<PAGE>
As filed with the Securities and Exchange Commission on February 23, 2000
Registration No. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
SLM FUNDING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 9999 23-2815650
(State or other (Primary Standard (I.R.S. employer
jurisdiction of Industrial identification no.)
incorporation or Classification Code
organization) Number)
777 Twin Creek Drive
Killeen, TX 76543
(817) 554-4500
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Marianne M. Keler, Esquire
c/o Sallie Mae, Inc.
11600 Sallie Mae Drive
Reston, VA 20193
(703) 810-3000
(Address, including zip code, and telephone number, including area code, of
agent for service)
Copies to:
Charles E. Bryan
Cadwalader, Wickersham & Taft
1333 New Hampshire Avenue, NW
Washington, D.C. 20036
Approximate date of commencement of proposed sale to the public: From time
to time after this registration statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act"), other than securities offered only in connection
with dividend or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
Proposed Maximum
Title of Each Class of Amount Proposed Maximum Aggregate
Securities to be to be Per Unit Offering Offering Price Amount of
Registered Registered Price (1) (1) Registration Fee
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<S> <C> <C> <C> <C>
Student Loan-backed
Securities............ $1,000,000 100% $1,000,000 $264
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</TABLE>
(1) Estimated solely for the purposes of calculating the registration fee.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act or until the registration statement shall
become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is subject to completion or amendment. We +
+may not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED FEBRUARY 23, 2000
PROSPECTUS
The SLM Student Loan Trusts
Student Loan-Backed Notes
Student Loan-Backed Certificates
-----------
SLM Funding Corporation,
Seller
Sallie Mae Servicing Corporation,
Servicer
-----------
You should The Seller
consider
carefully SLM Funding Corporation is a wholly owned subsidiary of the
the risk Student Loan Marketing Association.
factors
described The Securities
in this
prospectus The Seller intends to form trusts to issue student loan-backed
beginning securities. These securities may be in the form of notes or
on page 15 certificates. Each issue will have its own series designation.
and in the We will sell the securities from time to time in amounts, at
prospectus prices and on terms determined at the time of offering and sale.
supplement
that Each series may include:
accompanies
this . one or more classes of certificates that represent ownership
prospectus. interests in the assets of the trust for that issue; and
Each issue . one or more classes of notes secured by the assets of that
of trust.
securities
represents A class of certificates or notes may:
obligations
of, or . be senior or subordinate to other classes; and
interests
in, the . receive payments from one or more forms of credit or cash
applicable flow enhancements designed to reduce the risk to investors
trust caused by shortfalls in payments on the related student
only. They loans.
do not
represent Each class of certificates or notes has the right to receive
interests payments of principal and interest at the rates, on the dates
in or and in the manner described in the applicable supplement to this
obligations prospectus.
of SLM
Holding Trust Assets
Corporation,
the The assets of each trust will include:
Student
Loan . education loans to students or parents of students; and
Marketing
Association, . other moneys, investments and property.
the seller,
the servicer
or any of
their
affiliates.
The
securities
are not
guaranteed
or insured
by the
United
States of
America or
any
governmental
agency.
This
prospectus
may be
used to
offer and
sell any
series of
securities
only if
accompanied
by the
prospectus
supplement
for that
series.
A supplement to this prospectus will describe the specific amounts, prices and
terms of the notes and certificates of each series. The supplement will also
give details of the specific student loans, credit enhancement, and other
assets of the trust.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
, 2000
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS
AND THE RELATED PROSPECTUS SUPPLEMENT
We provide information to you about the securities in two separate documents
that progressively provide more detail:
. this prospectus, which provides general information, some of which may
not apply to your series of securities; and
. the related prospectus supplement that describes the specific terms of
your series of securities, including:
. the timing of interest and principal payments;
. financial and other information about the student loans and the
other assets owned by the trust;
. information about credit enhancement;
. the ratings; and
. the method of selling the securities.
If the terms of a particular series of securities are described differently
in this prospectus and the related prospectus supplement, you should rely on
the information in the prospectus supplement.
You should rely only on the information contained or incorporated in this
prospectus and the prospectus supplement. We have not authorized anyone to
provide you with different information. We are not offering the securities in
any state or other jurisdiction where the offer is prohibited.
We do not claim that the information in this prospectus is accurate as of
any date other than the date stated on its cover.
We have made cross-references to captions in this prospectus and the
accompanying prospectus supplement under which you can find further related
discussions. The following table of contents and the table of contents in the
related prospectus supplement indicate where these captions are located.
2
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TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
Prospectus Summary....................................................... 5
Risk Factors............................................................. 15
. The Securities Are Not Suitable For All Investors...................... 15
. Your Ability To Resell Your Securities May Be Limited.................. 15
. The Trust Will Have Limited Assets From Which To Make Payments On The
Securities............................................................. 15
. Losses May Occur If Borrowers Default On The Student Loans............. 15
. Your Investment Also Depends On The Guarantors As Security For The
Student Loans.......................................................... 16
. The Department Of Education's Failure To Make Reinsurance Payments May
Affect Your Securities................................................. 16
. The Investment Return On Your Securities Is Uncertain.................. 17
. A Failure To Comply With Student Loan Origination And Servicing
Procedures Could Adversely Affect Your Securities...................... 17
. The Inability Of The Seller Or The Servicer To Meet Its Repurchase
Obligation May Adversely Affect Your Securities........................ 18
. Noteholders' Right To Control Upon Defaults May Adversely Affect
Certificateholders..................................................... 18
. There May Be Risks Associated With Subordination Of The Notes Or
Certificates........................................................... 18
. The Securities May Be Repaid Early Due To An Auction Sale Or The
Exercise Of The Purchase Option. If This Happens, Your Yield May Be
Affected And You Will Bear The Reinvestment Risk....................... 19
. There May Be Risk Of Change In The Characteristics Of The Student Loans
Resulting From Incentive Programs...................................... 19
. There May Be Risk To Your Investment Associated With Commingling Of
Assets................................................................. 19
. Offsets By Guarantors Or The Department Of Education Could Reduce The
Amount Of Available Funds.............................................. 20
. There May Be Risks To Your Investment Associated With A Servicer
Default................................................................ 20
. The Bankruptcy Of The Seller Or Sallie Mae Could Adversely Affect
Payments On The Securities............................................. 21
. The Indenture Trustee May Have Difficulty Liquidating Student Loans
After An Event Of Default.............................................. 21
. The Federal Direct Student Loan Program Could Result In Reduced
Revenues For The Servicer And The Guarantors........................... 22
. Changes In Law May Adversely Affect Student Loans, The Guarantors, The
Seller Or Sallie Mae................................................... 22
. Consumer Protection Laws May Affect Enforceability Of Student Loans.... 22
. There May Be Risks To Your Investment Associated With The Use Of Master
Promissory Notes....................................................... 23
. You May Experience Liquidity Problems Or Payment Delays From The Use Of
Book-Entry Registration................................................ 23
. You May Be Unable To Reinvest Principal Payments At The Yield You Earn
On The Securities...................................................... 24
. Withdrawal Or Downgrade Of Initial Ratings May Affect The Prices Of
Your Securities........................................................ 24
Formation of the Trusts.................................................. 25
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<TABLE>
<CAPTION>
Page
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<S> <C>
. The Trusts.............................................................. 25
. Eligible Lender Trustee................................................. 25
Use of Proceeds........................................................... 26
Sallie Mae, The Seller And The Servicer................................... 26
. Sallie Mae.............................................................. 26
. The Seller.............................................................. 26
. The Servicer............................................................ 27
The Student Loan Pools.................................................... 28
. Sallie Mae's Student Loan Financing Business............................ 28
Loan Purchases........................................................... 28
Servicing................................................................ 29
Consolidation/Repayment Programs......................................... 29
Incentive Programs....................................................... 30
. Delinquencies, Defaults, Claims and Net Losses.......................... 30
. Payment of Notes........................................................ 30
. Seller Liability........................................................ 30
. Termination............................................................. 31
Transfer And Servicing Agreements......................................... 32
. General................................................................. 32
. Purchase of Student Loans by the Seller;
Representations and Warranties of Sallie Mae............................. 32
. Sale of Student Loans to the Trust;
Representations and Warranties of the Seller............................. 32
. Custodian of Promissory Note............................................ 33
. Additional Fundings..................................................... 33
. Amendments to Transfer and Servicing Agreements......................... 33
Servicing And Administration.............................................. 34
. General................................................................. 34
. Accounts................................................................ 34
. Servicing Procedures.................................................... 34
. Payments on Student Loans............................................... 35
. Servicer Covenants...................................................... 35
. Servicing Compensation.................................................. 36
. Net Deposits............................................................ 37
. Evidence as to Compliance............................................... 37
. Certain Matters Regarding the Servicer.................................. 37
. Servicer Default........................................................ 38
. Rights Upon Servicer Default............................................ 38
. Waiver of Past Defaults................................................. 38
. Administration Agreement................................................ 39
. Administrator Default................................................... 39
. Rights Upon Administrator Default....................................... 39
. Statements to Indenture the Trustee and The Trust....................... 40
. Evidence as to Compliance............................................... 40
Trading Information....................................................... 41
. Pool Factors............................................................ 41
Description Of The Notes.................................................. 43
. General................................................................. 43
. Principal and Interest on the Notes..................................... 43
. The Indenture........................................................... 43
General.................................................................. 43
Modification of Indenture................................................ 43
Events of Default; Rights Upon Event of Default.......................... 44
Certain Covenants........................................................ 46
Indenture Trustee's Annual Report........................................ 46
Satisfaction and Discharge of Indenture.................................. 46
The Indenture Trustee.................................................... 47
</TABLE>
3
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<TABLE>
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Page
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<S> <C>
Description Of The Certificates........................................... 48
. General................................................................. 48
. Distributions on the Certificate Balance................................ 48
Certain Information Regarding Securities.................................. 49
. Fixed Rate Securities................................................... 49
. Floating Rate Securities................................................ 49
. Distributions........................................................... 49
. Credit and Cash Flow or other Enhancement or Derivative Arrangements.... 49
. Insolvency Events....................................................... 50
. Book-Entry Registration................................................. 51
. Definitive Securities................................................... 53
. List of Securityholders................................................. 54
. Reports to Securityholders.............................................. 54
Certain Legal Aspects Of The Student Loans................................ 54
. Transfer of Student Loans............................................... 54
. Consumer Protection Laws................................................ 55
. Loan Origination and Servicing Procedures Applicable to Student Loans... 55
. Student Loans Generally Not Subject to Discharge in Bankruptcy.......... 56
U.S. Federal Income Tax Consequences...................................... 56
. Tax Characterization of the Trust....................................... 56
. Tax Consequences to Holders of Notes.................................... 57
Treatment of the Notes as Indebtedness................................... 57
Stated Interest.......................................................... 57
Original Issue Discount.................................................. 57
</TABLE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Market Discount.......................................................... 58
Amortizable Bond Premium................................................. 58
Election to Treat all Interest as OID.................................... 58
Sale or Other Disposition................................................ 58
Waivers and Amendments................................................... 59
Information Reporting and Backup Withholding............................. 59
Tax Consequences to Foreign Investors.................................... 59
Treatment of the Trust as a Partnership.................................. 60
Partnership Taxation..................................................... 60
Discount and Premium..................................................... 62
Distributions to Certificateholders...................................... 62
Section 708 Termination.................................................. 62
Disposition of Certificates.............................................. 62
Allocations Between Transferors and Transferees.......................... 62
Section 754 Election..................................................... 63
Administrative Matters................................................... 63
Foreign Investors........................................................ 63
Backup Withholding....................................................... 64
State Tax Consequences.................................................... 64
ERISA Considerations...................................................... 64
. The Notes............................................................... 65
. The Certificates........................................................ 66
Available Information..................................................... 66
Reports To Securityholders ............................................... 67
Incorporation Of Certain Documents By Reference........................... 67
The Plan Of Distribution.................................................. 67
Legal Matters............................................................. 68
</TABLE>
4
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information concerning the securities. It
does not contain all of the information that you might find important in making
your investment decision. You should read the full description of this
information appearing elsewhere in this document and in the prospectus
supplement for your particular securities.
Principal Parties
. Issuer............... A Delaware business trust to be formed for each
series of securities under a trust agreement
between the seller and an eligible lender trustee.
. Seller............... The seller is SLM Funding Corporation, a wholly
owned, special purpose subsidiary of the Student
Loan Marketing Association, also known as Sallie
Mae. Because the seller is not an institution
eligible to hold legal title to student loans, an
interim eligible lender trustee specified in the
related prospectus supplement will hold legal title
to the student loans on behalf of the seller.
References to the "seller" also include the interim
trustee where the context involves the holding or
transferring of legal title to the student loans.
. Eligible Lender
Trustee.............. For each series of securities, the related
prospectus supplement will specify the eligible
lender trustee for the related trust. See
"Formation of the Trusts--Eligible Lender Trustee"
in this prospectus.
. Servicer............. The servicer is Sallie Mae Servicing Corporation, a
wholly owned subsidiary of SLM Holding Corporation
and an affiliate of Sallie Mae or another third-
party servicer specified in the related prospectus
supplement. Sallie Mae Servicing Corporation
manages and operates Sallie Mae's loan servicing
functions for Sallie Mae, its affiliates and
various unrelated parties. Under the circumstances
described in this prospectus, the servicer may
transfer its obligations to other entities. The
servicer may also contract with various other
servicers or sub-servicers. The related prospectus
supplement will describe any sub-servicers. See
"Servicing and Administration--Certain Matters
Regarding the Servicer" in this prospectus.
. Indenture Trustee.... For each series of securities, the related
prospectus supplement will specify the indenture
trustee for the notes. See "Description of the
Notes--The Indenture--The Indenture Trustee" in
this prospectus.
. Administrator........ Sallie Mae will act as administrator of each trust.
Under the circumstances described in this
prospectus, Sallie Mae may transfer its obligations
as administrator. See "Servicing and
Administration--Administration Agreement."
The Notes Each series of securities will include one or more
classes of student loan-backed notes. The notes
will be issued under an indenture between the trust
and the related indenture trustee. We may offer
each class of notes publicly or privately, as
specified in the related prospectus supplement.
5
<PAGE>
The notes will be available for purchase in
multiples of $1,000. They will be available
initially in book-entry form only. Investors who
hold the notes in book-entry form will be able to
receive definitive notes only in the limited
circumstances described in this prospectus 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.
Classes of notes may also have different interest
rates. The interest rate may be:
.fixed,
.variable,
.adjustable,
.auction-determined, or
.any combination of these rates.
The related prospectus supplement will specify:
. the principal amount of each class of notes;
and
. the interest rate for each class of notes or
the method for determining the interest
rate.
See "Description of the Notes--Principal and
Interest on the Notes."
If a series includes two or more classes of notes:
. the timing and priority of payments,
seniority, interest rates or amount of
payments of principal or interest may differ
for each class; or
. payments of principal or interest on a class
may or may not be made, depending on whether
specified events occur.
The related prospectus supplement will provide this
information.
The Certificates Each series of securities may also include one or
more classes of certificates. The certificates will
be issued under the trust agreement for that
series. We may offer each class of certificates
publicly or privately, as specified in the related
prospectus supplement.
Certificates will be available for purchase in a
minimum denomination of $100,000 and additional
increments of $1,000. They will be available
initially in book-entry form only. Investors who
hold the certificates in book-entry form will be
able to receive definitive certificates only in the
limited circumstances described in this prospectus
or in the related prospectus supplement. See
"Certain Information Regarding the Securities--
Book-Entry Registration" and "--Definitive
Securities."
6
<PAGE>
Each class of certificates will have a stated
certificate balance. The certificates will yield a
return on that balance at a specified certificate
rate. The rate of return may be:
. fixed,
. variable,
. adjustable,
. auction-determined, or
. any combination of these rates.
The related prospectus supplement will specify:
. the certificate balance for each class of
certificates; and
. the rate of return for each class of
certificates or the method for determining
the rate of return.
If a series includes two or more classes of
certificates:
. the timing and priority of distributions,
seniority, allocations of losses,
certificate rates or distributions on the
certificate balance may differ for each
class; and
. distributions on a class may or may not be
made, depending on whether specified events
occur.
The related prospectus supplement will provide this
information.
See "Description of the Certificates--Distributions
on the Certificate Balance."
Distributions on the certificates may be
subordinated in priority of payment to payments of
principal and interest on the notes. If this is the
case, the related prospectus supplement will
provide this information.
Assets of the Trust The assets of each trust will include a pool of
student loans. They may be:
. education loans to students or parents of
students made under the Federal Family
Education Loan Program; or
. if so specified in the prospectus
supplement, other education loans not made
under the Federal Family Education Loan
Program.
Unless we say otherwise in this prospectus or in a
prospectus supplement, "student loans" refer to
loans made under the Federal Family Education Loan
Program. Student loans owned by a specific trust
are called "trust student loans".
The assets of the trust will include rights to
receive payments made on these student loans and
any proceeds related to them.
7
<PAGE>
The seller will purchase the student loans from
Sallie Mae or another eligible lender specified in
the related prospectus supplement under a purchase
agreement. The student loans will be selected based
on criteria listed in that purchase agreement. The
seller will sell the student loans to the trust
under a sale agreement. The related prospectus
supplement will specify the aggregate principal
balance of the loans sold. The property of each
trust also will include amounts on deposit in
specific trust accounts, including a 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."
Each student loan sold to a trust will be 98%
guaranteed (or 100% for student loans disbursed
before October 1, 1993) as to the payment of
principal and interest by a state guaranty agency
or a private non-profit guarantor. These guarantees
are contingent upon compliance with specific
origination and servicing procedures as prescribed
by various federal and guarantor regulations. Each
guarantor is reinsured by the Department of
Education for between 75% and 100% of claims paid
by that guarantor for a given federal fiscal year.
The reinsured amount depends on a guarantor's
claims experience and the year in which the loans
subject to the claims were disbursed. The
percentage of the claims paid by a guarantor that
are reinsured could change in the future by
legislation. See "Appendix A--The Federal Family
Education Loan Program--Guarantors under the
FFELP."
A trust may also have among its assets various
agreements with counterparties providing for
interest rate swaps, caps and similar financial
contracts. These agreements will be described in
the related prospectus supplement.
Collection Account For each trust, the administrator will establish
and maintain accounts to hold all payments made on
the trust student loans. We refer to these accounts
as the "collection account". The collection account
will be in the name of the indenture trustee on
behalf of the holders of the notes and the
certificates. The prospectus supplement will
describe the permitted uses of funds in the
collection account and the conditions for their
application.
Pre-Funding Account A prospectus supplement may indicate that a portion
of the net proceeds of the sale of the securities
may be kept in a pre-funding account for a period
of time and used to purchase additional student
loans. If a pre-funding account is established, it
will be in the name of the indenture trustee and
will be an asset of the trust. We refer to the
amount deposited in the pre-funding account as the
"pre-funding amount". The prospectus supplement
will describe the permitted uses of any funds in
the pre-funding account and the conditions to their
application.
8
<PAGE>
Reserve Account The administrator will establish an account for
each series called the "reserve account". This
account will be in the name of the indenture
trustee and will be an asset of the trust. On the
closing date, the seller will make a deposit into
the reserve account, as specified in the prospectus
supplement. The initial deposit into the reserve
account may also be supplemented from time to time
by additional deposits. The prospectus supplement
will describe the amount of these additional
deposits.
The prospectus supplement for each trust will
describe how amounts in the reserve account will be
available to cover shortfalls in payments due on
the securities. It will also describe how amounts
on deposit in the reserve account in excess of the
required reserve account balance will be
distributed.
Credit and Cash Flow or Credit or cash flow enhancement for any series of
other Enhancement or securities may include one or more of the
Derivative Arrangements following:
. subordination of one or more classes of
securities;
. a reserve account or a cash collateral
account;
. overcollateralization;
. letters of credit, credit or liquidity
facilities;
. surety bonds;
. guaranteed investment contracts;
. swaps (including interest rate or currency
swaps), exchange agreements, interest rate
protection agreements, repurchase
obligations, put or call options and other
yield protection agreements;
. agreements providing for third party
payments; or
. other support, deposit or derivative
arrangements.
If any credit or cash flow enhancement applies to a
trust or any of the securities issued by that
trust, the related prospectus supplement will
describe the specific enhancement as well as the
conditions for their application. A credit or cash
flow enhancement may have limitations and
exclusions from coverage. If applicable, the
related prospectus supplement will describe these
limitations or exclusions. See "Certain Information
Regarding the Securities--Credit and Cash Flow or
other Enhancement or Derivative Arrangements" in
this prospectus.
Purchase Agreements For each trust, the seller will acquire the related
student loans under a purchase agreement. The
seller will assign its rights under the purchase
agreement to the eligible lender trustee on behalf
of the trust. The trust will further assign these
rights to the indenture trustee as collateral for
the notes. See "Transfer and Servicing Agreements"
in this prospectus.
9
<PAGE>
Sale Agreements The seller will sell the trust student loans to the
trust under a sale agreement. The eligible lender
trustee will hold legal title to the trust student
loans. The trust will assign its rights under the
sale agreement to the indenture trustee as
collateral for the notes. See "Transfer and
Servicing Agreements" in this prospectus.
Servicing Agreements The servicer will enter into a servicing agreement
or servicing agreements covering the student loans
held by each trust. Under the servicing agreement,
the servicer will be responsible for servicing,
managing, maintaining custody of, and making
collections on the trust student loans. In
addition, it will file with the Department of
Education and the guarantors all appropriate claims
to collect interest subsidy payments, special
allowance payments and guarantee payments owed on
the trust student loans. We refer to these payments
as "program payments". See "Servicing and
Administration" in this prospectus.
Servicing Fee The servicer will receive a servicing fee specified
in the related prospectus supplement. It will also
receive reimbursement for expenses and charges, as
specified in that prospectus supplement. These
amounts will be payable monthly.
The servicing fee and any portion of the servicing
fee that remains unpaid from prior dates will be
payable before the related securities unless any
portion of the servicing fee is expressly
subordinated to payments on the securities, as
specified in the related prospectus supplement.
See "Servicing and Administration--Servicing
Compensation" and "Description of the Securities--
Servicing Compensation" in this prospectus and in
the related prospectus supplement.
Administration Agreement Sallie Mae, in its capacity as administrator,
entered into a master administration agreement with
the seller in May 1997. Sallie Mae and the seller
also will enter into a supplement to the master
administration agreement with each trust, the
eligible lender trustee, the servicer and the
indenture trustee. Under these agreements, Sallie
Mae will undertake specific administrative duties
for each trust. See "Servicing and Administration--
Administration Agreement" in this prospectus.
Administration Fee The administrator will receive an administration
fee specified in the related prospectus supplement.
It may also receive reimbursement for expenses and
charges, as specified in the related prospectus
supplement. These amounts will be payable before
the related securities, as specified in the related
prospectus supplement. See "Servicing and
Administration--Administration Agreement" in this
prospectus.
Representations and Under the sale agreement for each trust, the seller
Warranties of the will make specific representations and warranties
Seller to the trust concerning the student loans. The
seller will have an obligation to repurchase any
trust student loan if the trust is materially and
adversely affected by a breach of the
10
<PAGE>
seller's representations or warranties, unless the
seller can cure the breach within the period
specified in the applicable prospectus supplement.
Alternatively, the seller may substitute "qualified
substitute student loans" rather than repurchasing
the affected loans. "Qualified substitute student
loans" are student loans that comply, on the date
of substitution, with all of the representations
and warranties made by the seller in the sale
agreement. Qualified substitute student loans must
also be substantially similar on an aggregate basis
to the loans they are being substituted for with
regard to the following characteristics:
. principal balance;
. status (i.e., in-school, grace, deferment,
forbearance or repayment);
. program type (i.e., Unsubsidized Stafford,
Subsidized Stafford, PLUS, SLS,
Consolidation or non-Federal Family
Education Loan Program loans);
. school type;
. total return; and
. remaining term to maturity.
Any required repurchase or substitution will occur
on the date the next collection period ends after
the applicable cure period has expired.
In addition, the seller has an obligation to
reimburse the trust for:
. any shortfall between the balance of the
qualified substitute student loans and the
balance of the loans being replaced, and
. any accrued interest not guaranteed by, or
that is required to be refunded to, a
guarantor and any program payments lost as a
result of a breach of the seller's
representations and warranties.
See "Transfer and Servicing Agreements--Sale of
Student Loans to the Trust; Representations and
Warranties of the Seller."
Representations and In each purchase agreement, Sallie Mae or other
Warranties of Sallie specified eligible lender will make representations
Mae and warranties to the seller concerning the student
loans covered by that purchase agreement. These
representations and warranties will be similar to
the representations and warranties made by the
seller under the related sale agreement. Sallie Mae
will have repurchase, substitution and
reimbursement obligations under the purchase
agreement that match those of the seller under the
sale agreement.
See "Transfer and Servicing Agreements--Purchase of
Student Loans by the Seller; Representations and
Warranties of Sallie Mae."
Covenants of the The servicer, will agree to service the trust
Servicer student loans in compliance with the servicing
agreement and the Higher Education Act. It will
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have an obligation to purchase from a trust, or
substitute qualified substitute student loans for,
any trust student loan if the trust is materially
and adversely affected by a breach of any covenant
of the servicer concerning that student loan. Any
breach that relates to compliance with the Higher
Education Act or the requirements of a guarantor,
but that does not affect that guarantor's
obligation to guarantee payment of a trust student
loan, will not be considered to have a material
adverse effect.
If the servicer does not cure a breach within the
period specified in the applicable prospectus
supplement, the purchase or substitution will be
made on the next collection period end date after
the applicable cure period has expired, or as
described in the related prospectus supplement.
In addition, the servicer has an obligation to
reimburse the trust for:
. any shortfall between the balance of the
qualified substitute student loans and the
balance of the loans being replaced, and
. any accrued interest not guaranteed by, or
that is required to be refunded to, a
guarantor and any program payments lost as a
result of a breach of the servicer's
covenants.
See "Servicing and Administration--Servicer
Covenants."
Optional Purchase The seller may, at its option, purchase, or arrange
for the purchase of, all remaining student loans
owned by a trust on any distribution date when
their pool balance is 10% or less of the initial
pool balance. The seller's exercise of this
purchase option will result in the early retirement
of the securities issued by that trust. See "The
Student Loan Pools--Termination" in this
prospectus.
Auction of Trust Assets The indenture trustee will offer for sale all
remaining trust student loans at the end of the
collection period when their pool balance reduces
to 10% or less of the initial pool balance. An
auction will occur only if the seller has first
waived its optional purchase right. The auction of
the remaining trust student loans will result in
the early retirement of the securities issued by
that trust. See "The Student Loan Pools--
Termination" in this prospectus and "Auction of
Trust Assets" in the related prospectus supplement.
Tax Considerations On the closing date for a series, Shearman &
Sterling (or another law firm identified in the
applicable prospectus supplement), as federal tax
counsel to the applicable trust, will deliver an
opinion that, for U.S. federal income tax purposes:
. the notes of that series will be
characterized as debt; and
. the trust will not be characterized as an
association (or a publicly traded
partnership) taxable as a corporation.
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In addition, a firm identified in the applicable
prospectus supplement as Delaware tax counsel will
deliver an opinion that
. the same characterizations would apply for
Delaware state income tax purposes as for
U.S. federal income tax purposes; and
. holders of the securities that are not
otherwise subject to Delaware taxation on
income will not become subject to Delaware
state tax as a result of their ownership of
the securities.
By acquiring a note, you will agree to treat that
note as indebtedness. By acquiring a certificate
and assuming that all of the certificates are sold
to persons other than the seller, you will agree to
treat the related trust either as a partnership in
which you are a partner for federal income tax
purposes, or as otherwise described in the related
prospectus supplement.
See "U.S. Federal Income Tax Consequences" and
"State Tax Consequences" in this prospectus and in
the related prospectus supplement.
ERISA Considerations A fiduciary of any employee benefit plan or other
retirement arrangement subject to Title I of ERISA
or Section 4975 of the Internal Revenue Code,
should carefully review with its legal advisors
whether the plan's purchase or holding of any class
of securities could give rise to a transaction
prohibited or otherwise impermissible under ERISA
or the Internal Revenue Code. See "ERISA
Considerations" in this prospectus and in the
related prospectus supplement.
Capital Treatment of
the Notes The Board of Governors of the Federal Reserve
System, the Office of the Comptroller of the
Currency, the Federal Deposit Insurance Corporation
and the Office of Thrift Supervision have advised
us in letters addressed to the seller that notes
backed by Federal Family Education Loan Program
loans are eligible for 20% risk-based capital
treatment. These regulators further advised us
generally that if any trust student loan was
disbursed on or after October 1, 1993, consistent
with the Higher Education Act's two percent lender
risk sharing provisions, only 98% of each note
would be eligible for the 20% risk category. Most
of the student loans sold by the Seller will be
disbursed on or after October 1, 1993 and,
accordingly, only 98% of each note is eligible for
the 20% risk category. The letters from the banking
regulators did not address the certificates'
eligibility for the 20% risk category.
In addition, we have received letters from the
banking regulators for France, Germany, Italy,
Japan, Luxembourg, the Netherlands, Switzerland and
the United Kingdom, in each case advising us that
the notes may be eligible for 20% risk-based
capital treatment. The Netherlands banking
regulator further advised us that it considers the
Federal Family Education Loan Program loans to be a
homogenous
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pool of assets and, accordingly, will make no
distinction between trust student loans disbursed
before and after October 1, 1993. With the
exception of the French, German, Japanese and Swiss
banking regulators, whose advice does not address
the matter, the European bank authorities have
advised us that they will treat trust student loans
disbursed on or after October 1, 1993 in a manner
consistent with the advice we received from the
United States banking regulators.
Ratings
All of the securities will be rated in one of the
four highest rating categories. The related
prospectus supplement will specify the ratings for
the securities.
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RISK FACTORS
You should carefully consider the following risk factors in deciding whether
to purchase any securities. You should also consider the additional risk
factors described in each prospectus supplement. All of these risk factors
could affect your investment in or return on the securities.
The Securities Are Not
Suitable For All
Investors................ The securities are not a suitable investment if
you require a regular or predictable schedule of
payments or payment on any specific date. Because
the securities are complex instruments, you
should consider investing in them only if you
have sufficient expertise, either alone or with
your financial, tax and legal advisors, to
analyze the prepayment, reinvestment, default and
market risks, the tax consequences of this
investment, and the interaction of these factors.
Your Ability to Resell
Your Securities May Be
Limited.................. We do not intend to list the securities on any
national exchange. As a result, we can not assure
you that a secondary market for the securities
will develop. If a secondary market does develop,
it may not provide you with liquidity or continue
for the life of the securities.
The underwriters may assist in resales of the
securities but are not required to do so. The
related prospectus supplement will indicate
whether any of the underwriters intends to make a
secondary market in the securities offered by
that prospectus supplement. No underwriter will
be obligated to make a secondary market.
The Trust Will Have
Limited Assets From
Which To Make Payments
On The Securities........
The trust will not have, nor will it be permitted
to have, significant assets or sources of funds
other than the trust student loans, the guarantee
agreements, and, if so provided in the related
prospectus supplement, a reserve account and
other credit or cash flow enhancements. The notes
will represent obligations solely of the trust.
The certificates represent beneficial interests
solely in that trust. Neither the notes nor the
certificates will be obligations of or interests
in, or insured or guaranteed by:
. Sallie Mae,
. the seller,
. the servicer,
. the eligible lender trustee,
. the indenture trustee, or
. any other person or entity, except for the
trust.
Consequently, you must rely upon payments on the
trust student loans from the borrowers and
guarantors, and, if available, amounts on deposit
in the reserve account and any other credit or
cash flow enhancement to repay your securities.
Losses May Occur If
Borrowers Default On The
Student Loans............
The majority of the student loans owned by the
trust will be only 98% guaranteed. If a borrower
defaults on a student loan that is only 98%
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insured, the related trust will experience a loss
of approximately 2% of the outstanding principal
and accrued interest on that student loan. The
trust will assign a defaulted loan to the
applicable guarantor in exchange for a guarantee
payment on the 98% guaranteed portion. The
related trust may not have any right to pursue
the borrower for the remaining unguaranteed
portion. If defaults occur on the trust student
loans and the credit enhancement described in the
related prospectus supplement is insufficient,
you may suffer a delay in payment or losses on
your securities.
Your Investment Also
Depends On The
Guarantors As Security
For The Student Loans....
All of the student loans will be unsecured. As a
result, the only security for payment of a
student loan is the guarantee provided by the
applicable guarantor. Student loans acquired by
each trust will be subject to guarantee
agreements with a number of individual
guarantors. A deterioration in the financial
status of a guarantor and its ability to honor
guarantee claims could result in a failure of
that guarantor to make its guarantee payments to
the eligible lender trustee in a timely manner. A
guarantor's financial condition could be
adversely affected by a number of factors
including:
. the amount of claims made against that
guarantor as result of borrower defaults;
. the amount of claims reimbursed to that
guarantor from the Department of
Education, which range from 75% to 100% of
the 98% guaranteed portion of the loan
depending on the date the loan was made
and the performance of the guarantor; and
. changes in legislation that may reduce
expenditures from the Department of
Education that support federal guarantors
or that may require guarantors to pay more
of their reserves to the Department of
Education.
If the financial condition of a guarantor
deteriorates, it may fail to make guarantee
payments in a timely manner. In that event, you
may suffer delays in payment or losses on your
securities.
The Department Of
Education's Failure To
Make Reinsurance
Payments May Affect Your
Securities...............
If a guarantor is unable to meet its guarantee
obligations, the trust may submit claims directly
to the Department of Education for payment. The
Department of Education's obligation to pay
guarantee claims directly is dependent upon it
determining that the guarantor is unable to meet
its obligations. If the Department of Education
delays in making this determination, you may
suffer a delay in the payment of principal and
interest on your securities. In addition, if the
Department of Education determines that the
guarantor is able to meet its obligations, the
Department of Education will not make guarantee
payments to the trust. The Department of
Education may or may not make the necessary
determination or, if it does, it may or may not
make
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this determination or the ultimate payment of the
guarantee claims in a timely manner. This could
result in delays or losses on your investment.
The Investment Return On
Your Securities Is
Uncertain................ The return on your investment in the securities
will depend on:
. the price you pay for your securities,
. their interest rate, and
. the rate at which you receive a return of
principal.
Amounts received by a trust for a particular
collection period may vary greatly from the
payments actually due on the related trust
student loans for the collection period for a
variety of economic, social and other factors.
A borrower may prepay a student loan in whole or
in part, at any time. The likelihood of
prepayments is higher as a result of federal loan
consolidation programs. In addition, a trust may
receive unscheduled payments due to defaults and
to purchases by the servicer or the seller. The
rate of prepayments on the student loans may be
influenced by a variety of economic, social,
competitive and other factors, including changes
in interest rates, the availability of
alternative financings and the general economy.
Because a pool will include thousands of student
loans, it is impossible to predict the amount and
timing of payments that will be received and paid
to securityholders in any period. Consequently,
the length of time that your securities are
outstanding and accruing interest may be shorter
than you expect.
On the other hand, the student loans may be
extended as a result of grace periods, deferment
periods and, under some circumstances,
forbearance periods. This may lengthen the
remaining term of the student loans and delay
principal payments to you. The amount available
for distribution to you will be reduced if
borrowers fail to pay timely the principal and
interest due on the trust student loans. In
addition, the failure of a guarantor to timely
meet its guarantee obligations could also reduce
the amount of funds available for distribution to
you on a given distribution date. Consequently,
the length of time that your securities are
outstanding and accruing interest may be longer
than you expect.
The seller's option to terminate a trust early
and, if applicable, the possibility that any pre-
funded amount may not be fully used to purchase
additional student loans create additional
uncertainty regarding the timing of payments to
securityholders.
The effect of these factors is impossible to
predict. To the extent they create reinvestment
risk, you will bear that risk.
A Failure To Comply With
Student Loan Origination
And Servicing Procedures
Could Adversely Affect
Your Securities..........
The Higher Education Act requires lenders making
and servicing student loans and the guarantors
guaranteeing those loans to follow
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specified procedures, including due diligence
procedures, to ensure that the student loans are
properly made, disbursed and serviced.
Failure to follow these procedures may result in:
. the Department of Education's refusal to
make reinsurance payments to the
applicable guarantor or to make interest
subsidy payments and special allowance
payments on the trust student loans; or
. the guarantors' inability or refusal to
make guarantee payments on the trust
student loans.
Loss of any program payments could adversely
affect the amount of available funds and the
trust's ability to pay principal and interest on
your securities.
The Inability of The
Seller Or The Servicer
To Meet Its Repurchase
Obligation May Adversely
Affect Your Securities...
Under some circumstances, the trust has the right
to require the seller or the servicer to purchase
or substitute for a trust student loan. This
right arises generally if a breach of the
representations, warranties or covenants of the
seller or the servicer, as applicable, has a
material adverse effect on the trust, if the
breach is not cured within the applicable cure
period. We cannot guarantee you, however, that
the seller or the servicer will have the
financial resources to make a purchase or
substitution.
Noteholders' Right To
Control Upon Defaults
May Adversely Affect
Certificateholders.......
In the event of a default by the servicer or the
administrator, the indenture trustee or the
noteholders may remove the defaulting party
without the consent of the eligible lender
trustee or any of the certificateholders. In
addition, the noteholders have the ability, with
specified exceptions, to waive defaults by the
servicer or the administrator, including defaults
that could materially and adversely affect the
certificateholders.
There May Be Risks
Associated With
Subordination Of The
Notes Or Certificates....
Payments on the certificates may be subordinated
to payments due on the notes of that series. In
addition, some classes of notes may be
subordinate to other classes. Consequently,
holders of the certificates and the holders of
some classes of notes may bear a greater risk of
losses or delays in payment. The prospectus
supplement will describe the nature and the
extent of any subordination.
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<PAGE>
The Securities May Be
Repaid Early Due To An
Auction Sale Or The
Exercise Of The Purchase
Option. If This Happens,
Your Yield May Be
Affected And You Will
Bear The Reinvestment
Risk.....................
The securities may be repaid before you expect
them to be if:
. the indenture trustee successfully
conducts an auction sale or
. the seller exercises its option to
purchase all the trust student loans.
Either event would result in the early retirement
of the securities outstanding on that date. If
this happens, your yield on the securities may be
affected. You will bear the risk that you cannot
reinvest the money you receive in comparable
securities at as high a yield.
There May Be Risk Of
Change In The
Characteristics Of The
Student Loans Resulting
From Incentive
Programs.................
