SUBJECT TO COMPLETION, DATED MARCH 7, 1997
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED MARCH 1, 1997
$
SLM STUDENT LOAN TRUST 1997-1
$ FLOATING RATE CLASS A-1 STUDENT LOAN-BACKED NOTES
$ FLOATING RATE CLASS A-2 STUDENT LOAN-BACKED NOTES
$ FLOATING RATE STUDENT LOAN-BACKED CERTIFICATES
SLM FUNDING CORPORATION
SELLER
SALLIE MAE SERVICING CORPORATION
SERVICER
------------------------
The SLM Student Loan Trust 1997-1 (the "Trust") will issue $
aggregate principal amount of Floating Rate Class A-1 Student Loan-Backed Notes
(the "Class A-1 Notes"), $ aggregate principal amount of Floating
Rate Class A-2 Student Loan-Backed Notes (the "Class A-2 Notes" and, together
with the Class A-1 Notes, the "Notes") and $ aggregate balance of
Floating Rate Student Loan-Backed Certificates (the "Certificates").
(CONTINUED ON FOLLOWING PAGE)
------------------------
THE CERTIFICATES REPRESENT UNDIVIDED BENEFICIAL INTERESTS IN, AND THE NOTES
REPRESENT OBLIGATIONS OF, THE TRUST ONLY AND DO NOT REPRESENT INTERESTS IN
OR OBLIGATIONS OF, AND ARE NOT GUARANTEED OR INSURED BY, THE SELLER,
STUDENT LOAN MARKETING ASSOCIATION, THE SERVICER OR ANY AFFILIATE
THEREOF OR BY THE UNITED STATES OF AMERICA OR ANY GOVERNMENTAL
AGENCY. PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS
SET FORTH UNDER "RISK FACTORS" ON PAGE S-15 HEREIN
AND ON PAGE 13 OF THE PROSPECTUS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
Initial Public Underwriting Proceeds To The
Offering Price(1) Discount(2) Seller(1)(3)
----------------- -------------- ---------------
<S> <C> <C> <C>
Per Class A-1 Note.................. % % %
Per Class A-2 Note.................. % % %
Per Certificate..................... % % %
Total............................... $ $ $
</TABLE>
- ------------------
(1) Plus accrued interest, if any, or return, if any, from , 1997.
(2) The Seller and Sallie Mae have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended. There is no underwriting discount in respect of the Certificates
sold to the Seller.
(3) Before deducting estimated expenses of $ payable by the Seller.
------------------------
The Notes and the Certificates offered hereby are offered severally by the
Underwriters, as specified herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part. It is expected
that the Notes and Certificates will be ready for delivery in book-entry form
only through the facilities of The Depository Trust Company in New York, New
York on or about March 20, 1997 against payment therefor in immediately
available funds and, in the case of the Notes, also Cedel Bank, societe anonyme,
and the Euroclear System.
------------------------
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
DEUTSCHE MORGAN GRENFELL
EDUCATION SECURITIES, INC.
LEHMAN BROTHERS
MERRILL LYNCH & CO.
J.P. MORGAN & CO.
MORGAN STANLEY & CO.
INCORPORATED
SALOMON BROTHERS INC
------------------------
The date of this Prospectus Supplement is March , 1997
<PAGE>
(Continued from preceding page)
The assets of the Trust will include a pool of student loans purchased by
Chase Manhattan Bank USA, National Association, as eligible lender trustee on
behalf of the Trust (the "Eligible Lender Trustee"), from SLM Funding
Corporation (the "Seller") (such loans, the "Trust Student Loans"), collections
and other payments with respect to the Trust Student Loans, and monies on
deposit in certain trust accounts to be established (including the Collection
Account and the Reserve Account). The Notes will be secured by the assets of the
Trust. The interests of the Certificateholders in the assets of the Trust will
be subordinated to the interests of the Noteholders therein to the extent
described herein.
The per annum rate of interest for each Accrual Period will, subject to
certain limitations described herein, equal the T-Bill Rate (determined as
described herein) plus 0. % with respect to the Class A-1 Notes and the T-Bill
Rate plus 0. % with respect to the Class A-2 Notes. Principal and interest on
the Notes will be payable quarterly on or about each January 25, April 25, July
25 and October 25 of each year, commencing July 25, 1997 (each, a "Distribution
Date"); provided that no principal payments with respect to the Class A-2 Notes
will be made until the Class A-1 Notes are paid in full. Return on the
Certificates for each Accrual Period at a rate per annum equal, subject to
certain limitations described herein, to the T-Bill Rate plus 0. %, and
distributions in respect of the Certificate Balance will be made on each
Distribution Date, provided that no distributions in respect of the Certificate
Balance will be made until the Notes have been paid in full.
The final distribution date for the Class A-1 Notes will be the
Distribution Date. The final distribution date for the Class A-2 Notes will be
the Distribution Date. The final distribution date for the Certificates
will be the Distribution Date. However, payment in full of the Notes
and the Certificates could occur earlier than such dates as described herein and
in the Prospectus. In addition, the Notes and Certificates will be repaid (i) on
any Distribution Date on which the Seller exercises its option to purchase the
Trust Student Loans, exercisable when the aggregate principal balance of the
Trust Student Loans is reduced to 10% or less of the Initial Pool Balance, or
(ii) upon sale of any Trust Student Loans remaining in the Trust as of the end
of the Collection Period immediately preceding the Trust Auction Date or
thereafter pursuant to the auction procedures described herein.
Sallie Mae Servicing Corporation (the "Servicer"), a wholly-owned subsidiary
of Sallie Mae, will service all the Trust Student Loans. The Trust Student Loans
will only include loans guaranteed by the Guarantee Agencies described herein
and reinsured by the United States Department of Education (the "Department")
under the Federal Family Education Loan Program ("FFELP").
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN ALL INFORMATION ABOUT THE
OFFERING OF THE NOTES AND THE CERTIFICATES. ADDITIONAL INFORMATION IS CONTAINED
IN THE PROSPECTUS AND PURCHASERS MUST READ BOTH THE PROSPECTUS AND THIS
PROSPECTUS SUPPLEMENT TO OBTAIN MATERIAL INFORMATION ABOUT THE OFFERING. SALES
OF THE NOTES AND THE CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER
HAS RECEIVED BOTH THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT.
The Underwriters expect to make a secondary market in the Notes and the
Certificates but have no obligation to do so. There can be no assurance that a
secondary market for the Notes or the Certificates will develop or, if it does
develop, that it will continue. See "Risk Factors" in the Prospectus.
The Seller has not authorized any offer of Notes or Certificates to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995 (the "Regulations"). The Notes and Certificates may
not lawfully be offered or sold to persons in the United Kingdom except in
circumstances which do not result in an offer to the public in the United
Kingdom within the meaning of the Regulations or otherwise in compliance with
all applicable provisions of the Regulations.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS IN
THE UNITED STATES THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
NOTES AND THE CERTIFICATES, INCLUDING OVER-ALLOTMENT, STABILIZING AND
SHORT-COVERING TRANSACTIONS IN SUCH SECURITES, AND THE IMPOSITION OF A PENALTY
BID, DURING AND AFTER THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the Trust are required to be
delivered to Securityholders. See "Certain Information regarding the Securities
- -- Reports to Securityholders" in the Prospectus.
Unless and until Definitive Notes or Definitive Certificates are issued, the
reports containing information concerning the Student Loans will be sent on
behalf of the Trust only to Cede & Co. ("Cede"), as nominee of The Depository
Trust Company ("DTC") and registered holder of the Notes and the Certificates.
See "Certain Information Regarding the Securities -- Book-Entry Registration" in
the Prospectus.
The Trust will file with the Securities and Exchange Commission (the
"Commission") such periodic reports as are required under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations of the Commission thereunder.
S-2
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the Prospectus. Certain capitalized terms used in this Prospectus Supplement
are defined on the pages indicated in the "Index of Principal Terms" contained
herein or in the Prospectus.
<TABLE>
<CAPTION>
<S> <C>
Issuer.............................. SLM Student Loan Trust 1997-1 (the "Trust").
Securities Offered.................. Floating Rate Class A-1 Student Loan-Backed Notes (the "Class A-1 Notes")
in the aggregate principal amount of $ and Floating Rate Class
A-2 Student Loan-Backed Notes (the "Class A-2 Notes" and, together with
the Class A-1 Notes, the "Notes") in the aggregate principal amount of
$ ; and Floating Rate Student Loan-Backed Certificates (the
"Certificates" and, together with the Notes, the "Securities") in the
initial Certificate Balance of $ .
Seller.............................. SLM Funding Corporation (the "Seller"), a wholly-owned subsidiary of
Student Loan Marketing Association ("Sallie Mae"). Because the Seller is
not an institution eligible to hold legal title to the Student Loans,
Chase Manhattan Bank USA, National Association, as eligible lender
trustee for the Seller (the "Interim Trustee") will hold legal title to
the Student Loans on behalf of the Seller pursuant to a trust agreement
to be dated as of March 1, 1997 between the Interim Trustee and the
Seller (as amended and supplemented from time to time, the "Interim Trust
Agreement"). References to the "Seller" herein mean the Interim Trustee
for all purposes, where the context so requires, involving the holding or
transferring of legal title to the Trust Student Loans.
Servicer............................ Sallie Mae Servicing Corporation (the "Servicer"), a wholly-owned
subsidiary of Sallie Mae that manages and operates Sallie Mae's loan
servicing functions. Under certain circumstances, the Servicer may
transfer its obligations as Servicer. See "Servicing; Administration --
Certain Matters Regarding the Servicer" in the Prospectus.
Eligible Lender Trustee............. Chase Manhattan Bank USA, National Association, as trustee under the Trust
Agreement and holder of legal title to the Trust Student Loans on behalf
of the Trust (the "Eligible Lender Trustee"). See "Formation of the Trust
-- Eligible Lender Trustee."
Indenture Trustee................... Bankers Trust Company (the "Indenture Trustee"), as trustee under the
Indenture.
Administrator....................... Sallie Mae, as administrator (the "Administrator") on behalf of the Trust
pursuant to an Administration Agreement to be dated as of March , 1997
(as amended and supplemented from time to time, the "Administration
Agreement"), among the Administrator, the Trust, the Eligible Lender
Trustee, the Servicer and the Indenture Trustee. Under certain
circumstances, Sallie Mae may transfer its obligations as Administrator.
See "Servicing; Administration -- Administration Agreement" in the
Prospectus.
The Trust........................... The Trust will be established under the laws of the State of Delaware as a
Delaware Business Trust under a Trust Agreement to be dated as of March
1, 1997 (as amended and supplemented from time to time, the "Trust
Agreement"), between the Seller and
S-3
<PAGE>
the Eligible Lender Trustee. The activities of the Trust and the Eli-
gible Lender Trustee are limited by the terms of the Trust Agreement to
acquiring, owning and managing the Trust Student Loans and the other
assets of the Trust as described herein, issuing the Securities, making
payments thereon and other activities related thereto. See "Formation of
the Trust."
Assets of the Trust................. The assets of the Trust will include the following:
A. Student Loans.................. The Trust Student Loans will consist of education loans to students and
parents of students (the "Student Loans") made under the Federal Family
Education Loan Program ("FFELP") and will include rights to receive
payments made with respect to such Trust Student Loans and the proceeds
thereof. On or prior to March , 1997 (the "Closing Date"), the Seller
will sell Student Loans having an aggregate principal balance (including
interest to be capitalized) of approximately $2,004,091,862 as of March
3, 1997 (the "Cutoff Date"), to the Eligible Lender Trustee on behalf of
the Trust pursuant to a Sale Agreement to be dated as of March , 1997
(as amended and supplemented from time to time, the "Sale Agreement"),
among the Seller, the Trust and the Eligible Lender Trustee.
The Trust Student Loans were originally acquired by Sallie Mae in the
ordinary course of its student loan financing business. All of the Trust
Student Loans are guaranteed as to the payment of principal and interest
by the Guarantee Agencies described herein and are reinsured by the
United States Department of Education (the "Department"). The Trust
Student Loans will be acquired by the Seller from Sallie Mae pursuant to
the Purchase Agreement dated as of March , 1997 (as amended and
supplemented from time to time, the "Purchase Agreement") between the
Seller and Sallie Mae. The Trust Student Loans acquired by the Seller and
sold to the Trust have been selected from the Student Loans owned by
Sallie Mae based on the criteria described herein and in the Prospectus.
As of the Cutoff Date, the weighted average borrower interest rate per
annum with respect to the Trust Student Loans was approximately 8.17%
(based on the applicable interest rates as of the Cutoff Date) and the
weighted average remaining term to scheduled maturity of the Trust
Student Loans was approximately 114 months.
"Collection Period" means each period of three calendar months from and
including the date next following the end of the preceding Collection
Period (or, with respect to the first Collection Period, the period
beginning on the Cutoff Date and ending on June 30, 1997).
The "Pool Balance" means as of any date the aggregate principal balance of
the Trust Student Loans on such date (including accrued interest thereon
to the extent such interest is expected to be capitalized), after giving
effect to the following, without duplication: (i) all payments received
by the Trust through such date from or on behalf of borrowers, the
Guarantee Agencies and the Department (collectively, "Obligors"), (ii)
all Purchase Amounts on Purchased Student Loans received by the Trust
S-4
<PAGE>
through such date from the Seller or the Servicer, (iii) all Liquidation
Proceeds and Realized Losses on Trust Student Loans liquidated through
such date, (iv) the aggregate amount of certain adjustments to balances
of Trust Student Loans permitted to be effected by the Servicer under the
Servicing Agreement, if any, recorded through such date, and (v) the
aggregate amount by which reimbursements by Guarantors of the unpaid
principal balance of defaulted Trust Student Loans through such date are
reduced from 100% to 98% (or other applicable percentage) as required by
the risk sharing provisions of the Higher Education Act.
B. Collection Account............... As described in the Prospectus, collections received with respect to the
Trust Student Loans and Interest Subsidy Payments and Special Allowance
Payments in respect thereof are required to be deposited in the
Collection Account. See "Servicing; Administration -- Payments on Student
Loans" in the Prospectus.
Pursuant to the Administration Agreement, the Administrator will instruct
the Indenture Trustee to withdraw funds on deposit in the Collection
Account and to apply such funds on each Monthly Servicing Payment Date to
the payment of the Primary Servicing Fee and on each Distribution Date to
the following (in the priority indicated, except as otherwise described
herein):
(i) the Primary Servicing Fee to the Servicer; (ii) the Administration Fee
and all overdue Administration Fees to the Administrator; (iii) the
Noteholders" Interest Distribution Amount to the applicable Noteholders;
(iv) the Certificateholders" Return Distribution Amount to the
Certificateholders; (v) the Noteholders" Principal Distribution Amount to
the applicable Noteholders; (vi) on each Distribution Date on and after
which the Notes are paid in full, the Certificate Balance Distribution
Amount to the Certificateholders; (vii) the amount, if any, necessary to
be deposited in the Reserve Account to reinstate the balance thereof to
the Specified Reserve Account Balance; (viii) the Carryover Servicing
Fee, if any, to the Servicer; (ix) the Note Interest Carryover, if any,
to the Noteholders; (x) the Certificate Return Carryover, if any, to the
Certificateholders; and (xi) any remaining amounts after application of
clauses (i) through (x) above to the Reserve Account. See "Description of
the Securities -- Distributions."
C. Reserve Account.................. As described in the Prospectus, the Reserve Account will be established and
maintained by the Administrator and will be an asset of the Trust. The
Trust will make an initial deposit from the net proceeds from the sale of
the Securities into the Reserve Account on the Closing Date of cash
and/or Eligible Investments equal to $ (the "Reserve Account
Initial Deposit"). The Reserve Account Initial Deposit will be augmented
on each Distribution Date by the deposit into the Reserve Account of any
Available Funds for such Distribution Date remaining after making all
prior distributions on such date. See "Description of the Securities --
Distributions."
Amounts in the Reserve Account on any Distribution Date (after giving
effect to all distributions to be made on such Distribution
S-5
<PAGE>
Date) in excess of the Specified Reserve Account Balance for such
Distribution Date will, after payment of any Note Principal Shortfall,
Certificate Balance Shortfall, Carryover Servicing Fee, Note Interest
Carryover and Certificate Return Carryover, be released to the Seller.
The "Specified Reserve Account Balance" with respect to any Distribution
Date will be equal to the greater of (i) % of the Pool Balance as of
the close of business on the last day of the related Collection Period
and (ii) $ , provided that such balance will be subject to
adjustment in certain circumstances described herein and in no event will
such balance exceed the sum of the outstanding principal amount of the
Notes and the Certificate Balance. See "Description of the Securities --
Credit Enhancement -- Reserve Account."
Amounts on deposit in the Reserve Account will be available on each
Distribution Date (and, with respect to the Primary Servicing Fee, on
each Monthly Servicing Payment Date) to cover any shortfalls in payments
of the Primary Servicing Fee, the Administration Fee, the Noteholders"
Interest Distribution Amount and the Certificateholders" Return
Distribution Amount for such Distribution Date (and, with respect to the
Primary Servicing Fee, such Monthly Servicing Payment Date) for which
Available Funds for such Distribution Date (or such Monthly Servicing
Payment Date) are insufficient to make such payments and distributions.
In addition, amounts on deposit in the Reserve Account will be available
on the Class A-1 Maturity Date and the Class A-2 Maturity Date to cover
any shortfalls in payments of the Noteholders" Principal Distribution
Amount and interest accrued thereon, and on the final Distribution Date
upon termination of the Trust to pay the Certificate Balance Distribution
Amount and return accrued thereon and any Carryover Servicing Fee, Note
Interest Carryover or Certificate Return Carryover, for which Available
Funds on any such date are insufficient to make such payments and
distributions. If the market value of securities and cash in the Reserve
Account is on any Distribution Date sufficient to pay the remaining
principal amount of and interest accrued on the Notes, to reduce the
Certificate Balance to zero and to pay any accrued return thereon, and to
pay any Carryover Servicing Fee, Note Interest Carryover or Certificate
Return Carryover, such amount will be so applied on such Distribution
Date.
The funding and maintenance of the Reserve Account are intended to enhance
the likelihood of payment to the Noteholders of the Noteholders"
Distribution Amount and to the Certificateholders of the
Certificateholders" Distribution Amount. In certain circumstances,
however, the Reserve Account could be depleted and shortfalls in
distributions to the Noteholders or the Certificateholders could result.
S-6
<PAGE>
D. Transfer and Servicing Under the Sale Agreement, the Seller will sell the Trust Student Loans to
Agreements.......................... the Trust, with the Eligible Lender Trustee holding legal title thereto.
In addition, pursuant to the Servicing Agreement, the Servicer will agree
with the Trust to be responsible for servicing, maintaining custody of
and making collections on the Trust Student Loans and billing and
collecting Program Payments. See "Transfer and Servicing Agreements" and
"Servicing; Administration" in the Prospectus. Breach by the Seller of
its covenants under the Sale Agreement with respect to a Trust Student
Loan may result in an obligation of the Seller to repurchase or substi-
tute Qualified Substitute Student Loans for such Trust Student Loan
and/or to reimburse the Trust for certain losses resulting from such
breach. Breach by the Servicer of its covenants under the Servicing
Agreement with respect to a Trust Student Loan may result in an
obligation of the Servicer to purchase such Trust Student Loan and/or to
reimburse the Trust for certain losses resulting from such breach. See
"The Trust Student Loan Pool -- Insurance of Student Loans."
The Servicer will receive a Primary Servicing Fee and a Carryover Servicing
Fee (together, the "Servicing Fee"). The "Primary Servicing Fee" for any
month is an amount equal to the lesser of (i) the Unit Amount and (ii)
1/12th of % of the outstanding principal amount of the Trust Student
Loans, in each case as of the last day of the preceding calendar month,
plus any such amounts from prior Monthly Servicing Payment Dates that
remain unpaid. The "Unit Amount" for any month is equal to $ times the
number of accounts in the Trust during such month. The Primary Servicing
Fee will be payable out of Available Funds and amounts on deposit in the
Reserve Account on the 25th day of each month (or, if any such date is
not a business day, on the next succeeding business day), commencing
April 25,1997 (each, a "Monthly Servicing Payment Date"). The "Carryover
Servicing Fee" is the sum of (a) the amount, if any, as of any Monthly
Servicing Payment Date by which (i) 1/12th of % of the outstanding
principal amount of the Trust Student Loans exceeds (ii) the Unit Amount,
in each case as of the last day of the preceding calendar month, (b) the
amount of certain increases in the costs incurred by the Servicer
described herein, (c) the amount of certain conversion, transfer and
removal fees and (d) any amounts described in (a), (b) and (c) above that
remain unpaid from prior Distribution Dates, together with interest on
such unpaid amounts as described in the Servicing Agreement. The
Carryover Servicing Fee will be payable to the Servicer on each
succeeding Distribution Date out of Available Funds after payment on such
Distribution Date of the Primary Servicing Fee, the Administration Fee,
the Noteholders" Distribution Amount, the Certificateholders"
Distribution Amount, and the amount, if any, necessary to be deposited in
the Reserve Account to reinstate the balance thereof to the Specified
Reserve Account Balance. See "Description of the Securities -- Servicing
Compensation."
The Notes........................... The Trust will issue the Notes pursuant to an Indenture to be dated as of
March 1, 1997 (as amended and supplemented from time to time, the
"Indenture"), among the Indenture Trustee, the Trust
S-7
<PAGE>
and the Eligible Lender Trustee. The Notes will be secured by the assets
of the Trust. The Notes will be available for purchase in denominations
of $1,000 and integral multiples thereof and will be available in
book-entry form only.
A. Interest....................... Each of the Class A-1 Notes and the Class A-2 Notes will bear interest
during each Accrual Period at the respective rates per annum, except as
described below (the "Class A-1 Rate" or the "Class A-2 Rate" and,
collectively, the "Note Rates"), equal to the daily weighted average of
the T-Bill Rates within such Accrual Period (determined as described
herein) plus 0. %, in the case of the Class A-1 Notes, and plus
0. %, in the case of the Class A-2 Notes. The Class A-1 Rate and the
Class A-2 Rate will be adjusted weekly on the calendar day following each
auction of 91-day Treasury Bills, except that (i) the Note Rates in
effect from the first day of each Accrual Period, including the initial
Accrual Period, through the day of the first 91-day Treasury Bill auction
on or after the first day of each Accrual Period will be based on the
results of the most recent 91-day Treasury Bill auction prior to such day
and (ii) the Note Rates will be subject to a Lock-In Period of six busi-
ness days preceding each Distribution Date. See "Description of the
Securities -- Determination of T-Bill Rates." Interest on the outstanding
principal amount of the Notes will accrue from and including the
preceding Distribution Date (or in the case of the first Accrual Period,
the Closing Date) to but excluding the following Distribution Date (each
an "Accrual Period") and will be payable on the 25th day of each January,
April, July and October, or, if any such date is not a business day, on
the next succeeding business day (each a "Distribution Date"), commencing
July 25, 1997, to holders of record of the Class A-1 Notes (the "Class
A-1 Noteholders") and holders of record of the Class A-2 Notes (the
"Class A-2 Noteholders" and, together with Class A-1 Noteholders, the
"Noteholders") as of the close of business on the day immediately
preceding the Distribution Date (such day, the "Record Date"). Interest
will be calculated on the basis of the actual number of days elapsed in
each Accrual Period divided by 365 (or 366 in the case of a leap year).
Notwithstanding the foregoing, if either Note Rate, as so determined, for
any such Accrual Period would be greater than the Student Loan Rate, then
such Note Rate for such Distribution Date will be the Student Loan Rate.
"Student Loan Rate" has the meaning set forth herein under "Description
of the Securities -- The Notes -- Distributions of Interest."
If the Class A-1 Rate or the Class A-2 Rate for any Distribution Date is
based on the Student Loan Rate, the excess of (a) the amount of interest
on the Class A-1 Notes or the Class A-2 Notes, as the case may be, that
would have accrued in respect of the related Accrual Period had interest
been calculated without regard to the Student Loan Rate over (b) the
amount of interest on the Class A-1 Notes or the Class A-2 Notes, as the
case may be, actually accrued in respect of such Accrual Period based on
the Student Loan Rate (such excess, together with the unpaid portion of
any such excess from prior Distribution Dates (and interest accrued
thereon at the applicable Note Rate without regard to the Student
S-8
<PAGE>
Loan Rate), is collectively referred to as the "Note Interest Carry-
over") will be paid on that Distribution Date or on any subsequent
Distribution Date to the extent funds are allocated and available
therefor out of the Collection Account after making all required prior
distributions and deposits on such date as described herein under
"Description of the Securities -- The Notes -- Distributions of
Interest." Note Interest Carryover will continue to be so payable
notwithstanding that the principal amount of the applicable class of
Notes has been reduced to zero. The ratings of the Notes do not address
the likelihood of the payment of any Note Interest Carryover.
B. Principal........................ Principal of the Notes will be payable on each Distribution Date in an
amount equal to the Noteholders' Principal Distribution Amount for such
Distribution Date. The Noteholders' Principal Distribution Amount
generally will be equal to the Principal Distribution Amount for such
Distribution Date plus any Note Principal Shortfall as of the close of
the preceding Distribution Date. The Principal Distribution Amount will
be equal (i) with respect to the initial Distribution Date, to the amount
by which the sum of the outstanding principal amount of the Notes and the
Certificate Balance exceeds the Adjusted Pool Balance for such
Distribution Date and (ii) with respect to each subsequent Distribution
Date, to the amount by which the Adjusted Pool Balance for the preceding
Distribution Date exceeds the Adjusted Pool Balance for such Distribution
Date. For this purpose, "Adjusted Pool Balance" means, for any
Distribution Date, (a) if the Pool Balance as of the last day of the
related Collection Period is greater than 40% of the Initial Pool
Balance, the sum of such Pool Balance and the Specified Reserve Account
Balance for such Distribution Date, or (b) if the Pool Balance as of the
last day of the related Collection Period is less than or equal to 40% of
the Initial Pool Balance, such Pool Balance. See "Description of the
Securities -- Distributions."
The Noteholders' Principal Distribution Amount will be applied on each
Distribution Date, first, to the principal balance of the Class A-1 Notes
until such principal balance is reduced to zero and then to the principal
balance of the Class A-2 Notes until such principal balance is reduced to
zero.
The outstanding principal amount, if any, of the Class A-1 Notes will be
due and payable in full on the Distribution Date (the "Class A-1
Maturity Date"). The outstanding principal amount of the Class A-2 Notes
will be due and payable in full on the Distribution Date (the
"Class A-2 Maturity Date"). However, the actual maturity of the Class A-1
Notes or the Class A-2 Notes could occur sooner than such dates as a
result of a variety of factors, including prepayments on the Trust
Student Loans and exercise by the Seller of its option to purchase
remaining Trust Student Loans or sale of remaining Trust Student Loans on
or after the Trust Auction Date as described below under "Summary of
Terms -- Optional Purchase" and "-- Auction of Trust Assets." See
"Trading Information -- Weighted Average Life of the Securities" in the
Prospectus.
The Certificates.................... Concurrently with the issuance of the Notes, the Trust will issue the
Certificates pursuant to the Trust Agreement. Certificates will be
S-9
<PAGE>
available for purchase in a minimum denomination of $100,000 and in
integral multiples of $1,000 in excess thereof and will be available in
book-entry form only. The Certificates represent undivided beneficial
interests in the Trust. A portion of the Certificates will be retained by
the Seller and the remaining Certificates will be sold to third party
investors that are expected to be unaffiliated with Sallie Mae, the
Seller, the Servicer, the Trust, the Guarantee Agencies or the
Department. The initial Certificate Balance will equal $ . See
"Formation of the Trust -- The Trust."
A. Return on the Return on the Certificates will accrue for each Accrual Period at a rate
Certificates...................... per annum, except as described below (the "Certificate Rate"), equal to
the daily weighted average of the T-Bill Rates within such Accrual Period
(determined as described herein) plus 0. % and will be distributed on
each Distribution Date. The Certificate Rate will be adjusted weekly on
the calendar day following each auction of 91-day Treasury Bills, except
that (i) the Certificate Rate in effect from the first day of each
Accrual Period, including the initial Accrual Period, through the day of
the first 91-day Treasury Bill auction on or after the first day of each
Accrual Period will be based on the results of the most recent 91-day
Treasury Bill auction prior to such day and (ii) the Certificate Rate
will be subject to a Lock-In Period of six business days preceding each
Distribution Date. See "Description of the Securities -- Determination of
T-Bill Rates." Return on the Certificates will be calculated on the basis
of the actual number of days elapsed in each Accrual Period divided by
365 (or 366 in the case of a leap year).
Notwithstanding the foregoing, if the Certificate Rate, as so determined,
for such Accrual Period would be greater than the Student Loan Rate, then
the Certificate Rate for such Distribution Date will be the Student Loan
Rate. If the Certificate Rate for any Distribution Date is based on the
Student Loan Rate, the excess of (a) the amount of return on the
Certificates that would have accrued in respect of such Accrual Period at
the Certificate Rate without regard to the Student Loan Rate over (b) the
amount of return on the Certificates actually accrued in respect of such
Accrual Period based on the Student Loan Rate (such excess, together with
the unpaid portion of any such excess from prior Distribution Dates (and
any return accrued thereon calculated at the Certificate Rate without
regard to the Student Loan Rate), is referred to as the "Certificate
Return Carryover") will be paid on that Distribution Date or on any
subsequent Distribution Date to the extent funds are allocated and
available therefor out of the Collection Account after making all
required prior distributions and deposits on such date as described below
under "Description of the Securities -- Distributions." The ratings of
the Certificates do not address the likelihood of the payment of any
Certificate Return Carryover.
On each Distribution Date, the Eligible Lender Trustee will distribute pro
rata to the holders of record of Certificates (the "Certificateholders"
and, together with the Noteholders, the "Securityholders") as of the
preceding Record Date return at the Certificate Rate on the Certificate
Balance on the immediately preceding Distribution Date (or, in the case
of the first Distribution Date,
S-10
<PAGE>
on the Closing Date), after giving effect to all distributions in re-
spect of the Certificate Balance to Certificateholders on such preceding
Distribution Date.
B. Certificate Balance.............. Distributions in respect of the Certificate Balance will be made on each
Distribution Date on and after which the Notes have been paid in full in
an amount generally equal to the amount of principal paid or, in certain
cases, scheduled to be paid with respect to the Trust Student Loans
(including any realized losses thereon). See "Description of the
Securities -- Distributions."
Distribution of any remaining Certificate Balance will be made in full on
the Distribution Date (the "Final Distribution Date"). However,
final distribution of the Certificate Balance could occur earlier than
the Final Distribution Date as a result of a variety of factors,
including prepayments on the Trust Student Loans and exercise by the
Seller of its option to purchase remaining Trust Student Loans or sale of
remaining Trust Student Loans on or after the Trust Auction Date as
described below under "Summary of Terms -- Optional Purchase" and "--
Auction of Trust Assets." See "Trading Information -- Weighted Average
Life of the Securities" in the Prospectus.
C. Subordination of the On any Distribution Date distributions in respect of return on the
Certificates..................... Certificates will be subordinated to the payment of interest on the Notes
(other than any Note Interest Carryover) and distributions in respect of
the Certificate Balance will be subordinated to the payment of interest
on the Notes (other than any Note Interest Carryover) and principal of
the Notes. See "Description of the Securities -- The Certificates --
Subordination of the Certificates."
Optional Purchase................... The Seller may purchase or arrange for the purchase of all remaining Trust
Student Loans, and thus effect the early retirement of the Notes and the
Certificates, on any Distribution Date on or after which the Pool Balance
is equal to 10% or less of the Initial Pool Balance, at a price equal to
the aggregate Purchase Amounts for such Trust Student Loans as of the end
of the preceding Collection Period (but not less than the Minimum
Purchase Amount plus any Note Interest Carryover and any Certificate
Return Carryover). See "Formation of the Trusts -- Termination" in the
Prospectus. The "Initial Pool Balance" will equal the Pool Balance as of
the Cutoff Date.
Auction of Trust Assets............. Any Trust Student Loans remaining in the Trust as of the end of the
Collection Period immediately preceding the earliest Distribution Date on
which the Pool Balance is equal to 10% or less of the Initial Pool
Balance (three business days prior to such Distribution Date, the "Trust
Auction Date") will be offered for sale by the Indenture Trustee if the
Seller has first waived its option to purchase such remaining Trust
Student Loans with respect to such Distribution Date as described above
under "-- Optional Purchase." The Seller will be deemed to have waived
its option to purchase such remaining Trust Student Loans if it fails to
notify the Eligible Lender Trustee and the Indenture Trustee of its
exercise thereof in writing prior to the acceptance by the Indenture
Trustee of a bid to purchase such Trust Student Loans. The Seller and its
affiliates, including Sallie Mae and the Servicer, and unrelated third
parties
S-11
<PAGE>
may offer bids to purchase such Trust Student Loans on the Trust Auction
Date. If at least two bids are received, the Indenture Trustee will
solicit and resolicit new bids from all participating bidders until only
one bid remains or the remaining bidders decline to resubmit bids. The
Indenture Trustee will accept the highest of such remaining bids if it is
equal to or in excess of the higher of the Minimum Purchase Amount and
the fair market value of such Trust Student Loans as of the end of the
Collection Period immediately preceding the Trust Auction Date. If at
least two bids are not received or the highest bid after the
resolicitation process is completed is not equal to or in excess of the
higher of the Minimum Purchase Amount and the fair market value of the
Trust Student Loans, the Indenture Trustee will not consummate such sale.
The Indenture Trustee may consult, and, at the direction of the Seller,
will be required to consult, with a financial advisor, including an
Underwriter of the Securities or the Administrator, to determine if the
fair market value of the Trust Student Loans has been offered. The net
proceeds of any such sale will be used to redeem any outstanding Notes
and to retire any outstanding Certificates on the related Distribution
Date. If the sale is not consummated in accordance with the foregoing,
the Indenture Trustee may, but will not be under any obligation to,
solicit bids for sale of the Trust Student Loans with respect to future
Distribution Dates upon terms similar to those described above, including
the Seller's waiver of its option to purchase remaining Trust Student
Loans with respect to each such future Distribution Date. In the event
the Trust Student Loans are not sold in accordance with the foregoing, on
each subsequent Distribution Date, if the amount on deposit in the Re-
serve Account on such Distribution Date (after giving effect to all
withdrawals therefrom on such Distribution Date, except withdrawals
payable to the Seller other than as a Certificateholder) is in excess of
the Specified Reserve Account Balance for such Distribution Date, the
Administrator will direct the Indenture Trustee to distribute the amount
of such excess as accelerated payments of principal on the Notes and
distributions in respect of the Certificate Balance. No assurance can be
given as to whether the Indenture Trustee will be successful in
soliciting acceptable bids to purchase the Trust Student Loans either on
the Trust Auction Date or with respect to any Distribution Date
subsequent thereto. "Minimum Purchase Amount" means an amount that would
be sufficient to (i) reduce the outstanding principal amount of each
class of Notes then outstanding on such Distribution Date to zero, (ii)
pay to Noteholders the Noteholders' Interest Distribution Amount payable
on such Distribution Date, (iii) reduce the Certificate Balance to zero
and (iv) pay to the Certificateholders the Certificate Return
Distribution Amount payable on such Distribution Date. See "Formation of
the Trusts -- Termination" in the Prospectus.
Tax Considerations.................. In the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, Federal Tax
Counsel, based on its examination of the relevant documentation, and in
the opinion of Delaware tax counsel for the Trust, the Notes will be
characterized as debt for federal and Delaware state income tax purposes,
although there is no specific
S-12
<PAGE>
authority with respect to the characterization for federal and Delaware
state income tax purposes of securities having the same terms as the
Notes.
In the opinion of Federal Tax Counsel, for federal income tax purposes the
Trust will not be characterized as an association (or publicly traded
partnership) taxable as a corporation. The Certificateholders will agree
to treat the Trust as a partnership in which they are partners. In the
opinion of Delaware tax counsel for the Trust, the same characterizations
would apply for Delaware state income tax purposes as for federal income
tax purposes, and Noteholders and Certificateholders that are not
otherwise subject to Delaware taxation on income will not become subject
to Delaware tax as a result of their ownership of Notes or Certificates.
However, there are no cases or rulings on similar transactions involving
a trust that issues debt and equity interests with terms similar to those
of the Notes and the Certificates.
Due to the method of allocation of Trust income to the Certificateholders,
cash basis holders may, in effect, be required to report income from the
Certificates on an accrual basis. In addition, because tax allocations
and tax reporting will be done on a uniform basis, but Certificateholders
may be purchasing Certificates at different times and at different
prices, Certificateholders may be required to report on their tax returns
taxable income that is greater or less than the amount reported to them
by the Trust.
See "Certain Federal Income Tax Consequences" and "Certain State Tax
Consequences" in the Prospectus for additional information concerning the
application of federal tax laws with respect to the Notes and the
Certificates.
ERISA Considerations................ The Notes
A fiduciary of any employee benefit plan or other retirement arrangement
subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or Section 4975 of the Internal Revenue Code of 1986,
as amended (the "Code") (each, a "Plan") should carefully review with its
legal advisors whether the purchase or holding of the Notes could give
rise to a transaction prohibited or not otherwise permissible under ERISA
or Section 4975 of the Code. See "ERISA Considerations" herein and in the
Prospectus.
Subject to the conditions set forth in "ERISA Considerations," the Notes
may, in general, be purchased by or on behalf of a Plan (including
without limitation, as applicable, an insurance company general account)
that is subject to Title I of ERISA or Section 4975 of the Code only if,
and each fiduciary causing the Notes to be purchased by or on behalf of
such a Plan shall be deemed to have represented that, an exemption from
the prohibited transaction rules applies such that the purchase and
holding of the Notes by or on behalf of such Plan does not and will not
result in a non-exempt prohibited transaction.
The Certificates
The Certificates may not be acquired by, on behalf of, or using the assets
of any Plan (including without limitation, as applicable, an insurance
company general account) that is subject to Title I of
S-13
<PAGE>
ERISA or Section 4975 of the Code, and each purchaser of Certificates
shall be deemed to have represented that it is neither such a Plan,
purchasing the Certificates on behalf of such a Plan, nor using the
assets of such a Plan to purchase any of the Certificates.
Rating of the Securities............ It is a condition to the issuance and sale of the Notes that they be rated
in the highest investment rating category by at least two nationally
recognized rating agencies identified in the Indenture (the "Rating
Agencies"). It is a condition to the issuance and sale of the
Certificates that they be rated in one of the three highest investment
rating categories by the Rating Agencies. The ratings of the Notes do not
address the likelihood of the payment of any Note Interest Carryover and
the ratings of the Certificates do not address the likelihood of the
payment of any Certificate Return Carryover. A rating is not a
recommendation to buy, sell or hold securities and may be subject to
revision or withdrawal at any time by the assigning Rating Agency.
Risk Factors........................ Certain factors which investors should consider prior to making an
investment in the Certificates are set forth herein and in the Pro-
spectus under "Risk Factors." See "Risk Factors" in the Prospectus and
herein.
CUSIP Numbers....................... Class A-1 Notes: 78442
Class A-2 Notes: 78442
Certificates: 78442
</TABLE>
S-14
<PAGE>
RISK FACTORS
The payment of, and the timing of the payment of, distributions on the
Notes and the Certificates are subject to certain risks. Particular attention
should be given to the factors described below and to those described under
"Risk Factors" in the Prospectus, which, among others, could materially and
adversely affect the payment of, and the timing of the payment of, the Notes and
the Certificates, and which could also materially and adversely affect the
market prices of the Notes and the Certificates to an extent that cannot be
determined. The items listed below and under "Risk Factors" in the Prospectus do
not include all risks to which such payment is subject.
Certain Differences Among the Class A-1 Notes, the Class A-2 Notes and the
Certificates. Because the Class A-2 Noteholders will receive no payments of
principal until the Class A-1 Notes have been paid in full and the
Certificateholders will receive no distributions in respect of the Certificate
Balance until the Class A-1 Notes and the Class A-2 Notes have been paid in
full, Certificateholders, and to a lesser extent the Class A-2 Noteholders, bear
a greater risk of loss of Certificate Balance or principal, as the case may be,
than do Class A-1 Noteholders in the event of a shortfall in Available Funds and
amounts on deposit in the Reserve Account.
FORMATION OF THE TRUST
THE TRUST
The SLM Student Loan Trust 1997-1 will be a trust newly formed under the
laws of the State of Delaware pursuant to the Trust Agreement for the
transactions described in this Prospectus Supplement. After its formation, the
Trust will not engage in any activity other than (i) acquiring, holding and
managing the Trust Student Loans and the other assets of the Trust and the
proceeds therefrom, (ii) issuing the Certificates and the Notes, (iii) making
payments thereon and (iv) engaging in other activities that are necessary,
suitable or convenient to accomplish the foregoing or are incidental thereto.
The Trust will be initially capitalized with equity of $ ,
excluding amounts deposited in the Reserve Account by the Trust on the Closing
Date, representing the Certificate Balance. Certificates with an original
Certificate Balance of approximately $ will be sold to the Seller and
the remaining Certificates will be sold to third-party investors that are
expected to be unaffiliated with the Seller, the Servicer, the Guarantee
Agencies, the Trust or the Department. The equity of the Trust, together with
the proceeds from the sale of the Notes, will be used by the Eligible Lender
Trustee to make the Reserve Account Initial Deposit in the Reserve Account and
to purchase on behalf of the Trust the Trust Student Loans from the Seller
pursuant to the Sale Agreement. The Seller will use the net proceeds it receives
from the sale of the Trust Student Loans to pay to Sallie Mae the purchase price
of the Trust Student Loans acquired from Sallie Mae pursuant to the Purchase
Agreement. Upon the consummation of such transactions, the property of the Trust
will consist of (a) a pool of Student Loans, legal title to which is held by the
Eligible Lender Trustee on behalf of the Trust, (b) all funds collected in
respect thereof on or after the Cutoff Date and (c) all moneys and investments
on deposit in the Collection Account and the Reserve Account. The Notes will be
secured by the property of the Trust. The Collection Account and the Reserve
Account will be maintained in the name of the Indenture Trustee for the benefit
of the Noteholders and the Certificateholders. To facilitate servicing and to
minimize administrative burden and expense, the Servicer will be appointed
custodian of the promissory notes representing the Trust Student Loans by the
Eligible Lender Trustee.
The Trust's principal offices are in Wilmington, Delaware, in care of Chase
Manhattan Bank USA, National Association, as Eligible Lender Trustee, at the
address listed herein.
S-15
<PAGE>
CAPITALIZATION OF THE TRUST
The following table illustrates the capitalization of the Trust as of the
Cutoff Date, as if the issuance and sale of the Securities offered hereby had
taken place on such date:
Floating Rate Class A-1 Student Loan-Backed Notes............. $
Floating Rate Class A-2 Student Loan-Backed Notes.............
Floating Rate Student Loan-Backed Certificates................
---------------
Total............................................... $
===============
ELIGIBLE LENDER TRUSTEE
Chase Manhattan Bank USA, National Association, is the Eligible Lender
Trustee for the Trust under the Trust Agreement. Chase Manhattan Bank USA,
National Association, is a Delaware banking corporation whose principal offices
are located at 802 Delaware Avenue, Wilmington, Delaware 19801. The Eligible
Lender Trustee will acquire on behalf of the Trust legal title to all the Trust
Student Loans acquired from time to time pursuant to the Sale Agreement. The
Eligible Lender Trustee on behalf of the Trust has entered into a separate
Guarantee Agreement with each of the Guarantee Agencies described herein with
respect to such Trust Student Loans. The Eligible Lender Trustee qualifies as an
eligible lender and the holder of the Trust Student Loans for all purposes under
the Act and the Guarantee Agreements. Failure of the Trust Student Loans to be
owned by an eligible lender would result in the loss of Program Payments with
respect to such Trust Student Loans. See "Appendix A -- The Federal Family
Education Loan Program -- Eligible Lenders, Borrowers and Institutions" in the
Prospectus. The Eligible Lender Trustee's liability in connection with the
issuance and sale of the Notes and the Certificates is limited solely to the
express obligations of the Eligible Lender Trustee set forth in the Trust
Agreement and the Sale Agreement. See "Description of the Securities" herein and
"Transfer and Servicing Agreements" in the Prospectus. Sallie Mae maintains
certain banking relations with the Eligible Lender Trustee.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SOURCES OF CAPITAL AND LIQUIDITY
The Trust's primary sources of capital will be the net proceeds of the
Securities offered hereby. See "Formation of the Trust -- Capitalization of the
Trust."
The Trust's primary sources of liquidity will be collections with respect
to the Trust Student Loans and amounts on deposit in the Reserve Account.
RESULTS OF OPERATIONS
The Trust will be newly formed and, accordingly, has no results of
operations as of the date of this Prospectus Supplement. Because the Trust does
not have any operating history, there has not been included in this Prospectus
Supplement any historical or pro forma ratio of earnings to fixed charges. The
earnings on the Trust Student Loans and other assets owned by the Trust and the
interest costs of the Notes will determine the Trust's results of operations in
the future. The income generated from the Trust's assets will be used to pay
operating costs and expenses of the Trust, interest and principal on the Notes
and distributions to the holders of the Certificates. The principal operating
expenses of the Trust are expected to be, but are not limited to, the Primary
Servicing Fee, the Administration Fee and the Carryover Servicing Fee, if any.
S-16
<PAGE>
USE OF PROCEEDS
The Trust will use the net proceeds from the sale of the Notes and the
Certificates to make the Reserve Account Initial Deposit to the Reserve Account,
to make an initial deposit of $25,000 to the Collection Account and to purchase
the Trust Student Loans from the Seller on the Closing Date pursuant to the Sale
Agreement. The Seller will use such proceeds paid to it by the Trust to pay to
Sallie Mae the purchase price for the Trust Student Loans purchased by the
Seller from Sallie Mae pursuant to the Purchase Agreement.
THE TRUST STUDENT LOAN POOL
The pool of Trust Student Loans will be purchased from the Seller by the
Eligible Lender Trustee on behalf of the Trust as of the Cutoff Date.
The Trust Student Loans were purchased by the Seller from Sallie Mae
pursuant to the Purchase Agreement.
The Trust Student Loans were selected from Sallie Mae's portfolio of
Student Loans by employing several criteria, including, as of the Cutoff Date,
the following: each Trust Student Loan (i) is guaranteed as to principal and
interest by a Guarantee Agency pursuant to a Guarantee Agreement and the
Guarantee Agency is, in turn, reinsured by the Department in accordance with the
FFELP, (ii) contains terms in accordance with those required by the FFELP, the
Guarantee Agreements and other applicable requirements, (iii) is not more than
90 days past due as of the Cutoff Date and (iv) did not have a borrower who was
noted in the related records of the Servicer as being currently involved in a
bankruptcy proceeding. No Trust Student Loan as of the Cutoff Date consists of a
Student Loan that was subject to the Seller's or Sallie Mae's prior obligation
to sell such loan to a third party.
The distribution by weighted average interest rate applicable to the Trust
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 Trust Student Loans. Moreover, the
information described below with respect to the remaining term to maturity of
the Trust Student Loans as of the Cutoff Date may vary significantly from the
actual term to maturity of any of the Trust Student Loans as a result of
prepayments or of the granting of deferral and forbearance periods with respect
thereto.
S-17
<PAGE>
Set forth below in the following tables is a description of certain
additional characteristics of the Trust Student Loans as of the Cutoff Date:
COMPOSITION OF THE TRUST STUDENT LOANS
AS OF THE CUTOFF DATE
Aggregate Outstanding Principal Balance(1).................... $2,004,091,862
Number of Borrowers........................................... 283,633
Average Outstanding Principal Balance Per Borrower............ $7,066
Number of Loans............................................... 666,748
Average Outstanding Principal Balance Per Loan................ $3,006
Weighted Average Remaining Term to Maturity(2)................ 114 months
Weighted Average Annual Borrower Interest Rate(3)............. 8.17%
- ------------------
(1) Includes principal balance due from Obligors, plus accrued interest thereon
of $25,574,628.50 as of the Cutoff Date to be capitalized upon commencement
of repayment.
