clause (1) and clause (2) above and the
interest rate swap's scheduled notional amount.
The scheduled notional amount for any quarterly payment date will be the lesser
of (1) the outstanding principal balance of the notes and (2) the amounts set
forth in Exhibit A to this prospectus supplement. USA Group Secondary Market
Services, Inc. expects the scheduled notional amount for any quarterly payment
date to initially equal approximately __% of the then outstanding principal
balance of the senior notes and the subordinate notes. However, following the
closing date, USA Group Secondary Market Services, Inc. may agree with the swap
counterparty to cause the scheduled notional amount to equal the outstanding
principal balance of the notes.
While the interest rate swap is in effect, it will reduce, but not eliminate,
the risk that a note rate will be determined by the interest rate cap.
TAX STATUS
Stroock & Stroock & Lavan LLP, special federal income tax counsel to USA Group
Secondary Market Services, Inc., is of the opinion that (1) the trust will not
be treated as an association or a publicly traded partnership taxable as a
corporation and (ii) the senior notes will be characterized as indebtedness for
federal income tax purposes. Each noteholder, by accepting a senior note, will
agree to treat the senior notes as indebtedness.
ERISA CONSIDERATIONS
Subject to the considerations discussed under "ERISA Considerations," the senior
notes are eligible for purchase by employee benefit plans.
RATINGS
At least two nationally recognized rating agencies must each rate the senior
notes in the highest long-term rating category.
S-6
<PAGE>
RISK FACTORS
You should consider the following risk factors together with all the
information contained in this prospectus supplement and the related prospectus
in deciding whether to purchase any of the senior notes.
You May Have Difficulty
Selling Your Notes ....The senior notes will not be listed on any securities
exchange. As a result, if you want to sell your senior
notes you must locate a purchaser that is willing to
purchase those notes. The underwriters intend to make a
secondary market for the senior notes. The underwriters
will do so by offering to buy the senior notes from
investors that wish to sell. However, the underwriters
will not be obligated to make offers to buy the senior
notes and may stop making offers at any time. In
addition, the prices offered, if any, may not reflect
prices that other potential purchasers would be willing
to pay, were they to be given the opportunity. There
have been times in the past where there have been very
few buyers of asset backed securities (i.e., there has
been a lack of liquidity), and there may be such times
in the future. As a result, you may not be able to sell
your senior notes when you want to do so or you may not
be able to obtain the price that you wish to receive.
The Trust has Limited
Assets to Make Payments
on Your Notes........ The trust does not have, nor is it permitted or expected
to have, any significant assets or sources of funds
other than the student loans (and the related guarantee
agreements), the reserve account, the delayed delivery
student loan funding account and the interest rate swap.
The notes represent obligations solely of the trust and
will not be insured or guaranteed by any entity.
Consequently, you must rely for repayment upon payments
with respect to the student loans, the amount deposited
by USA Group Secondary Market Services, Inc. in the
delayed delivery student loan funding account and
amounts on deposit in the reserve account. 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, the trust will
depend solely on payments with respect to the student
loans to make payments on the notes and you could suffer
a loss. You will have no claim to any amounts properly
distributed to USA Group Secondary Market Services,
Inc., Secondary Market Company, Inc. or the servicer
from time to time.
You May Experience
Losses on Your
Investment Resulting
From Principal Balance
of Notes
Exceeding Pool Balance.As of the closing date, the aggregate principal amount
of the senior notes and subordinate notes will be equal
to approximately ________% of the sum of the outstanding
principal balance of the student loans as of the cutoff
date and the amount deposited by USA Group Secondary
Market Services, Inc. in the delayed delivery student
loan funding account, the reserve account and the
collection account on the closing date. During the
revolving period, any collections on the student loans
that are not used to cover certain fees and expenses of
the trust, distributions on the notes, deposits to the
reserve account or payments to the swap counterparty
will be deposited in the collateral reinvestment
account. The trust will apply amounts in the collateral
reinvestment account to increase the outstanding
principal balance of the student loans. If the
outstanding principal balance of the student loans at
the end of the revolving period does not equal the
aggregate principal amount of the senior notes and
subordinate notes, amounts in the collateral
reinvestment account will be used to pay principal on
the notes.
You may experience losses to the extent that excess
interest collections are insufficient to cause the
outstanding principal balance of the student loans to
equal the aggregate principal amount of the senior notes
and subordinate notes. The occurrence of any of the
following will increase the likelihood of an
insufficiency:
S-7
<PAGE>
o A high rate of prepayments;
o An increase in the weighted average discount rate
per annum for direct obligations of the United
States with a maturity of 13 weeks; or
o An increase in the London interbank offered rate
for deposits in U.S. dollars having a maturity of
three months.
Risk of Change in
Characteristics of
the Student Loans ... Additional Fundings. Following the transfer of
additional student loans to the trust after the closing
date, the characteristics of the student loans may
differ significantly from the information presented in
this prospectus supplement. The characteristics that may
differ include the composition of the student loans and
of the borrowers thereof, the related guarantors (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. You should
consider potential variances when making your investment
decision concerning the senior notes.
Incentive Programs. USA Group Secondary Market Services,
Inc. currently offers two incentive interest rate
reduction programs to borrowers. Either of these
programs may be modified by USA Group Secondary Market
Services, Inc. Under the first program, borrowers who
make their first 48 payments on time receive either a 1%
or 2% per annum interest rate reduction for the
remaining term of their loan. USA Group Secondary Market
Services, Inc. is obligated to reimburse the trust for
any such interest rate reductions. Under the second
program, borrowers who use an auto-debit system to remit
payments directly from their bank accounts receive a
0.25% per annum interest rate reduction on their loans.
The trust does not know which borrowers will qualify or
decide to participate in these programs. These incentive
programs may make it more likely for the interest rate
cap to limit the amount of interest paid to you.
The Return on Your
Investment Will
Change Over Time..... Your pre-tax return on your investment will change from
time to time for a number of reasons including the
following:
o The Rate of Return of Principal is Uncertain. The
amount of distributions of principal on the senior notes
and the time when you receive those distributions
depends on the amount and the times at which borrowers
make principal payments on the student loans. Those
principal payments may be regularly scheduled payments
or unscheduled payments resulting from prepayments,
defaults or consolidations of the student loans. In
addition, if the trust is not able to purchase
sufficient additional student loan principal balances
during the revolving period, the noteholders will
receive a principal prepayment immediately following the
end of the revolving period.
The revolving period may terminate earlier than
__________, _____ if (1) the student loans fail certain
performance tests, (2) the amount of excess interest for
two successive quarterly payment dates is below a
certain level, (3) an event of default occurs under the
indenture or other transaction documents or (4) certain
other events occur.
o You May Receive a Principal Payment on ________, ___.
If the amount deposited by USA Group Secondary Market
Services, Inc. in the delayed delivery student loan
funding account is not fully used to purchase the
delayed delivery student loans on _________, ___, you
may receive a principal payment on _______, ____. If the
amount remaining is $___________ or less, the indenture
trustee will distribute such amount on the Class A-1
Notes. If the amount remaining is greater than
$___________ the indenture trustee will distribute such
amount on each class of senior notes and subordinate
notes, pro rata, based on the
S-8
<PAGE>
initial principal balance of each class of notes.
o You Bear Reinvestment Risk. Asset backed securities,
like the senior notes, usually produce more returns of
principal to investors when market interest rates fall
below the interest rates on the student loans and
produce less returns of principal when market interest
rates are above the interest rates on the student loans.
As a result, you are likely to receive more money to
reinvest at a time when other investments generally are
producing a lower yield than that on the notes, and are
likely to receive less money to reinvest when other
investments generally are producing a higher yield than
that on the notes. You will bear the risk that the
timing and amount of distributions on your senior notes
will prevent you from attaining your desired yield.
o An Early Termination May Affect the Yield. Your
investment in the senior notes may end before you desire
if (1) the indenture trustee successfully conducts an
auction sale or (2) Secondary Market Company, Inc.
exercises its option to purchase all of the assets of
the trust. You will bear reinvestment risk following an
early termination.
Changes in Legislation
May Adversely Affect
Student Loans and
Federal Guarantors... The Higher Education Act or other relevant federal or
state laws, rules and regulations may be amended or
modified in the future in a manner that will adversely
affect the federal student loan programs described in
this prospectus supplement and the prospectus, the
student loans made thereunder or the financial condition
of the federal guarantors.
In addition, if the direct student loan program expands,
the servicers may experience increased costs due to
reduced economies of scale or other adverse effects on
their business to the extent the volume of loans
serviced by the servicers is reduced. Such cost
increases could reduce the ability of the servicers to
satisfy their obligations to service the student loans
or to purchase student loans in the event of certain
breaches of its covenants.
Risks Associated with
Sequential Payment of
Principal on the
Notes ............... Since the Class A-2 Notes will generally not be paid any
principal distributions until the principal balance of
the Class A-1 Notes has been reduced to zero, the Class
A-1 noteholders would be most affected by a high rate of
principal prepayment or an early termination of the
revolving period. In addition, as a result of this
sequential payment of principal, it is likely that at
any time the Class A-2 Notes will have a greater percent
of their initial principal balance outstanding than the
Class A-1 Notes at any time. Consequently, the Class A-2
Notes will be allocated more losses than the Class A-1
Notes following a default under the indenture as a
relative percentage of their respective initial
principal balances.
Basis Risk............ You may not be paid interest at the related note rate as
a result of an interest rate cap. Any interest not paid
as a result of the interest rate cap may subsequently be
paid to you on a subordinated basis. The interest rate
cap may be triggered as a result of:
o The student loans generally bear interest based on
the rate per annum for direct obligations of the
United States with a maturity of 13 weeks while
the note rate for each class of senior notes is
based on the London interbank offered rate for
deposits in U.S. dollars having a maturity of
three months.
o The principal balance of the student loans will
initially be less than the aggregate principal
amount of the senior notes and the subordinate
notes. Consequently, the aggregate principal
balances of the student loans on which
S-9
<PAGE>
interest will be collected will be less than the
principal amount of the senior notes and the
subordinate notes.
o The interest rate cap will be reduced as a result
of the trust's obligation to pay certain fees to
the Department of Education.
If the note rate is limited by the interest rate cap,
the market value and liquidity of your senior notes may
decline.
Borrower Default Risk
on Certain Federal
Loans................ The student loans are generally 98% insured by a federal
guarantor. As a result, to the extent a borrower of a
student loan defaults, the trust will experience a loss
of generally 2% of the outstanding principal and accrued
interest on each such student loan. The trust will
assign a defaulted student loan to the applicable
federal guarantor in exchange for a guarantee payment on
the 98% guaranteed portion. The trust may not have any
right to pursue the borrower for the remaining 2%
unguaranteed portion. If the credit enhancement
described in this prospectus supplement is not
sufficient, you may suffer a loss.
Risk of Dependence on
Guarantors as Security
for Student Loans.... All of the student loans are unsecured. As a result, the
only security for payment of the student loans are the
guarantees provided under the guarantee agreements
between the eligible lender trustee and the guarantors.
Substantially all of the student loans which will be
conveyed to the trust on the date of issuance of the
notes are guaranteed by United Student Aid Funds, Inc.
The financial condition of a guarantor may be adversely
affected by a number of factors including:
o the amount of claims made against such guarantor
as result of borrower defaults;
o the amount of claims reimbursed to such guarantor
from the Department of Education (which range from
75% to 100% depending on the date the student loan
was made and the performance of the guarantor);
and
o changes in legislation that may reduce
expenditures from the Department of Education that
support federal guarantors or that may require
federal guarantors to pay more of their reserves
to the Department of Education.
If the financial status of the guarantors, and
particularly United Student Aid Funds, Inc.,
deteriorates, the guarantors may fail to make guarantee
payments to the eligible lender trustee. In such event,
you may suffer delays in the payment of principal and
interest on your senior notes.
Risk of Loss of
Guarantor and
Department of
Education Payments for
Failure to Comply with
Loan Origination and
Servicing Procedures.. The Higher Education Act requires lenders and their
assignees making and servicing student loans that are
reinsured by the Department of Education and guarantors
guaranteeing federal loans to follow specified
procedures, to ensure that the federal loans are
properly made and repaid. If the servicer fails to
follow these procedures or if the originator of the loan
failed to follow procedures relating to the origination
of any loans, the Department of Education may refuse to
make reinsurance payments to the guarantors or to make
interest subsidy payments and special allowance payments
to the eligible lender trustee. In addition, under such
circumstances the guarantors may refuse to make
guarantee payments to the trust. The failure of the
Department of Education to provide reinsurance payments
to the guarantors could adversely affect the guarantors'
ability or legal obligation to make payments under the
guarantee agreements. Loss of any such guarantee
payments, interest subsidy payments or special allowance
payments could adversely affect the trust's ability to
pay you timely interest and principal. In such event,
you may suffer a loss on your investment.
S-10
<PAGE>
Risk Associated
with the Interest
Rate Swap............ USA Group Secondary Market Services, Inc. expects the
scheduled notional amount of the interest rate swap for
each quarterly payment date to be less than the
outstanding principal balance of the notes. As a result,
the interest rate swap would not give you full
protection against a gap between (1) the rate per annum
for direct obligations of the United States with a
maturity of 13 weeks and (2) the London interbank
offered rate for deposits in U.S. dollars having a
maturity of three months. However, following the closing
date, USA Group Secondary Market Services, Inc. may
agree with the swap counterparty to cause the scheduled
notional amount to equal the outstanding principal
balance of the notes.
In addition, the interest rate swap will terminate prior
to the final maturity date for each class of the notes.
If the interest rate swap is terminated early, the trust
or the swap counterparty may be liable to pay to the
other a termination payment. Any such termination
payment payable by the trust could be substantial and
could reduce amounts otherwise payable to noteholders,
thereby resulting in shortfalls to you.
Computer Problems in
the Year 2000 May
Result in Losses...... Many computers and computer chips were not programmed to
recognize more than two digits in a year of a date. As a
result, in the year 2000 (year '00 to the computer),
those computers will not know whether the '00 refers to
the year 1900 or the year 2000. To the extent that such
systems of the servicer, the administrator, the
guarantors, the eligible lender trustee or the indenture
trustee continue to have such problems in the year 2000
and later, the amount and timing of distributions to
noteholders could be adversely affected.
Computer Problems in
the Year 2000 May
Affect the Department
of Education.......... The Department of Education has undertaken a year 2000
compliance project to address year 2000 issues.
Information regarding the Department of Education's year
2000 efforts can be obtained at the Department of
Education's site on the World Wide Web at
http://www.ed.gov. Officials at the Department of
Education have made statements to the public
acknowledging that the Department of Education has been
placed on the Office of Management and Budget's "watch
list" for not meeting certain milestones toward year
2000 compliance. Any failure by the Department of
Education to resolve any year 2000 issues or any adverse
effect on the Department of Education caused by a party
on which the Department of Education relies as a result
of year 2000 issues may have a material adverse effect
on the Federal Family Education Loan Program, the
guarantors and you.
The Notes Are Not
Suitable Investments
for All Investors..... The senior notes are not a suitable investment if you
require a regular or predictable schedule of payments or
payment on any specific date. The senior notes are
complex investments that should be considered only by
investors who, either alone or with their financial, tax
and legal advisors, have the expertise to analyze the
prepayment, reinvestment, default and market risk, the
tax consequences of an investment, and the interaction
of these factors.
Withdrawal or
Downgrading of Initial
Ratings Will Affect
the Prices for Notes.. A security rating is not a recommendation to buy, sell
or hold securities. Similar ratings on different types
of securities do not necessarily mean the same thing.
You are encouraged to analyze the significance of each
rating independently from any other rating. Any rating
agency may change its rating of the senior notes after
the senior notes are issued if that rating agency
believes that circumstances have changed. Any subsequent
change in rating will likely affect the price that a
subsequent purchaser will be willing to pay for the
senior notes. The ratings do not address the likelihood
of (1) an early termination of the revolving period or
(2) the ultimate payment to you of any interest not paid
as a result of the interest rate cap.
S-11
<PAGE>
FORMATION OF THE TRUST
The Trust
SMS Student Loan Trust ______-__ (the "Trust") will be a trust formed
under the laws of the State of Delaware pursuant to the Trust Agreement for the
transactions described herein and in the Prospectus. The Trust will not engage
in any activity other than (i) acquiring, holding and managing the Student Loans
(the "Initial Financed Student Loans") sold to the Trust on _________, _____
(the "Closing Date"), the delayed delivery Student Loans to be acquired by the
Trust on __________, ___ (the "Delayed Delivery Student Loans"), the additional
Student Loans (other than the Delayed Delivery Student Loans) acquired by the
Trust after the Closing Date (the "Additional Student Loans" and, together with
the Initial Financed Student Loans and the Delayed Delivery Student Loans, the
"Financed Student Loans") and the other assets of the Trust and proceeds
therefrom, (ii) issuing the Notes, (iii) making payments thereon, (iv)
originating Federal Consolidation Loans during the Revolving Period, (v)
entering into the Interest Rate Swap, and (vi) 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 First National
Bank of Chicago (the "Eligible Lender Trustee") to purchase on behalf of the
Trust the Initial Financed Student Loans from USA Group Secondary Market
Services, Inc. ("SMS"), as seller (the "Seller") pursuant to the Loan Sale
Agreement, to fund the initial deposit into the Reserve Account on the Closing
Date of cash or Eligible Investments equal to $___________________ (the "Reserve
Account Initial Deposit"), to fund the deposit into the Delayed Delivery Student
Loan Funding Account on the Closing Date of cash or Eligible Investments equal
to $_______________, to fund the deposit into the Collection Account on the
Closing Date of cash or Eligible Investments equal to $___________________ 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 guaranteed education loans
to students and parents of students (the "Student Loans") made under the Federal
Family Education Loan Program ("FFELP"), 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, net of interest accrued thereon
prior to the Cutoff Date and not to be capitalized, (c) all monies and
investments on deposit in the Collection Account, the Collateral Reinvestment
Account, the Delayed Delivery Student Loan Funding Account and the Reserve
Account and (d) the Interest Rate Swap. The Notes will be collateralized by the
assets of the Trust as described herein. The Collection Account, the Reserve
Account, the Delayed Delivery Student Loan Funding 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. 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 Eligible Lender Trustee will use funds on deposit in the Delayed
Delivery Student Loan Funding Account to purchase on behalf of the Trust on
________, __, the Delayed Delivery Student Loans from SMS. See "Description of
the Transfer and Servicing Agreements-- Delayed Delivery Student Loans" herein.
On behalf of the Trust, the Eligible Lender Trustee 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 __________ 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--The Return on Your
Investment Will Change Over Time" herein and"--Maturity and Prepayment
Experience" 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. See "Federal Family Education Loan Program--Recent
Developments--Changes in Formulas for Determining Certain Interest Rates and
Special Allowance Payments" herein. Accordingly, there can be no
S-12
<PAGE>
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 _________, _________, in care of
______________________, as Eligible Lender Trustee, at the address listed below.
Eligible Lender Trustee
_____________________________ is the Eligible Lender Trustee for the Trust
under the Trust Agreement to be dated as of _______________, ___ (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. ____________________ is a ______________ whose principal offices are
located at ________________________________________. The Eligible Lender Trustee
will acquire on behalf of the Trust legal title to all the Financed Student
Loans acquired from time to time pursuant to the Loan Sale Agreement. The
Eligible Lender Trustee on behalf of the Trust will enter into a Guarantee
Agreement with each of the Guarantors with respect to such Financed Student
Loans. The Eligible Lender Trustee qualifies as an eligible lender and owner of
all Financed Student Loans for all purposes under the Higher Education Act and
the Guarantee Agreements. Failure of the Financed Student Loans to be owned by
an eligible lender would result in the loss of any Guarantee Payments from any
Guarantor and any Federal Assistance with respect to such Financed Student
Loans. See "The Student Loan Pools" in the Prospectus. The Eligible Lender
Trustee's liability in connection with the issuance and sale of the Notes is
limited solely to the express obligations of the Eligible Lender Trustee set
forth in the Trust Agreement, the Loan Sale Agreement and the Servicing
Agreement. See "Description of the Notes" herein and "Description of the
Transfer and Servicing Agreements" herein and in the Prospectus. The Seller and
its affiliates may maintain normal commercial banking relations with the
Eligible Lender Trustee.
THE FINANCED STUDENT LOAN POOL
The pool of Financed Student Loans will include the Initial Financed
Student Loans to be 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 or Delayed Delivery Student Loans 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.
The Trust will be obligated, on ___________, ___, to purchase from the
Seller, and the Seller, will be obligated to tender to the Trust the Delayed
Delivery Student Loans. 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
for the Loan Purchase Amount for 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
S-13
<PAGE>
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" and under "Federal Family Education Loan Program" herein. 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 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 $___________;
additionally, no Federal Consolidation Loan may be originated by the Trust
having a scheduled maturity date after ___________, ___, ____ if at the time of
such origination the aggregate principal balances of all Federal Consolidation
Loans held by the Trust that have a scheduled maturity date after ___________,
___, ____ exceed or, after giving effect to such origination, would exceed
$___________; provided, however, that the Eligible Lender Trustee will be
permitted to fund the addition of Add-on Consolidation Loans in excess of such
amounts if required to do so by the Act. After the Revolving Period the Eligible
Lender Trustee on behalf of the Trust will cease to make Federal Consolidation
Loans and Additional Student Loans will consist solely of Serial Loans acquired
in the manner specified above; provided, however, that for a maximum period of
210 days following the end of the Revolving Period, the Eligible Lender Trustee
may be required to increase the principal balance of Federal Consolidation Loans
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 and under "Federal Family
Education Loan Program" herein, 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 and the Delayed Delivery 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 and the Delayed Delivery 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 and the Delayed Delivery
Student Loans as of ___________, ____ and ____________, ____, respectively (the
"Cutoff Date"). The percentages set forth in the tables below may not always add
to 100% due to rounding.
S-14
<PAGE>
Composition of the Initial Financed Student Loans
as of the Cutoff Date
Aggregate Outstanding Principal Balance (1).................... $
Number of Billing Accounts.....................................
Average Outstanding Principal Balance per Billing Account...... $
Number of Loans................................................
Average Outstanding Principal Balance per Loan................. $
Weighted Average Original Term to Maturity (2)................. months
Weighted Average Remaining Term to Maturity (2)................ months
Weighted Average Annual Interest Rate (3)...................... %
- --------------------
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $__________________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
(2) Determined from the date of origination or the Cutoff Date, as the case
may be, to the stated maturity date of the applicable Initial Financed
Student Loans, assuming repayment commences promptly upon expiration of
the typical grace period following the expected graduation date and
without giving effect to any deferral or forbearance periods that may be
granted in the future. See "Federal Family Education Loan Program" herein
and 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" herein and in the Prospectus.
<TABLE>
<CAPTION>
Distribution of the Initial Financed Student Loans
by Loan Type as of the Cutoff Date
Percent of Initial
Financed Student
Aggregate Loans
Outstanding by Outstanding
Loan Type Number of Loans Principal Balance(1) Principal Balance
- --------- --------------- -------------------- ------------------
<S> <C> <C> <C>
Stafford Loans (2) ........... $ %
Federal Consolidation Loans...
PLUS Loans....................
SLS Loans.....................
Total....................... $ %
</TABLE>
- ------------------
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $_____________ as of the CutOff Date to be
capitalized upon commencement of repayment.
(2) Includes Unsubsidized Stafford Loans having aggregate outstanding
principal balances as of the Cutoff Date of $__________________.
Distribution of the Initial Financed Student Loans
by Borrower Interest Rates as of the Cutoff Date
Percent of
Initial Financed
Aggregate Student Loans
Range of Interest Number Outstanding by Outstanding
Rates(1) of Loans Principal Balance(2) Principal Balance
- ----------------- -------- ----------------- -----------------
6.50% to 7.49%....... $ %
7.50% to 7.99%.......
8.00% to 8.49%.......
8.50% to 8.99%.......
9.00% to 9.49%.......
9.50% and above.......
Total............... $ %
- ------------------
(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
S-15
<PAGE>
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" herein and in the Prospectus.
(2) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $______________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
Distribution of the Initial Financed Student Loans
by Outstanding Principal Balance as of the Cutoff Date
Percent of
Initial Financed
Aggregate Student Loans
Range of Outstanding Number Outstanding by Outstanding
Principal Balance of Loans Principal Balance(1) Principal Balance
- -------------------- -------- -------------------- -----------------
Less than $2,000............. $ %
$ 2,000 to $ 3,999...........
$ 4,000 to $ 5,999...........
$ 6,000 to $ 7,999 ..........
$ 8,000 to $ 9,999 ..........
$10,000 to $11,999...........
$12,000 to $13,999...........
$14,000 to $15,999...........
$16,000 to $17,999...........
$18,000 to $19,999...........
$20,000 to $21,999...........
$22,000 to $23,999...........
$24,000 to $25,999...........
$26,000 to $27,999...........
$28,000 and above ...........
Total..................... $ %
=
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $_____________________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
Distribution of the Initial Financed Student Loans
by Remaining Term to Scheduled Maturity as of the Cutoff Date
Percent of
Initial Financed
Aggregate Student Loans
Number of Months Remaining Number of Outstanding by Outstanding
to Scheduled Maturity (1) Loans Principal Balance(2) Principal Balance
-----------------
Less than 24%............... $ %
24 to 35....................
36 to 47....................
48 to 59....................
60 to 71....................
72 to 83....................
84 to 95....................
96 to 107 ..................
108 to 119..................
120 to 131..................
132 to 143..................
144 to 155..................
156 to 167..................
168 to 179..................
180 to 191..................
192 and above...............
Total.................... $ %
=
(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" herein and in the Prospectus.
S-16
<PAGE>
(2) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $_______________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
Distribution of the Initial Financed Student Loans
by Borrower Payment Status as of the Cutoff Date
Percent of
Initial Financed
Aggregate Student Loans
Number Outstanding by Outstanding
Borrower Payment Status (1) of Loans Principal Balance(2) Principal Balance
- --------------------------- -------- --------------------- ----------------
Deferral.................... $ %
Forbearance................
Grace......................
In-School..................
Repayment..................
Total.................... $ %
- ------------------
(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" herein
and 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 $____________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
Distribution of the Initial Financial Student Loans
by Location as of the Cut-off Date
Percent of
Initial Financed
Aggregate Student Loans
Number Outstanding by Outstanding
Borrower Payment Status (1) of Loans Principal Balance(2) Principal Balance
- --------------------------- -------- --------------------- -----------------
Alabama.................... $ %
Alaska.....................
Arizona ...................
Arkansas...................
California.................
Colorado...................
Connecticut................
Delaware...................
Florida....................
Georgia....................
Hawaii.....................
Idaho......................
Illinois...................
Indiana....................
Iowa.......................
Kansas.....................
Kentucky...................
Louisiana..................
Maine......................
Maryland...................
Massachusetts..............
Michigan...................
Minnesota..................
Mississippi................
Missouri...................
Montana....................
Nebraska...................
S-17
<PAGE>
Nevada.....................
New Hampshire..............
New Jersey.................
New Mexico.................
New York...................
North Carolina.............
North Dakota...............
Ohio.......................
Oklahoma...................
Oregon.....................
Pennsylvania...............
Puerto Rico................
Rhode Island...............
South Carolina.............
South Dakota...............
Tennessee..................
Texas......................
Utah.......................
Vermont....................
Virginia...................
Washington.................
Washington DC..............
West Virginia..............
Wisconsin..................
Wyoming....................
Other......................
Total.................... $ %
=
(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 $___________ as of the Cutoff Date to
be capitalized upon commencement of repayment.
Distribution of Initial Financed Student Loans
by Date of Disbursement
Percent of
Initial Financed
Aggregate Student Loans
Number of Outstanding by Outstanding
Borrower Payment Status(1) Loans Principal Balance(2) Principal Balance
- -------------------------- ---------- ------------------- -----------------
Pre-October 1, 1993........... $ %
On or After October 1, 1993
and Prior to October 1, 1998..