Sallie Mae currently offers various incentive
programs to borrowers. The servicer may also make
these incentive programs available to borrowers
with trust student loans. Any incentive program
that effectively reduces borrower payments or
principal balances on trust student loans and is
not required by the Higher Education Act will be
applicable to the trust student loans only if the
servicer receives payment from Sallie Mae in an
amount sufficient to offset the effective yield
reductions. If these benefits are made available
to borrowers with trust student loans, the
principal of the affected trust student loans may
amortize faster than anticipated.
There May Be Risk To
Your Investment
Associated With
Commingling Of Assets....
The servicer will remit collections on trust
student loans to the administrator, rather than
directly to the collection account, as long as
the administrator meets specified ratings-related
criteria.
The servicer will remit all these collections
within two business days of receipt to the
administrator. The administrator, then, will
remit all amounts received from the servicer to
the collection account by the business day
preceding each monthly servicing payment date, if
any servicing fees are then due, and in any case
by the business day preceding each distribution
date. The administrator will also deposit the
purchase amount received on student loans
purchased by the seller or the servicer into the
collection account by the business day before
each distribution date.
The administrator may invest collections pending
deposit into the collection account, at its own
risk and for its own benefit. It will not
segregate these funds. If the administrator is
unable to remit these funds, securityholders
might incur a loss.
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Offsets By Guarantors Or
The Department Of
Education Could Reduce
The Amount Of Available
Funds....................
The eligible lender trustee may use the same
Department of Education lender identification
number for student loans in a trust as it uses
for other student loans it holds on behalf of
other trusts established by the seller. If so,
the billings submitted to the Department of
Education and the claims submitted to the
guarantors will be consolidated with the billings
and claims for payments for trust student loans
under other trusts using the same lender
identification number. Payments on those billings
by the Department of Education as well as claim
payments by the applicable guarantors will be
made to the eligible lender trustee, or to the
servicer on behalf of the eligible lender
trustee, in lump sum form. Those payments must be
allocated by the eligible lender trustee among
the various trusts that reference the same lender
identification number.
If the Department of Education or a guarantor
determines that the eligible lender trustee owes
it a liability on any trust student loan,
including loans it holds on behalf of the trust
for your securities or other trusts, the
Department or the applicable guarantor may seek
to collect that liability by offsetting it
against payments due to the eligible lender
trustee under the terms of the trust. Any
offsetting or shortfall of payments due to the
eligible lender trustee could adversely affect
the amount of available funds for any collection
period and thus the trust's ability to pay you
principal and interest on the securities.
The servicing agreement for your securities and
other servicing agreements of the seller will
contain provisions for cross-indemnification
concerning those payments and offsets. Even with
cross-indemnification provisions, however, the
amount of funds available to the trust from
indemnification would not necessarily be adequate
to compensate the trust and investors in the
securities for any previous reduction in the
available funds.
There May Be Risks To
Your Investment
Associated With A
Servicer Default.........
If a servicer default occurs, the indenture
trustee or the noteholders in a given series of
securities may remove the servicer without the
consent of the eligible lender trustee or any of
the certificateholders of that series, or as set
forth in the related prospectus supplement. Only
the indenture trustee or the noteholders, and not
the eligible lender trustee or the
certificateholders, have the ability to remove
the servicer if a servicer default occurs. In the
event of the removal of the servicer and the
appointment of a successor servicer, we cannot
predict:
. the cost of the transfer of servicing to
the successor,
. the ability of the successor to perform
the obligations and duties of the servicer
under the servicing agreement, or
. the servicing fees charged by the
successor.
In addition, the noteholders have the ability,
with some exceptions, to waive defaults by the
servicer, including defaults that could
materially and adversely affect the
certificateholders.
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The Bankruptcy Of The
Seller Or Sallie Mae
Could Adversely Affect
Payments On The
Securities............... We have taken steps to assure that the voluntary
or involuntary application for relief by Sallie
Mae under the United States Bankruptcy Code or
other 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 under a
certificate of incorporation containing various
limitations. These limitations include
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, we cannot guarantee that the
activities of the seller will 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 this
conclusion or a filing were made under any
insolvency law by or against the seller, or if an
attempt were made to litigate this issue, then
delays in distributions on the securities or
reductions in these amounts could result.
Sallie Mae and the seller intend that each
transfer of student loans by Sallie Mae to the
seller will constitute a true sale to the seller.
If a transfer constitutes a true sale, the
student loans and their proceeds would not be
property of Sallie Mae should it become the
subject of any insolvency law.
If Sallie Mae were to become subject to an
insolvency law, and a creditor, a trustee-in-
bankruptcy or Sallie Mae itself were to take the
position that the sale of student loans should
instead be treated as a pledge of the student
loans to secure a borrowing of Sallie Mae, delays
in payments on the securities could occur. In
addition, if the court ruled in favor of this
position, reductions in the amounts of these
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 those
student loans to the seller may have priority
over that trust's interest in the student loans.
The Indenture Trustee
May Have Difficulty
Liquidating Student
Loans After An Event Of
Default..................
Generally if an event of default occurs under an
indenture, the indenture trustee may sell the
trust student loans, without the consent of the
certificateholders. However, the indenture
trustee may not be able to find a purchaser for
the trust student loans in a timely manner or the
market value of those loans may not be high
enough to make securityholders whole. If the
proceeds of that sale, together with amounts then
available in any reserve account or other
available credit enhancement are not sufficient,
securityholders, especially certificateholders to
the extent the certificates are subordinated, may
also suffer a loss.
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The Federal Direct
Student Loan Program
Could Result In Reduced
Revenues For The
Servicer And The
Guarantors...............
The Federal Direct Student Loan Program,
established under the Higher Education Act, has
resulted and may continue to result in reductions
in the volume of loans made under the Federal
Family Education Loan Program. If so, the
administrator and the servicer may experience
increased costs due to reduced economies of
scale. These cost increases could reduce the
ability of the servicer to satisfy its
obligations to service the trust student loans.
This increased competition from the Federal
Direct Student Loan Program could also reduce
revenues of the guarantors that would otherwise
be available to pay claims on defaulted student
loans. The level of demand currently existing in
the secondary market for loans made under the
Federal Family Education Loan Program could be
reduced, resulting in fewer potential buyers of
the student loans and lower prices available in
the secondary market for those loans. The
Department of Education also has implemented a
direct consolidation loan program, which may
reduce the volume of loans outstanding under the
Federal Family Education Loan Program and result
in prepayments of student loans held by the
trust.
Changes In Law May
Adversely Affect Student
Loans, The Guarantors,
The Seller Or Sallie
Mae......................
The Higher Education Act or other relevant
federal or state laws, rules and regulations may
be amended or modified in the future in a manner
that could adversely affect the federal student
loan programs as well as the student loans made
under these programs and the financial condition
of the guarantors. Among other things, the level
of guarantee payments may be adjusted from time
to time. Future changes could affect the ability
of Sallie Mae, the seller or the servicer to
satisfy their obligations to purchase or
substitute student loans. Future changes could
also have a material adverse effect on the
revenues received by the guarantors that are
available to pay claims on defaulted student
loans in a timely manner. We cannot predict
whether any changes will be adopted or, if
adopted, what impact those changes would have on
any trust or the securities that it issues.
Consumer Protection Laws
May Affect
Enforceability Of
Student Loans............
Numerous federal and state consumer protection
laws and related regulations impose substantial
requirements upon lenders and servicers involved
in consumer finance. Also, unless preempted by
Federal law, some state laws impose finance
charge ceilings and other restrictions on
consumer transactions and require contract
disclosures in addition to those required under
federal law. While these federal and state laws
are generally not applicable to federally
sponsored student loans, they may 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 upon an event of default
under the indenture, may not be readily available
or may be limited by applicable state and federal
laws.
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There May Be Risks To
Your Investment
Associated With The Use
Of Master Promissory
Notes....................
Beginning on July 1, 1999, a master promissory
note may evidence any student loan made to a
borrower under the Federal Family Education Loan
Program. If a master promissory note is used, a
borrower executes only one promissory note with
each lender. Subsequent student loans from that
lender are evidenced by a confirmation sent to
the student. Therefore, if a lender originates
multiple student loans to the same student, all
the student loans are evidenced by a single
promissory note.
Under the Higher Education Act, each student loan
made under a master promissory note may be sold
independently of any other student loan made
under that same master promissory note. Each
student loan is separately enforceable on the
basis of an original or copy of the master
promissory note. Also, a security interest in
these student loans may be perfected either
through the secured party taking possession of
the original or a copy of the master promissory
note, or the filing of a financing statement.
Prior to the master promissory note, each student
loan made under the Federal Family Education Loan
Program was evidenced by a separate note.
Assignment of the original note was required to
effect a transfer and possession of a copy did
not perfect a security interest in the loan.
It is possible that student loans transferred to
the trust may be originated under a master
promissory note. If the servicer were to deliver
a copy of the master promissory note, in exchange
for value, to a third party that did not have
knowledge of the indenture trustee's lien, that
third party may also claim an interest in the
student loan. It is possible that the third
party's interest could be prior to or on a parity
with the interest of the indenture trustee.
You May Experience
Liquidity Problems Or
Payment Delays From The
Use Of Book-Entry
Registration.............
Each class of securities will be initially
represented by certificates registered in the
name of Cede & Co., or any other nominee for The
Depository Trust Company (DTC). The notes and the
certificates will not be registered in the names
of investors. Because of this, investors will not
be recognized by the indenture trustee or
eligible lender trustee as "Noteholders" or
"Certificateholders". The notes and certificates
may therefore have reduced liquidity in the
secondary trading market, since some investors
may be unwilling to purchase securities for which
they cannot obtain physical certificates. Your
ability to pledge the securities may also be
limited due to the lack of a physical certificate
representing the securities. In addition, you may
experience some delay in the receipt of
distributions on the securities since
distributions will be forwarded by the trustee to
DTC and DTC will credit the distributions to the
accounts of its participants, which will
thereafter credit them to your account either
directly or indirectly through other
participants.
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You May Be Unable To
Reinvest Principal
Payments At The Yield
You Earn On The
Securities............... Asset-backed securities usually produce increased
principal payments to investors when market
interest rates fall below the interest rates on
the collateral (student loans in this case) and
decreased principal payments when market interest
rates rise above the interest rates on the
collateral. As a result, you are likely to
receive more money to reinvest at a time when
other investments generally are producing lower
yields than the yield on the securities.
Similarly, you are likely to receive less money
to reinvest when other investments generally are
producing higher yields than the yield on the
securities.
Withdrawal Or Downgrade
Of Initial Ratings May
Affect The Prices Of
Your Securities..........
The related prospectus supplement will specify
the required ratings for the securities. A
security rating is not a recommendation to buy,
sell or hold securities. Similar ratings on
different types of securities do not necessarily
mean the same thing. You should analyze the
significance of each rating independently from
any other rating. A rating agency may revise or
withdraw its rating at any time if it believes
circumstances have changed. A subsequent change
in rating is likely to affect the price a
subsequent purchaser will be willing to pay for
your securities.
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FORMATION OF THE TRUSTS
The Trusts
The seller will establish a separate trust for each series of securities.
Each trust will be formed under a trust agreement and will be governed by the
laws of the jurisdiction specified in the related prospectus supplement. It
will perform only the following activities:
. acquire, hold, sell and manage trust student loans, the other trust
assets and related proceeds;
. issue the securities;
. make payments on the securities; and
. engage in other incidental or related activities.
Each trust will have only nominal initial capital. On behalf of each trust,
the eligible lender trustee will use the proceeds from the sale of the related
securities to purchase the trust student loans.
Following the purchase of the trust student loans, the assets of the trust
will include:
. the trust student loans themselves, legal title to which the eligible
lender trustee will hold;
. all funds collected on the trust student loans on or after the date
specified in the prospectus supplement (including any program payments);
. all moneys and investments on deposit in the collection account, any
reserve account, any pre-funding account and any other trust accounts or
any other form of credit enhancement;
. rights under the related transfer and servicing agreements, including
the right to require Sallie Mae, the seller or the servicer to
repurchase trust student loans from it or to substitute student loans
under some conditions;
. rights under the guarantee agreements with guarantors; and
. any other property described in the prospectus supplement.
The certificates will represent beneficial ownership of the assets of the
trust and the notes will represent indebtedness of the trust secured by its
assets. To facilitate servicing and to minimize administrative burden and
expense, the servicer, directly or through subservicers, will retain
possession of the promissory notes and other documents related to the student
loans as custodian for the trust and the eligible lender trustee.
Eligible Lender Trustee
The eligible lender trustee for a trust will be the bank or trust company
specified in the related prospectus supplement. It will acquire legal title to
all trust student loans on behalf of that trust and will enter into a
guarantee agreement with each of the guarantors of those loans. The eligible
lender trustee must qualify as an eligible lender under the Higher Education
Act and the guarantee agreements.
The liability of the eligible lender trustee in connection with the issuance
and sale of any securities will consist solely of its express obligations in
the trust agreement and sale agreement. An eligible lender trustee may resign
at any time. If it does, the administrator must appoint a successor. The
administrator may also remove an eligible lender trustee if the eligible
lender trustee becomes insolvent or ceases to be eligible to continue as
trustee. In that event, the administrator must appoint a successor. The
resignation or removal of an eligible lender trustee and appointment of a
successor will become effective only when a successor accepts its appointment.
The prospectus supplement will specify the principal office of each trust
and eligible lender trustee.
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USE OF PROCEEDS
On the closing date specified in the applicable prospectus supplement, the
eligible lender trustee, on behalf of the trust, will purchase student loans
from the seller and make an initial deposit into the reserve account and the
pre-funding account, if any, with the net proceeds of sale of the securities.
The eligible lender trustee may also apply the net proceeds for other purposes
to the extent described in the related prospectus supplement. The seller will
use the money it receives for general corporate purposes, including purchasing
the student loans and acquiring any credit or cash flow enhancement specified
in the related prospectus supplement.
SALLIE MAE, THE SELLER AND THE SERVICER
Sallie Mae
Congress chartered the Student Loan Marketing Association, or Sallie Mae, in
1972 as a government-sponsored enterprise or GSE. It is a for-profit,
stockholder-owned corporation that provides a national secondary market for
federally sponsored student loans and serves as a source of credit to
participants in the post-secondary education-lending sector. It also engages
in other credit, service and investment operations related to higher education
finance. Sallie Mae will provide management and administrative services to the
trusts as administrator.
Sallie Mae's structure and the scope of its business activities appear in
Section 439, Part B, Title IV of the Higher Education Act. These provisions of
the Higher Education 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" in this prospectus.
On September 30, 1996, the Student Loan Marketing Association Reorganization
Act of 1996 (the Privatization Act) became effective. The Privatization Act
authorized the creation of a state-chartered holding company. Under the
Privatization Act, this holding company can pursue new business opportunities
beyond the limited scope of Sallie Mae's restrictive federal charter.
This reorganization occurred on August 7, 1997. In the reorganization, SLM
Holding Corporation became Sallie Mae's parent and Sallie Mae transferred
various assets, including the stock of Sallie Mae Servicing Corporation, to
SLM Holding Corporation. As required by the Privatization Act, all Sallie Mae
employees were transferred to SLM Holding Corporation or another of its
subsidiaries that is not a GSE.
The securities are likely to be outstanding past the projected termination
date of Sallie Mae's federal charter and its GSE status. Before the
termination of Sallie Mae's federal charter, we expect to transfer Sallie
Mae's obligations under the purchase agreements, including its obligation to
repurchase non-qualifying loans from the seller, and its obligations under the
administration agreement, 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 and Administration--
Administration Agreement" in this prospectus.
The Seller
SLM Funding Corporation is a wholly owned subsidiary of Sallie Mae
incorporated in Delaware on July 25, 1995. It has only limited purposes, which
include purchasing student loans from Sallie Mae, transferring the student
loans to the trusts and other incidental and related activities. Its principal
executive offices are at 777 Twin Creek Drive, Killeen, Texas 76543. Its
telephone number is (817) 554-4500.
The seller has taken steps intended to prevent any 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
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include its creation as a separate, limited-purpose subsidiary with its own
corporate identity. The seller's certificate of incorporation contains
limitations including:
. restrictions on the nature of its business; and
. a restriction on its ability to commence a voluntary case or proceeding
under any insolvency law without the unanimous affirmative vote of all
of its directors.
Among other things, the seller will maintain its separate corporate identity
by:
. maintaining records and books of accounts separate from those of Sallie
Mae;
. refraining from commingling its assets with the assets of Sallie Mae;
and
. refraining from holding itself out as having agreed to pay, or being
liable for, the debts of Sallie Mae.
We have structured the transactions described in this prospectus to assure
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
a "true sale," the student loans and related proceeds would not be property of
Sallie Mae should it become subject to any insolvency law.
Upon each issuance of securities, the seller will receive the advice of
counsel that, subject to various facts, assumptions and qualifications, the
transfer of the student loans by Sallie Mae to the seller would be
characterized as a "true sale" and the student loans and related proceeds
would not be property of Sallie Mae under the insolvency laws.
The seller will also represent and warrant that each sale of student loans
by the seller to the trust is a valid sale of those loans. In addition, the
seller, the eligible lender trustee and the trust will treat the conveyance of
the student loans as a sale. The seller and Sallie Mae will take all actions
that are required so the eligible lender trustee will be treated as the legal
owner of the student loans.
The Servicer
Sallie Mae Servicing Corporation will service the trust student loans on
behalf of each trust. It is a wholly owned subsidiary of SLM Holding
Corporation and an affiliate of Sallie Mae. The servicer manages and operates
Sallie Mae's loan servicing functions. It was incorporated in Delaware on
November 1, 1995. Its principal executive offices are at 11600 Sallie Mae
Drive, Reston, Virginia 20193. Its telephone number is (703) 810-3000.
The servicer's loan servicing centers, known as "LSCs", service the vast
majority of student loans owned by Sallie Mae. The LSCs are located in
Florida, Kansas, Pennsylvania and Texas. The servicer may delegate or
subcontract its duties as servicer, but no delegation or subcontract will
relieve the servicer of liability under the servicing agreement.
The prospectus supplement for a series may contain additional information
concerning the administrator, the seller or the servicer.
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THE STUDENT LOAN POOLS
The seller will purchase the trust student loans from Sallie Mae out of the
portfolio of student loans held by Sallie Mae. The trust student loans must
meet several criteria, including:
. Each loan is guaranteed as to principal and interest by a guarantor and
is reinsured by the Department of Education under the Federal Family
Education Loan Program (FFELP).
. Each loan was originated in the United States, its territories or its
possessions in accordance with a FFELP program.
. Each loan contains terms required by the program and the applicable
guarantee agreements.
. Each loan provides for periodic payments that will fully amortize the
amount financed over its term to maturity, exclusive of any deferral or
forbearance periods.
. Each loan satisfies any other criteria described in the related
prospectus supplement.
The prospectus supplement for each series will provide information about the
student loans in the related trust that will include:
. the composition of the pool,
. the distribution of the pool by loan type, payment status, interest rate
basis and remaining term to maturity,
. the borrowers' states of residence, and
. the percentages of the student loans guaranteed by the applicable
guarantors.
Sallie Mae's Student Loan Financing Business
Sallie Mae purchases student loans insured under federally sponsored
programs and makes secured loans, also known as warehousing advances, to
providers of education credit. "Appendix A--The Federal Family Education Loan
Program" to this prospectus describes these federally sponsored programs.
Loan Purchases. Sallie Mae purchases Stafford Loans, SLS Loans and PLUS
Loans originated under the FFELP, all of which are insured by guarantors and
reinsured by the Department of Education. It also originates consolidation
loans and makes loans as a lender of last resort.
Sallie Mae also purchases loans that are not originated under the FFELP,
such as Health Education Assistance Program (HEAL) which the United States
Department of Health and Human Services insures directly and loans which are
privately insured by entities other than the guarantors and not reinsured by
the federal government.
Sallie Mae purchases insured loans from various sources including :
. commercial banks, thrift institutions and credit unions,
. pension funds and insurance companies,
. educational institutions, and
. various state and private nonprofit loan originating and secondary
market agencies.
These purchases occur at various times including:
. shortly after loan origination;
. while the borrowers are still in school;
. just before their conversion to repayment after borrowers graduate or
otherwise leave school; or
. while the loans are in repayment.
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In addition to buying loans on a spot basis, Sallie Mae enters into
commitment contracts to purchase loans over a specified period of time. Many
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 they have the
right or the obligation to sell Sallie Mae a specified amount of loans over a
specified term, usually two to three years.
In conjunction with commitment contracts, Sallie Mae frequently provides the
selling institution with operational support in the form of either:
. its automated loan administration system called PortSS(R) for the lender
to use prior to loan sale; or
. its loan origination and interim servicing system called ExportSS(R).
Both PortSS and ExportSS provide Sallie Mae and the lender with the assurance
that the loans will be administered by the servicer's computerized servicing
systems.
Servicing. Prior to Sallie Mae's loan purchase, the servicer or a third
party servicing agent surveys appropriate loan documents for compliance with
Department of Education and guarantor requirements. Once acquired, loans are
serviced through the servicer or third-party servicers, in each case under
contractual agreements with Sallie Mae.
The Department of Education and the various guarantors 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 guarantor's guarantee agreement 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. Most FFELP loans are considered to be in
default when they become 270 days delinquent.
A guarantor may reject any claim for payment under a guarantee agreement if
the specified due diligence and collection procedures required by that
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, called "curing the defect". Interest penalties are commonly
incurred on loans that are cured. The servicer's recent experience has been
that approximately 90 percent of all rejected claims are cured within two
years, either internally or through collection agencies.
The servicer's internal procedures support compliance with existing
Department of Education and guarantor regulations and reporting requirements,
and provide high quality service to borrowers. It utilizes a computerized loan
servicing system called CLASS. This program 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 the servicer to service a high volume of loans in a manner consistent
with industry requirements. Sallie Mae also requires its third-party servicers
to maintain operating procedures which comply with applicable Department of
Education and guarantor regulations and reporting requirements, and
periodically reviews certain operations for 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 trust student loans. Sallie Mae currently
participates in the consolidation loan program. Therefore, the transfer and
servicing agreements permit
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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 some borrowers loan repayment terms that do
not provide for level payments over the repayment term of the loan. For
example, under Sallie Mae's graduated repayment program, some student loans
provide for an "interest only" period. During this period, the borrower is
required to make payment of accrued interest only. No payment of the principal
of the loan is required. At the conclusion of the interest only period, the
loan must be amortized through level payments over the remaining term.
In other cases, Sallie Mae offers borrowers a "graduated phased in"
amortization of the principal of the loans. For these loans, a greater portion
of the principal amortization of the loan occurs 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 under which
repayments are based on the borrower's income. Under this plan, ultimate
repayment may be delayed up to five years.
Incentive Programs. Sallie Mae has offered, and intends to continue to
offer, incentive programs to student loan borrowers. Three of these programs
may apply to student loans owned by the trusts.
. Great RewardsSM. Under the Great RewardsSM program, which is available
for all student loans that enter repayment after July 1993, if a
borrower makes 48 consecutive scheduled payments in a timely fashion,
the effective interest rate is reduced permanently by 2% per annum.
. Great ReturnsSM. Under the Great ReturnsSM program, a borrower who makes
24 consecutive scheduled payments in a timely fashion gets a reduction
in principal equal to any amount over $250 that was paid as part of the
borrower's origination fee to the extent that the fee does not exceed 3%
of the principal amount of the loan.
. Direct Repay plan. Under 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.
We cannot predict how many borrowers will participate in these programs.
The incentive programs currently or in the future made available by Sallie
Mae to borrowers may also be made available by the servicer to borrowers with
trust student loans. Any incentive program that effectively reduces borrower
payments or principal balances and is not required by the Higher Education Act
will be applicable to the trust student loans only if the servicer receives
payments from Sallie Mae in an amount sufficient to offset the effective yield
reductions.
Delinquencies, Defaults, Claims and Net Losses
Information about delinquencies, defaults, guarantee claims and net losses
on student loans is available in the Department of Education's Loan Programs
Data Books, called "DOE Data Books". The delinquency, default, claim and net
loss experience on any pool of trust student loans may not be comparable to
this information.
Payment of Notes
Upon the payment in full of all outstanding notes of a given series, the
eligible lender trustee will succeed to all the rights of the indenture
trustee, and the certificateholders will succeed to all the rights of the
noteholders under the related sale agreement.
Seller Liability
Under each trust agreement, the seller will agree to act as the general
partner of the related trust. It will be liable directly to an injured party
for the entire amount of any losses, claims, damages or liabilities, other
than
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for amounts payable by the trust on the related notes or certificates, arising
out of the trust agreement as though the arrangement created a partnership
under the Delaware Revised Uniform Limited Partnership Act in which the seller
was a general partner.
Termination
For each trust, the obligations of the servicer, the seller, the
administrator, the eligible lender trustee and the indenture trustee under the
transfer and servicing agreements will terminate upon:
. the maturity or other liquidation of the last trust student loan and the
disposition of any amount received upon liquidation of any remaining
trust student loan, and
. the payment to the securityholders of all amounts required to be paid to
them.
The seller, at its option, may repurchase or arrange for the purchase of all
remaining trust student loans as of the end of any collection period if the
outstanding pool balance is 10% or less of the initial pool balance, as
defined in the related prospectus supplement. The purchase price will equal
the aggregate purchase amounts for the loans as of the end of that collection
period. It will not be less than the minimum purchase amount specified in the
related prospectus supplement. These amounts will be used to retire the
related notes and certificates. Upon termination of the trust, any remaining
assets of that trust, after giving effect to final distributions to the
securityholders, will be transferred to the reserve account and paid to the
seller.
The indenture trustee will try to auction any trust student loans remaining
in the trust at the end of the collection period preceding the trust auction
date specified in the related prospectus supplement. Sallie Mae, its
affiliates and unrelated third parties may make bids to purchase these trust
student loans on the trust auction date; however, Sallie Mae or its affiliates
may offer bids only if the pool balance at that date is 10% or less of the
initial pool balance.
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TRANSFER AND SERVICING AGREEMENTS
General
The following is a summary of the important terms of the sale agreements
under which the trusts will purchase student loans from the seller, and the
purchase agreements under which the seller will acquire the student loans from
Sallie Mae. We have filed forms of the sale agreement and purchase agreement
as exhibits to the registration statement of which this prospectus is a part.
The summary does not cover every detail of these agreements, and it is subject
to all of the provisions of the sale agreements and the purchase agreements.
We refer to the purchase agreements, the sale agreements, the servicing
agreements and the administration agreements collectively as the "transfer and
servicing agreements."
Purchase of Student Loans by the Seller; Representations and Warranties of
Sallie Mae
On the closing date, Sallie Mae will sell to the seller, without recourse,
its entire interest in the student loans and all collections received on and
after the cutoff date specified in the prospectus supplement. An exhibit to
the purchase agreement will list each student loan.
In each purchase agreement, Sallie Mae will make representations and
warranties concerning the student loans. These include, among other things,
that:
. each student loan is free and clear of all security interests and other
encumbrances and no offsets, defenses or counterclaims have been
asserted or threatened,
. the information provided about the student loans is true and correct as
of the cutoff date,
. each student loan complies in all material respects with applicable
federal and state laws and applicable restrictions imposed by the FFELP
or under any guarantee agreement; and
. each student loan is guaranteed by the applicable guarantor.
Upon discovery of a breach of any representation or warranty that has a
materially adverse effect on the seller, Sallie Mae will repurchase the
affected student loan unless the breach is cured within the applicable cure
period specified in the related prospectus supplement. The purchase price will
be equal to the amount required to prepay in full that student loan including
all accrued interest (the "purchase amount"). Alternatively, rather than
repurchasing the trust student loan, Sallie Mae may, in its discretion,
substitute qualified substitute student loans for that loan. In addition,
Sallie Mae will have an obligation to reimburse the seller:
. for any shortfall between:
. the purchase amount of the qualified substitute student loans
and
. the purchase amount of the trust student loans being replaced; and
. any accrued interest amounts not guaranteed by, or that are required to
be refunded to, a guarantor and any interest subsidy payments or special
allowance payments lost as a result of the breach.
The repurchase or substitution and reimbursement obligations of Sallie Mae
constitute the sole remedy available to the seller for any uncured breach.
Sallie Mae's repurchase or substitution and reimbursement obligations are
contractual obligations that the seller or trust may enforce against Sallie
Mae, but the breach of these 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, the seller will sell to the eligible lender trustee, on
behalf of that trust, without recourse, its entire interest in the student
loans acquired by the seller from Sallie Mae. Each student loan will be listed
in an exhibit to the sale agreement. The eligible lender trustee concurrently
with that sale will issue the certificates and notes. The trust will apply net
proceeds from the sale of the notes and certificates to purchase the student
loans from the seller.
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In each sale agreement, the seller will make representations and warranties
concerning the student loans to the related trust for the benefit of security
holders, including representatives and warranties that are substantially the
same as those made by Sallie Mae to the seller.
Upon discovery of a breach of any representation or warranty that has a
materially adverse effect on the trust, the seller will have repurchase or
substitution and reimbursement obligations that are substantially the same as
those of Sallie Mae.
The repurchase or substitution and reimbursement obligations of the seller
will constitute the sole remedy available to the securityholders for any
uncured breach. The seller's repurchase or substitution and reimbursement
obligations are contractual obligations that the trust may enforce against the
seller, but the breach of these obligations will not constitute an event of
default under the indenture.
Custodian of Promissory Notes
To assure uniform quality in servicing and to reduce administrative costs,
the servicer will act as custodian of the promissory notes representing the
student loans and any other related documents. The seller's and the servicer's
records will reflect the sale by Sallie Mae of the student loans to the seller
and their subsequent sale by the seller to the trust.
Additional Fundings
The related prospectus supplement will indicate whether a pre-funding
account will exist for a particular trust. The prospectus supplement will also
indicate:
. the amount in the pre-funding account on the closing date,
. the length of the funding period, and
. the uses to which the funds in the pre-funding account can be applied
and the conditions to the application of those funds.
If the pre-funding amount has not been fully applied to purchase additional
student loans by the end of the funding period, the securityholders will
receive any remaining amounts.
Amendments to Transfer and Servicing Agreements
The parties to the transfer and servicing agreements may amend them without
the consent of securityholders if, in the opinion of counsel satisfactory to
the indenture trustee and eligible lender trustee, the amendment will not
materially and adversely affect the interests of the noteholders or
certificateholders. The parties also may amend the transfer and servicing
agreements with the consent of a majority in interest of noteholders and
certificateholders. However, such an amendment may not reduce the percentage
of the notes or certificates required to consent to an amendment, without the
consent of the holders of all the outstanding notes and certificates.
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SERVICING AND ADMINISTRATION
General
The following is a summary of the important terms of the servicing
agreements under which the servicer will service the trust student loans and
the administration agreement under which the administrator will undertake
administrative duties for a trust and its trust student loans. We have filed
forms of the servicing agreement and the administration agreement as exhibits
to the registration statement of which this prospectus is a part. This summary
does not cover every detail of these agreements and it is subject to all
provisions of the servicing agreements and the administration agreements.
Accounts
For each trust, the administrator will establish a collection account with
the indenture trustee into which all payments on the related trust student
loans will be deposited. The related prospectus supplement will describe any
other accounts established for a trust, including any pre-funding account and
any reserve account.
For any series of securities, the indenture trustee will invest funds in the
collection account, pre-funding account, reserve account and any other
accounts identified as accounts of the trust in "eligible investments" as
provided in the indenture. The administrator will instruct the indenture
trustee concerning investment decisions.
In general, eligible investments will be those which would not result in the
downgrading or withdrawal of any rating of any of the securities. They will
mature on the dates specified in the related prospectus supplement. A portion
of these eligible investments may mature after the next distribution date if
so provided in the related prospectus supplement.
Each trust account will be either:
. a segregated account with an FDIC-insured depository institution which
has either (A) a long-term unsecured debt rating acceptable to the
applicable rating agencies or (B) a short-term unsecured debt rating or
certificate of deposit rating acceptable to the applicable rating
agencies; or
. a segregated trust account with the corporate trust department of a
depository institution having corporate trust powers, so long as any of
the securities of that depository institution have an investment grade
credit rating from each applicable rating agency.
Servicing Procedures
Under each servicing agreement, the servicer will agree to service all the
trust student loans. The servicer is required to perform all services and
duties customary to the servicing of student loans, including all collection
practices. It must use the same standard of care as it uses to service student
loans owned by Sallie Mae and in compliance with the Higher Education Act, the
guarantee agreements and all other applicable federal and state laws.
The duties of the servicer include the following:
. collecting and depositing into the collection account all payments on
the trust student loans, including claiming and obtaining any program
payments;
. responding to inquiries from borrowers;
. attempting to collect delinquent payments; and
. sending out statements and payment coupons to borrowers.
In addition, the servicer will keep ongoing records on the loans and its
collection activities, and it will furnish periodic statements to the
indenture trustee, the eligible lender trustee and the securityholders, in
accordance with the servicer's customary practices and as specifically
required in the servicing agreement.
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Payments on Student Loans
The servicer will deposit all payments on trust student loans and proceeds
that it collects during each collection period specified in the related
prospectus supplement into the related collection account within two business
days of its receipt.
However, for so long as:
. either (a) the senior unsecured obligations of the administrator or of
any affiliate that guarantees the obligations of the administrator have
a long-term rating of not less than "AA-" or equivalent or a short-term
rating of not less than "A-1" or equivalent by each of the rating
agencies or (b) remittances to the administrator will not result in a
downgrading or withdrawal of any of the then current ratings of any of
the securities,
. no administrator default has occurred and is continuing, and
. each other condition to making deposits less frequently than daily as
described in the related prospectus supplement is satisfied,
the servicer will remit these amounts to the administrator within two business
days of receipt. The administrator will deposit these amounts in the
collection account by the business day preceding each monthly servicing
payment date (to the extent of the servicing fee then due) and each
distribution date.
"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.
The administrator may invest collections, pending deposit into the
collection account, at its own risk and for its own benefit, and it will not
segregate these funds. 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. 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 these amounts into the collection account
on or before the business day preceding each distribution date.
Servicer Covenants
For each trust, the servicer will agree that:
. it will satisfy all of its obligations relating to the trust student
loans, maintain in effect all qualifications required in order to
service the loans and comply in all material respects with all
requirements of law if a failure to comply would have a materially
adverse effect on the interest of the trust;
. it will not permit any rescission or cancellation of a trust student
loan except as ordered by a court or other government authority or as
consented to by the eligible lender trustee and the indenture trustee,
except that it may write off any delinquent loan if the remaining
balance of the borrower's account is less than $50;
. it will do nothing to impair the rights of the certificateholders and
noteholders in the trust student loans; and
. it will not reschedule, revise, defer or otherwise compromise payments
due on any trust student loan except during any applicable interest
only, deferral or forbearance periods or otherwise in accordance with
all applicable standards and requirements for servicing of the loans.
Upon the discovery of a breach of any covenant that has a materially adverse
effect on the interest of the related trust, the servicer will purchase that
trust student loan unless the breach is cured within the applicable cure
period specified on the related prospectus supplement. However, any breach
that relates to compliance with the requirements of the Higher Education Act
or the applicable guarantor but that does not affect that guarantor's
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obligation to guarantee payment of a trust student loan will not be considered
to have a material adverse effect. The purchase price will equal the unpaid
principal amount of that 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 of Education for
that trust student loan as a result of a breach of any covenant of the
servicer. The related trust's interest in that purchased trust student loan
will be assigned to the servicer or its designee. Alternatively, rather than
purchase the trust student loan, the servicer may, in its sole discretion,
substitute qualified substitute student loans.
In addition, the servicer will be obligated to 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 loans being replaced; and
. any accrued interest amounts not guaranteed by or that are required to
be refunded to a guarantor and any interest subsidy payments or special
allowance payments lost as a result of a breach.
The purchase or substitution and reimbursement obligations of the servicer
will constitute the sole remedy available to the trust for any uncured breach.
The servicer's purchase or substitution and reimbursement obligations are
contractual obligations that the trust may enforce, but the breach of these
obligations will not constitute an event of default under the indenture.
Servicing Compensation
For each trust, the servicer will receive a servicing fee for each period in
an amount specified in the related prospectus supplement. The servicer will
also receive any other administrative fees, expenses and similar charges
specified in the related prospectus supplement. The servicing fee may consist
of:
. a specified annual percentage of the pool balance;
. a unit amount based on the number of accounts and other activity or
event related fees;
. any combination of these; or
. any other formulation described in the related prospectus supplement.
The servicing fee may also include specified amounts payable to the servicer
for tasks it performs. The servicing fee may be subject to a maximum monthly
amount. If that is the case, the related prospectus supplement will state the
maximum together with any conditions to its application. The servicing fee,
including any unpaid amounts from prior distribution dates, will have a
payment priority over the securities, to the extent specified in the
applicable prospectus supplement.
The servicing fee compensates 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 trust student loans,
. investigating delinquencies,
. pursuing, filing and collecting any program payments,
. accounting for collections,
. furnishing monthly and annual statements to the trustees, and
. paying taxes, accounting fees, outside auditor fees, data processing
costs and other costs incurred in administering the student loans.
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Net Deposits
As an administrative convenience, unless the servicer must remit collections
daily to the collection account (see "--Payments on Student Loans" above), the
administrator will deposit collections for any collection period net of
servicing and administration fees for the same period. The administrator may
make a single, net transfer to the collection account on the business day
preceding each distribution date. The administrator, however, will account to
the indenture trustee, the eligible lender trustee, the noteholders and the
certificateholders as if all deposits, distributions and transfers were made
individually.
Evidence as to Compliance
The administration agreement will provide that a firm of independent public
accountants will furnish to the trust and indenture trustee an annual report
attesting to the servicer's compliance with the terms of that administration
agreement and the related servicing agreement, including all statutory
provisions incorporated into those agreements. The accounting firm will base
this report on its examination of various documents and records and on
accounting and auditing procedures considered appropriate under the
circumstances.
The administration agreement will require the servicer to deliver to the
trust and indenture trustee, concurrently with the compliance report, a
certificate signed by an officer of the servicer stating that, to his
knowledge, the servicer has fulfilled its obligations under that
administration agreement and the related servicing agreement. If there has
been a material default, the officer's certificate for that period will
describe the default. The servicer has agreed to give the indenture trustee
and eligible lender trustee notice of servicer defaults under the servicing
agreement.
You may obtain copies of these reports and certificates by a request in
writing to the eligible lender 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 under the
servicing agreement, the servicer does not hold itself out as an agent of the
trusts.
Each servicing agreement will provide that the servicer may not resign from
its obligations and duties as servicer unless its performance of these duties
is no longer legally permissible. No resignation will become effective until
the indenture trustee or a successor servicer has assumed the servicer's
duties. The servicer, however, may resign as a result of any sale or transfer
of substantially all of its student loan servicing operations relating to the
trust student loans if:
. the successor to the servicer's operations assumes in writing all of the
obligations of the servicer,
. the sale or transfer and the assumption comply with the requirements of
the servicing agreement, and
. the rating agencies confirm that this will not result in a downgrading
or a withdrawal of the ratings then applicable to the notes and
certificates.
