AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 27, 2001
REGISTRATION NO. 333-62624
333-62624-01
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
KEYCORP STUDENT LOAN TRUSTS
(Issuer of the Notes and the Certificates)
KEY BANK USA, NATIONAL ASSOCIATION
(Seller and Master Servicer)
(Exact name of Registrant as specified in its charter)
UNITED STATES 34-1804148
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
KEY CONSUMER RECEIVABLES LLC
(Originator of the Trust described herein)
(Exact name of Registrant as specified in its charter)
DELAWARE 34-1938746
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
KEY TOWER
127 PUBLIC SQUARE
CLEVELAND, OHIO 44114
(216) 689-6300
(216) 828-8122
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
DANIEL R. STOLZER, ESQ.
SENIOR VICE PRESIDENT
AND ASSOCIATE GENERAL COUNSEL
KEYCORP
KEY TOWER
127 PUBLIC SQUARE
CLEVELAND, OHIO 44114
(216) 689-6300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
ROBERT A. SELAK, ESQ. REED D. AUERBACH, ESQ.
THOMPSON HINE LLP STROOCK & STROOCK & LAVAN LLP
312 WALNUT STREET 180 MAIDEN LANE
SUITE 1400 NEW YORK, NEW YORK 10038
CINCINNATI, OHIO 45202
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, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /x/
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering./ / __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
================================================================================
=======================================
Proposed maximum
Proposed maximum
Title of each class of securities Amount to be offering price
aggregate Amount of
to be registered(1) registered per unit(2)
offering price(2) registration fee(3)
- --------------------------------------------------------------------------------
- ---------------------------------------
Asset Backed Notes and Asset Backed $3,500,000,000 100%
$3,500,000,000 $648,152.00(4)
Certificates
================================================================================
=======================================
(1) This Registration Statement is also related to market-making transactions
that may be made by McDonald Investments Inc., an affiliate of the
Registrant.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Calculated pursuant to Rule 457(a) of the Securities Act.
(4) $278.00 of which was previously paid; and pursuant to Rule 457(p) of the
Securities Act, $226,570, representing the previously paid but unused
registration fee in connection with registration statement on Form S-3 number
333-80109, is hereby applied as an offset to the registration fee due in
connection herewith. Market making activities, for which no fee is required,
will
continue in connection with securities previously issued under registration
statement no. 333-80109.
THE REGISTRATION STATEMENT IS ALSO BEING USED TO REGISTER SECURITIES THAT MAY BE
SOLD IN MARKET-MAKING TRANSACTIONS BY AN AFFILIATE OF THE REGISTRANT. THE
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
EXPLANATORY NOTE
THIS REGISTRATION STATEMENT CONTAINS (i) A FORM OF PROSPECTUS SUPPLEMENT,
RELATING TO A PUBLIC OFFERING BY KEYCORP STUDENT LOAN TRUSTS (THE "TRUST") OF
ASSET BACKED NOTES AND ASSET BACKED CERTIFICATES (COLLECTIVELY, THE
"SECURITIES"); (ii) CERTAIN PAGES OF A SECOND FORM OF PROSPECTUS SUPPLEMENT
WHICH MAY BE USED IN CONNECTION WITH OFFERS AND SALES RELATING TO MARKET-MAKING
TRANSACTIONS IN THE SECURITIES BY AN AFFILIATE OF THE REGISTRANT AND (iii) A
BASE PROSPECTUS RELATING TO THE SECURITIES. THE FORM OF PROSPECTUS SUPPLEMENT
RELATING TO THE SECURITIES FOLLOWS IMMEDIATELY AFTER THIS EXPLANATORY NOTE.
FOLLOWING SUCH FORM OF PROSPECTUS SUPPLEMENT ARE ALTERNATE PAGES OF THE
MARKET-MAKING FORM OF PROSPECTUS SUPPLEMENT RELATING TO THE SECURITIES. ALL
OTHER PAGES OF THE PUBLIC OFFERING FORM OF PROSPECTUS SUPPLEMENT FOR THE
SECURITIES ARE ALSO TO BE USED FOR THE MARKET-MAKING PROSPECTUS.
Information contained herein is subject to completion or amendment. A
registration statement relating to these Securities has been filed with the
Securities and Exchange Commission. These Securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these Securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED____________________
[SUBJECT TO COMPLETION DATED JULY 27, 2001]
$________________
KEYCORP STUDENT LOAN TRUST _____-__
KEY BANK USA, NATIONAL ASSOCIATION
Seller and Master Servicer
FLOATING RATE ASSET-BACKED NOTES
FLOATING RATE ASSET-BACKED CERTIFICATES
-----------------------------
SECURITIES OFFERED You should carefully consider
o classes of notes and certificates the risk factors beginning
listed in the table below on page S-9 of this
prospectus supplement and page
6 of the prospectus.
ASSETS
o student loans The securities are obligations
o certain student loans guaranteed only of the trust and are
by federal or private guarantors payable solely from the
student loans and other assets
CREDIT ENHANCEMENT of the trust. The initial
o Notes principal balance of the
o subordination of certificates student loans will be less
o reserve account than the initial principal
o certificates balance of the securities. The
o reserve account securities are not guaranteed
by any person. The securities
are not bank deposits.
-----------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the prospectus to which it relates is truthful or
complete. Any representation to the contrary is a criminal offense.
Interest
Proceeds to
Original Principal Rate (per Final Price to
Underwriting the
Amount annum) Maturity Date Public
(1) Discount Seller(1)(2)
Class A-1 Notes $ %
% %
Class A-2 Notes $ %
% %
Certificates $ %
% %
Total......... $ $
$ $
(1)......Plus accrued interest, if any, from ___________.
(2)......Before deducting expenses, estimated to be $_______________.
Delivery of the securities will be made on or about ____________, 19__, against
payment in immediately available funds.
[NAMES OF UNDERWRITERS]
Prospectus Supplement dated _____________, _________
YOU SHOULD RELY ON INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS
DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE
INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT.
We provide information to you about the securities in two separate
documents that progressively provide more detail: (1) the accompanying
prospectus, which provides general information, some of which may not apply to
your securities and (2) this prospectus supplement, which describes the specific
terms of your securities.
UNTIL ______________, _______ ALL DEALERS THAT EFFECT TRANSACTIONS IN
THE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED
TO DELIVER A PROSPECTUS AND PROSPECTUS SUPPLEMENT. THIS REQUIREMENT IS IN
ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS AND PROSPECTUS
SUPPLEMENT WHEN ACTING AS UNDERWRITERS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
We are not offering the securities in any state where the offer is not
permitted. We do not claim the accuracy of the information in this prospectus
supplement and the accompanying prospectus as of any date other than the dates
stated on their respective covers.
TABLE OF CONTENTS
PAGE
SUMMARY OF TERMS.......................................................S-1
RISK FACTORS...........................................................S-6
FORMATION OF THE TRUST................................................S-13
USE OF PROCEEDS.......................................................S-15
THE MASTER SERVICER AND THE SUB-SERVICERS.............................S-15
THE FINANCED STUDENT LOAN POOL........................................S-17
DESCRIPTION OF THE SECURITIES.........................................S-48
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS..................S-56
INCOME TAX CONSEQUENCES...............................................S-77
ERISA CONSIDERATIONS..................................................S-78
UNDERWRITING..........................................................S-79
LEGAL MATTERS.........................................................S-81
INDEX OF PRINCIPAL TERMS..............................................S-82
SUMMARY OF TERMS
This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to consider
in making your investment decision. To understand all of the terms of the
offering of the securities, we recommend that you carefully read this entire
prospectus supplement and the accompanying prospectus.
PRINCIPAL PARTIES
THE TRUST
o KeyCorp Student Loan Trust ____-___
THE SELLER, MASTER SERVICER AND ADMINISTRATOR
o Key Bank USA, National Association
THE SUB-SERVICERS
o Pennsylvania Higher Education Assistance Agency
o Great Lakes Educational Loan Services, Inc.
THE ELIGIBLE LENDER TRUSTEE
o [The First National Bank of Chicago]
THE INDENTURE TRUSTEE
o [Bankers Trust Company]
THE GUARANTORS
o American Student Assistance
o California Student Aid Commission
o Educational Credit Management Corporation
o HEMAR Insurance Corporation of America
o Nebraska Student Loan Program
o New York State Higher Education Services
o Pennsylvania Higher Education Assistance Agency
o The Education Resources Institute, Inc.
o United Student Aid Funds, Inc.
DATES
DISTRIBUTION DATES
The 25th day of each January, April, July, and October or if the 25th is not a
business day, the next business day. The first distribution date is _________
25th, _____.
CUTOFF DATE
_______ __________ for the initial student loans and _______ __________
for the subsequent pool student loans.
STATISTICAL CUTOFF DATE
___________, ___________. The statistical cutoff date is the date as of which
certain information with respect to student loans is presented in this
prospectus supplement.
CLOSING DATE
On or about __________.
DESCRIPTION OF THE SECURITIES
OFFERED SECURITIES
o [Two] classes of notes and [one] class of certificates
o Original principal amounts and interest rates are on the cover page of
this prospectus supplement
o Securities issued in book-entry form through the Depository Trust
Company, Cedelbank and the Euroclear System
o Minimum denominations of $1,000
TREASURY BILL INDEXED SECURITIES
o _____________________________
LIBOR INDEXED SECURITIES
o _____________________________
INTEREST PAYMENTS
o Each interest rate is subject to an interest rate cap described in this
prospectus supplement under the caption "Description of the Securities"
herein.
o Interest calculations
o actual/360 for the LIBOR indexed securities
o actual/365 or 366 as applicable for the Treasury-Bill indexed securities
o Interest not paid on a distribution date due to the interest rate cap may
be paid on future distribution dates as described in this prospectus
supplement under the caption "Description of the Securities" herein.
PRINCIPAL PAYMENTS
Principal payments on the securities will be made on each distribution date in
an amount described in this prospectus supplement under the caption "Description
of the Securities" herein.
PRIORITY OF PAYMENTS
On each distribution date, the indenture trustee will make the following
distributions and deposits to the extent of available funds in the order
indicated:
(1) to the master servicer certain fees;
(2) to the administrator, certain fees;
(3) to the holders of the notes, interest [on a pro rata basis];
(4) to the holders of the certificates, interest;
(5) to the reserve account, an amount, if any, necessary to reinstate the
balance of the reserve account to a specified amount;
(6) to the holders of the notes, principal as follows:
[(a) first to the Class A-1 Notes until paid in full; and then
(b) to the Class A-2 Notes until paid in full;]
(7) following the date on which the notes have been paid in full, to the
holders of the certificates, principal;
(8) to the master servicer certain fees;
(9) [to the holders of the notes, interest due in excess of the interest
rate cap, if any, on a pro rata basis;]
(10) [to the holders of the certificates, interest due in excess of the
interest rate cap, if any;] and
(11) to the seller, any remaining amounts.
FINAL MATURITY DATES
The unpaid principal amount of each class of securities will be payable in full
on the applicable final maturity date listed on the cover page of this
prospectus supplement.
AUCTION SALE
Any student loans remaining in the trust as of the end of the collection period
immediately preceding the __________ distribution date will be offered for sale.
The proceeds of any sale will be used to redeem your securities. The auction
price must at least equal the unpaid principal amount of the securities, plus
accrued and unpaid interest.
OPTIONAL PURCHASE
The seller may repurchase all remaining student loans when the principal balance
of the pool of student loans is equal to [5%] [10%] or less of the initial
principal balance of the pool of student loans.
TRUST PROPERTY
THE INITIAL STUDENT LOANS
The initial student loans consist of certain graduate and undergraduate student
loans. The initial student loans have the following characteristics as of
________, _____:
o Aggregate principal
amount: $______________
o Weighted average annual
percentage rate: _____%
o Weighted average original
term: _________ months
o Weighted average remaining
term: _________ months
o Percent reinsured by the
Department of Education _____%
o Percent not reinsured by the
Department of Education _____%
o Percent guaranteed by federal
guarantors _____%
o Percent guaranteed by the
Pennsylvania Higher
Education Assistance
Agency _____%
o Percent guaranteed by American
Student Assistance _____%
o Percent guaranteed by Nebraska
Student Loan Program _____%
o Percent guaranteed by Educational
Credit Management Corporation _____%
o Percent guaranteed by California
Student Aid Commission _____%
o Percent guaranteed by New York
State Higher Education Services
Corporation _____%
o Percent guaranteed by United Student
Aid Funds, Inc. _____%
o Percent guaranteed by private guarantors _____%
o Percent guaranteed by The Educational
Resources Institute, Inc. _____%
o Percent guaranteed by HEMAR
Insurance Corporation _____%
o Percent not guaranteed by any party or
reinsured by Department of Education _____%
o Percent of graduate school loans _____%
o Percent of undergraduate school loans _____%
The trust will purchase the initial student loans on the closing date.
SUBSEQUENT POOL STUDENT LOANS
The subsequent pool student loans consist of certain graduate and undergraduate
student loans. The subsequent pool student loans have the following
characteristics as of ____________, ____:
o Aggregate principal amount: $_______________
o Weighted average annual percentage rate: ____%
o Weighted average original term ______ months
o Weighted average remaining term ______ months
o Percent reinsured by the Department of
Education _____%
o Percent not reinsured by the Department of
Education _____%
o Percent guaranteed by federal guarantors _____%
o Percent guaranteed by the Pennsylvania Higher
Education Assistance Agency _____%
o Percent guaranteed by American Student Assistance _____%
o Percent guaranteed by Nebraska
o Student Loan Program _____%
o Percent guaranteed by Educational Credit
Management Corporation _____%
o Percent guaranteed by California Student Aid
Commission _____%
o Percent guaranteed by New York State Higher
Education Services Corporation _____%
o Percent guaranteed by United Student Aid Funds,
Inc. _____%
o Percent guaranteed by private guarantors _____%
o Percent guaranteed by The Educational Resources
Institute, Inc. _____%
o Percent guaranteed by HEMAR Insurance Corporation _____%
o Percent not guaranteed by any party or reinsured
by Department of Education _____%
o Percent of graduate school loans _____%
o Percent of undergraduate school loans _____%
OTHER STUDENT LOANS
Following ________, _______ and prior to ________, ________, the trust expects
to purchase other consolidation loans and serial loans made to borrowers with
student loans previously purchased by the trust. The trust expects to purchase
these other student loans with certain collections on the pool of existing
student loans that are not required to be distributed to you or paid to the
trustee, the master servicer or the administrator.
PRE-FUNDING ACCOUNT
There will be a pre-funding account of approximately $_______________. The trust
expects to use those amounts to purchase (1) prior to __________ __, _______
subsequent pool student loans and certain other federally or privately
guaranteed student loans, and (2) prior to ________ __, ____, consolidation
loans and serial loans, to pay capitalized interest on the pool of student loans
and to pay advances for certain fees related to the student loans.
THE RESERVE ACCOUNT
There will be a reserve account to cover servicing fees, administration fees,
interest on the notes and, except as described under "Description of the
Transfer and Servicing Agreements -Credit Enhancement" herein, interest on the
certificates. Amounts on deposit in the reserve account also will be available,
if necessary, to reduce the principal balance of each class of securities to
zero on its respective final maturity date.
Initially, the amount in the reserve account will be $___________. On each
distribution date, any available funds remaining after making all prior required
distributions will be deposited into the reserve account.
TAX STATUS
Thompson Hine LLP, as federal tax counsel to the trust, is of the
opinion that (1) the trust will not be classified as an association or a
publicly traded partnership taxable as a corporation for federal income tax
purposes and (2) the notes will be characterized as debt for federal income tax
purposes. Each noteholder, by accepting a note, will agree to treat the notes as
indebtedness.
Kirkpatrick & Lockhart LLP, as Pennsylvania tax counsel to the trust, is of the
opinion that the same characterizations of the notes and the trust would apply
for Pennsylvania state income tax purposes as for federal income tax purposes.
ERISA CONSIDERATIONS
Subject to the considerations discussed under "ERISA Considerations" herein the
notes are eligible for purchase by employee benefit plans.
The certificates may not be acquired by employee benefit plans or other
retirement arrangements subject to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), and/or Section 4975 of the Internal Revenue Code
of 1986, as amended or by any other entity that is deemed to hold assets of such
plan or arrangement.
RATINGS
At least two nationally recognized rating agencies (each a "Rating Agency" and
together, the "Rating Agencies") must each rate the notes in the highest
investment rating category and must rate the certificates in one of the four
highest investment rating categories.
RISK FACTORS
We recommend that you consider the following risk factors together
with all the information contained in this prospectus supplement (this
"Prospectus Supplement") and the related prospectus (the "Prospectus") in
deciding whether to purchase any of the securities.
YOU MAY HAVE DIFFICULTY SELLING
YOUR SECURITIES The securities will not be listed on any
securities exchange. As a result, if you
want to sell your securities you must
locate a purchaser that is willing to
purchase those securities. The
underwriters intend to make a secondary
market for the securities. The
underwriters will do so by offering to
buy the securities from investors that
wish to sell. However, the underwriters
will not be obligated to make offers to
buy the securities and may stop making
offers at any time. In addition, the
prices offered, if any, may not reflect
prices that other potential purchasers
would be willing to pay, were they to be
given the opportunity. There have been
times in the past where there have been
very few buyers of asset backed
securities, and there may be such times
in the future. As a result, you may not
be able to sell your securities when you
want to do so or you may not be able to
obtain the price that you wish to
receive.
IF THE TRUST ASSETS ARE
INSUFFICIENT TO MAKE PAYMENTS ON THE
SECURITIES, YOU MAY INCUR A LOSS The trust is not permitted to have any
significant assets or sources of funds
other than the student loans, the
guarantee agreements, the reserve
account, the escrow account and the
pre-funding account. The notes and the
certificates will not be insured or
guaranteed by any entity. Consequently,
you must rely for repayment upon
payments only from the trust's assets.
If the pre-funding account and the
reserve account are exhausted, the trust
will depend solely on payments with
respect to the student loans to make
payments on the securities and you could
suffer a loss. You will have no claim to
any amounts properly distributed to Key
Bank USA, National Association, in its
capacities as seller, administrator or
master servicer, or to any of the
sub-servicers, from time to time.
THE TRUST'S PURCHASE OF STUDENT
LOANS AT A PREMIUM MAY RESULT
IN LOSSES The original principal amount of the
securities will be equal to
approximately ________% of the sum of
the outstanding principal balance of the
student loans as of the cutoff date and
the amount deposited in the pre-funding
account, the reserve account and the
collection account on the closing date.
In addition, each subsequent pool
student loan will be purchased by the
trust for an amount equal to _____% of
the principal balance thereof. In
addition, _____% of the initial pool of
student loans and ____% of the
subsequent pool student loans have
repayment terms that require borrowers
to make only interest payments for the
first two years after entry into
repayment. We cannot assure you as to
when the aggregate principal amount of
the securities will be equal to or less
than the sum of the principal amount of
the pool of student loans and the
amounts on deposit in the reserve
account. If the student loans were
liquidated at a time when the
outstanding principal amount of the
securities exceeded the sum of the
principal amount of the student loans,
the amount on deposit in the pre-funding
account and the amounts on deposit in
the reserve account, you may suffer a
loss.
THE CERTIFICATES WILL ABSORB CASH
SHORTFALLS AND LOSSES BEFORE THE NOTES The rights of the holders of
certificates to receive payments of
interest are subordinated to the rights
of the holders of notes to receive
payments of interest. The holders of
certificates will not receive any
payments of principal until the notes
are paid in full. Consequently, amounts
available to cover cash shortfalls will
be applied to the payment of interest on
the notes before payment of interest on
the certificates. In addition, if the
pool of student loans is liquidated
because of an event of default under the
indenture or the insolvency of Key Bank
USA, National Association, all amounts
due on the notes will be payable before
any amounts are payable on the
certificates. Additionally, if the
outstanding principal balance of the
notes is in excess of a specified
amount, described under "Description of
the Transfer and Servicing Agreements -
Credit Enhancement" herein, principal
will be payable to the holders of the
notes in the amount of such excess to
the extent of funds available before any
amounts are payable to the holders of
the certificates. If amounts otherwise
allocable to the certificates are used
to fund payments of interest or
principal on the notes, distributions on
the certificates may be delayed or
reduced.
THE CHARACTERISTICS OF THE
STUDENT LOANS MAY CHANGE Certain characteristics of the student
loans will vary from the characteristics
of the initial student loans and the
subsequent pool student loans due to the
trust's purchase of consolidation loans
and serial loans. The distribution by
weighted average interest rates may vary
as a result of variations in the
effective rates of interest applicable
to the student loans after each transfer
of additional student loans to the trust
and the remaining term of the deferral
and forbearance periods.
The seller currently makes available and
may in the future make available certain
incentive programs to borrowers. The
effect of these incentive programs may
be to reduce the yield on the initial
pool of student loans.
YOUR YIELD TO MATURITY MAY BE
REDUCED BY PREPAYMENTS,
DELINQUENCIES AND DEFAULTS The pre-tax return on your investment is
uncertain and will depend on a number of
factors including the following:
o THE RATE OF RETURN OF PRINCIPAL IS
UNCERTAIN. The amount of
distributions of principal on the
securities and the time when you
receive those distributions depends
on the amount and the times at which
borrowers make principal payments on
the student loans. Those principal
payments may be regularly scheduled
payments or unscheduled payments
resulting from prepayments, defaults
or consolidations of the student
loans.
o YOU MAY RECEIVE A LARGE PRINCIPAL
PREPAYMENT ON ______ __, ___. The
trust will allocate an identified
portion of the student loans to a
subsequent pool to be purchased by
the trust from funds on deposit in a
subaccount of the pre-funding
account. If the amount in the
applicable subaccount of the
pre-funding account is not
substantially used to purchase the
student loans allocated to the
subsequent pool by _________, ___,
you may receive a principal
prepayment. If the amount remaining
is $___________ or less, the
indenture trustee will distribute
such amount on the Class A-1 Notes;
otherwise the indenture trustee will
distribute the amount on each class
of securities, pro rata, based on the
initial principal balance of each
class of securities.
o YOU MAY RECEIVE A PREPAYMENT OF
PRINCIPAL AT END OF FUNDING period.
If the amount in the applicable
subaccount of the pre-funding account
is not fully used to purchase student
loans that are consolidation loans,
serial loans and other student loans
(that are primarily federally or
privately guaranteed student loans)
that are eligible to be purchased by
the trust by the end of the funding
period, you may receive a principal
prepayment. Any such amount will be
distributed on the next distribution
date.
o YOU MAY NOT BE ABLE TO REINVEST
DISTRIBUTIONS IN COMPARABLE
INVESTMENTS. Asset backed securities,
like the securities offered hereby,
usually produce more returns of
principal to investors when market
interest rates fall below the
interest rates on the student loans
and produce less returns of principal
when market interest rates are above
the interest rates on the student
loans. As a result, you are likely to
receive more money to reinvest at a
time when other investments generally
are producing a lower yield than that
on the securities, and are likely to
receive less money to reinvest when
other investments generally are
producing a higher yield than that on
the securities. You will bear the
risk that the timing and amount of
distributions on your securities will
prevent you from attaining your
desired yield.
o AN EARLY TERMINATION WILL SHORTEN
THE LIFE OF YOUR INVESTMENT WHICH MAY
REDUCE YOUR YIELD TO MATURITY. Your
investment in the securities may end
before you desire if (1) the
indenture trustee successfully
conducts an auction sale or (2) the
seller exercises its option to
purchase all of the assets of the
trust. Because your securities will
no longer be outstanding, you will
not receive the additional interest
payments that you would have received
had the securities remained
outstanding. In addition, you may not
be able to reinvest the principal you
receive at a rate comparable to that
on your securities.
YOU MAY NOT RECEIVE CURRENT
PAYMENTS AT THE APPLICABLE INTEREST
RATE You may not be paid interest at the
related note rate or certificate rate as
a result of an interest rate cap. The
interest rate cap may be triggered as a
result of:
o Due to market forces, the
applicable index used to calculate
interest on the securities (plus the
applicable margin) becoming greater
than the indices used to calculate
interest on the student loans.
o The principal balance of the
student loans will initially be less
than the aggregate principal amount
of the securities. Consequently, the
aggregate principal balances of the
student loans on which interest will
be collected will be less than the
principal amount of the securities.
o The interest rate cap will be
reduced as a result of the trust's
obligation to pay certain amounts to
the Department of Education or to
repay certain amounts to borrowers.
Although you may receive interest not
paid because of the interest rate cap on
subsequent distribution dates, we cannot
assure you that there will be sufficient
funds available for that purpose. If the
note rate or certificate rate is limited
by the interest rate cap, the market
value and liquidity of your securities
may decline.
RELIANCE ON SUB-SERVICERS FOR
SERVICING STUDENT LOANS Although the master servicer is
obligated to cause the student loans to
be serviced in accordance with the terms
of the transaction agreements, the
timing of payments will be directly
affected by the ability of the
sub-servicers to adequately service the
student loans. In addition, you will be
relying on each of the sub-servicers'
compliance with applicable, federal and
private program regulations to ensure
that the guarantors are obligated to
maintain guaranteed payments and that
any reinsurance by the Department of
Education is maintained. If a
sub-servicer defaults on its obligations
and is terminated, you will be relying
on the ability of the master servicer to
find an alternative sub-servicer to
service the student loans and you may
suffer a delay in the timing of payments
until any transfer of servicing is
completed or effective.
RISK OF DEFAULT OF UNGUARANTEED
STUDENT LOANS Approximately ___% of the initial
student loans and ___% of the subsequent
pool student loans are not guaranteed or
insured by any federal or private
guarantor, or by any other party or
governmental agency. Consequently, you
will bear any risk of loss resulting
from the default by any borrower of a
non-guaranteed student loan to the
extent the amount of the default is not
covered by the limited credit
enhancement of the financing structure.
RISK OF DEFAULT BY PRIVATE
GUARANTORS Currently, except for The Educational
Resources Institute, Inc., none of the
private guarantors has an investment
grade credit rating by any national
statistical rating organization. If a
private guarantor defaults on its
guarantee obligations, you will rely
solely on payments from the related
borrower for payments on the related
private guaranteed loan. In these
circumstances, you will bear the risk of
loss resulting from the failure of any
borrower of a private guaranteed student
loan to the extent this loss is not
covered by the limited credit
enhancement of the financing structure.
COMPUTER PROBLEMS IN THE YEAR 2000
MAY RESULT IN LOSSES Many computers and computer chips were
not programmed to recognize more than
two digits in a year of a date. As a
result, in the year 2000, those
computers will not know whether the `00
refers to the year 1900 or the year
2000. To the extent that the systems of
the master servicer, any sub-servicer,
the administrator, any of the
guarantors, the eligible lender trustee
or the indenture trustee have such
problems in the year 2000 and later, the
amount and timing of distributions to
noteholders and certificateholders could
be adversely affected.
The Department of Education has
undertaken a year 2000 compliance
project to address year 2000 issues.
Information regarding the Department of
Education's year 2000 efforts can be
obtained at the Department of
Education's site on the World Wide Web
at http://www.ed.gov. The Office of
Management and Budget has reported that
the Department of Education has reported
that it is close to completing its work
on mission critical systems and is at
least 96% year 2000 compliant; however,
any failure by the Department of
Education to resolve any year 2000
issues or any adverse effect on the
Department of Education caused by a
party on which the Department of
Education relies as a result of year
2000 issues may have a material adverse
effect on the Federal Family Education
Loan Program, the federal guarantors and
you.
WITHDRAWAL OR DOWNGRADING OF
INITIAL RATINGS WILL ADVERSELY
AFFECT THE PRICES 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. We recommend that
you analyze the significance of each
rating independently from any other
rating. Any rating agency may change its
rating of the securities after the
securities are issued if that rating
agency believes that circumstances have
changed. Any subsequent withdrawal or
downgrading of a rating will likely
reduce the price that a subsequent
purchaser will be willing to pay for the
applicable securities. The ratings do
not address the likelihood of the
ultimate payment to you of any interest
not paid as a result of the interest
rate cap.
THE SECURITIES ARE NOT SUITABLE
INVESTMENTS 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. The
securities are complex investments that
should be considered only by investors
who, either alone or with their
financial, tax and legal advisors, have
the expertise to analyze the prepayment,
reinvestment, default and market risk,
the tax consequences of an investment,
and the interaction of these factors.
FORMATION OF THE TRUST
THE TRUST
KeyCorp Student Loan Trust _____- (the "Trust") is a trust formed
under the laws of the State of New York pursuant to the Amended and Restated
Trust Agreement dated as of ________, ____ (as amended and supplemented from
time to time, the "Trust Agreement") between Key Bank USA, National Association
(the "Seller") and The First National Bank of Chicago, as trustee (the "Eligible
Lender Trustee") for the transactions described in this Prospectus Supplement.
The assets of the Trust will include certain graduate and undergraduate student
loans (collectively "Student Loans"). Such Student Loans will be acquired by the
trust from the Seller on ____, 199_ (the "Closing Date") and from time to time
thereafter (collectively, the "Financed Student Loans"). The Financed Student
Loans will consist of (i) Financed Student Loans that are reinsured by the
United States Department of Education (the "Department") (collectively,
"Financed Federal Loans"), (ii) Financed Student Loans that are not reinsured by
the Department or any other government agency but are guaranteed by a private
guarantor (collectively, "Guaranteed Private Loans"), and (iii) certain Financed
Student Loans that are not guaranteed by any party nor reinsured by the
Department (collectively "Non-Guaranteed Private Loans," and together with the
Guaranteed Private Loans, the "Financed Private Loans).
The Trust will not engage in any activity other than
o acquiring, holding and managing the Financed Student Loans and
the other assets of the Trust and proceeds therefrom
o issuing the Certificates and the Notes
o making payments thereon and
o engaging in other activities that are related to the activities
listed above.
The Trust will be initially capitalized with equity of $____________
excluding amounts deposited in the Reserve Account in the name of the Indenture
Trustee by the Seller on the Closing Date, representing the initial principal
balance of the Floating Rate Asset Backed Certificates (the "Certificates").
Certificates with an original principal balance of approximately $___________
will be sold to and retained by the Seller and the remaining Certificates will
be sold to third-party investors that are expected to be unaffiliated with the
Seller, the Master Servicer, the Sub-Servicers, the Guarantors, the Trust or the
Department. The equity of the Trust, together with the proceeds from the sale of
the Notes, will be used by the Eligible Lender Trustee to purchase on behalf of
the Trust the Initial Financed Student Loans from the Seller pursuant to the
Sale and Servicing Agreement dated as of ______ __, ____ among the Trust, the
Seller, the Administrator, the Master Servicer, and the Eligible Lender Trustee
(the "Sale and Servicing Agreement") and to fund the deposit of $___________
(the "Pre-Funded Amount") into an account to be maintained by the Indenture
Trustee (the "Pre-Funding Account"). The Seller will use a portion of the net
proceeds it receives from the sale of the Initial Financed Student Loans to make
a deposit of $__________ on the Closing Date into the Reserve Account (the
"Reserve Account Initial Deposit").
Upon the consummation of such transactions, the property of the Trust
will consist of
(a) a pool of Financed Student Loans, legal title to which is held by
the Eligible Lender Trustee on behalf of the Trust,
(b) all funds collected in respect thereof on or after _______ __,
____,
(c) all Guarantee Agreements and other relevant rights under certain
collateral agreements with respect to the Guaranteed Private
Loans, to the extent guaranteed or insured by third parties, and
assigned to the Trust by the Seller (the "Assigned Rights"), and
(d) all moneys and investments on deposit in an account in the name
of the Indenture Trustee (the "Collection Account"), the
Pre-Funding Account, an account in the name of the Indenture
Trustee (the "Escrow Account") and the Reserve Account.
To facilitate servicing and to minimize administrative burden and expense, the
Master Servicer will be appointed by the Eligible Lender Trustee as the
custodian, and the Master Servicer will then appoint the Sub-Servicers as the
custodians on its behalf, of the promissory notes representing the Financed
Student Loans that each services on behalf of the Master Servicer.
"Initial Financed Student Loans" means the Student Loans transferred
by the Seller to the Trust as of the Closing Date having an aggregate principal
balance of approximately $______________ as of ______ __, ____ (the "Statistical
Cutoff Date").
ELIGIBLE LENDER TRUSTEE
The First National Bank of Chicago is the Eligible Lender Trustee for
the Trust under the Trust Agreement pursuant to which the Eligible Lender
Trustee acts as holder of legal title to the Financed Student Loans on behalf of
the Trust. The First National Bank of Chicago principal offices are located at
One First National Plaza, Suite 0126, Chicago, Illinois 60607 and its New York
offices are located at First Chicago Trust Company of New York, 14 Wall Street,
New York, New York 10005.
The Eligible Lender Trustee will acquire on behalf of the Trust legal
title to all the Financed Student Loans acquired from time to time pursuant to
the Sale and Servicing Agreement. The Eligible Lender Trustee on behalf of the
Trust will enter into a guarantee agreement or comparable arrangement with each
of the Guarantors with respect to the Financed Student Loans that are guaranteed
or insured (each a "Guarantee Agreement" and collectively, the "Guarantee
Agreements"). The Eligible Lender Trustee qualifies as an eligible lender and
owner of all Student Loans that are reinsured by the Department (the "Federal
Loans") and all student loans that are not reinsured by the Department, whether
or not guaranteed by a private guarantor (the "Private Loans") for all purposes
under the Higher Education Act of 1965 (the "Higher Education Act") and the
Guarantee Agreements. Failure of the Financed Federal Loans to be owned by an
eligible lender would result in the loss of any Guarantee Payments (as defined
in the Prospectus) from any of California Student Aid Commission ("CSAC"), New
York State Higher Education Services Corporation ("HESC") United Student Aid
Funds, Inc. ("USAF") Pennsylvania Higher Education Assistance Agency ("PHEAA"),
American Student Assistance ("ASA"), Nebraska Student Loan Program ("NSLP") or
Educational Credit Management Corporation ("ECMC") (collectively, the "Federal
Guarantors") and any Federal Assistance (as defined in the Prospectus) with
respect to such Financed Federal Loans. See "The Financed Student Loan
Pool--Insurance of Student Loans; Guarantors of Student Loans" herein.
