AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 27, 2000
REGISTRATION NO. 333-93643
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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USA GROUP SECONDARY
MARKET SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 35-1872185
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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30 SOUTH MERIDIAN STREET
INDIANAPOLIS, INDIANA 46204-3503
(317) 951-5640
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
EDWARD R. SCHMIDT, ESQ.
General Counsel
USA Group Secondary Market Services, Inc.
30 South Meridian Street
Indianapolis, Indiana 46204-3503
(317) 951-5123
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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COPIES TO:
TIMOTHY M. HARDEN, ESQ. REED D. AUERBACH, ESQ.
KRIEG DEVAULT ALEXANDER & CAPEHART, LLP STROOCK & STROOCK & LAVAN LLP
2800 ONE INDIANA SQUARE 180 MAIDEN LANE
INDIANAPOLIS, INDIANA 46204 NEW YORK, NEW YORK 10038
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this Registration Statement becomes effective as determined by
market conditions.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act Registration Statement Number of the earlier
effective Registration Statement for the same offering. |_| ________________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act Registration Statement Number of the earlier effective Registration
Statement for the same offering. |_|_________________
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box. |_|
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM
SECURITIES TO BE REGISTERED TO BE OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE(2)
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<S> <C> <C> <C> <C>
Asset-Backed Notes.................... $1,958,000,000 100.00% $1,958,000,000 $516,912(2)
================================================================================================================================
(1) Estimated solely for purposes of calculating the registration fee.
(2) A fee of $264 has previously been paid.
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</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
PURSUANT TO RULE 429 UNDER THE SECURITIES ACT OF 1933, THE PROSPECTUS
INCLUDED IN THIS REGISTRATION STATEMENT IS A COMBINED PROSPECTUS AND RELATES TO
REGISTRATION STATEMENT NO. 333-77301 AS PREVIOUSLY FILED BY THE REGISTRANT ON
FORM S-3 WITH $1,125,320,000 SECURITIES REGISTERED. THIS REGISTRATION STATEMENT,
WHICH IS A NEW REGISTRATION STATEMENT, ALSO CONSTITUTES POST-EFFECTIVE AMENDMENT
NO. 1 TO REGISTRATION STATEMENT NO. 333-77301 AND SUCH POST-EFFECTIVE AMENDMENT
SHALL HEREAFTER BECOME EFFECTIVE CONCURRENTLY WITH THE EFFECTIVENESS OF THIS
REGISTRATION STATEMENT AND IN ACCORDANCE WITH SECTION 8(C) OF THE SECURITIES ACT
OF 1933.
<PAGE>
Information contained in this prospectus is subject to completion or
amendment. A registration statement relating to these Securities has been filed
with the Securities and Exchange Commission. These securities may not be sold
nor may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these Securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities law of any State.
<PAGE>
SUBJECT TO COMPLETION DATED MARCH 27, 2000
<PAGE>
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED _________, ____
$----------
SMS STUDENT LOAN TRUST ____-_
USA GROUP SECONDARY MARKET SERVICES, INC.
Seller
FLOATING RATE ASSET-BACKED SENIOR NOTES
----------------
The sources for payment of the senior notes are a pool of education loans
originated under the Federal Family Education Loan Program to students and
parents of students, substantially all of which are guaranteed by United Student
Aid Funds, Inc., held by the trust, cash, held by the trust and one or more
interest rate swaps.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-_ OF THIS PROSPECTUS
SUPPLEMENT AND PAGE __ OF THE PROSPECTUS. THE SENIOR NOTES ARE ASSET-BACKED
SECURITIES ISSUED BY A TRUST. THE SENIOR NOTES ARE NOT INTERESTS IN OR
OBLIGATIONS OF USA GROUP SECONDARY MARKET SERVICES, INC. OR ANY OF ITS
AFFILIATES.
<TABLE>
<CAPTION>
ORIGINAL PROCEEDS TO
PRINCIPAL INTEREST RATE FINAL MATURITY PRICE TO UNDERWRITING THE
AMOUNT (PER ANNUM) DATE(1) PUBLIC DISCOUNT SELLER(2)
<S> <C> <C> <C> <C> <C> <C>
Per Class A-1 Note $___________ Three-Month LIBOR ___________ _____% _______% ______%
plus ____% annually,
Per Class A-2 Note $___________ Three-Month LIBOR __________ _____% ________% ______%
plus ____% annually,
Total............. $___________
(1) The quarterly payment date of ___________ and __________, as applicable.
(2) Plus accrued interest, if any, from the date of initial issuance.
</TABLE>
The senior notes will be delivered in book-entry form only through The
Depository Trust Company, Cedelbank, societe anonyme and the Euroclear System on
or about ______, ____ against payment in immediately available funds.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the prospectus to which it relates is truthful or
complete. Any representation to the contrary is a criminal offense.
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-------------------------
Prospectus Supplement dated ________, ____
<PAGE>
YOU SHOULD RELY ON INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS
DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE
INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT.
We provide information to you about the senior notes in two separate documents
that progressively provide more detail: (1) the accompanying prospectus, which
provides general information, some of which may not apply to your senior notes
and (2) this prospectus supplement, which describes the specific terms of your
senior notes.
UNTIL __________, ____ ALL DEALERS THAT EFFECT TRANSACTIONS IN THE SENIOR NOTES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS AND PROSPECTUS SUPPLEMENT. THIS REQUIREMENT IS IN ADDITION TO THE
DEALER'S OBLIGATION TO DELIVER A PROSPECTUS AND PROSPECTUS SUPPLEMENT WHEN
ACTING AS UNDERWRITERS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
We are not offering the senior notes in any state where the offer is not
permitted. We do not claim the accuracy of the information in this prospectus
supplement and the accompanying prospectus as of any date other than the dates
stated on their respective covers.
Persons participating in the offering of the senior notes may engage in
transactions that stabilize, maintain or otherwise affect the prices of the
senior notes. These transactions could cause the prices of the senior notes to
be higher than they might otherwise be in the absence of these transactions. See
"Underwriting" in this prospectus supplement.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
SUMMARY OF TERMS....................................3
RISK FACTORS........................................7
FORMATION OF THE TRUST.............................14
THE FINANCED STUDENT LOAN POOL.....................16
DESCRIPTION OF THE NOTES...........................27
DESCRIPTION OF THE TRANSFER AND
SERVICING AGREEMENTS.............................33
FEDERAL FAMILY EDUCATION LOAN PROGRAM..............51
CERTAIN FEDERAL INCOME TAX AND STATE
TAX CONSEQUENCES.................................56
ERISA CONSIDERATIONS...............................56
UNDERWRITING.......................................58
LEGAL MATTERS......................................59
REPORTS TO SECURITYHOLDERS.........................59
FORWARD LOOKING STATEMENTS.........................59
ANNEX I............................................60
INDEX OF PRINCIPAL TERMS...........................64
EXHIBIT A.........................................S-
PROSPECTUS
RISK FACTORS.........................................
FORMATION OF THE TRUSTS..............................
USE OF PROCEEDS......................................
USA GROUP, SMS, THE SELLER
AND THE SERVICER................................
THE STUDENT LOAN POOLS...............................
FEDERAL FAMILY EDUCATION LOAN PROGRAM................
WEIGHTED AVERAGE LIFE OF THE SECURITIES..............
POOL FACTORS AND TRADING INFORMATION.................
DESCRIPTION OF THE NOTES.............................
DESCRIPTION OF THE CERTIFICATES......................
INFORMATION REGARDING THE SECURITIES.................
DESCRIPTION OF THE TRANSFER AND
SERVICING AGREEMENTS............................
LEGAL ASPECTS OF THE STUDENT LOANS...................
FEDERAL INCOME TAX CONSEQUENCES......................
STATE TAX CONSEQUENCES...............................
ERISA CONSIDERATIONS.................................
PLAN OF DISTRIBUTION.................................
LEGAL MATTERS........................................
AVAILABLE INFORMATION................................
INCORPORATION OF DOCUMENTS BY REFERENCE..............
INDEX OF PRINCIPAL TERMS.............................
<PAGE>
SUMMARY OF TERMS
o This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to
consider in making your investment decision. To understand all of the terms
of the offering of the senior notes, you should carefully read this entire
prospectus supplement and the accompanying prospectus.
o This summary provides an overview to aid your understanding and is
qualified by the full description of this other information in this
prospectus supplement and the accompanying prospectus.
o You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under the caption "Index of Principal
Terms" beginning on page S-__ in this prospectus supplement.
PRINCIPAL PARTIES
THE TRUST
o SMS Student Loan Trust ____-_
THE SELLER AND ADMINISTRATOR
o USA Group Secondary Market Services, Inc.
THE SERVICER
o USA Group Loan Services, Inc.
THE ELIGIBLE LENDER TRUSTEE
o ________________
THE INDENTURE TRUSTEE
o ________________
THE INITIAL SWAP COUNTERPARTY
o ________________
DATES
QUARTERLY PAYMENT DATES
Payments on the senior notes will be made to you on the 28th day of each
January, April, July and October. If the 28th is not a business day, payments
will be made to you on the next business day. The first quarterly payment date
is __________, ____.
CUTOFF DATE
__________, ____. The trust will receive payments made on the related student
loans on and after this date.
CLOSING DATE
On or about __________, ____.
DESCRIPTION OF THE SECURITIES
The Trust is offering the following student loan floating rate asset-backed
senior notes pursuant to this prospectus:
o Class A-1 Notes in the aggregate principal amount of $____________; and
o Class A-2 Notes in the aggregate principal amount of $___________.
The trust is also issuing $__________ aggregate principal amount of floating
rate asset-backed subordinate notes. The trust is not offering the subordinate
notes pursuant to this prospectus.
The trust will issue the senior notes in book-entry form in minimum
denominations of $1,000 and in multiples of $1,000 in excess of $1,000.
You may hold your senior notes through The Depository Trust Company, Cedelbank,
societe anonyme or the Euroclear System.
INTEREST PAYMENTS
The note rate for each class of senior notes is specified on the cover page of
this prospectus supplement. Interest with respect to the senior notes will be
calculated on the basis of the actual number of days elapsed in the related
quarterly interest period and a 360-day year.
PRINCIPAL PAYMENTS
No principal will be paid to you prior to the end of the revolving period. The
revolving period will begin on the date the senior notes are issued and will end
__________, ____ (or earlier as described in this prospectus supplement).
Following the end of the revolving period, principal will be paid on the senior
notes on each quarterly payment date in an amount generally equal to the
principal collections with respect to the related student loans for the
preceding quarterly period until the senior notes have been paid in full.
Principal payments on the senior notes generally will be made to the holders of
the senior notes sequentially. No principal will be paid on the Class A-2 Notes
until the Class A-1 Notes have been paid in full. No principal will be paid on
the subordinate notes until the senior notes have been paid in full.
An exception to this rule is that following a default under the indenture and
the acceleration of the notes, principal will be paid first on a pro rata basis,
to each class of senior notes until they have been paid in full, and second, to
the subordinate notes until they have been paid in full.
PRIORITY OF PAYMENTS
On each quarterly payment date, the indenture trustee will make the following
distributions to the extent of available funds:
o to the servicer and administrator, specified fees;
o pro rata, to the senior noteholders, interest and to the swap
counterparties, any net swap payments;
o to the subordinate noteholders, interest;
o following the termination of the revolving period to the senior
noteholders, principal; and
o to the reserve account, remaining funds.
Any shortfalls in funds available to make interest and principal distributions
required to be made on the notes on a quarterly payment date may be paid on
future quarterly payment dates.
FINAL MATURITY DATES
To the extent not previously paid prior to these dates, the unpaid principal
amount of each class of senior notes will be payable in full on the final
maturity date listed on the cover page of this prospectus supplement.
AUCTION SALE
Any student loans remaining in the trust as of the end of the collection period
immediately preceding the __________ quarterly payment date will be offered for
sale. The proceeds of any sale will be used to redeem your senior notes. The
auction price must at least equal the unpaid principal amount of the notes, plus
accrued and unpaid interest thereon.
OPTIONAL REDEMPTION
Any notes that remain outstanding on any quarterly payment date on which
Secondary Market Company, Inc., or an assignee of Secondary Market Company,
Inc., exercises its option to purchase all of the assets of the trust will be
prepaid in whole at the applicable redemption price on this quarterly payment
date. The redemption price for any class of notes will equal the unpaid
principal amount of that class, plus accrued and unpaid interest thereon.
Neither Secondary Market Company, Inc. nor its assignee may exercise this option
until the unpaid principal amount of the senior notes and the subordinate notes
is less than or equal to 20% of the initial unpaid principal amount of the
senior notes plus the subordinate notes.
TRUST PROPERTY
The primary property of the trust will include:
o the student loans;
o all amounts collected on the student loans on or after the cutoff date;
(net of interest accrued prior to the cutoff date);
o amounts on deposit in the accounts of the trust; and
o one or more interest rate swaps.
THE INITIAL FINANCED STUDENT LOANS
The student loans consist of specified guaranteed education loans to students
and parents of students made under the Federal Family Education Loan Program.
All of the student loans are reinsured by the Department of Education. The
student loans to be transferred by USA Group Secondary Market Services, Inc. to
the trust on the closing date have the following characteristics as of
__________, ____:
o Aggregate principal amount: $______________
o Weighted average original term: ______ mths
o Weighted average remaining term: ______ mths
o Stafford Loans (%): ______%
o Federal Consolidation Loans (%): ______%
o PLUS Loans (%): ______%
o SLS Loans (%): ______%
o Percent guaranteed by United Student
Aid Funds, Inc.: ______%
ADDITIONAL STUDENT LOANS; REVOLVING PERIOD
From time to time after the closing date and before the earlier of the
occurrence of an early amortization event and __________, ____, the trust will
acquire additional student loans. The trust will purchase additional student
loans from collections received on the student loans owned by the trust that are
not used to cover specified fees and expenses of the trust, distributions on the
notes, deposits to the reserve account and payments due to the swap
counterparties.
ADDITIONAL STUDENT LOANS; SERIAL LOANS
Following the earlier of the occurrence of an early amortization event and
__________, ____, the trust may acquire additional student loans relating to
borrowers with student loans already owned by the trust. The trust will purchase
additional student loans from collections received on the student loans owned by
the trust that are not used to cover specified fees and expenses of the trust,
distributions on the notes, deposits to the reserve account and payments due to
the swap counterparties.
THE COLLECTION ACCOUNT
On the closing date, USA Group Secondary Market Services, Inc. will make an
initial deposit of $_____________ into the collection account.
CREDIT ENHANCEMENT
The credit enhancement for the senior notes will consist primarily of the
following:
o reserve account; and
o subordination of the subordinate notes.
THE RESERVE ACCOUNT
USA Group Secondary Market Services, Inc. will establish a reserve account with
the indenture trustee. Funds on deposit in the reserve account on each quarterly
payment date will be available to cover shortfalls in distributions of interest
and principal on the senior notes to the extent described in this prospectus
supplement. The reserve account will be funded as follows:
o On the closing date, USA Group Secondary Market Services, Inc.
will make an initial deposit of $_________ into the reserve account.
o On each quarterly payment date, any available funds remaining after
making all prior distributions required to be made, will be deposited
into the reserve account.
Amounts in the reserve account on any quarterly payment date (after giving
effect to all distributions to be made on this date) in excess of the specified
reserve account balance will be released to Secondary Market Company, Inc. or an
affiliate. The specified reserve account balance for any quarterly payment date
will be the greater of (1) ____% of the outstanding principal balance of the
notes and (2) $_______.
SUBORDINATION OF THE SUBORDINATE NOTES
The subordination of the subordinate notes to the senior notes as described in
this prospectus supplement will provide additional credit enhancement for the
senior notes. Any losses on the student loans not covered by other forms of
credit enhancement will be allocated to the subordinate notes before being
allocated to the senior notes.
INTEREST RATE SWAPS
The trust and the initial swap counterparty have entered into an interest rate
swap. Unless terminated earlier, this interest rate swap will terminate on the
_____, ____ quarterly payment date. The trust will owe the initial swap
counterparty a net swap payment when (1) the weighted average discount rate per
annum for direct obligations of the United States with a maturity of 13 weeks
plus a specified percentage is greater than (2) the London interbank offered
rate for deposits in U.S. dollars having a maturity of three months. The initial
swap counterparty will owe the trust a net swap receipt when the calculation
described in the immediately preceding sentence is negative.
The amount of a net swap payment or a net swap receipt is the product of the
difference in the rates described in clause (1) and clause (2) above and the
interest rate swap's scheduled notional amount.
The scheduled notional amount for the initial interest rate swap for any
quarterly payment date will be the lesser of (1) the outstanding principal
balance of the notes and (2) the amounts set forth in Exhibit A to this
prospectus supplement. USA Group Secondary Market Services, Inc. expects the
scheduled notional amount for the initial interest rate swap for any quarterly
payment date to initially equal approximately __% of the then outstanding
principal balance of the senior notes and the subordinate notes. However,
following the closing date, USA Group Secondary Market Services, Inc. may agree
with the initial swap counterparty to cause the scheduled notional amount to
equal an amount up to the outstanding principal balance of the notes.
In addition to the initial interest rate swap, the administrator may cause the
trust to enter into additional interest rate swaps with additional swap
counterparties on substantially similar terms as the initial interest rate swap.
TAX STATUS
Stroock & Stroock & Lavan LLP, special federal income tax counsel to USA Group
Secondary Market Services, Inc., is of the opinion that (1) the trust will not
be treated as an association or a publicly traded partnership taxable as a
corporation and (2) the senior notes will be characterized as indebtedness for
federal income tax purposes. Each noteholder, by accepting a senior note, will
agree to treat the senior notes as indebtedness.
ERISA CONSIDERATIONS
Subject to the considerations discussed under "ERISA Considerations," the senior
notes are eligible for purchase by employee benefit plans.
RATINGS
At least two nationally recognized rating agencies must each rate the senior
notes in the highest long-term rating category.
<PAGE>
RISK FACTORS
You should consider the following risk factors together with all the
information contained in this prospectus supplement and the related prospectus
in deciding whether to purchase any of the senior notes.
YOU MAY HAVE DIFFICULTY SELLING
YOUR NOTES........................ The senior notes will not be listed on
any securities exchange. As a result, if
you want to sell your senior notes you
must locate a purchaser that is willing
to purchase those notes. The
underwriters intend to make a secondary
market for the senior notes. The
underwriters will do so by offering to
buy the senior notes from investors that
wish to sell. However, the underwriters
will not be obligated to make offers to
buy the senior notes and may stop making
offers at any time. In addition, the
prices offered, if any, may not reflect
prices that other potential purchasers
would be willing to pay, were they to be
given the opportunity. There have been
times in the past where there have been
very few buyers of asset backed
securities (i.e., there has been a lack
of liquidity), and there may be these
times in the future. As a result, you
may not be able to sell your senior
notes when you want to do so or you may
not be able to obtain the price that you
wish to receive.
THE TRUST HAS LIMITED ASSETS TO
MAKE PAYMENTS ON
YOUR NOTES....................... The trust does not have, nor is it
permitted or expected to have, any
significant assets or sources of funds
other than the student loans (and the
related guarantee agreements), the
reserve account and the interest rate
swaps. The notes represent obligations
solely of the trust and will not be
insured or guaranteed by any entity.
Consequently, you must rely for
repayment upon payments with respect to
the student loans and amounts on deposit
in the reserve account. Monies to be
deposited in the reserve account are
limited in amount and will be reduced,
subject to a specified minimum, as the
aggregate principal amount of the notes
is reduced. If the reserve account is
exhausted, the trust will depend solely
on payments with respect to the student
loans to make payments on the notes and
you could suffer a loss. You will have
no claim to any amounts properly
distributed to USA Group Secondary
Market Services, Inc., Secondary Market
Company, Inc. or the servicer from time
to time.
YOU MAY EXPERIENCE LOSSES ON YOUR
INVESTMENT RESULTING FROM
PRINCIPAL BALANCE OF NOTES
EXCEEDING POOL BALANCE........... As of the closing date, the aggregate
principal amount of the senior notes and
subordinate notes will be equal to
approximately ___% of the sum of the
outstanding principal balance of the
student loans as of the cutoff date and
the amount deposited by USA Group
Secondary Market Services, Inc. in the
reserve account and the collection
account on the closing date. During the
revolving period, any collections on the
student loans that are not used to cover
specified fees and expenses of the
trust, distributions on the notes,
deposits to the reserve account or
payments to the swap counterparties will
be deposited in the collateral
reinvestment account. The trust will
apply amounts in the collateral
reinvestment account to increase the
outstanding principal balance of the
student loans. If the outstanding
principal balance of the student loans
at the end of the revolving period does
not equal the aggregate principal amount
of the senior notes and subordinate
notes, amounts in the collateral
reinvestment account will be used to pay
principal on the notes.
You may experience losses to the extent
that excess interest collections are
insufficient to cause the outstanding
principal balance of the student loans
to equal the aggregate principal amount
of the senior notes and subordinate
notes. The occurrence of any of the
following will increase the likelihood
of an insufficiency:
o A high rate of prepayments;
o An increase in the weighted average
discount rate per annum for direct
obligations of the United States with
a maturity of 13 weeks; or
o A decrease in the London interbank
offered rate for deposits in U.S.
dollars having a maturity of three
months.
RISK OF CHANGE IN CHARACTERISTICS
OF THE STUDENT LOANS ............. ADDITIONAL FUNDINGS. Following the
transfer of additional student loans to
the trust after the closing date, the
characteristics of the student loans may
differ significantly from the
information presented in this prospectus
supplement. The characteristics that may
differ include the composition of the
student loans and of the borrowers of
the student loans, the related
guarantors (which may include additional
guarantors whose ability to fulfill
their insurance obligations may vary
from that of the initial guarantor), the
distribution by loan type, the
distribution by interest rate, the
distribution by principal balance and
the distribution by remaining term to
scheduled maturity. You should consider
potential variances when making your
investment decision concerning the
senior notes.
INCENTIVE PROGRAMS. USA Group Secondary
Market Services, Inc. currently offers
two incentive interest rate reduction
programs to borrowers. Either of these
programs may be modified by USA Group
Secondary Market Services, Inc. Under
the first program, borrowers who make
their first 48 payments on time receive
either a 1% or 2% per annum interest
rate reduction for the remaining term of
their loan. USA Group Secondary Market
Services, Inc. is obligated to reimburse
the trust for any of these interest rate
reductions. Under the second program,
borrowers who use an auto-debit system
to remit payments directly from their
bank accounts receive a 0.25% per annum
interest rate reduction on their loans.
The trust does not know which borrowers
will qualify or decide to participate in
these programs.
THE RETURN ON YOUR INVESTMENT
WILL CHANGE OVER TIME............. Your pre-tax return on your investment
will change from time to time for a
number of reasons including the
following:
o THE RATE OF RETURN OF PRINCIPAL
IS UNCERTAIN. The amount of
distributions of principal on the
senior notes and the time when you
receive those distributions depends on
the amount and the times at which
borrowers make principal payments on
the student loans. Those principal
payments may be regularly scheduled
payments or unscheduled payments
resulting from prepayments, defaults
or consolidations of the student
loans. In addition, if the trust is
not able to purchase sufficient
additional student loan principal
balances during the revolving
period, the noteholders will receive a
principal prepayment immediately
following the end of the revolving
period.
o The revolving period may terminate
earlier than ________, ____ if
o the student loans fail specified
performance tests,
o the amount of excess interest for
two successive quarterly payment
dates is below a specified level,
o an event of default occurs under
the indenture or other transaction
documents or
o specified other events occur.
o YOU BEAR REINVESTMENT RISK. Asset
backed securities, like the senior
notes, usually produce more returns of
principal to investors when market
interest rates fall below the interest
rates on the student loans and produce
less returns of principal when market
interest rates are above the interest
rates on the student loans. As a
result, you are likely to receive more
money to reinvest at a time when other
investments generally are producing a
lower yield than that on the notes,
and are likely to receive less money
to reinvest when other investments
generally are producing a higher yield
than that on the notes. You will bear
the risk that the timing and amount of
distributions on your senior notes
will prevent you from attaining your
desired yield.
o AN EARLY TERMINATION MAY AFFECT THE
YIELD. Your investment in the senior
notes may end before you desire if (1)
the indenture trustee successfully
conducts an auction sale or (2)
Secondary Market Company, Inc.
exercises its option to purchase all
of the assets of the trust. You will
bear reinvestment risk following an
early termination.
CHANGES IN LEGISLATION MAY
ADVERSELY AFFECT STUDENT LOANS
AND FEDERAL GUARANTORS............ The Higher Education Act or other
relevant federal or state laws, rules
and regulations may be amended or
modified in the future in a manner that
will adversely affect the federal
student loan programs described in this
prospectus supplement and the
prospectus, the student loans made
thereunder or the financial condition of
the federal guarantors.
In addition, if the direct student loan
program expands, the servicers may
experience increased costs due to
reduced economies of scale or other
adverse effects on their business to the
extent the volume of loans serviced by
the servicers is reduced. These cost
increases could reduce the ability of
the servicers to satisfy their
obligations to service the student loans
or to purchase student loans in the
event of specified breaches of its
covenants.
RISKS ASSOCIATED WITH SEQUENTIAL
PAYMENT OF PRINCIPAL ON THE
NOTES ............................ Since the Class A-2 Notes will generally
not be paid any principal distributions
until the principal balance of the Class
A-1 Notes has been reduced to zero, the
Class A-1 noteholders would be most
affected by a high rate of principal
prepayment or an early termination of
the revolving period. In addition, as a
result of this sequential payment of
principal, it is likely that at any time
the Class A-2 Notes will have a greater
percent of their initial principal
balance outstanding than the Class A-1
Notes at any time. Consequently, the
Class A-2 Notes will be allocated more
losses than the Class A-1 Notes
following a default under the indenture
as a relative percentage of their
respective initial principal balances.
BASIS RISK......................... Interest collections plus net swap
receipts may be insufficient to cover
interest on the notes. If this occurs,
amounts otherwise that would have been
paid to you as principal, will be paid
to you as interest. This may occur as a
result of:
o The student loans generally bear
interest based on the rate per annum
for direct obligations of the United
States with a maturity of 13 weeks
while the note rate for each class of
senior notes is based on the London
interbank offered rate for deposits
in U.S. dollars having a maturity of
three months.
o The principal balance of the student
loans will initially be less than the
aggregate principal amount of the
senior notes and the subordinate
notes. Consequently, the aggregate
principal balances of the student
loans on which interest will be
collected will be less than the
principal amount of the senior
notes and the subordinate notes.
o The trust's obligation to pay
specified fees to the Department of
Education.
If interest collections plus net swap
receipts are not sufficient to cover
interest on the notes, the market value
and liquidity of your senior notes may
decline.
BORROWER DEFAULT RISK ON CERTAIN
FEDERAL LOANS.................... The student loans are generally 98%
insured by a federal guarantor. As a
result, to the extent a borrower of a
student loan defaults, the trust will
experience a loss of generally 2% of the
outstanding principal and accrued
interest on each student loan. The trust
will assign a defaulted student loan to
the applicable federal guarantor in
exchange for a guarantee payment on the
98% guaranteed portion. The trust may
not have any right to pursue the
borrower for the remaining 2%
unguaranteed portion. If the credit
enhancement described in this prospectus
supplement is not sufficient, you may
suffer a loss.
RISK OF DEPENDENCE ON GUARANTORS
AS SECURITY FOR STUDENT LOANS.... All of the student loans are unsecured.
As a result, the only security for
payment of the student loans are the
guarantees provided under the guarantee
agreements between the eligible lender
trustee and the guarantors.
Substantially all of the student loans
which will be conveyed to the trust on
the date of issuance of the notes are
guaranteed by United Student Aid Funds,
Inc. The financial condition of a
guarantor may be adversely affected by a
number of factors including:
o the amount of claims made
against the guarantor as result of
borrower defaults;
o the amount of claims reimbursed to
the guarantor from the Department of
Education (which range from 75% to
100% depending on the date
the student loan was made and the
performance of the guarantor); and
o changes in legislation that may
reduce expenditures from the
Department of Education that support
federal guarantors or that may
require federal guarantors to pay
more of their reserves to the
Department of Education.
If the financial status of the
guarantors, and particularly United
Student Aid Funds, Inc., deteriorates,
the guarantors may fail to make
guarantee payments to the eligible
lender trustee. In this event, you may
suffer delays in the payment of
principal and interest on your senior
notes.
RISK OF LOSS OF GUARANTOR AND
DEPARTMENT OF EDUCATION
PAYMENTS FOR FAILURE TO COMPLY
WITH LOAN ORIGINATION AND
SERVICING PROCEDURES............. The Higher Education Act requires
lenders and their assignees making and
servicing student loans that are
reinsured by the Department of Education
and guarantors guaranteeing federal
loans to follow specified procedures, to
ensure that the federal loans are
properly made and repaid. If the
servicer fails to follow these
procedures or if the originator of the
loan failed to follow procedures
relating to the origination of any
loans, the Department of Education may
refuse to make reinsurance payments to
the guarantors or to make interest
subsidy payments and special allowance
payments to the eligible lender trustee.
In addition, under these circumstances
the guarantors may refuse to make
guarantee payments to the trust. The
failure of the Department of Education
to provide reinsurance payments to the
guarantors could adversely affect the
guarantors' ability or legal obligation
to make payments under the guarantee
agreements. Loss of any these guarantee
payments, interest subsidy payments or
special allowance payments could
adversely affect the trust's ability to
pay you timely interest and principal.
In this event, you may suffer a loss on
your investment.
RISK ASSOCIATED WITH THE INTEREST
RATE SWAPS....................... USA Group Secondary Market Services,
Inc. expects the scheduled notional
amount of the initial interest rate swap
for each quarterly payment date to be
less than the outstanding principal
balance of the notes. As a result, the
initial interest rate swap would not
give you full protection against a gap
between (1) the rate per annum for
direct obligations of the United States
with a maturity of 13 weeks and (2) the
London interbank offered rate for
deposits in U.S. dollars having a
maturity of three months. However,
following the closing date, USA Group
Secondary Market Services, Inc. may
agree with the initial swap counterparty
to cause the scheduled notional amount
to equal an amount up to the outstanding
principal balance of the notes. Further,
USA Group Secondary Market Services,
Inc., as administrator, may cause the
trust to enter into additional interest
rate swaps following the closing date
with additional swap counterparties.
In addition, the initial interest rate
swap will, and subsequent interest rate
swaps may, terminate prior to the final
maturity date for each class of the
notes. If an interest rate swap is
terminated earlier than scheduled, the
trust or the applicable swap
counterparty may be liable to pay to the
other a termination payment. Any
termination payment payable by the trust
could be substantial and could reduce
amounts otherwise payable to
noteholders, thereby resulting in
shortfalls to you.
MASTER PROMISSORY NOTE.......... For periods of enrollment beginning on
or after July 1, 1999, a master
promissory note may evidence any student
loan made to a borrower under the
Federal Family Education Loan program.
Under the master promissory note, each
borrower executes only one promissory
note with each lender. Subsequent
student loans from that lender are
evidenced by a confirmation sent to the
student. Therefore, if a lender
originates multiple student loans to the
same student, all the student loans are
evidenced by a single promissory note.
Pursuant to the Higher Education Act of
1965, as amended, each student loan made
under a master promissory note may be
sold independently of any other student
loan under the same master promissory
note and each student loan is separately
enforceable on the basis of an original
or copy of the master promissory note.
Also, a security interest in these
student loans may be perfected either
through the secured party taking
possession of the original or a copy of
the master promissory note, or the
filing of a financing statement. Prior
to the master promissory note, each
student loan made under the Federal
Family Education Loan program was
evidenced by a separate note. Assignment
of the original note was required to
effect a transfer and possession of a
copy did not perfect a security interest
in the loan.
[Although none of the initial student
loans have been originated under a
master promissory note, it is possible
that additional loans transferred to the
trust may be originated under a master
promissory note.] If through negligence
or otherwise the servicer (or a
sub-servicer on its behalf) were to
deliver a copy of the master promissory
note, in exchange for value, to a third
party that did not have knowledge of the
indenture trustee's lien, that third
party may also claim an interest in the
student loan. The third party's interest
may be prior to or on a parity with the
interest of the indenture trustee.
COMPUTER PROBLEMS IN THE YEAR
2000 MAY RESULT IN LOSSES........ Many computers and computer chips were
not programmed to recognize more than
two digits in a year of a date. As a
result, in the year 2000 (year '00 to
the computer), those computers will not
know whether the '00 refers to the year
1900 or the year 2000. To the extent
that the systems of the servicer, the
administrator, the guarantors, the
eligible lender trustee or the indenture
trustee continue to have the problems in
the year 2000 and later, the amount and
timing of distributions to noteholders
could be adversely affected.
COMPUTER PROBLEMS IN THE YEAR
2000 MAY AFFECT THE DEPARTMENT
OF EDUCATION..................... The Department of Education has
undertaken a year 2000 compliance
project to address year 2000 issues.
Information regarding the Department of
Education's year 2000 efforts can be
obtained at the Department of
Education's site on the World Wide Web
at http://www.ed.gov. Officials at the
Department of Education have made
statements to the public acknowledging
that the Department of Education has
been placed on the Office of Management
and Budget's "watch list" for not
meeting specified milestones toward year
2000 compliance. Any failure by the
Department of Education to resolve any
year 2000 issues or any adverse effect
on the Department of Education caused by
a party on which the Department of
Education relies as a result of year
2000 issues may have a material adverse
effect on the Federal Family Education
Loan Program, the guarantors and you.
THE NOTES ARE NOT SUITABLE
INVESTMENTS FOR ALL INVESTORS.... The senior notes are not a suitable
investment if you require a regular or
predictable schedule of payments or
payment on any specific date. The senior
notes are complex investments that
should be considered only by investors
who, either alone or with their
financial, tax and legal advisors, have
the expertise to analyze the prepayment,
reinvestment, default and market risk,
the tax consequences of an investment,
and the interaction of these factors.
WITHDRAWAL OR DOWNGRADING OF
INITIAL RATINGS WILL AFFECT THE
PRICES FOR NOTES................. A security rating is not a
recommendation to buy, sell or hold
securities. Similar ratings on different
types of securities do not necessarily
mean the same thing. You are encouraged
to analyze the significance of each
rating independently from any other
rating. Any rating agency may change its
rating of the senior notes after the
senior notes are issued if that rating
agency believes that circumstances have
changed. Any subsequent change in rating
will likely affect the price that a
subsequent purchaser will be willing to
pay for the senior notes. The ratings do
not address the likelihood of an early
termination of the revolving period.
<PAGE>
FORMATION OF THE TRUST
THE TRUST
SMS Student Loan Trust ____-_ (the "Trust") will be a trust formed
under the laws of the State of Delaware pursuant to the Trust Agreement for the
transactions described in this prospectus supplement and in the prospectus. The
Trust will not engage in any activity other than:
o acquiring, holding and managing the Student Loans (the "Initial
Financed Student Loans") sold to the Trust on ________, ____ (the
"Closing Date"), the additional Student Loans acquired by the
Trust after the Closing Date (the "Additional Student Loans" and,
together with the Initial Financed Student Loans, the "Financed
Student Loans") and the other assets of the Trust and proceeds
therefrom,
o issuing the Notes,
o making payments thereon,
o originating Federal Consolidation Loans during the Revolving
Period,
o entering into the Initial Interest Rate Swap and Subsequent
Interest Rate Swaps, and
o engaging in other activities that are necessary, suitable or
convenient to accomplish the foregoing or are incidental thereto
or connected therewith.
