The information in this prospectus is not complete and may be changed. This
prospectus relates to an effective registration statement under the Securities
Act of 1933, as amended. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED MAY 8, 2000
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED MAY 8, 2000
$1,200,000,000
SMS Student Loan Trust 2000-B
USA Group Secondary Market Services, Inc.
Seller
Floating Rate Asset-Backed Notes
----------
The sources for payment of the notes are a pool of education loans
originated under the Federal Family Education Loan Program to students and
parents of students, a substantial majority of which are guaranteed by United
Student Aid Funds, Inc., held by the trust and cash held by the trust.
Consider carefully the Risk Factors beginning on page S-7 of this
prospectus supplement and page 1 of the prospectus. The notes are asset-backed
securities issued by a trust. The notes are not interests in or obligations of
USA Group Secondary Market Services, Inc. or any of its affiliates. The class B
notes are subordinate to the class A notes.
<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 $ 200,000,000 Three-Month LIBOR April 2008 100.00% % %
plus ____% annually
Per Class A-2 Note $ 958,000,000 Three-Month LIBOR April 2029 100.00% % %
plus ____% annually
Per Class B Note $ 42,000,000 Three-Month LIBOR October 2036 100.00% % %
plus ____% annually(3)
Total $ 1,200,000,000 $ $ $
</TABLE>
(1) The quarterly payment date of April 2008, April 2029 and October 2036, as
applicable.
(2) Plus accrued interest, if any, from the date of initial issuance.
(3) Subject to deferral if the subordinate note trigger is triggered.
The notes will be delivered in book-entry form only through The Depository
Trust Company, Clearstream Banking, societe anonyme and the Euroclear System on
or about May , 2000.
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.
Deutsche Banc Alex. Brown Merrill Lynch & Co.
Credit Suisse First Boston
J.P. Morgan & Co.
Morgan Stanley Dean Witter
PaineWebber Incorporated
----------
The date of this Prospectus Supplement is May , 2000
<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 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 notes and (2)
this prospectus supplement, which describes the specific terms of your notes.
Until 90 days after the date of the final prospectus supplement all dealers that
effect transactions in the 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.
TABLE OF CONTENTS
Prospectus Supplement
SUMMARY OF TERMS ........................................................ S-3
RISK FACTORS ............................................................ S-7
FORMATION OF THE TRUST .................................................. S-14
THE FINANCED STUDENT LOAN POOL .......................................... S-15
DESCRIPTION OF THE NOTES ................................................ S-25
DESCRIPTION OF THE TRANSFER AND
SERVICING AGREEMENTS .................................................. S-31
FEDERAL FAMILY EDUCATION LOAN PROGRAM .................................. S-48
FEDERAL INCOME TAX AND STATE
TAX CONSEQUENCES ...................................................... S-51
ERISA CONSIDERATIONS .................................................... S-52
UNDERWRITING ............................................................ S-52
LEGAL MATTERS ........................................................... S-53
REPORTS TO SECURITYHOLDERS .............................................. S-53
FORWARD LOOKING STATEMENTS .............................................. S-54
ANNEX I ................................................................. S-55
INDEX OF PRINCIPAL TERMS ................................................ S-58
Prospectus
RISK FACTORS .............................................................. 1
FORMATION OF THE TRUSTS ................................................... 7
USE OF PROCEEDS ........................................................... 7
USA GROUP, SMS, THE SELLER
AND THE SERVICER ........................................................ 8
THE STUDENT LOAN POOLS .................................................... 10
FEDERAL FAMILY EDUCATION LOAN PROGRAM ..................................... 12
WEIGHTED AVERAGE LIFE OF THE NOTES ........................................ 24
POOL FACTORS AND TRADING INFORMATION ...................................... 25
DESCRIPTION OF THE NOTES .................................................. 25
INFORMATION REGARDING THE NOTES ........................................... 30
DESCRIPTION OF THE TRANSFER AND
SERVICING AGREEMENTS .................................................... 33
LEGAL ASPECTS OF THE STUDENT LOANS ........................................ 41
FEDERAL INCOME TAX CONSEQUENCES ........................................... 43
STATE TAX CONSEQUENCES .................................................... 47
ERISA CONSIDERATIONS ...................................................... 47
PLAN OF DISTRIBUTION ...................................................... 48
LEGAL MATTERS ............................................................. 49
AVAILABLE INFORMATION ..................................................... 50
INCORPORATION OF DOCUMENTS BY REFERENCE ................................... 50
INDEX OF PRINCIPAL TERMS .................................................. 51
S-2
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF TERMS
o This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to
consider in making your investment decision. To understand all of the
terms of the offering of the 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.
o You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under the caption "Index of Principal
Terms" beginning on page S-58 in this prospectus supplement.
PRINCIPAL PARTIES
The Trust
o SMS Student Loan Trust 2000-B
The Seller and Administrator
o USA Group Secondary Market Services, Inc.
The Servicer
o USA Group Loan Services, Inc.
The Eligible Lender Trustee
o Bank One, National Association
The Indenture Trustee
o Bankers Trust Company
DATES
Quarterly Payment Dates
Payments on the 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 in
October 2000.
Cutoff Date
April 1, 2000 for the initial student loans and the date specified by the seller
with respect to any additional student loans. The trust will receive payments
made on the related student loans on and after this date.
Closing Date
On or about May , 2000.
DESCRIPTION OF THE SECURITIES
The Trust is offering the following student loan floating rate asset-backed
notes pursuant to this prospectus:
o Class A-1 Notes in the aggregate principal amount of $200,000,000;
o Class A-2 Notes in the aggregate principal amount of $958,000,000;
and
o Class B Notes in the aggregate principal amount of $42,000,000.
The Class A-1 Notes and Class A-2 Notes are senior notes. The Class B Notes are
subordinate notes.
The trust will issue the notes in book-entry form in minimum denominations of
$1,000 and in multiples of $1,000.
You may hold your notes through The Depository Trust Company, Clearstream
Banking, societe anonyme or the Euroclear System.
Interest Payments
The note rate for each class of notes is specified on the cover page of this
prospectus supplement. Interest with respect to the 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.
If the subordinate note trigger is triggered, the subordinate notes will not be
paid any interest on the related quarterly payment date. Any interest deferred
as a result of the subordinate note trigger will be payable, with interest at
the applicable interest rate, on subsequent quarterly payment dates to the
extent described in this prospectus supplement if the subordinate note trigger
is no longer triggered with respect to such subsequent quarterly payment dates.
- --------------------------------------------------------------------------------
S-3
<PAGE>
- --------------------------------------------------------------------------------
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 notes are issued and will end on
March 31, 2002 (or earlier as described in this prospectus supplement).
Following the end of the revolving period, principal will be paid on the 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 notes have been paid in full.
Principal payments on the notes generally will be made to the holders of the
notes sequentially. No principal will be paid on the Class B Notes until the
Class A-2 Notes have been paid in full and no principal will be paid on the
Class A-2 Notes until the Class A-1 Notes have been paid in full.
An exception to the preceding paragraph 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 any swap
counterparties, any net swap payments;
o to the subordinate noteholders, provided that the subordinate note
trigger is not triggered on the quarterly payment date, interest;
o following the termination of the revolving period to the
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 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 July 2010 quarterly payment date will be offered for
sale. The proceeds of any sale will be used to redeem your notes. The auction
price must at least equal the unpaid principal amount of the notes, plus accrued
and unpaid interest thereon, including in the case of the subordinate notes,
interest deferred as a result of the subordinate note trigger.
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 notes is less than or equal to 15% of
the initial unpaid principal amount of the 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 and not to
be capitalized); and
o amounts on deposit in the accounts of the trust.
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
- --------------------------------------------------------------------------------
S-4
<PAGE>
- --------------------------------------------------------------------------------
be transferred by USA Group Secondary Market Services, Inc. to the trust on the
closing date have the following characteristics as of April 1, 2000:
o Aggregate principal amount: $970,727,457
o Weighted average original term: 172 mths
o Weighted average remaining term: 146 mths
o Stafford Loans (%): 74.29%
o Federal Consolidation Loans (%): 17.05%
o PLUS Loans (%): 8.20%
o SLS Loans (%): 0.46%
o Percent guaranteed by United Student
Aid Funds, Inc.: 77.12%
o Percent guaranteed by Texas Guaranteed
Student Loan Corporation: 18.90%
Prefunded Student Loans; Revolving Period
On the date of issuance of the notes, a portion of the proceeds from the
issuance of the notes will be used to make a deposit of $190,000,000 or 15.83%
of the initial principal amount of the notes into an account of the trust held
with the indenture trustee. The trust expects to use these amounts prior to the
end of the revolving period to cover specified fees and expenses of the trust,
interest distributions on the notes and payments due to any swap counterparties
and to purchase additional student loans from USA Group Secondary Market
Services, Inc. To the extent that any amounts remain in the prefunding account
at the end of the revolving period, these amounts will be deposited into the
collection account and if the parity date has not yet occurred, may be
distributed to you as a prepayment of principal.
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 June 30, 2002 the trust will
acquire additional student loans (not including the prefunded 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, interest distributions on the notes, deposits to the
reserve account and payments due to any swap counterparties.
Additional Student Loans; Serial Loans
Following the earlier of the occurrence of an early amortization event and March
31, 2002, the trust may acquire additional student loans relating to borrowers
with student loans already owned by the trust. The trust will purchase these
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
any swap counterparties.
The Collection Account
On the closing date, USA Group Secondary Market Services, Inc. will make an
initial deposit of $9,581,119 into the collection account.
CREDIT ENHANCEMENT
The credit enhancement for the senior notes will consist primarily of the
following:
o reserve account;
o prior to the end of the revolving period, prefunding account; and
o subordination of the subordinate notes.
The credit enhancement for the subordinate notes will consist primarily of the
following:
o reserve account; and
o prior to the end of the revolving period, prefunding account.
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 specified
fees and expenses of the trust, interest and principal distributions on the
notes, and payments due to any swap counterparties to the extent described in
this prospectus supplement. The reserve account will be funded as follows:
o On the closing date, a portion of the proceeds from the issuance of
the notes will be used to make an initial deposit of $3,000,000,
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.
- --------------------------------------------------------------------------------
S-5
<PAGE>
- --------------------------------------------------------------------------------
The specified reserve account balance for any quarterly payment date
will be the greatest of (1) 0.25% of the outstanding principal balance of the
notes, (2) $1,500,000 and (3) if the reserve account trigger is triggered, the
outstanding principal amount of the notes.
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
On the date of issuance of the notes, the trust may or may not be a party to an
interest rate swap. The administrator, however, may, from time to time, cause
the trust to enter into interest rate swaps with one or more swap
counterparties. Prior to causing the trust to enter into an interest rate swap,
certain conditions must be satisfied. The trust will owe any 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. Any 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 cumulative scheduled notional amount for all interest rate swaps for any
quarterly payment date will be the lesser of (1) the outstanding principal
balance of the notes and (2) the cumulative amounts set forth in the schedules
to any interest rate swaps.
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 notes will be characterized as indebtedness for federal
income tax purposes. Each noteholder, by accepting a note, will agree to treat
the notes as indebtedness.
ERISA CONSIDERATIONS
Subject to the considerations discussed under "ERISA Considerations," the notes
are eligible for purchase by employee benefit plans.
CAPITAL TREATMENT OF THE NOTES
The Board of Governors of the Federal Reserve System, the Office of the
Comptroller of the Currency, the Federal Deposit Insurance Corporation and the
Office of Thrift Supervision have each advised us in separate letters that the
senior notes are eligible for 20% risk-based capital treatment. The banking
regulators further advised us generally that if any trust's student loan has
been disbursed on or after October 1, 1993, consistent with the Higher Education
Act's two percent lender risk sharing provisions, only 98% of each related
senior note would be eligible for the 20% risk category. Most of the trust's
student loans were disbursed on or after October 1, 1993 and, accordingly, only
98% of each senior note is eligible for the 20% risk category.
In addition, we have received letters from the banking regulators for Germany,
the Netherlands and the United Kingdom, in each case advising us that the senior
notes may be eligible for 20% risk-based capital treatment, subject in the case
of the Netherlands, to additional conditions. The United Kingdom banking
regulators have advised us that they will treat the trust's student loans
disbursed on or after October 1, 1993 in a manner consistent with the advice we
received from the UnitedStates banking regulators while neither the Netherlands
nor the German banking regulators address the matter.
RATINGS
At least two nationally recognized rating agencies must each rate the senior
notes in the highest long-term rating category. At least two nationally
recognized rating agencies must each rate the subordinate notes at least "A3" or
its equivalent.
- --------------------------------------------------------------------------------
S-6
<PAGE>
RISK FACTORS
You should consider the following risk factors together with all the
information contained in this prospectus supplement and the related prospectus
in deciding whether to purchase any of the notes.
You May Have Difficulty Selling
Your Notes ........................ The notes will not be listed on any
securities exchange. As a result, if you
want to sell your notes you must locate
a purchaser that is willing to purchase
those notes. The underwriters intend to
make a secondary market for the notes.
The underwriters will do so by offering
to buy the notes from investors that
wish to sell. However, the underwriters
will not be obligated to make offers to
buy the 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 notes when you want
to do so or you may not be able to
obtain the price that you wish to
receive.
The Trust has Limited Assets to
Make Payments on
Your Notes ........................ The trust does not have, nor is it
permitted or expected to have, any
significant assets or sources of funds
other than the student loans (and the
related guarantee agreements), the
reserve account, the prefunding account
and any 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, amounts on deposit in the
prefunding account and amounts on
deposit in the reserve account. Monies
to be deposited in the reserve account
are limited in amount and will be
reduced, subject to a specified minimum,
as the aggregate principal amount of the
notes is reduced. If the reserve account
is exhausted, the trust will depend
solely on payments with respect to the
student loans to make payments on the
notes and you could suffer a loss. You
will have no claim to any amounts
properly distributed to USA Group
Secondary Market Services, Inc.,
Secondary Market Company, Inc. or the
servicer from time to time.
