<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED AUGUST 6, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 5, 1998)
$
SLM STUDENT LOAN TRUST 1998-3
$ 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 1998-3 (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").
The assets of the Trust will include a pool of student loans purchased by
Chase Manhattan Bank Delaware, as eligible lender trustee on behalf of the
Trust (the "Eligible Lender Trustee"), from SLM
(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-16 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 PROCEEDS TO
OFFERING UNDERWRITING THE
PRICE(1) DISCOUNT SELLER(1)(2)
-------------- ------------ ------------
<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 August , 1998.
(2) 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 August , 1998 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.
J.P. MORGAN & CO.
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
------------
The date of this Prospectus Supplement is August , 1998.
<PAGE>
(Continued from preceding page)
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 January 25, 1999 (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"), an affiliate of Student
Loan Marketing Association ("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 and the Financial Services Act
1986.
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS IN
THE UNITED STATES THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICES OF
THE NOTES AND THE CERTIFICATES, INCLUDING OVER-ALLOTMENT TRANSACTIONS,
STABILIZING TRANSACTIONS, SYNDICATE COVERING TRANSACTIONS AND PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING" HEREIN.
S-2
<PAGE>
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-3
<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.
Issuer.................. SLM Student Loan Trust 1998-3 (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, to-
gether with the Class A-1 Notes, the "Notes") in
the aggregate principal amount of $ ; and Float-
ing 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 Associa-
tion ("Sallie Mae"). Because the Seller is not an
institution eligible to hold legal title to the
Student Loans, Chase Manhattan Bank Delaware, as
eligible lender trustee for the Seller (the "In-
terim Trustee") will hold legal title to the Stu-
dent Loans on behalf of the Seller pursuant to a
trust agreement to be dated as of August 1, 1998
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"),
an affiliate of Sallie Mae that manages and oper-
ates Sallie Mae's loan servicing functions. Under
certain circumstances, the Servicer may transfer
its obligations as Servicer. See "Servicing; Admin-
istration--Certain Matters Regarding the Servicer"
in the Prospectus.
Eligible Lender
Trustee................. Chase Manhattan Bank Delaware, 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 a Master Admin-
istration Agreement dated as of May 1, 1997 (as
amended and supplemented from time to time, the
"Master Administration Agreement") between the Ad-
ministrator and the Seller and the Supplement
thereto dated as of August , 1998 (as amended and
supplemented from time to time, the "Administration
Agreement Supplement" and, together with the Master
Administration Agreement, the "Administration
Agreement") among the Administrator, the Seller,
the Trust, the Eligible Lender Trustee, the
Servicer and the Indenture Trustee. Under certain
circumstances, Sallie Mae may transfer its obliga-
tions as Administrator. See "Servicing; Administra-
tion--Administration Agreement" in the Prospectus.
S-4
<PAGE>
The Trust............... The Trust will be established under the laws of the
State of Delaware as a Delaware Business Trust un-
der a Trust Agreement to be dated as of August 1,
1998 (as amended and supplemented from time to
time, the "Trust Agreement"), between the Seller
and the Eligible Lender Trustee. The activities of
the Trust and the Eligible Lender Trustee are lim-
ited by the terms of the Trust Agreement to acquir-
ing, 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 Edu-
cation Loan Program ("FFELP") including loans to
consolidate the borrower's obligations under vari-
ous federally authorized student loan programs into
a single loan ("Consolidation Loans") and will in-
clude rights to receive payments made with respect
to such Trust Student Loans and the proceeds there-
of. On or prior to August , 1998 (the "Closing
Date"), the Seller will sell Student Loans having
an aggregate principal balance (including interest
to be capitalized) of approximately $1,503,473,804
as of July 27, 1998 (the "Cutoff Date"), to the El-
igible Lender Trustee on behalf of the Trust pursu-
ant to a Sale Agreement to be dated as of the Clos-
ing Date (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 De-
partment 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 the Closing Date (as amended and supplemented
from time to time, the "Purchase Agreement") be-
tween 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 bor-
rower interest rate per annum with respect to the
Trust Student Loans was approximately 8.06% (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 131 months.
"Collection Period" means each period of three cal-
endar months from and including the date next fol-
lowing 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 December 31, 1998).
S-5
<PAGE>
The "Pool Balance" means as of any date the aggre-
gate principal balance of the Trust Student Loans
on such date (including accrued interest thereon to
the extent such interest is expected to be capital-
ized), after giving effect to the following, with-
out duplication: (i) all payments received by the
Trust through such date from or on behalf of bor-
rowers, the Guarantee Agencies and the Department
(collectively, "Obligors"), (ii) all Purchase
Amounts on Purchased Student Loans received by the
Trust through such date from the Seller or the
Servicer, (iii) all Liquidation Proceeds and Real-
ized 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 un-
der 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 re-
ceived with respect to the Trust Student Loans and
Interest Subsidy Payments and Special Allowance
Payments in respect thereof are required to be de-
posited in the Collection Account. See "Servicing;
Administration--Payments on Student Loans" in the
Prospectus.
Pursuant to the Administration Agreement, the Ad-
ministrator 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 Servic-
ing Fee and on each Distribution Date to the fol-
lowing (in the priority indicated, except as other-
wise described herein):
(i) the Primary Servicing Fee to the Servicer; (ii)
the Administration Fee and all overdue Administra-
tion Fees to the Administrator; (iii) the Notehold-
ers' 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 Distribu-
tion 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 Ac-
count to reinstate the balance thereof to the Spec-
ified Reserve Account Balance; (viii) the Carryover
Servicing Fee, if any, to the Servicer; (ix) the
Note Interest Carryover, if any, to the Notehold-
ers; (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, an account in the
name of the Indenture Trustee (the "Reserve Ac-
count") 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
S-6
<PAGE>
Deposit"). The Reserve Account Initial Deposit will
be augmented on each Distribution Date by the de-
posit 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 Date) in excess of the
Specified Reserve Account Balance for such Distri-
bution Date will, after payment of any Note Princi-
pal Shortfall, Certificate Balance Shortfall, Car-
ryover 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 re-
lated 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 out-
standing principal amount of the Notes and the Cer-
tificate Balance. See "Description of the Securi-
ties--Credit Enhancement--Reserve Account."
Amounts on deposit in the Reserve Account will be
available on each Distribution Date (and, with re-
spect to the Primary Servicing Fee, on each Monthly
Servicing Payment Date) to cover any shortfalls in
payments of the Primary Servicing Fee, the Adminis-
tration Fee, the Noteholders' Interest Distribution
Amount and the Certificateholders' Return Distribu-
tion 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 Servic-
ing 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 Matu-
rity Date to cover any shortfalls in payments of
the Noteholders' Principal Distribution Amount and
interest accrued thereon, and on the final Distri-
bution Date upon termination of the Trust to pay
the Certificate Balance Distribution Amount and re-
turn 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 Distribu-
tion Date sufficient to pay the remaining principal
amount of and interest accrued on the Notes, to re-
duce the Certificate Balance to zero and to pay any
accrued return thereon, and to pay any Carryover
Servicing Fee, Note Interest Carryover or Certifi-
cate Return Carryover, such amount will be so ap-
plied 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-7
<PAGE>
D. Transfer and
Servicing
Agreements.......... Under the Sale Agreement, the Seller will sell the
Trust Student Loans to the Trust, with the Eligible
Lender Trustee holding legal title thereto. In ad-
dition, pursuant to the Servicing Agreement, the
Servicer will agree with the Trust to be responsi-
ble for servicing, maintaining custody of and mak-
ing 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 sub-
stitute 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 reim-
burse the Trust for certain losses resulting from
such breach. See "The Trust Student Loan Pool--In-
surance of Student Loans."
The Servicer will receive a Primary Servicing Fee
and a Carryover Servicing Fee (together, the "Ser-
vicing Fee"). The "Primary Servicing Fee" for any
month is an amount equal to, in the case of Trust
Student Loans that are not Consolidation Loans,
1/12th of % of the outstanding principal amount
of such Trust Student Loans and, in the case of
Consolidation Loans, 1/12th of % of the outstand-
ing principal amount of such 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 Primary Servicing Fee will be payable out of
Available Funds and amounts on deposit in the Re-
serve 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 September 25,
1998 (each, a "Monthly Servicing Payment Date").
The "Carryover Servicing Fee" is the sum of (a) the
amount of certain increases in the costs incurred
by the Servicer described herein, (b) the amount of
certain conversion, transfer and removal fees and
(c) any amounts described in (a) and (b) above that
remain unpaid from prior Distribution Dates, to-
gether with interest on such unpaid amounts as de-
scribed 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 "De-
scription of the Securities--Servicing Compensa-
tion."
S-8
<PAGE>
The Notes............... The Trust will issue the Notes pursuant to an In-
denture to be dated as of August 1, 1998 (as
amended and supplemented from time to time, the
"Indenture"), among the Indenture Trustee, the
Trust and the Eligible Lender Trustee. The Notes
will be secured by the assets of the Trust. The
Notes will be available for purchase in denomina-
tions 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 here-
in) 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 Peri-
od, through the day of the first 91-day Treasury
Bill auction on or after the first day of each Ac-
crual 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 "Description of the Se-
curities--Determination of T-Bill Rates." Interest
on the outstanding principal amount of the Notes
will accrue from and including the preceding Dis-
tribution Date (or in the case of the first Accrual
Period, the Closing Date) to but excluding the fol-
lowing Distribution Date (each an "Accrual Period")
and will be payable on the 25th day of each Janu-
ary, April, July and October, or, if any such date
is not a business day, on the next succeeding busi-
ness day (each a "Distribution Date"), commencing
January 25, 1999, 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 the Class A-1 Note-
holders, the "Noteholders") as of the close of
business on the day immediately preceding the Dis-
tribution Date (such day, the "Record Date"). In-
terest will be calculated on the basis of the ac-
tual 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."