The proceeds from the sale of the Notes will be used by ______________
(the "Eligible Lender Trustee") to purchase on behalf of the Trust the Initial
Financed Student Loans from USA Group Secondary Market Services, Inc. ("SMS"),
as seller (the "Seller") pursuant to the Loan Sale Agreement, to fund the
initial deposit into the Reserve Account on the Closing Date of cash or Eligible
Investments equal to $_________ (the "Reserve Account Initial Deposit"), to fund
the deposit into the Collection Account on the Closing Date of cash or Eligible
Investments equal to $__________ and to fund the costs of issuance. Upon the
consummation of the transactions, the property of the Trust will consist of
o a pool of guaranteed education loans to students and parents of
students (the "Student Loans") made under the Federal Family
Education Loan Program ("FFELP"), legal title to which is held by
the Eligible Lender Trustee on behalf of the Trust,
o all funds collected in respect of the student loans on or after
the Cutoff Date, net of interest accrued thereon prior to the
Cutoff Date and not to be capitalized,
o all monies and investments on deposit in the Collection Account,
the Collateral Reinvestment Account and the Reserve Account and
o the Initial Interest Rate Swap.
The Notes will be collateralized by the assets of the Trust as
described in this prospectus supplement. The Collection Account, the Reserve
Account, the Collateral Reinvestment Account and the Initial Interest Rate Swap
will be maintained in the name of the Indenture Trustee for the benefit of the
Noteholders. To facilitate servicing and to minimize administrative burden and
expense, the Servicer will be appointed by the Eligible Lender Trustee as
custodian of the promissory notes representing the Financed Student Loans.
On behalf of the Trust, the Eligible Lender Trustee will use funds on
deposit in the Collateral Reinvestment Account during the Revolving Period to
make Additional Fundings, including to make or acquire Additional Student Loans
which will constitute property of the Trust. See "Description of the Transfer
and Servicing Agreements--Revolving Period and Additional Fundings" in this
prospectus supplement. In addition, after the Revolving Period, Additional
Student Loans will be added to the Trust to the extent that:
o the Eligible Lender Trustee on behalf of the Trust purchases
Serial Loans from the Seller,
o the Trust owns Financed Student Loans which are exchanged for
Serial Loans owned by the Seller as described in this prospectus
supplement or
o for 210 days after the end of the Revolving Period, Add-on
Consolidation Loans are added to Federal Consolidation Loans
owned by the Trust.
Any origination or conveyance during or after the Revolving Period of Additional
Student Loans is conditioned on compliance with the procedures described in the
Loan Sale Agreement. The Seller expects that the amount of Additional Fundings
during the Revolving Period will approximately equal the amount expected to be
deposited during the Revolving Period into the Collateral Reinvestment Account
and that the timing of the Additional Fundings will be sufficient so as not to
cause a build-up of funds in the Collateral Reinvestment Account that would
cause an Early Amortization Event to occur prior to the scheduled end of the
Revolving Period on the last day of the Collection Period preceding the ______
_____ Quarterly Payment Date. The Seller's expectations in this regard, based on
current facts and circumstances, but relating to future events, are inherently
forward-looking. These expectations are based primarily upon current market
conditions, including conditions in the secondary market for Student Loans, and
current expectations as to when Additional Fundings will need to be made (based,
in part, on expectations as to the rate at which the Initial Financed Student
Loans will repay). There is a risk that market conditions will change or that
the actual repayment experience on the Initial Financed Student Loans will be
other than as expected. See Risk Factors--The Return on Your Investment Will
Change Over Time" in this prospectus supplement and "--Maturity and Prepayment
Experience" in the prospectus. In addition, a material adverse change in the
operations or business or financial condition of the Seller could affect the
amount or timing of Additional Fundings of New Loans or Serial Loans during the
Revolving Period. See "Federal Family Education Loan Program--Recent
Developments--Changes in Formulas for Determining Interest Rates and Special
Allowance Payments" in this prospectus supplement. Accordingly, there can be no
assurance as to the amount or timing of Additional Fundings during the Revolving
Period. Upon an Early Amortization Event or in any event if the amount on
deposit in the Collateral Reinvestment Account has not been reduced to zero by
the end of the Revolving Period, any amounts remaining on deposit in the
Collateral Reinvestment Account will be paid on the Quarterly Payment Date
immediately following the end of the Revolving Period as a payment of principal
first to the Class A-1 Noteholders until the Class A-1 Notes have been paid in
full, then to the Class A-2 Noteholders until the Class A-2 Notes have been paid
in full and then to the Subordinate Noteholders. There can also be no assurance
as to the amount of Additional Fundings that will occur after the Revolving
Period. See "Description of the Transfer and Servicing Agreements--Revolving
Period and Additional Fundings" in this prospectus supplement.
The Trust's principal offices are in ________, _______ in care of
______________________________ as Eligible Lender Trustee, at the address listed
below.
ELIGIBLE LENDER TRUSTEE
_________________________ is the Eligible Lender Trustee for the Trust
under the Trust Agreement to be dated as of _________, ____ (as amended and
supplemented from time to time, the "Trust Agreement") among the Seller,
Secondary Market Company, Inc. (the "Company"), a limited purpose Delaware
corporation which is an affiliate of the Seller, and the Eligible Lender
Trustee. ____________________ is a ______________________ whose principal
offices are located at ____________________ and whose New York offices are
located at ______________________________. The Eligible Lender Trustee will
acquire on behalf of the Trust legal title to all the Financed Student Loans
acquired from time to time pursuant to the Loan Sale Agreement. The Eligible
Lender Trustee on behalf of the Trust will enter into a Guarantee Agreement with
each of the Guarantors with respect to the Financed Student Loans. The Eligible
Lender Trustee qualifies as an eligible lender and owner of all Financed Student
Loans for all purposes under the Higher Education Act and the Guarantee
Agreements. Failure of the Financed Student Loans to be owned by an eligible
lender would result in the loss of any Guarantee Payments from any Guarantor and
any Federal Assistance with respect to the Financed Student Loans. See "The
Student Loan Pools" in the prospectus. The Eligible Lender Trustee's liability
in connection with the issuance and sale of the Notes is limited solely to the
express obligations of the Eligible Lender Trustee set forth in the Trust
Agreement, the Loan Sale Agreement and the Servicing Agreement. See "Description
of the Notes" in this prospectus supplement and "Description of the Transfer and
Servicing Agreements" in this prospectus supplement and in the prospectus. The
Seller and its affiliates may maintain normal commercial banking relations with
the Eligible Lender Trustee.
THE FINANCED STUDENT LOAN POOL
The pool of Financed Student Loans will include the Initial Financed
Student Loans to be purchased by the Eligible Lender Trustee on behalf of the
Trust as of the Cutoff Date and any Additional Student Loans made or acquired by
the Eligible Lender Trustee on behalf of the Trust after the Closing Date.
No Initial Financed Student Loan as of the Cutoff Date consists of a
Student Loan that was subject to the Seller's prior obligation to sell the loan
to a third party.
Following the Closing Date and prior to the end of the Revolving
Period, the Trust will be obligated from time to time to purchase from the
Seller, and the Seller, subject to the availability of New Loans, will be
obligated to tender to the Trust, New Loans owned by the Seller each of which
will have been made to a borrower who is not a borrower under any Financed
Student Loan. In addition, following the Closing Date, and both during and after
the Revolving Period, the Trust will be obligated from time to time to purchase
from the Seller, subject to the availability of Serial Loans, Serial Loans owned
by the Seller. During the Revolving Period, the purchase of New Loans and Serial
Loans for the Loan Purchase Amount for the loan, will be funded by means of a
transfer of amounts on deposit in the Collateral Reinvestment Account as
described in this prospectus supplement. Following the end of the Revolving
Period, the purchase of Serial Loans will be funded by amounts representing
distributions of principal on the outstanding Financed Student Loans which would
otherwise have been part of the Available Funds or, alternatively, at the
Seller's option, the Eligible Lender Trustee will be obligated to exchange with
the Seller existing Financed Student Loans owned by the Trust for the Serial
Loans, provided that the Serial Loans and eligible Financed Student Loans meet
specified criteria described in this prospectus supplement. Any Purchase Premium
Amounts for Serial Loans purchased by the Trust after the Revolving Period will
be funded on the Quarterly Payment Date next succeeding the end of the
Collection Period during which the Serial Loan has been acquired by the Trust
from amounts, if any, then on deposit in the Reserve Account in excess of the
Specified Reserve Account Balance. No Purchase Premium Amounts will be payable
for Serial Loans exchanged for by the Trust.
In addition, following the Closing Date and prior to the end of the
Revolving Period, the Eligible Lender Trustee on behalf of the Trust will seek
to originate Federal Consolidation Loans to borrowers under Financed Student
Loans who are also borrowers under one or more Student Loans (whether or not all
the loans are in the Trust) under the Federal Consolidation Loan Program
described in the prospectus under "Federal Family Education Loan
Program--Federal Consolidation Loan Program" and under "Federal Family Education
Loan Program" in this prospectus supplement. Any of these originations by the
Eligible Lender Trustee on behalf of the Trust will be funded by means of a
transfer from the Collateral Reinvestment Account of the amount required to
repay any Student Loans that are being discharged in the consolidation process,
which amount will be paid by the Trust to the holder or holders of the Student
Loans to prepay the loans. The Eligible Lender Trustee will not be permitted to
originate Federal Consolidation Loans (including the addition of any Add-on
Consolidation Loans) on behalf of the Trust during the Revolving Period in an
aggregate principal amount in excess of [$_________]; additionally, no Federal
Consolidation Loan may be originated by the Trust having a scheduled maturity
date after [_________, ____] if at the time of the origination the aggregate
principal balances of all Federal Consolidation Loans held by the Trust that
have a scheduled maturity date after [_________, ____], exceed or, after giving
effect to the origination, would exceed [$_________]; provided, however, that
the Eligible Lender Trustee will be permitted to fund the addition of Add-on
Consolidation Loans in excess of the amounts if required to do so by the Act.
After the Revolving Period the Eligible Lender Trustee on behalf of the Trust
will cease to make Federal Consolidation Loans and Additional Student Loans will
consist solely of Serial Loans acquired in the manner specified above; provided,
however, that for a maximum period of ___ days following the end of the
Revolving Period, the Eligible Lender Trustee may be required to increase the
principal balance of Federal Consolidation Loans in the Trust by the amount of
any related Add-on Consolidation Loans as described below.
As described under "Federal Family Education Loan Program--Federal
Consolidation Loan Program" in the prospectus and under "Federal Family
Education Loan Program" in this prospectus supplement, borrowers may consolidate
additional loans ("Add-on Consolidation Loans") with an existing Federal
Consolidation Loan within 180 days from the date that the existing Federal
Consolidation Loan was made. As a result of the addition of any Add-on
Consolidation Loans, the related Federal Consolidation Loan may, in specified
cases, have a different interest rate and a different final payment date. Add-on
Consolidation Loans added to a Federal Consolidation Loan in the Trust during
the Revolving Period will be funded by means of a transfer from the Collateral
Reinvestment Account of the amount required to repay in full any Student Loans
that are being discharged in the consolidation process, which amount will be
paid by the Eligible Lender Trustee on behalf of the Trust to the holder or
holders of the Student Loans to prepay the loans. For a maximum period of 210
days following the end of the Revolving Period (30 days being attributed to the
processing of any Add-on Consolidation Loans), these amounts will be funded by
amounts representing distributions of principal on the outstanding Financed
Student Loans which would otherwise have been part of the Available Funds as
described under "Description of the Transfer and Servicing
Agreements--Distributions" in this prospectus supplement.
No selection procedures believed by the Seller to be adverse to the
Noteholders were used or will be used in selecting the Financed Student Loans.
However, except for the criteria described in the preceding paragraphs and under
"Description of the Transfer and Servicing Agreements--Revolving Period and
Additional Fundings" in this prospectus supplement or contained in the Loan Sale
Agreement, there will be no required characteristics of the Additional Student
Loans. Therefore, following the transfer of Additional Student Loans to the
Eligible Lender Trustee on behalf of the Trust, the aggregate characteristics of
the entire pool of Financed Student Loans, including the composition of the
Financed Student Loans and of the related borrowers, the related Guarantors, the
distribution by loan type, the distribution by interest rate, the distribution
by principal balance and the distribution by remaining term to scheduled
maturity described in the following tables, may vary significantly from those of
the Initial Financed Student Loans as of the Cutoff Date. In addition, the
distribution by weighted average interest rate applicable to the Financed
Student Loans on any date following the Cutoff Date may vary significantly from
that set forth in the following tables as a result of variations in the
effective rates of interest applicable to the Financed Student Loans. Moreover,
the information described below with respect to the original term to maturity
and remaining term of maturity of the Initial Financed Student Loans as of the
Cutoff Date may vary significantly from the actual term to maturity of any of
the Financed Student Loans as a result of the granting of deferral and
forbearance periods with respect thereto.
Set forth below in the following tables is a description of specified
characteristics of the Initial Financed Student Loans as of _________, ____ (the
"Cutoff Date"). The percentages set forth in the tables below may not always add
to 100% due to rounding.
COMPOSITION OF THE INITIAL FINANCED STUDENT LOANS
AS OF THE CUTOFF DATE
Aggregate Outstanding Principal Balance (1)................... $______________
Number of Billing Accounts.................................... ______
Average Outstanding Principal Balance per Billing Account..... $________
Number of Loans............................................... _______
Average Outstanding Principal Balance per Loan................ $________
Weighted Average Original Term to Maturity (2)................ ______ months
Weighted Average Remaining Term to Maturity (2)............... ______ months
Weighted Average Annual Interest Rate (3)..................... ____%
- -----------
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $_____________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
(2) Determined from the date of origination or the Cutoff Date, as the case may
be, to the stated maturity date of the applicable Initial Financed Student
Loans, assuming repayment commences promptly upon expiration of the typical
grace period following the expected graduation date and without giving
effect to any deferral or forbearance periods that may be granted in the
future. See "Federal Family Education Loan Program" in this prospectus
supplement and in the prospectus.
(3) Determined using the interest rates applicable to the Initial Financed
Student Loans as of the Cutoff Date. However, because some of the Initial
Financed Student Loans effectively bear interest generally at a variable
rate per annum to the borrower, there can be no assurance that the
foregoing percentage will remain applicable to the Initial Financed Student
Loans at any time after the Cutoff Date. See "Federal Family Education Loan
Program" in this prospectus supplement and in the prospectus.
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY LOAN TYPE AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF INITIAL
FINANCED STUDENT
NUMBER OF AGGREGATE OUTSTANDING LOANS BY OUSTANDING
LOAN TYPE LOANS PRINCIPAL BALANCE (1) PRINCIPAL BALANCE
- --------- --------- --------------------- -------------------
<S> <C> <C> <C>
Stafford Loans (2)................... $ %
Federal Consolidation Loans..........
PLUS Loans...........................
SLS Loans............................
---------- --------------- ----------
Total............................. $ %
========== =============== ==========
- ----------------
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $_____________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
(2) Includes Unsubsidized Stafford Loans having aggregate outstanding principal
balances as of the Cutoff Date of $______________.
</TABLE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY BORROWER INTEREST RATES AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF INITIAL
AGGREGATE FINANCED STUDENT
RANGE OF INTEREST NUMBER OF OUTSTANDING LOANS BY OUTSTANDING
RATES (1) LOANS PRINCIPAL BALANCE(2) PRINCIPAL BALANCE
- ------------------ --------- --------------------- ----------------------
<S> <C> <C> <C>
Less than 6.50%...................... $ %
6.50% to 7.49%.......................
7.50% to 7.99%.......................
8.00% to 8.49%.......................
8.50% to 8.99%.......................
9.00% to 9.49%.......................
9.50% and above......................
----------- -------------- ----------
Total....................... $ %
=========== ============== ==========
- ----------------
(1) Determined using the interest rates applicable to the Initial Financed
Student Loans as of the Cutoff Date. However, because some of the Initial
Financed Student Loans effectively bear interest at a variable rate per
annum to the borrower, there can be no assurance that the foregoing
information will remain applicable to the Initial Financed Student Loans at
any time after the Cutoff Date. See "Federal Family Education Loan Program"
in this prospectus supplement and in the prospectus.
(2) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $_____________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
</TABLE>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY OUTSTANDING PRINCIPAL BALANCE AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF INITIAL
FINANCED STUDENT
RANGE OF OUTSTANDING NUMBER OF AGGREGATE OUTSTANDING LOANS BY OUTSTANDING
PRINCIPAL BALANCE LOANS PRINCIPAL BALANCE (1) PRINCIPAL BALANCE
- --------------------- ---------- --------------------- ---------------------
<S> <C> <C> <C>
Less than $2,000....................... $ %
$ 2,000 to $ 3,999.....................
$ 4,000 to $ 5,999.....................
$ 6,000 to $ 7,999.....................
$ 8,000 to $ 9,999.....................
$10,000 to $11,999.....................
$12,000 to $13,999.....................
$14,000 to $15,999.....................
$16,000 to $17,999.....................
$18,000 to $19,999.....................
$20,000 to $21,999.....................
$22,000 to $23,999.....................
$24,000 to $25,999.....................
$26,000 to $27,999.....................
$28,000 and above ..................... _____
------------ ------------ ------------
Total......................... $ %
============ ============ ============
- --------------
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $_____________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
</TABLE>
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
NUMBER OF MONTHS REMAINING TO NUMBER OF AGGREGATE OUTSTANDING LOANS BY OUTSTANDING
SCHEDULED MATURITY (1) LOANS PRINCIPAL BALANCE (2) PRINCIPAL BALANCE
- -------------------------------- ----------- ---------------------- ---------------------
<S> <C> <C> <C>
Less than 24............................. $ %
24 to 35.................................
36 to 47.................................
48 to 59.................................
60 to 71.................................
72 to 83.................................
84 to 95.................................
96 to 107 ...............................
108 to 119...............................
120 to 131...............................
132 to 143...............................
144 to 155...............................
156 to 167...............................
168 to 179...............................
180 to 191...............................
192 and above............................
----------- ------------ ---------
Total........................... $ %
=========== ============ =========
- ----------------
(1) Determined from the Cutoff Date to the stated maturity date of the
applicable Initial Financed Student Loans, assuming repayment commences
promptly upon expiration of the typical grace period following the expected
graduation date and without giving effect to any deferral or forbearance
periods that may be granted in the future. See "Federal Family Education
Loan Program" in this prospectus supplement and in the prospectus.
(2) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $____________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION OF THE INITIAL FINANCED STUDENT LOANS
BY BORROWER PAYMENT STATUS AS OF THE CUTOFF DATE
PERCENT OF INITIAL
FINANCED STUDENT
NUMBER OF AGGREGATE OUTSTANDING LOANS BY OUTSTANDING
BORROWER PAYMENT STATUS(1) LOANS PRINCIPAL BALANCE (2) PRINCIPAL BALANCE
- ---------------------------- --------- ----------------------- ----------------------
<S> <C> <C> <C>
Deferral.............................. $ %
Forbearance...........................
Grace.................................
In-School.............................
Repayment.............................
---------- ------------- ------------
Total........................ $ %
=========== ============= ============
- ------------
(1) Refers to the status of the borrower of each Initial Financed Student Loan
as of the Cutoff Date: the borrower may still be attending school
("In-School"), may be in a grace period prior to repayment commencing
("Grace"), may be repaying the loan ("Repayment") or may have temporarily
ceased repaying the loan through a deferral ("Deferral") or a forbearance
("Forbearance") period. See "Federal Family Education Loan Program" in this
prospectus supplement and in the prospectus. For purposes of this table,
"In-School" excludes, and "Deferral" includes, all SLS or PLUS Loans of
borrowers still attending school.
(2) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $_____________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
</TABLE>
DISTRIBUTION OF THE INITIAL FINANCIAL STUDENT LOANS
BY LOCATION AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF INITIAL
AGGREGATE FINANCED STUDENT
NUMBER OF OUTSTANDING LOANS BY OUTSTANDING
LOCATION (1) LOANS PRINCIPAL BALANCE(2) PRINCIPAL BALANCE
- ----------------- ------------ -------------------- ---------------------
<S> <C> <C> <C>
Alabama............................... $ %
Alaska................................
Arizona ..............................
Arkansas..............................
California............................
Colorado..............................
Connecticut...........................
Delaware..............................
Florida...............................
Georgia...............................
Hawaii................................
Idaho.................................
Illinois..............................
Indiana...............................
Iowa..................................
Kansas................................
Kentucky..............................
Louisiana.............................
Maine.................................
Maryland..............................
Massachusetts.........................
Michigan..............................
Minnesota.............................
Mississippi...........................
Missouri..............................
Montana...............................
Nebraska..............................
Nevada................................
New Hampshire.........................
New Jersey............................
New Mexico............................
New York..............................
North Carolina........................
North Dakota..........................
Ohio..................................
Oklahoma..............................
Oregon................................
Pennsylvania..........................
Puerto Rico...........................
Rhode Island..........................
South Carolina........................
South Dakota..........................
Tennessee.............................
Texas.................................
Utah..................................
Vermont...............................
Virginia..............................
Washington............................
Washington DC.........................
West Virginia.........................
Wisconsin.............................
Wyoming...............................
Other.................................
------------- -------------- ------------
Total........................ $ %
============= ============== ============
- -----------
(1) Based on the permanent billing addresses of the borrowers of the Initial
Financed Student Loans shown on the Servicer's records as of the Cutoff
Date.
(2) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $_____________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
</TABLE>
DISTRIBUTION OF INITIAL FINANCED STUDENT LOANS
BY DATE OF DISBURSEMENT
<TABLE>
<CAPTION>
PERCENT OF INITIAL
FINANCED STUDENT
NUMBER OF AGGREGATE OUTSTANDING LOANS BY OUTSTANDING
BORROWER PAYMENT STATUS (1) LOANS PRINCIPAL BALANCE (2) PRINCIPAL BALANCE
- ----------------------------- --------- ---------------------- --------------------
<S> <C> <C> <C>
Pre-October 1, 1993.......................... $ %
On or After October 1, 1993 and
Prior to October 1, 1998...................
October 1, 1998 and thereafter...............
--------- ---------- ------------
Total............................... $ %
========= ========== ============
- ----------------
(1) Initial Financed Student Loans disbursed prior to October 1, 1993 are 100%
guaranteed by the Initial Guarantors and reinsured against default by the
Department up to a maximum of 100% of the Guarantee Payments. Initial
Financed Student Loans disbursed on or after October 1, 1993 and prior to
October 1, 1998 are 98% guaranteed by the Initial Guarantors and reinsured
against default by the Department up to a maximum of 98% of the Guarantee
Payments. Initial Financial Student Loans disbursed on or after October 1,
1998 are 98% guaranteed by the Initial Guarantors and reinsured against
default by the Department up to a maximum of 95% of the Guarantee Payments.
(2) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $_____________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION OF INITIAL FINANCED STUDENT LOANS
BY NUMBER OF DAYS OF DELINQUENCY AS OF THE CUTOFF DATE
PERCENT OF INITIAL
FINANCED STUDENT
NUMBER OF AGGREGATE OUTSTANDING LOANS BY OUSTANDING
DAYS DELINQUENT LOANS PRINCIPAL BALANCE (1) PRINCIPAL BALANCE
- ----------------- ---------- ---------------------- --------------------
<S> <C> <C> <C>
0 - 30................................ $ %
31 - 60...............................
61 - 90...............................
91 - 120..............................
121 and above.........................
--------- ------------ ------------
Total........................ $ %
========= ============ ============
- ----------------
(1) Includes net principal balances due from borrowers, plus accrued interest
thereon estimated to be $______________ as of the Cutoff Date to be
capitalized upon commencement of repayment.
</TABLE>
Each of the Financed Student Loans provides or will provide for the
amortization of the outstanding principal balance of the Financed Student Loan
over a series of regular payments. Each regular payment consists of an
installment of interest which is calculated on the basis of the outstanding
principal balance of the Financed Student Loan multiplied by the applicable
interest rate and further multiplied by the period elapsed (as a fraction of a
calendar year) since the preceding payment of interest was made. As payments are
received in respect of the Financed Student Loan, the amount received is applied
first to interest accrued to the date of payment and the balance is applied to
reduce the unpaid principal balance. Accordingly, if a borrower pays a regular
installment before its scheduled due date, the portion of the payment allocable
to interest for the period since the preceding payment was made will be less
than it would have been had the payment been made as scheduled, and the portion
of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if a borrower pays a monthly installment
after its scheduled due date, the portion of the payment allocable to interest
for the period since the preceding payment was made will be greater than it
would have been had the payment been made as scheduled, and the portion of the
payment applied to reduce the unpaid principal balance will be correspondingly
less. In either case, subject to any applicable Deferral Periods or Forbearance
Periods, the borrower pays a regular installment until the final scheduled
payment date, at which time the amount of the final installment is increased or
decreased as necessary to repay the then outstanding principal balance of the
Financed Student Loan.
GUARANTEE OF FINANCED STUDENT LOANS
By the Closing Date, the Eligible Lender Trustee will have entered
into a Guarantee Agreement with the Initial Guarantors pursuant to which United
Student Aid Funds, Inc., a Delaware non-profit corporation ("USA Funds") and
specified other Federal Guarantors (together, the "Initial Guarantors") have
agreed to serve as Guarantors for the Initial Financed Student Loans. As of the
Cutoff Date, _____% of the Initial Financed Student Loans are guaranteed by USA
Funds.
During the Revolving Period, the Trust may acquire Additional Student
Loans guaranteed by a Federal Guarantor other than the Initial Guarantors (each,
an "Additional Guarantor" and, together with the Initial Guarantors, the
"Guarantors") and enter into a Guarantee Agreement with the Eligible Lender
Trustee. In the aggregate no more than 20% of the Financed Student Loans (by
principal balance) may, following any addition, have guarantees from Additional
Guarantors and no more than 5% of the Financed Student Loans (by principal
balance) may, following any addition, have guarantees from any one Additional
Guarantor (unless and to the extent that either limitation is exceeded solely
though the origination on behalf of the Trust of Federal Consolidation Loans or
the purchase by the Trust of Serial Loans, in either case, that are made with
respect to Financed Student Loans guaranteed by an Additional Guarantor).
Pursuant to its Guarantee Agreement, each of the Guarantors guarantees
payment of 100% of the principal (including any interest capitalized from time
to time) and accrued interest for the Financed Student Loans as to which any one
of the following events has occurred:
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.
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
in each of the last five federal fiscal years:*
STAFFORD, SLS AND
PLUS LOANS
GUARANTEED BY
USA FUNDS
FEDERAL FISCAL YEAR (DOLLARS IN MILLIONS)
------------------- ---------------------
1995 $5,040
1996 5,376
1997 6,228
1998 6,196
1999 6,473
- -------------
* The information set forth in the table above has been obtained from USA
Funds, and is not guaranteed as to accuracy or completeness, and is not to
be construed as a representation, by the Seller or the underwriters.
RESERVE RATIO. USA Funds is and has been in compliance with all
provisions of the Act which require the Guarantor to maintain a reserve fund of
assets in an amount equal to or greater than a percentage of outstanding loans
guaranteed by the Guarantor.
RECOVERY RATES. USA Funds' recovery rate, which provides a measure of
the effectiveness of the collection efforts against defaulting borrowers after
the guarantee claims have been satisfied, is determined by dividing the amount
recovered from borrowers by the Guarantor by the aggregate amount of default
claims paid by the Guarantor during the applicable federal fiscal year with
respect to borrowers. The table below sets forth the recovery rates for USA
Funds as of the end of each of the last five federal fiscal years:*
RECOVERY RATE
FEDERAL FISCAL YEAR FOR USA FUNDS
------------------- -------------
1995 35.26%
1996 39.21
1997 40.89
1998 44.45
1999 47.54
- ------------
* The information set forth in the table above with respect to USA Funds has
been obtained from the Guarantor and is not guaranteed as to accuracy or
completeness, and is not to be construed as a representation, by the Seller
or the underwriters
CLAIMS RATE. USA Funds' claims rate measures the amount of federal
reinsurance claims paid by the United States Department of Education (the
"Department") to the Guarantor during a fiscal year as a percentage of the
original principal amount of guaranteed loans in repayment at the end of the
prior federal fiscal year. No assurance can be made that the Guarantor will
receive reimbursement for reinsurance claims at the maximum reinsurance rate
permitted under the Higher Education Act. The reimbursement is subject to
reduction where the annual default claims rate of a Federal Guarantor for a
federal fiscal year exceeds 5%. See "Federal Family Education Loan
Program--Federal Insurance and Reinsurance of Federal Guarantors" in the
prospectus and "Federal Family Education Loan Program" in this prospectus
supplement. The following table sets forth the claims rate of USA Funds
(excluding Arizona, Hawaii and some Pacific islands in the case of federal
fiscal years 1995 and 1996) for each of the last five federal fiscal years*:
CLAIMS RATE OF
FEDERAL FISCAL YEAR USA FUNDS
------------------- ---------
1995 4.69%
1996 4.65
1997 4.65
1998 3.96
1999 2.62
- ----------
* The information set forth in the table above with respect to USA Funds has
been obtained from the Guarantor and is not guaranteed as to accuracy or
completeness, and is not to be construed as a representation, by the Seller
or the underwriters.
Unless otherwise indicated, all the above information relating to USA
Funds has been obtained from the Guarantor, is not guaranteed as to accuracy or
completeness by the Seller or the underwriters and is not to be construed as a
representation by the Seller or the underwriters. The guarantee volumes, reserve
ratios, recovery rates and claim rates of Guarantors (other than USA Funds) may
vary from those of USA Funds. No assurances can be given as to what volumes,
ratios or rates will be or as to whether USA Funds or the other Guarantors will
be able to meet their insurance obligations. The DOE Data Books contain
information concerning all Federal Guarantors and therefore may be consulted for
additional information concerning USA Funds, the other Initial Guarantors and
some Federal Guarantors that could become Additional Guarantors.
<PAGE>
DESCRIPTION OF THE NOTES
The Class A-1 Floating Rate Asset Backed Senior Notes (the "Class A-1
Notes"), the Class A-2 Floating Rate Asset Backed Senior Notes (the "Class A-2
Notes" and together with the Class A-1 Notes, the "Senior Notes") and the
Floating Rate Asset Backed Subordinate Notes (the "Subordinate Notes" and
together with the Senior Notes, the "Notes") will be issued pursuant to the
terms of the Indenture to be dated as of ________, ____, (as amended and
supplemented from time to time, the "Indenture"), between the Trust and
_______________, a _______________ (the "Indenture Trustee"), substantially in
the form filed as an exhibit to the Registration Statement. The following
summary describes some terms of the Notes, the Indenture and the Trust Agreement
pursuant to which the Trust will be formed. The summary does not purport to be
complete and is qualified in its entirety by reference to the provisions of the
Notes, the Indenture and the Trust Agreement. The following summary supplements,
and to the extent inconsistent therewith, replaces the description of the
general terms and provisions of the Notes, the Indenture and the Trust Agreement
set forth in the prospectus, to which description reference is hereby made.
PAYMENTS OF INTEREST
Interest on the Notes will be payable quarterly on or about each
January 28, April 28, July 28 and October 28 of each year (or, if the 28th day
is not a business day, on the next succeeding business day), commencing
_________, ____ (each, a "Quarterly Payment Date") to holders of record of the
Notes on the related Record Date. "Record Date" means, with respect to any
Quarterly Payment Date, the 27th day of the month in which the Quarterly Payment
Date occurs (whether or not the date is a business day). Interest on the
outstanding principal amount of each class of Notes will accrue from and
including the Closing Date (in the case of the first Quarterly Payment Date), or
from and including the most recent Quarterly Payment Date on which interest
thereon has been paid, to but excluding the current Quarterly Payment Date
(each, a "Quarterly Interest Period"). Interest accrued as of any Quarterly
Payment Date but not paid on the Quarterly Payment Date will be due on the next
Quarterly Payment Date, together with an amount equal to interest on this amount
at the applicable rate per annum described below. Interest payments on the Notes
will generally be funded from the Available Funds on deposit in the Collection
Account and from amounts on deposit in the Reserve Account remaining after the
distribution of the Servicing Fee and all overdue Servicing Fees, the
Administration Fee and all overdue Administration Fees for the Quarterly Payment
Date. See "Description of the Transfer and Servicing Agreement--Distributions"
and "--Credit Enhancement" in this prospectus supplement.
The "Class A-1 Note Rate", the "Class A-2 Note Rate" and the
"Subordinate Note Rate" shall be equal to Three-Month LIBOR for the related
LIBOR Reset Period (determined as described in this prospectus supplement) plus
____%, ____% and ____%, respectively; provided that if the Subordinate Note
Trigger is triggered on any date, the Subordinate Note Rate shall equal zero [at
any time thereafter][until the Subordinate Note Trigger is no longer triggered].
Interest on the Notes will be calculated on the basis of the actual
number of days elapsed in each Quarterly Interest Period divided by 360. In the
case of the initial Quarterly Interest Period, interest will accrue for the
period from the Closing Date to but excluding _________, _____ based on
Three-Month LIBOR as determined on the initial LIBOR Determination Date and for
the period from ________, ____ to but excluding ________, ____ based on
Three-Month LIBOR as determined on the LIBOR Determination Date in ________,
____. See "--Calculation of Three-Month LIBOR."
The "Parity Date" is the first Quarterly Payment Date on which the
aggregate principal amount of the Notes, after giving effect to all
distributions on the date, is no longer in excess of the Pool Balance as of the
last day of the related Collection Period.
The "Pool Balance" at any time equals the aggregate principal balances
of the Financed Student Loans at the end of the preceding Collection Period
(including accrued interest thereon through the end of the Collection Period to
the extent the interest will be capitalized upon commencement of repayment),
after giving effect to the following, without duplication:
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"),
o all Purchase Amounts received by the Trust for the Collection
Period from the Seller or the Servicer,
o all Additional Fundings 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 activated on any date if the
aggregate principal amount of the Notes, after giving effect to all
distributions on this date, is less than __% of the Pool Balance as of the last
day of the related Collection Period.
DISTRIBUTIONS OF PRINCIPAL
No principal payments will be made on the Notes during the Revolving
Period. Commencing with the end of the Revolving Period, principal payments will
be made to the Noteholders, sequentially, in the order of priority set forth in
the second succeeding paragraph on each Quarterly Payment Date in an amount
generally equal to the Principal Distribution Amount for the Quarterly Payment
Date, until the aggregate principal amount of the Notes is reduced to zero.
Payments of the Principal Distribution Amount will generally be derived from the
Available Funds remaining after the distribution of
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
________, ____ Quarterly Payment Date, any Reserve Account Excess for the
Quarterly Payment Date will, after payment to the Seller of any unpaid Purchase
Premium Amounts for any Serial Loans purchased by the Trust prior to the end of
the related Collection Period, be applied to pay the principal of the Notes in
the order of priority set forth below. Amounts, if any, available to be
distributed as set forth in the preceding sentence will not be part of the
Principal Distribution Amount for the Quarterly Payment Date and the Noteholders
will have no entitlement thereto except to the extent of any excess in the
Reserve Account of which there can be no assurance. See "Description of the
Transfer and Servicing Agreements--Credit Enhancement--Reserve Account" in this
prospectus supplement.