(2) Determined from the Cutoff Date to the stated maturity date of the
applicable Trust Student Loan without giving effect to any deferral or
forbearance periods that may be granted in the future. See Appendix A to the
Prospectus and "The Student Loan Pools -- Sallie Mae's Student Loan
Financing Business" in the Prospectus.
(3) Exclusive of Special Allowance Payments. The weighted average spread,
including Special Allowance Payments, to the 91-day or 52-week T-Bill rate,
as applicable, was 3.03% as of the Cutoff Date and would have been 3.12% if
all of the Trust Student Loans were in repayment as of the Cutoff Date.
DISTRIBUTION OF THE TRUST STUDENT LOANS
BY LOAN TYPE AS OF THE CUTOFF DATE
PERCENT OF
AGGREGATE POOL BY
OUTSTANDING OUTSTANDING
NUMBER OF PRINCIPAL PRINCIPAL
LOAN TYPE LOANS BALANCE(1) BALANCE
- --------- --------- -------------- -----------
Subsidized Stafford Loans............. 478,502 $1,348,609,544 67.3%
Unsubsidized Stafford Loans........... 135,154 437,989,359 21.9
SLS Loans............................. 28,183 103,223,008 5.1
PLUS Loans............................ 24,909 114,269,951 5.7
--------- -------------- -----------
Total....................... 666,748 $2,004,091,862 100.0%
========= ============== ===========
- ------------------
(1) Includes principal balance due from Obligors, plus accrued interest thereon
of $25,574,628.50 as of the Cutoff Date to be capitalized upon commencement
of repayment.
S-18
<PAGE>
DISTRIBUTION OF THE TRUST STUDENT LOANS
BY BORROWER INTEREST RATES AS OF THE CUTOFF DATE
PERCENT OF
AGGREGATE POOL BY
OUTSTANDING OUTSTANDING
NUMBER OF PRINCIPAL PRINCIPAL
INTEREST RATES(1) LOANS BALANCE(2) BALANCE
- ----------------- --------- -------------- -----------
Less than 7.50%................... 1,320 $ 4,418,872 0.2%
7.50% to 8.49%.................... 611,727 1,780,091,801 88.8
8.50% to 9.49%.................... 53,673 219,499,350 11.0
Greater than 9.49%................ 28 81,839 0.0
--------- -------------- -----------
Total................... 666,748 $2,004,091,862 100.0%
========= ============== ===========
- ------------------
(1) Determined using the interest rates applicable to the Trust Student Loans as
of the Cutoff Date. However, because certain of the Trust Student Loans bear
interest at variable rates per annum, there can be no assurance that the
foregoing information will remain applicable to the Trust Student Loans at
any time after the Cutoff Date. See Appendix A to the Prospectus and "The
Student Loan Pools -- Sallie Mae's Student Loan Financing Business" in the
Prospectus.
(2) Includes principal balance due from Obligors, plus accrued interest thereon
of $25,574,628.50 as of the Cutoff Date to be capitalized upon commencement
of repayment.
DISTRIBUTION OF THE TRUST STUDENT LOANS
BY OUTSTANDING PRINCIPAL BALANCE AS OF THE CUTOFF DATE
PERCENT OF
AGGREGATE POOL BY
RANGE OF OUTSTANDING OUTSTANDING
OUTSTANDING NUMBER OF PRINCIPAL PRINCIPAL
PRINCIPAL BALANCE BORROWERS BALANCE(1) BALANCE
----------------- --------- -------------- -----------
Less than $1,000................... 7,288 $ 5,920,988 0.3%
$ 1,000 to $ 1,999.99.............. 30,516 45,745,457 2.3
$ 2,000 to $ 2,999.99.............. 53,414 135,368,283 6.8
$ 3,000 to $ 3,999.99.............. 27,940 97,369,524 4.8
$ 4,000 to $ 4,999.99.............. 23,411 104,936,319 5.2
$ 5,000 to $ 5,999.99.............. 25,280 137,985,687 6.9
$ 6,000 to $ 6,999.99.............. 23,279 150,673,809 7.5
$ 7,000 to $ 7,999.99.............. 13,417 100,059,796 5.0
$ 8,000 to $ 8,999.99.............. 10,927 92,717,508 4.6
$ 9,000 to $ 9,999.99.............. 8,810 83,515,832 4.2
$10,000 to $10,999.99.............. 8,538 89,767,226 4.5
$11,000 to $11,999.99.............. 8,000 91,639,157 4.6
$12,000 to $12,999.99.............. 5,299 66,078,621 3.3
$13,000 to $13,999.99.............. 4,604 62,110,593 3.1
$14,000 to $14,999.99.............. 4,737 68,696,111 3.4
$15,000 and greater................ 28,173 671,506,952 33.5
--------- -------------- -----------
Total.................... 283,633 $2,004,091,862 100.0%
========= ============== ===========
- ------------------
(1) Includes principal balance due from Obligors, plus accrued interest thereon
of $25,574,628.50 as of the Cutoff Date to be capitalized upon commencement
of repayment.
S-19
<PAGE>
DISTRIBUTION OF THE TRUST STUDENT LOANS
BY SCHOOL TYPE
PERCENT OF
AGGREGATE POOL BY
OUTSTANDING OUTSTANDING
NUMBER OF PRINCIPAL PRINCIPAL
SCHOOL TYPE LOANS BALANCE(1) BALANCE
----------- --------- -------------- -----------
4-year Institutions.................. 467,564 $1,555,895,404 77.6%
2-year Institutions.................. 93,583 200,405,864 10.0
Proprietary/Vocational............... 104,596 244,835,879 12.2
Unknown.............................. 1,005 2,954,715 0.2
--------- -------------- -----------
Total...................... 666,748 $2,004,091,862 100.0%
========= ============== ===========
- ------------------
(1) Includes principal balance due from Obligors, plus accrued interest thereon
of $25,574,628.50 as of the Cutoff Date to be capitalized upon commencement
of repayment.
DISTRIBUTION OF THE TRUST STUDENT LOANS
BY REMAINING TERM TO SCHEDULED MATURITY
AS OF THE CUTOFF DATE
PERCENT OF
NUMBER OF MONTHS AGGREGATE POOL BY
REMAINING TO OUTSTANDING OUTSTANDING
SCHEDULED NUMBER OF PRINCIPAL PRINCIPAL
MATURITY(1) LOANS BALANCE(2) BALANCE
- ---------------- --------- -------------- -----------
0 to 12............................ 1,829 $ 795,957 0.0%
13 to 24........................... 9,310 7,952,283 0.4
25 to 36........................... 14,558 17,917,304 0.9
37 to 48........................... 16,139 24,467,549 1.2
49 to 60........................... 16,835 29,267,801 1.5
61 to 72........................... 25,432 54,211,933 2.7
73 to 84........................... 17,259 37,030,582 1.9
85 to 96........................... 56,679 146,733,071 7.3
97 to 108.......................... 79,524 248,758,180 12.4
109 to 120......................... 198,706 667,513,913 33.3
121 to 132......................... 150,881 509,394,057 25.4
133 to 144......................... 45,258 149,917,202 7.5
145 and Up......................... 34,338 110,132,030 5.5
--------- -------------- -----------
Total.................... 666,748 $2,004,091,862 100.0%
========= ============== ===========
- ------------------
(1) Determined from the Cutoff Date to the stated maturity date of the
applicable Trust Student Loan without giving effect to any deferral or
forbearance periods that may be granted in the future. See Appendix A to the
Prospectus and "The Student Loan Pools -- Sallie Mae's Student Loan
Financing Business" in the Prospectus.
(2) Includes principal balance due from Obligors, plus accrued interest thereon
of $25,574,628.50 as of the Cutoff Date to be capitalized upon commencement
of repayment.
S-20
<PAGE>
DISTRIBUTION OF THE TRUST STUDENT LOANS
BY CURRENT BORROWER PAYMENT STATUS AS OF THE CUTOFF DATE
PERCENT OF
AGGREGATE POOL BY
OUTSTANDING OUTSTANDING
NUMBER OF PRINCIPAL PRINCIPAL
CURRENT BORROWER PAYMENT STATUS(1) LOANS BALANCE(2) BALANCE
- ---------------------------------- --------- -------------- -----------
In-School.......................... 119,712 $ 368,924,594 18.4%
Grace.............................. 76,900 223,832,754 11.2
Deferral........................... 85,327 272,619,686 13.6
Forbearance........................ 43,516 137,967,349 6.9
Repayment(3)
First year in repayment.......... 208,598 643,384,743 32.1
Second year in repayment......... 81,324 234,040,644 11.7
Third year in repayment.......... 51,371 123,322,092 6.1
--------- -------------- -----------
Total.................... 666,748 $2,004,091,862 100.0%
========= ============== ===========
- ------------------
(1) Refers to the status of the borrower of each Trust Student Loan as of the
Cutoff Date: such borrower may still be attending school ("In-School"), may
be in a grace period after completing school and prior to repayment
commencing ("Grace"), may be currently required to repay such loan
("Repayment") or may have temporarily ceased repaying such loan through a
deferral ("Deferral") or a forbearance ("Forbearance") period. See Appendix
A to the Prospectus and "The Student Loan Pools -- Sallie Mae's Student Loan
Financing Business" in the Prospectus.
(2) Includes principal balance due from Obligors, plus accrued interest thereon
of $25,574,628.50 as of the Cutoff Date to be capitalized upon commencement
of repayment.
(3) The weighted average number of months in repayment for all Trust Student
Loans currently in repayment is 10, calculated as the term to maturity at
the commencement of repayment less the number of months remaining to
scheduled maturity as of the Cutoff Date.
SCHEDULED WEIGHTED AVERAGE MONTHS IN STATUS OF THE TRUST STUDENT LOANS
BY CURRENT BORROWER PAYMENT STATUS AS OF THE CUTOFF DATE(1)
SCHEDULED MONTHS IN STATUS
CURRENT BORROWNER -------------------------------------------------------
PAYMENT STATUS IN-SCHOOL GRACE DEFERRAL FORBEARANCE REPAYMENT
- -------------- --------- ----- -------- ----------- ---------
In-School............. 14.4 6.0 -- -- 115.2
Grace................. -- 2.5 -- -- 115.0
Deferral.............. -- -- 10.7 -- 110.4
Forbearance........... -- -- -- 2.5 111.2
Repayment............. -- -- -- -- 104.2
- ------------------
(1) Determined without giving effect to any deferral or forbearance periods that
may be granted in the future. See Appendix A to the Prospectus and "The
Student Loan Pools -- Sallie Mae's Student Loan Financing Business" in the
Prospectus.
S-21
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE
TRUST STUDENT LOANS AS OF THE CUTOFF DATE
PERCENT OF
AGGREGATE POOL BY
OUTSTANDING OUTSTANDING
NUMBER OF PRINCIPAL PRINCIPAL
STATE(1) LOANS BALANCE(2) BALANCE
- -------------------------------- --------- -------------- -----------
Alabama......................... 4,063 $ 11,387,536 0.6%
Alaska.......................... 1,337 4,084,068 0.2
Arizona......................... 13,031 39,924,983 2.0
Arkansas........................ 12,211 31,252,830 1.5
California...................... 64,221 225,216,191 11.2
Colorado........................ 3,631 11,606,495 0.6
Connecticut..................... 13,854 43,582,340 2.2
Delaware........................ 2,280 7,108,674 0.3
District of Columbia............ 1,511 6,147,816 0.3
Florida......................... 17,872 52,659,599 2.6
Georgia......................... 4,952 15,350,454 0.8
Hawaii.......................... 725 2,366,416 0.1
Idaho........................... 3,327 9,503,250 0.5
Illinois........................ 28,003 86,977,434 4.3
Indiana......................... 2,883 9,200,417 0.5
Iowa............................ 8,958 22,404,109 1.1
Kansas.......................... 11,557 35,177,150 1.8
Kentucky........................ 7,170 20,556,249 1.0
Louisiana....................... 17,722 48,527,240 2.4
Maine........................... 660 2,285,441 0.1
Maryland........................ 6,329 21,085,605 1.1
Massachusetts................... 34,790 118,609,524 5.9
Michigan........................ 16,558 46,441,731 2.3
Minnesota....................... 27,711 72,856,754 3.6
Mississippi..................... 11,625 29,802,903 1.5
Missouri........................ 15,275 44,465,290 2.2
Montana......................... 973 2,790,859 0.1
Nebraska........................ 1,128 3,265,307 0.2
Nevada.......................... 7,096 19,054,891 1.0
New Hampshire................... 1,311 4,514,781 0.2
New Jersey...................... 22,237 68,900,450 3.4
New Mexico...................... 1,374 4,433,324 0.2
New York........................ 53,707 173,973,209 8.7
North Carolina.................. 4,923 15,175,463 0.8
North Dakota.................... 531 1,509,537 0.1
Ohio............................ 11,513 35,786,358 1.8
Oklahoma........................ 17,622 46,176,834 2.3
Oregon.......................... 33,992 91,964,680 4.6
Pennsylvania.................... 28,552 81,652,702 4.1
Rhode Island.................... 1,162 4,141,210 0.2
South Carolina.................. 1,959 6,238,410 0.3
South Dakota.................... 425 1,331,950 0.1
Tennessee....................... 20,671 52,767,963 2.6
Texas........................... 33,927 101,368,827 5.1
Utah............................ 1,244 3,767,050 0.2
Vermont......................... 513 1,876,415 0.1
Virginia........................ 16,567 50,419,875 2.5
S-22
<PAGE>
PERCENT OF
AGGREGATE POOL BY
OUTSTANDING OUTSTANDING
NUMBER OF PRINCIPAL PRINCIPAL
STATE(1) LOANS BALANCE(2) BALANCE
- -------- --------- -------------- -----------
Washington...................... 51,521 $ 154,638,714 7.7%
West Virginia................... 5,145 12,981,891 0.6
Wisconsin....................... 3,861 11,528,551 0.6
Wyoming......................... 830 1,993,079 0.1
Other........................... 11,708 33,259,033 1.7
--------- -------------- -----------
Total.................... 666,748 $2,004,091,862 100.0%
========= ============== ===========
- ------------------
(1) Based on the billing addresses of the borrowers of the Trust Student Loans
shown on the Servicer's records as of the Cutoff Date.
(2) Includes principal balance due from Obligors, plus accrued interest thereon
of $25,574,628.50 as of the Cutoff Date to be capitalized upon commencement
of repayment.
Each of the Trust Student Loans provides or will provide for the
amortization of the outstanding principal balance of such Trust Student Loan
over a series of regular payments. Except as set forth below, each regular
payment consists of an installment of interest which is calculated on the basis
of the outstanding principal balance of such Trust Student Loan. The amount
received is applied first to interest accrued to the date of payment and the
balance of the payment, if any, 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, and except as
provided below, the borrower pays a regular installment until the final
scheduled payment date, at which time the amount of the final installment is
increased or decreased as necessary to repay the then outstanding principal
balance of such Trust Student Loan.
Sallie Mae makes available to certain borrowers with Student Loans held by
it certain payment terms which may result in the lengthening of the remaining
term of the Student Loans. For example, not all of the loans owned by Sallie Mae
provide for level payments throughout the repayment term of the loans. Certain
Student Loans provide for interest payments only to be made for a designated
portion of the term of the loans, with amortization of the principal of such
loans occurring only when payments increase in the latter stage of the term of
the loans. Other loans provide for a "graduated phase in" of the amortization of
principal with a greater portion of principal amortization being required in the
latter stages than would be the case if amortization were on a level payment
basis. Sallie Mae also offers an income-sensitive repayment plan, pursuant to
which repayments are based on the borrower's income. Under that plan, ultimate
repayment may be delayed up to five years. Borrowers under Trust Student Loans
will continue to be eligible for such graduated payment and income-sensitive
repayment plans. See "The Student Loan Pools -- Sallie Mae's Student Loan
Financing Business" in the Prospectus.
S-23
<PAGE>
The following table sets forth certain information with respect to Trust
Student Loans subject to the repayment terms described in the preceding
paragraphs.
PERCENT OF
AGGREGATE POOL BY
OUTSTANDING OUTSTANDING
NUMBER OF PRINCIPAL PRINCIPAL
LOAN REPAYMENT TERMS LOANS BALANCE(1) BALANCE
- -------------------- --------- -------------- -----------
Interest Only Period Loans......... 61,287 $ 199,402,641 9.9%
Standard Terms(2).................. 605,461 1,804,689,221 90.1
--------- -------------- -----------
Total....................... 666,748 $2,004,091,862 100.0%
========= ============== ===========
- ------------------
(1) Includes principal balance due from Obligors, plus accrued interest thereon
of $25,574,628.50 as of the Cutoff Date to be capitalized upon commencement
of repayment.
(2) Consists primarily of level payment loans. Standard Terms also includes, but
is not limited to, graduated payment loans and income-sensitive repayment
loans with an outstanding principal balance representing less than 1.0% of
the aggregate outstanding principal balance of the pool.
The Servicer at the request of Sallie Mae and on behalf of the Trust may in
the future offer repayment terms similar to those described above to borrowers
of loans in the Trust which are not entitled to such repayment terms as of the
Cutoff Date. To the extent that such repayment terms are offered to and accepted
by borrowers, the weighted average life of the Notes could be lengthened. See
"Trading Information -- Weighted Average Life of the Securities" in the
Prospectus.
The following table sets forth information with respect to Trust Student
Loans regarding date of disbursement.
DISTRIBUTION OF THE TRUST
STUDENT LOANS BY DATE OF DISBURSEMENT
PERCENT OF
AGGREGATE POOL BY
OUTSTANDING OUTSTANDING
NUMBER OF PRINCIPAL PRINCIPAL
DISBURSEMENT DATE(1) LOANS BALANCE(2) BALANCE
- -------------------- --------- -------------- -----------
Pre-October 1, 1993................ 188,518 $ 507,439,871 25.3%
October 1, 1993 and thereafter..... 478,230 1,496,651,991 74.7
--------- -------------- -----------
Total....................... 666,748 $2,004,091,862 100.0%
========= ============== ===========
- ------------------
(1) Student Loans disbursed prior to October 1, 1993 are 100% guaranteed by the
applicable Guarantor, and reinsured against default by the Department up to
100% of the Guarantee Payments. Student Loans disbursed on or after October
1, 1993 are 98% guaranteed by the applicable Guarantor, and reinsured
against default by the Department up to a maximum of 98% of the Guarantee
Payments. See "Appendix A -- The Federal Family Education Loan Program --
Guarantee Agencies" and "-- Federal Insurance and Reinsurance of Guarantee
Agencies" in the Prospectus.
(2) Includes principal balance due from Obligors, plus accrued interest thereon
of $25,574,628.50 as of the Cutoff Date to be capitalized upon commencement
of repayment.
INSURANCE OF STUDENT LOANS; GUARANTORS OF STUDENT LOANS
General. Each Trust Student Loan is required to be guaranteed as to
principal and interest by one of the Guarantee Agencies described below and
reinsured by the Department under the Act and must be eligible for Special
Allowance Payments and, with respect to certain Trust Student Loans, Interest
Subsidy Payments paid by the Department.
S-24
<PAGE>
Guarantee Agencies for the Trust Student Loans. The Eligible Lender
Trustee has entered into a separate Guarantee Agreement with each of the
Guarantee Agencies listed below (each, a "Guarantor") pursuant to which each of
the Guarantors has agreed to serve as guarantor for certain of the Trust Student
Loans.
Pursuant to the Higher Education Amendments of 1992 (the "1992
Amendments"), under Section 432(o) of the Act, if the Department has determined
that a Guarantee Agency is unable to meet its insurance obligations, the loan
holder may submit claims directly to the Department and the Department is
required to pay the full Guarantee Payment due with respect thereto in
accordance with guarantee claim processing standards no more stringent than
those of the Guarantee Agency. However, the Department's obligation to pay
guarantee claims directly in this fashion is contingent upon the Department
making the determination referred to above. There can be no assurance that the
Department would ever make such a determination with respect to a Guarantee
Agency or, if such a determination was made, whether such determination or the
ultimate payment of such guarantee claims would be made in a timely manner. See
"Appendix A -- The Federal Family Education Loan Program -- Guarantee Agencies'
and "-- Federal Insurance and Reinsurance of Guarantee Agencies" in the
Prospectus.
S-25
<PAGE>
The following table provides information with respect to the portion of the
Trust Student Loans guaranteed by each Guarantor:
DISTRIBUTION OF THE TRUST
STUDENT LOANS BY GUARANTEE
AGENCY AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF
OUTSTANDING POOL BY
PRINCIPAL OUTSTANDING
NUMBER OF BALANCE PRINCIPAL
LOANS OF LOANS BALANCE
NAME OF GUARANTEE AGENCY GUARANTEED GUARANTEED(1) GUARANTEED
- ------------------------ ---------- -------------- -----------
<S> <C> <C> <C>
American Student Assistance Guarantor............................ 50,066 $ 172,586,937 8.6%
California Student Aid Commission................................ 56,748 193,623,850 9.7
Connecticut Student Aid Commission............................... 10,019 33,089,237 1.6
Educational Credit Management Corporation........................ 16,623 48,039,476 2.4
Florida Department of Education Office of Student Financial
Assistance..................................................... 10,342 27,023,904 1.3
Great Lakes Higher Education Corporation......................... 18,602 49,241,554 2.5
Iowa College Student Aid Commission.............................. 10,243 25,314,193 1.3
Illinois Student Assistance Commission........................... 23,114 72,560,257 3.6
Kentucky Higher Education Assistance Authority................... 7,405 20,740,462 1.0
Louisiana Student Financial Assistance Commission................ 12,572 33,898,331 1.7
Michigan Higher Education Assistance Authority................... 14,604 39,089,616 1.9
Missouri Coordinating Board for Higher Education................. 10,141 27,885,762 1.4
New Jersey Higher Education Assistance Authority................. 20,576 60,269,480 3.0
N.Y. State Higher Education Services Corporation................. 54,161 172,589,418 8.6
Northstar Guarantee Inc.......................................... 21,115 63,417,970 3.2
Northwest Education Loan Association............................. 56,130 167,708,645 8.4
Oklahoma State Regents for Higher Education...................... 18,101 47,348,050 2.4
Oregon State Scholarship Commission.............................. 32,559 84,113,414 4.2
Pennsylvania Higher Education Assistance Authority............... 35,851 98,796,648 4.9
Student Loan Guarantee Foundation of Arkansas, Inc............... 14,102 35,781,541 1.8
Tennessee Student Assistance Corporation......................... 21,162 53,320,521 2.7
Texas Guaranteed Student Loan Corporation........................ 29,541 85,171,932 4.2
United Student Aid Funds, Inc.................................... 122,971 392,480,664 19.6
---------- -------------- -----------
Total..................................................... 666,748 $2,004,091,862 100.0%
========== ============== ===========
</TABLE>
- ------------------
(1) Includes principal balance due from Obligors, plus accrued interest thereon
of $25,574,628.50 as of the Cutoff Date to be capitalized upon commencement
of repayment.
S-26
<PAGE>
Set forth below is certain historical information with respect to each of
the Guarantors which guarantees Trust Student Loans comprising at least 5% of
the Initial Pool Balance (the "Significant Guarantors"). The information shown
for each Significant Guarantor relates to all Student Loans (including but not
limited to Trust Student Loans) guaranteed by such Significant Guarantor:
Guaranty Volume. The following table sets forth the approximate
aggregate principal amount of federally reinsured Student Loans (excluding
Consolidation Loans) that first became guaranteed by each Significant
Guarantor and by all Guarantee Agencies (including but not limited to those
guaranteeing Trust Student Loans) in each of the five federal fiscal years
shown for which information is available:*
<TABLE>
<CAPTION>
LOANS GUARANTEED
-----------------------------------------------------------------------------------------
FEDERAL FISCAL YEAR
-----------------------------------------------------------------------------------------
NAME OF GUARANTEE AGENCY 1991 1992 1993 1994 1995
- --------------------------- --------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
American Student Assistance
Guarantor................ $ 593,607,561 $ 647,002,621 $ 729,805,284 $1,099,450,000 $ 906,455,000
California Student Aid
Commission............... 1,099,234,838 1,209,486,636 1,414,080,911 1,912,802,603 1,601,311,100
N.Y. State Higher Education
Services Corporation..... 1,009,946,034 1,109,076,428 1,308,793,197 1,667,424,351 1,553,863,358
Northwest Education Loan
Association.............. 177,125,438 202,410,354 273,691,424 395,769,791 376,388,912
United Student Aid Funds,
Inc...................... 2,546,031,457 2,864,322,503 3,493,936,722 4,724,261,870 5,040,546,459
All Guarantee Agencies..... $13,499,957,869 $14,749,165,049 $17,863,099,282 ** **
</TABLE>
- ------------------
* The information set forth in the table above has been obtained from the
Department's Guaranteed Student Loan Programs Data Books (each, a "DOE Data
Book") for Fiscal Years 1991, 1992 and 1993 (with respect to fiscal years
1991 through 1993) and from the Significant Guarantors (with respect to
fiscal years 1994 and 1995), and has not been audited or independently
verified for accuracy or completeness by the Seller, Sallie Mae or the
Underwriters.
** Not available.
Reserve Ratio. Each Significant Guarantor's reserve ratio is
determined by dividing its cumulative cash reserves by the original
principal amount of the outstanding loans it has agreed to guarantee. The
term "cumulative cash reserves" refers to cash reserves plus (i) sources of
funds (including insurance premiums, state appropriations, federal
advances, federal reinsurance payments, administrative cost allowances,
collections on claims paid and investment earnings) minus (ii) uses of
funds (including claims paid to lenders, operating expenses, lender fees,
the Department's share of collections on claims paid, returned advances and
reinsurance fees). The "original principal amount of outstanding loans"
consists of the original principal amount of loans guaranteed by such
Significant Guarantor minus the original principal amount of loans
cancelled, claims paid, loans paid in full and loan guarantees transferred
to such Significant Guarantor from other guarantors.
S-27
<PAGE>
The following table sets forth the Significant Guarantors' reserve ratios
and the national average reserve ratio for all guarantors for the five federal
fiscal years shown for which information is available:*
<TABLE>
<CAPTION>
RESERVE RATIO AS OF CLOSE OF
----------------------------------------
FEDERAL FISCAL YEAR
----------------------------------------
GUARANTORS 1991 1992 1993 1994 1995
- ---------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
American Student Assistance Guarantor..................... 0.5 % 0.6 % 0.6 % 0.7 % 0.8 %
California Student Aid Commission......................... 2.0 2.5 2.3 2.2 2.3
N.Y. State Higher Education Services Corporation.......... 0.3 0.8 0.7 1.3 1.3
Northwest Education Loan Association...................... 1.0 1.4 1.8 1.6 1.8
United Student Aid Funds, Inc............................. 0.1 1.0 1.3 1.2 1.4
All Guarantee Agencies.................................... 0.8 1.5 1.7 ** **
</TABLE>
- -----------------------
* The information set forth in the table above with respect to the
Significant Guarantors and the national average has been obtained from
the Fiscal Years 1991, 1992 and 1993 DOE Data Books (with respect to
fiscal years 1991 through 1993) and from the Significant Guarantors
(with respect to fiscal years 1994 and 1995).
The information set forth in the table above has not been audited or
independently verified for accuracy or completeness by the Seller,
Sallie Mae or the Underwriters.
** Not available.
Recovery Rates. A guarantor's recovery rate, which provides a measure of
the effectiveness of the collection efforts against defaulting borrowers after
the guarantee claim has been satisfied, is determined by dividing the amount
recovered from borrowers by the guarantor by the aggregate amount of default
claims paid by the guarantor during the applicable federal fiscal year with
respect to borrowers. The table below sets forth the recovery rates for each of
the Significant Guarantors for the five federal fiscal years shown:*
<TABLE>
<CAPTION>
RECOVERY RATIO
----------------------------------------
FEDERAL FISCAL YEAR
----------------------------------------
GUARANTORS 1991 1992 1993 1994 1995
- ---------------------------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
American Student Assistance Guarantor..................... 35.6% 36.2% 37.1% 37.2% 36.5%
California Student Aid Commission......................... 17.1 18.4 19.1 22.2 35.6
N.Y. State Higher Education Services Corporation.......... 34.7 36.3 34.2 41.9 43.9
Northwest Education Loan Association...................... 37.6 38.7 40.9 44.4 46.8
United Student Aid Funds, Inc............................. 22.2 24.1 26.6 30.3 35.3
</TABLE>
- -----------------------
* The information set forth in the table above has been obtained from the
Significant Guarantors and has not been audited or independently
verified for accuracy or completeness by the Seller, Sallie Mae or the
Underwriters.
S-28
<PAGE>
Claims Rate. The following table sets forth the claims rates of each
Significant Guarantor for each of the five federal fiscal years shown:*
<TABLE>
<CAPTION>
CLAIMS RATE
----------------------------------------
FEDERAL FISCAL YEAR
----------------------------------------
GUARANTORS 1991 1992 1993 1994 1995
- ---------------------------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
American Student Assistance Guarantor..................... 3.2 % 3.0 % 3.0 % 3.5 % 3.5 %
California Student Aid Commission......................... 8.0 6.6 5.8 4.9 3.6
N.Y. State Higher Education Services Corporation 3.3 3.7 2.9 2.8 3.2
Northwest Education Loan Association...................... 4.3 3.4 4.3 4.2 4.2
United Student Aid Funds, Inc............................. 8.41 4.99 6.89 4.99 4.7
</TABLE>
- -----------------------
* The information set forth in the table above has been obtained from the
Significant Guarantors and has not been audited or independently
verified for accuracy or completeness by the Seller, Sallie Mae or the
Underwriters.
Unless otherwise indicated, all the above information relating to the
Significant Guarantors has been obtained from the Significant Guarantors, is not
guaranteed as to accuracy or completeness by the Seller, Sallie Mae or the
Underwriters and is not to be construed as a representation by the Seller,
Sallie Mae or the Underwriters.
Each of the Guarantee Agency's guarantee obligations with respect to any
Trust Student Loan is conditioned upon the satisfaction of all the conditions
set forth in the applicable Guarantee Agreement. These conditions include, but
are not limited to, the following: (i) the origination and servicing of such
Trust Student Loan being performed in accordance with the FFELP, the Act, such
Guarantee Agency's rules and other applicable requirements, (ii) the timely
payment to the Guarantee Agency of the guarantee fee payable with respect to
such Trust Student Loan, (iii) the timely submission to the Guarantee Agency of
all required pre-claim delinquency status notifications and of the claim with
respect to such Trust Student Loan. Failure to comply with any of the applicable
conditions, including the foregoing, may result in the refusal of the Guarantee
Agency to honor its Guarantee Agreements with respect to such Trust Student
Loan, in the denial of guarantee coverage with respect to certain accrued
interest amounts with respect thereto or in the loss of certain Interest Subsidy
Payments and Special Allowance Payments with respect thereto.
Prospective investors should consult the DOE Data Books for further
information concerning the Guarantors.
CURE PERIOD FOR TRUST STUDENT LOANS
Sallie Mae, the Seller or the Servicer, as the case may be, will be
obligated to repurchase (or purchase in the case of the Servicer), or to
substitute Qualified Substitute Student Loans for, any Trust Student Loan in the
event of a material breach by such party of certain representations, warranties
or covenants with respect to such Trust Student Loan, following a period during
which such breach may be cured. For purposes of Trust Student Loans such cure
period will be 120 days, except that in the case of certain representations,
warranties or covenants, the breach of which may be cured by the reinstatement
of the Guarantor's guarantee of such Trust Student Loan, such cure period will
be 360 days, in each case following the earlier of the date on which such breach
is discovered and the date of the Servicer's receipt of the Guarantor reject
transmittal form with respect to such Trust Student Loan. Such repurchase (or
purchase in the case of the Servicer) or substitution will be made not later
than the end of such 120 day period or not later than the 60th day following the
end of such 360 day cure period, as applicable. Notwithstanding the foregoing,
if as of the last Business Day of any month the aggregate principal amount of
Trust Student Loans with respect to which claims have been filed with and
rejected by a Guarantor as a result of a breach by the Seller or the Servicer or
with respect to which the Servicer determines that claims cannot be filed
pursuant to the Higher Education Act as a result of such a breach exceeds 1% of
the Pool Balance, the Servicer and/or the Seller, as applicable, will be
required to purchase, within 30 days of a written request by the Eligible Lender
Trustee or the Indenture Trustee, affected Trust Student Loans in an aggregate
principal amount such that after such purchases the
S-29
<PAGE>
aggregate principal amount of affected Trust Student Loans is less than 1% of
the Pool Balance. The Trust Student Loans to be purchased by the Servicer and/or
the Seller pursuant to the preceding sentence will be based on the date of claim
rejection, with the Trust Student Loans with the earliest such dates to be
purchased first. See "Servicing; Administration -- Servicer Covenants,"
"Transfer and Servicing Agreements -- Sale of Student Loans to the Trust;
Representations and Warranties of the Seller" and "Transfer and Servicing
Agreements -- Purchase of Student Loans by the Seller; Representations and
Warranties of Sallie Mae" in the Prospectus.
CONSOLIDATION OF FEDERAL BENEFIT BILLINGS AND RECEIPTS AND GUARANTOR CLAIMS
WITH OTHER TRUSTS
Due to a recent change in Department policy limiting the granting of new
lender identification numbers, the Eligible Lender Trustee will be allowed under
the Trust Agreement to permit trusts, other than the Trust, established by the
Seller to securitize Student Loans to use the Department lender identification
number applicable to the Trust. In that event, the billings submitted to the
Department for Interest Subsidy and Special Allowance Payments on loans in the
Trust would be consolidated with the billings for such payments for Student
Loans in other trusts using the same lender identification number and payments
on such billings would be made by the Department in lump sum form. Such lump sum
payments would then be allocated among the various trusts using the same 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 from Guarantee
Agencies in lump sum form. In that event, such payments would be allocated among
the trusts in a manner similar to the allocation process for Interest Subsidy
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
Guarantee Agencies resulting from the Eligible Lender Trustee's activities in
the FFELP. As a result, if the Department or a Guarantee Agency were to
determine that the Eligible Lender Trustee owes a liability to the Department or
such Guarantee Agency on any Student Loan included in a trust using the shared
lender identification number, the Department or such Guarantee Agency 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 consolidation origination fees that exceed the Interest
Subsidy and Special Allowance Payments payable by the Department on the loans in
such other trusts, resulting in the consolidated payment from the Department
received by the Eligible Lender Trustee under such lender identification number
for that quarter equalling an amount that is less than the amount owed by the
Department on the loans in the Trust for that quarter.
The Trust Agreement for the Trust and the trust agreements for the other
trusts established by the Seller which share the lender identification number to
be used by the Trust will require any such trust (including the Trust) to
indemnify the other such trusts against a shortfall or an offset by the
Department or a Guarantee Agency arising from the Student Loans held by the
Eligible Lender Trustee on such trust's behalf.
S-30
<PAGE>
DESCRIPTION OF THE SECURITIES
GENERAL
The Notes will be issued pursuant to the terms of the Indenture and the
Certificates will be issued pursuant to the terms of the Trust Agreement, in
each case substantially in the form filed as an exhibit to the Registration
Statement of which this Prospectus Supplement is a part. The following summary
describes certain terms of the Notes, the Certificates, the Indenture and the
Trust Agreement. Other terms of the Notes and the Certificates are set forth in
the Prospectus. See "Description of the Notes," "Description of the
Certificates" and "Certain Information Regarding the Securities" in the
Prospectus. The summary does not purport to be complete and is qualified in its
entirety by reference to the provisions of the Notes, the Certificates, the
Indenture and the Trust Agreement.
THE NOTES
Distributions of Interest. Interest will accrue on the principal balance
of the Class A-1 Notes and the Class A-2 Notes at a rate per annum (calculated
as provided below) equal to the Class A-1 Rate and the Class A-2 Rate,
respectively. Interest will accrue during each Accrual Period and will be
payable to the Noteholders quarterly on each Distribution Date. Interest accrued
as of any Distribution Date but not paid on such Distribution Date will be due
on the next Distribution Date together with an amount equal to interest on such
amount at the applicable rate per annum specified above. Interest payments on
the Notes for any Distribution Date will generally be funded from Available
Funds and amounts on deposit in the Reserve Account remaining after the
distribution of the Primary Servicing Fee and the Administration Fee for such
Distribution Date. See "-- Distributions" and "-- Credit Enhancement." If such
sources are insufficient to pay the Noteholders" Interest Distribution Amount
for such Distribution Date, such shortfall will be allocated pro rata to the
Class A-1 Noteholders and the Class A-2 Noteholders (based upon the total amount
of interest then due on each class of Notes).
The "Class A-1 Rate" for each Accrual Period will be equal to the lesser of
(a) the daily weighted average of the T-Bill Rates within such Accrual Period
(determined as set forth under "-- Determination of T-Bill Rate") plus 0. % and
(b) the Student Loan Rate for such Accrual Period. The "Class A-2 Rate" for each
Accrual Period will be equal to the lesser of (a) the daily weighted average of
the T-Bill Rates within such Accrual Period (determined as set forth under "--
Determination of T-Bill Rate") plus 0. % and (b) the Student Loan Rate for such
Accrual Period. The weighted average calculations described above will be based
on the actual number of days in such Accrual Period.
The Class A-1 Rate and the Class A-2 Rate will be adjusted weekly on the
calendar day following each auction of 91-day Treasury Bills, except that (i)
the Note Rates in effect from the first day of each Accrual Period, including
the initial Accrual Period, through the day of the first 91-day Treasury Bill
auction on or after the first day of each Accrual Period will be based on the
results of the most recent 91-day Treasury Bill auction prior to such day and
(ii) the Note Rates will be subject to a Lock-In Period of six business days
preceding each Distribution Date. See "-- Determination of T-Bill Rates."
The "Student Loan Rate" for any Accrual Period will be equal to the product
of (a) the quotient obtained by dividing (i) 365 (or 366 in the case of a leap
year) by (ii) the actual number of days elapsed in such Accrual Period and (b)
the percentage equivalent of a fraction, (i) the numerator of which is equal to
Expected Interest Collections for the related Collection Period less the Primary
Servicing Fee and the Administration Fee and any prior unpaid Administration
Fees with respect to such Collection Period and (ii) the denominator of which is
the Pool Balance as of the first day of such Collection Period.
"Expected Interest Collections" means, with respect to any Collection
Period, the sum of (i) the amount of interest accrued, net of amounts required
to be paid to the Department or to be repaid to Guarantors or borrowers, with
respect to the Trust Student Loans for such Collection Period (whether or not
such interest is actually paid), (ii) all Interest Subsidy Payments and Special
Allowance Payments pursuant to claims submitted by the Eligible Lender Trustee
for such Collection Period (whether or not actually received), net of amounts
required to be paid to the Department, with respect to the Trust Student Loans,
to the extent not included in (i) above, and (iii) investment earnings on
amounts held in the Reserve Account and the Collection Account for such
Collection Period and interest on amounts to
S-31
<PAGE>
be remitted by the Administrator to the Collection Account with respect to such
Collection Period prior to the related Distribution Date.
Any Note Interest Carryover that may exist on any Distribution Date will be
payable to the Noteholders on that Distribution Date and any succeeding
Distribution Dates solely out of the amount of Available Funds remaining in the
Collection Account on any such Distribution Date after distribution of the
Primary Servicing Fee, the Administration Fee, the Noteholders' Distribution
Amount, the Certificateholders' Distribution Amount, the amount, if any,
necessary to be deposited into the Reserve Account to reinstate the balance
therein to the Specified Reserve Account Balance and the aggregate Carryover
Servicing Fee, if any; provided that (except on the final Distribution Date upon
termination of the Trust) no amounts on deposit in the Reserve Account (other
than amounts in excess of the Specified Reserve Account Balance) will be
available to pay any such Note Interest Carryover.
Distributions of Principal. Principal payments will be made to the
Noteholders on each Distribution Date in an amount generally equal to the
Principal Distribution Amount for such Distribution Date, until the principal
balance of the Notes is reduced to zero. Principal payments on the Notes will
generally be derived from Available Funds remaining after the distribution of
the Primary Servicing Fee, the Administration Fee, the Noteholders' Interest
Distribution Amount and the Certificateholders' Return Distribution Amount. See
"-- Distributions", "-- Credit Enhancement" and "-- The Certificates --
Subordination of the Certificates." If such sources are insufficient to pay the
Noteholders' Principal Distribution Amount for such Distribution Date, such
shortfall will be added to the principal payable to the Noteholders on
subsequent Distribution Dates. Amounts on deposit in the Reserve Account (other
than amounts in excess of the Specified Reserve Account Balance) will not be
available to make principal payments on the Notes except at maturity or on the
final Distribution Date upon termination of the Trust.
Principal payments on the Notes will be applied on each Distribution Date,
first, to the principal balance of the Class A-1 Notes until such principal
balance is reduced to zero and thereafter to the principal balance of the Class
A-2 Notes until such principal balance is reduced to zero; provided that
following the occurrence of an Event of Default and the exercise by the
Indenture Trustee of remedies under the Indenture, principal payments on the
Notes will be made pro rata, without preference or priority. The aggregate
outstanding principal amount of the Class A-1 Notes will be due and payable in
full on the Class A-1 Maturity Date and the Class A-2 Notes will be due and
payable in full on the Class A-2 Maturity Date. The actual date on which the
aggregate outstanding principal and accrued interest of the Class A-1 Notes or
the Class A-2 Notes are paid may be earlier than the respective maturity dates,
based on a variety of factors, including those described in the Prospectus under
"Risk Factors -- Maturity and Prepayment Assumptions" and "Trading Information
- -- Weighted Average Life of the Securities" in the Prospectus.
THE CERTIFICATES
Return on Certificates. Certificateholders will be entitled to
distributions of return on the Certificate Balance at the Certificate Rate.
Return on the Certificates will accrue during each Accrual Period, will be
calculated as provided below and will be distributable quarterly on each
Distribution Date. Return on the Certificates payable on any Distribution Date
but not distributed on such Distribution Date will be payable on the next
Distribution Date increased by an amount equal to return on such amount at the
Certificate Rate. Distributions with respect to return on the Certificates for
any Distribution Date will generally be funded from the portion of the Available
Funds and the amounts on deposit in the Reserve Account remaining after the
distribution of the Primary Servicing Fee, the Administration Fee and the
Noteholders' Interest Distribution Amount for such Distribution Date. See "--
Distributions", "-- Credit Enhancement -- Reserve Account" and "-- The
Certificates -- Subordination of the Certificates."
The "Certificate Rate" for each Accrual Period will be equal to the lesser
of (a) the daily weighted average of the T-Bill Rates within such Accrual Period
(determined as set forth under "-- Determination of T-Bill Rate") plus 0. %
based on the actual number of days in such Accrual Period and (b) the Student
Loan Rate for such Accrual Period. The Certificate Rate will be adjusted weekly
on the calendar day following each auction of 91-day Treasury Bills, except that
(i) the Certificate Rate in effect from the first day of each Accrual Period,
including the initial Accrual Period, through the day of the first 91-day
S-32
<PAGE>
Treasury Bill auction on or after the first day of each Accrual Period will be
based on the results of the most recent 91-day Treasury Bill auction prior to
such day and (ii) the Certificate Rate will be subject to a Lock-In Period of
six business days preceding each Distribution Date. See "-- Determination of
T-Bill Rates."
Any Certificate Return Carryover that may exist on any Distribution Date
will be payable to the Certificateholders on that Distribution Date and any
succeeding Distribution Dates solely out of the amount of Available Funds
remaining in the Collection Account on any such Distribution Date after
distribution of the Primary Servicing Fee, the Administration Fee, the
Noteholders' Distribution Amount, the Certificateholders' Distribution Amount,
the amount, if any, necessary to be deposited into the Reserve Account to
reinstate the balance therein to the Specified Reserve Account Balance, the
Carryover Servicing Fee, if any, and any Note Interest Carryover; provided that
(except on the final Distribution Date upon termination of the Trust) amounts on
deposit in the Reserve Account (other than amounts in excess of the Specified
Reserve Account Balance) will not be available to pay any such Certificate
Return Carryover.
Distributions in Respect of Certificate Balance. Certificateholders will
be entitled to distributions on each Distribution Date on and after which the
Notes are paid in full in an amount generally equal to the Certificate Balance
Distribution Amount for such Distribution Date. Distributions in respect of the
Certificate Balance for such Distribution Date will generally be funded from the
portion of Available Funds and amounts on deposit in the Reserve Account
remaining after distribution of the Primary Servicing Fee, the Administration
Fee and the Certificateholders' Return Distribution Amount for such Distribution
Date. Amounts on deposit in the Reserve Account (other than amounts in excess of
the Specified Reserve Account Balance) will not be available to make payments on
the Certificate Balance except on the final Distribution Date upon termination
of the Trust. See "-- Distributions" and "-- Credit Enhancement -- Reserve
Account."
Any remaining Certificate Balance will be distributed in full on the Final
Distribution Date. The actual date on which the final distribution on the
Certificates will be made may be earlier than the Final Distribution Date,
however, based on a variety of factors, including those described above under
"Risk Factors -- Maturity and Prepayment Assumptions" and "Trading Information
- -- Weighted Average Life of the Securities" in the Prospectus.
Subordination of the Certificates. On any Distribution Date distributions
in respect of return on the Certificates will be subordinated to the payment of
interest on the Notes and distributions in respect of the Certificate Balance
will be subordinated to the payment of interest on the Notes (other than any
Note Interest Carryover) and principal of the Notes. Consequently, on any
Distribution Date, Available Funds and amounts on deposit in the Reserve Account
remaining after payment of the Primary Servicing Fee and the Administration Fee
will be applied to the payment of interest on the Notes prior to any
distribution thereof in respect of return on the Certificates and no
distributions in respect of the Certificate Balance will be made until the
Distribution Date on or after which the Notes have been paid in full.
Notwithstanding the foregoing, if on any Distribution Date following all
distributions to be made on such Distribution Date the outstanding principal
amount of the Notes would be in excess of the sum of the outstanding principal
balance of the Trust Student Loans and any accrued but unpaid interest on the
Trust Student Loans as of the last day of the related Collection Period plus the
balance of the Reserve Account on such Distribution Date following such
distributions, or if an Insolvency Event with respect to the Seller or an Event
of Default under the Indenture has occurred and is continuing, amounts on
deposit in the Collection Account and the Reserve Account will be applied on
such Distribution Date to the payment of the Noteholders' Distribution Amount
before any amounts are applied to the payment of the Certificateholders'
Distribution Amount. In addition, on any Distribution Date, Available Funds
remaining after payment of the Servicing Fee, the Administration Fee, the
Noteholders' Distribution Amount, the Certificateholders' Distribution Amount,
the amount, if any, necessary to be deposited into the Reserve Account to
reinstate the balance therein to the Specified Reserve Account Balance and the
aggregate Carryover Servicing Fee, if any, for such Distribution Date will be
applied to the payment of the Note Interest Carryover prior to any distribution
thereof to Certificateholders to cover the Certificate Return Carryover. Any
portion of the Certificateholders' Return Distribution Amount not received on a
S-33
<PAGE>
Distribution Date in connection with such subordination will be treated as a
Certificate Return Shortfall to be paid on succeeding Distribution Dates.
DETERMINATION OF T-BILL RATES
"T-Bill Rate" means, on any day, the weighted average per annum discount
rate (expressed on a bond equivalent basis and applied on a daily basis) for
direct obligations of the United States with a maturity of thirteen weeks
("91-day Treasury Bills") sold at the most recent 91-day Treasury Bill auction
prior to such date, as reported by the U.S. Department of the Treasury. In the
event that the results of the auctions of 91-day Treasury Bills cease to be
reported as provided above, or that no such auction is held in a particular
week, then the T-Bill Rate in effect as a result of the last such publication or
report will remain in effect until such time, if any, as the results of auctions
of 91-day Treasury Bills shall again be reported or such an 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 Distribution Date
during which the Note Rate or Certificate Rate, as applicable, in effect on the
first day of such period will remain in effect until the end of the Accrual
Period related to such Distribution Date.
Accrued interest on either class of Notes from and including the Closing
Date or the preceding Distribution Date, as applicable, to but excluding the
current Distribution Date is calculated by multiplying the principal amount of
such Notes by an "accrued interest factor." This factor is calculated by adding
the interest rates applicable to each day on which each such Note has been
outstanding since the Closing Date or the preceding Distribution Date, as
applicable, and dividing the sum by 365 (or by 366 in the case of accrued
interest which is payable on a Distribution Date in a leap year) and rounding
the resulting number to nine decimal places.