October 1, 1998 and thereafter
Total.................. $ %
(1) Initial Financed Student Loans disbursed prior to October 1, 1993 are 100%
guaranteed by the Initial Guarantors and reinsured against default by the
Department up to a maximum of 100% of the Guarantee Payments. Initial
Financed Student Loans disbursed on or after October 1, 1993 and prior to
October 1, 1998 are 98% guaranteed by the Initial Guarantors and reinsured
against default by the Department up to a maximum of 98% of the Guarantee
Payments. Initial Financial Student Loans disbursed on or after October 1,
1998 are 98% guaranteed by the Initial Guarantors and reinsured against
default by the Department up to a maximum of 95% of the Guarantee
Payments.
(2) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $________________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
Distribution of Initial Financed Student Loans
by Number of Days of Delinquency as of the Cutoff Date
Percent of
Initial Financed
S-18
<PAGE>
Aggregate Student Loans
Number Outstanding by Outstanding
Days Delinquent of Loans Principal Balance(1) Principal Balance
- --------------- -------- -------------------- -----------------
0 - 30........................ $ %
31 - 60.......................
61 - 90.......................
91 - 120......................
121 and above.................
Total..................... $ %
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $________________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
Composition of the Delayed Delivery Student Loans
as of the Cutoff Date
Aggregate Outstanding Principal Balance (1)........................... $
Number of Billing Accounts............................................
Average Outstanding Principal Balance per Billing Account............. $
Number of Loans.......................................................
Average Outstanding Principal Balance per Loan........................ $
Weighted Average Original Term to Maturity (2)........................ months
Weighted Average Remaining Term to Maturity (2)....................... months
Weighted Average Annual Interest Rate (3)............................. %
- ------------------
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $____________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
(2) Determined from the date of origination or the Cutoff Date, as the case
may be, to the stated maturity date of the applicable Delayed Delivery
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" herein
and in the Prospectus.
(3) Determined using the interest rates applicable to the Delayed Delivery
Student Loans as of the Cutoff Date. However, because some of the Delayed
Delivery 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 Delayed Delivery
Student Loans at any time after the Cutoff Date. See "Federal Family
Education Loan Program" herein and in the Prospectus.
Distribution of the Delayed Delivery Student Loans
by Loan Type as of the Cutoff Date
Percent of
Delayed Delivery
Aggregate Student Loans
Number Outstanding by Outstanding
Loan Type of Loans Principal Balance(1) Principal Balance
- --------- -------- --------------------- ----------------
Stafford Loans (2)............ $ %
PLUS Loans....................
Federal Consolidation Loans...
SLS Loans.....................
Total..................... $ %
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $_________________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
(2) Includes Unsubsidized Stafford Loans having aggregate outstanding
principal balances as of the Cutoff Date of $---------------.
S-19
<PAGE>
Distribution of the Delayed Delivery Student Loans
by Borrower Interest Rates as of the Cutoff Date
Percent of
Delayed Delivery
Student Loans
Range of Interest Number Aggregate Outstanding by Outstanding
Rates (1) of Loans Principal Balance(2) Principal Balance
- -------------------- -------- -------------------- -----------------
6.50% to 7.49%................ $ %
7.50% to 7.99%................
8.00% to 8.49%................
8.50% to 8.99%................
Total..................... $
- ----------------
(1) Determined using the interest rates applicable to the Delayed Delivery
Student Loans as of the Cutoff Date. However, because some of the Delayed
Delivery 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 Delayed Delivery Student Loans
at any time after the Cutoff Date. See "Federal Family Education Loan
Program" herein and in the Prospectus.
(2) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $__________________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
Distribution of the Delayed Delivery Student Loan
by Outstanding Principal Balance as of the Cutoff Date
Percent of
Delayed Delivery
Student Loans
Range of Outstanding Number Aggregate Outstanding by Outstanding
Principal Balance of Loans Principal Balance(1) Principal Balance
- ------------------------- -------- --------------------- -----------------
Less than $2,000.............. $ %
$ 2,000 to $ 3,999............
$ 4,000 to $ 5,999............
$ 6,000 to $ 7,999............
$ 8,000 to $ 9,999............
$10,000 to $11,999............
$12,000 to $13,999............
$14,000 to $15,999............
$16,000 to $17,999............
$18,000 to $19,999............
$20,000 to $21,999............
$22,000 to $23,999............
$24,000 to $25,999............
$26,000 to $27,999............
$28,000 and above.............
Total..................... $ %
- ---------------
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $______________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
Distribution of the Delayed Delivery Student Loans
by Remaining Term to Scheduled Maturity as of the Cutoff Date
Percent of
Delayed Delivery
Student Loans
Range of Outstanding Number Aggregate Outstanding by Outstanding
Principal Balance of Loans Principal Balance(1) Principal Balance
- ------------------- - -------- --------------------- -----------------
Less than 24................... $ %
24 to 35.......................
36 to 47.......................
S-20
<PAGE>
48 to 59.......................
60 to 71.......................
72 to 83.......................
84 to 95.......................
96 to 107......................
108 to 119.....................
120 to 131.....................
132 to 143.....................
144 to 155.....................
156 to 167.....................
168 to 179.....................
180 to 191.....................
192 and above..................
Total...................... $ %
- ------------------
(1) Determined from the Cutoff Date to the stated maturity date of the
applicable Delayed Delivery 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" herein and in the Prospectus.
(2) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $________________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
Distribution of the Delayed Delivery Student Loans
by Borrower Payment Status as of the Cutoff Date
Percent of
Delayed Delivery
Student Loans
Number Aggregate Outstanding by Outstanding
Borrower Payment Status (1) of Loans Principal Balance(2) Principal Balance
- --------------------------- -------- --------------------- -----------------
Deferral...................... $ %
Forbearance...................
Grace.........................
In-School.....................
Repayment.....................
Total..................... $ %
(1) Refers to the status of the borrower of each Delayed Delivery 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" herein
and 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 $________________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
Distribution of the Delayed Delivery Student Loans
by Location as of the Cutoff Date
Percent of
Delayed Delivery
Student Loans
Number Aggregate Outstanding by Outstanding
Location (1) of Loans Principal Balance(2) Principal Balance
- ------------ -------- -------------------- -----------------
Alabama ...................... $ %
Alaska........................
Arizona.......................
Arkansas......................
California....................
Colorado......................
S-21
<PAGE>
Connecticut...................
Delaware......................
Florida.......................
Georgia.......................
Hawaii........................
Idaho.........................
Illinois......................
Indiana.......................
Iowa..........................
Kansas........................
Kentucky......................
Louisiana.....................
Maine.........................
Maryland......................
Massachusetts.................
Michigan......................
Minnesota.....................
Mississippi...................
Missouri......................
Montana.......................
Nebraska......................
Nevada........................
New Hampshire.................
New Jersey....................
New Mexico....................
New York......................
North Carolina................
North Dakota..................
Ohio..........................
Oklahoma......................
Oregon........................
Pennsylvania..................
Puerto Rico...................
Rhode Island..................
South Carolina................
South Dakota..................
Tennessee.....................
Texas.........................
Utah..........................
Vermont.......................
Virginia......................
Washington....................
Washington, DC................
West Virginia.................
Wisconsin.....................
Wyoming.......................
Other.........................
Total.................... $ %
(1) Based on the permanent billing addresses of the borrowers of the Delayed
Delivery 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 $_______________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
Distribution of Delayed Delivery Student Loans
by Date of Disbursement
Percent of
Delayed Delivery
Student Loans
Number Aggregate Outstanding by Outstanding
Borrower Payment Status of Loans Principal Balance(1)(2) Principal Balance
- ----------------------- -------- --------------------- -----------------
Pre-October 1, 1993......... $ %
S-22
<PAGE>
On or After October 1, 1993
and Prior to October 1, 1998..
October 1, 1998 and thereafter
Total.................... $ %
(1) Delayed Delivery Student Loans disbursed prior to October 1, 1993 are 100%
guaranteed by the Initial Guarantors and reinsured against default by the
Department up to a maximum of 100% of the Guarantee Payments. Delayed
Delivery Student Loans disbursed on or after October 1, 1993 and prior to
October 1, 1998 are 98% guaranteed by the Initial Guarantors and reinsured
against default by the Department up to a maximum of 98% of the Guarantee
Payments. Initial Financial Student Loans disbursed on or after October 1,
1998 are 98% guaranteed by the Initial Guarantors and reinsured against
default by the Department up to a maximum of 95% of the Guarantee
Payments.
(2) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $___________________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
Distribution of Delayed Delivery Student Loans
by Number of Days of Delinquency as of the Cutoff Date
Percent of
Delayed Delivery
Student Loans
Number Aggregate Outstanding by Outstanding
Days Delinquent of Loans Principal Balance(1) Principal Balance
- --------------- -------- ----------------- -----------------
0 - 30........................ $ %
31 - 60.......................
61 - 90.......................
91 - 120......................
121 and above.................
Total..................... $ %
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $__________________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
Each of the Financed Student Loans provides or will provide for the
amortization of the outstanding principal balance of such Financed Student Loan
over a series of regular payments. Each regular payment consists of an
installment of interest which is calculated on the basis of the outstanding
principal balance of such Financed Student Loan multiplied by the applicable
interest rate and further multiplied by the period elapsed (as a fraction of a
calendar year) since the preceding payment of interest was made. As payments are
received in respect of such Financed Student Loan, the amount received is
applied first to interest accrued to the date of payment and the balance is
applied to reduce the unpaid principal balance. Accordingly, if a borrower pays
a regular installment before its scheduled due date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be less than it would have been had the payment been made as scheduled, and the
portion of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if a borrower pays a monthly installment
after its scheduled due date, the portion of the payment allocable to interest
for the period since the preceding payment was made will be greater than it
would have been had the payment been made as scheduled, and the portion of the
payment applied to reduce the unpaid principal balance will be correspondingly
less. In either case, subject to any applicable Deferral Periods or Forbearance
Periods, the borrower pays a regular installment until the final scheduled
payment date, at which time the amount of the final installment is increased or
decreased as necessary to repay the then outstanding principal balance of such
Financed Student Loan.
Guarantee of Financed Student Loans
By the Closing Date, the Eligible Lender Trustee will have entered into
a Guarantee Agreement with the Initial Guarantors pursuant to which United
Student Aid Funds, Inc., a Delaware non-profit corporation ("USA Funds") and
certain other Federal Guarantors (together, the "Initial Guarantors") have
agreed to serve as Guarantors for the Initial Financed Student Loans. As of the
Cutoff Date, __________% of the Initial Financed Student Loans and _________% of
the Delayed Delivery Student Loans are guaranteed by USA Funds.
S-23
<PAGE>
During the Revolving Period, the Trust may acquire Additional Student
Loans guaranteed by a Federal Guarantor other than the Initial Guarantors (each,
an "Additional Guarantor" and, together with the Initial Guarantors, the
"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 for Student Loans for
which the first day of delinquency occurs prior to October 7, 1998 or 270 days
for Student Loans for which the first day of delinquency occurs on or after
October 7, 1998 (except that 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;
(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;
(e) the school closed thereby preventing the borrower from completing
his/her program of study; or
(f) the loan application was falsely certified.
When these conditions are satisfied, the Act requires the Federal
Guarantor generally to pay the claim within 90 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 of Education (the "Secretary") determines that a Federal
Guarantor is unable to meet its insurance obligations, the Secretary shall
assume responsibility for all functions of such guarantor under the loan
insurance program of such guarantor. The Secretary is authorized, among other
things, to take those actions necessary to ensure the continued availability of
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 and "Federal Family Education Loan Program"
herein.
Each Guarantor's guarantee obligations with respect to any Financed
Student Loan guaranteed by it are conditioned upon the satisfaction of all the
conditions set forth in the applicable Guarantee Agreement. These conditions
generally include, but are not limited to, the following: (i) the origination
and servicing of such Financed Student Loan being performed in accordance with
the Act and other applicable requirements, (ii) the timely payment to the
Guarantor of the guarantee fee payable with respect to such Financed Student
Loan, (iii) the timely submission to the Guarantor of all required pre-claim
delinquency status notifications and of the claim with respect to such Financed
Student Loan, and (iv) the transfer and endorsement of the promissory note
evidencing such Financed Student Loan to the Guarantor upon and in connection
with making a claim for Guarantee Payments thereon. Failure to comply with any
of the applicable conditions, including the foregoing, may result in the refusal
of the Guarantor to honor its Guarantee Agreement with respect to such Financed
Student Loan, in the denial of guarantee coverage with respect to certain
accrued interest amounts with respect thereto or in the loss of certain Interest
Subsidy Payments and Special Allowance Payments with respect thereto. Under the
Servicing Agreement and the Loan Sale Agreement, such failure to comply would
constitute a breach of the Servicer's covenants or the Seller's representations
and warranties, as the case may be, and would create an obligation of the
Servicer (subject to the limitations described under "Risk Factors--The Return
on Your Investment Will Change Over Time" herein) or the Seller, as the case may
be, to purchase or repurchase such Financed Student Loan or, in
S-24
<PAGE>
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 USA Funds 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 USA Funds in each of the
last five federal fiscal years:*
Stafford, SLS and
PLUS Loans
Guaranteed by
USA Funds
Federal Fiscal Year (dollars in millions)
------------------- ---------------------
1994 $ 4,724
1995 5,040
1996 5,376
1997 6,228
1998 6,196
- -----------------
* The information set forth in the table above has been obtained from USA
Funds, 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. USA Funds 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. USA Funds' 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 USA
Funds as of the end of each of the last five federal fiscal years:*
Recovery Rate
Federal Fiscal Year for USA Funds
------------------- -------------
1994 30.30%
1995 35.26
1996 39.21
1997 40.89
1998 44.45
- -------------------
* The information set forth in the table above with respect to USA Funds 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.
Claims Rate. USA Funds' claims rate measures the amount of federal
reinsurance claims paid by the United States Department of Education (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 reimbursement for reinsurance claims at the maximum reinsurance rate
permitted under the Higher Education Act. 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 and "Federal Family Education Loan Program" herein. The following
table sets forth the claims
S-25
<PAGE>
rate of USA Funds (excluding Arizona, Hawaii and certain Pacific islands in the
case of federal fiscal years 1994 through 1996) for each of the last five
federal fiscal years*:
Claims Rate of
Federal Fiscal Year USA Funds
- ------------------- ---------
1994 4.99%
1995 4.69
1996 4.65
1997 4.65
1998 3.96
- ------------------
* The information set forth in the table above with respect to USA Funds
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 USA
Funds 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 Guarantors (other than USA Funds) may
vary from those of USA Funds. No assurances can be given as to what such
volumes, ratios or rates will be or as to whether USA Funds or the other
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 USA Funds, the other Initial
Guarantors and certain Federal Guarantors that could become Additional
Guarantors.
DESCRIPTION OF THE NOTES
General
The Class A-1 Floating Rate Asset Backed Senior Notes (the "Class A-1
Notes"), the Class A-2 Floating Rate Asset Backed Senior Notes (the "Class A-2
Notes" and together with the Class A-1 Notes, the "Senior Notes") and the
Floating Rate Asset Backed Subordinate Notes (the "Subordinate Notes" and
together with the Senior Notes, the "Notes") will be issued pursuant to the
terms of the Indenture to be dated as of ________, ___ (as amended and
supplemented from time to time, the "Indenture"), between the Trust and Bankers
Trust Company, a New York banking corporation (the "Indenture Trustee"),
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 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 _________, ____
(each, a "Quarterly Payment Date") 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 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"). 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 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
____%, ____% and ____%, respectively.
S-26
<PAGE>
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, 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 "Federal Family Education Loan Program"
herein and in the Prospectus) with respect to the Financed Student Loans for 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 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 "Federal Family Education Loan Program" herein
and in the Prospectus) and (iii) Investment Earnings (as defined in "Description
of the Transfer and Servicing Agreements--Accounts" in the Prospectus) 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 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 (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.
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.
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) the purchase of Delayed Delivery Student Loans
made with respect to such Collection Period, (iv) all Additional Fundings made
with respect to such Collection Period and (v) all losses realized on Financed
Student Loans liquidated during such Collection Period.
"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.
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
S-27
<PAGE>
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, and (iv) 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 (1) 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 and (2) the
____________ Quarterly Payment Date, any Reserve Account Excess for such
Quarterly Payment Date will, after payment to the Seller of any unpaid Purchase
Premium Amounts for any Serial Loans purchased by the Trust prior to the end of
the related Collection Period, be applied to pay the principal of the Notes in
the order of priority set forth below. Amounts, if any, available to be
distributed as set forth in the preceding sentence will not be part of the
Principal Distribution Amount 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 to the
holders (the "Senior Noteholders") of the Senior Notes (whether in respect of
the Senior Noteholders' Principal Distribution Amount, amounts on deposit in the
Reserve Account constituting Reserve Account Excess (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 to the holders (the "Class A-1 Noteholders") of the Class A-1 Notes
until the aggregate principal amount of the Class A-1 Notes has been reduced to
zero, and then to the holders (the "Class A-2 Noteholders") 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 to the Senior Noteholders until the
aggregate principal amount of the Senior Notes has been paid in full, and then
to pay principal to the holders (the "Subordinate Noteholders" and, together
with the Senior Noteholders, the "Noteholders") of the Subordinate Notes until
the Subordinate Notes have been paid in full.
The aggregate outstanding principal amount, if any, of the Class A-1 Notes
will be payable in full on the ____________ Quarterly Payment Date (the "Class
A-1 Note Final Maturity Date"), of the Class A-2 Notes will be payable in full
on the ______________ Quarterly Payment Due Date (the "Class A-2 Note Final
Maturity Date") and of the Subordinate Notes on the __________ Quarterly Payment
Date (the "Subordinate Note Final Maturity Date"). However, the actual maturity
of any class of the Senior Notes or of the Subordinate Notes could occur other
than on such dates as a result of a variety of factors including those described
under "Risk Factors--The Return on Your Investment Will Change Over Time"
herein.
Mandatory Redemption
If any amount remains on deposit in the Delayed Delivery Student Loan
Funding Account on the close of business of _______________, after giving effect
to the purchase of Delayed Delivery Student Loans on such date, the entire
amount remaining on deposit in the Delayed Delivery Student Loan Funding Account
will be used on the Quarterly Payment Date immediately following such date to
redeem the Notes. If greater than $__________ remains on deposit, each class of
Notes shall be redeemed pro rata, based on the initial principal balance of such
class. If $__________ or less remains on deposit the Notes shall be redeemed 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 Delayed Delivery Student Loan Funding Account on such
date.
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 third preceding paragraph. The
aggregate principal amount of Notes to be redeemed will be an amount equal to
the
S-28
<PAGE>
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 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
S-29
<PAGE>
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.
Cedelbank, societe anonyme ("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.
The Euroclear System ("Euroclear") was created in 1968 to hold securities
for participants of Euroclear ("Euroclear Participants") and to clear and settle
transactions between Euroclear Participants through simultaneous electronic
book-entry delivery against payment, thereby eliminating the need for physical
movement of certificates and any risk from lack of simultaneous transfers of
securities and cash. Transactions may be settled in any of 27 currencies,
including United States dollars. Euroclear includes various other services,
including securities lending and borrowing and interfaces with domestic markets
in several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan Guaranty Trust Company of New York (the "Euroclear
Operator", under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by the
Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear, withdrawals of securities
and cash from the Euroclear, and receipts of payments with respect to securities
in Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants and has no record of or relationship with persons holding
through Euroclear Participants.
Distributions with respect to Senior Notes held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depositary (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
S-30
<PAGE>
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 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.
DTC management is aware that some computer applications, systems, and the
like for processing dates ("Systems") that are dependent upon calendar dates,
including dates before, on, and after January 1, 2000, may encounter "Year 2000
problems." DTC has informed its Participants and other members of the financial
community (the "Industry") that it has developed and is implementing a program
so that its Systems, as the same relate to the timely payment of distributions
(including principal and income payments) to securityholders, book-entry
deliveries, and settlement of trades within DTC ("DTC Services"), continue to
function appropriately. This program includes a technical assessment and a
remediation plan, each of which is complete. Additionally, DTC's plan includes a
testing phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors on whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to: (i)
impress upon them the importance of such services being Year 2000 compliant; and
(ii) determine the extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services. In addition, DTC is in the process of
developing such contingency plans as it deems appropriate.
S-31
<PAGE>
According to DTC, the information set forth in the preceding two
paragraphs about DTC has been provided to the Industry by DTC for informational
purposes only and is not intended to serve as a representation, warranty or
contract modification of any kind.
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 to
be dated as of _______, ____(as amended and supplemented from time to time, the
"Loan Sale Agreement"), among the Seller, the Trust and the Eligible Lender
Trustee, pursuant to which the Eligible Lender Trustee on behalf of the Trust
will purchase the Financed Student Loans; the Servicing Agreement to be dated as
of ________, _____ (as amended and supplemented from time to time, the
"Servicing Agreement") among the Trust, USA Group Loan Services, Inc. (the
"Servicer"), the Seller and the Eligible Lender Trustee pursuant to which the
Servicer will service the Financed Student Loans; the Administration Agreement
to be dated as of _________, ____(as amended and supplemented from time to time,
the "Administration Agreement") among the Trust, the Indenture Trustee and SMS,
as administrator (the "Administrator") 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 Securities and Exchange Commission (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 and the sale of the Delayed Delivery Student Loans from the Seller
to the Eligible Lender Trustee on behalf of the Trust following 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 _____________ 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 acquire
additional Student Loans (other than the Delayed Delivery Student Loans) or
increase the outstanding principal balance of the Financed Student Loans
("Additional Fundings"). The Eligible Lender Trustee on behalf of the Trust will
be obligated from time to time, subject to certain conditions described 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 Bank, N.A. ("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")
S-32
<PAGE>
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 related borrower plus accrued interest
thereon expected to be capitalized upon repayment (the "Purchase Collateral
Balance"), (ii) accrued interest on the principal balance owed by the related
borrower not expected to be capitalized upon repayment ("Noncapitalized Accrued
Interest") and (iii) an additional amount not to exceed ___% of the Purchase
Collateral Balance (the "Purchase Premium Amount" and, together with
Noncapitalized Accrued Interest and the Purchase Collateral Balance, the "Loan
Purchase Amount"). Following the end of the Revolving Period, New Loans may not
be purchased by the Trust.
The term "Early Amortization Event" refers to any of the following events:
(i) an Event of Default occurring under the Indenture, a Servicer Default
occurring under the Servicing Agreement or an Administrator Default occurring
under the Administration Agreement;
(ii) certain events of insolvency occurring with respect to the Seller;
(iii) the Trust becomes subject to registration as an investment company
under the Investment Company Act of 1940, as amended;
(iv) as of the end of any Collection Period, the percentage (by principal
balance) of Financed Student Loans the borrowers of which use such loans to
attend schools identified by the related Guarantor as proprietary or vocational
exceeds ___% of the Pool Balance;
(v) as of the end of any Collection Period, the percentage (by principal
balance) of Financed Student Loans which are not in repayment and are not
eligible for Interest Subsidy Payments exceeds _____% of the Pool Balance;
(vi) the Excess Spread, with respect to each of any two successive
Quarterly Payment Dates commencing with the Quarterly Payment Date in
_______________ is less than _____%; or
(vii) the arithmetic average of the Delinquency Percentage as of the end
of each of two successive Collection Periods commencing with the Quarterly
Payment Date in ____________ exceeds _____%.
"Excess Spread" means, with respect to any Quarterly Payment Date, the
percentage equivalent of a fraction the numerator of which is the product of (a)
four and (b) the difference between (x) the 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 and (iv) 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 over 210 days delinquent or (b) have had claims filed with the
Department for which payment is still awaited, and the denominator of which is
the aggregate principal 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 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
S-33
<PAGE>
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" and under "Federal Family Education Loan Program"
herein. 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 $__________;
additionally, no Federal Consolidation Loan may be originated by the Trust
having a scheduled maturity date after __________, _____ if at the time of such
origination the aggregate principal balances of all Federal Consolidation Loans
held by the Trust that have a scheduled maturity date after __________, _____
exceed or, after giving effect to such origination, would exceed $__________;
provided, however, that the Eligible Lender Trustee will be permitted to fund
Add-on Consolidation Loans in excess of such amounts if required to do so by the
Act. After the Revolving Period the Eligible Lender Trustee on behalf of the
Trust will cease to originate Federal Consolidation Loans and any Federal
Consolidation Loan made with respect to a Financed Student Loan will be made by
another lender, thereby resulting in a prepayment of such Financed Student Loan;
provided, however, that for a maximum period of 210 days following the end of
the Revolving Period, the Eligible Lender Trustee may be required to increase
the principal balance of 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 and "Federal Family Education Loan
Program" herein, 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 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
S-34
<PAGE>
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" herein and 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.
Delayed Delivery Student Loans
The Delayed Delivery Student Loans are currently owned by the Seller
through its eligible lender trustee. For certain administrative reasons, the
Seller can not deliver the Delayed Delivery Student Loans to the Eligible Lender
Trustee on behalf of the Trust on the Closing Date. On _________, _____, the
Eligible Lender Trustee on behalf of the Trust will be obligated to acquire the
Delayed Delivery Student Loans from the Seller and the Seller will be obligated
to sell such Student Loans to the Eligible Lender Trustee on behalf of the
Trust. The purchase price for each Delayed Delivery Student Loan will be an
amount equal to the Loan Purchase Amount for such Student Loan. If the Eligible
Lender Trustee, on behalf of the Trust does not use all of the funds on deposit
in the Delayed Delivery Student Loan Funding Account to purchase Delayed
Delivery Student Loans, certain Notes will be redeemed as set forth herein under
"Description of the Notes--Mandatory Redemption".
Accounts
In addition to the collection account (the "Collection Account") referred
to in the Prospectus under "Description of the Transfer and Servicing
Agreements--Accounts", the Administrator will establish and maintain a
collateral reinvestment account (the "Collateral Reinvestment Account"), a
delayed delivery student loan funding account (the "Delayed Delivery Student
Loan Funding Account") and a reserve account (the "Reserve Account") in the name
of the Indenture Trustee on behalf of the Noteholders.
Servicing Compensation; Administration Fee
The Servicer will be entitled to receive from the Trust monthly, on each
Monthly Payment Date or Quarterly Payment Date, a monthly servicing fee (the
"Servicing Fee") in an amount equal to the lesser of (a) one-twelfth of ____% or
such larger percentage approved by the rating agencies rating the Notes, not to
exceed ____% (or of ____% if such Monthly Payment Date or Quarterly Payment Date
is on or after the _____ ____ 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 billing account relating to a 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 billing accounts relating to In-School Student Loans as of such date
was $______ or less, $____ per billing account, (ii) one-twelfth of the GRDF
Percentage of the principal balance as of the last day of the preceding calendar
month of each billing account relating to a 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 billing accounts as
of such date was $______ or less, $____ per billing account, (iii) a fee of
$____ for each notification sent by the Servicer during the preceding calendar
month on behalf of the Trust to a borrower providing information to such
borrower with respect to Federal Consolidation Loan programs, (iv) a one-time
fee of $_____ for each Federal Consolidation Loan originated by the Eligible
Lender Trustee on behalf of the Trust during the preceding calendar month, (v) a
fee of $____ for each Financed Student Loan for which, during the preceding
calendar month, claim documentation was completed and provided to the Guarantor
or for which the Servicer performed bankruptcy or ineligible billing account
processing (that, in the case of ineligible billing 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 $____ per
Financed Student Loan for storing and warehousing the applicable loan
documentation for each such loan during the preceding calendar month, (vii) a
one-time fee of $____ for each billing account 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)
____%, which fee will be payable so long as certain
S-35
<PAGE>
servicing regulations of the Department remain in effect, and (ix) a fee of
$____ per hour for system development requests made by the Eligible Lender
Trustee on behalf of the Trust and provided by the Servicer during the preceding
calendar month.
"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 _____________.