On each Quarterly Payment Date on which principal payments are made to
the holders (the "Senior Noteholders") of the Senior Notes (whether in respect
of the Senior Noteholders' Principal Distribution Amount, amounts on deposit in
the Reserve Account constituting Reserve Account Excess (as described in the
preceding paragraph) or amounts in respect of a mandatory redemption, as
described below, or otherwise), all payments of principal will be applied to pay
principal to the holders (the "Class A-1 Noteholders") of the Class A-1 Notes
until the aggregate principal amount of the Class A-1 Notes has been reduced to
zero, and then to the holders (the "Class A-2 Noteholders") of the Class A-2
Notes until the aggregate principal amount of the Class A-2 Notes has been
reduced to zero. In addition, on each Quarterly Payment Date on which principal
payments are made on the Notes (whether in respect of the Principal Distribution
Amount, amounts on deposit in the Reserve Account constituting Reserve Account
Excess (as described in the preceding paragraph) or amounts in respect of a
mandatory redemption, as described below, or otherwise), all payments of
principal will be applied to pay principal to the Senior Noteholders until the
aggregate principal amount of the Senior Notes has been paid in full, and then
to pay principal to the holders (the "Subordinate Noteholders" and, together
with the Senior Noteholders, the "Noteholders") of the Subordinate Notes until
the Subordinate Notes have been paid in full.
The aggregate outstanding principal amount, if any, of the Class A-1
Notes will be payable in full on the ________, ____ Quarterly Payment Date (the
"Class A-1 Note Final Maturity Date"), of the Class A-2 Notes will be payable in
full on the ________, ____ Quarterly Payment Due Date (the "Class A-2 Note Final
Maturity Date") and of the Subordinate Notes on the ________, ____ Quarterly
Payment Date (the "Subordinate Note Final Maturity Date"). However, the actual
maturity of any class of the Senior Notes or of the Subordinate Notes could
occur other than on these dates as a result of a variety of factors including
those described under "Risk Factors--The Return on Your Investment Will Change
Over Time" in this prospectus supplement.
MANDATORY REDEMPTION
If any amount remains on deposit in the Collateral Reinvestment
Account on the last day of the Revolving Period after giving effect to all
Additional Fundings on or prior to this date, the entire amount remaining on
deposit in the Collateral Reinvestment Account will be used on the Quarterly
Payment Date on or immediately following this date first to pay the Swap
Counterparties any prior unpaid Net Trust Swap Payment Carryover Shortfalls and
then to redeem the Notes in the order of priority set forth in the third
preceding paragraph. The aggregate principal amount of Notes to be redeemed will
be an amount equal to the amount then on deposit in the Collateral Reinvestment
Account after giving effect to the payment to the Swap Counterparties of any
prior Net Trust Swap Payment Carryover Shortfalls on the last day of the
Revolving Period.
CALCULATION OF THREE-MONTH LIBOR
Pursuant to the Administration Agreement, the Administrator will
determine Three-Month LIBOR for purposes of calculating the Class A-1 Note Rate,
the Class A-2 Note Rate and the Subordinate Note Rate for each Quarterly
Interest Period (x) on the second business day prior to the commencement of the
LIBOR Reset Period within the Quarterly Interest Period (or, in the case of the
initial LIBOR Reset Period, on the second business day prior to the Closing
Date) and (y) with respect to the initial Quarterly Interest Period, as
determined pursuant to clause (x) for the period from the Closing Date to but
excluding ________, ____ and as determined on the second business day prior to
________, ____ for the period from ________, ____ to but excluding ________,
____ (each, a "LIBOR Determination Date"). For purposes of calculating
Three-Month LIBOR, a business day is any day on which banks in The City of New
York and the City of London are open for the transaction of international
business. Interest due for any Quarterly Interest Period will be determined
based on the actual number of days in the Quarterly Interest Period over a
360-day year.
"Three-Month LIBOR" means, with respect to any LIBOR Reset Period, the
London interbank offered rate for deposits in U.S. dollars having a maturity of
three months commencing on the related LIBOR Determination Date (the "Index
Maturity") which appears on Telerate Page 3750 as of 11:00 a.m. London time, on
the LIBOR Determination Date. If the rate does not appear on Telerate Page 3750,
the rate for that day will be determined on the basis of the rates at which
deposits in U.S. dollars, having the Index Maturity and in a principal amount of
not less than U.S. $1,000,000, are offered at approximately 11:00 a.m. London
time, on the LIBOR Determination Date, to prime banks in the London interbank
market by the Reference Banks. The Administrator will request the principal
London office of each Reference Bank to provide a quotation of its rate. If at
least two quotations are provided, the rate for that day will be the arithmetic
mean of the quotations. If fewer than two quotations are provided, the rate for
that day will be the arithmetic mean of the rates quoted by major banks in The
City of New York, selected by the Administrator, at approximately 11:00 a.m. New
York time, on the LIBOR Determination Date, for loans in U.S. dollars to leading
European banks having the Index Maturity and in a principal amount equal to an
amount of not less than U.S. $1,000,000; provided, however, that if the banks
selected as aforesaid are not quoting as mentioned in this sentence, Three-Month
LIBOR in effect for the applicable LIBOR Reset Period will be Three-Month LIBOR
in effect for the previous LIBOR Reset Period.
"LIBOR Reset Period" means the three-month period commencing on the
28th day (or, if any 28th day is not a business day, on the next succeeding
business day) of each January, April, July and October and ending on the day
immediately preceding the following LIBOR Reset Period; provided, however, that
the initial LIBOR Reset Period will commence on the Closing Date.
"Telerate Page 3750" means the display page so designated on the Dow
Jones Telerate Service (or another page as may replace that page on that service
for the purpose of displaying comparable rates or prices).
"Reference Banks" means four major banks in the London interbank
market selected by the Administrator.
BOOK-ENTRY REGISTRATION
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the UCC and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participating organizations ("Participants") and to
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in their accounts, thereby
eliminating the need for physical movement of certificates. Participants include
the underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations and may include some other organizations. Indirect access
to the DTC system also is available to others, including banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly ("Indirect Participants").
Senior Noteholders that are not Participants or Indirect Participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Senior Notes may do so only through Participants and Indirect
Participants. In addition, Senior Noteholders will receive all distributions of
principal of and interest on the Senior Notes from the Indenture Trustee through
DTC and its Participants. Under a book-entry format, Senior Noteholders will
receive payments after the related Quarterly Payment Date because, while
payments are required to be forwarded to Cede, as nominee for DTC, on each
Quarterly Payment Date, DTC will forward the payments to its Participants which
thereafter will be required to forward them to Indirect Participants or Senior
Noteholders. It is anticipated that the only "Senior Noteholder" will be Cede,
as nominee for DTC and that Senior Noteholders will not be recognized by the
Indenture Trustee as "Noteholders", as the terms are used in the Indenture.
Senior Noteholders will be permitted to exercise the rights of Senior
Noteholders indirectly through DTC and its Participants (which in turn will
exercise their rights through DTC).
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Senior Notes and is
required to receive and transmit distributions of principal of and interest on
the Senior Notes. Participants and Indirect Participants with which Senior
Noteholders have accounts with respect to the Senior Notes similarly are
required to make book-entry transfers and receive and transmit the payments on
behalf of their respective Senior Noteholders.
Because DTC can only act on behalf of Participants, which in turn act
on behalf of Indirect Participants and specified banks, the ability of a Senior
Noteholder to pledge Senior Notes to persons or entities that do not participate
in the DTC system, or otherwise to take actions in respect of the Senior Notes,
may be limited due to the lack of a physical certificate for the Senior Notes.
Cedelbank, societe anonyme ("CEDEL") is incorporated under the laws of
Luxembourg as a professional depository. CEDEL holds securities for its
participating organizations ("CEDEL Participants") and facilitates the clearance
and settlement of securities transactions between CEDEL Participants through
electronic book-entry changes in accounts of CEDEL Participants, thereby
eliminating the need for physical movement of certificates. Transactions may be
settled in CEDEL in any of 28 currencies, including United States dollars. CEDEL
provides to its CEDEL Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. CEDEL interfaces with domestic
markets in several countries. As a professional depository, CEDEL is subject to
regulation by the Luxembourg Monetary Institute. CEDEL Participants are
recognized financial institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and specified other organizations. Indirect access to CEDEL is also available to
others, including, banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a CEDEL Participant, either
directly or indirectly.
The Euroclear System ("Euroclear") was created in 1968 to hold
securities for participants of Euroclear ("Euroclear Participants") and to clear
and settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may be settled in any of 27
currencies, including United States dollars. Euroclear includes various other
services, including securities lending and borrowing and interfaces with
domestic markets in several countries generally similar to the arrangements for
cross-market transfers with DTC described above. Euroclear is operated by the
Brussels, Belgium office of Morgan Guaranty Trust Company of New York (the
"Euroclear Operator", under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Cooperative"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. It is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear, withdrawals of securities
and cash from the Euroclear, and receipts of payments with respect to securities
in Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants and has no record of or relationship with persons holding
through Euroclear Participants.
Distributions with respect to Senior Notes held through CEDEL or
Euroclear will be credited to the cash accounts of CEDEL Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depositary (as defined below). These
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. CEDEL or the Euroclear Operator, as the
case may be, will take any other action permitted to be taken by a Senior
Noteholder under the Indenture on behalf of a CEDEL Participant or Euroclear
Participant only in accordance with the relevant rules and procedures and
subject to the relevant Depositary's ability to effect these actions on its
behalf through DTC.
Senior Noteholders may hold their Senior Notes through DTC (in the
United States) or CEDEL or Euroclear (in Europe) if they are participants of
these systems, or indirectly through organizations which are participants in
these systems.
The Senior Notes will initially be registered in the name of Cede &
Co., the nominee of DTC. CEDEL and Euroclear will hold omnibus positions on
behalf of their participants through customers' securities accounts in CEDEL's
and Euroclear's names on the books of their respective depositaries which in
turn will hold positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank, N.A. ("Citibank") will act as depositary
for CEDEL and Morgan Guaranty Trust Company of New York ("Morgan") will act as
depositary for Euroclear (in these capacities, individually, the "Depositary"
and, collectively, the "Depositaries").
Transfers between Participants will occur in accordance with DTC
Rules. Transfers between CEDEL Participants and Euroclear Participants will
occur in accordance with their respective rules and operating procedures.
Because of time-zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. These credits or any transactions in these
securities settled during this processing will be reported to the relevant
Euroclear or CEDEL Participants on the business day following the DTC settlement
date. Cash received in CEDEL or Euroclear as a result of sales of securities by
or through a CEDEL Participant or Euroclear Participant to a Participant will be
received with value on the DTC settlement date but will be available in the
relevant CEDEL or Euroclear cash account only as of the business day following
settlement in DTC. For information with respect to tax documentation procedures
for the Senior Notes, see "Federal Income Tax Consequences--Trusts for Which a
Partnership Election Is Made--Tax Consequences to Holders of the Notes--FOREIGN
HOLDERS" in the prospectus.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC Rules on behalf of the relevant European international
clearing system by its Depositary; however, these cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in the system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions to the Depositaries.
DTC has advised the Administrator that it will take any action
permitted to be taken by a Senior Noteholder under the Indenture, only at the
direction of one or more Participants to whose accounts with DTC the Senior
Notes are credited.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of interests in the Senior Notes
among participants of DTC, CEDEL and Euroclear, they are under no obligation to
perform or continue to perform these procedures and these procedures may be
discontinued at any time.
DTC management is aware that some computer applications, systems, and
the like for processing dates ("Systems") that are dependent upon calendar
dates, including dates before, on, and after January 1, 2000, may encounter
"Year 2000 problems." DTC has informed its Participants and other members of the
financial community (the "Industry") that it has developed and is implementing a
program so that its Systems, as the same relate to the timely payment of
distributions (including principal and income payments) to securityholders,
book-entry deliveries, and settlement of trades within DTC ("DTC Services"),
continue to function appropriately. This program includes a technical assessment
and a remediation plan, each of which is complete. Additionally, DTC's plan
includes a testing phase, which is expected to be completed within appropriate
time frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including but not limited to issuers and their
agents, as well as third party vendors on whom DTC licenses software and
hardware, and third party vendors on whom DTC relies for information or the
provision of services, including telecommunication and electrical utility
service providers, among others. DTC has informed the Industry that it is
contacting (and will continue to contact) third party vendors from whom DTC
acquires services to: (1) impress upon them the importance of the services being
Year 2000 compliant; and (2) determine the extent of their efforts for Year 2000
remediation (and, as appropriate, testing) of their services. In addition, DTC
is in the process of developing contingency plans as it deems appropriate.
According to DTC, the information set forth in the preceding two
paragraphs about DTC has been provided to the Industry by DTC for informational
purposes only and is not intended to serve as a representation, warranty or
contract modification of any kind.
NONE OF THE TRUST, THE SELLER, THE SERVICER, THE COMPANY, THE
ADMINISTRATOR, THE ELIGIBLE LENDER TRUSTEE, THE INDENTURE TRUSTEE OR THE
UNDERWRITERS WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO ANY PARTICIPANTS,
CEDEL PARTICIPANTS OR EUROCLEAR PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS
NOMINEES WITH RESPECT TO
o THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC, CEDEL OR EUROCLEAR
OR ANY PARTICIPANT,
o THE PAYMENT BY DTC, CEDEL OR EUROCLEAR OR ANY PARTICIPANT OF ANY
AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE PRINCIPAL
AMOUNT OR INTEREST ON THE SENIOR NOTES,
o THE DELIVERY BY ANY PARTICIPANT, CEDEL PARTICIPANT OR EUROCLEAR
PARTICIPANT OF ANY NOTICE TO ANY BENEFICIAL OWNER WHICH IS
REQUIRED OR PERMITTED UNDER THE TERMS OF THE INDENTURE OR THE
TRUST AGREEMENT TO BE GIVEN TO SENIOR NOTEHOLDERS OR
o ANY OTHER ACTION TAKEN BY DTC AS THE SENIOR NOTEHOLDER.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following is a summary of some terms of the Loan Sale Agreement to
be dated as of ________,____, (as amended and supplemented from time to time,
the "Loan Sale Agreement"), among the Seller, the Trust and the Eligible Lender
Trustee, pursuant to which the Eligible Lender Trustee on behalf of the Trust
will purchase the Financed Student Loans; the Servicing Agreement to be dated as
of ________, ____ (as amended and supplemented from time to time, the "Servicing
Agreement") among the Trust, USA Group Loan Services, Inc. (the "Servicer"), the
Seller and the Eligible Lender Trustee pursuant to which the Servicer will
service the Financed Student Loans; the Administration Agreement to be dated as
of ________, ____, (as amended and supplemented from time to time, the
"Administration Agreement") among the Trust, the Indenture Trustee and SMS, as
administrator (the "Administrator") pursuant to which the Administrator will
undertake some other administrative duties and functions with respect to the
Trust and the Financed Student Loans; and the Trust Agreement pursuant to which
the Trust will be created (collectively, the "Transfer and Servicing
Agreements"). Forms of the Transfer and Servicing Agreements have been filed as
exhibits to the Registration Statement. A copy of the Transfer and Servicing
Agreements will be filed with the Securities and Exchange Commission (the
"Commission") following the issuance of the Notes. This summary does not purport
to be complete and is subject to, and qualified in its entirety by reference to,
all the provisions of the Transfer and Servicing Agreements. The following
summary supplements, and to the extent inconsistent therewith replaces, the
description of the general terms and provisions of the Transfer and Servicing
Agreements set forth in the prospectus, to which description reference is hereby
made.
SALE OF FINANCED STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
Information with respect to the sale of the Initial Financed Student
Loans from the Seller to the Eligible Lender Trustee on behalf of the Trust on
the Closing Date pursuant to the Loan Sale Agreement and the representations and
warranties made by the Seller in connection therewith and in connection with the
purchase of Student Loans by the Trust pursuant to Additional Fundings is set
forth under "Description of the Transfer and Servicing Agreements" in the
prospectus.
REVOLVING PERIOD AND ADDITIONAL FUNDINGS
During the period (the "Revolving Period") from the Closing Date until
the first to occur of (1) an Early Amortization Event as described below or (2)
the last day of the Collection Period preceding the ________, ____ Quarterly
Payment Date, the Eligible Lender Trustee on behalf of the Trust will be
obligated from time to time, subject to specified conditions described in this
prospectus supplement, to acquire additional Student Loans or increase the
outstanding principal balance of the Financed Student Loans ("Additional
Fundings"). The Eligible Lender Trustee on behalf of the Trust will be obligated
from time to time, subject to specified conditions described in this prospectus
supplement, to purchase from the Seller, and the Seller, subject to the
availability of Student Loans and to the availability of funds therefor in the
Collateral Reinvestment Account, will be obligated to tender to the Trust,
Student Loans which
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").
New Loans will be made or acquired by Bank One, National Association ("BONA") or
another eligible lender on behalf of the Seller at the discretion and in
accordance with usual practices of the Seller. Each purchase of a New Loan will
be made by the Eligible Lender Trustee on behalf of the Trust pursuant to a
transfer agreement (each, a "Transfer Agreement") among the Seller, the Trust
and the Eligible Lender Trustee. During the Revolving Period, each purchase of a
New Loan will be funded by means of a transfer from the Collateral Reinvestment
Account of an amount equal to the sum of
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 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 ____% 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 ___% 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 _____% of the Pool Balance;
o the Excess Spread, with respect to each of any two successive
Quarterly Payment Dates commencing with the Quarterly Payment
Date in ________, ____ is less than ____%; or
o the arithmetic average of the Delinquency Percentage as of the
end of each of two successive Collection Periods commencing with
the Quarterly Payment Date in ________, ____ exceeds _____%.
"Excess Spread" means, with respect to any Quarterly Payment Date, the
percentage equivalent of a fraction the numerator of which is the product of (a)
four and (b) the difference between (x) the sum of (1) the Expected Interest
Collections for the Quarterly Payment Date and (2) the Trust Swap Receipt
Amount, if any, for the Quarterly Payment Date and (y) the sum of
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.
"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
Repayment Loans.
In addition, following the Closing Date and both during and subsequent
to the Revolving Period, the Eligible Lender Trustee on behalf of the Trust will
be obligated from time to time, subject to the conditions described below, to
purchase from the Seller Student Loans which
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 BONA or another eligible lender on
behalf of the Seller at the discretion and in accordance with usual business
practices of the Seller.
During the Revolving Period, each purchase of a Serial Loan will be
funded by means of a transfer from the Collateral Reinvestment Account of an
amount equal to the Loan Purchase Amount of the Serial Loan. Following the end
of the Revolving Period, the Purchased Collateral Balance for purchases of
Serial Loans will be funded by amounts representing distributions of principal
on the outstanding Financed Student Loans which otherwise would have been part
of the Available Funds as described under "--Distributions" below, and Purchase
Premium Amounts for the purchases will be funded on the next succeeding
Quarterly Payment Date from any Reserve Account Excess for the Quarterly Payment
Date as described in this prospectus supplement under "Description of the
Transfer and Servicing Agreements--Credit Enhancement--RESERVE ACCOUNT".
Alternatively, at the Seller's option, following the end of the Revolving Period
the Eligible Lender Trustee will be obligated, in lieu of purchasing Serial
Loans as described above, to exchange with the Seller existing Financed Student
Loans owned by the Trust for Serial Loans owned by the Seller; PROVIDED,
HOWEVER, that each Financed Student Loan so exchanged (an "Exchanged Financed
Student Loan") meets specified criteria including that (1) the Exchanged
Financed Student Loan was originated under the same loan program and is
guaranteed by the same Guarantor as the Financed Student Loan and entitles the
holder to receive interest based on the same interest rate index as the Serial
Loan to be exchanged into the Trust (an "Exchanged Serial Loan") and (2) the
Exchanged Financed Student Loan will not, at any level of the interest rate
index, have an interest rate that is greater than that of the Exchanged Serial
Loan. In addition, if the outstanding principal balance of an Exchanged Financed
Student Loan is less than that of the related Exchanged Serial Loan, an
additional amount equal to the difference will be remitted to the Seller from
amounts which would otherwise have been part of the Available Funds as described
under "--Distributions" below. No Purchase Premium Amounts will be payable for
an Exchanged Serial Loan.
A purchase of Serial Loans or acquisition of Exchanged Serial Loans
will be prohibited at any time after (1) an Event of Default occurs under the
Indenture, a Servicer Default occurs under the Servicing Agreement or an
Administrator Default occurs under the Administration Agreement or (2) specified
events of insolvency occur with respect to the Seller.
Any purchase of New Loans or Serial Loans or exchange of Exchanged
Financed Student Loans for Exchanged Serial Loans will be made by the Trust on a
date designated by the Seller (each, a "Transfer Date") pursuant to one or more
Transfer Agreements. On the Transfer Date, the Seller will assign without
recourse (except as otherwise set forth in the Transfer and Servicing
Agreements) to the Eligible Lender Trustee on behalf of the Trust the Seller's
entire interest in the New Loans, Serial Loans or Exchanged Serial Loans being
transferred on the Transfer Date, in exchange for the related Loan Purchase
Amount or the Exchanged Financed Student Loans being exchanged therefor (with
the payment of any Purchase Premium Amount for Serial Loans acquired by the
Trust after the Revolving Period being deferred to the next succeeding Quarterly
Payment Date on which amounts in excess of the Specified Reserve Account Balance
are available in the Reserve Account as described above).
In addition, following the Closing Date and prior to the end of the
Revolving Period, in the event that a borrower under a Financed Student Loan who
is also a borrower under one or more Student Loans (whether or not all the loans
are part of the Trust) elects to consolidate the loans, the Eligible Lender
Trustee on behalf of the Trust will seek to originate a Federal Consolidation
Loan pursuant to the Federal Consolidation Loan Program described in the
prospectus under "Federal Family Education Loan Program--Federal Consolidation
Loan Program" and under "Federal Family Education Loan Program" in this
prospectus supplement. The origination will be funded by means of a transfer
from the Collateral Reinvestment Account of the amount required to repay in full
any Student Loans that are being discharged in the consolidation process, which
amount will be paid by the Trust to the holder or holders of the Student Loans
to prepay the loans. No assurance can be given that the Eligible Lender Trustee,
rather than another lender, will be the lender which makes the Federal
Consolidation Loan. In the event that another lender makes the Federal
Consolidation Loan, any Financed Student Loan which is being consolidated by the
Federal Consolidation Loan will be prepaid. The Eligible Lender Trustee will not
be permitted to originate Federal Consolidation Loans (including the addition of
any Add-on Consolidation Loans) on behalf of the Trust during the Revolving
Period in an aggregate principal amount in excess of [$35,000,000];
additionally, no Federal Consolidation Loan may be originated by the Trust
having a scheduled maturity date after [October 28, 2030] if at the time of the
origination the aggregate principal balances of all Federal Consolidation Loans
held by the Trust that have a scheduled maturity date after [October 28, 2030]
exceed or, after giving effect to the origination, would exceed [$15,000,000];
provided, however, that the Eligible Lender Trustee will be permitted to fund
Add-on Consolidation Loans in excess of the amounts if required to do so by the
Act. After the Revolving Period the Eligible Lender Trustee on behalf of the
Trust will cease to originate Federal Consolidation Loans and any Federal
Consolidation Loan made with respect to a Financed Student Loan will be made by
another lender, thereby resulting in a prepayment of the Financed Student Loan;
PROVIDED, HOWEVER, that for a maximum period of 210 days following the end of
the Revolving Period, the Eligible Lender Trustee may be required to increase
the principal balance of any Federal Consolidation Loan by the amount of any
related Add-on Consolidation Loan, as described below.
As described under "Federal Family Education Loan Program--Federal
Consolidation Loan Program" in the prospectus and "Federal Family Education Loan
Program" in this prospectus supplement, borrowers may consolidate additional
Student Loans ("Add-on Consolidation Loans") with an existing Federal
Consolidation Loan within 180 days from the date that the existing Federal
Consolidation Loan was made. As a result of the addition of any Add-on
Consolidation Loans, the related Federal Consolidation Loan may, in some cases,
have a different interest rate and a different final payment date. Any Add-on
Consolidation Loan added during the Revolving Period to a Federal Consolidation
Loan in the Trust will be funded by means of a transfer from the Collateral
Reinvestment Account of the amount required to repay in full any Student Loans
that are being discharged in the consolidation process, which amount will be
paid by the Eligible Lender Trustee on behalf of the Trust to the holder or
holders of the Student Loans to prepay the loans. For a maximum period of 210
days following the end of the Revolving Period (30 days being attributed to the
processing of any Add-on Consolidation Loans), the amounts will be funded by
amounts representing distributions of principal on the outstanding Financed
Student Loans which would otherwise have been part of the Available Funds as
described under "--Distributions" below.
As described under "Federal Family Education Loan Program" in this
prospectus supplement and in the prospectus, during specified qualifying
periods, interest on specified Financed Student Loans is not required to be paid
currently, but instead is added to the outstanding principal balance of the loan
at the end of the qualifying period. In order to minimize the possibility that
the failure to receive current interest payments on the loans during the
qualifying periods will result in a shortfall of the amount required to be
distributed on the Notes, amounts on deposit in the Collateral Reinvestment
Account will be applied during the Revolving Period to make interest payments to
the Noteholders in lieu of current collections of interest on the loans.
Following the end of the Revolving Period, the Collateral Reinvestment Account
will cease to be available as a source to fund the interest payments to the
Noteholders, and thereafter the payments will be funded through the application
of amounts which would otherwise have been distributable in respect of the
Principal Distribution Amount for the related Quarterly Payment Date as
described under "--Distributions" below.
ACCOUNTS
In addition to the collection account (the "Collection Account")
referred to in the prospectus under "Description of the Transfer and Servicing
Agreements--Accounts", the Administrator will establish and maintain a
collateral reinvestment account (the "Collateral Reinvestment Account") and a
reserve account (the "Reserve Account") in the name of the Indenture Trustee on
behalf of the Noteholders.
SERVICING COMPENSATION; ADMINISTRATION FEE
The Servicer will be entitled to receive from the Trust monthly, on
each Monthly Payment Date or Quarterly Payment Date, a monthly servicing fee
(the "Servicing Fee") in an amount equal to the lesser of (a) one-twelfth of
____% or a larger percentage approved by the rating agencies rating the Notes,
not to exceed ____% (or of ____% if the Monthly Payment Date or Quarterly
Payment Date is on or after the ________, ____ Quarterly Payment Date) of the
aggregate principal balances of the Financed Student Loans as of the last day of
the preceding calendar month and (b) the sum of
1. one-twelfth of the In-School Percentage of the principal balance
of each billing account relating to a Financed Student Loan as of
the last day of the preceding calendar month which was an
In-School Student Loan (as defined in this prospectus supplement)
on the last day of the preceding calendar month or, if the
average principal balance of billing accounts relating to
In-School Student Loans as of the last day of the preceding
calendar month was $2,500 or less, $1.50 per billing account,
2. one-twelfth of the GRDF Percentage of the principal balance as of
the last day of the preceding calendar month of each billing
account relating to a Financed Student Loan which was a Grace,
Repayment, Deferral or Forbearance Student Loan (each, as defined
in this prospectus supplement) as of the last day of the
preceding calendar month or, if the average principal balance of
the billing accounts as of the last day of the preceding calendar
month was $3,000 or less, $3.00 per billing account,
3. a fee of $1.00 for each notification sent by the Servicer during
the preceding calendar month on behalf of the Trust to a borrower
providing information to the borrower with respect to Federal
Consolidation Loan programs,
4. a one-time fee of $75.00 for each Federal Consolidation Loan
originated by the Eligible Lender Trustee on behalf of the Trust
during the preceding calendar month,
5. a fee of $25.00 for each Financed Student Loan for which, during
the preceding calendar month, claim documentation was completed
and provided to the Guarantor or for which the Servicer performed
bankruptcy or ineligible billing account processing (that, in the
case of ineligible billing account processing, resulted in a
demand letter being sent to the borrower), in each case as
required by the claims-processing requirements of the related
Guarantor,
6. a fee of $0.05 per Financed Student Loan for storing and
warehousing the applicable loan documentation for each loan
during the preceding calendar month,
7. a one-time fee of $0.40 for each billing account transferred by
the Seller to the Trust during the preceding calendar month,
8. a fee equal to one-twelfth of the product of (A) the aggregate
principal balances of the Financed Student Loans outstanding as
of the last day of the preceding calendar month and (B) 0.05%,
which fee will be payable so long as specified servicing
regulations of the Department remain in effect, and
9. a fee of $70.00 per hour for system development requests made by
the Eligible Lender Trustee on behalf of the Trust and provided
by the Servicer during the preceding calendar month.
"Monthly Payment Date" means the twenty-eighth day of each month (or
if any twenty-eighth day is not a business day, the next succeeding business
day), commencing ________, ____.
For purposes of making the determinations set forth in clauses (1) and
(2) of the second preceding paragraph, the "In-School Percentage" and "GRDF
Percentage" shall each be determined based on the average principal balance of
the billing accounts relating to the In-School Student Loans and the billing
accounts relating to the Grace, Repayment, Deferral and Forbearance Student
Loans, respectively, as of the last day of the preceding calendar month, as
follows:
<TABLE>
<CAPTION>
AVERAGE PRINCIPAL IN-SCHOOL AVERAGE PRINCIPAL GRDF
BALANCE PERCENTAGE BALANCE PERCENTAGE
- -------------------- ----------- ----------------- -----------
<S> <C> <C> <C>
$2,501 - $3,000................... 0.625% $ 3,001 - $ 3,400............... 1.100%
$3,001 - $3,500................... 0.525% $ 3,401 - $ 3,900............... 0.950%
$3,501 - $4,000................... 0.450% $ 3,901 - $ 4,400............... 0.830%
$4,001 - $4,750................... 0.375% $ 4,401 - $ 4,800............... 0.740%
$5,501 - $6,250................... 0.260% $ 5,401 - $ 6,000............... 0.575%
$6,251 and above.................. 0.230% $ 6,001 - $ 6,600............... 0.510%
$ 6,601 - $ 7,200............... 0.475%
$ 7,201 - $10,000................ 0.450%
$10,001 - $13,000................. 0.350%
$13,001 and above................. 0.300%
</TABLE>
The Servicing Fee (together with any portion of the Servicing Fee that
remains unpaid from prior Monthly Payment Dates) will be payable on each Monthly
Payment Date and will be paid solely out of the Monthly Available Funds in the
case of each Monthly Payment Date that is not a Quarterly Payment Date (and out
of the Available Funds in the case of each Quarterly Payment Date) and amounts
on deposit in the Reserve Account on the Monthly Payment Date. To the extent
that, for any Monthly Payment Date, the Servicing Fee is the amount calculated
as described in clause (a) of the first paragraph under "--Servicing
Compensation; Administration Fee," then an amount (the "Servicing Fee
Shortfall") equal to the excess of the amount described in clause (b) of the
first paragraph under "--Servicing Compensation; Administration Fee," over the
amount described in clause (a) of the first paragraph under "--Servicing
Compensation; Administration Fee," shall be payable on the next succeeding
Monthly Payment Date (or if the Monthly Payment Date is also a Quarterly Payment
Date, on the Quarterly Payment Date) from any remaining amounts on deposit in
the Reserve Account that are in excess of the Specified Reserve Account Balance,
pursuant to the priorities described under "--Credit Enhancement--RESERVE
ACCOUNT" below. The Servicer will be obligated to perform its servicing
obligations whether or not it receives any amounts in respect of Servicing Fee
Shortfalls.
As compensation for the performance of the Administrator's obligations
under the Administration Agreement and as reimbursement for its expenses related
thereto, the Administrator will be entitled to receive monthly in arrears, on
each Monthly Payment Date that is not a Quarterly Payment Date and on each
Quarterly Payment Date, a monthly administration fee (the "Administration Fee")
in an amount equal to one-twelfth of the product of (1) ___% and (2) the Pool
Balance as of the close of business on the last day of the calendar month
immediately preceding the related Monthly Payment Date or Quarterly Payment
Date.
DISTRIBUTIONS
DEPOSITS TO THE COLLECTION ACCOUNT. On or about the third business day
prior to each Monthly Payment Date (the "Determination Date"), the Administrator
will provide the Indenture Trustee with specified information with respect to
the preceding Monthly Collection Period or, in the case of a Monthly Payment
Date that is also a Quarterly Payment Date, the preceding Collection Period,
including the amount of the Monthly Available Funds or the Available Funds, as
the case may be, received with respect to the Financed Student Loans and the
aggregate Purchase Amounts relating to the Financed Student Loans to be
repurchased by the Seller or to be purchased by the Servicer.
"Monthly Collection Period" means, with respect to any Monthly Payment
Date that is not a Quarterly Payment Date, the calendar month immediately
preceding the month of the Monthly Payment Date.
"Collection Period" means each period of three calendar months from
and including the date next following the end of the preceding Collection Period
(or with respect to the first Collection Period, the period beginning on the
Cutoff Date and ending on ________, ____).
For purposes of this prospectus supplement, "Monthly Available Funds"
means, with respect to each Monthly Payment Date that is not a Quarterly Payment
Date, the sum of the following amounts with respect to the related Monthly
Collection Period:
1 all collections received by the Servicer on the Financed Student
Loans during the Collection Period (net, for the first Collection
Period, of interest accrued prior to the Cutoff Date and not to
be capitalized) and remitted to the Indenture Trustee (including
any Guarantee Payments received with respect to the Financed
Student Loans);
2. Interest Subsidy Payments and Special Allowance Payments received
by the Eligible Lender Trustee during the Monthly Collection
Period with respect to the Financed Student Loans;
3. all proceeds of the liquidation of defaulted Financed Student
Loans ("Liquidated Student Loans"), which became Liquidated
Student Loans during the Monthly Collection Period in accordance
with the Servicer's customary servicing procedures, net of
expenses incurred by the Servicer in connection with the
liquidation and any amounts required by law to be remitted to the
borrowers on the Liquidated Student Loans (the net proceeds,
"Liquidation Proceeds"), and all recoveries in respect of
Liquidated Student Loans which were written off in prior Monthly
Collection Periods and have been received by the Servicer during
the Monthly Collection Period and remitted to the Indenture
Trustee;
4. that portion of amounts released from the Collateral Reinvestment
Account with respect to Additional Fundings relating to interest
costs on the Financed Student Loans which are or will be
capitalized;
5. the aggregate amount received by the Indenture Trustee on the
Financed Student Loans repurchased by the Seller or purchased by
the Servicer under an obligation which arose during the related
Monthly Collection Period;
6. Investment Earnings for the Monthly Payment Date; and
7. with respect to each Monthly Payment Date other than a Quarterly
Payment Date and other than a Monthly Payment Date immediately
succeeding a Quarterly Payment Date,
the Monthly Available Funds remaining on deposit in the Collection Account from
the Monthly Collection Period relating to the preceding Monthly Payment Date
after giving effect to application of the Monthly Available Funds on the
preceding Monthly Payment Date; PROVIDED, HOWEVER, that if with respect to any
Monthly Payment Date there would not be sufficient funds, after application of
the Monthly Available Funds (as defined above) and amounts available in the
Reserve Account, to pay any of the items specified in clauses (1) and (2),
respectively, under the second paragraph of "--Distributions--DISTRIBUTIONS FROM
THE COLLECTION ACCOUNT" below, then the Monthly Available Funds for the Monthly
Payment Date will include, in addition to the Monthly Available Funds (as
defined above), amounts on deposit in the Collection Account on the
Determination Date relating to the Monthly Payment Date which would have
constituted part of the Monthly Available Funds for the Monthly Payment Date
succeeding the Monthly Payment Date up to the amount necessary to pay the items,
and the Monthly Available Funds for the succeeding Monthly Payment Date will be
adjusted accordingly; and PROVIDED, FURTHER, that the Monthly Available Funds
will exclude
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.