S-34
<PAGE>
The following table sets forth the accrued interest factors that would have
been applicable to any Note bearing interest at the indicated rates, assuming a
365-day year:
<TABLE>
<CAPTION>
ASSUMED INTEREST
-------------------------
SETTLEMENT DAYS RATE ON INTEREST
DATE OUTSTANDING THE NOTES FACTOR
---------- ----------- --------- -----------
<S> <C> <C> <C>
1st............................. 0 5.00000% 0.000000000
2nd............................. 1 5.00000 0.000136986
3rd............................. 2 5.00000 0.000273973
4th............................. 3 5.00000 0.000410959
5th*............................ 4 5.15000 0.000547945
6th............................. 5 5.15000 0.000689041
7th............................. 6 5.15000 0.000830137
8th............................. 7 5.15000 0.000971233
9th............................. 8 5.15000 0.001112329
10th............................ 9 5.15000 0.001253425
</TABLE>
- ------------------
* First interest rate adjustment (91-day Treasury bills are generally auctioned
weekly).
The numbers in this table are examples given for information purposes only
and are in no way a prediction of interest rates on any Notes. A similar factor
calculated in the same manner is applicable to the return on the Certificates.
Information concerning the current 91-day Treasury Bill Rate and the
accrued interest factor will be available by telephoning the Administrator at
(800) 321-7179 between the hours of 9 a.m. and 4 p.m. Eastern time on any day on
which the Reston, VA office of the Administrator is open for business and will
also be available through Telerate Systems Incorporated or Bloomberg L.P.
ACCOUNTS
The Administrator will establish and maintain in the name of the Indenture
Trustee the Collection Account and the Reserve Account, on behalf of the
Noteholders and the Certificateholders.
Funds in the Collection Account and the Reserve Account (collectively, the
"Trust Accounts") will be invested as provided in the 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. Subject to certain conditions, Eligible Investments may
include securities or other obligations issued by Sallie Mae, the Seller or
their affiliates or trusts originated by the Seller or its affiliates. Eligible
Investments are limited to obligations or securities that mature not later than
the business day immediately preceding the next Distribution Date or the next
Monthly Servicing Payment Date (to the extent of the Primary Servicing Fee).
SERVICING COMPENSATION
The Servicer will be entitled to receive the Servicing Fee in an amount
equal to the Primary Servicing Fee and the Carryover Servicing Fee as
compensation for performing the functions as servicer for the Trust described
above. The Primary Servicing Fee will be payable on each Monthly Servicing
Payment Date and will be paid solely out of Available Funds and amounts on
deposit in the Reserve Account on such date. The Carryover Servicing Fee will be
payable to the Servicer on each Distribution Date out of Available Funds after
payment on such Distribution Date of the Primary Servicing Fee, the
Administrative Fee, the Noteholders' Distribution Amount, the
Certificateholders' Distribution Amount, and the amount, if any, necessary to be
deposited in the Reserve Account to reinstate the balance thereof to the
Specified Reserve Account Balance. The Carryover Servicing Fee will be subject
to increase agreed to by the Administrator, the Eligible Lender Trustee and the
Servicer to the extent that a demonstrable and significant increase occurs in
the costs incurred by the Servicer in providing the services to be provided
under the Servicing Agreement, whether due to changes in applicable governmental
regulations, guarantor program requirements or regulations, or postal rates.
S-35
<PAGE>
DISTRIBUTIONS
Deposits to Collection Account. On or about the third business day prior
to each Distribution Date (the "Determination Date"), the Servicer and the
Administrator will provide the Indenture Trustee with certain information with
respect to the preceding Collection Period, including the amount of Available
Funds received with respect to the Trust Student Loans and the aggregate
Purchase Amount relating to the Trust Student Loans to be repurchased by the
Seller or to be purchased by the Servicer.
Except as provided below, the Servicer will deposit all payments on Student
Loans (from whatever source) and all proceeds of Student Loans collected by it
during each Collection Period into the Collection Account within two business
days of receipt thereof. Except as provided below, the Eligible Lender Trustee
will deposit all Interest Subsidy Payments and all Special Allowance Payments
with respect to the Student Loans received by it with respect to each Collection
Period into the Collection Account within two business days of receipt thereof.
However, for so long as (i) the senior unsecured obligations of the
Administrator (or any affiliate of the Administrator which guarantees the
obligations of the Administrator under the Administration Agreement) have been
assigned a long-term rating of not less than "AA-" (or equivalent rating) or a
short-term rating of not less than "A-1" (or equivalent rating) by each of the
Rating Agencies or the remitting by the Servicer and the Eligible Lender Trustee
of the amounts referred to above to the Administrator will not result in a
downgrading or withdrawal of any of the then current ratings of any of the
Securities by any of the Rating Agencies, and (ii) no Administrator Default has
occurred and is continuing, the Servicer and the Eligible Lender Trustee will
remit the amounts referred to above that would otherwise be deposited by it into
the Collection Account to the Administrator within two business days of receipt
thereof, and the Administrator will remit such amounts to the Collection Account
on or before the business day preceding each Monthly Servicing Payment Date (to
the extent of the Primary Servicing Fee payable on such date) and on or before
the business day preceding each Distribution Date (to the extent of the
remainder of such amounts), together with interest accrued through the last day
of the related Collection Period on amounts held by the Administrator at the
federal funds rate for each day during such period less .20%. See "Servicing;
Administration -- Payments on Student Loans" in the Prospectus.
For purposes hereof, the term "Available Funds" means, with respect to a
Distribution Date or any related Monthly Servicing Payment Date, the sum of the
following amounts with respect to the related Collection Period (or, in the case
of a Monthly Servicing Payment Date, the applicable portion thereof): (i) all
collections received by the Servicer on the Trust Student Loans (including any
Guarantee Payments received with respect to the Trust Student Loans but net of
(x) any collections in respect of principal on the Trust Student Loans applied
by the Trust to repurchase guaranteed loans from the Guarantors in accordance
with the Guarantee Agreements and (y) amounts required by the Higher Education
Act to be paid to the Department or to be repaid to borrowers (whether or not in
the form of a principal reduction of the applicable Trust Student Loan), with
respect to the Trust Student Loans for such Collection Period); (ii) any
Interest Subsidy Payments and Special Allowance Payments received by the
Servicer or the Eligible Lender Trustee during such Collection Period with
respect to the Trust Student Loans; (iii) all proceeds of the liquidation of
defaulted Trust Student Loans ("Liquidated Student Loans"), which became
Liquidated Student Loans during such Collection Period in accordance with the
Servicer's customary servicing procedures, net of expenses incurred by the
Servicer in connection with such liquidation and any amounts required by law to
be remitted to the borrower on such Liquidated Student Loans ("Liquidation
Proceeds"), and all recoveries in respect of Liquidated Student Loans which were
written off in prior Collection Periods or during such Collection Period; (iv)
the aggregate Purchase Amounts received during such Collection Period for those
Trust Student Loans repurchased by the Seller or purchased by the Servicer
("Purchased Student Loans"); (v) the aggregate amounts, if any, received from
the Seller or the Servicer, as the case may be, as reimbursement of
non-guaranteed interest amounts, or lost Interest Subsidy Payments and Special
Allowance Payments, with respect to the Trust Student Loans pursuant to the Sale
Agreement or the Servicing Agreement, respectively; (vi) amounts received by the
Trust pursuant to the Servicing Agreement during such Collection Period in
respect of yield or principal adjustments; and (vii) Investment Earnings for
such Distribution Date and any interest remitted by the Administrator to the
Collection Account prior to such Distribution Date or Monthly Servicing Payment
Date as described in the preceding paragraph; provided that if with respect
S-36
<PAGE>
to any Distribution Date there would not be sufficient funds, after application
of Available Funds (as defined above) and amounts available from the Reserve
Account, to pay any of the items specified in clauses (i) through (vii) under
"-- Distributions -- Distributions from Collection Account," then Available
Funds for such Distribution Date will include, in addition to the Available
Funds (as defined above), amounts on deposit in the Collection Account (or
amounts held by the Administrator, or which the Administrator reasonably
estimates to be held by the Administrator, for deposit into the Collection
Account) on the Determination Date which would have constituted Available Funds
for the Distribution Date succeeding such Distribution Date, up to the amount
necessary to pay such items, and the Available Funds for such succeeding
Distribution Date will be adjusted accordingly.
Distributions from Collection Account. On each Monthly Servicing Payment
Date that is not a Distribution Date, the Administrator will instruct the
Indenture Trustee to pay to the Servicer the Primary Servicing Fee due with
respect to the period from and including the preceding Monthly Servicing Payment
Date from amounts on deposit in the Collection Account. On each Distribution
Date, the Administrator will instruct the Indenture Trustee to make the
following deposits and distributions, in the amounts and in the order of
priority specified below, except as otherwise provided under "Description of the
Securities -- The Certificates -- Subordination of the Certificates" and "-- The
Notes -- Distributions of Principal", to the extent of the Available Funds with
respect to such Distribution Date:
(i) to the Servicer, the Primary Servicing Fee due on such
Distribution Date;
(ii) to the Administrator, the Administration Fee due on such
Distribution Date and all prior unpaid Administration Fees;
(iii) to the Noteholders, the Noteholders' Interest Distribution
Amount, ratably, without preference or priority of any kind, according to
the amounts payable on the Notes in respect of Noteholders' Interest
Distribution Amount;
(iv) to the Eligible Lender Trustee on behalf of the
Certificateholders, the Certificateholders' Return Distribution Amount, for
distribution by the Eligible Lender Trustee pursuant to the Trust
Agreement, ratably, without preference or priority of any kind, according
to the amounts payable in respect of Certificateholders' Return
Distribution Amount;
(v) to the Class A-1 Noteholders, the Noteholders' Principal
Distribution Amount, ratably, without preference or priority of any kind,
according to the amounts payable on the Class A-1 Notes for principal;
(vi) on each Distribution Date on and after which the Class A-1 Notes
have been paid in full, to the Class A-2 Noteholders, the Noteholders'
Principal Distribution Amount, ratably, without preference or priority of
any kind, according to the amounts payable on the Class A-2 Notes for
principal;
(vii) on each Distribution Date on and after which the Notes have been
paid in full, to the Eligible Lender Trustee on behalf of the
Certificateholders, the Certificate Balance Distribution Amount, for
distribution by the Eligible Lender Trustee pursuant to the Trust
Agreement, ratably, without preference or priority of any kind, according
to the amounts payable in respect of the Certificate Balance;
(viii) to the Reserve Account, the amount, if any, necessary to
reinstate the balance of the Reserve Account to the Specified Reserve
Account Balance;
(ix) to the Servicer, the aggregate unpaid amount of the Carryover
Servicing Fee, if any;
(x) to the Noteholders, the aggregate unpaid amount of the Note
Interest Carryover, if any, ratably, without preference or priority of any
kind, according to the amounts due and payable on the Notes in respect of
Note Interest Carryover;
(xi) to the Eligible Lender Trustee on behalf of the
Certificateholders, the aggregate unpaid amount of the Certificate Return
Carryover, if any, for distribution by the Eligible Lender Trustee pursuant
to the Trust Agreement ratably, without preference or priority of any kind,
according to the amounts payable in respect of Certificate Return
Carryover; and
S-37
<PAGE>
(xii) to the Reserve Account, any remaining amounts after application
of clauses (i) through (xi).
Notwithstanding the foregoing, in the event the Trust Student Loans are not
sold on the Trust Auction Date, on each subsequent Distribution Date on which
the Pool Balance is equal to 10% or less of the Initial Pool Balance, if the
amount on deposit in the Reserve Account on such Distribution Date (after giving
effect to all withdrawals therefrom on such Distribution Date, except
withdrawals payable to the Seller other than as a Certificateholder) is in
excess of the Specified Reserve Account Balance for such Distribution Date, the
Administrator will direct the Indenture Trustee to distribute the amount of such
excess as accelerated payments of principal on the Notes and distributions in
respect of the Certificate Balance.
For purposes hereof, the following terms have the following meanings:
"Certificate Balance" equals $ as of the Closing Date and,
thereafter, equals the initial Certificate Balance, reduced by all previous
distributions in respect of the Certificate Balance.
"Certificate Balance Distribution Amount" means, on each Distribution Date,
the excess of (i) the sum of (a) the Principal Distribution Amount for such
Distribution Date, (b) the Note Principal Shortfall as of the close of the
preceding Distribution Date and (c) the Certificate Balance Shortfall as of the
close of the preceding Distribution Date over (ii) the Note Principal
Distribution Amount for such Distribution Date; provided that the Certificate
Balance Distribution Amount will in no event exceed the Certificate Balance. In
addition, on the Final Distribution Date, the Certificate Balance to be
distributed to the Certificateholders will include the amount required to reduce
the outstanding Certificate Balance to zero.
"Certificate Balance Shortfall" means, as of the close of any Distribution
Date, the excess of (i) the Certificate Balance Distribution Amount on such
Distribution Date over (ii) the amount of distributions made with respect to the
Certificate Balance on such Distribution Date.
"Certificateholders' Distribution Amount" means with respect to any
Distribution Date, the Certificateholders' Return Distribution Amount for such
Distribution Date plus the Certificate Balance Distribution Amount for such
Distribution Date.
"Certificateholders' Return Distribution Amount" means, with respect to any
Distribution Date, the sum of (i) return on the Certificates accrued at the
Certificate Rate for the related Accrual Period on the outstanding Certificate
Balance on the immediately preceding Distribution Date, after giving effect to
all distributions to Certificateholders in respect of the Certificate Balance on
such preceding Distribution Date (or, in the case of the first Distribution
Date, on the Closing Date) and (ii) the Certificate Return Shortfall for such
Distribution Date; provided that the Certificateholders' Return Distribution
Amount will not include any Certificate Return Carryover.
"Certificate Return Carryover" means for any Distribution Date on which the
Certificate Rate is based on the Student Loan Rate, the excess of (a) the amount
of return on the Certificates that would have accrued in respect of such Accrual
Period at the Certificate Rate without regard to the Student Loan Rate over (b)
the amount of return on the Certificates actually accrued in respect of such
Accrual Period based on the Student Loan Rate, together with the unpaid portion
of any such excess from prior Distribution Dates and any return accrued thereon
calculated at the Certificate Rate without regard to the Student Loan Rate.
"Certificate Return Shortfall" means, with respect to any Distribution
Date, the excess of (i) the Certificateholders' Return Distribution Amount on
the preceding Distribution Date over (ii) the return on the Certificates
actually distributed to the Certificateholders on such preceding Distribution
Date, plus return on the amount of such excess, to the extent permitted by law,
at the Certificate Rate from such preceding Distribution Date to the current
Distribution Date.
"Noteholders' Distribution Amount" means, with respect to any Distribution
Date, the sum of the Noteholders' Interest Distribution Amount and the
Noteholders" Principal Distribution Amount for such Distribution Date.
"Noteholders' Interest Distribution Amount" means, with respect to any
Distribution Date, the sum of (i) the amount of interest accrued at the
respective Note Rates for the related Accrual Period on the aggregate
outstanding principal balances of both classes of Notes on the immediately
preceding
S-38
<PAGE>
Distribution Date after giving effect to all principal distributions to holders
of Notes on such date (or, in the case of the first Distribution Date, on the
Closing Date) and (ii) the Note Interest Shortfall for such Distribution Date;
provided that the Noteholders' Interest Distribution Amount will not include any
Note Interest Carryover.
"Noteholders' Principal Distribution Amount" means, with respect to any
Distribution Date, the Principal Distribution Amount for such Distribution Date
plus the Note Principal Shortfall as of the close of the preceding Distribution
Date; provided that the Noteholders' Principal Distribution Amount will not
exceed the outstanding principal balance of the Notes. In addition, (i) on the
Class A-1 Maturity Date, the principal required to be distributed to Class A-1
Noteholders will include the amount required to reduce the outstanding principal
balance of the Class A-1 Notes to zero and (ii) on the Class A-2 Maturity Date,
the principal required to be distributed to the Class A-2 Noteholders will
include the amount required to reduce the outstanding principal balance of the
Class A-2 Notes to zero.
"Note Interest Carryover" means, for any Distribution Date on which the
Class A-1 Rate or the Class A-2 Rate is based on the Student Loan Rate, the
excess of (a) the amount of interest on the Class A-1 Notes or the Class A-2
Notes, as the case may be, that would have accrued in respect of the related
Accrual Period had interest been calculated without regard to the Student Loan
Rate over (b) the amount of interest on the Class A-1 Notes or the Class A-2
Notes, as the case may be, actually accrued in respect of such Accrual Period
based on the Student Loan Rate, together with the unpaid portion of any such
excess from prior Distribution Dates and interest accrued thereon at the
applicable Note Rate without regard to the Student Loan Rate.
"Note Interest Shortfall" means, with respect to any Distribution Date, the
excess of (i) the Noteholders" Interest Distribution Amount on the preceding
Distribution Date over (ii) the amount of interest actually distributed to the
Noteholders on such preceding Distribution Date, plus interest on the amount of
such excess interest due to the Noteholders, to the extent permitted by law, at
the weighted average interest rate borne by the Class A-1 Notes and the Class
A-2 Notes from such preceding Distribution Date to the current Distribution
Date.
"Note Principal Shortfall" means, as of the close of any Distribution Date,
the excess of (i) the Noteholders' Principal Distribution Amount on such
Distribution Date over (ii) the amount of principal actually distributed to the
Noteholders on such Distribution Date.
"Principal Distribution Amount" means (i) with respect to the initial
Distribution Date, the amount by which the sum of the outstanding principal
amount of the Notes and the Certificate Balance exceeds the Adjusted Pool
Balance for such Distribution Date and (ii) with respect to each subsequent
Distribution Date, the amount by which the Adjusted Pool Balance for the
preceding Distribution Date exceeds the Adjusted Pool Balance for such
Distribution Date. For this purpose, "Adjusted Pool Balance" means, for any
Distribution Date, (a) if the Pool Balance as of the last day of the related
Collection Period is greater than 40% of the Initial Pool Balance, the sum of
such Pool Balance and the Specified Reserve Account Balance for such
Distribution Date, or (b) if the Pool Balance as of the last day of the related
Collection Period is less than or equal to 40% of the Initial Pool Balance, such
Pool Balance.
"Realized Loss" means the excess of the principal balance (including any
interest that had been or had been expected to be capitalized) of any Liquidated
Student Loan over Liquidation Proceeds with respect to such Student Loan to the
extent allocable to principal (including any interest that had been or had been
expected to be capitalized).
CREDIT ENHANCEMENT
Reserve Account. Pursuant to the Sale Agreement, the Reserve Account will
be created with an initial deposit by the Trust 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 Distribution Date, by deposit
therein of (i) the amount, if any, necessary to reinstate the balance of the
Reserve Account to the Specified Reserve Account Balance from the amount of
Available Funds remaining after payment of the Primary Servicing Fee, the
Administration Fee, the Noteholders' Distribution Amount and the
Certificateholders' Distribution Amount, all for such Distribution Date, and
(ii) any remaining Available Funds after application of clause (i) above and
after payment of any Carryover Servicing Fee, any Note
S-39
<PAGE>
Interest Carryover and any Certificate Return Carryover, as of such Distribution
Date. See "-- Distributions". As described below, subject to certain
limitations, amounts on deposit in the Reserve Account will be released to the
Seller to the extent that the amount on deposit in the Reserve Account exceeds
the Specified Reserve Account Balance. If the market value of securities and
cash in the Reserve Account is on any Distribution Date sufficient to pay the
remaining principal amount of and interest accrued on the Notes, to reduce the
Certificate Balance to zero and to pay any accrued return thereon and to pay any
Carryover Servicing Fee, Note Interest Carryover or Certificate Return
Carryover, such amount will be so applied on such Distribution Date.
"Specified Reserve Account Balance" with respect to any Distribution Date
means the greater of (a) % of the Pool Balance as of the close of business
on the last day of the related Collection Period and (b) $ , provided
that in no event will such balance exceed the sum of the outstanding principal
amount of the Notes and the Certificate Balance.
If the amount on deposit in the Reserve Account on any Distribution Date
(after giving effect to all deposits or withdrawals therefrom on such
Distribution Date) is greater than the Specified Reserve Account Balance for
such Distribution Date, subject to certain limitations, the Administrator will
instruct the Indenture Trustee to distribute the amount of the excess, after
payment of any Note Principal Shortfall, Certificate Balance Shortfall,
Carryover Servicing Fee, Note Interest Carryover and Certificate Return
Carryover, to the Seller. Upon any distribution to the Seller of amounts from
the Reserve Account, neither the Noteholders nor the Certificateholders will
have any rights in, or claims to, such amounts.
Subject to the limitation described in the preceding paragraph, amounts
held from time to time in the Reserve Account will continue to be held for the
benefit of the Trust. Funds will be withdrawn from cash in the Reserve Account
on any Distribution Date (or, in the case of the payment of any Primary
Servicing Fee, on any Monthly Servicing Payment Date) to the extent that the
amount of Available Funds on such Distribution Date (or such Monthly Servicing
Payment Date) is insufficient to pay any of the items specified in clauses (i)
through (iv) under "-- Distributions -- Distributions from Collection Account."
Such funds also will be withdrawn at maturity of the Notes or on the final
Distribution Date upon termination of the Trust to the extent that the amount of
Available Funds at such time is insufficient to pay any of the items specified
in clauses (v) through (vii) and, in the case of the final Distribution Date
upon termination of the Trust, clauses (ix) through (xi) under "-- Distributions
- -- Distributions from Collection Account." Such funds will be paid from the
Reserve Account to the persons and in the order of priority specified for
distributions out of the Collection Account in such clauses (i) through (iv) and
clauses (v) through (vii) and clauses (ix) through (xi), as applicable.
The Reserve Account is intended to enhance the likelihood of timely
distributions of interest to the Noteholders and return to the
Certificateholders and to decrease the likelihood that the Noteholders or the
Certificateholders will experience losses. In certain circumstances, however,
the Reserve Account could be reduced to zero. Moreover, except on the final
Distribution Date upon termination of the Trust, amounts on deposit in the
Reserve Account (other than amounts in excess of the Specified Reserve Account
Balance) will not be available to cover any aggregate Carryover Servicing Fees,
Note Interest Carryover or Certificate Return Carryover. Amounts on deposit in
the Reserve Account will be available to pay principal on the Notes and interest
accrued thereon at the maturity of the Notes, and to pay the Certificate Balance
and return accrued thereon, the Carryover Servicing Fee, Note Interest Carryover
and Certificate Return Carryover on the final Distribution Date upon termination
of the Trust.
Subordination of the Certificates. On any Distribution Date distributions
in respect of return on the Certificates will be subordinated to the payment of
interest on the Notes and distributions in respect of the Certificate Balance
will be subordinated to the payment of interest on the Notes (other than any
Note Interest Carryover) and principal of the Notes. See "Description of the
Securities -- The Certificates -- Subordination of the Certificates".
S-40
<PAGE>
ADMINISTRATION FEE
As compensation for the performance of the Administrator's obligations
under the Administration Agreement and the Sale Agreement and as reimbursement
for its expenses related thereto, the Administrator will be entitled to an
administration fee in an amount equal to $20,000 per Collection Period payable
on each Distribution Date (the "Administration Fee").
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"),
impose certain restrictions on (a) employee benefit plans (as defined in Section
3(3) of ERISA), (b) plans described in section 4975(e)(1) of the Code, including
individual retirement accounts or Keogh plans, (c) any entities whose underlying
assets include plan assets by reason of a plan's investment in such entities
(each of (a), (b) and (c), a "Plan") and (d) persons who have certain specified
relationships to such Plans ("Parties in Interest" under ERISA and "Disqualified
Persons" under the Code). Moreover, based on the reasoning of the United States
Supreme Court in John Hancock Life Ins. Co. v. Harris Trust and Sav. Bank, 114
S. Ct. 517 (1993), an insurance company's general account may be deemed to
include assets of the Plans investing in the general account (e.g., through the
purchase of an annuity contract), and such insurance company might be treated as
a Party in Interest with respect to a Plan by virtue of such investment. ERISA
also imposes certain duties on persons who are fiduciaries of Plans subject to
ERISA and prohibits certain transactions between a Plan and Parties in Interest
or Disqualified Persons with respect to such Plans.
The Seller, the Servicer, the Eligible Lender Trustee, the Indenture
Trustee and the Administrator may be the sponsor of or investment advisor with
respect to one or more Plans. Because such parties may receive certain benefits
in connection with the sale of the Notes, the purchase of the Notes using Plan
assets over which any of such parties has investment authority might be deemed
to be a violation of the prohibited transaction rules of ERISA and the Code for
which no exemption may be available. Accordingly, the Notes may not be purchased
using the assets of any Plan if any of the Seller, the Servicer, the Eligible
Lender Trustee, the Indenture Trustee or the Administrator has investment
authority with respect to such assets.
In addition, any Certificateholder, because of its activities or the
activities of its respective affiliates, may be deemed to be a Party in Interest
or Disqualified Person with respect to certain Plans, including but not limited
to Plans sponsored by such Certificateholder. If the Notes are acquired by a
Plan with respect to which a Certificateholder is a Party in Interest or
Disqualified Person, such transaction could be deemed to be a direct or indirect
violation of the prohibited transaction rules of ERISA and the Code unless such
transaction were subject to one or more statutory or administrative exemptions
such as Prohibited Transaction Class Exemption ("PTCE") 90-1, which exempts
certain transactions involving insurance company pooled separate accounts; PTCE
95-60, which exempts certain transactions involving insurance company general
accounts; PTCE 91-38, which exempts certain transactions involving bank
collective investment funds; PTCE 84-14, which exempts certain transactions
effected on behalf of a Plan by a "qualified professional asset manager"; or
PTCE 96-23, which exempts certain transactions effected on behalf of a Plan by
certain "in-house" asset managers. It should be noted, however, that even if the
conditions specified in one or more of these exemptions are met, the scope of
relief provided by these exemptions may not necessarily cover all acts that
might be construed as prohibited transactions.
Accordingly, prior to making an investment in the Notes, a Plan investor
must determine whether, and each fiduciary causing the Notes to be purchased by,
on behalf of or using the assets of a Plan that is subject to the prohibited
transaction rules of Title I of ERISA or Section 4975 of the Code shall be
deemed to have represented that, an exemption from the prohibited transaction
rules applies such that the use of the assets of such Plan to purchase the Notes
does not and will not constitute a non-exempt prohibited transaction in
violation of Section 406 of ERISA or Section 4975 of the Code, which could be
subject to a civil penalty assessed pursuant to Section 502 of ERISA or a tax
imposed under Section 4975 of the Code.
S-41
<PAGE>
In addition, under a regulation issued by the Department of Labor (the
"Plan Asset Regulation"), if a Plan makes an "equity" investment in a
corporation, partnership, trust or certain other entities, the underlying assets
and properties of such entity will be deemed for purposes of ERISA to be assets
of the investing Plan unless certain exceptions set forth in the regulation
apply. The Plan Asset Regulation defines an "equity interest" as any interest in
an entity other than an instrument that is treated as indebtedness under
applicable local law and which has no substantial equity features. If the Notes
are treated as debt for purposes of the Plan Asset Regulation, the Student Loans
and the other assets of the Trust should not be deemed to be assets of an
investing Plan. If, however, the Notes were treated as "equity" for purposes of
the Plan Asset Regulation, a Plan purchasing such Notes could be treated as
holding the Student Loans and the other assets of the Trust. Although there can
be no assurances in this regard, it appears that the Notes, which are
denominated as debt, should be treated as debt and not as "equity interests" for
purposes of the Plan Asset Regulation.
It should be noted, however, that because the Certificates represent equity
investments in the Trust, the Certificates may not be purchased with assets of
any Plan or any entity (including, as applicable, an insurance company general
account) that is subject to Title I of ERISA or Section 4975 of the Code whose
underlying assets might be deemed to include Plan assets by reason of such a
Plan's investment in such entity. Accordingly, each purchaser of Certificates
will be deemed to have represented that it is neither such a Plan, purchasing
the Certificates on behalf of such a Plan, nor using the assets of such a Plan
to purchase any of the Certificates, and to have agreed that if such
Certificates are subsequently deemed to be Plan assets, it will dispose of them.
It should also be noted that the Small Business Job Protection Act of 1996
added new Section 401(c) of ERISA relating to the status of the assets of
insurance company general accounts under ERISA and Section 4975 of the Code.
Pursuant to Section 401(c), the Department of Labor is required to issue final
regulations (the "General Account Regulations") not later than December 31, 1997
with respect to insurance policies issued on or before December 31, 1998 that
are supported by an insurer's general account. The General Account Regulations
are to provide guidance on which assets held by the insurer constitute "plan
assets" for purposes of the fiduciary responsibility provisions of ERISA and
Section 4975 of the Code. Section 401(c) also provides that, except in the case
of avoidance of the General Account Regulation and actions brought by the
Secretary of Labor relating to certain breaches of fiduciary duties that also
constitute breaches of state or federal criminal law, until the date that is 18
months after the General Account Regulations become final, no liability under
the fiduciary responsibility and prohibited transaction provisions of ERISA and
Section 4975 may result on the basis of a claim that the assets of the general
account of an insurance company constitute the plan assets of any such plan. The
plan asset status of insurance company separate accounts is unaffected by new
Section 401(c) of ERISA, and separate account assets continue to be treated as
the plan assets of any such plan invested in a separate account.
Prior to making an investment in the Notes, prospective Plan investors
should consult with their legal advisors concerning the impact of ERISA and the
Code and the potential consequences of such investment with respect to their
specific circumstances. Moreover, each Plan fiduciary should take into account,
among other considerations, whether the fiduciary has the authority to make the
investment; whether the investment constitutes a direct or indirect transaction
with a Party in Interest; the composition of the Plan"s portfolio with respect
to diversification by type of asset; the Plan's funding objectives; the tax
effects of the investment; and whether under the general fiduciary standards of
investment procedure and diversification an investment in the Notes is
appropriate for the Plan, taking into account the overall investment policy of
the Plan and the composition of the Plan's investment portfolio.
PROPOSED STATE TAX LEGISLATION
The Texas legislature is considering changes in Texas taxation, including a
bill (the "Bill") introduced on behalf of the Governor of Texas that would
impose a business activity tax with respect to certain activities in Texas. At
this time, it is not possible to determine whether the Bill (or any similar
proposal) will be enacted. Based on the terms of the Bill, it is not expected
that the Bill, if enacted in its current form, would affect to any material
extent the Trust's ability to make payments to Noteholders or Certificateholders
as described herein.
S-42
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the respective
Underwriting Agreements relating to the Notes and the Certificates (the
"Underwriting Agreements"), the Seller has agreed to cause the Trust to sell to
each of the Underwriters named below, and each of the Underwriters has severally
agreed to purchase, the principal amounts of the Notes and the Certificates set
forth opposite its name below:
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF
UNDERWRITER CLASS A-1 NOTES CLASS A-2 NOTES CERTIFICATES
----------- --------------- --------------- ------------
<S> <C> <C> <C>
Goldman, Sachs & Co........................................ $ $ $
Bear, Stearns & Co. Inc....................................
Deutsche Morgan Grenfell Inc...............................
Education Securities, Inc..................................
Lehman Brothers Inc........................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated.........
J.P. Morgan Securities Inc.................................
Morgan Stanley & Co. Incorporated..........................
Salomon Brothers Inc.......................................
--------------- --------------- ------------
Total............................................... $ $ $
=============== =============== ============
</TABLE>
In the respective Underwriting Agreements, the Underwriters have agreed,
subject to the terms and conditions set forth therein, to purchase all of the
Notes and Certificates offered hereby if any of the Notes or Certificates are
purchased. The Seller has been advised by the Underwriters that they propose
initially to offer the Securities to the public at the respective public
offering prices set forth on the cover page of this Prospectus Supplement, and
to certain dealers at such prices less a concession not in excess of % per
Class A-1 Note, % per Class A-2 Note and % per Certificate. The
Underwriters may allow and such dealers may reallow to other dealers a discount
not in excess of % per Class A-1 Note, % per Class A-2 Note and %
per Certificate. After the Securities are released for sale to the public, the
offering prices and other selling terms may be varied by the Underwriters.
Education Securities, Inc. is an affiliate of the Seller and a wholly-owned
subsidiary of Sallie Mae.
The Seller and Sallie Mae have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
The Notes and Certificates are new issues of securities with no established
trading market. The Seller has been advised by the Underwriters that the
Underwriters intend to make a market in the Notes and Certificates but are not
obligated to do so and may discontinue market making at any time without notice.
No assurance can be given as to the liquidity of the trading market for the
Notes and Certificates.
The Trust may, from time to time, invest the funds in the Trust Accounts in
Eligible Investments acquired from the Underwriters.
The closing of the sale of the Certificates is conditioned on the closing
of the sale of the Notes and the closing of the sale of the Notes is conditioned
on the closing of the sale of the Certificates.
During and after the offering, the Underwriters may purchase and sell Notes
and Certificates in the open market in transactions in the United States. These
transactions may include overallotment and stabilizing transactions and
purchases to cover short positions created in connection with the offering. The
Underwriters also may impose a penalty bid, whereby selling concessions allowed
to broker-dealers in respect of the Notes and Certificates sold in the offering
for their account may be reclaimed by the Underwriters if such Notes and
Certificates are repurchased by the Underwriters in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Notes and Certificates, which may be higher than the price
that might otherwise prevail in the open
S-43
<PAGE>
market. These transactions may be effected in the over-the-counter market or
otherwise, and these activities, if commenced, may be discontinued at any time.
Each Underwriter has represented and agreed that (a) it has not offered or
sold and will not offer or sell any Notes or Certificates to persons in the
United Kingdom prior to the expiration of the period of six months from the
issue date of the Notes and the Certificates except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995; (b) it has complied and will comply with
all applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Notes and the Certificates in, from or
otherwise involving the United Kingdom; and (c) it has only issued or passed on
and will only issue or pass on in the United Kingdom any document received by it
in connection with the issuance of the Notes and the Certificates to a person
who is of a kind described in article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 or is a person to whom such
document may otherwise lawfully be issued or passed on.
No action has been or will be taken by the Seller or the Underwriters that
would permit a public offering of the Notes and the Certificates in any country
or jurisdiction other than in the United States, where action for that purpose
is required. Accordingly, the Notes and the Certificates may not be offered or
sold, directly or indirectly, and neither the Prospectus, this Prospectus
Supplement nor any circular, prospectus, form of application, advertisement or
other material may be distributed in or from or published in any country or
jurisdiction, except under circumstances that will result in compliance with any
applicable laws and regulations. Persons into whose hands this Prospectus
Supplement comes are required by the Seller and the Underwriters to comply with
all applicable laws and regulations in each country or jurisdiction in which
they purchase, sell or deliver Notes or Certificates or have in their possession
or distribute such Prospectus Supplement, in all cases at their own expense.
LEGAL MATTERS
Certain legal matters relating to the Securities will be passed upon for
the Trust, the Seller, the Servicer and the Administrator by Timothy G. Greene,
Esq., General Counsel of Sallie Mae, as counsel to Sallie Mae, the Servicer and
the Seller, and by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York,
as special counsel to Sallie Mae, the Servicer and the Seller. Certain federal
income tax and other matters will be passed upon for the Trust by Skadden, Arps,
Slate, Meagher & Flom LLP, New York, New York. Certain Delaware State income tax
matters will be passed upon for the Trust by Richards, Layton & Finger, P.A. as
Delaware tax counsel for the Trust. Certain legal matters relating to the
Securities will be passed upon for the Underwriters by Cadwalader, Wickersham &
Taft, Washington, D.C., and Shearman & Sterling, Washington, D.C.
S-44
<PAGE>
INDEX OF PRINCIPAL TERMS
Set forth below is a list of the defined terms used in this Prospectus
Supplement and the pages on which the definitions of such terms may be found
herein.
PAGE
----------
1992 Amendments................................................ S-25
91-day Treasury Bills.......................................... S-34
Accrual Period................................................. S-8
Adjusted Pool Balance.......................................... S-9, S-39
Administration Agreement....................................... S-3
Administration Fee............................................. S-41
Administrator.................................................. S-3
Available Funds................................................ S-36
Carryover Servicing Fee........................................ S-7
Cede........................................................... S-2
Certificate Balance............................................ S-38
Certificate Balance Distribution Amount........................ S-38
Certificate Balance Shortfall.................................. S-38
Certificate Rate............................................... S-10, S-32
Certificate Return Carryover................................... S-10, S-38
Certificate Return Shortfall................................... S-38
Certificateholders............................................. S-10
Certificateholders' Distribution Amount........................ S-38
Certificateholders' Return Distribution Amount................. S-38
Certificates................................................... S-1, S-3
Class A-1 Maturity Date........................................ S-9
Class A-1 Noteholders.......................................... S-8
Class A-1 Notes................................................ S-1, S-3
Class A-1 Rate................................................. S-8, S-31
Class A-2 Maturity Date........................................ S-9
Class A-2 Noteholders.......................................... S-8
Class A-2 Notes................................................ S-1, S-3
Class A-2 Rate................................................. S-8, S-31
Closing Date................................................... S-4
Code........................................................... S-13, S-41
Collection Period.............................................. S-4
Commission..................................................... S-2
Cutoff Date.................................................... S-4
Deferral....................................................... S-21
Department..................................................... S-2, S-4
Determination Date............................................. S-36
Disqualified Persons........................................... S-41
Distribution Date.............................................. S-2
DOE Data Book.................................................. S-27
DTC............................................................ S-2
Eligible Investments........................................... S-35
Eligible Lender Trustee........................................ S-2, S-3
ERISA.......................................................... S-13, S-41
Exhange Act.................................................... S-2
Expected Interest Collections.................................. S-31
FFELP.......................................................... S-4
Final Distribution Date........................................ S-11
Forbearance.................................................... S-21
Grace.......................................................... S-21
Guarantor...................................................... S-25
In-School...................................................... S-21
Indenture...................................................... S-7
S-45
<PAGE>
PAGE
----------
Indenture Trustee.............................................. S-3
Initial Pool Balance........................................... S-11
Interim Trust Agreement........................................ S-3
Interim Trustee................................................ S-3
Liquidated Student Loans....................................... S-36
Liquidation Proceeds........................................... S-36
Lock-In Period................................................. S-34
Minimum Purchase Amount........................................ S-12
Monthly Servicing Payment Date................................. S-7
Note Interest Carryover........................................ S-9, S-39
Note Interest Shortfall........................................ S-39
Note Principal Shortfall....................................... S-39
Note Rates..................................................... S-8
Noteholders.................................................... S-8
Noteholders' Distribution Amount............................... S-38
Noteholders' Interest Distribution Amount...................... S-38
Noteholders' Principal Distribution Amount..................... S-39
Notes.......................................................... S-1, S-3
Obligors....................................................... S-4
Parties in Interest............................................ S-41
Plan........................................................... S-13, S-41
Plan Asset Regulation.......................................... S-42
Pool Balance................................................... S-4
Primary Servicing Fee.......................................... S-7
Principal Distribution Amount.................................. S-39
PTCE........................................................... S-41
Purchase Agreement............................................. S-4
Purchased Student Loans........................................ S-36
Rating Agencies................................................ S-14
Realized Loss.................................................. S-39
Record Date.................................................... S-8
Repayment...................................................... S-21
Reserve Account................................................ S-5
Reserve Account Initial Deposit................................ S-5
Sale Agreement................................................. S-4
Sallie Mae..................................................... S-3
Securities..................................................... S-3
Securityholders................................................ S-10
Seller......................................................... S-2, S-3
Servicer....................................................... S-2, S-3
Servicing Fee.................................................. S-7
Significant Guarantors......................................... S-27
Specified Reserve Account Balance.............................. S-6
Student Loan Rate.............................................. S-8, S-31
Student Loans.................................................. S-4
T-Bill Rate.................................................... S-34
Trust.......................................................... S-1, S-3
Trust Accounts................................................. S-35
Trust Agreement................................................ S-3
Trust Auction Date............................................. S-11
Trust Student Loans............................................ S-2
Underwriting Agreements........................................ S-43
Unit Amount.................................................... S-7
S-46
<PAGE>
PROSPECTUS
THE SLM STUDENT LOAN TRUSTS
STUDENT LOAN-BACKED NOTES
STUDENT LOAN-BACKED CERTIFICATES
------------------------
SLM FUNDING CORPORATION,
SELLER
SALLIE MAE SERVICING CORPORATION,
SERVICER
------------------------
The Student Loan-Backed Notes (the "Notes") and the Student Loan-Backed
Certificates (the "Certificates" and, together with the Notes, the "Securities")
described herein may be sold from time to time in one or more series, in
amounts, at prices and on terms to be determined at the time of sale and to be
set forth in a supplement to this Prospectus (a "Prospectus Supplement"). Each
series of Securities, which will include one or more classes of Notes and one or
more classes of Certificates, will be issued by a trust to be formed with
respect to such series (each, a "Trust"). Each Trust will be formed pursuant to
a Trust Agreement to be entered into between SLM Funding Corporation, as seller
(the "Seller"), and the Eligible Lender Trustee specified in the related
Prospectus Supplement (each, an "Eligible Lender Trustee"). The Seller is a
wholly-owned subsidiary of the Student Loan Marketing Association ("Sallie
Mae"). The Notes of each series will be issued and secured pursuant to an
Indenture between the Trust and the Indenture Trustee specified in the related
Prospectus Supplement (each, an "Indenture Trustee") and will represent
indebtedness of the related Trust. The Certificates of a series will represent
fractional undivided beneficial interests in the related Trust. The property of
each Trust will include education loans to students and/or parents of students
(the "Student Loans"), certain monies due or received thereunder on and after
the applicable Cutoff Date set forth in the related Prospectus Supplement and
certain other property, all as described herein and in the related Prospectus
Supplement. Sallie Mae Servicing Corporation, a wholly-owned subsidiary of
Sallie Mae, will be the servicer (the "Servicer") for each Trust.
Each class of Securities of any series will represent the right to receive a
specified amount of payments of principal and interest received in respect of
the related Trust Student Loans, at the rates, on the dates and in the manner
described herein and in the related Prospectus Supplement. The right of each
class of Securities to receive payments may be senior or subordinate to the
rights of one or more of the other classes of such series and may be subordinate
to certain expenses of the related Trust. Distributions on Certificates of a
series may be subordinated in priority to payments due on the related Notes to
the extent described herein and in the related Prospectus Supplement. A series
may include one or more classes of (i) Notes which differ as to the timing and
priority of payment, interest rate or amount of distributions in respect of
principal or interest or both, and (ii) Certificates which differ as to the
timing and priority of distributions in respect of the Certificate Balance of or
return on the Certificates or both. The rate of payment in respect of principal
of the Notes and distributions in respect of the Certificate Balance of any
class will depend on the priority of payment of such class, the rate and timing
of payments (including, but not limited to, prepayments, guarantee payments,
liquidations and repurchases) on, and the occurrence of any deferments or
forbearances with respect to, the related Trust Student Loans.
THE NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND THE CERTIFICATES
OF SUCH SERIES REPRESENT UNDIVIDED BENEFICIAL INTERESTS IN, THE RELATED TRUST
ONLY AND DO NOT REPRESENT OBLIGATIONS OF OR INTERESTS IN, AND ARE NOT GUARANTEED
OR INSURED BY, THE STUDENT LOAN MARKETING ASSOCIATION, SLM FUNDING CORPORATION,
SALLIE MAE SERVICING CORPORATION, OR ANY AFFILIATE THEREOF OR BY THE UNITED
STATES OF AMERICA OR ANY GOVERNMENTAL AGENCY. PROSPECTIVE INVESTORS SHOULD
CONSIDER THE FACTORS SET FORTH UNDER "RISK FACTORS" ON PAGE 13 HEREIN AND IN THE
RELATED PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Retain this Prospectus for future reference. This Prospectus may not be used
to consummate sales of Securities offered hereby unless accompanied by a
Prospectus Supplement.
------------------------
The date of this Prospectus is March 1, 1997
<PAGE>
AVAILABLE INFORMATION
The Seller, as originator of each Trust, has filed with the Securities and
Exchange Commission (the "Commission") a Registration Statement (together with
all amendments and exhibits thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Securities offered hereby. This Prospectus, which forms part of the Registration
Statement, does not contain all the information contained therein. For further
information, reference is made to the Registration Statement which may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20459; and at the
Commission's regional offices at Seven World Trade Center, Suite 1300, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. 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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Seller, as originator of any Trust, pursuant to
Section 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of 1934, as
amended, subsequent to the date of this Prospectus and prior to the termination
of the offering of the Securities shall be deemed to be incorporated by
reference in this Prospectus. Any statement contained herein or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any subsequently filed document which also is
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Seller will provide without charge to each person, including any
beneficial owner of Securities, to whom a copy of this Prospectus is delivered,
on the written or oral request of any such person, a copy of any or all of the
documents incorporated herein or in any related Prospectus Supplement by
reference, except the exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to SLM Funding Corporation, in care of Corporate and
Investor Relations, Student Loan Marketing Association, 1050 Thomas Jefferson
Street, N.W., Washington, D.C. 20007 (Telephone: (202) 333-8000).
PROSPECTUS SUPPLEMENT
The information contained in this Prospectus generally describes the terms
applicable to the Notes and the Certificates to be issued from time to time by
the Trusts. The Prospectus Supplement relating to each series of Notes and
Certificates will contain additional information with respect to such Notes and
Certificates together with a description of any terms of such Notes or
Certificates that are in addition to those described herein.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the Trusts are required to be
forwarded to the holders of Securities (the "Securityholders"). See "Certain
Information Regarding the Securities -- Reports to Securityholders."
2
<PAGE>
SUMMARY INFORMATION
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to the Securities of any series contained in the
related Prospectus Supplement to be prepared and delivered in connection with
the offering of such Securities. Certain capitalized terms used in this
Prospectus are defined elsewhere herein on the pages indicated in the "Index of
Principal Terms."
ISSUER........................... With respect to each series of Securities, the
trust to be formed pursuant to a Trust
Agreement (as amended and supplemented from
time to time, each a "Trust Agreement")
between the Seller and the Eligible Lender
Trustee for such Trust (the "Trust" or the
"Issuer"). See "Formation of the Trusts."
SELLER........................... SLM Funding Corporation (the "Seller"), a
wholly-owned subsidiary of Student Loan
Marketing Association ("Sallie Mae"). See "The
Seller." Because the Seller is not an
institution eligible to hold legal title to
the Student Loans, an eligible lender trustee
for the Seller specified in the related
Prospectus Supplement (the "Interim Trustee")
will hold legal title to the Student Loans on
behalf of the Seller pursuant to a Trust
Agreement between the Interim Trustee and the
Seller (as amended and supplemented from time
to time, each, an "Interim Trust Agreement").
References to the "Seller" herein mean the
Interim Trustee for all purposes, where the
context so requires, involving the holding or
transferring of legal title to the Student
Loans owned by the related Trust (the "Trust
Student Loans").
SERVICER......................... Sallie Mae Servicing Corporation, a
wholly-owned subsidiary of Sallie Mae that
manages and operates Sallie Mae's loan
servicing functions (the "Servicer"). Under
certain circumstances described herein, the
Servicer may transfer its obligations as
Servicer. See "Servicing; Administration --
Certain Matters Regarding the Servicer."
ELIGIBLE LENDER TRUSTEE.......... With respect to each series of Securities, the
Eligible Lender Trustee specified in the
related Prospectus Supplement (each, an
"Eligible Lender Trustee"). See "Formation of
the Trusts -- Eligible Lender Trustee."
INDENTURE TRUSTEE................ With respect to each series of Securities, the
Indenture Trustee specified in the related
Prospectus Supplement (each, an "Indenture
Trustee"). See "Description of the Notes --
The Indenture -- The Indenture Trustee."
ADMINISTRATOR.................... Sallie Mae, as administrator (in such
capacity, the "Administrator"). Under certain
circumstances described herein, Sallie Mae may
transfer its obligations as Administrator. See
"Servicing; Administration -- Administration
Agreement."
