AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 27, 1999
REGISTRATION NO. 333-____
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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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)
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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)
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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
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this Registration Statement becomes effective as determined by
market conditions.
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If the only securities being registered on this Form are being offered
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.
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. |_|
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===============================================================================================================================
Title of Each Class of Proposed Proposed
Securities to be Registered Amount Maximum Maximum
to be Offering Price Aggregate Amount of
Registered Per Unit(1) Offering Price(1) Registration Fee
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset-Backed Notes..................... $500,000 100.00% $500,000 $132
- -------------------------------------------------------------------------------------------------------------------------------
Asset-Backed Certificates.............. $500,000 100.00% $500,000 $132
- -------------------------------------------------------------------------------------------------------------------------------
Total.................................. $1,000,0000 100.00% $1,000,000 $264
===============================================================================================================================
(1) Estimated solely for purposes of calculating the registration fee.
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</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 in this prospectus 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 State.
<PAGE>
SUBJECT TO COMPLETION DATED DECEMBER 27, 1999
<PAGE>
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED _________, 1999
$----------
SMS STUDENT LOAN TRUST ____-_
USA GROUP SECONDARY MARKET SERVICES, INC.
Seller
FLOATING RATE ASSET-BACKED SENIOR NOTES
----------------
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 one or more
interest rate swaps.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-_ OF THIS PROSPECTUS
SUPPLEMENT AND PAGE __ 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.
<TABLE>
<CAPTION>
Original Principal Interest Rate Final Maturity Price to Underwriting Proceeds to the
Amount (per annum) Date(1) Public Discount Seller(2)
------------------ ------------ -------------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Per Class A-1 Note $___________ Three-Month LIBOR __________ _____% _______% ______%
plus ____% annually,
Per Class A-2 Note $___________ Three-Month LIBOR __________ _____% ________% ______%
plus ____% annually,
Total............. $___________
</TABLE>
- ---------------------
(1) The quarterly payment date of ___________ and __________, as applicable.
(2) Plus accrued interest, if any, from the date of initial issuance.
The senior notes will be delivered in book-entry form only 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.
-------------------------
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.
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. 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. These transactions could cause the prices
of the senior notes to be higher than they might otherwise be in the absence of
these transactions. See "Underwriting" in this prospectus supplement.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
SUMMARY OF TERMS............................................................3
RISK FACTORS................................................................7
FORMATION OF THE TRUST.....................................................14
THE FINANCED STUDENT LOAN POOL............................................ 16
DESCRIPTION OF THE NOTES...................................................27
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS.......................33
FEDERAL FAMILY EDUCATION LOAN PROGRAM......................................51
CERTAIN FEDERAL INCOME TAX AND STATE TAX CONSEQUENCES......................56
ERISA CONSIDERATIONS.......................................................56
UNDERWRITING...............................................................58
LEGAL MATTERS..............................................................59
REPORTS TO SECURITYHOLDERS.................................................59
FORWARD LOOKING STATEMENTS.................................................59
ANNEX I....................................................................60
INDEX OF PRINCIPAL TERMS...................................................64
EXHIBIT A..................................................................S-
PROSPECTUS
RISK FACTORS................................................................
FORMATION OF THE TRUSTS.....................................................
USE OF PROCEEDS.............................................................
USA GROUP, SMS, THE SELLER
AND THE SERVICER.......................................................
THE STUDENT LOAN POOLS......................................................
FEDERAL FAMILY EDUCATION LOAN PROGRAM.......................................
WEIGHTED AVERAGE LIFE OF THE SECURITIES.....................................
POOL FACTORS AND TRADING INFORMATION........................................
DESCRIPTION OF THE NOTES....................................................
DESCRIPTION OF THE CERTIFICATES.............................................
INFORMATION REGARDING THE SECURITIES........................................
DESCRIPTION OF THE TRANSFER AND
SERVICING AGREEMENTS...................................................
LEGAL ASPECTS OF THE STUDENT LOANS..........................................
FEDERAL INCOME TAX CONSEQUENCES.............................................
STATE TAX CONSEQUENCES......................................................
ERISA CONSIDERATIONS........................................................
PLAN OF DISTRIBUTION........................................................
LEGAL MATTERS...............................................................
AVAILABLE INFORMATION.......................................................
INCORPORATION OF DOCUMENTS BY REFERENCE
INDEX OF PRINCIPAL TERMS....................................................
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 to aid your understanding and is
qualified by the full description of this other information in this
prospectus supplement and the accompanying prospectus. 1 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 INITIAL 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 __________, ____.
CUTOFF DATE
__________, ____. 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
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 of $1,000.
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. 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.
PRINCIPAL PAYMENTS
No principal will be paid to you prior to the end of the revolving period. The
revolving period will begin on the date the senior notes are issued and will end
__________, ____ (or earlier as described in this prospectus supplement).
Following the end of the revolving period, 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, specified fees;
o pro rata, to the senior noteholders, interest and to the swap
counterparties, any net swap payments;
o to the subordinate noteholders, interest; 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 these 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 this 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.
Neither Secondary Market Company, Inc. nor its assignee may exercise this option
until the unpaid principal amount of the senior notes and the subordinate notes
is less than or equal to 20% of the initial unpaid principal amount of the
senior notes plus the subordinate notes.
TRUST PROPERTY
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 one or more interest rate swaps.
THE INITIAL FINANCED STUDENT LOANS
The student loans consist of specified 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
o Loans (%): _____%
o PLUS Loans (%): ____%
o SLS 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. The trust will purchase additional student
loans from collections received on the student loans owned by the trust that are
not used to cover specified fees and expenses of the trust, distributions on the
notes, deposits to the reserve account and payments due to the swap
counterparties.
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
additional student loans from collections received on the student loans owned by
the trust that are not used to cover specified fees and expenses of the trust,
distributions on the notes, deposits to the reserve account and payments due to
the swap counterparties.
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 in this prospectus
supplement. 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.
Amounts in the reserve account on any quarterly payment date (after giving
effect to all distributions to be made on this 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 in
this prospectus supplement 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 SWAPS
The trust and the initial swap counterparty have entered into an interest rate
swap. Unless terminated earlier, this interest rate swap will terminate on the
_____, ____ quarterly payment date. The trust will owe the initial 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 initial
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 the initial interest rate swap 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 the initial interest rate swap 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 initial swap counterparty to cause the scheduled notional amount to
equal an amount up to the outstanding principal balance of the notes.
In addition to the initial interest rate swap, the administrator may cause the
trust to enter into additional interest rate swaps with additional swap
counterparties on substantially similar terms as the initial interest rate swap.
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 (2) 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.
<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
these 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 and
the interest rate swaps. 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 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 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 specified
fees and expenses of the trust,
distributions on the notes, deposits
to the reserve account or payments
to the swap counterparties 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:
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
of the student loans, 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 of these 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.
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.
o The revolving period may
terminate earlier than ________,
____ if
o the student loans fail
specified performance tests,
o the amount of excess interest
for two successive quarterly
payment dates is below a
specified level,
o an event of default occurs
under the indenture or other
transaction documents or
o specified other events occur.
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. These 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 specified 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.............................. Interest collections plus net swap
receipts may be insufficient to
cover interest on the notes. If this
occurs, amounts otherwise that would
have been paid to you as principal,
will be paid to you as interest.
This may occur 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 interest will be
collected will be less than the
principal amount of the senior
notes and the subordinate notes.
o The trust's obligation to pay
specified fees to the Department
of Education.
If interest collections plus net
swap receipts are not sufficient to
cover interest on the notes, 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 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
the guarantor as result of
borrower defaults;
o the amount of claims reimbursed
to the 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 this
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
these 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 these guarantee payments,
interest subsidy payments or special
allowance payments could adversely
affect the trust's ability to pay
you timely interest and principal.
In this event, you may suffer a loss
on your investment.
RISK ASSOCIATED WITH THE INTEREST
RATE SWAPS............................ USA Group Secondary Market Services,
Inc. expects the scheduled notional
amount of the initial interest rate
swap for each quarterly payment date
to be less than the outstanding
principal balance of the notes. As a
result, the initial 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 initial swap
counterparty to cause the scheduled
notional amount to equal an amount
up to the outstanding principal
balance of the notes. Further, USA
Group Secondary Market Services,
Inc., as administrator, may cause
the trust to enter into additional
interest rate swaps following the
closing date with additional swap
counterparties.
In addition, the initial interest
rate swap will, and subsequent
interest rate swaps may, terminate
prior to the final maturity date for
each class of the notes. If an
interest rate swap is terminated
earlier than scheduled, the trust or
the applicable swap counterparty may
be liable to pay to the other a
termination payment. Any termination
payment payable by the trust could
be substantial and could reduce
amounts otherwise payable to
noteholders, thereby resulting in
shortfalls to you.
MASTER PROMISSORY NOTE.................... For periods of enrollment beginning
on or after July 1, 1999, a master
promissory note may evidence any
student loan made to a borrower
under the Federal Family Education
Loan program. Under the master
promissory note, each borrower
executes only one promissory note
with each lender. Subsequent student
loans from that lender are evidenced
by a confirmation sent to the
student. Therefore, if a lender
originates multiple student loans to
the same student, all the student
loans are evidenced by a single
promissory note.
Pursuant to the Higher Education Act
of 1965, as amended, each student
loan made under a master promissory
note may be sold independently of
any other student loan under the
same master promissory note and each
student loan is separately
enforceable on the basis of an
original or copy of the master
promissory note. Also, a security
interest in these student loans may
be perfected either through the
secured party taking possession of
the original or a copy of the master
promissory note, or the filing of a
financing statement. Prior to the
master promissory note, each student
loan made under the Federal Family
Education Loan program was evidenced
by a separate note. Assignment of
the original note was required to
effect a transfer and possession of
a copy did not perfect a security
interest in the loan.
[Although none of the initial
student loans have been originated
under a master promissory note, it
is possible that additional loans
transferred to the trust may be
originated under a master promissory
note.] If through negligence or
otherwise the servicer (or a
sub-servicer on its behalf) were to
deliver a copy of the master
promissory note, in exchange for
value, to a third party that did not
have knowledge of the indenture
trustee's lien, that third party may
also claim an interest in the
student loan. The third party's
interest may be prior to or on a
parity with the interest of the
indenture trustee.
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 the
systems of the servicer, the
administrator, the guarantors, the
eligible lender trustee or the
indenture trustee continue to have
the 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
specified 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 an early termination
of the revolving period.
<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 in this prospectus supplement and in the prospectus. The
Trust will not engage in any activity other than:
o acquiring, holding and managing the Student Loans (the "Initial
Financed Student Loans") sold to the Trust on ________, ____ (the
"Closing Date"), the additional Student Loans acquired by the
Trust after the Closing Date (the "Additional Student Loans" and,
together with the Initial Financed Student Loans, the "Financed
Student Loans") and the other assets of the Trust and proceeds
therefrom,
o issuing the Notes,
o making payments thereon,
o originating Federal Consolidation Loans during the Revolving
Period,
o entering into the Initial Interest Rate Swap and Subsequent
Interest Rate Swaps, and
o engaging in other activities that are necessary, suitable or
convenient to accomplish the foregoing or are incidental thereto
or connected therewith.
The proceeds from the sale of the Notes will be used by ______________
(the "Eligible Lender Trustee") to purchase on behalf of the Trust the Initial
Financed Student Loans from 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 Collection Account on the Closing Date of cash or Eligible
Investments equal to $__________ and to fund the costs of issuance. Upon the
consummation of the transactions, the property of the Trust will consist of
o 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,
o all funds collected in respect of the student loans on or after
the Cutoff Date, net of interest accrued thereon prior to the
Cutoff Date and not to be capitalized,
o all monies and investments on deposit in the Collection Account,
the Collateral Reinvestment Account and the Reserve Account and
o the Initial Interest Rate Swap.
The Notes will be collateralized by the assets of the Trust as
described in this prospectus supplement. The Collection Account, the Reserve
Account, the Collateral Reinvestment Account and the Initial 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.
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" in this
prospectus supplement. In addition, after the Revolving Period, Additional
Student Loans will be added to the Trust to the extent that:
o the Eligible Lender Trustee on behalf of the Trust purchases
Serial Loans from the Seller,
o the Trust owns Financed Student Loans which are exchanged for
Serial Loans owned by the Seller as described in this prospectus
supplement or
o 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 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 the 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" in this prospectus supplement 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 Interest Rates and Special
Allowance Payments" in this prospectus supplement. Accordingly, there can be no
assurance as to the amount or timing of Additional Fundings during the Revolving
Period. Upon an Early Amortization Event or in any event if the amount on
deposit in the Collateral Reinvestment Account has not been reduced to zero by
the end of the Revolving Period, any amounts remaining on deposit in the
Collateral Reinvestment Account will be paid on the Quarterly Payment Date
immediately following the end of the Revolving Period as a payment of principal
first to the Class A-1 Noteholders until the Class A-1 Notes have been paid in
full, then to the Class A-2 Noteholders until the Class A-2 Notes have been paid
in full and then to the Subordinate Noteholders. There can also be no assurance
as to the amount of Additional Fundings that will occur after the Revolving
Period. See "Description of the Transfer and Servicing Agreements--Revolving
Period and Additional Fundings" in this prospectus supplement.
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 ____________________ and whose New York 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 the 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 the 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" in this prospectus supplement and "Description of the Transfer and
Servicing Agreements" in this prospectus supplement 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 as of the Cutoff Date consists of a
Student Loan that was subject to the Seller's prior obligation to sell the loan
to a third party.
Following the Closing Date and prior to the end of the Revolving
Period, the Trust will be obligated from time to time to purchase from the
Seller, and the Seller, subject to the availability of New Loans, 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 of Serial Loans, Serial Loans owned
by the Seller. During the Revolving Period, the purchase of New Loans and Serial
Loans for the Loan Purchase Amount for the loan, will be funded by means of a
transfer of amounts on deposit in the Collateral Reinvestment Account as
described in this prospectus supplement. 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 the Serial
Loans, provided that the Serial Loans and eligible Financed Student Loans meet
specified criteria described in this prospectus supplement. 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 the Serial Loan has been acquired by the Trust
from amounts, if any, then on deposit in the Reserve Account in excess of the
Specified Reserve Account Balance. No Purchase Premium Amounts will be payable
for Serial Loans exchanged for by the Trust.
In addition, following the Closing Date and prior to the end of the
Revolving Period, the Eligible Lender Trustee on behalf of the Trust will seek
to originate Federal Consolidation Loans to borrowers under Financed Student
Loans who are also borrowers under one or more Student Loans (whether or not all
the 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" in this prospectus supplement. Any of these originations 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 the Student
Loans to prepay the 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 the 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 the 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 the 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 ___ 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" in this prospectus supplement, borrowers may consolidate
additional loans ("Add-on Consolidation Loans") with an existing Federal
Consolidation Loan within 180 days from the date that the existing Federal
Consolidation Loan was made. As a result of the addition of any Add-on
Consolidation Loans, the related Federal Consolidation Loan may, in specified
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 the Student Loans to prepay the loans. For a maximum period of 210
days following the end of the Revolving Period (30 days being attributed to the
processing of any Add-on Consolidation Loans), these 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" in this prospectus supplement.
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" in this prospectus supplement 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 related borrowers, the related Guarantors, the
distribution by loan type, the distribution by interest rate, the distribution
by principal balance and the distribution by remaining term to scheduled
maturity described in the following tables, may vary significantly from those of
the Initial Financed Student Loans as of the Cutoff Date. In addition, the
distribution by weighted average interest rate applicable to the Financed
Student Loans on any date following the Cutoff Date may vary significantly from
that set forth in the following tables as a result of variations in the
effective rates of interest applicable to the Financed Student Loans. Moreover,
the information described below with respect to the original term to maturity
and remaining term of maturity of the Initial Financed Student Loans as of the
Cutoff Date may vary significantly from the actual term to maturity of any of
the Financed Student Loans as a result of the granting of deferral and
forbearance periods with respect thereto.
Set forth below in the following tables is a description of specified
characteristics of the Initial Financed Student Loans as of _________, ____ (the
"Cutoff Date"). The percentages set forth in the tables below may not always add
to 100% due to rounding.
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" in this prospectus
supplement 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" in this prospectus supplement and in the prospectus.
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY LOAN TYPE AS OF THE CUTOFF DATE
PERCENT OF INITIAL
FINANCED STUDENT
AGGREGATE LOANS
NUMBER OUTSTANDING BY OUTSTANDING
LOAN TYPE 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 $______________.
<TABLE>
<CAPTION>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY BORROWER INTEREST RATES AS OF THE CUTOFF DATE
PERCENT OF INITIAL
AGGREGATE FINANCED STUDENT
OUTSTANDING LOANS
RANGE OF INTEREST NUMBER PRINCIPAL BY OUTSTANDING
RATES (1) OF LOANS BALANCE (2) PRINCIPAL BALANCE
- ----------------- -------- ----------- -------------------
<S> <C> <C> <C>
Less than 6.50%....................................... $ %
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 be no assurance that the foregoing
information will remain applicable to the Initial Financed Student Loans at
any time after the Cutoff Date. See "Federal Family Education Loan Program"
in this prospectus supplement 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY OUTSTANDING PRINCIPAL BALANCE AS OF THE CUTOFF DATE
PERCENT OF INITIAL
FINANCED STUDENT
AGGREGATE LOANS
RANGE OF OUTSTANDING NUMBER OUTSTANDING BY OUTSTANDING
PRINCIPAL BALANCE OF LOANS PRINCIPAL BALANCE (1) PRINCIPAL BALANCE
- -------------------- -------- --------------------- ------------------
<S> <C> <C> <C>
Less than $2,000..................................... $ %
$ 2,000 to $ 3,999...................................
$ 4,000 to $ 5,999...................................
$ 6,000 to $ 7,999...................................
$ 8,000 to $ 9,999...................................
$10,000 to $11,999...................................
$12,000 to $13,999...................................
$14,000 to $15,999...................................
$16,000 to $17,999...................................
$18,000 to $19,999...................................
$20,000 to $21,999...................................
$22,000 to $23,999...................................
$24,000 to $25,999...................................
$26,000 to $27,999...................................
$28,000 and above ................................... -------- --------------------- ------------------
Total........................................... $ %
======== ===================== ===================
- --------------
(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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY REMAINING TERM TO SCHEDULED MATURITY AS OF THE CUTOFF DATE
PERCENT OF INITIAL
FINANCED STUDENT
AGGREGATE LOANS
NUMBER OF MONTHS REMAINING TO NUMBER OUTSTANDING BY OUTSTANDING
SCHEDULED MATURITY (1) OF LOANS PRINCIPAL BALANCE (2) PRINCIPAL BALANCE
- ---------------------------- -------- --------------------- ------------------
<S> <C> <C> <C>
Less than 24......................................... $ %
24 to 35.............................................
36 to 47.............................................
48 to 59.............................................
60 to 71.............................................
72 to 83.............................................
84 to 95.............................................
96 to 107 ...........................................
108 to 119...........................................
120 to 131...........................................
132 to 143...........................................
144 to 155...........................................
156 to 167...........................................
168 to 179...........................................
180 to 191...........................................
192 and above........................................ __________ _______________________ _____________________
Total........................................... $ %
========== ======================= =====================
- ----------------
(1) Determined from the Cutoff Date to the stated maturity date of the
applicable Initial Financed Student Loans, assuming repayment commences
promptly upon expiration of the typical grace period following the expected
graduation date and without giving effect to any deferral or forbearance
periods that may be granted in the future. See "Federal Family Education
Loan Program" in this prospectus supplement 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.
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY BORROWER PAYMENT STATUS AS OF THE CUTOFF DATE
PERCENT OF INITIAL
FINANCED STUDENT
AGGREGATE LOANS
NUMBER OUTSTANDING BY OUTSTANDING
BORROWER PAYMENT STATUS(1) OF LOANS PRINCIPAL BALANCE (2) PRINCIPAL BALANCE
- -------------------------- -------- --------------------- ------------------
<S> <C> <C> <C>
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: the borrower may still be attending school
("In-School"), may be in a grace period prior to repayment commencing
("Grace"), may be repaying the loan ("Repayment") or may have temporarily
ceased repaying the loan through a deferral ("Deferral") or a forbearance
("Forbearance") period. See "Federal Family Education Loan Program" in this
prospectus supplement 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF THE INITIAL FINANCIAL STUDENT LOANS
BY LOCATION AS OF THE CUTOFF DATE
PERCENT OF INITIAL
FINANCED STUDENT
AGGREGATE LOANS
NUMBER OF OUTSTANDING BY OUTSTANDING
LOCATION (1) LOANS PRINCIPAL BALANCE (2) PRINCIPAL BALANCE
- ------------ --------- --------------------- ------------------
<S> <C> <C> <C>
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.............................................
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DISTRIBUTION OF INITIAL FINANCED STUDENT LOANS
BY DATE OF DISBURSEMENT
PERCENT OF INITIAL
FINANCED STUDENT
AGGREGATE LOANS
NUMBER OUTSTANDING BY OUTSTANDING
BORROWER PAYMENT STATUS (1) OF LOANS PRINCIPAL BALANCE (2) PRINCIPAL BALANCE
- --------------------------- ---------- --------------------- ------------------
<S> <C> <C> <C>
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.
</TABLE>
DISTRIBUTION OF INITIAL FINANCED STUDENT LOANS
BY NUMBER OF DAYS OF DELINQUENCY AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
Percent of Initial
Financed Student
Aggregate Loans
Number Outstanding by Outstanding
DAYS DELINQUENT of Loans Principal Balance (1) Principal Balance
- --------------- --------- --------------------- -------------------
<S> <C> <C> <C>
0 - 30.............................................. $ %
31 - 60..............................................