"Available Funds" means, with respect to any Quarterly Payment Date
and the related Collection Period, the sum of the amounts specified in clauses
(1) though (6) of the definition of Monthly Available Funds for each of the
three Monthly Collection Periods included in the Collection Period plus any
Trust Swap Receipt Amount received by the Trust with respect to the Quarterly
Payment Date; PROVIDED, HOWEVER, that if with respect to any Quarterly Payment
Date there would not be sufficient funds, after application of the Available
Funds (as defined above) and amounts available in the Reserve Account, to pay
any of the items specified in clauses (1) through (6), respectively, under the
third paragraph of "--DISTRIBUTIONS FROM THE COLLECTION ACCOUNT" below, then the
Available Funds for the Quarterly Payment Date will include, in addition to the
Available Funds (as defined above), amounts on deposit in the Collection Account
on the Determination Date relating to the Quarterly Payment Date which would
have constituted part of the Available Funds for the Quarterly Payment Date
succeeding the Quarterly Payment Date up to the amount necessary to pay these
items, and the Available Funds for the succeeding Quarterly Payment Date will be
adjusted accordingly; and provided, further, that the Available Funds will
exclude (A) all payments and proceeds (including Liquidation Proceeds) of any
Financed Student Loans the Purchase Amounts of which were included in the
Available Funds for a prior Collection Period; (B) except as expressly included
in clause (4) of the definition of Monthly Available Funds, amounts released
from the Collateral Reinvestment Account; (C) any Monthly Rebate Fees paid
during the related Collection Period by or on behalf of the Trust; (D) any
collections in respect of principal on the Financed Student Loans applied by the
Eligible Lender Trustee on behalf of the Trust prior to the end of the Revolving
Period as described under "--DISTRIBUTIONS FROM THE COLLECTION ACCOUNT" below
and, after the end of the Revolving Period, to fund the addition of any Add-on
Consolidation Loans, to purchase Serial Loans or to fund the acquisition of
Exchanged Serial Loans during the related Collection Period; and (E) the
Servicing Fee, all overdue Servicing Fees, the Administration Fee and all
overdue Administration Fees paid on each Monthly Payment Date that is not a
Quarterly Payment Date during the related Collection Period.
DISTRIBUTIONS FROM THE COLLECTION ACCOUNT. From time to time during
the Revolving Period, the Administrator may instruct the Indenture Trustee to
withdraw all collections in respect of principal on the Financed Student Loans
then on deposit in the Collection Account and deposit these amounts in the
Collateral Reinvestment Account. In addition, from time to time during the
Revolving Period, the Administrator may instruct the Indenture Trustee to
withdraw funds on deposit in the Collateral Reinvestment Account to the extent
the funds are not needed to make Additional Fundings and redeposit the amounts
in the Collection Account.
On each Monthly Payment Date that is not a Quarterly Payment Date, the
Administrator will instruct the Indenture Trustee to make the following
distributions to the extent of the Monthly Available Funds in the Collection
Account for the Monthly Payment Date, in the following order of priority:
(1) to the Servicer, the Servicing Fee for the Monthly Payment Date
and all prior unpaid Servicing Fees (but not any Servicing Fee
Shortfall or prior unpaid Servicing Fee Shortfalls); and
(2) to the Administrator, the Administration Fee for the Monthly
Payment Date and all prior unpaid Administration Fees.
On each Quarterly Payment Date, the Administrator will instruct the
Indenture Trustee to make the following deposits and distributions to the extent
of the Available Funds for the Quarterly Payment Date in the Collection Account,
in the following order of priority:
(1) to the Servicer, the Servicing Fee for the Quarterly Payment Date
and all prior unpaid Servicing Fees (but not any Servicing Fee
Shortfall or prior unpaid Servicing Fee Shortfalls);
(2) to the Administrator, the Administration Fee for the Quarterly
Payment Date and all prior unpaid Administration Fees;
(3) to the Class A-1 Noteholders, the Class A-1 Noteholders' Interest
Distribution Amount, to the Class A-2 Noteholders, the Class A-2
Noteholders' Interest Distribution Amount, and to the applicable
Swap Counterparty, the related Trust Swap Payment Amount, if any,
for the Quarterly Payment Date, PRO RATA, based on the ratio of
each amount to the total of the amounts;
(4) to the Subordinate Noteholders, the Subordinate Noteholders'
Interest Distribution Amount for the Quarterly Payment Date;
(5) if the Revolving Period has terminated, to the Senior
Noteholders, the Senior Noteholders' Principal Distribution
Amount for the Quarterly Payment Date (the amount to be allocated
among the Senior Noteholders as described in this prospectus
supplement under "Description of the Notes--Distributions of
Principal");
(6) after the Senior Notes have been paid in full, to the Subordinate
Noteholders, the Subordinate Noteholders' Principal Distribution
Amount for the Quarterly Payment Date; and
(7) to the Reserve Account, any remaining amounts after application
of clauses (1) through (6) above.
For purposes of this prospectus supplement, the following terms have
the following meanings:
The "Class A-1 Noteholders' Interest Carryover Shortfall" means, with
respect to any Quarterly Payment Date, the excess of (1) the Class A-1
Noteholders' Interest Distribution Amount on the preceding Quarterly Payment
Date over (2) the amount of interest actually distributed to the Class A-1
Noteholders on the preceding Quarterly Payment Date, plus interest on the amount
of the excess, to the extent permitted by law, at the interest rate borne by the
Class A-1 Notes from the preceding Quarterly Payment Date to the current
Quarterly Payment Date.
The "Class A-1 Noteholders' Interest Distribution Amount" means, with
respect to any Quarterly Payment Date, the sum of (1) the amount of interest
accrued at the Class A-1 Note Rate for the related Quarterly Interest Period on
the aggregate principal amount of the Class A-1 Notes outstanding on the
immediately preceding Quarterly Payment Date (after giving effect to all
principal distributions to the Class A-1 Noteholders on the immediately
preceding Quarterly Payment Date) or, in the case of the first Quarterly Payment
Date, on the Closing Date and (2) the Class A-1 Noteholders' Interest Carryover
Shortfall for the Quarterly Payment Date.
The "Class A-2 Noteholders' Interest Carryover Shortfall" means, with
respect to any Quarterly Payment Date, the excess of (1) the Class A-2
Noteholders' Interest Distribution Amount on the preceding Quarterly Payment
Date over (2) the amount of interest actually distributed to the Class A-2
Noteholders on the preceding Quarterly Payment Date, plus interest on the amount
of the excess, to the extent permitted by law, at the interest rate borne by the
Class A-2 Notes from the preceding Quarterly Payment Date to the current
Quarterly Payment Date.
The "Class A-2 Noteholders' Interest Distribution Amount" means, with
respect to any Quarterly Payment Date, the sum of (1) the amount of interest
accrued at the Class A-2 Note Rate for the related Quarterly Interest Period on
the aggregate principal amount of the Class A-2 Notes outstanding on the
immediately preceding Quarterly Payment Date (after giving effect to all
principal distributions to the Class A-2 Noteholders on the immediately
preceding Quarterly Payment Date) or, in the case of the first Quarterly Payment
Date, on the Closing Date and (2) the Class A-2 Noteholders' Interest Carryover
Shortfall for the Quarterly Payment Date.
The "Net Trust Swap Payment Carryover Shortfall" means, with respect
to any Quarterly Payment Date and any Interest Rate Swap with respect to which
there shall be an amount owed by the Trust to the related Swap Counterparty
under the related Interest Rate Swap, the excess of (1) the related Trust Swap
Payment Amount on the preceding Quarterly Payment Date over (2) the amount
actually paid to the related Swap Counterparty out of Available Funds on the
preceding Quarterly Payment Date, plus interest on the excess from the preceding
Quarterly Payment Date to the current Quarterly Payment Date at the rate of
Three Month LIBOR for the related Quarterly Interest Period.
The "Net Trust Swap Receipt Carryover Shortfall" means, with respect
to any Quarterly Payment Date and any Interest Rate Swap with respect to which
there shall be an amount owed by the related Swap Counterparty to the Trust
under the related Interest Rate Swap, the excess of (1) the related Trust Swap
Receipt Amount on the preceding Quarterly Payment Date over (2) the amount
actually paid by the related Swap Counterparty to the Trust on the preceding
Quarterly Payment Date, plus interest on the excess from the preceding Quarterly
Payment Date to the current Quarterly Payment Date at the rate of Three Month
LIBOR for the related Quarterly Interest Period.
The "Noteholders' Interest Distribution Amount" means, with respect to
any Quarterly Payment Date, the sum of the Class A-1 Noteholders' Interest
Distribution Amount, the Class A-2 Noteholders' Interest Distribution Amount and
the Subordinate Noteholders' Interest Distribution Amount for the Quarterly
Payment Date.
"Principal Distribution Adjustment" means, with respect to any
Quarterly Payment Date if the Revolving Period has terminated, the amount of the
Available Funds on the Quarterly Payment Date to be used to make additional
principal distributions to the Senior Noteholders (and, after the Senior Notes
have been paid in full, to the Subordinate Noteholders) to account for (1) the
amount of any insignificant balance remaining outstanding as of the Quarterly
Payment Date on a Financed Student Loan after receipt of a final payment from a
borrower or a Guarantor, when the insignificant balances are waived in the
ordinary course of business by the Servicer at the direction of the
Administrator in accordance with the Servicing Agreement, or (2) the amount of
principal collections erroneously treated as interest collections including,
without limitation, by reason of the failure by a borrower to capitalize
interest that had been expected to be capitalized; provided, however, that the
Principal Distribution Adjustment for any Quarterly Payment Date shall not
exceed the lesser of (x) $100,000 and (y) the amount of any Reserve Account
Excess remaining after giving effect to all distributions to be made therefrom
on the Quarterly Payment Date other than distributions to the Company out of the
excess.
"Principal Distribution Amount" means, with respect to any Quarterly
Payment Date (if the Revolving Period has terminated prior to the end of the
related Collection Period with respect to the Quarterly Payment Date), the sum
of the following amounts with respect to the related Collection Period:
1. that portion of all collections received by the Servicer on the
Financed Student Loans and remitted to the Indenture Trustee that
is allocable to principal (including the portion of any Guarantee
Payments received that is allocable to principal) of the Financed
Student Loans less the sum of
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 deposited in the Collateral Reinvestment Account.
"Realized Losses" means the excess of the aggregate principal balances
of the Liquidated Student Loans over the related Liquidation Proceeds to the
extent allocable to principal.
The "Senior Noteholders' Distribution Amount" means, with respect to
any Quarterly Payment Date, the sum of the Class A-1 Noteholders' Interest
Distribution Amount, the Class A-2 Noteholders' Interest Distribution Amount and
the Senior Noteholders' Principal Distribution Amount for the Quarterly Payment
Date.
The "Senior Noteholders' Interest Distribution Amount" means, with
respect to any Quarterly Payment Date, the sum of (1) the Class A-1 Noteholders'
Interest Distribution Amount, and (2) the Class A-2 Noteholders' Interest
Distribution Amount, for the Quarterly Payment Date.
The "Senior Noteholders' Principal Carryover Shortfall" means, as of
the close of any Quarterly Payment Date, the excess of (1) the Senior
Noteholders' Principal Distribution Amount on the Quarterly Payment Date over
(2) the amount of principal actually distributed to the Senior Noteholders on
the Quarterly Payment Date.
The "Senior Noteholders' Principal Distribution Amount" means, with
respect to any Quarterly Payment Date (if the Revolving Period has terminated
prior to the end of the related Collection Period with respect to the Quarterly
Payments Date), the Principal Distribution Amount for the Quarterly Payment Date
plus the Senior Noteholders' Principal Carryover Shortfall as of the close of
the preceding Quarterly Payment Date; provided, however, that the Senior
Noteholders' Principal Distribution Amount will not exceed the aggregate
principal amount of the Senior Notes outstanding on the preceding Quarterly
Payment Date. In addition, (1) on the Class A-1 Note Final Maturity Date, the
principal required to be distributed to the Class A-1 Noteholders will include
the amount required to reduce the outstanding aggregate principal amount of the
Class A-1 Notes to zero and (2) on the Class A-2 Note Final Maturity Date, the
principal required to be distributed to the Class A-2 Noteholders will include
the amount required to reduce the outstanding aggregate principal amount of the
Class A-2 Notes to zero.
The "Subordinate Noteholders' Distribution Amount" means, with respect
to any Quarterly Payment Date, the Subordinate Noteholders' Interest
Distribution Amount for the Quarterly Payment Date plus, with respect to any
Quarterly Payment Date on and after which the Senior Notes have been paid in
full, the Subordinate Noteholders' Principal Distribution Amount for the
Quarterly Payment Date.
The "Subordinate Noteholders' Interest Carryover Shortfall" means,
with respect to any Quarterly Payment Date, the excess of (1) the Subordinate
Noteholders' Interest Distribution Amount on the preceding Quarterly Payment
Date over (2) the amount of interest actually distributed to the Subordinate
Noteholders on the preceding Quarterly Payment Date, plus interest on the amount
of the excess, to the extent permitted by law, at the rate borne by the
Subordinate Notes from the preceding Quarterly Payment Date to the current
Quarterly Payment Date.
The "Subordinate Noteholders' Interest Distribution Amount" means,
with respect to any Quarterly Payment Date, the sum of (1) the amount of
interest accrued at the Subordinate Note Rate for the related Quarterly Interest
Period on the aggregate principal amount of the Subordinate Notes outstanding on
the immediately preceding Quarterly Payment Date (after giving effect to all
principal distributions to the Subordinate Noteholders on the Quarterly Payment
Date) or, in the case of the first Quarterly Payment Date, on the Closing Date
and (2) the Subordinate Noteholders' Interest Carryover Shortfall for the
Quarterly Payment Date.
The "Subordinate Noteholders' Principal Carryover Shortfall" means, as
of the close of any Quarterly Payment Date on or after which the Senior Notes
have been paid in full, the excess of (1) the Subordinate Noteholders' Principal
Distribution Amount on the Quarterly Payment Date over (2) the amount of
principal actually distributed to the Subordinate Noteholders on the Quarterly
Payment Date.
The "Subordinate Noteholders' Principal Distribution Amount" means,
with respect to each Quarterly Payment Date on and after which the aggregate
principal amount of the Senior Notes has been paid in full, the sum of (a) the
Principal Distribution Amount for the Quarterly Payment Date (or, in the case of
the Quarterly Payment Date on which the aggregate principal amount of the Senior
Notes is paid in full, any remaining Principal Distribution Amount not otherwise
distributed to Senior Noteholders on the Quarterly Payment Date) and (b) the
Subordinate Noteholders' Principal Carryover Shortfall as of the close of the
preceding Quarterly Payment Date; provided, however, that the Subordinate
Noteholders' Principal Distribution Amount will in no event exceed the aggregate
principal amount of the Subordinate Notes outstanding on the preceding Quarterly
Payment Date. In addition, on the Subordinate Note Final Maturity Date, the
principal required to be distributed to the Subordinate Noteholders will include
the amount required to reduce the outstanding principal amount of the
Subordinate Notes to zero.
The "Trust Swap Payment Amount" means, with respect to any Quarterly
Payment Date and any Interest Rate Swap, the sum of (1) if the related Interest
Rate Swap is still in effect, the related Net Trust Swap Payment for the
Quarterly Payment Date and (2) the related Net Trust Swap Payment Carryover
Shortfall for the Quarterly Payment Date.
The "Trust Swap Receipt Amount" means, with respect to any Quarterly
Payment Date and any Interest Rate Swap, the sum of (1) if the related Interest
Rate Swap is still in effect, the related Net Trust Swap Receipt for the
Quarterly Payment Date and (2) the related Net Trust Swap Receipt Carryover
Shortfall for the Quarterly Payment Date.
CREDIT ENHANCEMENT
RESERVE ACCOUNT. Pursuant to the Administration Agreement and the Loan
Sale Agreement, the Reserve Account will be created with an initial deposit by
the Seller on the Closing Date of cash or Eligible Investments in an amount
equal to the Reserve Account Initial Deposit. The Reserve Account will be
augmented on each Quarterly Payment Date by the deposit in the Reserve Fund of
the amount of the Available Funds remaining after payment of the Servicing Fee
and all overdue Servicing Fees, the Administration Fee and all overdue
Administration Fees, the Senior Noteholders' Interest Distribution Amount and
the Trust Swap Payment Amount, if any, the Subordinate Noteholders' Interest
Distribution Amount and, if the Revolving Period has terminated, the Senior
Noteholders' Principal Distribution Amount and the Subordinate Noteholders'
Principal Distribution Amount, all for the Quarterly Payment Date. See
"--Distributions" above. As described below, subject to some limitations,
amounts on deposit in the Reserve Account will be released to the Company to the
extent that the amount on deposit in the Reserve Account exceeds the Specified
Reserve Account Balance.
"Specified Reserve Account Balance" with respect to any Quarterly
Payment Date generally will be the greater of:
(a) ____% of the aggregate principal amount of the Notes outstanding
on the Quarterly Payment Date after taking into account the effect of
distributions on the Quarterly Payment Date, or
(b) $_______;
provided, however, that the Specified Reserve Account Balance shall in no event
exceed the aggregate principal amount of the Notes outstanding on the Quarterly
Payment Date.
If the amount on deposit in the Reserve Account on any Quarterly
Payment Date (after giving effect to all distributions required to be made from
the Available Funds on the Quarterly Payment Date) is greater than the Specified
Reserve Account Balance for the Quarterly Payment Date, the Administrator will
instruct the Indenture Trustee to apply the amount of the excess (the "Reserve
Account Excess") (a) during the Revolving Period, for deposit to the Collateral
Reinvestment Account; provided, however, that if this date is on or after the
Parity Date, to the extent that the funds represent payments (other than
principal payments) with respect to the Financed Student Loans, the funds shall
be applied in the order of priority set forth in clauses (b)(3) through (6)
below, and (b) at and after the termination of the Revolving Period, to the
following (in the priority indicated):
1. to the Seller for any unpaid Purchase Premium Amounts for any
Serial Loans purchased by the Trust prior to the end of the
related Collection Period;
2. if the Quarterly Payment Date is on or prior to the Parity Date,
to the payment of the unpaid principal amount of the Senior Notes
(to be allocated between the Class A-1 Noteholders and the Class
A-2 Noteholders as described in this prospectus supplement under
"Description of the Notes--Distributions of Principal") or, if
the Senior Notes have been paid in full, of the Subordinate
Notes, until the aggregate principal amount of the Notes is equal
to the Pool Balance as of the close of business on the last day
of the related Collection Period;
3. if the Quarterly Payment Date is after the ____ _____ Quarterly
Payment Date, to the payment of the unpaid principal amount of
the Senior Notes (to be allocated between the Class A-1
Noteholders and the Class A-2 Noteholders as described in this
prospectus supplement under "Description of the
Notes--Distributions of Principal") or, if the Senior Notes have
been paid in full, of the Subordinate Notes;
4. to the Servicer, the Servicing Fee Shortfall and all prior unpaid
Servicing Fee Shortfalls, if any; and
5. to the Company, any excess remaining after application of clauses
(1) through (4) above,
and, upon the payment to the Company or an affiliate, the Noteholders will not
have any rights in, or claims to, the amounts.
Subject to the limitation described in the preceding paragraph,
amounts held from time to time in the Reserve Account will continue to be held
for the benefit of the Trust. Funds will be withdrawn from the Reserve Account
(a) on each Monthly Payment Date that is not a Quarterly Payment Date, to the
extent that the Monthly Available Funds on the Monthly Payment Date is
insufficient to pay: (1) the Servicing Fee and all overdue Servicing Fees and
(2) the Administration Fee and all overdue Administration Fees, and (b) on any
Quarterly Payment Date to the extent that the amount of the Available Funds on
the Quarterly Payment Date is insufficient to pay any of the items specified in
clauses (1) through (7), respectively, of the third paragraph under
"--Distributions--DISTRIBUTIONS FROM THE COLLECTION ACCOUNT" above on the
Quarterly Payment Date. The funds will be paid from the Reserve Account to the
persons and in the order of priority specified for distribution from the
Collection Account on the Quarterly Payment Date. As a result of the
subordination of the Subordinate Notes to the Senior Notes described elsewhere
in this prospectus supplement, any amounts that the Subordinate Noteholders
would otherwise receive from the Reserve Account in respect of the Subordinate
Noteholders' Interest Distribution Amount on any Quarterly Payment Date will be
paid to the Senior Noteholders until the Senior Noteholders' Interest
Distribution Amount for the Quarterly Payment Date has been paid in full. In
addition, as a result of the subordination, Subordinate Noteholders will not
receive any amounts from the Reserve Account in respect of the Subordinate
Noteholders' Principal Distribution Amount until the Senior Notes have been paid
in full. See "--SUBORDINATION" below.
The Reserve Account is intended to enhance the likelihood of timely
receipt by the Senior Noteholders and the Subordinate Noteholders of the full
amount of principal and interest due them and to decrease the likelihood that
the Senior Noteholders or the Subordinate Noteholders will experience losses. In
specified circumstances, however, the Reserve Account could be depleted. If the
amount required to be withdrawn from the Reserve Account to cover shortfalls in
the amount of the Available Funds (or the Monthly Available Funds) exceeds the
amount of cash in the Reserve Account, the Senior Noteholders or the Subordinate
Noteholders could incur losses or a temporary shortfall in the amount of
principal and interest distributed to the Senior Noteholders or the Subordinate
Noteholders, which result could, in turn, increase the average life of the
Senior Notes or the Subordinate Notes.
SUBORDINATION. While the Class A-1 Noteholders and the Class A-2
Noteholders will have equal priority to the payment of interest, on any
Quarterly Payment Date on which principal is due to be paid on the Senior Notes,
and the Class A-2 Noteholders will receive no payments of principal until the
Class A-1 Noteholders have received payments of principal in an amount
sufficient to reduce the aggregate principal amount of the Class A-1 Notes to
zero; provided, however, that from and after any acceleration of the Notes
following an Event of Default (as defined in the prospectus), principal will be
allocated pro rata between the Class A-1 Notes and the Class A-2 Notes, based on
the ratio of the aggregate principal amount of each class of Notes to the
aggregate principal amount of the Senior Notes, until the aggregate principal
amount of the Senior Notes has been reduced to zero. In addition, the rights of
the Subordinate Noteholders to receive payments of interest on any Quarterly
Payment Date out of the Available Funds or the Reserve Account are subordinated
to the rights of the Senior Noteholders to receive payments of interest on the
Quarterly Payment Date, and the rights of the Subordinate Noteholders to receive
payments of principal out of the Available Funds or the Reserve Account on any
Quarterly Payment Date are subordinated to the rights of the Senior Noteholders
to receive payments of interest and principal on the Quarterly Payment Date. The
Subordinate Noteholders will not be entitled to any payments of principal out of
the Available Funds or the Reserve Account until the Senior Notes are paid in
full.
INTEREST RATE SWAP
PAYMENTS UNDER THE SWAP AGREEMENT. On the Closing Date, the Trust will
enter into an interest rate swap agreement (the "Initial Interest Rate Swap")
with _________________________ (the "Initial Swap Counterparty"). The Initial
Interest Rate Swap will terminate on the earliest to occur of the ________, ____
Quarterly Payment Date (the "Scheduled Initial Swap Termination Date"), the date
on which the Notes have been paid in full and the date on which the Initial
Interest Rate Swap is terminated in accordance with its terms pursuant to an
early termination (the "Initial Swap Termination Date").
The Administrator may cause the Trust to enter into additional
interest rate swap agreements (the "Subsequent Interest Rate Swaps" and,
together with the Initial Interest Rate Swap, the "Interest Rate Swaps") with
counterparties rated at least __ by at least [2] nationally recognized rating
agencies (the "Subsequent Swap Counterparties") on terms substantially the same
as the Initial Interest Rate Swap.
Each Interest Rate Swap will be documented according to a 1992 ISDA
Master Agreement (Multicurrency-Cross Border), together with a Schedule and a
Confirmation (the "Swap Agreement") modified to reflect the terms of the Notes,
the Indenture and the applicable Interest Rate Swap.
In accordance with the terms of the Interest Rate Swaps, the
applicable Swap Counterparty will pay to the Trust, on each Quarterly Payment
Date with respect to which the related Interest Rate Swap is still in effect, an
amount equal to the product of
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 (a) the Initial Interest Rate Swap and any Quarterly Payment
Date will be the lesser of (1) the outstanding principal balance of the Notes
immediately preceding the Quarterly Payment Date and (2) the amount listed on
Exhibit A hereto for the Quarterly Payment Date and (b) any Subsequent Interest
Rate Swap and any Quarterly Payment Date will be agreed to by the Administrator
and the related Subsequent Swap Counterparty but in no event will the Scheduled
Notional Swap Amount for a Subsequent Interest Rate Swap, when added to the
Scheduled Notional Swap Amounts of the other Interest Rate Swaps be amount
greater than the outstanding principal balance of the Notes immediately
preceding the Quarterly Payment Date. The Seller expects that the Scheduled
Notional Swap Amount for the Initial Interest Rate Swap and each Quarterly
Payment Date prior to the Initial Swap Termination Date will be equal to
approximately ___% of the outstanding principal amount of the Notes immediately
preceding the Quarterly Payment Date. However, following the Closing Date, USA
Group Secondary Market Services, Inc. may agree with the Initial Swap
Counterparty to cause the Scheduled Notional Swap Amount for the initial
Interest Rate Swap to equal the outstanding principal balance of the Notes.
In exchange for the payment, the Trust will pay to the applicable Swap
Counterparty, on each Quarterly Payment Date with respect to which the related
Interest Rate Swap is still in effect, an amount equal to the product of
o the T-Bill Rate (determined as described below) for the related
Quarterly Interest Period plus at least ____% but not more than
____%,
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 will be subject to a
Lock-In Period of six business days.
"Lock-In Period" means the period of days preceding any Quarterly
Payment Date during which the T-Bill Rate in effect on the first day of the
period will remain in effect until the end of the Quarterly Interest Period
related to the Quarterly Payment Date.
MODIFICATION AND AMENDMENT OF THE SWAP AGREEMENT AND TRANSFER AND
SERVICING AGREEMENTS. The Trust Agreement and the Indenture will contain
provisions permitting the Eligible Lender Trustee, with the consent of the
Indenture Trustee, to enter into any amendment to a Swap Agreement requested by
the applicable Swap Counterparty to cure any ambiguity in, or correct or
supplement any provision of, the related Swap Agreement, so long as the Eligible
Lender Trustee determines, and the Indenture Trustee agrees in writing, that the
amendment will not adversely affect the interests of the Noteholders. The
written consent of the applicable Swap Counterparty will be required before any
amendment is made to the Indenture or the Transfer and Servicing Agreements.
CONDITIONS PRECEDENT. The respective obligations of the applicable
Swap Counterparty and the Trust to pay specified amounts due under the related
Swap Agreement will be subject to the following conditions precedent: (1) no
Swap Default (as defined below) or event that with the giving of notice or lapse
of time or both would become a Swap Default shall have occurred and be
continuing with respect to the related Interest Rate Swap and (2) no Termination
Event (as defined below) has occurred or been effectively designated with
respect to the related Interest Rate Swap; provided, however, that the
applicable Swap Counterparty's obligation to pay these amounts will not be
subject to these conditions unless principal of the Notes has been accelerated
following an Event of Default under the Indenture or an early termination under
the related Swap Agreement has occurred or been designated.
DEFAULTS UNDER THE SWAP. "Events of Default" under each Swap Agreement
(each a "Swap Default") are limited to
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, 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 1992
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 1992 Master Agreement.
TERMINATION EVENTS. "Termination Events" under each Swap Agreement
consist of the following standard events under the 1992 Master Agreement:
"Illegality" (which generally relates to changes in law causing it to become
unlawful for either party to perform its obligations under the applicable
Interest Rate Swap) and "Tax Event" (which generally relates to either party to
the applicable Interest Rate Swap receiving a payment under the applicable
Interest Rate Swap from which an amount has been deducted or withheld for or on
account of taxes), as described in Sections 5(b)(i) and 5(b)(ii) of the 1992
Master Agreement.
EARLY TERMINATION OF THE SWAP. Upon the occurrence of any Swap Default
under a Swap Agreement, the non-defaulting party will have the right to
designate an Early Termination Date (as defined in the related Swap Agreement)
upon the occurrence of the Swap Default. The Trust may not designate an Early
Termination Date without the consent of the Administrator. With respect to
Termination Events, an Early Termination Date may be designated by one of the
parties (as specified in the related Swap Agreement) and will occur only upon
notice and, in some circumstances, after any Affected Party has used reasonable
efforts to transfer it rights and obligations under the related Swap Agreement
to a related entity within a limited period after notice has been given of the
Termination Event, all as set forth in the related Swap Agreement. The
occurrence of an Early Termination Date under a Swap Agreement will constitute a
"Swap Early Termination".
Upon any Swap Early Termination of a Swap Agreement, the Trust or the
applicable Swap Counterparty may be liable to make a termination payment to the
other (regardless, if applicable, of which of the parties has caused the
termination). The amount of the termination payment will be based on the value
of the related Interest Rate Swap computed in accordance with the procedures set
forth in the related Interest Rate Swap. Any payment could be substantial. In
the event that the Trust is required to make a termination payment, the payment
will be payable in the same order of priority as any Trust Swap Payment Amount
payable to the applicable Swap Counterparty (which is payable pari passu with
the Class A-1 Noteholders' Interest Distribution Amount and the Class A-2
Noteholders' Interest Distribution Amount); provided, however, that, in the
event that a termination payment is owed to the applicable Swap Counterparty
following a Swap Default resulting from a default of the applicable Swap
Counterparty or a Termination Event, the termination payment will be subordinate
to the right of the Noteholders to receive full payment of principal of and
interest on the Notes. Accordingly, termination payments, if required to be made
by the Trust, could result in shortfalls to Noteholders.
If, following an Early Termination Date, a termination payment is owed
by the Trust to a Swap Counterparty and the Trust receives a payment
("Assumption Payment") from a successor swap counterparty to assume the position
of the applicable Swap Counterparty, the portion of the Assumption Payment that
does not exceed the amount of the termination payment owed by the Trust to the
applicable Swap Counterparty will be paid by the Trust to the applicable Swap
Counterparty and will not be available to make distributions to Noteholders.
Following the payment, the amount of the termination payment owed by the Trust
to the applicable Swap Counterparty will be reduced by the amount of the
payment.
RATING AGENCY DOWNGRADE. If the rating of a Swap Counterparty (or any
successor credit support provider) is withdrawn or reduced below __ or its
equivalent by any Swap Rating Agency (this withdrawal or reduction, a "Rating
Agency Downgrade"), the applicable Swap Counterparty is required, no later than
the 30th day following the Rating Agency Downgrade, at the applicable Swap
Counterparty's expense, either to (1) obtain a substitute Swap Counterparty that
has a counterparty rating of at least __ or its equivalent by the Swap Rating
Agency or (2) enter into arrangements reasonably satisfactory to the Trustee,
including collateral arrangements, guarantees or letters of credit, which
arrangements in the view of the Swap Rating Agency will result in the total
negation of the effect or impact of the Rating Agency Downgrade on the
Noteholders and the Seller.
THE INITIAL SWAP COUNTERPARTY. _________________________ is a
__________ company with its principal place of business located at
_________________________. As of the date of the prospectus supplement, the
Initial Swap Counterparty's counterparty ratings were _________________________.
THE INFORMATION SET OUT IN THE PRECEDING PARAGRAPH HAS BEEN PROVIDED
BY THE INITIAL SWAP COUNTERPARTY AND IS NOT GUARANTEED AS TO ACCURACY OR
COMPLETENESS, AND IS NOT TO BE CONSTRUED AS REPRESENTATIONS, BY THE SELLER OR
THE UNDERWRITERS. EXCEPT FOR THE FOREGOING PARAGRAPH, THE INITIAL SWAP
COUNTERPARTY AND ITS AFFILIATES HAVE NOT BEEN INVOLVED IN THE PREPARATION OF,
AND DO NOT ACCEPT RESPONSIBILITY FOR, THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS.
COMPANY LIABILITY
Anything to the contrary in the prospectus notwithstanding, the
Company will not be liable to any person or entity for the amount of any losses,
claims, damages or liabilities arising out of or based on the Trust Agreement.
TERMINATION
Information regarding termination of the Trust is set forth in
"Description of the Transfer and Servicing Agreements--Termination" in the
prospectus; PROVIDED, HOWEVER, that the information set forth under the heading
"Description of the Transfer and Servicing Agreements--Insolvency Event" is not
applicable in connection with the Trust.
Any Financed Student Loans remaining in the Trust as of the end of the
Collection Period immediately preceding the ________, ____ Quarterly Payment
Date will be offered for sale by the Indenture Trustee. The Seller, its
affiliates and unrelated third parties may offer bids to purchase the Financed
Student Loans on the Quarterly Payment Date. If at least two bids (one of which
is from a bidder other than the Seller and its affiliates) are received, the
Indenture Trustee will accept the highest bid equal to or in excess of the
greater of (x) the aggregate Purchase Amounts of the Financed Student Loans as
of the end of the Collection Period immediately preceding the Quarterly Payment
Date and (y) an amount that would be sufficient to
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 and
o pay to the Swap Counterparties any prior unpaid Net Trust Swap
Payment Carryover Shortfalls and any other amounts owed by the
Trust to the Swap Counterparties under the Interest Rate Swaps
(the greater amount, the "Minimum Purchase Price").
If at least two bids are not received or the highest bid is not equal to or in
excess of the Minimum Purchase Price, the Indenture Trustee will not consummate
the sale. The proceeds of any sale will be used to redeem any Notes outstanding
on the Quarterly Payment Date. If the sale is not consummated in accordance with
the foregoing, the Indenture Trustee may, but shall not be under any obligation
to, solicit bids to purchase the Financed Student Loans on future Quarterly
Payment Dates upon terms similar to those described above. No assurance can be
given as to whether the Trustee will be successful in soliciting acceptable bids
to purchase the Financed Student Loans on either the ________, ____ Quarterly
Payment Date or any subsequent Quarterly Payment Date.
OPTIONAL REDEMPTION
The Company or an assignee of the Company, may at its option purchase
from the Eligible Lender Trustee, as of the end of any Collection Period
immediately preceding a Quarterly Payment Date on which the then outstanding
Pool Balance is 20% or less of the aggregate initial principal amount of the
Notes, all remaining Financed Student Loans at a price equal to the greater of
the aggregate Purchase Amounts as of the end of the Collection Period and the
Minimum Purchase Price, which amount will be used to retire the Notes
concurrently therewith. The Minimum Purchase Price for a purchase occurring
prior to the ________, ____ Quarterly Payment shall include any termination
payment due to the applicable Swap Counterparty. Upon termination of the Trust,
all right, title and interest in the Financed Student Loans and other funds of
the Trust, after giving effect to any final distributions to the Noteholders
therefrom, will be conveyed and transferred to the Company or the assignee.