For purposes of making the determinations set forth in clauses (i) and
(ii) of the second preceding paragraph, the "In-School Percentage" and "GRDF
Percentage" shall each be determined based on the average principal balance of
the billing accounts relating to the In-School Student Loans and the billing
accounts relating to 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%
$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, a monthly administration fee (the "Administration Fee")
in an amount equal to one-twelfth of the product of (i) ____% and (ii) the Pool
Balance as of the close of business on the last day of the calendar month
immediately preceding such date.
Distributions
Deposits to 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.
"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 _________, __).
S-36
<PAGE>
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 (net, for the first Collection Period, of interest accrued
prior to the Cutoff Date and not to be capitalized) 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 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 "Federal Family Education Loan Program--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 (vi), 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.
S-37
<PAGE>
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 Noteholders, the Subordinate Noteholders' Interest
Distribution Amount for such Quarterly Payment Date;
(v) 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");
(vi) 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
(vii) to the Reserve Account, any remaining amounts after application of
clauses (i) through (vi) hereof.
For purposes hereof, the following terms have the following meanings:
The "Class A-1 Noteholders' Interest Basis Carryover" means, the sum of
(i) if the Class A-1 Note Rate for any Quarterly Payment Date is based on the
Adjusted Student Loan Rate, the excess of (a) the amount of interest on the
Class A-1 Notes that would have accrued in respect of the related Quarterly
Interest Period had interest been calculated based on the Class A-1 Note LIBOR
Rate over (b) the amount of interest on the Class A-1 Notes actually accrued in
respect of such Quarterly Interest Period based on the Adjusted Student Loan
Rate, and (ii) the unpaid portion of any such excess from prior Quarterly
Payment Dates and interest accrued thereon at the Class A-1 Note Rate calculated
based on the Class A-1 Note LIBOR Rate.
The "Class A-1 Noteholders' Interest Carryover Shortfall" means, with
respect to any Quarterly Payment Date, the excess of (i) the Class A-1
Noteholders' Interest Distribution Amount on the preceding Quarterly Payment
Date over (ii) the amount of interest actually distributed to the Class A-1
Noteholders on 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
S-38
<PAGE>
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 Basis Carryover " means, the sum of
(i) if the Class A-2 Note Rate for any Quarterly Payment Date is based on the
Adjusted Student Loan Rate, the excess of (a) the amount of interest on the
Class A-2 Notes that would have accrued in respect of the related Quarterly
Interest Period had interest been calculated based on the Class A-2 Note LIBOR
Rate over (b) the amount of interest on the Class A-2 Notes actually accrued in
respect of such Quarterly Interest Period based on the Adjusted Student Loan
Rate, and (ii) the unpaid portion of any such excess from prior Quarterly
Payment Dates and interest accrued thereon at the Class A-2 Note Rate calculated
based on the Class A-2 Note LIBOR Rate.
The "Class A-2 Noteholders' Interest Carryover Shortfall" means, with
respect to any Quarterly Payment Date, the excess of (i) the Class A-2
Noteholders' Interest Distribution Amount on the preceding Quarterly Payment
Date over (ii) the amount of interest actually distributed to the Class A-2
Noteholders on 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.
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
S-39
<PAGE>
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 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 Basis Carryover" means, the sum of
(i) if the Subordinate Note Rate for any Quarterly Payment Date is based on the
Adjusted Student Loan Rate, the excess of (a) the amount of interest on the
Subordinate Notes that would have accrued in respect of the related Quarterly
Interest Period had interest been calculated based on the Subordinate Note LIBOR
Rate over (b) the amount of interest on the Subordinate Notes actually accrued
in respect of such Quarterly Interest Period based on the Adjusted Student Loan
Rate, and (ii) the unpaid portion of any such excess from prior Quarterly
Payment Dates and interest accrued thereon at the Subordinate Note Rate
calculated based on the Subordinate Note LIBOR Rate.
The "Subordinate Noteholders' Interest Carryover Shortfall" means, with
respect to any Quarterly Payment Date, the excess of (i) the Subordinate
Noteholders' Interest Distribution Amount on the preceding Quarterly Payment
Date over (ii) the
S-40
<PAGE>
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 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 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) ___% 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) $_______; 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
S-41
<PAGE>
Balance for such Quarterly Payment Date, the Administrator will instruct the
Indenture Trustee to apply the amount of such excess (the "Reserve Account
Excess") (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) if such Quarterly Payment Date is after
the __________ Quarterly Payment 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; (iv) 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;
(v) to the Subordinate Noteholders, the aggregate unpaid amount of any
Subordinate Noteholders' Interest Basis Carryover; (vi) to the Servicer, the
Servicing Fee Shortfall and all prior unpaid Servicing Fee Shortfalls, if any;
and (vii) to the Company, any excess remaining after application of clauses (i)
through (vi) above, and, upon such payment to the Company or an affiliate, 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 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,
and 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
S-42
<PAGE>
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.
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
___________________________ (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 earliest to occur of the _______________ 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
"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
Scheduled 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 "Scheduled Notional Swap Amount" for any Quarterly Payment Date will be the
lesser of (i) the outstanding principal balance of the Notes immediately
preceding such Quarterly Payment Date and (2) the amount listed on Exhibit A
hereto for such Quarterly Payment Date. The Seller expects that the Scheduled
Notional Swap Amount for each Quarterly Payment Date prior to the Swap
Termination Date will be equal to approximately __% of the outstanding principal
amount of the Notes immediately preceding such Quarterly Payment Date. However,
following the Closing Date, USA Group Secondary Market Services, Inc. may agree
with the Swap Counterparty to cause the Scheduled Notional Swap Amount to equal
the outstanding principal balance of the Notes.
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
at least ____% but not more than ____%, (ii) the Scheduled 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 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). 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, to
S-43
<PAGE>
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 agrees in writing, that such amendment will not adversely
affect the interests of the Noteholders. The written consent of the Swap
Counterparty will be required before any amendment is made to the Indenture or
the Transfer and Servicing Agreements.
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 or
an early termination under the Swap Agreement has occurred or been designated.
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. The Trust may not designate an Early
Termination Date without the consent of the Administrator. 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 ___ (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
S-44
<PAGE>
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
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 and the Seller.
The Swap Counterparty. [TO BE INSERTED BY SWAP COUNTERPARTY]
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 __________ 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 plus any Class A-1 Noteholders' Interest Basis Carryover,
Class A-2 Noteholders' Interest Basis Carryover and Subordinate Noteholders'
Interest Basis Carryover and (iii) 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 Quarterly Payment Dates upon terms similar
to those described above. No assurance can be given as to whether the Trustee
will be successful in soliciting acceptable bids to purchase the Financed
Student Loans on either the _______________ Quarterly Payment Date or any
subsequent Quarterly Payment Date.
Optional Redemption
The Company or an assignee of the Company, may at its option purchase from
the Eligible Lender Trustee, as of the end of any Collection Period immediately
preceding a Quarterly Payment Date 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. The Minimum Purchase Price for a purchase occurring
prior to the _____________ Quarterly Payment shall include any termination
payment due to the Swap Counterparty. 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.
FEDERAL FAMILY EDUCATION LOAN PROGRAM
A description of the Federal Family Education Loan Program is provided in
the Prospectus under "Federal Family Education Loan Program." The information
provided below sets forth recent developments and additional information with
respect the Federal Family Education Loan Program.
Recent Developments-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
S-45
<PAGE>
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 expired on
September 30, 1998. The combination of the change to a variable rate and the
8.25% interest cap reduced the lender's yield in most cases below the rate that
would have been applicable under the previous weighted average formula.
Recent Developments--FY 1998 Budget. In the 1997 Budget Reconciliation Act
(P.L. 105-33), several changes were made to the 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).
Recent Developments--1998 Amendments. On May 22, 1998, Congress passed,
and on June 9, 1998, the President signed into law, a temporary measure relating
to the Higher Education Act and FFELP loans as part of the Intermodal Surface
Transportation Efficiency Act of 1998 (the "1998 Amendments") that revised
interest rate changes under the FFELP that were scheduled to become effective on
July 1, 1998. For loans made during the period July 1, 1998 through September
30, 1998, the borrower interest rate for Stafford Loans and Unsubsidized
Stafford Loans is reduced to a rate of 91-day Treasury Bill Rate plus 2.30%
(1.70% during school, grace and deferment), subject to a maximum rate of 8.25%.
As described below, The formula for Special Allowance Payments on Stafford Loans
and Unsubsidized Stafford Loans is calculated to produce a yield to the loan
holder of 91-day Treasury Bill Rate plus 2.80% (2.20% during school, grace and
deferment). The 1998 Amendments also adjusted the interest rate on PLUS Loans
disbursed on or after July 1, 1998 and before October 1, 1998 to a rate of
91-day T-bill plus 3.10%, subject to a maximum rate of 9%, but did not affect
the rate change on Federal Consolidation Loans during the same period which is
fixed at the rate of 91-day T-bill established at the final auction held prior
to June 1, 1998 plus 3.10% subject to a maximum rate of 8.25%. The formula for
Special Allowance Payments for PLUS Loans continues to provide that no Special
Allowance Payments will be paid unless the interest rate formula described in
the preceding sentence produces a rate which exceeds 9%.
Recent Developments--1998 Reauthorization Bill. On October 7, 1998,
President Clinton signed into law the Higher Education Amendments of 1998 (the
"1998 Reauthorization Bill"), which enacted significant reforms in the FFELP.
The major provisions of the 1998 Reauthorization Bill include the following:
o All references to a "transition" to full implementation of the
Federal Direct Loan Program were deleted from the FFELP statute.
o Guarantor reserve funds were restructured so that Federal Guarantors
are provided with additional flexibility in choosing how to spend
certain funds they receive.
o The minimum Federal Guarantor reserve level requirement is reduced
from 0.50% of the total attributable amount of all outstanding loans
guaranteed to 0.25% of the total attributable amount of all
outstanding loans guaranteed.
o Additional recall of reserve funds by the Secretary were mandated,
amounting to $85 million in fiscal year 2002, $82.5 million in
fiscal year 2006, and $82.5 million in fiscal year 2007. However,
certain minimum reserve levels are protected from recall.
o The administrative cost allowance was replaced by two (2) new
payments, a Student Loan processing and issuance fee equal to 65
basis points (40 basis points for loans made on or after October 1,
1993) paid at the time a loan is guaranteed, and an account
maintenance fee of 12 basis points (10 basis points for fiscal years
2001-2003) paid annually on outstanding guaranteed Student Loans.
o The percentage of collections on defaulted Student Loans a Guarantor
is permitted to retain is reduced from 27% to 24% (23% beginning on
October 1, 2003) plus the complement of the reinsurance percentage
applicable at the time a claim was paid to the lender on the Student
Loan.
o Federal reinsurance provided to Federal Guarantors is reduced from
98% to 95% for Student Loans first disbursed on or after October 1,
1998.
o The delinquency period required for a loan to be declared in default
is increased from 180 days to 270 days for loans on which the first
day of delinquency occurs on or after the date of enactment of the
1998 Reauthorization Bill.
S-46
<PAGE>
o Interest rates charged to borrowers on Stafford Loans, and the yield
for Stafford Loan holders established by the 1998 Amendments, were
made permanent.
o Federal Consolidation Loan interest rates were revised to equal the
weighted average of the loans consolidated rounded up to the nearest
one-eighth of 1%, capped at 8.25%. When the 91-day Treasury Bill
Rate plus 3.1% exceeds the borrower's interest rate, Special
Allowance Payments are made to make up the difference.
o The lender-paid offset fee on Federal Consolidation Loans of 1.05%
is reduced to .62% for Loans made pursuant to applications received
on or after October 1, 1998 and on or before January 31, 1999.
o The Direct Consolidation Loan interest rate calculation was revised
to reflect the rate for Federal Consolidation Loans, and will be
effective for loans on which applications are received on or after
February 1, 1999.
o Lenders are required to offer extended repayment schedules to new
borrowers after the enactment of the 1998 Reauthorization Bill who
accumulate after such date outstanding loans under FFELP totaling
more than $30,000, under which schedules the repayment period may
extend up to 25 years subject to certain minimum repayment amounts.
o The Secretary is authorized to enter into six (6) voluntary flexible
agreements with Federal Guarantors under which various statutory and
regulatory provisions can be waived.
o Federal Consolidation Loan lending restrictions are revised to allow
lenders who do not hold one of the borrower's underlying federal
loans to issue a Federal Consolidation Loan to a borrower whose
underlying Federal Loans are held by multiple holders.
o Inducement restrictions were revised to permit Federal Guarantors
and lenders to provide assistance to schools comparable to that
provided to schools by the Secretary under the federal direct
student loan program.
o The Secretary is now required to pay off Student Loan amounts owed
by borrowers due to failure of the borrower's school to make a
tuition refund allocable to the Student Loan.
o Discharge of FFELP and certain other Student Loans in bankruptcy is
now limited to cases of undue hardship regardless of whether the
Student Loan has been in repayment for seven (7) years prior to the
bankruptcy filing.
o All of the Federal Guarantors will be subject to the new recall of
reserves and reduced reinsurance provisions for Federal Guarantors.
The new recall of reserves and reduced reinsurance for Federal
Guarantors increases the risk that resources available to the
Federal Guarantors to meet their guarantee obligations will be
significantly reduced.
Consolidation of Federal Benefit Billings and Receipts with Other Trusts.
Due to a recent change in Department policy limiting the granting of new lender
identification numbers, the Eligible Lender Trustee is allowed under the Trust
Agreement to permit the Trust, and other trusts established by the Seller to
securitize Student Loans, to use a common Department lender identification
number. The billings submitted to the Department for Interest Subsidy Payments
and Special Allowance Payments on the Financed Student Loans will be
consolidated with the billings for such payments for Student Loans in such other
trusts using the same lender identification number and payments on such billings
will be made by the Department in lump sum form. Such lump sum payments will
then be allocated among the various trusts using the lender identification
number.
In addition, the sharing of the lender identification number by the Trust
with other trusts may result in the receipt of claim payments by Federal
Guarantors in lump sum form. In that event, such payments would be allocated
among the trusts in a manner similar to the allocation process for Interest
Subsidy Payments and Special Allowance Payments.
The Department regards the Eligible Lender Trustee as the party primarily
responsible to the Department for any liabilities owed to the Department or
Federal Guarantors resulting from the Eligible Lender Trustee's activities in
the FFELP. As a result, if the Department or a Federal Guarantor were to
determine that the Eligible Lender Trustee owes a liability to the Department or
a Federal Guarantor on any Student Loan for which the Eligible Lender Trustee is
or was legal titleholder, including loans held in the Trust or other trusts, the
Department or such Federal Guarantor may seek to collect that liability by
offset against payments due the Eligible Lender Trustee under the Trust. In the
event that the Department or a Federal Guarantor determines such a liability
exists in connection with a trust using the shared lender identification number,
the Department or such Federal Guarantor would be likely to collect that
liability by offset against amounts due the Eligible Lender Trustee under the
shared lender identification number, including amounts owed in connection with
the Trust.
In addition, other trusts using the shared lender identification number
may in a given quarter incur Federal Origination Fees that exceed the Interest
Subsidy Payments and Special Allowance Payments payable by the Department on the
loans in such
S-47
<PAGE>
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.
Fees Payable on Certain Financed Student Loans. Under the Federal
Consolidation Program, the Trust will be obligated to pay to the Department a
monthly rebate fee (the "Monthly Rebate Fee") at an annualized rate of 1.05%
(0.62% for applications received between October 1, 1998 and January 31, 1999)
of the outstanding principal balance on the last day of each month plus accrued
interest thereon of each Federal Consolidation Loan which is a part of the
Trust, which rebate will be payable prior to distributions to the Noteholders
and which rebate will reduce the amount of funds which would otherwise be
available to make distributions on the Notes and will reduce the Adjusted
Student Loan Rate. In addition, the Trust must pay to the Department a 0.50%
origination fee (the "Federal Origination Fee") on the initial principal balance
of each Financed Student Loan which is originated on its behalf by the Eligible
Lender Trustee (i.e., each Federal Consolidation Loan originated on its behalf
by the Eligible Lender Trustee during the Revolving Period and each Add-on
Consolidation Loan added to a Federal Consolidation Loan in the Trust), which
fee will be deducted by the Department out of Interest Subsidy Payments and
Special Allowance Payments. If sufficient Interest Subsidy Payments and Special
Allowance Payments are not due to the Trust to cover the amount of the Federal
Origination Fee, the balance of such Federal Origination Fee may be deferred by
the Department until sufficient Interest Subsidy Payments and Special Allowance
Payments accrue to cover such fee or may be required to be paid immediately. If
such amounts never accrue, the Trust would be obligated to pay any remaining fee
from other assets of the Trust prior to making distributions to the Noteholders.
The offset of Interest Subsidy Payments and Special Allowance Payments, and the
payment of any remaining fee from other Trust assets will further reduce the
amount of the Available Funds from which payments to the Noteholders may be
made. Furthermore, any offset of Interest Subsidy Payments and Special Allowance
Payments will further reduce the Adjusted Student Loan Rate.
CERTAIN FEDERAL INCOME TAX AND STATE TAX CONSEQUENCES
Stroock & Stroock & Lavan LLP (the "Special Federal Tax Counsel") is of
the opinion that the Senior Notes will properly be characterized as indebtedness
for federal income tax purposes and that the Trust will not be an association
(or publicly traded partnership) taxable as a corporation 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 would
prevail if it were challenged. If 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 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 with respect to 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 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 imposition of an interest rate cap and
the allowance 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, 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.
S-48
<PAGE>
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 exclusive benefit rule under Section 401(a)(2) of ERISA and the
prohibited transaction rules set forth in Section 503 of the Code. See "ERISA
Considerations" in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement relating to the Senior Notes, the Seller has agreed to cause the Trust
to sell to each of the underwriters named below for which [Name of
Representative Underwriter] is acting as 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
- ----------- --------------- ---------------
- ---------------------------
- -----------........... $ $
- ---------------------------
- -----------........... $ $
- ---------------------------
- -----------...........
$ $
- ---------------------------
Total.............. $ $
=
The underwriting agreement provides that the underwriters are obligated to
purchase all of the Senior Notes if any are purchased. The underwriting
agreement provides that if an underwriter defaults the purchase commitments of
non-defaulting underwriters may be increased or the offering of Senior Notes may
be terminated.
The underwriters propose to offer the Senior Notes initially at the public
offering prices on the cover page of this Prospectus Supplement, and to selling
group members at those prices less a concession of ______% per Class A-1 Note
and ________% per Class A-2 Note. The underwriters and such selling group
members may allow a discount of _____% per Class A-1 Note and ______% per Class
A-2 Note on sales to certain other broker dealers. After the initial public
offering, the public offering prices and the concessions and discounts to
dealers may be changed by the representative.
The representative, on behalf of the underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
Senior Notes in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the representative
to reclaim a selling concession from a syndicate member when the Senior Notes
originally sold by such syndicate member are purchased in a syndicate covering
transaction to cover syndicate short positions. Such stabilizing transactions,
syndicate covering transactions and penalty bids may cause the price of the
Senior Notes to be higher than it would otherwise be in the absence of such
transactions. These transactions, if commenced, may be discontinued at any time.
We estimate that our out of pocket expenses for this offering will be
approximately $__________.
The Senior Notes are a new issue of securities with no established trading
market. One or more of the underwriters intend to make a secondary market for
the Senior Notes. However, they are not obligated to do so and may discontinue
making a
S-49
<PAGE>
secondary market for the Senior Notes at any time without notice. No assurance
can be given as to how liquid the trading market for the Senior Notes will be.
The Seller has agreed to indemnify the underwriters against certain
liabilities under the Securities Act, or contribute to payments which 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 [Name of Representative Underwriter] a
structuring fee equal to $___________.
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, LLP Indianapolis, Indiana and for the underwriters by
Stroock & Stroock & Lavan LLP, New York, New York. Edward R. Schmidt, general
counsel of SMS and an executive officer of and general counsel for USA Group,
USA Funds and Loan Services and a member of the board of directors of USA Group
and a member of the board of trustees of USA Group Loan Services, Inc., USA
Group Guarantee Services, Inc. and USA Funds, was formerly a partner of, and of
counsel to, the firm of Krieg DeVault Alexander & Capehart, LLP 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, LLP. Certain federal income tax matters will be passed upon for the
Trust by Stroock & Stroock & Lavan LLP and certain Indiana state income and
corporate income tax matters will be passed upon for the Trust by Krieg DeVault
Alexander & Capehart, LLP.
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 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. Such reports and other information may be inspected and copied at
prescribed rates at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W., Judiciary Plaza, Washington D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Commission maintains an internet site that
will obtain reports and other information regarding the Trust. The address of
that site is http://www.sec.gov.
FORWARD LOOKING STATEMENTS
Information under the heading "Formation of the Trust" and "Federal Family
Education Loan Program" contains various "forward looking statements", which
represent the Seller's expectations or beliefs concerning future events. The
Seller cautions that these statements are further qualified by important factors
that could cause actual results to differ materially from those in the forward
looking statements.
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Senior Notes
of SMS Student Loan Trust _______ - ___ (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
such Global Securities through any of DTC, CEDEL or Euroclear. The Global
Securities will be tradeable as home market instruments in both the European and
U.S. domestic markets. Initial settlements and all secondary trades will settle
in same-day funds.
S-50
<PAGE>
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 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.
S-51
<PAGE>
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;
(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:
S-52
<PAGE>
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
or with the application of tax documentation requirements that are generally
effective with respect to payments made after December 31, 1999. 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 or partnership
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, or (iv) 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 persons 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-53
<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.
1992 Master Agreement.......................................................S-43
1998 Amendments.............................................................S-46
1998 Reauthorization Bill...................................................S-46
91-day Treasury Bills.......................................................S-43
Additional Fundings.........................................................S-32
Additional Guarantor........................................................S-24
Additional Student Loans....................................................S-12
Add-on Consolidation Loans..................................................S-14
Adjusted Student Loan Rate..................................................S-27
Administration Agreement....................................................S-32
Administration Fee..........................................................S-36
Administrator...............................................................S-32
Assumption Payment..........................................................S-44
Available Funds.............................................................S-37
Cede........................................................................S-50
CEDEL.......................................................................S-30
CEDEL Participants..........................................................S-30
Citibank....................................................................S-31
Class A-1 Note Final Maturity Date..........................................S-28
Class A-1 Note LIBOR Rate...................................................S-26
Class A-1 Noteholders.......................................................S-28
Class A-1 Noteholders' Interest Carryover Shortfall.........................S-38
Class A-1 Noteholders' Interest Distribution Amount.........................S-38
Class A-1 Notes.............................................................S-26
Class A-2 Note Final Maturity Date..........................................S-28
Class A-2 Note LIBOR Rate...................................................S-26
Class A-2 Note Rate.........................................................S-26
Class A-2 Noteholders.......................................................S-28
Class A-2 Noteholders' Interest Basis Carryover.............................S-39
Class A-2 Noteholders' Interest Carryover Shortfall.........................S-39
Class A-2 Noteholders' Interest Distribution Amount.........................S-39
Class A-2 Notes.............................................................S-26
Closing Date................................................................S-12
Collateral Reinvestment Account.............................................S-35
Collection Account..........................................................S-35
Collection Period...........................................................S-36
Commission..................................................................S-32
Company.....................................................................S-13
Cooperative.................................................................S-30
Cutoff Date.................................................................S-14
S-54
<PAGE>
Deferral....................................................................S-17
Delayed Delivery Student Loan Funding Account...............................S-35
Delayed Delivery Student Loans..............................................S-12
Delinquency Percentage......................................................S-33
Department..................................................................S-25
Depositaries................................................................S-31
Depositary..................................................................S-31
Determination Date..........................................................S-36
DTC Services................................................................S-31
Early Amortization Event....................................................S-33
Eligible Lender Trustee.....................................................S-12
Euroclear...................................................................S-30
Euroclear Operator..........................................................S-30
Euroclear Participants......................................................S-30
Events of Default...........................................................S-44
Excess Spread...............................................................S-33
Exchange Act................................................................S-50
Exchanged Financed Student Loan.............................................S-34
Exchanged Serial Loan.......................................................S-34
Expected Interest Collections...............................................S-27
Federal Origination Fee.....................................................S-48
FFELP.......................................................................S-12
Financed Student Loans......................................................S-12
Forbearance.................................................................S-17
Global Securities...........................................................S-50
Grace.......................................................................S-17
GRDF Percentage.............................................................S-36
Guarantors..................................................................S-24
Illegality..................................................................S-44
Indenture...................................................................S-26
Indenture Trustee...........................................................S-26
Index Maturity..............................................................S-29
Indirect Participants.......................................................S-29
Initial Financed Student Loans..............................................S-12
Initial Guarantors..........................................................S-23
In-School...................................................................S-17
In-School Percentage........................................................S-36
Interest Rate Swap..........................................................S-43
IRS.........................................................................S-48
LIBOR Determination Date....................................................S-29
LIBOR Reset Period..........................................................S-29
Liquidated Student Loans....................................................S-37
Liquidation Proceeds........................................................S-37
Loan Purchase Amount........................................................S-33
Loan Sale Agreement.........................................................S-32
Lock-In Period..............................................................S-43
S-55
<PAGE>
Minimum Purchase Price......................................................S-45
Monthly Collection Period...................................................S-36
Monthly Payment Date........................................................S-36
Monthly Rebate Fee..........................................................S-48
Morgan......................................................................S-31
NBD.........................................................................S-32
Net Trust Swap Payment......................................................S-43
Net Trust Swap Payment Carryover Shortfall..................................S-39
Net Trust Swap Receipt......................................................S-43
Net Trust Swap Receipt Carryover Shortfall..................................S-39
New Loan....................................................................S-32
New Loans...................................................................S-32
Noncapitalized Accrued Interest.............................................S-33
Non-U.S. Person.............................................................S-53
Noteholders.................................................................S-28
Noteholders' Interest Distribution Amount...................................S-39
Notes.......................................................................S-26
Obligors....................................................................S-27
OID.........................................................................S-48
Parity Date.................................................................S-27
Participants................................................................S-29
Plan........................................................................S-49
Principal Distribution Adjustment...........................................S-39
Principal Distribution Amount...............................................S-39
Purchase Amount.............................................................S-27
Purchase Collateral Balance.................................................S-33
Purchase Premium Amount.....................................................S-33
Quarterly Interest Period...................................................S-26
Quarterly Payment Date......................................................S-26
Rating Agency Downgrade.....................................................S-44
Realized Losses.............................................................S-40
Record Date.................................................................S-26
Reference Banks.............................................................S-29
Repayment...................................................................S-17
Reserve Account.............................................................S-35
Reserve Account Excess......................................................S-42
Reserve Account Initial Deposit.............................................S-12
Revolving Period............................................................S-32
Scheduled Notional Swap Amount..............................................S-43
Scheduled Swap Termination Date.............................................S-43
Secretary...................................................................S-24
Seller......................................................................S-12
Seller Trusts...............................................................S-48
Senior Noteholders..........................................................S-28
Senior Noteholders' Distribution Amount.....................................S-40
Senior Noteholders' Interest Distribution Amount............................S-40
S-56
<PAGE>
Senior Noteholders' Principal Carryover Shortfall...........................S-40
Senior Noteholders' Principal Distribution Amount...........................S-40
Senior Notes................................................................S-26
Serial Loan.................................................................S-33
Serial Loans................................................................S-33
Servicer....................................................................S-32
Servicing Agreement.........................................................S-32
Servicing Fee...............................................................S-35
Servicing Fee Shortfall.....................................................S-36
SMS.........................................................................S-12
Special Federal Tax Counsel.................................................S-48
Specified Reserve Account Balance...........................................S-41
Student Loan Rate Accrual Period............................................S-27
Student Loans...............................................................S-12
Subordinate Noteholders.....................................................S-28
Subordinate Noteholders' Distribution Amount................................S-40
Subordinate Noteholders' Interest Basis Carryover...........................S-40
Subordinate Noteholders' Interest Carryover Shortfall.......................S-40
Subordinate Noteholders' Interest Distribution Amount.......................S-41
Subordinate Noteholders' Principal Carryover Shortfall......................S-41
Subordinate Noteholders' Principal Distribution Amount......................S-41
Subordinate Notes...........................................................S-26
Swap........................................................................S-44
Swap Counterparty...........................................................S-43
Swap Default................................................................S-44
Swap Rate...................................................................S-43
Swap Termination Date.......................................................S-43
Systems.....................................................................S-31
Tax Event...................................................................S-44
T-Bill Rate.................................................................S-43
Telerate Page 3750..........................................................S-29
Termination Events..........................................................S-44
Terms and Conditions........................................................S-30
Three-Month LIBOR...........................................................S-29
Transfer Agreement..........................................................S-32
Transfer and Servicing Agreements...........................................S-32
Transfer Date...............................................................S-34
Trust.......................................................................S-12
Trust Agreement.............................................................S-13
Trust Swap Payment Amount...................................................S-41
Trust Swap Receipt Amount...................................................S-41
U.S. Person.................................................................S-53
Underwriting.................................................................S-2
USA Funds...................................................................S-23
Year 2000 problems..........................................................S-31
S-57
<PAGE>
Exhibit A
Scheduled Notional Amount
Quarterly Interest
Period Ending Scheduled Notional Amount
----------------------- -------------------------
$
<PAGE>
PROSPECTUS
The SMS Student Loan Trusts
Asset-Backed Notes
Asset-Backed Certificates
USA GROUP SECONDARY MARKET SERVICES, INC.,
Seller
- --------------------------------------------------------------------------------
A trust will issue the asset backed notes and the asset backed
certificates described herein in one or more series with one or more classes. A
supplement to this prospectus will set forth the amounts and prices for the
notes and certificates. The source for payment of the notes and certificates
will be collections on a pool of education loans to students and parents of
students.