61 - 90..............................................
91 - 120.............................................
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.
</TABLE>
Each of the Financed Student Loans provides or will provide for the
amortization of the outstanding principal balance of the 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 the 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 the 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 the
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
specified 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 are guaranteed by USA
Funds.
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 addition, have guarantees from Additional
Guarantors and no more than 5% of the Financed Student Loans (by principal
balance) may, following any addition, have guarantees from any one Additional
Guarantor (unless and to the extent that either 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:
0 failure by the borrower under a Financed Student Loan to
make monthly principal or interest payments when due,
provided the 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 the guarantee against the 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);
0 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;
0 the death of the borrower under a Financed Student Loan;
0 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;
0 the school closed thereby preventing the borrower from
completing his/her program of study; or
0 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 the 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 the guarantor under the loan
insurance program of the 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 the guarantor did
business, the full honoring of all guarantees issued by the guarantor prior to
the assumption by the Secretary of the functions of the guarantor, and the
proper servicing of Student Loans guaranteed by the guarantor prior to the
Secretary's assumption of the functions of the 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" in
this prospectus supplement.
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:
0 the origination and servicing of the Financed Student Loan
being performed in accordance with the Act and other
applicable requirements,
0 the timely payment to the Guarantor of the guarantee fee
payable with respect to the Financed Student Loan,
0 the timely submission to the Guarantor of all required
pre-claim delinquency status notifications and of the claim
with respect to the Financed Student Loan, and
0 the transfer and endorsement of the promissory note
evidencing the 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 the Financed Student Loan, in the denial of guarantee
coverage with respect to specified accrued interest amounts with respect thereto
or in the loss of specified Interest Subsidy Payments and Special Allowance
Payments with respect thereto. Under the Servicing Agreement and the Loan Sale
Agreement, the 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" in this prospectus supplement) or the Seller, as the case may be, to
purchase or repurchase the Financed Student Loan or, in the case of a breach by
the Seller, to substitute for the loan and to reimburse the Trust for the
non-guaranteed interest amounts or the 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 Agreement--Sale of Student
Loans; Representations and Warranties" and "Servicer Covenants" in the
prospectus.
Set forth below is 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)
------------------- ----------------------
1995 $5,040
1996 5,376
1997 6,228
1998 6,196
1999 6,473
- ----------------
* 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.
<PAGE>
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 the Guarantor by the aggregate amount of default
claims paid by the 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
------------------- --------------
1995 35.26%
1996 39.21
1997 40.89
1998 44.45
1999 47.54
- ---------------
* The information set forth in the table above with respect to USA Funds
has been obtained from the 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 the 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 the Guarantor will
receive reimbursement for reinsurance claims at the maximum reinsurance rate
permitted under the Higher Education Act. The 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" in this prospectus
supplement. The following table sets forth the claims rate of USA Funds
(excluding Arizona, Hawaii and some Pacific islands in the case of federal
fiscal years 1995 and 1996) for each of the last five federal fiscal years*:
CLAIMS RATE OF
FEDERAL FISCAL YEAR USA Funds
------------------- ----------
1995 4.69%
1996 4.65
1997 4.65
1998 3.96
1999 2.62
- ----------------
* The information set forth in the table above with respect to USA Funds
has been obtained from the 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 the 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 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
some Federal Guarantors that could become Additional Guarantors.
<PAGE>
DESCRIPTION OF THE NOTES
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
_______________, a _______________ (the "Indenture Trustee"), substantially in
the form filed as an exhibit to the Registration Statement. The following
summary describes some 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 the 28th 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 the Quarterly Payment
Date occurs (whether or not the 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 the Quarterly Payment Date will be due on the next
Quarterly Payment Date, together with an amount equal to interest on this 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 the Quarterly Payment
Date. See "Description of the Transfer and Servicing Agreement--Distributions"
and "--Credit Enhancement" in this prospectus supplement.
The "Class A-1 Note Rate", the "Class A-2 Note Rate" and the
"Subordinate Note Rate" shall be equal to Three-Month LIBOR for the related
LIBOR Reset Period (determined as described in this prospectus supplement) plus
____%, ____% and ____%, respectively; provided that if the Subordinate Note
Trigger is triggered on any date, the Subordinate Note Rate shall equal zero [at
any time thereafter][until the Subordinate Note Trigger is no longer triggered].
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. In the
case of the initial Quarterly Interest Period, interest will accrue for the
period from the Closing Date to but excluding _________, _____ based on
Three-Month LIBOR as determined on the initial LIBOR Determination Date and for
the period from ________, ____ to but excluding ________, ____ based on
Three-Month LIBOR as determined on the LIBOR Determination Date in ________,
____. See "--Calculation of Three-Month LIBOR."
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 the 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 the Collection Period to
the extent the interest will be capitalized upon commencement of repayment),
after giving effect to the following, without duplication:
0 all payments received by the Trust during the Collection
Period from or on behalf of borrowers, the Guarantors and,
with respect to specified payments on specified Financed
Student Loans, the Department (collectively, the
"Obligors"),
0 all Purchase Amounts received by the Trust for the
Collection Period from the Seller or the Servicer,
0 all Additional Fundings made with respect to the Collection
Period and
0 all losses realized on Financed Student Loans liquidated
during the 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" in this prospectus supplement.
The "Subordinate Note Trigger" shall be activated on any date if the
aggregate principal amount of the Notes, after giving effect to all
distributions on this date, is less than __% of the Pool Balance as of the last
day of the related Collection Period.
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 the 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
0 the Servicing Fee and all overdue Servicing Fees,
0 the Administration Fee and all overdue Administration Fees,
0 the Senior Noteholders' Interest Distribution Amount and the
Trust Swap Payment Amount, if any, and
0 the Subordinate Noteholders' Interest Distribution Amount;
and, if the Available Funds are insufficient, from amounts on deposit in the
Reserve Account. See "Description of the Transfer and Servicing
Agreements--Distributions" and"--Credit Enhancement" in this prospectus
supplement. If the Available Funds and the amounts on deposit in the Reserve
Account are insufficient to pay the Senior Noteholders' Principal Distribution
Amount or, after the Senior Notes have been paid in full, the Subordinate
Noteholders' Principal Distribution, for a Quarterly Payment Date, the 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 this 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 the
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 the Quarterly Payment Date and the Noteholders
will have no entitlement thereto except to the extent of any excess in the
Reserve Account of which there can be no assurance. See "Description of the
Transfer and Servicing Agreements--Credit Enhancement--Reserve Account" in this
prospectus supplement.
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 these dates as a result of a variety of factors including
those described under "Risk Factors--The Return on Your Investment Will Change
Over Time" in this prospectus supplement.
MANDATORY REDEMPTION
If any amount remains on deposit in the Collateral Reinvestment
Account on the last day of the Revolving Period after giving effect to all
Additional Fundings on or prior to this date, the entire amount remaining on
deposit in the Collateral Reinvestment Account will be used on the Quarterly
Payment Date on or immediately following this date first to pay the Swap
Counterparties 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 amount then on deposit in the Collateral Reinvestment
Account after giving effect to the payment to the Swap Counterparties of any
prior Net Trust Swap Payment Carryover Shortfalls on the last day of the
Revolving Period.
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 Rate,
the Class A-2 Note Rate and the Subordinate Note Rate for each Quarterly
Interest Period (x) on the second business day prior to the commencement of the
LIBOR Reset Period within the Quarterly Interest Period (or, in the case of the
initial LIBOR Reset Period, on the second business day prior to the Closing
Date) and (y) with respect to the initial Quarterly Interest Period, as
determined pursuant to clause (x) for the period from the Closing Date to but
excluding ________, ____ and as determined on the second business day prior to
________, ____ for the period from ________, ____ to but excluding ________,
____ (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 the 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
the LIBOR Determination Date. If the rate does not appear on Telerate Page 3750,
the rate for that day will be determined on the basis of the rates at which
deposits in U.S. dollars, having the Index Maturity and in a principal amount of
not less than U.S. $1,000,000, are offered at approximately 11:00 a.m. London
time, on the 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 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 the 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 28th day 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 another 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 some other organizations. Indirect access
to the DTC system also is available to others, including 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
Quarterly Payment Date, DTC will forward the 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 the terms are used in the Indenture.
Senior Noteholders will be permitted to exercise the rights of Senior
Noteholders indirectly through DTC and its Participants (which in turn will
exercise their rights through DTC).
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Senior Notes and is
required to receive and transmit distributions of principal of and interest on
the Senior Notes. Participants and Indirect Participants with which Senior
Noteholders have accounts with respect to the Senior Notes similarly are
required to make book-entry transfers and receive and transmit the 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 specified 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 the Senior Notes,
may be limited due to the lack of a physical certificate for the 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 specified other organizations. Indirect access to CEDEL is also available to
others, including, 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. 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). These
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. CEDEL or the Euroclear Operator, as the
case may be, will take any other action permitted to be taken by a Senior
Noteholder under the Indenture on behalf of a CEDEL Participant or Euroclear
Participant only in accordance with the relevant rules and procedures and
subject to the relevant Depositary's ability to effect these 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
these systems, or indirectly through organizations which are participants in
these 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 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 these 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. These credits or any transactions in these
securities settled during this processing will be reported to the relevant
Euroclear or CEDEL Participants on the business day following the DTC settlement
date. 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 "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, these cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in the 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 these procedures and these 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: (1) impress upon them the importance of the services being
Year 2000 compliant; and (2) 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 contingency plans as it deems appropriate.
According to DTC, the information set forth in the preceding two
paragraphs about DTC has been provided to the Industry by DTC for informational
purposes only and is not intended to serve as a representation, warranty or
contract modification of any kind.
NONE OF THE TRUST, THE SELLER, THE SERVICER, THE COMPANY, 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
0 THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC, CEDEL OR
EUROCLEAR OR ANY PARTICIPANT,
0 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,
0 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
0 ANY OTHER ACTION TAKEN BY DTC AS THE SENIOR NOTEHOLDER.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following is a summary of some 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 some 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 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 (1) an Early Amortization Event as described below or (2)
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 specified conditions described in this
prospectus supplement, to acquire additional 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 specified conditions described in this prospectus
supplement, to purchase from the Seller, and the Seller, subject to the
availability of Student Loans and to the availability of funds therefor in the
Collateral Reinvestment Account, will be obligated to tender to the Trust,
Student Loans which
0 are made to a borrower who is not a borrower under any
Financed Student Loan,
0 are made under loan programs which existed as of the Closing
Date and
0 are guaranteed by a Guarantor (each, a "New Loan" and,
collectively, the "New Loans").
New Loans will be made or acquired by Bank One, National Association ("BONA") or
another eligible lender on behalf of the Seller at the discretion and in
accordance with usual practices of the Seller. Each purchase of a New Loan will
be made by the Eligible Lender Trustee on behalf of the Trust pursuant to a
transfer agreement (each, a "Transfer Agreement") among the Seller, the Trust
and the Eligible Lender Trustee. During the Revolving Period, each purchase of a
New Loan will be funded by means of a transfer from the Collateral Reinvestment
Account of an amount equal to the sum of
0 the principal balance owed by the related borrower plus
accrued interest thereon expected to be capitalized upon
repayment (the "Purchase Collateral Balance"),
0 accrued interest on the principal balance owed by the
related borrower not expected to be capitalized upon
repayment ("Noncapitalized Accrued Interest") and
0 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:
0 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;
0 specified events of insolvency occurring with respect to the
Seller;
0 the Trust becomes subject to registration as an investment
company under the Investment Company Act of 1940, as
amended;
0 as of the end of any Collection Period, the percentage (by
principal balance) of Financed Student Loans the borrowers
of which use the loans to attend schools identified by the
related Guarantor as proprietary or vocational exceeds ___%
of the Pool Balance;
0 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;
0 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
0 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 (1) the Expected Interest
Collections for the Quarterly Payment Date and (2) the Trust Swap Receipt
Amount, if any, for the Quarterly Payment Date and (y) the sum of
0 the Servicing Fee for the Quarterly Payment Date and all
prior unpaid Servicing Fees,
0 the Administration Fee for the Quarterly Payment Date and
all prior unpaid Administration Fees,
0 the Senior Noteholders' Interest Distribution Amount and the
Trust Swap Payment Amount, if any, for
0 the Quarterly Payment Date and
0 the Subordinate Noteholders' Interest Distribution Amount
for the 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.
"Expected Interest Collections" means, with respect to any Quarterly
Interest Period, the sum of
0 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" in this prospectus supplement 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 the interest is actually paid),
0 all Interest Subsidy Payments and Special Allowance Payments
estimated to have accrued for the 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"
in this prospectus supplement and in the prospectus) and
0 Investment Earnings (as defined in "Description of the
Transfer and Servicing Agreement--Accounts" in the
prospectus) for the Student Loan Rate Accrual 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
0 are made to a borrower who is also a borrower under at least
one outstanding Financed Student Loan,
0 are made under the same loan program as the Financed Student
Loan, and
0 are guaranteed by the Guarantor that guaranteed the Financed
Student Loan (each, a "Serial Loan" and, collectively, the
"Serial Loans").
Serial Loans will be made or acquired by BONA 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 the 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 the purchases will be funded on the next succeeding
Quarterly Payment Date from any Reserve Account Excess for the Quarterly Payment
Date as described in this prospectus supplement under "Description of the
Transfer and Servicing Agreements--Credit Enhancement--RESERVE ACCOUNT".
Alternatively, at the Seller's option, following the end of the Revolving Period
the Eligible Lender Trustee will be obligated, in lieu of purchasing Serial
Loans as described above, to exchange with the Seller existing Financed Student
Loans owned by the Trust for Serial Loans owned by the Seller; PROVIDED,
HOWEVER, that each Financed Student Loan so exchanged (an "Exchanged Financed
Student Loan") meets specified criteria including that (1) the Exchanged
Financed Student Loan was originated under the same loan program and is
guaranteed by the same Guarantor as the Financed Student Loan and entitles the
holder 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 (2) the
Exchanged Financed Student Loan will not, at any level of the 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 the 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 (1) 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 (2) specified
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 the 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 the Transfer Date, in exchange for the related Loan Purchase
Amount 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 the loans
are part of the Trust) elects to consolidate the 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" in this
prospectus supplement. The 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 the Student Loans
to prepay the loans. No assurance can be given that the Eligible Lender Trustee,
rather than another lender, will be the lender which makes the Federal
Consolidation Loan. In the event that another lender makes the Federal
Consolidation Loan, any Financed Student Loan which is being consolidated by the
Federal Consolidation Loan will be prepaid. The Eligible Lender Trustee will not
be permitted to originate Federal Consolidation Loans (including the addition of
any Add-on Consolidation Loans) on behalf of the Trust during the Revolving
Period in an aggregate principal amount in excess of [$35,000,000];
additionally, no Federal Consolidation Loan may be originated by the Trust
having a scheduled maturity date after [October 28, 2030] if at the time of the
origination the aggregate principal balances of all Federal Consolidation Loans
held by the Trust that have a scheduled maturity date after [October 28, 2030]
exceed or, after giving effect to the origination, would exceed [$15,000,000];
provided, however, that the Eligible Lender Trustee will be permitted to fund
Add-on Consolidation Loans in excess of the 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 the 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" in this prospectus supplement, 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 some 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 the Student Loans to prepay the loans. For a maximum period of 210
days following the end of the Revolving Period (30 days being attributed to the
processing of any Add-on Consolidation Loans), the amounts will be funded by
amounts representing distributions of principal on the outstanding Financed
Student Loans which would otherwise have been part of the Available Funds as
described under "--Distributions" below.
As described under "Federal Family Education Loan Program" in this
prospectus supplement and in the prospectus, during specified qualifying
periods, interest on specified 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 the loans during the
qualifying 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 the loans.
Following the end of the Revolving Period, the Collateral Reinvestment Account
will cease to be available as a source to fund the interest payments to the
Noteholders, and thereafter the payments will be funded through the application
of amounts which would otherwise have been distributable in respect of the
Principal Distribution Amount for the related Quarterly Payment Date as
described under "--Distributions" below.
ACCOUNTS
In addition to the collection account (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") 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 a larger percentage approved by the rating agencies rating the Notes,
not to exceed ____% (or of ____% if the 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
1. 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 in
this prospectus supplement) on the last day of the preceding
calendar month or, if the average principal balance of
billing accounts relating to In-School Student Loans as of
the last day of the preceding calendar month was $2,500 or
less, $1.50 per billing account,
2. 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 in this prospectus supplement) as of the
last day of the preceding calendar month or, if the average
principal balance of the billing accounts as of the last day
of the preceding calendar month was $3,000 or less, $3.00
per billing account,
3. a fee of $1.00 for each notification sent by the Servicer
during the preceding calendar month on behalf of the Trust
to a borrower providing information to the borrower with
respect to Federal Consolidation Loan programs,
4. a one-time fee of $75.00 for each Federal Consolidation Loan
originated by the Eligible Lender Trustee on behalf of the
Trust during the preceding calendar month,
5. a fee of $25.00 for each Financed Student Loan for which,
during the preceding calendar month, claim documentation was
completed and provided to the Guarantor or for which the
Servicer performed bankruptcy or ineligible 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,
6. a fee of $0.05 per Financed Student Loan for storing and
warehousing the applicable loan documentation for each loan
during the preceding calendar month,
7. a one-time fee of $0.40 for each billing account transferred
by the Seller to the Trust during the preceding calendar
month,
8. a fee equal to one-twelfth of the product of (A) the
aggregate principal balances of the Financed Student Loans
outstanding as of the last day of the preceding calendar
month and (B) 0.05%, which fee will be payable so long as
specified servicing regulations of the Department remain in
effect, and
9. a fee of $70.00 per hour for system development requests
made by the Eligible Lender Trustee on behalf of the Trust
and provided by the Servicer during the preceding calendar
month.
"Monthly Payment Date" means the twenty-eighth day of each month (or
if any twenty-eighth day is not a business day, the next succeeding business
day), commencing ________, ____.
For purposes of making the determinations set forth in clauses (1) and
(2) 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:
<TABLE>
<CAPTION>
AVERAGE PRINCIPAL In-School Average Principal GRDF
BALANCE Percentage Balance Percentage
- --------------------------- ----------- ---------------------------- ------------
<S> <C> <C> <C>
$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%
</TABLE>
The Servicing Fee (together with any portion of the Servicing Fee that
remains unpaid from prior Monthly Payment Dates) will be payable on each Monthly
Payment Date and will be paid solely out of 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 the Monthly Payment 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 paragraph under "--Servicing
Compensation; Administration Fee," then an amount (the "Servicing Fee
Shortfall") equal to the excess of the amount described in clause (b) of the
first paragraph under "--Servicing Compensation; Administration Fee," over the
amount described in clause (a) of the first paragraph under "--Servicing
Compensation; Administration Fee," shall be payable on the next succeeding
Monthly Payment Date (or if the Monthly Payment Date is also a Quarterly Payment
Date, on the 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 (1) ___% and (2) the Pool
Balance as of the close of business on the last day of the calendar month
immediately preceding the related Monthly Payment Date or Quarterly Payment
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 specified 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 the 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 ________, ____).
For purposes of this prospectus supplement, "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:
1. all collections received by the Servicer on the Financed
Student Loans during the 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);
2. Interest Subsidy Payments and Special Allowance Payments
received by the Eligible Lender Trustee during the Monthly
Collection Period with respect to the Financed Student
Loans;
3. all proceeds of the liquidation of defaulted Financed
Student Loans ("Liquidated Student Loans"), which became
Liquidated Student Loans during the Monthly Collection
Period in accordance with the Servicer's customary servicing
procedures, net of expenses incurred by the Servicer in
connection with the liquidation and any amounts required by
law to be remitted to the borrowers on the Liquidated
Student Loans (the 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 the Monthly
Collection Period and remitted to the Indenture Trustee;
4. 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;
5. 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;
6. Investment Earnings for the Monthly Payment Date; and
7. 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 the Monthly Available Funds on the
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 (1) and (2),
respectively, under the second paragraph of "--Distributions--DISTRIBUTIONS FROM
THE COLLECTION ACCOUNt" below, then the Monthly Available Funds for the 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 the Monthly Payment Date which would have
constituted part of the Monthly Available Funds for the Monthly Payment Date
succeeding the Monthly Payment Date up to the amount necessary to pay the items,
and the Monthly Available Funds for the succeeding Monthly Payment Date will be
adjusted accordingly; and PROVIDED, FURTHER, that the Monthly Available Funds
will exclude
0 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;
0 except as expressly included in clause (4) above, amounts
released from the Collateral Reinvestment Account;
0 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 Financed Student Loans" in this prospectus supplement;
and
0 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
(1) though (6) of the definition of Monthly Available Funds for each of the
three Monthly Collection Periods included in the Collection Period plus any
Trust Swap Receipt Amount received by the Trust with respect to the 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 (1) through (6), respectively, under the
third paragraph of "--DISTRIBUTIONS FROM THE COLLECTION ACCOUNT" below, then the
Available Funds for the 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 the Quarterly Payment Date which would
have constituted part of the Available Funds for the Quarterly Payment Date
succeeding the Quarterly Payment Date up to the amount necessary to pay these
items, and the Available Funds for the 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 (4) 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.