FEDERAL FAMILY EDUCATION LOAN PROGRAM
A description of the Federal Family Education Loan Program is provided
in the prospectus under "Federal Family Education Loan Program." The information
provided below sets forth recent developments and additional information with
respect the Federal Family Education Loan Program.
RECENT DEVELOPMENTS-EMERGENCY STUDENT LOAN CONSOLIDATION ACT OF 1997.
On November 13, 1997, President Clinton signed into law the Emergency Student
Loan Consolidation Act of 1997, which made significant changes to the Federal
Consolidation Loan program. These changes include:
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.
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.
RECENT DEVELOPMENTS - 1999 AMENDMENT. The Work Incentives Improvement
Act of 1999 passed by Congress in late November 1999, included a change in the
reference index for determining lender yield of Stafford Loans, PLUS Loans and
Federal Consolidation Loans. The formula used to calculate Special Allowance
Payments for loans first disbursed on or after January 1, 2000, and before July
1, 2003, is based on the 90-day Commercial Paper (financial) rates in effect for
each of the days in such quarter as reported by the Federal Reserve in
Publication H-15 (the "CP Rate"). Under the new formula, special allowance rates
for Stafford Loans and unsubsidized Stafford Loans will be calculated to provide
the loan holder with a minimum yield equal to the CP Rate plus 1.74 percent
during in-school periods, grace periods and deferment periods, and 2.34 percent
during repayment periods; PLUS loans and Consolidation loans will be calculated
based on the CP Rate plus 2.64 percent.
RECENT DEVELOPMENTS - 1999 FINAL REGULATIONS. The Department of
Education published its final regulations (the "1999 Final Regulations")
implementing the 1998 Reauthorization Bill. The 1999 Final Regulations implement
and interpret 1998 Reauthorization Bill and by and large reflect the consensus
of the federal and non-federal negotiators who participated in the negotiated
rulemaking process.
The major provisions of the 1999 Final Regulations include:
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 Lender Trustee owes a liability to the
Department or a Federal Guarantor on any Student Loan for which the Eligible
Lender Trustee is or was legal titleholder, including loans held in the Trust or
other trusts, the Department or the Federal Guarantor may seek to collect that
liability by offset against payments due the Eligible Lender Trustee under the
Trust. In the event that the Department or a Federal Guarantor determines a
liability exists in connection with a trust using the shared lender
identification number, the Department or the Federal Guarantor would be likely
to collect that liability by offset against amounts due the Eligible Lender
Trustee under the shared lender identification number, including amounts owed in
connection with the Trust.
In addition, other trusts using the shared lender identification
number may in a given quarter incur Federal Origination Fees that exceed the
Interest Subsidy Payments and Special Allowance Payments payable by the
Department on the loans in the other trusts, resulting in the consolidated
payment from the Department received by the Eligible Lender Trustee under the
lender identification number for that quarter being less than the amount owed by
the Department on the loans in the Trust for that quarter.
The Servicing Agreement for the Trust and the servicing agreements for
other trusts established by the Seller which share the lender identification
number to be used by the Trust (the Trust and the other trusts, collectively,
the "Seller Trusts") will require the Eligible Lender Trustee or the Servicer
for each Seller Trust to allocate to the proper Seller Trust a shortfall or an
offset by the Department or a Federal Guarantor arising from the Student Loans
held by the Eligible Lender Trustee on the Seller Trust's behalf.
FEES PAYABLE ON FINANCED STUDENT LOANS. Under the Federal
Consolidation Program, the Trust will be obligated to pay to the Department a
monthly rebate fee (the "Monthly Rebate Fee") at an annualized rate of 1.05%
(0.62% for applications received between October 1, 1998 and January 31, 1999)
of the outstanding principal balance on the last day of each month plus accrued
interest thereon of each Federal Consolidation Loan which is a part of the
Trust, which rebate will be payable prior to distributions to the Noteholders
and which rebate will reduce the amount of funds which would otherwise be
available to make distributions on the Notes. In addition, the Trust must pay to
the Department a 0.50% origination fee (the "Federal Origination Fee") on the
initial principal balance of each Financed Student Loan which is originated on
its behalf by the Eligible Lender Trustee (i.e., each Federal Consolidation Loan
originated on its behalf by the Eligible Lender Trustee during the Revolving
Period and each Add-on Consolidation Loan added to a Federal Consolidation Loan
in the Trust), which fee will be deducted by the Department out of Interest
Subsidy Payments and Special Allowance Payments. If sufficient Interest Subsidy
Payments and Special Allowance Payments are not due to the Trust to cover the
amount of the Federal Origination Fee, the balance of the Federal Origination
Fee may be deferred by the Department until sufficient Interest Subsidy Payments
and Special Allowance Payments accrue to cover the fee or may be required to be
paid immediately. If the amounts never accrue, the Trust would be obligated to
pay any remaining fee from other assets of the Trust prior to making
distributions to the Noteholders. The offset of Interest Subsidy Payments and
Special Allowance Payments, and the payment of any remaining fee from other
Trust assets will further reduce the amount of the Available Funds from which
payments to the Noteholders may be made.
FEDERAL INCOME TAX AND STATE TAX CONSEQUENCES
Stroock & Stroock & Lavan LLP (the "Special Federal Tax Counsel") is
of the opinion that the Senior Notes will properly be characterized as
indebtedness for federal income tax purposes and that the Trust will not be an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion is not binding on the Internal Revenue
Service (the "IRS") and thus no assurance can be given that the characterization
would prevail if it were challenged. If the IRS were to contend successfully
that the Subordinate Notes and the Senior Notes were not debt for federal income
tax purposes, the arrangement among Noteholders and the Seller might be
classified for federal income tax purposes as a publicly traded partnership
taxable as a corporation.
If the arrangement created by the Indenture were treated as a publicly
traded partnership taxable as a corporation, the resulting entity would be
subject to federal income taxes at corporate tax rates on its taxable income
generated with respect to the Financed Student Loans. Moreover, distributions by
the entity to all or some of the classes of Notes would probably not be
deductible in computing the entity's taxable income and all or part of the
distributions to holders of the Notes would probably be treated as dividends.
This entity-level tax could result in reduced distributions to the Noteholders
and the Noteholders could be liable for a share of the tax.
Because the Seller will treat the Notes as indebtedness for federal
income tax purposes, the Trustee will not comply with the tax reporting
requirements that would apply under the foregoing alternative characterizations
of the Notes.
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 treate the stated interest
one ach Senior Note as being unconditionally payable at a single qualified
floating rate for OID purposes and thus the interest on the Senior Notes should
not be taxable as OID to the holders of Senior Notes.
Prospective purchasers should read "Federal Income Tax Consequences"
and "State Tax Consequences" in the prospectus for a discussion of the
application of specified federal income tax laws and specified state tax laws to
the Trust and the Notes.
ERISA CONSIDERATIONS
Subject to the applicable provisions of ERISA and the Code, the Senior
Notes may be purchased by an employee benefit plan or an individual retirement
account or other arrangement described in Section 3(3) of ERISA or Section
4975(e)(1) of the Code (a "Plan"). Fiduciaries of a Plan subject to ERISA must
first determine that the Plan's acquisition of a Senior Note is consistent with
their fiduciary duties under ERISA, including the requirements of investment
prudence and diversification and the requirement that a Plan's investments be
made in accordance with the documents governing the Plan. Plan fiduciaries must
also determine that the acquisition will not result in a nonexempt prohibited
transaction as defined in Section 406 of ERISA or Section 4975 of the Code.
Employee benefit plans which are governmental plans (as defined in Section 3(32)
of ERISA) or specified church plans (as defined in Section 3(33) of ERISA) are
not subject to the fiduciary responsibility or prohibited transaction provisions
of ERISA or the Code. However, any plan which is qualified under Section 401(a)
of the Code and exempt from tax under Section 501(a) of the Code is subject to
the exclusive benefit rule under Section 401(a)(2) of ERISA and the prohibited
transaction rules set forth in Section 503 of the Code. See "ERISA
Considerations" in the prospectus.
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement relating to the Senior Notes, the Seller has agreed to cause the Trust
to sell to each of the underwriters named below for which Credit Suisse First
Boston Corporation is acting as representative and each of the underwriters has
severally agreed to purchase, the principal amount of Senior Notes set forth
opposite its name below.
PRINCIPAL AMOUNT
----------------------------------
UNDERWRITER CLASS A-1 NOTES CLASS A-2 NOTES
- ------------ --------------- ---------------
____________________.................. $ $
____________________.................. $ $
Total.......................... $ $
============= ============
The underwriting agreement provides that the underwriters are
obligated to purchase all of the Senior Notes if any are purchased. The
underwriting agreement provides that if an underwriter defaults the purchase
commitments of non-defaulting underwriters may be increased or the offering of
Senior Notes may be terminated.
The underwriters propose to offer the Senior Notes initially at the
public offering prices on the cover page of this prospectus supplement, and to
selling group members at those prices less a concession of _____% per Class A-1
Note and _____% per Class A-2 Note. The underwriters and the selling group
members may allow a discount of _____% per Class A-1 Note and _____% per Class
A-2 Note on sales to specified other broker dealers. After the initial public
offering, the public offering prices and the concessions and discounts to
dealers may be changed by the representative.
The representative, on behalf of the underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
Senior Notes in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the representative
to reclaim a selling concession from a syndicate member when the Senior Notes
originally sold by the syndicate member are purchased in a syndicate covering
transaction to cover syndicate short positions. These stabilizing transactions,
syndicate covering transactions and penalty bids may cause the price of the
Senior Notes to be higher than it would otherwise be in the absence of the
transactions. These transactions, if commenced, may be discontinued at any time.
We estimate that our out of pocket expenses for this offering will be
approximately $_______.
The Senior Notes are a new issue of securities with no established
trading market. One or more of the underwriters intend to make a secondary
market for the Senior Notes. However, they are not obligated to do so and may
discontinue making a secondary market for the Senior Notes at any time without
notice. No assurance can be given as to how liquid the trading market for the
Senior Notes will be.
The Seller has agreed to indemnify the underwriters against specified
liabilities under the Securities Act, or contribute to payments which the
underwriters may be required to make.
The Trust may, from time to time, invest the funds in the Collection
Account, the Collateral Reinvestment Account and the Reserve Account in Eligible
Investments acquired from the Underwriters.
The Seller has also agreed to pay _________________________ a
structuring fee equal to $________.
LEGAL MATTERS
Specified legal matters relating to the Senior Notes will be passed
upon for the Trust, the Seller, the Servicer and the Administrator by Krieg
DeVault Alexander & Capehart, LLP Indianapolis, Indiana and for the underwriters
by Stroock & Stroock & Lavan LLP, New York, New York. Edward R. Schmidt, general
counsel of SMS and an executive officer of and general counsel for USA Group,
USA Funds and Loan Services and a member of the board of directors of USA Group
and a member of the board of trustees of USA Group Loan Services, Inc., USA
Group Guarantee Services, Inc. and USA Funds, was formerly a partner of, and of
counsel to, the firm of Krieg DeVault Alexander & Capehart, LLP and William R.
Neale, a member of the board of directors of USA Group and a member of the board
of trustees of USA Funds, is a partner of the firm of Krieg DeVault Alexander &
Capehart, LLP. Specified federal income tax matters will be passed upon for the
Trust by Stroock & Stroock & Lavan LLP and specified Indiana state income and
corporate income tax matters will be passed upon for the Trust by Krieg DeVault
Alexander & Capehart, LLP.
REPORTS TO SECURITYHOLDERS
Unless and until Definitive Notes are issued, quarterly and annual
unaudited reports containing information concerning the Financed Student Loans
will be prepared by the Administrator and sent on behalf of the Trust only to
Cede & Co. ("Cede"), as nominee of The Depository Trust Company ("DTC") and
registered holder of the Senior Notes, and will not be sent to the beneficial
owners of the Senior Notes. Beneficial owners of Senior Notes will, however, be
able to obtain the reports by requesting them from the Indenture Trustee. The
reports will contain the information described under "Description of the
Transfer and Servicing Agreements--Statements to Indenture Trustee and Trust" in
the prospectus. The reports will not constitute financial statements prepared in
accordance with generally accepted accounting principles. See "Information
Regarding the Securities--Book-Entry Registration" and "Reports to
Securityholders" in the prospectus. The Trust will file with the Commission the
periodic reports required under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the rules and regulations of the Commission
thereunder. These reports and other information may be inspected and copied at
prescribed rates at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W., Judiciary Plaza, Washington D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Commission maintains an internet site that
will obtain reports and other information regarding the Trust. The address of
that site is http://www.sec.gov.
FORWARD LOOKING STATEMENTS
Information under the heading "Formation of the Trust" and "Federal
Family Education Loan Program" contains various "forward looking statements",
which represent the Seller's expectations or beliefs concerning future events.
The Seller cautions that these statements are further qualified by important
factors that could cause actual results to differ materially from those in the
forward looking statements.
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in specified limited circumstances, the globally offered Senior
Notes of SMS Student Loan Trust ____-_ (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
Global Securities through any of DTC, CEDEL or Euroclear. The Global Securities
will be tradeable as home market instruments in both the European and U.S.
domestic markets. Initial settlements and all secondary trades will settle in
same-day funds.
Secondary market trading between investors holding Global Securities
through CEDEL and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (I.E., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior asset-backed securities issues.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Global Securities will be effected on a
delivery-against-payment basis through the applicable Depositaries of CEDEL and
Euroclear (in this capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless the holders meet specified requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of CEDE & CO. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, CEDEL and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold the positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional asset-backed
securities. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and the
seller's accounts are located to ensure that settlement can be made on the
desired value date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled in same-day funds.
Trading between CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
TRADING BETWEEN DTC SELLER AND CEDEL OR EUROCLEAR PURCHASER. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear, as the case may be, will instruct the applicable Depositary to
receive the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment date
to and excluding the settlement date, on the basis of a calendar year consisting
of twelve 30-day calendar months. Payment will then be made by the respective
Depositary of the DTC Participant's account against delivery of the Global
Securities. After settlement has been completed, the Global Securities will be
credited to the respective clearing system and by the clearing system, in
accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debit will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the CEDEL or Euroclear cash debit
will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit
to them, CEDEL Participants or Euroclear Participants may elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of the overdraft charges, although this result will depend on each CEDEL
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants may employ their usual procedures for sending Global Securities
to the applicable Depositary for the benefit of CEDEL Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participants a cross-market transaction will
settle no differently from a trade between two DTC Participants.
TRADING BETWEEN CEDEL OR EUROCLEAR SELLER AND DTC PURCHASER. Due to
time zone differences in their favor, CEDEL Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through Euroclear Participants, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or a Euroclear
Participant at least one business day prior to settlement. In these cases, CEDEL
or Euroclear will instruct Euroclear Participants, to deliver the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date, on the basis of a calendar
year consisting of twelve 30-day calendar months. The payment will then be
reflected in the account of the CEDEL Participant or Euroclear Participant the
following day, and receipt of the cash proceeds in the CEDEL Participant's or
Euroclear Participant's account would be back-valued to the value date (which
would be the preceding day, when settlement occurred in New York). Should the
CEDEL Participant or Euroclear Participant have a line of credit with its
respective clearing system and elect to be in debit in anticipation of receipt
of the sale proceeds in its account, the back-valuation will extinguish any
overdraft incurred over that one-day period. If settlement is not completed on
the intended value date (i.e., the trade fails), receipt of the cash proceeds in
the CEDEL Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase
Global Securities from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades will automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(1) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(2) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear account
in order to settle the sale side of the trade; or
(3) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the CEDEL Participant or Euroclear
Participant.
U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
CEDEL or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to 30% U.S. withholding tax that generally applies to
payments of interest on registered debt issued by U.S. Persons, unless (1) each
clearing system, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business in the chain of
intermediaries between the beneficial owner and the U.S. entity required to
withhold tax complies with applicable certification requirements and (2) the
beneficial owner takes one of the following steps to obtain an exemption or
reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of the change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM 1001). Non-U.S. Persons that are beneficial owners residing in a
country that has a tax treaty with the United States can obtain an exemption or
reduced tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the beneficial owner or
his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payee's Request
for Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Global Securities
holder, or in the case of a Form 1001 or a Form 4224 filer, his agent, files by
submitting the appropriate form to the person through whom he holds (e.g., the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
This summary does not deal with all aspects of foreign income tax
withholding that may be relevant to foreign holders of these Global Securities
or with the application of tax documentation requirements that are generally
effective with respect to payments made after December 31, 2000. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of these Global Securities.
U.S. PERSON. As used in this prospectus supplement the term "U.S.
Person" means a beneficial owner of a Senior Note that is for United States
federal income tax purposes
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.
<PAGE>
INDEX OF PRINCIPAL TERMS
Set forth below is a list of the defined terms used in this prospectus
supplement and the pages on which the definitions of the terms may be found in
this prospectus supplement.
1998 Amendments...................................................S-52
1998 Reauthorization Bill.........................................S-52
91-day Treasury Bills.............................................S-49
Additional Fundings...............................................S-34
Additional Guarantor..............................................S-24
Additional Student Loans..........................................S-14
Add-on Consolidation Loans........................................S-17
Administration Agreement..........................................S-33
Administration Fee................................................S-39
Administrator.....................................................S-34
Assumption Payment................................................S-50
Available Funds...................................................S-41
BONA..............................................................S-34
Cede..............................................................S-59
CEDEL.............................................................S-31
CEDEL Participants................................................S-31
Citibank..........................................................S-32
Class A-1 Note Final Maturity Date................................S-29
Class A-1 Note Rate...............................................S-27
Class A-1 Noteholders.............................................S-29
Class A-1 Noteholders' Interest Carryover Shortfall...............S-42
Class A-1 Noteholders' Interest Distribution Amount...............S-42
Class A-1 Notes...................................................S-27
Class A-2 Note Final Maturity Date................................S-29
Class A-2 Note Rate...............................................S-27
Class A-2 Noteholders.............................................S-29
Class A-2 Noteholders' Interest Carryover Shortfall...............S-42
Class A-2 Noteholders' Interest Distribution Amount...............S-43
Class A-2 Notes...................................................S-27
Closing Date......................................................S-14
Collateral Reinvestment Account...................................S-38
Collection Account................................................S-38
Collection Period.................................................S-40
Commission........................................................S-34
Company...........................................................S-15
Cooperative.......................................................S-31
Cutoff Date.......................................................S-17
Deferral..........................................................S-20
Delinquency Percentage............................................S-36
Department........................................................S-26
Depositaries......................................................S-32
Depositary........................................................S-32
Determination Date................................................S-39
DTC...............................................................S-59
DTC Services......................................................S-33
Early Amortization Event..........................................S-35
Eligible Lender Trustee...........................................S-14
Euroclear.........................................................S-31
Euroclear Operator................................................S-31
Euroclear Participants............................................S-31
Events of Default.................................................S-49
Excess Spread.....................................................S-35
Exchange Act......................................................S-59
Exchanged Financed Student Loan...................................S-36
Exchanged Serial Loan.............................................S-36
Expected Interest Collections.....................................S-35
Federal Origination Fee...........................................S-55
FFELP.............................................................S-14
Financed Student Loans............................................S-14
Forbearance.......................................................S-20
Global Securities.................................................S-60
Grace.............................................................S-20
GRDF Percentage...................................................S-39
Guarantors........................................................S-24
Illegality........................................................S-49
Indenture.........................................................S-27
Indenture Trustee.................................................S-27
Index Maturity....................................................S-30
Indirect Participants.............................................S-30
Industry..........................................................S-33
Initial Financed Student Loans....................................S-14
Initial Guarantors................................................S-24
Initial Interest Rate Swap........................................S-47
Initial Swap Counterparty.........................................S-47
Initial Swap Termination Date.....................................S-47
In-School.........................................................S-20
In-School Percentage..............................................S-39
Interest Rate Swaps...............................................S-48
IRS...............................................................S-56
LIBOR Determination Date..........................................S-29
LIBOR Reset Period................................................S-30
Liquidated Student Loans..........................................S-40
Liquidation Proceeds..............................................S-40
Loan Purchase Amount..............................................S-34
Loan Sale Agreement...............................................S-33
Lock-In Period....................................................S-49
Minimum Purchase Price............................................S-51
Monthly Available Funds...........................................S-40
Monthly Collection Period.........................................S-40
Monthly Payment Date..............................................S-38
Monthly Rebate Fee................................................S-55
Morgan............................................................S-32
Net Trust Swap Payment............................................S-48
Net Trust Swap Payment Carryover Shortfall........................S-43
Net Trust Swap Receipt............................................S-48
Net Trust Swap Receipt Carryover Shortfall........................S-43
New Loan..........................................................S-34
New Loans.........................................................S-34
Noncapitalized Accrued Interest...................................S-34
Non-U.S. Person...................................................S-63
Noteholders.......................................................S-29
Noteholders' Interest Distribution Amount.........................S-43
Notes.............................................................S-27
Obligors..........................................................S-28
OID...............................................................S-56
Parity Date.......................................................S-27
Participants......................................................S-30
Plan..............................................................S-56
Pool Balance......................................................S-28
Principal Distribution Adjustment.................................S-43
Principal Distribution Amount.....................................S-43
Purchase Amount...................................................S-28
Purchase Collateral Balance.......................................S-34
Purchase Premium Amount...........................................S-34
Quarterly Interest Period.........................................S-27
Quarterly Payment Date............................................S-27
Rating Agency Downgrade...........................................S-50
Realized Losses...................................................S-44
Record Date.......................................................S-27
Reference Banks...................................................S-30
Repayment.........................................................S-20
Reserve Account...................................................S-38
Reserve Account Excess............................................S-46
Reserve Account Initial Deposit...................................S-14
Revolving Period..................................................S-34
Scheduled Initial Swap Termination Date...........................S-47
Scheduled Notional Swap Amount....................................S-48
Secretary.........................................................S-24
Seller............................................................S-14
Seller Trusts.....................................................S-55
Senior Noteholders................................................S-29
Senior Noteholders' Distribution Amount...........................S-44
Senior Noteholders' Interest Distribution Amount..................S-44
Senior Noteholders' Principal Carryover Shortfall.................S-44
Senior Noteholders' Principal Distribution Amount.................S-44
Senior Notes......................................................S-27
Serial Loan.......................................................S-36
Serial Loans......................................................S-36
Servicer..........................................................S-33
Servicing Agreement...............................................S-33
Servicing Fee.....................................................S-38
Servicing Fee Shortfall...........................................S-39
SMS...............................................................S-14
Special Federal Tax Counsel.......................................S-56
Specified Reserve Account Balance.................................S-46
Student Loan Rate Accrual Period..................................S-35
Student Loans.....................................................S-14
Subordinate Note Final Maturity Date..............................S-29
Subordinate Note Rate.............................................S-27
Subordinate Note Trigger..........................................S-28
Subordinate Noteholders...........................................S-29
Subordinate Noteholders' Distribution Amount......................S-45
Subordinate Noteholders' Interest Carryover Shortfall.............S-45
Subordinate Noteholders' Interest Distribution Amount.............S-45
Subordinate Noteholders' Principal Carryover Shortfall............S-45
Subordinate Noteholders' Principal Distribution Amount............S-45
Subordinate Notes.................................................S-27
Subsequent Interest Rate Swaps....................................S-47
Subsequent Swap Counterparties....................................S-48
Swap Agreement....................................................S-48
Swap Default......................................................S-49
Swap Early Termination............................................S-50
Swap Rate.........................................................S-48
Systems...........................................................S-33
Tax Event.........................................................S-49
T-Bill Rate.......................................................S-48
Telerate Page 3750................................................S-30
Termination Events................................................S-49
Terms and Conditions..............................................S-31
Three-Month LIBOR.................................................S-29
Transfer Agreement................................................S-34
Transfer and Servicing Agreements.................................S-34
Transfer Date.....................................................S-36
Trust.............................................................S-14
Trust Agreement...................................................S-15
Trust Swap Payment Amount.........................................S-45
Trust Swap Receipt Amount.........................................S-45
U.S. Person.......................................................S-63
USA Funds.........................................................S-24
Year 2000 problems................................................S-33
<PAGE>
PROSPECTUS
THE SMS STUDENT LOAN TRUSTS
ASSET-BACKED NOTES
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 5 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 _______ __, ____
<PAGE>
TABLE OF CONTENTS
RISK FACTORS..................................................................5
RISK OF LOSS FROM LIMITED CREDIT ENHANCEMENT...........................5
BORROWER DEFAULT RISK ON STUDENT LOANS.................................5
RISK OF DEPENDENCE ON GUARANTORS AS NOTE FOR STUDENT LOANS.............5
RISK OF DEPARTMENT OF EDUCATION'S FAILURE TO PAY GUARANTEE PAYMENTS....5
RISK OF LOSS OF FEDERAL GUARANTOR AND DEPARTMENT OF EDUCATION PAYMENTS
FOR FAILURE TO COMPLY WITH LOAN ORIGINATION AND SERVICING
PROCEDURES FOR STUDENT LOANS.........................................6
RISK OF SELLER OR SERVICER NOT PERFORMING ON PURCHASE OBLIGATIONS......6
CHANGES IN LEGISLATION MAY ADVERSELY AFFECT STUDENT LOANS AND
FEDERAL GUARANTORS, THE SELLER OR THE SERVICER.......................6
FEES PAYABLE ON STUDENT LOANS MAY REDUCE AMOUNTS PAYABLE TO YOU........7
RISK OF CONSOLIDATION OF FEDERAL BENEFIT BILLINGS AND RECEIPTS WITH
OTHER TRUSTS.........................................................7
FAILURE TO COMPLY WITH THIRD-PARTY SERVICER REGULATIONS MAY
ADVERSELY AFFECT LOAN SERVICING......................................8
CUSTODIAL RISK OF SERVICER.............................................8
INSOLVENCY RISK OF SERVICER OR ADMINISTRATOR...........................9
THE INVESTMENT RETURN ON THE NOTES IS UNCERTAIN........................9
RISK OF VARIABILITY OF ACTUAL CASH FLOWS.............................10
CONSUMER PROTECTION LAWS MAY AFFECT ENFORCEABILITY OF STUDENT LOANS...10
BOOK-ENTRY REGISTRATION--BENEFICIAL OWNERS NOT RECOGNIZED BY TRUST....11
FORMATION OF THE TRUSTS......................................................12
The Trusts............................................................12
Eligible Lender Trustee...............................................12
USE OF PROCEEDS..............................................................12
USA GROUP, SMS, THE SELLER AND THE SERVICER..................................13
USA Group.............................................................13
SMS...................................................................14
The Seller............................................................14
The Servicer..........................................................14
THE STUDENT LOAN POOLS.......................................................15
Origination and Marketing Process.....................................16
Servicing and Collections Process.....................................17
Claims and Recovery Rates.............................................17
FEDERAL FAMILY EDUCATION LOAN PROGRAM........................................18
Legislative and Administrative Matters..............................18
Eligible Lenders, Students and Educational Institutions.............19
Financial Need Analysis.............................................20
Special Allowance Payments..........................................20
Federal Stafford Loans..............................................21
INTEREST.......................................................21
INTEREST SUBSIDY PAYMENTS......................................22
LOAN LIMITS....................................................23
REPAYMENT......................................................24
GRACE PERIODS, DEFERRAL PERIODS AND FORBEARANCE PERIODS........24
Federal Unsubsidized Stafford Loans.................................24
Federal PLUS and Federal SLS Loan Programs..........................25
LOAN LIMITS....................................................25
INTEREST.......................................................25
REPAYMENT, DEFERMENTS..........................................25
Federal Consolidation Loan Program..................................26
Federal Guarantors..................................................27
Federal Insurance and Reinsurance of Federal Guarantors.............28
WEIGHTED AVERAGE LIVES OF THE NOTES..........................................29
POOL FACTORS AND TRADING INFORMATION.........................................30
DESCRIPTION OF THE NOTES.....................................................31
Principal of and Interest on the Notes..............................31
The Indenture.......................................................32
MODIFICATION OF INDENTURE......................................32
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT................32
COVENANTS......................................................34
ANNUAL COMPLIANCE STATEMENT....................................35
INDENTURE TRUSTEE'S ANNUAL REPORT..............................35
SATISFACTION AND DISCHARGE OF INDENTURE........................35
THE INDENTURE TRUSTEE..........................................35
INFORMATION REGARDING THE NOTES..............................................36
Fixed Rate Notes....................................................36
Floating Rate Notes.................................................36
Book-Entry Registration.............................................36
Definitive Notes....................................................37
List of Noteholders.................................................38
Reports to Noteholders..............................................38
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS.........................38
Sale of Student Loans; Representations and Warranties...............39
Additional Fundings.................................................40
Accounts............................................................40
Servicing Procedures................................................41
Payments on Student Loans...........................................41
Servicer Covenants..................................................41
Servicer Compensation...............................................42
Distributions.......................................................42
Credit and Cash Flow Enhancement....................................42
RESERVE ACCOUNT................................................43
Statements to Indenture Trustee and Trust...........................43
Evidence as to Compliance...........................................44
Matters Regarding the Servicer......................................44
Servicer Default....................................................45
Rights Upon Servicer Default........................................45
Waiver of Past Defaults.............................................46
Amendment...........................................................46
Payment of Notes....................................................46
Termination.........................................................46
OPTIONAL REDEMPTION............................................46
AUCTION OF STUDENT LOANS.......................................47
Administration Agreement............................................47
LEGAL ASPECTS OF THE STUDENT LOANS...........................................47
Transfer of Student Loans...........................................47
Consumer Protection Laws............................................48
Loan Origination and Servicing Procedures Applicable to
Student Loans.....................................................48
Student Loans Generally Not Subject to Discharge in Bankruptcy......49
FEDERAL INCOME TAX CONSEQUENCES..............................................49
TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE..............................50
Tax Characterization of the Trust...................................50
Tax Consequences to Holders of the Notes............................50
TREATMENT OF THE NOTES AS INDEBTEDNESS.........................50
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES...................50
ORIGINAL ISSUE DISCOUNT........................................50
INTEREST INCOME ON THE NOTES...................................51
SALE OR OTHER DISPOSITION......................................51
FOREIGN HOLDERS................................................51
BACKUP WITHHOLDING.............................................52
Recent Legislation..................................................53
STATE TAX CONSEQUENCES.......................................................53
TAX CONSEQUENCES WITH RESPECT TO THE NOTES.....................53
TAX CHARACTERIZATION OF THE TRUST..............................53
ERISA CONSIDERATIONS.........................................................53
PLAN OF DISTRIBUTION.........................................................54
LEGAL MATTERS................................................................55
AVAILABLE INFORMATION........................................................56
INCORPORATION OF DOCUMENTS BY REFERENCE......................................56
INDEX OF PRINCIPAL TERMS.....................................................57
<PAGE>
RISK FACTORS
You should consider the following factors and the additional factors
described under "Risk Factors" in the related prospectus supplement, together
with all the information contained in this prospectus and the related prospectus
supplement, before purchasing the 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 determines
that the federal guarantor is able
to meet its insurance obligations,
the Department of Education will
not make guarantee payments to the
related trust. If the credit
enhancement described in the
related prospectus supplement is
not sufficient to cover the federal
guarantor's obligations to the
related trust, you may suffer a
loss on your investment.
RISK OF LOSS OF FEDERAL GUARANTOR
AND DEPARTMENT OF EDUCATION PAYMENTS
FOR FAILURE TO COMPLY WITH LOAN
ORIGINATION AND SERVICING PROCEDURES
FOR STUDENT LOANS...................... The Higher Education Act and
implementing regulations requires
lenders and their assignees making
and servicing student loans that
are reinsured by the Department of
Education and guarantors
guaranteeing student loans that are
reinsured by the Department of
Education to follow specified
procedures, to ensure that the
student loans are properly made and
repaid. If the servicer fails to
follow these procedures or if the
originator of the loans fails to
follow procedures relating to the
origination of any student loans,
the Department of Education may
refuse to make reinsurance payments
to the federal guarantors or to
make interest subsidy payments and
special allowance payments to the
eligible lender trustee. In
addition, under these circumstances
the federal guarantors may refuse
to make guarantee payments to the
related trust. The failure of the
Department of Education to provide
reinsurance payments to the federal
guarantors could adversely affect
the federal guarantors' ability or
legal obligation to make payments
under the guarantee agreements to
the related trust. Loss of any
guarantee payments, interest
subsidy payments or special
allowance payments could adversely
affect the related trust's ability
to pay you timely interest and
principal. In this event, you may
suffer a loss on your investment.
RISK OF SELLER OR SERVICER NOT
PERFORMING ON PURCHASE OBLIGATIONS.... USA Group Secondary Market
Services, Inc. or the servicer will
be obligated to purchase from the
applicable trust student loans with
respect to which it materially
breaches representations,
warranties or covenants. You can
not be sure, however, that USA
Group Secondary Market Services,
Inc. or the servicer will have the
financial resources to purchase
student loans. The failure to so
purchase a student loan would not
constitute an event of default
under the related indenture or
permit the exercise of remedies
thereunder. However, the breach of
these representations, warranties
or covenants may cause you to
suffer a loss on your investment.
CHANGES IN LEGISLATION MAY ADVERSELY
AFFECT STUDENT LOANS, FEDERAL
GUARANTORS, THE SELLER OR
THE SERVICER.......................... You can not be positive that the
Higher Education Act or other
relevant federal or state laws,
rules and regulations will not be
amended or modified in the future
in a manner that will adversely
affect the federal student loan
programs described in this
prospectus, the student loans made
thereunder or the financial
condition of the federal
guarantors, the seller or the
servicer.
In addition, if the direct student
loan programs described in this
prospectus expand, the servicers
may experience increased costs due
to reduced economies of scale or
other adverse effects on their
business to the extent the volume
of loans serviced by the servicer
is reduced. These cost increases
could reduce the ability of the
servicer to satisfy its obligations
to service the student loans or to
purchase student loans in the event
of specified breaches of its
covenants. However, references in
the Higher Education Act of 1965,
as amended, regarding a transition
from Federal Family Education Loan
program to direct student loan
program (were eliminated by the
1998 Reauthorization Bill when
Congress determined that both
programs would continue to coexist.
FEES PAYABLE ON STUDENT LOANS MAY
REDUCE AMOUNTS PAYABLE TO YOU......... Each trust will be obligated to pay
to the Department of Education a
monthly rebate at an annualized
rate of generally 1.05% (or 0.62%
for loans for which the application
was received between October 1,
1998 and January 31, 1999) of the
outstanding principal balance on
each federal consolidation loan
which is a part of the related
trust. This rebate will be payable
prior to distributions made to you.
In addition, the trust must pay to
the Department of Education a 0.50%
origination fee on the initial
principal balance of each student
loan which is originated on its
behalf by the eligible lender
trustee subsequent to the
applicable closing date. This fee
will be deducted by the Department
of Education out of interest
subsidy payments and special
allowance payments otherwise
payable to the trust(s). In this
event the amount available to be
distributed to you will be reduced.
Under specified circumstances, the
related trust is obligated to pay
any portion of the unpaid fee from
other assets of the related trust
prior to making distributions to
you. As a result, the payment of
the rebate fee and origination fee
to the Department of Education will
affect the amount and timing of
payments to you. Moreover, if the
origination fee is deducted from
interest subsidy payments and
special allowance payments the
interest rate payable on your 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 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.
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.
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.
<PAGE>
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.
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.