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 trust or to securityholders for taking or not taking any
action under the servicing agreement, or for errors in judgment. However, the
servicer will not be protected against:
. its obligation to purchase trust student loans from a trust as required
in the related servicing agreement or to pay to the trust the amount of
any program payment which a guarantor or the Department of Education
refuses to pay, or requires the trust to refund, as a result of the
servicer's actions, or
. any liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or negligence in the performance of the
servicer's duties or because of reckless disregard of its obligations
and duties.
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.
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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 must assume the obligations
of the servicer.
Servicer Default
"Servicer default" under each servicing agreement will consist of:
. any failure by the servicer to deposit in the trust accounts any
required payment that continues for five business days after the
servicer receives written notice from the indenture trustee or the
eligible lender trustee;
. any failure by the servicer to observe or perform in any material
respect any other term, covenant or agreement in the servicing agreement
that materially and adversely affects the rights of noteholders or
certificateholders and continues for 60 days after written notice of the
failure is given (1) to the servicer by the indenture trustee, eligible
lender trustee or administrator or (2) to the servicer, the indenture
trustee and eligible lender trustee by holders of 25% or more of the
notes or certificates;
. the occurrence of an insolvency event involving the servicer; and
. 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 an event of bankruptcy, insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings or other
actions by a person indicating its insolvency, reorganization under bankruptcy
proceedings or inability to pay its obligations.
A servicer default does not include any failure of the servicer to service a
student loan in accordance with the Higher Education Act so long as the
servicer is in compliance with its obligations under the servicing agreement
to purchase any adversely affected trust student loans and to pay to the
applicable trust the amount of any program payments lost as a result of the
servicer's actions.
Rights Upon Servicer Default
As long as a servicer default remains unremedied, the indenture trustee or
holders of not less than 25% of the outstanding notes may terminate all the
rights and obligations of the servicer. 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 default occurs while the
notes are outstanding. Following a termination, a successor servicer appointed
by the indenture trustee or the indenture trustee itself will succeed to all
the responsibilities, duties and liabilities of the servicer under the
servicing agreement and will be entitled to similar compensation arrangements.
The compensation may not be greater than the servicing compensation to the
servicer under that servicing agreement, unless the compensation arrangements
will not result in a downgrading or withdrawal of the then ratings of the
notes and certificates. If the indenture trustee is unwilling or unable to
act, it may appoint, or petition a court for the appointment of, a successor
whose regular business includes the servicing of student loans. If, however, a
bankruptcy trustee or similar official has been appointed for the servicer,
and no servicer default other than that appointment has occurred, the trustee
may have the power to prevent the indenture trustee or the noteholders from
effecting the transfer.
Waiver of Past Defaults
For each trust, the holders of a majority of the outstanding notes (or a
majority of the outstanding certificates balance, in the case of any servicer
default which does not adversely affect the indenture trustee or the
noteholders) may, on behalf of all noteholders and certificateholders, waive
any default by the servicer, except a default in making any required deposits
to or payments from any of the trust accounts. Therefore, the noteholders have
the ability, except as noted, to waive defaults by the servicer which could
materially and adversely affect the certificateholders. No waiver will impair
the noteholders' or certificateholders' rights as to subsequent defaults.
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Administration Agreement
Sallie Mae, as administrator, has entered into the master administration
agreement. It also will enter into an administration agreement supplement with
each trust, the seller, the servicer, the eligible lender trustee and the
indenture trustee. Under the administration agreement, the administrator will
agree to provide various notices and to perform other administrative
obligations required by the indenture, trust agreement and sale agreement.
These services include:
. directing the indenture trustee to make the required distributions from
the trust accounts on each monthly servicing payment date and each
distribution date;
. preparing (based on periodic data received from the servicer) and
providing quarterly and annual distribution statements to the eligible
lender trustee and the indenture trustee and any related federal income
tax reporting information; and
. providing the notices and performing other administrative obligations
required by the indenture, the trust agreement and the sale agreement.
As compensation, the administrator will receive an administration fee
specified in the related prospectus supplement. Except as described in the
next paragraph, Sallie Mae may not resign as administrator unless its
performance is no longer legally permissible. No resignation will become
effective until a successor administrator has assumed Sallie Mae's duties
under the administration agreement.
Each administration agreement will provide that Sallie Mae may assign its
obligations and duties as administrator to an affiliate if the rating agencies
confirm that the assignment will not result in a downgrading or a withdrawal
of the ratings then applicable to the notes and the certificates.
Administrator Default
"Administrator default" under the administration agreement will consist of:
. any failure by the administrator to deliver to the indenture trustee for
deposit any required payment by the business day preceding any monthly
servicing payment date or distribution date, if the failure continues
for five business days after notice or discovery;
. any failure by the administrator to direct the indenture trustee to make
any required distributions from any of the trust accounts on any monthly
servicing payment date or any distribution date, if the failure
continues for five business days after notice or discovery;
. any failure by the administrator to observe or perform in any material
respect any other term, covenant or agreement in an administration
agreement or a related agreement that materially and adversely affects
the rights of noteholders or certificateholders and continues for 60
days after written notice of the failure is given:
(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 25% or more of the notes or certificates; and
. the occurrence of an insolvency event involving the administrator.
Rights Upon Administrator Default
As long as any administrator default remains unremedied, the indenture
trustee or holders of not less than 25% of the outstanding notes may terminate
all the rights and obligations of the administrator. Only the indenture
trustee or the noteholders, and not the eligible lender trustee or the
certificateholders may remove the administrator if an administrator default
occurs while the notes are outstanding. Following the termination of the
administrator, a successor administrator appointed by the indenture trustee or
the indenture trustee itself will succeed to all the responsibilities, duties
and liabilities of the administrator under the administration agreement. The
successor administrator will be entitled to similar compensation arrangements
or any other compensation as set forth in the related prospectus supplement.
If, however, a bankruptcy trustee or similar official has been
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appointed for the administrator, and no other administrator default other than
that appointment has occurred, the trustee or official may have the power to
prevent the indenture trustee or the noteholders from effecting the transfer.
If the indenture trustee is unwilling or unable to act, it may appoint, or
petition a court for the appointment of, a successor whose regular business
includes the servicing or administration of student loans. The indenture
trustee may make arrangements for compensation to be paid, which cannot be
greater than the compensation to the administrator unless the compensation
arrangements will not result in a downgrading of the notes and the
certificates.
Statements to Indenture Trustee and Trust
Before each distribution date, the administrator will prepare and provide a
statement to the indenture trustee and eligible lender trustee as of the end
of the preceding collection period. The statement will include:
. the amount of principal distributions for each class;
. the amount of interest distributions for each class and the applicable
interest rates;
. the pool balance at the end of the preceding collection period;
. 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 for that distribution date;
. the servicing and the administration fees for that collection period;
. the interest rates, if available, for the next period for each class;
. the amount of any aggregate realized losses for that collection period;
. 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) for each class, and any
changes in these amounts from the preceding statement;
. the amount of any carryover servicing fee for that collection period;
. the amount of any note interest carryover and certificate return
carryover (each as defined in the related prospectus supplement), if
applicable, for each class of securities, and any changes in these
amounts from the preceding statement;
. the aggregate purchase amounts for any trust student loans repurchased
by the seller, the servicer, or Sallie Mae from the trust in that
collection period;
. the balance of trust student loans that are delinquent in each
delinquency period as of the end of that collection period; and
. the balance of any reserve account, after giving effect to changes in
the balance on that distribution date.
Evidence as to Compliance
The administration agreement will provide that a firm of independent public
accountants will furnish to the trust and indenture trustee an annual report
attesting to the administrator's compliance with the terms of the
administration agreement, including all statutory provisions incorporated in
the agreement. The accounting firm will base this report on its examination of
various documents and records and on accounting and auditing procedures
considered appropriate under the circumstances.
The administration agreement will require the administrator to deliver to
the trust and indenture trustee, concurrently with each compliance report, a
certificate signed by an officer of the administrator stating that, to his
knowledge, the administrator has fulfilled its obligations under that
administration agreement. If there has been a material default the officer's
certificate will describe the default. The administrator has agreed to give
the indenture trustee and eligible lender trustee notice of administrator
defaults under the administration agreement.
You may obtain copies of these reports and certificates by a request in
writing to the eligible lender trustee.
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TRADING INFORMATION
The weighted average lives of the notes and the certificates of any series
generally will depend on the rate at which the principal balances of the
related student loans are paid. Payments may be in the form of scheduled
amortization or prepayments. For this purpose, the term "prepayments" includes
prepayments in full or in part, including the discharge of student loans by
consolidation loans, as a result of:
. borrower default, death, disability or bankruptcy;
. the closing of the borrower's school;
. the school's false certification of borrower eligibility;
. liquidation of the student loan or collection of the related guarantee
payments; and
. purchase of a student loan by the seller or the servicer.
All of the student loans are prepayable at any time without penalty.
A variety of economic, social and other factors, including the factors
described below, influence the rate at which student loans prepay. In general,
the rate of prepayments may tend to increase when cheaper alternative
financing becomes available. However, because many student loans bear interest
at a rate that is either actually or effectively floating, it is impossible to
predict whether changes in prevailing interest rates will correspond to
changes in the interest rates on student loans.
On the other hand, scheduled payments on the student loans, as well as their
maturities, may be extended due to applicable grace, deferral and forbearance
periods, or for other reasons. The rate of defaults resulting in losses on
student loans, as well as the severity and timing of those losses, may affect
the principal payments and yield on the securities. The rate of default also
may affect the ability of the guarantors to make guarantee payments.
Some of the terms of payment that Sallie Mae offers to borrowers may extend
principal payments on the securities. Sallie Mae offers some borrowers loan
payment terms which provide for an "interest only" period, when no principal
payments are required, or "graduated phased in" amortization of the principal,
in which case a greater portion of the principal amortization of the loan
occurs in the later stages of the loan than if amortization were on a level
payment basis. Sallie Mae also offers an income-sensitive repayment plan,
under which repayments are based on the borrower's income. Under the plan,
ultimate repayment may be delayed up to five years. If trust student loans
have these payment terms, principal payments on the related securities could
be affected. If 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 lives of the notes and certificates and reduce the
effective yield on student loans included in the trust.
The servicing agreements will provide that the servicer may offer, at the
request of Sallie Mae, incentive payment programs or repayment programs
currently or in the future made available by Sallie Mae. If these benefits are
made available to borrowers of trust student loans, the effect 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."
In light of the above considerations, we cannot guarantee that principal
payments will be made on the securities on any distribution date, since that
will depend, in part, on the amount of principal collected on the trust
student loans during the applicable period. As an investor, you will bear any
reinvestment risk resulting from a faster or slower rate of prepayment of the
loans.
Pool Factors
The "note pool factor" for each class of notes and the "certificate pool
factor" for each class of certificates will be a seven-digit decimal computed
by the administrator before each distribution date. Each pool factor will
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indicate the remaining outstanding balance of the related class, after giving
effect to distributions to be made on that distribution date, as a fraction of
the initial outstanding balance of that class. Each pool factor will initially
be 1.0000000. Thereafter, it will decline to reflect reductions in the
outstanding balance of the applicable class. Your portion of the aggregate
outstanding balance of a class of securities will be the product of:
. the original denomination of your note or certificate; and
. the applicable pool factor.
Securityholders will receive reports on or about each distribution date
concerning various matters, including the payments the trust has received on
the related trust student loans, the pool balance, the applicable pool factor
and various other items of information. See "Information Regarding the
Securities--Reports to Securityholders" in this prospectus.
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DESCRIPTION OF THE NOTES
General
Each trust may issue one or more classes of notes under an indenture. We
have filed the form of the indenture as an exhibit to the registration
statement of which this prospectus is a part. The following summary describes
the important terms of the notes and the indenture. It does not cover every
detail of the notes or the indenture and is subject to all of the provisions
of the notes and the indenture.
Each class of notes will initially be represented by one or more notes,
registered in the name of the nominee of DTC. DTC, together with any successor
depository selected by the servicer, is the "Depository." The notes will be
available for purchase in multiples of $1,000 in book-entry form only. The
seller has been informed by DTC that DTC's nominee will be Cede & Co., unless
another nominee is specified in the related prospectus supplement.
Accordingly, that nominee is expected to be the holder of record of the notes
of each class. Unless and until definitive notes are issued under the limited
circumstances described in this prospectus, investor in notes in book-entry
form will be entitled to receive a physical certificate representing a note.
All references in this prospectus and in the related prospectus supplement to
actions by holders of notes in book-entry form refer to actions taken by DTC
upon instructions from its participating organizations and all references in
this prospectus to distributions, notices, reports and statements to holders
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.
Principal and Interest on the Notes
The prospectus supplement will describe 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. 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 that series. Payments of interest on the notes
will be made prior to payments of principal. Each class of notes may have a
different note rate, which may be a fixed, variable, adjustable, auction-
determined rate or any combination of these rates. The related prospectus
supplement will specify the rate for each class of notes or the method for
determining the 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 under the circumstances
specified in the related prospectus supplement, including as a result of the
seller's exercising its option to purchase the related trust student loans.
Under some circumstances, the amount available for these payments could be
less than the amount of interest payable on the notes on any distribution
date, in which case each class of noteholders will receive its pro rata share
of the aggregate amount available for interest on the notes. See "Certain
Information Regarding the Securities--Distributions" and "--Credit and Cash
Flow or Other Enhancement or Derivative Arrangement."
In the case of a series which includes two or more classes of notes, the
prospectus supplement will describe the sequential order and priority of
payment of principal and interest of each class. Payments of principal and
interest of any class of notes will be on a pro rata basis among all the
noteholders of that class.
The Indenture
General. The notes will be issued under and secured by an indenture entered
into by the trust, the eligible lender trustee and the indenture trustee.
Modification of Indenture. 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, change or
eliminate any provisions of the indenture or to modify the rights of the
noteholders.
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However, without the consent of the holder of each affected note, no
supplemental indenture will:
. change the due date of any installment of principal of or interest on
any note or reduce its principal amount, interest rate or redemption
price;
. change the provisions of the indenture relating to the application of
collections on, or the proceeds of the sale of, the trust student loans
to payment of principal or interest on the notes;
. change the place of payment or the payment currency for any note,
. impair the right to institute suit for the enforcement of provisions of
the indenture regarding payment;
. reduce the percentage of outstanding notes whose holders must consent to
any supplemental indenture;
. modify the provisions of the indenture regarding the voting of notes
held by the trust, the seller or an affiliate;
. reduce the percentage of outstanding notes whose holders must consent to
a sale or liquidation of the trust student loans if the proceeds of the
sale would be insufficient to pay the principal amount and accrued
interest on the notes;
. modify the provisions of the indenture which specify the applicable
percentages of principal amount of notes necessary to take specified
actions except to increase these percentages or to specify additional
provisions;
. modify any of the provisions of the indenture to affect the calculation
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; or
. permit the creation of any lien ranking prior or equal to the lien of
the indenture on any of the collateral for that series or, except as
otherwise permitted or contemplated in that indenture, terminate the
lien of the indenture on any collateral or deprive the holder of any
note of the security afforded by that lien.
The trust and the indenture trustee may also enter into supplemental
indentures, without the consent of noteholders, for the purpose of adding,
changing or eliminating any provisions of the indenture or of modifying the
rights of noteholders, so long as such action will not, in the opinion of
counsel satisfactory to the indenture trustee, adversely affect in any
material respect the interest of any noteholder.
Events of Default; Rights Upon Event of Default. An "event of default" under
the indenture will consist of the following:
. a default for five business days or more in the payment of any interest
on any note after it is due;
. a default in the payment of the principal of any note at maturity;
. a default in the performance of any covenant or agreement of the trust
in the indenture, or a material breach of any representation or warranty
made by the trust in the related indenture or in any certificate, if the
default or breach has a material adverse effect on the holders of the
notes and is not cured within 30 days after notice by the indenture
trustee or by holders of at least 25% in principal amount of the
outstanding notes; or
. the occurrence of an insolvency event involving the trust.
The amount of principal required to be distributed to holders of the notes
on any distribution date will generally be limited to amounts available after
payment of interest and all other prior obligations of the 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 that class of notes.
If an event of default occurs and is continuing, the indenture trustee or
holders of a majority of the outstanding notes may declare the principal of
those notes to be immediately due and payable. This declaration may, under
certain circumstances, be rescinded by the holders of a majority of the
outstanding notes.
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If the notes have been declared to be due and payable following an event of
default, the related indenture trustee may, in its discretion,
. exercise remedies as a secured party against the trust student loans and
other property of the trust that is subject to the lien of the indenture
(the "indenture trust estate"),
. sell the indenture trust estate; or
. elect to have the eligible lender trustee maintain ownership of the
trust student loans and continue to apply collections on them as if
there had been no declaration of acceleration.
However, the indenture trustee may not sell the indenture trust estate
following an event of default, other than a default in the payment of any
principal at maturity or a default for five days or more in the payment of any
interest, unless:
. the holders of all the outstanding notes consent to the sale,
. the proceeds of the sale are sufficient to pay in full the principal and
accrued interest on the outstanding notes at the date of the sale, or
. the indenture trustee determines that the collections on the indenture
trust estate would not be sufficient on an ongoing basis to make all
payments on the notes as the payments would have become due if the notes
had not been declared due and payable, and the indenture trustee obtains
the consent of the holders of 66 2/3% of the outstanding notes.
Such a sale also requires the consent of the holders of a majority of the
outstanding certificates unless the proceeds of a sale would be sufficient to
discharge all unpaid amounts on the certificates.
Subject to the provisions of the applicable indenture relating to the duties
of the indenture trustee, if an event of default occurs and is continuing, the
indenture trustee will be under no obligation to exercise any of its rights or
powers at the request or direction of any of the holders of the notes, if the
indenture trustee reasonably believes it will not be adequately indemnified
against the costs, expenses and liabilities which it might incur in complying
with their request. Subject to the provisions for indemnification and
limitations contained in the related indenture, the holders of a majority of
the outstanding notes of a given series will have the right to direct the
time, method and place of conducting any proceeding or any remedy available to
the indenture trustee and may, in certain cases, waive any default, except a
default in the payment of principal or interest or a default under a covenant
or provision of the applicable indenture that cannot be modified without the
waiver or consent of all the holders of outstanding notes.
No holder of notes of any series will have the right to institute any
proceeding with respect to the related indenture, unless:
. the holder previously has given to the indenture trustee written notice
of a continuing event of default,
. the holders of not less than 25% of the outstanding notes have requested
in writing that the indenture trustee institute a proceeding in its own
name as indenture trustee,
. the holder or holders have offered the indenture trustee reasonable
indemnity,
. the indenture trustee has for 60 days after receipt of notice failed to
institute the proceeding, and
. no direction inconsistent with the written request has been given to the
indenture trustee during the 60-day period by the holders of a majority
of the outstanding notes.
In addition, the indenture trustee and the noteholders will covenant that
they will not at any time institute against the trust any bankruptcy,
reorganization or other proceeding under any federal or state bankruptcy or
similar law.
The indenture trustee, Sallie Mae, the seller, the administrator, the
servicer, the eligible lender trustee in its individual capacity, the
certificate holders and their owners, beneficiaries, agents, officers,
directors,
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employees, successors and assigns will not 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 trust may not
consolidate with or merge into any other entity, unless:
. the entity formed by or surviving the consolidation or merger is
organized under the laws of the United States, any state or the District
of Columbia,
. the surviving entity expressly assumes the trust's obligation to make
due and punctual payments on the notes and the performance or observance
of every agreement and covenant of the trust under the indenture,
. no default will occur and be continuing immediately after the merger or
consolidation,
. the trust has been advised that the ratings of the notes and the
certificates would not be reduced or withdrawn as a result of the merger
or consolidation, and
. the trust has received opinions of federal and Delaware tax counsel that
the consolidation or merger would have no material adverse federal or
Delaware state tax consequences to the trust or to any holder of the
notes or certificates.
Each trust will not:
. except as expressly permitted by the indenture, the transfer and
servicing agreements or other related documents, sell, transfer,
exchange or otherwise dispose of any of the assets of that trust,
. claim any credit on or make any deduction from the principal and
interest payable on notes of the series (other than amounts withheld
under the Internal Revenue Code or applicable state law) or assert any
claim against any present or former holder of notes because of the
payment of taxes levied or assessed upon the trust,
. except as contemplated by the indenture and the related documents,
dissolve or liquidate in whole or in part,
. permit the validity or effectiveness of the indenture to be impaired or
permit any person to be released from any covenants or obligations under
the indenture, except as expressly permitted by the indenture, or
. permit any lien, charge or other encumbrance to be created on the assets
of the trust, except as expressly permitted by the indenture and 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
Trusts--The Trusts." In addition, no trust will incur, assume or guarantee any
indebtedness other than indebtedness evidenced by the notes of a related
series and the applicable indenture, except as permitted by the indenture and
the related documents.
Indenture Trustee's Annual Report. Each indenture trustee will be required
to mail all noteholders a brief annual report relating to, among other things,
any changes in its eligibility and qualification to continue as the indenture
trustee under the indenture, any amounts advanced by it under the indenture,
the amount, interest rate and maturity date of indebtedness owing by the trust
to the indenture trustee in its individual capacity, the property and funds
physically held by the indenture trustee as such and any action taken by it
that materially affects the notes and that has not been previously reported.
Satisfaction and Discharge of Indenture. An indenture will be satisfied and
discharged when the indenture trustee has received for cancellation all of the
notes or, with certain limitations, when the indenture trustee receives funds
sufficient for the payment in full of all of the notes.
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The Indenture Trustee. The prospectus supplement will specify the indenture
trustee for each series. The indenture trustee may resign at any time, in
which event the eligible lender trustee must appoint a successor. The eligible
lender trustee may also remove any indenture trustee that ceases to be
eligible to continue as a trustee under the indenture or if the indenture
trustee becomes insolvent. In those circumstances, the eligible lender trustee
must appoint a successor trustee. Any resignation or removal of the indenture
trustee for any series will become effective only when the successor has
accepted its appointment.
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DESCRIPTION OF THE CERTIFICATES
General
For each trust, one or more classes of certificates will be issued under the
terms of a trust agreement. We have filed the form of the trust agreement as
an exhibit to the registration statement of which this prospectus is a part.
The following summary describes the important terms of the certificates and
the trust agreement. It does not cover every term of the certificates or the
trust agreement and it is subject to all of the provisions of the certificates
and the trust agreement.
The certificates will be available for purchase in minimum denominations of
$100,000 and additional increments of $1,000. DTC's nominee, Cede & Co., is
expected to be the holder of record of the certificates that are in book-entry
form. Unless definitive certificates are issued under the limited
circumstances described in this prospectus or in the related prospectus
supplement, no investor will be entitled to receive a physical certificate.
All references in this prospectus and in the related prospectus supplement to
actions by holders of certificates in book-entry form refer to actions taken
by DTC upon instructions from the participants and all references in this
prospectus and in the related prospectus supplement to distributions, notices,
reports and statements to holders of certificates in book-entry form refer to
distributions, notices, reports and statements to DTC or its nominee.
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 their 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 involving the seller.
Distributions on the Certificate Balance
The prospectus supplement will describe the timing and priority of
distributions, seniority, allocations of losses, certificate rate and amount
of or method of determining distributions on the balance of the certificates.
Distributions of return on the certificates will be made on each distribution
date and will be made before distributions of the certificate balance. Each
class of certificates may have a different certificate rate, which may be
fixed, variable, adjustable, auction-determined, 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.
Distributions on the certificates of a given series may be subordinate to
payments on the notes of that 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 that class.
The related prospectus supplement will specify the timing, sequential order,
priority of payment or amount of distributions on the certificate balance for
each class.
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CERTAIN INFORMATION REGARDING THE SECURITIES
Each class of securities may be "fixed rate securities" that bear interest
at a fixed annual rate or "floating rate securities" that bear interest at a
variable or adjustable annual rate, as more fully described below and in the
applicable prospectus supplement.
Fixed Rate Securities
Each class of fixed rate securities will bear interest or return at the
annual rate specified in the applicable prospectus supplement. Interest on
each class of fixed rate securities will be computed on the basis of a 360-day
year of twelve 30-day months. See "Description of the Notes--Principal and
Interest on the Notes" and "Description of the Certificates--Principal and
Interest on the Certificates" in this prospectus.
Floating Rate Securities
Each class of floating rate securities will bear interest during each
interest reset period at an annual rate determined by reference to an interest
rate index, plus or minus any spread, and multiplied by any spread multiplier,
specified in the related prospectus supplement. The applicable prospectus
supplement will designate the interest rate index for a floating rate
security. The index may be based on LIBOR, a commercial paper rate, federal
funds rate, U.S. Treasury securities rate, a negotiable certificate of deposit
rate or some other rate.
Floating rate securities also may have either or both of the following (in
each case expressed as an annual rate):
. a maximum limitation, or ceiling, on its interest rate, and
. a minimum limitation, or floor, on its interest rate.
In addition to any prescribed maximum interest rate, the interest rate
applicable to any class of floating rate securities will in no event be higher
than any maximum rate permitted by law.
Each trust that issues a class of floating rate securities will appoint, and
enter into agreements with, a calculation agent to calculate interest on that
class. The applicable prospectus supplement will identify the calculation
agent, which may be the administrator, the eligible lender trustee or the
indenture trustee for that series. In the absence of manifest error, all
determinations of interest by the calculation agent will be conclusive for all
purposes and binding on the holders of the floating rate securities. All
percentages resulting from any calculation of the rate of interest on a
floating rate security will be rounded, if necessary, to the nearest 1/100,000
of 1% (.0000001), with five one-millionths of a percentage point being rounded
upward.
Distributions
Beginning on the distribution date specified in the related prospectus
supplement, the applicable trustee will make distributions of principal and
interest on each class of securities.
Credit and Cash Flow or other Enhancement or Derivative Arrangements
General. The related prospectus supplement will describe the amounts and
types of credit or cash flow enhancement arrangements for each series. If
provided in the related prospectus supplement, credit or cash flow enhancement
may take the form of:
. subordination of one or more classes of securities,
. reserve accounts,
. overcollateralization,
. letters of credit, credit or liquidity facilities,
. cash collateral accounts,
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. financial insurance,
. commitment agreements,
. surety bonds,
. guaranteed investment contracts,
. swaps, including interest rate and currency swaps,
. exchange agreements,
. interest rate protection agreements,
. repurchase obligations,
. put or call options,
. yield protection agreements,
. other agreements providing for third party payments,
. any combination of the foregoing, or
. other support, cash deposit, derivative or other arrangements described
in the related prospectus supplement.
The presence of a reserve account and other forms of credit or liquidity
enhancement is intended to enhance the likelihood of receipt by the
securityholders of the full amount of distributions when due and to decrease
the likelihood that the securityholders will experience losses.
Credit enhancement will not provide protection against all risks of loss and
will not guarantee repayment of all distributions. If losses occur which
exceed the amount covered by any credit enhancement or which are not covered
by any credit enhancement, securityholders 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 of those series will be subject to the risk that the
credit enhancement will be exhausted by the claims of securityholders of other
series.
Reserve Account. If so provided in the related prospectus supplement, the
administrator will establish a reserve account for each series of securities.
The indenture trustee will maintain the reserve account. It will be funded by
an initial deposit by the trust. As further described in the related
prospectus supplement, the amount on deposit in the reserve account may be
increased after the closing date. The increase will be funded by deposits into
the reserve account of the amount of any collections on the related trust
student loans remaining on each distribution date after the payment of all
other required payments. The related prospectus supplement will describe the
circumstances and manner in which distributions may be made out of the reserve
account.
Insolvency Events
If the seller becomes insolvent, the trust student loans will be liquidated
and each trust will be terminated 90 days after the insolvency event, or as
described in the related prospectus supplement. Promptly after the occurrence
of an insolvency event, notice must be given to the security holders. Any
failure to give any required notice, however, will not prevent or delay
termination of that trust. Upon termination of the trust, the eligible lender
trustee will direct the 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 liquidation of the trust student loans will be treated
as collections on the loans and will be deposited in the collection account
for that trust. If the proceeds and other available assets are not sufficient
to pay the securities of that series in full, some or all of the noteholders
and the certificateholders will incur a loss.
Each trust agreement will provide that the eligible lender trustee may
commence a voluntary bankruptcy proceeding relating to that trust only with
the unanimous prior approval of all certificateholders (excluding the
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seller) of the related series. In order to commence a voluntary bankruptcy,
all certificateholders (excluding the seller) must deliver to the eligible
lender trustee a certificate certifying that they reasonably believe the
related trust is insolvent.
Book-Entry Registration
Investors in securities in book-entry form may, directly or indirectly, hold
their securities through DTC in the United States or, if so provided in the
related prospectus supplement, through Clearstream Banking, societe anonyme,
formerly known as Cedelbank, societe anonyme, or Euroclear in Europe.
Cede & Co., as nominee for DTC, will hold one or more global notes and
certificates. Clearstream and Euroclear will hold omnibus positions on behalf
of their participants through customers' securities accounts in Clearstream's
and Euroclear's names on the books of their respective depositories which in
turn will hold these positions in the depositories' names on the books of DTC.
Transfers between DTC participants will occur in accordance with DTC rules.
Transfers between Clearstream participants and Euroclear participants will
occur 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 Clearstream
or Euroclear participants, on the other, will be effected at DTC in accordance
with DTC rules on behalf of the relevant European international clearing
system by its depository; however, cross-market transactions will require
delivery of instructions to the relevant European international clearing
system by the counterparty in that system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures
for same-day funds settlement applicable to DTC. Clearstream Participants and
Euroclear Participants may not deliver instructions directly to the
depositaries.
Because of time-zone differences, credits of securities received in
Clearstream or Euroclear will be made during subsequent securities settlement
processing and dated the business day following the DTC settlement date.
Credits or any transactions in the securities settled during this processing
will be reported to the relevant Euroclear or Clearstream participant on that
business day. Cash received in Clearstream or Euroclear as a result of sales
of securities by or through a Clearstream 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 Clearstream 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, and for information on tax documentation procedures relating to
the securities, see Appendix B in this Prospectus.
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 Uniform Commercial Code and a "clearing agency"
registered under Section 17A of the Securities Exchange Act. DTC was created
to hold securities for its participating organizations ("Participants") and to
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-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 held through DTC may do so only through Participants
and Indirect Participants. Securityholders will receive all distributions of
principal and interest from the indenture trustee or the eligible lender
trustee, through Participants and Indirect Participants. Under a book-entry
format, securityholders may experience some delay in their receipt of
payments, since payments will be forwarded by
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the trustee to DTC's nominee. DTC will forward those payments to its
Participants, which thereafter will forward them to Indirect Participants or
securityholders. Securityholders will not be recognized by the applicable
trustee as noteholders or certificateholders under the indenture or trust
agreement, as the case may be, and securityholders will be permitted to
exercise the rights of securityholders only indirectly through DTC and its
Participants.
Under the rules, regulations and procedures creating DTC and affecting its
operations (the "DTC 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 principal and interest payments on the
securities. Participants and Indirect Participants with which securityholders
have accounts with respect to the securities are likewise required to make
book-entry transfers and receive and transmit payments of principal and
interest on the securities on behalf of their respective securityholders.
Accordingly, although securityholders will not possess securities, the DTC
Rules provide a mechanism by which Participants will receive payments and will
be able to transfer their interests.
Because DTC can only act on behalf of Participants, which in turn act on
behalf of Indirect Participants and 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 the
securities, may be limited since securityholders will not possess physical
certificates for their securities.
DTC has advised the seller that it will take any action that a
securityholder is permitted to take under the indenture or trust agreement,
only at the direction of one or more Participants to whose DTC accounts the
securities are credited. DTC may take conflicting actions on undivided
interests to the extent that those actions are taken on behalf of Participants
whose holdings include undivided interests.
Except as required by law, neither the administrator nor the applicable
trustee for any trust will not have any liability for the records relating to
payments or the payments themselves, 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 those beneficial ownership
interests.
Clearstream Banking, societe anonyme, formerly known as Cedel Bank, societe
anonyme ("Clearstream"') is organized under the laws of Luxembourg as a
professional depositary. Cedel holds securities for its participating
organizations ("Clearstream Participants") and facilitates the clearance and
settlement of securities transactions between Clearstream Participants through
electronic book-entry changes in accounts of Clearstream Participants. Thus,
the need for physical movement of certificates is eliminated. Transactions may
be settled in Clearstream in numerous currencies, including United States
dollars. Clearstream provides to its Participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream interfaces with domestic markets in several countries. As a
professional depositary, Clearstream is subject to regulation by the
Luxembourg Monetary Institute. Clearstream 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
Clearstream is also available to others, such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Clearstream 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
currently is operated by Morgan Guaranty Trust Company of New York, Brussels,
Belgium
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office (together with its successor, 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 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 current Euroclear Operator is the Belgian branch of a New York banking
corporation, which is a member bank of the Federal Reserve System. It is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System, and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions
govern transfers of securities and cash within the Euroclear 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 Clearstream or
Euroclear will be credited to the cash accounts of Clearstream Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depositary. These distributions will
be subject to tax reporting in accordance with relevant United States tax laws
and regulations. See "U.S. Federal Income Tax Consequences" in this
prospectus. The Clearstream 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 Clearstream Participant or Euroclear Participant only
in accordance with its relevant rules and procedures and subject to its
Depositary's ability to effect these actions on its behalf through DTC.
Although DTC, Clearstream and Euroclear have agreed to these procedures to
facilitate transfers of securities among participants of DTC, Clearstream and
Euroclear, they are under no obligation to perform or continue to perform
these procedures. The procedures may therefore be discontinued at any time.
Definitive Securities
The notes and the certificates of a given series will be issued in fully
registered, certificated form to noteholders or certificateholders or their
nominees, rather than to DTC or its nominee, only if:
. the administrator advises the applicable trustee in writing that DTC is
not willing or able to discharge its responsibilities as depository for
the securities and the administrator is unable to locate a successor;
. the administrator, at its option, elects to terminate the book-entry
system through DTC; or
. after the occurrence of an event of default, a servicer default or an
administrator default, investors holding a majority of the outstanding
principal amount of the notes or the certificates, advise the trustee
through DTC in writing that the continuation of a book-entry system
through DTC (or a successor thereto) is no longer in the best interest
of the holders of these securities.
Upon the occurrence of any event described in the bullets above, the
applicable trustee will be required to notify all applicable securityholders,
through Participants, of the availability of definitive securities. When DTC
surrenders the definitive securities, the applicable trustee will reissue to
the securityholders the corresponding
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securities as definitive securities upon receipt of instructions for re-
registration. From then on, payments of principal and interest on the
definitive securities will be made by the applicable trustee, in accordance
with the procedures set forth in the related indenture or trust agreement,
directly to the holders of definitive securities in whose names the definitive
securities were registered at the close of business on the applicable record
date specified in the related prospectus supplement. Payments will be made by
check mailed to the address of each holder as it appears on the register
maintained by the applicable trustee.
However, the final payment on any definitive security will be made only upon
presentation and surrender of that definitive security at the office or agency
specified in the notice of final distribution.
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 trustee may require payment of a
sum sufficient to cover any tax or other governmental charge that may be
imposed.
List of Securityholders
Holders of the notes of a series evidencing at least 25% of the outstanding
notes may, by written request to the indenture trustee, obtain a list of all
noteholders for communicating with other noteholders regarding their rights
under the indenture or under the notes. The indenture trustee may elect not to
give the noteholders access to the list if it agrees to mail the desired
communication or proxy, for and at the expense of the requesting noteholders,
to all noteholders of that series.
Three or more certificateholders of any series or one or more holders of
certificates of that series evidencing at least 25% of the certificate balance
of those certificates may, by written request to the eligible lender trustee,
obtain access to the list of all certificateholders for the purpose of
communicating with other certificateholders regarding their rights under the
trust agreement or under the certificates.
Reports to Securityholders
On each distribution date, the administrator will provide to securityholders
of record as of the record date a statement containing substantially the same
information as is required to be provided on the periodic report to the
indenture trustee and the trust described under "Servicing and
Administration--Statements to the Indenture Trustee and the Trust" in this
prospectus. Those statements will be filed with the SEC during the period
required by Rule 15d-1 under the Securities Exchange Act. The statements
provided to securityholders will not constitute financial statements prepared
in accordance with generally accepted accounting principles.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year, the trustee will mail to each person, who at any
time during that calendar year was a securityholder and who received a payment
from that trust, a statement containing certain information to enable it to
prepare its federal income tax return. See "U.S. Federal Income Tax
Consequences" in this prospectus.
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 will constitute a valid sale and assignment of those loans. The seller
intends that the transfer of the student loans by it to the eligible lender
trustee on behalf of each trust will also constitute a valid sale and
assignment of those loans. Nevertheless, if the transfer of the student loans
by Sallie Mae to the seller, or the transfer of those loans by the seller to
the eligible lender trustee, is deemed to be an assignment of collateral as
security, then a security interest in the student loans may be perfected under
the provisions of the Higher Education Act, by either taking possession of the
promissory note (or a copy of the master promissory note) evidencing the loan
or by filing of notice of the security interest
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in the manner provided by the applicable Uniform Commercial Code, or the UCC
as it is commonly known, for perfection of security interests in accounts.
Accordingly,
. A financing statement or statements covering the student loans 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 covering the trust student loans
naming the seller, as debtor, will also 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 limited
circumstances under the UCC in which prior or subsequent transferees of
student loans could have an interest in the student loans with priority over
the related eligible lender trustee's interest. A tax or other government lien
on property of Sallie Mae or the seller arising before the time a student loan
comes into existence may also have priority over the interest of the seller or
the eligible lender trustee in the student loan. Under the 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 or the
eligible lender trustee free and clear of the lien of any third party. In
addition, Sallie Mae and the seller each will covenant that it will not sell,
pledge, assign, transfer or grant any lien on any student loan held by a trust
or any interest in that loan other than to the seller or the eligible lender
trustee.
Under the servicing agreement, the servicer as custodian will have custody
of the promissory notes evidencing the student loans. Although the records of
Sallie Mae, the seller and the 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 the
student loans have been sold to the seller and to the eligible lender trustee.
If, through inadvertence or otherwise, any of the student loans were sold to
another party that:
. purchased the student loans in the ordinary course of its business,
. took possession of the student loans, and
. acquired the student loans for new value and without actual knowledge of
the related eligible lender trustee's interest,
then that purchaser might acquire an interest in the student loans superior to
the interest of the seller and the eligible lender trustee.