DISTRIBUTIONS FROM THE COLLECTION ACCOUNT. From time to time during
the Revolving Period, 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 these 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
the funds are not needed to make Additional Fundings and redeposit the 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 the Monthly Payment Date, in the following order of priority:
(1) to the Servicer, the Servicing Fee for the Monthly Payment
Date and all prior unpaid Servicing Fees (but not any
Servicing Fee Shortfall or prior unpaid Servicing Fee
Shortfalls); and
(2) to the Administrator, the Administration Fee for the 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 the Quarterly Payment Date in the Collection Account,
in the following order of priority:
(1) to the Servicer, the Servicing Fee for the Quarterly Payment
Date and all prior unpaid Servicing Fees (but not any
Servicing Fee Shortfall or prior unpaid Servicing Fee
Shortfalls);
(2) to the Administrator, the Administration Fee for the
Quarterly Payment Date and all prior unpaid Administration
Fees;
(3) 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 applicable Swap Counterparty, the related Trust Swap
Payment Amount, if any, for the Quarterly Payment Date, PRO
RATA, based on the ratio of each amount to the total of the
amounts;
(4) to the Subordinate Noteholders, the Subordinate Noteholders'
Interest Distribution Amount for the Quarterly Payment Date;
(5) if the Revolving Period has terminated, to the Senior
Noteholders, the Senior Noteholders' Principal Distribution
Amount for the Quarterly Payment Date (the amount to be
allocated among the Senior Noteholders as described in this
prospectus supplement under "Description of the
Notes--Distributions of Principal");
(6) after the Senior Notes have been paid in full, to the
Subordinate Noteholders, the Subordinate Noteholders'
Principal Distribution Amount for the Quarterly Payment
Date; and
(7) to the Reserve Account, any remaining amounts after
application of clauses (1) through (6) above.
For purposes of this prospectus supplement, the following terms have
the following meanings:
The "Class A-1 Noteholders' Interest Carryover Shortfall" means, with
respect to any Quarterly Payment Date, the excess of (1) the Class A-1
Noteholders' Interest Distribution Amount on the preceding Quarterly Payment
Date over (2) the amount of interest actually distributed to the Class A-1
Noteholders on the preceding Quarterly Payment Date, plus interest on the amount
of the excess, to the extent permitted by law, at the interest rate borne by the
Class A-1 Notes from the 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 (1) the amount of interest
accrued at the Class A-1 Note Rate for the related Quarterly Interest Period on
the aggregate principal amount of the Class A-1 Notes outstanding on the
immediately preceding Quarterly Payment Date (after giving effect to all
principal distributions to the Class A-1 Noteholders on the immediately
preceding Quarterly Payment Date) or, in the case of the first Quarterly Payment
Date, on the Closing Date and (2) the Class A-1 Noteholders' Interest Carryover
Shortfall for the Quarterly Payment Date.
The "Class A-2 Noteholders' Interest Carryover Shortfall" means, with
respect to any Quarterly Payment Date, the excess of (1) the Class A-2
Noteholders' Interest Distribution Amount on the preceding Quarterly Payment
Date over (2) the amount of interest actually distributed to the Class A-2
Noteholders on the preceding Quarterly Payment Date, plus interest on the amount
of the excess, to the extent permitted by law, at the interest rate borne by the
Class A-2 Notes from the 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 (1) 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 the immediately
preceding Quarterly Payment Date) or, in the case of the first Quarterly Payment
Date, on the Closing Date and (2) the Class A-2 Noteholders' Interest Carryover
Shortfall for the Quarterly Payment Date.
The "Net Trust Swap Payment Carryover Shortfall" means, with respect
to any Quarterly Payment Date and any Interest Rate Swap with respect to which
there shall be an amount owed by the Trust to the related Swap Counterparty
under the related Interest Rate Swap, the excess of (1) the related Trust Swap
Payment Amount on the preceding Quarterly Payment Date over (2) the amount
actually paid to the related Swap Counterparty out of Available Funds on the
preceding Quarterly Payment Date, plus interest on the excess from the 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 and any Interest Rate Swap with respect to which
there shall be an amount owed by the related Swap Counterparty to the Trust
under the related Interest Rate Swap, the excess of (1) the related Trust Swap
Receipt Amount on the preceding Quarterly Payment Date over (2) the amount
actually paid by the related Swap Counterparty to the Trust on the preceding
Quarterly Payment Date, plus interest on the excess from the 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 the 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 the 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 (1) the
amount of any insignificant balance remaining outstanding as of the Quarterly
Payment Date on a Financed Student Loan after receipt of a final payment from a
borrower or a Guarantor, when the 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 (2) 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 the Quarterly Payment Date other than distributions to the Company out of the
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 the Quarterly Payment Date), the sum
of the following amounts with respect to the related Collection Period:
1. that portion of all collections received by the Servicer on
the Financed Student Loans and remitted to the Indenture
Trustee that is allocable to principal (including the
portion of any Guarantee Payments received that is allocable
to principal) of the Financed Student Loans less the sum of
0 any collections which are applied by the Trust
during the Collection Period to purchase Serial
Loans,
0 any collections which are applied by the Trust
during the Collection Period to fund the addition
of any Add-on Consolidation Loans and
0 accrued and unpaid interest on the Financed
Student Loans for the Collection Period to the
extent the interest is not currently being paid
but will be capitalized upon commencement of
repayment of the Financed Student Loans;
2. all Liquidation Proceeds attributable to the principal
balances of Financed Student Loans which became Liquidated
Student Loans during the 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 the Financed Student Loans;
3. 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
4. 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 the 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 the Quarterly Payment
Date.
The "Senior Noteholders' Interest Distribution Amount" means, with
respect to any Quarterly Payment Date, the sum of (1) the Class A-1 Noteholders'
Interest Distribution Amount, and (2) the Class A-2 Noteholders' Interest
Distribution Amount, for the Quarterly Payment Date.
The "Senior Noteholders' Principal Carryover Shortfall" means, as of
the close of any Quarterly Payment Date, the excess of (1) the Senior
Noteholders' Principal Distribution Amount on the Quarterly Payment Date over
(2) the amount of principal actually distributed to the Senior Noteholders on
the 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 the Quarterly
Payments Date), the Principal Distribution Amount for the 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 the preceding Quarterly
Payment Date. In addition, (1) 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 (2) 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 the 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 the
Quarterly Payment Date.
The "Subordinate Noteholders' Interest Carryover Shortfall" means,
with respect to any Quarterly Payment Date, the excess of (1) the Subordinate
Noteholders' Interest Distribution Amount on the preceding Quarterly Payment
Date over (2) the amount of interest actually distributed to the Subordinate
Noteholders on the preceding Quarterly Payment Date, plus interest on the amount
of the excess, to the extent permitted by law, at the rate borne by the
Subordinate Notes from the 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 (1) 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 the Quarterly Payment
Date) or, in the case of the first Quarterly Payment Date, on the Closing Date
and (2) the Subordinate Noteholders' Interest Carryover Shortfall for the
Quarterly Payment Date.
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 (1) the Subordinate Noteholders' Principal
Distribution Amount on the Quarterly Payment Date over (2) the amount of
principal actually distributed to the Subordinate Noteholders on the 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 the 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 the 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 the preceding Quarterly
Payment 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 and any Interest Rate Swap, the sum of (1) if the related Interest
Rate Swap is still in effect, the related Net Trust Swap Payment for the
Quarterly Payment Date and (2) the related Net Trust Swap Payment Carryover
Shortfall for the Quarterly Payment Date.
The "Trust Swap Receipt Amount" means, with respect to any Quarterly
Payment Date and any Interest Rate Swap, the sum of (1) if the related Interest
Rate Swap is still in effect, the related Net Trust Swap Receipt for the
Quarterly Payment Date and (2) the related Net Trust Swap Receipt Carryover
Shortfall for the 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 in the Reserve Fund 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 the Quarterly Payment Date. See
"--Distributions" above. As described below, subject to some 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 the Quarterly Payment Date after taking into account the effect of
distributions on the 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 the Quarterly
Payment 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 the Quarterly Payment Date) is greater than the Specified
Reserve Account Balance for the Quarterly Payment Date, the Administrator will
instruct the Indenture Trustee to apply the amount of the excess (the "Reserve
Account Excess") (a) during the Revolving Period, for deposit to the Collateral
Reinvestment Account; provided, however, that if this date is on or after the
Parity Date, to the extent that the funds represent payments (other than
principal payments) with respect to the Financed Student Loans, the funds shall
be applied in the order of priority set forth in clauses (b)(3) through (6)
below, and (b) at and after the termination of the Revolving Period, to the
following (in the priority indicated):
1. 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;
2. if the 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 in
this prospectus supplement 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;
3. if the 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 in this prospectus supplement under
"Description of the Notes--Distributions of Principal") or,
if the Senior Notes have been paid in full, of the
Subordinate Notes;
4. to the Servicer, the Servicing Fee Shortfall and all prior
unpaid Servicing Fee Shortfalls, if any; and
5. to the Company, any excess remaining after application of
clauses (1) through (4) above,
and, upon the payment to the Company or an affiliate, the Noteholders will not
have any rights in, or claims to, the 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 the Monthly Payment Date is
insufficient to pay: (1) the Servicing Fee and all overdue Servicing Fees and
(2) 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
the Quarterly Payment Date is insufficient to pay any of the items specified in
clauses (1) through (7), respectively, of the third paragraph under
"--Distributions--DISTRIBUTIONs FROM THE COLLECTION ACCOUNT" above on the
Quarterly Payment Date. The 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 the Quarterly Payment Date. As a result of the
subordination of the Subordinate Notes to the Senior Notes described elsewhere
in this prospectus supplement, any amounts that the Subordinate Noteholders
would otherwise receive from the Reserve Account in respect of the Subordinate
Noteholders' Interest Distribution Amount on any Quarterly Payment Date will be
paid to the Senior Noteholders until the Senior Noteholders' Interest
Distribution Amount for the Quarterly Payment Date has been paid in full. In
addition, as a result of the subordination, Subordinate Noteholders will not
receive any amounts from the Reserve Account in respect of the Subordinate
Noteholders' Principal Distribution Amount until the Senior Notes have been paid
in full. See "--SUBORDINATION" below.
The Reserve Account is intended to enhance the likelihood of timely
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
specified 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.
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 class of Notes to the
aggregate principal amount of the Senior Notes, until the aggregate principal
amount of the Senior Notes has been reduced to zero. In addition, the rights of
the Subordinate Noteholders to receive payments of interest on any Quarterly
Payment Date out of the Available Funds or the Reserve Account are subordinated
to the rights of the Senior Noteholders to receive payments of interest on the
Quarterly Payment 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 the Quarterly Payment 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 "Initial Interest Rate Swap")
with _________________________ (the "Initial Swap Counterparty"). The Initial
Interest Rate Swap will terminate on the earliest to occur of the ________, ____
Quarterly Payment Date (the "Scheduled Initial Swap Termination Date"), the date
on which the Notes have been paid in full and the date on which the Initial
Interest Rate Swap is terminated in accordance with its terms pursuant to an
early termination (the "Initial Swap Termination Date").
The Administrator may cause the Trust to enter into additional
interest rate swap agreements (the "Subsequent Interest Rate Swaps" and,
together with the Initial Interest Rate Swap, the "Interest Rate Swaps") with
counterparties rated at least __ by at least [2] nationally recognized rating
agencies (the "Subsequent Swap Counterparties") on terms substantially the same
as the Initial Interest Rate Swap.
Each Interest Rate Swap will be documented according to a 1992 ISDA
Master Agreement (Multicurrency-Cross Border), together with a Schedule and a
Confirmation (the "Swap Agreement") modified to reflect the terms of the Notes,
the Indenture and the applicable Interest Rate Swap.
In accordance with the terms of the Interest Rate Swaps, the
applicable Swap Counterparty will pay to the Trust, on each Quarterly Payment
Date with respect to which the related Interest Rate Swap is still in effect, an
amount equal to the product of
0 the Swap Rate for the related Quarterly Interest Period,
0 the Scheduled Notional Swap Amount for the Quarterly Payment
Date and
0 the quotient of the number of days in the related Quarterly
Interest Period divided by 360.
The "Swap Rate" for any Interest Rate Swap and any Quarterly Interest Period
will be a rate equal to Three-Month LIBOR (determined as described in this
prospectus supplement under "Description of the Notes--Calculation of
Three-Month LIBOR") for the Quarterly Interest Period. The "Scheduled Notional
Swap Amount" for (a) the Initial Interest Rate Swap and any Quarterly Payment
Date will be the lesser of (1) the outstanding principal balance of the Notes
immediately preceding the Quarterly Payment Date and (2) the amount listed on
Exhibit A hereto for the Quarterly Payment Date and (b) any Subsequent Interest
Rate Swap and any Quarterly Payment Date will be agreed to by the Administrator
and the related Subsequent Swap Counterparty but in no event will the Scheduled
Notional Swap Amount for a Subsequent Interest Rate Swap, when added to the
Scheduled Notional Swap Amounts of the other Interest Rate Swaps be amount
greater than the outstanding principal balance of the Notes immediately
preceding the Quarterly Payment Date. The Seller expects that the Scheduled
Notional Swap Amount for the Initial Interest Rate Swap and each Quarterly
Payment Date prior to the Initial Swap Termination Date will be equal to
approximately ___% of the outstanding principal amount of the Notes immediately
preceding the Quarterly Payment Date. However, following the Closing Date, USA
Group Secondary Market Services, Inc. may agree with the Initial Swap
Counterparty to cause the Scheduled Notional Swap Amount for the initial
Interest Rate Swap to equal the outstanding principal balance of the Notes.
In exchange for the payment, the Trust will pay to the applicable Swap
Counterparty, on each Quarterly Payment Date with respect to which the related
Interest Rate Swap is still in effect, an amount equal to the product of
0 the T-Bill Rate (determined as described below) for the
related Quarterly Interest Period plus at least ____% but
not more than ____%,
0 the Scheduled Notional Swap Amount for the Quarterly Payment
Date and
0 the quotient of the actual number of days in the Quarterly
Interest Period divided by 365 (or 366 in the case of any
amount which is being calculated with respect to a Quarterly
Payment Date in a leap year).
For each Quarterly Payment Date with respect to which an 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 related
Swap Counterparty to the Trust and the payment by the Trust to the related Swap
Counterparty will be referred to as a "Net Trust Swap Receipt", if the
difference is a positive number, and a "Net Trust Swap Payment", if the
difference is a negative number. Any payments pursuant to an Interest Rate Swap
will be made solely on a net basis, as described above. Any Trust Swap Receipt
Amounts will be distributed as part of the Available Funds on the Quarterly
Payment Date and any Trust Swap Payment Amounts 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 the 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 the 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
auction is held in a particular week, then the T-Bill Rate in effect as a result
of the last publication or report will remain in effect until the time, if any,
as the results of auctions of 91-day Treasury Bills shall again be reported or
the 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 the
period will remain in effect until the end of the Quarterly Interest Period
related to the 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 enter into any amendment to a Swap Agreement requested by
the applicable Swap Counterparty to cure any ambiguity in, or correct or
supplement any provision of, the related Swap Agreement, so long as the Eligible
Lender Trustee determines, and the Indenture Trustee agrees in writing, that the
amendment will not adversely affect the interests of the Noteholders. The
written consent of the applicable 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 applicable
Swap Counterparty and the Trust to pay specified amounts due under the related
Swap Agreement will be subject to the following conditions precedent: (1) 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 with respect to the related Interest Rate Swap and (2) no Termination
Event (as defined below) has occurred or been effectively designated with
respect to the related Interest Rate Swap; provided, however, that the
applicable Swap Counterparty's obligation to pay these amounts will not be
subject to these conditions unless principal of the Notes has been accelerated
following an Event of Default under the Indenture or an early termination under
the related Swap Agreement has occurred or been designated.
DEFAULTS UNDER THE SWAP. "Events of Default" under each Swap Agreement
(each a "Swap Default") are limited to
0 the failure of the Trust or the applicable Swap Counterparty
to pay any amount when due under the related 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 this payment,
0 the occurrence of specified events of insolvency or
bankruptcy of the Trust or the applicable Swap Counterparty,
0 an acceleration of the principal of the Notes following an
Event of Default under the Indenture, and
0 the following other standard events of default under the
1992 Master Agreement:
0 "Breach of Agreement" (not applicable to the
Trust),
0 "Credit Support Default" (not applicable to the
Trust),
0 "Misrepresentation" (not applicable to the Trust),
and
0 "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 each 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 applicable
Interest Rate Swap) and "Tax Event" (which generally relates to either party to
the applicable Interest Rate Swap receiving a payment under the applicable
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 a Swap Agreement, the non-defaulting party will have the right to
designate an Early Termination Date (as defined in the related Swap Agreement)
upon the occurrence of the 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 related Swap Agreement) and will occur only upon
notice and, in some circumstances, after any Affected Party has used reasonable
efforts to transfer it rights and obligations under the related Swap Agreement
to a related entity within a limited period after notice has been given of the
Termination Event, all as set forth in the related Swap Agreement. The
occurrence of an Early Termination Date under a Swap Agreement will constitute a
"Swap Early Termination".
Upon any Swap Early Termination of a Swap Agreement, the Trust or the
applicable Swap Counterparty may be liable to make a termination payment to the
other (regardless, if applicable, of which of the parties has caused the
termination). The amount of the termination payment will be based on the value
of the related Interest Rate Swap computed in accordance with the procedures set
forth in the related Interest Rate Swap. Any payment could be substantial. In
the event that the Trust is required to make a termination payment, the payment
will be payable in the same order of priority as any Trust Swap Payment Amount
payable to the applicable 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 applicable Swap Counterparty
following a Swap Default resulting from a default of the applicable Swap
Counterparty or a Termination Event, the 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 a Swap Counterparty and the Trust receives a payment
("Assumption Payment") from a successor swap counterparty to assume the position
of the applicable Swap Counterparty, the portion of the Assumption Payment that
does not exceed the amount of the termination payment owed by the Trust to the
applicable Swap Counterparty will be paid by the Trust to the applicable Swap
Counterparty and will not be available to make distributions to Noteholders.
Following the payment, the amount of the termination payment owed by the Trust
to the applicable Swap Counterparty will be reduced by the amount of the
payment.
RATING AGENCY DOWNGRADE. If the rating of a Swap Counterparty (or any
successor credit support provider) is withdrawn or reduced below __ or its
equivalent by any Swap Rating Agency (this withdrawal or reduction, a "Rating
Agency Downgrade"), the applicable Swap Counterparty is required, no later than
the 30th day following the Rating Agency Downgrade, at the applicable Swap
Counterparty's expense, either to (1) obtain a substitute Swap Counterparty that
has a counterparty rating of at least __ or its equivalent by the Swap Rating
Agency or (2) enter into arrangements reasonably satisfactory to the Trustee,
including collateral arrangements, guarantees or letters of credit, which
arrangements in the view of the Swap Rating Agency will result in the total
negation of the effect or impact of the Rating Agency Downgrade on the
Noteholders and the Seller.
THE INITIAL SWAP COUNTERPARTY. _________________________ is a
__________ company with its principal place of business located at
_________________________. As of the date of the prospectus supplement, the
Initial Swap Counterparty's counterparty ratings were _________________________.
THE INFORMATION SET OUT IN THE PRECEDING PARAGRAPH HAS BEEN PROVIDED
BY THE INITIAL SWAP COUNTERPARTY AND IS NOT GUARANTEED AS TO ACCURACY OR
COMPLETENESS, AND IS NOT TO BE CONSTRUED AS REPRESENTATIONS, BY THE SELLER OR
THE UNDERWRITERS. EXCEPT FOR THE FOREGOING PARAGRAPH, THE INITIAL SWAP
COUNTERPARTY AND ITS AFFILIATES HAVE NOT BEEN INVOLVED IN THE PREPARATION OF,
AND DO NOT ACCEPT RESPONSIBILITY FOR, THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS.
COMPANY LIABILITY
Anything to the contrary in the prospectus notwithstanding, the
Company will not be liable to any person or entity for the amount of any losses,
claims, damages or liabilities arising out of or based on the Trust Agreement.
TERMINATION
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 the Financed
Student Loans on the 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 the Financed Student Loans as
of the end of the Collection Period immediately preceding the Quarterly Payment
Date and (y) an amount that would be sufficient to
0 reduce the outstanding principal amount of the Notes on the
Quarterly Payment Date to zero,
0 pay to the Noteholders, the Noteholders' Interest
Distribution Amount payable on the Quarterly Payment Date
and
0 pay to the Swap Counterparties any prior unpaid Net Trust
Swap Payment Carryover Shortfalls and any other amounts owed
by the Trust to the Swap Counterparties under the Interest
Rate Swaps (the greater amount, the "Minimum Purchase
Price").
If at least two bids are not received or the highest bid is not equal to or in
excess of the Minimum Purchase Price, the Indenture Trustee will not consummate
the sale. The proceeds of any sale will be used to redeem any Notes outstanding
on the 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 as of the end of the 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 applicable 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 the 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:
0 providing that federal direct student loans are eligible to
be included in a Federal Consolidation Loan;
0 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);
0 providing that the portion of a Federal Consolidation Loan
that is comprised of Subsidized Stafford Loans retains its
subsidy benefits during periods of deferment; and
0 establishing prohibitions against various forms of
discrimination in the making of Consolidation Loans.
Except for the last of the above changes, all these 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:
0 All references to a "transition" to full implementation of
the Federal Direct Loan Program were deleted from the FFELP
statute.
0 Guarantor reserve funds were restructured so that Federal
Guarantors are provided with additional flexibility in
choosing how to spend specified funds they receive.
0 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.