You May Experience Losses on
Your Investment Resulting
From Principal Balance of
Notes Exceeding Pool Balance ...... As of the closing date, the aggregate
principal amount of the notes will be
equal to approximately 102.27% of the
sum of the outstanding principal balance
of the student loans as of the cutoff
date and the amount deposited in the
prefunding account, the reserve account
and the collection account on the
closing date. The trust intends to use
amounts on deposit in the prefunding
account and the collateral reinvestment
account to cover specified fees and
expenses of the trust, interest
distributions on the notes, payments due
to any swap counterparties and to
purchase student loans, at a purchase
price of up to 101.5% of the related
principal balances of the student loans
purchased. 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 any
swap counterparties will be deposited in
the collateral reinvestment account. 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 notes,
amounts in the prefunding account will
be
S-7
<PAGE>
used to pay principal on the notes in an
amount necessary to cause the parity
date to occur. Any amounts on deposit in
the collateral reinvestment account at
the end of the revolving period 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 notes. The occurrence of any of
the following will increase the
likelihood of an insufficiency:
o A high rate of prepayments;
o A decrease 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 student loans to the trust
after the closing date, the
characteristics of the student loans in
the trust 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 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.
You should consider potential variances
when making your investment decision
concerning the 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
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, (1) all amounts
in the collateral reinvestment
account at the end of the revolving
period and (2) if the parity date
has not occurred, amounts on deposit
in the prefunding account necessary
to cause the parity date to occur,
will be used to pay you a prepayment
of principal immediately following
the end of the revolving period.
S-8
<PAGE>
The revolving period may terminate
earlier than March 31, 2002 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.
You will bear any reinvestment risk from
any distribution of amounts on deposit
in the prefunding account or the
collateral reinvestment account as a
prepayment of principal and you may not
attain your desired yield.
o You Bear Reinvestment Risk. Asset
backed securities, like the 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 notes will
prevent you from attaining your
desired yield.
o An Early Termination May Affect the
Yield. Your investment in the 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.
Risks Associated with
Subordination of the
Subordinate Notes ................. The rights of the subordinate
noteholders to receive payments of
interest will be subordinated to the
rights of the senior noteholders to
receive payments of interest, and the
rights of the subordinate noteholders to
receive payments of principal will be
subordinate to the rights of the senior
noteholders to receive payments of
interest and principal. Accordingly,
holders of the subordinate notes will
bear a greater risk of loss than senior
noteholders in the event of a shortfall
in available funds or amounts in the
reserve account due to losses or for any
other reason. As a result, the
subordinate notes will be very sensitive
to losses on the student loans and the
timing of these losses. If the actual
rate and amount of losses exceeds your
expectations, and if amounts in the
reserve account are insufficient to
cover the resulting shortfalls, the
yield to maturity on your subordinate
notes may be lower than you anticipate
and you could suffer a loss. Moreover,
because of the sequential payment of
principal, at any time prior to the
reduction of the principal balance of
the senior notes to zero, the
subordinate notes will not be paid any
principal payments. The sequential
payment of principal and the
subordination of the subordinate notes
increases the risk and severity of the
potential loss to subordinate
noteholders following an event of
default under the indenture.
If the Subordinate Note Trigger
is Triggered the Subordinate
Notes will not be Paid
Interest Currently ................ If the subordinate note trigger is
triggered, as a subordinate noteholder,
you will not receive payments of
interest until the subordinate note
trigger
S-9
<PAGE>
is no longer triggered. Moreover
you can not be certain that once the
subordinate note trigger is triggered
that it will be cured prior to the
reduction of the principal amount of the
senior notes to zero. If the subordinate
note trigger is triggered the market
value, yield and liquidity of your
subordinate notes will be adversely
affected.
Risks Associated with Sequential
Payment of Principal on the
Senior 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 may cause Principal
Collections to be used
to pay Interest ................... Interest collections plus any 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. As a result the
weighted average life of your notes may
be increased. This may occur because:
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 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 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 notes.
o The trust's obligation to pay
specified fees to the Department of
Education.
If interest collections plus any net
swap receipts are not sufficient to
cover interest on the notes, the market
value and liquidity of your notes may
decline.
The Trust's Right to Terminate
the Subservicer only for Cause
may make Finding a Successor
Servicer Difficult ................ The servicer has engaged UNIPAC Service
Corporation to subservice approximately
21.16% of the initial student loans. The
servicer anticipates that it will engage
UNIPAC Service Corporation to service
serial and consolidation loans with the
same borrowers as the initial student
loans that it will service. Pursuant to
the servicing agreement, the
subservicing agreement does not relieve
the servicer (or any successor servicer)
of its responsibility to the trust for
servicing these student loans. In
addition, pursuant to the subservicing
agreement, UNIPAC Service Corporation
may only be terminated for cause. In the
event that the servicer is terminated
pursuant to the servicing agreement and
UNIPAC Service Corporation did not
breach any of its obligations under the
subservicing agreement, the successor
servicer will be responsible for
assuming the UNIPAC Service Corporation
subservicing agreement and will be
responsible to the trust for any
breaches in servicing that may be caused
by UNIPAC Service
S-10
<PAGE>
Corporation. As a result, it may be more
difficult to find a successor servicer
than if the successor servicer were able
to terminate UNIPAC Service Corporation
or if the successor servicer were not
liable for breaches by UNIPAC Service
Corporation. Any delay in finding a
successor servicer may cause the market
value and liquidity of your notes to
decline or could cause you to suffer a
loss on your investment.
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.
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.
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. 77.12% and
18.90% 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. and Texas
Guaranteed Student Loan Corporation,
respectively. 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. or Texas
Guaranteed Student Loan Corporation,
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 notes.
S-11
<PAGE>
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 any Interest
Rate Swaps ........................ The trust may or may not be a party to
an interest rate swap on the closing
date. USA Group Secondary Market
Services, Inc., as administrator, may,
from time to time, cause the trust to
enter into one or more interest rate
swaps following the closing date with
swap counterparties. The cumulative
scheduled notional amount of any
interest rate swaps for each quarterly
payment date will be less than or equal
to the outstanding principal balance of
the notes. As a result, any interest
rate swaps may 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.
In addition, any 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 Notes ............. 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
S-12
<PAGE>
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.
Some of the student loans transferred to
the trust were originated and additional
student loans to be 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. 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 notes and, in particular, the
subordinate notes, are not a suitable
investment if you require a regular or
predictable schedule of payments or
payment on any specific date. The notes
and, in particular, the subordinate
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 notes after the 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
notes. The ratings do not address the
likelihood of an early termination of
the revolving period or any other
prepayment risk, including the risk that
not all amounts on deposit in the
prefunding account and the collateral
reinvestment account will be used to
purchase student loans.
S-13
<PAGE>
FORMATION OF THE TRUST
The Trust
SMS Student Loan Trust 2000-B (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 May , 2000 (the "Closing
Date"), the additional Student Loans to be acquired by the Trust with
funds on deposit in the Prefunding Account andthe additional Student
Loans to be acquired by the Trust with funds on deposit in the
Collateral Reinvestment Account, in each case 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 any 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 Bank One, National
Association (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 $3,000,000 (the "Reserve Account Initial
Deposit"), to fund the deposit into the Prefunding Account on the Closing Date
of cash or Eligible Investments equal to $190,000,000, to fund the deposit into
the Collection Account on the Closing Date of cash or Eligible Investments equal
to $9,581,119 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, and
o all monies and investments on deposit in the Collection Account, the
Collateral Reinvestment Account, the Prefunding Account and the Reserve
Account.
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, the Prefunding Account and any 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 and the Prefunding 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
S-14
<PAGE>
amount of Additional Fundings during the Revolving Period will approximately
equal the sum of the amount deposited into the Prefunding Account on the Closing
Date and the amount expected to be deposited during the Revolving Period into
the Collateral Reinvestment Account. 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 and if the Parity Date has not occurred by the
end of the Revolving Period, any amounts on deposit in the Prefunding Account
sufficient to cause the Parity Date to occur 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 Chicago, Illinois in care of Bank
One, National Association as Eligible Lender Trustee, at the address listed
below.
Eligible Lender Trustee
Bank One, National Association is the Eligible Lender Trustee for the
Trust under the Trust Agreement to be dated as of April 1, 2000 (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. Bank One, National Association is a national banking association whose
principal offices are located at 1 Bank One Plaza, Suite IL1-0126, Chicago,
Illinois 60670-0126 and whose New York offices are located at First Chicago
Trust Company of New York, 14 Wall Street, New York, New York 10005. The
Eligible Lender Trustee will acquire on behalf of the Trust legal title to all
the Financed Student Loans acquired from time to time pursuant to the Loan Sale
Agreement. The Eligible Lender Trustee on behalf of the Trust will enter into a
Guarantee Agreement with each of the Guarantors with respect to 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.
S-15
<PAGE>
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 Prefunding Account or 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 Prefunding Account or 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 $100,000,000;
additionally, no Federal Consolidation Loan may be originated by the Trust
having a scheduled maturity date after April 28, 2032 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 April 28, 2032,
exceed or, after giving effect to the origination, would exceed $15,000,000;
except that the Eligible Lender Trustee will be permitted to fund the addition
of Add-on Consolidation Loans in excess of these 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; except that for a maximum period of 210 days following the end of the
Revolving Period, the Eligible Lender Trustee may be required to increase the
principal balance of Federal Consolidation Loans in the Trust by the amount of
any related Add-on Consolidation Loans as described below.
As described under "Federal Family Education Loan Program--Federal
Consolidation Loan Program" in the prospectus and under "Federal Family
Education Loan Program" 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 Prefunding
Account or 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
S-16
<PAGE>
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
"Cutoff Date" with respect to the Initial Financed Student Loans is April 1,
2000 and with respect to the Additional Student Loans is the date specified by
the Seller. 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
<TABLE>
<CAPTION>
<S> <C>
Aggregate Outstanding Principal Balance (1) ............................... $970,727,457
Number of Billing Accounts ................................................ 124,622
Average Outstanding Principal Balance per Billing Account ................. $7,789.37
Number of Loans ........................................................... 252,670
Average Outstanding Principal Balance per Loan ............................ $3,841.88
Weighted Average Original Term to Maturity (2) ............................ 172 months
Weighted Average Remaining Term to Maturity (2) ........................... 146 months
Weighted Average Annual Interest Rate (3) ................................. 7.04%
</TABLE>
- -------------
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $11,961,410.36 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.
Distribution of the Initial Financed Student Loans
by Loan Type as of the Cutoff Date
<TABLE>
<CAPTION>
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) ...................................... 223,840 $721,197,615 74.29%
Federal Consolidation Loans ............................ 9,844 165,477,481 17.05
PLUS Loans ............................................. 17,830 79,572,087 8.20
SLS Loans .............................................. 1,156 4,480,274 0.46
------- ------------ ------
Total ................................................ 252,670 $970,727,457 100.00%
======= ============ ======
</TABLE>
(footnotes continued on next page)
S-17
<PAGE>
- -------------
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $11,961,410.36 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 $301,999,980.
Distribution of the Initial Financed Student Loans
by Borrower Interest Rates as of the Cutoff Date
<TABLE>
<CAPTION>
Percent of Initial
Financed Student
Aggregate Loans
Range of Interest Number Outstanding by Outstanding
Rates(1) of Loans Principal Balance(2) Principal Balance
- ----------------- -------- -------------------- -----------------
<S> <C> <C> <C>
Less than 6.50% ......................................... 138,773 $473,669,569 48.80%
6.50% to 7.49% .......................................... 41,264 145,662,063 15.01
7.50% to 7.99% .......................................... 60,293 252,001,096 25.96
8.00% to 8.99% .......................................... 8,696 41,203,203 4.24
9.00% to 9.49% .......................................... 3,279 53,385,002 5.50
9.50% and above ......................................... 365 4,806,523 0.50
------- ------------ ------
Total .............................................. 252,670 $970,727,457 100.00%
======= ============ ======
</TABLE>
- --------------
(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 $11,961,410.36 as of the Cutoff Date to be
capitalized upon commencement of repayment.
Distribution of the Initial Financed Student Loans
by Outstanding Principal Balance as of the Cutoff Date
<TABLE>
<CAPTION>
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 ........................................ 66,742 $ 75,577,441 7.79%
$ 2,000 to $ 3,999 ...................................... 108,342 310,257,303 31.96
$ 4,000 to $ 5,999 ...................................... 46,312 222,676,663 22.94
$ 6,000 to $ 7,999 ...................................... 9,067 62,609,451 6.45
$ 8,000 to $ 9,999 ...................................... 10,687 92,379,676 9.52
$10,000 to $11,999 ...................................... 4,523 48,186,070 4.96
$12,000 to $13,999 ...................................... 1,383 17,888,797 1.84
$14,000 to $15,999 ...................................... 1,031 15,461,784 1.59
$16,000 to $17,999 ...................................... 890 15,134,337 1.56
$18,000 to $19,999 ...................................... 703 13,341,030 1.37
$20,000 to $21,999 ...................................... 492 10,314,368 1.06
$22,000 to $23,999 ...................................... 413 9,511,138 0.98
$24,000 to $25,999 ...................................... 337 8,434,260 0.87
$26,000 to $27,999 ...................................... 246 6,634,438 0.68
$28,000 and above ....................................... 1,502 62,320,701 6.42
------- ------------ ------
Total .............................................. 252,670 $970,727,457 100.00%
======= ============ ======
</TABLE>
- -------------
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $11,961,410.36 as of the Cutoff Date to be
capitalized upon commencement of repayment.