Consumer Protection Laws
Numerous federal and state consumer protection laws and related regulations
impose substantial requirements upon lenders and servicers involved in
consumer finance. Also, some state laws impose finance charge ceilings and
other restrictions on consumer transactions and require contract disclosures
in addition to those required under federal law. These requirements impose
specific statutory liabilities upon lenders who fail to comply with their
provisions. The requirements generally do not apply to federally sponsored
student loans. The seller or a trust, however, may be liable for 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 and Administration--Servicer Covenants" in this
prospectus.
Loan Origination and Servicing Procedures Applicable to Student Loans
The Higher Education Act, including the implementing regulations, imposes
specific requirements, guidelines and procedures for originating and servicing
federally sponsored student loans. Generally, those
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procedures require that (1) completed loan applications be processed, (2) a
determination of whether an applicant is an eligible borrower under applicable
standards be made (including a review of a financial need analysis), (3) the
borrower's responsibilities under the loan be explained to him or her, (4) the
promissory note evidencing the loan be executed by the borrower and (5) the
loan proceeds be disbursed in a specified manner by the lender. After the loan
is made, the lender must establish repayment terms with the borrower, properly
administer deferrals and forbearances and credit the borrower for payments
made on the loan. If a borrower becomes delinquent in repaying a loan, a
lender or its servicing agent must perform collection procedures, primarily
telephone calls and demand letters, which vary depending upon the length of
time a loan is delinquent.
The servicer will perform collection and servicing procedures on behalf of
the trusts. Failure of the servicer to follow these procedures or failure of
the originator of the loan to follow procedures relating to the origination of
the student loans could result in adverse consequences. Any failure could
result in the Department of Education's refusal to make reinsurance payments
to the guarantors or to make interest subsidy payments or special allowance
payments to the eligible lender trustee.
Student Loans Generally Not Subject to Discharge in Bankruptcy
Student loans are generally not dischargeable by a borrower in bankruptcy
under the U.S. Bankruptcy Code, unless excepting this debt from discharge will
impose an undue hardship on the debtor and the debtor's dependents.
U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is, in the opinion of Shearman & Sterling, Federal tax counsel
to the seller and the trust, a general summary of all material U.S. federal
income tax consequences of the purchase, ownership and disposition of the
securities. It does not deal with U.S. federal income tax consequences
applicable to all categories of holders, some of which may be subject to
special rules. Moreover, it does not deal with the U.S. federal income tax
consequences to holders who hold the securities as part of hedging transaction
or straddle.
There are no cases or IRS rulings on similar transactions. As a result, the
IRS may disagree with all or a part of the discussion below. Prospective
investors should consult their own tax advisors as to the federal, state,
local, foreign and any other tax consequences of the purchase, ownership and
disposition of the securities.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended, the Treasury regulations promulgated
thereunder and judicial or ruling authority. These authorities are all subject
to change, which change may be retroactive.
Each trust will be provided with an opinion of Federal tax counsel regarding
the U.S. federal income tax matters discussed below. An opinion of Federal tax
counsel, however, is not binding on the IRS or the courts. No ruling on any of
the issues discussed below will be sought from the IRS.
For purposes of this summary, references to the trust, the securities and
related terms, parties and documents refer, unless described differently in
this prospectus, to each trust and the notes, certificates and related terms,
parties and documents applicable to that trust. References to a holder of a
security are deemed to refer to the beneficial owner of the security.
Tax Characterization of the Trust
Federal tax counsel will deliver its opinion to the trust that the trust
will not be an association (or publicly traded partnership) taxable as a
corporation for U.S. federal income tax purposes. This opinion will be based
on the assumption that the terms of the trust agreement and related documents
will be complied with.
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Federal tax counsel may also deliver an opinion to the trust that the trust
will be treated as a financial asset securitization investment trust ("FASIT")
for federal income tax purposes. The following summary assumes that the trust
will not intend to be treated as a FASIT. If a trust intends to qualify as a
FASIT for federal income tax purposes, the prospectus supplement will indicate
this and will describe the material U.S. federal income tax consequences
associated with the purchase, ownership and disposition of interests in a
FASIT.
Tax Consequences to Holders of Notes
Treatment of the Notes as Indebtedness. Except as described in the
prospectus supplement, federal tax counsel will deliver an opinion that
certain classes of the notes will qualify as debt for U.S. federal income tax
purposes. The seller will agree, and the noteholders will agree by their
purchase of the notes, to treat the notes as debt for U.S. federal income tax
purposes. The discussion below assumes this characterization of the notes is
correct. Treatment of the notes as equity interests 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.
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 holder of the notes.
Original Issue Discount. The discussion below assumes that all payments on
the notes are denominated in U.S. dollars, and that the interest formula for
the notes meets the requirements for "qualified stated interest" under
Treasury regulations (the "OID Regulations") relating to original issue
discount ("OID"), except as set forth below. If these conditions are not
satisfied with respect to a series of Notes, additional tax considerations
with respect to the notes will be disclosed in the 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, 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 should be the first price at which a substantial amount
of the notes is sold to other than placement agents, underwriters, brokers or
wholesalers. The stated redemption price at maturity of a note of a series is
generally equal to all payments on a note other than payments of "qualified
stated interest." 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 holder 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 holder
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. Holders of the
notes 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 holder 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
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respect to the 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 holder is allowed to reduce each accrual of
OID by a constant fraction.
An initial holder 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, may be subject to the "market discount rules" of Section 1276 of the
Code. In general, these rules apply if the holder 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. If the holder acquires the
note at a market discount and (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
that period plus the remaining OID as of the end of such period. A holder 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 holder may elect to include market
discount in gross income as it accrues. If it makes this election, the holder
will not be required to defer deductions. Any such election will apply to all
debt instruments acquired by the holder 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.
Amortizable Bond Premium. In general, if a holder purchases a note at a
premium (that is, an amount in excess of the amount payable at maturity), the
holder will be considered to have purchased the note with "amortizable bond
premium" equal to the amount of such excess. A holder 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. A holder'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 holder at the beginning of
the first taxable year for which the election applies or thereafter acquired
and is irrevocable without the consent of the IRS. Bond premium on a note held
by a holder 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 OID. A holder may elect to include in
gross income all interest with respect to the notes, including stated
interest, OID, de minimis OID, market discount, de minimis market discount,
and unstated interest, as adjusted by any amortizable bond premium or
acquisition premium, using the constant yield method described under Original
Issue Discount. This election will generally apply only to the specific note
for which it was made. It may not be revoked without the consent of the IRS.
Holders should consult their own tax advisors before making this election.
Sale or Other Disposition. If a holder of a note sells the note, the holder
will recognize gain or loss in an amount equal to the difference between the
amount realized on the sale and the holder's adjusted tax basis in the
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note. The adjusted tax basis will equal the holder's cost for the note,
increased by any market discount, OID and gain previously included by the
holder in income with respect to the note, and decreased by the amount of bond
premium (if any) previously amortized and by the amount of principal payments
previously received by the note holder with respect to the note. Any such gain
or loss will be capital gain or loss if the note was held as a capital asset,
except for gain representing accrued interest, accrued market discount not
previously included in income and in the event of a prepayment or redemption,
any not yet accrued OID. Capital gains or losses will be long-term capital
gains or losses if the note was held for more than one year. Capital losses
generally may be used only to offset capital gains.
Waivers and Amendments. An indenture for a series may permit noteholders to
waive an event of default or rescind an acceleration of the notes in some
circumstances upon a vote of the requisite percentage of the holders. 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 holder
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
noteholder, 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
holder (other than one who is not subject to the reporting requirements) will
be required to provide, under penalties of perjury, a certificate containing
its 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 noteholder fail to provide
the required certification or should the Internal Revenue Service notify the
indenture trustee or the issuer that the holder 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 noteholder, and
remit the withheld amounts to the IRS as a credit against the holder's federal
income tax liability.
Tax Consequences to Foreign Investors. The following information describes
the material U.S. federal income tax treatment of investors in the notes that
are not U.S. persons (each, a "foreign person"). The IRS has recently issued
regulations which set forth procedures to be followed by a foreign person in
establishing foreign status for certain purposes. These regulations are
effective for payments made after December 31, 2000. Prospective investors
should consult their tax advisors concerning the requirements imposed by the
new regulations and their effect on the holding of the notes.
The term "foreign person" means any person other than:
. a citizen or resident of the United States;
. a corporation, partnership or other entity organized in or under the
laws of the United States or any political subdivision thereof;
. an estate the income of which is includible in gross income for U.S.
federal income tax purposes regardless of its source; or
. a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States fiduciaries
who have the authority to control all substantial decisions of the
trust.
To the extent provided in Treasury regulations, however, some trusts in
existence on August 20, 1996, and treated as U.S. persons prior to that date,
that elect to continue to be treated as U.S. persons, will be U.S. persons and
not foreign persons.
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
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interest" and generally will not be subject to United States federal income
tax and withholding tax, as long as the foreign person
. 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 Internal
Revenue Code, and
. 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 (which
certification may be made on Form W-8BEN). 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 this 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. For
payments made after December 31, 2000, in the case of notes held by a foreign
partnership, the partnership, in addition to providing a Form W-8IMY, must
attach a Form W-8BEN received from each partner.
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:
. the gain is not effectively connected with the conduct of a trade or
business in the United States by the foreign person, and
. 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.
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 (or, after December 31,
2000, a Form W-8ECI) 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 Internal Revenue
Code for the taxable year, as adjusted for certain items, unless it qualifies
for a lower rate under an applicable tax treaty.
Tax Consequences to Holders of the Certificates
Treatment of the Trust as a Partnership. The seller and the servicer will
agree, and the holders of the certificates will agree by their purchase of
certificates, to treat the trust as a partnership for purposes of U.S. federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by
the trust, the partners of the partnership being the holders of the
certificates, including SLM Funding in its capacity as recipient of
distributions from the reserve account, if any, and the notes being treated as
debt of the partnership. However, the proper characterization of the
arrangement involving the trust, holders of the certificates, the seller and
the servicer is not clear because there is no authority on transactions
comparable to those contemplated in this prospectus. It is possible that the
certificates could be considered debt of the seller or the trust because the
certificates have certain characteristics of debt. The following discussion
assumes the certificates represent equity interests in a partnership.
Partnership Taxation. As a partnership, the trust will not be subject to
U.S. federal income tax. Rather, each holder of a certificate will be required
to take into account separately its allocable share of income, gains, losses,
deductions and credits of the trust. The trust's income will consist primarily
of interest and finance charges earned on student loans (including appropriate
adjustments for market discount, OID and bond premium), investment income from
investments of amounts on deposit in any related trust accounts and any gain
upon collection or disposition of student loans. Its 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.
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The tax items of a partnership are allocable to the partners in accordance
with the Internal Revenue Code, Treasury regulations and the partnership
agreement. In this case, the trust agreement and all related documents would
be deemed to be the "partnership agreement." The trust agreement will provide,
in general, that the holders of the certificates will be allocated items of
gross income of the trust for each month equal to the sum of:
. the return that accrues on the certificates in accordance with their
terms for that month, including an amount equivalent to return on
amounts previously due on the certificates but not yet distributed;
. any trust income attributable to discount on the trust student loans
that corresponds to any excess of the principal amount of the
certificates over their initial issue price; and
. all other amounts of income payable to the holders of the certificates
for that 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
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 the
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
includes 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 these 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,
its 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 above.
Counsel believes that this method of allocation will be valid under
applicable Treasury Department regulations, although no assurance can be given
that the IRS would not require a greater amount of income to be allocated to
certificateholders. It is also possible that the IRS 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. 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 Internal Revenue Code.
As an alternative to the treatment described above, the IRS 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.
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 trust intends to make all tax calculations relating to income and
allocations to holders of the certificates on an aggregate basis. If the IRS
were to require that such calculations be made separately for each 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 holders of the
certificates.
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Discount and Premium. To the extent that OID, if any, on the student loans
exceeds a de minimis amount, the trust will have OID income. It is not clear
whether the trust would be required to accrue any OID in accordance with the
provisions of the Internal Revenue Code requiring use of prepayment
assumptions and actual prepayment experience in the calculation of OID.
Moreover, the purchase price paid by the trust for the student loans may be
greater or less than the remaining principal balance of the student loans at
the time of purchase. If so, the student loans will have been acquired at a
premium or market discount, as the case may be.
If the trust acquires the student loans at a market discount or premium, it
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 against interest
income on the student loans. As indicated above, a portion of the market
discount income or premium deduction may be allocated to certificateholders.
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 its adjusted basis in the certificates, as described
below, immediately before the distribution. A certificateholder will recognize
loss upon termination of the trust or termination of its interest in a trust
if the trust distributes 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 Internal Revenue Code, a
trust 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 a termination occurs with
respect to the trust, it will be deemed under the Internal Revenue Code to
contribute all of its assets and liabilities to a new trust that is a
partnership in exchange for an interest in the new trust, and to immediately
thereafter terminate and distribute that interest to the certificateholders in
proportion to their respective interests in the terminated trust. A 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 holder generally will recognize capital gain
or loss on a sale of certificates in an amount equal to the difference between
the amount realized and the seller's tax basis in the certificates sold. The
gain or loss 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 holder's tax basis in a
certificate generally will equal the holder's cost, increased by its share of
trust income includible in gross income, and decreased by any distributions
received with respect to that certificate. In addition, both the tax basis in
the certificate and the amount realized on a sale of the certificate will
include the holder's share of the notes and other liabilities of the trust. A
holder acquiring certificates at different prices may be required to maintain
a single aggregate adjusted tax basis in the certificates and, upon sale or
other disposition of some of the certificates, to allocate a pro rata portion
of the aggregate tax basis to the certificates sold, rather than maintaining a
separate tax basis in each certificate for purposes of computing gain or loss
on a sale of that certificate.
Allocations Between Transferors and Transferees. In general, the trust's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the certificateholders in
proportion to the certificate balance of certificates owned by each of them as
of the close of the last day of such month. As a result, a holder purchasing
certificates may be allocated tax items attributable to periods before its
date of purchase.
The use of such a monthly convention may not be permitted by existing laws
and regulations. If a monthly convention is not allowed or only applies to
transfers of less than all of the partner's interest, taxable income or losses
of the trust might be reallocated among the certificateholders. The seller is
authorized to revise the trust's method of allocation between transferors and
transferees to conform to a method permitted by future laws, regulations or
other IRS guidance.
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Section 754 Election. In the event that a certificateholder sells a
certificate at a profit or loss, the purchaser will have a higher or lower
basis in the certificate than the selling holder had. The tax basis of the
trust's assets will not be adjusted to reflect that higher or lower basis
unless the trust were to file an election under Section 754 of the Internal
Revenue Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the trust will not make that
election. As a result, a certificateholder might be allocated a greater or
lesser amount of trust income than would be appropriate based on its own
purchase price.
Administrative Matters. The eligible lender trustee is required to keep or
cause to be kept complete and accurate books of the trust. The trust's books
will be maintained for financial reporting and tax purposes on an accrual
basis and the taxable year of the trust will be the calendar year. The
eligible lender trustee will file a partnership information return (IRS Form
1065) with the IRS for each taxable year of the trust and will report each
certificate holder's allocable share of items of trust income and expense to
holders and the IRS on Schedule K-1. The trust will provide the Schedule K-1
information to nominees that fail to provide it with the information statement
described below and those nominees will be required to forward the information
to the beneficial owners of certificates. Generally, holders of certificates
must file tax returns that are consistent with the information returns filed
by the trust or be subject to penalties unless they notify the IRS of all such
inconsistencies.
Under Section 6031 of the Internal Revenue Code, any person that holds
certificates as a nominee at any time during a calendar year is required to
furnish the trust with a statement containing information on the nominee, the
beneficial owners and the certificates so held, including the name, address
and taxpayer identification number of the nominee, and as to each beneficial
owner,
. the name, address and taxpayer identification number of the beneficial
owner,
. whether the beneficial owner is a U.S. person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned
agency or instrumentality of any of them, and
. certain information with respect to the certificates that were held,
bought or sold on behalf of the beneficial owner throughout the year.
In addition, brokers and financial institutions that hold certificates
through a nominee are required to furnish directly to the trust information as
to themselves and their ownership of certificates. A clearing agency
registered under Section 17A of the Exchange Act that holds certificates as a
nominee is not required to furnish any information statement to the trust. The
information referred to above for any calendar year must be furnished to the
trust on or before the following January 31. Nominees, brokers and financial
institutions that fail to provide the trust with the information described
above may be subject to penalties.
Unless otherwise provided by the Internal Revenue Code, applicable Treasury
regulations or other pronouncements, SLM Funding 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
IRS. The Internal Revenue 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
holder 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
certificate holder's returns and adjustments of items not related to the
income and losses of the trust.
Foreign Investors. 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. partners 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 provisions of the Internal Revenue Code.
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<PAGE>
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
Internal Revenue Code at a rate of 30 percent on the gross amount allocated to
such certificateholders, unless the 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 that trust from possible adverse consequences
of a failure to withhold.
A foreign certificateholder would generally be entitled to file with the IRS
a refund claim for such withheld taxes, taking the position that the interest
was portfolio interest. However, the IRS may disagree. 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 holder (although exempt from
withholding tax pursuant to Section 1441 or Section 1442, as previously
discussed, if a duly executed Form 4224 (or, after December 31, 2000, a Form
W-8ECI) 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 Internal Revenue Code.
STATE TAX CONSEQUENCES
The above discussion does not address the tax treatment of the related trust
or the notes, the certificates, or the holders of the notes or the
certificates 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
holders of the securities. Prospective investors are urged to consult with
their own tax advisors regarding the state and local tax treatment of the
trust as well as any state and local tax consequences to them of purchasing,
owning and disposing of the notes and certificates.
* * *
THE FEDERAL AND STATE TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON EACH
SECURITY HOLDER'S PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF
PURCHASING, OWNING OR DISPOSING OF NOTES AND CERTIFICATES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Internal Revenue Code, impose certain restrictions on:
. employee benefit plans;
. certain other retirement plans and arrangements, including:
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<PAGE>
1. individual retirement accounts and annuities,
2. Keogh plans, and
3. collective investment funds and separate accounts and, as
applicable, insurance company general accounts in which those plans,
accounts or arrangements are invested that are subject to the
fiduciary responsibility provisions of ERISA and Section 4975 of the
Internal Revenue Code; and
. persons who are fiduciaries with respect to the Plans in connection with
the investment of Plan assets.
The term "Plans" includes the plans and arrangements listed in the first two
bullet points above.
Some 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 Internal Revenue Code. Accordingly, assets of these
plans may, subject to the provisions of any other applicable federal and state
law, be invested in the securities without regard to the ERISA considerations
described in this prospectus. However, if a plan is not subject to ERISA
requirements but is qualified and exempt from taxation under Sections 401(a)
and 501(a) of the Internal Revenue Code, the prohibited transaction rules in
Section 503 of the Internal Revenue Code will apply.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and
the requirement that the Plan's investments be made in accordance with the
documents governing the Plan. In addition, Section 406 of ERISA and Section
4975 of the Internal Revenue Code prohibit a broad range of transactions
involving assets of a Plan and persons who are parties in interest under ERISA
and disqualified persons under the Internal Revenue Code ("Parties in
Interest") who have certain specified relationships to the Plan unless a
statutory, regulatory or administrative exemption is available. Some Parties
in Interest that participate in a prohibited transaction may be subject to an
excise tax imposed under Section 4975 of the Internal Revenue Code or a
penalty imposed under Section 502(i) of ERISA, unless a statutory or
administrative exemption is available. These prohibited transactions generally
are set forth in Section 406 of ERISA and Section 4975 of the Internal Revenue
Code.
The Notes
Unless described differently in the related prospectus supplement, the notes
of each series may be purchased by a Plan. A trust, the seller, any
underwriter, the eligible lender trustee, the indenture trustee, the servicer,
the administrator, any provider of credit support or any of their affiliates
may be considered to be or may become Parties in Interest with respect to
certain Plans. Prohibited transactions under Section 406 of ERISA and Section
4975 of the Internal Revenue Code may arise if a note is acquired by a Plan
with respect to which any of the trust, the seller, any underwriter, the
eligible lender trustee, the indenture trustee, the servicer, the
administrator, any credit support provider or any of their affiliates is a
Party in Interest unless the transactions are subject to one or more statutory
or administrative exemptions, such as:
. Prohibited Transaction Class Exemption ("PTCE") 96-23, which exempts
certain transactions effected on behalf of a Plan by an "in-house asset
manager";
. PTCE 90-1, which exempts certain transactions between insurance company
separate accounts and Parties in Interest;
. PTCE 91-38, which exempts certain transactions between bank collective
investment funds and Parties in Interest;
. PTCE 95-60, which exempts certain transactions between insurance company
general accounts and Parties in Interest; or
. PTCE 84-14, which exempts certain transactions effected on behalf of a
Plan by a "qualified professional asset manager".
These class exemptions may not apply with respect to any particular Plan's
investment in notes and, even if an exemption were deemed to apply, it might
not apply to all prohibited transactions that may occur in
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<PAGE>
connection with the investment. Accordingly, before making an investment in
the notes, investing Plans should determine whether the applicable trust, the
seller, any underwriter, the eligible lender trustee, the indenture trustee,
the servicer, the administrator, or any provider of credit support or any of
their affiliates is a Party in Interest for that Plan and, if so, whether the
transaction is subject to one or more statutory, regulatory or administrative
exemptions.
The Certificates
Unless described differently in the prospectus supplement, no certificates
of any series may be purchased by a Plan or by any entity whose underlying
assets include Plan assets by reason of a Plan's investment in that entity
(each, a "Benefit Plan"). The purchase of an equity interest in a trust will
result in the assets of that trust being deemed assets of a Benefit Plan for
the purposes of ERISA and the Internal Revenue Code, and certain transactions
involving the trust may then be deemed to constitute prohibited transactions
under Section 406 of ERISA and Section 4975 of the Internal Revenue Code. A
violation of the "prohibited transaction" rules may result in an excise tax or
other penalties and liabilities under ERISA and the Internal Revenue Code.
By its acceptance of a certificate, each certificateholder will be deemed to
have represented and warranted that it is not a Benefit Plan.
If a given series of certificates may be acquired by a Benefit Plan because
of the application of an exception contained in a regulation or administrative
exemption issued by the United States Department of Labor, the exception will
be discussed in the related prospectus supplement.
* * *
A Plan fiduciary considering the purchase of the securities of a given
series should consult its tax and/or legal advisors regarding whether the
assets of the related trust would be considered plan assets, the possibility
of exemptive relief from the prohibited transaction rules and other issues and
their potential consequences. Each Plan fiduciary also should determine
whether, under the general fiduciary standards of investment prudence and
diversification, an investment in the notes is appropriate for the Plan,
considering the overall investment policy of the Plan and the composition of
the Plan's investment portfolio, as well as whether the investment is
permitted under the Plan's governing instruments.
AVAILABLE INFORMATION
SLM Funding Corporation, as the originator of each trust and the seller, has
filed with the SEC a registration statement for the securities under the
Securities Act of 1933. This prospectus and the accompanying prospectus
supplement, both of which form part of the registration statement, do not
contain all the information contained in the registration statement. You may
inspect and copy the registration statement at the public reference facilities
maintained by the SEC at
. 450 Fifth Street, N.W., Washington, D.C. 20549;
and at the SEC's regional offices at
. Seven World Trade Center, Suite 1300, New York, New York 10048; and
. 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
In addition, you may obtain copies of the registration statement from the
Public Reference Branch of the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549 upon payment of certain prescribed fees. You may obtain information on
the operation of the SEC's public reference facilities by calling the SEC at
1-800-732-0330.
The registration statement may also be accessed electronically through the
SEC's Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system at
the SEC's website located at http://www.sec.gov.
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REPORTS TO SECURITYHOLDERS
The administrator will prepare periodic unaudited reports as described in
the prospectus supplement for each series. These periodic unaudited reports
will contain information concerning the trust student loans in the related
trust and sent only to Cede & Co., as nominee of DTC. The administrator will
not send reports directly to the beneficial holders of the securities. The
reports will not constitute financial statements prepared in accordance with
generally accepted accounting principles.
The trust will file with the SEC all periodic reports required under the
Securities Exchange Act of 1934. For as long as a trust files reports under
the Exchange Act, the reports will include unaudited quarterly financial
statements and audited annual financial statements prepared in accordance with
generally accepted accounting principles. The reports concerning the trust are
required to be delivered to the holders of the securities.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by or for a trust under Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
prospectus and before the termination of the offering of the securities will
be deemed to be incorporated by reference into this prospectus. Any statement
contained in this prospectus or in a document incorporated or deemed to be
incorporated by reference may be modified or superseded by a subsequently
filed document.
The seller will provide without charge to each person to whom a copy of this
prospectus is delivered, on the written or oral request of that person, a copy
of any or all of the documents incorporated in this prospectus or in any
related prospectus supplement by reference, except the exhibits to those
documents (unless the exhibits are specifically incorporated by reference).
Written requests for 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 requests for copies
should be directed to (703) 810-3000.
THE PLAN OF DISTRIBUTION
The seller and the underwriters named in each prospectus supplement will
enter into an underwriting agreement for the notes of the related series and a
separate underwriting agreement for the certificates of that series. Under the
underwriting agreements, the seller will agree to cause the related trust to
sell to the underwriters, and each of the underwriters will severally agree to
purchase, the amount of each class of securities listed in the prospectus
supplement.
The underwriters will agree, subject to the terms and conditions of their
underwriting agreements, to purchase all the notes and certificates described
in the underwriting agreements and offered by this prospectus and the related
prospectus supplement. In some series, the seller or an affiliate of the
seller may offer some or all of the securities for sale directly.
The underwriters or other offerors may offer the securities to potential
investors in person, by telephone, over the internet or by other means.
Each prospectus supplement will either:
. show the price at which each class of notes and certificates is being
offered to the public and any concessions that may be offered to dealers
participating in the offering; or
. specify that the notes and certificates will be sold by the seller or an
affiliate or will be sold or resold by the underwriters in negotiated
transactions at varying prices to be determined at the time of such
sale.
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After the initial public offering of any notes and certificates, the
offering prices and concessions may be changed.
Until the distribution of the securities is completed, SEC rules may limit
the ability of the underwriters and selling group members to bid for and
purchase the securities. As an exception to these rules, the underwriters are
permitted to engage in certain transactions that stabilize the price of the
securities. These consist of bids or purchases for the purpose of pegging,
fixing or maintaining the price of the securities.
If an underwriter creates a short position in the securities in connection
with the offering (i.e., if it sells more securities than are shown on the
cover page of the related prospectus supplement), the underwriter may reduce
that short position by purchasing securities in the open market.
An underwriter may also impose a penalty bid on other underwriters and
selling group members. This means that if the underwriter purchases securities
in the open market to reduce the underwriters' short position or to stabilize
the price of the securities, it may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
securities as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of those purchases. The imposition of a
penalty bid might also have an effect on the price of a security to the extent
that it discourages resales of the security.
Neither the seller nor the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the prices of the securities. In
addition, neither the seller nor the underwriters make any representation that
the underwriters will engage in those transactions or that those transactions,
once commenced, will not be discontinued without notice.
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
underwriters may be required to make on those civil liabilities.
Each trust may, from time to time, invest the funds in its trust accounts in
eligible investments acquired from the underwriters.
Under each of the underwriting agreements for a given series of securities,
the closing of the sale of any class of securities will be conditioned on the
closing of the sale of all other classes.
The place and time of delivery for the securities will appear in the related
prospectus supplement.
LEGAL MATTERS
Marianne M. Keler, General Counsel of Sallie Mae, as counsel to Sallie Mae,
the servicer and the seller, and Cadwalader, Wickersham & Taft, Washington,
D.C., special counsel to Sallie Mae, the servicer and the seller, will give
opinions on specific matters for the trust, the seller, the servicer and the
administrator. Shearman & Sterling, Washington, D.C., will give an opinion on
specific U.S. federal income tax matters for each trust.
Each prospectus supplement will identify the other law firms who will give
opinions on additional legal matters for the underwriters and specific
Delaware state tax matters.
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APPENDIX A
FEDERAL FAMILY EDUCATION LOAN PROGRAM
General
The Federal Family Education Loan Program ("FFELP"), formerly the Guaranteed
Student Loan Program, under Title IV of the Higher Education Act provides for
loans to students who are enrolled in eligible institutions, or to parents of
dependent students, to finance a portion of their educational costs. Payment
of principal and interest on the student loans is guaranteed by a state or
not-for-profit guarantor against:
. default of the borrower;
. the death, bankruptcy or disability of the borrower;
. closing of the borrower's school prior to the student earning a degree,
a false certification by the borrower's school or an unpaid school
refund; or
. a determination that the borrower was not eligible for the loan.
Subject to various conditions, a program of federal reinsurance under the
Higher Education Act entitles guarantors to reimbursement from the Department
of Education for between 75% and 100% of the amount of each guarantee payment.
In addition, the holder of student loans is entitled to receive interest
subsidy payments and special allowance payments from the Department on
eligible student loans.
Several types of student loans are currently authorized under the Higher
Education Act:
. Subsidized Stafford Loans to students who demonstrate requisite
financial need;
. Unsubsidized Stafford Loans to students who either do not demonstrate
financial need or require additional loans to supplement their Stafford
Loans;
. Loans called "PLUS Loans" to parents of students who are dependents and
whose estimated costs of attending school exceed other available
financial aid; and
. Loans called "Consolidation Loans," which consolidate into a single loan
a borrower's obligations under various federally authorized student loan
programs.
Before July 1, 1994, the Higher Education Act also authorized loans called
"Supplemental Loans to Students" or "SLS Loans" to graduate and professional
students, independent undergraduate students and, under some circumstances,
dependent undergraduate students, to supplement their Stafford Loans.
This appendix and the prospectus describe or summarize the material
provisions of the Higher Education Act, the FFELP, the guarantee agreements
and the other statutes, regulations and amendments. They, however, are not
complete and are qualified in their entirety by reference to each actual
statute, regulation or document. Both the Higher Education Act and the related
regulations have been the subject of extensive amendments in recent years.
Accordingly, we can not predict whether future amendments or modifications
might materially change any of the programs described in this prospectus or
the statutes and regulations that implement them.
Legislative and Administrative Matters
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"), the "Higher Education Technical Amendments of 1993" (the
"Technical Amendments"), the Higher Education Amendments of 1998 (the
"Reauthorization Legislation") and the Ticket to Work and Work Incentives
Improvement Act of 1999 (the "1999 Act").
The 1993 Act made significant changes to the FFELP and created a direct loan
program funded directly by the U.S. Department of Treasury (each loan under
such program, a "Federal Direct Student Loan"). It also
A-1
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implemented 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 two percent lender risk sharing, reducing
reimbursement payments to Guarantee Agencies, reducing interest rates and
Special Allowance Payments for some loans, reducing the interest payable to
holders of Consolidation Loans and affecting the Department's financial
assistance to Guarantee Agencies, by, for example, 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 retain.
The Act was further amended by enactment of the Reauthorization Legislation,
the general provisions of which became effective October 1, 1998 and which
extended the principal provisions of the FFELP to July 1, 2003. The
Reauthorization Legislation, as modified by the 1999 Act, lowered both the
borrower interest rate on Stafford loans to a formula based on the 91-day
Treasury bill rate plus 2.3 percent (1.7 percent during in-school and grace
periods) and the lender's rate after Special Allowance Payments to the 91-day
Treasury bill rate plus 2.8 percent (2.2 percent during in-school and grace
periods) for loans originated on or after October 1, 1998 and before January
1, 2000. The borrower interest rate on PLUS loans originated during this
period will be equal to the 91-day Treasury bill rate plus 3.1 percent.
Special allowance payments are also based on the 91-day Treasury bill rate
plus 3.1 percent. These rate reductions were first introduced on an interim
basis in temporary student loan legislation enacted into law on June 9, 1998
and effective for loans originated from July 1, 1998 through September 30,
1998.
The 1999 Act changed the financial index on which special allowance payments
are computed from the 91-day Treasury bill rate to the three-month commercial
paper rate (financial) for FFELP loans disbursed on or after January 1, 2000
and before July 1, 2003. For these FFELP loans, the special allowance payments
to lenders will be based upon the three-month commerical paper (financial)
rate plus 2.34% (1.74% for in-school and grace periods). The 1999 Act did not
change the rate that the borrower pays on FFELP loans.
The Reauthorization Legislation also maintained interest rates for borrowers
of Federal direct consolidation loans whose applications for such loans were
received prior to February 1, 1999 at 7.46 percent, which rates are adjusted
annually based on a formula equal to the 91-day Treasury bill rate plus 2.3
percent. The borrower interest rates on Federal direct consolidation loans for
borrowers whose applications are received on or after February 1, 1999 and
before July 1, 2003 will be a fixed rate equal to the lesser of the weighted
average of the interest rates of the loans consolidated, adjusted up to the
nearest one-eighth of one percent, and 8.25%. This is the same rate that the
Reauthorization Legislation sets on FFELP Consolidation Loans for borrowers
whose applications are received on or after October 1, 1998 and before July 1,
2003. The Reauthorization Legislation, as modified by the 1999 Act, sets the
special allowance payment rate for FFELP Consolidation Loans at the 91-day
Treasury bill rate plus 3.1 percent for loans originated on or after October
1, 1998 and before January 1, 2000, and at the three-month commercial paper
rate plus 2.64% for loans disbursed on or after January 1, 2000 and before
July 1, 2003. The annual fee paid by lenders on FFELP Consolidation Loans was
reduced under the Reauthorization Legislation from 1.05 percent to 0.62
percent of the principal plus accrued unpaid interest on these Consolidation
Loans, applications for which are received on or after October 1, 1998 and
before February 1, 1999.
Eligible Lenders, Students and Educational Institutions
Lenders eligible to make loans under the FFELP generally include banks,
savings and loan associations, credit unions, pension funds, insurance
companies and, under some conditions, schools and guarantors. A student loan
may be made to, or on behalf of, a "qualified student". A "qualified student"
is defined as an individual who
. is a United States citizen or national or is otherwise eligible under
federal regulations;
. has been accepted for enrollment or is enrolled and is maintaining
satisfactory academic progress at a participating educational
institution;
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. is carrying at least one-half of the normal full-time academic workload
for the course of study the student is pursuing, as determined by the
institution;
. has agreed to notify the holder of the loan promptly of any address
change; and
. meets the "need" requirements described in the application for the
particular loan program, in the case of Stafford Loans.
Eligible schools include institutions of higher education and proprietary
institutions meeting the standards provided in the Higher Education Act. For a
school to participate in the program, the Department of Education must approve
its eligibility under standards established by regulation.
Financial Need Analysis
Subject to program limits and conditions, student loans generally are made
in amounts sufficient to cover the student's estimated costs of attending
school, including tuition and fees, books, supplies, room and board,
transportation and miscellaneous personal expenses as determined by the
institution. Each Stafford Loan and Unsubsidized Stafford Loan applicant (and
parents, in the case of a dependent child) must undergo a financial need
analysis. This requires the applicant (and parents, in the case of a dependent
child) to submit a financial need analysis form to a federal processor. The
federal 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.
After receiving information on the family contribution, the institution then
subtracts the family contribution from the student's costs to attend the
institution to determine the student's eligibility for grants, loans and work
assistance. A student's "unmet need" is the difference between the amount of
grants and Stafford Loans for which the borrower is eligible and the student's
estimated cost of attendance. Students may borrower this unmet need through
Unsubsidized Stafford Loans subject to annual and aggregate loan limits
prescribed in the Higher Education Act. Parents may finance the family
contribution amount with their own resources or with PLUS Loans.
Special Allowance Payments
The Higher Education Act provides for quarterly special allowance payments
to be made by the Department of Education to holders of student loans to the
extent necessary to ensure that they receive at least specified market
interest rates of return. The rates for special allowance payments depend on
formulas that vary according to the type of loan, the date the loan was made
and the type of funds (i.e., tax-exempt or taxable) used to finance the loan.
The Department makes a special allowance payment for each of calendar quarter.
The special allowance payment equals the average unpaid principal balance
(including interest which has been capitalized) of all eligible loans held by
a holder during the quarterly period multiplied by the special allowance
percentage.
For student loans disbursed before January 1, 2000, the special allowance
percentage is computed by:
(1) determining the average of the bond equivalent rates of 3-month
Treasury bills auctioned for that quarter;
(2) subtracting the applicable borrower interest rate on the loan;
(3) adding the applicable special allowance margin (described in the
table below); and
(4) dividing the resultant percentage by 4.
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If the result is negative, the special allowance payment is zero.
<TABLE>
<CAPTION>
Date of First Disbursement Special Allowance Margin
-------------------------- ------------------------
<C> <S>
Before 10/17/86................. 3.50%
From 10/17/86 through 09/30/92.. 3.25%
From 10/01/92 through 06/30/95.. 3.10%
From 07/01/95 through 06/30/98.. 2.50% (Stafford Loans and Unsubsidized
Stafford Loans that are In-School, Grace or
Deferment)
3.10% (Stafford Loans and Unsubsidized
Stafford Loans that are in repayment and all
other loans)
From 07/01/98 through 12/31/99.. 2.20% (Stafford Loans and Unsubsidized
Stafford Loans that are In-School, Grace or
Deferment)
2.80% (Stafford Loans and Unsubsidized
Stafford Loans that are in repayment)
3.10% for all other loans
</TABLE>
For student loans disbursed on or after January 1, 2000, the special
allowance percentage is computed by:
1. determining the average of the bond equivalent rates of 3-month
commercial paper (financial) rates quoted for that quarter;
2. subtracting the applicable borrower interest rate on the loan;
3. adding the applicable special allowance margin (described in the table
below); and
4. dividing the resultant percentage by 4.
If the result is negative, the special allowance payment is zero.
<TABLE>
<CAPTION>
Date of First Disbursement Special Allowance Margin
-------------------------- ------------------------
<C> <S>
From 01/01/00 through 06/30/03.. 1.74% (Subsidized Stafford Loans and
Unsubsidized Stafford Loans that are In-
School, Grace or Deferment)
2.34% (Subsidized Stafford Loans and
Unsubsidized Stafford Loans that are in
repayment)
2.64% for all other loans
</TABLE>
Special allowance payments are available on variable rate PLUS Loans and SLS
Loans made on or after July 1, 1987 and before July 1, 1994 and on any PLUS
Loans made on or after July 1, 1998, only if the variable rate, which is reset
annually based on the 1-year Treasury bill for loans made before July 1, 1998
or based on the 3-month Treasury bill for loans made on or after July 1, 1998,
exceeds the applicable maximum borrower rate. The maximum borrower rate is
between 9% and 12%.