0 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, specified minimum reserve levels
are protected from recall.
0 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.
0 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.
0 Federal reinsurance provided to Federal Guarantors is
reduced from 98% to 95% for Student Loans first disbursed on
or after October 1, 1998.
0 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.
0 Interest rates charged to borrowers on Stafford Loans, and
the yield for Stafford Loan holders established by the 1998
Amendments, were made permanent, absent future amendments.
0 The Secretary is authorized to permit guarantors and lenders
to enter into blanket certificate of loan guaranty
agreements. Some guarantors have begun offering these new
agreements to lenders.
0 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.
0 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.
0 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.
0 Lenders are required to offer extended repayment schedules
to new borrowers after the enactment of the 1998
Reauthorization Bill who accumulate after the date
outstanding loans under FFELP totaling more than $30,000,
under which schedules the repayment period may extend up to
25 years subject to specified minimum repayment amounts.
0 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.
0 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.
0 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.
0 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.
0 Discharge of FFELP and specified 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.
0 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.
RECENT DEVELOPMENTS - 1999 AMENDMENT. The Work Incentives Improvement
Act of 1999 passed by Congress in late November 1999, included a change in the
reference index for determining lender yield of Stafford Loans, PLUS Loans and
Federal Consolidation Loans. The formula used to calculate Special Allowance
Payments for loans first disbursed on or after January 1, 2000, and before July
1, 2003, is based on the 90-day Commercial Paper (financial) rates in effect for
each of the days in such quarter as reported by the Federal Reserve in
Publication H-15 (the "CP Rate"). Under the new formula, special allowance rates
for Stafford Loans and unsubsidized Stafford Loans will be calculated to provide
the loan holder with a minimum yield equal to the CP Rate plus 1.74 percent
during in-school periods, grace periods and deferment periods, and 2.34 percent
during repayment periods; PLUS loans and Consolidation loans will be calculated
based on the CP Rate plus 2.64 percent.
RECENT DEVELOPMENTS - 1999 FINAL REGULATIONS. The Department of
Education published its final regulations (the "1999 Final Regulations")
implementing the 1998 Reauthorization Bill. The 1999 Final Regulations implement
and interpret 1998 Reauthorization Bill and by and large reflect the consensus
of the federal and non-federal negotiators who participated in the negotiated
rulemaking process.
The major provisions of the 1999 Final Regulations include:
0 Lenders may capitalize interest on unsubsidized loans ONLY
when the loan enters repayment, at the expiration of the
period of authorized deferment, at the expiration of a
forbearance, and when the borrower defaults.
0 Lenders may assess a lower origination fee to borrowers
provided the lenders do so consistently on a state-by-state
basis. Specifically, if a lender chooses to offer a lower
origination fee, it must do so for each of its borrowers
attending school in that state and each of its borrowers who
are residents of that state.
0 Periods of service by a borrower in the armed forces is
excluded from the borrower's six-month grace period.
0 The requirements for documentation regarding a borrower's
eligibility for some types of deferments were relaxed.
0 The six-month limit for applying some in-school deferments
retroactively was removed.
0 Lenders may grant administrative forbearances to resolve
delinquencies that existed at the time a natural disaster
forbearance is applied.
0 Lenders are required to suspend collection activities
against all parties to a loan (borrower, co-maker, endorser)
if any of those parties file for a Chapter 7, 11, 12 or 13
bankruptcy. 1
0 Due diligence requirements for collecting a delinquent loan
were modified to reflect the statutory change in the
definition of default from 180 days delinquent to 270 days
delinquent.
0 A guarantor must deposit the Secretary of Education's
equitable share of borrower payments received on defaulted
loans into the guarantor's federal fund within 48 hours of
receipt of the payments.
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 the payments for Student Loans in the other
trusts using the same lender identification number and payments on the billings
will be made by the Department in lump sum form. The 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, the 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 the 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 a
liability exists in connection with a trust using the shared lender
identification number, the Department or the 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 the other trusts, resulting in the consolidated
payment from the Department received by the Eligible Lender Trustee under the
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 Servicing Agreement for the Trust and the servicing agreements for
other trusts established by the Seller which share the lender identification
number to be used by the Trust (the Trust and the other trusts, collectively,
the "Seller Trusts") will require the Eligible Lender Trustee or the Servicer
for each Seller Trust to allocate to the proper Seller Trust a shortfall or an
offset by the Department or a Federal Guarantor arising from the Student Loans
held by the Eligible Lender Trustee on the Seller Trust's behalf.
FEES PAYABLE ON 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. 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 the Federal Origination
Fee may be deferred by the Department until sufficient Interest Subsidy Payments
and Special Allowance Payments accrue to cover the fee or may be required to be
paid immediately. If the 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.
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. This opinion is not binding on the Internal Revenue
Service (the "IRS") and thus no assurance can be given that the 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.
This entity-level tax could result in reduced distributions to the Noteholders
and the Noteholders could be liable for a share of the 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 specified 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 specified and the regulations do not address the tax treatment of debt
instruments bearing contingent interest except in circumstances not relevant to
this discussion. The Trust intends to treat the stated interest as a "qualified
floating rate" for OID purposes and thus the interest should not be taxable to
the Senior Noteholders as OID or as contingent interest.
Prospective purchasers should read "Federal Income Tax Consequences"
and "State Tax Consequences" in the prospectus for a discussion of the
application of specified federal income tax laws and specified 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 specified 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 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.
<PAGE>
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 Credit Suisse First
Boston Corporation 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.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
----------------------------------------------------------
UNDERWRITER CLASS A-1 NOTES CLASS A-2 NOTES
- ------------- ---------------- ------------------
<S> <C> <C>
- ---------------------.................................... $ $
- ---------------------.................................... $ $
Total.......................................... $ $
================ ====================
</TABLE>
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 the selling group
members may allow a discount of _____% per Class A-1 Note and _____% per Class
A-2 Note on sales to specified 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 the syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions. These 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 the 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 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 specified
liabilities under the Securities Act, or contribute to payments which the
underwriters may be required to make.
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 _________________________ a
structuring fee equal to $________.
<PAGE>
LEGAL MATTERS
Specified 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. Specified federal income tax matters will be passed upon for the
Trust by Stroock & Stroock & Lavan LLP and specified 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 the reports by requesting them from the Indenture Trustee. The
reports will contain the information described under "Description of the
Transfer and Servicing Agreements--Statements to Indenture Trustee and Trust" in
the prospectus. The reports will not constitute financial statements prepared in
accordance with generally accepted accounting principles. See "Information
Regarding the Securities--Book-Entry Registration" and "Reports to
Securityholders" in the prospectus. The Trust will file with the Commission the
periodic reports required under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the rules and regulations of the Commission
thereunder. These 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.
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in specified 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
Global Securities through any of DTC, CEDEL or Euroclear. The Global Securities
will be tradeable as home market instruments in both the European and U.S.
domestic markets. Initial settlements and all secondary trades will settle in
same-day funds.
Secondary market trading between investors holding Global Securities
through CEDEL and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (I.E., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior asset-backed securities issues.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Global Securities will be effected on a
delivery-against-payment basis through the applicable Depositaries of CEDEL and
Euroclear (in this capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless the holders meet specified 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 the 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.
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 the 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.
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 (1) 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 the beneficial owner and the U.S. entity required to
withhold tax complies with applicable certification requirements and (2) the
beneficial owner takes one of the following steps to obtain an exemption or
reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of the 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, 2000. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of these Global Securities.
U.S. PERSON. As used in this prospectus supplement the term "U.S.
Person" means a beneficial owner of a Senior Note that is for United States
federal income tax purposes
0 a citizen or resident of the United States,
0 a corporation or partnership created or organized in or
under the laws of the United States or of any political
subdivision of a corporation or partnership,
0 an estate the income of which is subject to United States
federal income taxation regardless of its source, or
0 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 in this prospectus supplement, the term "Non-U.S. Person" means a
beneficial owner of a Senior Note that is not a U.S. Person.
<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 the terms may be found in
this prospectus supplement.
1998 Amendments.........................................................S-52
1998 Reauthorization Bill...............................................S-52
91-day Treasury Bills...................................................S-49
Additional Fundings.....................................................S-34
Additional Guarantor....................................................S-24
Additional Student Loans................................................S-14
Add-on Consolidation Loans..............................................S-17
Administration Agreement................................................S-33
Administration Fee......................................................S-39
Administrator...........................................................S-34
Assumption Payment......................................................S-50
Available Funds.........................................................S-41
BONA....................................................................S-34
Cede....................................................................S-59
CEDEL...................................................................S-31
CEDEL Participants......................................................S-31
Citibank................................................................S-32
Class A-1 Note Final Maturity Date......................................S-29
Class A-1 Note Rate.....................................................S-27
Class A-1 Noteholders...................................................S-29
Class A-1 Noteholders' Interest Carryover Shortfall.....................S-42
Class A-1 Noteholders' Interest Distribution Amount.....................S-42
Class A-1 Notes.........................................................S-27
Class A-2 Note Final Maturity Date......................................S-29
Class A-2 Note Rate.....................................................S-27
Class A-2 Noteholders...................................................S-29
Class A-2 Noteholders' Interest Carryover Shortfall.....................S-42
Class A-2 Noteholders' Interest Distribution Amount.....................S-43
Class A-2 Notes.........................................................S-27
Closing Date............................................................S-14
Collateral Reinvestment Account.........................................S-38
Collection Account......................................................S-38
Collection Period.......................................................S-40
Commission..............................................................S-34
Company.................................................................S-15
Cooperative.............................................................S-31
Cutoff Date.............................................................S-17
Deferral................................................................S-20
Delinquency Percentage..................................................S-36
Department..............................................................S-26
Depositaries............................................................S-32
Depositary..............................................................S-32
Determination Date......................................................S-39
DTC.....................................................................S-59
DTC Services............................................................S-33
Early Amortization Event................................................S-35
Eligible Lender Trustee.................................................S-14
Euroclear...............................................................S-31
Euroclear Operator......................................................S-31
Euroclear Participants..................................................S-31
Events of Default.......................................................S-49
Excess Spread...........................................................S-35
Exchange Act............................................................S-59
Exchanged Financed Student Loan.........................................S-36
Exchanged Serial Loan...................................................S-36
Expected Interest Collections...........................................S-35
Federal Origination Fee.................................................S-55
FFELP...................................................................S-14
Financed Student Loans..................................................S-14
Forbearance.............................................................S-20
Global Securities.......................................................S-60
Grace...................................................................S-20
GRDF Percentage.........................................................S-39
Guarantors..............................................................S-24
Illegality..............................................................S-49
Indenture...............................................................S-27
Indenture Trustee.......................................................S-27
Index Maturity..........................................................S-30
Indirect Participants...................................................S-30
Industry................................................................S-33
Initial Financed Student Loans..........................................S-14
Initial Guarantors......................................................S-24
Initial Interest Rate Swap..............................................S-47
Initial Swap Counterparty...............................................S-47
Initial Swap Termination Date...........................................S-47
In-School...............................................................S-20
In-School Percentage....................................................S-39
Interest Rate Swaps.....................................................S-48
IRS.....................................................................S-56
LIBOR Determination Date................................................S-29
LIBOR Reset Period......................................................S-30
Liquidated Student Loans................................................S-40
Liquidation Proceeds....................................................S-40
Loan Purchase Amount....................................................S-34
Loan Sale Agreement.....................................................S-33
Lock-In Period..........................................................S-49
Minimum Purchase Price..................................................S-51
Monthly Available Funds.................................................S-40
Monthly Collection Period...............................................S-40
Monthly Payment Date....................................................S-38
Monthly Rebate Fee......................................................S-55
Morgan..................................................................S-32
Net Trust Swap Payment..................................................S-48
Net Trust Swap Payment Carryover Shortfall..............................S-43
Net Trust Swap Receipt..................................................S-48
Net Trust Swap Receipt Carryover Shortfall..............................S-43
New Loan................................................................S-34
New Loans...............................................................S-34
Noncapitalized Accrued Interest.........................................S-34
Non-U.S. Person.........................................................S-63
Noteholders.............................................................S-29
Noteholders' Interest Distribution Amount...............................S-43
Notes...................................................................S-27
Obligors................................................................S-28
OID.....................................................................S-56
Parity Date.............................................................S-27
Participants............................................................S-30
Plan....................................................................S-56
Pool Balance............................................................S-28
Principal Distribution Adjustment.......................................S-43
Principal Distribution Amount...........................................S-43
Purchase Amount.........................................................S-28
Purchase Collateral Balance.............................................S-34
Purchase Premium Amount.................................................S-34
Quarterly Interest Period...............................................S-27
Quarterly Payment Date..................................................S-27
Rating Agency Downgrade.................................................S-50
Realized Losses.........................................................S-44
Record Date.............................................................S-27
Reference Banks.........................................................S-30
Repayment...............................................................S-20
Reserve Account.........................................................S-38
Reserve Account Excess..................................................S-46
Reserve Account Initial Deposit.........................................S-14
Revolving Period........................................................S-34
Scheduled Initial Swap Termination Date.................................S-47
Scheduled Notional Swap Amount..........................................S-48
Secretary...............................................................S-24
Seller..................................................................S-14
Seller Trusts...........................................................S-55
Senior Noteholders......................................................S-29
Senior Noteholders' Distribution Amount.................................S-44
Senior Noteholders' Interest Distribution Amount........................S-44
Senior Noteholders' Principal Carryover Shortfall.......................S-44
Senior Noteholders' Principal Distribution Amount.......................S-44
Senior Notes............................................................S-27
Serial Loan.............................................................S-36
Serial Loans............................................................S-36
Servicer................................................................S-33
Servicing Agreement.....................................................S-33
Servicing Fee...........................................................S-38
Servicing Fee Shortfall.................................................S-39
SMS.....................................................................S-14
Special Federal Tax Counsel.............................................S-56
Specified Reserve Account Balance.......................................S-46
Student Loan Rate Accrual Period........................................S-35
Student Loans...........................................................S-14
Subordinate Note Final Maturity Date....................................S-29
Subordinate Note Rate...................................................S-27
Subordinate Note Trigger................................................S-28
Subordinate Noteholders.................................................S-29
Subordinate Noteholders' Distribution Amount............................S-45
Subordinate Noteholders' Interest Carryover Shortfall...................S-45
Subordinate Noteholders' Interest Distribution Amount...................S-45
Subordinate Noteholders' Principal Carryover Shortfall..................S-45
Subordinate Noteholders' Principal Distribution Amount..................S-45
Subordinate Notes.......................................................S-27
Subsequent Interest Rate Swaps..........................................S-47
Subsequent Swap Counterparties..........................................S-48
Swap Agreement..........................................................S-48
Swap Default............................................................S-49
Swap Early Termination..................................................S-50
Swap Rate...............................................................S-48
Systems.................................................................S-33
Tax Event...............................................................S-49
T-Bill Rate.............................................................S-48
Telerate Page 3750......................................................S-30
Termination Events......................................................S-49
Terms and Conditions....................................................S-31
Three-Month LIBOR.......................................................S-29
Transfer Agreement......................................................S-34
Transfer and Servicing Agreements.......................................S-34
Transfer Date...........................................................S-36
Trust...................................................................S-14
Trust Agreement.........................................................S-15
Trust Swap Payment Amount...............................................S-45
Trust Swap Receipt Amount...............................................S-45
U.S. Person.............................................................S-63
USA Funds...............................................................S-24
Year 2000 problems......................................................S-33
<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 in this prospectus 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 5 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
RISK FACTORS..................................................................5
RISK OF LOSS FROM LIMITED CREDIT ENHANCEMENT....................5
BORROWER DEFAULT RISK ON 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 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
THE INVESTMENT RETURN ON THE SECURITIES IS UNCERTAIN............9
RISK OF VARIABILITY OF ACTUAL CASH FLOWS......................10
NOTEHOLDERS' RIGHT TO CONTROL UPON 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..........................................11
FORMATION OF THE TRUSTS......................................................12
The Trusts..............................................................12
Eligible Lender Trustee.................................................12
USE OF PROCEEDS..............................................................12
USA GROUP, SMS, THE SELLER AND THE SERVICER..................................13
USA Group...............................................................13
SMS.....................................................................14
The Seller..............................................................14
The Servicer............................................................14
THE STUDENT LOAN POOLS.......................................................15
Origination and Marketing Process.......................................16
Servicing and Collections Process.......................................17
Claims and Recovery Rates...............................................17
FEDERAL FAMILY EDUCATION LOAN PROGRAM........................................18
Legislative and Administrative Matters..................................18
Eligible Lenders, Students and Educational Institutions.................19
Financial Need Analysis.................................................20
Special Allowance Payments..............................................20
Federal Stafford Loans..................................................21
INTEREST.......................................................21
INTEREST SUBSIDY PAYMENTS......................................22
LOAN LIMITS....................................................23
REPAYMENT......................................................24
GRACE PERIODS, DEFERRAL PERIODS AND FORBEARANCE PERIODS........24
Federal Unsubsidized Stafford Loans.....................................25
Federal PLUS and Federal SLS Loan Programs..............................25
LOAN LIMITS....................................................25
INTEREST.......................................................25
REPAYMENT, DEFERMENTS..........................................26
Federal Consolidation Loan Program......................................26
Federal Guarantors......................................................28
Federal Insurance and Reinsurance of Federal Guarantors.................28
WEIGHTED AVERAGE LIVES OF THE SECURITIES.....................................30
POOL FACTORS AND TRADING INFORMATION.........................................31
DESCRIPTION OF THE NOTES.....................................................31
Principal of and Interest on the Notes..................................32
The Indenture...........................................................32
MODIFICATION OF INDENTURE......................................32
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT................33
COVENANTS......................................................35
ANNUAL COMPLIANCE STATEMENT....................................36
INDENTURE TRUSTEE'S ANNUAL REPORT..............................36
SATISFACTION AND DISCHARGE OF INDENTURE........................36
THE INDENTURE TRUSTEE..........................................36
DESCRIPTION OF THE CERTIFICATES..............................................36
Principal and Interest in Respect of the Certificates...................37
INFORMATION REGARDING THE SECURITIES.........................................37
Fixed Rate Securities...................................................37
Floating Rate Securities................................................37
Book-Entry Registration.................................................38
Definitive Securities...................................................39
List of Securityholders.................................................40
Reports to Securityholders..............................................40
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS.........................40
Sale of Student Loans; Representations and Warranties...................41
Additional Fundings.....................................................42
Accounts................................................................42
Servicing Procedures....................................................43
Payments on Student Loans...............................................43
Servicer Covenants......................................................43
Servicer Compensation...................................................44
Distributions...........................................................44
Credit and Cash Flow Enhancement........................................45
RESERVE ACCOUNT................................................45
Statements to Indenture Trustee and Trust...............................45
Evidence as to Compliance...............................................46
Matters Regarding the Servicer..........................................47
Servicer Default........................................................47
Rights Upon Servicer Default............................................47
Waiver of Past Defaults.................................................48
Amendment...............................................................48
Payment of Notes........................................................48
Termination.............................................................49
OPTIONAL REDEMPTION............................................49
AUCTION OF STUDENT LOANS.......................................49
Administration Agreement................................................49
LEGAL ASPECTS OF THE STUDENT LOANS...........................................50
Transfer of Student Loans...............................................50
Consumer Protection Laws................................................51
Loan Origination and Servicing Procedures Applicable to Student Loans...51
Student Loans Generally Not Subject to Discharge in Bankruptcy..........52
FEDERAL INCOME TAX CONSEQUENCES..............................................52
TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE..............................52
Tax Characterization of the Trust.......................................52
Tax Consequences to Holders of the Notes................................52
TREATMENT OF THE NOTES AS INDEBTEDNESS.........................52
ORIGINAL ISSUE DISCOUNT........................................52
INTEREST INCOME ON THE NOTES...................................53
SALE OR OTHER DISPOSITION......................................53
FOREIGN HOLDERS................................................54
BACKUP WITHHOLDING.............................................55
Recent Legislation......................................................55
Tax Consequences to Holders of the Certificates.........................55
CLASSIFICATION AS A PARTNERSHIP................................55
TREATMENT OF THE TRUST AS A PARTNERSHIP........................55
PARTNERSHIP TAXATION...........................................55
COMPUTATION OF INCOME..........................................56
DETERMINING THE BASES OF TRUST ASSETS..........................57
DISCOUNT AND PREMIUM...........................................57
DISPOSITION OF CERTIFICATES....................................57
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES................58
SECTION 754 ELECTION...........................................58
ADMINISTRATIVE MATTERS.........................................58
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS.................59
BACKUP WITHHOLDING.............................................59
TRUSTS IN WHICH ALL RESIDUAL INTERESTS ARE RETAINED BY THE SELLER OR AN
AFFILIATE OF THE SELLER......................................................59
Tax Characterization of the Trust.......................................59
Tax Consequences to Holders of the Notes................................60
TREATMENT OF THE NOTES AS INDEBTEDNESS.........................60
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES...................60
STATE TAX CONSEQUENCES.......................................................65
TAX CONSEQUENCES WITH RESPECT TO THE NOTES.....................65
TAX CONSEQUENCES WITH RESPECT TO THE CERTIFICATES..............65
ERISA CONSIDERATIONS.........................................................65
The Notes...............................................................66
The Certificates........................................................66
PLAN OF DISTRIBUTION.........................................................67
LEGAL MATTERS................................................................68
AVAILABLE INFORMATION........................................................68
INCORPORATION OF DOCUMENTS BY REFERENCE......................................68
INDEX OF PRINCIPAL TERMS.....................................................69
<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 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
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 of these federal loans.