The notes and certificates will represent interests in the trust and will
be paid only from the assets of the trust. The notes and certificates will be
rated in one of the four highest rating categories by at least one nationally
recognized rating organization. The notes and certificates may have one or more
forms of enhancement.
The noteholders and certificateholders will receive principal and interest
payments from student loan collections.
Consider carefully the factors set forth under "Risk Factors" beginning at
page _____ in this prospectus and in the related prospectus supplement.
Neither the certificates nor the notes are insured or guaranteed by the
Federal Deposit Insurance Corporation or any other governmental agency. The
notes and certificates will represent interests in the trust only and will not
represent interests or obligations of USA Group Secondary Market Services, Inc.
or any USA Group Secondary Market Services, Inc. affiliate.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus or the prospectus supplement to which it relates is truthful or
complete. Any representation to the contrary is a criminal offense.
You should retain this prospectus for future reference. This prospectus
may not be used to consummate sales of notes or certificates offered hereby
unless accompanied by a prospectus.
The date of this prospectus is ______________, _____.
<PAGE>
TABLE OF CONTENTS
SUMMARY OF TERMS..............................................................1
RISK FACTORS..................................................................5
Risk of Loss from Limited Credit Enhancement.............................5
Borrower Default Risk on Certain Student Loans...........................5
Risk of Dependence on Guarantors as Security for Student Loans...........5
Risk of Department of Education's Failure to Pay Guarantee Payments......5
Risk of Loss of Federal Guarantor and Department of Education
Payments for Failure to Comply with Loan Origination and
Servicing Procedures for Student Loans.........6
Risk of Seller or Servicer not Performing on Purchase Obligations........6
Changes in Legislation May Adversely Affect Student Loans and
Federal Guarantors, the Seller or the Servicer........................6
Fees Payable on Certain Student Loans May Reduce Amounts Payable
to You................................................................7
Risk of Consolidation of Federal Benefit Billings and Receipts
with Other Trusts.....................................................7
Failure to Comply with Third-Party Servicer Regulations May
Adversely Affect Loan Servicing.......................................8
Custodial Risk of Servicer...............................................8
Insolvency Risk of Servicer or Administrator.............................9
Insolvency Risk of Servicer or Administrator.............................9
The Investment Return on the Securities Is Uncertain.....................9
Risk of Variability of Actual Cash Flows................................10
Noteholders' Right to Control Upon Certain Defaults may Adversely
Affect Certificateholders............................................10
Consumer Protection Laws May Affect Enforceability of Student Loans.....10
Book-Entry Registration--Beneficial Owners Not Recognized by Trust......10
FORMATION OF THE TRUSTS......................................................12
The Trusts................................................................12
Eligible Lender Trustee...................................................12
USE OF PROCEEDS..............................................................12
USA GROUP, SMS, THE SELLER AND THE SERVICER..................................12
USA Group.................................................................12
SMS.......................................................................14
The Seller................................................................14
The Servicer..............................................................14
THE STUDENT LOAN POOLS.......................................................15
General...................................................................15
Origination and Marketing Process.........................................16
Servicing and Collections Process.........................................16
Claims and Recovery Rates.................................................17
i
<PAGE>
FEDERAL FAMILY EDUCATION LOAN PROGRAM........................................17
General...................................................................17
Legislative and Administrative Matters....................................18
Eligible Lenders, Students and Educational Institutions...................18
Financial Need Analysis...................................................19
Special Allowance Payments................................................19
Federal Stafford Loans....................................................20
Interest................................................................20
Interest Subsidy Payments...............................................21
Loan Limits.............................................................22
Repayment...............................................................22
Grace Periods, Deferral Periods and Forbearance Periods.................23
Federal Unsubsidized Stafford Loans.......................................23
Federal PLUS and Federal SLS Loan Programs................................23
Loan Limits.............................................................24
Interest................................................................24
Repayment, Deferments...................................................24
Federal Consolidation Loan Program........................................25
Federal Guarantors........................................................26
Federal Insurance and Reinsurance of Federal Guarantors...................27
WEIGHTED AVERAGE LIVES OF THE SECURITIES.....................................28
POOL FACTORS AND TRADING INFORMATION.........................................29
DESCRIPTION OF THE NOTES.....................................................30
General...................................................................30
Principal of and Interest on the Notes....................................30
The Indenture.............................................................31
Modification of Indenture...............................................31
Events of Default; Rights upon Event of Default.........................32
Certain Covenants.......................................................33
Annual Compliance Statement.............................................34
Indenture Trustee's Annual Report.......................................34
Satisfaction and Discharge of Indenture.................................34
The Indenture Trustee...................................................34
DESCRIPTION OF THE CERTIFICATES..............................................34
General...................................................................34
Principal and Interest in Respect of the Certificates.....................35
ii
<PAGE>
CERTAIN INFORMATION REGARDING THE SECURITIES.................................35
Fixed Rate Securities.....................................................35
Floating Rate Securities..................................................36
Book-Entry Registration...................................................36
Definitive Securities.....................................................38
List of Securityholders...................................................38
Reports to Securityholders................................................39
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS.........................39
General...................................................................39
Sale of Student Loans; Representations and Warrantes......................39
Additional Fundings.......................................................40
Accounts..................................................................40
Servicing Procedures......................................................41
Payments on Student Loans.................................................42
Servicer Covenants........................................................42
Servicer Compensation.....................................................42
Distributions.............................................................43
Credit and Cash Flow Enhancement..........................................43
General.................................................................43
Reserve Account.........................................................43
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.................................................................46
Payment of Notes..........................................................47
Termination...............................................................47
Optional Redemption.....................................................47
Auction of Student Loans................................................47
Administration Agreement..................................................48
CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS...................................48
Transfer of Student Loans...............................................48
Consumer Protection Laws................................................49
Loan Origination and Servicing Procedures Applicable to Student
Loans.................................................................49
iii
<PAGE>
Student Loans Generally Not Subject to Discharge in Bankruptcy...........50
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.......................................50
TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE...............................51
Tax Characterization of the Trust..........................................51
Tax Consequences to Holders of the Notes...................................51
Treatment of the Notes as Indebtedness...................................51
Original Issue Discount..................................................51
Interest Income on the Notes.............................................51
Sale or Other Disposition................................................52
Foreign Holders..........................................................52
Backup Withholding.......................................................53
Recent Legislation.........................................................53
Tax Consequences to Holders of the Certificates............................53
Classification as a Partnership..........................................54
Treatment of the Trust as a Partnership..................................54
Partnership Taxation.....................................................54
Computation of Income....................................................55
Determining the Bases of Trust Assets....................................55
Discount and Premium.....................................................55
Disposition of Certificates..............................................56
Allocations Between Transferors and Transferees..........................56
Section 754 Election.....................................................56
Administrative Matters...................................................56
Tax Consequences to Foreign Certificateholders...........................57
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
Possible Alternative Treatments of the Notes.............................58
CERTAIN STATE TAX CONSEQUENCES................................................59
Tax Consequences with Respect to the Notes...............................59
Tax Consequences with Respect to the Certificates........................59
ERISA CONSIDERATIONS..........................................................59
The Notes................................................................60
The Certificates........................................................60
iv
<PAGE>
PLAN OF DISTRIBUTION.........................................................61
LEGAL MATTERS................................................................62
AVAILABLE INFORMATION........................................................62
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..............................63
INDEX OF PRINCIPAL TERMS.....................................................64
v
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF TERMS
o This summary highlights selected information from this prospectus and does
not contain all of the information that you need to consider in making
your investment decision. To understand all of the terms of the offering
of the notes and any certificates, you should carefully read this entire
prospectus and the accompanying prospectus.
o This summary provides an overview of certain information to aid your
understanding and is qualified by the full description of this selected
information in this prospectus and the accompanying prospectus supplement.
o You can find a listing of the pages where capitalized terms used in this
prospectus are defined under the caption "Index of Principal Terms"
beginning on page ___ in this prospectus.
Principal Parties
Issuer
The trust to be formed for each series of securities pursuant to a trust
agreement among USA Group Secondary Market Services, Inc., an affiliate of
USA Group Secondary Market Services, Inc. to be specified in the related
prospectus supplement and the eligible lender trustee for that trust.
Seller
USA Group Secondary Market Services, Inc., a Delaware corporation.
Servicer
USA Group Loan Services, Inc., a Delaware non-profit corporation, and/or
any other servicer(s) that is specified in the related prospectus
supplement.
Eligible Lender Trustee
For each trust, the entity specified as the eligible lender trustee in the
related prospectus supplement.
Indenture Trustee
The indenture trustee for a series of securities specified in the related
prospectus supplement under an indenture between the trust and the related
indenture trustee.
Administrator
USA Group Secondary Market Services, Inc. in its capacity as
administrator.
Company
The seller or 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.
Unless otherwise specified in the related prospectus supplement, you will
only be able to purchase notes in denominations of $1,000 and integral
multiples thereof in book-entry form only.
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. The interest rate for each class of notes
may be different. The interest rates may be fixed, variable or adjustable,
or any combination of the foregoing. The related prospectus supplement
will specify the interest rate for each class of notes offered to you or
the method for determining the interest rate.
For 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 and interest rate. 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 a trust agreement. Unless otherwise specified
in the related prospectus supplement, you will only be able to
- --------------------------------------------------------------------------------
<PAGE>
purchase certificates in denominations of $1,000 and integral multiples
thereof in book-entry form.
Unless otherwise specified in the related prospectus supplement, each class
of certificates will have a stated principal amount and will bear interest
at a specified rate or rates. The interest rate for each class of
certificates may be different. The interest rates may be fixed, variable or
adjustable, or any combination of the foregoing. The related prospectus
supplement will specify the interest rate for each class of certificates
offered to you or the method for determining the interest rate.
For a series that includes two or more classes of certificates, each class
may differ as to timing and priority of payments, seniority, allocations of
losses and interest rate. 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.
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, which will include
rights to receive payments made with respect to those student loans and the
proceeds thereof. On or prior to the closing date specified in the related
prospectus supplement with respect to a trust, USA Group Secondary Market
Services, Inc. will sell student loans having an aggregate principal
balance specified in the related prospectus supplement as of the date
specified therein, to the eligible lender trustee on behalf of the trust
pursuant to 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 identified herein and
in the applicable prospectus supplement.
USA Group Secondary Market Services, Inc. will select the student loans to
be sold to any trust based on criteria described herein and in the related
prospectus supplement.
If so provided in the related prospectus supplement, USA Group Secondary
Market Services, Inc. will cause an amount to be deposited on the closing
date in a pre-funding account established by the administrator and used to
purchase subsequent student loans. The trust would purchase subsequent
student loans from USA Group Secondary Market Services, Inc.
In addition, if so provided in the related prospectus supplement, during
the period set forth in the related prospectus supplement, principal will
not be distributed on the securities of the related series. Instead,
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 a collateral reinvestment account and will
be used to purchase additional student loans from USA Group Secondary
Market Services, Inc.
In addition, if specified in the related prospectus supplement, the assets
of the related trust may include certain rights of the seller to receive
excess cashflow in respect of student loans that are owned by one or more
other trusts established or sponsored by the seller. Excess cashflow rights
will not exceed 10% of the assets of any trust. The related prospectus
supplement will disclose certain summary data relating to the excess
cashflow rights.
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 is a guarantor that is reinsured by
the Department of Education for between 75% and 100% (depending on the date
of disbursement of the loan) of the amount of default claims paid by that
federal guarantor for a given federal fiscal year, and for 100% of death,
disability, bankruptcy, ineligible loan, closed school and false
certification claims paid.
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
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
or classes of securities may include any one or more of the following:
o subordination of one or more other classes of securities;
o a reserve account;
o over-collateralization;
o letters of credit;
o credit or liquidity facilities;
o surety bonds;
o guaranteed investment contracts;
o repurchase obligations;
o interest rate swaps, caps or floors;
o currency swaps;
o other agreements with respect to third party payments or other
support; and
o 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.
Transfer and Servicing Agreements
USA Group Secondary Market Services, Inc. will sell the related student
loans to each trust pursuant to a loan sale agreement, with the related
eligible lender trustee holding legal title thereto. The trust will assign
its rights and benefits to the indenture trustee as collateral for the
notes of the related series.
The servicer will agree with the applicable trust to be responsible for
servicing, managing and maintaining the custody of, and making collections
on, the pool of student loans. The servicer will also prepare and file all
appropriate claim forms and other documents and filings on behalf of the
eligible lender trustee in order to make certain claims from the United
States Department of Education in respect of the federal student loans
entitled thereto. In addition, the administrator will undertake certain
administrative duties with respect to the applicable trust under an
administration agreement.
Unless otherwise specified in the related prospectus supplement, USA Group
Secondary Market Services, Inc. will be obligated to repurchase, and the
servicers will be obligated to arrange for the purchase of, any student
loan if the interest of the applicable trust therein is materially
adversely affected by a breach of any representation, warranty or covenant
made by USA Group Secondary Market Services, Inc. or the respective
servicer, as the case may be, if the breach is not cured.
In addition, if so specified in the related prospectus supplement, USA
Group Secondary Market Services, Inc. or the respective servicer, as the
case may be, will be obligated to reimburse the applicable trust for any
accrued interest amounts not guaranteed by a guarantor due, or any interest
subsidy payments or special allowance payments lost as a result of, a
breach of USA Group Secondary Market Services, Inc. representations and
warranties or the respective servicer's covenants, as the case may be, with
respect to any student loan. The liability of USA Group Secondary Market
Services, Inc. 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 equal to a specified percentage of the
principal balance of the student loans serviced by the servicer, as set
forth in the related prospectus supplement, together with any other
administrative fees and similar charges specified in the related prospectus
supplement.
Termination
The obligations of USA Group Secondary Market Services, Inc., the servicer,
the administrator, the eligible lender trustee and the indenture trustee
relating to a particular trust will terminate upon the earlier of (i) the
maturity or other liquidation of the last student loan in that 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.
Optional Redemption
If USA Group Secondary Market Services, Inc. or any other party named in
the related prospectus supplement exercises its option to purchase the
student loans of a trust, your notes will be redeemed and your certificates
will receive a distribution as set forth in the related prospectus
supplement.
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
Mandatory Redemption
The trust will pay to you as a prepayment of principal any amounts on
deposit in any pre-funding account or collateral reinvestment account for a
series that have not been used by the trust to purchase student loans by
the time specified in the related prospectus supplement.
Auction of Student Loans
If so provided in the related prospectus supplement, the trust will offer
all remaining student loans held by a trust for sale on any distribution
date occurring on or after a date specified in that prospectus supplement.
USA Group Secondary Market Services, Inc. and related or unrelated third
parties may offer bids for those remaining student loans. Unless otherwise
provided in the related prospectus supplement, the indenture trustee will
accept the highest bid equal to or in excess of the aggregate unpaid
principal balance owed by the applicable borrowers plus accrued interest
thereon to the day of repurchase of those remaining student loans as of the
end of the collection period specified in the related prospectus supplement
immediately preceding the related distribution date. The trust will use the
proceeds of the sale to redeem all related notes and to retire the related
certificates.
Tax Considerations
Upon the issuance of each series of securities, except as otherwise
provided in the related prospectus supplement, Stroock & Stroock & Lavan
LLP, federal tax counsel to the applicable trust, will deliver an opinion
to the effect that, for federal income tax purposes: (i) the notes of the
related 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, by the
acceptance of a note of a given series, you will agree to treat that note
as indebtedness, and by the acceptance of a certificate of a given series,
you will agree to treat the related trust as a partnership in which the
related certificateholder is a partner for federal income and state income
tax and franchise tax purposes.
Erisa Considerations
Unless otherwise specified in the related prospectus supplement, subject to
the considerations discussed herein, the notes of each series are eligible
for purchase by employee benefit plans or other retirement arrangements.
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 and/or the
Internal Revenue Code, or by any individual retirement account.
- --------------------------------------------------------------------------------
4
<PAGE>
RISK FACTORS
You should consider the following factors and the additional factors
described under "Risk Factors" in the related prospectus supplement, together
with all the information contained in this prospectus and the related prospectus
supplement, before purchasing the securities.
Risk of Loss from Limited Credit
Enhancement...................... An investment in the securities involves a
risk that you may lose all or part of your
investment. Although every trust will include
some form of credit enhancement, that credit
enhancement may not cover every class of
securities issued by a trust. In addition,
every form of credit enhancement will have
certain limitations on, and exclusions from
coverage. As a result, there is always a risk
that you may not recover the full amount of
your investment.
Borrower Default Risk on
Certain Student Loans ........... Each student loan is generally 98% insured by
a federal guarantor. As a result, to the
extent a borrower of a federal loan defaults,
the related trust will experience a loss of
generally 2% of the outstanding principal and
accrued interest on each such federal loan.
The related trust will assign a defaulted
loan to the applicable federal guarantor in
exchange for a guarantee payment on the 98%
guaranteed portion. The related trust may not
have any right to pursue the borrower for the
remaining 2% unguaranteed portion. If the
credit enhancement described in the related
prospectus supplement is not sufficient, you
may suffer a loss
Risk of Dependence on Guarantors
as Security for Student Loans ... All of the student loans will be unsecured.
As a result, the only security for payment of
the student loans are the guarantees provided
under the guarantee agreements between the
eligible lender trustee and the federal
guarantors. The financial condition of a
federal guarantor may be adversely affected
by a number of factors including:
o the amount of claims made against such
federal guarantor as result of borrower
defaults;
o the amount of claims reimbursed to such
federal guarantor from the Department of
Education; and
o changes in legislation that may reduce
expenditures from the Department of Educati
on that support federal guarantors or that
may require federal guarantors to pay more
of their reserves to the Department of
Education.
If the financial status of the federal
guarantors deteriorates, the federal
guarantors may fail to make guarantee
payments to the eligible lender trustee. In
such event, you may suffer delays in the
payment of principal and interest on your
securities.
Risk of Department of Education's
Failure to Pay Guarantee
Payments ........................ If a federal guarantor is unable to meet its
insurance obligations, the related trust may
submit claims directly to the Department of
Education for payment. The Department of
Education's obligation
5
<PAGE>
to pay guarantee claims directly to the
related trust is dependent upon the
Department of Education's determining that
the federal guarantor is unable to meet its
insurance obligations. If the Department of
Education delays in making such a
determination, you may suffer a delay in the
payment of principal and interest on your
securities. In addition, if the Department of
Education determines that such federal
guarantor is able to meet its insurance
obligations, the Department of Education will
not make guarantee payments to the related
trust. If the credit enhancement described in
the related prospectus supplement is not
sufficient to cover the federal guarantor's
obligations to the related trust, you may
suffer a loss on your investment.
Risk of Loss of Federal Guarantor
and Department of Education
Payments for Failure to Comply
with Loan Origination and
Servicing Procedures for
Student Loans .................. The Higher Education Act requires lenders and
their assignees making and servicing student
loans that are reinsured by the Department of
Education and guarantors guaranteeing student
loans to follow specified procedures, to
ensure that the student loans are properly
made and repaid. If the servicer fails to
follow these procedures or if the originator
of the loans fails to follow procedures
relating to the origination of any student
loans, the Department of Education may refuse
to make reinsurance payments to the federal
guarantors or to make interest subsidy
payments and special allowance payments to
the eligible lender trustee. In addition,
under such circumstances the federal
guarantors may refuse to make guarantee
payments to the related trust. The failure of
the Department of Education to provide
reinsurance payments to the federal
guarantors could adversely affect the federal
guarantors' ability or legal obligation to
make payments under the guarantee agreements
to the related trust. Loss of any such
guarantee payments, interest subsidy payments
or special allowance payments could adversely
affect the related trust's ability to pay you
timely interest and principal. In such event,
you may suffer a loss on your investment.
Risk of Seller or Servicer not
Performing on Purchase
Obligations. ................... USA Group Secondary Market Services, Inc. or
the servicer will be obligated to purchase
from the applicable trust student loans with
respect to which it materially breaches
representations, warranties or covenants. You
can not be sure, however, that USA Group
Secondary Market Services, Inc. or the
servicer will have the financial resources to
purchase such student loans. The failure to
so purchase a student loan would not
constitute an event of default under the
related indenture or permit the exercise of
remedies thereunder. However, the breach of
such representations, warranties or covenants
may cause you to suffer a loss on your
investment.
Changes in Legislation May
Adversely Affect Student Loans,
Federal Guarantors, the Seller or
the Servicer .................... You can not be certain that the Higher
Education Act or other relevant federal or
state laws, rules and regulations will not be
6
<PAGE>
amended or modified in the future in a manner
that will adversely affect the federal
student loan programs described in this
prospectus, the student loans made thereunder
or the financial condition of the federal
guarantors, the seller or the servicer.
In addition, if the direct student loan
program expands, the servicers may experience
increased costs due to reduced economies of
scale or other adverse effects on their
business to the extent the volume of loans
serviced by the servicer is reduced. Such
cost increases could reduce the ability of
the servicer to satisfy its obligations to
service the student loans or to purchase
student loans in the event of certain
breaches of its covenants.
Fees Payable on Certain Student
Loans May Reduce Amounts Payable
to You .......................... Each trust will be obligated to pay to the
Department of Education a monthly rebate at
an annualized rate of generally 1.05% (or
0.62% for loans for which the application was
received between October 1, 1998 and January
31, 1999) of the outstanding principal
balance on each federal consolidation loan
which is a part of the related trust. This
rebate will be payable prior to distributions
made to you. In addition, the trust must pay
to the Department of Education a 0.50%
origination fee on the initial principal
balance of each student loan which is
originated on its behalf by the eligible
lender trustee subsequent to the applicable
closing date. This fee will be deducted by
the Department of Education out of interest
subsidy payments and special allowance
payments otherwise payable to the trust(s).
In such event the amount available to be
distributed to you will be reduced. Under
certain circumstances, the related trust is
obligated to pay any portion of the unpaid
fee from other assets of the related trust
prior to making distributions to you. As a
result, the payment of the rebate fee and
origination fee to the Department of
Education will affect the amount and timing
of payments to you. Moreover, if the
origination fee is deducted from interest
subsidy payments and special allowance
payments the interest rate payable on your
securities may be capped at a lower rate. In
such event, the value of your investment may
be impaired.
Risk of Consolidation of Federal
Benefit Billings and Receipts with
Other Trusts .................... Due to a Department of Education policy
limiting the granting of new lender
identification numbers, all of the trusts
established by the seller to securitize
federal student loans may use a common
Department of Education lender identification
number. The Department of Education regards
the eligible lender trustee as the party
primarily responsible to the Department of
Education for any liabilities owed to the
Department of Education or federal guarantors
resulting from the eligible lender trustee's
activities in the federal family education
loan program. In the event that the
Department of Education or a federal
guarantor determines such a liability exists
in connection with a trust using the shared
lender identification number, the Department
of Education or such federal guarantor may
collect that liability or offset such
liability from amounts due the eligible
lender trustee under the shared
7
<PAGE>
lender identification number. As a result, a
trust may suffer a liability as the result of
another trust.
The trust agreements for the trusts
established by USA Group Secondary Market
Services, Inc. which share a lender
identification number will require each such
trust to indemnify the other trusts for a
shortfall or an offset by the Department of
Education or a federal guarantor arising from
the student loans held by the eligible lender
trustee on such trust's behalf. In the event
the amount available for indemnification by
one trust to another trust is insufficient,
you may suffer a loss on your investment as a
result of the performance of another trust.
Failure to Comply with Third-Party
Servicer Regulations May Adversely
Affect Loan Servicing ........... The Department of Education regulates each
servicer of federal student loans. Under
certain of these regulations, a third-party
servicer (such as the servicer) is jointly
and severally liable with its client lenders
for liabilities to the Department of
Education arising from the servicer's
violation of applicable requirements. In
addition, if the servicer fails to meet
standards of financial responsibility or
administrative capability included in the
regulations, or violates other requirements,
the Department of Education may fine the
servicer and/or limit, suspend, or terminate
the servicer's eligibility to contract to
service federal student loans. If a servicer
were so fined or held liable, or its
eligibility were limited, suspended, or
terminated, its ability to properly service
the student loans and to satisfy its
obligation to purchase student loans with
respect to which it breaches its
representations, warranties or covenants
could be adversely affected. Moreover, if the
Department of Education terminates a
servicer's eligibility, a servicing transfer
will take place and there will be delays in
collections and temporary disruptions in
servicing. Any servicing transfer will at
least temporarily adversely affect payments
to you.
Custodial Risk of Servicer....... The servicer as custodian on behalf of a
trust, with respect to the student loans it
services, 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 of the seller will be marked to
indicate the sale and although the seller
will cause UCC financing statements to be
filed with the appropriate authorities, the
student loans will not be physically
segregated, stamped or otherwise marked to
indicate that such student loans have been
sold to the 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 such student loans for new
value and without knowledge of the eligible
lender trustee's interest.
8
<PAGE>
Insolvency Risk of Servicer,
Administrator or Seller.......... In the event of a default by the servicer or
an administrator resulting solely from
certain events of insolvency or bankruptcy, a
court, conservator, receiver or liquidator
may have the power to prevent either the
indenture trustee or the noteholders from
appointing a successor servicer or
administrator, as the case may be, and delays
in collections in respect of the student
loans may occur. Any delay in the collections
of student loans may delay payments to you.
If the seller becomes subject to bankruptcy
proceedings, you could experience losses or
delays in the payments on your securities.
The seller will sell the student loans to a
trust. However, if the seller becomes subject
to a bankruptcy proceeding, the court in the
bankruptcy proceeding could conclude that the
seller effectively still owns the student
loans by concluding that the sale to the
trust was not a "true sale" or that the trust
should be consolidated with the seller for
bankruptcy purposes. If the court were to
reach this conclusion, you could experience
losses or delays in payments on your
securities.
The seller has taken and will take steps in
structuring the transactions described in
this prospectus and in the related prospectus
supplement to minimize the risk that a court
would consolidate the seller with the trust
for bankruptcy purposes or conclude that the
sale of the student loans to the trust was
not a "true sale."