S-9
<PAGE>
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 calcu-
lated 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, actu-
ally accrued in respect of such Accrual Period
based on the Student Loan Rate (such excess, to-
gether 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), is collectively referred
to as "Note Interest Carryover") will be paid on
that Distribution Date or on any subsequent Distri-
bution 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--Distri-
butions 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 Dis-
tribution Date in an amount equal to the Notehold-
ers' Principal Distribution Amount for such Distri-
bution Date. The "Noteholders' Principal Distribu-
tion Amount" generally will be equal to the Princi-
pal 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 Dis-
tribution Date, to the amount by which the Adjusted
Pool Balance for the preceding Distribution Date
exceeds the Adjusted Pool Balance for such Distri-
bution Date. For this purpose, "Adjusted Pool Bal-
ance" means, for any Distribution Date, (a) if the
Pool Balance as of the last day of the related Col-
lection Period is greater than 40% of the Initial
Pool Balance, the sum of such Pool Balance and the
Specified Reserve Account Balance for such Distri-
bution 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 Securi-
ties--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
S-10
<PAGE>
"Class A-1 Maturity Date"). The outstanding princi-
pal 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 ma-
turity of the Class A-1 Notes and the Class A-2
Notes could occur sooner than such dates as a re-
sult 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 de-
scribed 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 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 inter-
ests in the Trust. The initial Certificate Balance
will equal $ . See "Formation of the Trust--The
Trust."
A. Return on the
Certificates........ Return on the Certificates will accrue for each Ac-
crual Period at a rate per annum, except as de-
scribed 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 ad-
justed 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 Ac-
crual 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 Stu-
dent Loan Rate, the excess of (a) the amount of re-
turn 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 actu-
ally accrued in respect of such Accrual Period
based on the Student Loan Rate (such excess, to-
gether with the unpaid portion of any such excess
from prior Distribution Dates (and any return ac-
crued thereon calculated at the Certificate Rate
without regard to the Student Loan Rate), is re-
ferred to as "Certificate Return Carryover") will
be paid on that Distribution Date or on any subse-
quent Distribution Date to the extent funds are
S-11
<PAGE>
allocated and available therefor out of the Collec-
tion Account after making all required prior dis-
tributions and deposits on such date as described
below under "Description of the Securities--Distri-
butions." The ratings of the Certificates do not
address the likelihood of the payment of any Cer-
tificate 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, on the Closing Date), after giving effect to
all distributions in respect 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 Securi-
ties--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 re-
sult 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 de-
scribed 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 Certificates.... On any Distribution Date distributions in respect
of return on the 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 subordi-
nated to the payment of interest on the Notes
(other than any Note Interest Carryover) and prin-
cipal of the Notes. See "Description of the Securi-
ties--The Certificates--Subordination of the Cer-
tificates."
Optional Purchase....... The Seller may purchase or arrange for the purchase
of all remaining Trust Student Loans, and thus ef-
fect the early retirement of the Notes and the Cer-
tificates, 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 Pe-
riod (but not less than the Minimum Purchase Amount
plus any Note Interest Carryover and any Certifi-
cate Return Carryover). See "Formation of the
Trusts--Termination" in the Prospectus. The "Ini-
tial Pool Balance" will equal the Pool Balance as
of the Cutoff Date.
S-12
<PAGE>
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 pur-
chase such remaining Trust Student Loans with re-
spect 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 may offer
bids to purchase such Trust Student Loans on the
Trust Auction Date. If at least two bids are re-
ceived, 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 Inden-
ture Trustee will not consummate such sale. The In-
denture 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, in-
cluding the Seller's waiver of its option to pur-
chase 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 Reserve Ac-
count on such Distribution Date (after giving ef-
fect to all withdrawals therefrom on such Distribu-
tion Date, except withdrawals payable to the Seller
other than as a Certificateholder) is in excess of
the Specified Reserve Account Balance for such Dis-
tribution 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 Certifi-
cate 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
S-13
<PAGE>
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 Certifi-
cate Return Distribution Amount payable on such
Distribution Date. See "Formation of the Trusts--
Termination" in the Prospectus.
Tax Considerations...... In the opinion of Shearman & Sterling, 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 character-
ized as debt for federal and Delaware state income
tax purposes, although there is no specific author-
ity with respect to the characterization for fed-
eral and Delaware state income tax purposes of se-
curities having the same terms as the Notes.
In the opinion of Federal Tax Counsel, for federal
income tax purposes the Trust will not be charac-
terized as an association (or publicly traded part-
nership) 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 Certifi-
cates. 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 Cer-
tificates on an accrual basis. In addition, because
tax allocations and tax reporting will be done on a
uniform basis, but Certificateholders may be pur-
chasing Certificates at different times and at dif-
ferent 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 applica-
tion 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 Re-
tirement 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 ad-
visors 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.
S-14
<PAGE>
Subject to the conditions set forth in "ERISA Con-
siderations," the Notes may, in general, be pur-
chased 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 ERISA or Section 4975 of the Code, and each pur-
chaser of Certificates shall be deemed to have rep-
resented that it is neither such a Plan, purchasing
the Certificates on behalf of such a Plan, nor us-
ing 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 as-
sets, it will dispose of them.
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 recog-
nized 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 pay-
ment 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 Prospectus under
"Risk Factors." See "Risk Factors" in the Prospec-
tus and herein.
CUSIP Numbers........... Class A-1 Notes: 78442
Class A-2 Notes: 78442
Certificates: 78442
S-15
<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 other factors, 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.
Change in Federal Direct Consolidation Loan Rate; Excess of Principal of
Securities over Trust Assets. On July 1, 1998, the Department of Education
published a notice in the Federal Register in which it announced that it
reduced current borrower interest rates on Federal Direct Consolidation Loans
for borrowers whose applications for such loans are processed after July 1,
1998 from 8.25% to 7.46% (6.86% during in-school, grace and deferment
periods), which rates are adjusted annually based on a formula equal to the
91-day Treasury bill rate plus 2.3 percent (1.7 percent during in-school,
grace and deferment periods). The availability of the reduced borrower
interest rates on Federal Direct Consolidation Loans may increase the
likelihood that a Trust Student Loan will be prepaid from the proceeds of such
loans. The volume of Trust Student Loans that may be prepaid in this fashion
cannot be determined at this time and will be affected by, among other things,
operational limitations on the ability of the Department of Education to
process a significant increase in Federal Direct Consolidation Loan volume and
the period during which reduced rates are available. The Congress is expected
to address the rate on Federal Direct Consolidation Loans as part of the
reauthorization of the Higher Education Act scheduled for this session of
Congress. There can be no assurance that the Congress will address the rate on
consolidation loans, either as to pending or future applications, or that any
legislation adopted will provide for the same rate on both FFELP and Federal
Direct Consolidation Loans or that any legislated consolidation loan rate will
not prompt borrowers to refinance Trust Student Loans at a level greater than
the current level of such refinancings.
As of the Closing Date, the ratio of (1) the principal balance of the assets
in the Trust to (2) the aggregate principal amount of the Securities (the
"Parity Ratio") will be equal to approximately 99.75%. Until the Parity Ratio
reaches 100.0%, the Securityholders must rely primarily on interest and
subsidy payments on the Trust Student Loans and interest on other Trust assets
in excess of Servicing Fees, Administration Fees and interest payable on the
Securities to reduce the aggregate principal amount of the Securities to an
amount equal to the assets of the Trust. To the extent that Securityholders
are so reliant, the Securityholders could be adversely affected by a
significant increase in the rate of prepayments.
FORMATION OF THE TRUST
THE TRUST
The SLM Student Loan Trust 1998-3 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,
S-16
<PAGE>
(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. 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 Delaware, as Eligible Lender Trustee, at the address listed
herein.
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:
<TABLE>
<S> <C>
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............................................................... $
=====
</TABLE>
ELIGIBLE LENDER TRUSTEE
Chase Manhattan Bank Delaware is the Eligible Lender Trustee for the Trust
under the Trust Agreement. Chase Manhattan Bank Delaware is a Delaware banking
corporation whose principal offices are located at 1201 Market Street,
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.
S-17
<PAGE>
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.
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 $ 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.
S-18
<PAGE>
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 120 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.
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
<TABLE>
<S> <C>
Aggregate Outstanding Principal Balance(1)...................... $1,503,473,804
Number of Borrowers............................................. 164,157
Average Outstanding Principal Balance Per Borrower.............. $ 9,159
Number of Loans................................................. 339,452
Average Outstanding Principal Balance Per Loan.................. $ 4,429
Weighted Average Remaining Term to Maturity(2).................. 131 months
Weighted Average Annual Borrower Interest Rate(3)............... 8.06%
</TABLE>
- --------
(1) Includes principal balance due from Obligors, plus accrued interest
thereon of $27,791,672 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 2.84% 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.
S-19
<PAGE>
DISTRIBUTION OF THE TRUST STUDENT LOANS
BY LOAN TYPE AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE POOL BY
OUTSTANDING OUTSTANDING
NUMBER OF PRINCIPAL PRINCIPAL
LOAN TYPE LOANS BALANCE(1) BALANCE
- --------- --------- -------------- -----------
<S> <C> <C> <C>
Subsidized Stafford Loans.................. 222,982 $ 755,787,712 50.3%
Unsubsidized Stafford Loans................ 88,601 419,757,308 27.9
SLS Loans.................................. 6,060 24,703,757 1.6
PLUS Loans................................. 1,388 2,663,150 0.2
Consolidation Loans........................ 20,421 300,561,877 20.0
------- -------------- -----
Total.................................... 339,452 $1,503,473,804 100.0%
======= ============== =====
</TABLE>
- --------
(1) Includes principal balance due from Obligors, plus accrued interest thereon
of $27,791,672 as of the Cutoff Date to be capitalized upon commencement of
repayment.