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 the federal guarantor
as result of borrower
defaults;
o the amount of claims
reimbursed to the federal
guarantor from the Department
of Education; 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
federal guarantors deteriorates, the
federal guarantors may fail to make
guarantee payments to the eligible
lender trustee. In this 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 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 the
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
the 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 and
implementing regulations requires
lenders and their assignees making and
servicing student loans that are
reinsured by the Department of Education
and guarantors guaranteeing student
loans that are reinsured by the
Department of Education 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 these 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 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 this 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
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 these 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 positive that
the Higher Education Act or other
relevant federal or state laws, rules
and regulations will not be 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 programs described in this
prospectus expand, 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. These 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
specified breaches of its covenants.
However, references in the Higher
Education Act of 1965, as amended,
regarding a transition from Federal
Family Education Loan program to direct
student loan program (were eliminated by
the 1998 Reauthorization Bill when
Congress determined that both programs
would continue to coexist.
FEES PAYABLE ON 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
this event the amount available to be
distributed to you will be reduced.
Under specified 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 this 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 a liability exists in
connection with a trust using the shared
lender identification number, the
Department of Education or the federal
guarantor may collect that liability or
offset the liability from amounts due
the eligible lender trustee under the
shared lender identification number. As
a result, a trust may suffer a liability
as the result of another trust.
The servicing agreements for
the trusts established by USA Group
Secondary Market Services, Inc. which
share a lender identification number
will require the eligible lender trustee
or the servicer to allocate to the
proper trust shortfalls or an offset by
the Department of Education or a federal
guarantor arising from the student loans
held by the eligible lender trustee on
each 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 these regulations,
a third-party servicer, including 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 the 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 in any of
the student loans were granted to
another party that purchased (or took
the security interest in) any of the
student loans in the ordinary course of
its business and took possession of the
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 the student loans for new value
and without knowledge of the eligible
lender trustee's interest. For periods
of enrollment beginning on or after July
1, 1999, a master promissory note may
evidence any student loan made to a
borrower under the Federal Family
Education Loan program. See "Risk
Factors--Master Promissory Note" for
any risks associated with the master
promissory note.
INSOLVENCY RISK OF SERVICER,
ADMINISTRATOR OR SELLER............... In the event of a default by
the servicer or an administrator
resulting solely from specified 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 cause the sale of 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
0 the price paid by you for your
securities,
0 the rate at which interest
accrues on your securities and
0 the rate at which you receive
a return of the principal.
Consequently, the length of
time that your securities are
outstanding and accruing interest may be
shorter than you expect. 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 federal loan consolidation
programs. In addition, a trust may
receive other unscheduled payments from
liquidations due to default, including
receipt of guarantee payments and 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 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 the 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 these
factors is impossible to predict.
NOTEHOLDERS' RIGHT TO CONTROL
UPON 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
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
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, including 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 specified
banks, your ability to pledge a security
to persons or entities that do not
participate in The Depository Trust
Company, Cedelbank or Euroclear system
or otherwise to take actions in respect
of the 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 the
distributions will be forwarded by the
trustee to The Depository Trust Company
and The Depository Trust Company will
credit the distributions to the accounts
of its participants which will
thereafter credit them to your account
either directly or indirectly through
indirect participants.
<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 in this prospectus and in
the related prospectus supplement. The property of each Trust will consist of:
0 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,
0 all funds collected or to be collected in respect thereof
(including any payments with respect to Guarantee Agreements
("Guarantee Payments") with respect thereto) on or after the
applicable date specified in the related prospectus
supplement (the "Cutoff Date") and
0 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 the 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 the entity
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 the 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 the 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 these 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 the net proceeds
paid to it with respect to any Trust for general corporate purposes.
<PAGE>
USA GROUP, SMS, THE SELLER AND THE SERVICER
USA GROUP
USA Group, Inc. ("USA Group"), a Delaware nonprofit corporation, is
the indirect or direct parent corporation of United Student Aid Funds, Inc.
("USA Funds"), which is a Federal Guarantor, USA Group Loan 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:
0 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;
0 providing guarantees for education loans made pursuant to
the Act as well as for loans made under Private Loan
Programs;
0 assisting guarantee agencies in managing and maintaining
their education loan programs;
0 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 Pacific Islands;
0 performing achievement and need-based scholarship processing
for corporations, foundations and benefit societies;
0 offering financial management services to guarantee agencies
to assist them in planning for the future and in meeting the
financial challenges facing guarantors;
0 providing and performing education loan purchase functions
for the holders of loans made to facilitate attendance of
students at universities, colleges and schools;
0 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
0 acquiring student loan notes held by eligible lenders under
the Federal Family Education Loan Program.
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, Illinois Student Assistance
Commission, 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 Student Assistance Commission and Rhode Island Higher
Education Assistance Authority. Some trustees and officers of USA Funds are also
directors or officers of USA Group Guarantee Services.
SMS
SMS was organized on November 19, 1992, and is a Delaware corporation.
SMS is an affiliate of USA Group.
The related supplement to this prospectus (a "prospectus supplement")
may set forth 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 the Trust is a valid sale of the 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 the debtor or the
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 the Student Loans to
secure a borrowing of the debtor, then delays in payments of collections of the
Student Loans could occur or (should the court rule in favor of any trustee,
debtor or creditor) reductions in the amount of the 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 the Trust may have priority over the
Eligible Lender Trustee's interest in the 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 the 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
another servicer(s) specified in the related prospectus supplement (the
"Servicer") is required to perform in accordance with the related loan servicing
agreement (each a "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 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 appropriately interpret the upcoming calendar year 2000, some
level of modification or replacement of the 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 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 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 the estimates. Specific factors that might cause material
differences include, but are not limited to:
0 the availability and cost of personnel trained in this area,
0 the ability to locate and correct all relevant computer
codes, and
0 similar uncertainties.
THE STUDENT LOAN POOLS
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:
0 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,
0 was originated in the United States of America,
0 its territories or its possessions under and in accordance
with the Federal Family Education Loan Program,
0 contains terms in accordance with those required by the
Federal Family Education Loan Program,
0 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,
0 provides for regular payments that fully amortize the amount
financed over its original term to maturity (exclusive of
any deferral or forbearance periods) and
0 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 the Trust.
The Student Loans that comprise assets of each Trust will be held by
the related Eligible Lender Trustee, as trustee on behalf of the Trust. The
Eligible Lender Trustee will also enter into, on behalf of the Trust, Guarantee
Agreements with the Guarantors pursuant to which each of the Student Loans will
be guaranteed by one of the 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 the Student Loans
guaranteed by the specified Guarantors.
In the case of each series for which the related Trust may acquire or
originate Student Loans after the related Cutoff Date, information with respect
to the Student Loans eligible to be acquired or originated by the related Trust
will be set forth in the related prospectus supplement as will information
regarding the duration and conditions of any related funding period (a "Funding
Period") or revolving period (a "Revolving Period"), the circumstances under
which Additional Fundings will be made during the period, and, if Additional
Fundings may continue to be made after the period, the circumstances under which
the Additional Fundings will be made.
In addition, if specified in the related prospectus supplement, the
assets of the related Trust may include specified 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 summary data relating to the
Excess Cashflow Rights.
ORIGINATION AND MARKETING PROCESS
The Higher Education Act of 1965, as amended (the 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 the Guarantor must
approve the application, including confirming that the 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 the 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. Some 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 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 the Student Loans are repaid on a timely basis by or on behalf of
borrowers. The Servicer agrees to perform the servicing and collection
procedures with respect to the Student Loans on behalf of each Trust pursuant to
the related Loan Servicing Agreement. The 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 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 the 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 established
procedures with respect to a Student Loan may also result in the denial of
coverage under a Guarantee Agreement for specified accrued interest amounts, in
circumstances where the failure has not caused the loss of the guarantee of the
principal of the 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 the delinquency.
These notices advise the Guarantor of seriously delinquent accounts and allow
the Guarantor to make additional attempts to collect on the loans prior to the
filing of claims. Any Student Loan which is delinquent beyond a specified 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 the 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 the 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 a purchase will constitute the sole
remedy available to Securityholders or the Eligible Lender Trustee for a failure
by the Servicer. SEE "Description of the Transfer and Servicing Agreements--
Servicer Covenants".
CLAIMS AND RECOVERY RATES
Limited 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 information set forth in each
prospectus supplement.
FEDERAL FAMILY EDUCATION LOAN PROGRAM
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 in this prospectus, 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 the borrower's school. The Guarantors
are entitled, subject to 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 interest subsidy payments and special
allowance payments with respect to the Federal Student Loans as described in
this prospectus.
FFELP provides for loans to students and parents of students which are
(1) guaranteed by a Guarantor and reinsured by the federal government or (2)
directly insured by the federal government. Several types of Federal Student
Loans are currently authorized under the Act:
0 loans to students who demonstrate need ("Federal Stafford
Loans");
0 loans to students who do not demonstrate need or who need
additional loans to supplement their Federal Stafford Loans
("Federal Unsubsidized Stafford Loans");
0 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
0 loans to consolidate the borrower's obligations under
various federally authorized student loan programs into a
single loan.
Prior to July 1, 1994, the Act also authorized loans to graduate and
professional students, independent undergraduate students and, under limited
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 the statutes,
regulations and agreements but do not purport to be comprehensive and are
qualified in their entirety by reference to each 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 in
this prospectus 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 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, legislation contemplated replacement of a
minimum of approximately 60% of the Federal Student Loan programs with direct
lending by the Department by 1998. However, references in the Act regarding a
transition from FFELP to direct student loan program were eliminated by the 1998
Reauthorization Bill when Congress determined that both programs would continue
to coexist. Notwithstanding these changes, any 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
the entities have not experienced a reduction to date and any 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. These
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 specified 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". These 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 with 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:
0 has been accepted for enrollment or is enrolled and is
maintaining satisfactory academic progress at a
participating educational institution,
0 is carrying at least one-half of the normal full-time
academic workload for the course of study the student is
pursuing, as determined by the institution,
0 has agreed to notify promptly the holder of the loan of any
address change, and
0 for Federal Stafford Loans, meets the applicable "need"
requirements for the particular loan program.
Each loan is to be evidenced by an unsecured promissory note.
Eligible schools include institutions of higher education and
proprietary institutions. Institutions of higher education must meet specified
standards, which generally provide that the institution:
0 only admits persons who have a high school diploma or its
equivalent,
0 is legally authorized to operate within a state,
0 provides not less than a two-year program with credit
acceptable toward a bachelor's degree,
0 is a public or non-profit institution and
0 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:
0 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),
0 is authorized by a state to provide a program of vocational
education designed to fit individuals for useful employment
in recognized occupations,
0 has been in existence for at least two years,
0 provides at least a six-month training program to prepare
students for gainful employment in a recognized occupation
and
0 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:
0 offers more than 50 percent of its courses by
correspondence,
0 enrolls 50 percent or more of its students in correspondence
courses,
0 has a student enrollment in which more than 25 percent of
the students are incarcerated or
0 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
0 the educational institution has filed for bankruptcy,
0 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
0 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 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 the institution to
determine the student's eligibility for grants, loans, and work assistance. The
difference between the amount of grants and Federal Stafford Loans for which the
borrower is eligible and the student's estimated cost of attendance (the "Unmet
Need") may be borrowed through Federal Unsubsidized Stafford Loans subject to
annual and aggregate loan limits prescribed in the Act. Parents may finance the
family contribution amount 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 the holder receives at least a
specified market interest rate of return on the 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 the 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 the holder during the period multiplied by the special allowance
percentage. The special allowance percentage is computed by:
(1) determining the average of the bond equivalent rates of
either 91-day Treasury bills auctioned for the 3-month
period, or, in the case of loans first disbursed on or after
January 1, 2000 and before July 1, 2003, the quotes of the
three-month commercial paper (financial) rates in effect for
each of the days in such quarter as reported by the Federal
Reserve in Publication H-15 (the "CP Rate"),
(2) subtracting the applicable borrower interest rate on the
loan from the average,
(3) adding the applicable Special Allowance Margin (as set forth
below) to the resultant percentage and
(4) dividing the resultant percentage by 4; provided, however,
that, if the amount determined by the application of clauses
(1), (2) and (3) is in the negative, the Special Allowance
Margin is zero.
<TABLE>
<CAPTION>
DATE OF FIRST DISBURSEMENT Special Allowance Margin
- --------------------------- ----------------------------------
<S> <C>
Prior to 10/17/86 3.50%
10/17/86 - 09/30/92 3.25%
10/01/92 - 06/30/95 3.10%
07/01/95 - 06/30/98 2.50% (Federal Stafford Loans and Federal Unsubsidized
Stafford Loans that are In-School, Grace or Deferment); 3.10%
(Federal Stafford Loans and Federal Unsubsidized Stafford
Loans that are in repayment and all other loans)
07/01/98 - 12/31/99 2.20% (Federal Stafford Loans and Federal Unsubsidized
Stafford Loans that are In-School, Grace or Deferment); 2.80%
(Federal Stafford Loans and Federal Unsubsidized Stafford
Loans that are in repayment) and 3.10% for all other loans
01/01/00-06/30/03 1.74% (Federal Stafford Loans and Federal Unsubsidized
Stafford Loans that are In-School, Grace or Deferment); 2.34%
(Federal Stafford Loans and Federal Unsubsidized Stafford
Loans that are in repayment)
</TABLE>
A holder of a PLUS, SLS or Federal Consolidation Loan is eligible to
receive Special Allowance Payments during any quarter equal to (a) the amount by
which (1) the average of the bond equivalent rates of 91-day Treasury bills
auctioned during the quarter (or the CP Rate in the case of PLUS loans first
disbursed on or after January 1, 2000 and before July 1, 2003) plus (2) the
Interest Rate Margin (or 2.64% in the case of PLUS or Federal Consolidation
loans first disbursed on or after January 1, 2000 and before July 1, 2003)
exceeds (b) the Borrower Rate. However, Special Allowance Payments are available
on variable rate PLUS and SLS Loans only if the 91-day Treasury bill rate for
the most recent quarter plus 3.1% exceeds the maximum rate.
FEDERAL STAFFORD LOANS
The Act provides for:
(1) federal insurance or reinsurance of Federal Stafford Loans
made by eligible lenders to qualified students,
(2) federal interest subsidy payments on 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
(3) Special Allowance Payments representing an additional
subsidy paid by the Department to the holders of eligible
Federal Stafford Loans (the federal reinsurance obligations,
together with those obligations referred to in clauses (2)
and (3) being collectively referred to in this prospectus 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 then 10%
Treasury + 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)
- --------------
(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 (1) the bond equivalent
rate of 91-day Treasury bills auctioned at the final auction held
prior to June 1 and (2) the applicable Interest Rate Margin.
</TABLE>
The 1992 Amendments provide that, for fixed rate loans made on or
after July 23, 1992 and for specified loans made to new borrowers on or after
July 1, 1988, the lender must have converted by January 1, 1995 the interest
rate on the loans to an annual interest rate adjusted each July 1 equal to:
0 for specified 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%,
0 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
0 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 the 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 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
need-based criteria (and the delivery of sufficient information by the borrower
and the lender to the Department to confirm the foregoing) and continued
eligibility of the loan for federal reinsurance. This 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 the 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 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 Interest Subsidy Payments and Special
Allowance Payments, if any, with respect to Federal Student Loans. Each Eligible
Lender Trustee will be required to remit Interest Subsidy Payments and Special
Allowance Payments it receives with respect to 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 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.
<PAGE>
<TABLE>
<CAPTION>
ALL
STUDENTS(1) INDEPENDENT STUDENTS
------------ -----------------------
BASE AMOUNT
SUBSIDIZED ADDITIONAL Maximum
AND UNSUBSIDIZED Aggregate
SUBSIDIZED UNSUBSIDIZED ONLY ON OR Total
BORROWER'S ACADEMIC SUBSIDIZED ON OR AFTER ON OR AFTER AFTER Amount
LEVEL PRE-1/1/87 1/1/87 10/1/93(2) 7/1/94(3) in
- -------------------------- ------------- ------------ -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Undergraduate (per year)
1st year............ $ 2,500 $ 2,625 $ 2,625 $ 4,000 $ 6,625
2nd year............ $ 2,500 $ 2,625 $ 3,500 $ 4,000 $ 7,500
3rd year and above $ 2,500 $ 4,000 $ 5,500 $ 5,000 $ 10,500
Graduate (per year) $ 5,000 $ 7,500 $ 8,500 $ 10,000 $ 18,500
Aggregate 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
- ---------------
(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 the 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.
</TABLE>
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 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"). However, during other periods (each, a "Deferral Period")
and subject to 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 specified
circumstances (each period, a "Forbearance Period"). The 1998 Reauthorization
Bill further expanded the situations in which a forbearance can be granted.
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 the 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 the 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 specified 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
her student loans.
INTEREST. THE INTEREST RATE DETERMINATION FOR A PLUS OR SLS LOAN IS
DEPENDENT ON WHEN THE LOAN WAS ORIGINALLY MADE AND DISBURSED AND THE PERIOD OF
ENROLLMENT. THE INTEREST RATES FOR PLUS AND SLS LOANS ARE SUMMARIZED IN THE
FOLLOWING CHART.
<TABLE>
<CAPTION>
Interest
Trigger Date(1) Borrower Rate(2) Maximum Rate 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%
- ---------------
(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 first 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 lesser of (a) the
applicable maximum rate and (b) the sum of (1) the bond equivalent
rate of 52-week Treasury bills (or 91 day Treasury bills in the case
of loans made or disbursed on or after June 30, 1998) auctioned at the
final auction held prior to June 1, and (2) the applicable Interest
Rate Margin.
</TABLE>
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 the final disbursement of the loan, subject to
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 periods of educational
enrollments and periods of unemployment or hardship as specified under the Act.
Further, whereas Interest Subsidy Payments are not available for the deferments,
interest may be capitalized during the 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 the 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 borrowers may consolidate one
or more of their Student Loans into a single loan (each, a "Federal
Consolidation Loan") insured and reinsured on a basis similar to Federal
Stafford Loans. Federal Consolidation Loans may be made in an amount sufficient
to pay outstanding principal, unpaid interest, late charges and collection costs
on all federally insured or reinsured student loans incurred under FFELP
selected by the borrower, as well as loans made pursuant to various other
federal student loan programs and which may have been made by different lenders.
Under this program, a lender may make a Federal Consolidation Loan to an
eligible borrower at the request of the borrower if the lender holds an
outstanding loan of the borrower or the borrower certifies that he has been
unable to obtain a Federal Consolidation Loan from the holders of the
outstanding loans made to him. 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 the 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, the 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% (or the CP Rate plus 2.64% for loans first
disbursed on or after January 1, 2000 and before July 1, 2003), 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
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 the graduated and income sensitive repayment plans for
applications received prior to that date. Generally, depending on the total of
loans outstanding, repayment may be scheduled over periods no shorter than ten
but not more than 25 years in length. For applications received on or after
January 1, 1993, the maximum maturity schedule is 30 years for Federal
Consolidation Loans of $60,000 or more.
All eligible loans of a borrower paid in full through consolidation
are discharged in the consolidation process when the new Federal Consolidation
Loan is issued.
FEDERAL GUARANTORS
The Act authorizes Federal Guarantors to support education financing
and credit needs of students at post-secondary schools. The Act encourages
every state either to establish its own agency or to designate another Federal
Guarantor in cooperation with the Secretary. Under various programs throughout
the United States of America, Federal Guarantors insure and sometimes service
guaranteed student loans. The Federal Guarantors are reinsured by the federal
government for from 80% to 100% of each default claim paid, depending on their
claims experience, for loans disbursed prior to October 1, 1993, 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 the 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 the 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 the Trust as of the applicable Closing Date and the amount of the
Federal Student Loans it is guaranteeing for the 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 the 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 the 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 the
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.
The 1998 Reauthorization Bill restructured guarantor funding such that Federal
Guarantors are provided with additional flexibility in choosing how to spend
certain funds they receive.
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 period of
time as specified by the Act. Under specified circumstances a loan deemed
ineligible for Federal Reinsurance may be restored to eligibility. Procedures
for the restoration of eligibility are discussed below.
If the loan in default is covered by federal loan insurance in
accordance with the provisions of the Act, the Department is to pay the
applicable Federal Guarantor, as insurance beneficiary, the amount of the loss
sustained thereby, upon notice and determination of the amount, within 90 days
of the 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 the 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 the 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; 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 the 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%
- ---------
(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.
</TABLE>
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. The levels are defined
as 0.5% of the total attributable amount of all outstanding loans guaranteed by
the Federal Guarantor for the fiscal year of the Federal Guarantor that begins
in 1993, 0.7% for the Federal Guarantor's fiscal year beginning in 1994, 0.9%
for the Federal Guarantor's fiscal year beginning in 1995, and 1.1% for the
Federal Guarantor's fiscal year beginning on or after January 1, 1996. Effective
with the 1998 Reauthorization Bill, Federal Guarantors must maintain a minimum
reserve level of at least 0.25 percent. 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 this event, the Department is required to
assume responsibility for the functions of the 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 the 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 specified events of death, disability, bankruptcy, school closure
or false certification by the educational institution described in the Act. 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 the obligations are transferred to a new Federal Guarantor
capable of meeting the obligations or until a successor Federal Guarantor
assumes the obligations. No assurance can be made that the Department would
under any given circumstances assume the 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 the 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:
0 borrower default, death, disability or bankruptcy,
0 a closing of or a false certification by the borrower's
school and
0 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
specified 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 the period could
affect the weighted average lives of the Securities of the related series. SEE
"Description of the Transfer and Servicing Agreements--Additional Fundings".