THE NOTES........................ Each series of Securities will include one or
more classes of Notes, which will be issued
pursuant to an Indenture between the Trust and
the related Indenture Trustee (each, as
amended and supplemented from time to time, an
"Indenture"). Such class or classes of Notes
may be offered publicly
3
<PAGE>
or privately, in each case as specified in the
related Prospectus Supplement.
The Notes will be available for purchase in
denominations of $1,000 and integral multiples
thereof and will be available in book-entry
form only, or as provided in the related
Prospectus Supplement. The holders of Notes
(the "Noteholders") in book-entry form will be
able to receive Definitive Notes only in the
limited circumstances described herein or in
the related Prospectus Supplement. See
"Certain Information Regarding the Securities
-- Book-Entry Registration" and "-- Definitive
Securities."
Each class of Notes will have a stated
principal amount and will bear interest at a
specified rate or rates (with respect to each
class of Notes, the "Note Rate"), or as set
forth in the related Prospectus Supplement.
Each class of Notes may have a different Note
Rate, which may be a fixed, a variable or an
adjustable Note Rate, or any combination of
the foregoing. The related Prospectus
Supplement will specify the Note Rate for each
class of Notes, or the method for determining
the Note Rate. See "Description of the Notes
-- Principal and Interest on the Notes."
With respect to a series that includes two or
more classes of Notes, (i) each class may
differ as to the timing and priority of
payments, seniority, Note Rate or amount of
payments of principal or interest, or (ii)
payments of principal or interest as to any
such class or classes may or may not be made
upon the occurrence of specified events.
If the Seller exercises its option to
purchase, or arrange for the purchase of, the
Trust Student Loans, or if such Trust Student
Loans are sold on or after the related Trust
Auction Date, in the manner and on the
respective terms and conditions described
under "Formation of the Trusts --
Termination," the outstanding Notes will be
redeemed as set forth in the related
Prospectus Supplement.
THE CERTIFICATES................. Each series of Securities will include one or
more classes of Certificates which will be
issued pursuant to the related Trust
Agreement. Such class or classes of
Certificates may be offered publicly or
privately or may be retained in part by the
Seller, in each case as specified in the
related Prospectus Supplement.
Except for the Certificates of a given series
held by the Seller, Certificates will be
available for purchase in a minimum
denomination of $100,000 and in integral
multiples of $1,000 in excess thereof and will
be available in book-entry form only, or as
set forth in the related Prospectus
Supplement. The holders of Certificates (the
"Certificateholders") in book entry form will
be able to receive Definitive Certificates
only in the limited circumstances described
herein or in the related Prospectus
4
<PAGE>
Supplement. See "Certain Information Regarding
the Securities -- Book-Entry Registration" and
"-- Definitive Securities."
Each class of Certificates will have a stated
Certificate Balance specified in the related
Prospectus Supplement (the "Certificate
Balance") and will yield a return on such
Certificate Balance at a specified rate (with
respect to each class of Certificates, the
"Certificate Rate"), or as set forth in the
related Prospectus Supplement. Each class of
Certificates may have a different Certificate
Rate, which may be a fixed, a variable or an
adjustable Certificate Rate, or any
combination of the foregoing. The related
Prospectus Supplement will specify the
Certificate Rate for each class of
Certificates or the method for determining the
Certificate Rate.
With respect to a series that includes two or
more classes of Certificates, (i) each class
may differ as to timing and priority of
distributions, seniority, allocations of
losses, Certificate Rate or distributions in
respect of the Certificate Balance, or (ii)
distributions of amounts in reduction of the
Certificate Balance as to any such class or
classes may or may not be made upon the
occurrence of specified events. See
"Description of the Certificates --
Distributions in Respect of the Certificate
Balance of the Certificates."
To the extent specified in the related
Prospectus Supplement, distributions in
respect of the Certificates may be
subordinated in priority of payment to
payments of principal and interest on the
Notes.
If the Seller exercises its option to
purchase, or arrange for the purchase of, the
Trust Student Loans, or if such Trust Student
Loans are sold on or after the related Trust
Auction Date, in the manner and on the
respective terms and conditions described
under "Formation of the Trusts --
Termination," Certificateholders will receive
a distribution in respect of the Certificate
Balance as specified in the related Prospectus
Supplement.
ASSETS OF THE TRUST.............. The assets of each Trust will include a pool
of Student Loans consisting of (i) education
loans to students and/or parents of students
("Student Loans") made under the Federal
Family Education Loan Program ("FFELP") and/or
(ii) if so specified in a Prospectus
Supplement, other Student Loans not made under
the FFELP ("Non-FFELP Loans"). Unless
otherwise specified herein or in the related
Prospectus Supplement, "Student Loans" refers
to Student Loans made under the FFELP (the
"FFELP Loans"). Such assets, in either case,
will include rights to receive payments made
with respect to such Student Loans and the
proceeds thereof. On or prior to the Closing
Date specified in the related Prospectus
Supplement with respect to a Trust (a "Closing
Date"), the Seller will sell Student Loans
having an aggregate principal balance
specified in the related Prospectus Supplement
as of the date specified therein (a "Cutoff
Date"), to the Eligible Lender Trustee on
5
<PAGE>
behalf of the Trust pursuant to a Sale
Agreement (as amended and supplemented from
time to time, a "Sale Agreement"), among the
Seller, the related Trust and the related
Eligible Lender Trustee. The Student Loans
will be purchased by the Seller from Sallie
Mae pursuant to a Purchase Agreement (as
amended and supplemented from time to time, a
"Purchase Agreement") between the Seller and
Sallie Mae providing for such purchase on or
before the Closing Date with respect to a
Trust. The property of each Trust will also
include amounts on deposit in certain trust
accounts, including the related Collection
Account, any Reserve Account, any Pre-Funding
Account and any other account identified in
the applicable Prospectus Supplement. See
"Formation of the Trusts -- The Trusts."
The Student Loans sold to the Trust will be
selected from Student Loans owned by Sallie
Mae based on criteria specified in the
applicable Purchase Agreement and described
herein and in the related Prospectus
Supplement.
Each Student Loan sold to any Trust, subject
to compliance with specific origination and
servicing procedures prescribed by federal and
guarantee agency regulations, will be 100%
guaranteed (or 98% with respect to Student
Loans disbursed on and after October 1, 1993)
as to the payment of principal and interest by
either a state or private non-profit guarantee
agency (each, a "Guarantee Agency"), or as
provided in the related Prospectus Supplement.
Each Guarantee Agency will be reinsured by the
Department of Education (the "Department") for
80% to 100% of claims paid by such Guarantee
Agency ("Guarantee Payments") for a given
federal fiscal year for loans disbursed prior
to October 1, 1993 and for 78% to 98% of
claims paid for loans disbursed on or after
October 1, 1993, depending on its claims
experience. The percentage of the claims paid
by a Guarantee Agency which is reinsured may
be changed in the future by legislation. See
"Appendix A -- The Federal Family Education
Loan Program -- Guarantee Agencies" and "--
Federal Insurance and Reinsurance of Guarantee
Agencies."
A Trust may also include among its assets
agreements with counterparties providing for
interest rate swaps, caps and other similar
financial contracts with the terms and subject
to the conditions specified in the related
Prospectus Supplement.
COLLECTION ACCOUNT............... With respect to each Trust, the Administrator
will establish and maintain one or more
accounts, in the name of the Indenture Trustee
on behalf of the related Noteholders and
Certificateholders, into which all payments
made on or with respect to the related Trust
Student Loans will be deposited (the
"Collection Account"). The Collection Account
will initially be established with the
applicable Indenture Trustee. The uses to
which the funds in the Collection Account can
be applied and the conditions to the
application of such funds will be set forth in
the Prospectus Supplement.
6
<PAGE>
PRE-FUNDING ACCOUNT.............. To the extent described in the related
Prospectus Supplement, a portion of the net
proceeds of sale of the Notes and Certificates
may, during the period set forth in such
Prospectus Supplement (the "Funding Period"),
be deposited in an account (the "Pre-Funding
Account") which will be maintained in the name
of the relevant Indenture Trustee and will be
an asset of the applicable Trust. The amount
(the "Pre-Funding Amount") to be deposited in
the Pre-Funding Account, the uses to which the
funds in the Pre-Funding Account may be
applied and the conditions to the application
of such funds will be set forth in the
Prospectus Supplement. Any Pre-Funding Amount
remaining at the end of the Funding Period
will be distributed to Securityholders as a
payment of principal of Notes and/or as a
distribution in respect of Certificate
Balance. See "Transfer and Servicing
Agreements -- Additional Fundings."
CREDIT AND CASH FLOW ENHANCEMENT..If and to the extent specified in the related
Prospectus Supplement, credit or cash flow
enhancement with respect to a Trust or any
class or classes of Securities may include any
one or more of the following: subordination of
one or more other classes of Securities, a
Reserve Account, a cash collateral account,
overcollateralization, letters of credit,
credit or liquidity facilities, surety bonds,
guaranteed investment contracts, repurchase
obligations, other agreements with respect to
third party payments or other support, cash
deposits or other arrangements. Any form of
credit or cash flow enhancement may have
certain limitations and exclusions from
coverage thereunder, which will be described
in the related Prospectus Supplement. See
"Certain Information Regarding the Securities
-- Credit and Cash Flow Enhancements."
RESERVE ACCOUNT.................. An account in the name of the related
Indenture Trustee (the "Reserve Account") will
be established and maintained by the
Administrator and will be an asset of the
applicable Trust. The Reserve Account will
initially be established with the applicable
Indenture Trustee. To the extent specified in
the related Prospectus Supplement, (i) the
Seller will make an initial deposit into the
Reserve Account on the Closing Date having a
value equal to the amount specified in the
Prospectus Supplement (the "Reserve Account
Initial Deposit") and (ii) the Reserve Account
Initial Deposit will be supplemented up to any
maximum amount specified in the related
Prospectus Supplement (the "Specified Reserve
Account Balance") on each Distribution Date by
the deposit into the Reserve Account of any
remaining Available Funds (as defined in the
related Prospectus Supplement) for such
Distribution Date after giving effect to
distributions on such Distribution Date. See
"Description of the Securities -- Credit
Enhancement" in the related Prospectus
Supplement.
Amounts in the Reserve Account will be
available to cover shortfalls in amounts due
to the holders of those classes of Securities
specified in the related Prospectus Supplement
in the manner and under the circumstances
specified therein. The related Prospectus
Supplement will also specify to whom and
7
<PAGE>
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 will be distributed.
PURCHASE AGREEMENTS.............................................................
With respect to each Trust, the Seller will
acquire the related Trust Student Loans from
Sallie Mae pursuant to a Purchase Agreement.
The rights and benefits of the Seller under
the Purchase Agreement will be assigned by the
Seller to the related Eligible Lender Trustee
on behalf of the Trust and will be assigned by
the Trust to the Indenture Trustee as
collateral for the Notes of the related
series. See "Transfer and Servicing
Agreements."
SALE AGREEMENTS.................................................................
With respect to each Trust, the Seller will
sell the related Trust Student Loans to such
Trust pursuant to a Sale Agreement, with the
related Eligible Lender Trustee holding legal
title thereto. The rights and benefits of such
Trust and Eligible Lender Trustee under the
Sale Agreement will be assigned to the
Indenture Trustee as collateral for the Notes
of the related series. See "Transfer and
Servicing Agreements."
SERVICING AGREEMENTS............................................................
The Servicer will enter into a Servicing
Agreement (a "Servicing Agreement") with
respect to the Student Loans in each Trust
with such Trust, the related Eligible Lender
Trustee, the Administrator and the related
Indenture Trustee. See "Servicing."
The Servicer will agree with each Trust to be
responsible for servicing and managing and
maintaining the custody of, and making
collections on, the Student Loans and
preparing and filing with the Department and
the applicable Guarantee Agency all
appropriate claim forms and other documents
and filings on behalf of the Eligible Lender
Trustee in order to claim the Interest Subsidy
Payments, Special Allowance Payments and
Guarantee Payments (such terms collectively
referred to herein as "Program Payments") in
respect of the Student Loans entitled thereto.
The Servicer will be entitled to a fee
specified in the related Prospectus Supplement
(the "Servicing Fee").
ADMINISTRATION AGREEMENTS.......................................................
Sallie Mae, as Administrator, will enter into
an Administration Agreement with each Trust,
the related Eligible Lender Trustee, the
Seller, the Servicer and the related Indenture
Trustee pursuant to which Sallie Mae will
agree to undertake certain administrative
duties with respect to each Trust (each, an
"Administration Agreement"). Sallie Mae will
be entitled to a fee for acting as
Administrator specified in the related
Prospectus Supplement (the "Administration
Fee"). See "Servicing -- Administration
Agreements."
REPRESENTATIONS AND WARRANTIES OF THE SELLER....................................
The Seller will be obligated under the related
Sale Agreement to repurchase from the related
Trust, or substitute Qualified Substitute
Student Loans for, any Student Loan if the
interest
8
<PAGE>
of the Trust is materially adversely affected
by a breach of certain representations or
warranties made by the Seller with respect to
such Student Loan, if the breach has not been
cured within the cure period specified in the
applicable Prospectus Supplement. "Qualified
Substitute Student Loans" means Student Loans
that comply, as of the date of substitution,
with all of the representations and warranties
made by the Seller in the related Sale
Agreement and are substantially similar on an
aggregate basis to the Student Loans for which
they are being substituted with respect to the
following characteristics: (1) principal
balance, (2) status (i.e., in-school, grace,
deferment, forbearance or repayment), (3)
program type (i.e., Unsubsidized Stafford,
Subsidized Stafford, PLUS, SLS, Consolidation
or non-FFELP), (4) school type, (5) total
return, and (6) remaining term to maturity.
Such purchase or substitution will be made as
of the first day following the end of such
cure period that is the last day of a
Collection Period or as set forth in the
related Prospectus Supplement. In addition,
unless otherwise specified in the related
Prospectus Supplement, the Seller will be
obligated to reimburse the related Trust for
(i) the shortfall, if any, between the
Purchase Amount of any Qualified Substitute
Student Loans and the Purchase Amount of the
Trust Student Loan for which the Qualified
Substitute Student Loans are being
substituted, and (ii) any accrued interest
amounts not guaranteed by (or required to be
refunded to) a Guarantee Agency and/or any
Interest Subsidy Payments or Special Allowance
Payments not paid by (or required to be
refunded to) the Department with respect to a
Trust Student Loan as a result of a breach of
the Seller's representations and warranties
with respect to such Trust Student Loan. See
"Transfer and Servicing Agreements -- Sale of
Student Loans to the Trust; Representations
and Warranties of the Seller."
REPRESENTATIONS AND
WARRANTIES OF SALLIE MAE......... Pursuant to each Purchase Agreement, Sallie
Mae will make certain representations and
warranties to the Seller with respect to the
Student Loans sold by Sallie Mae to the Seller
pursuant to such Purchase Agreement. Such
representations and warranties will generally
be to the same effect as the representations
and warranties made by the Seller to the
related Trust with respect to the Student
Loans sold by the Seller to such Trust
pursuant to the Sale Agreement. Sallie Mae
will be obligated under the related Purchase
Agreement to repurchase from the Seller, or
substitute Qualified Substitute Student Loans
for, any Student Loan if the Seller is
obligated to repurchase (or substitute) such
Student Loan from the related Trust as
described above. In addition, unless otherwise
specified in the related Prospectus
Supplement, Sallie Mae will be obligated to
reimburse the Seller for (i) the shortfall, if
any, between the Purchase Amount of any
Qualified Substitute Student Loans and the
Purchase Amount of the Trust Student Loan for
which the Qualified Substitute Student Loans
are being substituted, and (ii) any accrued
interest amounts not guaranteed by (or
required to be refunded to) a Guarantee Agency
and/or any Interest Subsidy Payments or
Special Allowance
9
<PAGE>
Payments not paid by (or required to be
refunded to) the Department with respect to a
Trust Student Loan as a result of a breach of
Sallie Mae's representations and warranties
with respect to such Trust Student Loan. See
"Transfer Agreements -- Purchase of Student
Loans by the Seller; Representations and
Warranties of Sallie Mae."
COVENANTS OF THE SERVICER........ The Servicer will be obligated under the
related Servicing Agreement to purchase from
the related Trust, or substitute Qualified
Substitute Student Loans for, any Student
Loan, if the interest of the Trust is
materially adversely affected by a breach of
any covenant of the Servicer (including the
covenant to service all Student Loans in
accordance with the Act, the rules of the
applicable Guarantee Agency and all other
applicable laws) made by the Servicer with
respect to such Student Loan (it being
understood that any such breach that relates
to compliance with the requirements of the
Higher Education Act or the applicable
Guarantee Agency but that does not affect such
Guarantee Agency's obligation to guarantee
payment of a Trust Student Loan will not be
considered to have a material adverse effect),
if such breach has not been cured within the
cure period specified in the applicable
Prospectus Supplement, such purchase or
substitution to be made as of the first day
following the end of such cure period that is
the last day of a Collection Period, or as set
forth in the related Prospectus Supplement. In
addition, unless otherwise specified in the
related Prospectus Supplement, the Servicer
will be obligated to reimburse such Trust for
(i) the shortfall, if any, between the
Purchase Amount of any Qualified Substitute
Student Loans and the Purchase Amount of the
Trust Student Loan for which the Qualified
Substitute Student Loans are being
substituted, and (ii) any accrued interest
amounts not guaranteed by (or required to be
refunded to) a Guarantee Agency and/or any
Interest Subsidy Payments or Special Allowance
Payments not paid by (or required to be
refunded to) the Department with respect to a
Trust Student Loan as a result of a breach of
the Servicer"s covenants with respect to such
Trust Student Loan. See "Servicing -- Servicer
Covenants."
SERVICING FEE.................... The Servicer will receive a fee (the
"Servicing Fee") equal to a specified amount,
as set forth in the related Prospectus
Supplement, together with any other fees,
expenses and similar charges specified in the
related Prospectus Supplement, payable monthly
on the dates specified in the related
Prospectus Supplement (each, a "Monthly
Servicing Payment Date"). The Servicing Fee
and any portion of the Servicing Fee that
remains unpaid from prior distribution dates
will be paid prior to any payment in respect
of the related Securities (other than any
portion of the Servicing Fee that is expressly
subordinated to such payments as set forth in
the related Prospectus Supplement), to the
extent specified in the related Prospectus
Supplement. See "Servicing -- Servicing
Compensation" herein and "Description of the
Securities --
10
<PAGE>
Servicing Compensation" in the related
Prospectus Supplement.
ADMINISTRATION FEE..............................................................
The Administrator will receive an
Administration Fee equal to a specified
amount, as set forth in the related Prospectus
Supplement, together with any other
administrative fees and similar charges
specified in the related Prospectus
Supplement. The Administration Fee will be
paid prior to any payment in respect of the
related Securities, as specified in the
applicable Prospectus Supplement. See
"Servicing; Administration -- Administration
Agreement" herein.
OPTIONAL PURCHASE; AUCTION......................................................
At its option, the Seller may purchase or
arrange for the purchase of all remaining
Trust Student Loans from the related Eligible
Lender Trustee, and thereby effect early
retirement of the related Notes and
Certificates, as of the end of any Collection
Period immediately preceding a Distribution
Date, if the then outstanding Pool Balance of
the Trust is 10% or less of the Initial Pool
Balance of such Trust, unless otherwise
specified in the Prospectus Supplement. See
"Formation of the Trusts -- Termination"
herein.
As provided in the related Prospectus
Supplement, any Trust Student Loans remaining
in a Trust as of the end of the Collection
Period immediately preceding the Trust Auction
Date specified in the related Prospectus
Supplement may be offered for sale by the
Indenture Trustee by auction in accordance
with the procedure described herein. See
"Formation of the Trusts -- Termination"
herein.
TERMINATION.....................................................................
With respect to each Trust, the obligations of
the Servicer, the Seller, the Administrator,
the related Eligible Lender Trustee and the
related Indenture Trustee will terminate upon
certain conditions set forth herein. See
"Formation of the Trusts -- Termination"
herein.
TAX CONSIDERATIONS..............................................................
As more specifically set forth herein, upon
the issuance of each series of Securities,
Skadden, Arps, Slate, Meagher & Flom LLP (or
such other firm as shall be identified in the
applicable Prospectus Supplement), as federal
tax counsel to the applicable Trust ("Federal
Tax Counsel"), will deliver an opinion to the
effect that, for federal income tax purposes:
(i) the Notes of such series will be
characterized as debt and (ii) the Trust will
not be characterized as an association (or a
publicly traded partnership) taxable as a
corporation; and the firm identified in the
applicable Prospectus Supplement as Delaware
tax counsel to such Trust ("Delaware Tax
Counsel"), will deliver an opinion to the
effect that the same characterizations would
apply for Delaware income tax purposes as for
federal income tax purposes, and that
Noteholders and Certificateholders that are
not otherwise subject to Delaware taxation on
income will not become subject to Delaware tax
as a result of their ownership of Notes or
Certificates, or as set forth in the related
Prospectus Supplement.
11
<PAGE>
Each Noteholder, by the acceptance of a Note
of a given series, will agree to treat such
Note as indebtedness, and each
Certificateholder, by the acceptance of a
Certificate of a given series and assuming
that any such Certificates are sold to persons
other than the Seller, will agree to treat the
related Trust as a partnership in which such
Certificateholder is a partner for federal
income tax purposes, or as set forth in the
related Prospectus Supplement.
Due to the method of allocation of Trust
income to the Certificateholders, cash basis
holders may, in effect, be required to report
income from the Certificates on an accrual
basis. In addition, because tax allocations
and tax reporting will be done on a uniform
basis, but Certificateholders may be
purchasing Certificates at different times and
at different prices, Certificateholders may be
required to report on their tax returns
taxable income that is greater or less than
the amount reported to them by the Trust.
See "Certain Federal Income Tax Consequences"
and "Certain State Tax Consequences" for
additional information.
ERISA CONSIDERATIONS............. A fiduciary of any employee benefit plan or
other retirement arrangement subject to the
Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975 of
the Internal Revenue Code of 1986, as amended
(the "Code"), should carefully review with its
legal advisors whether the purchase or holding
of any class of Securities could give rise to
a transaction prohibited or not otherwise
permissible under ERISA or Section 4975 of the
Code. See "ERISA Considerations" herein and in
the related Prospectus Supplement.
RATINGS.......................... The rating or ratings applicable to the Notes
and the Certificates of each series offered
hereby and by the related Prospectus
Supplement will each be in one of the four
highest rating categories, and as set forth in
the related Prospectus Supplement. A
securities rating should be evaluated
independently of similar ratings on different
types of securities. A securities rating does
not address the effects that the rate of
prepayments on Student Loans may have on the
yield to investors in the Notes and the
Certificates. See "Risk Factors" herein.
12
<PAGE>
RISK FACTORS
The payment of, and the timing of the payment of, the principal of and
interest on the Notes and distributions in respect of the Certificate Balance of
and return on the Certificates are subject to certain risks. Particular
attention should be given to the factors described below which, among others,
could materially and adversely affect the payment of, and the timing of the
payment of, the Notes and the Certificates, and which could also materially and
adversely affect the market price of the Notes and the Certificates to an extent
that cannot be determined. The items listed below do not include all risks to
which such payment is subject.
Failure to Comply with Student Loan Origination and Servicing
Procedures. The Higher Education Act of 1965, as amended (such act, together
with all rules and regulations promulgated thereunder by the Department and/or
the Guarantee Agencies, the "Higher Education Act" or the "Act"), including the
implementing regulations thereunder, requires lenders and their assignees making
and servicing Student Loans and Guarantee Agencies guaranteeing Student Loans to
follow specified procedures, including due diligence procedures, to ensure that
the student loans are properly made and disbursed to, and repaid on a timely
basis by or on behalf of, borrowers. Certain of those procedures, which are
specifically set forth in the Act, are summarized herein. See "The Student Loan
Pools -- The Student Loan Financing Business", "Appendix A -- The Federal Family
Education Loan Program" and "Servicing -- Servicing Procedures." Generally,
those procedures require that a determination of whether an applicant is an
eligible borrower under the Act be made, the borrower's responsibilities under
the loan be explained to him or her, the promissory note evidencing the loan be
executed by the borrower and 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 forbearance
and credit the borrower for payments made thereon. If a borrower becomes
delinquent in repaying a loan, a lender must perform certain collection
procedures (primarily telephone calls and demand letters) which vary depending
upon the length of time a loan is delinquent.
The Servicer has agreed pursuant to the related Servicing Agreement to
perform servicing and collection procedures on behalf of each Trust. However,
failure to follow these procedures or failure of the original lender or any
subsequent holder of any Trust Student Loan (including Sallie Mae or the related
Eligible Lender Trustee) to follow procedures relating to the origination and
servicing of such Trust Student Loans may result in the Department's refusal to
make reinsurance payments to the applicable Guarantee Agency or refusal of the
Department and/or the applicable Guarantee Agency to make Program Payments with
respect to such Trust Student Loans. If a Student Loan becomes ineligible for
reinsurance by the Department due to a failure by the Servicer or any prior
holder of such Trust Student Loan to follow the required procedures for the
origination and servicing of such Trust Student Loan, the Guarantee Agency's
obligation to make Guarantee Payments with respect to such Student Loan may be
adversely affected. Loss of any Program Payments could adversely affect the
amount of Available Funds for any Collection Period and the Trust's ability to
pay principal and interest on the related Notes and distributions in respect of
the Certificate Balance of and return on the Certificates.
Under certain circumstances, each Trust has the right, pursuant to the
related Sale Agreement and the related Servicing Agreement, to cause the Seller
to repurchase or substitute, or the Servicer to purchase or substitute, any
Trust Student Loan, if a breach of the representations, warranties or covenants
of the Seller or the Servicer, as the case may be, with respect to such Trust
Student Loan has a material adverse effect on the interest of such Trust therein
and such breach is not cured within any applicable cure period. In addition,
under certain circumstances each Trust has the right, pursuant to the related
Sale Agreement and the related Servicing Agreement, to cause the Seller or the
Servicer, as the case may be, to reimburse such Trust for any accrued and unpaid
Program Payments with respect to a Student Loan as a result of a breach of the
Seller's representations and warranties or the Servicer's covenants, as the case
may be, with respect to such Student Loan. See "Transfer and Servicing
Agreements -- Representations and Warranties" and "Servicing -- Representations
and Warranties" and "-- Servicer Covenants." There can be no assurance, however,
that the Seller or the Servicer will have the financial resources to do so. The
failure of the Seller or the Servicer to so repurchase or purchase or substitute
a Student Loan or to so reimburse the Trust would constitute a
13
<PAGE>
breach of the related Sale Agreement or Servicing Agreement, enforceable by the
related Eligible Lender Trustee on behalf of such Trust or by the related
Indenture Trustee on behalf of the Noteholders of the related series, but would
not constitute an Event of Default under each Indenture or permit the exercise
of remedies thereunder.
Effective July 1, 1995, the Department adopted new FFELP regulations, which
among other things, establish (i) requirements governing contracts between
holders of Student Loans and third-party servicers, (ii) standards of
administrative and financial responsibility for third-party servicers that
administer any aspect of a guarantee agency's or lender's participation in the
FFELP, and (iii) sanctions and liabilities for third-party servicers.
Under these regulations, a third-party servicer (such as the Servicer) is
jointly and severally liable with its client lenders for liabilities to the
Department arising from the servicer's violation of applicable requirements. In
addition, if the servicer fails to meet standards of financial responsibility or
administrative capability included in the new regulations, or violates other
FFELP requirements, the new regulations authorize the Department to fine the
servicer and/or limit, suspend or terminate the servicer's eligibility to
contract to service FFELP Loans. The effect of such a limitation or termination
on the servicer's eligibility to service loans already on its system, or to
accept new loans for servicing under existing contracts, is unclear. If the
Servicer were fined or held liable by the Department for liabilities arising out
of its FFELP activities for the Trust or other client lenders, or its
eligibility were limited, suspended or terminated, its ability to properly
service the Trust Student Loans and to satisfy its obligation to purchase loans
with respect to which it had breached its representations, warranties or
covenants under the related Servicing Agreement could be adversely affected.
However, in the event of a termination of eligibility, each Servicing Agreement
will provide for the removal of the Servicer and the appointment of a substitute
servicer. The Servicer will also agree in each Servicing Agreement to hold the
related Trust harmless for liabilities of the related Trust to the Department
arising from any violation by the Servicer of applicable requirements.
Variability of Actual Cash Flows; Inability of Related Indenture Trustee to
Liquidate Student Loans. Amounts received with respect to the Student Loans for
a particular Collection Period may vary greatly in both timing and amount from
the payments actually due on the Student Loans as of such Collection Period for
a variety of economic, social and other factors, including both individual
factors, such as additional periods of deferral or forbearance prior to or after
a borrower's commencement of repayment, and general factors, such as a general
economic downturn which could increase the amount of defaulted Student Loans.
Failures by borrowers to pay timely the principal and interest on the Student
Loans will affect the amount of Available Funds on a Distribution Date, which
may reduce the distributions made to the Securityholders on such Distribution
Date. Moreover, failures by borrowers of student loans generally to pay timely
the principal and interest due on such student loans could obligate the
respective Guarantee Agency to make payments thereon, which could adversely
affect the solvency of the Guarantee Agency and its ability to meet its
guarantee obligations (including with respect to the Trust Student Loans) in a
timely manner. The inability of any Guarantee Agency to meet its guarantee
obligations in a timely manner could reduce the distributions made to the
Securityholders on a Distribution Date. The effect of such factors, including
the effect on a Guarantee Agency's ability to meet its guarantee obligations
with respect to the Trust Student Loans in a timely manner or a Trust's ability
to make distributions with respect to the Securities, is impossible to predict.
See "-- Financial Status of Guarantee Agencies."
If an Event of Default occurs under the related Indenture, subject to
certain conditions, the related Indenture Trustee is authorized, without the
consent of the Certificateholders of the related series, to sell the Trust
Student Loans. There can be no assurance, however, that the related Indenture
Trustee will be able to find a purchaser for the Trust Student Loans in a timely
manner or that the market value of such Student Loans will be equal to the
outstanding principal of and accrued interest on the Notes and the Certificate
Balance of and accrued return on the Certificates.
The Omnibus Reconciliation Act of 1993 (the "1993 Act") made certain
changes to the FFELP and also provided for the implementation of a direct
student loan program ("DSLP") pursuant to which the Department makes loans
directly to students and parents, which program by statute is scheduled to
replace at least 60% of the FFELP by the 1998-1999 academic year. These changes
may adversely
14
<PAGE>
affect the secondary market for Student Loans and may thus adversely affect the
Indenture Trustee's ability to sell the Trust Student Loans upon the occurrence
of an Event of Default. If the proceeds of any such sale, together with amounts
then available in any Reserve Account or other account held by a Trust or
pursuant to any other credit enhancement specified as being available therefor
in the related Prospectus Supplement, do not exceed the aggregate outstanding
principal amount of Notes and accrued interest thereon, the Noteholders of the
related series will suffer a loss. In such circumstances, the
Certificateholders, to the extent the Certificates of such series are
subordinated to the Notes of such series, will also suffer a loss. Furthermore,
even if the proceeds of any such sale were sufficient to pay the aggregate
outstanding principal amount of the Notes and accrued interest thereon, there
can be no assurance that the Certificates, to the extent the Certificates of
such Series are subordinated to the Notes of such Series, would not suffer a
loss.
Financial Status of Guarantee Agencies. The Act requires all Student Loans
to be unsecured. As a result, the only sources of security for payment of the
Student Loans are the Guarantee Agreements between the related Eligible Lender
Trustee and the Guarantee Agencies. Student Loans acquired by a Trust will be
subject to Guarantee Agreements with a number of separate Guarantee Agencies.
The Guarantee Agreements will be several, not joint, obligations of the
Guarantee Agencies and no Guarantee Agency will be obligated to guarantee or
otherwise make payment in respect of Trust Student Loans guaranteed by another
Guarantee Agency. A deterioration in the financial status of the Guarantee
Agencies and their ability to honor guarantee claims with respect to the Trust
Student Loans could result in a failure of such Guarantee Agencies to make
Guarantee Payments to the related Eligible Lender Trustee in a timely manner.
One of the primary causes of a possible deterioration in a Guarantee Agency's
financial status would be an increase in the amount and percentage of defaulting
Student Loans guaranteed by a Guarantee Agency. Another factor affecting the
Guarantee Agencies' financial status is the 1993 reduction of the Guarantee
Agencies' one-time insurance fees charged to students from up to 3% to up to 1%
of the principal amount guaranteed on a student loan. In addition, as of October
1, 1993, the Act reduced the level of debt collections on defaulted student
loans the Guarantee Agencies may retain from 30% to 27%. Moreover, to the extent
that reimbursement claims submitted by a Guarantee Agency for any fiscal year
exceed certain specified levels, the Department's obligation to reimburse the
Guarantee Agency for losses will be reduced on a sliding scale from 100% or 98%,
as applicable, to a minimum of 80% or 78%, as applicable. There can be no
assurance that any Guarantee Agency will have the financial resources to make
all Guarantee Payments in a timely manner to a given Trust in respect of the
related Trust Student Loans.
Pursuant to the Higher Education Amendments of 1992 (the "1992
Amendments"), under Section 432(o) of the Act, if the Department has determined
that a Guarantee Agency is unable to meet its insurance obligations, the loan
holder may submit claims directly to the Department and the Department is
required to pay the full Guarantee Payment due with respect thereto in
accordance with guarantee claim processing standards no more stringent than
those of the Guarantee Agency. However, the Department's obligation to pay
guarantee claims directly in this fashion is contingent upon the Department
making the determination referred to above. There can be no assurance that the
Department would make such a determination with respect to a Guarantee Agency
or, if such a determination was made, whether such determination or the ultimate
payment of such guarantee claims would be made in a timely manner. See "Appendix
A -- The Federal Family Education Loan Program -- Guarantee Agencies" and "--
Federal Insurance and Reinsurance of Guarantee Agencies."
Change in Law. There can be no assurance that the Higher Education Act or
other relevant federal or state laws and rules and regulations and the programs
implemented thereunder will not be amended or modified in the future in a manner
that will adversely impact the programs described in this Prospectus and the
guaranteed student loans made thereunder, including the Student Loans, or the
Guarantee Agencies. In addition, existing legislation and future measures to
reduce the federal budget deficit or for other purposes may adversely affect the
amount and nature of federal financial assistance available with respect to
these programs. In recent years, federal budget legislation has provided for the
recovery of certain funds held by Guarantee Agencies in order to achieve
reductions in federal spending. There can be no assurance that future federal
budget legislation or administrative actions will not adversely affect
expenditures by the Department or the financial condition of the Guarantee
Agencies.
15
<PAGE>
The 1993 Act implemented a number of changes to the FFELP, including
imposing certain fees on lenders or holders of guaranteed student loans,
reducing the interest payable to holders of Consolidation Loans and reducing the
Department's financial assistance to Guarantee Agencies, including reducing the
percentage of claims the Department will reimburse to the Guarantee Agencies and
reducing the premiums and default collections that Guarantee Agencies are
entitled to receive and/or retain. The implementation of the DSLP will cause
reductions in the volume of FFELP Loans that might have otherwise been
originated but for the DSLP. As these reductions continue, the Servicer may
experience increased costs due to reduced economies of scale to the extent the
volume of new loans serviced by the Servicer is reduced and may experience other
adverse business consequences. Such volume decreases and cost increases could
affect the ability of Sallie Mae, the Seller or the Servicer to satisfy their
respective obligations to purchase Student Loans in the event of certain
breaches of representations and warranties in the Purchase Agreements or of
covenants in the Servicing Agreements. See "Transfer and Servicing Agreements --
Purchase of Student Loans by the Seller; Representations and Warranties of
Sallie Mae" and "Servicing -- Servicer Covenants." Such volume reductions and
other changes effected by the 1993 Act may have a material adverse effect on the
revenues received by the Guarantee Agencies that are available to pay claims on
defaulted Student Loans in a timely manner.
Subordination; Limited Assets. To the extent specified in the related
Prospectus Supplement, distributions in respect of the Certificate Balance of
and return on the Certificates of a series may be subordinated in priority of
payment to interest and principal due on the Notes of such series and some
classes of Notes may be subordinated to others. Moreover, each Trust will not
have, nor is it permitted or expected to have, any significant assets or sources
of funds other than the related Trust Student Loans and, to the extent provided
in the related Prospectus Supplement, a Reserve Account and any other credit or
cash flow enhancement. The Notes of any series will represent obligations solely
of, and the Certificates of such series will represent beneficial interests
solely in, the related Trust and neither the Notes nor the Certificates of such
series will be obligations of or interests in, or insured or guaranteed by
Sallie Mae, the Seller, the Servicer, the applicable Eligible Lender Trustee,
the applicable Indenture Trustee or any other person or entity. Consequently,
holders of the Securities of any series must rely for repayment upon payments on
the related Trust Student Loans and, if and to the extent available, amounts on
deposit in the Reserve Account (if any) and any other credit or cash flow
enhancement, all as specified in the related Prospectus Supplement.
Maturity and Prepayment Assumptions. All the Student Loans are prepayable
at any time without penalty. For this purpose the term "prepayments" includes
prepayments in full or in part (including pursuant to Consolidation Loans) and
liquidations due to default (including receipt of Guarantee Payments). The rate
of prepayments on the Student Loans may be influenced by a variety of economic,
social and other factors affecting borrowers, including interest rates and the
availability of alternative financing. In addition, under certain circumstances,
the Seller or the Servicer will be obligated to purchase or substitute Student
Loans from the Trust pursuant to the related Sale Agreement or Servicing
Agreement, as the case may be, as a result of breaches of their respective
representations, warranties or covenants. See "Transfer and Servicing Agreements
- -- Sale of Student Loans to the Trust"; "-- Representations and Warranties of
the Seller" and "Servicing -- Servicer Covenants." Moreover, to the extent
borrowers elect to refinance Trust Student Loans under Consolidation Loans
through Sallie Mae or another FFELP lender or through the Department under the
Federal Direct Consolidation Loan Program at any time, Noteholders and
Certificateholders will, to the extent described in the related Prospectus
Supplement, collectively receive as a prepayment of principal on the Notes and
the Certificate Balance of the Certificates the aggregate principal amount of
such Trust Student Loans. There can be no assurance that borrowers with Trust
Student Loans will not seek to obtain Consolidation Loans through Sallie Mae or
another FFELP lender or Federal Direct Consolidation Loans through the
Department with respect to such Trust Student Loans. Sallie Mae may solicit
borrowers of Trust Student Loans to elect to refinance such Trust Student Loans
with Consolidation Loans from Sallie Mae. See "Appendix A -- The Federal Family
Education Loan Program." In addition, the Federal Direct Consolidation Loan
Program is expected to provide borrowers with the opportunity to consolidate
outstanding student loans at interest rates that may be below, and upon
income-contingent repayment terms that some borrowers may find preferable to,
those that would
16
<PAGE>
be available under the terms of the borrowers' existing Student Loans or under
the federal Consolidation Loan program. The availability of such lower-rate,
income-contingent loans may increase the likelihood that a Trust Student Loan
will be prepaid from the proceeds of a Federal Direct Consolidation Loan. The
volume of existing loans that may be prepaid in this fashion is not determinable
at this time.
If and to the extent provided in the related Prospectus Supplement, a Trust
may elect to offer Consolidation Loans to borrowers with Trust Student Loans.
The making of Consolidation Loans by a Trust could increase the average life of
the related Notes and Certificates and reduce the effective yield on Student
Loans included in the Trust.
As discussed under "Servicing -- Accounts," a portion of the funds on
deposit in the Reserve Account may, if so provided in the related Prospectus
Supplement, be invested in Eligible Investments which mature subsequent to the
next succeeding Distribution Date. Accordingly, the amount of cash in the
Reserve Account at any time may be less than the balance of the Reserve Account.
If the amount required to be withdrawn from the Reserve Account to cover
shortfalls in the amount of funds needed on a Distribution Date to make required
payments to Securityholders exceeds the amount of cash in the Reserve Account, a
temporary shortfall in the amounts distributed to the Noteholders or the
Certificateholders could result. This could, in turn, increase the average life
of the Notes and the Certificates.
Scheduled payments with respect to, and maturities of, the Student Loans
may be extended, including pursuant to Grace Periods, Deferment Periods and,
under certain circumstances, Forbearance Periods, which may lengthen the
remaining term of the Student Loans and the average life of the Notes and the
Certificates. See "Appendix A -- The Federal Family Education Loan Program." In
addition, Sallie Mae makes available to certain borrowers with Student Loans
held by it certain payment terms which may result in the lengthening of the
remaining term of the Student Loans. For example, not all of the loans owned by
Sallie Mae provide for level payments throughout the repayment term of the loan.
Pursuant to Sallie Mae's graduated payment program, certain Student Loans
provide for interest payments only to be made for a designated portion of the
term of the loan, with amortization of the principal of such loan only occurring
when payments increase in the latter stage of the term of the loan. Other loans
provide for a "graduated phase in" of the amortization of principal with a
greater portion of principal amortization being required in the latter stages
than would be the case if amortization were on a level payment basis. Sallie Mae
also offers an income-sensitive repayment plan, pursuant to which repayments are
based on the borrower's income. Under that plan, ultimate repayment may be
delayed up to five years. Student Loans having such payment terms will be
included in the Trusts to the extent described in the related Prospectus
Supplement. Borrowers with Trust Student Loans will continue to be eligible for
such graduated payment and income-sensitive repayment plans. See "The Student
Loan Pools -- Sallie Mae's Student Loan Financing Business."
Any reinvestment risks resulting from a faster or slower incidence of
prepayment of Student Loans will be borne entirely by the Noteholders and the
Certificateholders. See also "Formation of the Trusts -- Insolvency Event"
regarding the sale of the Student Loans if an Insolvency Event occurs with
respect to the Seller and "Formation of the Trusts -- Termination" regarding the
Servicer's option to purchase the Student Loans.
At its option, the Seller may purchase or arrange for the purchase of all
remaining Trust Student Loans and other assets of a Trust from the related
Eligible Lender Trustee, and thereby effect early retirement of the related
Notes and Certificates, as of the end of any Collection Period immediately
preceding a Distribution Date, if the then outstanding Pool Balance of the Trust
is 10% or less of the Initial Pool Balance of such Trust. In addition, unless
otherwise provided for in the related Prospectus Supplement, any Trust Student
Loans remaining in a Trust as of the end of the Collection Period immediately
preceding the Trust Auction Date specified in the related Prospectus Supplement
will be offered for sale by the Indenture Trustee by auction in accordance with
the procedure described therein. See "Formation of the Trusts -- Termination'
herein. Either such event would result in the early retirement of the Securities
then outstanding and reduce their average lives.
17
<PAGE>
Securityholders should consider, in the case of Notes or Certificates, as
the case may be, purchased at a discount, the risk that a slower than
anticipated rate of principal payments on the Student Loans could result in an
actual yield that is less than the anticipated yield and, in the case of Notes
or Certificates, as the case may be, purchased at a premium, the risk that a
faster than anticipated rate of principal payments on the Student Loans could
result in an actual yield that is less than the anticipated yield. See "Trading
Information -- Weighted Average Life of the Securities."
Incentive Programs. Certain incentive programs currently or hereafter made
available by Sallie Mae to borrowers may also be made available by the Servicer
to borrowers with Trust Student Loans. Any such incentive program that
effectively reduces borrower payments or principal balances on Trust Student
Loans and is not required by the Act will be applicable to the Trust Student
Loans only if and to the extent that the Servicer receives payment from Sallie
Mae in an amount sufficient to offset such effective yield reductions. To the
extent that the Servicer makes such benefits available to borrowers with Trust
Student Loans, the effect of such benefits may be faster amortization of
principal of the affected Trust Student Loans. See "The Student Loan Pools --
Sallie Mae's Student Loan Financing Business -- Incentive Programs."
Risk of Commingling. With respect to each Trust, except as provided below,
the Servicer will deposit all payments on the related Trust Student Loans (from
whatever source) and all proceeds of such Trust Student Loans collected during
each Collection Period into the Collection Account of such Trust within two
business days of receipt thereof. However, for so long as (i) the senior
unsecured obligations of the Administrator have been assigned a long-term rating
of not less than "AA-" (or equivalent rating) or a short-term rating of not less
than "A-1" (or equivalent rating) by each of the Rating Agencies (as defined in
the related Prospectus Supplement, the "Rating Agencies") or the remitting by
the Servicer of all amounts received with respect to the Trust Student Loans to
the Administrator will not result in a downgrading or withdrawal of any of the
then current ratings of any of the related Securities by any of the Rating
Agencies, (ii) no Administrator Default has occurred and is continuing and (iii)
any other condition to making such deposits less frequently than daily as may be
described in the related Prospectus Supplement is satisfied, the Servicer will
remit all such amounts within two business days of receipt thereof to the
Administrator, and the Administrator will remit all such amounts received from
the Servicer to the Collection Account on or before the business day preceding
each Monthly Servicing Payment Date (to the extent of the Servicing Fee then
due) and each Distribution Date, as applicable. The Administrator will also
deposit the amount received as the Purchase Amount of Student Loans purchased by
the Seller or the Servicer into the applicable Collection Account on or before
the business day preceding each Distribution Date. Pending deposit into such
Collection Account, collections may be invested by the Administrator at its own
risk and for its own benefit and will not be segregated from funds of the
Administrator, or as described in the Prospectus Supplement. If the
Administrator were unable to remit such funds, the applicable Securityholders
might incur a loss. To the extent set forth in the related Prospectus
Supplement, the Administrator may, in order to satisfy the requirements
described above, obtain a letter of credit or other security for the benefit of
the related Trust to secure timely remittances of collections on the related
Trust Student Loans and payment of the aggregate Purchase Amount with respect to
Student Loans purchased by the Seller or the Servicer. As used herein, "business
day" means any day other than a Saturday, a Sunday or a day on which banking
institutions or trust companies in The City of New York are authorized or
obligated by law, regulation or executive order to remain closed.
Servicer Default. In the event a Servicer Default occurs, the Indenture
Trustee or the Noteholders with respect to a given series of Securities, as
described under "Servicing -- Rights upon Servicer Default," may remove the
Servicer without the consent of the Eligible Lender Trustee or any of the
Certificateholders with respect to such series, or as set forth in the related
Prospectus Supplement. Moreover, only the Indenture Trustee or the Noteholders
with respect to such series, and not the Eligible Lender Trustee or the
Certificateholders, have the ability to remove the Servicer if a Servicer
Default occurs. In the event of the removal of the Servicer and the appointment
of a successor servicer, no assurance can be given as to (i) the cost of the
transfer of servicing to such successor, (ii) the ability of such successor to
perform the obligations and duties of the Servicer under the Servicing Agreement
or (iii) servicing fees charged by such successor. In addition, the Noteholders
with respect to such series have the ability, with certain specified exceptions,
to waive defaults by the Servicer, including
18
<PAGE>
defaults that could materially adversely affect the Certificateholders with
respect to such series. See "Servicing -- Waiver of Past Defaults."
Certain Legal Aspects. The Seller has taken steps in structuring the
transactions contemplated hereby that are intended to ensure that the voluntary
or involuntary application for relief by Sallie Mae under the United States
Bankruptcy Code or other insolvency laws ("Insolvency Laws") will not result in
consolidation of the assets and liabilities of the Seller with those of Sallie
Mae. These steps include the creation of the Seller as a separate,
limited-purpose subsidiary of Sallie Mae pursuant to a certificate of
incorporation containing certain limitations (including restrictions on the
nature of the Seller's business and a restriction on the Seller's ability to
commence a voluntary case or proceeding under any Insolvency Law without the
prior unanimous affirmative vote of all of its directors, including at least one
director who must be independent of the Seller and its affiliates). However,
there can be no assurance that the activities of the Seller would not result in
a court concluding that the assets and liabilities of the Seller should be
consolidated with those of Sallie Mae in a proceeding under any Insolvency Law.
If a court were to reach such a conclusion or a filing were made under any
Insolvency Law by or against the Seller, or if an attempt were made to litigate
any of the foregoing issues, then delays in distributions on the Securities
could occur or reductions in the amounts of such distributions could result. See
"The Seller."