DISTRIBUTION OF THE TRUST STUDENT LOANS
BY BORROWER INTEREST RATES AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE POOL BY
OUTSTANDING OUTSTANDING
NUMBER OF PRINCIPAL PRINCIPAL
INTEREST RATES(1) LOANS BALANCE(2) BALANCE
- ----------------- --------- -------------- -----------
<S> <C> <C> <C>
Less than 7.50%............................ 2,505 $ 14,993,213 1.0%
7.50% to 8.49%............................. 312,159 1,238,273,923 82.4
8.50% to 9.49%............................. 24,013 240,616,018 16.0
Greater than 9.49%......................... 775 9,590,650 0.6
------- -------------- -----
Total.................................... 339,452 $1,503,473,804 100.0%
======= ============== =====
</TABLE>
- --------
(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 $27,791,672 as of the Cutoff Date to be capitalized upon commencement of
repayment.
S-20
<PAGE>
DISTRIBUTION OF THE TRUST STUDENT LOANS
BY OUTSTANDING PRINCIPAL BALANCE PER BORROWER AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE POOL BY
OUTSTANDING OUTSTANDING
RANGE OF OUTSTANDING NUMBER OF PRINCIPAL PRINCIPAL
PRINCIPAL BALANCE BORROWERS BALANCE(1) BALANCE
- -------------------- --------- -------------- -----------
<S> <C> <C> <C>
Less than $1,000........................... 6,968 $ 4,602,652 0.3%
$ 1,000 to $ 1,999.99...................... 16,308 24,139,581 1.6
$ 2,000 to $ 2,999.99...................... 26,029 66,639,275 4.4
$ 3,000 to $ 3,999.99...................... 14,628 51,017,776 3.4
$ 4,000 to $ 4,999.99...................... 8,412 37,511,721 2.5
$ 5,000 to $ 5,999.99...................... 14,688 80,677,687 5.4
$ 6,000 to $ 6,999.99...................... 8,694 56,647,430 3.8
$ 7,000 to $ 7,999.99...................... 6,318 47,393,855 3.2
$ 8,000 to $ 8,999.99...................... 6,539 55,468,660 3.7
$ 9,000 to $ 9,999.99...................... 4,648 44,026,742 2.9
$10,000 to $10,999.99...................... 5,214 54,978,544 3.7
$11,000 to $11,999.99...................... 4,344 49,685,203 3.3
$12,000 to $12,999.99...................... 3,164 39,518,383 2.6
$13,000 to $13,999.99...................... 2,960 39,977,373 2.7
$14,000 to $14,999.99...................... 3,206 46,516,622 3.1
$15,000 to $15,999.99...................... 2,495 38,628,434 2.6
$16,000 to $16,999.99...................... 2,595 42,773,830 2.8
$17,000 to $17,999.99...................... 3,067 53,308,727 3.5
$18,000 to $18,999.99...................... 3,025 56,333,668 3.7
$19,000 to $19,999.99...................... 5,973 114,727,835 7.6
$20,000 to $20,999.99...................... 1,330 27,223,735 1.8
$21,000 to $21,999.99...................... 1,246 26,803,885 1.8
$22,000 to $22,999.99...................... 1,107 24,912,164 1.7
$23,000 to $23,999.99...................... 760 17,834,462 1.2
$24,000 to $24,999.99...................... 696 17,056,125 1.1
$25,000 to $25,999.99...................... 644 16,428,072 1.1
$26,000 to $26,999.99...................... 567 15,011,689 1.0
$27,000 to $27,999.99...................... 543 14,929,666 1.0
$28,000 to $28,999.99...................... 537 15,305,930 1.0
$29,000 to $29,999.99...................... 532 15,686,673 1.0
$30,000 to $30,999.99...................... 476 14,483,997 1.0
$31,000 to $31,999.99...................... 410 12,909,273 0.9
$32,000 to $32,999.99...................... 344 11,176,713 0.7
$33,000 to $33,999.99...................... 369 12,362,064 0.8
$34,000 to $34,999.99...................... 338 11,659,313 0.8
$35,000 and above.......................... 4,983 245,116,045 16.3
------- -------------- -----
164,157 $1,503,473,804 100.0%
======= ============== =====
</TABLE>
- --------
(1) Includes principal balance due from Obligors, plus accrued interest thereon
of $27,791,672 as of the Cutoff Date to be capitalized upon commencement of
repayment.
S-21
<PAGE>
DISTRIBUTION OF THE TRUST STUDENT LOANS
BY SCHOOL/LOAN TYPE
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE POOL BY
OUTSTANDING OUTSTANDING
NUMBER OF PRINCIPAL PRINCIPAL
SCHOOL/LOAN TYPE LOANS BALANCE(1) BALANCE
- ---------------- --------- -------------- -----------
<S> <C> <C> <C>
FFELP:
4-year Institutions....................... 247,202 $1,033,471,621 68.7%
2-year Institutions....................... 37,912 79,384,993 5.3
Proprietary/Vocational.................... 32,360 80,418,379 5.4
Unidentified.............................. 1,557 9,636,934 0.6
Consolidation Loan Program (2)............. 20,421 300,561,877 20.0
------- -------------- -----
Total.................................... 339,452 $1,503,473,804 100.0%
======= ============== =====
</TABLE>
- --------
(1) Includes principal balance due from Obligors, plus accrued interest
thereon of $27,791,672 as of the Cutoff Date to be capitalized upon
commencement of repayment.
(2) The school type for Consolidation Loans is generally not available.
DISTRIBUTION OF THE TRUST STUDENT LOANS
BY REMAINING TERM TO SCHEDULED MATURITY AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE POOL BY
NUMBER OF MONTHS OUTSTANDING OUTSTANDING
REMAINING TO SCHEDULED NUMBER OF PRINCIPAL PRINCIPAL
MATURITY(1) LOANS BALANCE(2) BALANCE
---------------------- --------- -------------- -----------
<S> <C> <C> <C>
0 to 12................................... 1,495 $ 1,085,325 0.1%
13 to 24.................................. 4,909 3,737,371 0.2
25 to 36.................................. 7,520 8,277,320 0.6
37 to 48.................................. 8,579 12,431,427 0.8
49 to 60.................................. 8,323 14,911,305 1.0
61 to 72.................................. 9,850 21,451,435 1.4
73 to 84.................................. 9,700 24,775,659 1.6
85 to 96.................................. 11,948 38,374,369 2.6
97 to 108................................. 14,793 59,940,936 4.0
109 to 120................................ 65,878 261,435,231 17.4
121 to 132................................ 114,732 492,065,391 32.7
133 to 144................................ 35,387 193,856,750 12.9
145 and Up................................ 46,338 371,131,285 24.7
------- -------------- -----
Total................................... 339,452 $1,503,473,804 100.0%
======= ============== =====
</TABLE>
- --------
(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 $27,791,672 as of the Cutoff Date to be capitalized upon
commencement of repayment.