The Eligible Lender Trustee's liability in connection with the
issuance and sale of the [Floating Rate Class A-1 Asset Backed Notes (the "Class
A-1 Notes") and Floating Rate Class A-2 Asset Backed Notes (the "Class A-2
Notes" and together with the Class A-1 Notes], the "Notes") and the Certificates
is limited solely to the express obligations of the Eligible Lender Trustee set
forth in the Trust Agreement and the Sale and Servicing Agreement. See
"Description of the Securities" and "Description of the Transfer and Servicing
Agreements" herein. The Seller plans to maintain normal commercial banking
relations with the Eligible Lender Trustee.
In consideration for its performance of its obligations under the Sale
and Servicing Agreement, the Eligible Lender Trustee will be entitled to receive
an annual fee of $________.
USE OF PROCEEDS
After making the deposit of the Pre-Funded Amount to the Pre-Funding
Account, the balance of the net proceeds from the sale of the Certificates and
the Notes will be paid by the Trust to the Seller in consideration for the
purchase by the Trust of the Initial Financed Student Loans on the Closing Date.
The Seller will use such proceeds paid to it (x) to make the Reserve Account
Initial Deposit and an initial deposit into the Collection Account and (y) for
general corporate purposes.
THE MASTER SERVICER AND THE SUB-SERVICERS
KEY BANK USA, NATIONAL ASSOCIATION
Key Bank USA, National Association ("KBUSA"), in its capacity as
Master Servicer under the Sale and Servicing Agreement (the "Master Servicer"),
will be responsible for master servicing the Financed Student Loans. The Master
Servicer will arrange for and oversee the performance by PHEAA and Great Lakes
(collectively the "Sub-Servicers" and each a "Sub-Servicer") of their respective
servicing obligations with respect to the Financed Student Loans. The Master
Servicer will be entitled to receive the Master Servicing Fee, but will in turn
be solely responsible for all compensation due to the Sub-Servicers for the
performance of their respective obligations pursuant to the related
Sub-Servicing Agreements.
PHEAA
PHEAA is a body corporate and politic constituting a public
corporation and government instrumentality created pursuant to an act of the
Pennsylvania Legislature. Under its enabling legislation, PHEAA is authorized to
issue bonds or notes, with the approval of the Governor of the Commonwealth of
Pennsylvania for the purpose of purchasing, making, or guaranteeing loans. Its
enabling legislation also authorizes PHEAA to undertake the origination and
servicing of loans made by PHEAA and others. PHEAA's headquarters are located in
Harrisburg, Pennsylvania with regional offices located throughout Pennsylvania
and additional offices located in California, Delaware and West Virginia. As of
June 30, 1999 it had approximately 2300 employees.
PHEAA has been guaranteeing student loans since 1964 and has
guaranteed a total of approximately $20.4 billion principal amount of Stafford
Loans (as defined in the Prospectus) and approximately $2.1 billion principal
amount of Parent Loans for Undergraduate Students ("PLUS Loans") and SLS Loans
(as defined in the Prospectus) under the Higher Education Act. In addition to
guaranteeing loans under the Higher Education Act, PHEAA also operates certain
guarantee programs for which it receives no federal reinsurance. PHEAA has
outstanding guarantee obligations of such loans in the amount of approximately
$84.7 million as of June 30, 1999.
Pursuant to a Sub-Servicing Agreement with the Master Servicer, PHEAA
has agreed to service, and perform all other related tasks with respect to,
certain of the Financed Student Loans. PHEAA is required to perform all services
and duties customary to the servicing of such Financed Student Loans in
compliance with all applicable standards and procedures. See "Description of the
Transfer and Servicing Agreements--Servicing Procedures."
The above information relating to PHEAA has been obtained from PHEAA
and neither KBUSA nor the Underwriters have conducted any independent
verification of such information. PHEAA has agreed that it will provide a copy
of its most recent audited financial statements to holders of Notes and
Certificates (collectively, "Securityholders") upon receipt of a written request
directed to Mr. Tim Guenther, Chief Financial Officer, Financial Management,
1200 North Seventh Street, Harrisburg, Pennsylvania 17102.
GREAT LAKES
As of June 30, 1999, Great Lakes Educational Loan Services, Inc.
("Great Lakes") and its affiliates serviced 865,000 student and parental
accounts with an outstanding balance of $6.6 billion for 1,200 lenders
nationwide.
Pursuant to a Sub-Servicing Agreement with the Master Servicer, Great
Lakes has agreed to service, and perform all other related tasks with respect
to, certain of the Financed Student Loans. Great Lakes is required to perform
all services and duties customary to the servicing of such Financed Student
Loans in compliance with all applicable standards and procedures. See
"Description of the Transfer and Servicing Agreements--Servicing Procedures."
The above information relating to Great Lakes has been obtained from
Great Lakes and neither KBUSA nor the Underwriters have conducted any
independent verification of such information. Great Lakes has agreed that it
will provide a copy of its most recent audited financial statements on receipt
of a written request directed to 2401 International Lane, Madison, Wisconsin
53704, Attention: Vice President and Chief Financial Officer.
SERVICES AND FEES OF MASTER SERVICER AND THE SUB-SERVICERS
Pursuant to the Sale and Servicing Agreement KBUSA will act as Master
Servicer and will enter into one or more sub-servicing agreements (each a
"Sub-Servicing Agreement") with each of PHEAA and Great Lakes with respect to,
all the Financed Student Loans acquired by the Eligible Lender Trustee on behalf
of the Trust. In accordance with the Sub-Servicing Agreements, each Sub-Servicer
will service and perform all related tasks with respect to the Financed Student
Loans on behalf of the Master Servicer and the Trust. The Trust will be an
intended third-party beneficiary of each Sub-Servicing Agreement. With respect
to the Financed Student Loans it is servicing for the Master Servicer and the
Trust, each Sub-Servicer is required to perform the services and duties
customary to the servicing of Student Loans it is required to service with
reasonable care and to do so in the same manner as such Sub-Servicer has
serviced Student Loans on behalf of the Seller or the Master Servicer, as
applicable, and otherwise in compliance with all applicable standards and
procedures. In addition, each Sub-Servicer is required to maintain its
eligibility as a third-party servicer under the Higher Education Act. See
"Description of the Transfer and Servicing Agreements--Servicing Procedures"
herein.
In consideration for performing its obligations under the Sale and
Servicing Agreement, the Master Servicer will receive a monthly fee payable by
the Trust on or about the twenty-fifth day of each month (the "Monthly Servicing
Payment Date") generally equal to _____% (the "Master Servicing Fee Percentage")
of the principal balance of the Financed Student Loans as of the last day of the
preceding calendar month and certain one-time fixed fees for each Financed
Student Loan for which a forbearance period was granted or renewed or for which
a guarantee claim was filed, in each case subject to certain adjustments,
together with other administrative fees and similar charges. In consideration
for the Master Servicing Fee, the Master Servicer will be solely responsible for
the fees due to the Sub-Servicers pursuant to the terms of the related
Sub-Servicing Agreements. See "Description of Transfer and Servicing
Agreements--Master Servicing Compensation" herein.
THE FINANCED STUDENT LOAN POOL
GENERAL
The pool of Financed Student Loans will include the Initial Financed
Student Loans purchased by the Eligible Lender Trustee on behalf of the Trust as
of the Statistical Cutoff Date and any Additional Student Loans purchased by the
Eligible Lender Trustee on behalf of the Trust from the Seller as of the
applicable Subsequent Cutoff Dates.
The Financed Student Loans will be selected from the Seller's
portfolio of Student Loans by several criteria, including, as of the Statistical
Cutoff Date or the applicable Subsequent Cutoff Date, as the case may be, the
following:
1. Each Financed Student Loan
(a) was originated in the United States or its territories or
possessions under and in accordance with the Programs (as
defined in the Prospectus) (including, in the case of
borrowers of Financed Federal Loans, a financial need
analysis and, in the case of borrowers of Financed Private
Loans, a creditworthiness evaluation) to a borrower who (or
with respect to PLUS Loans to a parent of a student who),
with respect to the Initial Financed Student Loans and
Subsequent Pool Student Loans, (i) with respect to
undergraduate loans, has graduated or otherwise left an
undergraduate institution or is expected to graduate or
otherwise leave an undergraduate institution by
_____________, ____, and (ii) with respect to graduate
loans, has graduated or otherwise left graduate school or is
expected to graduate or otherwise leave graduate school by
_____________, ____,
(b) contains terms in accordance with those required by the
Programs, the applicable Guarantee Agreements and other
applicable requirements, and
(c) with respect to the Initial Financed Student Loans and
Subsequent Pool Student Loans, is not more than 180 days
past due as of the Cutoff Date or, with respect to the Other
Subsequent Student Loans or Other Student Loans not more
than 90 days past due as of the applicable Subsequent Cutoff
Date, as the case may be.
2. As of the Statistical Cutoff Date, no Initial Financed Student
Loan and no Subsequent Pool Student Loan had a borrower who was
noted in the related records of the Master Servicer or a
Sub-Servicer as being currently involved in a bankruptcy
proceeding or deceased since the date the Trust was created. Any
Subsequent Pool Student Loan in respect of which a claim is made
on a Guarantor following the Statistical Cutoff Date and prior to
the date such Student Loan is to be transferred to the Trust will
not be eligible for transfer to the Trust.
3. No Initial Financed Student Loan as of the Statistical Cutoff
Date consists of, and no Subsequent Pool Student Loan as of the
date of its transfer to the Trust will consist of, a Student Loan
that was subject to the Seller's prior obligation to sell such
loan to a third party.
4. No selection procedures believed by the Seller to be adverse to
the Securityholders were used or will be used in selecting the
Financed Student Loans.
5. The Financed Student Loans do not and will not include any
non-prime or sub-prime Student Loans. Non-prime or sub-prime
Student Loans are Student Loans originated to individuals who
have previously defaulted on their Student Loans.
6. As of the Statistical Cutoff Date, none of the Initial Financed
Student Loans and none of the Subsequent Pool Student Loans are
non-performing Student Loans. Non-performing Student Loans are
Student Loans which are in default and the Seller expects to
write-off as a loss.
Each of the Financed Student Loans provides or will provide for the
amortization of the outstanding principal balance of such Financed Student Loan
over a series of regular payments. Each regular payment consists of an
installment of interest which is calculated on the basis of the outstanding
principal balance of such Financed Student Loan multiplied by the applicable
interest rate and further multiplied by the period elapsed (as a fraction of a
calendar year) since the preceding payment of interest was made. As payments are
received in respect of such Financed Student Loan, the amount received is
applied first to interest accrued to the date of payment and the balance is
applied to reduce the unpaid principal balance. Accordingly, if a borrower pays
a regular installment before its scheduled due date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be less than it would have been had the payment been made as scheduled, and the
portion of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if a borrower pays a monthly installment
after its scheduled due date, a late fee will be assessed where applicable and
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 (as defined in the Prospectus) or
Forbearance Periods (as defined in the Prospectus), 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 and any accrued but unpaid interest on such
Financed Student Loan.
The Additional Student Loans to be conveyed to the Eligible Lender
Trustee on behalf of the Trust during the Funding Period are required to consist
of Subsequent Pool Student Loans, Other Subsequent Student Loans or Fee Advances
(as defined in the Prospectus), in each case originated by the Seller in
accordance with the Programs and other applicable requirements. The Subsequent
Pool Student Loans are identified in this Prospectus Supplement. The Other
Subsequent Student Loans and Fee Advances must be either (1) made to a borrower
who has, immediately prior to the date of any such conveyance, outstanding
Student Loans that are part of the pool of Financed Student Loans or (2) Other
Subsequent Student Loans which are primarily Financed Federal Loans or
Guaranteed Private Loans which the Trust is obligated to purchase from the
Seller until 90 days after the Closing Date. Each such Additional Student Loan
is otherwise required to comply with the criteria set forth above. See
"Description of the Transfer and Servicing Agreements--Additional Fundings"
herein.
Any Financed Student Loan guaranteed by HESC or CSAC will not be
included in either the Initial Financed Student Loans or the Subsequent Pool
Student Loans. The Seller may, but is under no obligation to, transfer Student
Loans guaranteed by HESC or CSAC to the Trust. Financed Student Loans guaranteed
by HESC or CSAC may be transferred into the Trust as Other Subsequent Student
Loans. If any Student Loans guaranteed by HESC or CSAC are transferred to the
Trust, such transfer will occur within 90 days after the Closing Date. The
outstanding principal balance of Financed Student Loans guaranteed by HESC will
be less than [1.0%] of the Initial Pool Balance. The outstanding principal
balance of Financed Student Loans guaranteed by CSAC will be less than [5.0%] of
the Initial Pool Balance.
Except for the criteria described in the preceding paragraphs, there
will be no required characteristics of the Additional Student Loans. Therefore,
following the transfer of the Subsequent Pool Student Loans and other Additional
Student Loans to the Eligible Lender Trustee on behalf of the Trust, the
aggregate characteristics of the entire pool of Financed Student Loans,
including the composition of the Financed Student Loans, the distribution by
weighted average interest rate and the distribution by principal amount
described in the following tables, may vary significantly from those of the
Initial Financed Student Loans and Subsequent Pool Student Loans as of the
Statistical Cutoff Date. In addition, the distribution by weighted average
interest rate applicable to the Financed Student Loans on any date following the
Statistical Cutoff Date may vary significantly from that set forth in the
following tables as a result of variations in the effective rates of interest
applicable to the Financed Student Loans. Moreover, the remaining term to
maturity of the Initial Financed Student Loans and Subsequent Pool Student Loans
as of the Statistical Cutoff Date may vary significantly from the actual term to
maturity of any of the Financed Student Loans as a result of the granting of
Deferral Periods and Forbearance Periods with respect thereto.
THE INITIAL FINANCED STUDENT LOANS AND SUBSEQUENT POOL STUDENT LOANS
Set forth below in the following tables is a description of certain
additional characteristics of the Initial Financed Student Loans and the
Subsequent Pool Student Loans as of the Statistical Cutoff Date. Regularly
scheduled payments and prepayments of such Subsequent Pool Student Loans (which
are prepayable at any time) between the Statistical Cutoff Date and the date as
of which such Student Loans are transferred to the Eligible Lender Trustee on
behalf of the Trust will affect the balances and percentages set forth herein.
Moreover, such Subsequent Pool Student Loans may become delinquent (or more
delinquent) between the Statistical Cutoff Date and the date of transfer to the
Trust. While the statistical distribution of the final characteristics of the
Subsequent Pool Student Loans when transferred to the Trust will vary somewhat
from the statistical information presented below, the Seller does not believe
that the characteristics of such Subsequent Pool Student Loans will vary
materially.
COMPOSITION AS OF THE STATISTICAL CUTOFF DATE
KEYCORP STUDENT LOAN TRUST ____ INITIAL POOL SUBSEQUENT POOL TOTAL
Aggregate Outstanding
Balance(1)
Number of Borrowers
Average Outstanding
Balance Per Borrower
Number of Loans
Average Outstanding
Balance Per Loan
Weighted Average
Remaining Term
to Maturity(2)
Weighted Average Annual
Borrower Interest Rate(3)
- ----------------------
(1) Includes in each case net principal balance due from borrowers, plus
accrued interest thereon to be capitalized upon commencement of
repayment, estimated to be $______________ with respect to the Initial
Financed Student Loans and $______, with respect to the Subsequent Pool
Student Loans, in each case as of the Statistical Cutoff Date.
(2) Determined from the date of origination or the Statistical Cutoff Date,
as the case may be, to the stated maturity date of the applicable
Initial Financed Student Loans or Subsequent Pool Student Loans,
assuming repayment commences promptly upon expiration of the typical
grace period following the expected graduation date and without giving
effect to any Deferral Periods or Forbearance Periods that may be
granted in the future. See "The Student Loan Financing Business" in the
Prospectus.
(3) Determined using the borrower interest rates exclusive of Special
Allowance Payments applicable to the Initial Financed Student Loans and
the Subsequent Pool Student Loans as of the Statistical Cutoff Date.
However, because all the Initial Financed Student Loans and the
Subsequent Pool Student Loans effectively bear interest at a variable
rate per annum, there can be no assurance that the foregoing rate will
remain applicable to the Initial Financed Student Loans and the
Subsequent Pool Student Loans at any time after the Statistical Cutoff
Date. See "The Student Loan Financing Business" in the Prospectus. The
weighted average spread, with respect to the Initial Financed Student
Loans, including Special Allowance Payments, to the 91-day Treasury
Bill Rate or 52-week Treasury Bill Rate, as applicable, was ____% as of
the Statistical Cutoff Date and would have been ____% if all of the
Student Loans were in repayment as of the Statistical Cutoff Date. The
weighted average spread, with respect to the Subsequent Pool Student
Loans, including Special Allowance Payments, to the 91-day Treasury
Bill Rate or 52-week Treasury Bill Rate, as applicable, was ____% as of
the Statistical Cutoff Date and would have been ____% if all of the
Student Loans were in repayment as of the Statistical Cutoff Date.
DISTRIBUTION BY LOAN TYPE AS
OF THE STATISTICAL CUTOFF DATE
INITIAL POOL
SUBSEQUENT POOL TOTAL
- --------------------------------------------------------------------------------
- ---------
PERCENT
AGGREGATE OF
AGGREGATE PERCENT OF AGGREGATE
NUMBER OUTSTANDING INITIAL NUMBER
OUTSTANDING SUBSEQUENT NUMBER OUTSTANDING PERCENT
OF PRINCIPAL POOL OF
PRINCIPAL POOL OF PRINCIPAL OF POOL
LOAN TYPE LOANS BALANCE(1) BALANCE LOANS BALANCE
(2) BALANCE LOANS BALANCE BALANCE
Stafford Subsidized Loans
Stafford Unsubsidized Loans
Federal Consolidation Loans
SLS Loans
PLUS Loans
Bar Examination Loans
Business Loans
Private Consolidation Loans
Dental Loans
Graduate Loans
Law Loans
Medical Loans
Residency Loans
Key Alternative Loans
Total
(1) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$________________ as of the Statistical Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$________________ as of the Statistical Cutoff Date.
DISTRIBUTION BY BORROWER INTEREST AS OF
THE STATISTICAL CUTOFF DATE
INITIAL POOL SUBSEQUENT
POOL TOTAL
- --------------------------------------------------------------------------------
- --------
PERCENT
AGGREGATE OF AGGREGATE
PERCENT OF AGGREGATE
NUMBER OUTSTANDING INITIAL NUMBER OUTSTANDING
SUBSEQUENT NUMBER OUTSTANDING PERCENT
OF PRINCIPAL POOL OF PRINCIPAL
POOL OF PRINCIPAL OF POOL
INTEREST RATE LOANS BALANCE(2) BALANCE LOANS BALANCE (3)
BALANCE LOANS BALANCE BALANCE
Less than 7.50%(1)
7.50% to 7.99%
8.00% to 8.49%
8.50% to 8.99%
9.00% and above
Total
(1) Determined using the interest rates applicable to the Initial Financed
Student Loans and the Subsequent Pool Student Loans as of the Statistical
Cutoff Date. However, because all the Initial Financed Student Loans and
the Subsequent Pool Student Loans effectively bear interest at a variable
rate per annum, there can be no assurance that the foregoing information
will remain applicable to the Initial Financed Student Loans or the
Subsequent Pool Student Loans at any time after the Statistical Cutoff
Date. See "The Student Loan Financing Business" in the Prospectus.
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$________________as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$________________as of the Statistical Cutoff Date.
DISTRIBUTION BY OUTSTANDING PRINCIPAL BALANCE
AS OF THE STATISTICAL CUTOFF DATE
INITIAL POOL SUBSEQUENT
POOL TOTAL
- --------------------------------------------------------------------------------
- ------------
PERCENT
AGGREGATE OF AGGREGATE
PERCENT OF AGGREGATE
NUMBER OUTSTANDING INITIAL NUMBER
OUTSTANDING SUBSEQUENT NUMBER OUTSTANDING PERCENT
OUTSTANDING PRINCIPAL OF PRINCIPAL POOL OF PRINCIPAL
POOL OF PRINCIPAL OF POOL
BALANCE LOANS(1) BALANCE(2) BALANCE LOANS BALANCE
(3) BALANCE LOANS BALANCE BALANCE
Less than $1,000
$1,000 to $1,999
$2,000 to $2,999
$3,000 to $3,999
$4,000 to $4,999
$5,000 to $5,999
$6,000 to $6,999
$7,000 to $7,999
$8,000 to $8,999
$9,000 to $9,999
$10,000 to $10,999
$11,000 to $11,999
$12,000 to $12,999
$13,000 to $13,999
$14,000 to $14,999
$15,000 to $15,999
$16,000 to $16,999
$17,000 to $17,999
$18,000 to $18,999
$19,000 to $19,999
$20,000 to $20,999
$21,000 to $21,999
$22,000 to $22,999
$23,000 to $23,999
$24,000 to $24,999
$25,000 to $25,999
$26,000 to $26,999
$27,000 to $27,999
$28,000 to $28,999
$29,000 to $29,999
$30,000 and above
Total
(1) Borrowers generally have more than one outstanding loan. The average
aggregate outstanding principal balance of loans per borrower is $_____,
with respect to the Initial Financed Student Loans, and $______, with
respect to the Subsequent Pool Student Loans, in each case as of the
Statistical Cutoff Date. Some borrowers have both loans which are Initial
Financed Student Loans and loans which are Subsequent Pool Student Loans.
If both pools were combined, the number of borrowers would be _____ and the
average outstanding principal balance per borrower would be $_____.
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$________ as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$_____ as of the Statistical Cutoff Date.
DISTRIBUTION BY REMAINING TERM TO SCHEDULED
MATURITY AS OF THE STATISTICAL CUTOFF DATE
INITIAL POOL SUBSEQUENT
POOL TOTAL
- --------------------------------------------------------------------------------
- ------------
PERCENT
AGGREGATE OF AGGREGATE
PERCENT OF AGGREGATE
NUMBER OUTSTANDING INITIAL NUMBER OUTSTANDING
SUBSEQUENT NUMBER OUTSTANDING PERCENT
MONTHS TO SCHEDULED OF PRINCIPAL POOL OF PRINCIPAL
POOL OF PRINCIPAL OF POOL
MATURITY LOANS(1) BALANCE(2) BALANCE LOANS BALANCE (3)
BALANCE LOANS BALANCE BALANCE
12 and below(1)
13 to 24
25 to 48
49 to 60
61 to 72
73 to 84
85 to 96
97 to 108
109 to 120
121 to 180
181 to 240
241 and above
Total
(1) Determined from the Statistical Cutoff Date to the stated maturity date of
the applicable Initial Financed Student Loan or Subsequent Pool Student
Loan, assuming repayment commences promptly upon expiration of the typical
grace period following the expected graduation date and without giving
effect to any deferral or forbearance periods that may be granted in the
future. See "The Student Loan Financing Business" in the Prospectus.
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$________________as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$________________as of the Statistical Cutoff Date.
DISTRIBUTION BY BORROWER PAYMENT
STATUS AS OF THE STATISTICAL CUTOFF DATE
INITIAL POOL
SUBSEQUENT POOL TOTAL
- --------------------------------------------------------------------------------
- ----------
PERCENT
AGGREGATE OF
AGGREGATE PERCENT OF AGGREGATE
NUMBER OUTSTANDING INITIAL NUMBER
OUTSTANDING SUBSEQUENT NUMBER OUTSTANDING PERCENT
OF PRINCIPAL POOL OF
PRINCIPAL POOL OF PRINCIPAL OF POOL
PAYMENT STATUS LOANS BALANCE(2) BALANCE LOANS BALANCE
(3) BALANCE LOANS BALANCE BALANCE
In School(1)
Grace
Deferral
Forbearance
Repayment
First year in repayment
Second year in repayment
More than two years
in repayment
Total
(1) Refers to the status of the borrower of each Initial Financed Student Loan
or Subsequent Pool Student Loan to be added, in each case, as of the
Statistical Cutoff Date: such borrower may still be attending an
undergraduate institution or a graduate school ("In-School"), may be in a
grace period prior to repayment commencing ("Grace"), may be repaying such
loan ("Repayment") or may have temporarily ceased repaying such loan
through a deferral ("Deferral") or a forbearance ("Forbearance") period.
See "The Student Loan Financing Business" in the Prospectus.
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$________________ as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$________________ as of the Statistical Cutoff Date.
SCHEDULED WEIGHTED
AVERAGE MONTHS REMAINING IN STATUS
BY CURRENT
BORROWER PAYMENT STATUS AS OF THE
STATISTICAL CUTOFF DATE(1)
PAYMENT
STATUS INITIAL POOL SUBSEQUENT
POOL TOTAL
IN- FOR- RE- IN- FOR-
RE- IN- FOR- RE-
SCHOOL GRACE DEFERRAL BEARANCE PAYMENT SCHOOL GRACE DEFERRAL
BEARANCE PAYMENT SCHOOL GRACE DEFERRAL BEARANCE PAYMENT
------ ----- -------- -------- ------- ------ ----- --------
- -------- ------- ------ ----- -------- -------- -------
In-School
Grace
Deferral
Forbearance
Repayment
Total
(1) Determined without giving effect to any Deferral Periods or Forbearance
Periods that may be granted in the future.
GEOGRAPHIC
DISTRIBUTION OF STATES REPRESENTING MORE THAN 4%
OF THE AGGREGATE POOL
BALANCE AS OF THE STATISTICAL CUTOFF DATE(1)
INITIAL POOL SUBSEQUENT POOL
TOTAL
PERCENT
PERCENT
AGGREGATE OF AGGREGATE
OF AGGREGATE PERCENT
NUMBER OUTSTANDING INITIAL NUMBER OUTSTANDING
SUBSEQUENT NUMBER OUTSTANDING OF
OF PRINCIPAL POOL OF PRINCIPAL
POOL OF PRINCIPAL POOL
LOANS BALANCE(2) BALANCE LOANS BALANCE(3)
BALANCE LOANS BALANCE(2) BALANCE
New York California
New York
California Massachusetts
California
Virginia New York
Virginia
Texas New Jersey
Massachusetts
Pennsylvania Virginia
Texas
Florida
Pennsylvania
Massachusetts
Florida
New Jersey
New Jersey
All other
All other
All Other States(4) States(4)
States(4)
Total
(1) Based on the permanent billing addresses of the borrowers of the Initial
Financed Student Loans and the Subsequent Pool Student Loans shown on the
Master Servicer's or a Sub-Servicer's records as of the Statistical Cutoff
Date.
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon of $_______ as of the Statistical Cutoff Date to be capitalized
upon commencement of repayment.
(3) Includes net principal balance due from borrowers, plus accrued interest
thereon of $______ as of the Statistical Cutoff Date to be capitalized
upon commencement of repayment.
(4) Includes all other states, none of which exceeds 4% of the Initial Pool
Balance or aggregate Pool Balance.
DISTRIBUTION BY LOAN REPAYMENT TERM AS OF
THE STATISTICAL CUTOFF DATE
INITIAL POOL SUBSEQUENT
POOL TOTAL
- --------------------------------------------------------------------------------
- ------------
PERCENT
AGGREGATE OF AGGREGATE
PERCENT OF AGGREGATE
NUMBER OUTSTANDING INITIAL NUMBER OUTSTANDING
SUBSEQUENT NUMBER OUTSTANDING PERCENT
OF PRINCIPAL POOL OF PRINCIPAL
POOL OF PRINCIPAL OF POOL
LOAN REPAYMENT TERMS LOANS BALANCE(1) BALANCE LOANS BALANCE (2)
BALANCE LOANS BALANCE BALANCE
Level Payment
Interest Only(3)
Graduated Payment(4)
Other (5)
Total
(1) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$________________ as of the Statistical Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$________________ as of the Statistical Cutoff Date.
(3) Student Loans with interest only repayment terms require borrowers to make
payments of interest only for the first two years after entering repayment
and thereafter to make level payments (made up of both principal and
interest) which will amortize the then outstanding principal balance of the
loan over the then remaining term.
(4) Student Loans with graduated repayment terms require borrowers to make
payments of interest only for the first two years after entering repayment
which increase over the next three years to a level payment amount which
will amortize the then outstanding principal balance of the loan over the
then remaining term.
(5) Loan still not in repayment status.
DISTRIBUTION OF FINANCED
FEDERAL LOANS BY DATE OF DISBURSEMENT
AS OF THE
STATISTICAL CUTOFF DATE
INITIAL POOL SUBSEQUENT
POOL TOTAL
- --------------------------------------------------------------------------------
- ------------
PERCENT
AGGREGATE OF AGGREGATE
PERCENT OF AGGREGATE
NUMBER OUTSTANDING INITIAL NUMBER OUTSTANDING
SUBSEQUENT NUMBER OUTSTANDING PERCENT
OF PRINCIPAL POOL OF PRINCIPAL
POOL OF PRINCIPAL OF POOL
DATE OF DISBURSEMENT(1) LOANS BALANCE(2) BALANCE LOANS BALANCE (3)
BALANCE LOANS BALANCE BALANCE
Pre October 1, 1993
October 1, 1993 to
September 30, 1998
October 1, 1998 to
Present
Total
(1) Federal Loans disbursed prior to October 1, 1993 are 100% guaranteed by the
applicable Federal Guarantor, and reinsured against default by the
Department up to 100% of the Guarantee Payments. Federal Loans disbursed on
or after October 1, 1993 (but before October 1, 1998) are 98% guaranteed by
the applicable Federal Guarantor, and reinsured against default by the
Department up to a maximum of 98% of the Guarantor Payments. Federal Loans
first disbursed on or after October 1, 1998 are 98% guaranteed by the
applicable Federal Guarantor, and reinsured against default by the
Department up to 95% of the Guarantee Payments. See "The Student Loan
Financing Business--Description of Federal Loans Under the Programs" and
"--Insurance of Student Loans; Guarantors of Student Loans" in the
Prospectus.
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$________________ as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$________________ as of the Statistical Cutoff Date.
DISTRIBUTION OF
FINANCED STUDENT LOANS BY
NUMBER OF DAYS OF DELINQUENCY AS
OF THE STATISTICAL CUTOFF DATE
INITIAL POOL SUBSEQUENT POOL
TOTAL
- --------------------------------------------------------------------------------
- ------------
PERCENT
AGGREGATE OF AGGREGATE
PERCENT OF AGGREGATE
NUMBER OUTSTANDING INITIAL NUMBER OUTSTANDING
SUBSEQUENT NUMBER OUTSTANDING PERCENT
OF PRINCIPAL POOL OF PRINCIPAL
POOL OF PRINCIPAL OF POOL
DAYS DELINQUENT LOANS BALANCE(1) BALANCE LOANS BALANCE (2)
BALANCE LOANS BALANCE BALANCE
0-30
31-60
61-90
90-120
120-150
150-180
Total
(1) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$________________ as of the Statistical Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$________________ as of the Statistical Cutoff Date.
MATURITY AND PREPAYMENT ASSUMPTIONS
The rate of payment of principal of the Notes and the Certificates and
the yield on the Notes and the Certificates will be affected by prepayments of
the Financed Student Loans that may occur as described below. All the Financed
Student Loans are prepayable in whole or in part by the borrowers at any time,
including by means of Federal Consolidation Loans (as defined in the
Prospectus), Federal Direct Consolidation Loans (as defined in the Prospectus)
or Private Consolidation Loans (as defined in the Prospectus) or as a result of
a borrower's default, death, disability or bankruptcy and subsequent liquidation
or collection of Guarantee Payments with respect thereto. The rate of such
prepayments cannot be predicted and may be influenced by a variety of economic,
social and other factors, including those described below. In general, the rate
of prepayments may tend to increase to the extent that alternative financing
becomes available at prevailing interest rates which fall significantly below
the interest rates applicable to the Financed Student Loans. However, because
many of the Financed Student Loans bear interest at a rate that either actually
or effectively is floating, it is impossible to determine whether changes in
prevailing interest rates will be similar to or vary from changes in the
interest rates on the Financed Student Loans.
To the extent borrowers of Financed Student Loans elect to borrow
Consolidation Loans with respect to such Financed Student Loans from the Seller
(x) after the Loan Purchase Termination Date or (y) from another lender at any
time, Noteholders (as defined in the Prospectus) (and after the Notes have been
paid in full, Certificateholders (as defined in the Prospectus)) will
collectively receive as a prepayment of principal the aggregate principal amount
of such Financed Student Loans; provided, that if the Seller makes any such
Consolidation Loan during the Funding Period or prior to the Loan Purchase
Termination Date (in which event the Seller will then sell that Consolidation
Loan to the Eligible Lender Trustee, to the extent that funds are available in
the Escrow Account and during the Funding Period, the Pre-Funding Account or
following the Funding Period but prior to the Loan Purchase Termination Date,
the Collection Account from amounts which constitute Available Loan Purchase
Funds, for the purchase thereof), the aggregate outstanding principal balance of
Financed Student Loans (after giving effect to the addition of such
Consolidation Loans) will be at least equal to and in most cases greater than
such balance prior to such prepayment, although the portion of the loan
guaranteed will be 98% with respect to any Federal Consolidation Loan disbursed
on or after October 1, 1993 even if the Underlying Federal Loans (as defined in
the Prospectus) were 100% guaranteed. See "The Student Loan Financing
Business--Description of Federal Loans Under the Programs--Federal Consolidation
Loans" in the Prospectus. There can be no assurance that borrowers with Financed
Student Loans will not seek to obtain Consolidation Loans with respect to such
Financed Student Loans on or after the Loan Purchase Termination Date or by
another lender at any time.
In addition, the Seller is obligated to repurchase any Financed
Student Loan pursuant to the Sale and Servicing Agreement as a result of a
breach of any of its representations and warranties, and the Master Servicer is
obligated to purchase any Financed Student Loan pursuant to the Sale and
Servicing Agreement as a result of a breach of certain covenants with respect to
such Financed Student Loan, in each case where such breach materially adversely
affects the interests of the Certificateholders or the Noteholders in that
Financed Student Loan and is not cured within the applicable cure period (it
being understood that with respect to any Financed Student Loan that has the
benefit of a Guarantee Agreement, any such breach that does not affect any
Guarantor's obligation to guarantee payment of such Financed Student Loan will
not be considered to have a material adverse effect for this purpose). See
"Description of the Transfer and Servicing Agreements--Sale of Student Loans;
Representations and Warranties" and "--Servicer Covenants" in the Prospectus.