It is intended by Sallie Mae and the Seller that the transfer of the
Student Loans by Sallie Mae to the Seller constitute a true sale of the Student
Loans to the Seller. If the transfer constitutes such a true sale, the Student
Loans and the proceeds thereof would not be property of Sallie Mae should it
become the subject of any Insolvency Law subsequent to the transfer of the
Student Loans to the Seller.
Sallie Mae will warrant to the Seller in the related Purchase Agreement
that the sale of the Student Loans by Sallie Mae to the Seller is a valid sale
of the Student Loans by Sallie Mae to the Seller. Notwithstanding the foregoing,
if Sallie Mae were to become subject to an Insolvency Law and a creditor or
trustee-in-bankruptcy of Sallie Mae or Sallie Mae itself were to take the
position that the sale of Student Loans by Sallie Mae to the Seller should
instead be treated as a pledge of such Student Loans to secure a borrowing of
Sallie Mae, delays in payments of collections of Student Loans to the related
Securityholders could occur or (should the court rule in favor of Sallie Mae or
such trustee or creditor) reductions in the amounts of such payments could
result. If the transfer of Student Loans by Sallie Mae to the Seller is treated
as a pledge instead of a sale, a tax or government lien on the property of
Sallie Mae arising before the transfer of such Student Loans to the Seller may
have priority over such Trust's interest in such Student Loans.
If an Insolvency Event occurs with respect to the Seller, the Trust Student
Loans will be liquidated and each Trust will be terminated 90 days after the
date of such Insolvency Event or as otherwise specified in the related
Prospectus Supplement. The proceeds from any such sale, disposition or
liquidation of Trust Student Loans will be treated as collections on the Trust
Student Loans and deposited in the Collection Account of each such Trust. If the
proceeds from the liquidation of the Trust Student Loans and any amounts on
deposit in the Reserve Account (if any) with respect to any Trust and any
amounts available from any credit enhancement, if any, are not sufficient to pay
the Notes and/or Certificates of the related series in full, the distributions
of principal to Noteholders and/or Certificate Balance to Certificateholders
will be reduced and Noteholders and/or Certificateholders will incur a loss. See
"Servicing -- Insolvency Event."
Numerous federal and state consumer protection laws and related regulations
impose substantial requirements upon lenders and servicers involved in consumer
finance. Also, some state laws impose finance charge ceilings and other
restrictions on certain consumer transactions and require contract disclosures
in addition to those required under federal law. These requirements impose
specific statutory liability that could affect an assignee's ability to enforce
consumer finance contracts such as the Student Loans. In addition, the remedies
available to the related Indenture Trustee or the Noteholders of the related
series upon an Event of Default under the Indenture may not be readily available
or may be limited by applicable state and federal laws.
Book-Entry Registration. Except as otherwise provided in the related
Prospectus Supplement, each class of the Notes and the Certificates of a given
series (except for the Certificates of a given
19
<PAGE>
series purchased by the Seller) will be initially represented by one or more
certificates registered in the name of Cede & Co. ("Cede"), or any other nominee
for DTC set forth in the related Prospectus Supplement (Cede, or such other
nominee, "DTC's Nominee"), and will not be registered in the names of the
holders of the Securities of such series or their nominees. Because of this,
unless and until Definitive Securities for such series originally issued in book
entry form are issued, holders of such Securities will not be recognized by the
applicable Indenture Trustee or Eligible Lender Trustee as "Noteholders,"
"Certificateholders" or "Securityholders," as the case may be (as such terms are
used herein or in the related Indenture and Trust Agreement, as the case may
be). Hence, unless and until Definitive Securities are issued, holders of such
Securities will be able to exercise the rights of Securityholders only
indirectly through DTC or, if applicable, Cedel or Euroclear and their
respective participating organizations. See "Certain Information Regarding the
Securities -- Book-Entry Registration" and "-- Definitive Securities."
Limited Liquidity. There can be no assurance that a secondary market for
the Notes or the Certificates will develop or, if it does develop, that it will
provide a Noteholder or a Certificateholder with liquidity of investment or will
continue for the life of the Notes or the Certificates. The related Prospectus
Supplement will indicate whether any of the underwriters identified therein
intends to make a secondary market in the Notes or the Certificates offered
thereby. No underwriter will be obligated to make any such secondary market.
Rating. The related Prospectus Supplement will specify any condition that
the Notes and Certificates offered thereby be rated by one or more Rating
Agencies. A security rating is not a recommendation to buy, sell or hold
securities and may be revised or withdrawn at any time by the assigning Rating
Agency. A security rating of the Notes or Certificates does not address the
likelihood of prepayment of the Student Loans.
SALLIE MAE
Sallie Mae was chartered by an Act of Congress in 1972 as a for-profit,
stockholder-owned corporation to provide a national secondary market for
federally sponsored student loans and as a source of credit to participants in
the post-secondary education lending sector. Sallie Mae also engages in other
credit, service and investment operations related to higher education finance.
The corporation's structure and the scope of its business activities are set
forth in Section 439, Part B, Title IV of the Act. These provisions of the Act,
including Sallie Mae's charter, are subject to legislative change from time to
time. See "The Student Loan Pools -- Sallie Mae's Student Loan Financing
Business."
On September 30, 1996, the Student Loan Marketing Association
Reorganization Act of 1996 (the "Privatization Act") was enacted. The
Privatization Act authorized the creation of a state-chartered holding company
(the "Holding Company") that can pursue new business opportunities beyond the
limited scope of Sallie Mae's restrictive federal charter. The Holding Company
would become the parent of Sallie Mae pursuant to a reorganization (the
"Reorganization").
A Proxy Statement/Prospectus regarding the terms of the Reorganization has
been filed with the Commission. If the Reorganization is approved by the
shareholders of Sallie Mae, then Sallie Mae will become a wholly-owned
subsidiary of the Holding Company and Sallie Mae's federal charter will be
rescinded on or before September 30, 2008. Pursuant to the Reorganization,
Sallie Mae will transfer certain assets, including stock in Sallie Mae Servicing
Corporation, to the Holding Company. As required by the Privatization Act, all
Sallie Mae employees will be transferred to the Holding Company or one of its
subsidiaries that is not a government sponsored enterprise ("GSE"). During the
wind-down period, it is expected that Sallie Mae operations, including its
obligations as Administrator for the Trusts, will be managed by Sallie Mae's
non-GSE affiliates.
If a reorganization pursuant to the Privatization Act does not occur on or
prior to April 1, 1998, the Privatization Act requires that Sallie Mae submit an
alternative wind-down plan to Congress and the Treasury Department by 2007. This
plan would call for the dissolution of Sallie Mae by 2013.
The terms of the Notes and the Certificates may exceed the projected date
of the termination of Sallie Mae's federal charter and its GSE status. Prior to
the termination of Sallie Mae's federal charter (or its dissolution if the
Reorganization is not approved), Sallie Mae's obligations under the Transfer and
20
<PAGE>
Servicing Agreements, including its obligation to repurchase non-qualifying
loans from the Seller under the Purchase Agreement and its obligations under the
Administration Agreement, will be transferred to an affiliate of Sallie Mae. See
"Transfer and Servicing Agreements--Purchase of Student Loans by the Seller;
Representations and Warranties of Sallie Mae" and "Servicing;
Administration--Administration Agreement."
Offset Fee. The 1993 Act imposed on Sallie Mae an offset fee of 30 basis
points per annum payable to the Secretary of Education (the "Secretary") on a
monthly basis with respect to the principal amount of certain Student Loans
acquired and held by Sallie Mae after August 10, 1993. The obligation, if any,
to pay the offset fee to the Secretary in respect of any Student Loan sold to a
Trust would be solely an obligation of Sallie Mae and not an obligation of the
Seller, the Trust, the Eligible Lender Trustee or the holder of a Note or a
Certificate.
The Department has advised Sallie Mae that the offset fee should be paid by
Sallie Mae in accordance with the 1993 Act in respect of any Student Loan
acquired by Sallie Mae after August 10, 1993 even if Sallie Mae sells such
Student Loan to the Seller and the Seller sells such Student Loan to a Trust.
Sallie Mae challenged the offset fee's constitutionality and the Secretary's
statutory authority to apply the fee on loans sold by Sallie Mae in connection
with a securitization by filing suit in the U.S. District Court for the District
of Columbia. On November 16, 1995, the District Court ruled that the Secretary
exceeded his statutory authority by applying the fee to student loans sold to a
trust for the purpose of securitization. The court, however, ruled that the fee
is constitutional. On January 10, 1997, the U.S. Court of Appeals for the
District of Columbia issued a decision striking down the interpretation of the
1993 Act by which the Secretary had sought to apply the fee to securitized loans
and affirming the District Court's ruling as to the constitutionality of the
fee. Under the Court of Appeals' decision, however, the case was remanded to the
District Court for remand to the Secretary. At this time, it is uncertain
whether the Secretary will seek to develop a new interpretation of the 1993 Act
in a further attempt to apply the fee to securitized loans, and whether any such
interpretation could withstand legal challenge.
21
<PAGE>
THE STUDENT LOAN POOLS
GENERAL
The Student Loans to be sold by the Seller to an Eligible Lender Trustee on
behalf of a Trust pursuant to the related Sale Agreement will be purchased by
the Seller from Sallie Mae pursuant to the related Purchase Agreement out of the
portfolio of Student Loans held by Sallie Mae. The Student Loans will be
required to meet several criteria, including that, each Student Loan (i) is
guaranteed as to principal and interest by a Guarantee Agency (and that
Guarantee Agency is in turn reinsured by the Department in accordance with the
terms of the FFELP), (ii) was originated in accordance with the FFELP, (iii)
contains terms in accordance with those required by the FFELP, the applicable
Guarantee Agreements and other applicable requirements, (iv) provides that
periodic payments must be made in order to fully amortize the amount financed
over its term to maturity (exclusive of any deferral or forbearance periods) and
(v) satisfies the other criteria, if any, set forth in the related Prospectus
Supplement.
Legal title to the Student Loans that comprise assets of each Trust will be
held by the related Eligible Lender Trustee, as trustee on behalf of such Trust.
The Eligible Lender Trustee will also enter into, on behalf of such Trust,
Guarantee Agreements with the Guarantee Agencies specified in the applicable
Prospectus Supplement pursuant to which each of the Student Loans will be
guaranteed by one of such Guarantee Agencies. 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 distribution by loan type, school type, loan payment status,
interest rate basis, remaining term to maturity and states of origination and
the portion of such Student Loans guaranteed by the specified Guarantee
Agencies.
SALLIE MAE'S STUDENT LOAN FINANCING BUSINESS
As described below, Sallie Mae is principally engaged in the purchase of
student loans insured under federally sponsored programs ("insured loans") and
the making of secured loans ("warehousing advances") to providers of education
credit. These federally sponsored programs were significantly changed by the
Higher Education Amendments of 1992 (the "1992 Act"), which became law on July
23, 1992, and by the Omnibus Budget Reconciliation Act of 1993 (the "1993 Act"),
which became law on August 10, 1993. See "Appendix A -- The Federal Family
Education Loan Program."
Loan Purchases. Sallie Mae purchases Stafford Loans, SLS Loans and PLUS
Loans originated under the FFELP, all of which are insured by Guarantee Agencies
and reinsured by the Department. Sallie Mae also originates Consolidation Loans
and loans as a lender of last resort. These various federal loan programs are
more fully described in Appendix A. Sallie Mae also purchases Non-FFELP Loans,
such as loans originated under the Health Education Assistance Program ("HEAL"),
which are insured directly by the United States Department of Health and Human
Services, and loans which are privately insured by entities other than Guarantee
Agencies and not reinsured by the Federal government. Unless otherwise specified
in the related Prospectus Supplement, "Student Loans" refers to FFELP Loans.
Sallie Mae purchases insured loans from commercial banks, savings and loan
associations, mutual savings banks, credit unions, certain pension funds and
insurance companies, educational institutions, and state and private nonprofit
loan originating and secondary market agencies.
Traditionally, Sallie Mae has purchased most loans just prior to their
conversion to repayment phase after borrowers graduate or otherwise leave
school. However, Sallie Mae also buys "in-school" loans and those in repayment.
Sallie Mae or one of its servicing agents generally assumes responsibility for
the servicing of loans after purchase.
In addition to buying loans on an immediate basis, Sallie Mae enters into
commitment contracts to purchase loans over a specified period of time. Most
lenders using the secondary market for student loans hold loans while borrowers
are in school and sell loans shortly before their conversion to
22
<PAGE>
repayment status, when servicing costs and risks increase significantly. Sallie
Mae offers these lenders commitment contracts, under which lenders have the
right or, in some cases, the obligation, to sell Sallie Mae a specified
principal amount of loans, at a price based on certain loan characteristics,
over a specified term, usually two to three years. These commitment contracts
generally entail no fee to the lender.
In conjunction with commitment contracts, Sallie Mae frequently provides
the selling institution with operational support in the form of an automated
loan administration system (PortSS(Registered)), for the lender to use prior to
loan sale or in the form of loan origination, and interim servicing provided
through one of Sallie Mae's loan servicing centers (ExportSS(Registered)). Both
PortSS and ExportSS provide Sallie Mae and the lender with the assurance that
the loans will be administered by Sallie Mae's computerized servicing systems.
During 1996, most of Sallie Mae's loan purchases were effected pursuant to
purchase commitments, and more than half of that volume came from users of
PortSS and ExportSS.
Servicing. Prior to the purchase by Sallie Mae of loans from a lender, the
Servicer or a third party servicing agent surveys appropriate loan documents for
compliance with Department and Guarantee Agency requirements. Once acquired,
loans are serviced through the Servicer or through third-party servicers under
contractual agreements with Sallie Mae. At December 31, 1996, Sallie Mae's Loan
Servicing Centers ("LSCs") serviced approximately 80 percent of student loans
owned by Sallie Mae. The LSCs are located in Florida, Kansas, Massachusetts,
Pennsylvania, Texas and Washington State. Sallie Mae also employed third-party
servicers to service approximately 19 percent of its student loans. The
remaining 1 percent were serviced by 5 lenders who, for a fee, retained the
servicing of loans sold to Sallie Mae.
The Department and the various Guarantee Agencies prescribe rules and
regulations which govern the servicing of federally insured loans. These rules
and regulations include specific procedures for contacting delinquent borrowers,
locating borrowers who can no longer be contacted at their documented address or
telephone number, and filing claims for reimbursement on loans in default.
Payments under a Guarantee Agency's loan guarantee require strict adherence to
these stated due diligence and collection procedures.
Regulations require that collection efforts commence within ten days of any
delinquency and continue for the period of delinquency until the loan is deemed
to be in default status. During the delinquency period, the holder of the loan
must diligently attempt to contact the borrower, in writing and by telephone, at
specified intervals. A loan under the FFELP generally is not considered to be in
default until it is 180 days delinquent.
A Guarantee Agency may reject any claim for payment under a Guarantee
Agreement if the specified due diligence and collection procedures under such
Guarantee Agreement have not been strictly followed and documented or if the
claim is not timely filed. Minor errors in due diligence may result in the
imposition of interest penalties, rather than a complete loss of the guarantee.
In instances in which a claim for payment under a Guarantee Agreement is denied
due to servicing or claim-filing errors, the guaranteed status of the affected
Student Loans may be reinstated by following specified procedures ("curing the
defect"). Interest penalties are commonly incurred on loans that are cured.
Sallie Mae's recent experience has been that approximately 90 percent of all
rejected claims are cured within two years, either internally or through
collection agencies.
Sallie Mae's internal procedures support compliance with Department and
Guarantee Agency regulations and reporting requirements and provide high quality
service to borrowers. Sallie Mae has developed a computerized loan servicing
system, CLASS, which monitors all student loans serviced by the LSCs. The CLASS
system identifies loans which require due diligence or other servicing
procedures and disseminates the necessary loan information to initiate the
servicing or collection process. The CLASS system enables Sallie Mae to service
a high volume of loans in a manner consistent with industry requirements. Sallie
Mae also requires its third-party servicers to maintain operating procedures
which comply with applicable Department and Guarantee Agency regulations and
reporting requirements and periodically reviews certain operations for such
compliance.
23
<PAGE>
Consolidation/Repayment Programs. Consolidation and repayment programs
made available by Sallie Mae to Student Loan borrowers will continue to be made
available to borrowers with Student Loans owned by the Trusts. These options
include a Consolidation Loan refinancing option to borrowers with more than one
Student Loan. The Transfer and Servicing Agreements (as defined herein) may
permit Sallie Mae to purchase Student Loans from the Trust to effect
consolidations at the request of borrowers. See "Appendix A -- The Federal
Family Education Loan Program -- The Consolidation Loan Program." In addition,
Sallie Mae offers certain borrowers with Student Loans held by it loan repayment
terms which do not provide for level payments over the repayment term of the
loan.
For example, pursuant to Sallie Mae's graduated repayment program, certain
Student Loans provide for an "interest only" period. During such period, the
borrower is required to make payment of accrued interest only; no payment of the
principal of the loan is required during such period. At the conclusion of the
"interest only" period, such loan is required to be amortized through level
payments over the remaining term of the loan.
In other cases, Sallie Mae offers certain borrowers a "graduated phased in"
amortization of the principal of the loans. For such loans, a greater portion of
the principal amortization of the loan is required in the later stages of the
loan than would be the case if amortization were on a level payment basis.
Sallie Mae also offers an income-sensitive repayment plan, pursuant to
which repayments are based on the borrower's income. Under the plan, ultimate
repayment may be delayed up to five years.
It cannot be predicted with certainty to what extent borrowers will decide
to participate in the programs described above.
Incentive Programs. Sallie Mae has offered, and intends to continue to
offer, incentive programs to certain Student Loan borrowers. Three such programs
are currently made available by Sallie Mae and may apply to Student Loans owned
by the Trusts. Under the Great RewardsSM program, which is made available for
all Student Loans which enter repayment after July 1993, if a borrower makes 48
consecutive scheduled payments in a timely fashion, the effective interest rate
charged to the borrower will be permanently reduced by 2% per annum thereafter.
Pursuant to the Great ReturnsSM program, a borrower who makes 24 consecutive
scheduled payments in a timely fashion will be entitled to a reduction in
principal of the borrower's Student Loan equal to any amount over $250 that was
paid as part of the borrower's origination fee (to the extent such fee does not
exceed 3% of the principal amount of the loan). Pursuant to the Direct Repay
plan, borrowers who make student loan payments electronically through automatic
monthly deductions from a savings, checking or NOW account receive a 0.25%
effective interest rate reduction as long as they continue in the Direct Repay
plan. It cannot be predicted with certainty the extent to which borrowers will
decide to participate in these programs.
These incentive programs currently or hereafter made available by Sallie
Mae to borrowers may also be made available by the Servicer to borrowers with
Trust Student Loans. Any such incentive program that effectively reduces
borrower payments or principal balances on Trust Student Loans and is not
required by the Act will be applicable to the Trust Student Loans only if and to
the extent that the Servicer receives payment from Sallie Mae in an amount
sufficient to offset such effective yield reductions.
DELINQUENCIES, DEFAULTS, CLAIMS AND NET LOSSES
Certain information pertaining to delinquencies, defaults, guarantee claims
and net losses with respect to Student Loans is available in the Department's
Loan Programs Data Books (each a "DOE Data Book"). There can be no assurance
that the delinquency, default, claim and net loss experience on any pool of
Student Loans with respect to a given Trust will be comparable to any such
information.
24
<PAGE>
THE SELLER
The Seller, a wholly-owned subsidiary of Sallie Mae, was incorporated in
the State of Delaware on July 25, 1995. The Seller was organized for limited
purposes, which include purchasing student loans from Sallie Mae and
transferring such student loans to third parties and any activities incidental
to and necessary or convenient for the accomplishment of such purposes. The
principal executive offices of the Seller are located at 777 Twin Creek Drive,
Killeen, Texas 76543. The telephone number of such offices is (817) 554-4500.
The Seller has taken steps in structuring the transactions contemplated
hereby that are intended to prevent any voluntary or involuntary application for
relief by Sallie Mae under any Insolvency Law from resulting in consolidation of
the assets and liabilities of the Seller with those of Sallie Mae. These steps
include the creation of the Seller as a separate, limited-purpose subsidiary
pursuant to a certificate of incorporation containing certain limitations
(including restrictions on the nature of the Seller's business and a restriction
on the Seller's ability to commence a voluntary case or proceeding under any
Insolvency Law without the unanimous affirmative vote of all of its directors).
However, there can be no assurance that the activities of the Seller would not
result in a court concluding that the assets and the liabilities of the Seller
should be consolidated with those of Sallie Mae in a proceeding under any
Insolvency Law.
The Seller has received the advice of its counsel to the effect that,
subject to certain facts, assumptions and qualifications, it would not be a
proper exercise by a court of its equitable discretion to disregard the separate
corporate existence of the Seller and to require the consolidation of the assets
and liabilities of the Seller with the assets and liabilities of Sallie Mae in
the event of the application of any Insolvency Laws to Sallie Mae. Among other
things, it is assumed by counsel that the Seller will follow certain procedures
in the conduct of its affairs, including maintaining records and books of
accounts separate from those of Sallie Mae, refraining from commingling its
assets with those of Sallie Mae and refraining from holding itself out as having
agreed to pay, or being liable for, the debts of Sallie Mae. The Seller intends
to follow and has represented to such counsel that it will follow these and
other procedures related to maintaining its separate corporate identity.
However, there can be no assurance that a court would not conclude that the
assets and liabilities of the Seller should be consolidated with those of Sallie
Mae. If a court were to reach such a conclusion, or a filing were made under any
Insolvency Law by or against the Seller, or if an attempt were made to litigate
any of the foregoing issues, delays in distributions on the Notes and the
Certificates could occur or reductions in the amounts of such distributions
could result.
It is intended by Sallie Mae and the Seller that the transfer of the
Student Loans by Sallie Mae to the Seller under the Purchase Agreements
constitute a "true sale" of the Student Loans to the Seller. If the transfer
constitutes such a "true sale," the Student Loans and the proceeds thereof would
not be property of Sallie Mae should Sallie Mae become subject to any Insolvency
Law subsequent to the transfer of the Student Loans to the Seller.
It will be a condition to the issuance of Securities by a Trust that the
Seller receives the advice of counsel to the effect that, subject to certain
facts, assumptions and qualifications, in the event Sallie Mae were to become
the subject of a proceeding under any Insolvency Law subsequent to the transfer
of Student Loans to the Seller pursuant to the related Purchase Agreement, the
transfer of the Student Loans by Sallie Mae to the Seller pursuant to such
Purchase Agreement would be characterized as a "true sale" of the Student Loans
by Sallie Mae to the Seller and the Student Loans and the proceeds thereof would
not be property of Sallie Mae under such Insolvency Law.
The Seller will also represent and warrant to each Trust in the related
Sale Agreement that the sale of the applicable Student Loans by the Seller to
the Eligible Lender Trustee on behalf of such Trust is a valid sale of such
Student Loans. In addition, the Seller, the Eligible Lender Trustee and such
Trust will treat the conveyance by the Seller of the applicable Student Loans as
a sale of such Student Loans by the Seller to the Eligible Lender Trustee on
behalf of such Trust and the Seller and Sallie Mae will take all actions that
are required such that the Eligible Lender Trustee will be treated as the legal
owner of such Student Loans. Notwithstanding the foregoing, if the Seller were
to become a debtor in a
25
<PAGE>
bankruptcy case and a creditor or trustee in bankruptcy of such debtor or such
debtor itself were to take the position that the sale of Student Loans by the
Seller to a Trust should instead be treated as a pledge of such Student Loans to
secure a borrowing of such debtor, then delays in payments of collections of
such Student Loans could occur or (should the court rule in favor of any such
trustee, debtor or creditor) reductions in the amount of such payments could
result. If the transfer of Student Loans by the Seller to the Eligible Lender
Trustee on behalf of a Trust is treated as a pledge instead of a sale, a tax or
government lien on the property of the Seller arising before the transfer of
Student Loans to the Eligible Lender Trustee on behalf of such Trust may have
priority over such Eligible Lender Trustee's interest in such Student Loans. If
the conveyance by the Seller of the Student Loans is treated as a sale, the
Student Loans would not be a part of the Seller's bankruptcy estate and would
not be available to the Seller's creditors.
FORMATION OF THE TRUSTS
THE TRUSTS
With respect to each series of Securities, the Seller will establish a
separate Trust pursuant to the related Trust Agreement for the transactions
described herein and in the related Prospectus Supplement. The property of each
Trust will consist of (a) a pool of Student Loans, legal title to which will be
held by the related Eligible Lender Trustee on behalf of each Trust, (b) all
funds collected or to be collected in respect thereof (including any Program
Payments with respect thereto) on or after the applicable Cutoff Date, (c) all
moneys and investments on deposit in the Collection Account, any Reserve
Account, any Pre-Funding Account and any other trust accounts, (d) certain
rights under the related Transfer and Servicing Agreements, including the right
of the Seller to cause Sallie Mae or the Servicer to repurchase from it or
substitute Student Loans in certain events, (e) any credit or cash flow
enhancement that may be obtained for the benefit of holders of one or more
classes of the related Securities, and (f) certain rights under the Guarantee
Agreements with Guarantee Agencies. To the extent provided in the applicable
Prospectus Supplement, the Notes will be collateralized by the property of the
related Trust. To facilitate servicing and to minimize administrative burden and
expense, the Servicer will retain possession of the promissory notes
representing the Student Loans and the other documents related thereto as
custodian for each Trust and the related Eligible Lender Trustee.
The principal offices of each Trust and the related Eligible Lender Trustee
will be specified in the applicable Prospectus Supplement.
ELIGIBLE LENDER TRUSTEE
The Eligible Lender Trustee for each Trust will be specified in the related
Prospectus Supplement. The Eligible Lender Trustee on behalf of the related
Trust will acquire legal title to all the related Trust Student Loans acquired
by the Trust pursuant to the related Sale Agreement and will enter into a
Guarantee Agreement with each of the Guarantee Agencies with respect to such
Student Loans. Each Eligible Lender Trustee will qualify as an eligible lender
and the owner and holder of the related Trust Student Loans for all purposes
under the Act and the Guarantee Agreements. Failure of the Student Loans to be
owned by an eligible lender would result in the loss of any Guarantee Payments
from any Guarantee Agency and any federal assistance with respect to such
Student Loans. See "Appendix A -- The Federal Family Education Loan Program --
Eligible Lenders, Borrowers and Institutions" and "-- Federal Insurance and
Reinsurance of Guarantee Agencies." An Eligible Lender Trustee's liability in
connection with the issuance and sale of the Notes and the Certificates is
limited solely to the express obligations of the Eligible Lender Trustee set
forth in the related Trust Agreement, Sale Agreement and Servicing Agreement. An
Eligible Lender Trustee may resign at any time, in which event the
Administrator, or its successor, will be obligated to appoint a successor
trustee. The Administrator of a Trust may also remove the Eligible Lender
Trustee if the Eligible Lender Trustee ceases to be or is likely to cease to be
eligible to continue as Eligible Lender Trustee under the related Trust
Agreement or if the Eligible Lender Trustee becomes insolvent. In such
circumstances, the Administrator will be obligated to appoint a successor
trustee. Any resignation or removal of an Eligible Lender Trustee and
appointment
26
<PAGE>
of a successor trustee will not become effective until acceptance of the
appointment by the successor trustee.
INSOLVENCY EVENT
If an Insolvency Event occurs with respect to the Seller, the Trust Student
Loans will be liquidated and each Trust will be terminated 90 days after the
date of such Insolvency Event, or as otherwise specified in the related
Prospectus Supplement. Promptly after the occurrence of an Insolvency Event with
respect to the Seller, notice thereof is required to be given such Noteholders
and Certificateholders, provided that any failure to give such required notice
will not prevent or delay termination of such Trust. Upon termination of such
Trust, the related Eligible Lender Trustee will direct the related Indenture
Trustee promptly to sell the assets of the Trust (other than the Trust Accounts)
in a commercially reasonable manner and on commercially reasonable terms. The
proceeds from any such sale, disposition or liquidation of the Student Loans
will be treated as collections thereon and deposited in the related Collection
Account. If the proceeds from the liquidation of the Student Loans and any
amounts on deposit in the Reserve Account (if any) and any other credit or cash
flow enhancement specified in the related Prospectus Supplement as being
available therefor are not sufficient to pay the Notes and the Certificates of a
related series in full, the amount of principal returned to such Noteholders
and/or Certificate Balance to such Certificateholders will be reduced and some
or all of such Noteholders and such Certificateholders will incur a loss.
Each Trust Agreement will provide that the related Eligible Lender Trustee
does not have the power to commence a voluntary proceeding in bankruptcy
relating to such Trust without the unanimous prior approval of all
Certificateholders (excluding the Seller) of the related series and the delivery
to such Eligible Lender Trustee by all Certificateholders (excluding the Seller)
of a certificate certifying that such Certificateholder reasonably believes that
the related Trust is insolvent.
PAYMENT OF NOTES
Upon the payment in full of all outstanding Notes of a given series and the
satisfaction and discharge of the related Indenture, the Eligible Lender Trustee
will succeed to all the rights of the Indenture Trustee, and the
Certificateholders of such series will succeed to all the rights of the
Noteholders of such series, under the related Sale Agreement, or as otherwise
provided therein.
SELLER LIABILITY
Under each Trust Agreement, the Seller will agree to act as the general
partner of the related Trust and to be liable directly to an injured party for
the entire amount of any losses, claims, damages or liabilities (other than in
respect of amounts payable by the Trust on the related Notes or Certificates)
arising out of or based on the arrangement created by such Trust Agreement as
though such arrangement created a partnership under the Delaware Revised Uniform
Limited Partnership Act in which the Seller was a general partner.
TERMINATION
With respect to each Trust, the obligations of the Servicer, the Seller,
the Administrator, the related Eligible Lender Trustee and the related Indenture
Trustee pursuant to the related Transfer and Servicing Agreements (as defined
below) will terminate upon (i) the maturity or other liquidation of the last
related Trust Student Loan and the disposition of any amount received upon
liquidation of any such remaining Trust Student Loan and (ii) the payment to the
Noteholders and the Certificateholders of the related series of all amounts
required to be paid to them pursuant to such Transfer and Servicing Agreements.
The Seller will be permitted at its option to repurchase from, or arrange
for the 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 10% or less of the Initial Pool Balance (as defined
in the related Prospectus Supplement), all remaining related Trust Student Loans
at a price
27
<PAGE>
equal to the aggregate Purchase Amounts thereof (but not less than the minimum
purchase amount specified in the related Prospectus Supplement) as of the end of
such Collection Period, which amounts will be used to retire the related Notes
and Certificates concurrently therewith, as set forth in the related Prospectus
Supplement. Upon termination of a Trust, any remaining assets of such Trust,
after giving effect to any final distributions to Noteholders and
Certificateholders of the related series, will be transferred to the related
Reserve Account and any assets credited to the related Reserve Account will be
transferred to the Seller.
If so provided in the related Prospectus Supplement, any Trust Student
Loans remaining in the Trust as of the end of the Collection Period immediately
preceding the Trust Auction Date specified in the related Prospectus Supplement
will be offered for sale by the Indenture Trustee in accordance with the auction
procedures set forth in the related Prospectus Supplement. Sallie Mae, its
affiliates, the Seller, the Servicer and unrelated third parties may offer bids
to purchase such Trust Student Loans on such Trust Auction Date, provided that
the Seller or any of its affiliates may offer bids only if the Pool Balance as
of the Trust Auction Date is equal to 10% or less of the Initial Pool Balance.
28
<PAGE>
TRANSFER AND SERVICING AGREEMENTS
GENERAL
The following is a summary of certain terms of each Sale Agreement,
pursuant to which the related Eligible Lender Trustee on behalf of a Trust will
purchase Student Loans from the Seller, and each Purchase Agreement pursuant to
which the Seller will acquire the Student Loans from Sallie Mae. Forms of each
Sale Agreement and Purchase Agreement have been filed as exhibits to the
Registration Statement of which this Prospectus is a part. However, the summary
does not purport to be complete and is qualified in its entirety by reference to
all of the provisions of the Sale Agreements and the Purchase Agreements. The
Purchase Agreements, the Sale Agreements, the Servicing Agreements and the
Administration Agreements are collectively referred to as the "Transfer and
Servicing Agreements."
PURCHASE OF STUDENT LOANS BY THE SELLER; REPRESENTATIONS AND WARRANTIES
OF SALLIE MAE
On the Closing Date specified with respect to any given Trust in the
related Prospectus Supplement, Sallie Mae will sell and assign to the Seller,
without recourse, its entire interest in the related Trust Student Loans and all
collections received and to be received with respect thereto for the period on
and after the Cutoff Date pursuant to a Purchase Agreement. Each Student Loan
will be identified in schedules appearing as an exhibit to such Purchase
Agreement.
In each Purchase Agreement, Sallie Mae will make certain representations
and warranties with respect to the Student Loans to the Seller, including, among
other things, that (i) each Student Loan, on the date on which transferred to
the Seller, is free and clear of all security interests, liens, charges and
encumbrances and no offsets, defenses or counterclaims have been asserted or
threatened, (ii) the information provided with respect to the Student Loans is
true and correct as of the Cutoff Date, (iii) each Student Loan, at the time it
was acquired by Sallie Mae, complied and, at the Closing Date, complies in all
material respects with applicable federal and state laws and applicable
restrictions imposed by the FFELP or under any Guarantee Agreement and (iv) each
Student Loan, on the date on which transferred to the Seller, is guaranteed by
the applicable Guarantee Agency.
Following the discovery by or notice to Sallie Mae of a breach of any such
representation or warranty Sallie Mae made with respect to any Student Loan in
the Purchase Agreement that has a materially adverse effect on the interest of
the Seller in such Student Loan, unless such breach is cured within the
applicable cure period specified in the related Prospectus Supplement, Sallie
Mae will repurchase such Student Loan from the Seller at a price equal to the
amount required to prepay in full such purchased Student Loan under the terms
thereof including all accrued interest thereon with respect thereto (the
"Purchase Amount"), or as provided in the related Prospectus Supplement, and the
related Trust's interest in any such purchased Trust Student Loan will be
assigned to Sallie Mae or its designee. As to any such Trust Student Loan
required to be purchased by Sallie Mae as provided above, rather than repurchase
such Trust Student Loan, Sallie Mae may, in its sole discretion, substitute
Qualified Substitute Student Loans for such Trust Student Loan. In addition,
unless otherwise specified in the related Prospectus Supplement, Sallie Mae will
be obligated to (a) reimburse the Seller for the shortfall, if any, between the
Purchase Amount of any Qualified Substitute Student Loans and the Purchase
Amount of the Trust Student Loan for which such Qualified Substitute Student
Loans are being substituted as a result of a breach of Sallie Mae's
representations and warranties with respect to such Trust Student Loan and (b)
reimburse the Seller for any accrued interest amounts not guaranteed by (or
required to be refunded to) a Guarantee Agency and/or any Interest Subsidy
Payments or Special Allowance Payments not paid by (or required to be refunded
to) the Department with respect to a Trust Student Loan as a result of a breach
of any such representation or warranty of Sallie Mae. The repurchase (or
substitution) and reimbursement obligations of Sallie Mae will constitute the
sole remedy available to the Seller for any such uncured breach, provided that
the information with respect to the Trust Student Loans listed on the applicable
bill of sale may be adjusted in the ordinary course of business subsequent to
the date of such bill of sale and to the extent that the aggregate principal
29
<PAGE>
balance of such Trust Student Loans is less than the aggregate principal balance
stated on such bill of sale, Sallie Mae will remit such amount to the Eligible
Lender Trustee on behalf of the Seller. Sallie Mae's repurchase (or
substitution) and reimbursement obligations are contractual obligations pursuant
to a Purchase Agreement that may be enforced against Sallie Mae, but the breach
of such obligations will not constitute an Event of Default under the Indenture.
SALE OF STUDENT LOANS TO THE TRUST; REPRESENTATIONS AND WARRANTIES OF THE SELLER
On the Closing Date specified with respect to any given Trust in the
related Prospectus Supplement, the Seller will sell and assign to the related
Eligible Lender Trustee on behalf of such Trust, without recourse, its entire
interest in the Student Loans acquired by the Seller from Sallie Mae pursuant to
the Purchase Agreement and all collections received and to be received with
respect thereto for the period on and after the Cutoff Date pursuant to the Sale
Agreement. Each Student Loan will be identified in schedules appearing as an
exhibit to such Sale Agreement. Each Eligible Lender Trustee will, concurrently
with such sale and assignment, execute, authenticate and deliver the related
Certificates and Notes. The net proceeds received from the sale of the related
Notes and Certificates will be applied to the purchase of the Student Loans from
the Seller.
In each Sale Agreement, the Seller will make certain representations and
warranties with respect to the Student Loans to the related Trust for the
benefit of the Certificateholders and the Noteholders of a given series,
including, among other things, that (i) each Student Loan, on the date on which
transferred to such Trust, is free and clear of all security interests, liens,
charges and encumbrances and no offsets, defenses or counterclaims have been
asserted or threatened, (ii) the information provided with respect to the
Student Loans is true and correct as of the Cutoff Date, (iii) each Student
Loan, at the time it was acquired, complied and, at the Closing Date, complies
in all material respects with applicable federal and state laws (including,
without limitation, the Act, consumer credit, truth in lending, equal credit
opportunity and disclosure laws) and applicable restrictions imposed by the
FFELP or under any Guarantee Agreement and (iv) each Student Loan on the date on
which transferred to the Seller, is guaranteed by the applicable Guarantee
Agency.
Following the discovery by or notice to the Seller of a breach of any such
representation or warranty of the Seller made with respect to any Student Loan
in the Sale Agreement or the Purchase Agreement that has a materially adverse
effect on the interest of the related Trust in such Student Loan, the Seller
will, unless such breach is cured within the applicable cure period specified in
the related Prospectus Supplement, repurchase such Student Loan from the related
Eligible Lender Trustee, as of the first day following the end of the applicable
cure period that is the last day of a Collection Period, at a price equal to the
Purchase Amount, or as set forth in the related Prospectus Supplement, and the
related Trust's interest in any such purchased Trust Student Loan will be
assigned to the Seller or its designee. As to any such Trust Student Loan
required to be purchased by the Seller as provided above, rather than repurchase
such Trust Student Loan, the Seller may, in its sole discretion, substitute
Qualified Substitute Student Loans for such Trust Student Loan. In addition,
unless otherwise specified in the related Prospectus Supplement, the Seller will
be obligated to (a) reimburse the related Trust for the shortfall, if any,
between the Purchase Amount of any Qualified Substitute Student Loans and the
Purchase Amount of the Trust Student Loan for which such Qualified Substitute
Student Loans are being substituted as a result of a breach of the Seller's
representations and warranties with respect to such Trust Student Loan and (b)
reimburse the related Trust for any accrued interest amounts not guaranteed by
(or required to be refunded to) a Guarantee Agency and/or any Interest Subsidy
Payments or Special Allowance Payments not paid by (or required to be refunded
to) the Department with respect to a Trust Student Loan as a result of a breach
of any such representation or warranty of the Seller. The repurchase (or
substitution) and reimbursement obligations of the Seller will constitute the
sole remedy available to or on behalf of a Trust, the related Certificateholders
and the related Noteholders for any such uncured breach, provided that the
information with respect to the Trust Student Loans listed on the applicable
bill of sale may be adjusted in the ordinary course of business subsequent to
the date of such bill of sale and to the extent that the aggregate principal
balance of such Trust Student Loans is less than the aggregate principal balance
stated on such bill of sale, the Seller will, or will cause Sallie Mae under the
Purchase Agreement to, remit such amount to the Eligible
30
<PAGE>
Lender Trustee. The Seller's repurchase (or substitution) and reimbursement
obligations are contractual obligations pursuant to a Sale Agreement that may be
enforced against the Seller, but the breach of which will not constitute an
Event of Default under the Indenture.
CUSTODIAN OF PROMISSORY NOTES
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 will
reflect the sale and assignment by Sallie Mae of the Student Loans to the Seller
and the subsequent sale and assignment by the Seller of the Student Loans to the
related Eligible Lender Trustee on behalf of the related Trust.
ADDITIONAL FUNDINGS
The related Prospectus Supplement will indicate whether a Pre-Funding
Account will be established with respect to a Trust. The Prospectus Supplement
will also indicate (i) the amount to be deposited in the Pre-Funding Account on
the related Closing Date, (ii) the length of the related Funding Period and
(iii) the uses to which the funds in the Pre-Funding Account can be applied and
the conditions to the application of such funds for such purposes. If the
Pre-Funding Amount has not been reduced to zero by the end of the Funding
Period, the Noteholders and/or Certificateholders will receive any amounts
remaining in the Pre-Funding Account as a payment of principal.
AMENDMENTS TO TRANSFER AND SERVICING AGREEMENTS
Each of the Transfer and Servicing Agreements may be amended by the parties
thereto, without the consent of the related Noteholders or Certificateholders,
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of such Transfer and Servicing Agreements or
of modifying in any manner the rights of such Noteholders or Certificateholders;
provided that such action will not, in the opinion of counsel satisfactory to
the related Indenture Trustee and Eligible Lender Trustee, materially and
adversely affect the interest of any such Noteholder or Certificateholder, or as
set forth 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 Noteholders of the related series
evidencing at least a majority in principal amount of such series and the
holders of Certificates (including any Certificates owned by the Seller) of the
related series evidencing at least a majority of the Certificate Balance of such
series for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of such Transfer and Servicing Agreements or
of modifying in any manner the rights of such Noteholders or Certificateholders;
provided that no such amendment may reduce the aforesaid percentage of such
Notes or Certificates which are required to consent to any such amendment,
without the consent of the holders of all such outstanding Notes and
Certificates, or as set forth in the related Prospectus Supplement.
SERVICING; ADMINISTRATION
GENERAL
The following is a summary of certain terms of each Servicing Agreement
pursuant to which the Servicer will service the Student Loans and each
Administration Agreement pursuant to which the Administrator will undertake
certain administrative duties with respect to a Trust and the Student Loans.
Forms of the Servicing Agreement and the Administration Agreement have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part. However, the summary does not purport to be complete and is qualified in
its entirety by reference to all provisions of the Servicing Agreements and the
Administration Agreements.
31
<PAGE>
ACCOUNTS
With respect to each Trust, the Administrator will establish and maintain
or cause to be established or maintained, initially with the applicable
Indenture Trustee, one or more accounts, in the name of the Indenture Trustee on
behalf of the related Noteholders and Certificateholders, into which all
payments made on or with respect to the related Trust Student Loans will be
deposited (collectively, the "Collection Account"). Any other accounts to be
established with respect to a Trust, including any Pre-Funding Account and any
Reserve Account, will be described in the related Prospectus Supplement.
For any series of Securities, funds in the Collection Account, any
Pre-Funding Account, any Reserve Account and any other accounts identified as
such in the related Prospectus Supplement (collectively, the "Trust Accounts")
will be invested as provided in the applicable Trust Indenture in Eligible
Investments in accordance with instructions received by the applicable Indenture
Trustee from the Administrator.
"Eligible Investments" are generally limited to investments which would not
result in the downgrading or withdrawal of any rating of any of the Securities
by any Rating Agency. Eligible Investments will be required to mature on such
dates or in such manner as are set forth in the related Prospectus Supplement. A
portion of such Eligible Investments may be permitted to mature subsequent to
the next succeeding Distribution Date if so provided in the related Prospectus
Supplement. In such case such Eligible Investments would not be sold to meet any
shortfall in amounts required to be withdrawn from the Reserve Account on such
Distribution Date. Accordingly, the amount of cash in the 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 Trust Student Loans (as provided in the related Prospectus
Supplement) exceeds the amount of cash in the Reserve Account, a temporary
shortfall in the amounts distributed to the related Noteholders or
Certificateholders could result, which could, in turn, increase the average life
of the Notes or the Certificates of such series. 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 Trust Student Loans, or as set forth in the related Prospectus
Supplement.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in such account, so long as any of the
securities of such depository institution have a credit rating from each Rating
Agency in one of its generic rating categories which signifies investment grade.
"Eligible Institution" means a depository institution organized under the laws
of the United States of America or any one of the states thereof or the District
of Columbia (or any domestic branch of a foreign bank), (i) which has either (A)
a long-term unsecured debt rating acceptable to the Rating Agencies or (B) a
short-term unsecured debt rating or certificate of deposit rating acceptable to
the Rating Agencies and (ii) whose deposits are insured by the Federal Deposit
Insurance Corporation.
SERVICING PROCEDURES
Pursuant to each Servicing Agreement, the Servicer will agree 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 Servicing Agreement to perform all services and duties
customary to the servicing of Student Loans (including all collection
practices), and to do so with the same standard of care as the Servicer uses to
service student loans owned by Sallie Mae and in compliance 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 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
32
<PAGE>
any Program Payments with respect thereto, responding to inquiries from
borrowers on the Student Loans, attempting to collect delinquent payments and
sending out statements and payment coupons to borrowers. In addition, the
Servicer will keep ongoing records with respect to such Student Loans and
collections thereon and will furnish periodic statements to the Indenture
Trustee, the Eligible Lender Trustee and the Securityholders with respect to
such information, in accordance with the Servicer's customary practices and as
otherwise required in the related Servicing Agreement.
PAYMENTS ON STUDENT LOANS
With respect to each Trust, except as provided below, the Servicer will
deposit all payments on Student Loans (from whatever source) and all proceeds of
Student Loans collected by it during each collection period specified in the
related Prospectus Supplement (each, a "Collection Period") into the related
Collection Account within two business days of receipt thereof.
However, for so long as (i) the senior unsecured obligations of the
Administrator (or any affiliate of the Administrator which guarantees the
obligations of the Administrator under the Administration Agreement) have been
assigned a long-term rating of not less than "AA-" (or equivalent rating) or a
short-term rating of not less than "A-1" (or equivalent rating) by each of the
Rating Agencies or the remitting by the Servicer of the amounts referred to in
the preceding paragraph to the Administrator will not result in a downgrading or
withdrawal of any of the then current ratings of any of the related Securities
by any of the Rating Agencies, (ii) no Administrator Default has occurred and is
continuing and (iii) each other condition to making deposits less frequently
than daily as may be set forth in the related Prospectus Supplement is
satisfied, the Servicer will remit such amounts to the Administrator within two
business days of receipt thereof, and the Administrator will not be required to
deposit the amounts referred to in the preceding paragraph into the Collection
Account until on or before the business day preceding each Monthly Servicing
Payment Date (to the extent of the Servicing Fee then due) and each Distribution
Date, as applicable. To the extent provided in the related Prospectus
Supplement, pending deposit into the Collection Account, collections may be
invested by the Administrator at its own risk and for its own benefit, and will
not be segregated from funds of the Administrator. If the Administrator were
unable to remit such collections, Securityholders might incur a loss. To the
extent set forth in the related Prospectus Supplement, the Administrator may, in
order to satisfy the requirements described above, obtain a letter of credit or
other security for the benefit of the related Trust to secure timely remittances
of collections on the related Trust Student Loans and payment of the aggregate
Purchase Amount with respect to Student Loans repurchased by the Seller or
purchased by the Servicer. The Seller and the Servicer will pay the aggregate
Purchase Amount of Student Loans repurchased by the Seller or purchased by the
Servicer to the Administrator and the Administrator will deposit such amounts
into the Collection Account on or before the business day preceding each
Distribution Date.
SERVICER COVENANTS
With respect to each Trust, in the related Servicing Agreement, the
Servicer will covenant that: (a) it will duly satisfy all obligations on its
part to be fulfilled under or in connection with the Student Loans, maintain in
effect all qualifications required in order to service the Student Loans and
comply in all material respects with all requirements of law in connection with
servicing the Student Loans, the failure to comply with which would have a
materially adverse effect on the interest of the related Trust; (b) it will not
permit any rescission or cancellation of a Student Loan except as ordered by a
court of competent jurisdiction or other government authority or as otherwise
consented to by the related Eligible Lender Trustee and the related Indenture
Trustee, provided that the Servicer may write off any delinquent Trust Student
Loan if the remaining balance of the borrower's account is less than $50; (c) it
will do nothing to impair the rights of the related Certificateholders and the
related Noteholders in the Student Loans; and (d) it will not reschedule,
revise, defer or otherwise compromise with respect to payments due on any
Student Loan except pursuant to any applicable interest only, deferral or
forbearance periods or otherwise in accordance with all applicable standards,
guidelines and requirements with respect to the servicing of the Trust Student
Loans.