Stafford Loans
For Stafford Loans, the Higher Education Act provides for:
. federal insurance or reinsurance of Stafford Loans made by eligible
lenders to qualified students;
. federal interest subsidy payments on eligible Stafford Loans paid by the
Department of Education to holders of the loans in lieu of the
borrowers' making interest payments; and
. special allowance payments representing an additional subsidy paid by
the Department to the holders of eligible Stafford Loans.
We refer to all three types of assistance as "federal assistance".
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Interest. The borrower's interest rate on a Stafford Loan can be fixed or
variable. Stafford Loan interest rates are summarized in the chart below.
<TABLE>
<CAPTION>
Maximum
Trigger Date Borrower Rate Borrower Rate Interest Rate Margin
------------ ------------- ------------- --------------------
<S> <C> <C> <C>
Before 01/01/81......... 7% 7% N/A
From 01/01/81 through
09/12/83............... 9% 9% N/A
From 09/13/83 through
06/30/88............... 8% 8% N/A
From 07/01/88 through
09/30/92............... 8% for 48 months; thereafter, 8% for 48 months, 3.25% for loans made
3-month Treasury + Interest Rate Margin then 10% before 7/23/92 and
for loans made on or
after 7/23/92 and
before 10/1/92 to new
student loan
borrowers;
3.10% for loans made
after 7/23/92 and
before 7/1/94 to
borrowers with
outstanding FFELP
loans
From 10/01/92 through
06/30/94............... 3-month Treasury + Interest Rate Margin 9% 3.10%
From 07/01/94 through
06/30/95............... 3-month Treasury + Interest Rate Margin 8.25% 3.10%
From 07/01/95 through
06/30/98............... 3-month Treasury + Interest Rate Margin 8.25% 2.50% (In-School,
Grace or Deferment);
3.10% (in repayment)
From 07/01/98........... 3-month Treasury + Interest Rate Margin 8.25% 1.70% (In-School,
Grace or Deferment);
2.30% (in repayment)
</TABLE>
The trigger date for Stafford Loans made before October 1, 1992 is the first
day of the enrollment period for which the borrower's first Stafford Loan is
made. The trigger date for Stafford Loans made on or after October 1, 1992 is
the date of the disbursement of the borrower's first Stafford Loan. All
Stafford Loans made on or after July 1, 1994 have a variable interest rate
regardless of the applicable rate on any prior loans.
The rate for variable rate 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:
. the applicable maximum borrower rate
and
. the sum of
. the bond equivalent rate of 3-month Treasury bills auctioned at the
final auction held before that June 1,
and
. the applicable interest rate margin.
In 1992, the Higher Education Act was amended to provide that, for fixed
rate Stafford Loans made on or after July 23, 1992 and loans made to new
borrowers on or after July 1, 1988, the lender must convert the interest rate
on those loans (by January 1, 1995) to an annual variable interest rate
adjusted each July 1 equal to:
. for fixed rate Stafford Loans made between July 1, 1988 and July 23,
1992, and for fixed rate Stafford Loans made to new FFELP borrowers on
or after July 23, 1992 and before October 1, 1992, the 3-month Treasury
bill rate at the final auction before the preceding June 1 plus 3.25%;
and
. for fixed rate Stafford Loans made on or after July 23, 1992 to
borrowers with outstanding FFELP Loans, the 3-month Treasury bill rate
at the final auction before the preceding June 1 plus 3.10%,
in each case capped at the applicable interest rate for the loan that existed
before the conversion. The variable interest rate conversion requirement does
not apply to loans made before July 23, 1992 during the first 48 months of
repayment.
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<PAGE>
Interest Subsidy Payments. The Department of Education is responsible for
paying interest on Stafford Loans:
. while the borrower is a qualified student,
. during the grace period, and
. during prescribed deferral periods.
The Department of Education makes quarterly interest subsidy payments to the
owner of a Stafford Loan in an amount equal to the interest that accrues on
the unpaid balance of that loan before repayment begins or during any deferral
periods. The Higher Education Act provides that the owner of an eligible
Stafford Loan has a contractual right against the United States to receive
interest subsidy payments and special allowance payments in accordance with
the provisions of the Higher Education Act. However, receipt of interest
subsidy payments and special allowance payments is conditioned on compliance
with the requirements of the Higher Education Act, including the following:
. satisfaction of need-based criteria,
. the delivery of sufficient information by the borrower and the lender to
the Department to confirm the foregoing, and
. continued eligibility of the loan for federal reinsurance.
If the loan is not held by an eligible lender in accordance with the
requirements of the Higher Education Act and the applicable federal guarantee
agreements, the loan may lose its eligibility.
Lenders, generally, receive interest subsidy payments and special allowance
payments within 45 days to 60 days after the servicer submits the applicable
forms for any given calendar quarter to the Department of Education. However,
there can be no assurance that payments will, in fact, be received from the
Department within that period.
Loan Limits. The Higher Education Act generally requires that eligible
lenders disburse student loans in at least two equal disbursements. The Act
limits the amount a student can borrow in any academic year. The following
chart shows the current and historic loan limits.
<TABLE>
<CAPTION>
All Students
(1) Independent Students
--------------- -----------------------------
Base Amount
Subsidized and
Unsubsidized on Additional
Subsidized or Unsubsidized Maximum
Borrower's Subsidized on or after after only on or after Annual Total
Academic Level Pre-1/1/87 1/1/87 10/1/93(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 $ 10,000
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 include both Stafford Loans and federal direct student
loans.
(2) These amounts represent the combined maximum loan amount per year for
Stafford Loans and Unsubsidized Stafford Loans. Accordingly, the maximum
amount that a student may borrow under an Unsubsidized Stafford Loan is
the difference between the combined maximum loan amount and the amount the
student received in the form of a Stafford Loan.
(3) Independent undergraduate students, graduate students or professional
students may borrow these additional amounts. Moreover, dependent
undergraduate students may also receive these additional loan amounts if
their parents are unable to provide the family contribution amount and it
is unlikely that the student's parents will qualify for a PLUS Loan.
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<PAGE>
The annual loan limits are sometimes reduced when the student is enrolled in
a program of less than one academic year or has less than a full academic year
remaining in his program. The Department of Education has discretion to raise
these limits to accommodate highly specialized or exceptionally expensive
courses of study.
Repayment. In general, repayment of principal on a Stafford Loan does not
begin while the borrower remains a qualified student, but only after the
applicable grace period, as described below. Any borrower may prepay a loan
voluntarily without penalty, and may waive any grace period or deferral period
related to his loan. In general, each loan must be scheduled for repayment
over a period of not more than ten years after repayment begins. New borrowers
on or after October 7, 1998 who accumulate outstanding loans under the FFELP
totaling more than $30,000 are entitled to extend repayment for up to 25
years, subject to scheduled minimum repayment amounts. The Higher Education
Act currently requires minimum annual payments of $600 or, if greater, the
amount of accrued interest for that year, unless the borrower and the lender
agree to lower payments. The Act and related regulations require lenders to
offer the choice of a standard, graduated, income-sensitive or extended
repayment schedule, if applicable, to all borrowers entering repayment.
Grace Periods, Deferral Periods and Forbearance Periods. After the borrower
stops pursuing at least a half-time course of study, he generally must begin
to repay principal of a Stafford Loan following a grace period of usually six
months. In addition, no principal repayments need be made, subject to some
conditions, during deferral periods.
For new borrowers whose loans are first disbursed on or after July 1, 1993,
repayment of principal may be deferred, subject to a maximum deferment of
three years, only:
. while the borrower is at least a half-time student or is enrolled in an
approved graduate fellowship program or 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 1992, the Higher Education Act was amended to permit, and in some cases
require, forbearance of loan collection in some circumstances (each, a
"forbearance period").
Unsubsidized Stafford Loans
The Unsubsidized Stafford Loan program is designed for students who do not
qualify for the maximum Stafford Loan due to parental and/or student income
and assets in excess of prescribed amounts or who need funds in excess of the
maximum permitted under Stafford Loans in order to finance their education.
The basic terms of Unsubsidized Stafford Loans are generally the same as
those of Stafford Loans, including interest rate provisions, annual loan
limits and special allowance payments. The terms of the Unsubsidized Stafford
Loans differ, however, in some respects from the terms of Stafford Loans. The
federal government does not make interest subsidy payments on Unsubsidized
Stafford Loans. The borrower must begin making interest payments on a monthly
or quarterly basis or the interest will be capitalized. Subject to the same
loan limits as those established for Stafford Loans, a student may borrow up
to the amount of his unmet need.
PLUS and SLS Loan Programs
The Higher Education Act authorizes PLUS Loans to be made to parents of
eligible dependent students and previously authorized SLS Loans to be made to
specific categories of students. Since July 1, 1993, only parents who have no
adverse credit history or who are able to secure an endorser without an
adverse credit history are eligible for PLUS Loans. The basic provisions
applicable to PLUS Loans and SLS Loans are similar to those of Stafford Loans
for federal insurance and reinsurance. However, PLUS and SLS Loans differ from
Stafford Loans, particularly because interest subsidy payments are not
available under the PLUS and SLS programs and, in some instances, special
allowance payments are more restricted.
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<PAGE>
Loan Limits. PLUS Loans and SLS Loans disbursed before July 1, 1993 were
limited to $4,000 per academic year with a maximum aggregate amount of
$20,000. Limits for SLS Loans disbursed on or after July 1, 1993 depend upon
the class year of the student and the length of the academic year. The annual
loan limits for SLS Loans first disbursed on or after July 1, 1993 range from
$4,000 for first and second year undergraduate borrowers to $10,000 for
graduate borrowers, with a maximum aggregate amount of $23,000 for
undergraduate borrowers and $73,000 for graduate and professional borrowers.
After July 1, 1994, the SLS Loan program was merged with the Unsubsidized
Stafford Loan program, with the borrowing limits reflecting the combined
eligibility under both programs. The annual and aggregate amounts of PLUS
Loans first disbursed on or after July 1, 1993 are limited only to the
difference between the cost of the student's education and other financial aid
received, including scholarship, grants and other student loans.
Interest. The interest rate for a PLUS Loan or an SLS Loan depends both on
the date of disbursement and the period of enrollment. The interest rates for
PLUS Loans and SLS Loans are summarized in the following chart.
<TABLE>
<CAPTION>
Maximum Interest Rate
Trigger Date Borrower Rate Borrower Rate Margin
------------ ------------- ------------- -------------
<S> <C> <C> <C>
Before 10/01/81......... 9% 9% N/A
From 10/01/81 through
10/30/82............... 14% 14% N/A
From 11/01/82 through
06/30/87............... 12% 12% N/A
From 07/01/87 through
09/30/92............... 1-year Treasury + Interest Rate Margin 12% 3.25%
From 10/01/92 through
06/30/94............... 1-year Treasury + Interest Rate Margin PLUS 10%, SLS 11% 3.10%
SLS repealed 07/01/94
From 07/01/94 through
06/30/98............... 1-year Treasury + Interest Rate Margin 9% 3.10%
After 6/30/98........... 3-month Treasury + Interest Rate Margin 9% 3.10%
</TABLE>
For PLUS Loans and SLS Loans made before October 1, 1992, the trigger date
is the first day of the enrollment period for which the loan was made. For
PLUS Loans and SLS Loans made on or after October 1, 1992, the trigger date is
the date of the disbursement of the loan.
For PLUS Loans or SLS Loans that carry a variable rate, the rate is set
annually for 12-month periods (July 1 through June 30) on the preceding June 1
and is equal to the lesser of:
. the applicable maximum borrower rate
and
. the sum of:
. the bond equivalent rate of 1-year Treasury bills or 3-month
Treasury bills, as applicable, auctioned at the final auction held
before that June 1,
and
. the applicable interest rate margin.
A holder of a PLUS Loan or SLS Loan is eligible to receive special allowance
payments during any quarter if:
. the borrower rate is set at the maximum borrower rate and
. the sum of the average of the bond equivalent rates of 3-month Treasury
bills auctioned during that quarter and the applicable interest rate
margin exceeds the maximum borrower rate.
Repayment, Deferments. In 1992, the Higher Education Act was amended to
grant to each borrower under an SLS Loan the option to defer repaying
principal until he begins to repay his Stafford Loans. Otherwise, borrowers
must begin to repay principal of their PLUS Loans and SLS Loans no later than
60 days after the date of disbursement, subject to the deferral and
forbearance provisions. The deferral provisions which apply to PLUS Loans and
SLS Loans are more limited than those applicable to Stafford Loans. However,
borrowers may defer
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<PAGE>
and capitalize repayment of interest during some periods of educational
enrollment and periods of unemployment or hardship, as specified under the
Act. Further, while interest subsidy payments are not available while
repayment is being deferred, interest may be capitalized during the deferral
period if the borrower does not pay the interest. Maximum loan repayment
periods and minimum payment amounts for PLUS Loans and SLS Loans are the same
as those for Stafford Loans.
Consolidation Loan Program
The Higher Education Act also authorizes a program under which borrowers may
consolidate one or more of their student loans into a single Consolidation
Loan that is insured and reinsured on a basis similar to Stafford Loans.
Consolidation Loans may be made in an amount sufficient to pay outstanding
principal, unpaid interest, late charges and collection costs on all federally
insured or reinsured student loans incurred under the FFELP that the borrower
selects for consolidation, as well as loans made under various other student
loan programs and student loans made by different lenders. Under this program,
a lender may make a Consolidation Loan to an eligible borrower who requests it
so long as the lender holds an outstanding loan of the borrower or the
borrower certifies that he has been unable to obtain a Consolidation Loan from
the holders of his outstanding student loans. In 1998, the Act was amended to
allow a lender to make a Consolidation Loan to a borrower whose loans are held
by multiple lenders even if the lender making the Consolidation Loan does not
hold any of the borrower's outstanding loans. A borrower who is unable to
obtain a Consolidation Loan from an eligible lender or a Consolidation Loan
with an income-sensitive repayment plan acceptable to the borrower may obtain
a Consolidation Loan under the direct loan program.
Consolidation Loans that were made on or after July 1, 1994 have no minimum
loan amount, although Consolidation Loans for less than $7,500 must be repaid
in ten years. Applications for Consolidation Loans received on or after
January 1, 1993 but before July 1, 1994 were available only to borrowers who
had aggregate outstanding student loan balances of at least $7,500. For
applications received before January 1, 1993, Consolidation Loans were
available only to borrowers who had aggregate outstanding student loan
balances of at least $5,000.
To obtain a Consolidation Loan, the borrower must be either in repayment
status or in a grace period before repayment begins. In addition, for
applications received before January 1, 1993, the borrower must not have been
delinquent by more than 90 days on any student loan payment; and for
applications received on or after January 1, 1993, delinquent or defaulted
borrowers are eligible to obtain Consolidation Loans only if they re-enter
repayment through loan consolidation.
In connection with applications received on or after January 1, 1993,
borrowers may, within 180 days after the origination of a Consolidation Loan,
add additional loans ("Add-on Consolidation Loans") made before the
origination of that Consolidation Loan consolidated with it; and in 1998, the
Act was amended to permit student loans made within the 180-day period after
the date of consolidation added to that Consolidation Loan. If the borrower
obtains student loans after the Consolidation Loan is originated (except as
provided above), he may consolidate the new loans and the existing
Consolidation Loan into a new Consolidation Loan. After a Consolidation Loan
is consolidated with any Add-on Consolidation Loans, the interest rate and
term of the Consolidation Loan may be recomputed within the parameters
permitted by the Act. For applications received on or after January 1, 1993,
married couples who agree to be jointly and severally liable will be treated
as one borrower for purposes of loan consolidation eligibility. For
applications received on or after November 13, 1997, borrowers may include
federal direct loans in Consolidation Loans.
Consolidation Loans bear interest at a rate equal to the greater of the
weighted average of the interest rates on the unpaid principal balances of the
consolidated loans and 9% for loans originated before July 1, 1994. For
Consolidation Loans made on or after July 1, 1994 and for which applications
were received before November 13, 1997, the weighted average interest rate are
rounded up to the nearest whole percent. Consolidation Loans made on or after
July 1, 1994 for which applications were received on or after November 13,
1997 through September 30, 1998 bear interest at the annual variable rate
applicable to Stafford
A-9
<PAGE>
Loans subject to a cap of 8.25%. Consolidation Loans for which the application
is received on or after October 1, 1998 bear interest at a rate equal to the
weighted average interest rate of the loans being consolidated (rounded up to
the nearest one-eighth of one percent) subject to a cap of 8.25%.
Interest on Consolidation Loans accrues and, for applications received
before January 1, 1993, is paid without interest subsidy by the Department.
For Consolidation Loans for which applications were received on or after
January 1, 1993, all interest of the borrower is paid during all deferral
periods. However, Consolidation Loans for which applications were received on
or after August 10, 1993 will only be subsidized if all of the underlying
loans being consolidated were subsidized Stafford Loans. Nevertheless, in the
case of Consolidation Loans made on or after November 13, 1997, the portion of
a Consolidation Loan that is comprised of subsidized Stafford Loans will
retain its subsidy benefits during deferral periods. Borrowers may elect to
accelerate principal payments without penalty.
No insurance premium may be charged to a borrower or a lender in connection
with a Consolidation Loan. However, a fee may be charged to the lender by a
guarantor to cover the costs of increased or extended liability for a
Consolidation Loan, and lenders must pay a monthly rebate fee to the
Department at an annualized rate of 1.05% on principal of and interest on
Consolidation Loans for loans disbursed on or after October 1, 1993, and at an
annualized rate of 0.62% for Consolidation Loan applications received between
October 1, 1998 and January 31, 1999. The rate for special allowance payments
for Consolidation Loans is determined in the same manner as for Stafford
Loans.
A borrower must begin to repay his Consolidation Loan within 60 days after
his prior consolidated loans have been discharged. For applications received
on or after January 1, 1993, repayment schedule options must include the
establishment of graduated or income-sensitive repayment plans, subject to
limits applicable to the sum of the Consolidation Loan and the amount of the
borrower's other eligible student loans outstanding. The lender may, at its
option, include graduated and income-sensitive repayment plans in connection
with student loans for which the applications were received before that date.
Generally, depending on the total loans outstanding, repayment may be
scheduled over periods no less than ten and not more than 25 years. For
applications received on or after January 1, 1993, the maximum maturity
schedule is 30 years for Consolidation Loans of $60,000 or more.
All eligible student loans of a borrower paid in full through consolidation
are discharged in the consolidation process when the new Consolidation Loan is
made.
GUARANTORS UNDER THE FFELP
Loan Guarantees
Under the FFELP, guarantors guarantee loans made by eligible lending
institutions. Student loans made before October 1, 1993 are guaranteed by
guarantors as to 100% of principal and accrued interest against default,
death, disability or bankruptcy. Student loans made on or after October 1,
1993 are guaranteed as to 100% of principal and accrued interest against
death, disability or bankruptcy and 98% of principal and accrued interest
against default. The guarantor is reimbursed by the Secretary of Education for
amounts paid to lenders pursuant to agreements for reimbursement.
Guarantor Reserve Funds
A guarantor generally pays claims to lenders for student loans that it has
guaranteed using the cash and reserves that comprise its guarantee funds. In
general, these funds have been funded principally by administrative cost
allowances paid by the Secretary of Education, guarantee fees paid by lenders
(the cost of which may be passed on to borrowers--up to 1% of the principal
amount of the student loan), investment income on moneys in the guarantee
fund, and a portion of the moneys collected from borrowers on guaranteed loans
that have been reimbursed by the Secretary to cover the guarantor's
administrative expenses.
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<PAGE>
The Secretary is required to demand payment on September 1, 2002 of a total
of one billion dollars from the funds of all the guarantors participating in
the FFELP. The amounts demanded of each guarantor will be determined in
accordance with formulas included in the Higher Education Act. Each guarantor
is required to deposit funds in a restricted account in installments,
beginning in the federal fiscal year ending September 30, 1998, to provide for
its payment. The Secretary has made the determination, and advised each
guarantor, of the amount required to be transferred by that guarantor. The
Higher Education Act was amended in 1998 to include significant changes
affecting the financial structure of guarantors in the FFELP and their sources
of revenue. These changes will affect the guarantors and their guarantee
funds. See "--1998 Reauthorization Amendments" below.
The adequacy of a guarantor's guarantee fund to meet its guarantee
obligations for existing student loans also depends, in significant part, on
its ability to collect revenues generated by guarantees of new student loans.
The federal direct student loan program may adversely affect the volume of new
guarantees. Future legislation may make additional changes to the Higher
Education Act that could significantly affect the revenues received by
guarantors and the structure of the guarantor program. Relevant federal laws,
including the Higher Education Act, could be further changed in a manner that
may adversely affect the ability of a guarantor to meet its guarantee
obligations.
Federal Reimbursement Agreements
General
Each guarantor and the Secretary of Education have entered into a federal
reimbursement contract. Each contract provides that the guarantor will be
reimbursed for a portion of the insurance payments that it makes to eligible
lenders for loans guaranteed by the guarantor before the termination of its
contract or expiration of the authority of the Higher Education Act. Under
some circumstances, the Secretary can terminate federal reimbursement
contracts or take other actions short of termination to protect the federal
interest. See "--Department of Education Oversight" below.
Under the Higher Education Act and the federal reimbursement contracts, the
Secretary of Education currently agrees to reimburse a guarantor for the
amounts it expends in the discharge of its guarantee obligation (i.e., the
unpaid principal balance and accrued interest on the guaranteed loans) as a
result of borrower default. The Secretary currently agrees to reimburse each
guarantor for:
. up to 100% of the amounts it expends for guaranteed loans made before
October 1, 1993;
. up to 98% of the amounts it expends for guaranteed loans made on or
after October 1, 1993 but before October 1, 1998; and
. up to 95% of the amounts it expends for guaranteed loans made on or
after October 1, 1998.
Depending on the claims rate of a guarantor, the 100%, 98% or 95%
reimbursement may be reduced as described in "--Effect of Annual Claims Rate
on Reimbursement of Guarantors" below.
The Secretary of Education also agrees to repay 100% of the unpaid principal
balance and accrued interest on guaranteed loans that the guarantor expends in
discharging its guarantee obligation as a result of the bankruptcy, death or
total and permanent disability of a borrower (or in the case of a PLUS Loan,
the death of the student on whose behalf the loan was borrowed) or, in some
circumstances, as a result of school closure, or if a school fails to make a
refund of loan proceeds which the school owed to the student's lender. The
latter reimbursements are not included in the calculations of the guarantor's
claims rate experience for the purpose of federal reimbursement under the
contracts.
Under present practice, after the Secretary reimburses a guarantor for a
default claim paid on a guaranteed loan, the guarantor continues to seek
repayment from the borrower. The guarantor returns to the Secretary any
payments that it receives from the borrower after deducting and retaining:
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<PAGE>
. a percentage amount equal to the complement of the reimbursement
percentage in effect at the time the loan was reimbursed,
plus
. an amount equal to 24% (or 23% beginning on October 1, 2003, and 18 1/2%
in the case of a payment from the proceeds of a Consolidation Loan) of
those payments for administrative costs.
However, the Secretary may require that the defaulted guaranteed loans be
assigned to the Department of Education. In that case, no further collections
activity would be undertaken by the guarantor, and no recoveries could be paid
to the guarantor.
A guarantor may enter into an addendum to its interest subsidy agreement
under which the guarantor would refer defaulted guaranteed loans to the
Secretary. Those loans would then be reported to the IRS to "offset" any tax
refunds which may be due the defaulted borrowers. To the extent that a
guarantor originally received less than 100% reimbursement from the Secretary
on a referred loan, it will not recover any amounts subsequently collected by
the federal government which are attributable to that portion of the defaulted
loan for which the guarantor was not reimbursed.
Eligibility for Federal Reimbursement
To be eligible for federal reimbursement payments, guaranteed loans must be
made by an eligible lender under the applicable guarantor's guarantee program
and meet the requirements of the regulations issued under the Higher Education
Act, including borrower eligibility, loan amount, disbursement, interest rate,
repayment period and guarantee fee provisions.
Generally, these procedures require that the lender process the applicant's
completed loan application, determine whether the applicant is an eligible
borrower attending an eligible institution, explain to the borrower his
responsibilities under the loan, ensure that the promissory note evidencing
the loan is executed by the borrower and disburse the loan proceeds as
required. After the loan is made, the lender must establish repayment terms
with the borrower, properly administer deferrals and forbearances and credit
the borrower for payments made. If a borrower becomes delinquent in repaying a
loan, a lender must perform collection procedures that vary depending upon the
length of time a loan is delinquent. The collection procedures consist
primarily of telephone calls, demand letters, skiptracing procedures and
requesting assistance from the applicable guarantor.
A lender may submit a default claim to the guarantor after the related
student loan has been delinquent for at least 270 days in most cases. However,
if the first day of delinquency occurred before October 7, 1998, the default
claim may be submitted after 180 days of delinquency. The lender must submit a
default claim package that includes all information and documentation required
under the FFELP regulations and the guarantor's policies and procedures. Under
current procedures, assuming that the default claim package complies with the
guarantor's loan procedures manual and regulations, the guarantor will pay the
lender for a default claim within 90 days after the lender has filed its
claim, which generally is expected to be 390 days following the date a loan
became delinquent. The guarantor will pay the lender interest accrued on the
loan for up to 450 days after delinquency. The guarantor must file a
reimbursement claim with the Secretary within 45 days after the guarantor has
paid the lender for the default claim.
Effect of Annual Claims Rate on Reimbursement of Guarantors
A guarantor's ability to meet its obligations to pay default claims on
student loans that it has guaranteed will depend on the adequacy of its
guarantee fund. That, in turn, will be affected by the default experience of
all the lenders participating in the guarantor's guarantee program. A high
default experience among participating lenders may cause the guarantor's
claims rate to exceed the 5% and 9% levels described below, with the result
that the Secretary of Education would reimburse the guarantor's default claims
payment at lower percentages.
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In general, guarantors are currently entitled to receive reimbursement
payments under federal reimbursement contracts in amounts that vary depending
on their claims rate experience. A guarantor's "claims rate" is computed by
dividing the total amount of its default claims since the previous September
30 by the total original principal amount of student loans in repayment on
that date that it had guaranteed. The formula for computing the percentage of
federal reimbursement under the federal reimbursement contracts is not
accumulated over a period of years but is measured by the amount of federal
reimbursement payments in any one federal fiscal year (October 1 through
September 30) as a percentage of the original principal amount of loans under
the FFELP guaranteed by the guarantor and in repayment at the end of the
preceding federal fiscal year. For purposes of computing reimbursement
payments to a guarantor, the original principal amount of loans in repayment
means the original principal amount of all loans guaranteed by that guarantor
less the sum of:
. the guarantee payments made on those loans;
. the original principal amount of those loans that have been fully
repaid; and
. the original principal amount of those loans for which the first
principal installment payment has not become due or the first
installment need not be paid because of a deferral period.
On October 1 of each year the claims rate begins again at zero, regardless
of a guarantor's experience in preceding years.
Under the formula,
. if a guarantor has a claims rate throughout any federal fiscal year that
does not exceed 5%, the Secretary will make federal reimbursement
payment to that guarantor at
. 100% for loans made before October 1, 1993;
. 98% for loans made on or after October 1, 1993 but before October 1,
1998; and
. 95% for loans made on or after October 1, 1998;
. if, beginning at any time in a federal fiscal year, a guarantor has a
claims rate that is greater than 5% but does not exceed 9%, the
Secretary will make federal reimbursement payments to that guarantor at
. 90% for loans made before October 1, 1993;
. 88% for loans made on or after October 1, 1993 but before October 1,
1998; and
. 85% for loans made on or after October 1, 1998;
. if, beginning at any time in a federal fiscal year, a guarantor has a
claims rate that is greater than 9%, the Secretary will make federal
reimbursement payments to that guarantor at
. 80% for loans made before October 1, 1993;
. 78% for loans made on or after October 1, 1993 but before October 1,
1998; and
. 75% for loans made on or after October 1, 1998.
Other Federal Agreements
In addition to guarantees, qualified Stafford Loans and some Consolidation
Loans acquired under the FFELP benefit from federal subsidies. Each guarantor
and the Secretary of Education have entered into an interest subsidy
agreement, which entitles the holders of eligible loans guaranteed by the
guarantor to receive interest subsidy payments from the Secretary on behalf of
some students while the student is in school, during the grace period after
the student leaves school, and during prescribed deferment periods, in each
case subject to the holders' compliance with all the requirements of the
Higher Education Act. See "--Stafford Loans--Interest Subsidy Payments" above
for a more detailed description of the interest subsidy payments.
A-13
<PAGE>
Rehabilitation of Defaulted Loans
The Secretary of Education is authorized to enter into an agreement with
each guarantor under which the guarantor may sell defaulted loans that are
eligible for rehabilitation to an eligible lender. The guarantor must repay
the Secretary an amount equal to 81.5% of the then current principal balance
of the sold defaulted loan, multiplied by the reimbursement percentage in
effect for the guarantor at the time the loan was reimbursed. The amount of
the repayment is deducted from the amount of federal reimbursement payments
for the federal fiscal year in which the repayment occurs, for purposes of
determining the guarantor's reimbursement rate for that federal fiscal year.
For a loan to be eligible for rehabilitation, the guarantor must have
received consecutive payments for 12 months of amounts owed on the loan. Upon
rehabilitation, a loan is eligible for all the benefits under the Higher
Education Act that it would have been eligible for had no default occurred.
However, no student loan may be rehabilitated more than once.
Federal Advances
Pursuant to agreements entered into between the guarantors and the Secretary
of Education under the Higher Education Act, the Secretary is authorized to
advance moneys from time to time to guarantors for the purpose of establishing
and strengthening their reserves. If the Secretary seeks to terminate a
guarantor's federal reimbursement contract or to assume its functions, the Act
currently authorizes the Secretary to make advances to the guarantor to assist
it in meeting its immediate cash needs or ensuring the uninterrupted payment
of claims.
Changes to Federal Agreements
United States Courts of Appeals have held that the federal government,
through subsequent legislation, has the right unilaterally to amend the
federal reimbursement contracts between the Secretary of Education and the
guarantors. Amendments to the Higher Education Act since 1986 have had the
following effects:
. some rights of guarantors under their contracts with the Secretary
relating to the repayment of advances from the Secretary were abrogated;
. the Secretary was authorized to withhold reimbursement payments
otherwise due to guarantors until specified amounts of their reserves
had been eliminated;
. new reserve level requirements were added for guarantors; and
. the Secretary's authority to terminate federal reimbursement contracts
and to seize guarantors' reserves was expanded.
Future legislation could further adversely affect the rights of guarantors
or holders of loans guaranteed by a guarantor under a federal reimbursement
contract.
Department of Education Oversight
The Secretary of Education has oversight powers over guarantors. Each
guarantor is required to maintain its Federal Fund at a current minimum
reserve level of at least 0.25% of the total amount of all outstanding student
loans guaranteed by that guarantor excluding some loans transferred to that
guarantor from an insolvent guarantor pursuant to a plan of the Secretary. See
"--Reauthorization Legislation" below. The Secretary can require the guarantor
to submit and implement a corrective plan in the following circumstances:
. if the guarantor falls below its minimum reserve level in two
consecutive years;
. if the guarantor's claims rate exceeds 5% in any year; or
. if the Secretary determines that the guarantor's administrative or
financial condition jeopardizes its ability to meet its obligations.
A-14
<PAGE>
The Secretary of Education may terminate a guarantor's reimbursement
contract in the following circumstances:
. if the guarantor fails to timely submit an acceptable plan to improve
its condition;
. if the Secretary determines that it is in danger of collapse; or
. if the Secretary determines that termination is necessary to protect the
federal fiscal interest or to ensure the continued availability of
student loans.
If the Department of Education has determined that a guarantor is unable to
meet its insurance obligations, the holders of loans guaranteed by that
guarantor may submit claims directly to the Department and the Department is
required to pay the full guarantee payments due, in accordance with guarantee
claim processing standards no more stringent than those applied by the
terminated guarantor. However, the Department's obligation to pay guarantee
claims directly in this fashion is contingent upon its making the
determination referred to above. It is possible that the Department would not
make this determination for any guarantor or, if it did, that the
determination or the ultimate payment of the guarantee claims would not be
made in a timely manner.
Reauthorization Legislation
General
The Reauthorization Legislation, enacted October 7, 1998, made various
changes to the Higher Education Act that affected guarantors, including the
following:
. Each guarantor had to establish a federal student loan reserve fund (a
"Federal Fund") and an operating fund (an "Operating Fund") before
December 7, 1998, that would be funded, invested and used as prescribed
by the 1998 Reauthorization Legislation.
. Each guarantor's sources of revenue were modified.
. Guarantors' additional reserves were recalled.
. The Secretary of Education and each guarantor may enter into voluntary
flexible agreements in lieu of existing agreements.
Federal Fund and Operating Fund
Each guarantor was required to deposit, before December 7, 1998, all funds,
securities and other liquid assets contained in its reserve fund into the
Federal Fund. Each Federal Fund is an account selected by the guarantor with
the approval of the Secretary of Education. The Federal Fund, as well as any
nonliquid assets such as buildings or equipment developed or purchased by the
guarantor in whole or in part with federal reserve funds of the guarantor, is
considered to be property of the United States (prorated to the extent that an
asset was developed or purchased with federal reserve funds) and must be used
in the operation of the FFELP to pay lender guarantee claims, to pay default
aversion fees into the guarantor's Operating Fund and, to the extent
permitted, to make transition payments into the Operating Fund. The Secretary
may direct a guarantor, or its officers and directors, to cease any activity
involving expenditures, use or transfer of the Federal Fund that the Secretary
determines is a misapplication, misuse or improper expenditure of the Federal
Fund or the Secretary's share of any asset. A guarantor is required to
maintain a current minimum reserve level in the Federal Fund of at least 0.25%
of the total amount of all outstanding loans that it has guaranteed, excluding
loans transferred to the guarantor from an insolvent guarantor pursuant to a
plan of the Secretary.
After the Federal Fund is established, the guarantor is required to deposit
into the Federal Fund:
. all reinsurance payments received from the Secretary;
A-15
<PAGE>
. a percentage of all amounts collected from defaulted borrowers equal to
the complement of the reinsurance percentage in effect when the
guarantee payment was made;
. all insurance premiums collected from borrowers;
. all amounts received from the Secretary as payment for supplemental pre-
claims assistance activity performed before October 7, 1998;
. 70% of administrative cost allowances received from the Secretary after
October 7, 1998 for loans guaranteed before that date; and
. other receipts specified in regulations of the Secretary.
Funds transferred to the Federal Fund are required to be invested in low-
risk securities and all earnings from the Federal Fund are the sole property
of the United States.
In addition, each guarantor was required to establish an Operating Fund
before December 7, 1998. The Reauthorization Legislation included various
transition rules allowing a guarantor to transfer transition amounts from its
Federal Fund to its Operating Fund from time to time during the first three
years following the establishment of the Operating Fund for use in the
performance of its duties under the FFELP. In determining the amounts that it
may transfer, the guarantor must ensure that sufficient funds remain in the
Federal Fund to pay lender claims within the required time periods and to meet
reserve recall requirements. In general, the transition rules require that the
Federal Fund be repaid any transition amounts transferred from it to the
Operating Fund.
The Operating Fund is considered to be the property of the guarantor, except
for any transition amounts transferred from the Federal Fund. The Secretary of
Education may not regulate the uses or expenditure of moneys in the Operating
Fund (but may require necessary reports and audits), except during any period
in which transition funds are owed to the Federal Fund. Moreover, during that
period, moneys in the Operating Fund may only be used for expenses related to
the FFELP.
Funds deposited into the Operating Fund must be invested at the discretion
of the guarantor in accordance with prudent investor standards, except that
transition amounts transferred to the Operating Fund from the Federal Fund
must be invested in the same manner as amounts in the Federal Fund. After
establishing the Operating Fund, the guarantor must make the following
deposits into the Operating Fund:
. loan processing and issuance fees and account maintenance fees paid by
the Secretary;
. default aversion fees;
. 30% of administrative cost allowances received from the Secretary after
October 7, 1998 for loans guaranteed before that date;
. 24% (decreasing to 23% on and after October 1, 2003) of amounts
collected on defaulted loans, excluding collected amounts required to be
transferred to the Federal Fund; and
. other receipts specified in regulations of the Secretary.
In general, funds in the Operating Fund will be used by the guarantor for
application processing, loan disbursement, enrollment and repayment status
management, default aversion activities, default collection activities, school
and lender training, financial aid awareness and related outreach activities,
compliance monitoring, and other student financial aid related activities, as
selected by the guarantor. The guarantor may transfer funds from the Operating
Fund to the Federal Fund, but any transfers are irrevocable and transferred
funds become the property of the United States.
Modifications in Sources of Revenue
The Reauthorization Legislation made the following modifications concerning
the principal sources of guarantor revenues:
A-16
<PAGE>
. Reinsurance payment percentages for loans made on and after October 1,
1998 were reduced as described above under "--Effect of Annual Claims
Rate on Reimbursement of Guarantors".
. The percentage of the amount of collections on defaulted loans that may
be retained by a guarantor was reduced from 27% to 24%, with a further
reduction to 23% on and after October 1, 2003.
. A loan processing and issuance fee, payable by the Secretary of
Education on a quarterly basis, was established equal to:
. for loans originated during fiscal years beginning on or after
October 1, 1998 and before October 1, 2003, 0.65% of the total
principal amount of loans on which insurance was issued under the
FFELP during the fiscal year by the guarantor; and
. for loans originated during fiscal years beginning on or after
October 1, 2003, 0.40% of the total principal amount of loans on
which insurance was issued under the FFELP during the fiscal year by
the guarantor.
. The discretionary administrative cost allowances or expenses that had
been paid at a rate of 0.85% of the loans originated in each fiscal year
was eliminated.
. A default aversion fee was established. This fee, which is related to
the default aversion activities that each guarantor is required to
perform, is payable on a monthly basis from the Federal Fund to the
Operating Fund, in an amount equal to 1% of the total unpaid principal
and accrued interest on a loan for which a default claim has not been
paid as a result of the loan being brought into current repayment status
on or before the 300th day after the loan became 60 days delinquent.
. An account maintenance fee was established that is payable quarterly to
the Secretary. If however, nationwide caps are met, the account
maintenance fee will be transferred from the Federal Fund to the
Operating Fund. The account maintenance fee is equal to:
. for fiscal years 1999 and 2000, 0.12% of the original principal
amount of outstanding loans on which insurance was issued under the
FFELP; and
. for fiscal years 2001, 2002 and 2003, 0.10% of the original
principal amount of outstanding loans on which insurance was issued
under the FFELP.
Additional Recalls of Reserves
The Reauthorization Legislation directs the Secretary of Education to demand
that each guarantor participating in the FFELP pay its share of the following
amounts held in its Federal Fund:
. in fiscal year 2002, an aggregate of $85 million;
. in fiscal year 2006, an aggregate of $82.5 million; and
. in fiscal year 2007, an aggregate of $82.5 million.