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, Commission, Iowa College Student
Aid Commission, Louisiana Office of Student Financial Assistance, Finance
Authority of Maine, Michigan Guaranty Agency, Montana Guaranteed Student Loan
Program, New Mexico Student Loan Guarantee Corporation, Northwest Education Loan
Association, Oklahoma Guaranteed Student Loan Program, Oregon Student Assistance
Commission and Rhode Island Higher Education Assistance Authority. Some trustees
and officers of USA Funds are also directors or officers of USA Group Guarantee
Services.
SMS
SMS was organized on November 19, 1992, and is a Delaware corporation.
SMS is an affiliate of USA Group.
The related supplement to this prospectus (a "prospectus supplement")
may set forth additional information with respect to SMS. See also "The Student
Loan Pools". The principal executive offices of SMS are located at 30 South
Meridian Street, Indianapolis, Indiana 46204-3503 and its telephone number is
(317) 951-5640.
THE SELLER
The Seller will warrant to each Trust in the related Loan Sale
Agreement that the sale of the applicable Student Loans by the Seller to the
Eligible Lender Trustee on behalf of the Trust is a valid sale of the Student
Loans. Notwithstanding the foregoing, if the Seller were to become a debtor in a
bankruptcy case and a creditor or trustee in bankruptcy of the debtor or the
debtor itself were to take the position that the sale of Student Loans by the
Seller to a Trust should instead be treated as a pledge of the Student Loans to
secure a borrowing of the debtor, then delays in payments of collections of the
Student Loans could occur or (should the court rule in favor of any trustee,
debtor or creditor) reductions in the amount of the payments could result. If
the transfer of Student Loans by the Seller to the Eligible Lender Trustee on
behalf of a Trust is treated as a pledge instead of a sale, a tax or government
lien on the property of the Seller arising before the transfer of Student Loans
to the Eligible Lender Trustee on behalf of the Trust may have priority over the
Eligible Lender Trustee's interest in the Student Loans. If the conveyance by
the Seller of the Student Loans is treated as a sale, the Student Loans would
not be part of the Seller's bankruptcy estate and would not be available to the
Seller's creditors.
Because the Seller is not eligible to hold legal title to Federal
Student Loans, all Federal Student Loans will, prior to their transfer by the
Seller to a Trust, be held in trust for the Seller by an eligible lender to be
named in the related prospectus supplement as trustee for the Seller, pursuant
to a trust agreement between the Seller and the trustee.
THE SERVICER
USA Group Loan Services, Inc. ("Loan Services") was incorporated in
1982 as a nonprofit Delaware corporation and is an affiliate of USA Group. If so
specified in the prospectus supplement for a series of 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.
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
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 specified in
the related prospectus supplement (the "Cut-off Date") for the Trust.
The Student Loans that comprise assets of each Trust will be held by
the related Eligible Lender Trustee, as trustee on behalf of the Trust. The
Eligible Lender Trustee will also enter into, on behalf of the Trust, Guarantee
Agreements with the Guarantors pursuant to which each of the Student Loans will
be guaranteed by one of the Guarantors. SEE "Formation of the Trusts-Eligible
Lender Trustee".
Information with respect to each pool of Student Loans for a given
Trust will be set forth in the related prospectus supplement, including, to the
extent appropriate, the composition, the distribution by loan type, loan payment
status, and states of borrowers' residence and the portion of the Student Loans
guaranteed by the specified Guarantors.
In the case of each series for which the related Trust may acquire or
originate Student Loans after the related Cutoff Date, information with respect
to the Student Loans eligible to be acquired or originated by the related Trust
will be set forth in the related prospectus supplement as will information
regarding the duration and conditions of any related funding period (a "Funding
Period") or revolving period (a "Revolving Period"), the circumstances under
which Additional Fundings will be made during the period, and, if Additional
Fundings may continue to be made after the period, the circumstances under which
the Additional Fundings will be made.
In addition, if specified in the related prospectus supplement, the
assets of the related Trust may include specified rights of the Seller to
receive excess cashflow ("Excess Cashflow Rights") in respect of Student Loans
that are owned by one or more other Trusts established or sponsored by the
Seller. Excess Cashflow Rights will not exceed 10% of the assets of any Trust.
The related prospectus supplement will disclose summary data relating to the
Excess Cashflow Rights.
ORIGINATION AND MARKETING PROCESS
The Higher Education Act of 1965, as amended (the Act, together with
all rules and regulations promulgated thereunder by the Department and/or the
Guarantor (the "Act")) specifies rules regarding loan origination practices,
which lenders must comply with in order for the Student Loans to be guaranteed
and to be eligible to receive Federal Assistance. Lenders of Federal Student
Loans are prohibited from offering points, premiums, payments or other
inducements, directly or indirectly, to any educational institution, guarantor
or individual in order to secure Federal Student Loan applications, and no
lender may conduct unsolicited mailings of Federal Student Loan applications to
students who have not previously received student loans from that lender.
Generally the student and school complete the combined application
with promissory note and mail or electronically transmit it either to a lender
or directly to the applicable Guarantor. Both the lender and the Guarantor must
approve the application, including confirming that the application is complete
and that it (as well as the prospective borrower and institution) complies with
all applicable requirements of the Act and the requirements of the Guarantor.
The Act requires that each Guarantor have procedures designed to assure that it
guarantees Federal Student Loans only to students attending institutions which
meet the requirements of the Act. Some lenders establish maximum default rates
for institutions whose students they will serve. Each lender will only make
loans that are approved by the applicable Guarantor (consistent with the
approval requirements of the Act and the Guarantor). For each application that
is approved, the applicable Guarantor will issue a guarantee certificate to the
lender, which will then cause the loan to be disbursed (typically in multiple
installments) and a disclosure statement confirming the terms of the Student
Loan to be sent to the student borrower.
These procedures differ slightly for Federal Consolidation Loans.
SERVICING AND COLLECTIONS PROCESS
The applicable Guarantee Agreements and the Act require the holder of
Student Loans to cause specified procedures, including due diligence procedures
and the taking of specific steps at specific intervals, to be performed with
respect to the servicing of the Student Loans. These procedures are designed to
ensure that the Student Loans are repaid on a timely basis by or on behalf of
borrowers. The Servicer agrees to perform the servicing and collection
procedures with respect to the Student Loans on behalf of each Trust pursuant to
the related Loan Servicing Agreement. The procedures generally include periodic
attempts to contact any delinquent borrower by telephone and by mail, commencing
with one written notice within the first ten days of delinquency and including
multiple written notices and telephone calls to the borrower thereafter at
specified times during any delinquency. All telephone calls and letters are
automatically registered, and a synopsis of each call or the mailing of each
letter is noted in the Servicer's loan file for the borrower. The Servicer is
also required to perform skip tracing procedures on delinquent borrowers whose
current location is unknown, including contacting the borrowers' schools and
references. Failure to comply with the established procedures could adversely
affect the ability of a given Eligible Lender Trustee, as holder of legal title
to the Student Loans on behalf of the related Trust, to realize the benefits of
any Guarantee Agreement or to receive the benefits of Federal Assistance from
the Department with respect thereto. Failure to comply with established
procedures with respect to a Student Loan may also result in the denial of
coverage under a Guarantee Agreement for specified accrued interest amounts, in
circumstances where the failure has not caused the loss of the guarantee of the
principal of the Student Loan. SEE "Risk Factors--Risk that Failure to Comply
with Student Loan Origination and Servicing Procedures for Federal Student Loans
May Adversely Affect the Trust's Ability to Pay Principal and Interest on the
Related Notes ".
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 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 made a number of changes to the Federal Student Loan
programs, including imposing on lenders or holders of Federal Student Loans fees
and affecting the Department's financial assistance to Federal Guarantors by
reducing the percentage of claim payments the Department will reimburse to
Federal Guarantors, reducing more substantially the insurance premiums and
default collections that Federal Guarantors are entitled to receive and/or
retain and allowing the Department to reduce the administrative fees it pays to
Federal Guarantors. In addition, legislation contemplated replacement of a
minimum of approximately 60% of the Federal Student Loan programs with direct
lending by the Department by 1998. However, references in the Act regarding a
transition from FFELP to direct student loan program were eliminated by the 1998
Reauthorization Bill when Congress determined that both programs would continue
to coexist. Notwithstanding these changes, any expansion of the new program may
involve increasing reductions in the volume of loans made under the existing
programs, which could result in increased costs for SMS and the Servicer due to
reduced economies of scale. It is expected that the volume of new loans held and
serviced by SMS and the Servicer will decrease due to the new program, although
the entities have not experienced a reduction to date and any reduction will not
necessarily be equal to the percentage by which existing Federal Student Loan
programs are replaced by the new program. As these reductions occur, SMS and the
Servicer could experience increased costs due to reduced economies of scale to
the extent the volume of loans held by SMS and the Servicer is reduced. These
cost increases could affect the ability of the Servicer to satisfy its
obligations to service the Student Loans or the obligations of the Seller and
the Servicer to repurchase Student Loans in the event of specified breaches of
their respective representations and warranties or covenants. SEE "Description
of the Transfer and Servicing Agreements--Sale of Student Loans; Representations
and Warranties" and"--Servicer Covenants". These volume reductions could also
reduce revenues received by Federal Guarantors that are available to pay claims
on defaulted Student Loans. Finally, the level of competition in existence in
the secondary market for loans made under the existing programs could be
reduced, resulting in fewer potential buyers of the Federal Student Loans and
lower prices available in the secondary market for those loans. Further, the
Department is implementing a direct consolidation loan program, which may
further reduce the volume of Federal Student Loans and increase the prepayment
of existing FFELP Loans. The volume of existing loans that may be prepaid in
this fashion is not determinable at this time. The Emergency Student Loan
Consolidation Act of 1997 authorizes FFELP loan originators to consolidate
direct loans into Federal Consolidated Loans. This provision applies to loan
applications received on or after November 13, 1997.
ELIGIBLE LENDERS, STUDENTS AND EDUCATIONAL INSTITUTIONS
Lenders eligible to make loans under FFELP generally include banks,
savings and loan associations, credit unions, pension funds, insurance
companies, and with conditions, schools and guarantors. Federal Student Loans
may only be made to a "qualified student", generally defined as a United States
citizen or national or otherwise eligible individual under federal regulations
who:
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.
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"),
(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 Treasury then 10%
+ Interest Rate Margin
10/01/92 - 06/30/94........ 91-Day Treasury + Interest 9% 3.10%
Rate Margin
07/01/94 - 06/30/95........ 91-Day Treasury + Interest 8.25% 3.10%
Rate Margin
07/01/95 - 06/30/98........ 91-Day Treasury + Interest 8.25% 2.50% (In-School, Grace or
Rate Margin Deferment); 3.10% (in
repayment)
On or after 07/01/98....... 91-Day Treasury + Interest 8.25% 1.70% (In-School, Grace or
Rate Margin Deferment); 2.30% (in
repayment)
- --------------
(1) The Trigger Date for Federal Stafford Loans made before October 1, 1992 is
the first day of enrollment period for which a borrower's first Federal
Stafford Loan is made and for Federal Stafford Loans made on October 1,
1992 and after the Trigger Date is the date of the disbursement of a
borrower's first Federal Stafford Loan.
(2) The rate for variable rate Federal Stafford Loans applicable for any
12-month period beginning on July 1 and ending on June 30, is determined on
the preceding June 1 and is equal to the lesser of (a) the applicable
Maximum Rate or (b) the sum of (1) the bond equivalent rate of 91-day
Treasury bills auctioned at the final auction held prior to June 1 and (2)
the applicable Interest Rate Margin.
</TABLE>
The 1992 Amendments provide that, for fixed rate loans made on or
after July 23, 1992 and for specified loans made to new borrowers on or after
July 1, 1988, the lender must have converted by January 1, 1995 the interest
rate on the loans to an annual interest rate adjusted each July 1 equal to:
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 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 AND ADDITIONAL MAXIMUM
UNSUBSIDIZED UNSUBSIDIZED AGGREGATE
SUBSIDIZED ON OR AFTER ONLY ON OR TOTAL
BORROWER'S ACADEMIC SUBSIDIZED ON OR AFTER 10/1/93(2) AFTER AMOUNT
LEVEL PRE-1/1/87 1/1/87 7/1/94(3) IN
- ---------------------------- ------------ ------------ -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Undergraduate (per year)
1st year............ $ 2,500 $ 2,625 $ 2,625 $ 4,000 $ 6,625
2nd year............ $ 2,500 $ 2,625 $ 3,500 $ 4,000 $ 7,500
3rd year and above.. $ 2,500 $ 4,000 $ 5,500 $ 5,000 $ 10,500
Graduate (per year)...... $ 5,000 $ 7,500 $ 8,500 $ 10,000 $ 18,500
Aggregate Limit;
Undergraduate....... $ 12,500 $ 17,250 $ 23,000 $ 23,000 $ 46,000
Graduate (including
undergraduate)........... $ 25,000 $ 54,750 $ 65,500 $ 73,000 $ 138,500
- ---------------
(1) The loan limits are inclusive of both Federal Stafford Loans and Federal
Direct Student Loans.
(2) These amounts represent the combined maximum loan amount per year for
Federal Stafford and Federal Unsubsidized Stafford Loans. Accordingly, the
maximum amount that a student may borrow under a Federal Unsubsidized
Stafford Loan is the difference between the combined maximum loan amount
and the amount the student received in the form of a Federal Stafford Loan.
(3) Independent undergraduate students, graduate students or professional
students may borrow these additional amounts. In addition, dependent
undergraduate students may also receive these additional loan amounts if
the parents of the students are unable to provide the family contribution
amount and it is unlikely that the student's parents will qualify for a
Federal PLUS Loan.
</TABLE>
The annual loan limits are reduced in some instances where the student
is enrolled in a program that is less than one academic year or has less than a
full academic year remaining in his or her program. The Department has
discretion to raise these limits to accommodate highly specialized or
exceptionally expensive courses of study.
REPAYMENT. Repayment of principal on a Federal Stafford Loan generally
does not commence while a student remains a qualified student, but generally
begins upon expiration of the applicable Grace Period, as described below. Any
borrower may voluntarily prepay without premium or penalty any loan and in
connection therewith may waive any Grace Period or Deferral Period. In general,
each loan must be scheduled for repayment over a period of not more than ten
years after the commencement of repayment. New borrowers on or after October 7,
1998 who accumulate outstanding loans under FFELP totaling more than $30,000 are
entitled to extended repayment schedules of up to 25 years subject to minimum
repayment amounts. The Act currently requires minimum annual payments of $600
or, if greater, the amount of accrued interest for that year, unless the
borrower and the lender agree to lesser payments. Effective July 1, 1993, the
Act and regulations promulgated thereunder require lenders to offer the choice
of a standard, graduated or income-sensitive repayment schedule to all borrowers
who receive a loan on or after that date.
GRACE PERIODS, DEFERRAL PERIODS AND FORBEARANCE PERIODS. Repayment of
principal on a Federal Stafford Loan must generally commence following a period
of (a) not less than 9 months or more than 12 months (with respect to loans for
which the applicable interest rate is 7% per annum) and (b) not more than 6
months (with respect to loans for which the applicable interest rate is 9% per
annum or 8% per annum and for loans to first-time borrowers on or after July 1,
1988) after the borrower ceases to pursue at least a half-time course of study
(a "Grace Period"). However, during other periods (each, a "Deferral Period")
and subject to conditions, no principal repayments need be made, including
periods when the student has returned to an eligible educational institution on
a full-time basis or is pursuing studies pursuant to an approved graduate
fellowship program, or when the student is a member of the United States Armed
Forces or a volunteer under the Peace Corps Act or the Domestic Volunteer
Service Act of 1973, or when the borrower is temporarily totally disabled, or
periods during which the borrower may defer principal payments because of
temporary financial hardship. For new borrowers to whom loans are first
disbursed on or after July 1, 1993, payment of principal may be deferred only
while the borrower is at least a half-time student or is in an approved graduate
fellowship program or is enrolled in a rehabilitation program, or when the
borrower is seeking but unable to find full-time employment, subject to a
maximum deferment of three years, or when for any reason the lender determines
that payment of principal will cause the borrower economic hardship, also
subject to a maximum deferment of three years. The 1992 Amendments also permit
and in some cases require forbearance of loan collection in specified
circumstances (each period, a "Forbearance Period"). The 1998 Reauthorization
Bill further expanded the situations in which a forbearance can be granted.
FEDERAL UNSUBSIDIZED STAFFORD LOANS
The Federal Unsubsidized Stafford Loan program created under the 1992
Amendments is designed for students who do not qualify for the maximum Federal
Stafford Loan due to parental and/or student income and assets in excess of
permitted amounts. The basic requirements for Federal Unsubsidized Stafford
Loans are essentially the same as those for the Federal Stafford Loans,
including with respect to provisions governing the interest rate, the annual
loan limits and the Special Allowance Payments. The terms of the Federal
Unsubsidized Stafford Loans, however, differ in some respects. The federal
government does not make Interest Subsidy Payments on Federal Unsubsidized
Stafford Loans. The borrower must either begin making interest payments within
60 days after the time the loan is disbursed or permit capitalization of the
interest by the lender until repayment begins. Federal Unsubsidized Stafford
Loan borrowers who obtained the loans on or after October 1, 1992 are required
to pay, upon disbursement, a 6.5% insurance fee to the Department, though no
guarantee fee may be charged by the applicable Federal Guarantor. Effective July
1, 1994, the maximum insurance premium charged by the Federal Guarantor is
reduced to 1% and the origination fee is 3%. Subject to the same loan limits
established for Federal Stafford Loans, the student may borrow up to the amount
of the student's Unmet Need. Lenders are authorized to make Federal Unsubsidized
Stafford Loans applicable for periods of enrollment beginning on or after
October 1, 1992.
FEDERAL PLUS AND FEDERAL SLS LOAN PROGRAMS
The Act authorizes Federal PLUS Loans to be made to parents of
eligible dependent students and previously authorized Federal SLS Loans to be
made to specified categories of students. After July 1, 1993, only parents who
do not have an adverse credit history or who can secure an endorser without an
adverse credit history are eligible for Federal PLUS Loans. The basic provisions
applicable to Federal PLUS and Federal SLS Loans are similar to those of Federal
Stafford Loans with respect to the federal insurance and reinsurance on the
loans. However, Federal PLUS and Federal SLS Loans differ from Federal Stafford
Loans, particularly because Interest Subsidy Payments are not available under
the Federal PLUS and Federal SLS Programs and in some instances Special
Allowance Payments are more restricted.
LOAN LIMITS. Federal PLUS and Federal SLS Loans disbursed prior to
July 1, 1993 are limited to $4,000 per academic year with a maximum aggregate
amount of $20,000. Federal SLS Loan limits for loans disbursed on or after July
1, 1993 depended upon the class year of the student and the length of the
academic year. The annual loan limit for Federal SLS Loans first disbursed on or
after July 1, 1993 ranged from $4,000 for first and second year undergraduate
borrowers to $10,000 for graduate borrowers, with a maximum aggregate amount of
$23,000 for undergraduate borrowers and $73,000 for graduate and professional
borrowers. After July 1, 1994, for purposes of new loans being originated, the
Federal SLS programs were merged with the Federal Unsubsidized Stafford Loan
program with the borrowing limits reflecting the combined eligibility under both
programs. The only limit on the annual and aggregate amounts of Federal PLUS
Loans first disbursed on or after July 1, 1993 is the cost of the student's
education less other financial aid received, including scholarship, grants and
other student loans.
INTEREST. THE INTEREST RATE DETERMINATION FOR A PLUS OR SLS LOAN IS
DEPENDENT ON WHEN THE LOAN WAS ORIGINALLY MADE AND DISBURSED AND THE PERIOD OF
ENROLLMENT. THE INTEREST RATES FOR PLUS AND SLS LOANS ARE SUMMARIZED IN THE
FOLLOWING CHART.
<TABLE>
<CAPTION>
Interest
Trigger Date(1) Borrower Rate(2) Maximum Rate Rate Margin
- --------------------------------- ----------------------------------------- ------------------------ ----------------
<S> <C> <C> <C>
Prior to 10/01/81............ 9% 9% N/A
10/01/81 - 10/30/82.......... 14% 14% N/A
11/01/82 - 06/30/87.......... 12% 12% N/A
07/01/87 - 09/30/92.......... 52-Week Treasury + Interest Rate Margin 12% 3.25%
10/01/92 - 06/30/94.......... 52-Week Treasury + Interest Rate Margin PLUS 10%, SLS 11% 3.10%
07/01/94 - 06/30/98.......... 52-Week Treasury + Interest Rate Margin 9% 3.10%
(SLS repealed 07/01/94)
After 06/30/98............... 91-Day Treasury + Interest Rate Margin 9% 3.10%
- ---------------
(1) The Trigger Date for PLUS and SLS loans made before October 1, 1992 is
the first day of enrollment period for which the loan is made, and for
PLUS and SLS loans made on October 1, 1992 and after the Trigger Date
is the date of the first disbursement of the loan, respectively.
(2) For PLUS or SLS loans that carry a variable rate, the rate is set
annually for 12-month periods beginning on July 1 and ending on June 30
on the preceding June 1 and is equal to the lesser of (a) the
applicable maximum rate and (b) the sum of (1) the bond equivalent rate
of 52-week Treasury bills (or 91 day Treasury bills in the case of
loans made or disbursed on or after June 30, 1998) auctioned at the
final auction held prior to June 1, and (2) the applicable Interest
Rate Margin.
</TABLE>
REPAYMENT, DEFERMENTS. The 1992 Amendments provide Federal SLS
borrowers with the option to defer commencement of repayment of principal until
the commencement of repayment of Federal Stafford Loans. Otherwise, repayment of
principal of Federal PLUS and Federal SLS Loans is required to commence no later
than 60 days after the date of the final disbursement of the loan, subject to
deferral and forbearance provisions. The deferral provisions which apply are
more limited than those which apply to Federal Stafford Loans. Repayment of
interest, however, may be deferred and capitalized during periods of educational
enrollments and periods of unemployment or hardship as specified under the Act.
Further, whereas Interest Subsidy Payments are not available for the deferments,
interest may be capitalized during the periods upon agreement of the lender and
borrower. Maximum loan repayment periods and minimum payment amounts are the
same as for Federal Stafford Loans.
A borrower may refinance all outstanding Federal PLUS Loans under a
single repayment schedule for principal and interest, with the new repayment
period calculated from the date of repayment of the most recent included loan.
The interest rate of the refinanced loan shall be the weighted average of the
rates of all Federal PLUS Loans being refinanced. A second type of refinancing
enables an eligible lender to reissue a Federal PLUS Loan which was initially
originated at a fixed rate prior to July 1, 1987 in order to permit the borrower
to obtain the variable interest rate available on Federal PLUS Loans on and
after July 1, 1987. If a lender is unwilling to refinance the original Federal
PLUS Loan, the borrower may obtain a loan from another lender for the purpose of
discharging the loan and obtaining a variable interest rate.
FEDERAL CONSOLIDATION LOAN PROGRAM
The Act authorizes a program under which borrowers may consolidate one
or more of their Student Loans into a single loan (each, a "Federal
Consolidation Loan") insured and reinsured on a basis similar to Federal
Stafford Loans. Federal Consolidation Loans may be made in an amount sufficient
to pay outstanding principal, unpaid interest, late charges and collection costs
on all federally insured or reinsured student loans incurred under FFELP
selected by the borrower, as well as loans made pursuant to various other
federal student loan programs and which may have been made by different lenders.
Under this program, a lender may make a Federal Consolidation Loan to an
eligible borrower at the request of the borrower if the lender holds an
outstanding loan of the borrower or the borrower certifies that he has been
unable to obtain a Federal Consolidation Loan from the holders of the
outstanding loans made to him. The 1998 Reauthorization Bill allows lenders to
make Federal Consolidation Loans to borrowers with multiple holders of
underlying FFELP loans even if the lender does not hold an outstanding loan. A
borrower who is unable to obtain a Federal Consolidation Loan from an eligible
lender or a Federal Consolidation Loan with an income-sensitive repayment plan
acceptable to the borrower may obtain a Federal Consolidation Loan under the
direct loan program. Federal Consolidation Loans that were made on or after July
1, 1994 have no minimum loan amount, although Federal Consolidation Loans for
less than $7,500 must be repaid in ten years. Applications for Federal
Consolidation Loans received on or after January 1, 1993 but prior to July 1,
1994, were available only to borrowers who had aggregate outstanding student
loan balances of at least $7,500; for applications received before January 1,
1993, Federal Consolidation Loans are available only to borrowers who have
aggregate outstanding student loan balances of at least $5,000. The borrowers
must be either in repayment status or in a grace period preceding repayment and,
for applications received prior to January 1, 1993, the borrower must not have
been delinquent by more than 90 days on any student loan payment; for
applications received on or after January 1, 1993, delinquent or defaulted
borrowers are eligible to obtain Federal Consolidation Loans if they will
reenter repayment through loan consolidation. For applications received on or
after January 1, 1993, borrowers may, within 180 days of the origination of a
Federal Consolidation Loan, add additional loans made prior to consolidation
("Add-on Consolidation Loans") for consolidation therewith. If the borrower
obtains loans subsequent to the Federal Consolidation Loan, the borrower may
consolidate the new loans and the Federal Consolidation Loan. The interest rate
and term of the Federal Consolidation Loan, following the consolidation with the
related Add-on Consolidation Loans, may be recomputed within the parameters
permitted by the Act. For applications received on or after January 1, 1993,
married couples who agree to be jointly and severally liable will be treated as
one borrower for purposes of loan consolidation eligibility. For applications
received on or after November 13, 1997, student loan borrowers may include
federal direct loans in Federal Consolidation Loans.
Federal Consolidation Loans made prior to July 1, 1994 bear interest
at a rate which equals the weighted average of interest rates on the unpaid
principal balances of outstanding loans, rounded up to the nearest whole one
percent, with a minimum rate of 9%. For Federal Consolidation Loans made on or
after July 1, 1994 through November 12, 1997, the weighted average interest rate
must be rounded up to the nearest whole percent. Federal Consolidation Loans
made on or after November 13, 1997 through September 30, 1998 will bear interest
at the annual variable rate applicable to Stafford Loans. Federal Consolidation
Loans for which the application is received on or after October 1, 1998 bear
interest at a rate equal to the weighted average interest rate of the loans
consolidated, rounded up to the nearest one-eighth of one percent and capped at
8.25%. Interest on Federal Consolidation Loans accrues and, for applications
received prior to January 1, 1993, is to be paid without Interest Subsidy by the
Department. For Federal Consolidation Loans received on or after January 1,
1993, all interest of the borrower is paid during all periods of Deferment.
However, Federal Consolidation Loan applications received on or after August 10,
1993 will only be subsidized if all of the underlying loans being consolidated
were subsidized Federal Stafford Loans; PROVIDED, HOWEVER, that in the case of
Federal Consolidation Loans made on or after November 13, 1997, that portion of
the Federal Consolidation Loan that is comprised of Subsidized Stafford Loans
will retain its subsidy benefits during periods of deferment. Borrowers may
elect to accelerate principal payments without penalty. Further, no insurance
premium may be charged to a borrower and no insurance premium may be charged to
a lender in connection with a Federal Consolidation Loan. However, a fee may be
charged to the lender by a Federal Guarantor to cover the costs of increased or
extended liability with respect to a Consolidation Loan, and lenders must pay a
Monthly Rebate Fee at an annualized rate of 1.05% for loans disbursed on or
after October 1, 1993 (0.62% for loans for which applications were received
between October 1, 1998 and January 31, 1999). Special Allowance Payments are
made on Consolidation Loans whenever the rate charged the borrower is limited by
the 9%/8.25% cap. However, for applications received on or after October 1,
1998, Special Allowance Payments are paid in order to afford the lender a yield
equal to the 91-day T-bill plus 3.1% (or the CP Rate plus 2.64% for loans first
disbursed on or after January 1, 2000 and before July 1, 2003), whenever that
formula exceeds the borrower's interest rate.
Repayment of Federal Consolidation Loans begins within 60 days after
discharge of all prior loans which are consolidated. Repayment schedule options
must include, for applications received on or after January 1, 1993, the
establishment of graduated or income sensitive repayment plans, subject to
limits applicable to the sum of the Federal Consolidation Loan and the amount of
the borrower's other eligible student loans outstanding. The lender may, at its
option, include the graduated and income sensitive repayment plans for
applications received prior to that date. Generally, depending on the total of
loans outstanding, repayment may be scheduled over periods no shorter than ten
but not more than 25 years in length. For applications received on or after
January 1, 1993, the maximum maturity schedule is 30 years for Federal
Consolidation Loans of $60,000 or more.
All eligible loans of a borrower paid in full through consolidation
are discharged in the consolidation process when the new Federal Consolidation
Loan is issued.
FEDERAL GUARANTORS
The Act authorizes Federal Guarantors to support education financing
and credit needs of students at post-secondary schools. The Act encourages every
state either to establish its own agency or to designate another Federal
Guarantor in cooperation with the Secretary of Education. Under various programs
throughout the United States of America, Federal Guarantors insure and sometimes
service guaranteed student loans. The Federal Guarantors are reinsured by the
federal government for from 80% to 100% of each default claim paid, depending on
their claims experience, for loans disbursed prior to October 1, 1993, from 78%
to 98% of each default claim paid for loans disbursed on or after October 1,
1993 and prior to October 1, 1998 and from 75% to 95% of each default claim paid
for loans disbursed on or after October 1, 1998. Federal Guarantors are
reinsured by the federal government for 100% of death, disability, bankruptcy,
closed school and false certification claims paid. Loans guaranteed under the
lender of last resort provisions of the Act are also 100% guaranteed and
reinsured. See"--Federal Insurance and Reinsurance of Federal Guarantors" below.
Federal Guarantors collect a one-time insurance premium ranging up to
1% of the principal amount of each guaranteed loan, depending on the Federal
Guarantor. Federal Guarantors are prohibited from charging insurance premiums on
loans made under the Federal Unsubsidized Stafford Loan program prior to July 1,
1994. On the loans made prior to July 1, 1994, the Act requires that a 6.5%
combined loan origination fee and insurance premium be paid by the borrower on
Federal Unsubsidized Stafford Loans. This fee is passed through to the
Department by the originating lender. Effective July 1, 1994, the maximum
insurance premium and origination fee for Federal Stafford Loans and Federal
Unsubsidized Stafford Loans are 1% and 3%, respectively.
Each Federal Student Loan to be sold to an Eligible Lender Trustee on
behalf of a Trust will be guaranteed as to principal and interest by a Federal
Guarantor pursuant to a Guarantee Agreement between the Federal Guarantor and
the applicable Eligible Lender Trustee. The applicable prospectus supplement for
each Trust will identify each related Federal Guarantor for the Federal Student
Loans held by the Trust as of the applicable Closing Date and the amount of the
Federal Student Loans it is guaranteeing for the Trust.
The 1993 Act granted the Department broad powers over Federal
Guarantors and their reserves. These powers include the authority to require a
Federal Guarantor to return all reserve funds to the Department if the
Department determines the action is necessary to ensure an orderly termination
of the Federal Guarantor, to serve the best interests of the student loan
programs or to ensure the proper maintenance of the Federal Guarantor's funds or
assets. The Department is also now authorized to direct a Federal Guarantor to
return a portion of its reserve funds which the Department determines is
unnecessary to pay the program expenses and contingent liabilities of the
Federal Guarantor and/or to cease any activities involving the use of the
Federal Guarantor's reserve funds or assets which the Department determines is a
misapplication or otherwise improper. The Department may also terminate a
Federal Guarantor's reinsurance agreement if the Department determines that the
action is necessary to protect the federal fiscal interest. These various
changes create a significant risk that the resources available to the Federal
Guarantors to meet their guarantee obligations will be significantly reduced.
The 1998 Reauthorization Bill restructured guarantor funding such that Federal
Guarantors are provided with additional flexibility in choosing how to spend
certain funds they receive.
FEDERAL INSURANCE AND REINSURANCE OF FEDERAL GUARANTORS
A Federal Student Loan is considered to be in default for purposes of
the Act when the borrower fails to make an installment payment when due or to
comply with other terms of the loan, and if the failure persists for a period of
time as specified by the Act. Under specified circumstances a loan deemed
ineligible for Federal Reinsurance may be restored to eligibility. Procedures
for the restoration of eligibility are discussed below.
If the loan in default is covered by federal loan insurance in
accordance with the provisions of the Act, the Department is to pay the
applicable Federal Guarantor, as insurance beneficiary, the amount of the loss
sustained thereby, upon notice and determination of the amount, within 90 days
of the notification, subject to reduction as described below.
If the loan is guaranteed by a Federal Guarantor, the eligible lender
is reimbursed by the Federal Guarantor for 100% (or not more than 98% for loans
disbursed on or after October 1, 1993) of the unpaid principal balance of the
defaulted loan plus accrued and unpaid interest thereon so long as the eligible
lender has properly originated and serviced the loan. Under the Act, the
Department enters into a guarantee agreement with each Federal Guarantor, which
provides for federal reinsurance for amounts paid to eligible lenders by the
Federal Guarantor with respect to defaulted loans.
Pursuant to the agreements, the Department also agrees to reimburse a
Federal Guarantor for 100% of the amounts expended in connection with a claim
resulting from the death, bankruptcy, total and permanent disability of a
borrower, ineligible loan, the death of a student whose parent is the borrower
of a Federal PLUS Loan or claims by borrowers who received loans on or after
January 1, 1986 and who are unable to complete the programs in which they are
enrolled due to school closure or borrowers whose borrowing eligibility was
falsely certified by the eligible institution; claims are not included in
calculating a Federal Guarantor's claims rate experience for federal reinsurance
purposes. The Department also agrees to reimburse a Federal Guarantor for 100%
of the amounts expended in connection with claims on loans made under the lender
of last resort provisions. The Department is also required to repay the unpaid
balance of any loan if the borrower files for relief under Chapter 12 or 13 of
the Bankruptcy Code or files for relief under Chapter 7 or 11 of the Bankruptcy
Code and has been in repayment for more than 7 years or commences an action for
a determination of dischargeability under Section 523(a)(8)(b) of the Bankruptcy
Code, and is authorized to acquire the loans of borrowers who are at high risk
of default and who request an alternative repayment option from the Department.
Effective for bankruptcy actions commenced by the borrower on or after October
8, 1998, student loans will not be discharged unless there is an undue hardship
determination made by the bankruptcy court.
The amount of the reinsurance payment to the Federal Guarantor for
default claims is subject to reduction based upon the annual default claims rate
of the Federal Guarantor, calculated to equal the amount of federal reinsurance
claims paid by the Department to the Federal Guarantor during any fiscal year as
a percentage of the original principal amount of guaranteed loans in repayment
at the end of the prior federal fiscal year. The formula is summarized as
follows:
<TABLE>
<CAPTION>
Claims Rate of Federal Guarantor Reimbursement to Federal Guarantor by the Department of Education(1)
- --------------------------------------- ----------------------------------------------------------------------
<S> <C>
0% to and including 5%................. 100%
Greater than 5% to and including 9%.... 100% of claims to and including 5%; 90% of claims greater than 5%
Greater than 9%........................ 100% of claims to and including 5%; 90% of claims greater than 5%
to and including 9%; and 80% of claims greater than 9%
- ---------
(1) The federal reimbursement has been reduced to 98%, 88% and 78% for
loans disbursed on or after October 1, 1993 and prior to October 1,
1998 and 95%, 85% and 75% for loans disbursed on or after October 1,
1998.