See also "Description of the Transfer and Servicing Agreements--Additional
Fundings" herein and in the Prospectus regarding the prepayment of principal to
Noteholders and Certificateholders if as of ________ ____, ____ (the "Special
Determination Date") the Subsequent Pool Pre-Funded Amount has not been reduced
to zero and the prepayment of principal to Noteholders as a result of excess
funds remaining on deposit in the Pre-Funding Account at the end of the Funding
Period. See also, "--Insolvency Event" in the Prospectus regarding the sale of
the Financed Student Loans if a Seller Insolvency Event (as defined in the
Prospectus) occurs and "--Termination" herein and in the Prospectus regarding
the Seller's option to purchase the Financed Student Loans when the aggregate
Pool Balance is less than or equal to [5%] [10%] of the Initial Pool Balance and
the auction of the Financed Student Loans occurs on or after the ____ 20__
Distribution Date. Any reinvestment risk from such accelerated payment of
principal will be borne by the holders of Notes and Certificates receiving such
prepayment.
On the other hand, scheduled payments with respect to, and maturities
of, the Financed Student Loans may be extended, including pursuant to Grace
Periods (as defined in the Prospectus, each a "Grace Period"), Deferral Periods
and, under certain circumstances, Forbearance Periods or as a result of the
conveyance of Serial Loans to the Eligible Lender Trustee on behalf of the Trust
prior to the Loan Purchase Termination Date or of refinancings through
Consolidation Loans to the extent such Consolidation Loans are sold to the
Eligible Lender Trustee on behalf of the Trust as described above. In that
event, the fact that such Consolidation Loans will likely have longer maturities
than the Financed Student Loans they are replacing may lengthen the remaining
term of the Financed Student Loans and the average life of the Notes and the
Certificates. The rate of payment of principal of the Notes and the Certificates
and the yield on the Notes and the Certificates may also be affected by the rate
of defaults resulting in losses on defaulted Student Loans which have been
liquidated, by the severity of those losses and by the timing of those losses,
which may affect the ability of the Guarantors to make Guarantee Payments with
respect thereto. In addition, the maturity of many of the Financed Student Loans
will extend well beyond the Final Maturity Dates of the Notes and the
Certificates.
The rate of prepayment on the Financed Student Loans cannot be
predicted. You will bear any reinvestment risks resulting from a faster or
slower incidence of prepayment of Financed Student Loans. Reinvestment risks may
include the risk that interest rates and the relevant spreads above particular
interest rate bases are lower at the time you receive payments from the Trust
than the interest rates and the spreads that would otherwise have been had
prepayments not been made or had prepayments been made at a different time.
"Available Loan Purchase Funds" means with respect to any Collection
Period and any Transfer Date after the Funding Period, the excess of Available
Funds (with certain exceptions) for the Collection Period relating to the
Distribution Date next succeeding such Transfer Date that are on deposit in the
Collection Account on such Transfer Date (before giving effect to any
application thereof) over the accrued expected expense payment for such
Distribution Date as specified in the Sale and Servicing Agreement.
The "Initial Pool Balance" will equal $_____________ plus the
aggregate increase in the Pool Balance during the Funding Period (by the Special
Determination Date) occurring as a result of the purchase of Subsequent Pool
Student Loans.
"Loan Purchase Termination Date" means ____________, ___________.
INSURANCE OF STUDENT LOANS; GUARANTORS OF STUDENT LOANS
Each Financed Federal Loan will be required to be guaranteed by one of
the Federal Guarantors and reinsured by the Department under the Higher
Education Act and must be eligible for Special Allowance Payments (as defined in
the Prospectus) and, with respect to each Financed Federal Loan that is a
Stafford Loan (excluding any Unsubsidized Stafford Loan (as defined in the
Prospectus, each an Unsubsidized Stafford Loan)) or Consolidation Loan where
none of the Underlying Federal Loans were Unsubsidized Stafford Loans, must be
eligible for Interest Subsidy Payments (as defined in the Prospectus) paid by
the Department. As of the Statistical Cutoff Date, approximately ___% (by
aggregate principal balance) of the Initial Financed Student Loans are and
approximately ___% of the Subsequent Pool Student Loans will be Financed Federal
Loans. As of the Statistical Cutoff Date, approximately ___% (by aggregate
principal balance) of the Initial Financed Student Loans are and approximately
___% of the Subsequent Pool Student Loans will be Guaranteed Private Loans that
are required to be guaranteed or insured as to principal and interest by The
Educational Resources Institute, Inc. ("TERI") or HEMAR Insurance Corporation of
America ("HICA" and together with TERI, the "Private Guarantors") As of the
Statistical Cutoff Date, approximately ___% (by aggregate principal balance) of
the Initial Financed Student Loans are (and approximately ___% of the Subsequent
Pool Student Loans will be) Non-Guaranteed Private Loans.
The following tables provide information with respect to the portion
of the Financed Student Loans guaranteed by each Guarantor:
DISTRIBUTION BY GUARANTORS AS OF
THE STATISTICAL CUTOFF DATE
INITIAL POOL SUBSEQUENT
POOL TOTAL
- --------------------------------------------------------------------------------
- ------------
PERCENT
AGGREGATE OF AGGREGATE
PERCENT OF AGGREGATE PERCENT
NUMBER OUTSTANDING INITIAL NUMBER OUTSTANDING
SUBSEQUENT NUMBER OUTSTANDING OF TOTAL
OF PRINCIPAL POOL OF PRINCIPAL
POOL OF PRINCIPAL POOL
LOANS BALANCE(1) BALANCE(3) LOANS BALANCE(2)
BALANCE(3) LOANS BALANCE BALANCE(3)
ASA
CSAC
ECMC
HESC
HICA
PHEAA
NSLP
TERI
USAF
Total (3)
(1) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$________________ as of the Statistical Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$________________ as of the Statistical Cutoff Date.
(3) May not equal 100% due to the Non-Guaranteed Private Loans in the pool of
Financed Student Loans.
FEDERAL REINSURANCE. Under the Higher Education Act, each Federal
Guarantor is reimbursed by the Department pursuant to certain agreements between
the Department and such Federal Guarantor for amounts paid under its Guarantee
Agreement. The amount of such reimbursement is subject to reduction. See "The
Student Loan Financing Business--Insurance of Student Loans; Guarantors of
Student Loans" in the Prospectus for a description of the federal reinsurance
program and factors affecting the Federal Guarantors.
GUARANTORS FOR THE FINANCED FEDERAL LOANS. The Higher Education Act
requires every state to designate a guarantee agency, either by establishing its
own or by designating another guarantee agency. A Guarantor who has been
designated by a particular state is obligated to guarantee loans for students
who reside or attend school in such state and must agree to provide loans to any
such students who are otherwise unable to obtain a loan from any other lender.
Guarantee agencies may guarantee a loan made to any eligible borrower and are
not limited to guaranteeing loans for students attending institutions in their
particular state or region or for their residents attending schools in another
state or region.
The Eligible Lender Trustee has entered into a Guarantee Agreement
with each of PHEAA, ASA, CSAC, HESC, USAF, NSLP and ECMC by which each such
Federal Guarantor has agreed to serve as Guarantor for certain Financed Federal
Loans. PHEAA is the designated Student Loan guarantor for Pennsylvania, West
Virginia and Delaware, and has an established operating center in Harrisburg,
Pennsylvania. For more information concerning PHEAA, see "The Master Servicer
and the Sub-Servicers--PHEAA" herein. ASA is the designated Student Loan
guarantor for Massachusetts and the District of Columbia and has an established
operating center in Boston, Massachusetts. CSAC is the designated Student Loan
guarantor for California, Arizona and Washington and has established an
operating center in Rancho Cordova, California. HESC is the designated guarantor
for New York, and has established an operating center in Albany, New York. USAF
is the designated Student Loan guarantor for Indiana, Kansas, Alaska, Nevada,
Wyoming, Maryland, Hawaii and Mississippi and has established an operating
center in Fishers, Indiana. NSLP is the designated Student Loan guarantor for
Nebraska and has established an operating center in Lincoln, Nebraska. ECMC is
the designated Student Loan guarantor for Virginia and has established operating
centers in St. Paul, Minnesota and Richmond, Virginia. As of the Statistical
Cutoff Date, approximately ____%, ____%, ____%, ____%, ____%, ____% and ____% of
the aggregate outstanding principal balance of the Initial Financed Student
Loans which are Financed Federal Loans and approximately ____%, ____%, ____%,
____%, ____%, ____% and ____% of the Subsequent Pool Student Loans which are
Financed Federal Loans were guaranteed by PHEAA, ASA, CSAC, HESC, USAF, NSLP and
ECMC, respectively.
Pursuant to its respective Guarantee Agreement, each Federal Guarantor
guarantees payment of 100% of the principal (including any interest capitalized
from time to time) and accrued interest for each Financed Federal Loan
guaranteed by it as to which any one of the following events has occurred:
(a) failure by the borrower thereof to make monthly principal or
interest payments on such Financed Federal Loan when due, provided
such failure continues for a period of 180 days (or 270 days with
respect to Financed Federal Loans for which the first date of
delinquency occurs on or after October 7, 1998) (except that such
guarantee against such failures will be 98% of principal and accrued
interest for loans first disbursed on or after October 1, 1993);
(b) any filing by or against the borrower thereof of a petition
in bankruptcy pursuant to any chapter of the Bankruptcy Code (as
defined in the Prospectus);
(c) the closure of, or false certification of borrower
eligibility by, the school;
(d) the death of the borrower thereof;
(e) the total and permanent disability of the borrower thereof to
work and earn money or attend school, as certified by a qualified
physician; or
(f) the failure of the borrower's school to pay a refund owed to
the borrower, to the extent of the amount of the refund that is
allocable to the loan.
When these conditions are satisfied, the Higher Education Act requires
the Guarantor generally to pay the claim within 90 days of its submission by the
lender. The obligations of each Federal Guarantor pursuant to their respective
Guarantee Agreements are obligations solely of each such Federal Guarantor
respectively, and are not supported by the full faith and credit of any state
government.
Each of the Federal Guarantors' guarantee obligations with respect to
any Financed Federal Loan are conditioned upon the satisfaction of all the
conditions set forth in the applicable Guarantee Agreement. These conditions
include, but are not limited to, the following:
o the origination and servicing of such Financed Federal Loan being
performed in accordance with the Programs, the Higher Education
Act and other applicable requirements,
o the timely payment to the applicable Federal Guarantor, as the
case may be, of the guarantee fee payable with respect to such
Financed Federal Loan,
o the timely submission to the applicable Federal Guarantor, as the
case may be, of all required pre-claim delinquency status
notifications and of the claim with respect to such Financed
Federal Loan, and
o the transfer and endorsement of the promissory note evidencing
such Financed Federal Loan to the applicable Federal Guarantor,
upon and in connection with making a claim to receive Guarantee
Payments thereon.
Failure to comply with any of the applicable conditions, including the
foregoing, may result in the refusal of the applicable Federal Guarantor to
honor their Guarantee Agreements with respect to such Financed Federal Loan, in
the denial of guarantee coverage with respect to certain accrued interest
amounts with respect thereto or in the loss of certain Interest Subsidy Payments
and Special Allowance Payments with respect thereto. Under the Sale and
Servicing Agreement, such failure to comply would constitute a breach of the
Master Servicer's covenants or the Seller's representations and warranties, as
the case may be, and would create an obligation of the Seller or the Master
Servicer, as the case may be, to repurchase or purchase such Financed Federal
Loan or to reimburse the Trust for such non-guaranteed interest amounts or such
lost Interest Subsidy Payments and Special Allowance Payments with respect
thereto. See "Description of the Transfer and Servicing Agreements--Sale of
Financed Student Loans; Representations and Warranties" and "-- Master Servicer
Covenants" herein.
Set forth below is certain current and historical information with
respect to each of the Federal Guarantors excluding ECMC [and ______________] as
of the Statistical Cutoff Date. No such information is provided with respect to
ECMC [and _____________] because the aggregate principal amount of Financed
Student Loans guaranteed by ECMC [and __________] is less than 5% of the sum of
the Initial Financed Student Loans and the Subsequent Pool Student Loans.
GUARANTY VOLUME. The following table sets forth the approximate
aggregate principal amount of federally reinsured education loans (including
loans under the Parent Loans for Undergraduate Students program but excluding
Federal Consolidation Loans) that have first become guaranteed by each Federal
Guarantor (excluding ____) and by all federal guarantors in each of the last
five federal fiscal years:*
STAFFORD, SLS AND PLUS LOANS GUARANTEED
(DOLLARS IN MILLIONS)
FEDERAL FISCAL YEAR PHEAA ASA
NSLP
1994 $1,747 $1,100
$378
1995 1,808 906
351
1996 1,794 716
316
1997 1,869 682
397
1998 1,784 667
629
FEDERAL FISCAL YEAR HESC USAF
CSAC ALL GUARANTORS
1994 $1,667 $2,070
$1,909
1995 1,554 2,404
1,600
1996 1,411 2,748
1,430
1997 1,550 3,135
1,583
1998 1,571 3,514
1,963
* The information set forth in the table above for all guarantors has been
obtained from the Department of Education's Federal Student Loan Programs
Data Books (each, a "DOE Data Book"). Information for each Federal
Guarantor was provided by such Federal Guarantor.
RESERVE RATIO. Each Federal 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 (a) sources of funds (including insurance
premiums, state appropriations, federal advances, federal reinsurance payments,
administrative cost allowances, collections on claims paid and investment
earnings) minus (b) uses of funds (including claims paid to lenders, operating
expenses, lender fees, the Department's share of collections on claims paid,
returned advances and reinsurance fees). The "original principal amount of
outstanding loans" consists of the original principal amount of loans guaranteed
by such Federal Guarantor minus (x) the original principal amount of loans
canceled, claims paid, loans paid in full and loan guarantees transferred from
such Federal Guarantor to other guarantors, plus (y) the original principal
amount of loan guarantees transferred to such Federal Guarantor from other
guarantors. ECMC has advised the Seller that ECMC's Agreements with the
Department require that on an annual basis, ECMC calculate the amount of reserve
funds and the amount of its expenses during the fiscal year in accordance with
directions of the Secretary. Unless the Secretary directs otherwise, if the
amount of ECMC's reserve funds exceeds 60 percent of the expenses, ECMC shall
return the excess reserves to the Secretary at the time of submitting the annual
report. The following tables set forth for each Federal Guarantor excluding ECMC
[and _________], their respective cumulative cash reserves and corresponding
reserve ratios and the national average reserve ratio for all federal guarantors
for the last five federal fiscal years:*
PHEAA ASA
NSLP
FEDERAL FISCAL CUMULATIVE CUMULATIVE CASH
CUMULATIVE
YEAR CASH RESERVES RESERVE RATIO RESERVES RESERVE
RATIO CASH RESERVES RESERVE RATIO
(DOLLARS IN MILLIONS)
1994 $133.63 1.3 $38.16 0.7
$16.44 1.3
1995 166.31 1.5 43.06 0.8
18.53 1.3
1996 214.74 1.6 51.08 0.9
21.17 1.3
1997 189.35 1.4 39.29 0.7
24.07 1.2
1998 190.65 1.3 39.02 0.6
30.99 1.3
- --------------------------------------------------------------------------------
- -----------------------------------
HESC USAF
CSAC
FEDERAL CUMULATIVE RESERVE CUMULATIVE RESERVE
CUMULATIVE RESERVE NATIONAL
FISCAL YEAR CASH RESERVES RATIO CASH RESERVES RATIO
CASH RESERVES RATIO AVERAGE
(DOLLARS IN MILLIONS)
1994 $106.83 1.1 $485.71 2.89
$175.70 1.9 --
1995 115.18 1.1 338.83 1.49
236.38 2.3 --
1996 114.28 1.0 777.35 2.73
251.46 2.4 --
1997 158.00 1.4 492.26 1.48
278.70 2.5 --
1998 134.03 1.1 526.00 1.43
209.89 1.8 --
* The information set forth in the tables above with respect to each Federal
Guarantor has been obtained from such Federal Guarantor, respectively, and
the information with respect to the national average has been obtained from
the DOE Data Books.
RECOVERY RATES. A Federal Guarantor's recovery rate, which provides a
measure of the effectiveness of the collection efforts against defaulting
borrowers after the guarantee claim has been satisfied, is determined by
dividing the amount recovered from borrowers by the Federal Guarantor by the
aggregate amount of default claims paid by the Federal Guarantor during the
applicable federal fiscal year with respect to borrowers. The table below sets
forth the recovery rates for each Federal Guarantor, excluding ECMC [and
_______] for the last five federal fiscal years:*
RECOVERY RATE
FEDERAL FISCAL YEAR PHEAA ASA NSLP
1994 52.9 43.3 19.8
1995 53.3 43.4 21.3
1996 55.0 41.3 26.6
1997 54.8 42.7 31.5
1998 59.2 49.0 38.4
- --------------------------------------------------------------------------------
RECOVERY RATE
FEDERAL FISCAL YEAR HESC USAF CSAC
1994 41.9 30.3 33.5
1995 43.9 34.9 35.6
1996 46.2 38.7 37.6
1997 49.4 40.9 39.2
1998 53.0 40.1 41.8
- --------------------------------------------------------------------------------
* The information set forth in the tables above with respect to each Federal
Guarantor was provided by such Federal Guarantor.
LOAN LOSS RESERVE. In the event that a Federal Guarantor receives less
than full reimbursement of its guarantee obligations from the Department (see
"--Federal Reinsurance" above), such Federal Guarantor would be forced to look
to its existing assets to satisfy any such guarantee obligations not so
reimbursed. Because federal guarantors are no longer reinsured by the Department
at 100% (98% for loans disbursed between October 1, 1993 and October 1, 1998 and
95% for loans disbursed on and after October 1, 1998), many federal guarantors
have begun to maintain reserves for the 2% to 5% "risk-sharing" associated with
these guarantees. In general, the Federal Guarantors use historical default and
recovery rates to attempt to predict the reserves that should be maintained for
this purpose. As of June 30, 1999, PHEAA has not specifically provided for this
risk. PHEAA does have deferred guaranty fees of $____ million and cash reserves
of $____ million to cover this risk. As of May 31, 1999 ASA has a loan loss
reserve in the amount of $6.5 million and as of September 30, 1998, 1999 NSLP
maintains a reserve of $3.96 million.
CLAIMS RATE. For the past five federal fiscal years, none of PHEAA's,
ASA's, NSLP's, CSAC's, HESC's or USAF's claims rate has exceeded 5.0%, and as a
result, all claims of PHEAA, ASA, NSLP, CSAC, HESC and USAF have been reimbursed
by the Department at the maximum reinsurance rate permitted by the Higher
Education Act. See "--Federal Reinsurance" above. The most recent national
default rate reported by the Department of Education was 9.6% for the federal
fiscal year 1996. As recently as federal fiscal year 1990 this national default
rate was over 22%. This trend, coupled with the claims and recovery information
listed in this section, shows improvement in the repayment of Student Loans by
borrowers. While, the Seller is not currently aware of any circumstances which
would cause the reimbursement levels for these Federal Guarantors to be less
than the maximum levels permitted, nevertheless, there can be no assurance that
any Federal Guarantor will continue to receive such maximum reimbursement for
such claims. The following table sets forth the claims rates of each Federal
Guarantor, excluding ECMC [and _________] for each of the last five federal
fiscal years:*
CLAIMS RATE
FEDERAL FISCAL YEAR PHEAA ASA NSLP
1994 2.2 3.5 3.0
1995 2.0 3.5 4.1
1996 1.6 3.1 3.1
1997 1.9 3.5 3.2
1998 2.0 2.8 3.2
- --------------------------------------------------------------------------------
CLAIMS RATE
FEDERAL FISCAL YEAR HESC USAF CSAC
1994 2.8% 4.9% 4.1%
1995 3.0% 4.7% 3.4%
1996 2.9% 4.6% 4.4%
1997 2.5% 4.6% 4.5%
1998 2.7% 3.9% 3.1%
- --------------------------------------------------------------------------------
* The information set forth in the tables above with respect to each Federal
Guarantor was provided by such Federal Guarantor.
GUARANTORS FOR THE GUARANTEED PRIVATE LOANS. The Eligible Lender
Trustee will enter into a Guarantee Agreement with TERI and the Seller will
assign to the Eligible Lender Trustee, on behalf of the Trust, its rights under
surety bonds issued by HICA applicable to the Financed Student Loans insured by
HICA. As a result TERI and HICA, respectively, will agree to guarantee or insure
a portion of the Guaranteed Private Loans.
Pursuant to its respective Guarantee Agreement, each of TERI and HICA
guarantees or insures payment of 100% of the principal (including any interest
or fees capitalized from time to time) and accrued interest for each Guaranteed
Private Loan guaranteed or insured by it as to which any one of the following
events has occurred:
(a) failure by the borrower thereof to make monthly principal or
interest payments on such Guaranteed Private Loan when due, provided
such failure continues for a period of 120 days (150 days for HICA);
(b) any filing by or against the borrower thereof of a petition
in bankruptcy pursuant to any chapter of the Bankruptcy Code, (with
respect to the Guaranteed Private Loans insured by HICA, subject to
the restrictions contained in the HICA Surety Bonds);
(c) the death of the borrower thereof; or
(d) the total and permanent disability of the borrower thereof to
be employed on a full-time basis, as certified by two qualified
physicians, (with respect to the Guaranteed Private Loans insured by
HICA, subject to the restrictions contained in the HICA Surety Bonds).
TERI's and HICA's guarantee/insurance obligation with respect to any
Guaranteed Private Loan is conditioned upon the satisfaction of all the
conditions set forth in its respective Guarantee Agreement. These conditions
include, but are not limited to, the following:
o the origination and servicing of such Guaranteed Private Loan
being performed in accordance with the Programs and other
applicable requirements,
o the timely payment to TERI or HICA, as the case may be, of all
guarantee fees or premiums payable with respect to such
Guaranteed Private Loan,
o the timely submission to TERI or HICA, as the case may be, of all
required pre-claim delinquency status notifications and of the
claim with respect to such Guaranteed Private Loan, and
o the transfer and endorsement of the promissory note evidencing
such Guaranteed Private Loan to TERI or HICA, as the case may be,
upon and in connection with making a claim to receive Guarantee
Payments thereon.
Failure to comply with any of the applicable conditions, including the
foregoing, may result in the refusal of TERI or HICA, as the case may be, to
honor its Guarantee Agreement with respect to such Guaranteed Private Loan. In
addition, in the event that any Guaranteed Private Loan is determined to be
unenforceable because the terms of such Guaranteed Private Loan or the forms of
the application or promissory note related thereto violate any provisions of
applicable state law, TERI's guarantee obligation is reduced to 50% and HICA's
insurance obligation is reduced to 0% of principal (including capitalized
interest and fees) and accrued interest with respect to such Guaranteed Private
Loan. Under the Sale and Servicing Agreement, such failure to comply or such
unenforceability would constitute a breach of the Master Servicer's covenants or
the Seller's representations and warranties, as the case may be, and would
create an obligation of the Seller to repurchase such Guaranteed Private Loan or
of the Master Servicer to purchase such Guaranteed Private Loan. See
"Description of the Transfer and Servicing Agreements--Sale of Financed Student
Loans; Representations and Warranties" and "--Master Servicer Covenants" herein.
TERI and HICA, as Guarantors of Private Loans, are not entitled to any
federal reinsurance or assistance from the Department or any other governmental
entity. Although each Private Guarantor maintains a loan loss reserve intended
to absorb losses arising from its guarantee/insurance commitments, there can be
no assurance that the amount of such reserve will be sufficient to cover the
obligations of TERI or HICA over the term of the Guaranteed Private Loan.
Certain organizational and summary financial information with respect
to each of TERI and HICA in its capacity as a Guarantor is set forth below. The
information set forth below relating to TERI and HICA is not guaranteed as to
accuracy or completeness and is not to be construed as a representation by the
Seller, the Master Servicer, any of the Underwriters, or any of their respective
affiliates:
TERI
TERI was incorporated in 1985 to guarantee Student Loans and is not an
insurance company. TERI is a Massachusetts non-profit corporation headquartered
in Boston, Massachusetts and employs approximately 175 people, as of December
31, 1998.
GUARANTY VOLUME. The following table sets forth the non-federally
reinsured education loans that have first become guaranteed by TERI in each of
the five calendar years referred to below; such information is not guaranteed as
to accuracy or completeness and is not to be construed as a representation by
the Seller, the Master Servicer, any of the Underwriters or any of their
respective affiliates:
PRIVATE LOANS
CALENDAR YEAR GUARANTEED BY YEAR
------------- ------------------
(DOLLARS IN MILLIONS)
1994 $292.2
1995 303.4
1996 339.7
1997 332.6
1998 380.4
PROPRIETARY SCHOOL LOANS. Default rates for Student Loans made to
students attending proprietary or vocational schools are significantly higher
than those made to students attending other 2-year and 4-year institutions.
Except for a few selected, accredited proprietary schools which grant degrees,
TERI does not guarantee student loans made to students attending proprietary or
vocational schools.
RESERVE RATIO. Unlike the Federal Guarantors, TERI computes its
reserve ratio by dividing the "Total Amounts Available To Meet Guarantee
Commitments" by the "total loans outstanding." TERI defines "Total Amounts
Available to Meet Guarantee Commitments" as the sum of the amounts set forth
below under the caption "Amounts Available To Meet Guarantee Commitments" (which
amounts include for this purpose the segregated reserves described below under
the caption "Segregated Reserves for Private Loans Under the Programs Guaranteed
by TERI"). TERI defines "total loans outstanding" as the total outstanding
principal amount of all loans it has agreed to guarantee as of December 31 of
each year. Consequently, the reserve ratio information provided above for the
Federal Guarantors is not comparable to that provided for TERI below. The
following table sets forth TERI's reserve ratio as of December 31 for the five
calendar years referred to below; such information is not guaranteed as to
accuracy or completeness and is not to be construed as a representation by the
Seller, the Master Servicer, any of the Underwriters, or any of their respective
affiliates:
AMOUNTS AVAILABLE TO MEET GUARANTEE
COMMITMENTS (DOLLARS IN THOUSANDS)
CALENDAR YEAR (UNAUDITED) RESERVE RATIO (UNAUDITED)
1994 $73,624 6.1%
1995 83,937 5.7%
1996 96,362 5.7%
1997 102,201 5.4%
1998 104,170 5.0%
AMOUNTS AVAILABLE TO MEET GUARANTEE COMMITMENTS. As part of guarantee
agreements with lending institutions, with certain such agreements being revised
in 1997, TERI has agreed to hold as security for its guarantees a percentage of
the amount of unpaid principal on outstanding loans which ranges from 0.0% to
4.5% in total TERI funds available as security for the performance of TERI
obligations. At December 31, 1998, and December 31, 1997 the balance of loans
outstanding guaranteed directly by TERI amounted to approximately $2.1 billion
and $1.9 billion, respectively. At December 31, 1998, TERI was required to have
approximately $94.9 million in reserves (consisting of loan loss reserves,
deferred revenue and unrestricted and/or board designated unrestricted net
assets) available as security for TERI's performance as guarantor.
As of the end of each of the five calendar years referred to below,
TERI had available the following funds and reserves to meet its loan guarantee
commitments; such information is not guaranteed as to accuracy or completeness
and is not to be construed as a representation by the Seller, the Master
Servicer, any of the Underwriters or any of their respective affiliates:
AS OF DECEMBER
31,
1994 1995 1996
1997 1998
(AS RESTATED)
(IN THOUSANDS)
(UNAUDITED)
Deferred Guarantee Fees $ 5,269 $ 5,234 $ 5,140
$ 5,032 $ 4,899
Loan Loss Reserve 29,629 29,092 57,006
56,999 54,186
Unrestricted--Board Designated 33,151 46,063 31,169
33,951 33,929
Unrestricted--Undesignated 5,579 3,548 3,047
6,219 11,156
Total Amounts Available To Meet
Guarantee Commitments $73,624 $83,937 $96,362
$102,201 $104,170
Subject to the minimum restrictions imposed by lending institutions
and the segregated reserves discussed below under "Segregated Reserves for
Private Loans Under the Programs Guaranteed by TERI," TERI establishes its loan
loss reserve based on its management's estimates of probable losses arising from
its guarantee commitments, based on the historical experience of TERI and those
of other lending institutions and programs, and based on the results of a
semi-annual actuarial study provided by an independent third party. TERI has
advised the Seller that it is currently in compliance with all operating
reserves requirements contained in guarantee agreements TERI has in place with
other student loan lenders and other trustees under prior securitizations of
student loans. However, there can be no assurance that such compliance will
continue.
RECOVERY RATE. Unlike the Federal Guarantors' calculation of recovery
rates discussed above, which consists of an annual measure of recoveries as
compared to default claims, the recovery rate for TERI is determined by dividing
the cumulative amount recovered from borrowers by the cumulative amount of
default claims paid by TERI as a guarantor for the year when the loan defaulted.
Consequently, the recovery rate information provided above for the Federal
Guarantors is not comparable to that provided for TERI below. TERI's recovery
rates as of December 31, 1998, with respect to loans defaulting in each of the
five calendar years referred to below are as follows; such information is not
guaranteed as to accuracy or completeness and is not to be construed as a
representation by the Seller, the Master Servicer, any of the Underwriters or
any of their respective affiliates:
PERIOD OF DEFAULT CUMULATIVE CASH RECOVERY RATE(UNAUDITED)
1994 46% (January 1, 1994--December 31, 1998)
1995 41% (January 1, 1995--December 31, 1998)
1996 31% (January 1, 1996--December 31, 1998)
1997 26% (January 1, 1997--December 31, 1998)
1998 11% (January 1, 1998--December 31, 1998)
The appearance of a declining trend in the foregoing recovery rates
can largely be attributed to the fact that each succeeding default year listed
above includes one fewer year in which to obtain recoveries for the amounts paid
out on guarantee claims in the default year.
CLAIMS RATE. Unlike the Federal Guarantors' calculation of claims
rates discussed above, which consists of an annual measure of claims made to
outstanding loan balances guaranteed at the start of that year, the claims rate
for TERI set forth below is based on the aggregate amount of claims, whenever
paid, on loans guaranteed by TERI in a particular year or period. The "Cohort
Default Rate" refers to the total principal amount of defaulted loans for which
guarantee payments were made by TERI (exclusive of any subsequent recoveries by
TERI) for the cohort year (or period) as a percentage of the aggregate principal
amount of loans guaranteed by TERI for the cohort year (or period). As a result,
the claims rate information provided above for the Federal Guarantors is not
comparable to that provided for TERI below. The following table sets forth the
total loans guaranteed, total defaults paid and the cohort default rate as of
December 31, for each of the five calendar years referred to below; such
information is not guaranteed as to accuracy or completeness and is not to be
construed as a representation by the Seller, the Master Servicer, any of the
Underwriters or any of their respective affiliates:
TOTAL DEFAULTS
PAID FOR
TOTAL LOANS GUARANTEED IN LOANS GUARANTEED IN
COHORT
COHORT YEAR (DOLLARS IN YEAR (DOLLARS
IN COHORT DEFAULT RATE
COHORT YEAR THOUSANDS) (UNAUDITED) THOUSANDS)
(UNAUDITED) (UNAUDITED)
1994 $292,289 $14,978
5.12%
1995 303,369 12,044
3.97%
1996 339,675 5,663
1.67%
1997 332,530 2,020
0.61%
1998 380,357 182
0.05%
The declining trend reflected above in the claims rates experienced by
TERI can largely be attributed to the fact that in each succeeding cohort year
fewer loans guaranteed by TERI were in repayment. As the number of loans
entering repayment increases, the percentage of loans becoming delinquent and
subsequently defaulting also tends to increase. There can be no assurance that
the claims rate experience of TERI for any future year will be similar to the
historical claims rate experience set forth above.
SEGREGATED RESERVES FOR PRIVATE LOANS UNDER THE PROGRAMS GUARANTEED BY
TERI. A portion of the reserves described above that are maintained by TERI have
been segregated solely to support its guarantee obligations under the Programs.
These segregated reserves, which are not available to cover TERI guaranteed
loans outside of the Programs, are equally available to all holders of TERI
guaranteed Private Loans made under the Programs since 1990-1991, which include
both the Seller and third-party purchasers of the Seller's TERI guaranteed
Private Loans under the Programs, including but not limited to the Eligible
Lender Trustee on behalf of the Trust. Draws on such segregated reserves will be
paid in the order received, to the extent of amounts remaining in the segregated
reserve account. Consequently, there may be one or more owners of such Private
Loans for which a claim could, in the event of a default by a student borrower,
be filed against such segregated reserves. As a result, there can be no
assurance that amounts in these segregated reserves will be available to support
Guarantee Payments by TERI owing in respect of the Guaranteed Private Loans made
under the aforementioned Programs, or that such amounts, if available, will be
sufficient to satisfy all existing Guarantee Payments due with respect to
Guaranteed Private Loans. The Seller will assign the portion of its rights under
the agreement implementing these segregated reserves that is attributable to
such Guaranteed Private Loans to the Trust.
TERI has agreed that it will provide a copy of its most recent audited
financial statements to Securityholders upon receipt of a written request
directed to its Chief Financial Officer, 330 Stuart Street, Suite 500, Boston,
Massachusetts 02116.
HICA
The Eligible Lender Trustee will take an assignment of Surety Bonds by
which HICA has insured certain Guaranteed Private Loans. HICA was incorporated
in 1986 to provide insurance coverage to lenders against credit losses on
education-related, non-federally insured loans to students attending
post-secondary educational institutions. HICA is a licensed, regulated insurance
company incorporated in South Dakota and headquartered in Sioux Falls, and
employs approximately 29 people as of June 30, 1999. HICA is an indirect
subsidiary of SLM Holding Corporation.