33
<PAGE>
Under the terms of each Servicing Agreement, if 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 noncompliance has not been
cured within the applicable cure period specified in the related Prospectus
Supplement and has a materially adverse effect on the interest of the related
Trust (it being understood that any such noncompliance that relates to
compliance with the requirements of the Higher Education Act or the applicable
Guarantee Agency but that does not affect such Guarantee Agency's obligation to
guarantee payment of a Trust Student Loan will not be considered to have a
material adverse effect), the Servicer will purchase such Trust Student Loan as
of the first day following the end of such cure period that is the last day of a
Collection Period, or as set forth in the related Prospectus Supplement, at a
price equal to the unpaid principal amount of such Trust Student Loan plus any
accrued interest calculated using the applicable percentage that would have been
insured pursuant to Section 428(b)(1)(G) of the Higher Education Act (currently
either 98% or 100%) plus any Interest Subsidy Payments or Special Allowance
Payments not paid by (or required to be refunded to) the Department with respect
to a Trust Student Loan as a result of a breach of any such covenant of the
Servicer, or as set forth in the related Prospectus Supplement, and the related
Trust's interest in any such purchased Trust Student Loan will be assigned to
the Servicer or its designee. As to any such Trust Student Loan required to be
purchased by the Servicer as provided above, rather than purchase such Trust
Student Loan, the Servicer may, in its sole discretion, substitute Qualified
Substitute Student Loans for such Trust Student Loan. In addition, unless
otherwise specified in the related Prospectus Supplement, the Servicer will be
obligated to (a) reimburse the related Trust for the shortfall, if any, between
the Purchase Amount of any Qualified Substitute Student Loans and the Purchase
Amount of the Trust Student Loan for which such Qualified Substitute Student
Loans are being substituted as a result of a breach of any covenant of the
Servicer with respect to such Trust Student Loan and (b) reimburse the related
Trust for any accrued interest amounts not guaranteed by (or required to be
refunded to) a Guarantee Agency and/or any Interest Subsidy Payments or Special
Allowance Payments not paid by (or required to be refunded to) the Department
with respect to a Trust Student Loan as a result of a breach of any such
covenant of the Servicer.
SERVICING COMPENSATION
With respect to any Trust, the Servicer will be entitled to receive the
Servicing Fee for each Collection Period in an amount equal to the specified
amount as set forth in the related Prospectus Supplement, together with any
other administrative fees, expenses and similar charges specified in the related
Prospectus Supplement. As set forth in the related Prospectus Supplement, the
Servicing Fee may be comprised of a specified percentage per annum of the Pool
Balance (as defined in the related Prospectus Supplement) or a unit amount based
on the number of accounts in the Trust as of the time set forth in the related
Prospectus Supplement or a combination thereof or any other formulation, plus
certain specified amounts payable to the Servicer for certain tasks performed by
the Servicer in a Collection Period. The Servicing Fee for any Collection Period
may be subject to a maximum monthly amount specified in the related Prospectus
Supplement. The Servicing Fee (together with any portion of the Servicing Fee
that remains unpaid from prior Distribution Dates), will be paid prior to any
payment in respect of the related Securities, to the extent 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, including collecting and posting all
payments, responding to inquiries of borrowers on the Student Loans,
investigating delinquencies, pursuing, filing and collecting any Program
Payments, accounting for collections and furnishing monthly and annual
statements to the Applicable Trustees with respect to distributions. The
Servicing Fee also will reimburse the Servicer for certain taxes, accounting
fees, outside auditor fees, data processing costs and other costs incurred in
connection with administering the Student Loans.
NET DEPOSITS
As an administrative convenience, unless the Servicer is required to remit
collections daily to the Collection Account (see "-- Payments on Student Loans"
above), the Administrator will be permitted to make the deposit to the
Collection Account of collections and aggregate Purchase Amounts for any
34
<PAGE>
Trust for or with respect to the related Collection Period net of payments of
Servicing Fees and Administration Fees for such Trust with respect to such
Collection Period to the extent described in the Prospectus Supplement. With
respect to any such Collection Period, the Administrator may cause to be made a
single, net transfer of such amounts to the Collection Account on the business
day preceding the related Distribution Date. The Administrator, however, will
account to the Indenture Trustee, the Eligible Lender Trustee, the Noteholders
and the Certificateholders with respect to such Trust as if all deposits,
distributions and transfers were made individually.
EVIDENCE AS TO COMPLIANCE
Each Administration Agreement will provide that a firm of independent
public accountants will furnish to the related Trust and Indenture Trustee
annually a report (based on the examination of certain documents and records and
on such accounting and auditing procedures considered appropriate under the
circumstances) attesting to the assertion of the Servicer's management about
compliance by the Servicer during the preceding twelve months (or, in the case
of the first such certificate, the period from the applicable Closing Date) with
the terms of such Administration Agreement and the related Servicing Agreement,
including all statutory provisions incorporated therein.
Each Administration Agreement will also provide for delivery to the related
Trust and Indenture Trustee, concurrently with the delivery of each report of
compliance referred to above, of a certificate signed by an officer of the
Servicer stating that, to his knowledge, the Servicer has fulfilled its
obligations under such Administration Agreement and the related Servicing
Agreement throughout the preceding twelve months (or, in the case of the first
such certificate, the period from the applicable Closing Date) or, if there has
been a material default in the fulfillment of any such obligation, describing
each such default. The Servicer has agreed to give the related Indenture Trustee
and Eligible Lender Trustee notice of certain Servicer Defaults under such
Servicing Agreement.
Copies of such reports and certificates may be obtained by Securityholders
by a request in writing addressed to the applicable Trustee.
35
<PAGE>
CERTAIN MATTERS REGARDING THE SERVICER
The Servicing Agreements will provide that the Servicer is an independent
contractor and that, except for the services to be performed as set forth in the
Servicing Agreement, the Servicer does not hold itself out as an agent of the
Trusts.
Each Servicing Agreement will provide that, except as provided below, the
Servicer may not resign from its obligations and duties as Servicer thereunder,
except upon determination that the performance of such duties by the Servicer is
no longer permissible under applicable law. No such resignation will become
effective until the related Indenture Trustee or a successor servicer has
assumed the servicing obligations and duties of the Servicer under the Servicing
Agreement. Notwithstanding the foregoing, the Servicer will be permitted to
resign as Servicer in connection with any sale or transfer of substantially all
of its student loan servicing operations relating to the Student Loans owned by
the Trusts provided that (i) the successor to the Servicer with respect to such
operations expressly assumes in writing all of the obligations of the Servicer
under the Servicing Agreements, (ii) such sale or transfer and such assumption
comply with the requirements of the Servicing Agreement and (iii) the Rating
Agencies confirm that such resignation and assumption will not result in a
downgrading or a withdrawal of the ratings then applicable to the Notes and
Certificates of the Trusts outstanding at the time.
The Trust Student Loans will be serviced by Sallie Mae Servicing
Corporation, a wholly-owned subsidiary of Sallie Mae. The Servicer may delegate
or subcontract its obligations and duties as Servicer under a Servicing
Agreement to any person provided that no such delegation or subcontracting may
relieve the Servicer of liability under such Servicing Agreement.
Each Servicing Agreement will further provide that neither the Servicer nor
any of its directors, officers, employees or agents will be under any liability
to the related Trust or the related Noteholders or Certificateholders for taking
any action or for refraining from taking any action pursuant to the related
Servicing Agreement, or for errors in judgment; provided that the Servicer will
not be protected against its obligation to purchase Student Loans from a Trust
as required in the related Servicing Agreement, to pay to the Trust the amount
of any Program Payment which a Guarantee Agency or the Servicer refuses to pay
(or requires the Trust to refund) as a result of the Servicer's actions, or
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 Servicing Agreement will provide that the Servicer
is under no obligation to appear in, prosecute or defend any legal action where
it is not named as a party.
Under the circumstances specified in each Servicing Agreement, any entity
into which the Servicer may be merged or consolidated, or any entity resulting
from any merger or consolidation to which the Servicer is a party, or any entity
succeeding to the business of the Servicer, which corporation or other entity in
each of the foregoing cases assumes the obligations of the Servicer, will be the
successor of the Servicer under such Servicing Agreement. Consistent with
certain legislation currently pending before Congress to privatize Sallie Mae,
it is contemplated that, in the event Sallie Mae is privatized, it will be
converted into a wholly-owned subsidiary of a newly-formed holding company and
the stock of any previously created subsidiaries of Sallie Mae, such as the
Servicer, would be transferred to the holding company.
SERVICER DEFAULT
"Servicer Default" under each Servicing Agreement will consist of (i) any
failure by the Servicer to deposit in any of the Trust Accounts any required
payment, which failure continues unremedied for five business days after written
notice from such Indenture Trustee or the related Eligible Lender Trustee is
received by the Servicer; (ii) any failure by the Servicer duly to observe or
perform in any material respect any other term, covenant or agreement in such
Servicing Agreement which failure materially and adversely affects the rights of
Noteholders or Certificateholders of the related series and which continues
unremedied for 60 days after the giving of written notice of such failure (1) to
the Servicer by the related Indenture Trustee, Eligible Lender Trustee or the
Administrator or (2) to the Servicer and to the related Indenture Trustee and
Eligible Lender Trustee by holders of Notes or Certificates of the
36
<PAGE>
related series, as applicable, evidencing not less than 25% in principal amount
of such outstanding Notes or 25% of the Certificate Balance of such outstanding
Certificates (including any Certificates owned by the Seller); (iii) the
occurrence of an Insolvency Event with respect to the Servicer; and (iv) any
failure by the Servicer to comply with any requirements under the Higher
Education Act resulting in a loss of its eligibility as a third-party servicer.
"Insolvency Event" means, with respect to any Person, certain events of
bankruptcy, insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings with respect to such Person and certain
actions by such Person indicating its insolvency, reorganization pursuant to
bankruptcy proceedings or inability to pay its obligations, or as set forth in
the related Prospectus Supplement.
A Servicer Default described in clause (ii) of the preceding paragraph
shall not include any failure of the Servicer to service a Student Loan in
accordance with the Act so long as the Servicer is in compliance with its
obligations set forth in the Servicing Agreement to purchase any adversely
affected Student Loan for the Purchase Amount and in compliance with its
obligation set forth in the Servicing Agreement to pay to the applicable Trust
the amount of any Program Payments which a Guarantee Agency or the Secretary
refuses to pay (or requires the applicable Trust to refund) as a result of the
Servicer's actions.
RIGHTS UPON SERVICER DEFAULT
As long as a Servicer Default under a Servicing Agreement remains
unremedied, the related Indenture Trustee or Noteholders of the related series
evidencing not less than 25% in stated amount of such then outstanding Notes may
terminate all the rights and obligations of the Servicer under such Servicing
Agreement, whereupon a successor servicer appointed by the related Indenture
Trustee or such Indenture Trustee itself will succeed to all the
responsibilities, duties and liabilities of the Servicer under such Servicing
Agreement and will be entitled to similar compensation arrangements. Such
compensation may not be greater than the servicing compensation to the Servicer
under such Servicing Agreement, unless such compensation arrangements will not
result in a downgrading or withdrawal of the then ratings of such Notes and
Certificates by any Rating Agency, or as set forth in the related Prospectus
Supplement. If, however, a bankruptcy trustee or similar official has been
appointed for the Servicer, and no Servicer Default other than such appointment
has occurred, such trustee or official may have the power to prevent such
Indenture Trustee or such Noteholders from effecting such a transfer. In the
event that such Indenture Trustee is unwilling or unable to so act, it may
appoint, or petition a court of competent jurisdiction for the appointment of, a
successor whose regular business includes the servicing of student loans. In the
event a Servicer Default occurs and is continuing, such Indenture Trustee or
such Noteholders, as described above, may remove the Servicer, without the
consent of the related Eligible Lender Trustee or any of the Certificateholders
of the related series. Moreover, only the Indenture Trustee or the Noteholders,
and not the Eligible Lender Trustee or the Certificateholders, will have the
ability to remove the Servicer if a Servicer Default occurs and is continuing.
WAIVER OF PAST DEFAULTS
With respect to each Trust, the Noteholders evidencing at least a majority
in principal amount of the then outstanding Notes (or the holders of
Certificates evidencing not less than a majority of the outstanding Certificate
Balance, in the case of any Servicer Default which does not adversely affect the
Indenture Trustee or the Noteholders) of the related series may, on behalf of
all such Noteholders and Certificateholders, waive any default by the Servicer
in the performance of its obligations under the related Servicing Agreement and
its consequences, except a default in making any required deposits to or
payments from any of the Trust Accounts in accordance with such Servicing
Agreement, or as set forth in the related Prospectus Supplement. Therefore, such
Noteholders have the ability, except as noted above, to waive defaults by the
Servicer which could materially adversely affect such Certificateholders. No
such waiver will impair such Noteholders' or Certificateholders' rights with
respect to subsequent defaults.
37
<PAGE>
ADMINISTRATION AGREEMENT
With respect to each Trust, Sallie Mae, in its capacity as Administrator,
will enter into an Administration Agreement with each Trust and the related
Indenture Trustee pursuant to which the Administrator will agree, to the extent
provided therein, to provide the notices and to perform other administrative
obligations required by the related Indenture, Trust Agreement and Sale
Agreement. Such services shall include undertakings (i) to direct the Indenture
Trustee to make the required distributions from the Trust Accounts on each
Monthly Servicing Payment Date and each Distribution Date, (ii) to prepare
(based on periodic data received from the Servicer) and provide quarterly and
annual statements to the Eligible Lender Trustee and the Indenture Trustee with
respect to distributions to Noteholders and Certificateholders and any related
federal income tax reporting information and (iii) to provide the notices and to
perform other administrative obligations required by the Indenture, the Trust
Agreement and the Sale Agreement, or as provided in a Prospectus Supplement. 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 the Administration Fee as
specified in the related Prospectus Supplement. Each Administration Agreement
will provide that, except as set forth below, Sallie Mae may not resign from its
obligations and duties as Administrator thereunder, except upon determination
that Sallie Mae's performance of such duties is no longer permissible under
applicable law. No such resignation will become effective until a successor
administrator has assumed Sallie Mae's obligations and duties under the
Administration Agreement.
Each Administration Agreement will further provide that Sallie Mae may
assign its obligations and duties as Administrator thereunder to an affiliate
provided that the Rating Agencies confirm that such assignment will not result
in a downgrading or a withdrawal of the ratings then applicable to the Notes and
the Certificates of the Trusts outstanding at such time.
ADMINISTRATOR DEFAULT
"Administrator Default" under the Administration Agreement will consist of
(i) (A) in the event that daily deposits into the Collection Account are not
required, any failure by the Administrator to deliver to the relevant Indenture
Trustee for deposit in any of the Trust Accounts any required payment on or
before the business day prior to any Monthly Servicing Payment Date or
Distribution Date, as applicable, or (B) any failure by the Administrator to
direct the relevant Indenture Trustee to make any required distributions from
any of the Trust Accounts on any Monthly Servicing Payment Date or any
Distribution Date, which failure in case of either clause (A) or (B) continues
unremedied for five business days after written notice from such Indenture
Trustee or the Eligible Lender Trustee is received by the Administrator or after
discovery by the Administrator; (ii) any failure by the Administrator duly to
observe or perform in any material respect any other term, covenant or agreement
in an Administration Agreement or related agreements which failure materially
and adversely affects the rights of Noteholders or Certificateholders and which
continues unremedied for 60 days after the giving of written notice of such
failure (1) to the Administrator by the Indenture Trustee or the Eligible Lender
Trustee or (2) to the Administrator, the Indenture Trustee and the Eligible
Lender Trustee by holders of Notes or Certificates, as applicable, evidencing
not less than 25% in principal amount of the outstanding Notes or 25% of the
Certificate Balance (including any Certificates owned by the Seller); and (iii)
certain events of bankruptcy, insolvency readjustment or debt, marshalling of
assets and liabilities, or similar proceedings with respect to the Administrator
and certain actions by the Administrator indicating its insolvency or inability
to pay its obligations.
RIGHTS UPON ADMINISTRATOR DEFAULT
As long as an Administrator Default under an Administration Agreement
remains unremedied, the relevant Indenture Trustee or Noteholders evidencing not
less than 25% in principal amount of then outstanding Notes under the relevant
Indenture may terminate all the rights and obligations of the Administrator
under the relevant Administration Agreement whereupon a successor administrator
appointed by the Indenture Trustee or the Indenture Trustee will succeed to all
the responsibilities,
38
<PAGE>
duties and liabilities of the Administrator under such Administration Agreement
and (except in the case of the Indenture Trustee) will be entitled to similar
compensation arrangements, or as set forth in the related Prospectus Supplement.
If, however, a bankruptcy trustee or similar official has been appointed for the
Administrator, and no Administrator Default other than such appointment has
occurred, such trustee or official may have the power to prevent the Indenture
Trustee or the Noteholders from effecting such a transfer. In the event that the
relevant 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 or administration of student
loans. The relevant Indenture Trustee may make such arrangements for
compensation to be paid, which in no event may be greater than the compensation
to the Administrator under such Administration Agreement unless such
compensation arrangements will not result in a downgrading of the Notes and the
Certificates by any Rating Agency. In the event an Administrator Default occurs
and is continuing, the relevant Indenture Trustee or the relevant Noteholders,
as described above, may remove the Administrator without the consent of the
relevant Eligible Lender Trustee or any of the related Certificateholders.
Moreover, only the relevant Indenture Trustee or the relevant Noteholders, and
not the related Eligible Lender Trustee or the related Certificateholders, has
the ability to remove the Administrator, if an Administrator Default occurs and
is continuing.
STATEMENTS TO INDENTURE TRUSTEE AND TRUST
Prior to each Distribution Date with respect to each series of Securities,
the Administrator will prepare and provide to the related Indenture Trustee and
the related Eligible Lender Trustee as of the close of business on the last day
of the preceding Collection Period a statement, which will include, among other
things, the following information (and any other information so specified in the
related Administration Agreement) with respect to such Distribution Date or the
preceding Collection Period as to the Notes and the Certificates of such series,
to the extent applicable:
(i) the amount of distributions in respect of the principal of each
class of the Notes and in respect of the Certificate Balance of the
Certificates;
(ii) the amount of distributions allocable to interest on each class
of the Notes and return on each class of the Certificates, together with
the rates applicable thereto;
(iii) the Pool Balance as of the close of business on the last day of
the preceding Collection Period;
(iv) the outstanding principal amount and the Note Pool Factor for
each class of the Notes and the Certificate Balance and the Certificate
Pool Factor for each class of the Certificates as of such Distribution
Date, each after giving effect to payments allocated to principal of each
class of Notes and distributions in respect of the Certificate Balance
reported under clause (i) above;
(v) the amount of the Servicing Fee and the Administration Fee paid to
the Servicer and the Administrator, respectively, with respect to such
Collection Period;
(vi) the Note Rate, if available, for the next period for any class of
Notes and the Certificate Rate for any class of Certificates of such series
with variable or adjustable rates;
(vii) the amount of the aggregate realized losses, if any, for such
Collection Period;
(viii) the amount of any Note Interest Shortfall, Note Principal
Shortfall, Certificate Return Shortfall and Certificate Balance Shortfall
(each as defined in the related Prospectus Supplement), if any, in each
case as applicable to each class of Securities, and the change in such
amounts from the preceding statement;
(ix) the amount of any Carryover Servicing Fee paid to the Servicer
with respect to such Collection Period;
39
<PAGE>
(x) the amount of any Note Interest Carryover and Certificate Return
Carryover (each as defined in the related Prospectus Supplement), if any,
in each case as applicable to each class of Securities, and the change in
such amounts from the preceding statement;
(xi) the aggregate Purchase Amounts for Trust Student Loans, if any,
that were repurchased by the Seller or purchased by the Servicer from the
Trust in such Collection Period;
(xii) the balance of Trust Student Loans that are delinquent in each
delinquency period as of the end of such Collection Period; and
(xiii) the balance of the Reserve Account (if any) on such
Distribution Date, after giving effect to changes therein on such
Distribution Date.
Each amount set forth pursuant to subclauses (i), (ii), (v), (viii), (ix)
and (x) with respect to the Notes or the Certificates of any series will be
expressed as a dollar amount per $1,000 of the initial principal balance of such
Notes or the initial Certificate Balance of such Certificates, as applicable.
EVIDENCE AS TO COMPLIANCE
Each Administration Agreement will provide that a firm of independent
public accountants will furnish to the related Trust and Indenture Trustee
annually a report (based on the examination of certain documents and records and
on such accounting and auditing procedures considered appropriate under the
circumstances) attesting to the assertion of the Administrator's management
about compliance by the Administrator during the preceding twelve months (or, in
the case of the first such certificate, the period from the applicable Closing
Date) with the terms of such Administration Agreement, including all statutory
provisions incorporated therein.
Each Administration Agreement will also provide for delivery to the related
Trust and Indenture Trustee, concurrently with the delivery of each report of
compliance referred to above, of a certificate signed by an officer of the
Administrator stating that, to his knowledge, the Administrator has fulfilled
its obligations under such Administration Agreement throughout the preceding
twelve months (or, in the case of the first such certificate, the period from
the applicable Closing Date) or, if there has been a material default in the
fulfillment of any such obligation, describing each such default. The
Administrator has agreed to give the related Indenture Trustee and Eligible
Lender Trustee notice of certain Administrator Defaults under such
Administration Agreement.
Copies of such reports and certificates may be obtained by Securityholders
by a request in writing addressed to the applicable Trustee.
TRADING INFORMATION
WEIGHTED AVERAGE LIFE OF THE SECURITIES
The weighted average life of the Notes and the Certificates of any series
will generally be influenced by the rate at which the principal balances of the
related Trust 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 Consolidation
Loans and Federal Direct Consolidation Loans), as a result of refinancings, or
borrower default, death, disability or bankruptcy and subsequent liquidation or
collection of Guarantee Payments with respect thereto and as a result of Student
Loans being repurchased by the Seller or the Servicer as required or as
permitted by the Sale Agreements or the Servicing Agreements. 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. Borrowers may refinance their Student Loans under the FFELP or DSLP
through Consolidation Loans offered by FFELP lenders or Federal Direct
Consolidation Loans
40
<PAGE>
offered by the Department. In addition, the Servicing Agreements may
specifically provide that Sallie Mae may solicit borrowers of Trust Student
Loans to elect to refinance such Trust Student Loans with Consolidation Loans.
Although it is impossible to predict the rate of prepayment as a result of
Consolidation Loans, the terms prescribed by the Act for Consolidation Loans may
be attractive for certain borrowers. If requested by a borrower with a Trust
Student Loan, the Servicer will, under certain circumstances, on behalf of the
related Trust, sell the borrower's Student Loan to another lender which will
continue to hold the remaining Student Loans of such borrower in order to permit
unified billing of the borrower's account. In addition, under certain
circumstances, the Seller will be obligated to repurchase Student Loans from a
given Trust pursuant to the related Sale Agreement as a result of breaches of
representations and warranties and the Servicer will be obligated to purchase
Student Loans from such Trust pursuant to the related Servicing Agreement as a
result of breaches by the Servicer of certain covenants. See "Transfer and
Servicing Agreements -- Sale of Student Loans to the Trust; Representations and
Warranties of the Seller" and "Servicing -- Servicer Covenants." See also
"Formation of the Trusts -- Termination" 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 Seller occurs.
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. In addition, certain of the terms of payment
offered to Student Loan borrowers by Sallie Mae may have the effect of extending
the rate of payment of principal of the Notes and distributions in respect of
the Certificate Balance of the Certificates. As discussed under "The Student
Loan Pools -- Sallie Mae's Student Loan Financing Business," Sallie Mae offers
certain borrowers loan payment terms which provide for an "interest only" period
in which case no required payments of the principal of the loan are required or
"graduated phased in" amortization of the principal of the loan in which case a
greater portion of the principal amortization of the loan is required in the
later stages of the loan than would be the case if amortization were on a level
payment basis. Sallie Mae also offers an income-sensitive repayment plan,
pursuant to which repayments are based on the borrower's income. Under the plan,
ultimate repayment may be delayed up to five years. To the extent that borrowers
with Trust Student Loans are offered and elect such payment terms, payment of
the principal of the related Notes and the Certificate Balance of the
Certificates could be affected. If and to the extent provided in the related
Prospectus Supplement, a Trust may elect to offer Consolidation Loans to
borrowers with Trust Student Loans and other Student Loans. The making of
Consolidation Loans by a Trust could increase the average life of the related
Notes and Certificates and reduce the effective yield on Student Loans included
in the Trust.
The Servicing Agreements will provide that, subject to compliance with
certain conditions, the Servicer will offer, at the request of Sallie Mae,
certain incentive payment programs or repayment term programs currently or
hereafter made available by Sallie Mae, to borrowers with Trust Student Loans.
To the extent that such benefits are made available to borrowers with Trust
Student Loans, the effect of such benefits may be faster amortization of
principal of the affected Trust Student Loans. See "The Student Loan Pools --
Sallie Mae's Student Loan Financing Business -- Incentive Programs."
The rate of payment of principal of and interest on the Notes and
distributions in respect of the Certificate Balance of and return on the
Certificates may also be affected by the rate of defaults on Trust Student
Loans, or on Student Loans generally, which may affect the ability of the
Guarantee Agencies to make Guarantee Payments with respect to Trust Student
Loans in a timely manner.
In light of the above considerations, there can be no assurance as to the
amount of principal payments to be made on the Notes or distributions in respect
of the Certificate Balance of Certificates of a given series on each
Distribution Date, since such amount will depend, in part, on the amount of
principal collected on the related pool of Student Loans during the applicable
Collection Period. Any reinvestment risks resulting from a faster or slower
incidence of prepayment of Student Loans will be borne entirely by the
Noteholders and the Certificateholders of a given series. The related Prospectus
Supplement may set forth certain additional information with respect to the
maturity and prepayment considerations applicable to the particular pool of
Student Loans and the related series of Securities.
41
<PAGE>
POOL FACTORS AND TRADING INFORMATION
Each of the "Note Pool Factor" for each class of Notes and the "Certificate
Pool Factor" for each class of Certificates (each, a "Pool Factor") will be a
seven-digit decimal which the Administrator will compute prior to each
Distribution Date indicating the remaining outstanding principal balance of such
class of Notes or the remaining Certificate Balance for such class of
Certificates, respectively, as of that Distribution Date (after giving effect to
distributions to be made on such Distribution Date), as a fraction of the
initial outstanding principal balance of such class of the Notes or the initial
Certificate Balance, for such class of Certificates, respectively. Each Pool
Factor will be 1.0000000 as of the Closing Date, or as specified in the
applicable Prospectus Supplement, and thereafter will decline to reflect
reductions in the outstanding principal balance of the applicable class of Notes
or reductions of the Certificate Balance of the applicable class of
Certificates, as applicable. A Securityholder's portion of the aggregate
outstanding principal balance of the related class of Notes or of the aggregate
outstanding Certificate Balance for the related class of Certificates, as
applicable, will be the product of (i) the original denomination of that
Securityholder's Note or Certificate and (ii) the applicable Pool Factor.
With respect to each Trust, the Securityholders will receive reports on or
about each Distribution Date concerning the Payments received on the related
Trust Student Loans, the Pool Balance (as such is defined in the related
Prospectus Supplement, the "Pool Balance"), the applicable Pool Factor and
various other items of information, or as set forth in the related Prospectus
Supplement. Securityholders of record during any calendar year will be furnished
information for tax reporting purposes not later than the latest date permitted
by law. See "Certain Information Regarding the Securities -- Reports to
Securityholders."
42
<PAGE>
DESCRIPTION OF THE NOTES
GENERAL
With respect to each Trust, one or more classes of Notes of a given series
will be issued pursuant to the terms of an Indenture, a form of which has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. The following summary describes certain terms of the Notes and the
Indenture.
Each class of Notes will each 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 Servicer, the "Depository") except as
set forth below, or as set forth 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, or as set forth in the related Prospectus
Supplement. The Seller has been informed by DTC that DTC's nominee will be Cede,
unless another nominee is specified in the related Prospectus Supplement.
Accordingly, such nominee is expected to be the holder of record of the Notes of
each class in book entry form. Unless and until Definitive Notes are issued
under the limited circumstances described herein or in the related Prospectus
Supplement, no Noteholder of Notes in book-entry form will be entitled to
receive a physical certificate representing a Note. All references herein and in
the related Prospectus Supplement to actions by Noteholders of Notes in
book-entry form refer to actions taken by DTC upon instructions from its
participating organizations (the "Participants") and all references herein to
distributions, notices, reports and statements to Noteholders of Notes in
book-entry form refer to distributions, notices, reports and statements to DTC
or its nominee, as the registered holder of the Notes, as the case may be, for
distribution to Noteholders in accordance with DTC's procedures with respect
thereto. See "Certain Information Regarding the Securities -- Book-Entry
Registration" and "-- Definitive Securities."
PRINCIPAL AND INTEREST ON THE NOTES
The timing and priority of payment, seniority, allocations of losses, Note
Rate and amount of or method of determining payments of principal and interest
on each class of Notes of a given series will be described in the related
Prospectus Supplement. The right of holders of any class of Notes to receive
payments of principal and interest may be senior or subordinate to the rights of
holders of any other class or classes of Notes of such series, as described in
the related Prospectus Supplement. Payments of interest on the Notes of such
series will be made prior to payments of principal thereon, or as set forth in
the related Prospectus Supplement. Each class of Notes may have a different Note
Rate, which may be a fixed, variable or adjustable Note Rate or any combination
of the foregoing. The related Prospectus Supplement will specify the Note Rate
for each class of Notes of a given series or the method for determining such
Note Rate. See also "Certain Information Regarding the Securities -- Fixed Rate
Securities" and "-- Floating Rate Securities." One or more classes of 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 Servicer's
exercising its option to purchase the related Trust Student Loans.
Under certain circumstances, the amount available for such payments could
be less than the amount of interest payable on the Notes on any of the dates
specified for payments in the related Prospectus Supplement (each, a
"Distribution Date"), in which case each class of Noteholders will receive its
ratable share (based upon the aggregate amount of interest due to such class of
Noteholders) of the aggregate amount available to be distributed in respect of
interest on the Notes of such series. See "Certain Information Regarding the
Securities -- Distributions" and "-- Credit and Cash Flow Enhancement."
In the case of a series of Notes which includes two or more classes of
Notes, the sequential order and priority of payment in respect of principal and
interest, and any schedule or formula or other provisions applicable to the
determination thereof, of each such class will be set forth in the related
43
<PAGE>
Prospectus Supplement. Payments in respect of principal and interest of any
class of Notes will be made on a pro rata basis among all the Noteholders of
such class.
THE INDENTURE
General. Notes of any Trust will be issued under and secured by an
Indenture entered into by such Trust, the related Eligible Lender Trustee and
the related Indenture Trustee. The following is a summary of certain terms of
each Indenture, a form of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. However, the summary does not
purport to be complete and is qualified in its entirety by reference to all
provisions of 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 Eligible Lender Trustee 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.
Without the consent of the holder of each such outstanding Note affected
thereby, no supplemental indenture will (i) change the due date of any
installment of principal of or interest on any such Note or reduce the principal
amount thereof, the interest rate specified thereon or the redemption price with
respect thereto or change the provisions of the related Indenture relating to
the application of collections on, or the proceeds of the sale of, the Trust
Student Loans to payment of principal of or interest on the Notes or change any
place of payment where or the coin or currency in which any such Note or any
interest thereon is payable, (ii) impair the right to institute suit for the
enforcement of certain provisions of the related Indenture regarding payment,
(iii) reduce the percentage of the aggregate amount of the outstanding Notes of
such series, the consent of the holders of which is required for any such
supplemental indenture or the consent of the holders of which is required for
any waiver of compliance with certain provisions of the related Indenture or of
certain defaults thereunder and their consequences as provided for in such
Indenture, (iv) modify or alter the provisions of the related Indenture
regarding the voting of Notes held by the applicable Trust, the Seller or an
affiliate of either of them, (v) reduce the percentage of the aggregate
outstanding amount of such Notes, the consent of the holders of which is
required to direct the related Eligible Lender Trustee on behalf of the
applicable Trust to sell or liquidate the Student Loans if the proceeds of such
sale would be insufficient to pay the principal amount and accrued but unpaid
interest on the outstanding Notes of such series, (vi) modify the provisions of
the related Indenture which specify the applicable percentages of aggregate
principal amount of Notes necessary to take specified actions except to increase
any such percentage or to specify additional such provisions, (vii) modify any
of the provisions of the related Indenture in such manner as to affect the
calculation of the amount of any payment of interest or principal due on any
Note on any Distribution Date or to affect the rights of the Noteholders to the
benefit of any provisions for the mandatory redemption of the Notes contained
therein, or (viii) permit the creation of any lien ranking prior to or on a
parity with the lien of the related Indenture with respect to any of the
collateral for the Notes of such series or, except as otherwise permitted or
contemplated in such Indenture, terminate the lien of such Indenture on any such
collateral or deprive the holder of any Note of the security afforded by the
lien of such Indenture, or as set forth in the related Prospectus Supplement
with respect to a series of Notes.
The applicable Trust and the related Indenture Trustee may also enter into
supplemental indentures, without obtaining the consent of Noteholders of such
series, for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the related Indenture or of modifying in
any manner the rights of Noteholders of such series so long as such action will
not, in the opinion of counsel satisfactory to the applicable Indenture Trustee,
adversely affect in any material respect the interest of any Noteholder of such
series.
Events of Default; Rights Upon Event of Default. With respect to the Notes
of a given series, an "Event of Default" under the related Indenture will
consist of the following: (i) a default for five business days or more in the
payment of any interest on any such Note after the same becomes due and payable;
(ii) a default in the payment of the principal of any such Note when the same
becomes due and
44
<PAGE>
payable at maturity; (iii) a default in the observance or performance of any
covenant or agreement of the applicable Trust made in the related Indenture, or
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 when made, such default or
breach having a material adverse effect on the holders of the Notes and such
default or breach not having been cured within thirty days after notice thereof
is given to such Trust by the applicable Indenture Trustee or to such Trust and
the applicable Indenture Trustee by the holders of at least 25% in principal
amount of the Notes of such series then outstanding or (iv) certain events of
bankruptcy, insolvency, receivership or liquidation of such Trust, or as set
forth in the related Prospectus Supplement. However, the amount of principal
required to be distributed to Noteholders of such series under the related
Indenture on any Distribution Date will generally be limited to amounts
available after payment of all prior obligations of such Trust. Therefore, the
failure to pay principal on a class of Notes generally will not result in the
occurrence of any Event of Default until the final scheduled Distribution Date
for such class of Notes, or as set forth in the related Prospectus Supplement.
If an Event of Default should occur and be continuing with respect to the
Notes of any series, the related Indenture Trustee or holders of a majority in
principal amount of such Notes then outstanding may declare the principal of
such Notes to be immediately due and payable. Such declaration may, under
certain circumstances, be rescinded by the holders of a majority in principal
amount of such Notes then outstanding, or as set forth in the related Prospectus
Supplement.
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, (i) exercise remedies as a secured party with
respect to the property, including the Trust Student Loans, subject to the lien
of the Indenture (the "Indenture Trust Estate"), (ii) sell the Indenture Trust
Estate and/or (iii) elect to have the related Eligible Lender Trustee maintain
ownership of the Trust Student Loans and continue to apply collections with
respect to the Trust Student Loans as if there had been no declaration of
acceleration. However, the related Indenture Trustee is prohibited from selling
the Indenture Trust Estate following an Event of Default, other than a default
in the payment of any principal or a default for five days or more in the
payment of any interest on any Note with respect to any series, unless (i) the
holders of all such outstanding Notes consent to such sale, (ii) the proceeds of
such sale are sufficient to pay in full the principal of and the accrued
interest on such outstanding Notes at the date of such sale or (iii) the related
Indenture Trustee determines that the collections on the Indenture Trust Estate
would not be sufficient on an ongoing basis to make all payments on such Notes
as such payments would have become due if such obligations had not been declared
due and payable, and the related Indenture Trustee obtains the consent of the
holders of 66 2/3% of the aggregate principal amount of such Notes then
outstanding, or as set forth in the related Prospectus Supplement.
Subject to the provisions of the applicable Indenture relating to the
duties of the related Indenture Trustee, if an Event of Default should occur and
be continuing with respect to a series of Notes, the related Indenture Trustee
will be under no obligation to exercise any of the rights or powers under the
applicable Indenture at the request or direction of any of the holders of such
Notes, if such Indenture Trustee reasonably believes it will not be adequately
indemnified against the costs, expenses and liabilities which might be incurred
by it in complying with such request. Subject to such provisions for
indemnification and certain limitations contained in the related Indenture, the
holders of a majority in principal amount of the outstanding Notes of a given
series will have the right to direct the time, method and place of conducting
any proceeding or any remedy available to such Indenture Trustee and the holders
of a majority in principal amount of such Notes then outstanding may, in certain
cases, waive any default with respect thereto, except a default in the payment
of principal or interest or a default in respect of a covenant or provision of
the applicable Indenture that cannot be modified without the waiver or consent
of all the holders of such outstanding Notes.
No holder of Notes of any series will have the right to institute any
proceeding with respect to the related Indenture, unless (i) such holder
previously has given to the applicable Indenture Trustee written notice of a
continuing Event of Default, (ii) the holders of not less than 25% in principal
amount of such outstanding Notes have requested in writing that such Indenture
Trustee institute such proceeding in its
45
<PAGE>
own name as Indenture Trustee, (iii) such holder or holders have offered such
Indenture Trustee reasonable indemnity, (iv) such Indenture Trustee has for 60
days after receipt of notice failed to institute such proceeding and (v) no
direction inconsistent with such written request has been given to such
Indenture Trustee during such 60-day period by the holders of a majority in
principal amount of such outstanding Notes, or as set forth in the related
Prospectus Supplement.
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, Sallie
Mae, the Seller, the Administrator, the Servicer or the Eligible Lender Trustee
in its individual capacity, nor any holder of a Certificate representing an
ownership interest in the applicable Trust, nor 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 liable for the
payment of the principal of or interest on the Notes or for the agreements of
the Trust contained in the Indenture.
Certain Covenants. Each Indenture will provide that the related Trust may
not consolidate with or merge into any other entity, unless (i) the entity
formed by or surviving such consolidation or merger is organized under the laws
of the United States, any state or the District of Columbia, (ii) such entity
expressly assumes such Trust's obligation to make due and punctual payments upon
the Notes of the related series and the performance or observance of every
agreement and covenant of such Trust under the related Indenture, (iii) no
default will have occurred and be continuing immediately after such merger or
consolidation, (iv) such Trust has been advised that the rating of the Notes and
the Certificates of the related series would not be reduced or withdrawn by the
Rating Agencies as a result of such merger or consolidation and (v) such Trust
has received an opinion of Federal Tax Counsel and counsel with respect to
certain Delaware state tax matters to the effect that such consolidation or
merger would have no material adverse federal or Delaware state tax consequence
to such Trust or to any Certificateholder or Noteholder of the related series.
Each Trust will not, among other things, (i) except as expressly permitted
by the applicable Indenture, the applicable Transfer and Servicing Agreements or
certain related documents (collectively, the "Related Documents"), sell,
transfer, exchange or otherwise dispose of any of the assets of such Trust, (ii)
claim any credit on or make any deduction from the principal and interest
payable in respect of the Notes of the related series (other than amounts
withheld under the Code or applicable state law) or assert any claim against any
present or former holder of such Notes because of the payment of taxes levied or
assessed upon such Trust, (iii) except as contemplated by the Related Documents,
dissolve or liquidate in whole or in part, (iv) permit the validity or
effectiveness of the applicable Indenture to be impaired or permit any person to
be released from any covenants or obligations with respect to such Notes under
the applicable Indenture except as may be expressly permitted thereby or (v)
permit any lien, charge, excise, claim, security interest, mortgage or other
encumbrance to be created on or extend to or otherwise arise upon or burden the
assets of the Trust or any part thereof, or any interest therein or the proceeds
thereof, except as expressly permitted by the Related Documents.
No Trust may engage in any activity other than as specified under the
section of the related Prospectus Supplement entitled "Formation of the Trust --
The Trust." No Trust will incur, assume or guarantee any indebtedness other than
indebtedness incurred pursuant to the Notes of a 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 related 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, any changes to its eligibility and qualification to continue as
such Indenture Trustee under the applicable Indenture, any amounts advanced by
it under the Indenture, the amount, interest rate and maturity date of certain
indebtedness owing by such Trust to the applicable Indenture Trustee in its
individual capacity, the property and funds
46
<PAGE>
physically held by the applicable Indenture Trustee as such and any action taken
by it that materially affects the related Notes and that has not been previously
reported.
Satisfaction and Discharge of Indenture. An Indenture will be discharged
with respect to the collateral securing the related Notes upon the delivery to
the related Indenture Trustee for cancellation of all such Notes or, with
certain limitations, upon deposit with such Indenture Trustee of funds
sufficient for the payment in full of all such Notes.
The Indenture Trustee. The Indenture Trustee for a series of Notes will be
specified in the related Prospectus Supplement. The Indenture Trustee for any
series may resign at any time, in which event the Eligible Lender Trustee will
be obligated to appoint a successor Indenture Trustee for such series. The
Eligible Lender Trustee may also remove any such Indenture Trustee that ceases
to be eligible to continue as such under the related Indenture or if such
Indenture Trustee becomes insolvent. In such circumstances, the Eligible Lender
Trustee will be obligated to appoint a successor trustee for the applicable
series of Notes. Any resignation or removal of the Indenture Trustee for any
series of Notes does not become effective until appointment of and acceptance of
the appointment by a successor trustee for such series.
47
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
With respect to each Trust, one or more classes of Certificates of a given
series will be issued pursuant to the terms of a Trust Agreement, a form of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. Such class or classes of Certificates may be offered
publicly, privately or may be retained by the Seller, in each case as specified
in the related Prospectus Supplement. The following summary describes certain
terms of the Certificates and the Trust Agreement. The summary does not purport
to be complete and is qualified in its entirety by reference to all the
provisions of the Certificates and the Trust Agreement. See "Formation of the
Trusts."
The Certificates will be available for purchase in minimum denominations of
$100,000 and integral multiples of $1,000 in excess thereof in book-entry form
only, or as set forth in the related Prospectus Supplement. The Seller has been
informed by DTC that DTC's nominee will be Cede, unless another nominee is
specified in the related Prospectus Supplement. Accordingly, such nominee is
expected to be the holder of record of the Certificates of any series in
book-entry form that are not held by the Seller. Unless and until Definitive
Certificates are issued under the limited circumstances described herein or in
the related Prospectus Supplement, no Certificateholder (other than the Seller)
of Certificates in book-entry form will be entitled to receive a physical
certificate representing a Certificate. All references herein and in the related
Prospectus Supplement to actions by Certificateholders of Certificates in book-
entry form refer to actions taken by DTC upon instructions from the Participants
and all references herein and in the related Prospectus Supplement to
distributions, notices, reports and statements to Certificateholders of
Certificates in book-entry form refer to distributions, notices, reports and
statement to DTC or its nominee, as the registered holder of the Certificates,
as the case may be, for distribution to Certificateholders in accordance with
DTC's procedures with respect thereto. See "Certain Information Regarding the
Securities -- Book-Entry Registration" and "-- Definitive Securities."
Certificates of a given series owned by the Seller or its affiliates will be
entitled to equal and proportionate benefits under the applicable Trust
Agreement, except that such Certificates will be deemed not to be outstanding
for the purpose of disapproving the termination of the related Trust upon the
occurrence of an Insolvency Event with respect to the Seller as described under
"Formation of the Trusts -- Insolvency Event"), or as set forth in the related
Prospectus Supplement.
DISTRIBUTIONS IN RESPECT OF THE CERTIFICATE BALANCE OF THE CERTIFICATES
The timing and priority of distributions, seniority, allocations of losses,
Certificate Rate and amount of or method of determining distributions in respect
of the Certificate Balance of each class of Certificates of a given series will
be described in the related Prospectus Supplement. Distributions of return on
such Certificates will be made on each Distribution Date and will be made prior
to distributions in respect of the Certificate Balance of such Certificates.
Each class of Certificates may have a different Certificate Rate, which may be
fixed, variable or adjustable or any combination of the foregoing. The related
Prospectus Supplement will specify the Certificate Rate for each class of
Certificates of a given series or the method for determining such Certificate
Rate. See also "Certain Information Regarding the Securities -- Fixed Rate
Securities" and "-- Floating Rate Securities." Unless otherwise provided in the
related Prospectus Supplement, distributions in respect of the Certificates of a
given series may be subordinate to payments in respect of the Notes of such
series as more fully described in the related Prospectus Supplement.
Distributions in reduction of the Certificate Balance of any class of
Certificates will be made on a pro rata basis among all the Certificateholders
of such class.
In the case of a series of Certificates which includes two or more classes
of Certificates, the timing, sequential order, priority of payment or amount of
distributions in reduction of the Certificate Balance, and any schedule or
formula or other provisions applicable to the determination thereof, of each
such class shall be as set forth in the related Prospectus Supplement.
48
<PAGE>
CERTAIN INFORMATION REGARDING THE SECURITIES
FIXED RATE SECURITIES
Each class of Securities may bear interest or yield a return at a fixed
rate per annum ("Fixed Rate Securities") or at a variable or adjustable rate per
annum ("Floating Rate Securities"), as more fully described below and in the
applicable Prospectus Supplement. Each class of Fixed Rate Securities will bear
interest or yield a return at the applicable per annum Note Rate or Certificate
Rate, as the case may be, specified in the applicable Prospectus Supplement. See
"Description of the Notes -- Principal and Interest on the Notes" and
"Description of the Certificates -- Distributions in Respect of the Certificate
Balance of the Certificates."
FLOATING RATE SECURITIES
Each class of Floating Rate Securities will bear interest or yield a return
for each applicable "Reset Period" or "Accrual Period" (as such terms are
defined in the related Prospectus Supplement with respect to a class of Floating
Rate Securities) at a rate per annum determined by reference to a rate basis
(the "Base Rate"), plus or minus the Spread, if any, or multiplied by the Spread
Multiplier, if any, in each case as specified in the related Prospectus
Supplement. The "Spread" is the number of basis points (one basis point equals
one one-hundredth of a percentage point) that may be specified in the applicable
Prospectus Supplement as being applicable to such class, and the "Spread
Multiplier" is the percentage that may be specified in the applicable Prospectus
Supplement as being applicable to such class.
The applicable Prospectus Supplement will designate a Base Rate for a given
Floating Rate Security based on London Interbank Offered Rates, commercial paper
rates, Federal funds rates, U.S. Government treasury securities rates,
negotiable certificates of deposit rates or another rate or rates as set forth
in such Prospectus Supplement.
As specified in the applicable Prospectus Supplement, Floating Rate
Securities of a given class may also have either or both of the following (in
each case expressed as a rate per annum): (i) a maximum limitation, or ceiling,
on the Note Rate or the Certificate Rate during any Reset Period or Accrual
Period and (ii) a minimum limitation, or floor, on the Note Rate or the
Certificate Rate during any Reset Period or Accrual Period. In addition to any
maximum Note Rate or Certificate Rate that may be applicable to any class of
Floating Rate Securities, the Note Rate or Certificate Rate applicable to any
class of Floating Rate Securities will in no event be higher than the maximum
rate permitted by applicable law, as the same may be modified by United States
law of general application.
Each Trust with respect to which a class of Floating Rate Securities will
be issued, will appoint, and enter into agreements with, a calculation agent,
which will be the Administrator unless otherwise specified in the related
Prospectus Supplement (the "Calculation Agent"), to calculate Note Rates and
Certificate Rates on each such class of Floating Rate Securities issued with
respect thereto. All determinations of the Note Rate and the Certificate Rate by
the Calculation Agent will, in the absence of manifest error, be conclusive for
all purposes and binding on the holders of Floating Rate Securities of a given
class. All percentages resulting from any calculation of the Note Rate or the
Certificate Rate on a Floating Rate Security will be rounded, if necessary, to
the nearest 1/100,000 of 1% (.0000001), with five one-millionths of a percentage
point rounded upward, or as set forth in the related Prospectus Supplement.