S-22
<PAGE>
DISTRIBUTION OF THE TRUST STUDENT LOANS
BY CURRENT BORROWER PAYMENT STATUS AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE POOL BY
OUTSTANDING OUTSTANDING
NUMBER OF PRINCIPAL PRINCIPAL
CURRENT BORROWER PAYMENT STATUS(1) LOANS BALANCE(2) BALANCE
- ---------------------------------- --------- -------------- -----------
<S> <C> <C> <C>
In-School.................................. 76,128 $ 357,742,849 23.8%
Grace...................................... 101,508 392,732,210 26.1
Deferral................................... 14,988 76,741,642 5.1
Forbearance................................ 13,565 72,443,705 4.8
Repayment(3)
First year in repayment.................. 68,381 275,758,485 18.4
Second year in repayment................. 14,639 88,953,478 5.9
Third year in repayment.................. 12,084 83,926,354 5.6
More than 3 years in repayment........... 38,159 155,175,081 10.3
------- -------------- -----
Total.................................. 339,452 $1,503,473,804 100.0%
======= ============== =====
</TABLE>
- --------
(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 $27,791,672 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 24, 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)
<TABLE>
<CAPTION>
SCHEDULED MONTHS IN STATUS
----------------------------------------------
CURRENT BORROWER PAYMENT STATUS IN-SCHOOL GRACE DEFERRAL FORBEARANCE REPAYMENT
- ------------------------------- --------- ----- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
In-School....................... 18.5 6.0 -- -- 119.3
Grace........................... -- 3.4 -- -- 118.8
Deferral........................ -- -- 10.8 -- 125.4
Forbearance..................... -- -- -- 3.4 127.6
Repayment....................... -- -- -- -- 127.4
</TABLE>
- --------
(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-23
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE
TRUST STUDENT LOANS AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE POOL BY
OUTSTANDING OUTSTANDING
NUMBER OF PRINCIPAL PRINCIPAL
STATE(1) LOANS BALANCE(2) BALANCE
- -------- --------- ------------ -----------
<S> <C> <C> <C>
Alabama................................. 1,156 $ 6,488,915 0.4%
Alaska.................................. 357 1,490,887 0.1
Arizona................................. 3,708 18,822,783 1.2
Arkansas................................ 2,704 8,305,835 0.5
California.............................. 43,380 214,340,160 14.3
Colorado................................ 7,934 24,595,976 1.6
Connecticut............................. 4,237 19,464,295 1.3
Delaware................................ 1,447 5,958,221 0.4
District of Columbia.................... 1,519 10,280,445 0.7
Florida................................. 8,302 62,700,950 4.2
Georgia................................. 8,202 57,604,323 3.8
Hawaii.................................. 778 3,406,419 0.2
Idaho................................... 683 2,681,378 0.2
Illinois................................ 21,891 103,591,379 6.9
Indiana................................. 2,093 11,749,341 0.8
Iowa.................................... 9,038 24,954,187 1.7
Kansas.................................. 20,961 58,551,133 3.9
Kentucky................................ 1,601 9,271,006 0.6
Louisiana............................... 12,288 44,769,711 3.0
Maine................................... 848 3,871,174 0.3
Maryland................................ 9,865 44,415,183 3.0
Massachusetts........................... 22,559 102,632,516 6.8
Michigan................................ 8,113 42,740,738 2.8
Minnesota............................... 11,925 33,244,533 2.2
Mississippi............................. 5,878 18,002,653 1.2
Missouri................................ 11,577 38,436,141 2.6
Montana................................. 504 1,842,472 0.1
Nebraska................................ 2,981 8,552,132 0.6
Nevada.................................. 1,368 6,136,219 0.4
New Hampshire........................... 873 4,256,612 0.3
New Jersey.............................. 6,683 30,547,807 2.0
New Mexico.............................. 832 3,229,480 0.2
New York................................ 23,485 103,296,182 6.9
North Carolina.......................... 3,605 29,960,433 2.0
North Dakota............................ 1,137 2,520,274 0.2
Ohio.................................... 9,726 59,907,287 4.0
Oklahoma................................ 6,856 20,449,500 1.4
Oregon.................................. 4,003 18,071,642 1.2
Pennsylvania............................ 6,860 33,164,795 2.2
Rhode Island............................ 1,303 5,455,527 0.4
South Carolina.......................... 1,452 13,733,705 0.9
South Dakota............................ 839 2,201,952 0.1
Tennessee............................... 4,998 22,873,779 1.5
Texas................................... 16,127 58,963,881 3.9
Utah.................................... 1,474 6,444,124 0.4
</TABLE>
S-24
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE POOL BY
OUTSTANDING OUTSTANDING
NUMBER OF PRINCIPAL PRINCIPAL
STATE(1) LOANS BALANCE(2) BALANCE
- -------- --------- -------------- -----------
<S> <C> <C> <C>
Vermont............................... 240 $ 1,200,016 0.1%
Virginia.............................. 5,965 31,483,688 2.1
Washington............................ 6,221 25,646,986 1.7
West Virginia......................... 2,008 9,565,541 0.6
Wisconsin............................. 2,704 17,278,994 1.1
Wyoming............................... 368 1,294,762 0.1
Other................................. 3,796 13,025,732 0.9
------- -------------- -----
Total............................... 339,452 $1,503,473,804 100.0%
======= ============== =====
</TABLE>
- --------
(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 $27,791,672 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-25
<PAGE>
The following table sets forth certain information with respect to Trust
Student Loans subject to the repayment terms described in the preceding
paragraphs.
DISTRIBUTION OF THE TRUST
STUDENT LOANS BY REPAYMENT TERMS
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE POOL BY
OUTSTANDING OUTSTANDING
NUMBER OF PRINCIPAL PRINCIPAL
LOAN REPAYMENT TERMS LOANS BALANCE(1) BALANCE
- -------------------- --------- -------------- -----------
<S> <C> <C> <C>
Level Payment.............................. 313,413 $1,250,136,302 83.1%
Other Repayment Options(2)................. 26,039 253,337,502 16.9
------- -------------- -----
Total.................................... 339,452 $1,503,473,804 100.0%
======= ============== =====
</TABLE>
- --------
(1) Includes principal balance due from Obligors, plus accrued interest
thereon of $27,791,672 as of the Cutoff Date to be capitalized upon
commencement of repayment.
(2) Includes graduated repayment, income sensitive and interest only period
loans. Income sensitive loans represent less than 1.1% of the Outstanding
Principal Balance. Interest only period loans represent 4.4% of the
Outstanding Principal Balance.
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
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE POOL BY
OUTSTANDING OUTSTANDING
NUMBER OF PRINCIPAL PRINCIPAL
DISBURSEMENT DATE(1) LOANS BALANCE(2) BALANCE(3)
- -------------------- --------- -------------- -----------
<S> <C> <C> <C>
Pre-October 1, 1993........................ 69,407 $ 259,652,179 17.3%
October 1, 1993 and thereafter............. 270,045 1,243,821,625 82.7
------- -------------- -----
Total.................................... 339,452 $1,503,473,804 100.0%
======= ============== =====
</TABLE>
- --------
(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 $27,791,672 as of the Cutoff Date to be capitalized upon
commencement of repayment.
(3) The holder of a Consolidation Loan made on or after October 1, 1993 must
pay the Department a monthly rebate fee calculated on an annual basis
equal to 1.05% of the principal plus accrued unpaid interest on any such
loan. Of the Trust Student Loans that are Consolidation Loans, 70% were
made on or after October 1, 1993.
S-26
<PAGE>
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.
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-27
<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
GUARANTY AGENCY AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF
OUTSTANDING POOL BY
PRINCIPAL OUTSTANDING
NUMBER OF BALANCE OF PRINCIPAL
LOANS LOANS BALANCE
NAME OF GUARANTY AGENCY GUARANTEED GUARANTEED(1) GUARANTEED
- ----------------------- ---------- -------------- -----------
<S> <C> <C> <C>
American Student Assistance Guarantor... 25,521 $ 120,175,133 8.0%
California Student Aid Commission....... 26,335 111,904,399 7.4
Colorado Student Loan Program........... 7,867 18,251,590 1.2
Connecticut Student Aid Commission...... 4,567 12,930,464 0.9
Education Assistance Corporation........ 657 1,562,546 0.1
Educational Credit Management
Corporation............................ 3,980 10,521,215 0.7
Finance Authority of Maine.............. 558 1,539,772 0.1
Florida Department of Education Office
of Student Financial Assistance........ 2,195 7,656,059 0.5
Georgia Higher Education Assistance
Corp. ................................. 5,325 16,138,773 1.1
Great Lakes Higher Education
Corporation............................ 41,412 198,773,027 13.2
Illinois Student Assistance Commission.. 24,675 123,539,348 8.2
Iowa College Student Aid Commission..... 8,799 22,361,485 1.5
Kentucky Higher Education Assistance
Authority.............................. 505 1,775,373 0.1
Louisiana Student Financial Assistance
Commission............................. 7,293 24,940,285 1.7
Michigan Higher Education Assistance
Authority.............................. 4,857 14,431,774 1.0
Missouri Student Loan Program........... 5,905 14,889,040 1.0
Nebraska Student Loan Program........... 19,879 79,804,849 5.3
New Jersey Office of Student
Assistance............................. 4,409 17,929,595 1.2
N.Y. State Higher Education Services
Corporation............................ 19,848 78,314,793 5.2
Northwest Education Loan Association.... 5,461 19,984,665 1.3
Oklahoma State Regents for Higher
Education.............................. 6,610 18,419,807 1.2
Oregon State Scholarship Commission..... 2,023 5,206,999 0.4
Pennsylvania Higher Education Assistance
Agency................................. 6,589 19,304,879 1.3
Rhode Island Higher Education Assistance
Authority.............................. 996 3,362,538 0.2
Student Loan Guarantee Foundation of
Arkansas, Inc. ........................ 2,975 9,582,521 0.6
Tennessee Student Assistance
Corporation............................ 3,608 11,793,230 0.8
Texas Guaranteed Student Loan
Corporation............................ 17,428 109,571,815 7.3
United Student Aid Funds, Inc. ......... 77,733 424,158,022 28.2
Utah Higher Education Assistance
Authority.............................. 1,442 4,649,808 0.3
------- -------------- -----
339,452 $1,503,473,804 100.0%
======= ============== =====
</TABLE>
- --------
(1) Includes principal balance due from Obligors, plus accrued interest thereon
of $27,791,672 as of the Cutoff Date to be capitalized upon commencement of
repayment.
S-28
<PAGE>
Set forth below is certain historical information with respect to each of
the Guarantors which guarantees Trust Student Loans comprising greater than 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:*
<TABLE>
<CAPTION>
LOANS GUARANTEED
-------------------------------------------------------------------------------
FEDERAL FISCAL YEAR
-------------------------------------------------------------------------------
NAME OF GUARANTY AGENCY 1993 1994 1995 1996 1997
- ----------------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
American Student
Assistance Guarantor... $ 729,805,284 $ 1,099,450,095 $ 906,463,717 $ 706,921,743 $ 668,412,579
California Student Aid
Commission............. 1,414,080,911 1,912,805,714 1,601,275,176 1,409,593,500 1,563,405,694
Great Lakes Higher
Education Corporation.. 797,933,452 1,197,291,546 1,070,698,615 1,172,647,897 1,784,259,938
Illinois Student
Assistance Commission.. 598,902,472 709,642,725 573,085,655 494,362,509 535,138,764
Nebraska Student Loan
Program................ 293,231,149 378,433,971 351,091,611 313,344,121 392,117,230
N.Y. State Higher
Education Services
Corporation............ 1,308,793,197 1,667,124,351 1,553,679,083 1,404,308,282 1,531,888,290
Texas Guaranteed Student
Loan Corporation....... 813,919,938 1,067,232,396 1,155,766,611 1,270,649,512 1,383,563,862
United Student Aid
Funds, Inc............. 3,493,936,722 4,724,841,523 5,040,721,324 5,293,074,800 6,161,344,966
All Guarantee Agencies.. $17,863,099,282 $23,101,135,064 $21,055,193,594 $19,727,950,145 $21,409,775,875
</TABLE>
- --------
* The information set forth in the table above has been obtained from the
Department's FY 1993 Loan Programs Data Book ("DOE Data Book") (with
respect to fiscal year 1993), from the Department's quarterly Loan Volume
Updates (with respect to fiscal years 1994, 1995, 1996 and 1997), and has
not been audited or independently verified for accuracy or completeness by
the Seller, Sallie Mae or the Underwriters.