INSURANCE VOLUME. The following table sets forth the amount of loans
that have first become insured by HICA in each of the five calendar years
referred to below; such information is not guaranteed as to accuracy or
completeness and is not to be construed as a representation by the Seller, the
Master Servicer, any of the Underwriters or any of their respective affiliates:
PRIVATE LOANS INSURED BY YEAR
CALENDAR YEAR (DOLLARS IN MILLIONS)
1994 $161
1995 173
1996 256
1997 286
1998 267
1999* 113
* For six-month period ending June 30, 1999.
HICA has agreed that it will provide a copy of its most recent audited
financial statements to Securityholders upon receipt of a written request
directed to Mr. Mark Bielen, Treasurer, 3900 West Technology Circle, Suite 7,
Sioux Falls, South Dakota 57106.
NON-GUARANTEED PRIVATE LOANS
Approximately ___% of the Initial Financed Student Loans are, and
approximately ___% of the Subsequent Pool Student Loans will be, Non-Guaranteed
Private Loans. The Non-Guaranteed Private Loans were originated in accordance
with the criteria set forth in the Prospectus under "The Student Loan Financing
Business--Description of the Private Loans Under the Programs." See also the
discussion of the Key Alternative Loan Program in the Prospectus under "The
Student Loan Financing Business--Description of the Private Loans Under the
Programs."
DESCRIPTION OF THE SECURITIES
Terms used in this section and not previously defined and not defined
herein are defined under "Description of the Transfer and Servicing Agreements
- --Distributions" herein.
GENERAL
The Notes will be issued pursuant to the terms of the Indenture, dated
_____ ___, ____ between the Trust and the Indenture Trustee (the "Indenture").
The Certificates will be issued pursuant to the terms of the Trust Agreement.
The following information supplements the summary of the material terms of the
Notes, the Certificates, the Indenture and the Trust Agreement set forth in the
Prospectus. The summary does not purport to be complete and is qualified in its
entirety by reference to the provisions of the Notes, the Certificates, the
Indenture and the Trust Agreement.
Each class of Notes and Certificates (collectively, the "Securities")
will initially be represented by one or more Notes and Certificates,
respectively, in each case registered in the name of the nominee of the
Depository Trust Company ("DTC") (together with any successor depository
selected by the Administrator, the "Depository"), except as set forth below. The
Securities will be available for purchase in denominations of $1,000 and
integral multiples of $1,000 in excess thereof in book-entry form only. The
Trust has been informed by DTC that DTC's nominee will be Cede & Co. ("Cede").
Accordingly, Cede is expected to be the holder of record of the Securities.
Unless and until Definitive Notes or Definitive Certificates are issued under
the limited circumstances described herein, no Noteholder or Certificateholder
will be entitled to receive a physical certificate representing a Note or
Certificate. All references herein to actions by Noteholders or
Certificateholders refer to actions taken by DTC upon instructions from its
participating organizations (the "Participants") and all references herein to
distributions, notices, reports and statements to Noteholders or
Certificateholders refer to distributions, notices, reports and statements to
DTC or Cede, as the registered holder of the Notes or the Certificates, as the
case may be, for distribution to Noteholders or Certificateholders in accordance
with DTC's procedures with respect thereto. See "Certain Information Regarding
the Securities--Book-Entry Registration" and "--Definitive Securities" in the
Prospectus.
THE NOTES
DISTRIBUTIONS OF INTEREST. Interest will accrue on the principal
balance of each class of Notes at a rate per annum equal to the lesser of the
Formula Rate for such Notes and the Student Loan Rate (each such interest rate
being a "Note Interest Rate"). Interest will accrue from and including the
Closing Date or from the most recent Distribution Date on which interest has
been paid to but excluding the current Distribution Date (each, an "Interest
Period") and will be payable to the Noteholders on each Distribution Date.
Interest accrued as of any Distribution Date but not paid on such Distribution
Date will be due on the next Distribution Date together with an amount equal to
interest on such amount at the applicable Note Interest Rate. Interest payments
on the Notes for any Distribution Date will generally be funded from Available
Funds and amounts on deposit in the Reserve Account and, under certain limited
circumstances, the Pre-Funding Account remaining after the distribution of the
Master Servicing Fee for each of the two immediately preceding Monthly Servicing
Payment Dates and of the Master Servicing Fee, and the Administration Fee for
each Distribution Date. See "Description of the Transfer and Servicing
Agreements -- Distributions" and "--Credit Enhancement" herein. If such sources
are insufficient to pay the Noteholders' Interest Distribution Amount for such
Distribution Date, such shortfall will be allocated pro rata to the Noteholders
(based upon the total amount of interest then due on each class of Notes).
"Collection Period" means each period of three calendar months from
and including the date following the end of the preceding Collection Period (or,
with respect to the first Collection Period, the period beginning on the
Statistical Cutoff Date and ending on _______ __, ____).
"Formula Rate" means for any class of Securities, the applicable
Investor Index plus the applicable Margin.
"Investor Index" means (x) in the case of the Treasury Bill Indexed
Securities, the daily weighted average of the 91-day Treasury Bill Rates within
such Interest Period (determined as described under "--Determination of the
91-day Treasury Bill Rate" below) or (y) in the case of the LIBOR Indexed
Securities, Three Month LIBOR (determined as described under "--Determination of
LIBOR" below).
In the case of any LIBOR Indexed Securities and the initial Interest
Period, interest will accrue for the period from the Closing Date to but
excluding ______ __, ____ based on Three Month LIBOR as determined on the
initial LIBOR Determination Date and for the period from ______ ___, ____ to but
excluding ______ __, ____ based on Three Month LIBOR as determined on the LIBOR
Determination Date in _______ ____. See "--Determination of LIBOR" below.
The "Margin" for each class of Securities is [___% for the Class A-1
Notes, ___% for the Class A-2 Notes] and ___% for the Certificates.
The "Student Loan Rate" for any class of Securities for any Interest
Period will equal the product of (a) the quotient obtained by dividing (x) 365
(or 366 in a leap year) by (y) the actual number of days elapsed in such
Interest Period and (b) the percentage equivalent of a fraction, the numerator
of which is equal to Expected Interest Collections for the Collection Period
relating to such Interest Period less the Master Servicing Fees and the
Administration Fee and payable on the related Distribution Date and any Master
Servicing Fees paid on the two preceding Monthly Servicing Payment Dates during
the related Collection Period and the denominator of which is the outstanding
principal balance of the Securities as of the first day of such Interest Period.
"Expected Interest Collections" means, with respect to any Collection
Period, the sum of
o the amount of interest accrued, net of amounts required by the
Higher Education Act to be paid to the Department or to be repaid
to borrowers, with respect to the Financed Student Loans for such
Collection Period (whether or not such interest is actually
paid),
o all Interest Subsidy Payments and Special Allowance Payments
expected to be received by the Eligible Lender Trustee for such
Collection Period (whether or not actually received) with respect
to the Financed Federal Loans and
o Investment Earnings for such Collection Period.
To the extent that for any Interest Period the rate for the Notes
calculated on the basis of the Formula Rate exceeds the Student Loan Rate, the
amount of the excess ("Noteholders' Interest Index Carryover") (together with
the unpaid portion of any such Noteholders' Interest Index Carryover from prior
Distribution Dates and interest accrued thereon at the Formula Rate for the
Notes) will be paid on such Distribution Date or any subsequent Distribution
Date to the extent funds are allocated and available therefor after making all
required prior allocations and distributions on such Distribution Date, as
described under "Description of the Transfer and Servicing Agreements--
Distributions" herein. Any Noteholders' Interest Index Carryover due on the
Notes that may exist on any Distribution Date will be payable to holders of the
Notes on that Distribution Date on a pro rata basis, based on the amount of the
Noteholders' Interest Index Carryover then owing on the Notes, and on any
succeeding Distribution Dates, solely out of the amount of Available Funds
remaining in the Collection Account on any such Distribution Date after
distribution of the amounts set forth in "Description of the Transfer and
Servicing Agreements--Distributions" herein. No amounts on deposit in the
Reserve Account or the Pre-Funding Account will be available to pay any
Noteholders' Interest Index Carryover. Any amount of Noteholders' Interest Index
Carryover due on the Notes remaining after distribution of all Available Funds
on the applicable Final Maturity Date will never become due and payable and will
be discharged on such date.
DISTRIBUTIONS OF PRINCIPAL. Principal payments will be made to the
holders of the Notes on each Distribution Date in an amount generally equal to
the Principal Distribution Amount for such Distribution Date, until the
principal balance of the Notes is reduced to zero. Principal payments on the
Notes will generally be derived from Available Funds remaining after the
distribution of the amounts set forth in "Description of the Transfer and
Servicing Agreements--Distributions" herein, provided, that, on any Distribution
Date that the principal balance of the Notes exceeds the Note Collateralization
Amount, an amount equal to the Noteholders' Priority Principal Distribution
Amount will be distributed to Noteholders prior to any payments to
Certificateholders. If the remaining amount of Available Funds is insufficient
to pay the Noteholders' Priority Principal Distribution Amount, for any
Distribution Date, the remaining shortfall will be distributable to the
Noteholders on subsequent Distribution Dates and (except with respect to the
Final Maturity Date for such classes of Notes), the remaining shortfall will not
constitute an Event of Default (as defined in the Prospectus). In addition, in
the event the Financed Student Loans are not sold pursuant to the auction
process described under "Description of the Transfer and Servicing
Agreements--Termination," with respect to any Distribution Date occurring on or
after the ______ _____ Distribution Date, the Specified Collateral Balance will
be reduced to zero and all amounts on deposit in the Collection Account (after
distribution of the Master Servicing Fee for each of the two immediately
preceding Monthly Servicing Payment Dates and the Master Servicing Fee, the
Administration Fee, the Noteholders' Interest Distribution Amount, any
Noteholders' Priority Principal Distribution Amount, the Certificateholders'
Interest Distribution Amount and any amounts necessary to reinstate the balance
of the Reserve Account to the Specified Reserve Account Balance on such
Distribution Date) will be distributed to the Noteholders and then to the
Certificateholders as principal until the outstanding principal balance of the
Notes and Certificates has been reduced to zero. See "Description of the
Transfer and Servicing Agreements--Termination" herein.
Principal payments on the Notes will be applied on each Distribution
Date, first, to the principal balance of the [Class A-1] Notes until the
principal balance is reduced to zero and then to the principal balance of the
[Class A-2] Notes until the principal balance is reduced to zero. The aggregate
outstanding principal amount of each class of Notes will be payable in full on
the Final Maturity Date for that class of Notes. The dates on which the Final
Maturity Dates occur for each class of Notes are set forth on the cover page. On
the Final Maturity Date for each class of Notes, amounts on deposit in the
Reserve Account, if any, will be available, if necessary, to be applied to
reduce the principal balance of the Notes to zero. Although the maturity of many
of the Financed Student Loans will extend well beyond the Final Maturity Dates,
the actual date on which the aggregate outstanding principal and accrued
interest of any class of Notes are paid may be earlier than the Final Maturity
Date for the related class of Notes, based on a variety of factors. See "The
Financed Student Loan Pool--Maturity and Prepayment Assumptions" herein.
MANDATORY REDEMPTION. If, as of the Special Determination Date, the
Subsequent Pool Pre-Funded Amount has not been reduced to zero, then the
remaining Subsequent Pool Pre-Funded Amount, if greater than $_____, will be
distributed on the first Distribution Date thereafter to redeem each class of
Notes and prepay the Certificates on a pro rata basis, based on the initial
principal amount of each class of Notes and the initial Certificate Balance of
the Certificates. If the remaining Subsequent Pool Pre-Funded Amount is $_______
or less, it will be distributed on the first Distribution Date thereafter only
to holders of the [Class A-1] Notes.
THE INDENTURE TRUSTEE. _______________, a ___________ banking
corporation, will be the Indenture Trustee under the Indenture. The Seller
maintains normal commercial banking relations with the Indenture Trustee.
THE CERTIFICATES
DISTRIBUTIONS OF INTEREST. Interest will accrue on the Certificate
Balance at a rate per annum equal to the lesser of the Formula Rate for the
Certificates and the Student Loan Rate (such interest rate being the
"Certificate Rate"). Interest on the Certificates will be distributable
quarterly on each Distribution Date. Interest distributions due for any
Distribution Date but not distributed on such Distribution Date will be due on
the next Distribution Date, increased by an amount equal to interest on such
amount at the Certificate Rate. Interest distributions with respect to 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 and,
under certain limited circumstances, the Pre-Funding Account remaining after
distribution of the amounts set forth in "Description of the Transfer and
Servicing Agreements--Distributions" herein for such Distribution Date. See
"Description of the Transfer and Servicing Agreements--Distributions," "--Credit
Enhancement--Reserve Account" and "--Additional Fundings" herein.
To the extent that for any Interest Period the rate for the
Certificates calculated on the basis of the Formula Rate exceeds the Student
Loan Rate, the amount of such excess (together with the unpaid portion of any
such excess from prior Distribution Dates and interest accrued thereon at the
Formula Rate for the Certificates) will be paid on such Distribution Date or any
subsequent Distribution Date on a subordinated basis to the extent funds are
allocated and available therefor after making all required prior allocations and
distributions on such Distribution Dates, as described under "Description of the
Transfer and Servicing Agreements -- Distributions" herein. The payment of such
amounts due to Certificateholders on any Distribution Date (such amount, the
"Certificateholders' Interest Index Carryover") is further subordinated to the
payment of Noteholders' Interest Index Carryover. To the extent funds are
available therefor, the Certificateholders' Interest Index Carryover may be paid
prior to the time that the Notes are paid in full. Any Certificateholders'
Interest Index Carryover due on the Certificates that may exist on any
Distribution Date will be payable on that Distribution Date on a pro rata basis
and any succeeding Distribution Dates solely out of the amount of Available
Funds remaining in the Collection Account on any such Distribution Date after
distribution of the amounts set forth in "Description of the Transfer and
Servicing Agreements--Distributions" herein. No amounts on deposit in the
Reserve Account or Pre-Funding Account will be available to pay any
Certificateholders' Interest Index Carryover. Any amount of Certificateholders'
Interest Index Carryover due on the Certificates remaining after distribution of
all Available Funds on the Final Maturity Date for the Certificates will never
become due and payable and will be discharged on such date.
DISTRIBUTIONS OF PRINCIPAL. The Certificates will be entitled to
distributions on each Distribution Date on and after which the Notes are paid in
full in an amount generally equal to the Principal Distribution Amount for such
Distribution Date. Distributions with respect to principal payments on the
Certificates for such Distribution Date will generally be funded from the
portion of Available Funds remaining after distribution of the amounts set forth
in "Description of the Transfer and Servicing Agreements--Distributions" herein.
See "Description of the Transfer and Servicing Agreements--Distributions" and
"--Credit Enhancement--Reserve Account" herein.
The outstanding Certificate Balance will be payable in full on the
Final Maturity Date for the Certificates. The Final Maturity Date for the
Certificates is set forth on the cover page. On the Final Maturity Date for the
Certificates, amounts on deposit in the Reserve Account, if any, will be
available, if necessary, to be applied to reduce the Certificate Balance to
zero. The actual date on which the aggregate outstanding Certificate Balance and
accrued interest of the Certificates will be paid may be earlier than the Final
Maturity Date for the Certificates, however, based on a variety of factors. See
"The Financed Student Loan Pool--Maturity and Prepayment Assumptions" herein.
SUBORDINATION OF THE CERTIFICATES. The rights of the holders of the
Certificates to receive payments of interest are subordinated to the rights of
the holders of the Notes to receive payments of interest (and in certain
circumstances, principal) and the rights of the holders of the Certificates to
receive payments of principal are subordinated to the rights of the holders of
the Notes to receive payments of interest and principal. Consequently, amounts
on deposit in the Collection Account and to the extent necessary, the Reserve
Account and, during the Funding Period, the Other Additional Pre-Funding
Subaccount, will be applied to the payment of interest on the Notes before
payment of interest on the Certificates. Moreover, the holders of the
Certificates will not be entitled to any payments of principal until the Notes
are paid in full. In addition, if an Event of Default occurs and is continuing
under the Indenture or a Seller Insolvency Event occurs and the Financed Student
Loans are liquidated, all amounts due on the Notes will be payable before any
amounts are payable on the Certificates. Additionally, if on any Distribution
Date the outstanding principal balance of the Notes (prior to giving effect to
distributions on such Distribution Date) is in excess of the Note
Collateralization Amount, principal will be payable to the holders of the Notes
in the amount of such excess to the extent of funds available before any amounts
are payable to the holders of the Certificates. If amounts otherwise allocable
to the Certificates are used to fund payments of interest or principal on the
Notes, distributions with respect to the Certificates may be delayed or reduced.
DETERMINATION OF THE TREASURY BILL RATE
"91-day Treasury 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 91-day Treasury Bills sold at the most recent 91-day Treasury
Bill auction prior to such date, as reported by the U.S. Department of the
Treasury. In the event that the results of the auctions of 91-day Treasury Bills
cease to be reported as provided above, or that no such auction is held in a
particular week, then the 91-day Treasury Bill Rate in effect as a result of the
last such publication or report will remain in effect until such time, if any,
as the results of auctions of 91-day Treasury Bills shall again be reported or
such an auction is held, as the case may be. The 91-day Treasury Bill Rate will
be subject to a Lock-In Period of six business days.
"Lock-In Period" means the number of days preceding any Distribution
Date during which the Note Interest Rate or Certificate Rate, as applicable, in
effect on the first day of such period will remain in effect until the end of
the accrual period related to such Distribution Date.
Accrued interest on any class of Notes (and the Certificates) which
are Treasury Bill Indexed Securities 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 the Notes
(or the Certificate Balance) by an "accrued interest factor." This factor is
calculated by adding the interest rates applicable to each day on which each
Note has been outstanding since the Closing Date or the preceding Distribution
Date, as applicable, and dividing the sum by 365 (or by 366 in the case of
accrued interest which is payable on a Distribution Date in a leap year) and
rounding the resulting number to nine decimal places.
The following table sets forth the accrued interest factors that would
have been applicable to any Notes which are Treasury Bill Indexed Securities
bearing interest at the indicated rates, assuming a 365-day year:
ASSUMED INTEREST
SETTLEMENT DATE DAYS OUTSTANDING RATE ON THE NOTES INTEREST FACTOR
1st
2nd 1
3rd 2
4th 3
5th* 4
6th 5
7th 6
8th 7
9th 8
10th 9
* 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 which are
Treasury Bill Indexed Securities. A similar factor calculated in the same manner
is applicable to the return on Certificates which are Treasury Bill Indexed
Securities.
The Administrator makes information concerning the current 91-day
Treasury Bill Rate and the accrued interest factor available through Bloomberg
L.P.
DETERMINATION OF LIBOR
Pursuant to the Sale and Servicing Agreement, the Administrator will
determine Three-Month LIBOR for purposes of calculating the interest due on the
Notes and Certificates which are LIBOR Indexed Securities and the Noteholders'
Interest Index Carryover and the Certificateholders' Interest Index Carryover,
in each case, for each given Interest Period on (x) the second business day
prior to the commencement of each Interest Period and (y) with respect to the
initial Interest Period, as determined pursuant to clause (x) for the period
from the Closing Date to but excluding ______ __, ____ and as determined on the
second business day prior to _______ __, ____ for the period from ________ __,
____ to but excluding _____ __, ____ (each, a "LIBOR Determination Date"). For
purposes of calculating Three-Month LIBOR, a business day is any day on which
banks in London and New York City are open for the transaction of business.
Interest due for any Interest Period will be determined based on the actual
number of days in such Interest Period over a 360-day year.
"Three-Month LIBOR" means the London interbank offered rate ("LIBOR")
for deposits in U.S. dollars having a maturity of three months commencing on the
related LIBOR Determination Date (the "Index Maturity") which appears on
Telerate Page 3750 as of 11:00 a.m., London time, on such LIBOR Determination
Date. If such 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 such 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 of such Reference Banks to provide a quotation of its rate. If at least two
such quotations are provided, the rate for that day will be the arithmetic mean
of the quotations. If fewer than two quotations are provided, the rate for that
day will be the arithmetic mean of the rates quoted by major banks in New York
City, selected by the Administrator, at approximately 11:00 a.m., New York City
time, on such LIBOR Determination Date for loans in U.S. dollars to leading
European banks having the Index Maturity and in a principal amount equal to an
amount of not less than U.S. $1,000,000; provided that if the banks selected as
aforesaid are not quoting as mentioned in this sentence, Three-Month LIBOR in
effect for the applicable reset period will be Three-Month LIBOR in effect for
the previous reset period.
"Telerate Page 3750" means the display page so designated on the
Bridge Telerate Service (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices).
"Reference Bank" means a leading bank (a) engaged in transactions in
Eurodollar deposits in the international Eurocurrency market, (b) not
controlling, controlled by or under common control with the Administrator and
(c) having an established place of business in London.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
GENERAL
The following information supplements the summary set forth in the
Prospectus of the material terms of the Sale and Servicing Agreement, pursuant
to which the Eligible Lender Trustee on behalf of the Trust will purchase, the
Master Servicer will service (or will cause the Sub-Servicers to service) and
the Administrator will perform certain administrative functions with respect to
the Financed Student Loans; the Administration Agreement, dated _____ __, ____
among the Administrator, the Trust and the Indenture Trustee (the
"Administration Agreement"), pursuant to which the Administrator will undertake
certain other administrative duties with respect to the Trust and the Financed
Student Loans; and the Trust Agreement, pursuant to which the Trust will be
created and the Certificates will be issued (collectively, the "Transfer and
Servicing Agreements"). However, the summary does not purport to be complete and
is qualified in its entirety by reference to the provisions of such Transfer and
Servicing Agreements.
SALE OF FINANCED STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
On or prior to the Closing Date, the Seller will sell and assign to
the Eligible Lender Trustee on behalf of the Trust, without recourse, its entire
interest in the Initial Financed Student Loans, all collections received and to
be received with respect thereto for the period on and after _______ __, ____
and all the Assigned Rights pursuant to the Sale and Servicing Agreement. Each
Initial Financed Student Loan will be identified in schedules appearing as an
exhibit to the Sale and Servicing Agreement. The Eligible Lender Trustee will,
concurrently with such sale and assignment, execute, authenticate and deliver
the Notes. The net proceeds received from the sale of the Notes and the
Certificates will be applied to the purchase of the Financed Student Loans and
the Assigned Rights and to the deposit of the Pre-Funded Amount in the
Pre-Funding Account and the Reserve Account Initial Deposit to the Reserve
Account. See "--Additional Fundings" below for a description of the application
of funds on deposit in the Pre-Funding Account during the Funding Period.
In the Sale and Servicing Agreement, the Seller will make certain
representations and warranties with respect to the Financed Student Loans to the
Trust for the benefit of the Certificateholders and the Noteholders and will
have certain cure, repurchase and reimbursement obligations with respect to any
breaches. See "Description of the Transfer and Servicing Agreements" in the
Prospectus.
The "Purchase Price" of any Financed Student Loan will be (1) in the
case of Initial Financed Student Loans, an amount equal to _______ of the
aggregate principal balance of such Initial Financed student Loan as of the
Statistical Cutoff Date, (2) in the case of Subsequent Pool Student Loans, an
amount equal to _______ of the aggregate principal balance thereof as of the
related Subsequent Cutoff Date and (3) in the case of Other Subsequent Student
Loans, an amount equal to ________ of the aggregate principal balance thereof as
of its Subsequent Cutoff Date. For purposes of the foregoing calculations, the
aggregate principal balance of each Financed Student Loan includes accrued
interest thereon from the date of origination to, with respect to each Initial
Financed Student Loan, the Statistical Cutoff Date, and to, with respect to each
Additional Student Loan, the related Subsequent Cutoff Date, in each case
expected to be capitalized upon entry into repayment.
To assure uniform quality in servicing and to reduce administrative
costs, each Sub-Servicer will be appointed custodian of the promissory notes
representing the Financed Student Loans which such Sub-Servicer is servicing on
behalf of the Master Servicer and with respect to the Trust. The Seller's, the
Master Servicer's and the each Sub-Servicers' accounting and other records will
reflect the sale and assignment of the Financed Student Loans to the Eligible
Lender Trustee on behalf of the Trust, and Uniform Commercial Code financing
statements reflecting such sale and assignment will be filed.
ACCOUNTS
The Administrator will establish and maintain four separate segregated
accounts as follows: the "Collection Account", the "Pre-Funding Account", the
"Escrow Account" and the "Reserve Account." Each such account will be
established in the name of the Indenture Trustee on behalf of the Noteholders
and the Certificateholders.
Funds in the Collection Account, the Pre-Funding Account, the Escrow
Account and the Reserve Account (collectively, the "Trust Accounts") will be
invested as provided in the Sale and Servicing Agreement in Eligible
Investments. "Eligible Investments" are generally limited to short-term U.S.
government backed securities, certain highly rated commercial paper and money
market funds and other investments acceptable to the Rating Agencies as being
consistent with the rating of the Notes. Subject to certain conditions, Eligible
Investments may include securities or other obligations issued by the Seller or
its affiliates, or trusts originated by the Seller or its affiliates, or shares
of investment companies for which the Seller or its affiliates may serve as the
investment advisor. Eligible Investments are limited to obligations or
securities that mature not later than the business day immediately preceding the
next Distribution Date. Investment earnings on funds deposited in the Trust
Accounts, net of losses and investment expenses (collectively, "Investment
Earnings"), will be deposited in the Collection Account on each Distribution
Date and will be treated as collections of interest on the Financed Student
Loans.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in such account, so long as any of the
securities of such depository institution have a credit rating from each Rating
Agency in one of its generic rating categories which signifies investment grade.
Any such accounts may be maintained with the Seller or any of its affiliates, if
such accounts meet the requirements described in clause (a) of the preceding
sentence. "Eligible Institution" means a depository institution (which may be,
without limitation, the Seller or an affiliate thereof, the Eligible Lender
Trustee, or an affiliate thereof, or the Indenture Trustee or an affiliate
thereof) organized under the laws of the United States of America or any one of
the states thereof or the District of Columbia (or any domestic branch of a
foreign bank) which has a long-term unsecured debt rating and/or a short-term
unsecured debt rating acceptable to the two nationally recognized rating
agencies rating the Securities and the deposits of which are insured by the
Federal Deposit Insurance Corporation ("FDIC").
ADDITIONAL FUNDINGS
The Trust may make expenditures (each, an "Additional Funding") from
the Pre Funding Account and the Escrow Account on Transfer Dates during the
Funding Period and from the Escrow Account and Available Loan Purchase Funds on
Transfer Dates during the period which begins on the day following the end of
the Funding Period and ends on the Loan Purchase Termination Date, in each case
consisting of amounts paid to the Seller to acquire Additional Student Loans as
of the applicable Subsequent Cutoff Dates, to pay capitalized interest on the
Financed Student Loans and to pay Fee Advances as provided in the Sale and
Servicing Agreement.
On the Closing Date, the Seller will deposit $__________ (the "Initial
Pre-Funded Amount") into the Pre-Funding Account from the proceeds of the sale
of the Securities. For administrative convenience, a portion of the Initial
Pre-Funded Amount equal to $__________ (the "Subsequent Pool Pre-Funded Amount")
will be allocated to an administrative subaccount of the Pre-Funding Account
(the "Subsequent Pool Pre-Funding Subaccount"). The remaining portion of the
Initial Pre-Funded Amount equal to $__________ (the "Other Additional Pre-Funded
Amount") will be allocated to an administrative subaccount of the Pre-Funding
Account (the "Other Additional Pre-Funding Subaccount"). The Subsequent Pool
Pre-Funded Amount may only be used by the Trust on or prior to the Special
Determination Date to purchase from the Seller Subsequent Pool Student Loans.
The Subsequent Pool Pre-Funded Amount will be reduced on each date Subsequent
Pool Student Loans are transferred to the Trust by the aggregate Purchase Price
of such Subsequent Pool Student Loans transferred on such date.
The Trust intends to use funds on deposit in the Subsequent Pool
Pre-Funding Subaccount on or prior to the Special Determination Date to acquire
the Subsequent Pool Student Loans. In the event that the Subsequent Pool
Pre-Funded Amount is insufficient to pay the Purchase Price of the Subsequent
Pool Student Loans, then the amount of such deficiency may be withdrawn from the
Other Additional Pre-Funding Subaccount.
Pursuant to the Sale and Servicing Agreement, the Seller is obligated
to sell, and the Eligible Lender Trustee on behalf of the Trust is obligated to
purchase during the Funding Period, Other Subsequent Student Loans having an
aggregate principal balance (net of the aggregate principal balance of the
Financed Student Loans repaid by any Other Subsequent Student Loans that are
Consolidation Loans) of not less than $__________ (less the amount thereof, if
any, used by the Trust to fund shortfalls in the payment of interest on the
Securities as described herein) to the extent that such Other Subsequent Student
Loans are available. Funds on deposit in the Other Additional Pre-Funding
Subaccount will be used from time to time during the Funding Period, subject to
certain limitations described below, together with any amounts on deposit in the
Escrow Account, to purchase from the Seller, for an amount equal to ___% of the
aggregate principal balance thereof plus accrued interest (to the extent
capitalized or to be capitalized), Other Subsequent Student Loans made by the
Seller to those eligible borrowers who have Student Loans that are part of the
pool of Initial Financed Student Loans as of the Statistical Cutoff Date or
Subsequent Pool Student Loans as of the related Subsequent Cutoff Date, to pay
capitalized interest on any Financed Student Loan and to pay Fee Advances. See
"The Student Loan Financing Business--Description of Federal Loans Under the
Programs--Federal Consolidation Loans" and "--Description of Private Loans Under
the Programs--Private Consolidation Loans" in the Prospectus.
The Seller expects that the total amount of Additional Fundings from
the Pre-Funding Account will approximate 100% of the Initial Pre-Funded Amount
by the last day of the Collection Period preceding the _______ ____ Distribution
Date; however, there can be no assurance that a sufficient amount of Additional
Fundings will be made during such time. If, on the Special Determination Date,
the Subsequent Pool Pre-Funded Amount has not been reduced to zero, then such
amounts will be distributed to Securityholders as described in "Description of
the Securities--The Notes--Mandatory Redemption" herein. If the Pre-Funded
Amount has not been reduced to zero by the end of the Funding Period, any
amounts remaining in the Pre-Funding Account will be deposited into the
Collection Account for distribution on the immediately following Distribution
Date. Such reduction in the Pre-Funded Amount will result in a corresponding
increase in the amount of principal distributable to the Securities on such
Distribution Date.
The Other Additional Pre-Funded Amount will also be available on each
Monthly Servicing Payment Date to cover any shortfalls in payments of the Master
Servicing Fee and on each Distribution Date to cover any shortfalls in payments
of the Master Servicing Fee, the Administration Fee, interest amounts payable in
respect of the Notes and the Certificates (other than the Noteholders' Interest
Index Carryover and the Certificateholders' Interest Index Carryover) for such
Distribution Date for which funds otherwise available therefor on such
Distribution Date are insufficient to make such distributions and after giving
effect to the application of funds on deposit in the Reserve Account to cover
such shortfalls; provided, however, that the Other Additional Pre-Funded Amount
will only be available to cover shortfalls in interest payments on the
Certificates to the extent that the Note Collateralization Amount (after giving
effect to such reductions in the Other Additional Pre-Funded Amount) would not
be less than the outstanding principal balance of the Notes. Amounts withdrawn
from the Pre-Funding Account for the purposes described in this paragraph will
not be replenished with future available funds.
In addition to the conditions set forth under "The Financed Student
Loan Pool--General" herein, the obligation to purchase any Additional Student
Loan (including a Subsequent Pool Student Loan) by the Eligible Lender Trustee
on behalf of the Trust is subject to the following conditions, among others:
(a) such Additional Student Loan must satisfy all applicable
origination requirements and all other requirements specified in
the Sale and Servicing Agreement or related agreements;
(b) the Seller will not select such Additional Student Loan in a
manner that it believes is adverse to the interests of the
Securityholders; and
(c) the Seller will deliver certain opinions of counsel to the
Indenture Trustee and the Rating Agencies with respect to the
validity of the conveyance of such Additional Student Loan.
In addition, (a) no Consolidation Loan will be transferred to the Trust unless
at least one underlying Student Loan was held by the Eligible Lender Trustee on
behalf of the Trust at the time of consolidation and (b) no Serial Loan will be
transferred to the Trust unless the borrower of such loan is the borrower for
one or more Financed Student Loans already owned by the Trust.
On the fifteenth day (or, if such day is not a business day, the next
succeeding business day) of each month or on certain other dates designated by
the Seller during the Funding Period and during the period which begins
following the end of the Funding Period and ends on the Loan Purchase
Termination Date (each, a "Transfer Date"), the Seller will sell and assign,
without recourse, to the Eligible Lender Trustee on behalf of the Trust, its
entire interest in the Other Subsequent Student Loans or Other Student Loans, as
applicable, made or, with respect to Subsequent Pool Student Loans, owned during
the period preceding the applicable Transfer Date, in each case as of the date
specified in the applicable Transfer Agreement to be delivered on such Transfer
Date (each, a "Subsequent Cutoff Date"). Subject to the satisfaction of the
foregoing conditions, the Seller will convey the Additional Student Loans to the
Eligible Lender Trustee on behalf of the Trust on each such Transfer Date
pursuant to the Sale and Servicing Agreement and the applicable Transfer
Agreement (a "Transfer Agreement") executed by the Seller, the applicable
Servicer, the Eligible Lender Trustee and the Administrator on such Transfer
Date. Each such Transfer Agreement will include as an exhibit a schedule
identifying each Additional Student Loan transferred on such Transfer Date. Upon
such conveyance of Additional Student Loans to the Eligible Lender Trustee on
behalf of the Trust, the Pool Balance will increase in an amount equal to the
aggregate principal balances of such Additional Student Loans (less any existing
Financed Student Loans being repaid pursuant to any Consolidation Loans included
within such Additional Student Loans) and an amount equal to the Purchase Price
of such Additional Student Loans will be withdrawn first from the Escrow Account
to the extent amounts are available therein and then (x) with respect to
Subsequent Pool Student Loans and Other Subsequent Student Loans, during the
Funding Period, from the Pre-Funding Account and (y) with respect to Other
Student Loans, during the period following the end of the Funding Period until
the Loan Purchase Termination Date, from Available Loan Purchase Funds on
deposit in the Collection Account, in each case on such date and transferred to
the Seller. Amounts in the Escrow Account will not be available to purchase any
Subsequent Pool Student Loan.