S-18
<PAGE>
Distribution of the Initial Financed Student Loans
by Remaining Term to Scheduled Maturity as of the Cutoff Date
<TABLE>
<CAPTION>
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 ............................................. 5,269 $ 3,186,447 0.33%
24 to 47 ................................................. 8,417 11,938,416 1.23
48 to 71 ................................................. 9,933 22,618,641 2.33
72 to 95 ................................................. 12,780 40,904,305 4.21
96 to 119 ................................................ 38,155 159,031,278 16.38
120 to 143 ............................................... 114,835 402,810,242 41.50
144 to 167 ............................................... 44,864 160,980,999 16.58
168 to 191 ............................................... 12,403 59,275,995 6.11
192 and above ............................................ 6,014 109,981,133 11.33
------- ------------ ------
Total ............................................... 252,670 $970,727,457 100.00%
======= ============ ======
</TABLE>
- -------------
(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 $11,961,410.36 as of the Cutoff Date to be
capitalized upon commencement of repayment.
Distribution of the Initial Financed Student Loans
by Borrower Payment Status as of the Cutoff Date
<TABLE>
<CAPTION>
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 ................................................ 10,692 $ 43,349,224 4.47%
Forbearance ............................................. 8,245 46,759,693 4.82
Grace ................................................... 30,798 88,401,525 9.11
In-School ............................................... 126,635 444,450,266 45.79
Repayment ............................................... 76,300 347,766,747 35.83
------- ------------ ------
Total .............................................. 252,670 $970,727,457 100.00%
======= ============ ======
</TABLE>
- --------------
(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 $11,961,410.36 as of the Cutoff Date to be
capitalized upon commencement of repayment.
S-19
<PAGE>
Distribution of the Initial Financial Student Loans
by Location as of the Cutoff Date
<TABLE>
<CAPTION>
Percent of Initial
Financed Student
Aggregate Loans
Number Outstanding by Outstanding
Location(1) of Loans Principal Balance(2) Principal Balance
- ------------ -------- -------------------- -----------------
<S> <C> <C> <C>
Alabama .............................................. 1,507 $ 5,941,965 0.61%
Alaska ............................................... 302 1,166,654 0.12
Arizona .............................................. 18,073 69,997,886 7.21
Arkansas ............................................. 2,038 7,717,658 0.80
California ........................................... 10,795 52,117,720 5.37
Colorado ............................................. 3,932 17,616,946 1.81
Connecticut .......................................... 407 2,743,918 0.28
Delaware ............................................. 150 879,380 0.09
Florida .............................................. 9,100 42,853,014 4.41
Georgia .............................................. 5,098 26,082,042 2.69
Guam ................................................. 28 88,357 0.01
Hawaii ............................................... 3,629 13,333,961 1.37
Idaho ................................................ 245 1,118,507 0.12
Illinois ............................................. 6,742 28,944,563 2.98
Indiana .............................................. 44,781 139,792,590 14.40
Iowa ................................................. 607 2,916,659 0.30
Kansas ............................................... 2,136 9,261,471 0.95
Kentucky ............................................. 1,581 5,858,983 0.60
Louisiana ............................................ 24,834 85,477,753 8.81
Maine ................................................ 216 1,064,199 0.11
Maryland ............................................. 1,573 8,494,450 0.88
Massachusetts ........................................ 2,786 12,879,121 1.33
Michigan ............................................. 3,129 12,355,006 1.27
Minnesota ............................................ 1,226 4,540,662 0.47
Mississippi .......................................... 1,836 6,955,864 0.72
Missouri ............................................. 2,431 11,839,266 1.22
Montana .............................................. 313 1,326,853 0.14
Nebraska ............................................. 530 2,003,966 0.21
Nevada ............................................... 2,198 8,065,678 0.83
New Hampshire ........................................ 244 1,332,065 0.14
New Jersey ........................................... 1,222 6,000,453 0.62
New Mexico ........................................... 1,313 5,003,694 0.52
New York ............................................. 3,271 17,029,532 1.75
North Carolina ....................................... 2,193 9,916,766 1.02
North Dakota ......................................... 95 514,044 0.05
Ohio ................................................. 6,967 25,880,361 2.67
Oklahoma ............................................. 961 4,994,465 0.51
Oregon ............................................... 1,168 6,180,726 0.64
Pennsylvania ......................................... 5,775 20,889,711 2.15
Puerto Rico .......................................... 685 3,262,480 0.34
Rhode Island ......................................... 119 576,263 0.06
South Carolina ....................................... 1,751 6,957,529 0.72
South Dakota ......................................... 89 479,385 0.05
Tennessee ............................................ 2,788 10,463,395 1.08
Texas ................................................ 61,950 226,381,698 23.32
Utah ................................................. 452 2,154,518 0.22
Vermont .............................................. 58 266,875 0.03
Virginia ............................................. 2,664 11,265,412 1.16
Washington ........................................... 2,612 10,677,641 1.10
Washington DC ........................................ 269 1,945,378 0.20
West Virginia ........................................ 1,159 3,955,669 0.41
Wisconsin ............................................ 1,639 6,834,646 0.70
Wyoming .............................................. 406 1,436,556 0.15
Other ................................................ 597 2,883,103 0.30
------- ------------ ------
Total .......................................... 252,670 $970,727,457 100.00%
======= ============ ======
</TABLE>
- -------------
(1) Based on the permanent billing addresses of the borrowers of the Initial
Financed Student Loans shown on the Servicer's records as of the Cutoff
Date.
(2) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $11,961,410.36 as of the Cutoff Date to be
capitalized upon commencement of repayment.
S-20
<PAGE>
Distribution of Initial Financed Student Loans
by Date of Disbursement
<TABLE>
<CAPTION>
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 ................................. 20,389 $ 69,803,086 7.19%
On or After October 1, 1993 and
Prior to October 1, 1998 .......................... 87,608 333,796,535 34.39
October 1, 1998 and thereafter ...................... 144,673 567,127,836 58.42
------- ------------ ------
Total .......................................... 252,670 $970,727,457 100.00%
======= ============ ======
</TABLE>
- -------------
(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 $11,961,410.36 as of the Cutoff Date to be
capitalized upon commencement of repayment.
Distribution of Initial Financed Student Loans
by Number of Days of Delinquency as of the Cutoff Date
<TABLE>
<CAPTION>
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 ..................................... 241,134 $926,536,203 95.45%
31 - 60 .................................... 4,274 18,779,669 1.93
61 - 90 .................................... 2,711 10,294,639 1.06
91 - 120 ................................... 2,734 9,179,308 0.95
121 and above .............................. 1,817 5,937,638 0.61
------- ------------ ------
Total ................................. 252,670 $970,727,457 100.00%
======= ============ ======
</TABLE>
- -------------
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $11,961,410.36 as of the Cutoff Date to be
capitalized upon commencement of repayment.
Each of the Financed Student Loans provides or will provide for the
amortization of the outstanding principal balance of 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.
S-21
<PAGE>
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"), Texas
Guaranteed Student Loan Corporation ("TGSLC") 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, 77.12%
and 18.90% of the Initial Financed Student Loans are guaranteed by USA Funds and
TGSLC, respectively.
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:
o 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);
o 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;
o the death of the borrower under a Financed Student Loan;
o 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;
o the school closed thereby preventing the borrower from completing
his/her program of study; or
o 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.
S-22
<PAGE>
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:
o the origination and servicing of the Financed Student Loan being
performed in accordance with the Act and other applicable requirements,
o the timely payment to the Guarantor of the guarantee fee payable with
respect to the Financed Student Loan,
o 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
o 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 and TGSLC,
respectively, in each of the last five federal fiscal years:*
USA Funds TGSLC
Guarantee Volume Guarantee Volume
Federal Fiscal Year (dollars in millions) (dollars in millions)
------------------- --------------------- ---------------------
1995 $5,040 $1,156
1996 5,376 1,271
1997 6,228 1,384
1998 6,196 1,456
1999 6,473 1,560
- -------------
* The information set forth in the table above has been obtained from USA
Funds and TGSLC, respectively, and is not guaranteed as to accuracy or
completeness, and is not to be construed as a representation, by the Seller
or the underwriters.
Reserve Ratio. Each of TGSLC and 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.
S-23
<PAGE>
Recovery Rates. A Guarantor's recovery rate, which provides a measure of
the effectiveness of the collection efforts against defaulting borrowers after
the guarantee claims have been satisfied, is determined by dividing the amount
recovered from borrowers by 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 each of
USA Funds and TGSLC as of the end of each of the last five federal fiscal
years:*
Recovery Rate Recovery Rate
Federal Fiscal Year for USA Funds for TGSLC
------------------ ------------- -------------
1995 35.26% 34.3%
1996 39.21 41.4
1997 40.89 45.4
1998 44.45 48.9
1999 47.54 54.1
- -------------
* The information set forth in the table above with respect to USA Funds and
TGSLC, respectively, 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. A Guarantor's 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 each of USA Funds
(excluding Arizona, Hawaii and some Pacific islands in the case of federal
fiscal years 1995 and 1996) and TGSLC for each of the last five federal fiscal
years*:
Claims Rate of Claims Rate of
Federal Fiscal Year USA Funds TGSLC
------------------- -------------- --------------
1995 4.69% 4.97%
1996 4.65 3.90
1997 4.65 3.32
1998 3.96 3.21
1999 2.62 2.40
- -------------
* The information set forth in the table above with respect to USA Funds and
TGSLC, respectively, 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 and TGSLC has been obtained from the applicable 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 and TGSLC) may vary from those of USA Funds and
TGSLC. No assurances can be given as to what volumes, ratios or rates will be or
as to whether USA Funds, TGSLC 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, TGSLC, the other Initial Guarantors and some Federal
Guarantors that could become Additional Guarantors.
S-24
<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 Class
B Floating Rate Asset Backed Subordinate Notes (the "Class B Notes" or 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 April 1, 2000
(as amended and supplemented from time to time, the "Indenture"), between the
Trust and Bankers Trust Company, a New York banking corporation (the "Indenture
Trustee"), substantially in the form filed as an exhibit to the Registration
Statement. Both Bankers Trust Company and Deutsche Bank Securities Inc., which
is acting as underwriter and as representative of the underwriters, are
indirect, wholly owned subsidiaries of Deutsche Bank AG. 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 October 28, 2000
(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 and, prior to the end
of the Revolving Period, the Prefunding 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, the Subordinate Note Rate shall equal zero 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 July 28, 2000 based on Three-Month LIBOR as
determined on the initial LIBOR Determination Date and for the period from July
28, 2000 to but excluding October 28, 2000 based on Three-Month LIBOR as
determined on the LIBOR Determination Date in July 2000.
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:
o 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"),
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o all Purchase Amounts received by the Trust for the Collection Period
from the Seller or the Servicer,
o all Additional Fundings and purchases of Student Loans made with
respect to the Collection Period and
o 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 triggered on any Quarterly Payment
Date and with respect to the related Quarterly Interest Period if (a) the Pool
Balance as of the last day of the related Collection Period plus the amount on
deposit in the Reserve Account, the Collateral Reinvestment Account and the
Prefunding Account is less than (b) 92.00% of the aggregate principal amount of
the Notes after giving effect to all distributions on such Quarterly Payment
Date, and shall remain triggered with respect to each succeeding Quarterly
Interest Period until the earlier of (1) the first day of the Quarterly Interest
Period relating to the Quarterly Payment Date on which the amount calculated in
clause (a) above equals or exceeds 100.00% of the aggregate principal amount of
the Notes after giving effect to all distributions on such Quarterly Payment
Date and (2) the first day of the Quarterly Interest Period relating to the
Quarterly Payment Date on which the outstanding principal amount of the Senior
Notes is reduced to zero.
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
o the Servicing Fee and all overdue Servicing Fees,
o the Administration Fee and all overdue Administration Fees,
o the Senior Noteholders' Interest Distribution Amount and the Trust Swap
Payment Amount, if any, and
o 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 July 2010
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
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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 April 2008 Quarterly Payment Date (the "Class A-1
Note Final Maturity Date"), of the Class A-2 Notes will be payable in full on
the April 2029 Quarterly Payment Due Date (the "Class A-2 Note Final Maturity
Date") and of the Subordinate Notes on the October 2036 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 any 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 second preceding paragraph. In
addition, if the Parity Date has not occurred by the end of the Revolving
Period, any amounts on deposit in the Prefunding Account will be used to redeem
the Notes in the order of priority set forth in the second preceding paragraph
in an amount necessary to cause the Parity Date to occur.
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
July 28, 2000 and as determined on the second business day prior to July 28,
2000 for the period from July 28, 2000 to but excluding October 28, 2000 (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
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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").
Noteholders that are not Participants or Indirect Participants but desire
to purchase, sell or otherwise transfer ownership of, or other interests in,
Notes may do so only through Participants and Indirect Participants. In
addition, Noteholders will receive all distributions of principal of and
interest on the Notes from the Indenture Trustee through DTC and its
Participants. Under a book-entry format, 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 Noteholders. It is anticipated that the
only "Noteholder" will be Cede, as nominee for DTC and that Noteholders will not
be recognized by the Indenture Trustee as "Noteholders", as the terms are used
in the Indenture. Noteholders will be permitted to exercise the rights of
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 Notes and is required to receive and
transmit distributions of principal of and interest on the Notes. Participants
and Indirect Participants with which Noteholders have accounts with respect to
the Notes similarly are required to make book-entry transfers and receive and
transmit the payments on behalf of their respective 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 Noteholder
to pledge Notes to persons or entities that do not participate in the DTC
system, or otherwise to take actions in respect of the Notes, may be limited due
to the lack of a physical certificate for the Notes.
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was a incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10,
2000, Cedelbank's parent company, Cedel International, societe anonyme ("CI")
merged its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG ("DBC"). The merger involved the transfer by CI of substantially all
of its assets and liabilities (including its shares in CB) to a new Luxembourg
company, New Cedel International, societe anonyme ("New CI"), which is 50% owned
by CI and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders
of these two entities are banks, securities dealers and financial institutions.