</TABLE>
The claims experience is not accumulated from year to year, but is
determined solely on the basis of claims in any one federal fiscal year compared
with the original principal balance of loans in repayment at the beginning of
that year.
The 1992 Amendments addressed education loan industry concerns
regarding the Department's commitment to providing support in the event of
Federal Guarantor failures. Pursuant to the 1992 Amendments, Federal Guarantors
are required to maintain specified reserve fund levels. The levels are defined
as 0.5% of the total attributable amount of all outstanding loans guaranteed by
the Federal Guarantor for the fiscal year of the Federal Guarantor that begins
in 1993, 0.7% for the Federal Guarantor's fiscal year beginning in 1994, 0.9%
for the Federal Guarantor's fiscal year beginning in 1995, and 1.1% for the
Federal Guarantor's fiscal year beginning on or after January 1, 1996. Effective
with the 1998 Reauthorization Bill, Federal Guarantors must maintain a minimum
reserve level of at least 0.25 percent. If the Federal Guarantor fails to
achieve the minimum reserve level in any two consecutive years, if the Federal
Guarantor's federal annual claims rate equals or exceeds 9% or if the Department
determines the Federal Guarantor's administrative or financial condition
jeopardizes its continued ability to perform its responsibilities, the
Department may require the Federal Guarantor to submit and implement a
management plan to address the deficiencies. The Department may terminate the
Federal Guarantor's agreements with the Department if the Guarantor fails to
submit the required plan, or fails to improve its administrative or financial
condition substantially, or if the Department determines the Federal Guarantor
is in danger of financial collapse. In this event, the Department is required to
assume responsibility for the functions of the Federal Guarantor and in
connection therewith is authorized to undertake specified actions to assure the
continued payment of claims, including maturity advances to Federal Guarantors
to cover immediate cash needs, transferring of guarantees to another Federal
Guarantor, or transfer of guarantees to the Department itself. No assurance can
be made that the Department will under any given circumstance exercise its right
to terminate a reimbursement agreement with a Federal Guarantor or make a
determination that the Federal Guarantor is unable to meet its guarantee
obligations.
The Act requires that, subject to compliance with the Act, the
Secretary must pay all amounts, which may be required to be paid under the Act
as a result of specified events of death, disability, bankruptcy, school closure
or false certification by the educational institution described in the Act. It
further provides that Federal Guarantors shall be deemed to have a contractual
right against the United States of America to receive reinsurance in accordance
with its provisions. In addition, the 1992 Amendments provide that if the
Department determines that a Federal Guarantor is unable to meet its insurance
obligations, holders of loans may submit insurance claims directly to the
Department until the obligations are transferred to a new Federal Guarantor
capable of meeting the obligations or until a successor Federal Guarantor
assumes the obligations. No assurance can be made that the Department would
under any given circumstances assume the obligation to assure satisfaction of a
guarantee obligation by exercising its right to terminate a reimbursement
agreement with a Federal Guarantor or by making a determination that the Federal
Guarantor is unable to meet its guarantee obligations.
WEIGHTED AVERAGE LIVES OF THE 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.
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 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,
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 effects 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 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,
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.
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
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 Cedel or Euroclear in Europe. Notes will be registered in the name of
Cede & Co. ("Cede") as nominee for DTC. Cedel and Euroclear will hold omnibus
positions with respect to the Notes on behalf of Cedel Participants and the
Euroclear Participants, respectively, through customers' notes accounts in
Cedel's and Euroclear's name on the books of their respective depositaries
(collectively, the "Depositaries") which in turn will hold the positions in
customers' 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.
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". 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 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 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;
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 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;
(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 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 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 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.
If the transfer of the Student Loans is deemed to be an assignment as
security for the benefit of a Trust, there are limited circumstances under the
UCC in which prior or subsequent transferees of Student Loans coming into
existence after the Closing Date could have an interest in the Student Loans
with priority over the related Eligible Lender Trustee's interest. A tax or
other government lien on property of the Seller arising prior to the time a
Student Loan comes into existence may also have priority over the interest of
the related Eligible Lender Trustee in the Student Loan. Under the related Loan
Sale Agreement, however, the Seller will warrant that it has caused the Student
Loans to be transferred to the related Eligible Lender Trustee on behalf of a
Trust free and clear of the lien of any third party. In addition, the Seller
will covenant that it will not sell, pledge, assign, transfer or grant any lien
on any Student Loan held by a Trust (or any interest in any Student Loan held by
a Trust) other than to the related Eligible Lender Trustee on behalf of a Trust,
except as provided below.
Pursuant to each Loan Servicing Agreement, the Servicer as custodian
on behalf of the related Trust will have custody of the promissory notes
evidencing the Student Loans following the sale of the Student Loans to the
related Eligible Lender Trustee. Although the accounts and computer records of
the Seller and Servicer will be marked to indicate the sale and although the
Seller will cause UCC financing statements to be filed with the appropriate
authorities, the Student Loans will not be physically segregated, stamped or
otherwise marked to indicate that the Student Loans have been sold to the
Eligible Lender Trustee. If, through inadvertence or otherwise, any of the
Student Loans were sold to another party, or a security interest in any Student
Loan were granted to another party, that purchased (or took the security
interest in) any of the Student Loans in the ordinary course of its business and
took possession of the Student Loans, then the purchaser (or secured party)
might acquire an interest in the Student Loans superior to the interest of the
Eligible Lender Trustee if the purchaser (or secured party) acquired (or took a
security interest in) the Student Loans for new value and without actual
knowledge of the related Eligible Lender Trustee's interest. See "Description of
the Transfer and Servicing Agreements--Sale of Student Loans; Representations
and Warranties".
With respect to each Trust, in the event of a Servicer Default
resulting solely from specified events of insolvency or bankruptcy that may
occur with respect to the Seller or the Servicer, a court,
trustee-in-bankruptcy, conservator, receiver or liquidator may have the power to
prevent either the related Indenture Trustee or Noteholders of the related
series from appointing a successor Servicer. See "Description of the Transfer
and Servicing Agreements--Rights upon Servicer Default".
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon lenders and servicers involved
in consumer finance. Also, some state laws impose finance charge ceilings and
other restrictions on consumer transactions and require contract disclosures in
addition to those required under federal law. These requirements impose specific
statutory liabilities upon lenders who fail to comply with their provisions.
These requirements are generally inapplicable to Federal Student Loans, but a
Trust may be liable for violations of consumer protection laws that may apply to
the Student Loans, either as assignee or as the party directly responsible for
obligations arising after the transfer. For a discussion of a Trust's rights if
the Student Loans were not originated or serviced in compliance in all material
respects with applicable laws, SEE "Description of the Transfer and Servicing
Agreements--Sale of Student Loans; Representations and Warranties"
and"--Servicer Covenants".
LOAN ORIGINATION AND SERVICING PROCEDURES APPLICABLE TO STUDENT LOANS
The Act, including the implementing regulations thereunder, imposes
specified requirements, guidelines and procedures with respect to originating
and servicing student loans including the Student Loans. Generally, those
procedures require that completed loan applications be processed, a
determination of whether an applicant is an eligible borrower under applicable
standards (including a review of a financial need analysis) be made, the
borrower's responsibilities under the loan be explained to him or her, the
promissory note evidencing the loan be executed by the borrower and then that
the loan proceeds be disbursed in a specified manner by the lender. After the
loan is made, the lender must establish repayment terms with the borrower,
properly administer deferrals and forbearances and credit the borrower for
payments made thereon. If a borrower becomes delinquent in repaying a loan, a
lender or a servicing agent must perform collection procedures (primarily
telephone calls and demand letters) which vary depending upon the length of time
a loan is delinquent. The Servicer has agreed pursuant to the related Loan
Servicing Agreement to perform collection and servicing procedures on behalf of
the related Trust. However, failure to follow these procedures or failure of the
originator of the loan to follow procedures relating to the origination of any
Federal Student Loans could result in adverse consequences. Any failure could
result in the Department's refusal to make reinsurance payments to the Federal
Guarantors or to make Interest Subsidy Payments and Special Allowance Payments
to the Eligible Lender Trustee with respect to the Federal Student Loans or in
the Federal Guarantors' refusal to honor their Guarantee Agreements with the
Eligible Lender Trustee with respect to the Federal Student Loans. Failure of
the Federal Guarantors to receive reinsurance payments from the Department could
adversely affect the Federal Guarantors' ability or legal obligation to make
Guarantee Payments to the related Eligible Lender Trustee with respect to the
Federal Student Loans.
Loss of any Guarantee Payments, Interest Subsidy Payments or Special
Allowance Payments could adversely affect the amount of Available Funds on any
Distribution Date and the related Trust's ability to pay principal and interest
on the Notes of the related series and to make distributions in respect of the
Certificates of the related series. Under specified circumstances, unless
otherwise specified in the related prospectus supplement, the related Trust has
the right, pursuant to the related Loan Sale Agreement and Loan Servicing
Agreement, to cause the Seller to repurchase any Student Loan, or to cause the
Servicer to arrange for the purchase of any Student Loan, if a breach of the
representations, warranties or covenants of the Seller or the Servicer, as the
case may be, with respect to the Student Loan has a material adverse effect on
the interest of the Trust in the Student Loan and the breach is not cured within
any applicable cure period. SEE "Description of the Transfer and Servicing
Agreements--Sale of Student Loans; Representations and Warranties"
and"--Servicer Covenants". The failure of the Seller to so purchase, or of the
Servicer to arrange for the purchase of, a Student Loan, if so required, would
constitute a breach of the related Loan Sale Agreement and Loan Servicing
Agreement, enforceable by the related Eligible Lender Trustee on behalf of the
related Trust or by the related Indenture Trustee on behalf of the Noteholders
of the related series, but would not constitute an Event of Default under the
Indenture.
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.
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.
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
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 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 notes clearing organization or specified other
financial institutions, the organization or institution may provide the relevant
signed statement to the withholding agent; in that case, however, the signed
statement must be accompanied by a Form W-8 or substitute form provided by the
foreign person that owns the Note. If the interest is not portfolio interest,
then it will be subject to United States federal income and withholding tax at a
rate of 30%, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person generally will be exempt from
United States federal income and withholding tax, provided that (1) the gain is
not effectively connected with the conduct of a trade or business in the United
States by the foreign person and (2) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
If the interest, gain or income on a Note held by a foreign person is
effectively connected with the conduct of a trade or business in the United
States by the foreign person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement), the
holder generally will be subject to United States federal income tax on the
interest, gain or income at regular federal income tax rates. In addition, if
the foreign person is a foreign corporation, it may be subject to a branch
profits tax equal to 30% of its "effectively connected earnings and profits"
within the meaning of the Code for the taxable year, as adjusted for specified
items, unless it qualifies for a lower rate under an applicable tax treaty (as
modified by the branch profits tax rules).
Final regulations dealing with backup withholding and information
reporting on income paid to foreign persons and related matters (the "New
Withholding Regulations") were published in the Federal Register on October 14,
1997. In general, the New Withholding Regulations do not significantly alter the
substantive withholding and information reporting requirements, but do unify
current certification procedures and forms and clarify reliance standards. The
New Withholding Regulations generally will be effective for payments made after
December 31, 2000, subject to transition rules. The discussion set forth above
does not take the New Withholding Regulations into account. Prospective
Noteholders who are foreign persons are strongly urged to consult their own tax
advisors with respect to the New Withholding Regulations.
BACKUP WITHHOLDING. Each holder of a Note (other than an exempt holder
including a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalty of perjury, a certificate setting forth the holder's
name, address, correct federal taxpayer identification number and a statement
that the holder is not subject to backup withholding. Should a nonexempt
Noteholder fail to provide the required certification, the related Trust will be
required to withhold 31% of the amount otherwise payable to the holder and remit
the withheld amount to the IRS as a credit against the holder's federal income
tax liability. As previously mentioned, the New Withholding Regulations
generally will be effective for payments made after December 31, 2000, subject
to transition rules.
RECENT LEGISLATION
Sections 860H through 860L to the Code (the "FASIT Provisions")
provide for a new type of entity for federal income tax purposes known as a
"financial asset securitization investment trust" (a "FASIT"). The legislation
providing for the new FASIT entity, however, did not become effective until
September 1, 1997, and many technical issues are to be addressed in Treasury
regulations yet to be drafted. In general, the FASIT legislation enables trusts
including the Trust to elect to be treated as a pass-through entity not subject
to federal entity-level income tax (except with respect to prohibited
transactions) and to issue notes 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.
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 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.
The Notes may be offered by the Seller (or an affiliate) from time to
time directly or through underwriters or agents in one or more negotiated
transactions, or otherwise, at varying prices to be determined at the time of
sale, in one or more separate transactions at prices to be negotiated at the
time of each sale. Any underwriters or agents that participate in the
distribution of the Notes may be deemed to be "underwriters" within the meaning
of the Securities Act and any profit on the sale of those Notes by them and any
discounts, commissons, concessions or other compensation received by any of them
may be deemed to be underwriting discounts and commissions under the Securities
Act.
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.
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).
<PAGE>
INDEX OF PRINCIPAL TERMS
PAGE
10 percent shareholder..................................................52
1992 Amendments.........................................................18
1993 Act................................................................18
1998 Reauthorization Bill...............................................18
Act.....................................................................16
Additional Fundings.....................................................40
Add-on Consolidation Loans..............................................26
Administration Agreement................................................47
Administration Fee......................................................47
Administrator...........................................................47
Administrator Default...................................................47
Base Rate...............................................................36
Calculation Agent.......................................................36
Cede....................................................................36
Closing Date............................................................17
Code....................................................................49
Collateral Reinvestment Account.........................................40
Collection Account......................................................40
Collection Period.......................................................41
Commission..............................................................56
Controlled Foreign Corporation..........................................52
CP Rate.................................................................21
Cutoff Date.............................................................12
Deferral Period.........................................................24
Definitive Notes........................................................37
Department..............................................................15
Depositaries............................................................36
Depositary..............................................................31
Distribution Date.......................................................31
DTC.....................................................................36
DTC's Nominee...........................................................31
Eligible Deposit Account................................................40
Eligible Institution....................................................41
Eligible Investments....................................................40
Eligible Lender Trustee.................................................12
ERISA...................................................................53
Event of Default........................................................32
Excess Cashflow Rights..................................................16
Family Contribution.....................................................20
FASIT...................................................................53
FASIT Provisions........................................................53
Federal Assistance......................................................21
Federal Consolidation Loan..............................................26
Federal Guarantor.......................................................15
Federal PLUS Loans......................................................18
Federal SLS Loans.......................................................18
Federal Stafford Loans..................................................18
Federal Student Loans...................................................12
Federal Supplemental Loans to Students..................................18
Federal Tax Counsel.....................................................49
Federal Unsubsidized Stafford Loans.....................................18
FFELP...................................................................18
Fixed Rate Notes........................................................36
Floating Rate Notes.....................................................36
Forbearance Period......................................................24
foreign person..........................................................51
Funding Period..........................................................16
Grace Period............................................................24
Guarantee Agreement.....................................................16
Guarantee Payments......................................................12
Guarantor...............................................................15
Indenture...............................................................31
Indenture Trustee.......................................................31
Index Shortfall Carryover...............................................33
Indiana Tax Counsel.....................................................53
Indirect Participants...................................................37
Initial Pool Balance....................................................46
Insolvency Event........................................................30
Interest Rate...........................................................31
Interest Reset Period...................................................36
Interest Subsidy Payments...............................................21
Investment Earnings.....................................................40
IRS.....................................................................49
Loan Sale Agreement.....................................................15
Loan Services...........................................................13
Loan Servicing Agreement................................................14
Monthly Rebate Fee......................................................27
New Withholding Regulations.............................................52
Notes...................................................................31
OID.....................................................................50
OID Regulations.........................................................50
Participants............................................................31
Parties in Interest.....................................................54
Plans...................................................................54
Pool Balance............................................................30
Pool Factor.............................................................30
Pre-Funding Amount......................................................44
prepayments.............................................................29
prospectus supplement...................................................14
PTCE....................................................................54
Purchase Amount.........................................................39
Registration Statement..................................................56
Related Documents.......................................................35
related person..........................................................52
Reserve Account.........................................................43
Revolving Period........................................................16
Rules...................................................................37
Secretary of Education..................................................27
Securities Act..........................................................56
Seller..................................................................13
Servicer................................................................14
Servicer Default........................................................45
Servicing Fee...........................................................42
Short-Term Note.........................................................51
SMS.....................................................................13
Special Allowance Payments..............................................20
Spread..................................................................36
Spread Multiplier.......................................................36
Student Loans...........................................................12
Transfer and Servicing Agreements.......................................39
Trust...................................................................12
Trust Accounts..........................................................40
Trust Agreement.........................................................12
UCC.....................................................................47
Underwriting Agreement..................................................54
Unmet Need..............................................................20
USA Funds...............................................................13
USA Group...............................................................13
USA Group Guarantee Services............................................13
<PAGE>
SMS Student Loan
Trust _________-__________
$______________
Class A-1 Floating Rate
Asset-Backed Senior Notes
$______________
Class A-2 Floating Rate
Asset-Backed Senior Notes
USA Group Secondary
Market Services, Inc.
Seller
PROSPECTUS SUPPLEMENT
[Underwriters]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses in connection with the offering of the Notes being registered in
this prospectus are estimated as follows:
SEC registration fee...................................... $ 516,912
Legal fees and expenses................................... 110,000
Accounting fees and expenses.............................. 48,000
Blue Sky fees and expenses................................ 30,000
Rating agency fees........................................ 750,000
Eligible Lender Trustee fees and expenses................. 25,000
Indenture Trustee fees and expenses....................... 15,000
Printing expenses......................................... 160,000
Miscellaneous............................................. 15,088
Total............................................ $1,670,000
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As authorized by Section 145 of the General Corporation Law of Delaware
(the "Delaware Corporation Law") and the By-Laws of SMS, each director and
officer of SMS may be indemnified by SMS against expenses (including attorney's
fees, judgments, fines and amounts paid in settlement) actually and reasonably
incurred in connection with the defense or settlement of any threatened, pending
or completed legal proceedings in which he is involved by reason of the fact
that he is or was a director or officer of SMS if he acted in good faith and in
a manner that he reasonably believed to be in or not opposed to the best
interest of SMS, and, with respect to any criminal action or proceeding, if he
had no reasonable cause to believe that his conduct was unlawful. If the legal
proceeding, however, is by or in the right of SMS, the director or officer may
not be indemnified in respect of any claim, issue or matter as to which he shall
have been adjudged to be liable for negligence or misconduct in the performance
of his duty to SMS unless a court determines otherwise.
There are directors' and officers' liability insurance policies outstanding
which insure directors and officers of SMS. The policies insure SMS against
losses for which SMS shall be required or permitted by law to indemnify
directors and officers and which result from claims made against the directors
or officers based upon the commission of wrongful acts in the performance of
their duties. The losses covered by the policies are subject to exclusions and
do not include fines or penalties imposed by law or other matters deemed
uninsurable under the law. The policies contain self-insured retention
provisions.
ITEM 16. EXHIBITS.
1.1 --Form of Underwriting Agreement**
3.1 --Restated Certificate of Incorporation of USA Group Secondary Market
Services, Inc.*
3.2 --By-laws of USA Group Secondary Market Services, Inc.*
3.3 --Form of Certificate of Trust for the Trusts (included as an exhibit to
Exhibit 4.2)**
4.1 --Form of Indenture between the Trust and the Indenture Trustee
(included as an exhibit thereto a form of Note)**
4.2 --Form of Trust Agreement among the Seller, the Company and the Eligible
Lender Trustee**
4.3 --Form of Note (included as an exhibit to Exhibit 4.1)**
5.1 --Opinion of Krieg DeVault Alexander & Capehart, LLP with respect to
legality***
5.2 --Opinion of Richards, Layton & Finger with respect to legality***
8.1 --Opinion of Stroock & Stroock & Lavan LLP with respect to tax matters***
8.2 --Opinion of Krieg DeVault Alexander & Capehart, LLP with respect to tax
matters***
23.1 --Consent of Krieg DeVault Alexander & Capehart, LLP (included as part
of Exhibit 5.1)***
23.2 --Consent of Stroock & Stroock & Lavan LLP (included as part of Exhibit
8.1)***
23.3 --Consent of Richards, Layton & Finger (included as part of Exhibit
5.2)***
24.1 --Power of Attorney (included on signature page)
25.1 --Statement of Eligibility under the Trust Indenture Act of 1939 of
Bankers Trust***
99.1 --Form of Loan Sale Agreement among the Seller, the Trust and the
Eligible Lender Trustee**
99.2 --Form of Loan Servicing Agreement among the Servicer, the Trust and the
Eligible Lender Trustee**
99.3 --Form of Administration Agreement among the Trust, the Indenture Trustee
and USA Group Secondary Market Services, Inc., as Administrator**
- -------------
* Previously filed in Registration Statement on Form S-3 (Reg. No.
33-94952, filed with the Commission by the Registrant on July 25, 1995).
** Previously filed in Amendment No. 2 to Registration Statement on Form
S-3 (Reg. No. 33-76784, filed with the Commission by the Registrant on June 7,
1994).
*** Filed by this amendment.
ITEM 17. UNDERTAKINGS.
(a) As to Rule 415:
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made of
the notes registered hereby, a post-effective amendment to this Registration
Statement:
(1) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
(2) to reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent
post-effective amendment hereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement; and
(3) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to the information in this Registration Statement;
PROVIDED, HOWEVER, that the undertakings set forth in clauses (1) and (2) above
do not apply if the information required to be included in a post-effective
amendment by those clauses is contained in periodic reports filed by the
Registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act of 1934, as amended, that are incorporated by reference in this Registration
Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment shall be deemed to be a
new registration statement relating to the notes offered , and the offering of
the notes at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment
any of the notes being registered which remain unsold at the termination of the
offering.
(b) As to documents subsequently filed that are incorporated by reference:
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended, that is incorporated
by reference in this Registration Statement shall be deemed to be a new
registration statement relating to the notes offered in this prospectus, and the
offering of the notes at that time shall be deemed to be the initial bona fide
offering thereof.
(c) The undersigned Registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreements Notes in the
denominations and registered in the names as required by the Underwriter to
permit prompt delivery to each purchaser.
(d) As to indemnification:
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described under Item 15, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission the indemnification is against public policy as
expressed in the Act and is therefore unenforceable. In the event that a claim
for indemnification against the liabilities (other than payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by the director, officer or controlling person in
connection with the notes being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether the
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of the issue.
(e) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, as amended, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to the
notes offered, and the offering of the notes at that time shall be deemed to be
the initial bona fide offering thereof.
(f) The undersigned Registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act of 1939, as amended, in
accordance with the rules and regulations prescribed by the Commission under
Section 305(b)(2) of the Trust Indenture Act of 1939, as amended.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement or Amendment to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Indianapolis, State of Indiana, on March 27, 2000.
USA GROUP SECONDARY MARKET SERVICES, INC.,
as originator of the Trust (Registrant)
By: /s/ CHERYL E. WATSON
----------------------------------
Cheryl E. Watson
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or Amendment has been signed below on March 27, 2000
by the following persons in the capacities indicated.
SIGNATURE CAPACITY
* Chairman of the Board, President,
- ------------------------ Chief Executive Officer (Principal
Stephen W. Clinton Executive Officer) and Director
* Senior Vice President and Chief
- ------------------------ Financial Officer
Cheryl E. Watson (Principal Financial and Accounting
Officer)
* Director
- ------------------------
Ernest J. Newborn, Jr.
* Director
- ------------------------
Ike G. Batalis
*BY: /s/ CHERYL E. WATSON
----------------------
ATTORNEY-IN-FACT
<PAGE>
EXHIBIT INDEX
Sequential
EXHIBIT NO. DESCRIPTION PAGE NO.
- ------------ ------------ --------
1.1 --Form of Underwriting Agreement**
3.1 --Restated Certificate of Incorporation of USA Group
Secondary Market Services, Inc.*
3.2 --By-laws of USA Group Secondary Market Services,
Inc.*
3.3 --Form of Certificate of Trust for the Trusts
(included as an exhibit to Exhibit 4.2)**
4.1 --Form of Indenture between the Trust and the
Indenture Trustee (included as an exhibit thereto
a form of Note)**
4.2 --Form of Trust Agreement among the Seller, SMS and
the Eligible Lender Trustee***
4.3 --Form of Note (included as an exhibit to Exhibit
4.1)**
5.1 --Opinion of Krieg DeVault Alexander & Capehart,
LLP with respect to legality***
5.2 --Opinion of Richards, Layton & Finger with
respect to legality***
8.1 --Opinion of Stroock & Stroock & Lavan LLP with
respect to tax matters***
8.2 --Opinion of Krieg DeVault Alexander & Capehart,
LLP with respect to tax matters***
23.1 --Consent of Krieg DeVault Alexander & Capehart,
LLP (included as part of Exhibit 5.1)***
23.2 --Consent of Stroock & Stroock & Lavan LLP
(included as part of Exhibits 8.1)***
23.3 --Consent of Richards, Layton & Finger (included
as part of Exhibit 5.2)***
24.1 --Power of Attorney (included on signature page)
25.1 --Statement of Eligibility under the Trust
Indenture Act of 1939 of Bankers Trust***
99.1 --Form of Loan Sale Agreement among the Seller,
the Trust and the Eligible Lender Trustee**
99.2 --Form of Loan Servicing Agreement among the
Servicer, the Trust and the Eligible Lender
Trustee**
99.3 --Form of Administration Agreement among the
Trust, the Indenture Trustee and USA Group
Secondary Market Services, Inc., as
Administrator**
- ----------------
* Previously filed in Registration Statement on Form S-3 (Reg. No.
33-94952, filed with the Commission by the Registrant on July 25, 1995).
** Previously filed in Amendment No. 2 to Registration Statement on Form
S-3 (Reg. No. 33-76784, filed with the Commission by the Registrant on June 7,
1994).
*** Filed by this amendment.
Exhibit 5.1
<PAGE>
February 8, 2000
USA Group Secondary Market Services, Inc.
Page 2
February 8, 2000
USA Group Secondary Market Services, Inc.
30 South Meridian Street
Indianapolis, Indiana 46250-3503
Ladies and Gentlemen:
We have acted as counsel to USA Group Secondary Market Services, Inc.
("SMS") as originator, in connection with a Registration Statement (No.
333-93643) on Form S-3 (the "Registration Statement") filed with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended, relating to the registration of Asset Backed Notes (the "Notes") and
Asset Backed Certificates (the" Certificates", and together with the Notes the
"Securities"). The Securities will be issued from time to time in series, with
each series to be issued by a trust ( each a "Trust") to be formed among SMS,
and an Eligible Lender Trustee (the "Eligible Lender Trustee"), pursuant to a
Trust Agreement (each a "Trust Agreement"), in connection with the sale of
certain Student Loans (the "Student Loans") by SMS, as Seller, to the Trust.
With respect to each series, the Notes are to be issued pursuant to an Indenture
(each an "Indenture") between the Trust and an Indenture Trustee (the "Indenture
Trustee"), and the Certificates are to be issued pursuant to a Trust Agreement.
The Securities will be sold from time to time pursuant to underwriting
agreements (each an "Underwriting Agreement") between SMS and the various
underwriters named therein.
We are familiar with the corporate proceedings of SMS to date and have
examined and relied upon the forms of the Trust Agreement, the Indenture and the
Underwriting Agreements (collectively the "Operative Documents") filed with the
Commission as exhibits to the Registration Statement. In addition, we have
examined such corporate records of the SMS and such other documents as we have
deemed relevant and necessary as a basis for the opinions hereinafter expressed.
Based on the foregoing, we are of the opinion that:
1. Assuming due authorization of the Indenture relating to a series
by the related Trust and due authorization, execution and
delivery thereof by the related Indenture Trustee, the Indenture,
when executed and delivered by the Indenture Trustee, will
constitute a valid and legally binding instrument of the Trust.
2. When appropriate corporate action has been taken to authorize the
issuance of Notes relating to a series, the Operative Documents
relating to such series have been duly completed, executed and
delivered by the parties thereto, and such Notes have been duly
completed, executed, authenticated, sold and delivered in the
applicable form filed as an exhibit to the Registration
Statement, in accordance with the applicable Indenture and in the
manner described in the Registration Statement, any amendment
thereto, the Prospectus and any Prospectus Supplement relating
thereto, such Notes will be legal valid and binding obligations
of the Trust entitled to the benefits of the Indenture.
The opinions set forth above are subject, as to enforcement, to (i)
bankruptcy, insolvency (including, without limitation, all laws relating to
fraudulent transfers), reorganization, moratorium or other similar laws relating
to or affecting the enforcement of creditors' rights generally and (ii) general
equitable principles (regardless of whether enforcement is considered in a
proceeding in equity or at law). With respect to matters of Delaware law
affecting this opinion, we have relied on the opinion of Richards, Layton &
Finger filed as an exhibit to the Registration Statement.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the use of our name under the heading "Legal
Matters" in the Prospectus which constitutes a part of the Registration
Statement. In giving the foregoing consent, we do not thereby admit that we come
within the category of Persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder. Except as stated above, without
our prior written consent, this opinion may not be furnished or quoted to, or
relied upon by, any other person or for any other purpose.
Very truly yours,
/s/ Krieg Devault Alexander and Capehart, LLP
KRIEG DEVAULT ALEXANDER & CAPEHART, LLP
EXHIBIT 5.2
[LETTERHEAD OF RICHARDS, LAYTON & FINGER]
March 1, 2000
USA Group Secondary Market Services, Inc.
8350 Craig Street
Indianapolis, Indiana 46250
Re: USA Group Secondary Market Services, Inc.
Registration Statement on Form S-3
(Registration No. 333-93643)
Ladies and Gentlemen:
We have acted as special Delaware counsel to USA Group Secondary
Market Services, Inc., a Delaware corporation (the "Seller"), in connection with
the above-captioned Registration Statement (such registration statement together
with the exhibits and any amendments thereto, the "Registration Statement"),
filed by the Seller with the Securities and Exchange Commission in connection
with the registration by the Seller of Asset Backed Notes (the "Notes") and
Asset Backed Certificates (the "Certificates").
As described in the Registration Statement, the Notes and the
Certificates will be issued from time to time in series, with each series to be
issued by a Delaware business trust (each, a "Trust") to be formed by the Seller
pursuant to a Trust Agreement (each, a "Trust Agreement") among the Seller,
Secondary Market Company, Inc., a Delaware corporation (the "Company") and an
Eligible Lender Trustee. With respect to each series, the Certificates will be
issued pursuant to a Trust Agreement, the Notes will be issued pursuant to an
Indenture (each, an "Indenture") between the related Trust and an Indenture
Trustee and the Notes and Certificates will be sold from time to time pursuant
to certain underwriting agreements (the "Underwriting Agreements") between the
Seller and the various underwriters named therein. At your request, this opinion
is being furnished to you.
For purposes of giving the opinions hereinafter set forth, we have
examined and relied upon the Registration Statement and, in each case as filed
with the Registration Statement, the form of Servicing Agreement among a Trust,
the Eligible Lender Trustee and the Servicer, the form of Indenture (including
forms of Notes included as exhibits thereto), the form of Trust Agreement
(including the form of Certificate of Trust to be filed pursuant to the Delaware
Business Trust Act and the form of Certificate filed as an exhibit thereto) and
the forms of Underwriting Agreements for the Notes and the Certificates (the
"Operative Documents"). Terms used herein without definition have the meanings
given to such terms in the Registration Statement.
For purposes of this opinion, we have not reviewed any documents other
than the documents listed above, and we assume that there exists no provision in
any document not listed above that bears upon or is inconsistent with the
opinions stated herein. We have conducted no independent factual investigation
of our own but rather have relied solely upon the foregoing documents, the
statements and information set forth therein and the additional matters recited
or assumed herein, all of which we assume to be true, complete and accurate in
all material respects. Based upon the foregoing, and upon our examination of
such questions of law and statutes of the State of Delaware as we have
considered necessary or appropriate, and subject to the assumptions,
qualifications, limitations and exceptions set forth herein, we are of the
opinion that, with respect to the Certificates of any series, when (i) the final
terms of such Certificates have been duly established and approved by or
pursuant to authorization of the Board of Directors of the Seller, (ii) the
Operative Documents relating to such series have each been duly completed,
executed and delivered by the parties thereto substantially in the form filed as
an exhibit to the Registration Statement reflecting the terms established as
described above, (iii) the Certificate of Trust for the related Trust has been
duly executed by the Eligible Lender Trustee and the Delaware Trustee (as
defined in the Trust Agreement) and filed with the Secretary of State of the
State of Delaware, and (iv) such Certificates have been duly authorized,
executed and issued by the related Trust and authenticated by the Eligible
Lender Trustee, and delivered to and paid for by the purchasers thereof, all in
accordance with the terms and conditions of the related Operative Documents and
in the manner described in the Registration Statement, such Certificates will be
valid, fully paid and nonassessable beneficial interests in the Trust (subject
to the obligation of the Company under Section 2.07(a) of the Trust Agreement).
The foregoing opinion is subject to the following exceptions,
qualifications, limitations and assumptions:
A. This opinion is limited to the laws of the State of Delaware
(excluding the securities laws of the State of Delaware), and we have not
considered and express no opinion on the laws of any other jurisdiction,
including federal laws and rules and regulations relating thereto. Our opinions
are rendered only with respect to Delaware laws and rules, regulations and
orders thereunder which are currently in effect.
B. We have not participated in the preparation of the Registration
Statement or any offering materials with respect to the Certificates and assume
no responsibility for their contents.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement. In giving the foregoing consent, we do not thereby admit
that we come within the category of Persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder. Except as
stated above, without our prior written consent, this opinion may not be
furnished or quoted to, or relied upon by, any other Person or for any other
purpose.
Very truly yours,
/s/ Richards, Layton & Finger
GCK/ka
EXHIBIT 8.1
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038-4982
March 1, 2000
USA Group Secondary Market Services, Inc.
30 South Meridian Street
Indianapolis, Indiana 46204-3503
Gentlemen:
We have acted as special counsel to USA Group Secondary Market Services, Inc.
(the "Company") in connection with the preparation of a registration statement
on Form S-3 (the "Registration Statement") relating to the proposed offering
from time to time in one or more series (each, a "Series") by one or more trusts
of Asset-Backed Certificates (the "Certificates") and Asset-Backed Notes (the
"Notes" and together with the Certificates, the "Securities"). The Registration
Statement has been filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"). As set
forth in the Registration Statement, each Series of Securities is to be issued
under and pursuant to the terms of a separate pooling and servicing agreement,
or sale and servicing agreement, trust agreement and indenture (each, an
"Agreement") among the Company, as depositor, the servicer and an independent
trustee (the "Trustee") to be identified in the prospectus supplement for each
Series of Securities.
As such counsel, we have examined copies of the Certificate of Incorporation and
By-Laws of the Company, the Registration Statement, the base Prospectus and form
of Prospectus Supplement included therein, the form of each Agreement, and
originals or copies of such other corporate minutes, records, agreements and
other instruments of the Company, certificates of public officials and other
documents and have made such examinations of law, as we have deemed necessary to
form the basis for the opinions hereinafter expressed. In our examination of
such materials, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals and the conformity to
original documents of all copies submitted to us. As to various questions of
fact material to such opinions, we have relied, to the extent we deemed
appropriate, upon representations, statements and certificates of officers and
representatives of the Company and others.