With respect to any Consolidation Loan to be made by the Seller to a
given borrower, the Eligible Lender Trustee on behalf of the Trust will convey
to the Seller all Underlying Federal Loans and Underlying Private Loans, as
applicable (each as defined under "The Student Loan Financing Business" in the
Prospectus, the "Underlying Federal Loans" and the "Underlying Private Loans,"
respectively), held by it with respect to that borrower, as specified in a
notice delivered by or on behalf of the Seller. In exchange for and
simultaneously with such conveyance, the Seller will deposit into the Escrow
Account an amount of cash equal to the principal balances of all such Underlying
Federal Loans and Underlying Private Loans, plus accrued interest thereon to the
date of such conveyance. Each purchase of a Serial Loan will be funded by means
of a transfer from (a) during the Funding Period, the Pre-Funding Account and
(b) after the end of the Funding Period until the Loan Purchase Termination
Date, from Available Loan Purchase Funds on deposit in the Collection Account,
in each case, of an amount equal to the Purchase Price of such Serial Loan.
Amounts on deposit in the Escrow Account will be invested in Eligible
Investments (see "--Accounts" above) and will be used on the succeeding Transfer
Date, as described above, to purchase Additional Student Loans from the Seller.
Any of such amounts remaining in the Escrow Account on the Transfer Date after
giving effect to the conveyance of all such Additional Student Loans on such
Transfer Date will be deposited into the Collection Account and distributed as
Available Funds on the Distribution Date immediately following such Transfer
Date.
For purposes of the foregoing, the following terms have the respective
meanings set forth below:
"Additional Student Loans" means collectively the Subsequent Pool
Student Loans, the Other Subsequent Student Loans, the Other Student
Loans and Fee Advances.
The "Funding Period" means the period from the Closing Date until
the first to occur of:
(1) an Event of Default occurring under the Indenture, a Master
Servicer Default (as defined in the Prospectus) occurring under the
Sale and Servicing Agreement or an Administrator Default occurring
under the Sale and Servicing Agreement or the Administration
Agreement;
(2) certain events of insolvency with respect to the Seller;
(3) the date on which the amounts on deposit in the Pre-Funding
Account would be reduced to zero after giving effect to purchases of
Other Subsequent Student Loans on such date; or
(4) the last day of the Collection Period preceding the ______
____ Distribution Date.
"Loan Purchase Termination Date" means __________, ____________.
"Other Student Loans" means Serial Loans and Consolidation Loans
made to a borrower who is also a borrower under at least one
outstanding Financed Student Loan which the Trust is obligated to
purchase from the Seller during the period which begins following the
end of the Funding Period and ends on the Loan Purchase Termination
Date, from amounts on deposit in the Escrow Account and Available Loan
Purchase Funds (as defined below) to the extent permitted by the Sale
and Servicing Agreement.
"Other Subsequent Student Loans" means (x) Consolidation Loans
and Serial Loans made to a borrower which is also a borrower under at
least one outstanding Financed Student Loan which the Trust is
obligated to purchase from the Seller during the Funding Period with
funds on deposit in the Escrow Account and funds on deposit in the
Pre-Funding Account and allocated to the Other Additional Pre-Funding
Subaccount, and (y) primarily Financed Federal Loans or Guaranteed
Private Loans that the Trust is obligated to purchase from the Seller
until 90 days after the Closing Date with funds on deposit in the
Pre-Funding Account and allocated to the Other Additional Pre-Funding
Subaccount.
"Serial Loans" constitute Student Loans which are made to a
borrower who is also a borrower under at least one outstanding Initial
Financed Student Loan or Subsequent Pool Student Loan.
"Subsequent Pool Student Loans" means the Student Loans included
in the Subsequent Pool.
"Subsequent Pool" means the pool of Student Loans currently owned
by the Seller and having, as of the Statistical Cutoff Date, the
characteristics described herein under "The Financed Student Loan
Pool," to be purchased from funds on deposit in the Subsequent Pool
Pre-Funding Subaccount.
SERVICING PROCEDURES
Pursuant to the Sale and Servicing Agreement, the Master Servicer has
agreed to service and perform all other related tasks (or to cause the
Sub-Servicers to service and perform all other related tasks) with respect to
the Financed Student Loans acquired from time to time. So long as no claim is
being made against a Guarantor for any Financed Student Loan, the Master
Servicer (or a Sub-Servicer on its behalf) will hold, as custodian on behalf of
the Trust, the notes evidencing, and other documents relating to, that Financed
Student Loan. The Master Servicer is required pursuant to the Sale and Servicing
Agreement (or shall cause a Sub-Servicer) to perform all services and duties
customary to the servicing of Student Loans (including all collection practices)
with reasonable care, and in compliance with all standards and procedures
provided for in the Higher Education Act, the Guarantee Agreements and all other
applicable federal and state laws.
Without limiting the foregoing, the responsibilities of the Master
Servicer under the Sale and Servicing Agreement (or of a Sub-Servicer pursuant
to a Sub-Servicing Agreement) include, but are not limited to, the following:
collecting and depositing into the Collection Account (or, in the event that
daily deposits into the Collection Account are not required, paying to the
Administrator) all payments with respect to the Financed Student Loans the
Master Servicer (or a Sub-Servicer) is servicing, including claiming and
obtaining any Guarantee Payments (subject to the Maximum TERI Payments Amount)
with respect thereto but excluding such tasks with respect to Interest Subsidy
Payments and Special Allowance Payments (as to which the Administrator and the
Eligible Lender Trustee have agreed to perform, see "--Administrator" below),
responding to inquiries from borrowers on such Financed Student Loans,
investigating delinquencies and sending out statements, payment coupons and tax
reporting information to borrowers. In addition, the Master Servicer will (or
will cause each Sub-Servicer to) keep ongoing records with respect to such
Financed Student Loans and collections thereon and will furnish periodic
statements to the Administrator with respect to such information, in accordance
with the Master Servicer's (or such Sub-Servicer's) customary practices with
respect to the Seller and as otherwise required in the Sale and Servicing
Agreement. Without being released from its obligations under the Sale and the
Servicing Agreement, the Master Servicer may cause the Sub-Servicers to perform
some or all of its duties listed above on its behalf pursuant to the
Sub-Servicing Agreements, and in the event that any such duties require
consents, approvals or licenses under the Higher Education Act or otherwise, the
Master Servicer shall appoint one or more Sub-Servicer that possesses such
consents, approvals and licenses to act on its behalf; provided, however, that
the Master Servicer shall remain responsible for the failure of any Sub-Servicer
to perform these activities. In its capacity as a Sub-Servicer, PHEAA will from
time to time be required on behalf of the Trust to file claims against, and
pursue the receipt of Guarantee Payments from, itself as a Federal Guarantor.
PAYMENTS ON FINANCED STUDENT LOANS
Except as provided below, the Master Servicer or a Sub-Servicer, as
applicable, will deposit all payments on Financed Student Loans (from whatever
source), and all proceeds of Financed Student Loans collected by it during each
Collection Period into the Collection Account within two business days of
receipt thereof. Except as provided below, the Eligible Lender Trustee will
deposit all Interest Subsidy Payments and all Special Allowance Payments with
respect to the Financed Student Loans received by it during each Collection
Period into the Collection Account within two business days of receipt thereof.
However, in the event that KBUSA satisfies certain requirements for
quarterly remittances and the rating agencies affirm their ratings of the Notes
and the Certificates at the initial level, then so long as KBUSA is the
Administrator and provided that (x) there exists no Administrator Default (as
described below) and (y) each other condition to making quarterly deposits as
may be specified by the rating agencies is satisfied, the Master Servicer, each
Sub-Servicer and the Eligible Lender Trustee will pay all the amounts referred
to in the preceding paragraph that would otherwise be deposited into the
Collection Account to the Administrator, and the Administrator will not be
required to deposit such amounts into the Collection Account until on or before
the business day immediately preceding each Monthly Servicing Payment Date (to
the extent of the Master Servicing Fee payable on such date) and on or before
the business day immediately preceding each Distribution Date (to the extent of
the remainder of such amounts). In such event, the Administrator will deposit
the aggregate Purchase Amount of Financed Student Loans repurchased by the
Seller and purchased by the Master Servicer into the Collection Account on or
before the business day preceding each Distribution Date. Pending deposit into
the Collection Account, collections may be invested by the Administrator at its
own risk and for its own benefit, and will not be segregated from funds of the
Administrator.
MASTER SERVICER COVENANTS
In the Sale and Servicing Agreement, the Master Servicer covenants
that:
(a) it will or will cause each Sub-Servicer to duly satisfy all
obligations on its part to be fulfilled under or in connection with
the Financed Student Loans the Master Servicer or a Sub-Servicer is
servicing, maintain in effect all qualifications required in order to
service such Financed Student Loans and comply in all material
respects with all requirements of law in connection with servicing
such Financed Student Loans, the failure to comply with which would
have a materially adverse effect on the Certificateholders or the
Noteholders;
(b) it will not permit nor permit a Sub-Servicer to permit any
rescission or cancellation of a Financed Student Loan the Master
Servicer or a Sub-Servicer is servicing except as ordered by a court
of competent jurisdiction or other government authority or as
otherwise consented to by the Eligible Lender Trustee and the
Indenture Trustee;
(c) it will do nothing nor permit a Sub-Servicer to impair the
rights of the Certificateholders and the Noteholders in such Financed
Student Loans; and
(d) it will not nor permit a Sub-Servicer to reschedule, revise,
defer or otherwise compromise with respect to payments due on any such
Financed Student Loan except pursuant to any applicable deferral or
forbearance periods or otherwise in accordance with its guidelines for
servicing student loans in general and those of the Seller in
particular and any applicable Programs requirements.
Under the terms of the Sale and Servicing Agreement, if the Seller or
the Master Servicer discovers, or receives written notice, that any covenant of
the Master Servicer (or covenants made by the Master Servicer relating to either
of the Sub-Servicers), set forth above has not been complied with by the Master
Servicer (or a Sub-Servicer) in all material respects and such noncompliance has
not been cured within 60 days thereafter and has a materially adverse effect on
the interest of the Certificateholders or the Noteholders in any Financed
Student Loan (it being understood that in the case of any Financed Federal Loan
any such breach that does not affect any Guarantor's obligation to guarantee or
insure payment of such Financed Student Loan will not be considered to have such
a material adverse effect), unless such breach is cured, the Master Servicer
will purchase such Financed Student Loan as of the first day following the end
of such 60-day period that is the last day of a Collection Period. In that
event, the Master Servicer will be obligated to deposit into the Collection
Account an amount equal to the Purchase Amount of such Financed Student Loan and
the Trust's interest in any such purchased Financed Student Loan will be
automatically assigned to the Master Servicer. In addition, the Master Servicer
will reimburse the Trust with respect to any Financed Federal Loan for any
accrued interest amounts that a Federal Guarantor refuses to pay pursuant to its
Guarantee Agreement due to, or for any Interest Subsidy Payments and Special
Allowance Payments that are lost or that must be repaid to the Department as a
result of, a breach of any such covenant of the Master Servicer.
INCENTIVE PROGRAMS
Certain incentive programs currently or hereafter made available by
the Seller to borrowers may also be made available by the Master Servicer or a
Sub-Servicer to borrowers with Financed Student Loans. As of _________, ____,
the Seller offers ____ incentive programs to certain Financed Student Loan
borrowers. Any such incentive program not in existence as of _________, ____,
that effectively reduces borrower payments on Financed Student Loans and, with
respect to Financed Federal Loans, is not required by the Higher Education Act
will be applicable to the Financed Student Loans only if and to the extent that
the Master Servicer or a Sub-Servicer receives payment on behalf of the Trust
from the Seller in an amount sufficient to offset such effective yield
reductions. See "The Student Loan Financing Business -- Incentive Programs" in
the Prospectus.
SERVICING COMPENSATION
The Master Servicer will be entitled to receive, subject to the
limitations set forth in the following paragraph, the Master Servicing Fee
monthly in an amount equal to the Master Servicing Fee Percentage of the Pool
Balance as of the last day of the immediately preceding calendar month and
certain one-time fixed fees for each Financed Student Loan for which a
forbearance period was granted or renewed or for which a guarantee claim was
filed, in each case subject to adjustment, together with other administrative
fees, late fees and similar charges, as compensation for performing the
functions as master servicer for the Trust described above. The Master Servicing
Fee Percentage may be subject to reasonable increase agreed to by the
Administrator, the Eligible Lender Trustee and the Master Servicer to the extent
that a demonstrable and significant increase occurs in the costs incurred by the
Master Servicer in providing the services to be provided under the Sale and
Servicing Agreement, whether due to changes in applicable governmental
regulations, guarantor program requirements or regulations, United States Postal
Service postal rates or some other identifiable cost increasing event with
respect to the Master Servicer or a Sub-Servicer. The Master Servicing Fee
(together with any portion of the Master Servicing Fee that remains unpaid from
prior Distribution Dates) 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 Monthly Servicing Payment Date. In return for receiving
the Master Servicing Fee, the Sub-Servicers will be paid solely by the Master
Servicer, pursuant to the Sub-Servicing Agreements.
Notwithstanding the foregoing, in the event that the aggregate fees
payable to the Master Servicer as defined above for any Monthly Servicing
Payment Date would exceed 0.50% per annum of the Pool Balance as of the last day
of the preceding calendar month (other than any deconversion fees) (the "Capped
Amount"), then the "Master Servicing Fee" for such Monthly Servicing Payment
Date will instead be the Capped Amount for such date plus any deconversion fees
referred to below. The remaining amount in excess of such Master Servicing Fee,
together with any such excess amounts from prior Monthly Servicing Payment Dates
that remain unpaid (the aggregate amounts being the "Excess Master Servicing
Fee"), will be payable to the Master Servicer on each succeeding Distribution
Date out of Available Funds after payment on such Distribution Date of the
amounts set forth in "Description of the Transfer and Servicing
Agreements--Distributions" herein. The Master Servicer will only be entitled to
receive the Excess Master Servicing Fee if and to the extent that Available
Funds exist to make such payments after making all prior distributions and
deposits.
The Master Servicing Fee and the Excess Master Servicing Fee will
compensate the Master Servicer for performing (or for arranging the performance
by the Sub-Servicers of) the functions of a third party servicer of student
loans as agent for their beneficial owner, including collecting and posting all
payments, responding to inquiries of borrowers on the Financed Student Loans,
investigating delinquencies, pursuing, filing and collecting any Guarantee
Payments, accounting for collections and furnishing monthly and annual
statements to the Administrator. The Master Servicing Fee and the Excess Master
Servicing Fee also will reimburse the Master Servicer for certain taxes,
accounting fees, outside auditor fees, data processing costs and other costs
incurred in connection with administering the Financed Student Loans.
In the event of (x) any sale of the Financed Student Loans on behalf
of the Trust to any person (other than the Seller, the Administrator, the Master
Servicer, PHEAA or Great Lakes) in which the purchaser elects to deconvert the
Financed Student Loans and not retain PHEAA or Great Lakes, as the case may be,
as the servicer of such Financed Student Loans or (y) any termination by the
Master Servicer of PHEAA or Great Lakes, as the case may be, as a Sub-Servicer
of the Financed Student Loans, except for any termination for cause or as a
result of any Sub-Servicer default by PHEAA or Great Lakes, as the case may be,
the Trust shall pay to the Master Servicer, but only in the event that the
Master Servicer is also obligated to pay to PHEAA or Great Lakes, as the case
may be, as a part of the Master Servicing Fee (not subject to the Capped Amount)
a deconversion fee, per loan, based on the status of the loan at the time of
deconversion.
DISTRIBUTIONS
DEPOSITS TO COLLECTION ACCOUNT. On or about the third business day
prior to each Distribution Date (the "Determination Date"), the Administrator
will provide the Indenture Trustee with certain information with respect to the
distributions to be made on such Distribution Date.
On or before the business day preceding each Monthly Servicing Payment
Date that is not a Distribution Date, the Administrator will cause (or will
cause the Master Servicer and the Eligible Lender Trustee to cause) (x) any
Guaranteed Payments made by TERI in excess of the Maximum TERI Payments Amount
and (y) a portion of the amount of the Available Funds equal to the Master
Servicing Fee, payable on such date to be deposited into the Collection Account
for payment to the Seller in the case of such excess Guarantee Payments and to
the Master Servicer in the case of the Master Servicing Fee. On or before the
business day prior to each Distribution Date, the Administrator will cause (or
will cause the Master Servicer and the Eligible Lender Trustee to cause) the
amount of Available Funds to be deposited into the Collection Account.
For purposes hereof, the term "Available Funds" means, with respect to
a Distribution Date or any Monthly Servicing Payment Date, the sum of the
following amounts received with respect to the related Collection Period (or, in
the case of a Monthly Servicing Payment Date, the applicable portion thereof) to
the extent not previously distributed:
(1) all collections received by Master Servicer (or the
Sub-Servicers) on the Financed Student Loans (including any Guarantee
Payments (subject to the Maximum TERI Payments Amount) received with
respect to such Financed Student Loans) but net of (x) any Federal
Origination Fee (as defined in the Prospectus) and Federal
Consolidation Loan Rebate (as defined in the Prospectus) payable to
the Department on Federal Consolidation Loans disbursed after October
1, 1993, (y) any applicable administrative fees, late fees or similar
fees received from a borrower, and (z) any collections in respect of
principal on the Financed Student Loans applied by the Trust to
repurchase guaranteed loans from the Guarantors in accordance with the
Guarantee Agreements;
(2) any Interest Subsidy Payments and Special Allowance Payments
received by the Eligible Lender Trustee during the then elapsed
portion of such Collection Period with respect to the Financed Federal
Loans;
(3) all proceeds of the Financed Student Loans which were
liquidated ("Liquidated Student Loans") during the then elapsed
portion of such Collection Period in accordance with the Master
Servicer's (or the Sub-Servicers') respective customary servicing
procedures, net of expenses incurred by the Master Servicer (or the
Sub-Servicers) in connection with such liquidation and any amounts
required by law to be remitted to the borrower on such Liquidated
Student Loans ("Liquidation Proceeds"), and all recoveries in respect
of Liquidated Student Loans which were written off in prior Collection
Periods or prior months of such Collection Period;
(4) the aggregate Purchase Amounts received for those Financed
Student Loans repurchased by the Seller or purchased by the Master
Servicer under an obligation which arose during the elapsed portion of
such Collection Period;
(5) the aggregate amounts, if any, received from the Seller or
the Master Servicer (or a Sub-Servicer), as the case may be, as
reimbursement of non-guaranteed interest amounts, or lost Interest
Subsidy Payments and Special Allowance Payments;
(6) amounts deposited by the Seller into the Collection Account
in connection with the making of Consolidation Loans;
(7) with respect to the first Distribution Date, the initial
deposit into the Collection Account;
(8) Investment Earnings for such Distribution Date;
(9) amounts withdrawn from the Reserve Account in excess of the
Specified Reserve Account Balance and deposited into the Collection
Account;
(10) amounts withdrawn from the Escrow Account and deposited into
the Collection Account; and
(11) with respect to the Distribution Date on or immediately
after the end of the Funding Period, the amount transferred from the
Pre-Funding Account to the Collection Account;
Available Funds will exclude (A) all payments and proceeds (including
Liquidation Proceeds) of any Financed Student Loans, the Purchase Amount of
which has been included in Available Funds for a prior Distribution Date and (B)
following the end of the Funding Period and prior to the Loan Purchase
Termination Date, amounts withdrawn from the Collection Account to purchase
Other Student Loans or pay Fee Advances during the period following the
preceding Distribution Date and ending on or prior to such Distribution Date. If
on any Distribution Date there would not be sufficient funds, after application
of Available Funds amounts available from the Reserve Account and the
Pre-Funding Account (x) to pay any of the items specified in clauses (1) through
(3), respectively, under "--Distributions from the Collection Account" below,
for such Distribution Date and (y) if the principal balance of the Notes (after
giving effect to any distributions thereon on such Distribution Date) is less
than or equal to the Note Collateralization Amount, to pay the
Certificateholders' Interest Distribution Amount for such Distribution Date,
then Available Funds for such Distribution Date will include, in addition to the
Available Funds on deposit in the Collection Account on the Determination Date
relating to such Distribution Date which would have constituted Available Funds
for the Distribution Date succeeding such Distribution Date up to the amount
necessary to pay, in the case of clause (x) above such items specified in
clauses (1) through (3) respectively and in the case of clause (y) above the
Certificateholders' Interest Distribution Amount and the Available Funds for
such succeeding Distribution Date will be adjusted accordingly.
DISTRIBUTIONS FROM THE COLLECTION ACCOUNT. On each Monthly Servicing
Payment Date that is not a Distribution Date, the Administrator will instruct
the Indenture Trustee to pay to (a) the Seller, any amounts on deposit in the
Collection Account which consist of Guarantee Payments made by TERI in excess of
the Maximum TERI Payments Amount and (b) the Master Servicer, the Master
Servicing Fee due with respect to the period from and including the preceding
Monthly Servicing Payment Date from amounts on deposit in the Collection
Account.
On each Distribution Date, the Administrator will instruct the
Indenture Trustee to make the following deposits and distributions, in the
amounts and in the order of priority specified below, to the extent of Available
Funds for the related Collection Period:
(1) to the Seller, any amounts on deposit in the Collection
Account which consist of Guarantee Payments made by TERI in excess of
the Maximum TERI Payments Amount;
(2) to the Master Servicer, the Master Servicing Fee due on such
Distribution Date and all prior unpaid Master Servicing Fees;
(3) to the Administrator, the Administration Fee and all unpaid
Administration Fees from prior Collection Periods;
(4) to the holders of the Notes, the Noteholders' Interest
Distribution Amount;
(5) to the holders of the Certificates, the Certificateholders'
Interest Distribution Amount;
(6) to the Reserve Account, an amount, up to the amount, if any,
necessary to reinstate the balance of the Reserve Account to the
Specified Reserve Account Balance;
(7) to the holders of the Notes, the Noteholders' Principal
Distribution Amount;
(8) on each Distribution Date on and after which the Notes have
been paid in full, to the holders of the Certificates, the
Certificateholders' Principal Distribution Amount;
(9) to the Master Servicer, the aggregate unpaid amount, if any,
of the Excess Master Servicing Fee;
(10) to the holders of the Notes on a pro rata basis, based on
the amount of the Noteholders' Interest Index Carryover owing on each
class of Notes, the aggregate unpaid amount of the Noteholders'
Interest Index Carryover, if any;
(11) to the holders of the Certificates, the aggregate unpaid
amount of the Certificateholders' Interest Index Carryover, if any;
and
(12) to the Seller, any remaining amounts after application of
clauses (1) through (11).
Additionally, if on any Distribution Date the outstanding principal
balance of the Notes (after giving effect to distributions on such Distribution
Date) is in excess of the Note Collateralization Amount, the principal will be
payable to the Noteholders in the amount of the Noteholders' Priority Principal
Distribution Amount to the extent of funds available before any amounts are
payable to the holders of the Certificates.
Upon any distribution to the Seller of any amounts included as
Available Funds, neither the Noteholders nor the Certificateholders will have
any rights in, or claims to, such amounts.
For purposes hereof, the following terms have the following meanings:
"Certificate Balance" equals $__________ as of the Closing Date and
thereafter, equals the initial Certificate Balance, reduced by all amounts
allocable to principal subsequently distributed to the Certificateholders.
"Certificateholders' Distribution Amount" means, with respect to any
Distribution Date, the Certificateholders' Interest Distribution Amount for such
Distribution Date plus, for each Distribution Date on and after which the Notes
have been paid in full, the Certificateholders' Principal Distribution Amount
for such Distribution Date.
"Certificateholders' Interest Carryover Shortfall" means with respect
to any Distribution Date, the excess of (x) the sum of the Certificateholders'
Interest Distribution Amount on the preceding Distribution Date over (y) the
amount of interest actually distributed to the holders of the Certificates on
such preceding Distribution Date, plus interest on the amount of such excess
interest due to the holders of the Certificates, to the extent permitted by law,
at the Certificate Rate from such preceding Distribution Date to the current
Distribution Date.
"Certificateholders' Interest Distribution Amount" means with respect
to any Distribution Date, the sum of (a) the amount of interest accrued at the
Certificate Rate for the related Interest Period on the outstanding Certificate
Balance on the immediately preceding Distribution Date, after giving effect to
all distributions of principal to holders of the Certificates on such
Distribution Date (or, in the case of the first Distribution Date, on the
Closing Date) and (b) the Certificateholders' Interest Carryover Shortfall for
such Distribution Date; provided, that the Certificateholders' Interest
Distribution Amount will not include any Certificateholders' Interest Index
Carryover.
"Certificateholders' Principal Distribution Amount" means on each
Distribution Date on and after which the principal balance of the Notes has been
paid in full, the Principal Distribution Amount for such Distribution Date (or,
in the case of the Distribution Date on which the principal balance of the Notes
is paid in full, any remaining Principal Distribution Amount not otherwise
distributed to the holders of the Notes on such Distribution Date); provided
that the Certificateholders' Principal Distribution Amount will in no event
exceed the Certificate Balance. In addition, on the Final Maturity Date for the
Certificates, the principal required to be distributed to the holders of the
Certificates will include the amount required to reduce the outstanding
Certificate Balance to zero.
"Maximum TERI Payments Amount" means 19% of the Initial Pool Balance.
"Monthly Servicing Payment Date" means the 25th day of each month (or
if such day is not a Business Day, the next succeeding Business Day).
"Net Government Receivable" means, with respect to any Distribution
Date, the sum of the amount of Interest Subsidy Payments and Special Allowance
Payments due from the Department less the amount owed to the Department for
Federal Origination Fee and Federal Consolidation Loan Rebate as of the end of
the related Collection Period.
"Note Collateralization Amount" means, with respect to any
Distribution Date, the sum of
(a) the Pool Balance as of the end of the related Collection Period;
(b) the Pre-Funded Amount, as of the end of the related Collection
Period;
(c) the amount on deposit in the Reserve Account after giving effect
to distributions on such Distribution Date; and
(d) the Net Government Receivable.
"Noteholders' Distribution Amount" means, with respect to any
Distribution Date, the sum of the Noteholders' Interest Distribution Amount and
the Noteholders' Principal Distribution Amount for such Distribution Date.
"Noteholders' Interest Carryover Shortfall" means, with respect to any
Distribution Date, the excess of (x) the sum of the Noteholders' Interest
Distribution Amount on the preceding Distribution Date over (y) the amount of
interest actually distributed to the holders of the Notes on such preceding
Distribution Date, plus interest on the amount of such excess interest due to
the holders of the Notes, to the extent permitted by law, at the weighted
average of the Note Interest Rates from such preceding Distribution Date to the
current Distribution Date.
"Noteholders' Interest Distribution Amount" means, with respect to any
Distribution Date, the sum of (a) the aggregate amount of interest accrued at
the respective Note Interest Rate for the related Interest Period on the
outstanding principal balance of each class of the Notes on the immediately
preceding Distribution Date after giving effect to all principal distributions
to Noteholders on such date (or, in the case of the first Distribution Date, on
the Closing Date) and (b) the Noteholders' Interest Carryover Shortfall for such
Distribution Date; provided, that the Noteholders' Interest Distribution Amount
will not include any Noteholders' Interest Index Carryover.
"Noteholders' Principal Distribution Amount" means, with respect to
any Distribution Date, the Principal Distribution Amount for such Distribution
Date; provided, however, that the Noteholders' Principal Distribution Amount
will not exceed the outstanding principal balance of the Notes. In addition, (a)
on the Final Maturity Date for each class of Notes, the principal required to be
distributed to the class of Notes will include the amount required to reduce the
outstanding principal balance of such class of Notes to zero, and (b) on the
related Distribution Date following a sale of the Financed Student Loans in the
manner described under "--Termination" below, the principal required to be
distributed to the holders of Class A-2 Notes will include the amount required
to reduce the outstanding principal balance of such Class A-2 Notes to zero. In
the event that the outstanding balance of the Notes is in excess of the Note
Collateralization Amount, the Noteholders' Principal Distribution Amount for the
Notes will be reduced by the amount of any Noteholders' Priority Principal
Distribution Amount.
"Noteholders' Priority Principal Distribution Amount" means, with
respect to any Distribution Date, the excess of (x) the aggregate outstanding
principal balance of such Notes (after giving effect to any distributions on
such Distribution Date) over (y) the Note Collateralization Amount.
"Pool Balance" means, at any time, the aggregate principal balance of
the Financed Student Loans at the end of the preceding Collection Period
(including accrued interest thereon for such Collection Period to the extent
such interest will be capitalized upon commencement of repayment), after giving
effect to the following without duplication:
o all payments received by the Trust related to the Financed
Student Loans during such Collection Period from or on behalf of
borrowers, Guarantors (except with respect to any guarantee
payments made by TERI in excess of the Maximum TERI Payments
Amount) and, with respect to certain payments on certain Financed
Federal Loans, the Department (collectively, "Obligors"),
o all Purchase Amounts received by the Trust related to the
Financed Student Loans for such Collection Period from the
Seller, the Master Servicer or the Sub-Servicers,
o all Additional Fundings made from the Escrow Account and the
Pre-Funding Account or the Available Loan Purchase Funds with
respect to such Collection Period, and
o all losses realized on Financed Student Loans liquidated during
such Collection Period.
"Principal Distribution Amount" means, with respect to any
Distribution Date, the amount by which the sum of the outstanding principal
balance of the Notes and the Certificate Balance exceeds the Specified
Collateral Balance for such Distribution Date.
"Specified Collateral Balance" means, with respect to any Distribution
Date, the sum of (a) the Pool Balance as of the last day of the related
Collection Period plus (b) the Pre-Funded Amount as of the last day of the
related Collection Period for such Distribution Date. In the event that the
Financed Student Loans are not sold pursuant to the auction process described
under "--Termination" below, with respect to any Distribution Date occurring on
or after the _________ ______ Distribution Date, the Specified Collateral
Balance will be zero.
CREDIT ENHANCEMENT
RESERVE ACCOUNT. Pursuant to the Sale and Servicing Agreement, the
Reserve Account will be created with an initial deposit by the Seller on the
Closing Date of cash or Eligible Investments in an amount equal to $__________
(the "Reserve Account Initial Deposit"). On the Closing Date, the Reserve
Account Initial Deposit will equal the Specified Reserve Account Balance as of
the Closing Date. The amounts on deposit in the Reserve Account to the extent
used will be replenished up to the Specified Reserve Account Balance on each
Distribution Date by deposit therein of 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 prior
amounts set forth under "--Distributions" above, all for such Distribution Date.
"Specified Reserve Account Balance" means, with respect to any
Distribution Date will be equal to the greater of (x) ____% of the aggregate
outstanding principal amount of the Notes and the Certificate Balance on such
Distribution Date before giving effect to any distribution on such Distribution
Date, and (y) $________; provided, however, that in no event will such balance
exceed the sum of the outstanding principal amount of the Notes and the
outstanding principal balance of the Certificates.
Funds will be withdrawn from the Reserve Account to the extent that
the amount of Available Funds is insufficient to pay the Master Servicing Fee on
any Monthly Servicing Payment Date and any of the items specified in clauses (2)
through (5) under "--Distributions--Distributions from Collection Account" above
on any Distribution Date; provided that amounts on deposit in the Reserve
Account shall only be available to cover shortfalls in interest payments on the
Certificates to the extent that the Note Collateralization Amount (after giving
effect to such withdrawals from the Reserve Account) is not less than the
outstanding principal balance of the Notes. Such funds will be paid from the
Reserve Account to the Master Servicer on a Monthly Servicing Payment Date, and
to the persons and in the order of priority specified for distributions out of
the Collection Account in such clauses (2) through (5) on a Distribution Date.
In addition, on the Final Maturity Dates for the Securities, amounts on deposit
in the Reserve Account, if any, will be available, if necessary, to be applied
to reduce the principal balance of the Securities to zero. Amounts on deposit in
the Reserve Account will not be available to cover any reimbursement for unpaid
Excess Master Servicing Fees, Noteholders' Interest Index Carryover or
Certificateholders' Interest Index Carryover.
If the amount on deposit in the Reserve Account on any Distribution
Date (after giving effect to all deposits or withdrawals therefrom on such
Distribution Date) is greater than the Specified Reserve Account Balance for
such Distribution Date, subject to certain limitations, the Administrator will
instruct the Indenture Trustee to deposit the amount of the excess into the
Collection Account for distribution as Available Funds on such Distribution
Date. Upon any distribution to the Seller of any amounts included as Available
Funds, neither the Noteholders nor the Certificateholders will have any rights
in, or claims to, such amounts. Subject to the limitation described in the
preceding sentence, amounts held from time to time in the Reserve Account will
continue to be held for the benefit of the Trust.
The Reserve Account is intended to enhance the likelihood of timely
receipt by the holders of Notes and the holders of Certificates of the full
amount of interest due them and to decrease the likelihood that such holders
will experience losses. In certain circumstances, however, the Reserve Account
could be depleted.
SUBORDINATION OF THE CERTIFICATES. The rights of the holders of
Certificates to receive payments of interest are subordinated to the rights of
the holders of Notes to receive payments of interest (and, in certain
circumstances, principal) and the rights of the holders of Certificates to
receive payments of principal are subordinated to the rights of the holders of
Notes to receive payments of interest and principal. Consequently, amounts on
deposit in the Collection Account, the Reserve Account and the Pre-Funding
Account will be applied to the payment of interest on the Notes before payment
of interest on the Certificates and will be applied to the payment of principal
on the Notes before payment of principal on the Certificates. In addition if (x)
an Event of Default should occur and be continuing under the Indenture or (y) an
Insolvency Event should occur and the Financed Student Loans were liquidated,
all amounts due on the Notes will be payable before any amounts are payable on
the Certificates. Also if the outstanding principal balance of the Notes is in
excess of the Note Collateralization Amount, principal will be payable to
holders of Notes in the amount of such excess to the extent of funds available
before any amounts are payable to holders of Certificates. See "Description of
the Securities--The Certificates--Subordination of the Certificates" herein.