Cedel International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than 5 percent
of Cedel International's stock.
Further to the merger, the Board of Directors of New CI decided to rename
the companies in the group in order to give them a cohesive brand name. The new
brand name that was chosen is "Clearstream". With effect
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from January 14, 2000 New CI has been renamed "Clearstream International,
societe anonyme". On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, societe anonyme", and Cedel Global services was renamed "Clearstream
Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This means
that there are now two entities in the corporate group headed by Clearstream
International which share the name "Clearstream Banking", the entity previously
named "Cedelbank" and the entity previously named "Deutsche Borse Clearing AG".
Clearstream, Luxembourg holds securities for its customers ("Clearstream,
Luxembourg Participants") and facilitates the clearance and settlement of
securities transactions between Clearstream, Luxembourg customers through
electronic book-entry changes in accounts of Clearstream, Luxembourg customers,
thereby eliminating the need for physical movement of certificates. Transactions
may be settled by Clearstream, Luxembourg in any of 36 currencies, including
United States Dollars. Clearstream, Luxembourg provides to its customers, among
other things, services for safekeeping, administration, clearance and settlement
of internationally traded securities and securities lending and borrowing.
Clearstream, Luxembourg also deals with domestic securities markets in over 30
countries through established depository and custodial relationships.
Clearstream, Luxembourg is registered as a bank in Luxembourg, and as such is
subject to regulation by the Commission de Surveillance du Secteur Financier,
"CSSF", which supervises Luxembourg banks. Clearstream, Luxembourg's customers
are world-wide financial institutions including underwriters, securities brokers
and dealers, banks, trust companies and clearing corporations. Clearstream,
Luxembourg's U.S. customers are limited to securities brokers and dealers, and
banks. Currently, Clearstream, Luxembourg has approximately 2,000 customers
located in over 80 countries, including all major European countries, Canada,
and the United States. Indirect access to Clearstream, Luxembourg is available
to other institutions that clear through or maintain a custodial relationship
with an account holder of Clearstream, Luxembourg. Clearstream, Luxembourg has
established an electronic bridge with Morgan Guaranty Trust Company of New York
as the Operator of the Euroclear System (MGT/EOC) in Brussels to facilitate
settlement of trades between Clearstream, Luxembourg and MGT/EOC.
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 Notes held through Clearstream, Luxembourg
or Euroclear will be credited to the cash accounts of Clearstream, Luxembourg
Participants or Euroclear Participants in accordance with the
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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. Clearstream,
Luxembourg or the Euroclear Operator, as the case may be, will take any other
action permitted to be taken by a Noteholder under the Indenture on behalf of a
Clearstream, Luxembourg 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.
Noteholders may hold their Notes through DTC (in the United States) or
Clearstream, Luxembourg or Euroclear (in Europe) if they are participants of
these systems, or indirectly through organizations which are participants in
these systems.
The Notes will initially be registered in the name of Cede & Co., the
nominee of DTC. Clearstream, Luxembourg and Euroclear will hold omnibus
positions on behalf of their participants through customers' securities accounts
in Clearstream, Luxembourg'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 Clearstream, Luxembourg 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 Clearstream, Luxembourg 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
Clearstream, Luxembourg 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 Clearstream, Luxembourg Participants on the
business day following the DTC settlement date. Cash received in Clearstream,
Luxembourg or Euroclear as a result of sales of securities by or through a
Clearstream, Luxembourg Participant or Euroclear Participant to a Participant
will be received with value on the DTC settlement date but will be available in
the relevant Clearstream, Luxembourg or Euroclear cash account only as of the
business day following settlement in DTC. For information with respect to tax
documentation procedures for the 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 Clearstream,
Luxembourg 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.
Clearstream, Luxembourg 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 Noteholder under the Indenture, only at the direction of one or
more Participants to whose accounts with DTC the Notes are credited.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of interests in the Notes
among participants of DTC, Clearstream, Luxembourg and Euroclear, they are under
no obligation to perform or continue to perform these procedures and these
procedures may be discontinued at any time.
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,
CLEARSTREAM,
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LUXEMBOURG PARTICIPANTS OR EUROCLEAR PARTICIPANTS OR THE PERSONS FOR WHOM THEY
ACT AS NOMINEES WITH RESPECT TO
o THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC, CLEARSTREAM, LUXEMBOURG
OR EUROCLEAR OR ANY PARTICIPANT,
o THE PAYMENT BY DTC, CLEARSTREAM, LUXEMBOURG OR EUROCLEAR OR ANY
PARTICIPANT OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE
PRINCIPAL AMOUNT OR INTEREST ON THE NOTES,
o THE DELIVERY BY ANY PARTICIPANT, CLEARSTREAM, LUXEMBOURG 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 NOTEHOLDERS OR
o ANY OTHER ACTION TAKEN BY DTC AS THE 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 April 1, 2000, (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 April 1, 2000 (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 April 1, 2000, (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 close of business on
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 April
2002 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 and in the Administration Agreement, 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
o are made to a borrower who is not a borrower under any Financed Student
Loan;
o are made under loan programs which existed as of the Closing Date; and
o are guaranteed by a Guarantor (each, a "New Loan" and, collectively,
the "New Loans").
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New Loans will be made or acquired by Bank One, National Association
("Bank One") 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
Prefunding Account or, if insufficient funds are on deposit in the Prefunding
Account, from the Collateral Reinvestment Account of an amount equal to the sum
of
o the principal balance owed by the related borrower plus accrued
interest thereon expected to be capitalized upon repayment (the
"Purchase Collateral Balance");
o accrued interest since the Cutoff Date on the principal balance owed by
the related borrower not expected to be capitalized upon repayment
("Noncapitalized Accrued Interest"); and
o an additional amount not to exceed 1.5% 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:
o 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;
o specified events of insolvency occurring with respect to the Seller;
o the Trust becomes subject to registration as an investment company
under the Investment Company Act of 1940, as amended;
o 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 35% of the Pool Balance;
o 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 50.00% of the Pool
Balance;
o the Excess Spread, with respect to each of any two successive Quarterly
Payment Dates is less than 0.50%; or
o the arithmetic average of the Delinquency Percentage as of the end of
each of two successive Collection Periods exceeds 20.00%.
"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
o the Servicing Fee for the Quarterly Payment Date and all prior unpaid
Servicing Fees;
o the Administration Fee for the Quarterly Payment Date and all prior
unpaid Administration Fees;
o the Senior Noteholders' Interest Distribution Amount and the Trust Swap
Payment Amount, if any, for the Quarterly Payment Date; and
o 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.
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<PAGE>
"Expected Interest Collections" means, with respect to any Quarterly
Interest Period, the sum of
o 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);
o 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
o 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 in
Repayment.
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 and in
the Administration Agreement, to purchase from the Seller Student Loans which
o are made to a borrower who is also a borrower under at least one
outstanding Financed Student Loan;
o are made under the same loan program as the Financed Student Loan; and
o 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 Bank One 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 Prefunding Account or, if insufficient funds are
on deposit in the Prefunding Account, 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; so long as 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.
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<PAGE>
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 Prefunding Account or, if insufficient funds are on deposit in the
Prefunding Account, 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
$100,000,000; additionally, no Federal Consolidation Loan may be originated by
the Trust having a scheduled maturity date after April 28, 2032 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 April 28, 2032
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; provided, further, that the Prefunded Student Loans shall not be subject to
this restriction. 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 Prefunding Account or, if
insufficient funds are on deposit in the Prefunding Account,
S-34
<PAGE>
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,
each of the Prefunding Account and 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"), a
prefunding account (the "Prefunding 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 0.60% or
a larger percentage approved by the rating agencies rating the Notes, not to
exceed 1.00% (or of 0.50% if the Monthly Payment Date or Quarterly Payment Date
is on or after the July 2010 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.
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<PAGE>
"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 June 2000.
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) 0.05% 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 September 30, 2000).
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<PAGE>
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 Prefunding Account or 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 first,
prior to the end of the Revolving Period, from the Prefunding Account and second
from 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
o 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;
o except as expressly included in clause (4) above, amounts released from
the Collateral Reinvestment Account;
o 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
o 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.
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<PAGE>
"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, plus amounts deposited in the Collection Account from the Prefunding
Account at the end of the Revolving Period; 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
first from the Prefunding Account during the Revolving Period to pay any of the
items specified in clauses (1) through (4), respectively, and at the end of the
Revolving Period to pay any of the items specified in clauses (1) through (5),
respectively, and second, from the Reserve Account, to pay any of the items
specified in clauses (1) through (6), respectively, in each case 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 any 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;
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<PAGE>
(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.
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"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
o any collections which are applied by the Trust during the Collection
Period to purchase Serial Loans,
o any collections which are applied by the Trust during the Collection
Period to fund the addition of any Add-on Consolidation Loans and
o 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 applied by the Trust during the Collection Period to purchase New
Loans from amounts on deposit in the Collateral Reinvestment Account or that
were on deposit in the Collateral Reinvestment Account at the end of the
Revolving Period.
"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.
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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
Payment 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,
(2) the Subordinate Noteholders' Interest Carryover Shortfall for the Quarterly
Payment Date and (3) with respect to any Quarterly Payment Date on which the
Subordinate Note Trigger is no longer in effect, the amount that would have been
calculated pursuant to clause (1) above for all Quarterly Payment Dates while
the Subordinate Note Trigger was in effect, calculated as if the Subordinate
Note Trigger was not in effect, plus interest on these amounts at the applicable
Subordinate Note Rate. Payments with respect to the Subordinate Noteholders'
Interest Distribution Amount shall be allocated first with respect to clause (1)
above, second with respect to clause (2) above and third with respect to clause
(3) above.
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
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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 greatest of:
(a) 0.25% 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;
(b) $1,500,000; and
(c) if the Reserve Account Trigger is triggered with respect to this
Quarterly Payment Date, the outstanding principal amount of the Notes
outstanding on the Quarterly Payment Date;
provided, however, that the Specified Reserve Account Balance shall in no event
exceed the outstanding principal amount of the Notes after giving effect to
payments on the Quarterly Payment Date.
The "Reserve Account Trigger" will be triggered with respect to a
Quarterly Payment Date if (1) Three Month LIBOR for the related LIBOR Reset
Period exceeds (2) the greater of (a) the T-Bill Rate for the related Quarterly
Interest Period and (b) the 91-day Treasury Bill rate in effect for the variable
rate Student Loans effective as of the preceding July 1, by more than 1.25%;
provided that the Reserve Account Trigger may be modified for any reason
(including as a result of the Trust entering into one or more Interest Rate
Swaps) if each of the rating agencies rating the notes confirms that the
modification would not result in the rating agency lowering, withdrawing or
placing on credit watch its rating on the notes.
If the amount on deposit in the Reserve Account on any Quarterly Payment
Date (after giving effect to all distributions required to be made from 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 (5)
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 July 2010 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
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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 plus, during the Revolving Period, amounts on
deposit in the Prefunding Account 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 (plus amounts
on deposit in the Prefunding Account during the Revolving Period with respect to
the payment of the items specified in clauses (1) through (4), respectively, and
at the end of the Revolving Period with respect to the payment of the items
specified in clauses (1) through (5), respectively, of the third paragraph under
"--Distributions--Distributions from the Collection Account" above on the
Quarterly Payment Date) on the Quarterly Payment Date is insufficient to pay any
of the items specified in clauses (1) through (6), 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 (or, prior to the end of the Revolving
Period, the Prefunding 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, the Prefunding Account 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.
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Prefunding Account. Prior to the termination of the Revolving Period,
funds will be withdrawn from the Prefunding Account to the extent on deposit (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 each
Quarterly Payment Date, to the extent that the Available Funds on the Quarterly
Payment Date is insufficient to pay any of the items specified in clauses (1)
through (4), 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 Prefunding Account to
the persons and in the order of priority specified for distribution from the
Collection Account on the Monthly Payment Date or Quarterly Payment Date as
applicable.
Interest Rate Swap
Payments Under any Swap Agreement.
The Administrator may from time to time cause the Trust to enter into one
or more interest rate swap agreements, (the "Interest Rate Swaps") with
counterparties rated at least "A2" from Moody's Investors Service, Inc. or "A"
from Standard & Poor's, a division of The McGraw-Hill Companies, Inc. (the "Swap
Counterparties"). The trust may enter into an Interest Rate Swap if:
(1) the Administrator gives each rating agency that initially rated any of
the Notes 10 days' prior written notice of the name of the Swap Counterparty and
the terms of the Interest Rate Swap; and
(2) prior to the end of the ten-day period, none of the rating agencies
that then rate the Notes notifies the Administrator that the then current
ratings of the Notes will be lowered, withdrawn or placed on credit watch as
result of the Interest Rate Swap (collectively, the "Swap Rating Condition").
Set forth below is a description of the material terms expect to be
included in each Interest Rate Swap. An Interest Rate Swap may contain other
additional or different terms from the terms described below provided that the
Swap Counterparty has the rating specified above, the Swap Rating Condition is
satisfied and each other condition specified in the Administration Agreement is
satisfied.
Any Interest Rate Swap will be documented according to an 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.
Any Interest Rate Swap will terminate on the earliest to occur of the
Quarterly Payment Date specified therein (the "Scheduled Swap Termination
Date"), the date on which the Notes have been paid in full and the date on which
the Interest Rate Swap is terminated in accordance with its terms pursuant to an
early termination (the "Swap Termination Date").
In accordance with the terms of any 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
o the Swap Rate for the related Quarterly Interest Period,
o the Scheduled Notional Swap Amount for the Quarterly Payment Date and
o 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 any Interest Rate Swap and any Quarterly Payment Date will be
agreed to by the Administrator and the related Swap Counterparty but in no event
will the Scheduled Notional Swap Amount for any new Interest Rate Swap, when
added to the Scheduled Notional Swap Amounts of any other Interest Rate Swaps be
an amount greater than the outstanding principal balance of the Notes
immediately preceding the Quarterly Payment Date.