The Investment Return on the
Securities Is Uncertain.......... The return on your investment in the
securities of any series will depend on (1)
the price paid by you for your securities,
(2) the rate at which interest accrues on
your securities and (3) the rate at which you
receive a return of the principal and,
consequently, the length of time that your
securities are outstanding and accruing
interest. The last factor is the biggest
uncertainty in an investment in the
securities.
An obligor may prepay a student loan in whole
or in part, at any time. The likelihood of an
obligor prepaying a student loan is higher as
a result of certain federal loan
consolidation programs. In addition, a trust
may receive other unscheduled payments from
liquidations due to default, including
receipt of guarantee payments and certain
other student loans purchased or repurchased
by a servicer or USA Group Secondary Market
Services, Inc. The rate of prepayments on the
student loans may be influenced by a variety
of economic, social, competitive and other
factors, including changes in interest rates,
the availability of alternative financings
and the general economy. Because a pool will
include thousands of student loans that are
payable by obligors, it is impossible to
predict the amount and timing of payments
that will be received and paid to
securityholders in any month or over the
period of time that the securities of a
series remain outstanding. In addition, the
student loans may be extended which may
lengthen the remaining term of the student
loans and delay payments to you. The seller's
or other entity's option to terminate a trust
early and, the possibility that all of any
pre-funded amount or any collateral
reinvestment amount will not be used to
purchase subsequent student loans, creates
9
<PAGE>
additional uncertainty regarding the timing
of payments to securityholders.
The different amounts of principal payments
on the securities and the uncertainty of the
timing of those payments creates reinvestment
risk. Reinvestment risk refers to the fact
that you may not be able to invest the
payments on the securities received by you at
a rate that is equal to or greater than the
rate of interest borne by your securities.
Risk of Variability of Actual
Cash Flows....................... Amounts received by the related trust for a
particular collection period may vary greatly
from the payments actually due on the student
loans for such collection period for a
variety of economic, social and other
factors. The amount available for
distribution to you will be reduced by the
failure of borrowers to pay timely the
principal and interest due on the related
student loans. In addition, the failure of a
guarantor to timely meet its guarantee
obligations with respect to the student loans
could also reduce the amount of funds
available for distribution to you on a given
distribution date. The effect of such factors
is impossible to predict.
Noteholders' Right to Control
Upon Certain Defaults may
Adversely Affect
Certificateholders .............. In the event of a default by the servicer or
the administrator, the indenture trustee or
the noteholders may remove a servicer or the
administrator, as the case may be, without
the consent of the eligible lender trustee or
any of the certificateholders. In addition,
the noteholders have the ability, with
certain specified exceptions, to waive
defaults by the servicer or the
administrator, including defaults that could
materially adversely affect the
certificateholders.
Consumer Protection Laws May
Affect Enforceability
of Student Loans................. Numerous federal and state consumer
protection laws and related regulations
impose substantial requirements upon lenders
and servicers involved in consumer finance.
Also, some state laws impose finance charge
ceilings and other restrictions on certain
consumer transactions and require contract
disclosures in addition to those required
under federal law. These requirements impose
specific statutory liability that could
affect an assignee's ability to enforce
consumer finance contracts such as the
student loans. In addition, the remedies
available to the indenture trustee or the
noteholders 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--
Beneficial Owners Not
Recognized by Trust............. Issuance of the securities in book-entry form
may reduce the liquidity of these securities
in the secondary trading market since
investors may be unwilling to purchase
securities for which they cannot obtain
physical certificates. Since transactions in
the securities can be effected only through
The Depository Trust Company, Cedelbank,
Euroclear, participating organizations,
indirect participants and certain banks, your
ability to pledge a security to persons or
entities that do not participate in The
10
<PAGE>
Depository Trust Company, Cedelbank or
Euroclear system or otherwise to take actions
in respect of such securities may be limited
due to lack of a physical certificate
representing the securities. You may
experience some delay in the receipt of
distributions of interest and principal on
the securities since such distributions will
be forwarded by the trustee to The Depository
Trust Company and The Depository Trust
Company will credit such distributions to the
accounts of its participants which will
thereafter credit them to your account either
directly or indirectly through indirect
participants.
11
<PAGE>
FORMATION OF THE TRUSTS
The Trusts
With respect to each series of securities, the seller will establish a
separate trust (each a "Trust") pursuant to the respective trust agreement (each
a "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
education loans to students and parents of students (the "Student Loans"), legal
title to which is held by the related eligible lender trustee (the "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 date specified in the related prospectus
supplement (the "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 be appointed
the custodian of the promissory notes representing the Student Loans 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 Higher Education Act and
the guarantee agreements. Failure of the Federal Student Loans to be owned by an
eligible lender would result in the loss of any federal guarantee payments from
any federal guarantor and any Federal Assistance with respect to such Federal
Student Loans. See "Federal Family Education Loan Program-Eligible Lenders,
Students and Educational Institutions" and "-Federal Insurance and Reinsurance
of Federal Guarantors." An Eligible Lender Trustee's liability in connection
with the issuance and sale of the Notes and the Certificates is limited solely
to the express obligations of the Eligible Lender Trustee set forth in the
related trust agreement and the related loan sale agreement. See "Description of
the Transfer and Servicing Agreements." 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, USA Group Loan
12
<PAGE>
Services, Inc. ("Loan Services"), USA Group Secondary Market Services, Inc.
("SMS" and as seller, the "Seller"), USA Group Guarantee Services, Inc. ("USA
Group Guarantee Services"), and USA Group Enterprises, Inc.
The purposes of USA Group are exclusively charitable and educational. The
primary mission of USA Group is to provide overall direction and strategic
planning to its nonprofit member corporations and its for profit subsidiaries.
USA Group's corporate objectives are:
-- to foster education and encourage the continuation of studies;
-- to promote, provide and participate in means for the attainment of
higher education;
-- to establish, maintain, administer and expend funds in furtherance
and in support of education objectives, activities and projects;
-- to provide a central clearing point for information, conferences and
other exchanges;
-- to perform servicing functions for the holders of loans that enable
students to attend universities, colleges and schools;
-- to otherwise advance the cause of education finance and support to
students at universities, colleges and schools.
To fulfill its corporate mission and objectives, USA Group provides
administrative, financial and various other corporate support services to its
member corporations and subsidiaries.
The affiliated corporations of USA Group provide education finance
services in a variety of forms. Those education finance services provided by USA
Group affiliated corporations currently include (i) maintaining facilities for
the provision of guarantee services with respect to approved education loans
made to or for the benefit of eligible students who are enrolled at or plan to
attend approved educational institutions; (ii) providing guarantees for
education loans made pursuant to the Act as well as for loans made under Private
Loan Programs; (iii) assisting guarantee agencies in managing and maintaining
their education loan programs; (iv) serving pursuant to designation by the state
or territory as guarantor for the education loan programs of Alaska, Arizona,
Hawaii, Indiana, Kansas, Maryland, Mississippi, Nevada, Wyoming and certain
Pacific Islands; (v) performing achievement and need-based scholarship
processing for corporations, foundations and benefit societies; (vi) offering
financial management services to certain guarantee agencies to assist them in
planning for the future and in meeting the financial challenges facing
guarantors; (vii) providing and performing education loan purchase functions for
the holders of loans made to facilitate attendance of students at universities,
colleges and schools; (viii) providing conversion services, data processing and
other assistance necessary in connection with the acquisition and servicing of
education loans by primary lenders and secondary markets; and (ix) acquiring
student loan notes held by eligible lenders under the Federal Family Education
Loan Program (as defined below).
In addition to the above activities, USA Funds is affiliated with USA
Group Guarantee Services, a Delaware private, non-profit corporation, which
provides varying degrees of services to the following guarantee agencies:
Student Loan Guarantee Foundation of Arkansas, Iowa College Student Aid
Commission, Louisiana Office of Student Financial Assistance, Finance Authority
of Maine, Michigan Guaranty Agency, Montana Guaranteed Student Loan Program, New
Mexico Student Loan Guarantee Corporation, Northwest Education Loan Association,
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.
13
<PAGE>
SMS
SMS was organized on November 19, 1992, and is a Delaware corporation. SMS
is an affiliate of USA Group.
The related supplement to this prospectus (a "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. Loan Services, or
such other servicer(s) as is specified in the related Prospectus Supplement (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.
Year 2000 Compliance
The Seller, Loan Services and USA Funds, utilize a significant number of
computer software programs and operating systems and are highly dependent on
computer systems operated by third parties which include, but are not limited
to, the Department of Education (the "Department"), their suppliers, customers,
brokers and agents and the telephone, electric and utility companies. To the
extent that any computer system relied upon by the Seller, Loan Services and USA
Funds or any third party, has software applications and contains source codes
that are unable to
14
<PAGE>
appropriately interpret the upcoming calendar year 2000, some level of
modification or replacement of such applications or hardware may be necessary.
The year 2000 issue is the result of prior computer programs being written using
two digits, rather than four digits, to define the applicable year. Any computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. Any such occurrence could result in a
major computer system failure or miscalculations.
The Seller, Loan Services and USA Funds currently are assessing the impact
of modifications or replacements required to adjust for the year 2000. The
Seller, Loan Services and USA Funds are utilizing both internal and external
resources to identify, correct or reprogram and test their systems for year 2000
compliance. It is anticipated that all reprogramming efforts and necessary
testing will be completed prior to the year 2000. The Seller, Loan Services and
USA Funds have initiated formal communications with those third parties on whom
they will rely to determine the extent to which the Seller, Loan Services and
USA Funds are vulnerable to the failure of these third parties to remediate
their own year 2000 issue. However, there can be no assurance that the systems
of third parties on which the systems of the Seller, Loan Services and USA Funds
rely will be converted in a timely fashion, or that a failure to convert by a
third party, or a conversion that is incompatible with the systems of the
Seller, Loan Services and USA Funds, would not have an adverse effect on the
business, financial condition or results of operations of the Seller, Loan
Services and USA Funds. The dates on which the Seller, Loan Services and USA
Funds plan to complete their year 2000 modifications are based on their best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans (including, the Department) and other factors. However, there
can be no assurance that these estimates will be achieved and actual results
could differ materially from such estimates. Specific factors that might cause
such material differences include, but are not limited to: (i) the availability
and cost of personnel trained in this area, (ii) the ability to locate and
correct all relevant computer codes, and (iii) similar uncertainties.
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 (the "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
(a "Guarantor" or a "Federal Guarantor") which is 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 by which each Federal Student
Loan will be guaranteed as to principal and interest by a Federal Guarantor
(each a "Guarantee Agreement") 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 20% by principal balance of the Student Loans comprising a
Trust will be more than 30 days delinquent as of the cut-off date specified in
the related Prospectus Supplement (the "Cut-off Date") for such Trust.
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.
15
<PAGE>
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 (a "Funding
Period") or revolving period (a "Revolving Period"), the circumstances under
which Additional Fundings will be made during such period, and, if Additional
Fundings may continue to be made after such period, the circumstances under
which such Additional Fundings will be made.
In addition, if specified in the related Prospectus Supplement, the assets
of the related Trust may include certain rights of the Seller to receive excess
cashflow ("Excess Cashflow Rights") in respect of Student Loans that are owned
by one or more other Trusts established or sponsored by the Seller. Excess
Cashflow Rights will not exceed 10% of the assets of any Trust. The related
Prospectus Supplement will disclose certain summary data relating to the Excess
Cashflow Rights.
Origination and Marketing Process
The Higher Education Act of 1965, as amended (such Act, together with all
rules and regulations promulgated thereunder by the Department and/or the
Guarantor (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 Federal Consolidation Loans.
Servicing and Collections Process
The applicable Guarantee Agreements and the Act require the holder of
Student Loans to cause specified procedures, including due diligence procedures
and the taking of specific steps at specific intervals, to be performed with
respect to the servicing of the Student Loans. These procedures are designed to
ensure that such Student Loans are repaid on a timely basis by or on behalf of
borrowers. The Servicer agrees to perform such servicing and collection
procedures with respect to the Student Loans on behalf of each Trust pursuant to
the related Loan Servicing Agreement. Such procedures generally include periodic
attempts to contact any delinquent borrower by telephone and by mail, commencing
with one written notice within the first ten days of delinquency and including
multiple written notices and telephone calls to the borrower thereafter at
specified times during any such delinquency. All telephone calls and letters are
automatically registered, and a synopsis of each call or the mailing of each
letter is noted in the Servicer's loan file for the borrower. The Servicer is
also required to perform skip tracing procedures on delinquent borrowers whose
current location is unknown, including contacting such borrowers' schools and
references. Failure to comply with the established procedures could adversely
affect the ability of a given Eligible Lender Trustee, as holder of legal title
to the Student Loans on behalf of the related Trust, to realize the benefits of
any Guarantee Agreement or to receive the benefits of Federal Assistance from
the Department with respect thereto. Failure to comply with certain of the
established procedures with respect to a Student Loan may also result in the
denial of coverage under a Guarantee Agreement for certain accrued interest
amounts, in circumstances
16
<PAGE>
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 specified in the related Prospectus Supplement (the
"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
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 100% to 75% of the
amount of each Guarantee Payment made pursuant to a program of federal
reinsurance under the Act. In addition, the related Eligible Lender Trustee, as
a holder of 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
17
<PAGE>
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-Changes in
Legislation May Adversely Affect Student Loans and Federal Guarantors."
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, and the Higher Education Act Amendments of 1998 (the "1998
Reauthorization Bill") further extended the principal provisions of FFELP
through June 30, 2003.
The 1993 Act made a number of changes to the Federal Student Loan
programs, including imposing on lenders or holders of Federal Student Loans
certain fees and affecting the Department's financial assistance to Federal
Guarantors by reducing the percentage of claim payments the Department will
reimburse to Federal Guarantors, reducing more substantially the insurance
premiums and default collections that Federal Guarantors are entitled to receive
and/or retain and allowing the Department to reduce the administrative fees it
pays to Federal Guarantors. In addition, such legislation contemplated
replacement of a minimum of approximately 60% of the Federal Student Loan
programs with direct lending by the Department by 1998. The expansion of the new
program may involve increasing reductions in the volume of loans made under the
existing programs, which could result in increased costs for SMS and the
Servicer due to reduced economies of scale. It is expected that the volume of
new loans held and serviced by SMS and the Servicer will decrease due to the new
program, although such entities have not experienced such a reduction to date
and any such reduction will not necessarily be equal to the percentage by which
existing Federal Student Loan programs are replaced by the new program. As these
reductions occur, SMS and the Servicer could experience increased costs due to
reduced economies of scale to the extent the volume of loans held by SMS and the
Servicer is reduced. Such cost increases could affect the ability of the
Servicer to satisfy its obligations to service the Student Loans or the
obligations of the Seller and the Servicer to repurchase Student Loans in the
event of certain breaches of their respective representations and warranties or
covenants. See "Description of the Transfer and Servicing Agreements--Sale of
Student Loans; Representations and Warranties" and"--Servicer Covenants". Such
volume reductions could also reduce revenues received by Federal Guarantors that
are available to pay claims on defaulted Student Loans. Finally, the level of
competition in existence in the secondary market for loans made under the
existing programs could be reduced, resulting in fewer potential buyers of the
Federal Student Loans and lower prices available in the secondary market for
those loans. Further, the Department is implementing a direct consolidation loan
program, which may further reduce the volume of Federal Student Loans and
increase the prepayment of existing FFELP Loans. The volume of existing loans
that may be prepaid in this fashion is not determinable at this time. The
Emergency Student Loan Consolidation Act of 1997 authorizes FFELP loan
originators to consolidate direct loans into Federal Consolidated Loans. This
provision applies to loan applications received on or after November 13, 1997.
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 academic 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.
18
<PAGE>
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 is expected to contribute towards the
student's cost of education (the "family contribution"). After receiving
information on the family contribution, the institution then subtracts the
family contribution from the cost for the student to attend such institution to
determine the student's eligibility for grants, loans, and work assistance. The
difference between the amount of grants and Federal Stafford Loans for which the
borrower is eligible and the student's estimated cost of attendance (the "Unmet
Need") may be borrowed through Federal Unsubsidized Stafford Loans subject to
annual and aggregate loan limits prescribed in the Act. Parents may finance the
family contribution amount through their own resources or through Federal PLUS
Loans.
Special Allowance Payments
The Act provides for quarterly special allowance payments ("Special
Allowance Payments") to be made by the Department to holders of Federal Student
Loans to the extent necessary to ensure that such holder receives at least a
specified market interest rate of return on such loans. The rates for Special
Allowance Payments are based on formulas that differ according to the type of
loan, the date the loan was originally made or insured and the type of funds
used to finance such loan (tax-exempt or taxable). A Special Allowance Payment
is made for each of the 3-month periods ending March 31, June 30, September 30
and December 31. The Special Allowance Payment equals the average unpaid
principal balance (including interest permitted to be capitalized) of all
eligible loans held by such holder during such period multiplied by the special
allowance percentage. The special allowance percentage is computed by (i)
determining the average of the bond equivalent rates of 91-day Treasury bills
auctioned for such 3-
19
<PAGE>
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 First 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)
07/01/98 - 06/30/03 2.20% (Federal Stafford Loans and Federal
Unsubsidized Stafford Loans that are In-School,
Grace or Deferment); 2.80% (Federal Stafford
Loans and Federal Unsubsidized Loans that are in
repayment) and 3.10% for 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; 8% for 48 months, 3.25%
thereafter, 91-Day Treasury then 10%
+ Interest 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 Margin Deferment); 3.10% (in
repayment)
On or after 07/01/98....... 91-Day Treasury + Interest 8.25% 1.70% (In-School, Grace or
Rate Margin Deferment); 2.30% (in
repayment)
</TABLE>
20
<PAGE>
- --------------
(1) The Trigger Date for Federal Stafford Loans made before October 1, 1992
is the first day of enrollment period for which a borrower's first
Federal Stafford Loan is made and for Federal Stafford Loans made on
October 1, 1992 and after the Trigger Date is the date of the
disbursement of a borrower's first Federal Stafford Loan.
(2) The rate for variable rate Federal Stafford Loans applicable for any
12-month period beginning on July 1 and ending on June 30, is determined
on the preceding June 1 and is equal to the lesser of (a) the applicable
Maximum Rate or (b) the sum of (i) the bond equivalent rate of 91-day
Treasury bills auctioned at the final auction held prior to such June 1
and (ii) the applicable Interest Rate Margin.
The 1992 Amendments provide that, for fixed rate loans made on or after
July 23, 1992 and for certain loans made to new borrowers on or after July 1,
1988, the lender must have converted by January 1, 1995 the interest rate on
such loans to an annual interest rate adjusted each July 1 equal to (a) for
certain loans made between July 1, 1988 and July 23, 1992, the 91-day Treasury
bill rate at the final auction prior to the preceding June 1 plus 3.25%, (b) for
loans made on or after July 23, 1992 and prior to July 1, 1998, the 91-day
Treasury bill rate at the final auction prior to the preceding June 1 plus
3.10%, and (c) for loans made on or after July 1, 1998, the 91-day Treasury bill
rate at the final auction prior to the preceding June 1 plus 2.2% (In-School,
Grace or Deferment) or 2.8% (in repayment) 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 of Loss of Federal Guarantor and
Department of Education Payments for Failure to Comply with Loan Origination and
Servicing Procedures for Student Loans", "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--Risk of Variability of Actual Cash Flows". The
Servicer has agreed to prepare and file with the Department all such claims
forms and any other required documents or filings on behalf of each Eligible
Lender Trustee as owner of the related Federal Student Loans on behalf of each
Trust. The Servicer has also agreed to assist each Eligible Lender Trustee in
monitoring, pursuing and obtaining such Interest Subsidy Payments and Special
Allowance Payments, if any, with respect to such Federal Student Loans. Each
Eligible Lender Trustee will be required to remit Interest Subsidy Payments and
Special Allowance Payments it receives with respect to such Federal Student
Loans within two business days of receipt thereof to the related Collection
Account.
Loan Limits. The Act requires that loans be disbursed by eligible lenders
in at least two separate and equal disbursements; except that for schools with a
cohort default rate of less than 10% for the three most recent fiscal years for
which data is available, loans for a period of enrollment of not more than one
semester, trimester or quarter, or of not more than four months, may be
disbursed in a single disbursement. The Act limited the amount a student
21
<PAGE>
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
-------------- ----------------------------
Base Amount Additional
Subsidized and Unsubsidized Maximum
Subsidized Unsubsidized only on or Aggregate
Borrower's Academic Subsidized on or after on or after after Total
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 $ 5,000 $ 5,000 $ 10,500
Graduate (per year)...... $ 5,000 $ 7,500 $ 8,500 $ 10,000 $ 18,500
Aggregate Limit;
Undergraduate....... $ 12,500 $ 17,250 $ 23,000 $ 23,000 $ 46,000
Graduate (including
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 is
enrolled in a program that is less than one academic year or has less than a
full academic year remaining in his or her program. The Department has
discretion to raise these limits to accommodate highly specialized or
exceptionally expensive courses of study.
Repayment. Repayment of principal on a Federal Stafford Loan generally
does not commence while a student remains a qualified student, but generally
begins upon expiration of the applicable Grace Period, as described below. Any
borrower may voluntarily prepay without premium or penalty any loan and in
connection therewith may waive any Grace Period or Deferral Period. In general,
each loan must be scheduled for repayment over a period of not more than ten
years after the commencement of repayment. New borrowers on or after October 7,
1998 who accumulate outstanding loans under FFELP totaling more than $30,000 are
entitled to extended repayment schedules of up to 25 years subject to certain
minimum repayment amounts. The Act currently requires minimum annual payments of
$600 or, if greater, the amount of accrued interest for that year, unless the
borrower and the lender agree to lesser payments. Effective July 1, 1993, the
Act and regulations promulgated thereunder require lenders to offer the choice
of a standard, graduated or income-sensitive repayment schedule to all borrowers
who receive a loan on or after that date.
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").
22
<PAGE>
However, during certain other periods (each, a "Deferral
Period") and subject to certain conditions, no principal repayments need be
made, including periods when the student has returned to an eligible educational
institution on a full-time basis or is pursuing studies pursuant to an approved
graduate fellowship program, or when the student is a member of the United
States Armed Forces or a volunteer under the Peace Corps Act or the Domestic
Volunteer Service Act of 1973, or when the borrower is temporarily totally
disabled, or periods during which the borrower may defer principal payments
because of temporary financial hardship. For new borrowers to whom loans are
first disbursed on or after July 1, 1993, payment of principal may be deferred
only while the borrower is at least a half-time student or is in an approved
graduate fellowship program or is enrolled in a rehabilitation program, or when
the borrower is seeking but unable to find full-time employment, subject to a
maximum deferment of three years, or when for any reason the lender determines
that payment of principal will cause the borrower economic hardship, also
subject to a maximum deferment of three years. The 1992 Amendments also permit
and in some cases require forbearance of loan collection in certain
circumstances (each such period, a "Forbearance Period").
Federal Unsubsidized Stafford Loans
The Federal Unsubsidized Stafford Loan program created under the 1992
Amendments is designed for students who do not qualify for the maximum Federal
Stafford Loan due to parental and/or student income and assets in excess of
permitted amounts. The basic requirements for Federal Unsubsidized Stafford
Loans are essentially the same as those for the Federal Stafford Loans,
including with respect to provisions governing the interest rate, the annual
loan limits and the Special Allowance Payments. The terms of the Federal
Unsubsidized Stafford Loans, however, differ in some respects. The federal
government does not make Interest Subsidy Payments on Federal Unsubsidized
Stafford Loans. The borrower must either begin making interest payments within
60 days after the time the loan is disbursed or permit capitalization of the
interest by the lender until repayment begins. Federal Unsubsidized Stafford
Loan borrowers who obtained such loans on or after October 1, 1992 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.
23
<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 06/30/98............... 91-Day Treasury + Interest Rate Margin 9% 3.10%
</TABLE>
- ---------------
(1) The Trigger Date for PLUS and SLS loans made before October 1, 1992 is
the first day of enrollment period for which the loan is made, and for
PLUS and SLS loans made on October 1, 1992 and after the Trigger Date
is the date of the disbursement of the loan, respectively.
(2) For PLUS or SLS loans that carry a variable rate, the rate is set
annually for 12-month periods beginning on July 1 and ending on June 30
on the preceding June 1 and is equal to the 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
24
<PAGE>
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. The 1998 Reauthorization Bill allows lenders to
make Federal Consolidation Loans to borrowers with multiple holders of
underlying FFELP loans even if the lender does not hold an outstanding loan. A
borrower who is unable to obtain a Federal Consolidation Loan from an eligible
lender or a Federal Consolidation Loan with an income-sensitive repayment plan
acceptable to the borrower may obtain a Federal Consolidation Loan under the
direct loan program. Federal Consolidation Loans that were made on or after July
1, 1994 have no minimum loan amount, although Federal Consolidation Loans for
less than $7,500 must be repaid in ten years. Applications for Federal
Consolidation Loans received on or after January 1, 1993 but prior to July 1,
1994, were available only to borrowers who had aggregate outstanding student
loan balances of at least $7,500; for applications received before January 1,
1993, Federal Consolidation Loans are available only to borrowers who have
aggregate outstanding student loan balances of at least $5,000. The borrowers
must be either in repayment status or in a grace period preceding repayment and,
for applications received prior to January 1, 1993, the borrower must not have
been delinquent by more than 90 days on any student loan payment; for
applications received on or after January 1, 1993, delinquent or defaulted
borrowers are eligible to obtain Federal Consolidation Loans if they will
reenter repayment through loan consolidation. For applications received on or
after January 1, 1993, borrowers may, within 180 days of the origination of a
Federal Consolidation Loan, add additional loans made prior to consolidation
("Add-on 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, student loan borrowers may include
federal direct loans in Federal Consolidation Loans.
Federal Consolidation Loans made prior to July 1, 1994 bear interest at a
rate which equals the weighted average of interest rates on the unpaid principal
balances of outstanding loans, rounded up to the nearest whole one percent, with
a minimum rate of 9%. For Federal Consolidation Loans made on or after July 1,
1994 through November 12, 1997, such weighted average interest rate must be
rounded up to the nearest whole percent. Federal Consolidation Loans made on or
after November 13, 1997 through September 30, 1998 will bear interest at the
annual variable rate applicable to Stafford Loans. Federal Consolidation Loans
for which the application is received on or after October 1, 1998 bear interest
at a rate equal to the weighted average interest rate of the loans consolidated,
rounded up to the nearest one-eighth of one percent and capped at 8.25%.
Interest on Federal Consolidation Loans accrues and, for applications received
prior to January 1, 1993, is to be paid without Interest Subsidy by the
Department. For Federal Consolidation Loans received on or after January 1,
1993, all interest of the borrower is paid during all periods of Deferment.
However, Federal Consolidation Loan applications received on or after August 10,
1993 will only be subsidized if all of the underlying loans being consolidated
were subsidized Federal Stafford Loans; provided, however, that in the case of
Federal Consolidation Loans made on or after November 13, 1997, that portion of
the Federal Consolidation Loan that is comprised of Subsidized Stafford Loans
will retain its subsidy benefits during periods of deferment. Borrowers may
elect to accelerate principal payments without penalty. Further, no insurance
premium may be charged to a borrower and no insurance premium may be charged to
a lender in connection with a Federal Consolidation Loan. However, a fee may be
charged to the lender by a Federal Guarantor to cover the costs of increased or
extended liability with respect to a 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 (0.62% for loans for which applications were received
between October 1, 1998 and January 31, 1999). Special Allowance Payments are
made on Consolidation Loans whenever the rate charged the borrower is limited by
the 9%/8.25% cap. However, for applications received on or after October 1,
1998, Special Allowance Payments are paid in order to afford the lender a yield
equal to the 91-day T-bill plus 3.1%, whenever that formula exceeds the
borrower's interest rate.