STATEMENTS TO INDENTURE TRUSTEE AND TRUST
Prior to each Distribution Date, the Administrator (based on the
periodic statements and other information provided to it by the Master Servicer
or the Sub-Servicers) will provide to the Indenture Trustee and the Trust, as of
the close of business on the last day of the preceding Collection Period, a
statement which will include the following information with respect to such
Distribution Date or the preceding Collection Period as to the Notes and the
Certificates, to the extent applicable:
(1) the amount of the distribution allocable to principal of
each class of Securities;
(2) the amount of the distribution allocable to interest on each
class of Securities, together with the interest rates applicable with
respect thereto (indicating whether such interest rates are based on
the Formula Rate or on the Student Loan Rate and specifying what each
such interest rate would have been if it had been calculated using the
alternate basis; provided that no such calculation of the Student Loan
Rate will be required to be made unless the Investor Index for such
Interest Period is 100 basis points greater than the Investor Index of
the preceding Determination Date or, with respect to Treasury Bill
Indexed Securities only, the 52-week Treasury Bill Rate is 100 basis
points less than the 91-day Treasury Bill Rate as of such
Determination Date);
(3) the amount of the distribution, if any, allocable to any
Noteholders' Interest Index Carryover and any Certificateholders'
Interest Index Carryover, together with the outstanding amount, if
any, of each thereof after giving effect to any such distribution;
(4) the Pool Balance as of the close of business on the last day
of the preceding Collection Period, after giving effect to payments
allocated to principal reported as described in clause (1) above;
(5) the aggregate outstanding principal balance of each Class of
Notes, the Certificate Balance and each Pool Factor as of such
Distribution Date, after giving effect to payments allocated to
principal reported under clause (1) above;
(6) the amount of the Master Servicing Fee and any Excess Master
Servicing Fee paid to the Master Servicer and the amount of the
Administration Fee paid to the Administrator with respect to such
Collection Period, and the amount, if any, of the Master Servicing Fee
and the Excess Master Servicing Fee remaining unpaid after giving
effect to any such payments;
(7) the amount of the aggregate Realized Losses, if any, for
such Collection Period and the balance of Financed Student Loans that
are delinquent in each delinquency period as of the end of such
Collection Period;
(8) the balance of the Reserve Account on such Distribution
Date, after giving effect to changes therein on such Distribution
Date;
(9) for Distribution Dates during the Funding Period, the
remaining Pre-Funded Amount on such Distribution Date, after giving
effect to changes therein during the related Collection Period;
(10) for the first Distribution Date, the amount, if any, of the
Subsequent Pool Pre-Funded Amount remaining in the Subsequent Pool
Pre-Funding Subaccount that has not been used to acquire Subsequent
Pool Student Loans and is being paid out to the Noteholders and
Certificateholders;
(11) for the first Distribution Date on or following the end of
the Funding Period, the amount of any remaining Pre-Funded Amount that
has not been used to make Additional Fundings and is being paid out to
the Noteholders; and
(12) the aggregate amount of TERI's Guarantee Payments deposited
into the Collection Account (net of any amounts paid to the Seller
under clause (1) of "--Distributions from the Collection Account"
above) expressed as a percentage of the Initial Pool Balance.
"Realized Losses" means, the excess of the principal balance of the
Liquidated Student Loans over the Liquidation Proceeds to the extent allocable
to principal.
"52-week Treasury Bill Rate" means, on any date of determination, the
bond equivalent rate of 52-week Treasury Bills auctioned at the final auction
held prior to the preceding June 1.
TERMINATION
The obligations of the Master Servicer, the Seller, the Administrator,
the Eligible Lender Trustee and the Indenture Trustee pursuant to the Transfer
and Servicing Agreements will terminate upon (a) the maturity or other
liquidation of the last Financed Student Loan and the disposition of any amount
received upon liquidation of any remaining Financed Student Loans and (b) the
payment to the holders of Notes and the holders of Certificates of all amounts
required to be paid to them pursuant to the Transfer and Servicing Agreements.
In order to avoid excessive administrative expense, the Seller is permitted at
its option to repurchase from the Eligible Lender Trustee, as of the end of any
Collection Period immediately preceding a Distribution Date, if the then
outstanding Pool Balance is [5%] [10%] or less than the Initial Pool Balance,
all remaining Financed Student Loans at a price sufficient to retire the
Certificates concurrently therewith. Upon termination of the Trust, all right,
title and interest in the Financed Student Loans and other funds of the Trust,
after giving effect to any final distributions to holders of Notes and holders
of Certificates therefrom, will be conveyed and transferred to the Seller.
Any Financed Student Loans remaining in the Trust as of the end of the
Collection Period immediately preceding the _______ _____ Distribution Date will
be offered for sale by the Indenture Trustee. KeyCorp, its affiliates (other
than the Seller and the Master Servicer), PHEAA, TERI and unrelated third
parties may offer bids to purchase such Financed Student Loans on such
Distribution Date. If at least two bids are received, the Indenture Trustee will
solicit and resolicit bids from all participating bidders until only one bid
remains or the remaining bidders decline to resubmit bids. The Indenture Trustee
will accept the highest of such remaining bids if it is equal to or in excess of
an amount (the "Minimum Purchase Amount") equal to the greatest of
1. the Auction Purchase Amount;
2. the fair market value of such Financed Student Loans as of the
end of the Collection Period immediately preceding such
Distribution Date; and
3. the aggregate unpaid principal amount of the Notes and principal
balance of the Certificates plus, in each case, accrued and
unpaid interest thereon payable on such Distribution Date (other
than any Noteholders' Interest Index Carryover and
Certificateholders' Interest Index Carryover).
If at least two bids are not received or the highest bid after the
resolicitation process is completed is not equal to or in excess of the Minimum
Purchase Amount, the Indenture Trustee will not consummate such sale. In
connection with the determination of the Minimum Purchase Amount, the Indenture
Trustee may consult and, at the direction of the Seller, shall consult, with a
financial advisor, including the Underwriters or the Administrator, to determine
if the fair market value of the Financed Student Loans has been offered. The net
proceeds of any such sale will be used to redeem any outstanding Notes and to
retire any outstanding Certificates on such Distribution Date. If the sale is
not consummated in accordance with the foregoing, the Indenture Trustee may, but
shall not be under any obligation to, solicit bids to purchase the Financed
Student Loans on future Distribution Dates upon terms similar to those described
above. No assurance can be given as to whether the Indenture Trustee will be
successful in soliciting acceptable bids to purchase the Financed Student Loans
on either the ______ _____ Distribution Date or any subsequent Distribution
Date. In the event the Financed Student Loans are not sold in accordance with
the foregoing, on each Distribution Date on and after the _____ ____
Distribution Date the Specified Collateral Balance shall be reduced to zero and
all Available Funds remaining after applying such amounts to pay the Master
Servicing Fee, the Administration Fee, the Noteholders' Interest Distribution
Amount, the Noteholders' Priority Principal Distribution Amount, if any, and the
Certificateholders' Interest Distribution Amount will be paid as principal to
the holders of Notes and then to the holders of Certificates until the
outstanding principal balance of the Notes and the Certificates has been reduced
to zero.
"Auction Purchase Amount" with respect to the Financed Student Loans
means the aggregate unpaid principal balance owed by the applicable borrowers
thereon plus accrued interest thereon to the date of purchase less the amount on
deposit in the Reserve Account as for such date.
ADMINISTRATOR
The Seller, in its capacity as Administrator, will enter into the
Administration Agreement with the Trust and the Indenture Trustee, and the Sale
and Servicing Agreement with the Trust, the Seller, the Master Servicer and the
Eligible Lender Trustee. For a description of the Administrator's duties, see
"Description of the Transfer and Servicing Agreements - Administrator" in the
Prospectus.
As compensation for the performance of the Administrator's obligations
under the Administration Agreement and the Sale and Servicing Agreement and as
reimbursement for its expenses related thereto, the Administrator will be
entitled to an administration fee in an amount equal to $______ per quarter (the
"Administration Fee").
INCOME TAX CONSEQUENCES
Thompson Hine LLP, federal tax counsel to the Trust ("Federal
Tax Counsel"), is of the opinion that the Trust will not be classified as an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes and that the Notes will be characterized as debt for
federal income tax purposes.
Kirkpatrick & Lockhart LLP, Pennsylvania tax counsel ("Pennsylvania
Tax Counsel") is of the opinion that the same characterizations of the Notes and
the Trust would apply for Pennsylvania state income tax purposes as for federal
income tax purposes.
The Seller and the Master Servicer will agree, and the
Certificateholders will agree by their purchase of Certificates, to treat the
Trust as a partnership for purposes of federal, state and local income and
franchise tax with the assets of the partnership being the assets held by the
Trust, the partners of the partnership being the Certificateholders (including
the Seller both in its capacity as owner of Certificates and as recipient of
distributions from the Reserve Account), and the Notes being debt of the
partnership.
If the Trust were held to be an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes, rather
than a partnership, the Trust would be subject to a corporate level income tax.
Any such corporate income tax could materially reduce or eliminate cash that
would otherwise be available to make payments on the Notes and the Certificates
(and the Certificateholders could be liable for any such tax that is unpaid by
the Trust).
We recommend that investors carefully review the information under the
caption "Income Tax Consequences" in the Prospectus.
ERISA CONSIDERATIONS
Section 406 of ERISA, and/or Section 4975 of the Internal Revenue Code
of 1986, as amended (the "Code"), prohibit a pension, profit-sharing or other
employee benefit plan, as well as individual retirement accounts, and certain
types of Keogh Plans, and other plans subject to Section 4975 of the Code (each
a "Benefit Plan") from engaging in certain transactions with persons that are
"parties in interest" under ERISA or "disqualified persons" under the Code with
respect to such Benefit Plan. A violation of these "prohibited transaction"
rules may result in an excise tax or other penalties and liabilities under ERISA
and the Code for such persons. Title I of ERISA also requires that fiduciaries
of a Benefit Plan subject to ERISA make investments that are prudent,
diversified (except if prudent not to do so) and in accordance with governing
plan documents.
Certain transactions involving the purchase, holding or transfer of
the Notes might be deemed to constitute prohibited transactions under ERISA and
the Code if assets of the Trust were deemed to be assets of a Benefit Plan.
Under a regulation issued by the United States Department of Labor (the "Plan
Assets Regulation"), the assets of the Trust would be treated as plan assets of
a Benefit Plan for the purposes of ERISA and the Code only if the Benefit Plan
acquires an "Equity Interest" in the Trust and none of the exceptions contained
in the Plan Assets Regulation is applicable. An equity interest is defined under
the Plan Assets Regulation as an interest other than an instrument which is
treated as indebtedness under applicable local law and which has no substantial
equity features. The Notes should be treated as indebtedness without substantial
equity features for purposes of the Plan Assets Regulation. However, without
regard to whether the Notes are treated as an Equity Interest for such purposes,
the acquisition or holding of Notes by or on behalf of a Benefit Plan could be
considered to give rise to a prohibited transaction if the Trust, the Trustee or
the Indenture Trustee, the Seller, the owner of collateral, or any of their
respective affiliates is or becomes a party in interest or a disqualified person
with respect to such Benefit Plan. In such case, certain exemptions from the
prohibited transaction rules could be applicable depending on the type and
circumstances of the plan fiduciary making the decision to acquire a Note.
Included among these exemptions are: Prohibited Transaction Class Exemption
("PTCE") 90-1, regarding investments by insurance company pooled separate
accounts; PTCE 95-60, regarding investments by insurance company general
accounts; PTCE 91-38, regarding investments by bank collective investment funds;
PTCE 96-23, regarding transactions effected by in-house asset managers; and PTCE
84-14, regarding transactions effected by "qualified professional asset
managers."
Employee benefit plans that are 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 ERISA requirements.
A plan fiduciary considering the purchase of Notes should consult its
tax and/or legal advisors regarding whether the assets of the Trust would be
considered plan assets, the possibility of exemptive relief from the prohibited
transaction rules and other issues and their potential consequences.
No Certificates may be purchased for, or on behalf of, any Benefit
Plan or any entity whose underlying assets are deemed to be plan assets of such
Benefit Plan.
The purchaser of a Certificate is deemed to have represented that it
is not acquiring the Certificates directly or indirectly for, or on behalf of, a
Benefit Plan or any entity whose underlying assets are deemed to be plan assets
of such Benefit Plan. The purchaser of Notes is deemed to have represented that
either: (A) the purchaser is not acquiring the Notes directly or indirectly for,
or on behalf of, a Benefit Plan or any entity whose underlying assets are deemed
to be plan assets of such Benefit Plan, or (B) the acquisition and holding of
the Notes by the purchaser qualifies for prohibited transaction exemptive relief
under PTCE 95-60, PTCE 96-23, PTCE 91-38, PTCE 90-1, PTCE 84-14 or some other
applicable exemption.
UNDERWRITING
Subject to the terms and conditions set forth in the respective
Underwriting Agreements relating to the Notes and the Certificates (the
"Underwriting Agreements"), the Seller has agreed to cause the Trust to sell to
the underwriters named below (the "Underwriters"), and each of the Underwriters
has severally agreed to purchase, the principal amount of [Class A-1] Notes,
[Class A-2 Notes] and Certificates set forth opposite its name:
PRINCIPAL AMOUNT OF PRINCIPAL AMOUNT OF
PRINCIPAL AMOUNT OF
UNDERWRITER [CLASS A-1] NOTES [CLASS A-2] NOTES
CERTIFICATES TOTAL
McDonald Investments
Total
In the respective Underwriting Agreements, the Underwriters have
agreed, subject to the terms and conditions set forth therein, to purchase (x)
all the Notes offered hereby if any of the Notes are purchased and (y) all the
Certificates offered hereby if any of the Certificates are purchased. The Seller
has been advised by the Underwriters that the Underwriters propose initially to
offer the Securities to the public at the respective public offering prices set
forth on the cover page of this Prospectus Supplement, and to certain dealers at
such prices less a concession not in excess of _____% per [Class A-1] Note,
_____% per [Class A-2] Note and _____% per Certificate. The Underwriters may
allow and such dealers may reallow to other dealers a discount not in excess of
_____% per [Class A-1] Note, _____% per [Class A-2] Note and _____% per
Certificate. After the initial public offering, such public offering prices,
concessions and reallowances may be changed.
The representative, on behalf of the underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bides in accordance with Regulation M under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the representative to reclaim a selling concession from a
syndicate member when the Securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Securities to be higher than it would
otherwise be in the absence of such transactions. These transactions, if
commenced, may be discontinued at any time.
The Seller does not intend to apply for listing of the Securities on a
national securities exchange, but has been advised by ____________________ that
it intends to, and by McDonald Investments Inc. ("McDonald Investments") that it
may, make a market in the Securities. The Underwriters are not obligated,
however, to make a market in the Securities 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 Securities.
The Underwriting Agreements provide that the Seller will indemnify the
Underwriters against certain liabilities, including liabilities under applicable
securities laws, or contribute to payments the Underwriters may be required to
make in respect thereof.
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.
____________________ is engaged from time to time by KeyCorp, the
parent corporation of the Seller, to provide investment banking services.
After the initial distribution of the Securities by the Underwriters,
this Prospectus Supplement may be used by McDonald Investments, an affiliate of
the Seller and KeyCorp, or its successors, in connection with offers and sales
relating to market-making transactions in the Securities. McDonald Investments
may act as principal or agent in such transactions, but has no obligation to do
so. McDonald Investments is a member of the New York Stock Exchange, Inc. Such
transactions will be at prices related to prevailing market prices at the time
of sale.
Pursuant to an Agreement and Plan of Merger dated as of June 15, 1998
between KeyCorp and McDonald & Company Investment, Inc. ("McDonald"), a
full-service investment banking and securities brokerage company headquartered
in Cleveland, Ohio, on October 23, 1998, McDonald was merged with and into
KeyCorp. On November 9, 1998, the merger of Key Capital Markets, Inc., a
wholly-owned broker-dealer subsidiary of KeyCorp, into McDonald & Company
Securities, Inc. (a wholly-owned subsidiary of the former McDonald) was
completed and the surviving entity was renamed McDonald Investments Inc.
McDonald Investments may engage in market-making transactions as described
above.
The Seller has also agreed to pay the Underwriters a structuring fee
equal to $_____.
LEGAL MATTERS
Certain legal matters relating to the Securities will be passed upon
for the Trust, the Seller and the Administrator by Forrest F. Stanley, Esq.,
General Counsel and Assistant Secretary of the Seller, as counsel for the
Seller, and by Thompson Hine LLP, Cleveland, Ohio and for the
Underwriters by Stroock & Stroock & Lavan LLP, New York, New York. Certain
federal income tax and other matters will be passed upon for the Trust by
Thompson Hine LLP. Certain Pennsylvania state income tax matters will be
passed upon for the Trust by Kirkpatrick & Lockhart LLP.
INDEX OF PRINCIPAL TERMS
Set forth below is a list of the defined terms used in this Prospectus
Supplement and the pages on which the definitions of such terms may be found
herein.
PAGE
Statistical Cutoff Date.....................................................14
52-week Treasury Bill Rate..................................................74
91-day Treasury Bill Rate...................................................50
Additional Funding..........................................................58
Additional Student Loans....................................................61
Administration Agreement....................................................56
Administration Fee..........................................................77
ASA.........................................................................15
Assigned Rights.............................................................14
Auction Purchase Amount.....................................................77
Available Funds.............................................................67
Available Loan Purchase Funds...............................................34
Bankruptcy Code.............................................................38
Benefit Plan................................................................78
Capped Amount...............................................................66
Cede........................................................................49
Certificate Balance.........................................................70
Certificate Rate............................................................52
Certificateholders..........................................................53
Certificateholders' Distribution Amount.....................................70
Certificateholders' Interest Carryover Shortfall............................70
Certificateholders' Interest Distribution Amount............................70
Certificateholders' Interest Index Carryover................................74
Certificateholders' Principal Distribution Amount...........................70
Certificates................................................................13
Class A-1 Notes.............................................................15
Class A-2 Notes.............................................................15
Closing Date................................................................13
Code........................................................................78
Cohort Default Rate.........................................................46
Collection Account..........................................................57
Collection Period...........................................................50
CSAC........................................................................15
Deferral....................................................................27
Deferral Periods............................................................19
Department..................................................................13
Depository..................................................................49
Determination Date..........................................................66
Distribution Dates..........................................................51
DOE Data Book...............................................................39
DTC.........................................................................49
ECMC........................................................................15
Eligible Deposit Account....................................................58
Eligible Institution........................................................58
Eligible Investments........................................................57
Eligible Lender Trustee.....................................................13
Equity Interest.............................................................78
ERISA........................................................................5
Escrow Account..............................................................14
Event of Default............................................................51
Excess Master Servicing Fee.................................................66
Exchange Act................................................................80
Expected Interest Collections...............................................50
FDIC........................................................................58
Federal Assistance..........................................................15
Federal Consolidation Loans.................................................59
Federal Guarantors..........................................................15
Federal Loans...............................................................15
Federal Origination Fee.....................................................67
Federal Tax Counsel.........................................................77
Fee Advances................................................................19
Final Maturity Dates........................................................34
Financed Federal Loans......................................................13
Financed Private Loans......................................................13
Financed Student Loans......................................................13
Forbearance.................................................................27
Forbearance Periods.........................................................19
Formula Rate................................................................50
Funding Period..............................................................61
Grace.......................................................................27
Grace Period................................................................34
Great Lakes.................................................................16
Guarantee Agreement.........................................................14
Guarantee Payments..........................................................15
Guaranteed Private Loans....................................................13
Guarantors...................................................................1
HESC........................................................................15
HICA........................................................................35
Higher Education Act........................................................15
Indenture...................................................................49
Indenture Trustee............................................................1
Index Maturity..............................................................55
Initial Financed Student Loans..............................................14
Initial Pool Balance........................................................35
Initial Pre-Funded Amount...................................................58
In-School...................................................................28
Interest Period.............................................................49
Interest Subsidy Payments...................................................35
Investment Earnings.........................................................57
Investor Index..............................................................50
KBUSA.......................................................................15
LIBOR........................................................................2
LIBOR Determination Date....................................................55
LIBOR Indexed Securities....................................................50
Liquidated Student Loans....................................................67
Liquidation Proceeds........................................................67
Loan Purchase Termination Date..............................................35
Lock-In Period..............................................................54
Margin......................................................................50
Master Servicer.............................................................15
Master Servicer Default.....................................................61
Master Servicing Fee........................................................17
Master Servicing Fee Percentage.............................................17
Maximum TERI Payments Amount................................................70
McDonald....................................................................80
McDonald Investments........................................................80
Minimum Purchase Amount.....................................................76
Monthly Servicing Payment Date..............................................17
Net Government Receivable...................................................70
Non-Guaranteed Private Loans................................................13
Note Collateralization Amount...............................................71
Note Interest Rate..........................................................49
Noteholders.................................................................51
Noteholders' Distribution Amount............................................71
Noteholders' Interest Carryover Shortfall...................................71
Noteholders' Interest Distribution Amount...................................71
Noteholders' Interest Index Carryover.......................................51
Noteholders' Principal Distribution Amount..................................71
Noteholders' Priority Principal Distribution Amount.........................72
Notes.......................................................................13
NSLP........................................................................15
Obligors....................................................................72
Other Additional Pre-Funded Amount..........................................58
Other Additional Pre-Funding Subaccount.....................................58
Other Student Loans.........................................................62
Other Subsequent Student Loans..............................................62
Participants................................................................49
Pennsylvania Tax Counsel....................................................77
PHEAA.......................................................................15
Plan Assets Regulation......................................................78
PLUS Loans..................................................................16
Pool Balance................................................................72
Pre-Funded Amount...........................................................14
Pre-Funding Account.........................................................14
Principal Distribution Amount...............................................72
Private Consolidation Loans.................................................33
Private Guarantors..........................................................35
Private Loans...............................................................15
Programs....................................................................18
Prospectus...................................................................6
Prospectus Supplement........................................................6
PTCE........................................................................78
Purchase Price..............................................................57
Rating Agencies..............................................................5
Rating Agency................................................................5
Realized Losses.............................................................75
Reference Bank..............................................................56
Repayment...................................................................27
Reserve Account.............................................................57
Reserve Account Initial Deposit.............................................73
Sale and Servicing Agreement................................................14
Securities..................................................................49
Securityholders.............................................................16
Seller......................................................................13
Seller Insolvency Event.....................................................34
Serial Loans................................................................62
SLS Loans...................................................................16
Special Allowance Payments..................................................35
Special Determination Date..................................................34
Specified Collateral Balance................................................72
Specified Reserve Account Balance...........................................73
Stafford Loans..............................................................16
Student Loan Rate...........................................................50
Student Loans...............................................................13
Subsequent Cutoff Date......................................................60
Subsequent Pool.............................................................62
Subsequent Pool Pre-Funded Amount...........................................58
Subsequent Pool Pre-Funding Subaccount......................................58
Subsequent Pool Student Loans...............................................62
Sub-Servicer................................................................16
Sub-Servicers...............................................................16
Sub-Servicing Agreement.....................................................17
Telerate Page 3750..........................................................56
TERI........................................................................35
Three-Month LIBOR...........................................................55
Transfer Agreement..........................................................60
Transfer and Servicing Agreements...........................................56
Transfer Date...............................................................60
Treasury Bill Indexed Securities............................................50
Trust.......................................................................13
Trust Accounts..............................................................57
Trust Agreement.............................................................13
Underlying Federal Loans....................................................61
Underlying Private Loans....................................................61
Underwriters................................................................79
Underwriting Agreements.....................................................79
Unsubsidized Stafford Loan..................................................35
USAF........................................................................15
[ALTERNATE PAGE]
$--------------
KEYCORP STUDENT LOAN TRUST _____-__
KEY BANK USA, NATIONAL ASSOCIATION
Seller
ASSET-BACKED NOTES
ASSET-BACKED CERTIFICATES
-------------------
-----------------------------
SECURITIES OFFERED You should carefully consider
o classes of notes and certificates the risk factors beginning
listed in the table below on page S-__ of this
prospectus supplement and page
2 of the prospectus.
ASSETS
o student loans The securities are obligations
o certain student loans guaranteed only of the trust and are
by federal or private guarantors payable solely from the
student loans and other assets
CREDIT ENHANCEMENT of the trust. The securities
o Notes are not guaranteed by any
o subordination of certificates person.
o reserve account
o certificates The securities are not bank
o reserve account deposits.
-----------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the prospectus to which it relates is truthful or
complete. Any representation to the contrary is a criminal offense.
Original Final
Principal Interest Rate Maturity Price to
Underwriting Proceeds to the
Amount (per annum) Date Public (1)
Discount Seller(1)(2)
Class A-1 Notes $ %
% %
Class A-2 Notes $ %
% %
Certificates $ %
% %
Total............. $ $
$ $
(1) Plus accrued interest, if any, from ____________________.
(2) Before deducting expenses, estimated to be $___________________.
Delivery of the securities will be made on or about ___________, 19 ___, against
payment in immediately available funds.
This prospectus supplement and the prospectus to which it relates are to be used
by McDonald Investments Inc., a wholly-owned subsidiary of KeyCorp and an
affiliate of the Seller, in connection with offers and sales related to
market-making transactions in the securities in which it acts as principal
and/or agent. Sales will be made at prices related to the prevailing prices at
the time of the sale.
[NAMES OF UNDERWRITERS]
Prospectus supplement dated __________________, _______
[ALTERNATE PAGE]
PLAN OF DISTRIBUTION
This Prospectus Supplement and the Prospectus to which it relates are
to be used by McDonald Investments Inc., a wholly-owned subsidiary of KeyCorp
and an affiliate of the Seller ("McDonald"), in connection with offers and sales
related to market-making transactions in the Securities in which McDonald acts
as principal. McDonald may also act as agent in such transactions. Sales will be
made at prices related to prevailing prices at the time of sale. Any obligations
of McDonald are the sole obligations of McDonald and do not create any
obligations on the part of any affiliate of McDonald.
In connection with the offering, McDonald may engage in transactions
that stabilize, maintain or otherwise affect the price of the Notes and the
Certificates. Specifically, McDonald may overallot the offering, creating a
short position in the Notes and the Certificates for its own account. McDonald
may bid for and purchase Notes and Certificates in the open market to cover such
short positions. In addition, McDonald may bid for and purchase Notes and
Certificates in the open market to stabilize the price of the Notes and the
Certificates. These activities may stabilize or maintain the market price of the
Notes and the Certificates above independent market levels. McDonald is not
required to engage in these activities, and may end these activities at any
time.
Prospectus
[Subject to completion, dated July 27, 2001]
KEYCORP STUDENT LOAN TRUSTS
Issuer
KEY BANK USA, NATIONAL ASSOCIATION
Seller and Master Servicer
KEY CONSUMER RECEIVABLES LLC
Depositor
Asset-Backed Notes
Asset-Backed Certificates
SECURITIES OFFERED ------------------------------
o asset backed notes and asset You should carefully consider
backed certificates the risk factors beginning
o rated in one of four highest on page 6.
rating categories by at least
one nationally recognized The securities are not bank
rating organization deposits and are not insured
o not listed on any trading exchange by the Federal Deposit
o obligations only of the related trust Insurance Corporation.
ASSETS This prospectus must be
o student loans accompanied by a prospectus
o may include one or more forms of supplement for the particular
credit enhancement series.
-----------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. MAKING ANY CONTRARY REPRESENTATION IS A
CRIMINAL OFFENSE.
The seller and/or the depositor may offer securities through underwriters or by
other methods described under the caption "Plan of Distribution."
The date of this Prospectus is ________, 2001
TABLE OF CONTENTS
RISK FACTORS...............................................................6
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...........................14
FORMATION OF THE TRUSTS...................................................14
The Trusts...........................................................14
Eligible Lender Trustee..............................................15
USE OF PROCEEDS...........................................................16
THE SELLER, THE DEPOSITOR, THE ADMINISTRATOR, THE MASTER SERVICER
AND THE SUB-SERVICERS.....................................................16
The Seller, Depositor, Administrator and Master Servicer.............16
General..........................................................16
Services and Fees of Administrator...............................17
Master Servicer..................................................17
The Sub-Servicers....................................................17
THE STUDENT LOAN POOLS....................................................17
General..............................................................17
THE STUDENT LOAN FINANCING BUSINESS.......................................19
Programs Offered by the Seller.......................................19
Description of Federal Loans Under the Programs......................20
General..........................................................20
The Stafford Loan Program........................................21
(1) Eligibility Requirements.....................................21
(2) Loan Limits..................................................22
(3) Interest.....................................................23
(4) Repayment....................................................24
(5) Grace Periods, Deferral Periods, Forbearance Periods.........25
(6) Interest Subsidy Payments....................................25
(7) Special Allowance Payments...................................25
The SLS Loan Program.............................................26
The PLUS Loan Program............................................28
The Federal Consolidation Loan Program...........................29
Undergraduate Federal Loans......................................31
Graduate Federal Loans...........................................32
Description of Private Loans Under the Programs......................33
General..........................................................33
Private Undergraduate Loans......................................34
Eligibility Requirements.........................................34
Loan Limits......................................................34
Interest.........................................................35
Repayment........................................................35
Grace Periods, Deferral Periods, Forbearance Periods.............35
Private Graduate Loans...........................................36
Payment Terms....................................................37
Private Consolidation Loans......................................41
Insurance of Student Loans; Guarantors of Student Loans..............43
Federal Guarantors...............................................43
Federal Insurance and Reinsurance of Federal Guarantors..........43
Private Guarantors...............................................46
Claims and Recovery Rates............................................46
Origination Process..................................................46
Servicing and Collections Process....................................48
Incentive Programs...................................................49
WEIGHTED AVERAGE LIVES OF THE SECURITIES..................................50
POOL FACTORS AND TRADING INFORMATION......................................52
DESCRIPTION OF THE NOTES..................................................52
General..............................................................52
Principal of and Interest on the Notes...............................53
The Indenture........................................................54
Modification of Indenture........................................54
Events of Default; Rights upon Event of Default..................55
Certain Covenants................................................58
Annual Compliance Statement......................................60
Indenture Trustee's Annual Report................................60
Satisfaction and Discharge of Indenture..........................60
The Indenture Trustee............................................60
DESCRIPTION OF THE CERTIFICATES...........................................60
General..............................................................60
Principal and Interest in Respect of the Certificates................61
CERTAIN INFORMATION REGARDING THE SECURITIES..............................62
Fixed Rate Securities................................................62
Floating Rate Securities.............................................62
Book-Entry Registration..............................................63
Definitive Securities................................................67
List of Securityholders..............................................68
Reports to Securityholders...........................................68
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS......................69
General..............................................................69
Sale of Student Loans; Representations and Warranties................69
Additional Fundings..................................................71
Accounts.............................................................71
Servicing Procedures.................................................72
Payments on Student Loans............................................73
Master Servicer Covenants............................................74
Master Servicing Compensation........................................75
Distributions........................................................76
Credit and Cash Flow Enhancement.....................................76
General..........................................................76
Reserve Account..................................................77
Statements to Indenture Trustee and Trust............................77
Evidence as to Compliance............................................79
Certain Matters Regarding the Master Servicer and the Sub-Servicers..79
Master Servicer Default; Administrator Default.......................80
Rights Upon Master Servicer Default and Administrator Default........82
Waiver of Past Defaults..............................................82
Insolvency Event.....................................................83
Amendment............................................................84
Payment of Notes.....................................................84
Seller or Depositor Liability........................................84
Termination..........................................................85
Administrator........................................................86
Student Loan Transfer Agreement......................................87
CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS................................87
Transfer of Student Loans............................................87
Certain Matters Relating to Receivership.............................89
Consumer Protection Laws.............................................89
Loan Origination and Servicing Procedures Applicable to Student
Loans...............................................................90
Failure to Comply with Third-Party Servicer Regulations May
Adversely Affect Loan Servicing......................................91
Bankruptcy Considerations............................................91
Recent Developments..................................................92
Emergency Student Loan Consolidation Act of 1997.................92
FY 1998 Budget...................................................92
1998 Amendments..................................................92
1998 Reauthorization Bill........................................93
Departments of Labor, Health and Human Services, and
Education, and Related Agencies Appropriations Act, 2001.........94
Electronic Signatures in Global and National Commerce Act........94
INCOME TAX CONSEQUENCES...................................................95
FEDERAL TAX CONSEQUENCES FOR TRUSTS FOR WHICH A PARTNERSHIP
ELECTION IS MADE..........................................................96
Tax Characterization of the Trust....................................96
Possible Alternative Treatment of the Trust......................96
Tax Consequences to Holders of the Notes.............................96
Treatment of the Notes as Indebtedness...........................96
Original Issue Discount..........................................96
Interest Income on the Notes.....................................96
Sale or Other Disposition........................................97
Foreign Holders..................................................97
Backup Withholding...............................................99
Possible Alternative Treatments of the Notes.....................99
FASITs...............................................................99
Tax Consequences to Holders of the Certificates.....................100
Classification as a Partnership.....................................100
Treatment of the Trust as a Partnership.........................100
Partnership Taxation............................................100
Guaranteed Payments.............................................100
Allocation of Tax Items.........................................101
Computation of Income...........................................102
Section 708 Termination.........................................102
Discount and Premium............................................103
Disposition of Certificates.....................................103
Allocations Between Transferors and Transferees.................103
Section 754 Election............................................104
Administrative Matters..........................................104
Tax Consequences to Foreign Certificateholders..................105
Backup Withholding..............................................105
FEDERAL TAX CONSEQUENCES FOR TRUSTS IN WHICH ALL CERTIFICATES ARE
RETAINED BY THE SELLER OR THE DEPOSITOR..................................106
Tax Characterization of the Trust...................................106
Tax Consequences to Holders of the Notes............................106
Treatment of the Notes as Indebtedness..........................106
PENNSYLVANIA STATE TAX CONSEQUENCES......................................106
Pennsylvania Income and Franchise Tax Consequences with
Respect to the Notes................................................106
Pennsylvania Income and Franchise Tax Consequences with
Respect to the Certificates.........................................106
ERISA CONSIDERATIONS.....................................................107
The Notes...........................................................108
The Certificates....................................................109
PLAN OF DISTRIBUTION.....................................................109
LEGAL MATTERS............................................................111
INDEX OF PRINCIPAL TERMS.................................................112
RISK FACTORS
We recommend that you consider the following factors and the additional
factors described under "Risk Factors" in the related prospectus supplement
before purchasing the securities.