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In exchange for the payment, the Trust will pay to any 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
o the T-Bill Rate (determined as described below) for the related
Quarterly Interest Period plus no more than 0.80%,
o the Scheduled Notional Swap Amount for the Quarterly Payment Date and
o 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 with respect to a Swap
Agreement 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 a 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 a Swap. "Events of Default" under each Swap Agreement (each
a "Swap Default") are limited to
o 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,
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in the case of the Trust, the Trust has funds available after all prior
obligations of the Trust to make this payment,
o the occurrence of specified events of insolvency or bankruptcy of the
Trust or the applicable Swap Counterparty,
o an acceleration of the principal of the Notes following an Event of
Default under the Indenture, and
o the following other standard events of default under the ISDA Master
Agreement:
o "Breach of Agreement" (not applicable to the Trust),
o "Credit Support Default" (not applicable to the Trust),
o "Misrepresentation" (not applicable to the Trust), and
o "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 ISDA Master Agreement.
Termination Events. "Termination Events" under each Swap Agreement consist
of the following standard events under the ISDA 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 ISDA Master Agreement.
Early Termination of a 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 "A3" 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
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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 "A3" 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.
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 July 2010 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
o reduce the outstanding principal amount of the Notes on the Quarterly
Payment Date to zero,
o pay to the Noteholders, the Noteholders' Interest Distribution Amount
payable on the Quarterly Payment Date (without regard to the
Subordinate Note Trigger) and
o pay to any Swap Counterparties any prior unpaid Net Trust Swap Payment
Carryover Shortfalls and any other amounts owed by the Trust to any
Swap Counterparties under any 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
July 2010 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
15% 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 July 2010 Quarterly Payment shall include any termination payment
due to any 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.
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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:
o providing that federal direct student loans are eligible to be included
in a Federal Consolidation Loan;
o 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);
o 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
o 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:
o All references to a "transition" to full implementation of the Federal
Direct Loan Program were deleted from the FFELP statute.
o Guarantor reserve funds were restructured so that Federal Guarantors
are provided with additional flexibility in choosing how to spend
specified funds they receive.
o The minimum Federal Guarantor reserve level requirement is reduced from
0.50% of the total attributable amount of all outstanding loans
guaranteed to 0.25% of the total attributable amount of all outstanding
loans guaranteed.
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o Additional recall of reserve funds by the Secretary were mandated,
amounting to $85 million in fiscal year 2002, $82.5 million in fiscal
year 2006, and $82.5 million in fiscal year 2007. However, specified
minimum reserve levels are protected from recall.
o The administrative cost allowance was replaced by two (2) new payments,
a Student Loan processing and issuance fee equal to 65 basis points (40
basis points for loans made on or after October 1, 1993) paid at the
time a loan is guaranteed, and an account maintenance fee of 12 basis
points (10 basis points for fiscal years 2001-2003) paid annually on
outstanding guaranteed Student Loans.
o The percentage of collections on defaulted Student Loans a Guarantor is
permitted to retain is reduced from 27% to 24% (23% beginning on
October 1, 2003) plus the complement of the reinsurance percentage
applicable at the time a claim was paid to the lender on the Student
Loan.
o Federal reinsurance provided to Federal Guarantors is reduced from 98%
to 95% for Student Loans first disbursed on or after October 1, 1998.
o The delinquency period required for a loan to be declared in default is
increased from 180 days to 270 days for loans on which the first day of
delinquency occurs on or after the date of enactment of the 1998
Reauthorization Bill.
o 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.
o 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.
o Federal Consolidation Loan interest rates were revised to equal the
weighted average of the loans consolidated rounded up to the nearest
one-eighth of 1%, capped at 8.25%. When the 91-day Treasury Bill Rate
plus 3.1% exceeds the borrower's interest rate, Special Allowance
Payments are made to make up the difference.
o The lender-paid offset fee on Federal Consolidation Loans of 1.05% is
reduced to .62% for Loans made pursuant to applications received on or
after October 1, 1998 and on or before January 31, 1999.
o The Direct Consolidation Loan interest rate calculation was revised to
reflect the rate for Federal Consolidation Loans, and will be effective
for loans on which applications are received on or after February 1,
1999.
o Lenders are required to offer extended repayment schedules to new
borrowers after the enactment of the 1998 Reauthorization Bill who
accumulate after 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.
o The Secretary is authorized to enter into six (6) voluntary flexible
agreements with Federal Guarantors under which various statutory and
regulatory provisions can be waived.
o Federal Consolidation Loan lending restrictions are revised to allow
lenders who do not hold one of the borrower's underlying federal loans
to issue a Federal Consolidation Loan to a borrower whose underlying
Federal Loans are held by multiple holders.
o Inducement restrictions were revised to permit Federal Guarantors and
lenders to provide assistance to schools comparable to that provided to
schools by the Secretary under the federal direct student loan program.
o The Secretary is now required to pay off Student Loan amounts owed by
borrowers due to failure of the borrower's school to make a tuition
refund allocable to the Student Loan.
o Discharge of FFELP and 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.
o All of the Federal Guarantors will be subject to the new recall of
reserves and reduced reinsurance provisions for Federal Guarantors. The
new recall of reserves and reduced reinsurance for Federal Guarantors
increases the risk that resources available to the Federal Guarantors
to meet their guarantee obligations will be significantly reduced.
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Recent Developments--1999 Amendment. The Work Incentives Improvement Act
of 1999 signed into law by President Clinton on December 17, 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
the 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:
o 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.
o 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.
o Periods of service by a borrower in the armed forces is excluded from
the borrower's six-month grace period.
o The requirements for documentation regarding a borrower's eligibility
for some types of deferments were relaxed.
o The six-month limit for applying some in-school deferments
retroactively was removed.
o Lenders may grant administrative forbearances to resolve delinquencies
that existed at the time a natural disaster forbearance is applied.
o 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.
o 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.
o 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
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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 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 assets of the Trust. 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.
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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.
Under Treasury regulations governing "original issue discount" ("OID"),
stated interest on a note that is unconditionally payable at a single qualified
floating rate, including a rate that is based on Three-Month LIBOR, will not be
treated as OID. For this purpose, interest will be treated as unconditionally
payable only if reasonable legal remedies exist to compel timely payment of the
stated interest or the note otherwise provides terms and conditions that make
the likelihood of late payment (other than a late payment that occurs within a
reasonable grace period) or non-payment of the stated interest a "remote
contingency." The Trust intends to treat the stated interest on each Note as
being unconditionally payable at a single qualified floating rate for OID
purposes and thus the interest on the Notes should not be taxable as OID to the
holders of Notes. In particular, the Seller believes that the likelihood that
the subordinate note trigger will ever be triggered is remote. If the IRS
determines that the likelihood was not remote, the Subordinate Notes will be
treated as issued with original issue discount and the holders of the
Subordinate Notes may be required to include in income interest accrued on the
Subordinate Notes according to their terms, whether or not paid currently.
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 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 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.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement relating to the Notes, the Seller has agreed to cause the Trust to
sell to each of the underwriters named below for which Deutsche Bank Securities
Inc. is acting as representative and each of the underwriters has severally
agreed to purchase, the principal amount of Notes set forth opposite its name
below.
<TABLE>
<CAPTION>
Principal Amount
------------------------------------------------
Underwriter Class A-1 Notes Class A-2 Notes Class B Notes
- ----------- --------------- --------------- -------------
<S> <C> <C> <C>
Deutsche Bank Securities Inc. ................... $ $ $
Merrill Lynch, Pierce, Fenner & Smith
Incorporated ............................ $ $ $
Credit Suisse First Boston Corporation .......... $
J.P. Morgan Securities Inc. ..................... $
Morgan Stanley Dean Witter ...................... $
PaineWebber Incorporated ........................ $ $ $
------------ ------------ ------------
Total ..................................... $200,000,000 $958,000,000 $ 42,000,000
============ ============ ============
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all of the 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 Notes may be
terminated.
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The underwriters propose to offer the 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,
____% per Class A-2 Note and ___% per Class B Note. The underwriters and the
selling group members may allow a discount of ____% per Class A-1 Note, ___% per
Class A-2 Note and ___% per Class B 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
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 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 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 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 Notes. However, they are not obligated to do so and may discontinue making a
secondary market for the Notes at any time without notice. No assurance can be
given as to how liquid the trading market for the 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, the Prefunding Account and the
Reserve Account in Eligible Investments acquired from the Underwriters.
Each of Bankers Trust Company, which is acting as Indenture Trustee and
Deutsche Bank Securities Inc., which is acting as underwriter and as
representative of the underwriters, is an indirect, wholly owned subsidiary of
Deutsche Bank AG.
The Seller has also agreed to pay Deutsche Bank Securities Inc. a
structuring fee equal to $_________.
The Seller may use some of the proceeds from the offering of the Notes to
repay financing facilities with respect to some of the Student Loans provided by
one or more of the underwriters or their affiliates.
LEGAL MATTERS
Specified legal matters relating to the 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.
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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 Notes, and will not be sent to the beneficial owners of
the Notes. Beneficial owners of 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
SecuritiesBook-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.
S-54
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in specified limited circumstances, the globally offered Notes of
SMS Student Loan Trust 2000-B (the "Global Securities") will be available only
in book-entry form. Investors in the Global Securities may hold Global
Securities through any of DTC, Clearstream, Luxembourg 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 Clearstream, Luxembourg 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 Clearstream, Luxembourg or
Euroclear and DTC Participants holding Global Securities will be effected on a
delivery-against-payment basis through the applicable Depositaries of
Clearstream, Luxembourg 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, Clearstream, Luxembourg
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 Clearstream,
Luxembourg 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 Clearstream, Luxembourg and/or Euroclear Participants.
Secondary market trading between Clearstream, Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
Trading between DTC seller and Clearstream, Luxembourg or Euroclear
purchaser. When Global Securities are to be transferred from the account of a
DTC Participant to the account of a Clearstream, Luxembourg Participant or a
Euroclear Participant, the purchaser will send instructions to Clearstream,
Luxembourg or Euroclear through a Clearstream, Luxembourg Participant or
Euroclear Participant at least one business day prior to settlement.
Clearstream, Luxembourg 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
S-55
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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
Clearstream, Luxembourg 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 Clearstream, Luxembourg or Euroclear cash debit will be
valued instead as of the actual settlement date.
Clearstream, Luxembourg 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 Clearstream,
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream, Luxembourg or Euroclear until the Global Securities are credited
to their accounts one day later.
As an alternative, if Clearstream, Luxembourg or Euroclear has extended a
line of credit to them, Clearstream, Luxembourg 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, Clearstream, Luxembourg
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 Clearstream, Luxembourg 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 Clearstream, Luxembourg
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 Clearstream, Luxembourg or Euroclear seller and DTC
purchaser. Due to time zone differences in their favor, Clearstream, Luxembourg
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 Clearstream, Luxembourg or
Euroclear through a Clearstream, Luxembourg Participant or a Euroclear
Participant at least one business day prior to settlement. In these cases,
Clearstream, Luxembourg 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 Clearstream, Luxembourg
Participant or Euroclear Participant the following day, and receipt of the cash
proceeds in the Clearstream, Luxembourg 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 Clearstream, Luxembourg
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
Clearstream, Luxembourg Participant's or Euroclear Participant's account would
instead be valued as of the actual settlement date.
Finally, day traders that use Clearstream, Luxembourg or Euroclear and
that purchase Global Securities from DTC Participants for delivery to
Clearstream, Luxembourg 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 Clearstream, Luxembourg or Euroclear for one day
(until the purchase side of the day trade is reflected in their Clearstream,
Luxembourg or Euroclear accounts) in accordance with the clearing system's
customary procedures;
S-56
<PAGE>
(2) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their Clearstream, Luxembourg 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 Clearstream, Luxembourg
Participant or Euroclear Participant.
U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Clearstream, Luxembourg or Euroclear (or through DTC if the holder has an
address outside the U.S.) will be subject to 30% (or in some cases 31%) 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 BEN). 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 BEN. If the information shown on
Form W-8 BEN changes, a new Form W-8 BEN must be filed within 30 days of the
change.
Exemption for non-U.S. Persons with effectively connected income (Form
W-8ECI). 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 W-8ECI.
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form W-8 BEN). 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 W-8
BEN.
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.
U.S. Federal Income Tax Reporting Procedure. The Global Securities holder
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). Forms W-8 BEN and W-8ECI are generally effective for
three calendar years.
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 the extensive withholding regulations that are
generally effective with respect to payments made after December 31, 2000, which
have detailed rules regarding the determination of beneficial ownership.
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
o a citizen or resident of the United States,
o a corporation or partnership created or organized in or under the laws
of the United States or of any political subdivision of the United States,
o an estate the income of which is subject to United States federal income
taxation regardless of its source, or
o 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.