On the other hand, scheduled payments with respect to, and maturities
of, the Student Loans may be extended, including pursuant to applicable grace,
deferral and forbearance periods. The rate of payment of principal of the Notes
and the Certificates and the yield on the Notes and the Certificates may also be
affected by the rate of defaults resulting in losses on Student Loans, by the
severity of those losses and by the timing of those losses, which may affect the
ability of the Guarantors to make Guarantee Payments with respect thereto.
In light of the above considerations, there can be no assurance as to
the amount of principal payments to be made on the Notes or the Certificates of
a given series on each Distribution Date, since the 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 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 the
class of Notes or the remaining principal balance for the class of Certificates
(the "Certificate Balance"), respectively, as of that Distribution Date (after
giving effect to distributions to be made on the Distribution Date), as a
fraction of the initial outstanding principal amount of the class of the Notes
or the initial Certificate Balance for the 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 (1) the original denomination of
that Securityholder's Note or Certificate and (2) 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
the 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
"Information Regarding the Securities--Reports to Securityholders".
DESCRIPTION OF THE NOTES
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 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, the 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 in this
prospectus or in the related prospectus supplement, no Noteholder will be
entitled to receive a physical certificate representing a Note. All references
in this prospectus and in the related prospectus supplement to actions by
Noteholders of Notes held in book-entry form refer to actions taken by DTC upon
instructions from its participating organizations (the "Participants") and all
references in this prospectus to distributions, notices, reports and statements
to Noteholders refer to distributions, notices, reports and statements to DTC or
its nominee, as the case may be, as the registered holder of the Notes for
distribution to Noteholders in accordance with DTC's procedures with respect
thereto. SEE "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 the series, as described in the related prospectus
supplement. Unless otherwise provided in the related prospectus supplement,
payments of interest on the Notes of the 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 the
Interest Rate. SEE ALSO "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 another party 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. The amount available for the 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 the class of
Noteholders) of the aggregate amount available to be distributed in respect of
interest on the Notes of the 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 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 the 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 the 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 the date, in an
aggregate principal amount described in the related prospectus supplement.
SEE "Description of the Transfer and Servicing Agreements-Credit and
Cash Flow Enhancement-RESERVE ACCOUNT" for a description of the Reserve Account
and the distribution of amounts in excess of the Specified Reserve Account
Balance (as defined in the related prospectus supplement).
THE INDENTURE
MODIFICATION OF INDENTURE. WITH RESPECT TO EACH TRUST, WITH THE
CONSENT OF THE HOLDERS OF A MAJORITY OF THE OUTSTANDING NOTES OF THE RELATED
SERIES, THE INDENTURE TRUSTEE AND THE TRUST MAY EXECUTE A SUPPLEMENTAL INDENTURE
TO ADD PROVISIONS TO, OR CHANGE IN ANY MANNER OR ELIMINATE ANY PROVISIONS OF,
THE INDENTURE WITH RESPECT TO THE NOTES, OR TO MODIFY (EXCEPT AS PROVIDED BELOW)
IN ANY MANNER THE RIGHTS OF THE RELATED NOTEHOLDERS.
Unless otherwise specified in the related prospectus supplement with
respect to a series of Notes, however, without the consent of the holder of each
outstanding Note affected thereby, no supplemental indenture will:
0 change the due date of any installment of principal of or
interest on any 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 Note or any interest
thereon is payable,
0 impair the right to institute suit for the enforcement of
provisions of the related Indenture regarding payment,
0 reduce the percentage of the aggregate amount of the
outstanding Notes of the series, the consent of the holders
of which is required for any supplemental indenture or the
consent of the holders of which is required for any waiver
of compliance with provisions of the related Indenture or of
defaults thereunder and their consequences as provided for
in the Indenture,
0 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
the Notes,
0 reduce the percentage of the aggregate outstanding amount of
the 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 the sale would be insufficient to pay the
principal amount and accrued but unpaid interest on the
outstanding Notes of the series,
0 decrease the percentage of the aggregate principal amount of
the Notes required to amend the sections of the related
Indenture which specify the applicable percentage of
aggregate principal amount of the Notes necessary to amend
the related Indenture or other related agreements, or
0 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 the series or,
except as otherwise permitted or contemplated in the
Indenture, terminate the lien of the Indenture on any
collateral or deprive the holder of any Note of the security
afforded by the lien of the 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 the
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 the series so long as the action will
not, in the opinion of counsel satisfactory to the applicable Indenture Trustee,
materially and adversely affect the interest of any Noteholder of the 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:
(1) a default for five days or more in the payment of any
interest on any Note after the same becomes due and payable;
(2) a default in the payment of the principal of or any
installment of the principal of any Note when the same
becomes due and payable;
(3) 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 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 the Notes
then outstanding; provided, however, that if the Trust
demonstrates that it is making a good faith attempt to cure
the default, the 30-day period may be extended by the
Indenture Trustee to 90 days;
(4) 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 the
breach is not cured within 30 days after notice thereof is
given to the Trust by the applicable Indenture Trustee or to
the Trust and the applicable Indenture Trustee by the
holders of at least 25% in principal amount of the Notes of
the series then outstanding; provided, however, that if the
Trust demonstrates that it is making a good faith attempt to
cure the breach, the 30-day period may be extended by the
Indenture Trustee to 90 days, or
(5) events of bankruptcy, insolvency, receivership or
liquidation of the Trust. However, the amount of principal
required to be distributed to Noteholders of the series
under the related Indenture on any Distribution Date will
generally be limited to amounts available after payment of
all prior obligations of the 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 the 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 the
Distribution Date based on interest collections on the Student Loans (the amount
of the difference, the "Index Shortfall Carryover"), the Interest Rate for the
Distribution Date shall be the alternate rate and the Interest Shortfall
Carryover shall be payable as described in the prospectus supplement. Unless
otherwise provided in the prospectus supplement, payment of the Index Shortfall
Carryover shall be lower in priority than payment of interest on the Notes at
the Interest Rate (whether the Interest Rate is based on the index or the
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 the Notes.
If an Event of Default should occur and be continuing with respect to
the Notes of any series, the related Indenture Trustee or holders of a majority
in principal amount of the Notes then outstanding may declare the principal of
the Notes to be immediately due and payable. Unless otherwise specified in the
related prospectus supplement, the declaration may be rescinded by the holders
of a majority in principal amount of the Notes then outstanding if (1) 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 the Notes if the Event of Default giving rise to
the 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 (2) all Events of Default, other than the nonpayment of the
principal of the Notes that has become due solely by the 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 the 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
0 the holders of all the outstanding Notes consent to the
sale,
0 the proceeds of the sale are sufficient to pay in full the
principal of and the accrued interest on the outstanding
Notes at the date of the sale, or
0 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 the Notes as the
payments would have become due if the 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 the 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 the
Notes, if the 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 the request. Subject to the provisions for
indemnification and other 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 the Indenture Trustee and the holders
of a majority in principal amount of the Notes then outstanding may, in
specified 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 the outstanding Notes.
Unless otherwise specified in the related prospectus supplement, no
holder of Notes of any series will have the right to institute any proceeding
with respect to the related Indenture, unless:
0 the holder previously has given to the applicable Indenture
Trustee written notice of a continuing Event of Default,
0 the holders of not less than 25% in principal amount of the
outstanding Notes have requested in writing that the
Indenture Trustee institute the proceeding in its own name
as Indenture Trustee,
0 the holder or holders have offered the Indenture Trustee
reasonable indemnity,
0 the Indenture Trustee has for 60 days failed to institute
the proceeding, and
0 no direction inconsistent with the written request has been
given to the Indenture Trustee during the 60-day period by
the holders of a majority in principal amount of the
outstanding Notes.
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.
COVENANTS. Each Indenture will provide that the related Trust may not
consolidate with or merge into any other entity, unless
0 the entity formed by or surviving the consolidation or
merger is organized under the laws of the United States of
America, any state thereof or the District of Columbia,
0 the entity expressly assumes the 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 the Trust under the related Indenture,
0 no Event of Default shall have occurred and be continuing
immediately after the merger or consolidation,
0 the 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 the
merger or consolidation, and
0 the Trust has received an opinion of counsel to the effect
that the consolidation or merger would have no material
adverse federal or Indiana state tax consequence to the
Trust or to any Certificateholder or Noteholder of the
related series.
Each Trust will not, among other things,
0 except as expressly permitted by the applicable Indenture,
the applicable Transfer and Servicing Agreements or related
documents (collectively, the "Related Documents"), sell,
transfer, exchange or otherwise dispose of any of the assets
of the Trust,
0 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 the Notes because of the payment
of taxes levied or assessed upon the Trust,
0 except as contemplated by the Related Documents, dissolve or
liquidate in whole or in part,
0 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 the Notes
under the applicable Indenture except as may be expressly
permitted thereby, or
0 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 in the Trust 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 the
Indenture Trustee under the applicable Indenture, any amounts advanced by it
under the Indenture, the amount, interest rate and maturity date of indebtedness
owing by the Trust to the applicable Indenture Trustee in its individual
capacity, the property and funds physically held by the applicable Indenture
Trustee 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 the Notes or,
with limitations, upon deposit with the Indenture Trustee of funds sufficient
for the payment in full of all the Notes.
THE INDENTURE TRUSTEE. The Indenture Trustee for a series of Notes
will be specified in the related prospectus supplement. The Indenture Trustee
for any series may resign at any time, in which event the Trust will be
obligated to appoint a successor trustee for the series. The Trust may also
remove any Indenture Trustee if the Indenture Trustee ceases to be eligible to
continue under the related Indenture or if the Indenture Trustee becomes
insolvent. In addition, the Administrator for any series may remove the related
Indenture Trustee at any time. In such circumstances, the Trust 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 the series
DESCRIPTION OF THE CERTIFICATES
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 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, the
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 in this prospectus 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 in
this prospectus 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 in this
prospectus 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 "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 the Certificates
will be made on each Distribution Date and will be made prior to distributions
with respect to principal of the Certificates. Each class of Certificates may
have a different Pass-Through Rate, which may be a fixed, variable or
adjustable Pass-Through Rate or any combination of the 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 the Pass-Through
Rate. SEE ALSO "Information Regarding the Securities--Fixed Rate Securities" and
"Floating Rate Securities". Unless otherwise provided in the related prospectus
supplement, distributions in respect of the Certificates of a given series may
be subordinate to payments in respect of the Notes of the 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 the 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
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).
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 the 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 the
class, and the "Spread Multiplier" is the percentage that may be specified in
the applicable prospectus supplement as being applicable to the 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 the prospectus
supplement.
As specified in the applicable prospectus supplement, Floating Rate
Securities of a given class may also have either or both of the following (in
each case expressed as a rate per annum): (1) a maximum limitation, or ceiling,
on the rate at which interest may accrue during any interest period and (2) 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 class of
Floating Rate Securities issued with respect thereto. The applicable prospectus
supplement will set forth the identity of the Calculation Agent for each class
of Floating Rate Securities of a given series, which may be the Administrator,
the Eligible Lender Trustee or the Indenture Trustee with respect to the 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 the 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
including 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
the payments will be forwarded by the Applicable Trustee to DTC's Nominee. DTC
will forward the 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 the 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 the 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 specified banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to the
Securities, may be limited due to the lack of a physical certificate for the
Securities.
DTC has advised the Seller that it will take any action permitted to
be taken by a Securityholder under the related Indenture or the related Trust
Agreement, as the case may be, only at the direction of one or more Participants
to whose accounts with DTC the Securities are credited. DTC may take conflicting
actions with respect to other undivided interests to the extent that the actions
are taken on behalf of Participants whose holdings include the undivided
interests.
Except as required by law, neither the Administrator nor the
applicable Trustee will have any liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests of the
Securities held by DTC's nominee or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
DEFINITIVE SECURITIES
Unless otherwise specified in the related prospectus supplement and
except with respect to the Certificates of a given series that may be purchased
by the 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
in this prospectus as "Definitive Securities") to Noteholders or
Certificateholders or their respective nominees, rather than to DTC or its
nominee, only if:
0 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,
0 the Administrator, at its option, elects to terminate the
book-entry system through DTC, or
0 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 the 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 the Notes or Certificates
is no longer in the best interest of the holders of the
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 the Securities as
Definitive Securities to the Securityholders.
Distributions of principal of, and interest on, the Definitive
Securities will thereafter be made by the Applicable Trustee in accordance with
the procedures set forth in the related Indenture or 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 the Securities in the related
prospectus supplement. Distributions will be made by check mailed to the address
of the holder as it appears on the register maintained by the Applicable
Trustee. The final payment on any Definitive Security, however, will be made
only upon presentation and surrender of the Definitive Security at the office or
agency specified in the notice of final distribution to applicable
Securityholders.
Definitive Securities will be transferable and exchangeable at the
offices of the Applicable Trustee or of a registrar named in a notice delivered
to holders of Definitive Securities. No service charge will be imposed for any
registration of transfer or exchange, but the Applicable Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
LIST OF SECURITYHOLDERS
Unless otherwise specified in the related prospectus supplement,
holders of Notes evidencing not less than 25% of the aggregate outstanding
principal balance of the Notes may, by written request to the related Indenture
Trustee, obtain access to the list of all Noteholders maintained by the
Indenture Trustee for the purpose of communicating with other Noteholders with
respect to their rights under the related Indenture or the Notes. The 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 the
series.
Unless otherwise specified in the related prospectus supplement, three
or more Certificateholders of the series or one or more holders of the
Certificates evidencing not less than 25% of the Certificate Balance of the
Certificates may, by written request to the related Eligible Lender Trustee,
obtain access to the list of all Certificateholders for the purpose of
communicating with other Certificateholders with respect to their rights under
the related Trust Agreement or under the Certificates.
REPORTS TO SECURITYHOLDERS
With respect to each series of Securities, on each Distribution Date,
the 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". The
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 the calendar year was a
Securityholder with respect to the Trust and received any payment thereon, a
statement containing information for the purposes of the Securityholder's
preparation of federal income tax returns. See "Federal Income Tax
Consequences".
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following is a summary of 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 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, the Seller will sell and assign to the related
Eligible Lender Trustee on behalf of the Trust, without recourse, except as
provided in the Loan Sale Agreement, its entire interest in 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 the
Loan Sale Agreement. Each Eligible Lender Trustee will, concurrently with the
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 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:
0 each Student Loan, on the date on which it is transferred to
the Trust, is free and clear of all security interests,
liens, charges and encumbrances and no offsets, defenses or
counterclaims with respect thereto have been asserted or
threatened;
0 the information provided with respect to the Student Loans
is true and correct as of the Cutoff Date; and
0 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 the Student Loan (it being understood that any breach that does
not affect any Guarantor's obligation to guarantee payment of the Student Loan
will not be considered to have a material adverse effect), the Seller will,
unless the breach is cured within 60 days, repurchase the Student Loan from the
related Eligible Lender Trustee, as of the first day following the end of the
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
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
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 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 the
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, the Trust will use funds on deposit in the account from
time to time during the related Funding Period or Revolving Period,
respectively, (1) to make interest payments to Noteholders and
Certificateholders in lieu of collections of interest on the Student Loans to
the extent interest is not paid currently but is capitalized and added to the
principal balance of the Student Loans and (2) 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"). The
additional Student Loans may be purchased by the Trust from the Seller or may be
originated by the Trust, if and to the extent specified in the related
prospectus supplement.
There can be no assurance that substantially all of the amounts on
deposit in any Pre-Funding Account or Collateral Reinvestment Account will be
expended during the related Funding Period or Revolving Period, respectively. If
the amount initially deposited into a Pre-Funding Account or a Collateral
Reinvestment Account for a series has not been reduced to zero by the end of the
related Funding Period or Revolving Period, respectively, the amounts remaining
on deposit in the Pre-Funding Account or Collateral Reinvestment Account 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 (the "Pre-Funding Account") and any collateral
reinvestment account (the "Collateral Reinvestment Account"), will be described
in the related prospectus supplement.
For any series of Securities, funds in the Collection Account, any
Reserve Account, any Pre-Funding Account, any Collateral Reinvestment Account
and any other accounts identified in the related prospectus supplement
(collectively, the "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 the 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 the 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
the 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 the account, so long as any of the
securities of the 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), (1) 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 (2) whose deposits are insured by the Federal Deposit
Insurance Corporation.
SERVICING PROCEDURES
Pursuant to each Loan Servicing Agreement, the Servicer has agreed to
service, and perform all other related tasks with respect to, all the Student
Loans acquired from time to time on behalf of each Trust. The Servicer is
required pursuant to the related Loan Servicing Agreement to perform all
services and duties customary to the servicing of Student Loans (including all
collection practices), to do so in the same manner as the Servicer has serviced
student loans for parties other than the Seller and to do so in compliance with,
and to otherwise comply with, all standards and procedures provided for in the
Act, the Guarantee Agreements and all other applicable federal and state laws.
Without limiting the foregoing, the duties of the Servicer with
respect to each Trust under the related Loan Servicing Agreement include, but
are not limited to, the following: collecting and depositing into the Collection
Account all payments with respect to the Student Loans, including claiming and
obtaining any Guarantee Payments, any Interest Subsidy Payments and Special
Allowance Payments with respect to the Student Loans, responding to inquiries
from borrowers under the Student Loans, investigating delinquencies and sending
out statements and payment coupons. In addition, the Servicer will keep ongoing
records with respect to the Student Loans and collections thereon and will
furnish monthly and annual statements with respect to the 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:
0 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;
0 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;
0 it will do nothing to impair the rights of the related
Certificateholders and the related Noteholders in the
Student Loans; and
0 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
the 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 the 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 the Student Loan as of the first day
following the end of the 60-day period that is the last day of a Collection
Period. In that event, the Servicer will arrange to be deposited into the
Collection Account an amount equal to the Purchase Amount of the Student Loan
and the related Trust's interest in any purchased Student Loan will be
automatically assigned to the Servicer or its designee. Upon the assignment, the
Servicer or its designee will be entitled to all payments made on the Student
Loan. In addition, if so specified in the related prospectus supplement, the
Servicer will reimburse the related Trust for any accrued interest amounts that
a Guarantor refuses to pay pursuant to its Guarantee Agreement, or for any prior
Interest Subsidy Payments and Special Allowance Payments that are lost or that
must be repaid to the Department with respect to a Student Loan, as a result of
a breach of any 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 the Securities entitled thereto will
be made by the applicable Trustee to the Noteholders and the Certificateholders
of the 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 the 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, including a Reserve
Account, will be available to cover any shortfalls in the amount available for
distribution to the extent specified in the related prospectus supplement. As
more fully described in the related prospectus supplement, and unless otherwise
specified in the related prospectus supplement, 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 the series, and distributions in respect of the Certificates of the series
may be subordinate to payments in respect of the Notes of the series.
CREDIT AND CASH FLOW ENHANCEMENT
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 other arrangements described in the related
prospectus supplement or any combination of two or more of the foregoing. If
specified in the applicable prospectus supplement, credit enhancement for a
class of Securities may cover one or more other classes of Securities of the
same series, and credit enhancement for a series of Securities may cover one or
more other series of Securities.
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 the class or series
of the full amount of principal and interest due thereon and to decrease the
likelihood that the Securityholders will experience losses. Unless otherwise
specified in the related prospectus supplement, the credit enhancement for a
class or series of Securities will not provide protection against all risks of
loss and will not guarantee repayment of the entire principal balance and
interest thereon. If losses occur which exceed the amount covered by any credit
enhancement or which are not covered by any credit enhancement, Securityholders
of any class or series will bear their allocable share of deficiencies, as
described in the related prospectus supplement. In addition, if a form of credit
enhancement covers more than one series of Securities, Securityholders of any
series will be subject to the risk that the 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 in the Reserve
Account of the amount of collections on the related Student Loans remaining on
each Distribution Date after the payment of all other required payments and
distributions on the 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 in the related prospectus supplement. 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 the Distribution Date or the preceding
Collection Period as to the Notes and the Certificates of the series, to the
extent applicable:
(1) the amount of the distribution allocable to principal of
each class of the Notes and the Certificates;
(2) 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;
(3) the Pool Balance as of the close of business on the last
day of the preceding Collection Period;
(4) 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 the Distribution Date, each after giving effect to payments
allocated to principal reported under clause (1) above;
(5) the amount of the Servicing Fee and the Administration
Fee paid to the Servicer and the Administrator, respectively, with
respect to the Collection Period;
(6) the Interest Rate or Pass-Through Rate for the next
period for any class of Notes or Certificates of the series with
variable or adjustable rates;
(7) the amount of the aggregate realized losses, if any, for
the Collection Period;
(8) the Noteholders' Interest Carryover Shortfall, the
Noteholders' Principal Carryover Shortfall, the Certificateholders'
Interest Carryover Shortfall and the Certificateholders' Principal
Carryover Shortfall (each as defined in the related prospectus
supplement), if any, in each case as applicable to each class of
Securities, and the change in the amounts from the preceding
statement;
(9) the aggregate Purchase Amounts for Student Loans, if
any, that were repurchased in the Collection Period;
(10) the balance of the Reserve Account (if any) on the
Distribution Date, after giving effect to changes in the Reserve
Account on the Distribution Date;
(11) 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
(12) the principal balance and number of Student Loans
conveyed to or originated by the Trust during the Collection Period.