Repayment of Federal Consolidation Loans begins within 60 days after
discharge of all prior loans which are consolidated. Repayment schedule options
must include, for applications received on or after January 1, 1993, the
establishment of graduated or income sensitive repayment plans, subject to
certain limits applicable to the sum of the Federal Consolidation Loan and the
amount of the borrower's other eligible student loans outstanding. The lender
may, at its option, include such graduated and income sensitive repayment plans
for applications received
25
<PAGE>
prior to that date. Generally, depending on the total of loans outstanding,
repayment may be scheduled over periods no shorter than ten but not more than 25
years in length. For applications received on or after January 1, 1993, the
maximum maturity schedule is 30 years for Federal Consolidation Loans of $60,000
or more.
All eligible loans of a borrower paid in full through consolidation are
discharged in the consolidation process when the new Federal Consolidation Loan
is issued.
Federal Guarantors
The Act authorizes Federal Guarantors to support education financing and
credit needs of students at post-secondary schools. The Act encourages every
state either to establish its own agency or to designate another Federal
Guarantor in cooperation with the Secretary. Under various programs throughout
the United States of America, Federal Guarantors insure and sometimes service
guaranteed student loans. The Federal Guarantors are reinsured by the federal
government for from 80% to 100% of each default claim paid, depending on their
claims experience, for loans disbursed prior to October 1, 1993, from 78% to 98%
of each default claim paid for loans disbursed on or after October 1, 1993 and
prior to October 1, 1998 and from 75% to 95% of each default claim paid for
loans disbursed on or after October 1, 1998. Federal Guarantors are reinsured by
the federal government for 100% of death, disability, bankruptcy, closed school
and false certification claims paid. Loans guaranteed under the lender of last
resort provisions of the Act are also 100% guaranteed and reinsured.
See"--Federal Insurance and Reinsurance of Federal Guarantors" below.
Federal Guarantors collect a one-time insurance premium ranging up to 1%
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 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. 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.
26
<PAGE>
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 more 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, ineligible loan, the death of a student whose parent is the borrower
of a Federal PLUS Loan or claims by borrowers who received loans on or after
January 1, 1986 and who are unable to complete the programs in which they are
enrolled due to school closure or borrowers whose borrowing eligibility was
falsely certified by the eligible institution; such claims are not included in
calculating a Federal Guarantor's claims rate experience for federal reinsurance
purposes. The Department also agrees to reimburse a Federal Guarantor for 100%
of the amounts expended in connection with claims on loans made under the lender
of last resort provisions. The Department is also required to repay the unpaid
balance of any loan if the borrower files for relief under Chapter 12 or 13 of
the Bankruptcy Code or files for relief under Chapter 7 or 11 of the Bankruptcy
Code and has been in repayment for more than 7 years or commences an action for
a determination of dischargeability under Section 523(a)(8)(b) of the Bankruptcy
Code, and is authorized to acquire the loans of borrowers who are at high risk
of default and who request an alternative repayment option from the Department.
Effective for bankruptcy actions commenced by the borrower on or after October
8, 1998, student loans will not be discharged unless there is an undue hardship
determination made by the bankruptcy court.
The amount of such reinsurance payment to the Federal Guarantor for
default claims is subject to reduction based upon the annual default claims rate
of the Federal Guarantor, calculated to equal the amount of federal reinsurance
claims paid by the Department to the Federal Guarantor during any fiscal year as
a percentage of the original principal amount of guaranteed loans in repayment
at the end of the prior federal fiscal year. The formula is summarized as
follows:
<TABLE>
<CAPTION>
Claims Rate of Federal Guarantor Reimbursement to Federal Guarantor by the Department of Education(1)
- -------------------------------- --------------------------------------------------------------------
<S> <C>
0% to and including 5%................. 100%
Greater than 5% to and including 9%.... 100% of claims to and including 5%; 90% of claims greater than 5%
Greater than 9%........................ 100% of claims to and including 5%; 90% of claims greater than 5%
to and including 9%; and 80% of claims greater than 9%
</TABLE>
- -----------------
(1) The federal reimbursement has been reduced to 98%, 88% and 78% for loans
disbursed on or after October 1, 1993 and prior to October 1, 1998 and
95%, 85% and 75% for loans disbursed on or after October 1, 1998.
The claims experience is not accumulated from year to year, but is
determined solely on the basis of claims in any one federal fiscal year compared
with the original principal balance of loans in repayment at the beginning of
that year.
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
27
<PAGE>
January 1, 1996. If the Federal Guarantor fails to achieve the minimum reserve
level in any two consecutive years, if the Federal Guarantor's federal annual
claims rate equals or exceeds 9% or if the Department determines the Federal
Guarantor's administrative or financial condition jeopardizes its continued
ability to perform its responsibilities, the Department may require the Federal
Guarantor to submit and implement a management plan to address the deficiencies.
The Department may terminate the Federal Guarantor's agreements with the
Department if the Guarantor fails to submit the required plan, or fails to
improve its administrative or financial condition substantially, or if the
Department determines the Federal Guarantor is in danger of financial collapse.
In such event, the Department is required to assume responsibility for the
functions of such Federal Guarantor and in connection therewith is authorized to
undertake specified actions to assure the continued payment of claims, including
maturity advances to Federal Guarantors to cover immediate cash needs,
transferring of guarantees to another Federal Guarantor, or transfer of
guarantees to the Department itself. No assurance can be made that the
Department will under any given circumstance exercise its right to terminate a
reimbursement agreement with a Federal Guarantor or make a determination that
such Federal Guarantor is unable to meet its guarantee obligations.
The Act requires that, subject to compliance with the Act, the Secretary
must pay all amounts, which may be required to be paid under the Act as a result
of certain events of death, disability, bankruptcy, school closure or false
certification by the educational institution described therein. It further
provides that Federal Guarantors shall be deemed to have a contractual right
against the United States of America to receive reinsurance in accordance with
its provisions. In addition, the 1992 Amendments provide that if the Department
determines that a Federal Guarantor is unable to meet its insurance obligations,
holders of loans may submit insurance claims directly to the Department until
such time as the obligations are transferred to a new Federal Guarantor capable
of meeting such obligations or until a successor Federal Guarantor assumes such
obligations. No assurance can be made that the Department would under any given
circumstances assume such obligation to assure satisfaction of a guarantee
obligation by exercising its right to terminate a reimbursement agreement with a
Federal Guarantor or by making a determination that such Federal Guarantor is
unable to meet its guarantee obligations.
WEIGHTED AVERAGE LIVES OF THE SECURITIES
The weighted average lives of the Notes and the Certificates of any series
will generally be influenced by the rate at which the principal balances of the
related Student Loans are paid, which payment may be in the form of scheduled
amortization or prepayments. (For this purpose, the term "prepayments" includes
prepayments in full or in part (including pursuant to Federal Consolidation
Loans), as a result of (i) borrower default, death, disability or bankruptcy,
(ii) a closing of or a false certification by the borrower's school and (iii)
subsequent liquidation of the loans or collection of Guarantee Payments with
respect thereto and as a result of Student Loans being repurchased by the Seller
or the Servicer for administrative reasons.) All of the Student Loans are
prepayable at any time without penalty to the borrower. The rate of prepayment
of Student Loans is influenced by a variety of economic, social and other
factors, including as described below and in the applicable Prospectus
Supplement. In general, the rate of prepayments may tend to increase to the
extent that alternative financing becomes available at prevailing interest rates
which fall significantly below the interest rates applicable to the Student
Loans. However, because many of the Student Loans bear interest that either
actually or effectively is floating, it is impossible to predict whether changes
in prevailing interest rates will be 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
28
<PAGE>
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 principal balance for such class of Certificates
(the "Certificate Balance"), respectively, as of that Distribution Date (after
giving effect to distributions to be made on such Distribution Date), as a
fraction of the initial outstanding principal amount of such class of the Notes
or the initial Certificate Balance for such class of Certificates, respectively.
Each Pool Factor will be 1.0000000 as of the Closing Date, and thereafter will
decline to reflect reductions in the outstanding principal amount of the
applicable class of Notes or reductions of the Certificate Balance of the
applicable class of Certificates, as applicable. A Securityholder's portion of
the aggregate outstanding principal amount of the related class of Notes or of
the aggregate outstanding Certificate Balance for the related class of
Certificates, as applicable, is the product of (i) the original denomination of
that Securityholder's Note or Certificate and (ii) the applicable Pool Factor.
If so provided in the related Prospectus Supplement with respect to a
Trust, the Securityholders will receive reports on or about each Distribution
Date concerning the payments received on the Student Loans, the Pool Balance (as
such term is defined in the related Prospectus Supplement, the "Pool Balance"),
the applicable Pool Factor and various other items of information.
Securityholders of record during any calendar year will be furnished information
for tax reporting purposes not later than the latest date permitted by law. See
"Certain Information Regarding the Securities--Reports to Securityholders".
DESCRIPTION OF THE NOTES
General
With respect to each Trust, one or more classes of notes (the "Notes") of
a given series will be issued pursuant to the terms of an indenture (an
"Indenture") between the Trust and the trustee specified in the related
Prospectus Supplement (an "Indenture Trustee"), 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
29
<PAGE>
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 at a per annum interest rate (the "Interest Rate") and amount of or
method of determining payments of principal and interest on each class of Notes
of a given series will be described in the related Prospectus Supplement. The
right of holders of any class of Notes to receive payments of principal and
interest may be senior or subordinate to the rights of holders of any other
class or classes of Notes of such series, as described in the related Prospectus
Supplement. Unless otherwise provided in the related Prospectus Supplement,
payments of interest on the Notes of such series will be made prior to payments
of principal thereon. Each class of Notes may have a different Interest Rate,
which may be a fixed, variable or adjustable Interest Rate or any combination of
the foregoing. The related Prospectus Supplement will specify the Interest Rate
for each class of Notes of a given series or the method for determining such
Interest Rate. See also "Certain Information Regarding the Securities--Fixed
Rate Securities" and "Floating Rate Securities". One or more classes of the
Notes of a series may be redeemable in whole or in part under the circumstances
specified in the related Prospectus Supplement, including as a result of the
exercise by the Seller, or such other party as may be named in the related
Prospectus Supplement, of its option to purchase the related Student Loans.
Unless otherwise specified in the related Prospectus Supplement,
Noteholders of all classes within a series will have the same priority with
respect to payments of interest. Under certain circumstances, the amount
available for such payments could be less than the amount of interest payable on
the Notes on any of the dates specified for payments in the related Prospectus
Supplement (each, a "Distribution Date"), in which case each class of
Noteholders will receive its ratable share (based upon the aggregate amount of
interest due to such class of Noteholders) of the aggregate amount available to
be distributed in respect of interest on the Notes of such series. See
"Description of the Transfer and Servicing Agreements-Distributions" and "Credit
and Cash Flow Enhancement".
In the case of a series of Notes which includes two or more classes of
Notes, the sequential order and priority of payment in respect of principal and
interest, and any schedule or formula or other provisions applicable to the
determination thereof, of each such class will be set forth in the related
Prospectus Supplement. Payments in respect of principal and interest of any
class of Notes will be made on a pro rata basis among all the Noteholders of
such class.
In the case of a series of Notes relating to a Trust having a Pre-Funding
Account or Collateral Reinvestment Account, the Notes of such series will be
redeemed in part on the Distribution Date on or immediately following the last
day of the related Funding Period or Revolving Period, respectively, in the
event that any amount remains on deposit in the applicable account after giving
effect to all Additional Fundings on or prior to such date, in an aggregate
principal amount described in the related Prospectus Supplement.
See "Description of the Transfer and Servicing Agreements-Credit and Cash
Flow Enhancement-Reserve Account" for a description of the Reserve Account and
the distribution of amounts in excess of the Specified Reserve Account Balance
(as defined in the related Prospectus Supplement).
The Indenture
Modification of Indenture. With respect to each Trust, with the consent of
the holders of a majority of the outstanding Notes of the related series, the
Indenture Trustee and the Trust may execute a supplemental indenture to add
provisions to, or change in any manner or eliminate any provisions of, the
Indenture with respect to the Notes, or to modify (except as provided below) in
any manner the rights of the related Noteholders.
30
<PAGE>
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 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
31
<PAGE>
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
662/3% of the aggregate principal amount of such Notes then outstanding.
Subject to the provisions of the applicable Indenture relating to the
duties of the related Indenture Trustee, if an Event of Default should occur and
be continuing with respect to a series of Notes, the related Indenture Trustee
will be under no obligation to exercise any of the rights or powers under the
applicable Indenture at the request or direction of any of the holders of such
Notes, if such Indenture Trustee reasonably believes it will not be adequately
indemnified against the costs, expenses and liabilities which might be incurred
by it in complying with such request. Subject to such provisions for
indemnification and certain limitations contained in the related Indenture, the
holders of a majority in principal amount of the outstanding Notes of a given
series will have the right to direct the time, method and place of conducting
any proceeding or any remedy available to such Indenture Trustee and the holders
of a majority in principal amount of such Notes then outstanding may, in certain
cases, waive any default with respect thereto, except a default in the payment
of principal or interest or a default in respect of a covenant or provision of
the applicable Indenture that cannot be modified without the waiver or consent
of all the holders of such outstanding Notes.
Unless otherwise specified in the related Prospectus Supplement, no holder
of Notes of any series will have the right to institute any proceeding with
respect to the related Indenture, unless (i) such holder previously has given to
the applicable Indenture Trustee written notice of a continuing Event of
Default, (ii) the holders of not less than 25% in principal amount of such
outstanding Notes have requested in writing that such Indenture Trustee
institute such proceeding in its own name as Indenture Trustee, (iii) such
holder or holders have offered such Indenture Trustee reasonable indemnity, (iv)
such Indenture Trustee has for 60 days failed to institute such proceeding, and
(v) no direction inconsistent with such written request has been given to such
Indenture Trustee during such 60-day period by the holders of a majority in
principal amount of such outstanding Notes.
32
<PAGE>
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.
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.
33
<PAGE>
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 (the
"Certificates" and together with the Notes, the "Securities") 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 Seller or an affiliate of the
Seller specified in the related Prospectus Supplement (the "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").
Principal and Interest in Respect of the Certificates
The timing and priority of distributions, seniority, allocations of
losses, interest at a per annum interest rate (the "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--
34
<PAGE>
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.
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
35
<PAGE>
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
Persons acquiring beneficial ownership interests in the Notes may hold
their interests through The Depository Trust Company ("DTC") in the United
States or Cedel or Euroclear in Europe and persons acquiring beneficial
ownership interests in the Certificates may hold their interests through DTC.
Securities will be registered in the name of Cede & Co. ("Cede") as nominee for
DTC. Cedel and Euroclear will hold omnibus positions with respect to the Notes
on behalf of Cedel Participants and the Euroclear Participants, respectively,
through customers' securities accounts in Cedel's and Euroclear's name on the
books of their respective depositaries (collectively, the "Depositaries") which
in turn will hold such positions in customers' securities accounts in the
Depositaries' names on the books of DTC.
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 Seller or an
affiliate of the Seller 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
36
<PAGE>
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.
NONE OF THE TRUST, THE SELLER, THE SERVICER, THE COMPANY, THE
ADMINISTRATOR, THE ELIGIBLE LENDER TRUSTEE, THE INDENTURE TRUSTEE NOR THE
UNDERWRITERS WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO ANY PARTICIPANTS,
CEDEL PARTICIPANTS OR EUROCLEAR PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS
NOMINEES WITH RESPECT TO (1) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC,
CEDEL OR EUROCLEAR OR ANY PARTICIPANT, (2) THE PAYMENT BY DTC, CEDEL OR
EUROCLEAR OR ANY PARTICIPANT OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN
RESPECT OF THE PRINCIPAL AMOUNT OF OR INTEREST ON THE SECURITIES, (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 SECURITYHOLDERS OR (4) ANY
OTHER ACTION TAKEN BY DTC AS THE SECURITYHOLDER.
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
Seller or an affiliate of the Seller, 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.
37
<PAGE>
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 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
38
<PAGE>
Agreement. Each Eligible Lender Trustee will, concurrently with such sale and
assignment, execute, authenticate and deliver the related Certificates and
Notes. The net proceeds received from the sale of the related Notes and
Certificates will be applied to the purchase of the Student Loans.
In each Loan Sale Agreement, the Seller will make certain representations
and warranties with respect to the Student Loans to a Trust for the benefit of
the Certificateholders and the Noteholders of a given series, including, among
other things, that (i) each Student Loan, on the date on which it is transferred
to such Trust, is free and clear of all security interests, liens, charges and
encumbrances and no offsets, defenses or counterclaims with respect thereto have
been asserted or threatened; (ii) the information provided with respect to the
Student Loans is true and correct as of the Cutoff Date; and (iii) each Student
Loan, at the time it was originated, complied and, at the Closing Date, complies
in all material respects with applicable federal and state laws (including,
without limitation, the Act) and applicable restrictions imposed by FFELP or any
Guarantee Agreement.
Unless otherwise provided in the related Prospectus Supplement, following
the discovery by or notice to the Seller of a breach of any representation or
warranty with respect to any Student Loan that materially and adversely affects
the interests of the related Certificateholders or the Noteholders in such
Student Loan (it being understood that any such breach that does not affect any
Guarantor's obligation to guarantee payment of such Student Loan will not be
considered to have such a material adverse effect), the Seller will, unless such
breach is cured within 60 days, repurchase such Student Loan from the related
Eligible Lender Trustee, as of the first day following the end of such 60-day
period that is the last day of a Collection Period, at a price equal to the
unpaid principal balance owed by the applicable borrower plus accrued interest
thereon to the day of repurchase (the "Purchase Amount"). Alternatively, the
Seller may, at its option, remit all or a portion of the Purchase Amount by
substituting into the related Trust a Student Loan that meets certain criteria
set forth in the related Loan Sale Agreement for the Student Loan as to which
the breach has occurred. In addition, the Seller will reimburse the related
Trust for any accrued interest amounts that a 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
39
<PAGE>
amounts remaining on deposit therein will be distributed to the related
Securityholders in the amounts described in the related Prospectus Supplement.
If and to the extent specified in the related Prospectus Supplement, the
related Trust may use distributions on the Student Loans, or may exchange
Student Loans with the Seller, in order to pay for Additional Fundings after any
Funding Period or Revolving Period.
Accounts
With respect to each Trust, the Administrator will establish and maintain
with the applicable Indenture Trustee one or more accounts, in the name of the
Indenture Trustee on behalf of the related Noteholders and Certificateholders,
into which all payments made on or with respect to the related Student Loans
will be deposited (the "Collection Account"). Any other accounts to be
established with respect to a Trust, including any Reserve Account, any
Pre-Funding Account and any Collateral Reinvestment Account, will be described
in the related Prospectus Supplement.
For any series of Securities, funds in the Collection Account, any Reserve
Account, any Pre-Funding Account, any Collateral Reinvestment Account and any
other accounts identified as such in the related Prospectus Supplement
(collectively, the "Trust Accounts") will be invested as provided in the
applicable Trust Indenture in Eligible Investments. "Eligible Investments" are
generally limited to investments acceptable to the Rating Agencies as being
consistent with the rating of such Securities. Except as described below or in
the related Prospectus Supplement, Eligible Investments are limited to
obligations or securities that mature not later than the business day
immediately preceding the next applicable Distribution Date. However, to the
extent permitted by the Rating Agencies, funds in any Reserve Account may be
invested in securities that will not mature prior to the date of the next
distribution with respect to such Securities and will not be sold to meet any
shortfalls. Thus, the amount of cash in any Reserve Account at any time may be
less than the balance of the Reserve Account. If the amount required to be
withdrawn from any Reserve Account to cover shortfalls in collections on the
related Student Loans (as provided in the related Prospectus Supplement) exceeds
the amount of cash in the Reserve Account, a temporary shortfall in the amounts
distributed to the related Noteholders or Certificateholders could result, which
could, in turn, increase the average lives of the Notes or the Certificates of
such series. Except as otherwise specified in the related Prospectus Supplement,
investment earnings on funds deposited in the Trust 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
40
<PAGE>
with, all standards and procedures provided for in the Act, the Guarantee
Agreements and all other applicable federal and state laws.
Without limiting the foregoing, the duties of the Servicer with respect to
each Trust under the related Loan Servicing Agreement include, but are not
limited to, the following: collecting and depositing into the Collection Account
all payments with respect to the Student Loans, including claiming and obtaining
any Guarantee Payments, any Interest Subsidy Payments and Special Allowance
Payments with respect to the Student Loans, responding to inquiries from
borrowers under the Student Loans, investigating delinquencies and sending out
statements and payment coupons. In addition, the Servicer will keep ongoing
records with respect to such Student Loans and collections thereon and will
furnish monthly and annual statements with respect to such information to the
Administrator, in accordance with the Servicer's customary practices with
respect to the Seller and as otherwise required in the related Loan Servicing
Agreement.
If so provided in the related Prospectus Supplement, the Servicer may act
as a master servicer and may from time to time perform its servicing obligations
under the applicable Loan Sale Agreement through subservicing agreements with
affiliated or unrelated third-party loan servicers.
Payments on Student Loans
With respect to each Trust, the Servicer will deposit into the related
Collection Account, within two business days after receipt of freely available
funds, all payments on Student Loans and all proceeds of Student Loans received
by it during each collection period specified in the related Prospectus
Supplement (each, a "Collection Period"). The Eligible Lender Trustee will
deposit into the Collection Account, within two business days after receipt, all
Interest Subsidy Payments and all Special Allowance Payments with respect to the
Student Loans received by it during each Collection Period.
Servicer Covenants
With respect to each Trust, the Servicer will covenant in the related Loan
Servicing Agreement that: (a) it will duly satisfy all obligations on its part
to be fulfilled under or in connection with the Student Loans, maintain in
effect all qualifications required in order to service the Student Loans and
comply in all material respects with all requirements of law in connection with
servicing the Student Loans, the failure to comply with which would have a
materially adverse effect on the related Certificateholders or Noteholders; (b)
it will not permit any rescission or cancellation of a Student Loan except as
ordered by a court of competent jurisdiction or other government authority or as
otherwise consented to by the related Eligible Lender Trustee and the related
Indenture Trustee; (c) it will do nothing to impair the rights of the related
Certificateholders and the related Noteholders in the Student Loans; and (d) it
will not reschedule, revise, defer or otherwise compromise with respect to
payments due on any Student Loan except pursuant to any applicable deferral or
forbearance periods or otherwise in accordance with its guidelines for servicing
student loans in general and those of the Seller in particular and any
applicable FFELP or Guarantor requirements.
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
41
<PAGE>
Payments and Special Allowance Payments that are lost or that must be repaid to
the Department with respect to a Student Loan, as a result of a breach of any
such covenant of the Servicer.
Servicer Compensation
Unless otherwise specified in the related Prospectus Supplement with
respect to any Trust, the Servicer will be entitled to receive the Servicing Fee
for each Collection Period at the specified percentage per annum (as set forth
in the related Prospectus Supplement) of the average Pool Balance for the
related Collection Period together with any other administrative fees and
similar charges specified in the related Prospectus Supplement, as compensation
for performing the functions as servicer for the related Trust described above
(the "Servicing Fee"). The Servicing Fee (together with any portion of the
Servicing Fee that remains unpaid from prior Distribution Dates) will be paid
prior to any payment in respect of the related Securities, as specified in the
applicable Prospectus Supplement.
The Servicing Fee will compensate the Servicer for performing the
functions of a third-party servicer of student loans as an agent for their
beneficial owner, including collecting and posting all payments, responding to
inquiries of borrowers on the Student Loans, investigating delinquencies,
pursuing, filing and directing the payment of any Guarantee Payments, Interest
Subsidy Payments or Special Allowance Payments, accounting for collections and
furnishing periodic accounting reports to the Administrator.
Distributions
With respect to each series of Securities, beginning on the Distribution
Date specified in the related Prospectus Supplement, distributions of principal
and interest on each class of such Securities entitled thereto will be made by
the applicable Trustee to the Noteholders and the Certificateholders of such
series. The timing, calculation, allocation, order, source, priorities of and
requirements for all payments to each class of Noteholders and all distributions
to each class of Certificateholders of such series will be set forth in the
related Prospectus Supplement.
With respect to each Trust, collections on the related Student Loans will
be distributed from the Collection Account on each Distribution Date to
Noteholders and Certificateholders to the extent provided in the related
Prospectus Supplement. Credit and cash flow enhancement, such as a Reserve
Account, will be available to cover any shortfalls in the amount available for
distribution on such date to the extent specified in the related Prospectus
Supplement. As more fully described in the related Prospectus Supplement, and
unless otherwise specified therein, distributions in respect of principal and/or
interest of a class of Securities of a given series will be subordinate to
distributions in respect of interest on one or more other classes of such
series, and distributions in respect of the Certificates of such series may be
subordinate to payments in respect of the Notes of such series.
Credit and Cash Flow Enhancement
General. The amounts and types of credit enhancement arrangements and the
provider thereof, if applicable, with respect to each class of Securities of a
given series, if any, will be set forth in the related Prospectus Supplement. If
and to the extent provided in the related Prospectus Supplement, credit
enhancement may be in the form of subordination of one or more classes of
Securities, Reserve Accounts, over-collateralization, letters of credit, credit
or liquidity facilities, surety bonds, guaranteed investment contracts,
repurchase obligations, interest rate swaps, interest rate caps, interest rate
floors, currency swaps, other agreements with respect to third party payments or
other support, cash deposits or such other arrangements as may be described in
the related Prospectus Supplement or any combination of two or more of the
foregoing. If specified in the applicable Prospectus 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
42
<PAGE>
the entire principal balance and interest thereon. If losses occur which exceed
the amount covered by any credit enhancement or which are not covered by any
credit enhancement, Securityholders of any class or series will bear their
allocable share of deficiencies, as described in the related Prospectus
Supplement. In addition, if a form of credit enhancement covers more than one
series of Securities, Securityholders of any such series will be subject to the
risk that such credit enhancement will be exhausted by the claims of
Securityholders of other series.
Reserve Account. If so provided in the related Prospectus Supplement,
pursuant to the related Loan Sale Agreement, the Seller will establish for a
series or class of Securities an account, as specified in the related Prospectus
Supplement (the "Reserve Account"), which will be maintained in the name of the
applicable Indenture Trustee. Unless otherwise provided in the related
Prospectus Supplement, the Reserve Account will be funded by an initial deposit
by the Seller on the Closing Date in the amount set forth in the related
Prospectus Supplement. As further described in the related Prospectus
Supplement, the amount on deposit in the Reserve Account will be increased on
each Distribution Date thereafter up to the Specified Reserve Account Balance
(as defined in the related Prospectus Supplement) by the deposit therein of the
amount of collections on the related Student Loans remaining on each such
Distribution Date after the payment of all other required payments and
distributions on such date. Amounts in the Reserve Account will be available to
cover shortfalls in amounts due to the holders of those classes of Securities
specified in the related Prospectus Supplement in the manner and under the
circumstances specified therein. The related Prospectus Supplement will also
specify to whom and the manner and circumstances under which amounts on deposit
in the Reserve Account (after giving effect to all other required distributions
to be made by the applicable Trust) in excess of the Specified Reserve Account
Balance (as defined in the related Prospectus Supplement) will be distributed.
Statements to Indenture Trustee and Trust
Prior to each Distribution Date with respect to each series of Securities,
the Administrator will prepare and provide to the related Indenture Trustee and
the related Eligible Lender Trustee as of the close of business on the last day
of the preceding Collection Period a statement, which will include the following
information (and any other information so specified in the related Prospectus
Supplement) with respect to such Distribution Date or the preceding Collection
Period as to the Notes and the Certificates of such series, to the extent
applicable:
(i) the amount of the distribution allocable to principal of
each class of the Notes and the Certificates;
(ii) the amount of the distribution allocable to interest on
each class of the Notes and the Certificates, together with the interest
rates applicable with respect thereto;
(iii) the Pool Balance as of the close of business on the last
day of the preceding Collection Period;
(iv) the aggregate outstanding principal amount and the Note
Pool Factor of each class of the Notes, and the Certificate Balance and
the Certificate Pool Factor for each class of the Certificates as of
such Distribution Date, each after giving effect to payments allocated
to principal reported under clause (i) above;
(v) the amount of the Servicing Fee and the Administration Fee
paid to the Servicer and the Administrator, respectively, with respect
to such Collection Period;
(vi) the Interest Rate or Pass-Through Rate for the next period
for any class of Notes or Certificates of such series with variable or
adjustable rates;
(vii) the amount of the aggregate realized losses, if any, for
such Collection Period;
(viii)the Noteholders' Interest Carryover Shortfall, the
Noteholders' Principal Carryover Shortfall, the Certificateholders'
Interest Carryover Shortfall and the Certificateholders' Principal
Carryover
43
<PAGE>
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 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
44
<PAGE>
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, marshaling of assets and liabilities or similar
proceedings with respect to such person and certain actions by such person
indicating its insolvency, reorganization pursuant to bankruptcy proceedings or
inability to pay its obligations.