S-57
<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-48
1998 Reauthorization Bill ......................................... S-48
1999 Final Regulations ............................................ S-50
91-day Treasury Bills ............................................. S-45
Additional Fundings ............................................... S-31
Additional Guarantor .............................................. S-22
Additional Student Loans .......................................... S-14
Add-on Consolidation Loans ........................................ S-16
Administration Agreement .......................................... S-31
Administration Fee ................................................ S-36
Administrator ..................................................... S-31
Assumption Payment ................................................ S-46
Available Funds ................................................... S-38
Bank One .......................................................... S-32
Cede .............................................................. S-54
CI ................................................................ S-28
Citibank .......................................................... S-30
Class A-1 Note Final Maturity Date ................................ S-27
Class A-1 Note Rate ............................................... S-25
Class A-1 Noteholders ............................................. S-26
Class A-1 Noteholders' Interest Carryover Shortfall ............... S-39
Class A-1 Noteholders' Interest Distribution Amount ............... S-39
Class A-1 Notes ................................................... S-25
Class A-2 Note Final Maturity Date ................................ S-27
Class A-2 Note Rate ............................................... S-25
Class A-2 Noteholders ............................................. S-27
Class A-2 Noteholders' Interest Carryover Shortfall ............... S-39
Class A-2 Noteholders' Interest Distribution Amount ............... S-39
Class A-2 Notes ................................................... S-25
Class B Notes ..................................................... S-25
Clearstream, Luxembourg ........................................... S-28
Clearstream, Luxembourg Participants .............................. S-29
Closing Date ...................................................... S-14
Collateral Reinvestment Account ................................... S-35
Collection Account ................................................ S-35
Collection Period ................................................. S-36
Commission ........................................................ S-31
Company ........................................................... S-15
Cooperative ....................................................... S-29
CP Rate ........................................................... S-50
Cutoff Date ....................................................... S-17
DBC ............................................................... S-28
Deferral .......................................................... S-19
Delinquency Percentage ............................................ S-33
Department ........................................................ S-24
Depositaries ...................................................... S-30
S-58
<PAGE>
Depositary ........................................................ S-30
Determination Date ................................................ S-36
DTC ............................................................... S-54
Early Amortization Event .......................................... S-32
Eligible Lender Trustee ........................................... S-14
Euroclear ......................................................... S-29
Euroclear Operator ................................................ S-29
Euroclear Participants ............................................ S-29
Events of Default ................................................. S-45
Excess Spread ..................................................... S-32
Exchange Act ...................................................... S-53
Exchanged Financed Student Loan ................................... S-33
Exchanged Serial Loan ............................................. S-33
Expected Interest Collections ..................................... S-33
Federal Origination Fee ........................................... S-51
FFELP ............................................................. S-14
Financed Student Loans ............................................ S-14
Forbearance ....................................................... S-19
Global Securities ................................................. S-55
Grace ............................................................. S-19
GRDF Percentage ................................................... S-36
Guarantors ........................................................ S-22
Illegality ........................................................ S-46
Indenture ......................................................... S-25
Indenture Trustee ................................................. S-25
Index Maturity .................................................... S-27
Indirect Participants ............................................. S-28
Initial Financed Student Loans .................................... S-14
Initial Guarantors ................................................ S-22
In-School ......................................................... S-19
In-School Percentage .............................................. S-36
Interest Rate Swaps ............................................... S-44
IRS ............................................................... S-51
LIBOR Determination Date .......................................... S-27
LIBOR Reset Period ................................................ S-28
Liquidated Student Loans .......................................... S-37
Liquidation Proceeds .............................................. S-37
Loan Purchase Amount .............................................. S-32
Loan Sale Agreement ............................................... S-31
Lock-In Period .................................................... S-45
Minimum Purchase Price ............................................ S-47
Monthly Available Funds ........................................... S-37
Monthly Collection Period ......................................... S-36
Monthly Payment Date .............................................. S-36
Monthly Rebate Fee ................................................ S-51
Morgan ............................................................ S-30
Net Trust Swap Payment ............................................ S-45
Net Trust Swap Payment Carryover Shortfall ........................ S-39
Net Trust Swap Receipt ............................................ S-45
Net Trust Swap Receipt Carryover Shortfall ........................ S-39
S-59
<PAGE>
New CI ............................................................ S-28
New Loan .......................................................... S-31
New Loans ......................................................... S-31
Noncapitalized Accrued Interest ................................... S-32
Non-U.S. Person ................................................... S-57
Noteholders ....................................................... S-27
Noteholders' Interest Distribution Amount ......................... S-34
Notes ............................................................. S-25
Obligors .......................................................... S-25
OID ............................................................... S-52
Parity Date ....................................................... S-25
Participants ...................................................... S-28
Plan .............................................................. S-52
Pool Balance ...................................................... S-25
Prefunding Account ................................................ S-35
Principal Distribution Adjustment ................................. S-40
Principal Distribution Amount ..................................... S-40
Purchase Amount ................................................... S-26
Purchase Collateral Balance ....................................... S-32
Purchase Premium Amount ........................................... S-32
Quarterly Interest Period ......................................... S-25
Quarterly Payment Date ............................................ S-25
Rating Agency Downgrade ........................................... S-46
Realized Losses ................................................... S-40
Record Date ....................................................... S-25
Reference Banks ................................................... S-28
Repayment ......................................................... S-19
Reserve Account ................................................... S-35
Reserve Account Excess ............................................ S-42
Reserve Account Initial Deposit ................................... S-14
Reserve Account Trigger ........................................... S-42
Revolving Period .................................................. S-31
Scheduled Notional Swap Amount .................................... S-44
Scheduled Swap Termination Date ................................... S-44
Secretary ......................................................... S-22
Seller ............................................................ S-14
Seller Trusts ..................................................... S-51
Senior Noteholders ................................................ S-26
Senior Noteholders' Distribution Amount ........................... S-40
Senior Noteholders' Interest Distribution Amount .................. S-40
Senior Noteholders' Principal Carryover Shortfall ................. S-41
Senior Noteholders' Principal Distribution Amount ................. S-41
Senior Notes ...................................................... S-25
Serial Loan ....................................................... S-33
Serial Loans ...................................................... S-33
Servicer .......................................................... S-31
Servicing Agreement ............................................... S-31
Servicing Fee ..................................................... S-35
Servicing Fee Shortfall ........................................... S-36
SMS ............................................................... S-14
S-60
<PAGE>
Special Federal Tax Counsel ....................................... S-51
Specified Reserve Account Balance ................................. S-42
Student Loan Rate Accrual Period .................................. S-33
Student Loans ..................................................... S-14
Subordinate Note Final Maturity Date .............................. S-27
Subordinate Note Rate ............................................. S-25
Subordinate Note Trigger .......................................... S-26
Subordinate Noteholders ........................................... S-27
Subordinate Noteholders' Distribution Amount ...................... S-41
Subordinate Noteholders' Interest Carryover Shortfall ............. S-41
Subordinate Noteholders' Interest Distribution Amount ............. S-41
Subordinate Noteholders' Principal Carryover Shortfall ............ S-41
Subordinate Noteholders' Principal Distribution Amount ............ S-41
Subordinate Notes ................................................. S-45
Swap Agreement .................................................... S-44
Swap Counterparties ............................................... S-44
Swap Default ...................................................... S-45
Swap Early Termination ............................................ S-46
Swap Rate ......................................................... S-44
Swap Rating Condition ............................................. S-44
Swap Termination Date ............................................. S-45
Systems ........................................................... S-29
Tax Event ......................................................... S-46
T-Bill Rate ....................................................... S-45
Telerate Page 3750 ................................................ S-28
Termination Events ................................................ S-46
Terms and Conditions .............................................. S-29
TGSLC ............................................................. S-22
Three-Month LIBOR ................................................. S-27
Transfer Agreement ................................................ S-32
Transfer and Servicing Agreements ................................. S-31
Transfer Date ..................................................... S-34
Trust ............................................................. S-14
Trust Agreement ................................................... S-15
Trust Swap Payment Amount ......................................... S-41
Trust Swap Receipt Amount ......................................... S-42
U.S. Person ....................................................... S-57
USA Funds ......................................................... S-22
Year 2000 problems ................................................ S-29
S-61
<PAGE>
PROSPECTUS
The SMS Student Loan Trusts
Asset-Backed Notes
USA GROUP SECONDARY MARKET SERVICES, INC.,
Seller
----------
A trust will issue the asset backed notes 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. The source for payment of
the notes will be collections on a pool of education loans to students and
parents of students.
The notes will represent interests in the trust and will be paid only from
the assets of the trust. The notes will be rated in one of the four highest
rating categories by at least one nationally recognized rating organization. The
notes may have one or more forms of enhancement.
The noteholders will receive principal and interest payments from student
loan collections.
Consider carefully the factors set forth under "Risk Factors" beginning at
page 1 in this prospectus and in the related prospectus supplement.
The notes are not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other governmental agency. The notes 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 notes
commission has approved or disapproved these notes 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 offered hereby unless accompanied
by a prospectus supplement.
----------
The date of this prospectus is May 8, 2000
----------
<PAGE>
TABLE OF CONTENTS
RISK FACTORS ............................................................... 1
Risk of Loss from Limited Credit Enhancement ............................ 1
Borrower Default Risk on Student Loans .................................. 1
Risk of Dependence on Guarantors as Security for Student Loans .......... 1
Risk of Department of Education's Failure to Pay Guarantee Payments ..... 1
Risk of Loss of Federal Guarantor and Department of Education
Payments for Failure to Comply with Loan Origination and
Servicing Procedures for Student Loans ............................... 2
Risk of Seller or Servicer not Performing on Purchase Obligations ....... 2
Changes in Legislation May Adversely Affect Student Loans and
Federal Guarantors, the Seller or the Servicer ....................... 2
Fees Payable on Student Loans May Reduce Amounts Payable to You ......... 3
Risk of Consolidation of Federal Benefit Billings and Receipts
with Other Trusts .................................................... 3
Failure to Comply with Third-Party Servicer Regulations May
Adversely Affect Loan Servicing ...................................... 4
Custodial Risk of Servicer .............................................. 4
Insolvency Risk of Service, Administrator or Seller ..................... 4
The Investment Return on the Notes Is Uncertain ......................... 5
Risk of Variability of Actual Cash Flows ................................ 6
Consumer Protection Laws May Affect Enforceability of Student Loans ..... 6
Book-Entry Registration--Beneficial Owners Not Recognized by Trust ...... 6
FORMATION OF THE TRUSTS .................................................... 7
The Trusts .............................................................. 7
Eligible Lender Trustee ................................................. 7
USE OF PROCEEDS ............................................................ 7
USA GROUP, SMS, THE SELLER AND THE SERVICER ................................ 8
USA Group ............................................................... 8
SMS ..................................................................... 9
The Seller .............................................................. 9
The Servicer ............................................................ 9
Year 2000 Compliance .................................................... 10
THE STUDENT LOAN POOLS ..................................................... 10
Origination and Marketing Process ....................................... 11
Servicing and Collections Process ....................................... 12
Claims and Recovery Rates ............................................... 12
FEDERAL FAMILY EDUCATION LOAN PROGRAM ...................................... 12
Legislative and Administrative Matters .................................. 13
Eligible Lenders, Students and Educational Institutions ................. 14
Financial Need Analysis ................................................. 15
Special Allowance Payments .............................................. 15
ii
<PAGE>
Federal Stafford Loans .................................................. 16
Interest ............................................................. 16
Interest Subsidy Payments ............................................ 17
Loan Limits .......................................................... 18
Repayment ............................................................ 18
Grace Periods, Deferral Periods and Forbearance Periods .............. 18
Federal Unsubsidized Stafford Loans ..................................... 19
Federal PLUS and Federal SLS Loan Programs .............................. 19
Loan Limits .......................................................... 19
Interest .......................................................... 20
Repayment, Deferments ................................................ 20
Federal Consolidation Loan Program ...................................... 20
Federal Guarantors ...................................................... 22
Federal Insurance and Reinsurance of Federal Guarantors ................. 22
WEIGHTED AVERAGE LIVES OF THE NOTES ........................................ 24
POOL FACTORS AND TRADING INFORMATION ....................................... 25
DESCRIPTION OF THE NOTES ................................................... 25
Principal of and Interest on the Notes .................................. 25
The Indenture ........................................................... 26
Modification of Indenture ............................................ 26
Events of Default; Rights upon Event of Default ...................... 27
Covenants ............................................................ 29
Annual Compliance Statement .......................................... 29
Indenture Trustee's Annual Report .................................... 30
Satisfaction and Discharge of Indenture .............................. 30
The Indenture Trustee ................................................ 30
INFORMATION REGARDING THE NOTES ............................................ 30
Fixed Rate Notes ........................................................ 30
Floating Rate Notes ..................................................... 30
Book-Entry Registration ................................................. 31
Definitive Notes ........................................................ 32
List of Noteholders ..................................................... 32
Reports to Noteholders .................................................. 32
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS ....................... 33
Sale of Student Loans; Representations and Warranties ................... 33
Additional Fundings ..................................................... 34
Accounts ................................................................ 34
Servicing Procedures .................................................... 35
Payments on Student Loans ............................................... 35
Servicer Covenants ...................................................... 35
Servicer Compensation ................................................... 36
Distributions ........................................................... 36
Credit and Cash Flow Enhancement ........................................ 37
Reserve Account ...................................................... 37
iii
<PAGE>
Statements to Indenture Trustee and Trust ............................... 37
Evidence as to Compliance ............................................... 38
Matters Regarding the Servicer .......................................... 38
Servicer Default ........................................................ 39
Rights Upon Servicer Default ............................................ 39
Waiver of Past Defaults ................................................. 40
Amendment ............................................................... 40
Payment of Notes ........................................................ 40
Termination ............................................................. 40
Optional Redemption .................................................. 40
Auction of Student Loans ............................................. 41
Administration Agreement ................................................ 41
LEGAL ASPECTS OF THE STUDENT LOANS ......................................... 41
Transfer of Student Loans ............................................... 41
Consumer Protection Laws ................................................ 42
Loan Origination and Servicing Procedures Applicable to Student Loans ... 42
Student Loans Generally Not Subject to Discharge in Bankruptcy .......... 43
FEDERAL INCOME TAX CONSEQUENCES ............................................ 43
TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE ............................ 44
Tax Characterization of the Trust ....................................... 44
Tax Consequences to Holders of the Notes ................................ 44
Treatment of the Notes as Indebtedness .................................. 44
Possible Alternative Treatments of the Notes ............................ 44
Original Issue Discount ................................................. 44
Interest Income on the Notes ............................................ 45
Sale or Other Disposition ............................................... 45
Foreign Holders ......................................................... 45
Backup Withholding ...................................................... 46
Recent Legislation ...................................................... 46
STATE TAX CONSEQUENCES ..................................................... 47
Tax Consequences with Respect to the Notes ........................... 47
Tax Characterization of the Trust .................................... 47
ERISA CONSIDERATIONS ....................................................... 47
PLAN OF DISTRIBUTION ....................................................... 48
LEGAL MATTERS .............................................................. 49
AVAILABLE INFORMATION ...................................................... 50
INCORPORATION OF DOCUMENTS BY REFERENCE .................................... 50
INDEX OF PRINCIPAL TERMS ................................................... 51
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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 notes.