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-29
<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 1993 1994 1995 1996 1997
---------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
American Student Assistance
Guarantor.......................... 0.6% 0.7% 0.8% 0.9% 0.7%
California Student Aid Commission... 2.3 2.1 2.3 2.5 2.6
Great Lakes Higher Education
Corporation........................ 0.8 1.0 1.1 1.3 1.2
Illinois Student Assistance
Commission......................... 0.7 1.0 1.0 1.1 1.2
Nebraska Student Loan Program....... 0.4 1.2 1.5 1.9 1.2
N.Y. State Higher Education Services
Corporation........................ 0.7 1.0 1.1 1.0 1.0
Texas Guaranteed Student Loan
Corporation........................ 1.1 0.9 1.4 1.1 1.3
United Student Aid Funds, Inc. ..... 1.3 1.2 1.5 1.5 1.5
All Guarantee Agencies.............. 1.7 1.4 1.6 1.6 **
</TABLE>
--------
* The information set forth in the table above with respect to the
Significant Guarantors and the national average has been obtained from
the DOE Data Book (with respect to fiscal year 1993), from the
Department's FY94-96 Federal Student Loan Programs Data Book (with
respect to fiscal years 1994 and 1995), from the latest available
Department of Education reports (with respect to fiscal year 1996) and
from the Significant Guarantors (with respect to fiscal year 1997) and
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 for each year by dividing
the cumulative amount recovered from borrowers by the Guarantor by the
cumulative aggregate amount of default claims paid by the Guarantor. The table
below sets forth the cumulative recovery rates for each of the Significant
Guarantors for the five federal fiscal years shown for which information is
available:*
<TABLE>
<CAPTION>
RECOVERY RATE
----------------------------
FEDERAL FISCAL YEAR
----------------------------
GUARANTORS 1993 1994 1995 1996 1997
---------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
American Student Assistance Guarantor........ 38.8% 39.0% 38.3% 41.3% 42.7%
California Student Aid Commission............ 29.6 33.6 35.6 37.6 36.4
Great Lakes Higher Education Corporation..... 36.2 35.2 35.8 39.8 37.6
Illinois Student Assistance Commission....... 47.3 46.0 46.0 47.3 48.0
Nebraska Student Loan Program................ 15.8 19.8 21.3 26.6 60.0
N.Y. State Higher Education Services
Corporation................................. 38.2 41.9 43.9 46.2 49.4
Texas Guaranteed Student Loan Corporation.... 25.3 30.4 34.3 41.4 45.4
United Student Aid Funds, Inc. .............. 25.6 29.3 34.9 39.2 40.9
</TABLE>
--------
* The information set forth in the table above with respect to the
Significant Guarantors has been obtained from privately published
compilations of DOE data and from the Significant Guarantors (with
respect to fiscal year 1997) and has not been audited or independently
verified for accuracy or completeness by the Seller, Sallie Mae or the
Underwriters.
S-30
<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 1993 1994 1995 1996 1997
---------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
American Student Assistance Guarantor......... 3.0% 3.0% 3.5% 3.1% 3.5%
California Student Aid Commission............. 5.4 4.1 3.4 4.5 4.5
Great Lakes Higher Education Corporation...... 3.7 3.3 3.0 2.3 2.1
Illinois Student Assistance Commission........ 2.5 3.7 2.7 2.7 3.3
Nebraska Student Loan Program................. 4.8 3.0 4.1 3.1 3.2
N.Y. State Higher Education Services Corpora-
tion......................................... 2.9 2.8 3.2 2.9 2.5
Texas Guaranteed Student Loan Corporation..... 5.0 5.2 5.0 3.9 3.3
United Student Aid Funds, Inc. ............... 7.3 5.0 4.7 4.7 4.7
</TABLE>
--------
* The Department is required to make reinsurance payments to Guarantors
with respect to FFELP loans in default that are subject to specified
reductions when the Guarantor's claims rate for a fiscal year equals or
exceeds certain trigger percentages of the aggregate original principal
amount of FFELP loans guaranteed by such Guarantor that are in repayment
on the last day of the prior fiscal year. See Appendix A to the
Prospectus.
** The information set forth in the table above with respect to the
Significant Guarantors has been obtained from annually published DOE
reports and from the Significant Guarantors (with respect to fiscal year
1997) 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
S-31
<PAGE>
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 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 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-32
<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
S-33
<PAGE>
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 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."
S-34
<PAGE>
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 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
S-35
<PAGE>
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
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.
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 ACCRUED
RATE ON INTEREST
DAYS THE RECEIVABLE
SETTLEMENT DATE OUTSTANDING NOTES FACTOR
--------------- ----------- -------- -----------
<S> <C> <C> <C>
1st......................................... 0 5.50000% 0.000000000
2nd......................................... 1 5.50000 0.000150685
3rd......................................... 2 5.50000 0.000301370
4th......................................... 3 5.50000 0.000452055
5th*........................................ 4 5.65000 0.000606849
6th......................................... 5 5.65000 0.000761644
7th......................................... 6 5.65000 0.000916438
8th......................................... 7 5.65000 0.001071233
9th......................................... 8 5.65000 0.001226027
10th........................................ 9 5.65000 0.001380822
</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.
S-36
<PAGE>
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 Dow Jones Telerate Service 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.
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
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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 on
such amounts calculated from the first day of the month following receipt
thereof by the Administrator through the last day of the related Collection
Period at the federal funds rate for each day during such period less 0.20%.
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 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;
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<PAGE>
(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
(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.
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<PAGE>
"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 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
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<PAGE>
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 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
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<PAGE>
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), 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".
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").
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<PAGE>
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.
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
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<PAGE>
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 was 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 Regulations 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 Department of Labor issued
proposed regulations under Section 401(c) on December 22, 1997, but the
required final regulations have not yet been issued. Further, the proposed
regulations under Section 401(c) take a broad approach to what might
constitute "avoidance" of the General Account Regulations, and it should also
be noted that the General Account Regulations are inapplicable to policies
issued after December 31, 1998. 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.
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<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 (the "Underwriters"), 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...........
J.P. Morgan Securities Inc........
Merrill Lynch, Pierce, Fenner &
Smith Incorporated......
Salomon Smith Barney..............
--- --- ---
Total........................... $ $ $
=== === ===
</TABLE>
In the respective Underwriting Agreements, the Underwriters have agreed,
subject to the terms and conditions 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 prices set forth on the cover page
hereof, and to certain dealers at such prices less a concession not in excess
of 0. % per Class A-1 Note, 0. % per Class A-2 Note and 0. % per Certificate.
The Underwriters may allow and such dealers may reallow a concession not in
excess of 0. % per Class A-1 Note, 0. % per Class A-2 Note and 0. % per
Certificate to certain other dealers. After the initial public offering, such
prices and such concessions may be changed.
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.
In the ordinary course of their business, the Underwriters and certain of
their affiliates have in the past, and may in the future, engage in commercial
and investment banking activities with Sallie Mae and its affiliates.