Attorneys involved in the preparation of this opinion are admitted to practice
law in the State of New York and we do not express any opinion herein concerning
any law other than the federal laws of the United States of America, and the
laws of the State of New York.
Based upon and subject to the foregoing, we are of the opinion that the
statements set forth in the base Prospectus under the heading "Certain Federal
Income Tax Consequences," to the extent they constitute matters of law or legal
conclusions with respect thereto, constitute our opinion with respect to such
matters.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, to the references to this firm in the Prospectus and the
related Prospectus Supplement which forms a part of the Registration Statement
and to the filing of this opinion as an exhibit to any application made by or on
behalf of the Company or any dealer in connection with the registration of the
Securities under the securities or blue sky laws of any state or jurisdiction.
In giving such consent, we do not admit hereby that we come within the category
of persons whose consent is required under Section 7 of the Act or the Rules and
Regulations of the Commission thereunder.
Very truly yours,
/s/ Stroock & Stroock & Lavan LLP
STROOCK & STROOCK & LAVAN LLP
EXHIBIT 8.2
February 8, 2000
USA Group Secondary Market Services, Inc.
30 South Meridian Street
Indianapolis, Indiana 46250-3503
Re: USA Group Secondary Market Services, Inc.
Registration Statement on Form S-3 (No. 333-93643)
Ladies and Gentlemen:
We have acted as special Indiana tax counsel to USA Group Secondary
Market Services, Inc., a Delaware corporation (the "Registrant"), in connection
with the issuance and sale of its Asset Backed Notes (the "Notes") and Asset
Backed Certificates (the "Certificates" and, together with the Notes, the
"Securities"), to be issued from time to time in one or more series. Each series
of Securities will be issued by a trust to be formed with respect to such loans
to students and parents of dependant students. Each Trust will be formed, and
each series of Certificates will be issued, pursuant to a Trust Agreement to be
entered into among the Registrant, an affiliate of the Registrant, and a trustee
to be specified in the prospectus supplement for such series of Certificates.
Each series of Notes will be issued pursuant to an Indenture between the
Registrant and a separate trustee to be specified in the prospectus supplement
for such series of Notes. We have advised the Registrant with respect to certain
Indiana income tax consequences of the proposed issuance of the Securities. This
advice is summarized under the heading "State Tax Consequences" in the
Prospectus relating to the Securities, and under the heading "Federal Income Tax
and State Tax Consequences" in the Prospectus Supplement, which are a part of
the Registration Statement on Form S-3 (the "Registration Statement") filed with
the Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended (the "Act"), for the registration of the Securities
under the Act. Such description does not purport to discuss all possible Indiana
income tax ramifications of the proposed issuance, but with respect to those tax
consequences that are discussed, in our opinion, the description is accurate in
all material respects.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to a reference to this firm (as counsel to the
Registrant) under the headings "Legal Matters" in the Prospectus forming a part
of the Registration Statement, without implying or admitting that we are
"experts" within the meaning of the Act or the rules and regulations of the
Commission issued thereunder, with respect to any part of the Registration
Statement, including this exhibit.
Very truly yours,
/s/ Krieg Devault Alexander & Capehart, LLP
KRIEG DEVAULT ALEXANDER & CAPEHART, LLP
EXHIBIT 25.1
- -----------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION
DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) ___________
------------------------------
BANKERS TRUST COMPANY
(Exact name of trustee as specified in its charter)
NEW YORK 13-4941247
(Jurisdiction of Incorporation or (I.R.S. Employer
organization if not a U.S. national bank) Identification no.)
FOUR ALBANY STREET
NEW YORK, NEW YORK 10006
(Address of principal (Zip Code)
executive offices)
BANKERS TRUST COMPANY
LEGAL DEPARTMENT
130 LIBERTY STREET, 31ST FLOOR
NEW YORK, NEW YORK 10006
(212) 250-2201
(Name, address and telephone number of agent for service)
---------------------------------
USA GROUP SECONDARY MARKET SERVICES, INC.
(Exact name of Registrant as specified in its charter)
OHIO 35-4271000
(State or other jurisdiction of (I.R.S. employer identification no.)
Incorporation or organization)
301 CLEVELAND AVENUE, S. W.
CANTON, OHIO 44702
(330) 456 8173
(Address, including zip code, and telephone
number of principal executive offices)
UNSECURED NOTES
(Title of the indenture securities)
<PAGE>
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee.
(a) Name and address of each examining or supervising authority to
which it is subject.
NAME ADDRESS
Federal Reserve Bank (2nd District) New York, NY
Federal Deposit Insurance Corporation Washington, D.C.
New York State Banking Department Albany, NY
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
If the obligor is an affiliate of the Trustee, describe each such
affiliation.
None.
ITEM 3. -15. NOT APPLICABLE
ITEM 16. LIST OF EXHIBITS.
EXHIBIT 1 - Restated Organization Certificate of Bankers
Trust Company dated August 7, 1990, Certificate of
Amendment of the Organization Certificate of
Bankers Trust Company dated June 21, 1995 -
Incorporated herein by reference to Exhibit 1
filed with Form T-1 Statement, Registration No.
33-65171, Certificate of Amendment of the
Organization Certificate of Bankers Trust Company
dated March 20, 1996, incorporate by referenced to
Exhibit 1 filed with Form T-1 Statement,
Registration No. 333-25843 and Certificate of
Amendment of the Organization Certificate of
Bankers Trust Company dated June 19, 1997, copy
attached.
EXHIBIT 2 - Certificate of Authority to commence business -
Incorporated herein by reference to Exhibit 2
filed with Form T-1 Statement, Registration No.
33-21047.
EXHIBIT 3 - Authorization of the Trustee to exercise
corporate trust powers - Incorporated herein by
reference to Exhibit 2 filed with Form T-1
Statement, Registration No. 33-21047.
EXHIBIT 4 - Existing By-Laws of Bankers Trust Company, as
amended on November 18, 1997. Copy attached.
EXHIBIT 5 - Not applicable.
EXHIBIT 6 - Consent of Bankers Trust Company required by
Section 321(b) of the Act. - Incorporated herein
by reference to Exhibit 4 filed with Form T-1
Statement, Registration No. 22-18864.
EXHIBIT 7 - The latest report of condition of Bankers Trust
Company dated as of September 30, 1998. Copy
attached.
EXHIBIT 8 - Not Applicable.
EXHIBIT 9 - Not Applicable.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Bankers Trust Company, a corporation organized and
existing under the laws of the State of New York, has duly caused this statement
of eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in The City of New York, and State of New York, on this 30th day
of March, 1999
BANKERS TRUST COMPANY
By: /s/ PATRICIA MF RUSSO
---------------------------
Patricia MF Russo
Vice President
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Bankers Trust Company, a corporation organized and
existing under the laws of the State of New York, has duly caused this statement
of eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in The City of New York, and State of New York, on this 30th day
of March, 1999
BANKERS TRUST COMPANY
By: /s/ PATRICIA MF RUSSO
---------------------------
Patricia MF Russo
Vice President
<PAGE>
STATE OF NEW YORK,
BANKING DEPARTMENT
I, MANUEL KURSKY, Deputy Superintendent of Banks of the State of New
York, DO HEREBY APPROVE the annexed Certificate entitled "CERTIFICATE OF
AMENDMENT OF THE ORGANIZATION CERTIFICATE OF BANKERS TRUST COMPANY UNDER SECTION
8005 OF THE BANKING LAW," dated June 19, 1997, providing for an increase in
authorized capital stock from $1,601,666,670 consisting of 100,166,667 shares
with a par value of $10 each designated as Common Stock and 600 shares with a
par value of $1,000,000 each designated as Series Preferred Stock to
$2,001,666,670 consisting of 100,166,667 shares with a par value of $10 each
designated as Common Stock and 1,000 shares with a par value of $1,000,000 each
designated as Series Preferred Stock.
WITNESS, MY HAND AND OFFICIAL SEAL OF THE BANKING DEPARTMENT AT THE CITY OF
NEW YORK,
THIS 27TH DAY OF JUNE IN THE YEAR OF OUR LORD ONE THOUSAND NINE
HUNDRED AND NINETY-SEVEN.
MANUEL KURSKY
-------------------------------
DEPUTY SUPERINTENDENT OF BANKS
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
ORGANIZATION CERTIFICATE
OF BANKERS TRUST
Under Section 8005 of the Banking Law
-----------------------------
We, James T. Byrne, Jr. and Lea Lahtinen, being respectively a
Managing Director and an Assistant Secretary of Bankers Trust Company, do hereby
certify:
1. The name of the corporation is Bankers Trust Company.
2. The organization certificate of said corporation was filed by the
Superintendent of Banks on the 5th of March, 1903.
3. The organization certificate as heretofore amended is hereby
amended to increase the aggregate number of shares which the corporation shall
have authority to issue and to increase the amount of its authorized capital
stock in conformity therewith.
4. Article III of the organization certificate with reference to the
authorized capital stock, the number of shares into which the capital stock
shall be divided, the par value of the shares and the capital stock outstanding,
which reads as follows:
"III. The amount of capital stock which the corporation is hereafter to
have is One Billion, Six Hundred and One Million, Six Hundred Sixty-Six
Thousand, Six Hundred Seventy Dollars ($1,601,666,670), divided into
One Hundred Million, One Hundred Sixty-Six Thousand, Six Hundred
Sixty-Seven (100,166,667) shares with a par value of $10 each
designated as Common Stock and 600 shares with a par value of One
Million Dollars ($1,000,000) each designated as Series Preferred
Stock."
is hereby amended to read as follows:
"III. The amount of capital stock which the corporation is hereafter to
have is Two Billion One Million, Six Hundred Sixty-Six Thousand, Six
Hundred Seventy Dollars ($2,001,666,670), divided into One Hundred
Million, One Hundred Sixty-Six Thousand, Six Hundred Sixty-Seven
(100,166,667) shares with a par value of $10 each designated as Common
Stock and 1000 shares with a par value of One Million Dollars
($1,000,000) each designated as Series Preferred Stock."
<PAGE>
5. The foregoing amendment of the organization certificate was
authorized by unanimous written consent signed by the holder of all outstanding
shares entitled to vote thereon.
IN WITNESS WHEREOF, we have made and subscribed this certificate this
19th day of June, 1997.
JAMES T. BYRNE, JR.
----------------------------
James T. Byrne, Jr.
Managing Director
LEA LAHTINEN
----------------------------
Lea Lahtinen
Assistant Secretary
State of New York )
) ss:
County of New York )
Lea Lahtinen, being fully sworn, deposes and says that she is an
Assistant Secretary of Bankers Trust Company, the corporation described in the
foregoing certificate; that she has read the foregoing certificate and knows the
contents thereof, and that the statements herein contained are true.
LEA LAHTINEN
----------------------------
Lea Lahtinen
Sworn to before me this 19th day
of June, 1997.
SANDRA L. WEST
--------------------------
Notary Public
SANDRA L. WEST
Notary Public State of New York
No. 31-4942101
Qualified in New York County
Commission Expires September 19, 1998
<PAGE>
BY-LAWS
NOVEMBER 18, 1997
BANKERS TRUST COMPANY
NEW YORK
<PAGE>
BY-LAWS
OF
BANKERS TRUST COMPANY
ARTICLE I
MEETINGS OF STOCKHOLDERS
SECTION 1. The annual meeting of the stockholders of this Company shall be held
at the office of the Company in the Borough of Manhattan, City of New York, on
the third Tuesday in January of each year, for the election of directors and
such other business as may properly come before said meeting.
SECTION 2. Special meetings of stockholders other than those regulated by
statute may be called at any time by a majority of the directors. It shall be
the duty of the Chairman of the Board, the Chief Executive Officer or the
President to call such meetings whenever requested in writing to do so by
stockholders owning a majority of the capital stock.
SECTION 3. At all meetings of stockholders, there shall be present, either in
person or by proxy, stockholders owning a majority of the capital stock of the
Company, in order to constitute a quorum, except at special elections of
directors, as provided by law, but less than a quorum shall have power to
adjourn any meeting.
SECTION 4. The Chairman of the Board or, in his absence, the Chief Executive
Officer or, in his absence, the President or, in their absence, the senior
officer present, shall preside at meetings of the stockholders and shall direct
the proceedings and the order of business. The Secretary shall act as secretary
of such meetings and record the proceedings.
ARTICLE II
DIRECTORS
SECTION 1. The affairs of the Company shall be managed and its corporate powers
exercised by a Board of Directors consisting of such number of directors, but
not less than ten nor more than twenty-five, as may from time to time be fixed
by resolution adopted by a majority of the directors then in office, or by the
stockholders. In the event of any increase in the number of directors,
additional directors may be elected within the limitations so fixed, either by
the stockholders or within the limitations imposed by law, by a majority of
directors then in office. One-third of the number of directors, as fixed from
time to time, shall constitute a quorum. Any one or more members of the Board of
Directors or any Committee thereof may participate in a meeting of the Board of
Directors or Committee thereof by means of a conference telephone or similar
communications equipment which allows all persons participating in the meeting
to hear each other at the same time. Participation by such means shall
constitute presence in person at such a meeting.
All directors hereafter elected shall hold office until the next annual meeting
of the stockholders and until their successors are elected and have qualified.
No person who shall have attained age 72 shall be eligible to be elected or
re-elected a director. Such director may, however, remain a director of the
Company until the next annual meeting of the stockholders of Bankers Trust New
York Corporation (the Company's parent) so that such director's retirement will
coincide with the retirement date from Bankers Trust New York Corporation.
No Officer-Director who shall have attained age 65, or earlier relinquishes his
responsibilities and title, shall be eligible to serve as a director.
SECTION 2. Vacancies not exceeding one-third of the whole number of the Board of
Directors may be filled by the affirmative vote of a majority of the directors
then in office, and the directors so elected shall hold office for the balance
of the unexpired term.
SECTION 3. The Chairman of the Board shall preside at meetings of the Board of
Directors. In his absence, the Chief Executive Officer or, in his absence, such
other director as the Board of Directors from time to time may designate shall
preside at such meetings.
SECTION 4. The Board of Directors may adopt such Rules and Regulations for the
conduct of its meetings and the management of the affairs of the Company as it
may deem proper, not inconsistent with the laws of the State of New York, or
these By-Laws, and all officers and employees shall strictly adhere to, and be
bound by, such Rules and Regulations.
SECTION 5. Regular meetings of the Board of Directors shall be held from time to
time on the third Tuesday of the month. If the day appointed for holding such
regular meetings shall be a legal holiday, the regular meeting to be held on
such day shall be held on the next business day thereafter. Special meetings of
the Board of Directors may be called upon at least two day's notice whenever it
may be deemed proper by the Chairman of the Board or, the Chief Executive
Officer or, in their absence, by such other director as the Board of Directors
may have designated pursuant to Section 3 of this Article, and shall be called
upon like notice whenever any three of the directors so request in writing.
SECTION 6. The compensation of directors as such or as members of committees
shall be fixed from time to time by resolution of the Board of Directors.
<PAGE>
ARTICLE III
COMMITTEES
SECTION 1. There shall be an Executive Committee of the Board consisting of not
less than five directors who shall be appointed annually by the Board of
Directors. The Chairman of the Board shall preside at meetings of the Executive
Committee. In his absence, the Chief Executive Officer or, in his absence, such
other member of the Committee as the Committee from time to time may designate
shall preside at such meetings.
The Executive Committee shall possess and exercise to the extent permitted by
law all of the powers of the Board of Directors, except when the latter is in
session, and shall keep minutes of its proceedings, which shall be presented to
the Board of Directors at its next subsequent meeting. All acts done and powers
and authority conferred by the Executive Committee from time to time shall be
and be deemed to be, and may be certified as being, the act and under the
authority of the Board of Directors.
A majority of the Committee shall constitute a quorum, but the Committee may act
only by the concurrent vote of not less than one-third of its members, at least
one of whom must be a director other than an officer. Any one or more directors,
even though not members of the Executive Committee, may attend any meeting of
the Committee, and the member or members of the Committee present, even though
less than a quorum, may designate any one or more of such directors as a
substitute or substitutes for any absent member or members of the Committee, and
each such substitute or substitutes shall be counted for quorum, voting, and all
other purposes as a member or members of the Committee.
SECTION 2. There shall be an Audit Committee appointed annually by resolution
adopted by a majority of the entire Board of Directors which shall consist of
such number of directors, who are not also officers of the Company, as may from
time to time be fixed by resolution adopted by the Board of Directors. The
Chairman shall be designated by the Board of Directors, who shall also from time
to time fix a quorum for meetings of the Committee. Such Committee shall conduct
the annual directors' examinations of the Company as required by the New York
State Banking Law; shall review the reports of all examinations made of the
Company by public authorities and report thereon to the Board of Directors; and
shall report to the Board of Directors such other matters as it deems advisable
with respect to the Company, its various departments and the conduct of its
operations.
In the performance of its duties, the Audit Committee may employ or retain, from
time to time, expert assistants, independent of the officers or personnel of the
Company, to make studies of the Company's assets and liabilities as the
Committee may request and to make an examination of the accounting and auditing
methods of the Company and its system of internal protective controls to the
extent considered necessary or advisable in order to determine that the
operations of the Company, including its fiduciary departments, are being
audited by the General Auditor in such a manner as to provide prudent and
adequate protection. The Committee also may direct the General Auditor to make
such investigation as it deems necessary or advisable with respect to the
Company, its various departments and the conduct of its operations. The
Committee shall hold regular quarterly meetings and during the intervals thereof
shall meet at other times on call of the Chairman.
SECTION 3. The Board of Directors shall have the power to appoint any other
Committees as may seem necessary, and from time to time to suspend or continue
the powers and duties of such Committees. Each Committee appointed pursuant to
this Article shall serve at the pleasure of the Board of Directors.
ARTICLE IV
OFFICERS
SECTION 1. The Board of Directors shall elect from among their number a Chairman
of the Board and a Chief Executive Officer; and shall also elect a President,
and may also elect a Senior Vice Chairman, one or more Vice Chairmen, one or
more Executive Vice Presidents, one or more Senior Managing Directors, one or
more Managing Directors, one or more Senior Vice Presidents, one or more
Principals, one or more Vice Presidents, one or more General Managers, a
Secretary, a Controller, a Treasurer, a General Counsel, one or more Associate
General Counsels, a General Auditor, a General Credit Auditor, and one or more
Deputy Auditors, who need not be directors. The officers of the corporation may
also include such other officers or assistant officers as shall from time to
time be elected or appointed by the Board. The Chairman of the Board or the
Chief Executive Officer or, in their absence, the President, the Senior Vice
Chairman or any Vice Chairman, may from time to time appoint assistant officers.
All officers elected or appointed by the Board of Directors shall hold their
respective offices during the pleasure of the Board of Directors, and all
assistant officers shall hold office at the pleasure of the Board or the
Chairman of the Board or the Chief Executive Officer or, in their absence, the
President, the Senior Vice Chairman or any Vice Chairman. The Board of Directors
may require any and all officers and employees to give security for the faithful
performance of their duties.
SECTION 2. The Board of Directors shall designate the Chief Executive Officer of
the Company who may also hold the additional title of Chairman of the Board,
President, Senior Vice Chairman or Vice Chairman and such person shall have,
subject to the supervision and direction of the Board of Directors or the
Executive Committee, all of the powers vested in such Chief Executive Officer by
law or by these By-Laws, or which usually attach or pertain to such office. The
other officers shall have, subject to the supervision and direction of the Board
of Directors or the Executive Committee or the Chairman of the Board or, the
Chief Executive Officer, the powers vested by law or by these By-Laws in them as
holders of their respective offices and, in addition, shall perform such other
duties as shall be assigned to them by the Board of Directors or the Executive
Committee or the Chairman of the Board or the Chief Executive Officer.
The General Auditor shall be responsible, through the Audit Committee, to the
Board of Directors for the determination of the program of the internal audit
function and the evaluation of the adequacy of the system of internal controls.
Subject to the Board of Directors, the General Auditor shall have and may
exercise all the powers and shall perform all the duties usual to such office
and shall have such other powers as may be prescribed or assigned to him from
time to time by the Board of Directors or vested in him by law or by these
By-Laws. He shall perform such other duties and shall make such investigations,
examinations and reports as may be prescribed or required by the Audit
Committee. The General Auditor shall have unrestricted access to all records and
premises of the Company and shall delegate such authority to his subordinates.
He shall have the duty to report to the Audit Committee on all matters
concerning the internal audit program and the adequacy of the system of internal
controls of the Company which he deems advisable or which the Audit Committee
may request. Additionally, the General Auditor shall have the duty of reporting
independently of all officers of the Company to the Audit Committee at least
quarterly on any matters concerning the internal audit program and the adequacy
of the system of internal controls of the Company that should be brought to the
attention of the directors except those matters responsibility for which has
been vested in the General Credit Auditor. Should the General Auditor deem any
matter to be of special immediate importance, he shall report thereon forthwith
to the Audit Committee. The General Auditor shall report to the Chief Financial
Officer only for administrative purposes.
The General Credit Auditor shall be responsible to the Chief Executive Officer
and, through the Audit Committee, to the Board of Directors for the systems of
internal credit audit, shall perform such other duties as the Chief Executive
Officer may prescribe, and shall make such examinations and reports as may be
required by the Audit Committee. The General Credit Auditor shall have
unrestricted access to all records and may delegate such authority to
subordinates.
SECTION 3. The compensation of all officers shall be fixed under such plan or
plans of position evaluation and salary administration as shall be approved from
time to time by resolution of the Board of Directors.
SECTION 4. The Board of Directors, the Executive Committee, the Chairman of the
Board, the Chief Executive Officer or any person authorized for this purpose by
the Chief Executive Officer, shall appoint or engage all other employees and
agents and fix their compensation. The employment of all such employees and
agents shall continue during the pleasure of the Board of Directors or the
Executive Committee or the Chairman of the Board or the Chief Executive Officer
or any such authorized person; and the Board of Directors, the Executive
Committee, the Chairman of the Board, the Chief Executive Officer or any such
authorized person may discharge any such employees and agents at will.
<PAGE>
ARTICLE V
INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS
SECTION 1. The Company shall, to the fullest extent permitted by Section 7018 of
the New York Banking Law, indemnify any person who is or was made, or threatened
to be made, a party to an action or proceeding, whether civil or criminal,
whether involving any actual or alleged breach of duty, neglect or error, any
accountability, or any actual or alleged misstatement, misleading statement or
other act or omission and whether brought or threatened in any court or
administrative or legislative body or agency, including an action by or in the
right of the Company to procure a judgment in its favor and an action by or in
the right of any other corporation of any type or kind, domestic or foreign, or
any partnership, joint venture, trust, employee benefit plan or other
enterprise, which any director or officer of the Company is servicing or served
in any capacity at the request of the Company by reason of the fact that he, his
testator or intestate, is or was a director or officer of the Company, or is
serving or served such other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise in any capacity, against judgments,
fines, amounts paid in settlement, and costs, charges and expenses, including
attorneys' fees, or any appeal therein; provided, however, that no
indemnification shall be provided to any such person if a judgment or other
final adjudication adverse to the director or officer establishes that (i) his
acts were committed in bad faith or were the result of active and deliberate
dishonesty and, in either case, were material to the cause of action so
adjudicated, or (ii) he personally gained in fact a financial profit or other
advantage to which he was not legally entitled.
SECTION 2. The Company may indemnify any other person to whom the Company is
permitted to provide indemnification or the advancement of expenses by
applicable law, whether pursuant to rights granted pursuant to, or provided by,
the New York Banking Law or other rights created by (i) a resolution of
stockholders, (ii) a resolution of directors, or (iii) an agreement providing
for such indemnification, it being expressly intended that these By-Laws
authorize the creation of other rights in any such manner.
SECTION 3. The Company shall, from time to time, reimburse or advance to any
person referred to in Section 1 the funds necessary for payment of expenses,
including attorneys' fees, incurred in connection with any action or proceeding
referred to in Section 1, upon receipt of a written undertaking by or on behalf
of such person to repay such amount(s) if a judgment or other final adjudication
adverse to the director or officer establishes that (i) his acts were committed
in bad faith or were the result of active and deliberate dishonesty and, in
either case, were material to the cause of action so adjudicated, or (ii) he
personally gained in fact a financial profit or other advantage to which he was
not legally entitled.
SECTION 4. Any director or officer of the Company serving (i) another
corporation, of which a majority of the shares entitled to vote in the election
of its directors is held by the Company, or (ii) any employee benefit plan of
the Company or any corporation referred to in clause (i) in any capacity shall
be deemed to be doing so at the request of the Company. In all other cases, the
provisions of this Article V will apply (i) only if the person serving another
corporation or any partnership, joint venture, trust, employee benefit plan or
other enterprise so served at the specific request of the Company, evidenced by
a written communication signed by the Chairman of the Board, the Chief Executive
Officer or the President, and (ii) only if and to the extent that, after making
such efforts as the Chairman of the Board, the Chief Executive Officer or the
President shall deem adequate in the circumstances, such person shall be unable
to obtain indemnification from such other enterprise or its insurer.
SECTION 5. Any person entitled to be indemnified or to the reimbursement or
advancement of expenses as a matter of right pursuant to this Article V may
elect to have the right to indemnification (or advancement of expenses)
interpreted on the basis of the applicable law in effect at the time of
occurrence of the event or events giving rise to the action or proceeding, to
the extent permitted by law, or on the basis of the applicable law in effect at
the time indemnification is sought.
SECTION 6. The right to be indemnified or to the reimbursement or advancement of
expense pursuant to this Article V (i) is a contract right pursuant to which the
person entitled thereto may bring suit as if the provisions hereof were set
forth in a separate written contract between the Company and the director or
officer, (ii) is intended to be retroactive and shall be available with respect
to events occurring prior to the adoption hereof, and (iii) shall continue to
exist after the rescission or restrictive modification hereof with respect to
events occurring prior thereto.
SECTION 7. If a request to be indemnified or for the reimbursement or
advancement of expenses pursuant hereto is not paid in full by the Company
within thirty days after a written claim has been received by the Company, the
claimant may at any time thereafter bring suit against the Company to recover
the unpaid amount of the claim and, if successful in whole or in part, the
claimant shall be entitled also to be paid the expenses of prosecuting such
claim. Neither the failure of the Company (including its Board of Directors,
independent legal counsel, or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of or
reimbursement or advancement of expenses to the claimant is proper in the
circumstance, nor an actual determination by the Company (including its Board of
Directors, independent legal counsel, or its stockholders) that the claimant is
not entitled to indemnification or to the reimbursement or advancement of
expenses, shall be a defense to the action or create a presumption that the
claimant is not so entitled.
SECTION 8. A person who has been successful, on the merits or otherwise, in the
defense of a civil or criminal action or proceeding of the character described
in Section 1 shall be entitled to indemnification only as provided in Sections 1
and 3, notwithstanding any provision of the New York Banking Law to the
contrary.
ARTICLE VI
SEAL
SECTION 1. The Board of Directors shall provide a seal for the Company, the
counterpart dies of which shall be in the charge of the Secretary of the Company
and such officers as the Chairman of the Board, the Chief Executive Officer or
the Secretary may from time to time direct in writing, to be affixed to
certificates of stock and other documents in accordance with the directions of
the Board of Directors or the Executive Committee.
SECTION 2. The Board of Directors may provide, in proper cases on a specified
occasion and for a specified transaction or transactions, for the use of a
printed or engraved facsimile seal of the Company.
ARTICLE VII
CAPITAL STOCK
SECTION 1. Registration of transfer of shares shall only be made upon the books
of the Company by the registered holder in person, or by power of attorney, duly
executed, witnessed and filed with the Secretary or other proper officer of the
Company, on the surrender of the certificate or certificates of such shares
properly assigned for transfer.
ARTICLE VIII
CONSTRUCTION
SECTION 1. The masculine gender, when appearing in these By-Laws, shall be
deemed to include the feminine gender.
ARTICLE IX
AMENDMENTS
SECTION 1. These By-Laws may be altered, amended or added to by the Board of
Directors at any meeting, or by the stockholders at any annual or special
meeting, provided notice thereof has been given.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Legal Title of Bank: Bankers Trust Company Call Date: 09/30/98 ST-BK: 36-4840 FFIEC 031
Address: 130 Liberty Street Vendor ID: D CERT: 00623 Page RC-1
City, State ZIP: New York, NY 10006 11
FDIC Certificate No.: | 0 | 0 | 6 | 2 | 3
CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL
AND STATE-CHARTERED SAVINGS BANKS FOR SEPTEMBER 30, 1998
All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, reported the amount outstanding as of the last business day of the
quarter.
SCHEDULE RC--BALANCE SHEET
| C400 |
DOLLAR AMOUNTS IN THOUSANDS | RCFD BIL MIL THOU |
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS | / / / / / / / / / / / / |
1. Cash and balances due from depository institutions (from Schedule RC-A): | / / / / / / / / / / / / |
a. Noninterest-bearing balances and currency and coin (1) ................ | 0081 2,291,000 |1.a.
b. Interest-bearing balances (2) .................................... | 0071 2,636,000 |1.b.
2. Securities: | / / / / / / / / / / / / |
a. Held-to-maturity securities (from Schedule RC-B, column A) ....... | 1754 0 |2.a.
b. Available-for-sale securities (from Schedule RC-B, column D)...... | 1773 6,617,000 |2.b.
3. Federal funds sold and securities purchased under agreements to resell.... | 1350 32,734,000 |3.
4. Loans and lease financing receivables: | / / / / / / / / / / / / |
a. Loans and leases, net of unearned income (from Schedule RC-C) RCFD 2122 20,227,000|/ / / / / / / / / / / / /|4.a.
b. LESS: Allowance for loan and lease losses....................RCFD 3123 619,000|/ / / / / / / / / / / / /|4.b.
c. LESS: Allocated transfer risk reserve .......................RCFD 3128 0|/ / / / / / / / / / / |4.c.
d. Loans and leases, net of unearned income, | / / / / / / / / / / / / |
allowance, and reserve (item 4.a minus 4.b and 4.c) ............... | 2125 19,608,000 |4.d.
5. Trading Assets (from schedule RC-D) .................................... | 3545 49,545,000 |5.
6. Premises and fixed assets (including capitalized leases) ................ | 2145 885,000 |6.
7. Other real estate owned (from Schedule RC-M) ............................ | 2150 115,000 |7.
8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M) | 2130 391,000 |8.
9. Customers' liability to this bank on acceptances outstanding ............ | 2155 392,000 |9.
10. Intangible assets (from Schedule RC-M) ................................... | 2143 266,000 |10.
11. Other assets (from Schedule RC-F) ........................................ | 2160 5,884,000 |11.
12. Total assets (sum of items 1 through 11) ................................. | 2170 121,364,000 |12.
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(1) Includes cash items in process of collection and unposted debits.
(2) Includes time certificates of deposit not held for trading.
Legal Title of Bank: Bankers Trust Company Call Date: 09/30/98 ST-BK: 36-4840 FFIEC 031
Address: 130 Liberty Street Vendor ID: D CERT: 00623 Page RC-2
City, State Zip: New York, NY 10006 12
FDIC Certificate No.: | 0 | 0 | 6 | 2 | 3
SCHEDULE RC--CONTINUED
DOLLAR AMOUNTS IN THOUSANDS | / / / / / / / BIL MIL THOU |
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LIABILITIES | / / / / / / / / / / / / |
13. Deposits: | / / / / / / / / / / / / |
a. In domestic offices (sum of totals of columns A and C from Schedule RC-E, part I) | RCON 2200 22,231,000 |13.a.
(1) Noninterest-bearing(1) ............................RCON 6631 3,040,000......... | / / / / / / / / / / / / |13.a.(1)
(2) Interest-bearing ...................................RCON 6636 19,191,000....... | / / / / / / / / / / / / |13.a.(2)
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs (from Schedule RC-E | / / / / / / / / / / / / |
part II) | RCFN 2200 21,932,000 |13.b.
(1) Noninterest-bearing ..............................RCFN 6631 2,423,000 | / / / / / / / / / / / |13.b.(1)
(2) Interest-bearing .................................RCFN 6636 19,509,000 | / / / / / / / / // / |13.b.(2)
14. Federal funds purchased and securities sold under agreements to repurchase | RCFD 2800 14,360,000 |14.
15. a. Demand notes issued to the U.S. Treasury ........................... | RCON 2840 0 |15.a.
b. Trading liabilities (from Schedule RC-D).......................... | RCFD 3548 32,890,000 |15.b.
16. Other borrowed money (includes mortgage indebtedness and obligations under
capitalized leases): | / / / / / / / / / / / |
a. With a remaining maturity of one year or less ...................... | RCFD 2332 7,653,000 |16.a.
b. With a remaining maturity of more than one year through three years. | A547 3,707,000 |16.b.
c. With a remaining maturity of more than three years................... | A548 3,034,000 | 16.c
17. Not Applicable. | / / / / / / / / / / / / |17.
18. Bank's liability on acceptances executed and outstanding ................ | RCFD 2920 392,000 |18.
19. Subordinated notes and debentures (2).................................... | RCFD 3200 1,533,000 |19.
20. Other liabilities (from Schedule RC-G) .................................. | RCFD 2930 6,595,000 |20.
21. Total liabilities (sum of items 13 through 20) .......................... | RCFD 2948 114,327,000 |21.
22. Not Applicable | / / / / / / / / / / / /|
| / / / / / / / / / / / /|22.
EQUITY CAPITAL | / / / / / / / / / / / /|
23. Perpetual preferred stock and related surplus ........................... | RCFD 3838 1,500,000 |23.
24. Common stock ............................................................ | RCFD 3230 2,002,00 |24.
25. Surplus (exclude all surplus related to preferred stock) ................ | RCFD 3839 540,000 |25.
26. a. Undivided profits and capital reserves ............................. | RCFD 3632 3,421,000 |26.a.
b. Net unrealized holding gains (losses) on available-for-sale securities . | RCFD 8434 ( 46,000) |26.b.
27. Cumulative foreign currency translation adjustments ..................... | RCFD 3284 ( 380,000) |27.
28. Total equity capital (sum of items 23 through 27) ....................... | RCFD 3210 7,037,000 |28.
29. Total liabilities and equity capital (sum of items 21 and 28)............ | RCFD 3300 121,364,000 |29
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Memorandum
To be reported only with the March Report of Condition.
1. Indicate in the box at the right the number of the statement below that best NUMBER
describes the most comprehensive level of auditing work performed for the -------
bank by independent external auditors as of any date during 1997.........................| RCFD 6724 1 |M.1
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1 = Independent audit of the bank conducted in accordance 4 = Directors' examination of the bank performed by other
with generally accepted auditing standards by a certified external auditors (may be required by state chartering
public accounting firm which submits a report on the bank authority)
2 = Independent audit of the bank's parent holding company 5 = Review of the bank's financial statements by external
conducted in accordance with generally accepted auditing auditors
standards by a certified public accounting firm which 6 = Compilation of the bank's financial statements by
submits a report on the consolidated holding company external auditors
(but not on the bank separately) 7 = Other audit procedures (excluding tax preparation work)
3 = Directors' examination of the bank conducted in 8 = No external audit work
accordance with generally accepted auditing standards
by a certified public accounting firm (may be required by
state chartering authority)
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(1) Including total demand deposits and noninterest-bearing time and savings deposits.
(2) Includes limited-life preferred stock and related surplus.
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