The share demanded from each guarantor is determined in accordance with
formulas included in Section 422(i) of the Higher Education Act. If a
guarantor charges the maximum permitted 1% insurance premium, however, the
recall may not result in the depletion of its reserve funds below an amount
equal to the amount of lender claim payments paid during the 90 days before
the date of return.
Voluntary Flexible Agreements
The Reauthorization Legislation authorizes the Secretary of Education to
enter into agreements with guarantors which modify or waive many of the
requirements of the FFELP covered under existing agreements and otherwise
required by the Higher Education Act.
A-17
<PAGE>
APPENDIX B
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in some limited circumstances, the securities will be available only
in book-entry form (the "Global Securities"). Investors in the Global
Securities may hold them through The Depository Trust Company ("DTC") or, if
applicable, Clearstream or Euroclear. The Global Securities are 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
Clearstream 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 Clearstream or Euroclear and DTC
participants holding Securities will be effected on a delivery-against-payment
basis through the respective depositaries of Clearstream and Euroclear and as
participants in DTC.
Non-U.S. holders of Global Securities will be exempt from U.S. withholding
taxes, provided that the holders meet specific requirements and deliver
appropriate U.S. tax documents to the securities clearing organizations or
their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co., as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect participants in DTC. As a result, Clearstream and
Euroclear will hold positions on behalf of their participants through their
respective depositaries, which in turn will hold 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 Clearstream 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 Clearstream and/or Euroclear participants. Secondary market
trading between Clearstream participants and/or Euroclear participants will be
settled using the procedures applicable to conventional eurobonds in same-day
funds.
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<PAGE>
Trading between DTC seller and Clearstream or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC participant
to the account of a Clearstream participant or a Euroclear participant, the
purchaser will send instructions to Clearstream or Euroclear through a
participant at least one business day before settlement. Clearstream 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 Clearstream 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 Clearstream or Euroclear cash debit will be valued instead as of
the actual settlement date.
Clearstream 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 Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Global Securities are credited to their accounts one day later.
As an alternative, if Clearstream 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, Clearstream
participants or Euroclear participants purchasing Global Securities would
incur overdraft charges for one day, assuming they cleared the overdraft when
the Global Securities were credited to their accounts. However, interest on
the Global Securities would accrue from the value date. Therefore, in many
cases the investment income on the Global Securities earned during that one-
day period may substantially reduce or offset the amount of the overdraft
charges, although this result will depend on each 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 Clearstream 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 Clearstream or Euroclear, the Seller and DTC purchaser. Due to
time zone differences in their favor, Clearstream 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 Clearstream or Euroclear through a participant at least one
business day before settlement. In this case, Clearstream 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 Clearstream participant or Euroclear participant the following
day, and receipt of the cash proceeds in the Clearstream or Euroclear
participant's account would be back-valued to the value date (which would be
the preceding day, when settlement occurred in New York). Should the
Clearstream 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
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<PAGE>
(i.e., the trade fails), receipt of the cash proceeds in the Clearstream or
Euroclear participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Clearstream or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Clearstream
participants or Euroclear participants should note that these trades would
automatically fail on the sale side unless affirmative action is taken. At
least three techniques should be readily available to eliminate this potential
problem:
. borrowing through Clearstream or Euroclear for one day (until the
purchase side of the day trade is reflected in their Clearstream or
Euroclear accounts) in accordance with the clearing system's customary
procedures;
. borrowing the Global Securities in the U.S. from a DTC participant no
later than one day before settlement, which would give the Global
Securities sufficient time to be reflected in their Clearstream or
Euroclear account in order to settle the sale side of the trade; or
. 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 before the value date for the sale to the Clearstream
participant or Euroclear participant.
U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A holder of Global Securities through Clearstream 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:
. each clearing system, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business in
the chain of intermediaries between the beneficial owner and the U.S.
entity required to withhold tax complies with applicable certification
requirements, and
. that 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 the change.
Exemption for non-U.S. persons with effectively connected income (Form
4224). A non-U.S. person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its
conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form 4224 (Exemption from Withholding of
Tax on Income Effectively Connected with the Conduct of a Trade or Business in
the United States).
Exemption or reduced rate for non-U.S. persons resident in treaty countries
(Form 1001). Non-U.S. persons that are beneficial owners residing in a country
that has a tax treaty with the United States can obtain an exemption or
reduced tax rate (depending on the treaty terms) by filing Form 1001
(Ownership, Exemption or Reduced Rate Certificate). If the treaty provides
only for a reduced rate, withholding tax will be imposed at that rate unless
the filer alternatively files Form W-8. Form 1001 may be filed by the
beneficial owner or his agent.
Exemption for U.S. persons (Form W-9). U.S. persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (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
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(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:
. a citizen or resident of the United States,
. a corporation, partnership or other entity organized in or under the
laws of the United States or any political subdivision thereof,
. an estate the income of which is includible in gross income for U.S.
federal income tax purposes, regardless of its source, or
. a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States fiduciaries
who have the authority to control all substantial decisions of the
trust.
Notwithstanding the preceding sentence, to the extent provided in Treasury
regulations, trusts in existence on August 20, 1996, and treated as U.S.
persons before this 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>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. Other Expenses of Issuance and Distribution
The following table sets forth the expenses payable by us in connection with
the offering of the securities being registered herein. They are estimated as
follows:
<TABLE>
<S> <C>
SEC registration fee................................................... $264
Legal fees and expenses................................................ *
Accounting fees and expenses........................................... *
Blue Sky fees and expenses............................................. *
Rating agency fees..................................................... *
Eligible Lender Trustee fees and expenses.............................. *
Indenture Trustee fees and expenses.................................... *
Printing expenses...................................................... *
Miscellaneous.......................................................... *
----
Total................................................................ $*
====
</TABLE>
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* To be completed by amendment.
Indemnification of Directors and Officers
As authorized by Section 145 of the General Corporation Law of Delaware (the
"Delaware Corporation Law"), SLM Funding's By-Laws provide that each director
and officer of SLM Funding shall be indemnified against expenses (including
attorney's fees, judgments, fines and amounts paid in settlement) actually or
reasonably incurred in connection with the defense or settlement of any
threatened, pending or completed legal proceedings in which he is involved by
reason of the fact that he is or was a director or officer if he acted in good
faith and in a manner that he reasonably believed to be in or not opposed to
the best interest of SLM Funding, and, with respect to any criminal action or
proceeding, if he had no reasonable cause to believe that his conduct was
unlawful. If the legal proceeding, however, is by or in the right of SLM
Funding, the director or officer may not be indemnified in respect of any
claim, issue or matter as to which he is found to be liable for negligence or
misconduct in the performance of his duty to SLM Funding, unless a court
determines otherwise. We filed a copy of SLM Funding's By-Laws as Exhibit 3.1
to SLM Funding's Registration Statement on Form S-3 (File No. 333-24949).
In addition, our Certificate of Incorporation provides that SLM Funding
shall indemnify each officer and director to the fullest extent permitted by
law. We filed a copy of SLM Funding's By-Laws as Exhibit 3.1 to SLM Funding's
Registration Statement on Form S-3 (File No. 333-24949). Our Certificate of
Incorporation provides that no director of SLM Funding shall be personally
liable to us or our stockholders for monetary damages for any breach of his
fiduciary duty as a director. This limitation does not apply to any liability
of a director (1) for any breach of his duty of loyalty to SLM Funding or its
stockholders, (2) for acts or omissions that are not in good faith or involved
intentional misconduct or a knowing violation of the law, (3) under Section
174 of the Delaware Corporation Law or (4) for any transaction from which the
director derived an improper personal benefit.
The directors and officers of SLM Funding are covered by a policy of
insurance under which they are insured, within limits and subject to certain
limitations, against certain expenses in connection with the defense of
actions, suits or proceedings, and certain liabilities that might be imposed
as a result of such actions, suits or proceedings in which they are parties by
reason of being or having been directors or officers.
II-1
<PAGE>
ITEM 16. Exhibits
The following exhibits are filed herewith or incorporated by reference:
<TABLE>
<CAPTION>
Exhibit No. Description of Document
----------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement for Notes*
1.2 Form of Underwriting Agreement for Certificates*
3.1 Certificate of Incorporation of SLM Funding Corporation**
3.2 By-Laws of SLM Funding Corporation**
3.3 Form of Certificate of Trust for the SLM Student Loan Trusts*
4.1 Form of Indenture between the Trust and the Indenture Trustee
(including as an exhibit thereto a form of Note)*
4.2 Form of Trust Agreement between SLM Funding Corporation and the
Eligible Lender Trustee (including as an exhibit thereto a form of
Certificate)*
4.3 Form of Interim Trust Agreement between SLM Funding Corporation
and the Interim Eligible Lender Trustee*
4.4 Form of Note (included as an exhibit to Exhibit 4.1)
4.5 Form of Certificate (included as an exhibit to Exhibit 4.2)
4.6 Form of Prospectus Supplement+
4.7 Form of Market-maker Prospectus Supplement**
5 Opinion of Marianne M. Keler, Esq. with respect to legality++
8.1 Opinion of Shearman & Sterling with respect to tax matters++
8.2 Opinion of Delaware tax counsel with respect to certain Delaware
tax matters++
23.1 Consent of Marianne M. Keler, Esq. (included as part of Exhibit
5)++
23.2 Consent of Shearman & Sterling (included as part of Exhibit 8.1)++
23.3 Consent of Cadwalader, Wickersham & Taft++
23.4 Consent of Delaware tax counsel (included as part of Exhibit
8.2)++
25 Statement of Eligibility under the Trust Indenture Act of 1939 of
the Indenture Trustee++
99.1 Form of Sale Agreement among SLM Funding Corporation, the Trust
and the Eligible Lender Trustee*
99.2 Form of Servicing Agreement among Sallie Mae Servicing
Corporation, the Trust, the Administrator, the Eligible Lender
Trustee and the Indenture Trustee*
99.3 Master Administration Agreement between the Seller and Sallie Mae,
as Administrator dated May 1, 1997, including a Form of Supplement
thereto among the Trust, the Eligible Lender Trustee, the
Indenture Trustee, the Seller, the Servicer and Sallie Mae, as
Administrator***
99.4 Form of Purchase Agreement between SLM Funding Corporation and
Sallie Mae*
</TABLE>
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* Incorporated by reference to the correspondingly numbered exhibit to the
Registrant's Registration Statement on Form S-3 (File No. 333-2502)(the
"1996 Registration Statement").
** Incorporated by reference to the correspondingly numbered exhibit to the
Registrant's Registration Statement on Form S-3 (File No. 333-24949) (the
"1997 Registration Statement").
*** Incorporated by reference to the correspondingly numbered exhibit to the
Post-Effective Amendment No. 1 to the 1997 Registration Statement.
**** Incorporated by reference to the correspondingly numbered exhibit to the
Registrant's Registration Statement on Form S-3 (File No. 333-44465) (the
"1998 Registration Statement").
+ Filed herewith.
++ To be filed by amendment.
II-2
<PAGE>
ITEM 17. Undertakings.
(a) As to Rule 415:
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information
required to be included in the post-effective amendment by those paragraphs
is contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) For purposes of determining any liability under the Securities Act of
1933, as amended, each filing of the Registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as
amended, that is incorporated by reference in this Registration Statement
shall be deemed to be a new registration statement relating to the
securities offered herein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) As to documents subsequently filed that are incorporated by reference:
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to Section 13(a) or Section 15(d)
of the Securities Exchange Act of 1934 that is incorporated by reference in
the registration statement shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(c) The undersigned registrant hereby undertakes to provide to each
underwriter at the closing specified in the underwriting agreements for the
notes and certificates in such denominations and registered in such names as
required by that underwriter to permit prompt delivery to each purchaser.
(d) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant
will, unless in the opinion of counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
(e) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, as amended, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(f) The Registrant hereby undertakes to file an application for the purposes
of determining the eligibility of the Indenture Trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with
the rules and regulations prescribed by the Securities and Exchange Commission
under Section 305(b)(2) of the Securities Act of 1933, as amended.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, SLM Funding
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Reston, Virginia on the 22nd day of February, 2000.
SLM Funding Corporation
/s/ Mark G. Overend
By: _________________________________
Mark G. Overend
President (Principal Executive
Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, each person whose signature appears below
constitutes and appoints J. Lance Franke and Michael E. Sheehan and each of
them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments (including post-
effective amendments) to this Registration Statement and any and all other
documents in connection therewith, and to file the same, with all exhibits
thereto, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agents or any of them full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
above the premises, as fully to all intents and purposes as might or could be
done in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents or any of them, or their substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below on February 22, 2000 by the
following persons in the capacities indicated.
<TABLE>
<CAPTION>
Signature Capacity
--------- --------
<S> <C>
/s/ Mark G. Overend President (Principal Executive Officer)
___________________________________________
(Mark G. Overend)
/s/ William M.E. Rachal, Jr. Treasurer and Controller (Principal
___________________________________________ Accounting Officer)
(William M.E. Rachal, Jr.)
/s/ J. Lance Franke Chief Financial Officer (Principal
___________________________________________ Financial Officer)
(J. Lance Franke)
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Document
----------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement for Notes*
1.2 Form of Underwriting Agreement for Certificates*
3.1 Certificate of Incorporation of SLM Funding Corporation*
3.2 By-Laws of SLM Funding Corporation**
3.3 Form of Certificate of Trust for the SLM Student Loan Trusts*
4.1 Form of Indenture between the Trust and the Indenture Trustee
(including as an exhibit thereto a form of Note)*
4.2 Form of Trust Agreement between SLM Funding Corporation and the
Eligible Lender Trustee (including as an exhibit thereto a form of
Certificate)*
4.3 Form of Interim Trust Agreement between SLM Funding Corporation
and the Interim Eligible Lender Trustee*
4.4 Form of Note (included as an exhibit to Exhibit 4.1)
4.5 Form of Certificate (included as an exhibit to Exhibit 4.2)
4.6 Form of Prospectus Supplement+
4.7 Form of Market-maker Prospectus Supplement**
5 Opinion of Marianne M. Keler, Esq. with respect to legality++
8.1 Opinion of Shearman & Sterling with respect to tax matters++
8.2 Opinion of Delaware tax counsel with respect to certain Delaware
tax matters++
23.1 Consent of Marianne M. Keler, Esq. (included as part of Exhibit
5)++
23.2 Consent of Shearman & Sterling (included as part of Exhibit 8.1)++
23.3 Consent of Cadwalader, Wickersham & Taft++
23.4 Consent of Delaware tax counsel (included as part of Exhibit
8.2)++
25 Statement of Eligibility under the Trust Indenture Act of 1939 of
the Indenture Trustee++
99.1 Form of Sale Agreement among SLM Funding Corporation, the Trust
and the Eligible Lender Trustee*
99.2 Form of Servicing Agreement among Sallie Mae Servicing
Corporation, the Trust, the Administrator, the Eligible Lender
Trustee and the Indenture Trustee*
99. Master Administration Agreement between the Seller and Sallie Mae,
as Administrator dated May 1, 1997, including a Form of Supplement
thereto among the Trust, the Eligible Lender Trustee, the
Indenture Trustee, the Seller, the Servicer and Sallie Mae, as
Administrator***
99.4 Form of Purchase Agreement between SLM Funding Corporation and
Sallie Mae*
</TABLE>
- --------
* Incorporated by reference to the correspondingly numbered exhibit to the
Registrant's Registration Statement on Form S-3 (File No. 333-2502) (the
"1996 Registration Statement").
** Incorporated by reference to the correspondingly numbered exhibit to the
Registrant's Registration Statement on Form S-3 (File No. 333-24949)
(the "1997 Registration Statement").
*** Incorporated by reference to the correspondingly numbered exhibit to the
Post-Effective Amendment No. 1 to the 1997 Registration Statement.
+ Filed herewith.
++ To be filed by amendment.
<PAGE>
EXHIBIT 4.6
FORM OF PROSPECTUS SUPPLEMENT TO PROSPECTUS
DATED , 2000
{PROSPECTUS SUPPLEMENT}
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Information contained in this document is subject to completion or amendment.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED FEBRUARY , 2000 Exhibit 4.6
Prospectus Supplement to Prospectus dated , 2000
$
SLM Student Loan Trust 200-
Issuer
SLM Funding Corporation
Seller
Sallie Mae Servicing Corporation
Servicer
Floating Rate Student Loan-Backed Securities
On , 20 , the Trust will issue*:
<TABLE>
<CAPTION>
Class A-1 Notes Class A-2 Notes Certificates
----------------- ----------------- ------------
Class Class Class Class
A-1T A-1L A-2T A-2L Certificates
<S> <C> <C> <C> <C> <C>
You should Principal $ $ $ $ $
consider
carefully Interest Rate 91-day -month 91-day -month -month
the risk T-Bill LIBOR T-bill LIBOR LIBOR
factors plus % plus % plus % plus % plus %
beginning
on page S- Maturity , 20 , 20 , 20
13 of this </TABLE>
Prospectus
Supplement The Trust will make payments quarterly beginning 20 ,
and on primarily from collections on a pool of student loans.
Page 15 of
the The Trust will pay principal first pro rata to the Class A-1
Prospectus. Notes until paid in full and second pro rata to the Class A-2
Notes until paid in full. The Trust will pay principal on the
The Certificates after all classes of Notes have been paid in full.
Certificates
represent We are offering the Notes and Certificates through the
interests underwriters at the prices shown below, when and if issued. The
in, and securities will not be listed on any exchange.
the Notes
represent ----------------------------------------------------------------
obligations
of, the <TABLE>
Trust <CAPTION>
only. They Proceeds
are not Price to Underwriting to the
interests Public Discount Seller
in or -------- ------------ --------
obligations <S> <C> <C> <C>
of SLM Per Class A-1T Note % % %
Holding Per Class A-1L Note % % %
Corporation, Per Class A-2T Note % % %
the Seller, Per Class A-2L Note % % %
Student Per Certificate % % %
Loan </TABLE>
Marketing
Association, We expect the aggregate proceeds to the Seller to be $ before
the Servicer deducting expenses payable by the Seller estimated to be $ .
or any of
their Neither the SEC nor any state securities commission has approved
affiliates. or disapproved the Notes or Certificates or determined whether
this Prospectus Supplement or the Prospectus is accurate or
Neither complete. Any representation to the contrary is a criminal
the offense.
Certificates
nor the *For illustrative purposes only. Each class of Securities may
Notes are have a different specified rate of interest, which may be fixed,
guaranteed variable, adjustable or auction-determined rates or any
or insured combination of the foregoing, and there may be additional
by the classes offered .
United
States of [Underwriter]
America or
any , 20
governmental
agency.
This
Prospectus
Supplement
may be
used to
offer and
sell the
Notes or
Certificates
only if
accompanied
by the
Prospectus.
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary of Terms......................................................... S-4
. Issuer................................................................. S-4
. Information about the Securities ...................................... S-4
. The Notes.............................................................. S-4
. The Certificates....................................................... S-5
. Indenture Trustee...................................................... S-6
. Eligible Lender Trustee................................................ S-6
. Administrator.......................................................... S-6
. Information about the Trust............................................ S-6
Formation of the Trust.................................................. S-6
Its Assets.............................................................. S-6
. Administration of the Trust............................................ S-7
Servicing of the Assets................................................. S-9
Compensation of the Servicer............................................ S-9
. Termination of the Trust............................................... S-10
Optional Purchase....................................................... S-10
Auction of Trust Assets................................................. S-10
. Swap Agreement......................................................... S-11
. Tax Considerations..................................................... S-11
. ERISA Considerations................................................... S-12
. Rating of the Securities............................................... S-12
. Risk Factors........................................................... S-12
. CUSIP Numbers.......................................................... S-12
Risk Factors............................................................. S-13
. The Class A-2 Notes Bear Sequential Payment Risk and the Certificates
Bear Subordination Risk................................................ S-13
. Change in Federal Direct Consolidation Loan Rate May Encourage
Prepayments............................................................ S-13
. Initial Principal Balance of Securities Exceeds Trust Assets........... S-13
. The Swap Agreement May Create Credit Risks............................. S-14
.Year 2000 Issues Could Adversely Affect the Trust's Liquidity and the
Timing of Payments..................................................... S-14
Formation of the Trust................................................... S-15
. The Trust.............................................................. S-15
. Capitalization of the Trust............................................ S-15
. Eligible Lender Trustee................................................ S-16
Reports to Securityholders............................................... S-16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... S-16
. Sources of Capital and Liquidity....................................... S-16
. Results of Operations.................................................. S-16
Use of Proceeds.......................................................... S-17
The Trust Student Loan Pool.............................................. S-17
.Insurance of Student Loans; Guarantors of Student Loans................. S-25
. Cure Period for Trust Student Loans.................................... S-29
.Consolidation of Federal Benefit Billings and Receipts and Guarantor
Claims with Other Trusts............................................... S-29
Description of the Securities............................................ S-31
. General................................................................ S-31
. The Notes.............................................................. S-31
. The Certificates....................................................... S-32
. Determination of T-Bill Rates.......................................... S-33
. Determination of LIBOR................................................. S-34
. Accounts............................................................... S-35
. Servicing Compensation................................................. S-35
. Distributions.......................................................... S-36
. Credit Enhancement..................................................... S-40
. Administration Fee..................................................... S-41
. Swap Agreement......................................................... S-41
ERISA Considerations..................................................... S-45
Underwriting............................................................. S-47
Ratings of the Securities................................................ S-49
Legal Matters............................................................ S-49
Index of Defined Terms for Prospectus Supplement......................... S-50
</TABLE>
Prospectus
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information.................................................... 2
Incorporation of Certain Documents by Reference.......................... 2
Prospectus Supplement.................................................... 2
Reports to Securityholders............................................... 2
Summary Information...................................................... 3
. Issuer................................................................. 3
. Seller................................................................. 3
. Servicer............................................................... 3
. Eligible Lender Trustee................................................ 3
. Indenture Trustee...................................................... 3
. Administrator.......................................................... 3
. The Notes.............................................................. 3
. The Certificates....................................................... 4
. Assets of the Trust.................................................... 5
. Collection Account..................................................... 6
. Pre-Funding Account.................................................... 6
.Credit and Cash Flow or other Enhancement or Derivative Arrangements.... 7
. Reserve Account........................................................ 7
. Purchase Agreements.................................................... 8
. Sale Agreements........................................................ 8
. Servicing Agreements................................................... 8
. Administration Agreement............................................... 8
. Representations and Warranties of the Seller........................... 9
. Representations and Warranties of Sallie Mae........................... 9
. Covenants of the Servicer.............................................. 10
. Servicing Fee.......................................................... 10
. Administration Fee..................................................... 11
. Optional Purchase; Auction............................................. 11
. Termination............................................................ 11
. Tax Considerations..................................................... 11
. ERISA Considerations................................................... 12
. Ratings................................................................ 12
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
</TABLE>
<PAGE>
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS
We provide information to you about the Notes and the Certificates in two
separate sections of this document that provide progressively more detailed
information. These two sections are: (a) the accompanying Prospectus, which
begins after the end of this Prospectus Supplement and which provides general
information, some of which may not apply to your particular class of Notes or
Certificates, and (b) this Prospectus Supplement, which describes the specific
terms of the Notes and Certificates being offered.
If the terms of the Notes or Certificates vary between this Prospectus
Supplement and the Prospectus, you should rely on the information in this
Prospectus Supplement.
For your convenience, we include cross-references in this Prospectus
Supplement and in the Prospectus to captions in these materials where you can
find related information. The Table of Contents on page S-2 provides the pages
on which these captions can be found.
We also include a listing of the pages where we define capitalized terms
used in this Prospectus Supplement. You can find this listing under the caption
"Index of Defined Terms for Prospectus Supplement" at the end of this
Prospectus Supplement.
----------------
Neither the Notes nor the Certificates may be offered or sold to persons in
the United Kingdom in a transaction that results in an offer to the public
within the meaning of the securities laws of the United Kingdom.
----------------
REPORTS TO SECURITYHOLDERS
Except in very limited circumstances, you will not receive quarterly and
annual reports concerning the Trust and the student loans directly from the
Trust. Instead, you will receive them through Cede & Co., as nominee of The
Depository Trust Company and registered holder of the Notes and Certificates.
See "Certain Information Regarding the Securities--Book-Entry Registration" in
the Prospectus.
The Trust will also file periodic reports containing similar information
with the SEC.
S-3
<PAGE>
SUMMARY OF TERMS
This summary highlights selected information about the Notes and the
Certificates. It does not contain all of the information that you might find
important in making your investment decision. It provides only an overview of
certain information to aid your understanding. You should read the full
description of this information appearing elsewhere in this document and in the
Prospectus.
ISSUER
SLM Student Loan Trust 200 - .
INFORMATION ABOUT THE SECURITIES
The Trust is offering the following classes of Securities:
. Floating Rate Class A-1T Student Loan-Backed Notes in the amount of $ ;
. Floating Rate Class A-1L Student Loan-Backed Notes in the amount of $ ;
. Floating Rate Class A-2T Student Loan-Backed Notes in the amount of $ ;
. Floating Rate Class A-2L Student Loan-Backed Notes in the amount of $ ;
. Floating Rate Student Loan-Backed Certificates in the amount of $ .
The Securities will receive payments primarily from collections on a pool of
Trust Student Loans.
THE NOTES
The Notes are debt obligations of the Trust.
Interest will accrue on the principal balance of the Notes at the Note Rates
during three-month Accrual Periods and will be paid on quarterly Distribution
Dates.
An Accrual Period begins on a Distribution Date and ends on the day before the
next Distribution Date. The first Accrual Period, however, will begin on ,
20 , the Closing Date, and end on , 20 , the day before the first
Distribution Date.
A Distribution Date is the 25th of each January, April, July and October,
beginning , 20 . If any January 25, April 25, July 25 or October 25 is not
a business day, the Distribution Date will be the next business day.
Interest and principal will be payable to holders of record as of the close of
business on each Record Date.
A Record Date is the day before the related Distribution Date.
. Interest Rates.* The Notes will bear interest at the annual rates listed
below:
. The Class A-1T Rate will be the daily weighted average of the 91-day
Treasury bill rates for each day within the applicable Accrual Period
plus %;
. The Class A-1L Rate will be Three-month LIBOR, except for the first
Accrual Period, which will be -Month LIBOR, as determined on the
second business day before the beginning of the applicable Accrual
Period plus %;
. The Class A-2T Rate will be the daily weighted average of the 91-day
Treasury bill rates for each day within the applicable Accrual Period
plus %; and
. The Class A-2L Rate will be Three-month LIBOR, except for the first
Accrual Period, which will be -Month LIBOR, as determined on the
second business day before the beginning of the applicable Accrual
Period plus %.
In most cases, the Class A-1T and Class A-2T Rates will adjust weekly on the
calendar day following each auction of 91-day Treasury bills. See "Description
of the Securities--Determination of T-Bill Rates."
S-4
<PAGE>
*The interest rate on the securities may be capped at a rate, which in general
will equal the expected weighted average interest rate of the Trust Student
Loans less servicing and administration fees. If so, and if the interest rate
is so capped for any Distribution Date, this will create a "carryover" of
interest that will be payable on later Distribution Dates if funds are
available after paying the Servicer any Carryover Servicing fee.
For the Class A-1T and Class A-2T Notes, we calculate interest based on the
actual number of days elapsed in each Accrual Period divided by 365 (or 366 for
a leap year).
For the Class A-1L and Class A-2L Notes, we calculate interest based on the
actual number of days elapsed in each Accrual Period divided by 360.
. Interest Payments. Interest accrued on the outstanding principal amount of
the Notes during each Accrual Period will be payable on the related
Distribution Date.
. Principal Payments. Principal of the Notes will be payable on each
Distribution Date in an amount generally equal to (a) the Principal
Distribution Amount for that Distribution Date plus (b) any shortfall in the
payment of Note principal as of the preceding Distribution Date.
We describe the "Principal Distribution Amount" under "Description of the
Securities--Distributions."
Note principal will be applied sequentially on each Distribution Date:
. first, pro rata to the Class A-1T and Class A-1L Notes until their
principal balance is reduced to zero; and
. second, pro rata to the Class A-2T and Class A-2L Notes until their
principal balance is reduced to zero.
. Maturity Dates.
. The Class A-1 Notes will mature no later than , 20 ; and
. the Class A-2 Notes will mature no later than , 20 .
The actual maturity of the Class A-1 Notes and the Class A-2 Notes could
occur sooner. This may happen if, for example,
. there are prepayments on the Trust Student Loans;
. the Seller exercises its option to purchase any remaining Trust Student
Loans; or
. the Indenture Trustee auctions the remaining Trust Student Loans. See
"Trading Information--Weighted Average Life of the Securities" in the
Prospectus.
. Denominations. The Notes will be available for purchase in multiples of
$1,000. They will be available only in DTC book-entry form, which means that
you will not receive a certificate representing your Notes except in very
limited circumstances.
. Security for the Notes. The Notes will be secured by the assets of the
Trust, primarily the Trust Student Loans.
THE CERTIFICATES
The Trust will issue the Certificates under the Trust Agreement. The
Certificates represent ownership interests in the Trust. The initial
Certificate Balance will equal $ .
. Return on the Certificates. The Certificates will bear interest at an annual
rate equal to:
Three-month LIBOR, except for the first Accrual Period, which will be -
Month LIBOR, as determined on the second business day before the beginning
of the applicable Accrual Period plus %.
S-5
<PAGE>
We calculate return on the Certificates based on the actual number of days
elapsed in each Accrual Period divided by 360.
. Payments of Accrued Return
On each Distribution Date, holders of record of Certificates as of the
Record Date will be paid return at the Certificate Rate on the Certificate
Balance.
. Distribution of the Certificate Balance. Distributions on the Certificate
Balance will be made only after the Notes have been paid in full, in an
amount generally equal to (a) the remaining Principal Distribution Amount
plus (b) any shortfall in the payment of the Certificate Balance as of the
preceding Distribution Date. See "Description of the Securities--
Distributions."
. Final Distribution Date. Distribution of any remaining Certificate Balance
will be made no later than , 20 . However, final distribution of the
Certificate Balance could occur earlier as a result of the same factors that
may cause an early maturity of the Notes.
. Subordination of the Certificates. Distributions of return on the
Certificates will be subordinated to the payment of interest on the Notes.
Distributions of the Certificate Balance will be subordinated to the payment
of both interest and principal on the Notes. See "Description of the
Securities--The Certificates--Subordination of the Certificates."
. Denominations. Certificates will be available for purchase in denominations
of $[100,000] and additional increments of $1,000. They will be available in
DTC book-entry form only.
INDENTURE TRUSTEE
The Trust will issue the Notes under an Indenture.
Under the Indenture, Bankers Trust Company will act as Indenture Trustee for
the benefit of and to protect the interests of the Noteholders.
ELIGIBLE LENDER TRUSTEE
The Trust will issue the Certificates under a Trust Agreement. Chase Manhattan
Bank Delaware will be the initial Eligible Lender Trustee under the Trust
Agreement. It will hold legal title to the assets of the Trust for
Certificateholders.
ADMINISTRATOR
The Student Loan Marketing Association, known as Sallie Mae, will act as the
Administrator of the Trust under an Administration Agreement. Sallie Mae is a
government-sponsored enterprise and currently owns the Trust Student Loans.
Under certain circumstances, Sallie Mae may transfer its obligations as
administrator. See "Servicing and Administration--Administration Agreement" in
the Prospectus.
INFORMATION ABOUT THE TRUST
Formation of the Trust
The Trust will be a Delaware Business Trust.
The only activities of the Trust are acquiring, owning and managing the Trust
Student Loans and the other assets of the Trust, issuing and making payments on
the Securities and other related activities. See "Formation of the Trust--The
Trust."
SLM Funding Corporation, as Seller, after acquiring the student loans from
Sallie Mae or another eligible lender specified in the prospectus supplement
and described in detail comparable to the description of Sallie Mae in the
prospectus under a Purchase Agreement, will sell them to the Trust on the
Closing Date under a Sale Agreement. The Seller is a wholly-owned subsidiary of
Sallie Mae. Because the Seller is not eligible under the federal higher
education laws to hold legal title to the student loans, Chase Manhattan Bank
Delaware, as Interim Eligible Lender Trustee, will hold legal title to the
student loans for the Seller under an interim trust arrangement.
Its Assets
The assets of the Trust will include:
. the Trust Student Loans;
S-6
<PAGE>
. collections and other payments on the Trust Student Loans;
. funds it will hold in its trust accounts, including the Collection Account
and the Reserve Account; and
. its rights under the swap agreement described under "Swap Agreement" below.*
The rest of this section describes the Trust Student Loans and trust accounts
more fully.
. Trust Student Loans. The Trust Student Loans are education loans to students
and parents of students made under the Federal Family Education Loan Program
("FFELP") or made under a program of private insurance. Some of the Trust
Student Loans are Consolidation Loans, which are used to combine the
borrower's obligations under various federally authorized student loan
programs into a single loan.
The Trust Student Loans had an initial Pool Balance of approximately
$ as of , 20 ("the Cutoff Date").
We describe "Pool Balance" under "Description of Securities--
Distributions."
As of the Cutoff Date, the weighted average annual interest rate of the
Trust Student Loans was approximately % and their weighted average
remaining term to scheduled maturity was approximately months.
Sallie Mae originally acquired the Trust Student Loans in the ordinary
course of its student loan financing business. Guarantee Agencies described
in this document guarantee all of the Trust Student Loans. They are
reinsured by the United States Department of Education (the
- --------
* References to a swap agreement are for illustrative purposes only. Any
similar cash flow enhancement will be described comparably.
"Department"). The Trust Student Loans have been selected from the student
loans owned by Sallie Mae based on the criteria established by the Seller,
as described in this Prospectus Supplement and the Prospectus.
. Collection Account. The Administrator will deposit collections on the Trust
Student Loans, Interest Subsidy Payments, Special Allowance Payments and any
payments received from the swap counterparty into the Collection Account.
. Reserve Account. The Administrator will establish and maintain the Reserve
Account as an asset of the Trust in the name of the Indenture Trustee. 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. The deposit
will be in cash or Eligible Investments equal to $ (the "Reserve
Account Initial Deposit"). Funds in the Reserve Account may be replenished
on each Distribution Date by additional funds available after all prior
required distributions have been made. See "Description of the Securities--
Distributions."
The Reserve Account enhances the likelihood of payment to Noteholders and
Certificateholders. In certain circumstances, however, the Reserve Account
could be depleted. This depletion could result in shortfalls in
distributions to Noteholders or Certificateholders.
ADMINISTRATION OF THE TRUST
Under the Administration Agreement, Sallie Mae, as Administrator, will instruct
the Indenture Trustee to withdraw funds on deposit in the Collection Account.
These funds will be applied monthly to the payment of the Primary Servicing Fee
and on each Distribution Date generally as shown in the following chart.
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<PAGE>
COLLECTION
ACCOUNT
\/
First SERVICER
(Primary Servicing
Fee)
\/
Second ADMINISTRATOR
(Administration
Fees)
\/
Third SWAP COUNTERPARTY
(Swap Fee)
\/
Fourth NOTEHOLDERS
(Noteholders'
Interest
Distribution
Amount)
\/
Fifth CERTIFICATEHOLDERS
(Certificateholders'
Return Distribution
Amount)
\/
Sixth NOTEHOLDERS
(first pro rata (Noteholders'
to the Class A-1 Principal
Noteholders and Distribution
then pro rata to Amount)
the Class A-2 \/
Noteholders)
Seventh CERTIFICATEHOLDERS
(after the Notes (Certificate
are paid in full) Balance
Distribution
Amount)
\/
Eighth RESERVE ACCOUNT
(Amount, if any,
necessary
to reinstate the
Reserve Account
balance to the
Specified Reserve
Account Balance)
\/
Ninth SWAP COUNTERPARTY
(Swap payments,
if any)
\/
Tenth SERVICER
(Carryover
Servicing Fee,
if any)
\/
Eleventh RESERVE ACCOUNT
(any remaining
amounts)
Amounts remaining in the Reserve Account on any Distribution Date in excess of
the Specified Reserve Account Balance will, after the payments described below,
be released to the Seller.
The "Specified Reserve Account Balance" is an amount, generally subject to a
floor of $ , required to be maintained in the Reserve Account. More
specifically, the Specified Reserve Account Balance for any Distribution Date
will be equal to the greater of (a) % of the Pool Balance at the end of the
related Collection Period and (b) $ . It will be subject to adjustment as
described in this document. In no event will it exceed the outstanding balance
of the Securities.
"Collection Period" means a calendar quarter or, for the first Collection
Period, the period from the Cutoff Date through , 20 .
The following chart depicts the distribution of amounts in the Reserve Account
on any Distribution Date, after the required distributions for that
Distribution Date have been made, in excess of the Specified Reserve Account
Balance.
RESERVE ACCOUNT
-----------------
Excess $
-----------------
SPECIFIED RESERVE
ACCOUNT BALANCE
-----------------
-----------------
1st NOTEHOLDERS
(Note Principal
Shortfall)
-----------------
-----------------
2nd CERTIFICATEHOLDERS
(Certificate
Balance
Shortfall)
-----------------
-----------------
3rd SWAP COUNTERPARTY
(Swap payments)
-----------------
-----------------
4th SERVICER
(Carryover
Servicing Fee)
-----------------
-----------------
Last SELLER
-----------------
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<PAGE>
The Reserve Account will be available to cover any shortfalls in payments of
the Primary Servicing Fee, the Administration Fee, the swap fee, the
Noteholders' Interest Distribution Amount and the Certificateholders' Return
Distribution Amount. In addition, the Reserve Account will be available:
(a) on the Class A-1 Maturity Date and the Class A-2 Maturity Date, to cover
shortfalls in payments of the Noteholders' principal and accrued interest,
and
(b) on the Final Distribution Date upon termination of the Trust, to pay the
Certificate Balance and accrued return, any payments owing to the swap
counterparty and any Carryover Servicing Fee.
If the market value of the Reserve Account on any Distribution Date is
sufficient to pay the remaining principal and interest accrued on the Notes,
the remaining Certificate Balance, any accrued return on the Certificates, any
payments owing to the swap counterparty and any Carryover Servicing Fee,
amounts on deposit in the Reserve Account will be so applied on that
Distribution Date.
See "Description of the Securities--Credit Enhancement--Reserve Account."
Transfer of the Assets to the Trust. Under the Sale Agreement, the Seller will
sell the Trust Student Loans to the Trust, with the Eligible Lender Trustee
holding legal title to the Trust Student Loans.