Rights Upon Servicer Default
Unless otherwise specified in the related Prospectus Supplement, as long
as a Servicer Default under a Loan Servicing Agreement remains unremedied, the
related Indenture Trustee, or holders of Notes of the related series evidencing
not less than 75% in principal amount of such then outstanding Notes, may
terminate all the rights and obligations of the Servicer under such Loan
Servicing Agreement, whereupon a successor servicer appointed by the related
Indenture Trustee or such Indenture Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under such Loan
Servicing Agreement, and will be entitled to similar compensation arrangements.
If, however, a bankruptcy trustee or similar official has been appointed for the
Servicer, and no Servicer Default other than such appointment has occurred, such
trustee or official may have the power to prevent such Indenture Trustee or such
Noteholders from effecting such a transfer. In the event that such Indenture
Trustee is unwilling or unable to so act, it may appoint, or petition a court of
competent jurisdiction for the appointment of, a successor whose regular
business includes the servicing of student loans. Such Indenture Trustee may
make such arrangements for compensation to be paid, which in no event may be
greater than the servicing compensation to the Servicer under such Loan
Servicing Agreement, unless such compensation arrangements will not result in a
downgrading of such Notes and Certificates by any Rating Agency. In the event a
Servicer Default occurs and is continuing, such Indenture Trustee or such
Noteholders, as described above, may remove the Servicer, without the consent of
the related Eligible Lender Trustee or any of the Certificateholders of the
related series. Moreover, only the Indenture Trustee or the Noteholders, and not
the Eligible Lender Trustee or the Certificateholders, have the ability to
remove the Servicer if a Servicer Default occurs and is continuing.
Waiver of Past Defaults
With respect to each Trust, unless otherwise specified in the related
Prospectus Supplement, the holders of Notes evidencing at least a majority in
principal amount of the then outstanding Notes (or the holders of Certificates
evidencing not less than a majority of the outstanding Certificate Balance), in
the case of any Servicer Default which
45
<PAGE>
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.
Each Trust Agreement will provide that the related Eligible Lender Trustee
does not have the power to commence a voluntary proceeding in bankruptcy
relating to such Trust without the unanimous prior approval of all
Certificateholders (including the applicable Company) of the related series and
the delivery to such Eligible Lender Trustee by each such Certificateholder
(including such Company) of a certificate certifying that such Certificateholder
reasonably believes that the related Trust is insolvent.
Payment of Notes
Upon the payment in full of all outstanding Notes of a given series and
the satisfaction and discharge of the related Indenture, the Eligible Lender
Trustee will succeed to all the rights of the Indenture Trustee, and the
Certificateholders of such series will succeed to all the rights of the
Noteholders of such series, under the related Loan Servicing Agreement, except
as otherwise provided therein.
Termination
With respect to each Trust, the obligations of the Seller, the Servicer,
the Administrator, the related Eligible Lender Trustee and the related Indenture
Trustee pursuant to the related Transfer and Servicing Agreements will terminate
upon (i) the maturity or other liquidation of the last related Student Loan and
the disposition of any amount received upon liquidation of any such remaining
Student Loans and (ii) the payment to the Noteholders and the Certificateholders
of the related series of all amounts required to be paid to them pursuant to
such Transfer and Servicing Agreements.
Optional Redemption. If so specified in the related Prospectus Supplement,
in order to avoid excessive administrative expense, the Seller or another party
will be permitted at its option to purchase from the related Eligible Lender
Trustee, as of the end of any Collection Period immediately preceding a
Distribution Date, if the
46
<PAGE>
then outstanding Pool Balance is a percentage specified in the related
Prospectus Supplement (not to exceed 30%) of the Initial Pool Balance (as
defined in the related Prospectus Supplement, the "Initial Pool Balance"), all
remaining related Student Loans at a price equal to the aggregate Purchase
Amounts thereof as of the end of such Collection Period, which amounts will be
used to retire the related Notes and Certificates concurrently therewith. Upon
termination of a Trust, as more fully described in the related Prospectus
Supplement, all right, title and interest in the Student Loans and other funds
of such Trust, after giving effect to any final distributions to Noteholders and
Certificateholders of the related series therefrom, will be conveyed and
transferred to the Seller or such other party.
Auction of Student Loans. If so provided in the related Prospectus
Supplement, all remaining Student Loans held by a Trust will be offered for sale
by the Indenture Trustee on any Distribution Date occurring on or after a date
specified in such Prospectus Supplement. The Seller and unrelated third parties
may offer bids for such Student Loans. The Indenture Trustee will accept the
highest bid equal to or in excess of the aggregate Purchase Amounts of such
Student Loans as of the end of the Collection Period immediately preceding the
related Distribution Date. The proceeds of such sale will be used to redeem all
related Notes and to retire the Certificates.
Administration Agreement
The Seller, in its capacity as administrator (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
47
<PAGE>
interest of the Eligible Lender Trustee in the event the transfer by the Seller
is deemed to be an assignment of collateral as security for the benefit of the
Trust.
If the transfer of the Student Loans is deemed to be an assignment as
security for the benefit of a Trust, there are certain limited circumstances
under the UCC in which prior or subsequent transferees of Student Loans coming
into existence after the Closing Date could have an interest in such Student
Loans with priority over the related Eligible Lender Trustee's interest. A tax
or other government lien on property of the Seller arising prior to the time a
Student Loan comes into existence may also have priority over the interest of
the related Eligible Lender Trustee in such Student Loan. Under the related Loan
Sale Agreement, however, the Seller will warrant that it has caused the Student
Loans to be transferred to the related Eligible Lender Trustee on behalf of a
Trust free and clear of the lien of any third party. In addition, the Seller
will covenant that it will not sell, pledge, assign, transfer or grant any lien
on any Student Loan held by a Trust (or any interest therein) other than to the
related Eligible Lender Trustee on behalf of a Trust, except as provided below.
Pursuant to each Loan Servicing Agreement, the Servicer as custodian on
behalf of the related Trust will have custody of the promissory notes evidencing
the Student Loans following the sale of the Student Loans to the related
Eligible Lender Trustee. Although the accounts and computer records of the
Seller and Servicer will be marked to indicate the sale and although the Seller
will cause UCC financing statements to be filed with the appropriate
authorities, the Student Loans will not be physically segregated, stamped or
otherwise marked to indicate that such Student Loans have been sold to such
Eligible Lender Trustee. If, through inadvertence or otherwise, any of the
Student Loans were sold to another party, or a security interest therein were
granted to another party, that purchased (or took such security interest in) any
of such Student Loans in the ordinary course of its business and took possession
of such Student Loans, then the purchaser (or secured party) might acquire an
interest in the Student Loans superior to the interest of the Eligible Lender
Trustee if the purchaser (or secured party) acquired (or took a security
interest in) the Student Loans for new value and without actual knowledge of the
related Eligible Lender Trustee's interest. See "Description of the Transfer and
Servicing Agreements--Sale of Student Loans; Representations and Warranties".
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
48
<PAGE>
executed by the borrower and then that the loan proceeds be disbursed in a
specified manner by the lender. After the loan is made, the lender must
establish repayment terms with the borrower, properly administer deferrals and
forbearances and credit the borrower for payments made thereon. If a borrower
becomes delinquent in repaying a loan, a lender or a servicing agent must
perform certain collection procedures (primarily telephone calls and demand
letters) which vary depending upon the length of time a loan is delinquent. The
Servicer has agreed pursuant to the related Loan Servicing Agreement to perform
collection and servicing procedures on behalf of the related Trust. However,
failure to follow these procedures or failure of the originator of the loan to
follow procedures relating to the origination of any Federal Student Loans could
result in adverse consequences. Any such failure could result in the
Department's refusal to make reinsurance payments to the Federal Guarantors or
to make Interest Subsidy Payments and Special Allowance Payments to the Eligible
Lender Trustee with respect to such Federal Student Loans or in the Federal
Guarantors' refusal to honor their Guarantee Agreements with the Eligible Lender
Trustee with respect to such Federal Student Loans. Failure of the Federal
Guarantors to receive reinsurance payments from the Department could adversely
affect the Federal Guarantors' ability or legal obligation to make Guarantee
Payments to the related Eligible Lender Trustee with respect to such Federal
Student Loans.
Loss of any such Guarantee Payments, Interest Subsidy Payments or Special
Allowance Payments could adversely affect the amount of Available Funds on any
Distribution Date and the related Trust's ability to pay principal and interest
on the Notes of the related series and to make distributions in respect of the
Certificates of the related series. Under certain circumstances, unless
otherwise specified in the related Prospectus Supplement, the related Trust has
the right, pursuant to the related Loan Sale Agreement and Loan Servicing
Agreement, to cause the Seller to repurchase any Student Loan, or to cause the
Servicer to arrange for the purchase of any Student Loan, if a breach of the
representations, warranties or covenants of the Seller or the Servicer, as the
case may be, with respect to such Student Loan has a material adverse effect on
the interest of the Trust therein and such breach is not cured within any
applicable cure period. See "Description of the Transfer and Servicing
Agreements--Sale of Student Loans; Representations and Warranties"
and"--Servicer Covenants". The failure of the Seller to so purchase, or of the
Servicer to arrange for the purchase of, a Student Loan, if so required, would
constitute a breach of the related Loan Sale Agreement and Loan Servicing
Agreement, enforceable by the related Eligible Lender Trustee on behalf of the
related Trust or by the related Indenture Trustee on behalf of the Noteholders
of the related series, but would not constitute an Event of Default under the
Indenture.
Student Loans Generally Not Subject to Discharge in Bankruptcy
Effective for bankruptcy actions commenced on or after October 8, 1998,
Student Loans are generally not dischargeable by a borrower in bankruptcy
pursuant to the U.S. Bankruptcy Code, unless excepting such debt from discharge
will impose an undue hardship on the debtor and the debtor's dependents.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is, in the opinion of Stroock & Stroock & Lavan LLP
("Federal Tax Counsel"), a summary of all material federal income tax
consequences of the purchase, ownership and disposition of the Notes and the
Certificates. This summary does not purport to deal with federal income tax
consequences applicable to all categories of holders, some of which may be
subject to special rules. For example, it does not discuss the tax treatment of
Noteholders or Certificateholders that are insurance companies, regulated
investment companies or dealers in securities. Moreover, there are no cases or
Internal Revenue Service ("IRS") rulings on similar transactions involving debt
and/or equity interests issued by a trust with terms similar to those of the
Notes and/or the Certificates. As a result, the IRS may disagree with all or a
part of the discussion below. Prospective investors are urged to consult their
own tax advisors in determining the federal, state, local, foreign and any other
tax consequences to them of the purchase, ownership and disposition of the Notes
and the Certificates.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder and judicial or ruling authority, all of which are
subject to change, which change may be retroactive. Each Trust will be provided
with an opinion of Federal Tax Counsel regarding certain federal income tax
matters discussed below, which opinion will be filed with the Commission on a
Form 8-K prior to the sale of the securities issued by such Trust. An opinion of
Federal Tax Counsel, however, is not binding on the IRS or the courts. No ruling
on any of the issues discussed below will be
49
<PAGE>
sought from the IRS. For purposes of the following summary, references to the
Trust, the Notes, the Certificates and related terms, parties and documents
shall be deemed to refer, unless otherwise specified herein, to each Trust and
the Notes, Certificates and related terms, parties and documents applicable to
such Trust. EACH PROSPECTIVE INVESTOR SHOULD CONSULT WITH ITS TAX ADVISOR AS TO
THE FEDERAL, STATE, LOCAL, FOREIGN AND ANY OTHER TAX CONSEQUENCES OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF SECURITIES SPECIFIC TO SUCH PROSPECTIVE
INVESTOR.
TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE
Tax Characterization of the Trust
Federal Tax Counsel will deliver its opinion that the Trust will not be an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Trust Agreement and related documents will be complied with and
on counsel's conclusions that the nature of the income of the Trust or the
satisfaction of certain safe harbors relating to the trading of the Certificates
will exempt the Trust from the rule that certain publicly traded partnerships
are taxable as corporations.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The Seller will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Federal Tax Counsel will, except as otherwise
provided in the related Prospectus Supplement, deliver an opinion to the Trust
that the Notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the Notes is correct.
Original Issue Discount. The discussion below assumes that all payments on
the Notes are denominated in U.S. dollars, that the interest formula for the
Notes meets the requirements for "qualified stated interest" under Treasury
regulations (the "OID Regulations") relating to original issue discount ("OID"),
and that any OID on the Notes (i.e., any excess of the stated redemption price
at maturity of the Notes, generally the principal amount of the Notes, over
their issue price) is less than a de minimis amount (i.e., 0.25% of their
principal amount multiplied by the weighted number of full years included in
their term), all within the meaning of the OID regulations. If these conditions
are not satisfied with respect to any given series of Notes, additional tax
considerations with respect to such Notes will be disclosed in the Related
Prospectus Supplement. The OID Regulations do not address their application to
debt instruments such as the Notes that are subject to prepayment based on the
prepayment of other debt instruments. The legislative history of the OID
provisions of the Code provides, however, that the calculation and accrual of
OID should be based on the prepayment assumption used by the parties in pricing
the transaction. In the event that any of the notes are issued with OID, the
prepayment assumption will be set forth in the related Prospectus Supplement.
Furthermore, although premium amortization and accrued market discount on debt
instruments such as the Notes, which are subject to prepayment based on the
payments on other debt instruments, are to be determined under regulations yet
to be issued, the legislative history of these Code provisions provides that the
same prepayment assumption used to calculate OID, whether or not the debt
instrument is issued with OID, should be used.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID Regulations, a holder of a
Note that was issued with a de minimis amount of OID must include such OID in
income, on a pro rata basis, as principal payments are made on the Note.
Alternatively, a Noteholder may elect to accrue all interest, discount
(including de minimis market discount or OID) and premium in income as interest,
based on a constant yield method. If such an election were made with respect to
a Note with market discount, the Noteholder would be deemed to have made an
election to include in income currently market discount with respect to all debt
instruments having market discount that such Noteholder acquires during the year
of the election and thereafter. Similarly, a Noteholder that makes this election
for a Note that is acquired at a premium will be deemed to have made an election
to amortize bond premium with respect to all debt instruments having
50
<PAGE>
amortizable bond premium that such Noteholder owns at the beginning of the first
taxable year to which the election applies or acquires thereafter. The election
to accrue interest, discount and premium under a constant yield method with
respect to a Note is irrevocable. A purchaser who buys a Note for more or less
than its principal amount will generally be subject, respectively, to the
premium amortization or market discount rules of the Code.
Qualified Stated Interest, which is taxable in accordance with the
holder's method of accounting, is interest that is unconditionally payable
(i.e., payments can be compelled or the debt instrument provides terms and
conditions that make the likelihood of late payment or nonpayment remote) at
least annually at a single fixed rate (or certain variable rates). The Company
intends to treat the interest paid on the Notes as Qualified Stated Interest.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (each, a "Short-Term Note") may be subject
to special rules. An accrual basis holder of a Short-Term Note (and certain cash
method holders, including regulated investment companies, banks and securities
dealers, as set forth in Section 1281 of the Code) generally will be required to
report interest income as interest accrues on a ratable basis over the term of
each interest period or, at the election of the holder, on a constant yield
basis. Cash basis holders of a Short-Term Note will, in general, be required to
report interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1282 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, and would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect to the
Note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by such Noteholder
with respect to such Note. Any such gain or loss will be capital gain or loss if
the Note was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in income. Any such
gain or loss would be long-term capital gain or loss if the Noteholder's holding
period exceeded one year. Capital losses generally may be used only to offset
capital gains.
Foreign Holders. Interest paid (or accrued) to a Noteholder who is a
nonresident alien, foreign corporation or other person that is not a United
States person as such term is defined in the Code and the Treasury regulations
thereunder (a "foreign person") generally will be considered "portfolio
interest", and generally will not be subject to United States federal income tax
and withholding tax, provided, that (i) the interest is not effectively
connected with the conduct of a trade or business within the United States by
the foreign person (ii) the foreign person is not actually or constructively a
"10 percent shareholder" of the Trust, the Seller or the Company (including a
holder of 10% of the outstanding Certificates) or a "controlled foreign
corporation" with respect to which the Trust, the Seller or the Company is a
"related person" within the meaning of the Code, and (iii) the foreign 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
51
<PAGE>
person and (ii) in the case of an individual foreign person, the foreign person
is not present in the United States for 183 days or more in the taxable year.
If the interest, gain or income on a Note held by a foreign person is
effectively connected with the conduct of a trade or business in the United
States by the foreign person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement), the
holder generally will be subject to United States federal income tax on the
interest, gain or income at regular federal income tax rates. In addition, if
the foreign person is a foreign corporation, it may be subject to a branch
profits tax equal to 30% of its "effectively connected earnings and profits"
within the meaning of the Code for the taxable year, as adjusted for certain
items, unless it qualifies for a lower rate under an applicable tax treaty (as
modified by the branch profits tax rules).
Final regulations dealing with backup withholding and information
reporting on income paid to foreign persons and related matters (the "New
Withholding Regulations") were published in the Federal Register on October 14,
1997. In general, the New Withholding Regulations do not significantly alter the
substantive withholding and information reporting requirements, but do unify
current certification procedures and forms and clarify reliance standards. The
New Withholding Regulations generally will be effective for payments made after
December 31, 1999, subject to certain transition rules. The discussion set forth
above does not take the New Withholding Regulations into account. Prospective
Noteholders who are foreign persons are strongly urged to consult their own tax
advisors with respect to the New Withholding Regulations.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalty of perjury, a certificate setting forth the holder's
name, address, correct federal taxpayer identification number and a statement
that the holder is not subject to backup withholding. Should a nonexempt
Noteholder fail to provide the required certification, the related Trust will be
required to withhold 31% of the amount otherwise payable to the holder and remit
the withheld amount to the IRS as a credit against the holder's federal income
tax liability. As previously mentioned, the New Withholding Regulations
generally will be effective for payments made after December 31, 1999, subject
to certain transition rules.
Recent Legislation
Sections 860H through 860L to the Code (the "FASIT Provisions") provide
for a new type of entity for federal income tax purposes known as a "financial
asset securitization investment trust" (a "FASIT"). The legislation providing
for the new FASIT entity, however, did not become effective until September 1,
1997, and many technical issues are to be addressed in Treasury regulations yet
to be drafted. In general, the FASIT legislation enables trusts such as the
Trust to elect to be treated as a pass-through entity not subject to federal
entity-level income tax (except with respect to certain prohibited transactions)
and to issue securities that would be treated as debt for federal income tax
purposes. If a Trust is intended to qualify as a FASIT for federal income tax
purposes, the Prospectus Supplement will so indicate.
Tax Consequences to Holders of the Certificates
The following discussion only applies to a Trust which issues one or more
classes of Certificates and assumes that all payments on the Certificates are
denominated in U.S. dollars, that a series of Securities includes a single class
of Certificates, that any such Certificates are sold to persons other than the
Company, and that the Company retains an equity interest in the Trust. 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
52
<PAGE>
income tax, franchise tax and any other tax measured in whole or in part by
income, with the assets of the partnership being the assets held by the Trust,
the partners of the partnership being the Certificateholders (including the
Company in its capacity as recipient of distributions from the Reserve Account,
if any), and the Notes being debt of the partnership. However, the proper
characterization of the arrangement involving the Trust, the Certificateholders,
the Noteholders, the Seller and the Servicer is not clear because there is no
authority on transactions comparable to that contemplated herein.
Under the provisions of Subchapter K, a partnership is not considered a
separate taxable entity. Instead, partnership income is taxed directly to the
partners and each partner generally is viewed as owning a direct undivided
interest in each partnership asset. The partnership is generally treated as an
entity, however, for computing partnership income, determining the tax
consequences of transactions between a partner and the partnership, and
characterizing the gain on the sale or exchange of a partnership interest. The
following discussion is a summary of some of the material federal income tax
consequences of classifying the Trust as a partnership. Prospective owners of
Trust Certificates should consult their own tax advisors regarding the federal
income tax consequences discussed below, as well as any other material federal
income tax consequences that may result from applying the provisions of
Subchapter K to the ownership and transfer of a Trust Certificate.
Partnership Taxation. As a partnership, the Trust will not be subject to
federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest and finance charges earned on the Student Loans (including
appropriate adjustments for market discount, OID and bond premium), investment
income from investments of amounts on deposit in any related Trust Accounts and
any gain upon collection or disposition of Student Loans. The Trust's deductions
will consist primarily of interest accruing with respect to the Notes, servicing
and other fees, and losses or deductions upon collection or disposition of
Student Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust for each Interest Period (as defined in the applicable Prospectus
Supplement, an "Interest Period") equal to the sum of (i) the interest that
accrues on the Certificates in accordance with their terms for such Interest
Period, including interest accruing at the Pass-Through Rate for such Interest
Period and interest on amounts previously due on the Certificates but not yet
distributed; (ii) any Trust income attributable to discount on the Student Loans
that corresponds to any excess of the principal amount of the Certificates over
their initial issue price; and (iii) all other amounts of income payable to the
Certificateholders for such Interest Period. All remaining taxable income of the
Trust will be allocated to the Company. Losses will generally be allocated in
the manner in which they are borne. Based on the economic arrangement of the
parties, this approach for allocating Trust income should be permissible under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to
Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire amount of
interest accruing on the Certificates for an Interest Period, based on the
Pass-Through Rate plus the other items described above, even though the Trust
might not make (or have sufficient cash to make) current cash distributions of
such amount. Thus, cash basis holders will in effect be required to report
income from the Certificates on the accrual basis and Certificateholders may
become liable for taxes on Trust income even if they have not received cash from
the Trust to pay such taxes. In addition, because tax allocations and tax
reporting will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices, Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust.
An individual taxpayer's share of expenses of the Trust (including fees to
the Servicer but not interest expenses) are miscellaneous itemized deductions
which are deductible only to the extent they exceed two percent of the
individual's adjusted gross income (and not at all for alternative minimum tax
purposes). Accordingly, such deductions might be disallowed to the individual in
whole or in part and might result in such holder being taxed on an amount of
income that exceeds the amount of cash actually distributed to such holder over
the life of the Trust. Such deductions may also be subject to reduction under
Section 68 of the Code if an individual taxpayer's adjusted gross income exceeds
certain limits.
53
<PAGE>
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each of the Student Loans,
the Trust might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
Computation of Income. Taxable income of the Trust will be computed at the
Trust level and the portion allocated to the Trust Certificateholders will be
allocated to them pro rata. Consequently, the method of accounting for taxable
income will be chosen by, and any elections (such as those described above with
respect to the market discount rules) will be made by, the Trust rather than the
Trust Certificateholders. The Trust intends, to the extent possible, to (i) have
the taxable income of the Trust computed under the accrual method of accounting
and (ii) adopt a calendar-year taxable year for computing the taxable income of
the Trust. The tax year of the Trust, however, is generally determined by
reference to the tax years of the Certificateholders. An owner of a Trust
Certificate is required to include its pro rata share of Trust income for a
taxable year as determined by the Trust in such Trust Certificateholder's gross
income for its taxable year in which the taxable year of the Trust ends.
Determining the Bases of Trust Assets. The Trust will become a partnership
on the first date when Trust Certificates are held by more than one person. On
that date, each of the Trust Certificateholders should be treated as having
purchased a share of the assets of the Trust (subject to the liability for the
Notes) followed immediately by a deemed contribution of such assets to the newly
formed partnership. The partnership's basis in the Trust's assets would
therefore equal the sum of the Trust Certificateholders' bases in their
respective interests in the Trust's assets immediately prior to the deemed
contribution to the partnership. To the extent that the fair market value of the
assets deemed contributed to the partnership varied from the bases of such
assets to the partnership, the allocation of taxable income to the Trust
Certificateholders would be adjusted in accordance with Section 704(c) of the
Code to account for such variations.
Under Section 708 of the Code, if 50% or more of the outstanding interests
in a partnership are sold or exchanged within any 12-month period, such
partnership will be deemed to terminate and then be reconstituted for federal
income tax purposes. If such a termination occurs, the assets of the terminated
partnership are deemed to be constructively contributed to a reconstituted
partnership in exchange for interests in such reconstituted partnership. Such
interests would be deemed distributed to the partners of the terminated
partnership in liquidation thereof, which distribution would not constitute a
sale or exchange. Accordingly, if the sale of the Trust Certificates terminates
the partnership under Section 708 of the Code, a Certificateholder's basis in
its ownership interest would not change. The Trust's taxable year would also
terminate as a result of a constructive termination and, if the
Certificateholder's taxable year is different from the Trust's, the termination
could result in the "bunching" of more than 12 months' income or loss of the
Trust in such Certificateholder's income tax return for the year in which the
Trust was deemed to terminate. A redemption of interests is not considered a
sale or exchange of interests for purposes of applying this constructive
termination rule.
Discount and Premium. To the extent that OID, if any, on the Student Loans
exceeds a de minimis amount, the Trust would have OID income. As indicated
above, a portion of such OID income may be allocated to the Certificateholders.
Moreover, the purchase price paid by the Trust for the Student Loans may
be greater or less than the remaining aggregate principal balances of the
Student Loans at the time of purchase. If so, the Student Loans will have been
acquired at a premium or discount, as the case may be. (As indicated above, the
Trust will make this calculation on an aggregate basis, but might be required to
recompute it on a loan by loan basis.)
If the Trust acquires the Student Loans at a market discount or premium,
the Trust will elect to include any such discount in income currently as it
accrues over the life of the Student Loans or to offset any such premium against
interest income on the Student Loans. As indicated above, a portion of such
market discount income or premium deduction may be allocated to
Certificateholders.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
Any
54
<PAGE>
such gain or loss would be long-term capital gain or loss if the
Certificateholder's holding period exceeded one year. A Certificateholder's tax
basis in a Certificate will generally equal the holder's cost increased by the
holder's share of Trust income (includible in gross income) and decreased by any
distributions received or losses allocated with respect to such Certificate. In
addition, both the tax basis in the Certificate and the amount realized on a
sale of a Certificate would include the holder's share of the Notes and other
liabilities of the Trust. A holder acquiring Certificates at different prices
may be required to maintain a single aggregate adjusted tax basis in such
Certificates and, upon sale or other disposition of some of the Certificates,
allocate a pro rata portion of such aggregate tax basis to the Certificates sold
(rather than maintaining a separate tax basis in each Certificate for purposes
of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share
of unrecognized accrued market discount on the Student Loans would generally be
treated as ordinary income to the holder.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the close
of the last day of such month. As a result, a holder purchasing Certificates may
be allocated tax items (which will affect the tax liability and tax basis of the
holder) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing laws
and regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust might be reallocated among the Certificateholders. SMS and the
Company are authorized to revise the Trust's method of allocation between
transferors and transferees to conform to a method permitted by future laws,
regulations or other IRS guidance.
Section 754 Election. In the event that a Certificateholder sells a
Certificate at a profit (or loss), the purchasing Certificateholder will have a
higher (or lower) basis in the Certificate than the selling Certificateholder
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust were to file an election under Section
754 of the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust will not make such election. As a
result, Certificateholders might be allocated a greater or lesser amount of
Trust income than would be appropriate based on their own purchase price for
Certificates.