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
S-45
<PAGE>
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 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 Marianne M. Keler,
Esq., General Counsel of Sallie Mae, as counsel to Sallie Mae, the Servicer
and the Seller, and by Cadwalader, Wickersham & Taft, Washington, D.C., 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 Shearman &
Sterling, Washington, D.C. 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-46
<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.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1992 Amendments..................................................... S-27
91-day Treasury Bills............................................... S-36
Accrual Period...................................................... S-9
Adjusted Pool Balance............................................... S-10, S-41
Administration Agreement............................................ S-4
Administration Agreement Supplement................................. S-4
Administration Fee.................................................. S-42
Administrator....................................................... S-4
Available Funds..................................................... S-38
Carryover Servicing Fee............................................. S-8
Cede................................................................ S-3
Certificate Balance................................................. S-39
Certificate Balance Distribution Amount............................. S-39
Certificate Balance Shortfall....................................... S-40
Certificate Rate.................................................... S-11, S-35
Certificate Return Carryover........................................ S-11, S-40
Certificate Return Shortfall........................................ S-40
Certificateholders.................................................. S-12
Certificateholders' Distribution Amount............................. S-40
Certificateholders' Return Distribution Amount...................... S-40
Certificates........................................................ S-1, S-4
Class A-1 Maturity Date............................................. S-11
Class A-1 Noteholders............................................... S-9
Class A-1 Notes..................................................... S-1, S-4
Class A-1 Rate...................................................... S-9, S-33
Class A-2 Maturity Date............................................. S-11
Class A-2 Noteholders............................................... S-9
Class A-2 Notes..................................................... S-1, S-4
Class A-2 Rate...................................................... S-9, S-33
Closing Date........................................................ S-5
Code................................................................ S-14, S-43
Collection Period................................................... S-5
Commission.......................................................... S-3
Consolidation Loans................................................. S-5
Cutoff Date......................................................... S-5
Deferral............................................................ S-23
Department.......................................................... S-2, S-5
Determination Date.................................................. S-37
Disqualified Persons................................................ S-43
Distribution Date................................................... S-2, S-9
DOE Data Book....................................................... S-29
DTC................................................................. S-3
Eligible Investments................................................ S-37
Eligible Lender Trustee............................................. S-1, S-4
ERISA............................................................... S-14, S-43
Exchange Act........................................................ S-3
Expected Interest Collections....................................... S-33
FFELP............................................................... S-2, S-5
Final Distribution Date............................................. S-12
</TABLE>
S-47
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forbearance......................................................... S-23
General Account Regulations......................................... S-44
Grace............................................................... S-23
Guarantor........................................................... S-27
In-School........................................................... S-23
Indenture........................................................... S-9
Indenture Trustee................................................... S-4
Initial Pool Balance................................................ S-12
Interim Trust Agreement............................................. S-4
Interim Trustee..................................................... S-4
Liquidated Student Loans............................................ S-38
Liquidation Proceeds................................................ S-38
Lock-In Period...................................................... S-36
Master Administration Agreement..................................... S-4
Minimum Purchase Amount............................................. S-13
Monthly Servicing Payment Date...................................... S-8
Note Interest Carryover............................................. S-10, S-40
Note Interest Shortfall............................................. S-41
Note Principal Shortfall............................................ S-41
Note Rates.......................................................... S-9
Noteholders......................................................... S-9
Noteholders' Distribution Amount.................................... S-40
Noteholders' Interest Distribution Amount........................... S-40
Noteholders' Principal Distribution Amount.......................... S-10, S-40
Notes............................................................... S-1, S-4
Obligors............................................................ S-6
Parity Ratio........................................................ S-16
Parties in Interest................................................. S-43
Plan................................................................ S-14, S-43
Plan Asset Regulation............................................... S-43
Pool Balance........................................................ S-6
Primary Servicing Fee............................................... S-8
Principal Distribution Amount....................................... S-41
PTCE................................................................ S-43
Purchase Agreement.................................................. S-5
Purchased Student Loans............................................. S-38
Rating Agencies..................................................... S-15
Realized Loss....................................................... S-41
Record Date......................................................... S-9
Regulations......................................................... S-2
Repayment........................................................... S-23
Reserve Account..................................................... S-6
Reserve Account Initial Deposit..................................... S-6
Sale Agreement...................................................... S-5
Sallie Mae.......................................................... S-2, S-4
Securities.......................................................... S-4
Securityholders..................................................... S-12
Seller.............................................................. S-2, S-4
Servicer............................................................ S-2, S-4
Servicing Fee....................................................... S-8
Significant Guarantors.............................................. S-29
</TABLE>
S-48
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Specified Reserve Account Balance.................................... S-7, S-41
Student Loan Rate.................................................... S-9, S-33
Student Loans........................................................ S-5
T-Bill Rate.......................................................... S-36
Trust................................................................ S-1, S-4
Trust Accounts....................................................... S-37
Trust Agreement...................................................... S-5
Trust Auction Date................................................... S-13
Trust Student Loans.................................................. S-2
Underwriters......................................................... S-45
Underwriting Agreements.............................................. S-45
</TABLE>
S-49
<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, an affiliate 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 June 5, 1998
<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.
20549; 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. In
addition, the Registration Statement may be accessed electronically at the
Commission's site on the world wide web located at http://www.sec.gov.
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,
11600 Sallie Mae Drive, Reston, Virginia 20193 (Telephone: (703) 810-3000).
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 SLM Holding Corporation and an
affiliate 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 "Sallie Mae" and
"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
3
<PAGE>
from time to time, an "Indenture"). Such class or
classes of Notes may be offered publicly 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, an adjustable or an auction-determined
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 as specified in the related Prospectus
Supplement.
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
Supplement. See "Certain Information Regarding the
Securities--Book-Entry Registration" and "--
Definitive Securities."
4
<PAGE>
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,
an adjustable or an auction-determined 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 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
5
<PAGE>
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.
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")
6
<PAGE>
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 or
other Enhancement or
Derivative
Arrangements........... 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,
swaps (including without limitation interest rate
and currency swaps), exchange agreements, interest
rate protection agreements, repurchase obligations,
put and/or call options, yield protection
agreements, other agreements with respect to third
party payments or such other support, cash deposit,
derivative or other arrangements as may be
described in the related Prospectus Supplement or
any combination of the foregoing. 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 or
other Enhancement or Derivative Arrangements."
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
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the related Prospectus Supplement in the manner and
under the circumstances specified therein. The
related Prospectus Supplement will also specify to
whom and the manner and circumstances under which
amounts on deposit in the Reserve Account (after
giving effect to all other required distributions
to be made by the applicable Trust) in excess of
the Specified Reserve Account Balance 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;
Administration."
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
Agreement............... Sallie Mae, as Administrator, has entered into a
Master Administration Agreement, dated as of May 1,
1997 (the "Master Administration Agreement") with
the Seller and will enter into a Supplement thereto
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 Supplement" and, together
with the Master Administration Agreement, the
"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--Administration Agreement."
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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 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
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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 Sallie Mae's representations and
warranties with respect to such Trust Student Loan.
See "Transfer and Servicing 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;
Administration--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;
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Administration--Servicing Compensation" herein and
"Description of the Securities--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, Shearman &
Sterling (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.
Each Noteholder, by the acceptance of a Note of a
given series, will agree to treat such Note as
indebtedness, and each Certificateholder, by
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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.
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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; Administration--
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; Administration--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 breach of the related Sale
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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 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 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
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the FFELP by the 1998-1999 academic year. These changes may adversely 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.
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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; Administration--
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 be available
under the terms of the borrowers' existing Student Loans or under the federal
Consolidation Loan
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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; Administration--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.
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
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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; Administration--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
defaults that could materially adversely affect the Certificateholders with
respect to such series. See "Servicing; Administration--Waiver of Past
Defaults."
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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; Administration--Insolvency Event."
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 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 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
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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.
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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").
On July 31, 1997, at a Special Meeting of Shareholders convened pursuant to
a combined proxy Statement/Prospectus filed with the Securities and Exchange
Commission, Sallie Mae shareholders voted to approve the Reorganization, which
was consummated on August 7, 1997. Pursuant to the Reorganization, Sallie Mae
has transferred or 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 have been 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.
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, Sallie Mae's obligations
under the Transfer and 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."
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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.
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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
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 1997, 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. As of March 31, 1998,
Sallie Mae's Loan Servicing Centers ("LSCs") serviced approximately 90 percent
of student loans owned by Sallie Mae. The LSCs are located in Florida, Kansas,
Massachusetts, Pennsylvania, Texas and the State of Washington. On April 24,
1998, Sallie Mae announced that it will close the LSCs located in
Massachusetts and the State of Washington and transfer their servicing
activities to the remaining much larger LSCs. Sallie Mae also employed third-
party servicers to service approximately 10 percent of its student loans. Less
than 1 percent were serviced by 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
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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.
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. Currently,
Sallie Mae has elected not to participate in the Consolidation Loan Program.
However, if Sallie Mae elects to participate in the Consolidation Loan Program
in the future, 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.
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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,
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if the Seller were to become a debtor in a bankruptcy case and a creditor or
trustee in bankruptcy of such debtor or such debtor itself were to take the
position that the sale of Student Loans by the Seller to a Trust should
instead be treated as a pledge of such Student Loans to secure a borrowing of
such debtor, then delays in payments of collections of such Student Loans
could occur or (should the court rule in favor of any such trustee, debtor or
creditor) reductions in the amount of such payments could result. If the
transfer of Student Loans by the Seller to the Eligible Lender Trustee on
behalf of a Trust is treated as a pledge instead of a sale, a tax or
government lien on the property of the Seller arising before the transfer of
Student Loans to the Eligible Lender Trustee on behalf of such Trust may have
priority over such Eligible Lender Trustee's interest in such Student Loans.
If the conveyance by the Seller of the Student Loans is treated as a sale, the
Student Loans would not be 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 of a successor trustee will not become effective until acceptance
of the appointment by the successor trustee.
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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 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
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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.
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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 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
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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 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.
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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.
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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.
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.
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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
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
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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.
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 (including certain activity or
event related fees) 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.
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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 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.
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
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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 the Privatization Act, 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 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.
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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.
ADMINISTRATION AGREEMENT
Sallie Mae, in its capacity as Administrator, has entered into the Master
Administration Agreement and, with respect to each Trust, will enter into an
Administration Agreement Supplement with each Trust, the Seller, the Servicer
and the related Eligible Lender Trustee and 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
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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. See "Sallie Mae."
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, 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
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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;
(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
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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 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; Administration--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
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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.
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."
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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, a variable, an adjustable or an
auction-determined 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
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.
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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 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
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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. Such a sale also would require the consent
of the holders of a majority in Certificate Balance unless the proceeds of
such a sale would be sufficient to discharge in full all amounts then due and
unpaid on the Certificates.
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
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have requested in writing that such Indenture Trustee institute such
proceeding in its own name as Indenture Trustee, (iii) such holder or holders
have offered such Indenture Trustee reasonable indemnity, (iv) such Indenture
Trustee has for 60 days 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
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continue as such Indenture Trustee under the applicable Indenture, any amounts
advanced by it under the Indenture, the amount, interest rate and maturity
date of certain indebtedness owing by such Trust to the applicable Indenture
Trustee in its individual capacity, the property and funds physically held by
the applicable Indenture Trustee as such and any action taken by it that
materially affects the related Notes and that has not been previously
reported.