If the Seller breaches a representation under the Sale Agreement regarding a
Trust Student Loan, generally it will have to cure the breach, repurchase or
replace that Trust Student Loan or reimburse the Trust for losses resulting
from the breach.
Servicing of the Assets
Under the Servicing Agreement, Sallie Mae Servicing Corporation [or another
third-party servicer of student loans specified in the prospectus supplement
and described in detail comparable to the description of Sallie Mae Servicing
Corporation in the prospectus], as Servicer, will be responsible for servicing,
maintaining custody of and making collections
on the Trust Student Loans. It will also bill and collect payments from the
Guarantee Agencies and the Department. [ The Servicer, an affiliate of Sallie
Mae, manages and operates Sallie Mae's loan servicing functions.] See
"Servicing and Administration--Servicing Procedure" and "Servicing and
Administration--Administration Agreement" in the Prospectus. Under certain
circumstances, the Servicer may transfer its obligations as Servicer. See
"Servicing and Administration--Certain Matters Regarding the Servicer" in the
Prospectus.
If the Servicer breaches a covenant under the Servicing Agreement regarding a
Trust Student Loan, generally it will have to cure the breach, purchase that
Trust Student Loan or reimburse the Trust for losses resulting from the breach.
See "The Trust Student Loan Pool--Insurance of Student Loans."
Compensation of the Servicer
The Servicer will receive two separate fees: a Primary Servicing Fee and a
Carryover Servicing Fee.
The "Primary Servicing Fee" for any month is equal to
. in the case of Trust Student Loans that are not Consolidation Loans, 1/12th
of % of their outstanding principal amount, plus
. in the case of Consolidation Loans, 1/12th of % of their outstanding
principal amount.
The Primary Servicing Fee will be payable out of Available Funds and amounts on
deposit in the Reserve Account on the 25th of each month (or the next business
day), beginning , 20 (a "Monthly Servicing Payment Date"). Fees are
calculated as of the last day of the preceding calendar month. Fees will
include amounts from prior Monthly Servicing Payment Dates that remain unpaid.
The Carryover Servicing Fee will be payable to the Servicer on each
Distribution Date out of Available Funds.
The "Carryover Servicing Fee" is the sum of
. the amount of certain increases in the costs incurred by the Servicer;
S-9
<PAGE>
. the amount of certain conversion, transfer and removal fees;
. any amounts described in the first two bullets that remain unpaid from prior
Distribution Dates; and
. interest on such unpaid amounts as described in the Servicing Agreement.
See "Description of the Securities--Servicing Compensation."
TERMINATION OF THE TRUST
The obligations of the Servicer, the Seller, the Administrator, the Eligible
Lender Trustee, the Indenture Trustee and the swap counterparty will terminate
upon:
. the maturity or other liquidation of the last Trust Student Loan and the
disposition of any amount received upon its liquidation; and
. the payment of all amounts required to be paid to the Noteholders and the
Certificateholders.
See "The Student Loan Pools --Termination" in the Prospectus.
Optional Purchase
The Seller may purchase or arrange for the purchase of all remaining Trust
Student Loans on any Distribution Date when the Pool Balance is % or less of
the initial Pool Balance as of the Cutoff Date. The Seller's exercise of this
purchase option will result in the early retirement of the Notes and the
Certificates. The purchase price will equal the amount required to prepay in
full (including all accrued interest) the remaining Trust Student Loans as of
the end of the preceding Collection Period, but not less than the Minimum
Purchase Amount plus any amount owing to the swap counterparty.
"Minimum Purchase Amount" means an amount that would be sufficient to
. reduce the outstanding principal amount of each class of Notes then
outstanding on the related Distribution Date to zero;
. pay to Noteholders the interest payable on the related Distribution Date;
. reduce the Certificate Balance to zero; and
. pay to Certificateholders the return payable on the related Distribution
Date.
Auction of Trust Assets
The Indenture Trustee will offer for sale all remaining Trust Student Loans at
the end of the Collection Period when the Pool Balance is --% or less of the
initial Pool Balance. The "Trust Auction Date" will be the 3rd business day
before the related Distribution Date. An auction will occur only if the Seller
has first waived its optional purchase right described above. The Seller will
waive its option to purchase the remaining Trust Student Loans if it fails to
notify the Eligible Lender Trustee and the Indenture Trustee, in writing, that
it intends to exercise its purchase option before the Indenture Trustee accepts
a bid to purchase the Trust Student Loans. The Seller and its affiliates,
including Sallie Mae and the Servicer, and unrelated third parties may offer
bids to purchase the Trust Student Loans on the Trust Auction Date.
If at least two bids are received, the Indenture Trustee will solicit and re-
solicit 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 the remaining bids if it equals or exceeds the Minimum
Purchase Amount or the fair market value of the Trust Student Loans as of the
end of the related Collection Period, whichever is higher. If at least two bids
are not received or the highest bid after the re-solicitation process does not
equal or exceed that amount, the Indenture Trustee will not complete the sale.
The Indenture Trustee may, 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.
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<PAGE>
The net proceeds of any auction sale will be used to retire any outstanding
Notes and Certificates on the related Distribution Date.
If the sale is not completed, the Indenture Trustee may, but will not be under
any obligation to, solicit bids for sale of the Trust Student Loans after
future Collection Periods upon terms similar to those described above,
including the Seller's waiver of its option to purchase remaining Trust Student
Loans.
If the Trust Student Loans are not sold as described above, on each subsequent
Distribution Date, if the amount on deposit in the Reserve Account (after
giving effect to all Reserve Account withdrawals, except withdrawals payable to
the Seller) exceeds the Specified Reserve Account Balance, the Administrator
will direct the Indenture Trustee to distribute the amount of such excess as
accelerated payments of Note principal and Certificate Balance. The Indenture
Trustee may or may not succeed in soliciting acceptable bids for the Trust
Student Loans either on the Trust Auction Date or subsequently.
SWAP AGREEMENT
The Trust will enter into a swap agreement as of the Closing Date with a swap
counterparty. Under the swap agreement, the swap counterparty will be required
to pay to the Administrator on behalf of the Trust for deposit into the
Collection Account on or before the business day preceding each Distribution
Date an amount calculated on a quarterly basis equal to the sum of:
. the excess, if any, of the Class A-1L Rate over the Student Loan Rate
multiplied by the principal amount of the Class A-1L Notes; plus
. the excess, if any, of the Class A-2L Rate over the Student Loan Rate
multiplied by the principal amount of the Class A-2L Notes; plus
. the excess, if any, of the Certificate Rate over the Student Loan Rate
multiplied by the Certificate Balance.
The Student Loan Rate, in general, will equal the expected weighted average
interest rate of the Trust Student Loans less servicing and administration fees
and the swap fee.
On each Distribution Date, the swap counterparty will be paid from the
Collection Account, before any payments are made to the Noteholders or
Certificateholders, a blended fee (based upon the estimated weighted average
life of the Securities) equal to approximately % of the aggregate principal
balance of the LIBOR-based Securities. In addition, on each Distribution Date,
the swap counterparty will be paid from the Collection Account, after funds
from the Collection Account are applied, if necessary, to reinstate the Reserve
Account Balance to the Specified Reserve Account Balance, a sum equal to any
unreimbursed swap counterparty payments received by the Trust plus interest.
See "Description of the Securities--Swap Agreement."
TAX CONSIDERATIONS
Subject to important considerations described in this Prospectus Supplement and
the Prospectus:
. Federal tax counsel and Delaware tax counsel for the Trust are of the
opinion that the Notes will be characterized as debt for federal and
Delaware state income tax purposes.
. Federal tax counsel is also of the opinion that, for federal income tax
purposes, the Trust will not be taxable as a corporation. By accepting a
Certificate, a Certificateholder will be deemed to agree to treat the Trust
as a partnership in which it is a partner.
. A Certificateholder will be required to take into account separately its
allocable share of income, gains, losses, deductions and credits of the
Trust, including income, gains, losses and deductions attributable to the
swap agreements. The swap agreements, together, should be considered a
notional principal contract for federal income tax purposes. The Trust
intends to report any
S-11
<PAGE>
payments it receives under the swap agreements as ordinary income and to
deduct the swap fee as an ordinary expense, as those items accrue. In
addition, the Trust intends to amortize any transaction fee attributable to
the swap agreements as an ordinary expense over the term of the swap
agreements using a reasonable method. Finally, the Trust intends to treat
the payments, if any (other than the swap fee), made by it pursuant to the
swap agreements as contingent payments, and to treat those amounts as
ordinary expenses when paid.
. 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. 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.
See "U.S. Federal Income Tax Consequences" in the Prospectus.
ERISA CONSIDERATIONS
. The Notes. Subject to important considerations and conditions described in
this Prospectus Supplement and the Prospectus, the Notes may, in general,
be purchased by or on behalf of a Plan (including an insurance company
general account) that is subject to Title I of ERISA or Section 4975 of the
Internal Revenue Code only if an exemption from the prohibited transaction
rules applies so that the purchase and holding of the Notes by or on behalf
of the Plan will not result in a non-exempt prohibited transaction. Each
fiduciary who purchases any Note will be deemed to represent that such an
exemption exists and applies to it.
. The Certificates. The Certificates may not be acquired by, on behalf of, or
using the assets of any Plan (including an insurance company general
account) of the type described above. Each purchaser of Certificates will
be deemed to represent that it is not such a Plan, is not purchasing the
Certificates on behalf of a Plan, and is not using the assets of a Plan to
purchase any of the Certificates. Further, each purchaser of Certificates
will be deemed to agree that if its Certificates are subsequently deemed to
be Plan assets, that purchaser will dispose of them.
See "ERISA Considerations" in this Prospectus Supplement and the Prospectus
for additional information concerning the application of ERISA.
RATING OF THE SECURITIES
The Securities are required to be rated by at least two nationally recognized
rating agencies identified in the Indenture as follows:
Notes: Highest rating category
Certificates: One of the three highest rating
categories
See "Ratings of the Securities" in this Prospectus Supplement for additional
information.
RISK FACTORS
Certain factors you should consider before making an investment in the
Certificates are described in this Prospectus Supplement and in the Prospectus
under "Risk Factors."
CUSIP NUMBERS
. Class A-1T Notes:78442
. Class A-1L Notes:78442
. Class A-2T Notes:78442
. Class A-2L Notes:78442
. Certificates:78442
S-12
<PAGE>
RISK FACTORS
You should carefully consider the following factors in deciding whether to
purchase any Note or Certificate. The Prospectus describes additional risk
factors that you should also consider beginning on page --. These risk factors
could affect your investment in or return on the Notes and the Certificates.
The Class A-2 Notes Bear Certificateholders and, to a lesser extent, Class
Sequential Payment Risk A-2 Noteholders bear a greater risk of loss than do
and the Certificates Class A-1 Noteholders:
Bear Subordination Risk
. No principal will be paid to Class A-2
Noteholders until the Class A-1 Noteholders have
been paid in full; and
. No distribution of Certificate Balance will be
made to Certificateholders until the Class A-1
Noteholders and Class A-2 Noteholders have been
paid in full.
[Change in Federal On October 7, 1998, the President signed into law
Direct Consolidation the Higher Education Amendments of 1998,
Loan Rate May Encourage legislation that reauthorized federal higher
Prepayments education loan programs for a six-year period (the
"Reauthorization Legislation"). The Reauthorization
Legislation maintained reduced borrower interest
rates for Federal Direct Consolidation Loans whose
applications were received by January 31, 1999.
Borrower interest rates were maintained at
7.46 percent (6.86 percent during in-school and
grace periods), adjusted annually based on a
formula equal to the 91-day Treasury bill rate plus
2.3 percent (1.7 percent during in-school and grace
periods).
The availability of the reduced borrower interest
rates on these Federal Direct Consolidation Loans
may increase the likelihood that a Trust Student
Loan will be prepaid. We do not know the volume of
Trust Student Loans that may be prepaid because of
this factor. We believe, however, that most of the
applications received by the Department by the
January 31, 1999 deadline have been processed and,
accordingly, that the volume of Trust Student Loans
that may be prepaid because of the reduced borrower
interest rates on Federal Direct Consolidation
Loans will not be material.]
Initial Principal The Initial Pool Balance plus the initial deposit
Balance of Securities to the Collection Account is approximately % of
Exceeds Trust Assets the aggregate principal amount of the Securities.
Securityholders must rely primarily on interest
payments on the Trust Student Loans and other Trust
assets, in excess of Servicing Fees, Administration
Fees, the swap fee and interest payable on the
Securities, to reduce the aggregate principal
amount of the Securities to the Pool Balance. The
Securityholders, especially Certificateholders,
could be adversely affected by a high rate of
prepayments, which would reduce the amount of
interest available for this purpose. In addition,
the principal balance of the Trust Student Loans on
which interest will be collected will be less than
the principal amount of the Securities for some
period.
S-13
<PAGE>
The Swap Agreement May The Trust will enter into a swap agreement with the
Create Credit Risks swap counterparty intended to mitigate the basis
risk associated with the Notes and the
Certificates. If a payment is due to the Trust
under the swap agreement, a default by the swap
counterparty may reduce the amount of available
funds for any Collection Period and thus the
Trust's ability to pay you principal and interest
on the Securities.
In addition, an "Early Termination" (as defined in
the swap agreement) may occur in the event that
either:
. the swap counterparty fails to make a required
payment within three business days of the date
such payment was due; or
. the swap counterparty fails, within 45 calendar
days of the date on which the counterparty
ratings of the swap counterparty fall below the
required ratings specified in the swap
agreement, to:
. obtain a replacement swap agreement with
terms substantially the same as the swap
agreement; or
. establish any other arrangement satisfactory
to the Trust and the applicable rating
agencies.
If an Early Termination occurs, the Trust may no
longer have the benefit of the swap agreement. You
cannot be certain that the Trust will be able to
enter into a substitute swap agreement.
Year 2000 Issues Could The "Year 2000 issue" refers to a wide variety of
Adversely Affect the computer problems that may arise from the inability
Trust's Liquidity and of computer programs to properly process date-
the Timing of Payments sensitive information relating to the Year 2000 and
the years after 2000.
By the end of 1998, the Administrator and the
Servicer achieved Year 2000 readiness for all
internal applications. During 1999 they completed
Year 2000 readiness testing with their external
business partners and developed Year 2000
contingency plans. The failure by the
Administrator, the Servicer or any of their
significant business partners to have resolved a
material Year 2000 issue, however, could interrupt
normal business activities or operations such as
making timely payments on the Securities or
servicing the Trust Student Loans.
The Servicer, on behalf of the Trust, will submit
claims to various Guarantee Agencies for payment on
defaulted Trust Student Loans and in other
circumstances. If any Guarantee Agency that
guarantees a significant portion of the Trust
Student Loans is unable to timely process guarantee
payments because of its failure to have remediated
its Year 2000 issues, the Trust's liquidity could
be adversely affected, possibly to a material
extent. This also could happen if the Department of
Education is unable to timely process interest
subsidy or special allowance payments because of
Year 2000 issues.
To date, we are unaware of any significant Year
2000 failures incurred by any of these entities.
S-14
<PAGE>
FORMATION OF THE TRUST
The Trust
The SLM Student Loan Trust 200 - (the "Trust") will be a trust newly
formed under the laws of the State of Delaware under the Trust Agreement to be
dated as of , 20 (as amended and supplemented from time to time, the
"Trust Agreement"), between the Seller and the Eligible Lender Trustee. After
its formation, the Trust will not engage in any activity other than:
. acquiring, holding and managing the Trust Student Loans and the other
assets of the Trust and related proceeds;
. issuing the Certificates and the Notes;
. making payments on them; and
. engaging in other activities that are necessary, suitable or convenient
to accomplish, or are incidental to, the foregoing.
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. It will purchase
the Trust Student Loans from the Seller under the Sale Agreement to be dated as
of the Closing Date (as amended and supplemented from time to time, the "Sale
Agreement"), among the Seller, the Trust and the Eligible Lender Trustee. 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 dated as of the
Closing Date (as amended and supplemented from time to time, the "Purchase
Agreement") between the Seller and Sallie Mae.
Upon the consummation of such transactions, the property of the Trust will
consist of (a) the pool of Trust Student Loans, legal title to which is held by
the Eligible Lender Trustee on behalf of the Trust, (b) all funds collected on
Trust Student Loans 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
act as custodian of the promissory notes representing the Trust Student Loans.
The Trust's principal offices are in Wilmington, Delaware, in care of Chase
Manhattan Bank Delaware, as Eligible Lender Trustee, at its address shown
below.
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-1T Student Loan-Backed Notes.............. $
Floating Rate Class A-1L Student Loan-Backed Notes.............. $
Floating Rate Class A-2T Student Loan-Backed Notes.............. $
Floating Rate Class A-2L Student Loan-Backed Notes.............. $
Floating Rate Student Loan-Backed Certificates.................. $
Total.......................................................... $
</TABLE>
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<PAGE>
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 under 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 in this Prospectus Supplement with respect to the
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 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.
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 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") periodic reports required under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and the rules and regulations of the
Commission.
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 from the
sale of the Securities. See "Formation of the Trust--Capitalization of the
Trust."
The Trust's primary sources of liquidity will be collections on the Trust
Student Loans, as supplemented by payments, if any, from the Swap Counterparty,
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, we have not included in this Prospectus
Supplement any historical or pro forma ratio of earnings to fixed charges.
S-16
<PAGE>
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 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, the Swap Fee and any Carryover Servicing
Fee.
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 under 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 under the Purchase Agreement.
THE TRUST STUDENT LOAN POOL
The Eligible Lender Trustee on behalf of the Trust will purchase the pool
of Trust Student Loans from the Seller as of the Cutoff Date.
The Seller will purchase the Trust Student Loans from Sallie Mae under the
Purchase Agreement.
The Trust Student Loans were selected from Sallie Mae's portfolio of
Student Loans by employing several criteria, including requirements that each
Trust Student Loan as of the Cutoff Date:
. 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;
. contains terms in accordance with those required by the FFELP, the
Guarantee Agreements and other applicable requirements;
. is not more than days past due; and
. does not have a borrower who is 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 in the following tables as a result of variations in the effective rates
of interest applicable to the Trust Student Loans. Moreover, the information
below about 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.
The following tables provide a description of certain additional
characteristics of the Trust Student Loans as of the Cutoff Date. The
"Aggregate Outstanding Principal Balance" in each of the following tables
includes principal balance due from obligors, plus accrued interest of $ as
of the Cutoff Date to be capitalized upon commencement of repayment.
S-17
<PAGE>
COMPOSITION OF THE TRUST STUDENT LOANS
AS OF THE CUTOFF DATE
<TABLE>
<S> <C>
Aggregate Outstanding Principal Balance............................. $
Number of Borrowers.................................................
Average Outstanding Principal Balance Per Borrower.................. $
Number of Loans.....................................................
Average Outstanding Principal Balance Per Loan...................... $
Weighted Average Remaining Term to Maturity(1)...................... months
Weighted Average Annual Borrower Interest Rate(2)................... %
</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) Exclusive of Special Allowance Payments. The weighted average spread,
including Special Allowance Payments, to the 91-day or 52-week T-Bill rate
or Three-Month Commercial Paper Rate, as applicable, was % as of the
Cutoff Date and would have been % if all of the Trust Student Loans were
in repayment as of the Cutoff Date. See "Special Allowance Payments" in
Appendix A to the Prospectus.
DISTRIBUTION OF THE TRUST STUDENT LOANS
BY LOAN TYPE AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
Percent of
Aggregate Pool by
Number Outstanding Outstanding
of Principal Principal
Loan Type Loans Balance Balance
- --------- ------ ----------- -----------
<S> <C> <C> <C>
Subsidized Stafford Loans........................ $ %
Unsubsidized Stafford Loans......................
SLS Loans........................................
PLUS Loans.......................................
Consolidation Loans..............................
---- ----- ----
Total.......................................... $ %
==== ===== ====
</TABLE>
DISTRIBUTION OF THE TRUST STUDENT LOANS
BY BORROWER INTEREST RATES AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
Percent of
Aggregate Pool by
Number Outstanding Outstanding
of Principal Principal
Interest Rates(1) Loans Balance Balance
- ----------------- ------ ----------- -----------
<S> <C> <C> <C>
Less than 7.50%.................................. $ %
7.50% to 8.49%...................................
8.50% to 9.49%...................................
Greater than 9.49%...............................
---- ----- ----
Total.......................................... $ %
==== ===== ====
</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, the above information may not 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.
S-18
<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 Balance
- -------------------- --------- ----------- -----------
<S> <C> <C> <C>
Less than $ 1,000............................. $ %
$ 1,000 to $ 1,999.99.........................
$ 2,000 to $ 2,999.99.........................
$ 3,000 to $ 3,999.99.........................
$ 4,000 to $ 4,999.99.........................
$ 5,000 to $ 5,999.99.........................
$ 6,000 to $ 6,999.99.........................
$ 7,000 to $ 7,999.99.........................
$ 8,000 to $ 8,999.99.........................
$ 9,000 to $ 9,999.99.........................
$10,000 to $10,999.99.........................
$11,000 to $11,999.99.........................
$12,000 to $12,999.99.........................
$13,000 to $13,999.99.........................
$14,000 to $14,999.99.........................
$15,000 to $15,999.99.........................
$16,000 to $16,999.99.........................
$17,000 to $17,999.99.........................
$18,000 to $18,999.99.........................
$19,000 to $19,999.99.........................
$20,000 to $20,999.99.........................
$21,000 to $21,999.99.........................
$22,000 to $22,999.99.........................
$23,000 to $23,999.99.........................
$24,000 to $24,999.99.........................
$25,000 to $25,999.99.........................
$26,000 to $26,999.99.........................
$27,000 to $27,999.99.........................
$28,000 to $28,999.99.........................
$29,000 to $29,999.99.........................
$30,000 to $30,999.99.........................
$31,000 to $31,999.99.........................
$32,000 to $32,999.99.........................
$33,000 to $33,999.99.........................
$34,000 to $34,999.99.........................
$35,000 and above.............................
---- ----- -----
$ 100.0%
==== ===== =====
</TABLE>
S-19
<PAGE>
DISTRIBUTION OF THE TRUST STUDENT LOANS
BY SCHOOL/LOAN TYPE AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
Percent of
Aggregate Pool by
Number Outstanding Outstanding
of Principal Principal
School/Loan Type Loans Balance Balance
- ---------------- ------ ----------- -----------
<S> <C> <C> <C>
FFELP:
4-year Institutions............................ $ %
2-year Institutions............................
Proprietary/Vocational.........................
Unidentified...................................
Consolidation Loan Program(1)....................
------ ------- -----
Total........................................ $ 100.0%
====== ======= =====
</TABLE>
- --------
(1) 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
Number of Months Aggregate Pool by
Remaining to Number Outstanding Outstanding
Scheduled of Principal Principal
Maturity(1) Loans Balance Balance
- ---------------- ------ ----------- -----------
<S> <C> <C> <C>
0 to 12...................................... $ %
13 to 24......................................
25 to 36......................................
37 to 48......................................
49 to 60......................................
61 to 72......................................
73 to 84......................................
85 to 96......................................
97 to 108......................................
109 to 120......................................
121 to 132......................................
133 to 144......................................
145 and Up......................................
---- ------- -----
Total....................................... $ 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.
S-20
<PAGE>
DISTRIBUTION OF THE TRUST STUDENT LOANS
BY CURRENT BORROWER PAYMENT STATUS AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
Percent of
Aggregate Pool by
Number Outstanding Outstanding
of Principal Principal
Current Borrower Payment Status(1) Loans Balance Balance
- ---------------------------------- ------ ----------- -----------
<S> <C> <C> <C>
In-School........................................ $ %
Grace............................................
Deferral.........................................
Forbearance......................................
Repayment(2)
First year in repayment........................
Second year in repayment.......................
Third year in repayment........................
More than 3 years in repayment.................
------ ------- -----
Total........................................ $ 100.0%
====== ======= =====
</TABLE>
- --------
(1) Refers to the status of the borrower of each Trust Student Loan as of the
Cutoff Date. The 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 the loan
("Repayment") or may have temporarily ceased repaying the 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) The weighted average number of months in repayment for all Trust Student
Loans currently in repayment is , 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 REMAINING MONTHS IN STATUS OF THE TRUST STUDENT
LOANS BY CURRENT BORROWER PAYMENT STATUS AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
Scheduled Months in Status(1)
----------------------------------------------
Current Borrower Payment Status In-School Grace Deferral Forbearance Repayment
- ------------------------------- --------- ----- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
In-School....................... -- --
Grace........................... -- -- --
Deferral........................ -- -- --
Forbearance..................... -- -- --
Repayment....................... -- -- -- --
</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-21
<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 Balance
- -------- --------- ----------- -----------
<S> <C> <C> <C>
Alabama....................................... $ %
Alaska........................................
Arizona.......................................
Arkansas......................................
California....................................
Colorado......................................
Connecticut...................................
Delaware......................................
District of Columbia..........................
Florida.......................................
Georgia.......................................
Hawaii........................................
Idaho.........................................
Illinois......................................
Indiana.......................................
Iowa..........................................
Kansas........................................
Kentucky......................................
Louisiana.....................................
Maine.........................................
Maryland......................................
Massachusetts.................................
Michigan......................................
Minnesota.....................................
Mississippi...................................
Missouri......................................
Montana.......................................
Nebraska......................................
Nevada........................................
New Hampshire.................................
New Jersey....................................
New Mexico....................................
New York......................................
North Carolina................................
North Dakota..................................
Ohio..........................................
Oklahoma......................................
Oregon........................................
Pennsylvania..................................
Rhode Island..................................
South Carolina................................
South Dakota..................................
Tennessee.....................................
Texas.........................................
Utah..........................................
</TABLE>
S-22
<PAGE>
<TABLE>
<CAPTION>
Percent of
Aggregate Pool by
Outstanding Outstanding
Number of Principal Principal
State(1) Loans Balance Balance
- -------- --------- ----------- -----------
<S> <C> <C> <C>
Vermont....................................... $ %
Virginia......................................
Washington....................................
West Virginia.................................
Wisconsin.....................................
Wyoming.......................................
Other.........................................
--- ---- -----
Total....................................... $ 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.
Each of the Trust Student Loans provides or will provide for the
amortization of its outstanding principal balance over a series of regular
payments. Except as described below, each regular payment consists of an
installment of interest which is calculated on the basis of the outstanding
principal balance of the 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 that Trust Student Loan.
Sallie Mae makes available to some borrowers of Student Loans it holds
payment terms that 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. Some Student
Loans provide for interest only payments to be made for a designated portion of
the term of the loans, with amortization of the principal of the 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, under
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 the graduated payment and income-sensitive
repayment plans. See "The Student Loan Pools--Sallie Mae's Student Loan
Financing Business" in the Prospectus.
The following table provides certain information about Trust Student Loans
subject to the repayment terms described in the preceding paragraphs.
S-23
<PAGE>
DISTRIBUTION OF THE TRUST
STUDENT LOANS BY REPAYMENT TERMS AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
Percent of
Aggregate Pool by
Outstanding Outstanding
Number of Principal Principal
Loan Repayment Terms Loans Balance Balance
- -------------------- --------- ----------- -----------
<S> <C> <C> <C>
Level Payment................................. $ %
Other Repayment Options(1)....................
--- ----- ---
Total....................................... $ 100%
=== ===== ===
</TABLE>
- --------
(1) Includes graduated repayment, income sensitive and interest only period
loans. Income sensitive loans represent less than % of the Outstanding
Principal Balance. Interest only period loans represent % 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 these repayment terms as of the
Cutoff Date. If repayment terms are offered to and accepted by borrowers, the
weighted average life of the Notes could be lengthened.
The following table provides information about Trust Student Loans
regarding date of disbursement.
DISTRIBUTION OF THE TRUST
STUDENT LOANS BY DATE OF DISBURSEMENT AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
Percent of
Aggregate Pool by
Outstanding Outstanding
Number of Principal Principal
Disbursement Date(1) Loans Balance Balance
- -------------------- --------- ----------- -----------
<S> <C> <C> <C>
Pre-October 1, 1993........................... $ %
October 1, 1993 and thereafter................
--- ----- -----
Total....................................... $ 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--
"Guarantors Under The FFELP--Loan Guarantees" and "--Federal Reimbursement
Agreements" in the Prospectus.
(2) 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, in most cases, % of the principal plus accrued unpaid interest on any
such loan. Of the Trust Student Loans that are Consolidation Loans, %
were made on or after October 1, 1993.
S-24
<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, in the case of some Trust Student Loans, Interest
Subsidy Payments 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 specified Trust Student Loans.
Under 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, a loan holder may
submit claims directly to the Department and the Department is required to pay
the full Guarantee Payment 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 that 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--"Guarantors Under The FFELP--Loan Guarantees" and "--
Federal Reimbursement Agreements" in the Prospectus.
S-25
<PAGE>
The following table provides information with respect to the portion of the
Trust Student Loans guaranteed by each Guarantor:
DISTRIBUTION OF THE TRUST STUDENT LOANS BY
GUARANTY AGENCY AS OF THE CUTOFF DATE
<TABLE>
<CAPTION>
Percent of
Aggregate Pool by
Outstanding Outstanding
Number of Principal Balance Principal
Loans of Loans Balance
Name of Guaranty Agency* Guaranteed Guaranteed Guaranteed
- ------------------------ ---------- ----------------- -----------
<S> <C> <C> <C>
American Student Assistance Guaran-
tor.................................
California Student Aid Commission....
Colorado Student Loan Program........
Connecticut Student Loan Foundation..
Education Assistance Corporation.....
Educational Credit Management Corpo-
ration..............................
Finance Authority of Maine...........
Florida Department of Education
Office of Student Financial
Assistance..........................
Georgia Higher Education Assistance
Corp................................
Great Lakes Higher Education Corpora-
tion................................
Illinois Student Assistance Commis-
sion................................
Iowa College Student Aid Commission..
Kentucky Higher Education Assistance
Authority...........................
Louisiana Student Financial Assis-
tance Commission....................
Michigan Higher Education Assistance
Authority...........................
Missouri Coordinating Board for
Higher Education....................
Montana Guaranteed Student Loan Pro-
gram................................
Nebraska Student Loan Program........
New Jersey Higher Education Assis-
tance Authority.....................
New York State Higher Education Serv-
ices Corporation....................
Northwest Education Loan Associa-
tion................................
Oklahoma State Regents for Higher Ed-
ucation.............................
Ohio Student Aid Commission..........
Oregon State Scholarship Commission..
Pennsylvania Higher Education Assis-
tance Agency........................
Rhode Island Higher Education Assis-
tance Authority.....................
Student Loan Guarantee Foundation of
Arkansas, Inc.......................
Tennessee Student Assistance Corpora-
tion................................
Texas Guaranteed Student Loan Corpo-
ration..............................
United Student Aid Funds, Inc........
Utah Higher Education Assistance Au-
thority.............................
--- ----- ---
100%
=== ===== ===
</TABLE>
- --------
* For illustrative purposes only; the actual Guarantee Agencies are likely to
vary from offering to offering.
S-26
<PAGE>
Some historical information about each of the Guarantors that guarantees
Trust Student Loans comprising at least 5% of the Initial Pool Balance (the
"Significant Guarantors") is provided below. 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 describes 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
-------------------------------------------------------------------------------
1995 1996 1997 1998 1999
Name of Guaranty Agency --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
All Guarantee Agencies.. $21,055,193,594 $19,727,950,145 $21,409,775,875 $22,300,960,997 $22,923,325,576
</TABLE>
- --------
* We obtained the information in the table above from the Department's
quarterly Loan Volume Updates. The Seller, Sallie Mae and the Underwriters
have not audited or independently verified this information for accuracy or
completeness.
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 the Significant Guarantor minus the original
principal amount of loans cancelled, claims paid, loans paid in full and loan
guarantees transferred to the Significant Guarantor from other guarantors.
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 1995 1996 1997 1998 1999
- ---------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
All Guarantee Agencies................................ **
</TABLE>
- --------
* We obtained the information in the table above from the Department's FY94-96
Federal Student Loan Programs Data Book (for fiscal year 1995), from the
latest available Department of Education reports (for fiscal years 1996,
1997 and 1998) and from the Significant Guarantors (for fiscal year 1999).
The Seller, Sallie Mae and the Underwriters have not audited or
independently verified this information for accuracy or completeness.
** Not Available.
S-27
<PAGE>
Recovery Rates. A Guarantor's recovery rate, which provides a measure of
the effectiveness of the collection efforts against defaulting borrowers after
the guarantee 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 1995 1996 1997 1998 1999
- ---------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
% % % % %
</TABLE>
- --------
* We obtained the information in the table above from privately published
compilations of DOE data (for fiscal years 1995 and 1996) and from the
Significant Guarantors (for fiscal years 1997, 1998 and 1999). The Seller,
Sallie Mae and the Underwriters have not audited or independently verified
this information for accuracy or completeness.
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 1995 1996 1997 1998 1999
- ---------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
% % % % %
</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.
** We obtained the information in the table above from annually published DOE
reports. The Seller, Sallie Mae and the Underwriters have not audited or
independently verified this information for accuracy or completeness.
Each Guarantee Agency's guarantee obligations with respect to any Trust
Student Loan is conditioned upon the satisfaction of all the conditions in the
applicable Guarantee Agreement. These conditions include, but are not limited
to, the following:
. 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;
. the timely payment to the Guarantee Agency of the guarantee fee payable
on the Trust Student Loan; and
. the timely submission to the Guarantee Agency of all required pre-claim
delinquency status notifications and of the claim on the Trust Student
Loan.
S-28
<PAGE>
Failure to comply with any of the applicable conditions, including those
listed above, may result in the refusal of the Guarantee Agency to honor its
Guarantee Agreements on the Trust Student Loan, in the denial of guarantee
coverage for certain accrued interest amounts or in the loss of certain
Interest Subsidy Payments and Special Allowance Payments.
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 concerning the Trust Student Loan, following a period
during which the breach may be cured. For purposes of Trust Student Loans the
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, the
cure period will be 360 days, in each case following the earlier of the date on
which the breach is discovered and the date of the Servicer's receipt of the
Guarantor reject transmittal form with respect to the Trust Student Loan. The
repurchase (or purchase in the case of the Servicer) or substitution will be
made not later than the end of the 120-day period or not later than the 60th
day following the end of the 360 day cure period, as applicable.
Notwithstanding the foregoing, if as of the last Business Day of any month
the aggregate principal amount of Trust Student Loans for which claims have
been filed with and rejected by a Guarantor as a result of a breach by the
Seller or the Servicer or for which the Servicer determines that claims cannot
be filed pursuant to the Higher Education Act as a result of such a breach
exceeds % 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 the purchases the aggregate
principal amount of affected Trust Student Loans is less than % 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 of these dates to be
purchased first. See "Servicing and Administration--Servicer Covenants" and
"Transfer and Servicing Agreements--Sale of Student Loans to the Trust;
Representations and Warranties of the Seller" and "--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 the payments for Student
Loans in other trusts using the same lender identification number and payments
on the billings would be made by the Department in lump sum form. These 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, these payments would be allocated
among the trusts in a manner similar to the allocation process for Interest
Subsidy and Special Allowance Payments.
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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 a Guarantee Agency on any Student Loan included in a trust using the shared
lender identification number, the Department or that 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 the other trusts, resulting in the consolidated payment from the
Department received by the Eligible Lender Trustee under the lender
identification number for that quarter equaling an amount that is less than the
amount owed by the Department on the loans in the Trust for that quarter.
The Servicing Agreement for the Trust and the servicing agreements for the
other trusts established by the Seller that share the lender identification
number to be used by the Trust will require any trust (including the Trust) to
indemnify the other 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 the trust's behalf.
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DESCRIPTION OF THE SECURITIES
General
The Notes will be issued under the Indenture and the Certificates will be
issued under 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 some terms of the Notes, the
Certificates, the Indenture, the Trust Agreement and the Swap Agreement. The
Prospectus describes other terms of the Notes and the Certificates. See
"Description of the Notes," "Description of the Certificates" and "Certain
Information Regarding the Securities" in the Prospectus. The summary does not
cover every detail and is subject to the provisions of the Notes, the
Certificates, the Indenture, the Trust Agreement and the Swap Agreement.
The Notes
Distributions of Interest. Interest will accrue on the principal balances
of the Notes at their respective Note Rates. 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
that Distribution Date will be due on the next Distribution Date together with
an amount equal to interest on this 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, the
Administration Fee and the Swap Fee for that Distribution Date. See "--
Distributions" and "--Credit Enhancement." If these sources are insufficient to
pay the Noteholders' Interest Distribution Amount for such Distribution Date,
the 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-1T Rate" for each Accrual Period will be equal to the daily
weighted average of the T-Bill Rates within that Accrual Period (determined as
described under "--Determination of T-Bill Rates") plus %. The "Class A-2T
Rate" for each Accrual Period will be equal to the daily weighted average of
the T-Bill Rates within that Accrual Period plus %. The weighted average
calculations described above will be based on the actual number of days in that
Accrual Period.
The Class A-1T Rate and the Class A-2T Rate will be adjusted weekly on the
calendar day following each auction of 91-day Treasury Bills, except that
. the Class A-1T Rate and the Class A-2T 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 that day and
. the Class A-1T Rate and the Class A-2T Rate will be subject to a Lock-
In Period of six business days preceding each Distribution Date. See
"--Determination of T-Bill Rates."
The "Class A-1L Rate" for each Accrual Period will be equal to Three-Month
LIBOR, except for the First Accrual Period, which will be -Month LIBOR, on
the second business day before the beginning of that Accrual Period (determined
as set forth under "--Determination of LIBOR") plus %. The "Class A-2L Rate"
for each Accrual Period will be equal to Three-Month LIBOR, except for the
First Accrual Period, which will be -Month LIBOR, on the second business day
before the beginning of that Accrual Period plus %.
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 that
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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 Swap Fee, the Noteholders' Interest Distribution Amount
and the Certificateholders' Return Distribution Amount. See "--Distributions",
"--Credit Enhancement" and "--The Certificates--Subordination of the
Certificates." If these sources are insufficient to pay the Noteholders'
Principal Distribution Amount for a Distribution Date, the 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 pro rata to the principal balances of the Class A-1T Notes and the Class
A-1L Notes until retired and second pro rata to the principal balances of the
Class A-2T Notes and the Class A-2L Notes until retired. However, 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 that of 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 their maturity dates, based on a variety
of factors.
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 that Distribution Date will be payable on the next
Distribution Date increased by an amount equal to return on the 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,
the Swap Fee and the Noteholders' Interest Distribution Amount for that
Distribution Date. See "--Distributions", "--Credit Enhancement--Reserve
Account" and "--The Certificates--Subordination of the Certificates."
The "Certificate Rate" for each Accrual Period will be equal to Three-Month
LIBOR, except for the first Accrual Period, which will be -Month LIBOR, on
the second business day before the beginning of that Accrual Period (determined
as described under "--Determination of LIBOR") plus %.