Each amount set forth pursuant to subclauses (1), (2), (5) and (8)
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 the Notes or the
initial Certificate Balance of the 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 documents and records and on
the 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 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 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 the Loan Servicing Agreement throughout the preceding twelve
months (or, in the case of the first certificate, the period from the applicable
Closing Date) or, if there has been a default in the fulfillment of any
obligation, describing each default. The Servicer has agreed to give the
Administrator, the related Indenture Trustee and Eligible Lender Trustee notice
of Servicer Defaults under the Loan Servicing Agreement.
Copies of the statements and certificates may be obtained by
Securityholders by a request in writing addressed to the applicable Trustee.
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 the duties is no longer
permissible under applicable law. No 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 person will be protected
against any liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or negligence in the performance of the Servicer's duties
thereunder or by reason of reckless disregard of its obligations and duties
thereunder. In addition, each Loan Servicing Agreement will provide that the
Servicer is under no obligation to appear in, prosecute, or defend any legal
action that is not incidental to its servicing responsibilities under the Loan
Servicing Agreement and that, in its opinion, may cause it to incur any expense
or liability. Each Loan Servicing Agreement will, however, provide that the
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 the 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:
0 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 the Indenture
Trustee or the related Eligible Lender Trustee is received
by the Servicer or after discovery by the Servicer,
0 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,
0 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
0 an Insolvency Event with respect to the Servicer occurs.
"Insolvency Event" means, with respect to any person, any of
the following events or actions: specified events of
insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings with respect to the
person and specified actions by the 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 the then outstanding Notes,
may terminate all the rights and obligations of the Servicer under the Loan
Servicing Agreement, whereupon a successor servicer appointed by the related
Indenture Trustee or the Indenture Trustee will succeed to all the
responsibilities, duties and liabilities of the Servicer under the 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 the appointment has occurred, the
trustee or official may have the power to prevent the Indenture Trustee or the
Noteholders from effecting a transfer. In the event that the Indenture Trustee
is unwilling or unable to 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. The Indenture Trustee may make
the arrangements for compensation to be paid, which in no event may be greater
than the servicing compensation to the Servicer under the Loan Servicing
Agreement, unless the compensation arrangements will not result in a downgrading
of the Notes and Certificates by any Rating Agency. In the event a Servicer
Default occurs and is continuing, the Indenture Trustee or the Noteholders, as
described above, may remove the Servicer, without the consent of the related
Eligible Lender Trustee or any of the Certificateholders of the related series.
Moreover, only the Indenture Trustee or the Noteholders, and not the Eligible
Lender Trustee or the Certificateholders, have the ability to remove the
Servicer if a Servicer Default occurs and is continuing.
WAIVER OF PAST DEFAULTS
With respect to each Trust, unless otherwise specified in the related
prospectus supplement, the holders of Notes evidencing at least a majority in
principal amount of the then outstanding Notes (or the holders of Certificates
evidencing not less than a majority of the outstanding Certificate Balance), in
the case of any Servicer Default which does not adversely affect the Indenture
Trustee or the Noteholders of the related series, may, on behalf of all the
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 the Loan Servicing
Agreement. Therefore, the Noteholders have the ability, except as noted above,
to waive defaults by the Servicer which could materially adversely affect the
Certificateholders. No waiver will impair the 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 the Transfer and Servicing Agreements or of modifying in
any manner the rights of the Noteholders or Certificateholders; provided that
the 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 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 the then outstanding Notes
and the holders of Certificates of the related series evidencing at least a
majority of the Certificate Balance for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of the Transfer
and Servicing Agreements or of modifying in any manner the rights of the
Noteholders or Certificateholders; provided, however, that no amendment may (1)
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 the Noteholders or Certificateholders, or (2) reduce the
aforesaid percentage of the Notes or Certificates which are required to consent
to any amendment, without the consent of the holders of all the outstanding
Notes and Certificates.
Each Trust Agreement will provide that the related Eligible Lender
Trustee does not have the power to commence a voluntary proceeding in bankruptcy
relating to the Trust without the unanimous prior approval of all
Certificateholders (including the applicable Company) of the related series and
the delivery to the Eligible Lender Trustee by each Certificateholder (including
the Company) of a certificate certifying that the Certificateholder reasonably
believes that the 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 the series will succeed to all the rights of the
Noteholders of the series, under the related Loan Servicing Agreement, except as
otherwise provided in the related Loan Servicing Agreement.
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 (1) the maturity or other liquidation of the last related Student
Loan and the disposition of any amount received upon liquidation of any
remaining Student Loans and (2) the payment to the Noteholders and the
Certificateholders of the related series of all amounts required to be paid to
them pursuant to the Transfer and Servicing Agreements.
OPTIONAL REDEMPTION. If so specified in the related prospectus
supplement, in order to avoid excessive administrative expense, the Seller or
another party will be permitted at its option to purchase from the related
Eligible Lender Trustee, as of the end of any Collection Period immediately
preceding a Distribution Date, if the then outstanding Pool Balance is a
percentage specified in the related prospectus supplement (not to exceed 30%) of
the Initial Pool Balance (as defined in the related prospectus supplement, the
"Initial Pool Balance"), all remaining related Student Loans at a price equal to
the aggregate Purchase Amounts thereof as of the end of the 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 the 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 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 the prospectus supplement. The Seller and unrelated third parties
may offer bids for the Student Loans. The Indenture Trustee will accept the
highest bid equal to or in excess of the aggregate Purchase Amounts of the
Student Loans as of the end of the Collection Period immediately preceding the
related Distribution Date. The proceeds of the 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 in the
Administration Agreement, 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:
0 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 the failure,
0 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
0 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 the procedures will apply to the Administrator and the
Administration Agreement rather than the Servicer and the Loan Servicing
Agreement.
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 the 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 the loans or by the filing of notice
of the security interest in the manner provided by the applicable Uniform
Commercial Code ("UCC") for perfection of security interests in accounts. A
financing statement or statements covering the Student Loans will be filed under
the UCC to protect the interest of the Eligible Lender Trustee in the event the
transfer by the Seller is deemed to be an assignment of collateral as security
for the benefit of the Trust.
If the transfer of the Student Loans is deemed to be an assignment as
security for the benefit of a Trust, there are 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 the 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 the 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 in any Student Loan held by
a Trust) 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 the 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 in any Student
Loan were granted to another party, that purchased (or took the security
interest in) any of the Student Loans in the ordinary course of its business and
took possession of the 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 specified 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 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 a
Trust may be liable for 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 including the Student Loans. Generally, those
procedures require that completed loan applications be processed, a
determination of whether an applicant is an eligible borrower under applicable
standards (including a review of a financial need analysis) be made, the
borrower's responsibilities under the loan be explained to him or her, the
promissory note evidencing the loan be executed by the borrower and then that
the loan proceeds be disbursed in a specified manner by the lender. After the
loan is made, the lender must establish repayment terms with the borrower,
properly administer deferrals and forbearances and credit the borrower for
payments made thereon. If a borrower becomes delinquent in repaying a loan, a
lender or a servicing agent must perform 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 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 the Federal Student Loans or in
the Federal Guarantors' refusal to honor their Guarantee Agreements with the
Eligible Lender Trustee with respect to the 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 the
Federal Student Loans.
Loss of any 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 specified 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 the Student Loan has a material adverse effect on
the interest of the Trust in the Student Loan and the breach is not cured within
any applicable cure period. SEE "Description of the Transfer and Servicing
Agreements--Sale of Student Loans; Representations and Warranties"
and"--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.
<PAGE>
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 the debt from discharge
will impose an undue hardship on the debtor and the debtor's dependents.
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 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 the Trust. An opinion of Federal
Tax Counsel, however, is not binding on the IRS or the courts. No ruling on any
of the issues discussed below will be sought from the IRS. For purposes of the
following summary, references to the Trust, the Notes, the Certificates and
related terms, parties and documents shall be deemed to refer, unless otherwise
specified in this prospectus, to each Trust and the Notes, Certificates and
related terms, parties and documents applicable to the 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 THE 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 safe harbors relating to the trading of the Certificates will
exempt the Trust from the rule that specified 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 the Notes will be disclosed in the
Related prospectus supplement. The OID Regulations do not address their
application to debt instruments including 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 including 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 the
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 the 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 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 the Noteholder acquires during the year
of the election and thereafter. Similarly, a Noteholder that makes this election
for a Note that is acquired at a premium will be deemed to have made an election
to amortize bond premium with respect to all debt instruments having amortizable
bond premium that the 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 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 the Note (each, a "Short-Term Note") may be subject
to special rules. An accrual basis holder of a Short-Term Note (and specified
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. 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 the 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 the Noteholder
with respect to the Note. Any 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 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 the 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:
0 the interest is not effectively connected with the conduct
of a trade or business within the United States by the
foreign person
0 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
0 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 specified 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 the 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 (1) the gain is
not effectively connected with the conduct of a trade or business in the United
States by the foreign person and (2) 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 specified
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, 2000, subject to 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
including 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, 2000, subject
to 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
including the Trust to elect to be treated as a pass-through entity not subject
to federal entity-level income tax (except with respect to 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 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 the Certificates will be
disclosed in the applicable prospectus supplement.
CLASSIFICATION AS A PARTNERSHIP
TREATMENT OF THE TRUST AS A PARTNERSHIP. The Seller and the Servicer
will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust as a partnership for purposes of federal and
state income tax, franchise tax and any other tax measured in whole or in part
by income, with the assets of the partnership being the assets held by the
Trust, the partners of the partnership being the Certificateholders (including
the Company in its capacity as recipient of distributions from the Reserve
Account, if any), and the Notes being debt of the partnership. However, the
proper characterization of the arrangement involving the Trust, the
Certificateholders, the Noteholders, the Seller and the Servicer is not clear
because there is no authority on transactions comparable to that contemplated in
this prospectus.
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 the 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:
0 the interest that accrues on the Certificates in accordance
with their terms for the Interest Period, including interest
accruing at the Pass-Through Rate for the Interest Period
and interest on amounts previously due on the Certificates
but not yet distributed;
0 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
0 all other amounts of income payable to the
Certificateholders for the 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 this 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 the 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, the deductions might be disallowed to the individual
in whole or in part and might result in the holder being taxed on an amount of
income that exceeds the amount of cash actually distributed to the holder over
the life of the Trust. The deductions may also be subject to reduction under
Section 68 of the Code if an individual taxpayer's adjusted gross income exceeds
limits.
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 the 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 (including 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 (1) have the taxable income of the Trust computed under the accrual
method of accounting and (2) 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 the 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 the 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 the 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 the 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, the
partnership will be deemed to terminate and then be reconstituted for federal
income tax purposes. If a termination occurs, the assets of the terminated
partnership are deemed to be constructively contributed to a reconstituted
partnership in exchange for interests in the reconstituted partnership. The
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 the 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 the 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 discount in income currently as it
accrues over the life of the Student Loans or to offset any premium against
interest income on the Student Loans. As indicated above, a portion of the
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 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 the 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 the
Certificates and, upon sale or other disposition of some of the Certificates,
allocate a pro rata portion of the 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, the 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 the 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 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 the 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 the nominees will be required to forward the
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 the 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 information on the nominee, the beneficial owners
and the Certificates so held. The information includes (1) the name, address and
taxpayer identification number of the nominee and (2) as to each beneficial
owner:
0 the name, address and identification number of the person,
0 whether the 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
0 information on Certificates that were held, bought or sold
on behalf of the person throughout the year.
In addition, brokers and financial institutions that hold Certificates through a
nominee are required to furnish directly to the Trust information as to
themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act that holds Certificates as a nominee is
not required to furnish any 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 will be responsible for representing the Certificateholders
in 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 the return for the 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
specified 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 in this prospectus. Although it
is not expected that the Trust would be engaged in a trade or business in the
United States for the 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 the 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, 2000, subject to 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 the 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 this 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 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,
2000, subject to transition rules.
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
this retention or acquisition to disregard the Trust as an entity separate from
the 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 so 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 the
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, the
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 this case,
the entity would be subject to federal income taxes at corporate tax rates on
its taxable income generated by Student Loans. An entity-level tax could result
in reduced distribution to Noteholders and Noteholders could be liable for a
share of the tax.
Furthermore, even if the Trust were not taxable as a corporation, the
treatment of Notes as equity interests in a partnership could have adverse tax
consequences to holders of the Notes. For example, income from classes of Notes
to 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 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 the 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.
TRUSTS FOR WHICH A GRANTOR TRUST ELECTION IS MADE
TAX CHARACTERIZATION OF THE TRUST
CHARACTERIZATION. In the case of a grantor trust, Federal Tax Counsel
will deliver its opinion that the Trust will not be classified as an association
taxable as a corporation and that the Trust will be classified as a grantor
trust under subpart E, Part I of subchapter J of the Code. In this case,
beneficial owners of certificates (referred to in this prospectus as "grantor
trust certificateholders") will be treated for federal income tax purposes as
owners of a portion of the Trust's assets as described below. The certificates
issued by a Trust that is treated as a grantor trust are referred to in this
prospectus as "grantor trust certificates".
TAXATION OF GRANTOR TRUST CERTIFICATEHOLDERS. Subject to the
discussion below under "--Stripped Certificates" and "--Subordinated
certificates," each grantor trust certificateholder will be treated as the owner
of a pro rata undivided interest in the assets of the Trust. Accordingly, and
subject to the discussion below of the recharacterization of the Servicing Fee,
each grantor trust certificateholder must include in income its pro rata share
of the interest and other income from the Student Loans, including any interest,
original issue discount, market discount, prepayment fees, assumption fees, and
late payment charges with respect to the assets, and, subject to limitations
discussed below, may deduct its pro rata share of the fees and other deductible
expenses paid by the Trust, at the same time and to the same extent as these
items would be included or deducted by the grantor trust certificateholder if
the grantor trust certificateholder held directly a pro rata interest in the
assets of the Trust and received and paid directly the amounts received and paid
by the Trust. Any amounts received by a grantor trust certificateholder in lieu
of amounts due with respect to any Student Loan because of a default or
delinquency in payment will be treated for federal income tax purposes as having
the same character as the payments they replace.
Under Sections 162 and 212 each grantor trust certificateholder will
be entitled to deduct its pro rata share of servicing fees, and other fees and
charges retained by the Servicer, provided that these amounts are reasonable
compensation for services rendered to the Trust. Grantor trust
certificateholders that are individuals, estates or trusts will be entitled to
deduct their share of expenses only to the extent these expenses plus all other
miscellaneous itemized deductions exceed two percent of the grantor trust
certificateholder's adjusted gross income, and will be allowed no deduction for
these expenses in determining their liabilities for alternative minimum tax. In
addition, Section 68 of the Code provides that the amount of itemized
deductions, including those provided for in Section 212 of the Code, otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds a threshold amount specified in the Code, $100,000 (or $50,000 in the
case of a separate return by a married individual), adjusted for changes in the
cost of living subsequent to 1990, will be reduced by the lesser of (1) 3% of
the excess of adjusted gross income over the specified threshold amount or (2)
80% of the amount of itemized deductions otherwise allowable for the applicable
taxable year. For taxable years beginning after December 31, 1997, in the case
of a partnership that has 100 or more partners and elects to be treated as an
"electing large partnership," 70% of the partnership's miscellaneous itemized
deductions will be disallowed, although the remaining deductions will generally
be allowed at the partnership level and will not be subject to the 2% floor that
would otherwise be applicable to individual partners.
The servicing compensation to be received by the servicer may be
questioned by the IRS as exceeding a reasonable fee for the services being
performed in exchange for the servicing compensation, and a portion of the
servicing compensation could be recharacterized as an ownership interest
retained by the servicer or other party in a portion of the interest payments to
be made pursuant to the Student Loans. In this event, a Certificate might be
treated as a Stripped Certificate subject to the stripped bond rules of Section
1286 of the Code and the original issue discount provisions rather than to the
market discount and premium rules. See the discussion below under "-- Stripped
Certificates". Except as discussed below under "--Stripped Certificates" or
"--Subordinated Certificates," this discussion assumes that the servicing fees
paid to the servicer do not exceed reasonable servicing compensation.
A purchaser of a grantor trust Certificate will be treated as
purchasing an interest in each Student Loan in the Trust at a price determined
by allocating the purchase price paid for the Certificate among all Student
Loans in proportion to their fair market values at the time of the purchase of
the Certificate. To the extent that the portion of the purchase price of a
grantor trust certificate allocated to a Student Loan is less than or greater
than the portion of the stated redemption price at maturity of the Student Loan,
the interest in the Student Loan will have been acquired at a discount or
premium. See "--Market Discount" and "--Premium," below.
The treatment of any discount on a Student Loan will depend on whether
the discount represents original issue discount or market discount. Except as
indicated otherwise in the applicable prospectus supplement, we do not expect
that any Student Loan will have original issue discount (except as discussed
below under "--Stripped Certificates" or "--Subordinated Certificates"). For the
rules governing original issue discount, see "Trusts for Which a Partnership
Election is Made--Tax Consequences to Holders of Notes--Original Issue Discount"
above.
The information provided to grantor trust certificateholders will not
include information necessary to compute the amount of discount or premium, if
any, at which an interest in each Student Loan is acquired.
MARKET DISCOUNT. A grantor trust certificateholder that acquires an
undivided interest in Student Loans may be subject to the market discount rules
of Sections 1276 through 1278 to the extent an undivided interest in a Student
Loan is considered to have been purchased at a "market discount". For a
discussion of the market discount rules under the Code, see "Trusts for Which a
Partnership Election is Made--Classification as a Partnership--Discount and
Premium" above.
PREMIUM. To the extent a grantor trust certificateholder is considered
to have purchased an undivided interest in a Student Loan for an amount that is
greater than the stated redemption price at maturity of the interest, the
grantor trust certificateholder will be considered to have purchased the
interest in the Student Loan with "amortizable bond premium" equal in amount to
the excess. For a discussion of the rules applicable to amortizable bond
premium, see "Trusts for Which a Partnership Election is Made--Classification as
a Partnership--Discount and Premium" above.
STRIPPED CERTIFICATES. Some classes of certificates may be subject to
the stripped bond rules of Section 1286 of the Code and for purposes of this
discussion will be referred to as "Stripped Certificates." In general, a
Stripped Certificate will be subject to the stripped bond rules where there has
been a separation of ownership of the right to receive some or all of the
principal payments on a Student Loan from ownership of the right to receive some
or all of the related interest payments. In general, where a separation has
occurred, under the stripped bond rules of Section 1286 of the Code the holder
of a right to receive a principal or interest payment on the bond is required to
accrue into income, on a constant yield basis under rules governing original
issue discount, the difference between the holder's initial purchase price for
the right to receive and the principal or interest payment to be received with
respect to that right.
Certificates will constitute Stripped Certificates and will be subject
to these rules under various circumstances, including the following:
0 if any servicing compensation is deemed to exceed a
reasonable;
0 if the company or any other party retains a retained yield
with respect to the Student Loans held by the Trust;
0 if two or more classes of certificates are issued
representing the right to non-pro rata percentages of the
interest or principal payments on the Student Loans; or
0 if certificates are issued which represent the right to
interest-only payments or principal-only payments.
The tax treatment of the Stripped Certificates with respect to the
application of the original issue discount provisions of the Code is currently
unclear. However, the trustee intends to treat each Stripped Certificate as a
single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Original issue discount with respect to
a Stripped Certificate must be included in ordinary gross income for federal
income tax purposes as it accrues in accordance with the constant yield method
that takes into account the compounding of interest and this accrual of income
may be in advance of the receipt of any cash attributable to that income. For
purposes of applying the original issue discount provisions of the Code, the
issue price of a Stripped Certificate will be the purchase price paid by each
holder of the Stripped Certificate and the stated redemption price at maturity
may include the aggregate amount of all payments to be made with respect to the
Stripped Certificate whether or not denominated as interest. The amount of
original issue discount with respect to a Stripped Certificate may be treated as
zero under the original issue discount DE MINIMIS rules described above.
SUBORDINATED CERTIFICATES. In the event the Trust issues two classes
of grantor trust certificates that are identical except that one class is a
subordinate class, with a relatively high certificate pass through rate, and the
other is a senior class, with a relatively low certificate pass through rate
(referred to in this prospectus as the "Subordinate Certificates" and "Senior
Certificates", respectively), the grantor trust certificateholders will be
deemed to have acquired the following assets: (1) the principal portion of each
Student Loan plus a portion of the interest due on each Student Loan (the "Trust
Stripped Bond"), and (2) a portion of the interest due on each Student Loan
equal to the difference between the certificate pass through rate on the
Subordinate Certificates and the certificate pass through rate on the Senior
Certificates, if any, which difference is then multiplied by the Subordinate
Class Percentage (the "Trust Stripped Coupon"). The "Subordinate Class
Percentage" equals the initial aggregate principal amount of the Subordinate
Certificates divided by the sum of the initial aggregate principal amount of the
Subordinate Certificates and the Senior Certificates. The "Senior Class
Percentage" equals the initial aggregate principal amount of the Senior
Certificates divided by the sum of the initial aggregate principal amount of the
Subordinate Certificates and the Senior Certificates.
<PAGE>
The Senior Certificateholders in the aggregate will own the Senior
Class Percentage of the Trust Stripped Bond and accordingly each Senior
Certificateholder will be treated as owning its pro rata share of each asset.
The Senior Certificateholders will not own any portion of the Trust Stripped
Coupon. The Subordinate Certificateholders in the aggregate own both the
Subordinate Class Percentage of the Trust Stripped Bond plus 100% of the Trust
Stripped Coupon, if any, and accordingly each Subordinate Certificateholder will
be treated as owning its pro rata share in both assets. The Trust Stripped Bond
will be treated as a "stripped bond" and the Trust Stripped Coupon will be
treated as "stripped coupons" within the meaning of Section 1286 of the Code.