Satisfaction and Discharge of Indenture. An Indenture will be discharged
with respect to the collateral securing the related Notes upon the delivery to
the related Indenture Trustee for cancellation of all such Notes or, with
certain limitations, upon deposit with such Indenture Trustee of funds
sufficient for the payment in full of all such Notes.
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.
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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 or privately, 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. Unless and until Definitive Certificates are issued under the
limited circumstances described herein or in the related Prospectus
Supplement, no Certificateholder 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 a fixed, a variable, an adjustable or an auction-determined
Certificate Rate 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.
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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 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.
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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 OR OTHER ENHANCEMENT OR DERIVATIVE ARRANGEMENTS
General. The amounts and types of credit or cash flow 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 or cash flow 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, swaps (including without limitation
interest rate and currency swaps), exchange agreements, interest rate
protection agreements, repurchase obligations, put and/or call options, yield
protection agreements, other agreements with respect to third party payments
or such other support, cash deposit, derivative or other arrangements as may
be described in the related Prospectus Supplement or any combination of the
foregoing. If specified in the applicable Prospectus Supplement, credit or
cash flow enhancement for a class of Securities may cover one or more other
classes of Securities of the same series, and credit or cash flow 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.
BOOK-ENTRY REGISTRATION
Securityholders of Securities in book-entry form may hold their Securities
through DTC (in the United States) or, if so provided in the related
Prospectus Supplement, Cedel or Euroclear (in Europe) if they are participants
of such systems, or indirectly through organizations which are participants in
such systems.
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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 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.
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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").
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
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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
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
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
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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 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
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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; Administration--Servicer Covenants."
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
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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.
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
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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 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
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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.
In the event a Note Owner purchases a Note issued with OID at an acquisition
premium (i.e., at a price in excess of its "adjusted issue price" but less
than its stated redemption price), the amount includible in income in each
taxable year as OID is reduced by that portion of the excess properly
allocable to such year. 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. Acquisition premium is allocated on a pro rata basis to
each accrual of OID, so that the Note Owner is allowed to reduce each accrual
of OID by a constant fraction.
An initial Note Owner who owns an interest in more than one class of Notes
with respect to a series should be aware that the OID Regulations may treat
such interests as a single debt instrument for purposes of the OID provisions
of the Code.
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 that do not
constitute qualified stated interest, the lesser of (i) such gain or payment,
or (ii) the accrued market discount that has not previously been included in
income, 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 (computed taking into account the Prepayment Assumption),
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 (computed
taking into account the Prepayment Assumption).
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
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.
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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.
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
(or one of the other methods described above under "--Market Discount") over
the remaining term of the Note, using the Prepayment Assumption. 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.
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 OID,
market discount, de minimis market discount and unstated interest, as adjusted
by any amortizable bond premium (described above 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.
Disposition of Notes. The adjusted tax basis of a Note Owner in a Note 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 are 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 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.
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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 might 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,
(iii) an estate the income of which is includible in gross income for U.S.
federal income tax purposes regardless of its source, or (iv) 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. Notwithstanding the preceding
sentence, to the extent provided in Treasury regulations, certain trusts in
existence on August 20, 1996, and treated as U.S. persons prior to such date,
that elect to continue to be treated as U.S. persons, will be U.S. persons and
not Foreign Persons.
(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.
(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.
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(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.
The Internal Revenue Service has recently issued regulations which set forth
procedures to be followed by a Foreign Person in establishing foreign status
for certain purposes. Such regulations generally are effective for payments
made after December 31, 1999. Prospective investors should consult their tax
advisors concerning the requirements imposed by the new regulations and their
effect on the holding of the Notes.
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.
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
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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
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. The
Taxpayer Relief Act of 1997 (the "1997 Act") expands the application of
special provisions of the Code that require the use of a prepayment assumption
and actual prepayment experience in the computation of OID. Under the 1997
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Act, such special provisions apply, for taxable years beginning after the date
of enactment of the 1997 Act, to any pool of debt instruments the yield on
which may be affected by reason of prepayments. If the provisions contained in
the 1997 Act were to apply to the Student Loans held by a Trust, such
provisions may result in the acceleration of any OID income 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 within a 12-
month period there is a sale or exchange of 50 percent or more of the total
interest in the capital and profits of the Trust. If such a termination occurs
with respect to a Trust, such Trust will be deemed under the Code to
contribute all of its assets and liabilities to a new Trust that is a
partnership in exchange for an interest in such new Trust, and to immediately
thereafter terminate and distribute such interest in the new Trust to the
Certificateholders in proportion to their respective interests in the
terminated Trust. Such deemed termination of a Trust generally should not
result in any material adverse tax consequences to Certificateholders
(although such deemed termination may accelerate the recognition of income
from the Trust for Certificateholders whose taxable year is different than the
Trust's taxable year).
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), decreased by the holder's share of Trust losses and
deductions 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 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
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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.
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.
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Interest payments made (or accrued) to a Certificateholder who is a Foreign
Person may be characterized as other than "portfolio interest." As a result,
Foreign Certificateholders that do not hold their Certificates in connection
with the conduct of a trade or business within the United States will likely
be subject to withholding tax pursuant to Section 1441 or Section 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 and does not provide appropriate certification that it is entitled to
reduced or eliminated withholding pursuant to an applicable treaty or that it
holds its Certificates in connection with its conduct of a trade or business
within the United States, the withholding agent will withhold from the gross
amount of income of the Trust allocated to Foreign Certificateholders at a
rate of 30% 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 Internal Revenue Service a refund claim for such
withheld taxes, taking the position that the interest was portfolio interest.
However, the Internal Revenue Service may disagree and no assurance can be
given as to the appropriate amount of tax liability. Finally, if the interest,
gain or income on a Certificate held by a Foreign Certificateholder is
effectively connected with the conduct of a trade or business in the United
States by the Foreign Certificateholder, the Foreign Certificateholder
(although exempt from withholding tax pursuant to Section 1441 or Section
1442, as previously discussed, if a duly executed Form 4224 (or successor
form) is furnished) generally will be subject to U.S. federal income tax on
the interest, gain or income at regular federal income tax rates (including
potential application of the branch profits tax in the case of a corporation).
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.
* * *
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 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
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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
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. With respect to certain series, the Seller or an affiliate
may offer some or all of the Securities for sale directly.
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 sold by the Seller or an affiliate and/or
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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 Marianne M. Keler, Esq., General Counsel of Sallie Mae, and
Cadwalader, Wickersham & Taft, Washington, D.C., 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 Shearman & Sterling,
Washington, D.C. Certain Delaware state tax matters will be passed on for each
Trust by the firm identified in the related Prospectus Supplement.
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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 of
Education (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
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professional students and independent undergraduate students and, under
certain circumstances, dependent undergraduate students who 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. The Technical
Amendments became effective on December 20, 1993. The Balanced Budget Act of
1997 extended the principal provisions of the FFELP to September 30, 2002 (or
in the case of borrowers who receive loans prior to that date, September 30,
2006).
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
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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.
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
applicable "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.
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<TABLE>
<CAPTION>
DATE OF DISBURSEMENT SPECIAL ALLOWANCE MARGIN
-------------------- ------------------------
<C> <S>
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.
For loans disbursed after October 1, 1993, lenders must pay an origination
fee of 0.5% of the loan. This fee cannot be passed on to the borrower.
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.
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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 Stafford Loan.
(3) Independent undergraduate students, graduate students or professional
students may borrow these additional amounts. In addition, dependent
undergraduate students may also receive these additional loan amounts if
the parents of such students are unable to provide the family contribution
amount and it is unlikely that the student's parents will qualify for a
Federal PLUS Loan.
The 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 that for loans made prior to October 1, 1992 to borrowers with
outstanding Subsidized Stafford Loans, the rate for new loans as the same as
that for their outstanding loans. 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.
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; thereafter, 8% for 48 months,
91-Day Treasury + Interest Rate Margin then 10% 3.25%
10/01/92-06/30/94....... 91-Day Treasury + Interest Rate Margin 9% 3.10%
07/01/94-06/30/95....... 91-Day Treasury + Interest Rate Margin 8.25% 3.10%
07/01/95-06/30/98....... 91-Day Treasury + Interest Rate Margin 8.25% 2.50% (in school,
grace or deferment);
3.10% (in repayment)
07/01/98-09/30/98....... 91-Day Treasury + Interest Rate Margin 8.25% 1.70% (in school,
grace or deferment);
2.30% (in repayment)
</TABLE>
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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 commencement of repayment. The Act currently requires
minimum annual payments of $600 including principal and interest (or, if
greater, the amount of accrued interest for that year), 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
A-6
<PAGE>
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 on an Unsubsidized Stafford Loan 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 loan limits
set forth in the Maximum Loan Amounts table above, 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 generally similar 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.
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.
A-7
<PAGE>
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 + Interest Rate Margin 12% 3.25%
10/01/92-06/30/94....... 52-Week Treasury + Interest Rate Margin PLUS 10% 3.10%
SLS 11%
06/30/94 - 06/30/98..... 52-Week Treasury + Interest Rate Margin 9% 3.10%
07/01/98-09/30/98....... 91-Day Treasury + Interest Rate Margin 9% 3.10%
(SLS repealed 07/01/94)
</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.