Administrative Matters. The Eligible Lender Trustee is required to keep or
cause to be kept complete and accurate books of the Trust. The Eligible Lender
Trustee will file a partnership information return (IRS Form 1065) with the IRS
for each taxable year of the Trust and will report each Certificateholder's
allocable share of items of Trust income and expense to holders and the IRS on
Schedule K-1. The Trust will provide the Schedule K-1 information to nominees
that fail to provide the Trust with the information statement described below
and such nominees will be required to forward such information to the beneficial
owners of the Certificates. Generally, holders must file tax returns that are
consistent with the information returns filed by the Trust or be subject to
penalties unless the holder timely notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust with
a statement containing certain information on the nominee, the beneficial owners
and the Certificates so held. Such information includes (i) the name, address
and taxpayer identification number of the nominee and (ii) as to each beneficial
owner (x) the name, address and identification number of such person, (y)
whether such person is a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the
55
<PAGE>
year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust information as
to themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act that holds Certificates as a nominee is
not required to furnish any such information statement to the Trust. The
information referred to above for any calendar year must be furnished to the
Trust on or before the following January 31. Nominees, brokers and financial
institutions that fail to provide the Trust with the information described above
may be subject to penalties.
The Company will be designated as "tax matters partner" in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in certain disputes with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the later of the date
on which the partnership information return is filed or the last day for filing
such return for such year (determined without regard to extensions). Any adverse
determination following an audit of the return of the Trust by the appropriate
taxing authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may be
precluded from separately litigating a proposed adjustment to the items of the
Trust. An adjustment could also result in an audit of a Certificateholder's
returns and adjustments of items not related to the income and losses of the
Trust.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust would be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust would be engaged in a trade or business in the United States for
such purposes, the Trust will withhold as if it were so engaged in order to
protect the Trust from possible adverse consequences of a failure to withhold.
The Trust expects to withhold on the portion of its taxable income that is
allocable to foreign Certificateholders pursuant to Section 1446 of the Code, as
if such income were effectively connected to a U.S. trade or business, at a rate
of 35% for foreign holders that are taxable as corporations and 39.6% for all
other foreign holders. Subsequent adoption of Treasury regulations or the
issuance of other administrative pronouncements may require the Trust to change
its withholding procedures. In determining a holder's withholding status, the
Trust may rely on IRS Form W-8, IRS Form W-9 or the holder's certification of
nonforeign status signed under penalty of perjury. As previously mentioned, the
New Withholding Regulations generally will be effective for payments made after
December 31, 1999, subject to certain transition rules. The discussion set forth
above does not take into account the New Withholding Regulations. Prospective
Certificateholders who are foreign persons are strongly urged to consult their
own tax advisors with respect to the New Withholding Regulations.
Each foreign holder may be required to file a U.S. individual or corporate
income tax return (including in the case of a corporation, the branch profits
tax) on its share of the Trust's income. Each foreign holder must obtain a
taxpayer identification number from the IRS and submit that number to the Trust
in order to assure appropriate crediting of the taxes withheld. A foreign holder
generally would be entitled to file with the IRS a claim for refund with respect
to taxes withheld by the Trust, taking the position that no taxes were due
because the Trust was not engaged in a U.S. trade or business. However, interest
payments made (or accrued) to a Certificateholder who is a foreign person may be
considered "guaranteed payments" (to the extent such payments are determined
without regard to the income of the Trust). If these interest payments are
properly characterized as guaranteed payments, then the interest will not be
considered "portfolio interest." As a result, Certificateholders will be subject
to United States federal income tax and withholding tax at a rate of 30% on the
Trust's gross income, unless reduced or eliminated pursuant to an applicable
treaty. In such case, a foreign holder would only be entitled to claim a refund
for that portion of the taxes, if any, in excess of the taxes that should be
withheld with respect to the guaranteed payments. As a result, each potential
foreign Certificateholder should consult its tax advisor as to whether the tax
consequences of holding a Certificate make it an unsuitable investment.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code. As previously mentioned, the New Withholding
Regulations generally will be effective for payments made after December 31,
1999, subject to certain transition rules.
56
<PAGE>
TRUSTS IN WHICH ALL RESIDUAL INTERESTS ARE RETAINED BY THE SELLER OR AN
AFFILIATE OF THE SELLER
Tax Characterization of the Trust
Any party that retains or acquires 100% of the Certificates agrees by such
retention or acquisition to disregard the Trust as an entity separate from such
sole Certificateholder. 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, assuming that the terms of the
Trust Agreement and related documents will be complied with such that, among
other things, no election will be made to treat the Trust as a corporation for
federal income tax purposes.
Absent the election to be treated as a corporation for federal income tax
purposes, Treasury regulations provide that the Trust will be disregarded as an
entity separate from its sole Certificateholder for federal income tax purposes.
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 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.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of Federal Tax Counsel, the IRS successfully asserted that one or more classes
of Notes did not represent debt for federal income tax purposes, such class or
classes of Notes might be treated as equity interests in the Trust. If so
treated, the Trust could, in the view of Federal Tax Counsel, be treated as a
publicly traded partnership that would be taxable as a corporation In such case,
the entity would be subject to federal income taxes at corporate tax rates on
its taxable income generated by Student Loans. Such an entity-level tax could
result in reduced distribution to Noteholders and Noteholders could be liable
for a share of such tax.
Furthermore, even if the Trust were not taxable as a corporation, the
treatment of Notes as equity interests in such a partnership could have adverse
tax consequences to certain holders of such Notes. For example, income from
certain classes of Notes to certain tax-exempt entities (including pension
funds) might be "unrelated business taxable income", income to foreign holders
may be subject to U.S. withholding tax and U.S. tax return filing requirements,
and individual holders might be subject to certain limitations on their ability
to deduct their share of Trust expenses. In the event one or more classes of
Notes were treated as interests in a partnership, the consequences governing the
Certificates as equity interests in a partnership described above under"--TRUSTS
FOR WHICH A PARTNERSHIP ELECTION IS MADE--Tax Consequences to Holders of the
Certificates" would apply to the holders of such Notes.
THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A NOTEHOLDER'S OR
CERTIFICATEHOLDER'S PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF SECURITIES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
57
<PAGE>
CERTAIN STATE TAX CONSEQUENCES
The loan servicing activities to be undertaken by the Servicer will
predominantly take place in Indiana.
Because of the variation in each state's tax laws based in whole or in
part upon income, it is not feasible to predict tax consequences to holders of
Notes and Certificates in all of the state taxing jurisdictions in which they
are already subject to tax. Noteholders and Certificateholders are urged to
consult their own tax advisors with respect to state tax consequences arising
out of the purchase, ownership and disposition of Notes and Certificates.
The State of Indiana imposes an individual income tax and a corporate
income tax including a corporate gross income tax. This discussion is based upon
present provisions of Indiana statutes and the regulations promulgated
thereunder and applicable judicial or ruling authority, all of which are subject
to change, which change may be retroactive. No ruling on any of the issues
discussed below will be sought from the Indiana Department of Revenue.
Tax Consequences with Respect to the Notes. It is expected that Krieg
DeVault Alexander & Capehart, LLP ("Indiana Tax Counsel") will deliver an
opinion to the Trust that, assuming the Notes are treated as debt for federal
income tax purposes, the Notes will be treated as debt for Indiana individual
income and corporate income tax purposes. Accordingly, Noteholders not otherwise
subject to taxation in Indiana should not become subject to taxation in Indiana
solely because of a holder's ownership of Notes. However, a Noteholder already
subject to Indiana's individual income tax or corporate income tax could be
required to pay additional Indiana tax as a result of the holder's ownership or
disposition of Notes.
Tax Consequences with Respect to the Certificates. Indiana Tax Counsel is
of the opinion that the Trust will be taxable for Indiana income tax purposes in
the same manner as it is taxed for federal income tax purposes. As a result, if
the Trust should be treated as a partnership which is not a publicly traded
partnership, the Trust should not be subject to Indiana corporate income taxes.
(If such taxes were applicable, however, they could result in reduced
distributions to Certificateholders.) Moreover, Certificateholders that are not
otherwise subject to tax in Indiana should not be subject to Indiana individual
income or corporate income taxes with respect to income from the partnership,
unless in the event the Trust is considered to be carrying on business in
Indiana.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain requirements on employee benefit plans and on
certain other retirement plans and arrangements, including individual retirement
accounts and annuities 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 and prohibited transaction 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 exclusive benefit rule under Section 401(a)(2) of ERISA and 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
58
<PAGE>
imposed pursuant to Section 502(i) of ERISA, unless a statutory or
administrative exemption is available. These prohibited transactions generally
are set forth in Section 406 of ERISA and Section 4975 of the Code.
The Notes
Unless otherwise specified in the related Prospectus Supplement, the Notes
of each series may be purchased by a Plan. The Issuer, the Company, any
underwriter, the Eligible Lender Trustee, the Indenture Trustee, the Servicer,
the Administrator, any provider of credit support or any of their affiliates may
be considered to be or may become Parties in Interest with respect to certain
Plans. Prohibited transactions under Section 406 of ERISA and Section 4975 of
the Code may arise if a Note is acquired by a Plan with respect to which such
persons are Parties in Interest unless such transactions are subject to one or
more statutory or administrative exemptions, such as: Prohibited Transaction
Class Exemption ("PTCE") 96-23, which exempts certain transactions effected on
behalf of a Plan by an "in-house asset manager"; PTCE 90-1, which exempts
certain transactions between insurance company separate accounts and Parties in
Interest; PTCE 91-38, which exempts certain transactions between bank collective
investment funds and Parties in Interest; PTCE 95-60, which exempts certain
transactions between insurance company general accounts and Parties in Interest;
or PTCE 84-14, which exempts certain transactions effected on behalf of a Plan
by a "qualified professional asset manager". There can be no assurance that any
of these class exemptions will apply with respect to any particular Plan
investment in Notes or, even if it were deemed to apply, that any exemption
would apply to all prohibited transactions that may occur in connection with
such investment. Accordingly, prior to making an investment in the Notes,
investing Plans should determine whether the Issuer, the Company, any
underwriter, the Eligible Lender Trustee, the Indenture Trustee, the Servicer,
the Administrator, or any provider of credit support or any of their affiliates
is a Party in Interest with respect to such Plan and, if so, whether such
transaction is subject to one or more statutory, regulatory or administrative
exemptions.
Any Plan fiduciary considering whether to invest in Notes on behalf of a
Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment. Each Plan fiduciary also should determine whether,
under the general fiduciary standards of investment prudence and
diversification, an investment in the Notes is appropriate for the Plan,
considering the overall investment policy of the Plan and the composition of the
Plan's investment portfolio, as well as whether such investment is permitted
under the governing Plan instruments.
The Certificates
Unless otherwise specified in the Prospectus Supplement, the Certificates
of each series may not be purchased by a Plan or by any entity whose underlying
assets include plan assets by reason of a plan's investment in the entity (each,
a "Benefit Plan"). Such purchase of an equity interest in the Trust will result
in the assets of the Trust being deemed assets of a Benefit Plan for the
purposes of ERISA and the Code and certain transactions involving the Trust may
then be deemed to constitute prohibited transactions under Section 406 of ERISA
and Section 4975 of the Code. A violation of the "prohibited transaction" rules
may result in an excise tax or other penalties and liabilities under ERISA and
the Code for such persons.
By its acceptance of a Certificate, each Certificateholder will be deemed
to have represented and warranted that it is not a Benefit Plan.
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.
59
<PAGE>
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement with
respect to the Notes of a given series and an underwriting agreement with
respect to the Certificates of such series (collectively, the "Underwriting
Agreements"), the Seller will agree to cause the related Trust to sell to the
underwriters named therein and in the related Prospectus Supplement, and each of
such underwriters will severally agree to purchase, the principal amount of each
class of Notes and Certificates, as the case may be, of the related series set
forth therein and in the related Prospectus Supplement.
In each of the Underwriting Agreements with respect to any given series of
Securities, the several underwriters will agree, subject to the terms and
conditions set forth therein, to purchase all the Notes and Certificates, as the
case may be, described therein which are offered hereby and by the related
Prospectus Supplement if any of such Notes and Certificates, as the case may be,
are purchased.
Each Prospectus Supplement will either (i) set forth the price at which
each class of Notes and Certificates, as the case may be, being offered thereby
will be offered to the public and any concessions that may be offered to certain
dealers participating in the offering of such Notes and Certificates, as the
case may be, or (ii) specify that the related Notes and Certificates, as the
case may be, are to be resold by the underwriters in negotiated transactions at
varying prices to be determined at the time of such sale. After the initial
public offering of any such Notes and Certificates, as the case may be, such
public offering prices and such concessions may be changed.
Until the distribution of the Securities is completed, rules of the
Commission may limit the ability of the underwriters and certain selling group
members to bid for and purchase the Securities. As an exception to these rules,
the underwriters are permitted to engage in certain transactions that stabilize
the price of the Securities. Such transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of the Securities.
If an underwriter creates a short position in the Securities in connection
with the offering (i.e., if it sells more Securities than are set forth on the
cover page of the related Prospectus Supplement), the underwriter may reduce
that short position by purchasing Securities in the open market.
An underwriter may also impose a penalty bid on certain underwriters and
selling group members. This means that if the underwriter purchases Securities
in the open market to reduce the underwriters' short position or to stabilize
the price of the Securities, it may reclaim the amount of the selling concession
from the underwriters and selling group members who sold those Securities as
part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it
discourages resales of the security.
Neither the Seller nor the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Securities. In addition, neither
the Seller nor the underwriters make any representation that the underwriters
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
Each Underwriting Agreement will provide that the Seller will indemnify
the underwriters against certain civil liabilities, including liabilities under
the Securities Act, or contribute to payments the several underwriters may be
required to make in respect thereof.
Each Trust may, from time to time, invest the funds in its Trust Accounts
in Eligible Investments acquired from such underwriters.
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.
60
<PAGE>
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, LLP, Indianapolis, Indiana,
and for the underwriters for such series by Stroock & Stroock & Lavan LLP, New
York, New York. Edward R. Schmidt, general counsel of SMS and an executive
officer of and general counsel for USA Group, USA Funds and Loan Services and a
member of the board of directors of USA Group and a member of the board of
trustees of USA Funds, USA Group Guarantee Services and Loan Services was
formerly a partner of, and of counsel to, the firm of Krieg DeVault Alexander &
Capehart, LLP 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, LLP. Certain federal income tax
matters will be passed upon for each Trust by Stroock & Stroock & Lavan LLP and
certain Indiana State income and corporate income tax matters by Krieg DeVault
Alexander & Capehart, LLP.
AVAILABLE INFORMATION
USA Group Secondary Market Services, Inc., 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 Street, Indianapolis, Indiana 46204-3503 (Telephone:
(317) 951-5640).
61
<PAGE>
INDEX OF PRINCIPAL TERMS
Page
----
10 percent shareholder........................................................51
1992 Amendments...............................................................18
1993 Act......................................................................18
1998 Reauthorization Bill.....................................................18
Act.......................................................................13, 16
Additional Fundings...........................................................39
Add-on Consolidation Loans....................................................25
Administration Agreement......................................................47
Administration Fee............................................................47
Administrator.................................................................47
Administrator Default.........................................................47
Applicable Trustee............................................................36
Base Rate.....................................................................35
Benefit Plan..................................................................59
Calculation Agent.............................................................35
Cede..........................................................................36
Certificate Balance...........................................................29
Certificate Pool Factor.......................................................29
Certificates..................................................................34
Closing Date..............................................................17, 38
Code..........................................................................49
Collateral Reinvestment Account...............................................30
Collection Account............................................................40
Collection Period.............................................................41
Commission....................................................................61
Company.......................................................................34
Controlled Foreign Corporation................................................51
Cutoff Date...................................................................12
Deferral Period...............................................................23
Definitive Certificates.......................................................37
Definitive Notes..............................................................37
Definitive Securities.........................................................37
Department....................................................................14
Depositaries..................................................................36
Depositary....................................................................29
Distribution Date.............................................................30
DTC...........................................................................36
DTC's Nominee.................................................................29
Eligible Deposit Account......................................................40
Eligible Institution..........................................................40
Eligible Investments..........................................................40
Eligible Lender Trustee.......................................................12
ERISA.........................................................................58
Event of Default..............................................................31
Excess Cashflow Rights........................................................16
Family Contribution...........................................................19
FASIT.........................................................................52
FASIT Provisions..............................................................52
Federal Assistance............................................................20
Federal Consolidation Loan................................................17, 24
Federal PLUS Loans............................................................17
62
<PAGE>
Federal SLS Loans.............................................................17
Federal Stafford Loans........................................................17
Federal Student Loans.........................................................12
Federal Supplemental Loans to Students........................................17
Federal Tax Counsel...........................................................49
Federal Unsubsidized Stafford Loans...........................................17
FFELP.........................................................................17
Fixed Rate Securities.........................................................35
Floating Rate Securities......................................................35
Forbearance Period............................................................23
foreign person................................................................51
Funding Period................................................................16
Grace Period..................................................................22
Guarantee Agreement...........................................................15
Guarantor or a Federal Guarantor..............................................15
Indenture.....................................................................29
Index Shortfall Carryover.....................................................31
Indiana Tax Counsel...........................................................58
Indirect Participants.........................................................36
Initial Pool Balance..........................................................47
Insolvency Event..............................................................28
Interest Period...............................................................53
Interest Rate.................................................................30
Interest Reset Period.........................................................35
Interest Subsidy Payments.....................................................20
Investment Earnings...........................................................40
IRS...........................................................................49
Loan Services.................................................................13
Monthly Rebate Fee............................................................25
New Withholding Regulations...................................................52
Note Pool Factor..............................................................29
Notes.........................................................................29
OID...........................................................................50
OID Regulations...............................................................50
Participants..................................................................30
Parties in Interest...........................................................58
Pass-Through Rate.............................................................34
Plans.........................................................................58
Pool Balance..................................................................29
Pool Factor...................................................................29
Pre-Funding Amount............................................................44
prepayments...................................................................28
Prospectus Supplement.........................................................14
PTCE..........................................................................59
Purchase Amount...............................................................39
Registration Statement........................................................61
Related Documents.............................................................33
related person................................................................51
Reserve Account...............................................................43
Revolving Period..............................................................16
Rules.........................................................................36
Secretary.....................................................................26
Securities....................................................................34
Securities Act................................................................61
Seller........................................................................13
63
<PAGE>
Servicer......................................................................14
Servicer Default..............................................................45
Servicing Fee.................................................................42
Short-Term Note...............................................................51
SMS...........................................................................13
Special Allowance Payments....................................................19
Spread........................................................................35
Spread Multiplier.............................................................35
Student Loans.................................................................12
tax matters partner...........................................................56
Transfer and Servicing Agreements.............................................38
Trust.........................................................................12
Trust Accounts................................................................40
Trust Agreement...............................................................12
UCC...........................................................................47
Underwriting Agreements.......................................................60
Unmet Need....................................................................19
USA Funds.....................................................................12
USA Group.....................................................................12
USA Group Guarantee Services..................................................13
64
<PAGE>
SMS Student Loan
Trust _________-______
$ ____________
Class A-1 Floating Rate
Asset-Backed Senior Notes
$ ____________
Class A-2 Floating Rate
Asset-Backed Senior Notes
USA Group Secondary
Market Services, Inc.
Seller
PROSPECTUS SUPPLEMENT
[Underwriters]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
Expenses in connection with the offering of the Notes and the Certificates
being registered herein are estimated as follows:
SEC registration fee................................... $ *
Legal fees and expenses................................ *
Accounting fees and expenses........................... *
Blue Sky fees and expenses............................. *
Rating agency fees..................................... *
Eligible Lender Trustee fees and expenses.............. *
Indenture Trustee fees and expenses.................... *
Printing expenses...................................... *
Miscellaneous.......................................... ___________
Total......................................... $ *
- -----------
To be completed by amendment.
Item 15. Indemnification of Directors and Officers.
As authorized by Section 145 of the General Corporation Law of Delaware
(the "Delaware Corporation Law") and the By-Laws of SMS, each director and
officer of SMS may be indemnified by SMS against expenses (including attorney's
fees, judgments, fines and amounts paid in settlement) actually and reasonably
incurred in connection with the defense or settlement of any threatened, pending
or completed legal proceedings in which he is involved by reason of the fact
that he is or was a director or officer of SMS if he acted in good faith and in
a manner that he reasonably believed to be in or not opposed to the best
interest of SMS, and, with respect to any criminal action or proceeding, if he
had no reasonable cause to believe that his conduct was unlawful. If the legal
proceeding, however, is by or in the right of SMS, the director or officer may
not be indemnified in respect of any claim, issue or matter as to which he shall
have been adjudged to be liable for negligence or misconduct in the performance
of his duty to SMS unless a court determines otherwise.
There are directors' and officers' liability insurance policies
outstanding which insure directors and officers of SMS. The policies insure SMS
against losses for which SMS shall be required or permitted by law to indemnify
directors and officers and which result from claims made against such directors
or officers based upon the commission of wrongful acts in the performance of
their duties. The losses covered by the policies are subject to certain
exclusions and do not include fines or penalties imposed by law or other matters
deemed uninsurable under the law. The policies contain certain self-insured
retention provisions.
Item 16. Exhibits.
1.1 --Form of Underwriting Agreement for Notes**
1.2 --Form of Underwriting Agreement for Certificates**
3.1 --Restated Certificate of Incorporation of USA Group Secondary Market
Services, Inc.*
3.2 --By-laws of USA Group Secondary Market Services, Inc.*
3.3 --Form of Certificate of Trust for the Trusts (included as an exhibit to
Exhibit 4.2)**
4.1 --Form of Indenture between the Trust and the Indenture Trustee
(included as an exhibit thereto a form of Note)**
4.2 --Form of Trust Agreement among the Seller, the Company and the Eligible
Lender Trustee (included as an exhibit thereto a form of
Certificate)**
4.3 --Form of Note (included as an exhibit to Exhibit 4.1)**
II-1
<PAGE>
4.4 --Form of Certificate (included as an exhibit to Exhibit 4.2)**
5.1 --Opinion of Krieg DeVault Alexander & Capehart, LLP with respect to
legality ***
5.2 --Opinion of Richards, Layton & Finger with respect to legality ***
8.1 --Opinion of Stroock & Stroock & Lavan LLP with respect to tax
matters ***
8.2 --Opinion of Krieg DeVault Alexander & Capehart, LLP with respect to tax
matters ***
23.1 --Consent of Krieg DeVault Alexander & Capehart, LLP (included as part
of Exhibit 5.1)
23.2 --Consent of Stroock & Stroock & Lavan LLP (included as part of Exhibit
8.1)
23.3 --Consent of Richards, Layton & Finger (included as part of Exhibit 5.2)
24.1 --Power of Attorney (included on signature page)
25 --Statement of Eligibility under the Trust Indenture Act of 1939 of the
Indenture Trustee ***
99.1 --Form of Loan Sale Agreement among the Seller, the Trust and the
Eligible Lender Trustee**
99.2 --Form of Loan Servicing Agreement among the Servicer, the Trust and the
Eligible Lender Trustee**
99.3 --Form of Administration Agreement among the Trust, the Indenture
Trustee and USA Group Secondary Market Services, Inc., as
Administrator**
- -------------
* Previously filed in Registration Statement on Form S-3 (Reg. No.
33-94952, filed with the Commission by the Registrant on July 25, 1995).
** Previously filed in Amendment No. 2 to Registration Statement on Form
S-3 (Reg. No. 33-76784, filed with the Commission by the Registrant on June 7,
1994).
*** To be filed.
Item 17. Undertakings.
(a) As to Rule 415:
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made of
the securities registered hereby, a post-effective amendment to this
Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933, as amended;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or the most
recent post-effective amendment hereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement; and
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
provided, however, that the undertakings set forth in clauses (i) and (ii) above
do not apply if the information required to be included in a post-effective
amendment by those clauses is contained in periodic reports filed by the
Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934, as amended, that are incorporated by reference in this Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-2
<PAGE>
(b) As to documents subsequently filed that are incorporated by reference:
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended, that is incorporated
by reference in this Registration Statement shall be deemed to be a new
registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreements Notes and
Certificates in such denominations and registered in such names as required by
the Underwriter to permit prompt delivery to each purchaser.
(d) As to indemnification:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described under Item 15, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is therefore unenforceable. In the event that a claim
for indemnification against such liabilities (other than payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of such Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, such Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(e) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, as amended, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(f) The undersigned Registrant hereby undertakes to file an application
for the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act of 1939, as amended, in
accordance with the rules and regulations prescribed by the Commission under
Section 305(b)(2) of the Trust Indenture Act of 1939, as amended.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement or Amendment to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Indianapolis, State of Indiana, on April 28, 1999.
USA GROUP SECONDARY MARKET SERVICES, INC.,
as originator of the Trust (Registrant)
By: _______________________________________
Cheryl E. Watson
Senior Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or Amendment has been signed below on April 28, 1999 by
the following persons in the capacities indicated.
Each person signing below hereby appoints Stephen W. Clinton and Cheryl E.
Watson and each of them as his or her attorney-in-fact to execute and file such
amendments to this Registration Statement as such attorney-in-fact may deem
appropriate.
Signature Capacity
--------- --------
____________________________________ Chairman of the Board, President,
Stephen W. Clinton Chief Executive Officer (Principal
Executive Officer) and Director
____________________________________ Senior Vice President (Principal
Cheryl E. Watson Financial and Accounting Officer)
____________________________________ Director
Ernest J. Newborn, Jr.
____________________________________ Director
Ike G. Batalis
II-4
<PAGE>
EXHIBIT INDEX
Exhibit Sequential
No. Description Page No.
- ------- ----------- ----------
1.1 --Form of Underwriting Agreement for Notes**
1.2 --Form of Underwriting Agreement for Certificates**
3.1 --Restated Certificate of Incorporation of USA Group Secondary
Market Services, Inc.*
3.2 --By-laws of USA Group Secondary Market Services, Inc.*
3.3 --Form of Certificate of Trust for the Trusts (included as an
exhibit to Exhibit 4.2)**
4.1 --Form of Indenture between the Trust and the Indenture Trustee
(included as an exhibit thereto a form of Note)**
4.2 --Form of Trust Agreement among the Seller, the Company and the
Eligible Lender Trustee (included as an exhibit thereto a form of
Certificate)**
4.3 --Form of Note (included as an exhibit to Exhibit 4.1)**
4.4 --Form of Certificate (included as an exhibit to Exhibit 4.2)**
5.1 --Opinion of Krieg DeVault Alexander & Capehart, LLP with respect
to legality ***
5.2 --Opinion of Richards, Layton & Finger with respect to legality ***
8.1 --Opinion of Stroock & Stroock & Lavan LLP with respect to tax
matters ***
8.2 --Opinion of Krieg DeVault Alexander & Capehart, LLP with respect
to tax matters ***
23.1 --Consent of Krieg DeVault Alexander & Capehart, LLP (included as
part of Exhibit 5.1)
23.2 --Consent of Stroock & Stroock & Lavan LLP (included as part of
Exhibit 8.1)
23.3 --Consent of Richards, Layton & Finger (included as part of Exhibit
5.2)
24.1 --Power of Attorney (included on signature page)
25 --Statement of Eligibility under the Trust Indenture Act of 1939 of
the Indenture Trustee ***
99.1 --Form of Loan Sale Agreement among the Seller, the Trust and the
Eligible Lender Trustee**
99.2 --Form of Loan Servicing Agreement among the Servicer, the Trust
and the Eligible Lender Trustee**
99.3 --Form of Administration Agreement among the Trust, the Indenture
Trustee and USA Group Secondary Market Services, Inc., as
Administrator**
- ----------------
* Previously filed in Registration Statement on Form S-3 (Reg. No.
33-94952, filed with the Commission by the Registrant on July 25, 1995).
** Previously filed in Amendment No. 2 to Registration Statement on Form
S-3 (Reg. No. 33-76784, filed with the Commission by the Registrant on June 7,
1994).
*** To be filed.