CREDIT ENHANCEMENT
MAY NOT PROTECT YOU
FROM ALL LOSSES Although every trust will include some
form of credit enhancement, that credit
enhancement may not cover every class of
securities issued by a trust. In
addition, every form of credit
enhancement will have certain
limitations on, and exclusions from
coverage. As a result, there is always a
risk that you may not recover the full
amount of your investment.
GUARANTEES OF STUDENT
LOANS MAY NOT PREVENT
LOSSES A significant number of the student
loans in a trust will be guaranteed by
either a federal or a private guarantor.
However, those guarantees may not
protect you against all losses for
several reasons, including:
o federal guarantees are generally
limited to 98% of the principal
amount of the student loan;
o if Key Bank USA, National Association
or the applicable originator fails to
follow prescribed origination
procedures or if the master servicer
or any sub-servicers fail to follow
required servicing procedures, the
applicable guarantors may refuse to
make guarantee payments to the
applicable trust and if the loans are
federally insured, the Department may
refuse to make reinsurance payments
to the applicable federal guarantors
or to make interest subsidy or
special allowance payments to the
trust; and
o private guarantors are not reinsured
by or entitled to any assistance from
the Department. If the loan loss
reserves of a private guarantor are
not sufficient, that private
guarantor may not be able to honor
its obligations to make guarantee
payments.
DEFAULTS ON STUDENT LOANS
WITHOUT GUARANTEES MAY
RESULT IN LOSSES A trust may include student loans that
are not guaranteed by any federal or
private guarantor, or by any other party
or governmental agency. Since all
student loans, whether guaranteed or
not, are unsecured, if a borrower under
one of these student loans defaults, the
applicable trust and you may suffer a
loss.
THE FINANCIAL CONDITION OF
FEDERAL GUARANTORS MAY BE
ADVERSELY AFFECTED BY SEVERAL
FACTORS The financial condition of the federal
guarantors may be adversely affected by
a number of factors including:
o the amount of claims made against
such federal guarantor as a result of
borrower defaults;
o the amount of claims reimbursed to
such federal guarantor from the
Department;
o changes in legislation that may
reduce expenditures from the
Department that support federal
guarantors or that may require
federal guarantors to pay more of
their reserves to the Department;
o loss of reinsurance benefits due to
the master servicer's or a
sub-servicer's failure to follow
required servicing procedures; and
o expansion of the federal direct
student loan program.
If the financial status of the
guarantors deteriorates, the guarantors
may fail to make guarantee payments to
the trustee. In such event, you may
suffer delays in the payment of
principal and interest on your
securities.
REINSURANCE OF FEDERAL
GUARANTORS MAY NOT
PREVENT DELAYS OR LOSSES If a federal guarantor fails to make
guarantee payments, the applicable trust
may submit claims directly to the
Department. However, the Department may
determine that the federal guarantor is
able to meet its obligations, and the
Department will not make those payments.
Even if the Department determines to
make those payments, there may be delays
in making the necessary determination.
Loss or delay of any such guarantee
payments, interest subsidy payments or
special allowance payments could
adversely affect the related trust's
ability to pay timely interest and
principal. In such event, you may suffer
a loss on your investment.
THE TRUST IS DEPENDENT UPON
THE PERFORMANCE BY VARIOUS
PARTIES OF THEIR OBLIGATIONS The trust is relying, and the
performance of the securities depends,
on the performance of the seller, the
depositor, the master servicer and the
sub-servicers of their respective
obligations. Any failure to perform
could have material adverse consequences
as follows:
o FAILURE TO HONOR PURCHASE OBLIGATIONS
MAY CAUSE LOSSES. Key Bank USA,
National Association, as seller and
master servicer, Key Consumer
Receivables LLC, as depositor, or the
applicable sub-servicer, will be
obligated to purchase student loans
from a trust with respect to which it
materially breaches representations,
warranties or covenants. You can not
be assured, however, that Key Bank
USA, National Association, Key
Consumer Receivables LLC, or the
applicable sub-servicer, will have
the financial resources to purchase
such student loans. The failure to so
purchase a student loan would not
constitute an event of default under
the related indenture or permit the
exercise of remedies thereunder.
However, the breach of such
representations, warranties or
covenants may cause you to suffer a
loss on your investment.
o FAILURE TO COMPLY WITH THIRD-PARTY
SERVICER REGULATIONS MAY ADVERSELY
AFFECT LOAN SERVICING. The Department
regulates each servicer of federal
student loans. Under certain of these
regulations, a third-party servicer
(such as one of the sub-servicers) is
jointly and severally liable with its
client lenders for liabilities to the
Department arising from the
sub-servicer's violation of
applicable requirements. In addition,
if a sub-servicer fails to meet
standards of financial responsibility
or administrative capability included
in the regulations, or violates other
requirements, the Department may fine
the sub-servicer and/or limit,
suspend, or terminate such
sub-servicer's eligibility to
contract to service federal student
loans. If a sub-servicer were so
fined or held liable, or its
eligibility were limited, suspended,
or terminated, its ability to
properly service the federal loans
and to satisfy its obligation to
purchase federal loans with respect
to which it breaches its
representations, warranties or
covenants could be adversely
affected. Moreover, if the Department
terminates a sub-servicer's
eligibility, a servicing transfer
will take place and there will be
delays in collections and temporary
disruptions in servicing. Any such
servicing transfer will at least
temporarily adversely affect payments
to you.
o THE TRUST'S INTEREST IN ITS STUDENT
LOANS COULD BE DEFEATED BY ACTIONS OF
THE SUB-SERVICERS AS CUSTODIANS. The
applicable sub-servicer, as custodian
on behalf of the master servicer with
respect to each trust, will have
custody of the promissory notes
evidencing the student loans it
services. Although the accounts of
the seller and/or the depositor, as
applicable, will be marked to
indicate the sale and although the
seller, the depositor, the
administrator and/or the master
servicer, as applicable, will cause
UCC financing statements to be filed
with the appropriate authorities, the
student loans will not be physically
segregated, stamped or otherwise
marked to indicate that such student
loans have been sold to the eligible
lender trustee. If, through
inadvertence or otherwise, any of the
student loans were sold to another
party, or a security interest therein
were granted to another party that
purchased (or took such security
interest in) any of such student
loans in the ordinary course of its
business and took possession of such
student loans, then the purchaser (or
secured party) would acquire an
interest in the student loans
superior to the interest of the
eligible lender trustee, if the
purchaser (or secured party) acquired
such student loans without knowledge
of the eligible lender trustee's
interest.
o INSOLVENCY OF THE MASTER SERVICER, A
SUB-SERVICER OR THE ADMINISTRATOR MAY
CAUSE LOSSES. In the event of default
by the master servicer, a
sub-servicer or the administrator
resulting solely from certain events
of insolvency or bankruptcy, a court,
conservator, receiver or liquidator
may have the power to prevent either
the indenture trustee or the
noteholders from appointing a
successor master servicer or
administrator, or prevent the master
servicer from appointing a new
sub-servicer, as the case may be, and
delays in collections in respect of
the student loans may occur. Any
delay in the collections of student
loans may delay or reduce payments to
you.
CHANGES IN LEGISLATION MAY
ADVERSELY AFFECT STUDENT
LOANS AND FEDERAL GUARANTORS You can not be certain that the
Higher Education Act or other relevant
federal or state laws, rules and
regulations will not be amended or
modified in the future in a manner that
will adversely affect the federal
student loan programs described in this
prospectus, the student loans made
thereunder or the financial condition of
the federal guarantors.
In addition, if the direct student loan
program expands, the sub-servicers may
experience increased costs due to
reduced economies of scale or other
adverse effects on their business to the
extent the volume of loans serviced by
the sub-servicers is reduced. Such cost
increases could reduce the ability of
the sub-servicers to satisfy their
obligations to service the student loans
or to purchase student loans in the
event of certain breaches of its
covenants.
CERTAIN POLICIES OF THE
DEPARTMENT MAY REDUCE
AMOUNTS AVAILABLE
FOR PAYMENTS ON
YOUR SECURITIES Each trust will be obligated to pay to
the Department a monthly rebate at an
annualized rate of generally 1.05% of
the outstanding principal balance and
accrued interest receivable on each
federal consolidation loan which is a
part of the related trust. This rebate
will be payable prior to distributions
made to you. In addition, the trust must
pay to the Department a 0.50%
origination fee on the initial principal
balance of each student loan which is
originated on its behalf by the eligible
lender trustee after the applicable
closing date. This fee will be deducted
by the Department out of interest
subsidy payments and special allowance
payments otherwise payable to the
trust(s). In such event the amount
available to be distributed to you will
be reduced. Under certain circumstances,
the related trust is obligated to pay
any portion of the unpaid fee from other
assets of that trust prior to making
distributions to you. As a result, the
payment of the rebate fee and
origination fee to the Department will
affect the rate and timing of payments
to you. Moreover, if the origination fee
is deducted from interest subsidy
payments and special allowance payments
the interest rate payable on your
securities may be capped at a lower
rate. In such event, the value of your
investment may be impaired.
Due to a Department policy limiting the
granting of new lender identification
numbers, all of the trusts established
by the seller and/or the depositor, as
applicable, to securitize federal
student loans may use a common
Department lender identification number.
The Department regards the eligible
lender trustee as the party primarily
responsible to the Department for any
liabilities owed to the Department or
federal guarantors resulting from the
eligible lender trustee's activities in
the federal student loan program. If the
Department or a federal guarantor
determines such a liability exists in
connection with a trust using the shared
lender identification number, the
Department or such federal guarantor may
collect that liability or offset such
liability from amounts due the eligible
lender trustee under the shared lender
identification number.
Because the servicing agreements for the
trusts established by the seller and/or
the depositor, as applicable, which
share a lender identification number,
will require the eligible lender trustee
or the master servicer to allocate to
the proper trust shortfalls or an offset
by the Department or a federal guarantor
arising from the student loans held by
the eligible lender trustee on each
trust's behalf, if the amount available
for indemnification by one trust to
another trust is insufficient, you may
suffer a loss on your investment as a
result of the performance of another
trust.
NOTEHOLDERS' RIGHT TO CONTROL
UPON CERTAIN DEFAULTS
MAY ADVERSELY AFFECT
CERTIFICATEHOLDERS In the event of a default by the master
servicer or the administrator, the
indenture trustee or the noteholders,
may remove the master servicer or the
administrator, as the case may be,
without the consent of the eligible
lender trustee or any of the
certificateholders. In addition, the
noteholders have the ability, with
certain specified exceptions, to waive
defaults by the master servicer or the
administrator, including defaults that
could materially adversely affect the
certificateholders.
CONSUMER PROTECTION LAWS
MAY AFFECT ENFORCEABILITY OF
STUDENT LOANS Numerous federal and state consumer
protection laws and related regulations
impose substantial requirements upon
lenders and servicers involved in
consumer finance. Also, some state laws
impose finance charge ceilings and other
restrictions on certain consumer
transactions and require contract
disclosures in addition to those
required under federal law. These
requirements impose specific statutory
liability that could affect an
assignee's ability to enforce consumer
finance contracts such as the student
loans. In addition, the remedies
available to the indenture trustee or
the noteholders upon an event of default
under the indenture may not be readily
available or may be limited by
applicable state and federal laws.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Key Bank USA, National Association and Key Consumer Receivables LLC, as
originators of each of the various trusts, have filed with the Securities and
Exchange Commission (the "Commission") a Registration Statement (together with
all amendments and exhibits thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities offered pursuant to this prospectus. The Registration Statement,
contains information which is not contained in this prospectus. Prospective
investors may read the Registration Statement and make copies of it at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549; and at the Commission's regional offices at Seven
World Trade Center, New York, New York 10048, and 500 West Madison Street, 14th
Floor, Chicago, Illinois 60661. Copies of the Registration Statement may be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Web site at http://www.sec.gov containing registration statements
and other information regarding registrants, including Key Bank USA, National
Association and Key Consumer Receivables LLC, that file electronically with the
Commission.
All documents filed by Key Bank USA, National Association or Key Consumer
Receivables LLC, as originator of any trust, pursuant to Section 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), subsequent to the date of this prospectus and prior to the termination of
the offering of the securities shall be deemed to be incorporated by reference
in this prospectus. Any statement contained herein or in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this prospectus to the extent that a statement
contained herein or in any subsequently filed document which also is to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this prospectus.
Key Bank USA, National Association and Key Consumer Receivables LLC will
provide without charge to each person, including any beneficial owner of
securities, to whom a copy of this prospectus is delivered, on the written or
oral request of any such person, a copy of any or all of the documents
incorporated herein or in any related prospectus supplement by reference, except
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests for such copies should be
directed to Key Bank USA, National Association, Education Resources, 800
Superior Avenue, 4th Floor, Cleveland, Ohio 44114, Attention: Education Loan
Trust Administrator (Telephone: (216) 828-9357).
FORMATION OF THE TRUSTS
THE TRUSTS
With respect to each series of Securities, either the Seller or the
Depositor will establish a separate trust (each a "Trust") pursuant to the
respective trust agreement (each a "Trust Agreement"), for the transactions
described herein and in the related Prospectus Supplement. The property of each
Trust will consist of:
(a) a pool of undergraduate loans and/or graduate school student loans
(the "Student Loans"), legal title to which is held by the related
eligible lender trustee (the "Eligible Lender Trustee") on behalf of
each Trust,
(b) all funds collected or to be collected in respect thereof (including
any Guarantee Payments with respect thereto) on or after the
applicable date specified in the related Prospectus Supplement (the
"Cutoff Date"),
(c) any other rights under certain collateral agreements with respect to
certain Private Graduate Loans to the extent assigned to each Trust by
the Seller, and
(d) all moneys and investments on deposit in any Collection Account, any
Pre-Funding Account, any Escrow Account, any Negative Carry Account,
any Reserve Account and any other trust accounts or any other form of
credit or cash flow enhancement that may be obtained for the benefit
of holders of one or more classes of such Securities. To the extent
provided in the applicable Prospectus Supplement, the Notes will be
collateralized by the property of the related Trust. To facilitate
servicing and to minimize administrative burden and expense, the
Master Servicer will be appointed by the Eligible Lender Trustee as
the custodian, and the Master Servicer will then appoint the
Sub-Servicers as the custodians on its behalf, of the promissory notes
representing the Student Loans that each services.
The principal offices of each Trust and the related Eligible Lender Trustee
will be specified in the applicable Prospectus Supplement.
If specified in a Prospectus Supplement, an election may be made to treat a
Trust as a "financial asset securitization improvement trust" (a "FASIT") for
federal income tax purposes. See "Federal Tax Consequences For Trusts For Which
a Partnership Election is Made--FASITs" herein.
ELIGIBLE LENDER TRUSTEE
The Eligible Lender Trustee for each Trust will be such entity as is
specified in the related Prospectus Supplement. The Eligible Lender Trustee on
behalf of the related Trust will acquire legal title to all the related Student
Loans acquired pursuant to the related Sale and Servicing Agreement and will
enter into a Guarantee Agreement or comparable arrangement, if applicable, with
each of the Guarantors with respect to the Student Loans which are guaranteed or
insured. Each Eligible Lender Trustee will qualify as an eligible lender and
owner of all Federal Loans and Private Loans for all purposes under the Higher
Education Act and the Guarantee Agreements. Failure of the Federal Loans to be
owned by an eligible lender would result in the loss of any Federal Guarantee
Payments from any Federal Guarantor and any Federal Assistance with respect to
such Federal Loans. See "The Student Loan Financing Business--Description of
Federal Loans Under the Programs." An Eligible Lender Trustee's liability in
connection with the issuance and sale of the Notes and the Certificates is
limited solely to the express obligations of the Eligible Lender Trustee as set
forth in the related Trust Agreement and the related Sale and Servicing
Agreement. See "Description of the Transfer and Servicing Agreements." The
Seller plans to maintain normal commercial banking relations with the Eligible
Lender Trustee.
USE OF PROCEEDS
If the Seller is selling the Student Loans relating to any given series,
the net proceeds from the sale of Securities of a given series will be used by
the applicable Trust to purchase the related Student Loans on the applicable
Closing Date from the Seller and to make the initial deposit into the Reserve
Account, Pre-Funding Account or Negative Carry Account, if any. The Seller will
use such net proceeds paid to it with respect to any such Trust for general
corporate purposes.
If the Depositor is selling the Student Loans relating to any given series,
the net proceeds from the sale of Securities of a given series will be used by
the applicable Trust to purchase the related Student Loans on the applicable
Closing Date from the Depositor and to make the initial deposit into the Reserve
Account, Pre-Funding Account or Negative Carry Account, if any. The Depositor
will use such net proceeds to purchase the related Student Loans on the Closing
Date from the Seller and/or other affiliates of the Seller. The Seller will use
such net proceeds paid to it with respect to any such Trust for general
corporate purposes.
THE SELLER, THE DEPOSITOR, THE ADMINISTRATOR, THE MASTER
SERVICER AND THE SUB-SERVICERS
THE SELLER, DEPOSITOR, ADMINISTRATOR AND MASTER SERVICER
GENERAL. If Key Bank USA, National Association ("KBUSA") is selling the
Student Loans relating to any given series, KBUSA will act as seller (the
"Seller") and as master servicer (the "Master Servicer"), pursuant to the
related Sale and Servicing Agreement, and as administrator (the "Administrator")
pursuant to the related Administration Agreement.
If Key Consumer Receivables LLC ("KCRL") is selling the Student Loans
relating to any given series, KCRL will act as depositor (the "Depositor"), and
KBUSA will act as Master Servicer, pursuant to the related Sale and Servicing
Agreement. KBUSA will also act as Administrator pursuant to the related
Administration Agreement and may act as seller of Student Loans to the Depositor
pursuant to the related Student Loan Transfer Agreement.
KBUSA is a national banking association and a wholly owned subsidiary of
KeyCorp. KBUSA is engaged in consumer loan activities nationally, including,
automobile lending and leasing, home equity financing of both first- and
second-home mortgages, education lending, and marine and recreational vehicle
financing. The principal executive offices of KBUSA are located at Key Tower,
127 Public Square, Cleveland, Ohio 44114 and its telephone number is (216)
828-8122.
KCRL is a Delaware limited liability company and a wholly-owned subsidiary
of KBUSA. KCRL is a special-purpose "bankruptcy remote" entity formed to
purchase student loans from the Seller and its affiliates, and to form trusts
that will issue asset-backed securities. The principal executive offices of KCRL
are located at Key Tower, 127 Public Square, Cleveland, Ohio 44114 and its
telephone number is (216) 828-8122.
SERVICES AND FEES OF ADMINISTRATOR. Pursuant to the related Administration
Agreement, the Administrator will be responsible for preparing and filing claim
forms on behalf of the Eligible Lender Trustee for Interest Subsidy Payments and
Special Allowance Payments from the United States Department of Education (the
"Department") and is required to provide notices and reports and to perform
other administrative obligations required by the related Indenture, the Trust
Agreement and the Sale and Servicing Agreement. See "Description of the Transfer
and Servicing Agreements--Administrator."
MASTER SERVICER. KBUSA, in its capacity as Master Servicer will be
responsible for master servicing the Student Loans. The Master Servicer will
arrange for and oversee the performance of each Sub-Servicer of its respective
servicing obligations with respect to the Student Loans. In consideration for
performing its obligations under the applicable Sale and Servicing Agreement,
the Master Servicer will receive in the aggregate, subject to certain
limitations described herein, a monthly fee payable by each Trust as specified
in the related Prospectus Supplement and certain one-time fixed fees for each
Student Loan for which a forbearance period was granted or renewed or for which
a guarantee claim was filed, in each case subject to certain adjustments,
together with other administrative fees and similar charges. The Master Servicer
will in turn be solely responsible for all compensation due to the Sub-Servicers
for the performance of their respective obligations pursuant to the related
Sub-Servicing Agreements. See "Description of Transfer and Servicing
Agreements--Servicing Compensation."
THE SUB-SERVICERS
The sub-servicers (the "Sub-Servicers") under each Sale and Servicing
Agreement will be the entity or entities specified in the related Prospectus
Supplement.
With respect to the Student Loans it is servicing on behalf of the Master
Servicer and with respect to each Trust, each Sub-Servicer will be required by
the related sub-servicing agreement between such Sub-Servicer and the Master
Servicer (each a "Sub-Servicing Agreement") to perform the services and duties
customary to the servicing of Student Loans it is required to service and to do
so in the same manner as such Sub-Servicer has serviced Student Loans on behalf
of the Seller and/or the Master Servicer and otherwise in compliance with all
applicable standards and procedures. In addition, each Sub-Servicer is required
to maintain its eligibility as a third-party servicer under the Higher Education
Act. See "Description of the Transfer and Servicing Agreements--Servicing
Procedures." Each Sub-Servicer will be paid directly by the Master Servicer for
its services rendered under each Sub-Servicing Agreement. The Trust will be an
intended third-party beneficiary of each Sub-Servicing Agreement. See
"Description of the Transfer and Servicing Agreements--Master Servicer Default;
Administrator Default."
THE STUDENT LOAN POOLS
GENERAL
The Student Loans to be sold by the Seller, or the Depositor after
purchasing such Student Loans from the Seller and/or affiliates of the Seller,
to the Eligible Lender Trustee on behalf of a Trust pursuant to the related Sale
and Servicing Agreement will be selected from the Seller's and/or such
affiliate's portfolio of Student Loans by several criteria, including that each
Student Loan:
o was originated in the United States or its territories or possessions
under and in accordance with the Programs (including, in the case of
borrowers of Federal Loans, a financial need analysis and, in the case
of borrowers of Private Loans, a creditworthiness evaluation);
o contains terms in accordance with those required by the Programs, the
Guarantee Agreements (with respect to those Student Loans that are
guaranteed or insured) and other applicable requirements;
o no selection procedures believed by the Seller and/or any affiliate of
the Seller to be adverse to the Securityholders of any series will be
used in selecting the related Student Loans; and
o satisfies the other criteria, if any, set forth in the related
Prospectus Supplement.
The Student Loans that comprise assets of each Trust will be held by the
related Eligible Lender Trustee, as trustee on behalf of such Trust. The
Eligible Lender Trustee will also enter into, on behalf of such Trust (with
respect to those Student Loans that are guaranteed or insured), Guarantee
Agreements with the Guarantors pursuant to which each of such Student Loans will
be guaranteed by one of such Guarantors. See "Formation of the Trusts--Eligible
Lender Trustee."
Information with respect to each pool of Student Loans for a given Trust
will be set forth in the related Prospectus Supplement, including, to the extent
appropriate, the composition, the distribution by loan type, loan payment
status, and states of borrowers' residence and the portion of such Student Loans
guaranteed by the specified Guarantors.
In the case of each series for which the related Trust may acquire Student
Loans from the Seller or the Depositor, as applicable, after the related Cutoff
Date ("Additional Fundings"), information with respect to the Student Loans
eligible to be acquired by the related Trust will be set forth in the related
Prospectus Supplement as will information regarding the duration and conditions
of any related funding period (a "Funding Period") or revolving period (a
"Revolving Period"), the circumstances under which Additional Fundings will be
made during such period, and, if Additional Fundings may continue to be made
after such period, the circumstances under which such Additional Fundings will
be made.
Each of the Student Loans provides or will provide for the amortization of
the outstanding principal balance of such Student Loan over a series of regular
payments. Each regular payment consists of an installment of interest which is
calculated on the basis of the outstanding principal balance of such Student
Loan multiplied by the applicable interest rate and further multiplied by the
period elapsed (as a fraction of a calendar year) since the preceding payment of
interest was made. As payments are received in respect of such Student Loan, the
amount received is applied first to interest accrued to the date of payment and
the balance is applied to reduce the unpaid principal balance. Accordingly, if a
borrower pays a regular installment before its scheduled due date, the portion
of the payment allocable to interest for the period since the preceding payment
was made will be less than it would have been had the payment been made as
scheduled, and the portion of the payment applied to reduce the unpaid principal
balance will be correspondingly greater. Conversely, if a borrower pays a
monthly installment after its scheduled due date, a late fee, where applicable,
will be assessed and the portion of the payment allocable to the late fee and
interest for the period since the preceding payment was made will be greater
than it would have been had the payment been made as scheduled, and the portion
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. In either case, subject to any applicable Deferral Periods
or Forbearance Periods, the borrower pays a regular installment until the final
scheduled payment date, at which time the amount of the final installment is
increased or decreased as necessary to repay the then outstanding principal
balance of and any accrued but unpaid interest on such Student Loan.
THE STUDENT LOAN FINANCING BUSINESS
PROGRAMS OFFERED BY THE SELLER
The Student Loans to be sold by the Seller or the Depositor to the Eligible
Lender Trustee on behalf of a Trust pursuant to the related Sale and Servicing
Agreement will be selected from Student Loans originated or acquired by the
Seller under various loan programs (the "Programs"). The proceeds of the loans
are used to finance a portion of the costs of
(1) undergraduate education ("Undergraduate Loans"),
(2) graduate education ("Graduate Loans") or
(3) post-graduate activities such as studying for bar exams or
participating in residency programs ("Post-Graduate Loans").
Undergraduate Loans and Graduate Loans may be originated through the
Federal Family Education Loan Program ("FFELP"). As described herein and in the
related Prospectus Supplement, substantially all payments of principal and
interest with respect to loans originated through FFELP (collectively, the
"Federal Loans") will be guaranteed against default, death, bankruptcy or
disability of the applicable borrower, and a closing of or a false certification
by such borrower's school, by certain federal guarantors pursuant to a guarantee
agreement to be entered into between such federal guarantors specified in the
related Prospectus Supplement (each a "Federal Guarantor" and collectively, the
"Federal Guarantors") and the applicable Eligible Lender Trustee (such
agreements, each as amended or supplemented from time to time, the "Federal
Guarantee Agreements"). Each of the Federal Guarantors is entitled, subject to
certain conditions, to be reimbursed by the Department for 75% to 100% of all
Guarantee Payments it makes pursuant to a program of federal reinsurance under
the Higher Education Act of 1965, as amended (such act, together with all rules
and regulations promulgated thereunder by the Department and/or the Federal
Guarantors, the "Higher Education Act"). In addition, each Eligible Lender
Trustee, as a holder of the Federal Loans on behalf of the related Trust, is
entitled to receive from the Department certain Interest Subsidy Payments and
Special Allowance Payments with respect to certain of such Federal Loans as
described herein. See "--Description of Federal Loans Under the Programs" below.
Payments of principal and interest with respect to the Private Loans may be
(1) unguaranteed by any federal or private guarantor, or by any other party or
governmental agency ("Private Unguaranteed Loans") or (2) guaranteed against
default, death, bankruptcy or disability of the applicable borrower ("Private
Guaranteed Loans") by certain private guarantors pursuant to a guarantee
agreement to be entered into among private guarantors specified in the related
Prospectus Supplement (each a "Private Guarantor" and collectively, "Private
Guarantors," and together with the Federal Guarantors, the "Guarantors" or
individually a "Guarantor"), the Seller or the Depositor, as applicable, and the
Eligible Lender Trustee, or by Private Guarantors pursuant to surety bonds
issued to the Seller or the Depositor, as applicable, and assigned to each
Eligible Lender Trustee on behalf of the related Trust (such agreement and
surety bonds, each as amended or supplemented from time to time, the "Private
Guarantee Agreements" and, together with the Federal Guarantee Agreements, the
"Guarantee Agreements"). Payments under the Private Guarantee Agreements are
referred to as "Private Guarantee Payments" and payments under Federal Guarantee
Agreements are referred to as "Federal Guarantee Payments." Private Guarantee
Payments and Federal Guarantee Payments are together referred to as "Guarantee
Payments." See "--Description of Private Loans Under the Programs" below.
DESCRIPTION OF FEDERAL LOANS UNDER THE PROGRAMS
GENERAL. The following descriptions of Federal Stafford Loan Program (the
"Stafford Loan Program"), Federal Supplemental Loans for Students Program (the
"SLS Loan Program"), the Federal Parental Loans For Undergraduate Students Loan
Program (the "PLUS Loan Program"), and Federal Consolidation Loan Program (the
"Federal Consolidation Loan Program") (such programs being collectively referred
to herein as the "Federal Programs") as authorized under the Higher Education
Act are qualified in their entirety by reference to the Higher Education Act.
Since its original enactment in 1965, the Higher Education Act has been amended
and reauthorized several times, including by the Higher Education Amendments of
1992 (the "1992 Amendments") and the Higher Education Amendments of 1998 (the
"1998 Amendments"). The 1992 Amendments extended the principal provisions of the
Federal Programs to September 30, 1998 (or, in the case of borrowers who have
received Federal Loans prior to that date, September 30, 2002), and the 1998
Amendments further extended the principal provisions of the Federal Programs
through June 30, 2003.
There can be no assurance that the Higher Education Act or other relevant
federal or state laws, rules and regulations and the programs implemented
thereunder will not be amended or modified in the future in a manner that will
adversely impact the programs described in this Prospectus, the related
Prospectus Supplement and the student loans made thereunder, including the
Student Loans, or the Guarantors. In addition, future measures to reduce any
future federal budget deficit or for other purposes may adversely affect the
amount and nature of federal financial assistance available with respect to
these programs. In recent years, federal legislation has provided for the
recovery of certain funds held by guarantee agencies in order to achieve
reductions in federal spending. There can be no assurance that future federal
legislation or administrative actions will not adversely affect expenditures by
the Department or the financial condition of the Federal Guarantors. For a
discussion of each Federal Guarantor's claims-paying ability, see the related
Prospectus Supplement.
THE STAFFORD LOAN PROGRAM. "Stafford Loans" are loans made by eligible
lenders in accordance with the Higher Education Act to Eligible Students, based
on financial need, to finance a portion of the costs of attending an eligible
institution of higher education or a vocational school. The Higher Education Act
limits the amount of Stafford Loans that may be made to a student in any given
academic year, the amount a student may have outstanding in the aggregate and
specifies certain payment terms, including the interest rates that may be
charged on Stafford Loans. Holders of Stafford Loans complying with these
limitations and the other conditions specified in the Higher Education Act will
be entitled to the benefits of:
1. a guarantee of the payment of principal and interest with respect
to such Stafford Loans by a guarantee agency (the Federal Guarantors in the
case of the Federal Loans), which guarantee will be supported by federal
reinsurance of all or most of such guaranteed amounts as described herein;
2. federal interest subsidy payments equal to the interest payable on
such Stafford Loans prior to the time the borrower begins repayment of such
Stafford Loans and during any applicable Deferral Periods, together with
interest on any such amounts not paid by the Department when due ("Interest
Subsidy Payments"); and
3. federal special allowance payments, in varying amounts, during the
term of such Stafford Loans to ensure that interest payable on such
Stafford Loans approximates current market interest rates, together with
interest on any such amounts not paid by the Department when due ("Special
Allowance Payments"), (such federal reinsurance obligations, together with
those obligations referred to in clauses (2) and (3) above, being
collectively referred to herein as "Federal Assistance").
Certain Stafford Loans do not qualify for Interest Subsidy Payments but
otherwise qualify for all other forms of Federal Assistance ("Unsubsidized
Stafford Loans"). These loans are identical to Stafford Loans in all material
respects, except that interest accruing thereon during periods when the borrower
is in school or in a Deferral Period or Grace Period is either paid periodically
by the borrower during such periods or added periodically to the principal
balance of the loan by the holder thereof. A borrower qualifies for an
Unsubsidized Stafford Loan if, and to the extent that, the borrower's need for a
Stafford Loan, as calculated pursuant to the Higher Education Act, is more than
the maximum subsidized Stafford Loan authorized by statute.
(1) ELIGIBILITY REQUIREMENTS. Subject to the annual and aggregate limits on
the amount of Stafford Loans that a student can borrow discussed below, Stafford
Loans are available to Eligible Students in amounts not exceeding their unmet
need for financing as determined in accordance with the provisions of the Higher
Education Act. "Eligible Students" are students that are:
1. enrolled in, or admitted for enrollment in, an approved or accredited
undergraduate or graduate school;
2. enrolled in, or admitted for enrollment in, an acceptable degree
program;
3. attending at least half-time;
4. making satisfactory progress toward the completion of that program
according to the standards of the school;
5. U.S. citizens, U.S. nationals or eligible non-citizens;
6. not borrowers under Federal Loans, including the requested loan, that
exceed the applicable annual and aggregate limits; and
7. not in default on any education loan or not required to refund an
educational grant.
Each Stafford Loan:
o must be unsecured;
o must provide for deferral of the obligation of the borrower to make
(x) interest payments for as long as the Department makes Interest
Subsidy Payments and (y) principal payments so long as the borrower
remains an Eligible Student and thereafter during any applicable Grace
Periods, Deferral Periods or Forbearance Periods; and
o must provide for repayment over a period not to exceed 10 years
(excluding any Deferral Periods or Forbearance Periods) from the date
repayment commences.
(2) LOAN LIMITS. In order to qualify for assistance under the Stafford Loan
Program, the Higher Education Act imposes an annual limit on the amount of
Stafford Loans and other Federal Loans that may be made to any single student
and an aggregate limit on the amount of such Federal Loans such student may have
outstanding.
The following chart sets forth the current and historic loan limits.