Because the purchase price paid by each Subordinate Certificateholder will be
allocated between that certificateholder's interest in the Trust Stripped Bond
and the Trust Stripped Coupon based on the relative fair market value of each
asset on the date the Subordinate Certificate is purchased, the Trust Stripped
Bond may be issued with original issue discount.
Except to the extent modified below, the income of the Trust Stripped
Bond represented by a Certificate will be reported in the same manner as
described generally above for holders of certificates. The interest income on
the Subordinate Certificates at the Senior Certificate pass-through rate and the
portion of the Servicing Fee that does not constitute excess servicing will be
treated as qualified stated interest.
Income of the holder of the Trust Stripped Coupon will be reported by
treating the Trust Stripped Coupon as a single debt instrument with original
issue discount equal to the excess of the total amount payable with respect to
the Trust Stripped Coupon, based on the prepayment assumption used in pricing
the certificates, over the portion of the purchase price allocated to the Trust
Stripped Coupon. The sum of the daily portions of original issue discount on the
Trust Stripped Coupon for each day during a year in which the Subordinate
Certificateholder holds the Trust Stripped Coupon will be included in the
Subordinate Certificateholder's income.
If the Subordinate Certificateholders receive distribution of less
than their share of the Trust's receipts of principal or interest (the
"Shortfall Amount") because of the subordination of the Subordinate
Certificates, holders of Subordinate Certificates would probably be treated for
federal income tax purposes as if they had
0 received as distributions their full share of receipts,
0 paid over to the Senior Certificateholders an amount equal
to the Shortfall Amount and
0 retained the right to reimbursement of the relevant amounts
to the extent these amounts are otherwise available as a
result of collections on the Student Loans or amounts
available from a Reserve Account or other form of credit
enhancement, if any.
Under this analysis,
0 Subordinate Certificateholders would be required to accrue
as current income any interest income or original issue
discount of the Trust that was a component of the Shortfall
Amount, even though that amount was in fact paid to the
Senior Certificateholders,
0 a loss would only be allowed to the Subordinate
Certificateholders when their right to receive reimbursement
of the Shortfall Amount became worthless (i.e., when it
becomes clear that amount will not be available from any
source to reimburse the loss) and
0 reimbursement of the Shortfall Amount prior to a claim of
worthlessness would not be taxable income to Subordinate
Certificateholders because the amount was previously
included in income.
Those results should not significantly affect the inclusion of income for
Subordinate Certificateholders on the accrual method of accounting, but could
accelerate inclusion of income to Subordinate Certificateholders on the cash
method of accounting by, in effect, placing them on the accrual method.
Moreover, the character and timing of loss deductions are unclear. Subordinate
Certificateholders are strongly urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any losses sustained
with respect to the Subordinate Certificates including any loss resulting from
the failure to recover previously accrued interest or discount income.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. The OID
regulations permit a grantor trust certificateholder to elect to accrue all
interest, discount, including DE MINIMIS market or original issue discount,
reduced by any premium, in income as interest, based on a constant yield method.
If an election were to be made with respect to an interest in a Student Loan
with market discount, the Certificate Owner would be deemed to have made an
election to include in income currently market discount with respect to all
other debt instruments having market discount that the grantor trust
certificateholder acquires during the year of the election or afterward. See "--
Market Discount" above. Similarly, a grantor trust certificateholder that makes
this election for an interest in a Student Loan that is acquired at a premium
will be deemed to have made an election to amortize bond premium with respect to
all debt instruments having amortizable bond premium that the grantor trust
certificateholder owns at the beginning of the first taxable year to which the
election applies or acquires afterward. See "--Premium" above. The election to
accrue interest, discount and premium on a constant yield method with respect to
a grantor trust Certificate is irrevocable.
PREPAYMENTS. The Taxpayer Relief Act of 1997 (the "1997 Act") contains
a provision requiring original issue discount on any pool of debt instruments
the yield on which may be affected by reason of prepayments be calculated taking
into account the prepayment assumption and requiring the discount to be taken
into income on the basis of a constant yield to assumed maturity taking account
of actual prepayments. The legislative history to the 1986 Act states that
similar rules apply with respect to market discount and amortizable bond premium
on debt instruments.
SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE. Sale or exchange of a
grantor trust certificate prior to its maturity will result in gain or loss
equal to the difference, if any, between the amount realized, exclusive of
amounts attributable to accrued and unpaid interest, which will be treated as
ordinary income, allocable to the Student Loan and the owner's adjusted basis in
the grantor trust certificate. The adjusted basis generally will equal the
seller's cost for the grantor trust certificate, increased by the original issue
discount and any market discount included in the seller's gross income with
respect to the grantor trust certificate, and reduced, but not below zero, by
any premium amortized by the seller and by principal payments on the grantor
trust certificate previously received by the seller. The gain or loss will,
except as discussed below, be capital gain or loss to an owner for which the
Student Loans represented by a grantor trust certificate are "capital assets"
within the meaning of Section 1221, except that gain will be treated in whole or
in part as ordinary interest income to the extent of the seller's interest in
accrued market discount not previously taken into income on underlying Student
Loans having a fixed maturity date of more than one year from the date of
origination. A capital gain or loss will be long-term or short-term depending on
whether or not the grantor trust certificate has been owned for the long-term
capital gain holding period, currently more than one year.
Notwithstanding the foregoing, any gain realized on the sale or
exchange of a grantor trust certificate will be ordinary income to the extent of
the seller's interest in accrued market discount on Student Loans not previously
taken into income. See "--Market Discount," above.
NON-UNITED STATES GRANTOR TRUST CERTIFICATE OWNERS. Amounts paid to
Non-United States Owners of grantor trust certificates will be treated as
interest for purposes of United States withholding tax. The interest
attributable to the underlying Student Loans will not be subject to the normal
30%, or any lower rate provided for by an applicable tax treaty, withholding tax
imposed on these amounts provided that (1) the Non-U.S. Certificate Owner does
not own, directly or indirectly, 10% or more of, and is not a controlled foreign
corporation, within the definition of Section 957, related to any of the issuers
of the Student Loans and (2) the Certificate Owner fulfills specific
certification requirements. Under these requirements, the Certificate Owner must
certify, under penalty of perjury, that it is not a "United States person" and
must provide its name and address. "United States person" means a citizen or
resident of the United States, a corporation, partnership or other entity
created or organized in or under the laws of the United States or any political
subdivision of the United States, or an estate or trust the income of which is
includable in gross income for United States federal income tax purposes,
without regard to its source. If, however, interest or gain is effectively
connected to the conduct of a trade or business within the United States by the
Certificate Owner, the owner will be subject to United States federal income tax
on the interest or gain at graduated rates and, in the case of a corporation, to
a possible branch profits tax, and will not be subject to withholding tax
provided that the owner meets applicable documentation requirements. Potential
investors who are not United States persons should consult their own tax
advisors regarding the specific tax consequences of owning a Certificate.
On October 6, 1997, final Treasury Regulations (the "1997 Withholding
Regulations") were issued which affect the United States taxation of Non-United
States Owners of grantor trust certificates. The 1997 Withholding Regulations
are generally effective for payments after December 31, 2000, regardless of the
issue date of the Student Loans with respect to which payments are made, subject
to particular transition rules.
BACKUP WITHHOLDING. Distributions made on the grantor trust
certificates and proceeds from the sale of the grantor trust certificates will
be subject to a "backup" withholding tax of 31% if, in general, the grantor
trust certificateholder fails to comply with particular identification
procedures, unless the holder is an exempt recipient under applicable provisions
of the Code.
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 the 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 requirements on employee benefit plans and on
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 the 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 the
Plans in connection with the investment of Plan assets. Some employee benefit
plans, including 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 the 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 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 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 specified relationships to the
Plan unless a statutory, regulatory or administrative exemption is available.
Some Parties in Interest that participate in a prohibited transaction may be
subject to an excise tax imposed pursuant to Section 4975 of the Code or a
penalty imposed pursuant to Section 502(i) of ERISA, unless a statutory or
administrative exemption is available. These prohibited transactions generally
are set forth in Section 406 of ERISA and Section 4975 of the Code.
THE NOTES
Unless otherwise specified in the related prospectus supplement, the
Notes of each series may be purchased by a Plan. The Trust, 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 specified
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 the
persons are Parties in Interest unless the transactions are subject to one or
more statutory or administrative exemptions, including: Prohibited Transaction
Class Exemption ("PTCE") 96-23, which exempts specified transactions effected on
behalf of a Plan by an "in-house asset manager"; PTCE 90-1, which exempts
specified transactions between insurance company separate accounts and Parties
in Interest; PTCE 91-38, which exempts specified transactions between bank
collective investment funds and Parties in Interest; PTCE 95-60, which exempts
specified transactions between insurance company general accounts and Parties in
Interest; or PTCE 84-14, which exempts specified 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 the
investment. Accordingly, prior to making an investment in the Notes, investing
Plans should determine whether the Trust, 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 the Plan and, if so, whether the transaction is subject
to one or more statutory, regulatory or administrative exemptions.
Any Plan fiduciary considering whether to invest in Notes on behalf of
a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to the investment. Each Plan fiduciary also should determine whether, under
the general fiduciary standards of investment prudence and diversification, an
investment in the Notes is appropriate for the Plan, considering the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio, as well as whether the investment is permitted under the 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"). The 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 specified 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 the 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, the
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.
<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/or an underwriting agreement
with respect to the Certificates of the series (each, an "Underwriting
Agreement"), the Seller will agree to cause the related Trust to sell to the
underwriters named in the Underwriting Agreements and in the related prospectus
supplement, and each of the underwriters will severally agree to purchase, the
principal amount of each class of Notes and Certificates, as the case may be, of
the related series set forth in the Underwriting Agreements 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 in the Underwriting Agreements, to purchase all the
Notes and Certificates, as the case may be, described in the Underwriting
Agreements which are offered hereby and by the related prospectus supplement if
any of the Notes and Certificates, as the case may be, are purchased.
Each prospectus supplement will either (1) 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
dealers participating in the offering of the Notes and Certificates, as the case
may be, or (2) 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 the sale. After the initial public
offering of any Notes and Certificates, as the case may be, the public offering
prices and the concessions may be changed.
Until the distribution of the Securities is completed, rules of the
Commission may limit the ability of the underwriters and selling group members
to bid for and purchase the Securities. As an exception to these rules, the
underwriters are permitted to engage in transactions that stabilize the price of
the Securities. The 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 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 the 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 the transactions or that the transactions, once commenced, will
not be discontinued without notice.
Each Underwriting Agreement will provide that the Seller will
indemnify the underwriters against 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 the 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 the classes subject to either thereof.
The place and time of delivery for the Securities in respect of which
this Prospectus is delivered will be set forth in the related prospectus
supplement.
LEGAL MATTERS
Specified 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 the 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. Specified federal income tax
matters will be passed upon for each Trust by Stroock & Stroock & Lavan LLP and
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 in the Registration Statement. 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 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 in this prospectus or in a
document incorporated or deemed to be incorporated by reference in this
prospectus shall be deemed to be modified or superseded for purposes of this
prospectus to the extent that a statement contained in this prospectus or in any
subsequently filed document which also is to be incorporated by reference in
this prospectus modifies or supersedes the statement. Any 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 person, a copy of any or all of the
documents incorporated in this prospectus or in any related prospectus
supplement by reference, except the exhibits to the documents (unless the
exhibits are specifically incorporated by reference in the documents). Requests
for the copies should be directed to President, USA Group Secondary Market
Services, Inc., 30 South Meridian Street, Indianapolis, Indiana 46204-3503
(Telephone: (317) 951-5640).
<PAGE>
INDEX OF PRINCIPAL TERMS
PAGE
10 percent shareholder...................................................54
1992 Amendments..........................................................18
1993 Act.................................................................18
1997 Act.................................................................64
1998 Reauthorization Bill................................................18
Act......................................................................16
Additional Fundings......................................................42
Add-on Consolidation Loans...............................................27
Administration Agreement.................................................49
Administration Fee.......................................................49
Administrator............................................................49
Administrator Default....................................................49
Applicable Trustee.......................................................38
Base Rate................................................................38
Benefit Plan.............................................................66
Calculation Agent........................................................38
Cede.....................................................................38
Certificate Balance......................................................31
Certificate Pool Factor..................................................31
Certificates.............................................................36
Closing Date.............................................................17
Code.....................................................................52
Collateral Reinvestment Account..........................................42
Collection Account.......................................................42
Collection Period........................................................43
Commission...............................................................68
Company..................................................................36
Controlled Foreign Corporation...........................................54
CP Rate..................................................................21
Cutoff Date..............................................................12
Deferral Period..........................................................24
Definitive Certificates..................................................39
Definitive Notes.........................................................39
Definitive Securities....................................................39
Department...............................................................15
Depositaries.............................................................38
Depositary...............................................................31
Distribution Date........................................................32
DTC......................................................................38
DTC's Nominee............................................................31
Eligible Deposit Account.................................................42
Eligible Institution.....................................................43
Eligible Investments.....................................................42
Eligible Lender Trustee..................................................12
ERISA....................................................................65
Event of Default.........................................................33
Excess Cashflow Rights...................................................16
Family Contribution......................................................20
FASIT....................................................................55
FASIT Provisions.........................................................55
Federal Assistance.......................................................21
Federal Consolidation Loan...............................................26
Federal Guarantor........................................................15
Federal PLUS Loans.......................................................18
Federal SLS Loans........................................................18
Federal Stafford Loans...................................................18
Federal Student Loans....................................................12
Federal Supplemental Loans to Students...................................18
Federal Tax Counsel......................................................52
Federal Unsubsidized Stafford Loans......................................18
FFELP....................................................................18
Fixed Rate Securities....................................................37
Floating Rate Securities.................................................37
Forbearance Period.......................................................25
foreign person...........................................................54
Funding Period...........................................................16
Grace Period.............................................................24
grantor trust certificateholders.........................................60
grantor trust certificates...............................................60
Guarantee Agreement......................................................16
Guarantee Payments.......................................................12
Guarantor................................................................15
Indenture................................................................31
Indenture Trustee........................................................31
Index Shortfall Carryover................................................34
Indiana Tax Counsel......................................................65
Indirect Participants....................................................38
Initial Pool Balance.....................................................49
Insolvency Event.........................................................30
Interest Period..........................................................56
Interest Rate............................................................32
Interest Reset Period....................................................37
Interest Subsidy Payments................................................21
Investment Earnings......................................................42
IRS......................................................................52
Loan Sale Agreement......................................................15
Loan Services............................................................13
Loan Servicing Agreement.................................................14
Monthly Rebate Fee.......................................................27
New Withholding Regulations..............................................54
Note Pool Factor.........................................................31
Notes....................................................................31
OID......................................................................53
OID Regulations..........................................................53
Participants.............................................................31
Parties in Interest......................................................66
Pass-Through Rate........................................................37
Plans....................................................................65
Pool Balance.............................................................31
Pool Factor..............................................................31
Pre-Funding Amount.......................................................46
prepayments..............................................................30
prospectus supplement....................................................14
PTCE.....................................................................66
Purchase Amount..........................................................41
Registration Statement...................................................68
Related Documents........................................................35
related person...........................................................54
Reserve Account..........................................................45
Revolving Period.........................................................16
Rules....................................................................39
Secretary................................................................28
Securities...............................................................36
Securities Act...........................................................68
Seller...................................................................13
Senior Certificates......................................................62
Senior Class Percentage..................................................62
Servicer.................................................................14
Servicer Default.........................................................47
Servicing Fee............................................................44
Shortfall Amount.........................................................63
Short-Term Note..........................................................53
SMS......................................................................13
Special Allowance Payments...............................................20
Spread...................................................................38
Spread Multiplier........................................................38
Stripped Certificates....................................................62
Student Loans............................................................12
Subordinate Certificates.................................................62
Subordinate Class Percentage.............................................62
tax matters partner......................................................58
Transfer and Servicing Agreements........................................40
Trust....................................................................12
Trust Accounts...........................................................42
Trust Agreement..........................................................12
Trust Stripped Bond......................................................62
Trust Stripped Coupon....................................................62
UCC......................................................................50
Underwriting Agreement...................................................67
Unmet Need...............................................................20
USA Funds................................................................13
USA Group................................................................13
USA Group Guarantee Services.............................................13
<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 in this prospectus 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......................................................... $
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 the 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 exclusions and
do not include fines or penalties imposed by law or other matters deemed
uninsurable under the law. The policies contain self-insured retention
provisions.
ITEM 16. EXHIBITS.
1.1 --Form of Underwriting Agreement for Notes**
1.2 --Form of Underwriting Agreement for Certificates**
3.1 --Restated Certificate of Incorporation of USA Group Secondary Market
Services, Inc.*
3.2 --By-laws of USA Group Secondary Market Services, Inc.*
3.3 --Form of Certificate of Trust for the Trusts (included as an exhibit
to Exhibit 4.2)**
4.1 --Form of Indenture between the Trust and the Indenture Trustee
(included as an exhibit thereto a form of Note)**
4.2 --Form of Trust Agreement among the Seller, the Company and the
Eligible Lender Trustee (included as an exhibit thereto a form of
Certificate)**
4.3 --Form of Note (included as an exhibit to Exhibit 4.1)**
4.4 --Form of Certificate (included as an exhibit to Exhibit 4.2)**
5.1 --Opinion of Krieg DeVault Alexander & Capehart, 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)
25.1 --Statement of Eligibility under the Trust Indenture Act of 1939 of
HSBC***
25.2 --Statement of Eligibility under the Trust Indenture Act of 1939 of
Bankers Trust***
99.1 --Form of Loan Sale Agreement among the Seller, the Trust and the
Eligible Lender Trustee**
99.2 --Form of Loan Servicing Agreement among the Servicer, the Trust and
the Eligible Lender Trustee**
99.3 --Form of Administration Agreement among the Trust, the Indenture
Trustee and USA Group Secondary Market Services, Inc., as
Administrator**
-------------
* Previously filed in Registration Statement on Form S-3 (Reg. No.
33-94952, filed with the Commission by the Registrant on July 25, 1995).
** Previously filed in Amendment No. 2 to Registration Statement on
Form S-3 (Reg. No. 33-76784, filed with the Commission by the Registrant on June
7, 1994).
*** To be filed by amendment.
ITEM 17. UNDERTAKINGS.
(a) As to Rule 415:
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made
of the securities registered hereby, a post-effective amendment to this
Registration Statement:
(1) to include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933, as amended;
(2) 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
(3) to include any material information with respect to the
plan of distribution not previously disclosed in this Registration
Statement or any material change to the information in this
Registration Statement;
PROVIDED, HOWEVER, that the Securities, and the change in the amounts
from the preceding 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 post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered ,
and the offering of the securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) As to documents subsequently filed that are incorporated by
reference:
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended, that is incorporated
by reference in this Registration Statement shall be deemed to be a new
registration statement relating to the securities offered in this prospectus,
and the offering of the 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 the denominations and registered in the 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 the indemnification is against public
policy as expressed in the Act and is therefore unenforceable. In the event that
a claim for indemnification against the liabilities (other than payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by the director, officer or controlling person in
connection with the securities being registered, the 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 the
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of the 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, and the offering of the 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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment 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 December 27, 1999.
USA GROUP SECONDARY MARKET SERVICES, INC., as
originator of the Trust (Registrant)
By: /s/ CHERYL E. WATSON
Cheryl E. Watson
Senior Vice President and
Chief Financial Officer
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.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or Amendment has been signed below on December 27, 1999
by the following persons in the capacities indicated.
SIGNATURE CAPACITY
Chairman of the Board, President,
/s/ STEPHEN W. CLINTON Chief Executive Officer (Principal
Stephen W. Clinton Executive Officer) and Director
Senior Vice President and
/s/ CHERYL E. WATSON Chief Financial Officer
Cheryl E. Watson (Principal Financial and
Accounting Officer)
/s/ ERNEST J. NEWBORN, JR. Director
Ernest J. Newborn, Jr.
/s/ IKE G. BATALIS Director
Ike G. Batalis
<PAGE>
EXHIBIT INDEX
Sequential
EXHIBIT 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, SMS and the Eligible
Lender Trustee (included as an exhibit thereto a form of
Certificate)**
4.3 --Form of Note (included as an exhibit to Exhibit 4.1)**
4.4 --Form of Certificate (included as an exhibit to Exhibit 4.2)**
5.1 --Opinion of Krieg DeVault Alexander & Capehart, 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
Exhibits 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)
25.1 --Statement of Eligibility under the Trust Indenture Act of 1939 of
HSBC***
25.2 --Statement of Eligibility under the Trust Indenture Act of 1939 of
Bankers Trust***
99.1 --Form of Loan Sale Agreement among the Seller, the Trust and the
Eligible Lender Trustee**
99.2 --Form of Loan Servicing Agreement among the Servicer, the Trust and
the Eligible Lender Trustee**
99.3 --Form of Administration Agreement among the Trust, the Indenture
Trustee and USA Group Secondary Market Services, Inc., as
Administrator**
----------------
* Previously filed in Registration Statement on Form S-3 (Reg. No.
33-94952, filed with the Commission by the Registrant on July 25, 1995).
** Previously filed in Amendment No. 2 to Registration Statement on
Form S-3 (Reg. No. 33-76784, filed with the Commission by the Registrant on June
7, 1994).
*** To be filed by amendment.