Risk of Loss from Limited
Credit Enhancement ................ An investment in the notes 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 notes 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 notes.
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 notes. In addition, if
the Department of Education
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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
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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 notes 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
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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" in the
related prospectus supplement 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.
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If the seller becomes subject to
bankruptcy proceedings, you could
experience losses or delays in the
payments on your notes. 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 notes.
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
Notes Is Uncertain ................ The return on your investment in the
notes of any series will depend on
o the price paid by you for your
notes,
o the rate at which interest accrues
on your notes and
o the rate at which you receive a
return of the principal.
Consequently, the length of time that
your notes are outstanding and accruing
interest may be shorter than you expect.
The last factor is the biggest
uncertainty in an investment in the
notes.
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 noteholders in any month or
over the period of time that the notes
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
noteholders.
The different amounts of principal
payments on the notes 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 notes received by you at
a rate that is equal to or greater than
the rate of interest borne by your
notes.
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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.
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 notes in book-entry form
may reduce the liquidity of these notes
in the secondary trading market since
investors may be unwilling to purchase
notes for which they cannot obtain
physical certificates. Since
transactions in the notes 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 notes may be
limited due to lack of a physical
certificate representing the notes. You
may experience some delay in the receipt
of distributions of interest and
principal on the notes 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.
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FORMATION OF THE TRUSTS
The Trusts
With respect to each series of notes, 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:
o a pool of student loans consisting of education loans to students
and parents of students ("Federal Student Loans" or "Student
Loans"), legal title to which is held by the related eligible lender
trustee (the "Eligible Lender Trustee") on behalf of each Trust,
o 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
o 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 Notes.
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 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 notes 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.
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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:
o 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;
o providing guarantees for education loans made pursuant to the Act as
well as for loans made under Private Loan Programs;
o assisting guarantee agencies in managing and maintaining their
education loan programs;
o 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;
o performing achievement and need-based scholarship processing for
corporations, foundations and benefit societies;
o offering financial management services to guarantee agencies to
assist them in planning for the future and in meeting the financial
challenges facing guarantors;
o providing and performing education loan purchase functions for the
holders of loans made to facilitate attendance of students at
universities, colleges and schools;
o 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
o acquiring student loan notes held by eligible lenders under the
Federal Family Education Loan Program.
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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
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 Notes, 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 Notes in the related prospectus supplement.
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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:
o the availability and cost of personnel trained in this area,
o the ability to locate and correct all relevant computer codes, and
o 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:
o 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,
o was originated in the United States of America,
o its territories or its possessions under and in accordance with the
Federal Family Education Loan Program,
o contains terms in accordance with those required by the Federal
Family Education Loan Program,
o 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,
o provides for regular payments that fully amortize the amount
financed over its original term to maturity (exclusive of any
deferral or forbearance periods) and
10
<PAGE>
o 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 Noteholders 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 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.
11
<PAGE>
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".
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 Notes, 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
Noteholders 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 Notes 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
12
<PAGE>
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:
o loans to students who demonstrate need ("Federal Stafford Loans");
o loans to students who do not demonstrate need or who need additional
loans to supplement their Federal Stafford Loans ("Federal
Unsubsidized Stafford Loans");
o 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
o 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 ("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;
13
<PAGE>
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:
o has been accepted for enrollment or is enrolled and is maintaining
satisfactory academic progress at a participating educational
institution,
o 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,
o has agreed to notify promptly the holder of the loan of any address
change, and
o 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:
o only admits persons who have a high school diploma or its
equivalent,
o is legally authorized to operate within a state,
o provides not less than a two-year program with credit acceptable
toward a bachelor's degree,
o is a public or non-profit institution and
o 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:
o 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),
o is authorized by a state to provide a program of vocational
education designed to fit individuals for useful employment in
recognized occupations,
o has been in existence for at least two years,
o provides at least a six-month training program to prepare students
for gainful employment in a recognized occupation and
o is accredited by a nationally recognized accrediting agency or is
specially accredited by the Department.
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<PAGE>
With specified exceptions, institutions are excluded from consideration as
educational institutions if the institution:
o offers more than 50 percent of its courses by correspondence,
o enrolls 50 percent or more of its students in correspondence
courses,
o has a student enrollment in which more than 25 percent of the
students are incarcerated or
o 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
o the educational institution has filed for bankruptcy,
o 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
o 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"),
15
<PAGE>
(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.
Date of First Disbursement Special Allowance Margin
- -------------------------- ------------------------
Prior to 10/17/86 3.50%
10/17/86 - 09/30/92 3.25%
10/01/92 - 06/30/95 3.10%
07/01/95 - 06/30/98 2.50% (Federal Stafford Loans and Federal
Unsubsidized Stafford Loans that are
In-School, Grace or Deferment); 3.10%
(Federal Stafford Loans and Federal
Unsubsidized Stafford Loans that are in
repayment and all other loans)
07/01/98 - 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)
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
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Trigger Date(1) Borrower Rate(2) Maximum Rate Interest Rate Margin
- --------------- ---------------- ------------ --------------------
<S> <C> <C> <C>
07/01/95 - 06/30/98 ..... 91-Day Treasury + Interest 8.25% 2.50% (In-School, Grace or
Rate Margin Deferment); 3.10% (in repayment)
On or after 07/01/98 .... 91-Day Treasury + Interest 8.25% 1.70% (In-School, Grace or
Rate Margin Deferment); 2.30% (in repayment)
</TABLE>
- ----------
(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.
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:
o 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%,
o 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
o 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
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<PAGE>
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.
<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
</TABLE>
- ----------
(1) The loan limits are inclusive of both Federal Stafford Loans and Federal
Direct Student Loans.
(2) These amounts represent the combined maximum loan amount per year for
Federal Stafford and Federal Unsubsidized Stafford Loans. Accordingly, the
maximum amount that a student may borrow under a Federal Unsubsidized
Stafford Loan is the difference between the combined maximum loan amount
and the amount the student received in the form of a Federal Stafford
Loan.
(3) Independent undergraduate students, graduate students or professional
students may borrow these additional amounts. In addition, dependent
undergraduate students may also receive these additional loan amounts if
the parents of 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.
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
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<PAGE>
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 other student
loans.
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<PAGE>
Interest. The interest rate determination for a PLUS or SLS loan is
dependent on when the loan was originally made and disbursed and the period of
enrollment. The interest rates for PLUS and SLS loans are summarized in the
following chart.
<TABLE>
<CAPTION>
Interest
Trigger Date(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%
</TABLE>
- ----------
(1) The Trigger Date for PLUS and SLS loans made before October 1, 1992 is the
first day of enrollment period for which the loan is made, and for PLUS
and SLS loans made on October 1, 1992 and after the Trigger Date is the
date of the 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.
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
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<PAGE>
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.
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<PAGE>
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 of Education (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.
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<PAGE>
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%
</TABLE>
- ----------
(1) The federal reimbursement has been reduced to 98%, 88% and 78% for loans
disbursed on or after October 1, 1993 and prior to October 1, 1998 and
95%, 85% and 75% for loans disbursed on or after October 1, 1998.
The claims experience is not accumulated from year to year, but is
determined solely on the basis of claims in any one federal fiscal year compared
with the original principal balance of loans in repayment at the beginning of
that year.
The 1992 Amendments addressed education loan industry concerns regarding
the Department's commitment to providing support in the event of Federal
Guarantor failures. Pursuant to the 1992 Amendments, Federal Guarantors are
required to maintain specified reserve fund levels. 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
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<PAGE>
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 NOTES
The weighted average lives of the Notes 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:
o borrower default, death, disability or bankruptcy,
o a closing of or a false certification by the borrower's school and
o 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 Notes 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 yield on the Notes 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.
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<PAGE>
In light of the above considerations, there can be no assurance as to the
amount of principal payments to be made on the Notes 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 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 Notes.
POOL FACTORS AND TRADING INFORMATION
The "Pool Factor" for each class of Notes 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, 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. 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. A Noteholder's
portion of the aggregate outstanding principal amount of the related class of
Notes, is the product of (1) the original denomination of that Noteholder's Note
and (2) the applicable Pool Factor.
If so provided in the related prospectus supplement with respect to a
Trust, the Noteholders 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. Noteholders 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 Notes--Reports to Noteholders".
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 Notes--Book-Entry Registration" and
"--Definitive Notes".
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
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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 Notes--Fixed
Rate Notes" and "Floating Rate Notes". 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:
o 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,
o impair the right to institute suit for the enforcement of provisions
of the related Indenture regarding payment,
o 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,
o 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,
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o 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,
o 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
o 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
which default materially and adversely affects the rights of
Noteholders 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
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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
o the holders of all the outstanding Notes consent to the sale,
o 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
o 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 66
2/3% 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:
o the holder previously has given to the applicable Indenture Trustee
written notice of a continuing Event of Default,
o 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,
o the holder or holders have offered the Indenture Trustee reasonable
indemnity,
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o the Indenture Trustee has for 60 days failed to institute the
proceeding, and
o 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 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
o 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,
o 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,
o no Event of Default shall have occurred and be continuing
immediately after the merger or consolidation,
o the Trust has been advised that the ratings of the Notes of the
related series would not be reduced or withdrawn by the Rating
Agencies as a result of the merger or consolidation, and
o 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 Noteholder of
the related series.
Each Trust will not, among other things,
o 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,
o 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,
o except as contemplated by the Related Documents, dissolve or
liquidate in whole or in part,
o 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
o 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.
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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.
INFORMATION REGARDING THE NOTES
Fixed Rate Notes
Each class of Notes may bear interest at a fixed rate per annum ("Fixed
Rate Notes") or at a variable or adjustable rate per annum ("Floating Rate
Notes"), as more fully described below and in the applicable prospectus
supplement. Each class of Fixed Rate Notes will bear interest at the applicable
per annum Interest Rate, specified in the applicable prospectus supplement.
Unless otherwise set forth in the applicable prospectus supplement, interest on
each class of Fixed Rate Notes 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".
Floating Rate Notes
Each class of Floating Rate Notes 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 Notes, "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 Note based on LIBOR, commercial paper rates, Federal funds
rates, U.S. Government treasury notes 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 Notes
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 Notes, the interest rate applicable to any class
of Floating Rate Notes 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 Notes 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
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Floating Rate Notes issued with respect thereto. The applicable prospectus
supplement will set forth the identity of the Calculation Agent for each class
of Floating Rate Notes 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 Notes 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 Note 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 Clearsteam Banking, societe anonyme or Euroclear Systems in Europe.
Notes will be registered in the name of Cede & Co. ("Cede") as nominee for DTC.
Clearstream and Euroclear will hold omnibus positions with respect to the Notes
on behalf of Clearstream Participants and the Euroclear Participants,
respectively, through customers' notes accounts in Clearstream's and Euroclear's
name on the books of their respective depositaries (collectively, the
"Depositaries") which in turn will hold the positions in customers' notes
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 notes for
its Participants and to facilitate the clearance and settlement of notes
transactions between Participants through electronic book-entries, thereby
eliminating the need for physical movement of certificates. Participants include
notes 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").
Noteholders 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, Noteholders will receive all distributions of
principal and interest from the related Indenture Trustee through Participants
and Indirect Participants. Under a book-entry format, Noteholders may experience
some delay in their receipt of payments, since the payments will be forwarded by
the Indenture Trustee to DTC's Nominee. DTC will forward the payments to its
Participants, which thereafter will forward them to Indirect Participants or
Noteholders. Except for the Seller or an affiliate of the Seller with respect to
any series of Notes, it is anticipated that the only "Noteholder" will be DTC's
Nominee. Noteholders will not be recognized by the Indenture Trustee as
Noteholders, as the terms are used in each Indenture, and Noteholders will be
permitted to exercise the rights of Noteholders 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
Notes among Participants on whose behalf it acts with respect to the Notes and
to receive and transmit distributions of principal of, and interest on, the
Notes. Participants and Indirect Participants with which Noteholders have
accounts with respect to the Notes similarly are required to make book-entry
transfers and receive and transmit the payments on behalf of their respective
Noteholders. Accordingly, although Noteholders will not possess Notes, 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 Noteholder
to pledge Notes to persons or entities that do not participate in the DTC
system, or to otherwise act with respect to the Notes, may be limited due to the
lack of a physical certificate for the Notes.
DTC has advised the Seller that it will take any action permitted to be
taken by a Noteholder under the related Indenture only at the direction of one
or more Participants to whose accounts with DTC the Notes 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.
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Except as required by law, neither the Administrator nor the Indenture
Trustee will have any liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the Notes held by
DTC's nominee or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.
Definitive Notes
Unless otherwise specified in the related prospectus supplement the Notes
of a given series will be issued in fully registered, certificated form
("Definitive Notes" to Noteholders or their respective nominees, rather than to
DTC or its nominee, only if:
o the related Administrator advises the Indenture Trustee in writing
that DTC is no longer willing or able to discharge properly its
responsibilities as depository with respect to the Notes and the
Administrator is unable to locate a qualified successor,
o the Administrator, at its option, elects to terminate the book-entry
system through DTC, or
o after the occurrence of an Event of Default or a Servicer Default,
Noteholders representing at least a majority of the outstanding
principal amount of the Notes, as the case may be, of the series
advise the Indenture Trustee through DTC in writing that the
continuation of a book-entry system through DTC (or a successor
thereto) with respect to the Notes is no longer in the best interest
of the holders of the Notes.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Indenture Trustee will be required to notify all applicable
Noteholders of a given series through Participants of the availability of
Definitive Notes. Upon surrender by DTC of the Definitive Notes representing the
corresponding Notes and receipt of instructions for re-registration, the
Indenture Trustee will reissue the Notes as Definitive Notes to the Noteholders.