DISTRIBUTIONS
With respect to each series of Securities, beginning on the Distribution
Date specified in the related Prospectus Supplement, distributions of principal
and interest on each class of Notes and amounts in respect of the Certificate
Balance of and return on each class of Certificates of such Securities entitled
thereto will be made by the applicable Trustee to the Noteholders and the
Certificateholders, as applicable, of such series. The timing, calculation,
allocation, order, source, priorities of and
49
<PAGE>
requirements for all payments to each class of Noteholders and all distributions
to each class of Certificateholders of such series will be set forth in the
related Prospectus Supplement.
With respect to each Trust, on each Distribution Date, collections on or
with respect to the related Trust Student Loans will be distributed from the
Collection Account to Noteholders and Certificateholders to the extent provided
in the related Prospectus Supplement. Credit and cash flow enhancement, such as
a Reserve Account, will be available to cover any shortfalls in the amount
available for distribution on such date to the extent specified in the related
Prospectus Supplement. As more fully described in the related Prospectus
Supplement, distributions in respect of the principal amount of Notes and in
respect of the Certificate Balance of Certificates of a class of a given series
will be subordinate to distributions in respect of interest or return on such
class, and distributions in respect of the Certificates of such series will, to
the extent provided in the related Prospectus Supplement, be subordinate to
payments in respect of the Notes of such series. With respect to a series that
includes two or more classes of Certificates, each class may differ as to timing
and priority of distributions in respect of the Certificate Balance thereof and
return thereon.
CREDIT AND CASH FLOW ENHANCEMENT
General. The amounts and types of credit enhancement arrangements and the
provider thereof, if applicable, with respect to each class of Securities of a
given series, if any, will be set forth in the related Prospectus Supplement. If
and to the extent provided in the related Prospectus Supplement, credit
enhancement may be in the form of subordination of one or more classes of
Securities, Reserve Accounts, overcollateralization, letters of credit, cash
collateral accounts, financial insurance, commitment agreements, credit or
liquidity facilities, surety bonds, guaranteed investment contracts, repurchase
obligations, other agreements with respect to third party payments or other
support, cash deposits or such other arrangements as may be described in the
related Prospectus Supplement or any combination of two or more of the
foregoing. If specified in the applicable Prospectus Supplement, credit
enhancement for a class of Securities may cover one or more other classes of
Securities of the same series, and credit enhancement for a series of Securities
may cover one or more other series of Securities.
The presence of a Reserve Account and other forms of credit or liquidity
enhancement for the benefit of any class or series of Securities is intended to
enhance the likelihood of receipt by the Securityholders of such class or series
of the full amount of distributions due thereon when due and to decrease the
likelihood that such Securityholders will experience losses. The credit
enhancement for a class or series of Securities will not provide protection
against all risks of loss and will not guarantee repayment of all distributions
thereon, or as set forth in the related Prospectus Supplement. If losses occur
which exceed the amount covered by any credit enhancement or which are not
covered by any credit enhancement, Securityholders of any class or series will
bear their allocable share of deficiencies, as described in the related
Prospectus Supplement. In addition, if a form of credit enhancement covers more
than one series of Securities, Securityholders of any such series will be
subject to the risk that such credit enhancement will be exhausted by the claims
of Securityholders of other series.
Reserve Account. If so provided in the related Prospectus Supplement,
pursuant to the related Sale Agreement, the Administrator will establish a
Reserve Account for a series or class of Securities, as specified in the related
Prospectus Supplement which will be maintained in the name of the applicable
Indenture Trustee. The Reserve Account will be funded by an initial deposit by
the Trust 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 may be increased on each Distribution
Date thereafter up to the Specified Reserve Account Balance (as defined in the
related Prospectus Supplement) by the deposit therein of the amount of any
collections on the related Trust Student Loans remaining on each such
Distribution Date after the payment of all other required payments and
distributions on such date. The related Prospectus Supplement will describe the
circumstances and manner in which distributions may be made out of the Reserve
Account, either to holders of the Securities covered thereby or to the Seller.
50
<PAGE>
BOOK-ENTRY REGISTRATION
Securityholders of Securities in book-entry form may hold their Securities
through DTC (in the United States) or Cedel or Euroclear (in Europe) if they are
participants of such systems, or indirectly through organizations which are
participants in such systems.
Cede & Co., as nominee for DTC, will hold one or more global Notes and
Certificates. Cedel and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in Cedel's and Euroclear's
names on the books of their respective Depositaries which in turn will hold such
positions in customers' securities accounts in the Depositaries' names on the
books of DTC. Select entities (referred to as common depositaries) will, if
applicable, act as depositary for Cedel and Euroclear (in such capacities, the
"Depositaries"). Transfers between DTC participants will occur in the ordinary
way in accordance with DTC rules. Transfers between Cedel Participants and
Euroclear Participants will occur in the ordinary way in accordance with their
applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel or
Euroclear participants, on the other, will be effected in DTC in accordance with
DTC rules on behalf of the relevant European international clearing system by
its Depositary; however, such cross-market transactions will require delivery of
instructions to the relevant European international clearing system by the
counterparty in such system in accordance with its rules and procedures and
within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its Depositary to take action to effect
final settlement on its behalf by delivering or receiving securities in DTC, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to DTC. Cedel Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a DTC participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedel participant on such business day. Cash received in Cedel or
Euroclear as a result of sales of securities by or through a Cedel Participant
or a Euroclear Participant to a DTC 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
additional information regarding clearance and settlement procedures for the
Securities, see Appendix B hereto and for information with respect to tax
documentation procedures relating to the Securities, see Appendix B hereto and
"Certain Federal Income Tax Consequences -- Foreign Holders."
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 New York UCC and a "clearing agency"
registered pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for its Participants and to facilitate the clearance and settlement
of securities transactions between Participants through electronic book-entries,
thereby eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations. Indirect access to the DTC system also is available to others such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
("Indirect Participants").
Securityholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Securities may do so only through Participants and Indirect Participants, or
as set forth in the related Prospectus Supplement. In addition, Securityholders
will receive all distributions from the related Indenture Trustee or the related
Eligible Lender Trustee, as applicable (the "Applicable Trustee"), through
Participants and Indirect Participants. Under a book-entry format,
Securityholders may experience some delay in their receipt of payments, since
such payments will be forwarded by the Applicable Trustee to DTC's Nominee. DTC
will forward
51
<PAGE>
such payments to its Participants, which thereafter will forward them to
Indirect Participants or Securityholders. Except for the Seller with respect to
any series of Securities, it is anticipated that the only "Securityholder,"
"Certificateholder" and "Noteholder" will be DTC's Nominee. Securityholders will
not be recognized by the Applicable Trustee as Noteholders or
Certificateholders, as such terms are used in each Indenture and each Trust
Agreement, respectively, and Securityholders will be permitted to exercise the
rights of Securityholders only indirectly through DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Securities among Participants on whose behalf it acts with respect to the
Securities and to receive and transmit distributions of amounts payable on the
Securities. Participants and Indirect Participants with which Securityholders
have accounts with respect to the Securities similarly are required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Securityholders. Accordingly, although Securityholders will not
possess Securities, the Rules provide a mechanism by which Participants will
receive payments and will be able to transfer their interests.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to such
Securities, may be limited due to the lack of a physical certificate for such
Securities.
DTC has advised the Seller that it will take any action permitted to be
taken by a Securityholder under the related Indenture or the related Trust
Agreement, as the case may be, only at the direction of one or more Participants
to whose accounts with DTC the Securities are credited. DTC may take conflicting
actions with respect to other undivided interests to the extent that such
actions are taken on behalf of Participants whose holdings include such
undivided interests.
Except as required by law, neither the Administrator nor the Applicable
Trustee will have any liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests of the Securities
held by DTC's Nominee, or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
Cedel Bank, societe anonyme ("Cedel") is incorporated under the laws of
Luxembourg as a professional depositary. 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 numerous currencies, including United States dollars. Cedel
provides to its 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 depositary, Cedel is subject to regulation
by the Luxembourg Monetary Institute. Cedel Participants are recognized
financial institutions around the world, including underwriters, securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations and may include the Underwriters. Indirect access to Cedel
is also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Cedel
Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("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 numerous
currencies, including United States dollars. The Euroclear System 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. The Euroclear
System is operated by Morgan Guaranty Trust Company of New York, Brussels,
Belgium office (the "Euroclear Operator" or "Euroclear"), under contract with
Euroclear Clearance System S.C., a Belgian cooperative corporation (the
"Cooperative").
52
<PAGE>
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
the Euroclear System on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries and may include the Underwriters.
Indirect access to the Euroclear system is also available to other firms that
clear through or maintain a custodial relationship with a Euroclear Participant,
either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System, and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawals of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System 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 Securities 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. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Certain Federal Income Tax Consequences." The Cedel or the Euroclear
Operator, as the case may be, will take any other action permitted to be taken
by a Securityholder under the Agreement on behalf of a Cedel Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to its Depositary's ability to effect such actions on its behalf
through DTC.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Securities among participants of DTC, Cedel
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
DEFINITIVE SECURITIES
Except with respect to the Certificates of a given series that may be held
by the Seller, the Notes and the Certificates of a given series originally in
book-entry form will be issued in fully registered, certificated form
("Definitive Notes" and "Definitive Certificates", respectively, and
collectively referred to herein as "Definitive Securities") to Noteholders or
Certificateholders or their respective nominees, rather than to DTC or its
nominee, only if (i) the related Administrator advises the Applicable Trustee in
writing that DTC is no longer willing or able to discharge properly its
responsibilities as depository with respect to the Securities and the
Administrator is unable to locate a successor, (ii) the Administrator, at its
option, elects to terminate the book-entry system through DTC or (iii) after the
occurrence of an Event of Default, a Servicer Default or an Administrator
Default, Securityholders representing beneficial interests aggregating a
majority of the outstanding principal amount of the Notes or the outstanding
Certificate Balance of the Certificates, as the case may be, of such series
advise the Applicable Trustee through DTC in writing that the continuation of a
book-entry system through DTC (or a successor thereto) with respect to such
Notes or Certificates is no longer in the best interest of the holders of such
Securities, or as set forth in the related Prospectus Supplement.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Applicable Trustee will be required to notify all applicable
Securityholders of a given series through Participants of the availability of
Definitive Securities. Upon surrender by DTC of the definitive securities
53
<PAGE>
representing the corresponding Securities and receipt of instructions for
re-registration, the Applicable Trustee will reissue such Securities as
Definitive Securities to such Securityholders.
Distributions of amounts payable on such Definitive Securities will
thereafter be made by the Applicable Trustee in accordance with the procedures
set forth in the related Indenture or the related Trust Agreement, as the case
may be, directly to holders of Definitive Securities in whose names the
Definitive Securities were registered at the close of business on the applicable
Record Date specified for such Securities in the related Prospectus Supplement.
Such distributions will be made by check mailed to the address of such holder as
it appears on the register maintained by the Applicable Trustee. The final
payment on any such Definitive Security, however, will be made only upon
presentation and surrender of such Definitive Security at the office or agency
specified in the notice of final distribution to applicable Securityholders.
Definitive Securities will be transferable and exchangeable at the offices
of the Applicable Trustee or of a registrar named in a notice delivered to
holders of Definitive Securities. No service charge will be imposed for any
registration of transfer or exchange, but the Applicable Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
LIST OF SECURITYHOLDERS
Three or more holders of the Notes of any series or one or more holders of
such Notes evidencing not less than 25% of the aggregate outstanding principal
balance of such Notes may, by written request to the related Indenture Trustee,
obtain access to the list of all Noteholders maintained by such Indenture
Trustee for the purpose of communicating with other Noteholders with respect to
their rights under the related Indenture or such Notes, or as set forth in the
related Prospectus Supplement. Such Indenture Trustee may elect not to afford
the requesting Noteholders access to the list of Noteholders if it agrees to
mail the desired communication or proxy, on behalf and at the expense of the
requesting Noteholders, to all Noteholders of such series.
Three or more Certificateholders of such series or one or more holders of
such Certificates evidencing not less than 25% of the Certificate Balance of
such Certificates may, by written request to the related Eligible Lender
Trustee, obtain access to the list of all Certificateholders for the purpose of
communicating with other Certificateholders with respect to their rights under
the related Trust Agreement or under such Certificates, or as set forth in the
related Prospectus Supplement.
REPORTS TO SECURITYHOLDERS
With respect to each series of Securities, on each Distribution Date, the
Applicable Trustee will provide to Securityholders of record as of the related
Record Date a statement setting forth substantially the same information as is
required to be provided on the periodic report provided to the related Indenture
Trustee and the related Trust described under "Servicing; Administration --
Statements to Indenture Trustee and Trust."
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of each Trust, the Applicable Trustee
will mail to each person who at any time during such calendar year was a
Securityholder with respect to such Trust and received any payment thereon, a
statement containing certain information for the purposes of such
Securityholder's preparation of federal income tax returns. See "Certain Federal
Income Tax Consequences."
CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS
TRANSFER OF STUDENT LOANS
Sallie Mae intends that the transfer of the Student Loans by it to the
Seller, and the Seller intends that the transfer of the Student Loans by it to
the related Eligible Lender Trustee on behalf of each Trust, will constitute a
valid sale and assignment of such Student Loans. Notwithstanding the foregoing,
if the transfer of the Student Loans by Sallie Mae to the Seller and/or the
transfer of the Student Loans by the
54
<PAGE>
Seller to the Eligible Lender Trustee on behalf of each Trust is deemed to be an
assignment of collateral as security, then a security interest in the Student
Loans may, pursuant to the provisions of 20 U.S.C. sec. 1087-2(d)(3), be
perfected by, among other things, the filing of notice of such security interest
in the manner provided by the applicable Uniform Commercial Code ("UCC") for
perfection of security interests in accounts. A financing statement or
statements naming Sallie Mae as debtor will be filed under the UCC to protect
the interest of the Seller in the event that the transfer by Sallie Mae is
deemed to be an assignment of collateral as security, and a financing statement
or statements naming the Seller as debtor will be filed under the UCC to protect
the interest of the Eligible Lender Trustee in the event that the transfer by
the Seller is deemed to be an assignment of collateral as security.
If the transfer of the Student Loans is deemed to be an assignment as
security for the benefit of the Seller or a Trust, there are certain limited
circumstances in which prior or subsequent transferees of Student Loans could
have an interest in such Student Loans with priority over the related Eligible
Lender Trustee's interest. A tax or other government lien on property of Sallie
Mae or the Seller arising prior to the time a Student Loan comes into existence
may also have priority over the interest of the Seller or the related Eligible
Lender Trustee in such Student Loan. Under the related Purchase Agreement and
Sale Agreement, however, Sallie Mae or the Seller, as applicable, will warrant
that it has transferred the Student Loans to the Seller and the related Eligible
Lender Trustee on behalf of a Trust free and clear of the lien of any third
party. In addition, each of Sallie Mae and the Seller will covenant that it will
not sell, pledge, assign, transfer or grant any lien on any Student Loan (or any
interest therein) other than to the Seller or the related Eligible Lender
Trustee on behalf of a Trust, respectively, except as provided below.
Pursuant to each 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 Seller and the related
Eligible Lender Trustee. Although the records of Sallie Mae, the Seller and
Servicer will be marked to indicate the sale and although Sallie Mae and the
Seller will cause UCC financing statements to be filed with the appropriate
authorities, the Student Loans will not be physically segregated, stamped or
otherwise marked to indicate that such Student Loans have been sold to the
Seller and to such Eligible Lender Trustee. If, through inadvertence or
otherwise, any of such Student Loans were sold to another party that (i)
purchased such Student Loans in the ordinary course of its business, (ii) took
possession of such Student Loans, and (iii) acquired the Student Loans for new
value and without actual knowledge of the related Eligible Lender Trustee's
interest, then such purchaser would acquire an interest in the Student Loans
superior to the interest of the Seller and the Eligible Lender Trustee. See
"Transfer and Servicing Agreements -- Sale of Student Loans to the Trust;
Representations and Warranties of the Seller."
With respect to each Trust, in the event of a Servicer Default resulting
solely from certain events of insolvency or bankruptcy that may occur with
respect to the Servicer, a court, 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 "Servicing -- 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, unless preempted by federal law, some state laws impose finance
charge ceilings and other restrictions on certain consumer transactions and
require contract disclosures in addition to those required under federal law.
These requirements impose specific statutory liabilities upon lenders who fail
to comply with their provisions. In certain circumstances, the Seller or a Trust
may be liable for certain violations of consumer protection laws that apply to
the Student Loans, either as assignee from Sallie Mae or the Seller 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
"Transfer and Servicing Agreements -- Sale of Student Loans to the Trust;
Representations and Warranties of the Seller" and "Servicing -- Servicer
Covenants."
55
<PAGE>
LOAN ORIGINATION AND SERVICING PROCEDURES APPLICABLE TO STUDENT LOANS
The Act, including the implementing regulations thereunder, imposes
specified requirements with respect to originating and servicing student loans
such as the Student Loans. Generally, those procedures require that a
determination of whether an applicant is an eligible borrower under applicable
standards (including 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 forbearance and credit the borrower for payments made thereon. If
a borrower becomes delinquent in repaying a loan, a lender or a servicing agent
must perform certain collection procedures (primarily telephone calls and demand
letters) which vary depending upon the length of time a loan is delinquent. The
Servicer has agreed pursuant to the related Servicing Agreement to perform
collection and servicing procedures on behalf of the related Trust. However,
failure to follow these procedures or failure of the Seller to follow procedures
relating to the origination of the Student Loans could result in adverse
consequences. Any such failure could result in the Department's refusal to make
reinsurance payments to the Guarantee Agencies or the Department's or the
Guarantee Agencies" refusal to make Program Payments to the Eligible Lender
Trustee with respect to such Student Loans. Failure of the Guarantee Agencies to
receive reinsurance payments from the Department could adversely affect the
Guarantee Agencies" ability or legal obligation to make Guarantee Payments to
the related Eligible Lender Trustee with respect to such Student Loans.
Loss of any such Program Payments could adversely affect the amount of
Available Funds on any Distribution Date and the related Trust's ability to pay
principal and interest on the Notes of the related series and to make
distributions in respect of the Certificates of the related series. Under
certain circumstances, the related Trust has the right, pursuant to the related
Sale Agreement and the related Servicing Agreement, to cause the Seller or the
Servicer to purchase or substitute any Student Loan, if a breach of the
representations, warranties or covenants of the Seller or the Servicer, as the
case may be, with respect to such Student Loan has a material adverse effect on
the interest of the Trust therein where such breach would result in nonpayment
of Program Payments and such breach is not cured within any applicable cure
period. See "Transfer and Servicing Agreements -- Sale of Student Loans to the
Trust; Representations and Warranties of the Seller" and "Servicing -- Servicer
Covenants." The failure of the Seller or the Servicer to so purchase or
substitute a Student Loan would constitute a breach of the related Sale
Agreement or related Servicing Agreement, enforceable by the related Eligible
Lender Trustee on behalf of the related Trust or by the related Indenture
Trustee on behalf of the Noteholders of the related series, but would not
constitute an Event of Default under the Indenture.
STUDENT LOANS GENERALLY NOT SUBJECT TO DISCHARGE IN BANKRUPTCY
Student Loans are generally not dischargeable by a borrower in bankruptcy
pursuant to the U.S. Bankruptcy Code, unless (a) such Student Loan first became
due before seven years (exclusive of any applicable suspension of the repayment
period) before the date of the bankruptcy or (b) excepting such debt from
discharge will impose an undue hardship on the debtor and the debtor's
dependents.
56
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of certain federal income tax
consequences of the purchase, ownership and disposition of the Notes and the
Certificates. The summary does not purport to deal with federal income tax
consequences applicable to all categories of holders, some of which may be
subject to special rules. For example, it does not discuss the tax treatment of
Noteholders or Certificateholders that are insurance companies, regulated
investment companies or dealers in securities. Moreover, there are no cases or
Internal Revenue Service rulings on similar transactions involving both debt and
equity interests issued by a trust with terms similar to those of the Notes and
the Certificates. As a result, the Internal Revenue Service may disagree with
all or a part of the discussion below. Prospective investors are urged to
consult their own tax advisors in determining the federal, state, local, foreign
and any other tax consequences to them of the purchase, ownership and
disposition of the Notes and the Certificates.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder and judicial or ruling authority, all of which are
subject to change, which change may be retroactive. Each Trust will be provided
with an opinion of Federal Tax Counsel regarding certain federal income tax
matters discussed below. An opinion of Federal Tax Counsel, however, is not
binding on the Internal Revenue Service or the courts. No ruling on any of the
issues discussed below will be sought from the Internal Revenue Service. For
purposes of the following summary, references to the Trust, the Notes, the
Certificates and related terms, parties and documents shall be deemed to refer,
unless otherwise specified herein, to each Trust and the Notes, Certificates and
related terms, parties and documents applicable to such Trust.
TAX CHARACTERIZATION OF THE TRUST
Unless otherwise specified in the related Prospectus Supplement, with
respect to each series, Federal Tax Counsel will deliver its opinion at closing,
subject to the assumptions and qualifications therein, and based on any
representations referenced therein, that the Trust will not be classified as an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. The opinion will be based on the assumption that
the terms of the Trust Agreement for such series and related documents will be
complied with, on certain representations, and on counsel's conclusions that (1)
the Trust will have certain characteristics and will affirmatively elect not to
be characterized as an association taxable as a corporation and (2) the
structure of the Trust will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations.
If a Trust were taxable as a corporation for federal income tax purposes,
the Trust would be subject to corporate income tax on its taxable income. A
Trust's taxable income would include all its income on the Student Loans, and
should be reduced by its interest expense on the Notes. Any such corporate
income tax would materially reduce cash available to make payments on the Notes
and distributions on the Certificates, and Certificateholders could be liable
for any such tax that is unpaid by the Trust.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. Unless otherwise specified in the
related Prospectus Supplement, the Seller will agree, and the Noteholders of
each series will agree by their purchase of Notes of such series, to treat the
Notes as debt for federal income tax purposes. Unless otherwise specified in the
related Prospectus Supplement, Federal Tax Counsel will deliver an opinion to
the Trust at closing that the Notes of such series will be classified as debt
for federal income tax purposes. The discussion below assumes that the Notes
will be characterized as debt.
Stated Interest. Stated interest on the Notes will be taxable as ordinary
income for federal income tax purposes when received or accrued in accordance
with the method of tax accounting of the beneficial owner of a Note (a "Note
Owner").
Original Issue Discount. The discussion below assumes that all payments on
the Notes of a series are denominated in U.S. dollars, and that the interest
formula for the Notes of a series meets the
57
<PAGE>
requirements for "qualified stated interest" under Treasury regulations (the
"OID Regulations") relating to original issue discount ("OID"), except as set
forth below. If these conditions are not satisfied with respect to a series of
Notes, additional tax considerations with respect to such Notes will be
disclosed in the applicable Prospectus Supplement.
A Note will be treated as issued with OID if the excess of the Note's
"stated redemption price at maturity" over its issue price equals or exceeds a
de minimis amount equal to 1/4 of 1 percent of the Note's stated redemption
price at maturity multiplied by the number of years (based on the anticipated
weighted average life of the Notes of the same series, calculated using the
prepayment assumption used in pricing the Notes (the "Prepayment Assumption")
and weighing each payment by reference to the number of full years elapsed from
the closing date prior to the anticipated date of such payment) to its maturity.
Generally, the issue price of a Note of a series should be the first price at
which a substantial amount of the Notes included in the issue of which the Note
is a part is sold to other than placement agents, underwriters, brokers or
wholesalers. The stated redemption price at maturity of a Note of a series is
generally equal to all payments on a Note, other than payments of "qualified
stated interest." Qualified stated interest payments are interest payments on
the Notes that are unconditionally payable at least annually at a single fixed
rate (or certain variable rates) applied to the outstanding principal amount of
the obligation. Assuming that interest is qualified stated interest, the stated
redemption price is generally expected to equal the principal amount of the
Note. Any de minimis OID must be included in income as principal payments are
received on the Notes in the proportion that each such payment bears to the
original principal balance of the Note.
If the Notes are treated as issued with OID, a Note Owner will be required
to include OID in income before the receipt of cash attributable to such income
using a constant yield method. The amount of OID generally includible in income
is the sum of the daily portions of OID with respect to a Note for each day
during the taxable year or portion of the taxable year in which the Note Owner
holds the Note. Special provisions apply to debt instruments on which payments
may be accelerated due to prepayments of other obligations securing those debt
instruments. Under these provisions, the computation of OID on such debt
instruments must be determined by taking into account both the Prepayment
Assumption used in pricing the debt instrument and the actual prepayment
experience. As a result of these special provisions, the amount of OID on the
Notes issued with OID that will accrue in any given accrual period may either
increase or decrease depending upon the actual prepayment rate. Note Owners
should consult their own tax advisors regarding the impact of the OID rules in
the event that Notes are issued with OID.
The adjusted issue price of a Note is the sum of its issue price plus prior
accruals of OID, reduced by the total payments made with respect to such Note in
all prior periods, other than "qualified stated interest" payments.
Market Discount. The Notes, whether or not issued with original issue
discount, will be subject to the "market discount rules" of section 1276 of the
Code. In general, these rules provide that if the Note Owner purchases the Note
at a market discount (that is, a discount from its stated redemption price at
maturity or, if the Notes were issued with OID, adjusted issue price) that
exceeds a de minimis amount specified in the Code and thereafter (a) recognizes
gain upon a disposition, or (b) receives payments of principal, the lesser of
(i) such gain or principal payment, or (ii) the accrued market discount, will be
taxed as ordinary interest income. Generally, market discount accrues in the
ratio of stated interest allocable to the relevant period to the sum of the
interest for such period plus the remaining interest as of the end of such
period, or in the case of a Note issued with OID, in the ratio of OID accrued
for the relevant period to the sum of the OID accrued for such period plus the
remaining OID as of the end of such period. A Note Owner may elect, however, to
determine accrued market discount under the constant yield method.
Limitations imposed by the Code which are intended to match deductions with
the taxation of income may defer deductions for interest on indebtedness
incurred or continued, or short-sale expenses incurred, to purchase or carry a
Note with accrued market discount. A Note Owner may elect to include market
discount in gross income as it accrues and, if such Note Owner makes such an
58
<PAGE>
election, is exempt from this rule. Any such election will apply to all debt
instruments acquired by the taxpayer on or after the first day of the first
taxable year to which such election applies. The adjusted basis of a Note
subject to such election will be increased to reflect market discount included
in gross income, thereby reducing any gain or increasing any loss on a sale or
taxable disposition.
Short-Term Obligations. Under the Code, special rules apply to notes that
have a maturity of one year or less from their date of original issue. Such
notes are treated as issued with "acquisition discount" which is calculated and
included in income under principles similar to those governing OID except that
"acquisition discount" is equal to the excess of all payments of principal and
interest on such Notes over their issue price. In general, an individual or
other cash basis holder of a short-term obligation is not required to accrue
acquisition discount for federal income tax purposes unless it elects to do so.
Accrual basis and certain other Note Owners, including banks, regulated
investment companies, dealers in securities and cash basis Note Owners who so
elect, are required to accrue acquisition discount on short-term notes on either
a straight line basis or under a constant yield method (based on daily
compounding), at the election of the Note Owners. In the case of a Note Owner
not required and not electing to include acquisition discount in income
currently, any gain realized on the sale or retirement of such Note will be
ordinary income to the extent of the acquisition discount accrued on a straight
line basis (unless an election is made to accrue the acquisition discount under
the constant yield method) through the date of sale or retirement. Note Owners
who are not required and do not elect to accrue acquisition discount on
short-term Notes will be required to defer deductions for interest on borrowings
allocable to short-term obligations in an amount not exceeding the deferred
income until the deferred income is realized.
Election to Treat All Interest as Original Issue Discount. A Note Owner
may elect to include in gross income all interest that accrues on a Note using
the constant yield method described above under the heading "-- Original Issue
Discount," with modifications described below. For purposes of this election,
interest includes stated interest, acquisition discount, OID, de minimis
original issue discount, market discount, de minimis market discount and
unstated interest, as adjusted by any amortizable bond premium (described below
under "-- Amortizable Bond Premium") or acquisition premium.
In applying the constant yield method to a Note with respect to which this
election has been made, the issue price of the Note will equal the adjusted
basis of the electing Note Owner in the Note immediately after its acquisition,
the issue date of the Note will be the date of its acquisition by the electing
Note Owner, and no payments on the Note will be treated as payments of qualified
stated interest. This election will generally apply only to the Note with
respect to which it is made and may not be revoked without the consent of the
Internal Revenue Service. Note Owners should consult their own tax advisers as
to the effect in their circumstances of making this election.
Amortizable Bond Premium. In general, if a Note Owner purchases a note at
a premium (that is, an amount in excess of the amount payable upon the maturity
thereof), such Note Owner will be considered to have purchased such Note with
"amortizable bond premium" equal to the amount of such excess. Such Note Owner
may elect to amortize such bond premium as an offset to interest income and not
as a separate deduction item as it accrues under a constant yield method over
the remaining term of the Note. Such Note Owner's tax basis in the Note will be
reduced by the amount of the amortized bond premium. Any such election shall
apply to all debt instruments (other than instruments the interest on which is
excludible from gross income) held by the Note Owner at the beginning of the
first taxable year for which the election applies or thereafter acquired and is
irrevocable without the consent of the Internal Revenue Service. Bond premium on
a Note held by a Note Owner who does not elect to amortize the premium will
decrease the gain or increase the loss otherwise recognized on the disposition
of the Note.
Disposition of Notes. The adjusted tax basis of a Note Owner will be its
cost, increased by the amount of any OID, market discount and gain previously
included in income with respect to the Note, and reduced by the amount of any
payments on the Note that is not qualified stated interest and the amount of
bond premium previously amortized with respect to the Note. A Note Owner will
generally recognize gain or loss on the sale or retirement of a Note equal to
the difference between the amount
59
<PAGE>
realized on the sale or retirement and the tax basis of the Note. Such gain or
loss will be capital gain or loss (except to the extent attributable to accrued
but unpaid interest or as described above under "-- Market Discount," and, in
the event of a prepayment or redemption, any not yet accrued OID) and will be
long-term capital gain or loss if the Note was held for more than one year.
WAIVERS AND AMENDMENTS
An Indenture for a series may permit the Note Owners to waive an event of
default or rescind an acceleration of the Notes in some circumstances upon a
vote of the requisite percentage of Note Owners. Any such waiver or rescission,
or any amendment of the terms of the Notes, could be treated for federal income
tax purposes as a constructive exchange by a Note Owner of the Notes for new
notes, upon which gain or loss would be recognized.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Indenture Trustee will be required to report annually to the Internal
Revenue Service, and to each Note Owner, the amount of interest paid on the
Notes (and the amount withheld for federal income taxes, if any) for each
calendar year, except as to exempt recipients (generally, corporations, tax-
exempt organizations, qualified pension and profit-sharing trusts, individual
retirement accounts, or nonresident aliens who provide certification as to their
status). Each Note Owner (other than Note Owners who are not subject to the
reporting requirements) will be required to provide, under penalties of perjury,
a certificate containing the Note Owner's name, address, correct federal
taxpayer identification number (which includes a social security number) and a
statement that the Holder is not subject to backup withholding. Should a
non-exempt Note Owner fail to provide the required certification or should the
Internal Revenue Service notify the Indenture Trustee or the Issuer that the
Note Owner has provided an incorrect federal taxpayer identification number or
is otherwise subject to backup withholding, the Indenture Trustee will be
required to withhold (or cause to be withheld) 31% of the interest otherwise
payable to the Note Owner, and remit the withheld amounts to the Internal
Revenue Service as a credit against the Note Owner's federal income tax
liability.
TAX CONSEQUENCES TO FOREIGN INVESTORS
The following information describes the U.S. federal income tax treatment
of investors that are not U.S. persons (each, a "Foreign Person"). The term
"Foreign Person" means any person other than (i) a citizen or resident of the
United States, (ii) a corporation, partnership or other entity organized in or
under the laws of the United States or any political subdivision thereof or
(iii) an estate the income of which is includible in gross income for U.S.
federal income tax purposes, regardless of its source, or a trust whose
administration is subject to the primary supervision of a United States court
and which has one or more United States fiduciaries who have the authority to
control all substantial decisions of the trust.
(a) Interest paid or accrued to a Foreign Person that is not
effectively connected with the conduct of a trade or business within the
United States by the Foreign Person, will generally be considered
"portfolio interest" and generally will not be subject to United States
federal income tax and withholding tax, as long as the Foreign Person (i)
is not actually or constructively a "10 percent shareholder" of the Issuer
or a "controlled foreign corporation" with respect to which the Issuer is a
"related person" within the meaning of the Code, and (ii) provides an
appropriate statement, signed under penalties of perjury, certifying that
the holder is a Foreign Person and providing that Foreign Person's name and
address. If the information provided in this statement changes, the Foreign
Person must so inform the Indenture Trustee within 30 days of such change.
The statement generally must be provided in the year a payment occurs or in
either of the two preceding years. If such interest were not portfolio
interest, then it would be subject to United States federal income and
withholding tax at a rate of 30 percent unless reduced or eliminated
pursuant to an applicable income tax treaty.
60
<PAGE>
(b) Any capital gain realized on the sale or other taxable disposition
of a Note by a Foreign Person will be exempt from United States federal
income and withholding tax, provided that (i) the gain is not effectively
connected with the conduct of a trade or business in the United States by
the Foreign Person, and (ii) in the case of an individual Foreign Person,
the Foreign Person is not present in the United States for 183 days or more
in the taxable year and certain other requirements are met.
(c) 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, the holder (although exempt from the
withholding tax previously discussed if a duly executed Form 4224 is
furnished) 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 percent of its "effectively connected
earnings and profits" within the meaning of the Code for the taxable year,
as adjusted for certain items, unless it qualifies for a lower rate under
an applicable tax treaty.
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES
If, contrary to the opinion of Federal Tax Counsel, the Internal Revenue
Service successfully asserted that one or more of the classes of Notes of a
series did not represent debt for federal income tax purposes, the Notes might
be treated as equity interests in the Trust of that series. If so treated, the
Trust might be taxable as a corporation with the adverse consequences described
above (and the taxable corporation would not be able to reduce its taxable
income by deductions for interest expense on Notes recharacterized as equity).
Alternatively, the Trust might be treated as a publicly traded partnership that
would not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, all or a portion of the income accrued by tax-exempt
entities (including pension funds) would be "unrelated business taxable income,"
income to foreign holders might be subject to U.S federal income tax and U.S.
federal income tax return filing and withholding requirements, and individual
holders might be subject to limitations on their ability to deduct their shares
of Trust expenses including losses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of a Trust as a Partnership. The Seller and the Servicer will
agree, and the Certificateholders of a series will agree by their purchase of
Certificates, unless otherwise specified in the related Supplement, to treat the
Trust of that series as a partnership for purposes of federal and state income
tax and any other tax measured in whole or in part by income, with the assets of
the partnership being the assets held by the Trust, the partners of the
partnership being the Certificateholders (including the Seller in its capacity
as recipient of distributions from the Trust) and the Notes being debt of the
partnership. The proper characterization of the arrangement involving the Trust
of a series, the Seller and the Servicer is not clear, however, because there is
no authority on transactions closely comparable to that contemplated herein. It
is possible that the Certificates could be considered debt of the Seller or the
Trust because the Certificates have certain features characteristic of debt. The
following discussion assumes that the Certificates represent equity interests in
a partnership.
Partnership Taxation. As a partnership, a Trust will not be subject to
federal income tax. Rather, each Certificateholder will be required to take into
account separately such holder's allocable share of income, gains, losses,
deductions and credits of the Trust (as described below). A Trust's income will
consist primarily of interest and finance charges earned on or with respect to
the Student Loans (including appropriate adjustments for market discount, OID
and bond premium) and any gain upon collection or disposition of Student Loans.
A Trust's deductions will consist primarily of interest accruing with respect to
the Notes, servicing and other fees and losses or deductions upon collection or
disposition of Student Loans.
61
<PAGE>
The tax items of a partnership are allocable among the partners in
accordance with the Code, Treasury Department regulations and the partnership
agreement (here, the Trust Agreement and related documents). The Trust Agreement
will provide that the Certificateholders generally will be allocated items of
gross income of the Trust for each month equal to the sum of (i) the product of
the Certificate Rate and the Certificate Balance for such month, (ii) an amount
equivalent to return that accrues during such month on amounts previously due on
the Certificates but not yet distributed, (iii) any Trust income attributable to
discount on the Student Loans that corresponds to any excess of the Certificate
Balance over their initial issue price, (iv) prepayment premium payable to the
Certificateholders for such month and (v) any other amounts of income payable to
the Certificateholders for such month. Losses and deductions generally will not
be allocated to the Certificateholders except to the extent the Servicer
determines that the Certificateholders are reasonably expected to bear the
economic burden of such losses or deductions. If a Certificateholder were
allocated items of loss and deduction that are characterized as capital losses
(including losses recognized upon the sale, extension, revision or, in certain
circumstances, default of a Student Loan), such losses would generally be
deductible by such Certificateholder only against capital gain income (whether
from the Trust or other sources). In addition, individual Certificateholders are
generally subject to limitations on their ability to deduct "miscellaneous
itemized deductions" of the Trust, which include fees paid to the Servicer (but
do not include interest expense on the Notes). Finally, individual
Certificateholders may be subject to other limitations on their ability to
deduct losses and other deductions, including limitations applicable to
investment interest, and should consult their own tax advisors regarding such
limitations. As a consequence of the above described limitations regarding
deduction of losses and other Trust items, a Certificateholder could be required
to report taxable income that is greater than the Certificateholder's gross
income less losses and deductions.
Under the method of allocation described above, Certificateholders may be
allocated income equal to the entire Certificate Rate plus the other items
described above, even though the Trust might not have sufficient cash to make
current cash distributions of such amounts. Thus, cash basis holders will in
effect be required to report income from the Certificates on an accrual basis.
If a Certificateholder is allocated income in excess of cash distributions, the
Certificateholder's basis in the Certificates will be increased by the amount of
such excess, which will reduce any gain or increase any loss upon a sale or
other disposition of the Certificates, as described below under "-- Disposition
of Certificates." It is believed that this method of allocation will be valid
under applicable Treasury Department regulations, although no assurance can be
given that the Internal Revenue Service would not require a greater amount of
income to be allocated to Certificateholders. It is also possible that the
Internal Revenue Service would require a Trust to allocate to Certificateholders
net income (instead of gross income) equal to the foregoing amounts, which
allocations would comprise items of gross income and losses and deductions of
the Trust. If a Trust were to allocate net income to Certificateholders, a
Certificateholder's taxable income could exceed the amount of net income
allocated because of limitations on the deductibility of capital losses and
"miscellaneous itemized deductions" described above.
As an alternative to the foregoing, the Internal Revenue Service might
treat Certificateholders as receiving guaranteed payments from a Trust, in which
event the payments would be treated as ordinary income but not as interest
income. The Seller is authorized to adjust the allocations described above to
reflect the economic income, gain or loss to the Certificateholders (including
the Seller) or as otherwise required by the Code.
A portion of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will be treated as income from
"debt financed property," which generally will be taxable as unrelated business
taxable income.
The Eligible Lender Trustee intends to make all tax calculations relating
to income and allocations to Certificateholders on an aggregate basis. If the
Internal Revenue Service were to require that such calculations be made
separately for each Trust Student Loan, the Trust might be required to incur
62
<PAGE>
additional expense but it is believed that there would not be a material adverse
effect on Certificateholders.
Discount and Premium. It is believed that the Student Loans may have been
issued (or may be issued) with OID. In the event that such OID exceeds a de
minimis amount, a Trust of a series would have OID income. As indicated above, a
portion of such OID income may be allocated to the Certificateholders.
Moreover, the purchase price paid by a Trust for the Student Loans acquired
by such Trust may be greater or less than the remaining principal balance of the
Student Loan at the time of purchase. If so, the Student Loans will have been
acquired at a premium or discount, as the case may be. (As indicated above, the
Trust will make this calculation on an aggregate basis, but might be required to
recompute it on a loan by loan basis.) If the Trust acquires the Student Loans
at a market discount or premium, the Trust will elect to include any such
discount in income currently as it accrues over the life of the Student Loans or
to offset any such premium currently against interest income on the Student
Loans. As indicated above, a portion of such market discount income or premium
deduction may be allocated to Certificateholders.
Distributions to Certificateholders. Certificateholders generally will not
recognize gain or loss with respect to distributions from the Trust. A
Certificateholder will recognize gain, however, to the extent that any money
distributed exceeds the Certificateholder's adjusted basis in the Certificates
(as described below under "-- Disposition of Certificates") immediately before
the distribution. A Certificateholder will recognize loss upon termination of
the Trust or termination of the Certificateholder's interest in a Trust if the
Trust only distributes money to the Certificateholder and the amount distributed
is less than the Certificateholder's adjusted basis in the Certificates. Any
gain or loss generally will be long-term capital gain or loss if the
Certificateholder's holding period of the Certificates is more than one year.
Section 708 Termination. Under Section 708 of the Code, a Trust of a
series will be deemed to terminate for federal income tax purposes if 50% or
more of the capital and profits interests in the Trust are sold or exchanged
within a 12-month period. If such a termination occurs, the Trust will be
considered to distribute its assets to the Certificateholders, who would then be
treated as recontributing those assets to the Trust, as a new partnership. Such
deemed distribution and recontribution generally should not result in material
adverse tax consequences to Certificateholders (although it may accelerate the
recognition of income from the Trust for Certificateholders whose taxable year
is different than the Trust's taxable year and result in a shorter holding
period for Certificateholders in their Certificates to the extent the amount
distributed to them in the deemed termination consists of money).
Disposition of Certificates. A Certificateholder who disposes of a
Certificate generally will recognize gain or loss in an amount equal to the
difference between the amount realized and the Certificateholder's tax basis in
the Certificates. The gain or loss generally will be capital gain or loss and
will be long-term capital gain or loss if the holding period is more than one
year. A Certificateholder's tax basis in a Certificate generally will equal the
holder's cost increased by the holder's share of Trust income (includible in
income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the holder's share (as
determined under applicable Treasury Department regulations) of the Notes and
other liabilities of the Trust. A holder acquiring Certificates at different
prices may be required to maintain a single aggregate adjusted tax basis in such
Certificates, and, upon sale or other disposition of some of the Certificates,
allocate a portion of such aggregate tax basis to the Certificates sold (rather
than maintaining a separate tax basis in each Certificate for purposes of
computing gain or loss on a sale of that Certificate).
Allocations Between Transferors and Transferees. In general, a Trust's
taxable income and losses will be determined monthly and tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the close
of the last day of the month. As a result, a holder purchasing Certificates may
be allocated tax
63
<PAGE>
items (which will affect its tax liability and tax basis) attributable to
periods before the holder acquired the Certificates.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the Certificateholder's interest), taxable income
or losses of the Trust might be reallocated among the Certificateholders. The
Seller is authorized to revise the Trust's method of allocation between
transferors and transferees to conform to the method permitted by future
regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (or loss), the purchasing Certificateholder will have a
higher (or lower) basis in the Certificates than the selling Certificateholder
had. The tax basis of a Trust's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust were to file an election under Section
754 of the Code. In order to avoid the administrative complexities that would be
involved in keeping the accounting records necessary if a Section 754 election
is made, as well as potentially onerous information reporting requirements, the
Trust will not make such election. As a result, subsequent purchasers might be
allocated a greater or lesser amount of Trust income than would be appropriate
based on their own purchase price for Certificates.
Administrative Matters. The Eligible Lender Trustee is required to keep or
cause to be kept complete and accurate books of the Trust. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and the
fiscal year of a Trust will be the calendar year. The Eligible Lender Trustee
will file a partnership information return (IRS Form 1065) with the Internal
Revenue Service for each fiscal year of the Trust and will report each
Certificateholder's allocable share of items of Trust income and expense to
Certificateholders and the Internal Revenue Service on Schedule K-1. The Trust
will provide the Schedule K-1 information to nominees that fail to provide the
Trust with the information statement described below and such nominees will be
required to forward such information to the beneficial owners of the
Certificates. Generally, Certificateholders must file tax returns that are
consistent with the information return filed by the Trust or be subject to
penalties unless the holder discloses the inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust with
a statement containing certain information about the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and taxpayer identification number of
such person, (y) whether such person is a United States person, a tax-exempt
entity or a foreign government, international organization or wholly-owned
agency or instrumentality of either of the foregoing and (z) certain information
about Certificates that were held, bought or sold on behalf of such person
throughout the year. In addition, brokers and financial institutions that hold
Certificates through a nominee are required to furnish directly to the Trust
information about themselves and their ownership of Certificates. A clearing
agency registered under Section 17A of the Exchange Act is not required to
furnish any such information statement to the Trust. The information referred to
above for any calendar year must be furnished to the Trust on or before the
following January 31. Nominees, brokers and financial institutions that fail to
provide the Trust with the information described above may be subject to
penalties.
The Seller will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the Internal Revenue Service. The Code
provides for administrative examination of a partnership as if the partnership
were a separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust by the appropriate taxing authorities could
result in an adjustment of the returns of the Certificateholders and, under
certain circumstances, a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Trust. An adjustment could
also result in an audit of a Certificateholder's returns and adjustments of
items not related to the income and losses of a Trust.
64
<PAGE>
Tax Consequences to Foreign Certificateholders. No regulations, published
rulings or judicial decisions exist that discuss the characterization for U.S.
federal withholding tax purposes with respect to non-U.S. persons of a
partnership with activities substantially the same as the Trust. Accordingly,
the Trustee intends to withhold tax in the maximum amount that could be required
under different interpretations of the applicable Code provisions.
If the Trust were considered to be engaged in a trade or business in the
United States for such purposes, the income of the Trust allocable to Foreign
Persons would be subject to U.S. federal withholding tax pursuant to Section
1446 of the Code at a rate of 35% for persons taxable as a corporation and 39.6%
for all other Foreign Persons. Also, in such case, a Foreign Certificateholder
that is a corporation may be subject to the branch profits tax. If a beneficial
owner of the Certificates is a Foreign Person, the withholding agent will
withhold an amount at least equal to the amount that would be required to be
withheld if it were engaged in a trade or business in the United States in order
to protect the Trust from possible adverse consequences of a failure to
withhold. Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Trust to change its withholding
procedures. Each Foreign Certificateholder might be required to file a U.S.
individual or corporate income tax return (including in the case of a
corporation, the branch profits tax) on its share of the Trust's income.
Each Foreign Certificateholder must obtain a taxpayer identification number
from the IRS and submit that number to the withholding agent on Form W-8 in
order to assure appropriate crediting of any taxes withheld. A Foreign
Certificateholder generally would be entitled to file with the IRS a claim for
refund with respect to withheld taxes, taking the position that no taxes were
due because the Trust was not engaged in a U.S. trade or business. However,
interest payments made (or accrued) to a Certificateholder who is a Foreign
Person may be characterized as other than "portfolio interest." As a result,
even if the Trust is not considered to be engaged in a U.S. trade or business,
Foreign Certificateholders will likely be subject to withholding tax pursuant to
Section 1441 or 1442 of the Code at a rate of 30 percent on the gross amount
allocated to such Certificateholders, unless such rate is reduced or eliminated
pursuant to an applicable treaty. Consequently, if a holder of a Certificate is
a Foreign Person, the withholding agent will withhold from the gross amount of
income of the Trust allocated to Foreign Certificateholders at a rate of 30% (to
the extent such amount exceeds the amount withheld pursuant to the preceding
paragraph) in order to protect the Trust from possible adverse consequences of a
failure to withhold. A Foreign Certificateholder would generally be entitled to
file with the IRS a refund claim for such withheld taxes, taking the position
that the interest was portfolio interest. However, the IRS may disagree and no
assurance can be given as to the appropriate amount of tax liability.
As a result of the foregoing, the Certificates generally should not be
purchased by Foreign Persons.
Backup Withholding. Proceeds from the sale of the Certificate will be
subject to a "backup" withholding tax of 31% if, in general, the
Certificateholder is a U.S. person and fails to comply with certain
identification procedures, unless the Certificateholder is an exempt recipient
under applicable provisions of the Code.