Distributions in Respect of Certificate Balance. Certificateholders will be
entitled to distributions on each Distribution Date after the Notes are retired
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, the Swap 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."
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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.
Subordination of the Certificates. On any Distribution Date distributions
of return on the Certificates will be subordinated to the payment of interest
on the Notes and distributions of the Certificate Balance will be subordinated
to the payment of both interest and principal on 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, the
Administration Fee and the Swap Fee will be applied to the payment of interest
on the Notes prior to any distribution from these sources of return on the
Certificates and no distributions of the Certificate Balance will be made until
the Notes have been retired.
Notwithstanding the foregoing, if
(a) on any Distribution Date following all distributions to be made on that
Distribution Date, the outstanding principal amount of the Notes would be in
excess of:
. the outstanding principal balance of the Trust Student Loans plus
. 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 the Distribution Date following
the distributions minus
. the Specified Reserve Account Balance for that Distribution Date, or
(b) an insolvency event involving the Seller or an event of default under the
Indenture has occurred and is continuing.
The amounts on deposit in the Collection Account and the Reserve Account will
be applied on the Distribution Date to the payment of the Noteholders'
Distribution Amount before any amounts are applied to the payment of the
Certificateholders' Distribution Amount.
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 that date, as reported by the U.S. Department of the Treasury. In the event
that the results of the auctions of 91-day Treasury Bills cease to be reported
as provided above, or that no auction is held in a particular week, then the T-
Bill Rate in effect as a result of the last such publication or report will
remain in effect until the results of auctions of 91-day Treasury Bills are
reported again or an auction is held. 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 Class A-1T Rate and Class A-2T Rate 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 the Class A-1T Notes and the Class A-2T 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
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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 tables set forth the accrued interest factors that would have
been applicable to any Class A-1T Note or Class A-2T Note bearing interest at
the indicated rates, assuming a 365-day and 366-day year, respectively:
Accrued Interest Factors -- 365-Day Assumption
<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>
Accrued Interest Factors -- 366-Day Assumption
<TABLE>
<CAPTION>
Assumed
Interest Accrued
Rate on Interest
Days the Receivable
Settlement Date Outstanding Notes Factor
- --------------- ----------- -------- -----------
<S> <C> <C> <C>
1st.......................................... 0 5.00000% 0.000000000
2nd.......................................... 1 5.00000 0.000136612
3rd.......................................... 2 5.00000 0.000273224
4th.......................................... 3 5.00000 0.000409836
5th*......................................... 4 5.15000 0.000546448
6th.......................................... 5 5.15000 0.000687158
7th.......................................... 6 5.15000 0.000827869
8th.......................................... 7 5.15000 0.000968579
9th.......................................... 8 5.15000 0.001109290
10th......................................... 9 5.15000 0.001250000
</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.
Determination of LIBOR
"Three-Month LIBOR" and " -Month LIBOR" mean, with respect to any Accrual
Period, the London interbank offered rate for deposits in U.S. dollars having a
maturity of three months or months, respectively, commencing on the first
day of the Accrual Period (the "Index Maturity") which appears on Telerate Page
3750 as of 11:00 a.m. London time, on the related LIBOR Determination Date. If
this rate does not appear on Telerate Page 3750, the rate for that day will be
determined on the basis of the rates at which deposits in U.S. dollars, having
the Index Maturity and in a principal amount of not less than U.S. $1,000,000,
are offered at approximately 11:00 a.m., London time, on that
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LIBOR Determination Date, to prime banks in the London interbank market by the
Reference Banks. The Administrator will request the principal London office of
each Reference Bank to provide a quotation of its rate. If the Reference Banks
provide at least two quotations, the rate for that day will be the arithmetic
mean of the quotations. If the Reference Banks provide fewer than two
quotations, the rate for that day will be the arithmetic mean of the rates
quoted by major banks in New York City, selected by the Administrator, at
approximately 11:00 a.m. New York time, on that LIBOR Determination Date, for
loans in U.S. dollars to leading European banks having the Index Maturity and
in a principal amount of not less than U.S. $1,000,000. If the banks selected
as described above are not providing quotations, Three-Month LIBOR in effect
for the applicable Accrual Period will be Three-Month LIBOR in effect for the
previous Accrual Period.
"LIBOR Determination Date" means, for each Accrual Period, the second
business day before the beginning of that Accrual Period.
"Telerate Page 3750" means the display page so designated on the Dow Jones
Telerate Service (or such other page as may replace that page on that service
for the purpose of displaying comparable rates or prices).
"Reference Banks" means four major banks in the London interbank market
selected by the Administrator.
For purposes of calculating Three-Month LIBOR or -Month LIBOR, a business
day is any day on which banks in New York City and the City of London are open
for the transaction of international business. Interest due for any Accrual
Period will be determined based on the actual number of days elapsed in such
Accrual Period over a 360-day year.
Information concerning the current 91-day Treasury Bill Rate, the accrued
interest factor, Three-Month LIBOR and -Month LIBOR will be available on
Sallie Mae's website at http://investors.salliemae.com or 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 some 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/1/
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
- --------
/1/For illustrative purposes only. As specified in the Prospectus Supplement,
the Servicing Fee may be comprised of a specified percentage per annum of
the Pool Balance, a unit amount based upon loan status and/or the number of
accounts in the Trust as of the time set forth in the related Prospectus
Supplement, a specified periodic fixed amount, 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.
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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 Swap Fee, the Noteholders'
Distribution Amount, the Certificateholders' Distribution Amount, and the
amount, if any, necessary to be deposited in the Reserve Account to reinstate
its balance 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 as to
the preceding Collection Period, including the amount of Available Funds
received from the Trust Student Loans and the aggregate Purchase Amount of the
Trust Student Loans to be repurchased by the Seller or to be purchased by the
Servicer.
Except as provided in the next paragraph, 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. Except as provided in the next paragraph,
the Eligible Lender Trustee will deposit all Interest Subsidy Payments and all
Special Allowance Payments on the Student Loans received by it for each
Collection Period into the Collection Account within two business days of
receipt.
However, for so long as
. the senior unsecured obligations of the Administrator (or any affiliate
of the Administrator that 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
. no Administrator Default has occurred and is continuing,
the Servicer and the Eligible Lender Trustee will remit the amounts referred to
above that would otherwise be deposited by it into the Collection Account to
the Administrator within two business days of receipt, 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 by the Administrator through the last day of the
related Collection Period at the federal funds rate for each day during such
period less %. See "Servicing and Administration--Payments on Student Loans"
in the Prospectus.
The term "Available Funds" means, as to a Distribution Date or any related
Monthly Servicing Payment Date, the sum of the following amounts for the
related Collection Period (or, in the case of a Monthly Servicing Payment Date,
the applicable portion of these amounts):
. all collections received by the Servicer on the Trust Student Loans
(including any Guarantee Payments received on the Trust Student Loans
but net of (a) any collections in respect of
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principal on the Trust Student Loans applied by the Trust to repurchase
guaranteed loans from the Guarantors under the Guarantee Agreements and
(b) 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), on the Trust
Student Loans for that Collection Period);
. any Interest Subsidy Payments and Special Allowance Payments received by
the Servicer or the Eligible Lender Trustee during that Collection
Period for the Trust Student Loans;
. all proceeds of the liquidation of defaulted Trust Student Loans
("Liquidated Student Loans"), which became Liquidated Student Loans
during that Collection Period in accordance with the Servicer's
customary servicing procedures, net of expenses incurred by the Servicer
related to their liquidation and any amounts required by law to be
remitted to the borrower on the Liquidated Student Loans ("Liquidation
Proceeds"), and all recoveries on Liquidated Student Loans which were
written off in prior Collection Periods or during that Collection
Period;
. the aggregate Purchase Amounts received during that Collection Period
for those Trust Student Loans repurchased by the Seller or purchased by
the Servicer ("Purchased Student Loans");
. 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, on the
Trust Student Loans pursuant to the Sale Agreement or the Servicing
Agreement, respectively;
. amounts received by the Trust pursuant to the Servicing Agreement during
that Collection Period as to yield or principal adjustments;
. investment earnings for that 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; and
. amounts received from the Swap Counterparty for that Distribution Date;
provided that if on 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 (b)
through (k) under "--Distributions--Distributions from Collection Account,"
then Available Funds for that 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 that Distribution Date,
up to the amount necessary to pay such items, and the Available Funds for the
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 for 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 shown
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 for that
Distribution Date:
(a) to the Servicer, the Primary Servicing Fee due on that Distribution
Date;
(b) to the Administrator, the Administration Fee due on that
Distribution Date and all prior unpaid Administration Fees;
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(c) to the Swap Counterparty, the Swap Fee;
(d) to the Noteholders, the Noteholders' Interest Distribution Amount,
pro rata, based on the amounts payable on the Notes as Noteholders'
Interest Distribution Amount;
(e) 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, pro rata, based on
the amounts payable as Certificateholders' Return Distribution Amount;
(f) to the Class A-1 Noteholders, the Noteholders' Principal
Distribution Amount, pro rata;
(g) 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, pro rata;
(h) 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, pro rata;
(i) to the Reserve Account, the amount, if any, necessary to reinstate
the balance of the Reserve Account to the Specified Reserve Account
Balance;
(j) to the Swap Counterparty, the aggregate unpaid amount of any
payments owing by the Trust to the Swap Counterparty under the Swap
Agreement;
(k) to the Servicer, the aggregate unpaid amount of the Carryover
Servicing Fee, if any; and
(l) to the Reserve Account, any remaining amounts after application of
clauses (a) through (k).
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 that Distribution Date (after
giving effect to all withdrawals from the Reserve Account on such Distribution
Date, except withdrawals payable to the Seller) is in excess of the Specified
Reserve Account Balance for that Distribution Date, the Administrator will
direct the Indenture Trustee to distribute the amount of this excess as
accelerated payments of principal on the Notes and distributions on the
Certificate Balance.
For these purposes, the following terms have the following meanings:
"Certificate Balance" equals $ on the Closing Date and, after the
Closing Date, equals the initial Certificate Balance, reduced by all previous
distributions on 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
that 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 that Distribution Date; provided that the Certificate
Balance Distribution Amount will in no event exceed the Certificate Balance.
In addition, on the Final Distribution Date, the Certificate Balance to be
distributed to the Certificateholders will include the amount required to
reduce the outstanding Certificate Balance to zero.
"Certificate Balance Shortfall" means, as of the close of any Distribution
Date, the excess of (a) the Certificate Balance Distribution Amount on that
Distribution Date over (b) the amount of distributions made on the Certificate
Balance on that Distribution Date.
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"Certificateholders' Distribution Amount" means, for any Distribution Date,
the Certificateholders' Return Distribution Amount for that Distribution Date
plus the Certificate Balance Distribution Amount for that Distribution Date.
"Certificateholders' Return Distribution Amount" means, for any
Distribution Date, the sum of (a) 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 on the Certificate Balance on the
preceding Distribution Date (or, in the case of the first Distribution Date, on
the Closing Date) and (b) the Certificate Return Shortfall for Distribution
Date.
"Certificate Return Shortfall" means, for any Distribution Date, the excess
of (a) the Certificateholders' Return Distribution Amount on the preceding
Distribution Date over (b) the return on the Certificates actually distributed
to the Certificateholders on the preceding Distribution Date, plus return on
the amount of such excess, to the extent permitted by law, at the Certificate
Rate from the preceding Distribution Date to the current Distribution Date.
"Noteholders' Distribution Amount" means, for any Distribution Date, the
sum of the Noteholders" Interest Distribution Amount and the Noteholders'
Principal Distribution Amount for that Distribution Date.
"Noteholders' Interest Distribution Amount" means, for 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 all classes of Notes on the immediately preceding Distribution Date
after giving effect to all principal distributions to holders of Notes on date
(or, in the case of the first Distribution Date, on the Closing Date) and (ii)
the Note Interest Shortfall for that Distribution Date.
"Noteholders' Principal Distribution Amount" means, for any Distribution
Date, the Principal Distribution Amount for that 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, (a) 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 (b) 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 Shortfall" means, for any Distribution Date, the excess of
(a) the Noteholders' Interest Distribution Amount on the preceding Distribution
Date over (b) the amount of interest actually distributed to the Noteholders on
such preceding Distribution Date, plus interest on the amount of the excess
interest due to the Noteholders, to the extent permitted by law, at the
weighted average interest rate borne by all classes of 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 (a) the Noteholders' Principal Distribution Amount on such
Distribution Date over (b) the amount of principal actually distributed to the
Noteholders on that Distribution Date.
"Pool Balance" for any date means the aggregate principal balance of the
Trust Student Loans on that date, including accrued interest that is expected
to be capitalized, as reduced by:
. all payments received by the Trust through that date from borrowers, the
Guarantee Agencies and the Department;
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<PAGE>
. all amounts received by the Trust through that date from purchases of
the Trust Student Loans by the Seller or the Servicer;
. all Liquidation Proceeds and Realized Losses on the Trust Student Loans
liquidated through that date;
. the amount of any adjustments to balances of the Trust Student Loans
that the Servicer makes under the Servicing Agreement through that date;
and
. the amount by which Guarantor reimbursements of principal on defaulted
Trust Student Loans through that date are reduced from 100% to 98% (or
other applicable percentage), as required by the risk sharing provisions
of the Higher Education Act.
"Principal Distribution Amount" means (a) as 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 that
Distribution Date and (b) as to each subsequent Distribution Date, the amount
by which the Adjusted Pool Balance for the preceding Distribution Date exceeds
the Adjusted Pool Balance for that 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 that 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, that Pool Balance. The "Initial Pool Balance"
means the Pool Balance as of the Cutoff Date.
"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 for a 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. Under 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 (a) 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 Swap Fee, the Noteholders' Distribution Amount and the
Certificateholders' Distribution Amount, all for that Distribution Date, and
(b) any remaining Available Funds after application of clause (a) above and
after payment of any amount owing to the Swap Counterparty and Carryover
Servicing Fee as of that 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 on
any Distribution Date is 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 and to pay any amount owing to the Swap
Counterparty and Carryover Servicing Fee, these assets will be so applied on
such Distribution Date.
"Specified Reserve Account Balance" for 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.
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<PAGE>
If the amount on deposit in the Reserve Account on any Distribution Date
(after giving effect to all deposits or withdrawals from the Reserve Account on
that Distribution Date) is greater than the Specified Reserve Account Balance
for that 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,
payments to the Swap Counterparty and Carryover Servicing Fee, 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.
Except as 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 (a) through
(e) under "--Distributions--Distributions from Collection Account." These 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 that time is insufficient to pay any of the items specified in clauses
(f) through (h) and, in the case of the final Distribution Date upon
termination of the Trust, clauses (j) and (k) 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 (a) through (e),
clauses (f) through (h) and clauses (j) and (k), 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. 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 Swap Counterparty payments or Carryover
Servicing Fees. Amounts on deposit in the Reserve Account will be available to
pay principal on the Notes and accrued interest at the maturity of the Notes,
and to pay the Certificate Balance and accrued return, swap counterparty
payments and the Carryover Servicing Fee on the final Distribution Date upon
termination of the Trust.
Subordination of the Certificates. On any Distribution Date distributions
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 both interest and principal on 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 related expenses, the Administrator will be entitled to an
administration fee in an amount equal to $ per Collection Period payable in
arrears on each Distribution Date (the "Administration Fee").
Swap Agreement
Payments under the Swap Agreement. On the Closing Date, the Trust will enter
into a swap agreement (the "Swap Agreement") with (the "'Swap
Counterparty"). The Swap Agreement will be documented under a 1992 ISDA Master
Agreement (Multicurrency-Cross Border) ("1992 Master Agreement") modified to
reflect the terms of the Notes, the Certificates, the Indenture and the Trust
Agreement. The Swap Agreement will terminate on the Final Distribution Date or,
if earlier, the date on which the Swap Agreement terminates in accordance with
its terms due to an early termination (the "Swap Termination Date").
S-41
<PAGE>
In accordance with the terms of the Swap Agreement, the Swap Counterparty
will pay to the Administrator on behalf of the Trust, on or before the business
day preceding each Distribution Date while the Swap Agreement is still in
effect, an amount calculated on a quarterly basis equal to the sum of:
. the excess, if any, of the Class A-1L Rate over the Student Loan Rate
multiplied by the Notional Swap Amount for the Class A-1L Notes; plus
. the excess, if any, of the Class A-2L Rate over the Student Loan Rate
multiplied by the Notional Swap Amount for the Class A-2L Notes; plus
. the excess, if any, of the Certificate Rate over the Student Loan Rate
multiplied by the Notional Swap Amount for the Certificates.
The "Student Loan Rate" for any Accrual Period will be equal to the product
of:
(a) the quotient obtained by dividing 360 by the actual number of days
elapsed in that Accrual Period; and
(b) the percentage equivalent of a fraction,
. the numerator of which is equal to Expected Interest Collections for the
related Collection Period less the Primary Servicing Fee, the
Administration Fee and the Swap Fee and any prior unpaid Administration
Fees for that Collection Period and
. the denominator of which is the Pool Balance as of the first day of that
Collection Period.
"Expected Interest Collections" means, for any Collection Period, the sum
of:
. the amount of interest accrued, net of amounts required to be paid to
the Department or to be repaid to Guarantors or borrowers, for the Trust
Student Loans for that Collection Period (whether or not actually paid);
. all Interest Subsidy Payments and Special Allowance Payments pursuant to
claims submitted by the Eligible Lender Trustee for that Collection
Period (whether or not actually paid), net of amounts required to be
paid to the Department, for the Trust Student Loans, to the extent not
included in the preceding bullet; and
. investment earnings on amounts held in the Reserve Account and the
Collection Account for that Collection Period and interest on amounts to
be remitted by the Administrator to the Collection Account for that
Collection Period before the related Distribution Date.
The "Notional Swap Amount" for any Distribution Date for each of the Class
A-1L Notes, the Class A-2L Notes or the Certificates will be the outstanding
principal balance of those Notes or Certificates on the day immediately
preceding that Distribution Date. The sum of the Notional Swap Amounts for each
of the Class A-1L Notes, the Class A-2L Notes and the Certificates is referred
to as the "Aggregate Notional Swap Amounts".
In exchange for the Swap Counterparty's payments, the Trust will pay to the
Swap Counterparty, on each Distribution Date while the Swap Agreement is still
in effect, a blended fee (based upon the estimated weighted average life of the
Securities) equal to approximately % of the Aggregate Notional Swap Amounts
(the "Swap Fee"). The Swap Fee will be paid from the Collection Account before
any payments are made to the Noteholders or Certificateholders.
In addition, the Swap Counterparty will be paid on each Distribution Date
from the Collection Account, after funds from the Collection Account are
applied, if necessary, to reinstate the Reserve Account Balance to the
Specified Reserve Account Balance, an amount equal to any unreimbursed payments
made by the Swap Counterparty as of that Distribution Date plus interest
thereon.
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<PAGE>
Modifications and Amendment of the Swap Agreement. The Trust Agreement and
the Indenture will contain provisions permitting the Eligible Lender Trustee,
with the consent of the Indenture Trustee, to enter into any amendment to the
Swap Agreement requested by the Swap Counterparty to cure any ambiguity in, or
correct or supplement any provision of, the Swap Agreement, so long as the
Eligible Lender Trustee determines, and the Indenture Trustee agrees in
writing, that that amendment will not adversely affect the interest of the
Securityholders.
Conditions Precedent. The obligation of the Trust to pay certain amounts due
under the Swap Agreement will be subject to the conditions that no Swap Default
(as defined below) or event that with the giving of notice or lapse of time or
both would become a Swap Default has occurred and is continuing.
The Swap Counterparty's obligation to pay such amounts will not be subject to
these conditions unless principal of the Notes has been accelerated following
an Event of Default under the Indenture or an early termination under the Swap
Agreement has occurred or been designated.
Default Under the Swap. "Events of Default" under the Swap Agreement (each a
"Swap Default") are limited to:
. the failure of the Trust or the Swap Counterparty to pay any amount when
due under the Swap Agreement after giving effect to the applicable grace
period; provided, however that with respect to the Trust, the Trust has
available, after all prior obligations of the Trust, sufficient funds to
make such payment,
. the occurrence of certain events of insolvency or bankruptcy of the
Trust or the Swap Counterparty,
. an acceleration of the principal of the Notes following an Event of
Default under the Indenture, and
. the following other standard events of default under the 1992 Master
Agreement: "Credit Support Default" (not applicable to the Trust) and
"Merger Without Assumption" (not applicable to the Trust), as described
in Sections 5(a)(iii) and 5(a)(viii) of the 1992 Master Agreement.
Termination Events. "Termination Events" under the Swap Agreement include the
following standard events under the 1992 Master Agreement: "Illegality" (which
generally relates to changes in law causing it to become unlawful for either
party to perform its obligations under the Swap Agreement), "Tax Event" (which
generally relates to either party to the Swap Agreement receiving a payment
under the Swap Agreement from which an amount has been deducted or withheld for
or on account of taxes), "Tax Event Upon Merger" (not applicable to the Trust),
"Credit Event Upon Merger" (not applicable to the Trust) and an "Additional
Termination Event" relating to a credit rating downgrade of the Swap
Counterparty, as described in Section 5(b) of the 1992 Master Agreement.
Additional Termination Event. The Swap Agreement will include an "Additional
Termination Event" relating to withdrawal or downgrade of the Swap
Counterparty's credit rating. This Additional Termination Event will occur if:
. the counterparty or financial program rating of the Swap Counterparty is
withdrawn or downgraded below by [Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies, Inc., or any
successor rating agency ("S&P") or by Moody's Investors Service,
Inc. ("Moody's")] or any successor rating agency; and
. the Swap Counterparty has not, within 45 days of such withdrawal or
downgrade, procured a Collateral Arrangement, a Replacement Transaction
or a Rating Affirmation.
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<PAGE>
For purposes of this Additional Termination Event:
. "Collateral Arrangement" means either:
. An executed collateral agreement between the parties naming a third-
party collateral agent providing for the collateralization of the
Swap Counterparty's obligations under the Swap Agreement as measured
by the net present value of the Swap Counterparty's marked-to-market
obligations. The collateral, collateral levels, collateral agent and
other terms of such collateral agreement must be satisfactory to the
Swap Counterparty and the Trust in their reasonable judgment and to
the Rating Agency whose rating was lowered or withdrawn, or
. A letter of credit, guaranty or surety bond or insurance policy
covering the Swap Counterparty's obligations under the Swap
Agreement from a bank, guarantor or insurer having a debt rating (or
else a financial program or counterparty rating or claims paying
rating) of at least (a) by S&P and (b) by Moody's.
. "Replacement Transaction" means a transaction with a replacement
counterparty who assumes the Swap Counterparty's position under the Swap
Agreement on substantially the same terms or with such other amendments
to the terms of the Swap Agreement as may be approved by the parties and
each of the Rating Agencies.
. "Rating Affirmation" means a written acknowledgment from the Rating
Agency whose rating was lowered or withdrawn that, notwithstanding such
withdrawal or downgrade, the then-current rating of the Notes or the
Certificates will not be lowered.
Early Termination of the Swap. Upon the occurrence of any Swap Default under
the Swap Agreement or a Termination Event, the non-defaulting party or the non-
affected party, as the case may be, will have the right to designate an Early
Termination Date (as defined in the Swap Agreement) upon the occurrence of such
Swap Default or Termination Event. The Trust may not designate an Early
Termination Date without the consent of the Administrator. The occurrence of an
Early Termination Date under the Swap Agreement will constitute a "Swap Early
Termination".
Upon any Swap Early Termination of the Swap Agreement, the Trust or the
Swap Counterparty may be liable to make a termination payment to the other
(regardless, if applicable, of which of the parties has caused that
termination). The amount of that termination payment will be based on the value
of the Swap Agreement computed in accordance with the procedures set forth in
the Swap Agreement. In the event that the Trust is required to make such a
termination payment, such payment will be payable in the same order of priority
as any amount payable to the Swap Counterparty; provided, however, that, in the
event that a termination payment is owed to the Swap Counterparty following a
Swap Default resulting from a default of the Swap Counterparty or a Termination
Event, such termination payment will be subordinate to the right of the
Securityholders to receive full payment of principal of and interest on the
Securities and to the replenishment of the Reserve Account to the Specified
Reserve Account Balance.
, the Swap Counterparty, was formed as a in to act as
principal in a broad range of over-the-counter interest rate and currency
derivative products. Its principal place of business is .
The Swap Counterparty currently has an " " counterparty credit rating from
S&P and an " " counterparty rating from Moody's.
The information set out in the preceding two paragraphs has been provided by
the Swap Counterparty and is not guaranteed as to accuracy or completeness, and
is not to be construed as representations, by the Seller or the Underwriters.
Except for the foregoing two paragraphs, the Swap Counterparty and its
affiliates have not been involved in the preparation of, and do not accept
responsibility for, this Prospectus Supplement and the Prospectus.
S-44
<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 these entities (each of (a), (b) and (c), a "Plan") and
(d) persons who have certain specified relationships to these 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 as to a Plan by virtue of that investment. ERISA also imposes various
duties on persons who are fiduciaries of Plans subject to ERISA and prohibits
certain transactions between a Plan and its Parties in Interest or Disqualified
Persons.
The Seller, the Servicer, the Eligible Lender Trustee, the Indenture
Trustee and the Administrator may be the sponsor of or investment advisor for
one or more Plans. Because these parties may receive certain benefits from the
sale of the Notes, the purchase of the Notes using Plan assets over which any
of them 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 the Seller, the Servicer, the Eligible Lender Trustee, the
Indenture Trustee or the Administrator has investment authority over those
assets.
In addition, any Certificateholder, because of its activities or the
activities of its affiliates, may be deemed to be a Party in Interest or
Disqualified Person as to some Plans, including Plans sponsored by the
Certificateholder. If the Notes are acquired by a Plan for which a
Certificateholder is a Party in Interest or Disqualified Person, this
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. These include
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"; and
PTCE 96-23, which exempts certain transactions effected on behalf of a Plan by
certain "in-house" asset managers. However, even if the conditions specified in
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, before 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 will be
deemed to have represented that, an exemption from the prohibited transaction
rules applies, so that the use of the Plan's assets to purchase the Notes does
not and will not constitute a
S-45
<PAGE>
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. A fiduciary of such a plan may request of any Underwriters further
information regarding the initial Certificateholders in connection with
determining the possible applicability of an ERISA prohibited transaction
exemption.
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 exceptions in the regulation apply. The
Plan Asset Regulation defines an "equity interest" as any interest in an entity
other than an instrument that is treated as indebtedness under applicable local
law and which has no substantial equity features. If the Notes are treated as
debt for purposes of the Plan Asset Regulation, the Student Loans and the other
assets of the Trust should not be deemed to be assets of an investing Plan. If,
however, the Notes were treated as "equity" for purposes of the Plan Asset
Regulation, a Plan purchasing the 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.
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 the Plan's investment in
that 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 its Certificates are subsequently
deemed to be Plan assets, it will dispose of them.
Before 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 the investment in 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 diversification by type of asset of the Plan's portfolio;
. 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
The Notes and the Certificates listed below are offered severally by the
Underwriters, 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
, 20 against payment in immediately available funds and, in the case of
the Notes, also Cedel Bank, societe anonyme, and the Euroclear System.
Subject to the terms and conditions in the Underwriting Agreements for 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:
<TABLE>
<CAPTION>
Principal
Principal Amount of Principal Principal
Amount of Class Amount of Amount of Principal
Class A-1T A-1L Class A-2T Class A-2L Amount of
Underwriter Notes Notes Notes Notes Certificates
----------- ---------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
$ $ $ $ $
----- ----- ----- ----- -----
Total................. $ $ $ $ $
===== ===== ===== ===== =====
</TABLE>
The Underwriters have agreed, subject to the terms and conditions of the
Underwriting Agreements, to purchase all of the Notes and Certificates listed
above if any of the Notes or Certificates are purchased. The Underwriters have
advised the Seller that they propose initially to offer such Securities to the
public at the prices listed below, and to certain dealers at these prices less
concessions not in excess of the concessions listed below. The Underwriters may
allow and such dealers may reallow concessions to other dealers not in excess
of the reallowances listed below. After the initial public offering, these
prices and concessions may be changed.
<TABLE>
<CAPTION>
Initial Public Underwriting Proceeds To
Offering Price(1) Discount The Seller(1)(2) Concession Reallowance
----------------- ------------ ---------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Per Class A-1T Note..... % % % % %
Per Class A-1L Note..... % % % % %
Per Class A-2T Note..... % % % % %
Per Class A-2L Note..... % % % % %
Per Certificate......... % % % % %
Total................... $ $ $
</TABLE>
- --------
(1) Plus accrued interest, if any, or return, if any, from , 20 .
(2) Before deducting estimated expenses of $ payable by the Seller.
[Sallie Mae intends to purchase $ of the Class Notes (included
in "Total" in the preceding table) and may resell these Notes from time to time
through the Underwriters or dealers after the Closing Date in negotiated
transactions, at varying prices to be determined at the time of sale. The
Seller has agreed to pay the Underwriters a management fee of % on the Notes
Sallie Mae intends to purchase.]
The Seller and Sallie Mae have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
S-47
<PAGE>
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. An
affiliate of has received compensation for arranging the swap
transaction contemplated by the Swap Agreement.
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 engage in transactions,
including open market purchases and sales, to stabilize the prices of the Notes
and Certificates.
The lead Underwriter, for example, may over-allot the Notes and
Certificates for the account of the underwriting syndicate to create a
syndicate short position by accepting orders for more Notes and Certificates
than are to be sold.
In addition, the Underwriters may impose a penalty bid on the broker-
dealers who sell the Notes and Certificates. This means that if an Underwriter
purchases Notes or Certificates in the open market to reduce a broker-dealer's
short position or to stabilize the prices of the Notes or Certificates, it may
reclaim the selling concession from the broker-dealer who sold those Notes or
Certificates as part of the offering.
In general, over-allotment transactions and open market purchases of the
Notes and Certificates for the purpose of stabilization or to reduce a short
position could cause the price of a Note or Certificate to be higher than it
might be in the absence of such transactions.
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
S-48
<PAGE>
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.
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.
This Prospectus Supplement and the accompanying Prospectus have not been
registered as a prospectus with the Registrar of Companies and Businesses in
Singapore and the Securities will be offered in Singapore pursuant to an
exemption invoked under Section 106C of the Companies Act, Chapter 50, of
Singapore (the "Singapore Companies Act"). Accordingly, the Underwriters
offering Securities have acknowledged and agreed that they have not offered or
sold and will not offer or sell the Securities nor will they circulate or
distribute this Prospectus Supplement, the accompanying Prospectus or any other
offering document or material relating to the Securities, either directly or
indirectly, to the public or any member of the public in Singapore other than
to an institutional investor or other person specified in Section 106C of the
Singapore Companies Act; to a sophisticated investor, and in accordance with
the conditions specified in Section 106D of the Singapore Companies Act; or
otherwise pursuant to, and in accordance with the conditions of, any other
applicable provision of the Singapore Companies Act.
RATINGS OF THE SECURITIES
It is a condition to the issuance and sale of the Notes that they be rated
in the highest investment rating category by at least two nationally recognized
rating agencies identified in the Indenture (the "Rating Agencies"). It is a
condition to the issuance and sale of the Certificates that they be rated in
one of the three highest investment rating categories by the Rating Agencies. 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.
LEGAL MATTERS
Marianne M. Keler, Esq., General Counsel of Sallie Mae, as counsel to
Sallie Mae, the Servicer and the Seller, and Cadwalader, Wickersham & Taft,
Washington, D.C., as special counsel to Sallie Mae, the Servicer and the
Seller, will give opinions on specified legal matters for the Trust, the
Seller, the Servicer and the Administrator. Shearman & Sterling, Washington,
D.C. will give an opinion on specified federal income tax matters for the
Trust. Richards, Layton & Finger, P.A., as Delaware tax counsel for the Trust,
will give an opinion on specified Delaware state income tax matters for the
Trust. Cadwalader, Wickersham & Taft, Washington, D.C., and Shearman &
Sterling, Washington, D.C. will give opinions on specified legal matters for
the Underwriters.
S-49
<PAGE>
INDEX OF DEFINED TERMS
FOR PROSPECTUS SUPPLEMENT
This is a list of the defined terms used in this Prospectus Supplement and
the pages where you can find their definitions.
<TABLE>
<CAPTION>
Page
---------
<S> <C>
1992 Amendments....................................................... S-25
1992 Master Agreement................................................. S-41
91-day Treasury Bills................................................. S-33
Accrual Period........................................................ S-4
Additional Termination Event.......................................... S-43
Adjusted Pool Balance................................................. S-40
Administration Agreement.............................................. S-6
Administration Fee.................................................... S-41
Administrator......................................................... S-6
Aggregate Notional Swap Amounts....................................... S-42
Available Funds....................................................... S-36
Carryover Servicing Fee............................................... S-9
Cede.................................................................. S-16
Certificate Balance................................................... S-38
Certificate Balance Distribution Amount............................... S-38
Certificate Balance Shortfall......................................... S-38
Certificate Rate...................................................... S-32
Certificate Return Shortfall.......................................... S-39
Certificateholders' Distribution Amount............................... S-39
Certificateholders' Return Distribution Amount........................ S-39
Certificates.......................................................... S-5
Class A-1 Maturity Date............................................... S-5
Class A-1L Rate....................................................... S-4, S-31
Class A-1T Rate....................................................... S-4, S-31
Class A-2 Maturity Date............................................... S-5
Class A-2L Rate....................................................... S-4, S-31
Class A-2T Rate....................................................... S-4, S-31
Closing Date.......................................................... S-4
Code.................................................................. S-45
Collateral Arrangement................................................ S-44
Collection Period..................................................... S-8
Commission............................................................ S-16
Consolidation Loans................................................... S-7
Credit Event Upon Merger.............................................. S-43
Cutoff Date........................................................... S-7
Deferral.............................................................. S-21
Department............................................................ S-7
Determination Date.................................................... S-36
Disqualified Persons.................................................. S-45
Distribution Date..................................................... S-4
DTC................................................................... S-16
Eligible Investments.................................................. S-35
Eligible Lender Trustee............................................... S-6
ERISA................................................................. S-45
Events of Default..................................................... S-43
Exchange Act.......................................................... S-16
</TABLE>
S-50
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Expected Interest Collections.............................................. S-42
FFELP...................................................................... S-7
Final Distribution Date.................................................... S-6
Five-Month LIBOR........................................................... S-34
Forbearance................................................................ S-21
Grace...................................................................... S-21
Guarantor.................................................................. S-25
Illegality................................................................. S-43
In-School.................................................................. S-21
Indenture.................................................................. S-6
Indenture Trustee.......................................................... S-6
Index Maturity............................................................. S-34
Initial Pool Balance....................................................... S-40
LIBOR Determination Date................................................... S-35
Liquidated Student Loans................................................... S-37
Liquidation Proceeds....................................................... S-37
Lock-In Period............................................................. S-33
Minimum Purchase Amount.................................................... S-10
Monthly Servicing Payment Date............................................. S-9
Moody's.................................................................... S-43
Note Interest Shortfall.................................................... S-39
Note Principal Shortfall................................................... S-39
Note Rates................................................................. S-31
Noteholders' Distribution Amount........................................... S-39
Noteholders' Interest Distribution Amount.................................. S-39
Noteholders' Principal Distribution Amount................................. S-39
Notes...................................................................... S-1
Notional Swap Amount....................................................... S-42
Parties in Interest........................................................ S-45
Plan....................................................................... S-45
Plan Asset Regulation...................................................... S-46
Pool Balance............................................................... S-39
Primary Servicing Fee...................................................... S-9
Principal Distribution Amount.............................................. S-40
PTCE....................................................................... S-45
Purchase Agreement......................................................... S-15
Purchased Student Loans.................................................... S-37
Rating Affirmation......................................................... S-44
Rating Agencies............................................................ S-49
Realized Loss.............................................................. S-40
Reauthorization Legislation ............................................... S-13
Record Date................................................................ S-4
Reference Banks............................................................ S-35
Regulations................................................................ S-49
Repayment.................................................................. S-21
Replacement Transaction.................................................... S-44
Reserve Account............................................................ S-7
Reserve Account Initial Deposit............................................ S-7
S & P...................................................................... S-43
</TABLE>
S-51
<PAGE>
<TABLE>
<CAPTION>
Page
----------
<S> <C>
Sale Agreement....................................................... S-15
Sallie Mae........................................................... S-6
Securities........................................................... S-4
Seller............................................................... S-7
Servicer............................................................. S-9
Singapore Companies Act.............................................. S-49
Significant Guarantors............................................... S-29
Specified Reserve Account Balance.................................... S-8, S-40
Student Loan Rate.................................................... S-41
Swap Agreement....................................................... S-41
Swap Counterparty.................................................... S-41
Swap Default......................................................... S-43
Swap Early Termination............................................... S-44
Swap Termination Date................................................ S-41
Swap Fee............................................................. S-42
T-Bill Rate.......................................................... S-33
Tax Event............................................................ S-43
Tax Event Upon Merger................................................ S-43
Telerate Page 3750................................................... S-35
Termination Events................................................... S-43
Three-Month LIBOR.................................................... S-34
Trust................................................................ S-15
Trust Accounts....................................................... S-35
Trust Agreement...................................................... S-15
Trust Auction Date................................................... S-10
Underwriters......................................................... S-47
Underwriting Agreements.............................................. S-47
</TABLE>
S-52
<PAGE>
$
SLM Student Loan Trust 200-
$ Floating Rate Class A-1T Student Loan-Backed Notes
$ Floating Rate Class A-1L Student Loan-Backed Notes
$ Floating Rate Class A-2T Student Loan-Backed Notes
$ Floating Rate Class A-2L Student Loan-Backed Notes
$ Floating Rate Student Loan-Backed Certificates
SLM Funding Corporation
Seller
Sallie Mae Servicing Corporation
Servicer
-------------------
PROSPECTUS SUPPLEMENT
-------------------
[Underwriter]
You should rely only on the information contained or incorporated by reference
in this Prospectus Supplement and the Prospectus. We have not authorized
anyone to provide you with different information.
We are not offering the Notes or the Certificates in any state or other
jurisdiction where the offer is prohibited.
We do not claim the information in this Prospectus Supplement and the
Prospectus is accurate as of any date other than the dates stated on their
covers.
Dealers must deliver a Prospectus Supplement and Prospectus when acting as
underwriters of the Notes or Certificates and with respect to their unsold
allotments or subscriptions. In addition, all dealers selling any Note or
Certificate must deliver a Prospectus Supplement and a Prospectus until
[ ], 20 .
[ ], 20