Distributions of principal of, and interest on, the Definitive Notes will
thereafter be made by the Indenture Trustee in accordance with the procedures
set forth in the related Indenture directly to holders of Definitive Notes in
whose names the Definitive Notes were registered at the close of business on the
applicable Record Date specified for the Notes 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 Indenture Trustee. The
final payment on any Definitive Note, however, will be made only upon
presentation and surrender of the Definitive Note at the office or agency
specified in the notice of final distribution to applicable Noteholders.
Definitive Notes will be transferable and exchangeable at the offices of
the Indenture Trustee or of a registrar named in a notice delivered to holders
of Definitive Notes. No service charge will be imposed for any registration of
transfer or exchange, but the Indenture Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge imposed in connection
therewith.
List of Noteholders
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.
Reports to Noteholders
With respect to each series of Notes, on each Distribution Date, the
Indenture Trustee will provide to Noteholders 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".
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The statements will be filed with the Commission during the period required by
Rule 15d-1 under the Notes Exchange Act of 1934, as amended, and will not be
filed with the Commission thereafter. The statements provided to Noteholders
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 Indenture Trustee
will mail to each person who at any time during the calendar year was a
Noteholder with respect to the Trust and received any payment thereon, a
statement containing information for the purposes of the Noteholder'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 Notes. The
net proceeds received from the sale of the related Notes 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
Noteholders of a given series, including, among other things, that:
o 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;
o the information provided with respect to the Student Loans is true
and correct as of the Cutoff Date; and
o 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 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
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of the Seller will constitute the sole remedy available to or on behalf of a
Trust 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 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 Noteholders 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, 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 Notes, 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 Notes. Except as described below or in the related prospectus
supplement, Eligible Investments are limited to obligations or notes 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 notes that will not mature prior
to the date of the next distribution with respect to the Notes 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 could result,
which could, in turn, increase the average lives of the Notes of
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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
notes 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:
o 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
Noteholders;
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o 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;
o it will do nothing to impair the rights of the related Noteholders
in the Student Loans; and
o 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 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 Notes, 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 Notes, beginning on the Distribution Date
specified in the related prospectus supplement, distributions of principal and
interest on each class of the Notes entitled thereto will be made by the
Indenture Trustee to the Noteholders of the series. The timing, calculation,
allocation, order, source, priorities of and requirements for all payments to
each class of Noteholders 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 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
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supplement, distributions in respect of principal and/or interest of a class of
Notes of a given series will be subordinate to distributions in respect of
interest on one or more other classes 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 Notes 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 Notes, 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 Notes may cover one or
more other classes of Notes of the same series, and credit enhancement for a
series of Notes may cover one or more other series of Notes.
The presence of a Reserve Account and other forms of credit enhancement
for the benefit of any class or series of Notes is intended to enhance the
likelihood of receipt by the Noteholders of the class or series of the full
amount of principal and interest due thereon and to decrease the likelihood that
the Noteholders will experience losses. Unless otherwise specified in the
related prospectus supplement, the credit enhancement for a class or series of
Notes 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, Noteholders 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 Notes, Noteholders of any series will be subject to the risk
that the credit enhancement will be exhausted by the claims of Noteholders 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 Notes 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 Notes
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 Notes, 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 of the series, to the extent applicable:
(1) the amount of the distribution allocable to principal of each class
of the Notes;
(2) the amount of the distribution allocable to interest on each class
of the Notes, 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;
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(4) the aggregate outstanding principal amount and the Pool Factor of
each class of the Notes 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 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 and the Noteholders'
Principal Carryover Shortfall (each as defined in the related
prospectus supplement), if any, in each case as applicable to each
class of Notes, 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 of any series will be expressed as a dollar amount per
$1,000 of the initial principal amount of the Notes.
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 Noteholders
by a request in writing addressed to the Indenture 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 for taking
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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 Noteholders.
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:
o 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,
o 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,
o 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
o 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 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
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Trustee. Moreover, only the Indenture Trustee or the Noteholders, and not the
Eligible Lender Trustee, 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, 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, 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. No waiver will impair
the Noteholders' 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, 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; 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. 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
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; 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 (2) reduce the
aforesaid percentage of the Notes which are required to consent to any
amendment, without the consent of the holders of all the outstanding Notes.
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, 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 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 concurrently therewith.
Upon termination of a Trust, as more fully described in the related prospectus
supplement, all right, title and interest in
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the Student Loans and other funds of the Trust, after giving effect to any final
distributions to Noteholders 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.
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:
o 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,
o 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
o 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.
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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
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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.
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. 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 that are insurance
companies, regulated investment companies or dealers in notes. 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. 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.
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 notes 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 and related terms, parties
and documents shall be deemed to refer, unless otherwise specified in this
prospectus, to each Trust and the Notes 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 THE NOTES SPECIFIC TO THE
PROSPECTIVE INVESTOR.
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TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE
Tax Characterization of the Trust
Any party that retains or acquires 100% of the equity interests of the
Trust agrees by this retention or acquisition to disregard the Trust as an
entity separate from such sole equity holder. Federal Tax Counsel will deliver
its opinion that a Trust which issues one or more classes of Notes to investors
and all the equity interests of which are retained by the Seller or an affiliate
thereof will not be a separate entity that is 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 for federal income tax purposes the
Trust will be disregarded as an entity separate from the sole holder of the
equity interests in the Trust.
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.
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.
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.
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Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with 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 notes
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:
o the interest is not effectively connected with the conduct of a
trade or business within the United States by the foreign person
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o 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 equity interests in the Trust) 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
o 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 BEN 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 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 BEN 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. 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.
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 finalized. In general, the FASIT legislation enables trusts including the
Trust to elect to be treated as a pass-through entity not subject to federal
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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.
THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A NOTEHOLDER'S
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF NOTES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR
OTHER TAX LAWS.
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 in all of the state taxing jurisdictions in which they are already subject
to tax. Noteholders are urged to consult their own tax advisors with respect to
state tax consequences arising out of the purchase, ownership and disposition of
Notes.
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 Characterization of the Trust. 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
is disregarded as an entity separate from the sole owner of the equity interests
in the Trust for federal income tax purposes, the Trust should not be subject to
Indiana corporate income taxes.
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.
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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.
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.
A plan fiduciary considering the purchase of Notes of a given series
should consult its tax and/or legal advisors regarding whether the assets of the
related Trust would be considered plan assets, the possibility of exemptive
relief from the prohibited transaction rules and other issues and their
potential consequences.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement with
respect to the Notes of a given series (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, 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
Notes, the several underwriters will agree, subject to the terms and conditions
set forth in the Underwriting Agreements, to purchase all the Notes, described
in the Underwriting Agreements which are offered hereby and by the related
prospectus supplement if any of the Notes, are purchased.
Each prospectus supplement will either (1) set forth the price at which
each class of Notes, being offered thereby will be offered to the public and any
concessions that may be offered to dealers participating in the
48
<PAGE>
offering of the Notes, or (2) specify that the related Notes, 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, the public offering prices and the concessions may be changed.
Until the distribution of the Notes is completed, rules of the Commission
may limit the ability of the underwriters and selling group members to bid for
and purchase the Notes. As an exception to these rules, the underwriters are
permitted to engage in transactions that stabilize the price of the Notes. The
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Notes.
If an underwriter creates a short position in the Notes in connection with
the offering (i.e., if it sells more Notes than are set forth on the cover page
of the related prospectus supplement), the underwriter may reduce that short
position by purchasing Notes 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 Notes in the open
market to reduce the underwriters' short position or to stabilize the price of
the Notes, it may reclaim the amount of the selling concession from the
underwriters and selling group members who sold those Notes as part of the
offering.
In general, purchases of a note for the purpose of stabilization or to
reduce a short position could cause the price of the note 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 note to the extent that it discourages
resales of the note.
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 Notes. 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 Notes, the closing of the sale of any class of Notes 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 Notes 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 Notes 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.
49
<PAGE>
AVAILABLE INFORMATION
USA Group Secondary Market Services, Inc., as originator of each trust,
has filed with the Notes 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 notes 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 notes 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 notes, 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).
50
<PAGE>
INDEX OF PRINCIPAL TERMS
Page
----
10 percent shareholder .................................................... 52
1992 Amendments ........................................................... 13
1993 Act .................................................................. 13
1998 Reauthorization Bill ................................................. 13
Act ....................................................................... 11
Additional Fundings ....................................................... 34
Add-on Consolidation Loans ................................................ 21
Administration Agreement .................................................. 41
Administration Fee ........................................................ 41
Administrator ............................................................. 41
Administrator Default ..................................................... 41
Base Rate ................................................................. 30
Calculation Agent ......................................................... 30
Cede ...................................................................... 31
Closing Date .............................................................. 12
Code ...................................................................... 43
Collateral Reinvestment Account ........................................... 34
Collection Account ........................................................ 34
Collection Period ......................................................... 35
Commission ................................................................ 50
controlled foreign corporation ............................................ 46
CP Rate ................................................................... 25
Cutoff Date ............................................................... 7
Deferral Period ........................................................... 18
Definitive Notes .......................................................... 32
Department ................................................................ 10
Depositaries .............................................................. 31
Depositary ................................................................ 25
Distribution Date ......................................................... 26
DTC ....................................................................... 31
DTC's Nominee ............................................................. 25
Eligible Deposit Account .................................................. 35
Eligible Institution ...................................................... 35
Eligible Investments ...................................................... 34
Eligible Lender Trustee ................................................... 7
ERISA ..................................................................... 47
Event of Default .......................................................... 27
Excess Cashflow Rights .................................................... 11
Family Contribution ....................................................... 15
FASIT ..................................................................... 46
FASIT Provisions .......................................................... 46
Federal Assistance ........................................................ 16
Federal Consolidation Loan ................................................ 20
51
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Page
----
Federal Guarantor ......................................................... 10
Federal PLUS Loans ........................................................ 13
Federal SLS Loans ......................................................... 13
Federal Stafford Loans .................................................... 13
Federal Student Loans ..................................................... 7
Federal Supplemental Loans to Students .................................... 13
Federal Tax Counsel ....................................................... 43
Federal Unsubsidized Stafford Loans ....................................... 13
FFELP ..................................................................... 12
Fixed Rate Notes .......................................................... 30
Floating Rate Notes ....................................................... 30
Forbearance Period ........................................................ 19
foreign person ............................................................ 45
Funding Period ............................................................ 11
Grace Period .............................................................. 18
Guarantee Agreement ....................................................... 10
Guarantee Payments ........................................................ 7
Guarantor ................................................................. 10
Indenture ................................................................. 25
Indenture Trustee ......................................................... 25
Index Shortfall Carryover ................................................. 27
Indiana Tax Counsel ....................................................... 47
Indirect Participants ..................................................... 31
Initial Pool Balance ...................................................... 40
Insolvency Event .......................................................... 24
Interest Rate ............................................................. 25
Interest Reset Period ..................................................... 30
Interest Subsidy Payments ................................................. 16
Investment Earnings ....................................................... 35
IRS ....................................................................... 43
Loan Sale Agreement ....................................................... 10
Loan Services ............................................................. 8
Loan Servicing Agreement .................................................. 9
Monthly Rebate Fee ........................................................ 21
New Withholding Regulations ............................................... 46
Notes ..................................................................... 25
OID ....................................................................... 44
OID Regulations ........................................................... 44
Participants .............................................................. 25
Parties in Interest ....................................................... 48
Plans ..................................................................... 47
Pool Balance .............................................................. 25
Pool Factor ............................................................... 25
Pre-Funding Account ....................................................... 34
Pre-Funding Amount ........................................................ 34
52
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Page
----
prepayments ............................................................... 24
prospectus supplement ..................................................... 9
PTCE ...................................................................... 48
Purchase Amount ........................................................... 33
Registration Statement .................................................... 50
Related Documents ......................................................... 35
related person ............................................................ 46
Reserve Account ........................................................... 37
Revolving Period .......................................................... 11
Rules ..................................................................... 31
Secretary ................................................................. 22
Securities Act ............................................................ 50
Seller .................................................................... 8
Servicer .................................................................. 9
Servicer Default .......................................................... 39
Servicing Fee ............................................................. 36
Short-Term Note ........................................................... 45
SMS ....................................................................... 8
Special Allowance Payments ................................................ 15
Spread .................................................................... 30
Spread Multiplier ......................................................... 30
Student Loans ............................................................. 7
Transfer and Servicing Agreements ......................................... 33
Trust ..................................................................... 7
Trust Accounts ............................................................ 34
Trust Agreement ........................................................... 7
UCC ....................................................................... 41
Underwriting Agreement .................................................... 48
Unmet Need ................................................................ 15
USA Funds ................................................................. 8
USA Group ................................................................. 8
USA Group Guarantee Services .............................................. 8
53
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SMS Student Loan
Trust 2000-B
$200,000,000
Class A-1 Floating Rate
Asset-Backed Senior Notes
$958,000,000
Class A-2 Floating Rate
Asset-Backed Senior Notes
$42,000,000
Class B Floating Rate
Asset-Backed Subordinate Notes
USA Group Secondary
Market Services, Inc.
Seller
PROSPECTUS SUPPLEMENT
Deutsche Banc Alex. Brown
Merrill Lynch & Co.
Credit Suisse First Boston
J.P. Morgan & Co.
Morgan Stanley Dean Witter
PaineWebber Incorporated