CERTAIN STATE TAX CONSEQUENCES
The above discussion does not otherwise address the tax treatment of the
related Trust or the Notes, the Certificates, the Noteholders or the
Certificateholders of any series under any state or local tax laws. The
activities of the Servicer in servicing and collecting the Trust Student Loans
will take place at each of the locations at which the Servicer's operations are
conducted and, therefore, different tax regimes apply to the Trust and the
Securityholders. Prospective investors are urged to consult with their own tax
advisors regarding the state and local tax treatment of the related Trust as
well as any state and local tax consequences to them of purchasing, holding and
disposing of the Notes and the Certificates of any series.
* * *
65
<PAGE>
THE FEDERAL AND STATE TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A NOTEHOLDER"S
OR CERTIFICATEHOLDER"S PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES AND CERTIFICATES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"),
impose certain restrictions on (a) employee benefit plans (as defined in Section
3(3) of ERISA), (b) plans described in section 4975(e)(1) of the Code, including
individual retirement accounts or Keogh plans, (c) any entities whose underlying
assets include plan assets by reason of a plan's investment in such entities
(each of (a), (b) and (c), a "Plan") and (d) persons who have certain specified
relationships to such Plans ("Parties in Interest" under ERISA and "Disqualified
Persons" under the Code). Moreover, based on the reasoning of the United States
Supreme Court in John Hancock Life Ins. Co. v. Harris Trust and Sav. Bank, 114
S. Ct. 517 (1993), an insurance company's general account may be deemed to
include assets of the Plans investing in the general account (e.g., through the
purchase of an annuity contract), and the insurance company might be treated as
a Party in Interest with respect to a Plan by virtue of such investment. ERISA
also imposes certain duties on persons who are fiduciaries of Plans subject to
ERISA and prohibits certain transactions between a Plan and Parties in Interest
or Disqualified Persons with respect to such Plans.
A fiduciary of any Plan should carefully review with its legal and other
advisors whether the purchase or holding of the Securities could give rise to a
transaction prohibited or otherwise impermissible under ERISA or the Code, and
should refer to "ERISA Considerations" in the related Prospectus Supplement
regarding any restrictions on the purchase and/or holding of the Securities
offered thereby.
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA) are not subject to the prohibited transaction provisions of ERISA and
Section 4975 of the Code. Accordingly, assets of such plans may, subject to the
provisions of any other applicable federal and state law, be invested in the
Securities of any series without regard to the ERISA considerations described
herein. It should be noted, however, that any such plan that is qualified and
exempt from taxation under Sections 401(a) and 501(a) of the Code is subject to
the prohibited transaction rules set forth in Section 503 of the Code.
USE OF PROCEEDS
The net proceeds from the sale of Securities of a given series will be
applied by the applicable Trust to purchase the related Trust Student Loans on
the Closing Date from the Seller and to make any Reserve Account Initial Deposit
into the Reserve Account and/or to make any deposit to any Pre-Funding Account,
or as set forth in the related Prospectus Supplement. The Seller will use such
net proceeds paid to it with respect to any such Trust to acquire any credit
enhancement, if so specified in the related Prospectus Supplement, and to
purchase the Student Loans from Sallie Mae pursuant to the related Purchase
Agreement.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement with
respect to the Notes of a given series and an underwriting agreement with
respect to the Certificates of such series (collectively, the "Underwriting
Agreements"), the Seller will agree to cause the related Trust to sell to the
66
<PAGE>
underwriters named therein and in the related Prospectus Supplement, and each of
such underwriters will severally agree to purchase, the principal amount of each
class of Notes and the Certificate Balance of each class of Certificates or
portion thereof, as the case may be, of the related series set forth therein and
in the related Prospectus Supplement.
In each of the Underwriting Agreements with respect to any given series of
Securities, the several underwriters will agree, subject to the terms and
conditions set forth therein, to purchase all the Notes and Certificates, as the
case may be, described therein which are offered hereby and by the related
Prospectus Supplement if any of such Notes and Certificates, as the case may be,
are purchased.
Each Prospectus Supplement will either (i) set forth the price at which
each class of Notes and Certificates, as the case may be, being offered thereby
will be offered to the public and any concessions that may be offered to certain
dealers participating in the offering of such Notes and Certificates, as the
case may be, or (ii) specify that the related Notes and Certificates, as the
case may be, are to be resold by the underwriters in negotiated transactions at
varying prices to be determined at the time of such sale. After the initial
public offering of any such Notes and Certificates, as the case may be, such
public offering prices and such concessions may be changed.
Each Underwriting Agreement will provide that the Seller and Sallie Mae
will indemnify the underwriters against certain civil liabilities, including
liabilities under the Securities Act, or contribute to payments the several
underwriters may be required to make in respect thereof.
Each Trust may, from time to time, invest the funds in its Trust Accounts
in Eligible Investments acquired from such underwriters.
Pursuant to each of the Underwriting Agreements with respect to a given
series of Securities, the closing of the sale of any class of Securities subject
to either thereof will be conditioned on the closing of the sale of all other
such classes subject to either thereof.
The place and time of delivery for the Securities in respect of which this
Prospectus is delivered will be set forth in the related Prospectus Supplement.
LEGAL MATTERS
Certain legal matters relating to the Securities of any series will be
passed upon for the related Trust, the Seller, the Servicer and the
Administrator by Timothy G. Greene, Esq., General Counsel of Sallie Mae, and
Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York, special counsel to
Sallie Mae and the Seller, and for the underwriters for such series by the firm
identified in the related Prospectus Supplement. Certain federal income and
other matters will be passed on for each Trust by Skadden, Arps, Slate, Meagher
& Flom LLP. Certain Delaware State tax matters will be passed on for each Trust
by the firm identified in the related Prospectus Supplement.
67
<PAGE>
APPENDIX A
THE FEDERAL FAMILY EDUCATION LOAN PROGRAM
GENERAL
The Federal Family Education Loan Program ("FFELP") (formerly the
Guaranteed Student Loan Program (the "Guaranteed Student Loan Program")) under
Title IV of the Higher Education Act provides for loans to be made to students
or parents of dependent students enrolled in eligible institutions to finance a
portion of the costs of attending school. If a borrower defaults on a Student
Loan (as described herein), becomes totally or permanently disabled, dies, files
for bankruptcy or attends a school that closes prior to the student earning a
degree, or if the applicable educational institution falsely certifies the
borrower's eligibility for a Student Loan (collectively, "insurance triggers"),
the holder of the loan (which must be an eligible lender) may file a claim with
the applicable Guarantee Agency. Provided that the loan has been properly
originated and serviced, the Guarantee Agency pays the holder all or a portion
of the unpaid principal balance on the loans as well as accrued interest. See
"-- Guarantee Agencies." Origination and servicing requirements, as well as
procedures to cure deficiencies, are established by the Department and the
Guarantee Agencies.
Under the FFELP, payment of principal and interest with respect to the
Student Loans is guaranteed upon occurrence of an insurance trigger by the
applicable Guarantee Agency and reinsured by the Department. As described
herein, the Guarantee Agencies are entitled, subject to certain conditions, to
be reimbursed by the Department for all or a portion of Guarantee Payments they
make pursuant to a program of federal reinsurance under the Act. See " --
Federal Insurance and Reinsurance of Guarantee Agencies." In addition, the
related Eligible Lender Trustee, as an "eligible lender" and the "holder" of the
Trust Student Loans under the Act on behalf of a Trust, is entitled to receive
from the Department certain interest subsidy payments ("Interest Subsidy
Payments") and special allowance payments ("Special Allowance Payments") with
respect to certain Student Loans as described herein.
Guarantee Agencies enter into reinsurance agreements with the Secretary
pursuant to which the Secretary agrees to reimburse the Guarantee Agency for all
or a portion of the amount expended by the Guarantee Agency in discharge of its
guarantee obligation with respect to default claims provided the loans have been
properly originated and serviced. Except for claims resulting from death,
disability or bankruptcy of a borrower, in which case the Secretary pays the
Guarantee Agency the full amount of the claim, the amount of reinsurance depends
on the default experience of the Guarantee Agency. See " -- Federal Insurance
and Reinsurance of Guarantee Agencies."
In the event of a shortfall between the amounts of claims paid to holders
of defaulted loans and reinsurance payments from the federal government,
Guarantee Agencies pay the claims from their reserves. These reserves come from
four principal sources: insurance premiums they charge on Student Loans
(currently up to 1% of loan principal), administrative cost allowances from the
Department (payment of which is currently discretionary on the part of the
Department), debt collection activities (generally, the Guarantee Agency may
retain 27% of its collections on defaulted student loans), and investment income
from reserve funds. Claims which a Guarantee Agency is financially unable to pay
will be paid by the Secretary or transferred to a financially sound Guarantee
Agency, if the Secretary makes the necessary determination that the Guarantee
Agency is so financially unable to pay.
Several types of guaranteed student loans are currently authorized under
the Act: (i) loans to students who pass certain financial need tests
("Subsidized Stafford Loans"); (ii) loans to students who do not pass the
Stafford need tests or who need additional loans to supplement their Subsidized
Stafford Loans ("Unsubsidized Stafford Loans"); (iii) loans to parents of
students ("PLUS Loans") who are dependents and whose need exceeds the financing
available from Unsubsidized Stafford Loans and/or Subsidized Stafford Loans; and
(iv) loans to consolidate the borrower's obligations under various federally
authorized student loan programs into a single loan ("Consolidation Loans").
Prior to July 1, 1994 the Act also permitted loans to graduate and professional
students and independent undergraduate students and, under certain
circumstances, dependent undergraduate students who
A-1
<PAGE>
needed additional loans to supplement their Subsidized Stafford Loans
("Supplemental Loans to Students" or "SLS Loans").
The FFELP is subject to statutory and regulatory revision from time to
time. The most recent revisions are contained in the Higher Education Amendments
of 1992 (the "1992 Amendments"), the Omnibus Budget Reconciliation Act of 1993
(the "1993 Act") and the "Higher Education Technical Amendments of 1993" (the
"Technical Amendments"). As part of the 1992 Amendments the name of the
Guaranteed Student Loan Program was changed to the FFELP. The 1993 Act contains
significant changes to the FFELP and creates a direct loan program funded
directly by the U.S. Department of Treasury (each loan under such program, a
"Federal Direct Student Loan").
Following enactment of the 1992 Amendments, Subsidized Stafford Loans and
Unsubsidized Stafford Loans, PLUS Loans and Consolidation Loans are officially
referred to as "Federal Stafford Loans," "Federal Unsubsidized Stafford Loans,"
"Federal PLUS Loans" and "Federal Consolidation Loans," respectively.
The description and summaries of the Act, the FFELP, the Guarantee
Agreements and the other statutes, regulations and documents referred to in this
Prospectus do not purport to be comprehensive, and are qualified in their
entirety by reference to each such statute, regulation or document. The Act is
codified at 20 U.S.C. sec. 1071 et seq., and the regulations promulgated
thereunder can be found at 34 C.F.R. Part 682. 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 -- Change in
Law."
LEGISLATIVE AND ADMINISTRATIVE MATTERS
The Act was amended by enactment of the 1992 Amendments, the general
provisions of which became effective on July 23, 1992 and which extend the
principal provisions of the FFELP to September 30, 1998 (or in the case of
borrowers who have received loans prior to that date, September 30, 2002, except
that authority to make Consolidation Loans expires on September 30, 1998). The
Technical Amendments became effective on December 20, 1993.
The 1993 Act, effective on August 10, 1993, implements a number of changes
to the federal guaranteed student loan programs, including imposing on lenders
or holders of guaranteed student loans certain fees, providing for 2% lender
risk sharing, reducing reimbursement payments to Guarantee Agencies, reducing
interest rates and Special Allowance Payments for certain loans, reducing the
interest payable to holders of Consolidation Loans and affecting the
Department's financial assistance to Guarantee Agencies, including by reducing
the percentage of claims the Department will reimburse Guarantee Agencies and
reducing more substantially the premiums and default collections that Guarantee
Agencies are entitled to receive and/or retain. In addition, such legislation
also contemplates replacement of at least 60% of the federal guaranteed student
loan programs with direct lending by the Department by the 1998-99 Academic
Year.
The transition from the federal guaranteed student loan programs to the new
direct lending program has resulted in increasing reductions since 1993 in the
volume of FFELP Loans made under the existing programs. As these reductions
occur, the Servicer may experience increased costs due to reduced economies of
scale to the extent the volume of new loans serviced by the Servicer is reduced.
Such cost increases could affect the ability of the Servicer to satisfy its
obligations to service the Student Loans or to purchase Student Loans in the
event of certain breaches of its representations and warranties under the
Servicing Agreements or of its covenants as Servicer. See "Transfer and
Servicing Agreements -- Purchase of Student Loans by the Seller; Representations
and Warranties of Sallie Mae" and "Servicing; Administration -- Servicer
Covenants." Such volume reductions and other changes effected by the 1993 Act
could also reduce revenues received by the Guarantee Agencies that are available
to pay claims on defaulted Student Loans in a timely manner and have other
adverse economic consequences to the Guarantee Agencies and their ability to pay
claims. Finally, the level of competition currently in existence in the
secondary market for loans made under the existing programs could be reduced,
resulting in fewer potential buyers of the Student Loans and lower prices
available in the secondary market for those loans, and the liquidity provided by
such market may be impaired.
A-2
<PAGE>
ELIGIBLE LENDERS, BORROWERS AND INSTITUTIONS
Lenders eligible to make and/or hold loans under the FFELP generally
include banks, savings and loan associations, credit unions, pension funds,
insurance companies and, under certain conditions, schools and guarantee
agencies. Sallie Mae is an eligible lender for the purpose of making
Consolidation Loans, acting as a lender of last resort and holding FFELP Loans.
A FFELP Loan may be made only to qualified borrowers. Generally, a
qualified borrower is an individual or the parent of an individual who (a) has
been accepted for enrollment or is enrolled and is maintaining satisfactory
progress at an eligible institution, (b) is carrying or will carry at least
one-half of the normal full-time academic workload for the course of study the
student is pursuing, as determined by such institution, (c) has agreed to notify
promptly the holder of the loan of any address change and (d) meets the
application "need" requirements for the particular loan program. Each loan is to
be evidenced by an unsecured promissory note signed by the qualified borrower.
Eligible Institutions are post-secondary schools which meet the
requirements set forth in the Act. They include institutions of higher
education, proprietary institutions of higher education and post-secondary
vocational institutions.
FINANCIAL NEED ANALYSIS
Student Loans may generally be made in amounts, subject to certain limits
and conditions, to cover the student's estimated costs of attendance, including
tuition and fees, books, supplies, room and board, transportation and
miscellaneous personal expenses (as determined by the institution). Each
borrower must undergo a need analysis, which requires the borrower to submit a
need analysis form to a multiple data entry processor which 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 its cost of attendance to determine the
student's eligibility for grants, Subsidized Stafford Loans and work assistance.
The difference between (a) the sum of (i) the amount of grants, (ii) the amount
earned through work assistance and (iii) the amount of Subsidized Stafford Loans
for which the borrower is eligible, and (b) the student's estimated cost of
attendance (the "Unmet Need") may be borrowed through Unsubsidized Stafford
Loans. Parents may finance the family contribution amount through their own
resources or through PLUS Loans.
SPECIAL ALLOWANCE PAYMENTS
The Act provides for quarterly Special Allowance Payments to be made by the
Department to holders of Student Loans to the extent necessary to ensure that
such holder receives at least a specified market interest rate of return on such
loans. The rates for Special Allowance Payments are based on formulas that
differ according to the type of loans, the date the loan was originally made or
insured and the type of funds used to finance such a loan. A Special Allowance
Payment is made for each of the 3-month periods ending March 31, June 30,
September 30, and December 31. The Special Allowance Payment equals the average
unpaid principal balance (including interest permitted to be capitalized) of all
eligible loans held by such holder during such period multiplied by the special
allowance percentage. The special allowance percentage is computed by (i)
determining the average of the bond equivalent rates of 91-day Treasury bills
auctioned for such 3-month period, (ii) subtracting the applicable borrower
interest rate on such loan from such average, (iii) adding the applicable
Special Allowance Margin (as set forth below) to the resultant percentage, and
(iv) dividing the resultant percentage by 4.
A-3
<PAGE>
<TABLE>
<CAPTION>
DATE OF DISBURSEMENT SPECIAL ALLOWANCE MARGIN
- ------------------------------------ -----------------------------------------------------------------
<S> <C>
Prior to 10/17/86................... 3.50%
10/17/86 - 9/30/92.................. 3.25%
10/1/92 - 6/30/95................... 3.10%
7/1/95 - 6/30/98.................... 2.50% (Subsidized and Unsubsidized Stafford Loans, in school,
grace or deferment) 3.10% (Subsidized and Unsubsidized Stafford
Loans, in repayment and all other loans)
</TABLE>
Special Allowance Payments are available on variable rate PLUS Loans and
SLS Loans as described below under "PLUS and SLS Loan Programs" only if the
variable rate, which is reset annually based on the 52-week Treasury Bill, would
exceed the applicable maximum rate.
ORIGINATION FEES
The eligible lender charges borrowers an origination fee on Subsidized and
Unsubsidized Stafford Loans and PLUS Loans equal to 3% of the principal balance
of each loan. The amount of the origination fee may be deducted from each
disbursement pursuant to a loan on a pro rata basis. No origination fee is paid
on Consolidation Loans.
Lenders must refund all origination fees attributable to a disbursement
that was returned to the lender by the school or repaid or not delivered within
120 days of the disbursement. Such origination fees must be refunded by
crediting the borrower's loan balance with the applicable lender.
STAFFORD LOANS
The Act provides for (i) federal insurance or reinsurance of Subsidized
Stafford Loans made by eligible lenders to qualified borrowers, (ii) Interest
Subsidy Payments on certain eligible Subsidized Stafford Loans to be paid by the
Department to holders of the loans in lieu of the borrower making interest
payments, and (iii) Special Allowance Payments representing an additional
subsidy paid by the Department to the holders of eligible Subsidized Stafford
Loans (collectively referred to herein as "Federal Assistance").
Subsidized Stafford Loans are loans under the FFELP that may be made, based
on need, only to post-secondary students accepted or enrolled in good standing
at an eligible institution who are carrying at least one-half the normal
full-time course load at such institution. The Act limits 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.
A-4
<PAGE>
MAXIMUM LOAN AMOUNTS
FEDERAL STAFFORD LOAN PROGRAM
<TABLE>
<CAPTION>
ALL STUDENTS INDEPENDENT STUDENTS(1)
-------------- ------------------------
BASE AMOUNT ADDITIONAL
SUBSIDIZED SUBSIDIZED AND UNSUBSIDIZED
ON OR UNSUBSIDIZED ONLY ON OR
SUBSIDIZED AFTER ON OR AFTER AFTER TOTAL
BORROWER'S ACADEMIC LEVEL PRE-1/1/87 1/1/87 7/7/93(2) 7/1/94(3) AMOUNT
------------------------- ---------- ---------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C>
UNDERGRADUATE (PER YEAR)
1st year.............................. $ 2,500 $ 2,625 $ 2,625 $ 4,000 $ 6,625
2nd year.............................. $ 2,500 $ 2,625 $ 3,500 $ 4,000 $ 7,500
3rd year and above.................... $ 2,500 $ 4,000 $ 5,500 $ 5,000 $ 10,500
GRADUATE (PER YEAR)..................... $ 5,000 $ 7,500 $ 8,500 $ 10,000 $ 18,500
AGGREGATE LIMIT
Undergraduate......................... $ 12,500 $ 17,250 $ 23,000 $ 23,000 $ 46,000
Graduate (including undergraduate).... $ 25,000 $ 54,750 $ 65,500 $ 73,000 $138,500
</TABLE>
- ------------------
(1) The loan limits are inclusive of both Federal Stafford Loans and Federal
Direct Student Loans.
(2) These amounts represent the combined maximum loan amount per year for
Subsidized and Unsubsidized Stafford Loans. Accordingly, the maximum amount
that a student may borrow under an Unsubsidized Loan is the difference
between the combined maximum loan amount and the amount the student received
in the form of a Subsidized Loan.
(3) Independent undergraduate students, graduate students or professional
students may borrow these additional amounts. In addition, dependent
undergraduate students may also receive these additional loan amounts if the
parents of such students are unable to provide the family contribution
amount and it is unlikely that the student's parents will qualify for a
Federal PLUS Loan.
The interest rate paid by the borrower on a Subsidized Stafford Loan is
dependent on the date the promissory note evidencing the loan is signed by the
borrower except for loans made prior to October 1, 1992, whose interest rate
depends on any outstanding borrowings of that borrower as of such date. The rate
for variable rate Subsidized Stafford Loans applicable for any 12-month period
beginning on July 1 and ending on June 30, is determined on the preceding June 1
and is equal to the lesser of (a) the applicable Maximum Rate or (b) the sum of
(i) the bond equivalent rate of 91-day Treasury bills auctioned at the final
auction held prior to such June 1 and (ii) the applicable Interest Rate Margin.
A-5
<PAGE>
SUBSIDIZED STAFFORD LOANS
<TABLE>
<CAPTION>
DATE OF DISBURSEMENT BORROWER RATE MAXIMUM RATE INTEREST RATE MARGIN
- ------------------------------------- -------------------- ----------------- --------------------
<S> <C> <C> <C>
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, then 10%
91-Day Treasury +
Interest Rate Margin
10/01/92 - 06/30/94.................. 91-Day Treasury + 9% 3.10%
Interest Rate Margin
07/01/94 - 06/30/95.................. 91-Day Treasury + 8.25% 3.10%
Interest Rate Margin
07/01/95 - 06/30/98.................. 91-Day Treasury + 8.25% 2.50% (in school,
Interest Rate Margin grace or deferment);
3.10% (in repayment)
</TABLE>
The Technical Amendments provide that, for fixed rate loans made on or
after July 23, 1992 and for certain loans made to new borrowers on or after July
1, 1988, the lender must have converted by January 1, 1995 the interest rate on
such loans to an annual interest rate adjusted each July 1 equal to (1) for
certain loans made between July 1, 1988 and July 23, 1992, the 91-day Treasury
bill rate at the final auction prior to the preceding June 1 plus 3.25% and (2)
for loans made on or after July 23, 1992, the 91-day Treasury bill rate at the
final auction prior to the preceding June 1 plus 3.10%, in each case capped at
the applicable interest rate for such loan existing prior to the conversion. The
variable interest rate does not apply to loans made prior to July 23, 1992
during the first 48 months of repayment.
Holders of Subsidized Stafford Loans are eligible to receive Special
Allowance Payments. The Department is responsible for paying interest on
Subsidized Stafford Loans while the borrower is a qualified student, during a
Grace Period or during certain Deferment Periods. The Department makes quarterly
Interest Subsidy Payments to the owner of Subsidized Stafford Loans in the
amount of interest accruing on the unpaid balance thereof prior to the
commencement of repayment or during any Deferment Periods. The Act provides that
the owner of an eligible Subsidized Stafford Loan shall be deemed to have a
contractual right against the United States 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 and continued eligibility of such
loan for federal reinsurance. Such eligibility may be lost, however, if the
loans are not held by an eligible lender, in accordance with the requirements of
the Act and the applicable guarantee agreements. See "-- Eligible Lenders,
Borrowers and Institutions"; "Risk Factors -- Failure to Comply with Student
Loan Origination and Servicing Procedures"; "Formation of the Trusts -- Eligible
Lender Trustee" and "Servicing -- Servicing Procedures."
Interest Subsidy Payments and Special Allowance Payments are generally
received within 45 days to 60 days after the end of any given calendar quarter
(provided that the applicable claim form is properly filed with the Department),
although there can be no assurance that such payments will in fact be received
from the Department within that period. See "Risk Factors -- Variability of
Actual Cash Flows." The Servicer has agreed to prepare and file with the
Department all such claims forms and any other required documents or filings on
behalf of each Eligible Lender Trustee as owner of the related Trust Student
Loans on behalf of each Trust. The Servicer has also agreed to assist each
Eligible Lender Trustee in monitoring, pursuing and obtaining such Interest
Subsidy Payments and Special Allowance Payments, if any, with respect to such
Student Loans. Except under certain conditions described herein, Interest
Subsidy Payments and Special Allowance Payments will be remitted with respect to
such Student Loans within two business days of receipt thereof by the Servicer
to the related Collection Account, or as set forth in the related Prospectus
Supplement.
Repayment of principal on a Subsidized or Unsubsidized Stafford Loan
typically 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 Deferment Period. In
general, each loan must be scheduled for repayment over a period of not more
than ten years after the
A-6
<PAGE>
commencement of repayment. The Act currently requires minimum annual payments of
$600 including principal and interest, unless the borrower and the lender agree
to lesser payments. As of July 1, 1995, lenders are required to offer borrowers
a choice among standard, graduated and income-sensitive repayment schedules.
These repayment options must be offered to all new borrowers who enter repayment
on or after July 1, 1995. If a borrower fails to elect a particular repayment
schedule or fails to submit the documentation necessary for the option the
borrower chooses, the standard repayment schedule will be used.
Repayment of principal on a Subsidized or Unsubsidized Stafford Loan must
generally commence following a period of (a) not less than 9 months or more than
12 months (with respect to loans for which the applicable interest rate is 7%
per annum) and (b) not more than 6 months (with respect to loans for which the
applicable interest rate is 9% per annum or 8% per annum and for loans to first
time borrowers on or after July 1, 1988) after the borrower ceases to pursue at
least a half-time course of study (a "Grace Period"). However, during certain
other periods (each, a "Deferment Period") and subject to certain conditions, no
principal repayments need be made, including periods when the student has
returned to an eligible educational institution on a full time (or in certain
cases half time) basis or is pursuing studies pursuant to an approved graduate
fellowship program, or when the student is a member of the Armed Forces or a
volunteer under the Peace Corps Act or the Domestic Volunteer Service Act of
1973, or when the borrower is temporarily or 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, or when for any reason the lender determines that
payment of principal will cause the borrower economic hardship: in the case of
unemployment or economic hardship the deferment is subject to a maximum
deferment period of three years. The 1992 Amendments also require forbearance of
loans in certain circumstances and permit forbearance of loans in certain other
circumstances (each such period, a "Forbearance Period").
The Unsubsidized Stafford Loan program created under the 1992 Amendments is
designed for borrowers who do not qualify for Subsidized Stafford Loans and for
independent, graduate and professional students whose Unmet Need exceeds what
they can borrow under the Subsidized Stafford Loan program. The basic
requirements for Unsubsidized Stafford Loans are essentially the same as those
for the Subsidized Stafford Loans, including with respect to provisions
governing the interest rate, the annual loan limits and the Special Allowance
Payments. The terms of the Unsubsidized Stafford Loans, however, differ in some
respects. Specifically, the federal government does not make Interest Subsidy
Payments on Unsubsidized Stafford Loans.
The borrower must either pay interest on a periodic basis beginning 60 days
after the time the loan is disbursed or capitalize the interest that accrues
until repayment begins. Effective July 1, 1994, the maximum insurance premium
was set at 1%. Subject to the same loan limits established for Subsidized
Stafford Loans, the student may borrow up to the amount of such student's Unmet
Need. Lenders are authorized to make Unsubsidized Stafford Loans applicable for
periods of enrollment beginning on or after October 1, 1992.
PLUS AND SLS LOAN PROGRAMS
The Act also provides for the PLUS Program. The Act authorizes PLUS Loans
to be made to parents of eligible dependent students. The 1993 Act eliminated
the SLS Program after July 1, 1994.
The PLUS program permits parents of dependent students to borrow an amount
equal to each student's Unmet Need. Under the former SLS program, independent
graduate or professional students and certain dependent undergraduate students
were permitted to borrow subject to the same loan limitations.
The first payment of principal and interest is due within 60 days of full
disbursement of the loan except for borrowers eligible for deferment who may
defer principal and interest payments while eligible for deferment; deferred
interest is then capitalized periodically or at the end of the deferment period
under specific arrangements with the borrower. The maximum repayment term is 10
years. PLUS and SLS loans carry no in-school interest subsidy.
A-7
<PAGE>
The interest rate determination for a PLUS or SLS loan is dependent on when
the loan was originally made or disbursed. Some PLUS or SLS loans carry a
variable rate. The rate varies annually for 12-month periods beginning on July 1
and ending on June 30. The variable rate is determined on the preceding June 1
and is equal to the lesser of (a) the applicable Maximum Rate or (b) the sum of
(i) the bond equivalent rate of 52-week Treasury bills auctioned at the final
auction held prior to such June 1, and (ii) the applicable Interest Rate Margin
as set forth below.
A holder of a PLUS or SLS loan is eligible to receive Special Allowance
Payments during any such 12-month period if (a) the sum of (i) the bond
equivalent rate of 52-week Treasury bills auctioned at the final auction held
prior to such June 1 and (ii) the Interest Rate Margin exceeds (b) the Maximum
Rate.
PLUS/SLS LOANS
<TABLE>
<CAPTION>
DATE OF DISBURSEMENT BORROWER RATE MAXIMUM RATE INTEREST 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 + 12% 3.25%
Interest Rate
Margin
10/01/92 - 06/30/94.............................. 52-Week Treasury + PLUS 10% 3.10%
Interest Rate SLS 11%
Margin
After 06/30/94................................... 52-Week Treasury + 9% 3.10%
(SLS repealed 07/01/94) Interest Rate
Margin
</TABLE>
THE CONSOLIDATION LOAN PROGRAM
The Act authorizes a program under which certain borrowers may consolidate
their various Student Loans into Consolidation Loans which will be insured and
reinsured to the same extent as other loans made under the FFELP. Under this
program, a lender may make a Consolidation Loan only if, among other things, (a)
such lender holds one of the borrower's outstanding Student Loans that is
selected for consolidation, or (b) the borrower has unsuccessfully sought a
Consolidation Loan from the holders of the Student Loans selected for
consolidation.
Consolidation Loans are made in an amount sufficient to pay outstanding
principal and accrued unpaid interest and late charges on all FFELP loans, as
well as loans made pursuant to various other federal student loan programs,
which were selected by the borrower for consolidation. The unpaid principal
balance of a Consolidation Loan made prior to July 1, 1994 bears interest at a
rate not less than 9%. The interest rate on a Consolidation Loan made after July
1, 1994 is equal to the weighted average of the interest rates on the loans
selected for consolidation, rounded upward to the nearest whole percent. The
holder of a Consolidation Loan made on or after October 1, 1993 must pay the
Secretary a monthly rebate fee calculated on an annual basis equal to 1.05
percent of the principal plus accrued unpaid interest on any such loan.
The repayment term under a Consolidation Loan varies depending upon the
aggregate amount of the loans being consolidated. In no case may the repayment
term exceed 30 years. A Consolidated Loan is evidenced by an unsecured
promissory note and entitles the borrower to prepay the loan, in whole or in
part, without penalty.
GUARANTEE AGENCIES
The Act authorizes Guarantee Agencies to support education financing and
credit needs of students at post-secondary schools. Under various programs
throughout the United States, Guarantee Agencies insure and sometimes service
and hold guaranteed student loans. The Guarantee Agencies are reinsured by the
federal government for 80% to 100% of claims paid, depending on their claims
experience for loans disbursed prior to October 1, 1993 and for 78% to 98% of
claims paid for loans disbursed on or after October 1, 1993. See "-- Federal
Insurance and Reinsurance of Guarantee Agencies."
A-8
<PAGE>
Guarantee Agencies may collect a one-time insurance fee of up to 1% of the
principal amount of each loan, other than Consolidation Loans, that the agency
guarantees.
The Guarantee Agencies generally guarantee loans for students attending
institutions in their particular state or region or for residents of their
particular state or region that are attending schools in another state. Certain
Guarantee Agencies have been designated as the Guarantee Agency for more than
one state. Some Guarantee Agencies contract with other entities to administer
their guarantee agency program.
Each 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 Guarantee Agency
pursuant to a Guarantee Agreement between such Guarantee Agency and the
applicable Eligible Lender Trustee. The applicable Prospectus Supplement for
each Trust will identify each related Guarantee Agency and the amount of related
Trust Student Loans it is guaranteeing for such Trust.
FEDERAL INSURANCE AND REINSURANCE OF GUARANTEE AGENCIES
A 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 180 days in the case of
a loan repayable in monthly installments or for 240 days in the case of a loan
repayable in less frequent installments.
If the loan is guaranteed by a Guarantee Agency, the eligible lender is
reimbursed by the Guaranty Agency for 100% (98% for loans first disbursed on or
after October 1, 1993) of the unpaid principal balance of the loan plus accrued
unpaid interest on any loan defaulted so long as the eligible lender has
properly originated and serviced such loan. Under certain circumstances a loan
deemed ineligible for reimbursement may be restored to eligibility.
Under the Act, the Department enters into a reinsurance agreement with each
Guarantee Agency, which provides for federal reinsurance of amounts paid to
eligible lenders by the Guarantee Agency with respect to defaulted loans.
Pursuant to such agreements, the Department agrees to reimburse a Guarantee
Agency for 100% of the amounts expended in connection with a claim resulting
from the death, bankruptcy or total and permanent disability of a borrower, the
death of a student whose parent is the borrower of a PLUS Loan or claims by
borrowers who received loans on or after January 1, 1986 and who are unable to
complete the programs in which they are enrolled due to school closure or
borrowers whose borrowing eligibility was falsely certified by the eligible
institution; such claims are not included in calculating a Guarantee Agency's
"claims experience" for federal reinsurance purposes, as set forth below. The
Department is also required to repay the unpaid balance of any loan if
collection is stayed under 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.
With respect to FFELP loans in default, the Department is required to pay
the applicable Guarantee Agency a certain percentage ("Reinsurance Rate") of the
amount such agency paid pursuant to default claims filed by the lender on a
reinsured loan. The level of such Reinsurance Rate is subject to specified
reductions when the total reinsurance claims paid by the Department to a
Guarantee Agency during a fiscal year equals or exceeds 5% of the aggregate
original principal amount of FFELP loans guaranteed by such agency that are in
repayment on the last day of the prior fiscal year. Accordingly, the amount of
the reinsurance payment received by the Guarantee Agency may vary. The
Reinsurance Rates are set forth in the following table.
<TABLE>
<CAPTION>
GUARANTEE AGENCY'S
CLAIMS EXPERIENCE(1) APPLICABLE REINSURANCE RATE(2)
- --------------------------------- --------------------------------------------------------------------
<S> <C>
0% up to 5%...................... 98% (100% for loans disbursed before Oct. 1, 1993)
5% up to 9%...................... 88% (90% for loans disbursed before Oct. 1, 1993)
9% and over...................... 78% (80% for loans disbursed before Oct. 1, 1993)
</TABLE>
- ------------------
(1) The claims experience is not cumulative. Rather, the claims experience for
any given Guarantee Agency is determined solely on the basis of claims for
any one federal fiscal year compared with the original principal amount of
loans in repayment at the beginning of that year.
(2) Within each fiscal year, the applicable Reinsurance Rate steps down
incrementally with respect to claims made only after the claims experience
thresholds are reached.
A-9
<PAGE>
The 1992 Amendments addressed industry concerns regarding the Department's
commitment to providing support in the event of Guarantee Agency failures.
Pursuant to the 1992 Amendments, Guarantee Agencies are required to maintain
specified reserve fund levels. Such levels are defined as 0.5% of the total
attributable amount of all outstanding loans guaranteed by the agency for the
fiscal year of the agency that begins in 1993, 0.7% for the agency's fiscal year
beginning in 1994, 0.9% for the agency's fiscal year beginning in 1995 and 1.1%
for the agency's fiscal year beginning on or after January 1, 1996. If (i) the
Guarantee Agency fails to achieve the minimum reserve level in any two
consecutive years, (ii) the Guarantee Agency's federal reimbursements are
reduced to 80 percent (or 78 percent after October 1, 1993) or (iii) the
Department determines the Guarantee Agency's administrative or financial
condition jeopardizes its continued ability to perform its responsibilities, the
Department must require the Guarantee Agency to submit and implement a
management plan to address the deficiencies. The Department may terminate the
Guarantee Agency's agreements with the Department if the Guarantee Agency fails
to submit the required plan, or fails to improve its administrative or financial
condition substantially, or if the Department determines the Guarantee Agency is
in danger of financial collapse. In such event, the Department is authorized to
undertake specified actions to assure the continued payment of claims, including
making advances to Guarantee Agencies to cover immediate cash needs, transfer
guarantees to another Guarantee Agency, or transfer of guarantees to the
Department itself.
The Act provides that, subject to compliance with the Act, the full faith
and credit of the United States is pledged to the payment of federal reinsurance
claims. It further provides that Guarantee Agencies are deemed to have a
contractual right against the United States to receive reinsurance in accordance
with its provisions. In addition, the 1992 Amendments provide that if the
Department determines that a Guarantee Agency is unable to meet its insurance
obligations, holders of loans may submit insurance claims directly to the
Department until such time as the obligations are transferred to a new Guarantee
Agency capable of meeting such obligations or until a successor Guarantee Agency
assumes such obligations. There can be no assurance that the Department would
under any given circumstances assume such obligation to assure satisfaction of a
guarantee obligation by exercising its right to terminate a reimbursement
agreement with a Guarantee Agency or by making a determination that such
Guarantee Agency is unable to meet its guarantee obligations.
Lastly, the 1993 Act provides the Secretary with broad authority to manage
the finances and affairs of Guarantee Agencies. In general, the Act provides
that agency reserve funds are federal property and may be taken by the Secretary
if he determines such action is in the best interests of the loan program. Also,
the Secretary has broad authority to terminate a Guarantee Agency's reinsurance
agreement with the Department.
A-10
<PAGE>
APPENDIX B
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Securities will be available
only in book-entry form (the "Global Securities"). Investors in the Global
Securities may hold such Global Securities through The Depository Trust Company
("DTC") or, if applicable, Cedel or Euroclear. The Global Securities will be
tradeable as home market instruments in both the European and U.S. domestic
markets. Initial settlement 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.
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.
Secondary cross-market trading between Cedel or Euroclear and DTC
participants holding Securities will be effected on a delivery-against-payment
basis through the respective depositaries of Cedel and Euroclear and as
participants in DTC.
Non-U.S. holders of Global Securities will be exempt from U.S. withholding
taxes, provided that such holders meet certain requirements and deliver
appropriate U.S. tax documents to the securities clearing organizations or their
participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their respective depositaries,
which in turn will hold such positions in accounts as participants of DTC.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to U.S. corporate debt obligations. 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 purchase determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and 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 using the procedures applicable to U.S. corporate
debt issues in same-day funds.
Trading between Cedel and/or Euroclear participants. Secondary market
trading between Cedel participants and/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 participant at least one
business day prior to settlement. Cedel or Euroclear will instruct the
respective 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. Payment will then
be made by the respective depositary to the DTC participant's account against
delivery of the Global
B-1
<PAGE>
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 Global 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 exiting 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, participants can elect not to preposition funds and allow that credit line
to be drawn upon to finance settlement. Under this procedure, Cedel participants
or Euroclear participants purchasing Global Securities would incur overdraft
charges for one day, assuming they cleared the overdraft when the Global
Securities were credited to their accounts. However, interest on the Global
Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of such overdraft charges, although
this result will depend on each participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
participants can employ their usual procedures for sending Global Securities to
the respective 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 participant a cross-market transaction will
settle no differently than a trade between two DTC participants.
Trading between Cedel or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, Cedel and Euroclear participants may employ
their customary procedures for transactions in which Global Securities are to be
transferred by the respective clearing system, through the respective
depositary, to a DTC participant. The seller will send instructions to Cedel or
Euroclear through a participant at least one business day prior to settlement.
In this case, Cedel or Euroclear will instruct the respective depositary to
deliver the 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 date to and excluding the settlement date. 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 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 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
charges 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 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 would automatically fail on the sale
side unless affirmative action were 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
B-2
<PAGE>
3. staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC participant is at
least one day prior to the value date for the sale to the Cedel participant
or Euroclear participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A holder 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 the 30% U.S. withholding tax that generally applies to payments of interest
(including original interest discount) on registered debt issued by U.S.
persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such holder takes one of the following steps to obtain an exemption or
reduced tax rate:
Exemption for non-U.S. person (Form W-8). Non-U.S. persons that are
beneficial owners can obtain a complete exemption from the withholding tax by
filing a signed Form W-8 (Certificate of Foreign Status).
If the information shown on Form W-8 changes, a new Form W-8 must be filed
within 30 days of such change.
Exemption for non-U.S. persons with effectively connected income (Form
4224). A non-U.S. person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. persons resident in treaty countries
(Form 1001). Non-U.S. persons that are beneficial owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the beneficial owner or
his agent.
Exemption for U.S. persons (Form W-9). U.S. persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Global Security 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 which he holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form S-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof or (iii) an estate the income
of which is includible in gross income for United States tax purposes,
regardless of its source, or a trust whose administration is subject to the
primary supervision of a United States court and which has one or more United
States fiduciaries who have the authority to control all substantial decisions
of the trust. This summary does not deal with all aspects of U.S. federal income
tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
B-3
<PAGE>
APPENDIX C
INDEX OF PRINCIPAL TERMS
Set forth below is a list of the defined terms used in this Prospectus and
the pages on which the definitions of such terms may be found herein.
PAGE
------
1992 Act........................................................... 22
1992 Amendments.................................................... 15
1993 Act........................................................... 14, 22
Accrual Period..................................................... 49
Act................................................................ 13
Administration Agreement........................................... 8
Administration Fee................................................. 8
Administrator...................................................... 3
Administrator Default.............................................. 38
Applicable Trustee................................................. 51
Base Rate.......................................................... 49
Business Day....................................................... 18
Calculation Agent.................................................. 49
Cede............................................................... 20
Cedel.............................................................. 52
Cedel Participants................................................. 52
Certificate Balance................................................ 5
Certificate Pool Factor............................................ 42
Certificate Rate................................................... 5
Certificateholders................................................. 4
Certificates....................................................... 1
Closing Date....................................................... 5
Code............................................................... 12, 57
Collection Account................................................. 6, 31
Collection Period.................................................. 33
Commission......................................................... 2
Cooperative........................................................ 52
Cutoff Date........................................................ 5
Definitive Certificates............................................ 53
Definitive Notes................................................... 53
Definitive Securities.............................................. 53
Delaware Tax Counsel............................................... 11
Department......................................................... 6
Depositaries....................................................... 51
Depository......................................................... 42
Distribution Date.................................................. 43
DOE Data Book...................................................... 24
DSLP............................................................... 14
DTC's Nominee...................................................... 20
Eligible Deposit Account........................................... 32
Eligible Investments............................................... 32
Eligible Lender Trustee............................................ 1, 3
ERISA.............................................................. 12, 66
Euroclear.......................................................... 52
Euroclear Operator................................................. 52
Euroclear Participants............................................. 52
C-1
<PAGE>
PAGE
------
Event of Default................................................... 44
Federal Tax Counsel................................................ 11
FFELP.............................................................. 5
FFELP Loans........................................................ 5
Fixed Rate Securities.............................................. 49
Floating Rate Securities........................................... 49
Foreign Person..................................................... 60
Funding Period..................................................... 7
Guarantee Agency................................................... 6
Guarantee Payments................................................. 6
HEAL............................................................... 22
Higher Education Act............................................... 13
Indenture.......................................................... 3
Indenture Trust Estate............................................. 45
Indenture Trustee.................................................. 1, 3
Indirect Participants.............................................. 51
Insolvency Event................................................... 37
Interest Subsidy Payments.......................................... A-1
Interim Trust Agreement............................................ 3
Interim Trustee.................................................... 3
Investment Earnings................................................ 32
Issuer............................................................. 3
LSCs............................................................... 23
Monthly Servicing Payment Date..................................... 10
Non-FFELP Loans.................................................... 5
Note Owner......................................................... 57
Note Pool Factor................................................... 42
Note Rate.......................................................... 4
Noteholders........................................................ 4
Notes.............................................................. 1
OID................................................................ 58
OID Regulations.................................................... 58
Participants....................................................... 43
Plan............................................................... 66
Pool Balance....................................................... 42
Pool Factor........................................................ 41
Pre-Funding Account................................................ 7
Pre-Funding Amount................................................. 7
Prepayment Assumption.............................................. 58
Program Payments................................................... 8
Prospectus Supplement.............................................. 1
Purchase Agreement................................................. 6
Purchase Amount.................................................... 29
Qualified Substitute Student Loans................................. 9
Rating Agencies.................................................... 18
Registration Statement............................................. 2
Related Documents.................................................. 46
Reserve Account.................................................... 7
Reserve Account Initial Deposit.................................... 7
Reset Period....................................................... 48
Rules.............................................................. 52
Sale Agreement..................................................... 6
Sallie Mae......................................................... 1, 3
C-2
<PAGE>
PAGE
------
Secretary.......................................................... 21
Securities......................................................... 1
Securities Act..................................................... 2
Securityholders.................................................... 2
Seller............................................................. 1, 3
Servicer........................................................... 1, 3
Servicer Default................................................... 36
Servicing Agreement................................................ 8
Servicing Fee...................................................... 8, 10
Special Allowance Payment.......................................... A-1
Specified Reserve Account Balance.................................. 7
Spread............................................................. 48
Spread Multiplier.................................................. 48
Student Loans...................................................... 1, 5
Terms and Conditions............................................... 53
Trust.............................................................. 1, 3
Trust Accounts..................................................... 32
Trust Agreement.................................................... 3
Trust Student Loans................................................ 3
UCC................................................................ 55
Underwriting Agreements............................................ 66
C-3
<PAGE>
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE SELLER, THE TRUST OR THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN
ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE
PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER OR
THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE SELLER OR THE TRUST SINCE THE DATE HEREOF
OR THAT THE INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
-----
Reports to Securityholders........................ S-2
Summary of Terms.................................. S-3
Risk Factors...................................... S-15
Formation of the Trust............................ S-15
Management's Discussion and Analysis of Financial
Condition and Results of Operations............. S-16
Use of Proceeds................................... S-17
The Trust Student Loan Pool....................... S-17
Description of the Securities..................... S-31
ERISA Considerations.............................. S-41
Proposed State Tax Legislation.................... S-42
Underwriting...................................... S-43
Legal Matters..................................... S-44
Index of Principal Terms.......................... S-45
PROSPECTUS
Available Information............................. 2
Incorporation of Certain Documents by Reference... 2
Prospectus Supplement............................. 2
Reports to Securityholders........................ 2
Summary Information............................... 3
Risk Factors...................................... 13
Sallie Mae........................................ 20
The Student Loan Pools............................ 22
The Seller........................................ 25
Formation of the Trusts........................... 26
Transfer and Servicing Agreements................. 29
Servicing; Administration......................... 31
Trading Information............................... 40
Description of the Notes.......................... 43
Description of the Certificates................... 48
Certain Information Regarding the Securities...... 49
Certain Legal Aspects of the Student Loans........ 54
Certain Federal Income Tax Consequences........... 57
Certain State Tax Consequences.................... 65
ERISA Considerations.............................. 66
Use of Proceeds................................... 66
Plan of Distribution.............................. 66
Legal Matters..................................... 67
Appendix A: The Federal Family Education Loan
Program......................................... A-1
Appendix B: Global Clearance, Settlement and Tax
Documentation Procedures........................ B-1
Appendix C: Index of Principal Terms.............. C-1
------------------
UNTIL , 1997 (NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS
SUPPLEMENT), ALL DEALERS EFFECTING TRANSACTIONS IN THE NOTES OR THE
CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS ACTING AS UNDERWRITERS TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
$
SLM STUDENT
LOAN TRUST 1997-1
$
FLOATING RATE CLASS A-1
STUDENT LOAN-BACKED NOTES
$
FLOATING RATE CLASS A-2
STUDENT LOAN-BACKED NOTES
$
FLOATING RATE
STUDENT LOAN-BACKED CERTIFICATES
SLM FUNDING CORPORATION
SELLER
SALLIE MAE SERVICING CORPORATION
SERVICER
----------------------
PROSPECTUS SUPPLEMENT
----------------------
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
DEUTSCHE MORGAN GRENFELL
EDUCATION SECURITIES, INC.
LEHMAN BROTHERS
MERRILL LYNCH & CO.
J.P. MORGAN & CO.
MORGAN STANLEY & CO.
INCORPORATED
SALOMON BROTHERS INC
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