On November 13, 1997, President Clinton signed into law the Emergency
Student Loan Consolidation Act of 1997, which made significant changes to the
FFELP loan consolidation program. These changes include: (1) providing that
federal direct student loans are eligible to be included in a FFELP
consolidation loan; (2) changing the borrower interest rate on new
Consolidation Loans (previously a fixed rate based on the weighted average of
the loans consolidated, rounded up to the nearest whole percent) to the annual
variable rate applicable to Stafford Loans (the bond equivalent rate at the
last auction in May of 91-Day Treasury Bills, plus 3.10%, capped at 8.25%);
(3) providing that the portion of a Consolidated Loan that is comprised of
Subsidized Stafford Loans retains its subsidy benefits during periods of
deferment; and (4) establishing prohibitions against various forms of
discrimination in the making of Consolidation Loans. All of these provisions,
with the exception of item 4, expire on September 30, 1998. The emergency
legislation did not alter the 105 basis points annual fee payable by the
holder of a Consolidation Loan or the 50 basis points origination fee charged
to lenders when a Consolidation Loan is issued.
Following enactment of this legislation, Sallie Mae announced that,
effective as of November 13, 1997, it had suspended its loan consolidation
program (marketed as the SMART LoanSM program). The new legislation makes it
difficult for Sallie Mae to participate in the FFELP consolidation loan
program for both operational and profitability reasons.
A-8
<PAGE>
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."
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
A-9
<PAGE>
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.
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 requires that, subject to compliance with the Act, the Secretary
must pay all amounts which may be required to be paid under the Act as a
result of certain events of death, disability, bankruptcy, school closure or
false certification by the educational institution described therein. It
further provides that 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.
B-1
<PAGE>
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.
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
B-2
<PAGE>
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
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.
B-3
<PAGE>
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, partnership or other entity organized in or under the laws
of the United States or any political subdivision thereof, (iii) an estate the
income of which is includible in gross income for U.S. federal income tax
purposes, regardless of its source, or (iv) 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. Notwithstanding the preceding sentence, to
the extent provided in Treasury regulations, certain trusts in existence on
August 20, 1996, and treated as U.S. persons prior to such date, that elect to
continue to be treated as U.S. persons, will be U.S. persons and not Foreign
Persons. 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-4
<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.
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
1992 Act............................................................ 22
1992 Amendments..................................................... 15, A-2
1993 Act............................................................ 14, 22, A-2
1997 Act............................................................ 61
Accrual Period...................................................... 48
Act................................................................. 13
Administration Agreement............................................ 8
Administration Agreement Supplement................................. 8
Administration Fee.................................................. 8
Administrator....................................................... 3
Administrator Default............................................... 38
Applicable Trustee.................................................. 50
Base Rate........................................................... 48
Business Day........................................................ 18
Calculation Agent................................................... 48
Cede................................................................ 19
Cedel............................................................... 51
Cedel Participants.................................................. 51
Certificate Balance................................................. 5
Certificate Pool Factor............................................. 41
Certificate Rate.................................................... 5
Certificateholders.................................................. 4
Certificates........................................................ 1
Closing Date........................................................ 5
Code................................................................ 12, 55
Collection Account.................................................. 6, 32
Collection Period................................................... 33
Commission.......................................................... 2
Cooperative......................................................... 51
Consolidation Loans................................................. A-1
Deferment Period.................................................... A-7
DTC................................................................. B-1
Cutoff Date......................................................... 5
Definitive Certificates............................................. 52
Definitive Notes.................................................... 52
Definitive Securities............................................... 52
Delaware Tax Counsel................................................ 11
Department.......................................................... 6
Depositaries........................................................ 50
Depository.......................................................... 42
Distribution Date................................................... 42
DOE Data Book....................................................... 24
DSLP................................................................ 14
DTC's Nominee....................................................... 20
Eligible Deposit Account............................................ 32
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Eligible Institution..................................................... 32
Eligible Investments..................................................... 32
Eligible Lender Trustee.................................................. 1, 3
ERISA.................................................................... 12, 64
Euroclear................................................................ 51
Euroclear Operator....................................................... 51
Euroclear Participants................................................... 51
Event of Default......................................................... 43
Federal Assistance....................................................... A-4
Federal Direct Student Loan.............................................. A-2
Federal Tax Counsel...................................................... 11
FFELP.................................................................... 5, A-1
FFELP Loans.............................................................. 5
Fixed Rate Securities.................................................... 48
Floating Rate Securities................................................. 48
Forbearance Period....................................................... A-7
Foreign Person........................................................... 59
Funding Period........................................................... 6
Global Securities........................................................ B-1
Grace Period............................................................. A-6
GSE...................................................................... 21
Guarantee Agency......................................................... 6
Guarantee Payments....................................................... 6
Guaranteed Student Loan Program.......................................... A-1
HEAL..................................................................... 22
Higher Education Act..................................................... 13
Holding Company.......................................................... 21
Indenture................................................................ 4
Indenture Trust Estate................................................... 44
Indenture Trustee........................................................ 1, 3
Indirect Participants.................................................... 50
Insolvency Event......................................................... 36
Insolvency Laws.......................................................... 19
Interest Subsidy Payments................................................ A-1
Interim Trust Agreement.................................................. 3
Interim Trustee.......................................................... 3
Investment Earnings...................................................... 32
Issuer................................................................... 3
LSCs..................................................................... 23
Master Administration Agreement.......................................... 8
Monthly Servicing Payment Date........................................... 10
Non-FFELP Loans.......................................................... 5
Note Owner............................................................... 56
Note Pool Factor......................................................... 41
Note Rate................................................................ 4
Noteholders.............................................................. 4
Notes.................................................................... 1
OID...................................................................... 56
OID Regulations.......................................................... 56
Participants............................................................. 42
Plan..................................................................... 65
</TABLE>
C-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PLUS Loans................................................................ A-1
Pool Balance.............................................................. 41
Pool Factor............................................................... 41
Pre-Funding Account....................................................... 6
Pre-Funding Amount........................................................ 7
Prepayment Assumption..................................................... 56
Privatization Act......................................................... 21
Program Payments.......................................................... 8
Prospectus Supplement..................................................... 1
Purchase Agreement........................................................ 6
Purchase Amount........................................................... 29
Qualified Substitute Student Loans........................................ 9
Rating Agencies........................................................... 18
Registration Statement.................................................... 2
Reinsurance Rate.......................................................... A-9
Related Documents......................................................... 45
Reorganization............................................................ 21
Reserve Account........................................................... 7
Reserve Account Initial Deposit........................................... 7
Reset Period.............................................................. 48
Rules..................................................................... 51
Sale Agreement............................................................ 5
Sallie Mae................................................................ 1, 3
Secretary................................................................. A-1
Securities................................................................ 1
Securities Act............................................................ 2
Securityholders........................................................... 2
Seller.................................................................... 1, 3
Servicer.................................................................. 1, 3
Servicer Default.......................................................... 36
Servicing Agreement....................................................... 8
Servicing Fee............................................................. 8, 10
SLS Loans................................................................. A-2
Special Allowance Payment................................................. A-1
Specified Reserve Account Balance......................................... 7
Spread.................................................................... 48
Spread Multiplier......................................................... 48
Student Loans............................................................. 1, 5
Subsidized Stafford Loans................................................. A-1
Supplemental Loans to Students............................................ A-2
Technical Amendments...................................................... A-2
Terms and Conditions...................................................... 52
Transfer and Servicing Agreement.......................................... 29
Trust..................................................................... 1, 3
Trust Accounts............................................................ 32
Trust Agreement........................................................... 3
Trust Student Loans....................................................... 3
UCC....................................................................... 53
U.S. Person............................................................... B-4
Underwriting Agreements................................................... 65
Unmet Need................................................................ A-3
Unsubsidized Stafford Loans............................................... A-1
</TABLE>
C-3
<PAGE>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPO-
RATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR IN THE ACCOMPANYING PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SELLER, THE TRUST OR THE UNDER-
WRITERS. 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 SUP-
PLEMENT OR THE ACCOMPANYING PROSPECTUS, NOR ANY SALE MADE HEREUNDER OR THERE-
UNDER 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 THEREOF OR THAT THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-----------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Reports to Securityholders............................................... S-3
Summary of Terms......................................................... S-4
Risk Factors............................................................. S-16
Formation of the Trust................................................... S-16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... S-18
Use of Proceeds.......................................................... S-18
The Trust Student Loan Pool.............................................. S-19
Description of the Securities............................................ S-33
ERISA Considerations..................................................... S-43
Underwriting............................................................. S-45
Legal Matters............................................................ S-46
Index of Principal Terms................................................. S-47
<CAPTION>
PROSPECTUS
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<S> <C>
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............................................................... 21
The Student Loan Pools................................................... 22
The Seller............................................................... 25
Formation of the Trusts.................................................. 26
Transfer and Servicing Agreements........................................ 29
Servicing; Administration................................................ 32
Trading Information...................................................... 40
Description of the Notes................................................. 42
Description of the Certificates.......................................... 47
Certain Information Regarding the Securities............................. 48
Certain Legal Aspects of the Student Loans............................... 53
Certain Federal Income Tax Consequences.................................. 55
Certain State Tax Consequences........................................... 64
ERISA Considerations..................................................... 64
Use of Proceeds.......................................................... 65
Plan of Distribution..................................................... 65
Legal Matters............................................................ 66
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
</TABLE>
UNTIL , 1998 (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 PRO-
SPECTUS 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.
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$
SLM STUDENT
LOAN TRUST 1998-3
$
FLOATING RATE CLASS A-1
STUDENT LOAN-BACKED NOTES
$
FLOATING RATE CLASS A-2
STUDENT LOAN-BACKED NOTES
$
FLOATING RATE
STUDENT LOAN-BACKEDCERTIFICATES
SLM FUNDING CORPORATION
SELLER
SALLIE MAE SERVICING CORPORATION
SERVICER
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PROSPECTUS SUPPLEMENT
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GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
J.P. MORGAN & CO.
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
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