ALL STUDENTS (1)
INDEPENDENT STUDENTS(1)
BASE AMOUNT
ADDITIONAL MAXIMUM
SUBSIDIZED SUBSIDIZED AND
UNSUBSIDIZED AGGREGATE
SUBSIDIZED ON OR UNSUBSIDIZED ON
ONLY ON OR TOTAL
BEFORE AFTER OR AFTER
AFTER AMOUNT IN
1/1/87 1/1/87 10/1/93(2)
7/1/94(3) BORROWER'S ACADEMIC LEVEL
Undergraduate (per year)
1st year $ 2,500 $ 2,625 $ 2,625
$ 4,000 $ 6,625
2nd year $ 2,500 $ 2,625 $ 3,500
$ 4,000 $ 7,500
3rd year and above $ 2,500 $ 4,000 $ 5,500
$ 5,000 $10,500
Graduate (per year) $ 5,000 $ 7,500 $ 8,500
$10,000 $18,500
Aggregate Limit;
Undergraduate $12,500 $17,250 $23,000
$23,000 $46,000
Graduate (including
undergraduate) $25,000 $54,750 $65,500
$73,000 $138,500
- -----------------
(1) The loan limits are inclusive of both Stafford Loans and 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. In addition, dependent
undergraduate students may also receive these additional loan amounts if
the parents of such students are unable to provide the family contribution
amount and it is unlikely that the student's parents will qualify for a
PLUS Loan.
The annual loan limits are reduced in some instances where the student
is enrolled in a program that is less than one academic year or has less than a
full academic year remaining in his or her program. The Department has
discretion to raise these limits to accommodate highly specialized or
exceptionally expensive course of study.
(3) INTEREST. The borrower's interest rate on a Stafford Loan may be fixed
or variable. Stafford Loan interest rates are summarized in the chart below.
TRIGGER DATE(1) BORROWER RATE(2) MAXIMUM RATE
INTEREST RATE MARGIN
--------------------- ----------------------- ------------------
-----------------------
Prior to 01/01/81 7% 7%
N/A
01/01/81-09/12/83 9% 9%
N/A
09/13/83-06/30/88 8% 8%
N/A
07/01/88-09/30/92 8% for 48 months; 8% for 48
months, 3.25%
thereafter, 91-Day then 10%
Treasury + Interest Rate
Margin
10/01/92-06/30/94 91-Day Treasury + 9%
3.10%
Interest Rate Margin
07/01/94-06/30/95 91-Day Treasury + 8.25%
3.10%
Interest Rate Margin
07/01/95-06/30/98 91-Day Treasury + 8.25%
2.50% (In-School, Grace or
Interest
Deferment); 3.10% (in
Rate Margin
repayment)
On or after 07/01/98 91-Day Treasury + 8.25%
1.70% (In-School, Grace or
Interest Rate Margin
Deferment); 2.30% (in
repayment)
- ---------------------
(1) The Trigger Date for Stafford Loans made before October 1, 1992 is the
first day of enrollment period for which a borrower's first Stafford Loan
in made and for Stafford Loans made on October 1, 1992 and after the
Trigger Date is the date of the disbursement of a borrower's first Stafford
Loan.
(2) 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 (a) the applicable Maximum
Rate or (b) the sum of (i) the bond equivalent rate of 91-day Treasury
Bills auctioned at the final auction held prior to such June 1 and (ii) the
applicable Interest Rate Margin.
The 1992 Amendments provide that, for fixed rate loans made on or after
July 23, 1992 and for certain loans made to new borrowers on or after July 1,
1988, the lender must have converted by January 1, 1995 the interest rate on
such loans to an annual interest rate adjusted each July 1 equal to (a) for
certain loans made between July 1, 1988 and July 23, 1992, the 91-day Treasury
Bill rate at the final auction prior to the preceding June 1 plus 3.25%, and (b)
for loans made on or after July 23, 1992 and prior to July 1, 1998, the 91-day
Treasury Bill rate at the final auction prior to the preceding June 1 plus
3.10%. The variable interest rate does not apply to loans made prior to July 23,
1992 during the first 48 months of repayment.
Interest is payable on each Stafford Loan monthly in arrears until the
principal amount thereof is paid in full. However, prior to the date the
borrower begins repaying the principal of such Stafford Loan and during any
applicable Deferral Period, the borrower has no obligation to make interest
payments. Instead, the Department makes quarterly Interest Subsidy Payments to
the holder of the Subsidized Stafford Loans on behalf of the borrower during
such periods, in amounts equal to the accrued and unpaid interest for the
previous quarter with respect to such Stafford Loan. During a Forbearance
Period, the Department will not make any Interest Subsidy Payments; instead, at
the borrower's option, interest on each Stafford Loan may be paid currently or
capitalized and added to the outstanding principal balance of such Stafford Loan
at the end of such Forbearance Period. See "--(6) Interest Subsidy Payments"
below.
"91-day Treasury Bill Rate" means, on any date of determination, the
weighted average per annum discount rate (expressed on a bond equivalent basis
and applied on a daily basis) for 91-day Treasury Bills at the most recent
91-day Treasury Bills auction prior to such date as published by the Board of
Governors of the Federal Reserve System or as reported by the U.S. Treasury
Department.
(4) REPAYMENT. No principal and/or interest payments with respect to a
Stafford Loan are required to be made during the time a borrower remains an
Eligible Student and during the existence of an applicable Grace Period,
Deferral Period or Forbearance Period. In general, a borrower must repay each
Stafford Loan in monthly installments over a period of not more than 10 years
(excluding any Deferral Period or Forbearance Period) after commencement of
repayment. New borrowers on or after October 7, 1998 who accumulate outstanding
loans under the Student Assistance General Provisions and FFELP totaling more
than $30,000, are entitled to extended repayment schedules of up to 25 years
subject to certain minimum repayment amounts. Any borrower may voluntarily
prepay without premium or penalty any Federal Loan and in connection therewith
may waive any Grace Period or Deferral Period. The Higher Education Act
presently requires a minimum annual principal and interest payment with respect
to a Stafford Loan of $600 in the aggregate (but in no event less than accrued
interest), unless the borrower and the lender agree to a lesser amount. For
Stafford Loans and SLS Loans first disbursed on or after July 1, 1993 to a
borrower who has no outstanding Federal Loans on the date such loan is made, the
borrower must be offered the opportunity to repay the loan according to a
graduated or income-sensitive repayment schedule established in accordance with
Department regulations. For Stafford Loans entering repayment on or after
October 1, 1995, borrowers may choose among several repayment options, including
the option to make interest only payments for limited periods.
(5) GRACE PERIODS, DEFERRAL PERIODS, FORBEARANCE PERIODS. Borrowers of
Stafford Loans must generally commence repaying the loans following a period of
(a) not less than 9 months nor more than 12 months (with respect to loans for
which the applicable interest rate is 7% per annum) and (b) not more than 6
months (with respect to loans for which the applicable interest rate is other
than 7% per annum) (a "Grace Period") after the borrower ceases to be an
Eligible Student. However, subject to certain conditions, no principal
repayments need be made with respect to Stafford Loans during periods when the
borrower has returned to an eligible educational institution on at least a
half-time basis or is pursuing studies pursuant to an approved graduate
fellowship program, during certain other periods (varying from six months to
three years) when the borrower has joined the military or certain volunteer
organizations (for all loans made prior to July 1, 1993, or loans made after
such date to borrowers with loans already outstanding on such date), for periods
when the borrower is unable to secure employment (up to three years) or for
periods during which the borrower is experiencing economic hardship (for loans
made after July 1, 1993, to borrowers with no outstanding loans on such date)
(each, a "Deferral Period"). In addition, the lender may, and in some
circumstances must, allow, in accordance with standards and guidelines approved
by the applicable Federal Guarantor and the Department, periods of forbearance
during which the borrower may defer principal and/or interest payments because
of temporary financial hardship (a "Forbearance Period").
(6) INTEREST SUBSIDY PAYMENTS. Interest Subsidy Payments are payments made
quarterly to the holder of a subsidized Stafford Loan by the Department with
respect to those Stafford Loans as to which the applicable conditions of the
Higher Education Act have been satisfied, in an amount equal to the accrued and
unpaid interest on the outstanding principal amount of each Stafford Loan for
such quarter, commencing from the date such Stafford Loan is made until the end
of the applicable Grace Period after the borrower ceases to be an Eligible
Student and during any applicable Deferral Period. The Department will not make
Interest Subsidy Payments during any Forbearance Period. The Higher Education
Act provides that the holder of such a qualifying Stafford Loan has a
contractual right against the United States, to receive Interest Subsidy
Payments from the Department (including the right to receive interest on any
Interest Subsidy Payments not timely paid). Receipt of Interest Subsidy Payments
is conditioned on compliance with the requirements of the Higher Education Act,
including satisfaction of certain need-based criteria (and the delivery of
sufficient information by the borrower and the lender to the Department to
confirm the foregoing) and continued eligibility of the Stafford Loan for
federal reinsurance. Such eligibility may be lost, however, if the loans are not
originated and serviced, or are not held by an eligible lender, in accordance
with the requirements of the Higher Education Act and the applicable guarantee
agreements. See "--(1) Eligibility Requirements"; "Formation of the
Trusts--Eligible Lender Trustee" and "Description of the Transfer and Servicing
Agreements--Servicing Procedures." The Seller and the Depositor expect that each
of the subsidized Stafford Loans that are part of a pool of Student Loans will
be eligible to receive Interest Subsidy Payments.
(7) SPECIAL ALLOWANCE PAYMENTS. The Higher Education Act requires, subject
to certain conditions, the Department to make quarterly Special Allowance
Payments to holders of qualifying Federal Loans (including Stafford Loans), in
an amount equal to a specified percentage of the average outstanding principal
amount of each such Federal Loan during each quarter.
The percentage or rate used to determine the Special Allowance Payments for
a particular loan varies based on a number of factors, including when the loan
was disbursed and the period of enrollment with respect to which it was made.
Generally, the Special Allowance Payment with respect to a Federal Loan for a
quarter will be equal to the excess, if any, of (1) the amount of interest that
would be payable on such loan at a rate per annum equal to the average bond
equivalent rates of (x) 91-day Treasury Bills auctioned for such quarter plus
3.25% (3.10% for loans first disbursed on or after October 1, 1992 and before
October 1, 1998), or (y) for loans first disbursed on or after July 1, 1998 and
before January 1, 2000, 91-day Treasury Bills auctioned for such quarter plus
2.2% while borrowers are in-school, grace or deferment status, or 2.8% while
borrowers are in the repayment period, or (z) for loans first disbursed on or
after January 1, 2000 and before July 1, 2003, the 3-month commercial paper
(financial) rates in effect for each of the days in such quarter as reported by
the Federal Reserve in Publication H-15 (the "CP Rate"), plus 2.34% during
repayment periods or 1.74% while borrowers are in school, grace or deferment
periods (or 2.64% in the case of PLUS and Federal Consolidation Loans for which
the application is received on or after January 1, 2000 and before July 1,
2003), over (2) the stated amount of interest payable on such loan.
The Higher Education Act provides that a holder of a qualifying loan who is
entitled to receive Special Allowance Payments has a contractual right against
the United States to receive those Special Allowance Payments (including the
right to receive interest on any Special Allowance Payments not timely paid).
Receipt of Special Allowance Payments, however, is conditioned on compliance
with the requirements of the Higher Education Act, including satisfaction of
certain need-based criteria (and the delivery of sufficient information by the
borrower and the lender to the Department to confirm the foregoing) and
continued eligibility for federal reinsurance. Such eligibility may be lost,
however, if the loans are not originated and serviced, or are not held by an
eligible lender, in accordance with the requirements of the Higher Education Act
and the applicable guarantee agreement. See "--(1) Eligibility Requirements;"
"Formation of the Trusts--Eligible Lender Trustee" and "Description of the
Transfer and Servicing Agreements--Servicing Procedures." The Seller and the
Depositor expect that each of the Stafford Loans that are part of a pool of
Student Loans will be eligible to receive Special Allowance Payments, if any are
payable from time to time.
Interest Subsidy Payments and Special Allowance Payments are generally
received within 45 to 60 days after submission to the Department of the
applicable claims forms for any given calendar quarter, although there can be no
assurance that such payments will in fact be received from the Department within
that period. For each Trust, the related Administrator will agree to prepare and
file with the Department all such claims forms and any other required documents
or filings on behalf of the applicable Eligible Lender Trustee as owner of the
related Federal Loans on behalf of such Trust. The Administrator will also agree
to assist the Eligible Lender Trustee in monitoring, pursuing and obtaining such
Interest Subsidy Payments and Special Allowance Payments, if any, with respect
to such Federal Loans. Except under certain conditions described herein, each
Eligible Lender Trustee will be required to remit Interest Subsidy Payments and
Special Allowance Payments it receives with respect to the Federal Loans within
two business days of receipt thereof to the related Collection Account.
THE SLS LOAN PROGRAM. In addition to the Stafford Loan Program, the Higher
Education Act provides a separate program to facilitate additional loans to
graduate and professional students and independent undergraduate students. This
program is referred to as the "Supplemental Loans for Students Program" (the
"SLS Loan Program"). As of July 1, 1994, the SLS Loan Program was discontinued
and SLS Loans are no longer made. The basic framework and principal provisions
of the Stafford Loan Program as described above are similar in many respects to
those that are applicable to loans under the SLS Loan Program ("SLS Loans"). In
particular, SLS Loans are subject to similar eligibility requirements and,
provided that such requirements are satisfied, are entitled to the same
guarantee and federal reinsurance arrangements. SLS Loans differ significantly
from Stafford Loans, however, in the context of the Interest Subsidy Payments
and Special Allowance Payments discussed above.
The annual and aggregate limitations that are applicable to SLS Loans in
the case of those constituting Student Loans are as follows: SLS Loans to a
single borrower cannot exceed $4,000 per academic year (or $10,000 for loans
first disbursed on or after July 1, 1993) and $20,000 in aggregate principal
amount (or $73,000 for loans first disbursed on or after July 1, 1993)
(exclusive of any capitalized interest) at any one time outstanding. SLS Loans
are also limited, generally, to the cost of attendance minus other financial aid
for which the borrower is eligible. A determination of a borrower's eligibility
for the Stafford Loan Program, among other programs, is a condition to the
making of an SLS Loan.
As specified by the Higher Education Act, the applicable interest rate for
an SLS Loan depends upon the date of issuance of the loan and the period of
enrollment for which the loan is made. The interest rate per annum for SLS Loans
made and disbursed on or after July 1, 1987 is fixed each July 1 for each
succeeding 12-month period at a rate equal to the sum of:
(1) the bond equivalent rate of 52-week Treasury Bills auctioned at the
final auction held prior to the preceding June 1 (or for periods
beginning on or after July 1, 2001, the weekly average 1-year constant
maturity Treasury yield, as published by the Board of Governors of the
Federal Reserve System, for the last calendar week ending on the
preceding June 26); and
(2) 3.25% (3.10% for loans first disbursed on and after October 1, 1992),
with a maximum rate of 12% per annum (11% for loans first disbursed on
or after October 1, 1992).
Although holders of SLS Loans are not entitled to receive Interest Subsidy
Payments, interest on such SLS Loans accrues from the date each such SLS Loan is
made and may either be paid currently by a borrower or may be capitalized and
added to the outstanding principal amount of such SLS Loan at the time the
borrower begins repayment. SLS Loans are eligible for Special Allowance Payments
only if and to the extent that the interest rate for such SLS Loans calculated
based on the 52-week Treasury Bill rate referred to above would exceed the
applicable maximum borrower interest rate. Because the basis for determining the
amount, if any, of Special Allowance Payments due to lenders is based on the
91-day Treasury Bill Rate while the interest rate for SLS Loans is based on the
52-week Treasury Bill rate or the weekly average 1-year constant maturity
Treasury yield (which may differ from the 91-day Treasury Bill Rate), there can
be no assurance that any Special Allowance Payments will be due and payable with
respect to SLS Loans even though such SLS Loans are deemed to be eligible
therefor. See "--(7) Special Allowance Payments" above.
A borrower of an SLS Loan is required to begin repayment of the principal
of such SLS Loan within 60 days after the date the last installment of such SLS
Loan is advanced, subject to deferral so long as such borrower remains an
Eligible Student or as a result of any applicable Deferral Period or Forbearance
Period. In addition, any borrower of an SLS Loan made and advanced after July
23, 1992, who also has Stafford Loans outstanding may defer commencing repayment
of such SLS Loan for the Grace Period applicable to such Stafford Loans. For SLS
Loans entering repayment on or after October 1, 1995, borrowers may choose among
several repayment options, including the option to make interest only payments
for limited periods.
THE PLUS LOAN PROGRAM The Higher Education Act authorizes Federal Parental
Loans For Undergraduate Students Loans ("PLUS Loans") to be made to parents of
eligible dependent students (the "PLUS Loan Program"). After July 1, 1993, only
parents who do not have an adverse credit history or who can secure an endorser
without an adverse credit history are eligible for PLUS Loans. The basic
provisions applicable to Federal PLUS Loans are similar to those of Stafford
Loans with respect to the federal insurance and reinsurance on the loans.
However, PLUS Loans differ from Stafford Loans, particularly because Interest
Subsidy Payments are not available under the PLUS Loan Program and in some
instances Special Allowance Payments are more restricted.
PLUS Loans disbursed prior to July 1, 1993 are limited to $4,000 per
academic year with a maximum aggregate amount of $20,000. The only limit on the
annual and aggregate amounts of PLUS Loans first disbursed on or after July 1,
1993 is the cost of the student's education less other financial aid received,
including scholarship, grants and other student loans.
The interest rate determination for a PLUS Loan is dependent on when the
PLUS Loan was originally made and disbursed and the period of enrollment. The
interest rates for PLUS Loans are summarized in the following chart.
INTEREST
TRIGGER DATE(1) BORROWER RATE(2) MAXIMUM
RATE RATE MARGIN
- --------------- ---------------
- ------------ ------------
Prior to 10/01/81......... 9% 9%
N/A
10/01/81-10/30/82......... 14% 14%
N/A
11/01/82-06/30/87......... 12% 12%
N/A
07/01/87-09/30/92......... 52-Week Treasury + Interest Rate 12%
3.25%
Margin(3)
10/01/92-06/30/94......... 52-Week Treasury + Interest Rate 10%
3.10%
Margin(3)
07/01/94-06/30/98......... 52-Week Treasury + Interest Rate 9%
3.10%
Margin(3)
After 6/30/98............. 91-Day Treasury + Interest Rate 9%
3.10%
Margin
- ---------------------
(1) The Trigger Date for PLUS Loans made before October 1, 1992 is the first
day of enrollment period for which the PLUS Loan is made, and for PLUS
Loans made on October 1, 1992 and after the Trigger Date is the date of the
disbursement of the PLUS Loan, respectively.
(2) For PLUS Loans that carry a variable rate, the rate is set annually for
12-month periods beginning on July 1 and ending on June 30 on the preceding
June 1 and is equal to the lesser of (a) the applicable maximum rate and
(b) the sum of (i) the bond equivalent rate of 52-week Treasury Bills (or
91-day Treasury Bills in the case of loans made or disbursed on or after
June 30, 1998) auctioned at the final auction held prior to such June 1 and
(ii) the applicable Interest Rate Margin.
(3) For periods beginning on or after July 1, 2001, the interest rate is equal
to the weekly average 1-year constant maturity Treasury yield, as published
by the Board of Governors of the Federal Reserve System, for the last
calendar week ending on the preceding June 26, plus the applicable interest
rate margin.
A holder of a PLUS Loan is eligible to receive Special Allowance Payments
during any quarter if (a) the sum of (i) the average of the bond equivalent
rates of 91-day Treasury Bills auctioned during such quarter and (ii) the
Interest Rate Margin exceeds (b) the Maximum Rate.
Repayment of principal of a PLUS Loan is required to commence no later than
60 days after the date of disbursement of such loan, subject to certain deferral
and forbearance provisions. The deferral provisions which apply are more limited
than those which apply to Stafford Loans and although Interest Subsidy Payments
are not available for such deferments, interest may be capitalized during such
periods upon agreement of the lender and borrower during certain periods of
educational enrollments and periods of unemployment or hardship as specified
under the Higher Education Act. Maximum loan repayment periods and minimum
payment amounts are the same as for Stafford Loans.
A borrower may refinance all outstanding PLUS Loans under a single
repayment schedule for principal and interest, with the new repayment period
calculated from the date of repayment of the most recent included loan. The
interest rate of such refinanced loan shall be the weighted average of the rates
of all PLUS Loans being refinanced. A second type of refinancing enables an
eligible lender to reissue a PLUS Loan which was initially originated at a fixed
rate prior to July 1, 1987 in order to permit the borrower to obtain the
variable interest rate available on PLUS Loans on and after July 1, 1987. If a
lender is unwilling to refinance the original PLUS Loan, the borrower may obtain
a loan from another lender for the purpose of discharging the loan and obtaining
a variable interest rate.
THE FEDERAL CONSOLIDATION LOAN PROGRAM. The Higher Education Act
established a program to facilitate the ability of eligible borrowers of
Stafford Loans or SLS Loans (each, an "Underlying Federal Loan") to consolidate
such Underlying Federal Loans, together with such borrowers' other education
loans that are made or guaranteed by the federal government, into a single loan
(a "Federal Consolidation Loan"). Subject to the satisfaction of certain
conditions set forth in the Higher Education Act, including limitations on the
timing and payment of principal and interest with respect to Federal
Consolidation Loans and a requirement that the proceeds of Federal Consolidation
Loans are to be used to repay the respective Underlying Federal Loans (and any
other loans consolidated thereunder) of any borrower, each holder of a Federal
Consolidation Loan will be entitled to substantially the same guarantee and
federal reinsurance arrangements as are available on Stafford Loans and SLS
Loans. Federal Consolidation Loans, like Stafford Loans, are also eligible for
Interest Subsidy Payments and Special Allowance Payments. Under this program, an
eligible borrower of Federal Consolidation Loans means a borrower (i) with
outstanding Underlying Federal Loans and (ii) who has begun repaying, who is in
a grace period preceding repayment of, or who is a delinquent or defaulted
borrower who will, through such loan consolidation, recommence repayment of,
such Underlying Federal Loans. A married couple, each of whom has outstanding
Underlying Federal Loans, may apply for and obtain a single Federal
Consolidation Loan so long as both individuals agree to be held jointly and
severally liable on such Federal Consolidation Loan.
Under this program, a lender may make a Federal Consolidation Loan to an
eligible borrower at the request of the borrower if the lender holds an
outstanding Underlying Federal Loan of the borrower or the borrower certifies
that he or she has been unable to obtain a Federal Consolidation Loan from any
of the holders of the outstanding Underlying Federal Loans of the borrower. The
lender making any Federal Consolidation Loan will pay the amount thereof to the
various lenders of the respective Underlying Federal Loans and other loans being
consolidated thereby. The 1998 Amendments allows lenders to make Federal
Consolidation Loans to borrowers with multiple holders even if the lender does
not own an Underlying Federal Loan.
The Federal Direct Consolidation Loan Program (the "Federal Direct
Consolidation Loan Program") provides borrowers with the opportunity to
consolidate outstanding student loans at interest rates below, and
income-contingent repayment terms that some borrowers may find preferable to,
those that would be available from the Seller on a loan originated by the Seller
under the Federal Consolidation Loan Program. Borrowers generally make smaller
payments based on their earnings than in the standard ten-year plan, and the
government forgives loans that are not repaid in twenty-five years. For
applications received after October 1, 1998 and before January 31, 1999, the
Federal Direct Consolidation Loan Program established borrower rates at levels
lower than the statutory rate established by the 1998 Reauthorization Bill under
the Federal Family Education Loan Program. The 1998 Reauthorization Bill also
reduced the lender paid monthly fee on Federal Consolidation Loans from 1.05% to
0.62% per annum for loans made pursuant to applications received on or after
October 1, 1998 and on or before January 31, 1999. The lower rate applies only
to borrowers who applied before February 1, 1999. The availability of such
lower-rate, income-contingent loans may decrease the likelihood that the Seller
would be the originator of a Federal Consolidation Loan, as well as increase the
likelihood that a Federal Loan in a Trust will be prepaid through the issuance
of a Federal Direct Consolidation Loan (a "Federal Direct Consolidation Loan").
In accordance with the Higher Education Act, Federal Consolidation Loans
may bear interest, as negotiated between the individual borrower and lender, at
a rate per annum up to the weighted average of the interest rates on the
Underlying Federal Loans (rounded up to the nearest whole percent) or, for loans
made before July 1, 1994, 9%, whichever is greater. However, Federal
Consolidation Loans made on or after November 13, 1997 through September 30,
1998 will bear interest at the annual variable rate applicable to Stafford Loans
capped at 8.25%. Federal Consolidation Loans for which the application is
received on or after October 1, 1998 bear interest at a rate equal to the
weighted average interest rate of the loans consolidated, rounded up to the
nearest one-eighth percent and capped at 8.25%. Interest on Federal
Consolidation Loans accrues and, for applications received prior to January 1,
1993, is to be paid without Interest Subsidy Payments by the Department. For
Federal Consolidation Loans received on or after January 1, 1993, all interest
of the borrower is paid during all Deferral Periods. However, Federal
Consolidation Loan applications received on or after August 10, 1993 will only
be subsidized if all of the underlying loans being consolidated were subsidized
Stafford Loans; provided that, in the case of Federal Consolidation Loans made
on or after November 13, 1997, that portion of the Federal Consolidation Loan
that is comprised of subsidized Stafford Loans will retain its subsidy benefits
during Deferral Periods. In general, a borrower must repay each Federal
Consolidation Loan in scheduled monthly installments over a period of not more
than 10 to 30 years (excluding any Deferral Period and any Forbearance Period),
depending on the original principal amount of such Federal Consolidation Loan.
Borrowers may voluntarily prepay all or a portion of any Federal Consolidation
Loan without premium or penalty. Repayment of a Federal Consolidation Loan must
commence within 60 days after all holders of Underlying Federal Loans have
discharged the liability of the borrower thereon; provided, however, that such
repayment obligation is deferred for as long as the borrower remains an Eligible
Student and during any applicable Deferral Period and Forbearance Period. For
Federal Consolidation Loans entering repayment on or after October 1, 1995,
borrowers may choose among several repayment options, including the option to
make interest only payments for limited periods. Special Allowance Payments are
made on Federal Consolidation Loans whenever the rate charged the borrower is
limited by the applicable fixed percentage rate cap. However, for applications
received on or after October 1, 1998, Special Allowance Payments are paid in
order to afford the lender a yield equal to the 91-day Treasury Bill Rate plus
3.1% whenever that formula exceeds the borrower's interest rate.
The Omnibus Budget Reconciliation Act of 1993 made a number of changes to
the Federal Consolidation Loan Program, including (i) requiring holders of
Federal Consolidation Loans made on or after October 1, 1993, to pay to the
Department a monthly fee equal to 1.05% per annum on the outstanding balance of
such loans (the "Federal Consolidation Loan Rebate"), (ii) requiring lenders of
Federal Consolidation Loans made on or after July 1, 1994, to offer borrowers
income-sensitive repayment schedules, (iii) repealing the $7,500 minimum
indebtedness requirement, and (iv) removing the 9% interest rate floor for
Federal Consolidation Loans made on or after July 1, 1994. In addition, with
respect to any Federal Loan (including Federal Consolidation Loans) made on or
after October 1, 1993, the lender must pay to the Department an origination fee
equal to 0.50% on the initial principal balance of such loan (the "Federal
Origination Fee"). With respect to any Federal Consolidation Loan originated by
the Seller and purchased by the Eligible Lender Trustee on behalf of the related
Trust, the related Trust must pay to the Department the Federal Origination Fee,
which fee will be deducted by the Department out of Interest Subsidy Payments
and Special Allowance Payments. If sufficient Interest Subsidy Payments and
Special Allowance Payments are not due to the applicable Trust to cover the
amount of the Federal Origination Fee, the balance of such Federal Origination
Fee may be deferred by the Department until sufficient Interest Subsidy Payments
and Special Allowance Payments accrue to cover such fee. If such amounts never
accrue, the applicable Trust would be obligated to pay any remaining fee from
other assets of that Trust prior to making distributions to Noteholders or
Certificateholders.
UNDERGRADUATE FEDERAL LOANS. The Seller originates or acquires Stafford
Loans and Federal Consolidation Loans for students attending eligible schools.
Eligible schools include institutions of higher education and proprietary
institutions. Institutions of higher education must meet certain standards,
which generally provide that the institution:
o only admits persons who have a high school diploma or its equivalent,
o is legally authorized to operate within a state,
o provides not less than a two-year program with credit acceptable
toward a bachelor's degree,
o is a public or non-profit institution, and
o is credited by a nationally recognized accrediting agency or is
determined by the Department to meet the standards of an accredited
institution.
Eligible proprietary institutions of higher education include business,
trade and vocational schools meeting standards which provide that the
institution:
o only admits persons who have a high school diploma or its equivalent,
or persons who are beyond the age of compulsory school attendance and
have the ability to benefit from the training offered (as defined in
the Higher Education Act),
o is authorized by a state to provide a program of vocational education
designed to fit individuals for useful employment in recognized
occupations,
o has been in existence for at least two years,
o provides at least a six-month training program to prepare students for
gainful employment in a recognized occupation, and
o is accredited by a nationally recognized accrediting agency or is
specially accredited by the Department.
With specified exceptions, institutions are excluded from consideration as
educational institutions if the institution:
o offers more than 50 percent of its courses by correspondence,
o enrolls 50 percent or more of its students in correspondence courses,
o has a student enrollment in which more than 25 percent of the students
are incarcerated, or
o has a student enrollment in which more than 50 percent of the students
are admitted without a high school diploma or its equivalent on the
basis of their ability to benefit from the education provided (as
defined by statute and regulation).
Further, schools are specifically excluded from participation if:
o the educational institution has filed for bankruptcy,
o the owner, or its chief executive officer, has been convicted or
pleaded "nolo contendere" or "guilty" to a crime involving the
acquisition, use or expenditure of federal student aid funds, or has
been judicially determined to have committed fraud involving funds
under the student aid program, or
o the educational institution has a cohort default rate in excess of the
rate prescribed by the Act. In order to participate in the program,
the eligibility of a school must be approved by the Department under
standards established by regulation.
GRADUATE FEDERAL LOANS. The Seller originates or acquires Federal Loans
under loan programs (the "Federal Graduate Programs") to provide educational
financing to graduate and professional students enrolled in or recently
graduated from approved or accredited law schools, medical schools, dental
schools, graduate business schools and other graduate schools. The Federal
Graduate Programs originally targeted law school students but have been expanded
over the years to include virtually all graduate level fields of study. The
Seller (or its predecessors) has been originating loans under the Federal
Graduate Programs since 1990.
The following table sets forth the approved or accredited schools and the
acceptable degree programs for each graduate field of study:
FIELD OF STUDY APPROVED/ACCREDITED SCHOOLS
ACCEPTABLE DEGREE PROGRAMS
- -------------- ---------------------------
---------------------------
Law American Bar Association approved law schools that are
Juris Doctor of Law or other
members of LSAC
joint degree program
Medical Liaison Committee on Medical Education or American
Medical Doctor or Doctor of
Osteopathic Association accredited graduate medical
schools Osteopathy
Dental American Dental Association accredited dental schools
Graduate dental program
Business American Assembly of Collegiate Schools of Business
Graduate business program
("AACSB") accredited graduate business schools; or AACSB
candidate schools accredited by the New England
Association of Schools and Colleges, the Middle States
Association of Colleges and Schools, the North Central
Association of Colleges and Schools, the Southern
Association of Colleges and Schools, the Western
Association of Schools and Colleges, or the North West
Association of Schools and Colleges
Graduate Schools accredited by the New England Association of
Graduate level certificate or
Schools and Colleges, the Middle States Association of
degree program
Colleges and Schools, The North Central Association of
Colleges and Schools, the Southern Association of Colleges
and Schools, the Western Association of Schools and
Colleges, or the North West Association of Schools and
Colleges
DESCRIPTION OF PRIVATE LOANS UNDER THE PROGRAMS
GENERAL. In addition to the Federal Loans originated under the Higher
Education Act, the Seller and other lenders have developed student loan programs
that are not federally guaranteed for undergraduate students and/or their
parents ("Private Undergraduate Loans") and graduate students ("Private Graduate
Loans"), that can be used by borrowers to supplement their Federal Loans in
situations where the Federal Loans do not cover the cost of education. In
addition, a law student may also receive a bar examination loan (a "Bar Exam
Loan") to finance the costs of preparing for and taking one or more state bar
examinations if such student has applied for the loan within a limited period
before or after graduation. A medical or dental student may also receive a
residency loan (a "Residency Loan") to finance the cost of participating in one
or more medical or dental residency programs if such student has applied for the
loan within a limited period or after graduation.
The Private Undergraduate Loans, Private Graduate Loans, Bar Exam Loans and
Residency Loans are sometimes referred to collectively as the "Private Loans."
The holders of Private Loans are not entitled to receive any Federal Assistance
with respect thereto.
PRIVATE UNDERGRADUATE LOANS. The Seller originates Key Alternative Loans
("Key Alternative Loans"). Key Alternative Loans provide undergraduate students
supplemental fundings that allows such students the opportunity to share the
responsibility of education financing with or without a cosigner. Key
Alternative Loans were introduced to students in 1995 and are serviced on behalf
of the Seller by Great Lakes Educational Loan Services Inc. ("Great Lakes"). Key
Alternative Loans are not guaranteed by any federal or private guarantor, or by
any other party or governmental agency.
(1) ELIGIBILITY REQUIREMENTS. In order to qualify for a Key Alternative
Loan, the borrower must meet the following eligibility requirements:
o At least half-time undergraduate student at a Title IV eligible
institution (Prior to the 1998-1999 program year, the borrower had to
be a full-time student.)
o U.S. citizen/national or an eligible non-citizen
o Must meet the following credit criteria:
(a) No account has been 90 or more days delinquent in the past two
years.
(b) No record of bankruptcy, foreclosure, repossession, skips or
wages garnishment.
(c) No record of unpaid collections, charged-off accounts or
written-off accounts.
(d) No record of an open judgment or suit, unsatisfied tax lien,
unpaid prior educational loan default or other negative public
record items in the past seven years.
(e) Applicant can be approved without cosigner if the applicant meets
credit criteria, has acceptable credit bureau score and
sufficient credit history.
(f) If applicant does not meet the criteria applicant will be
declined.
(g) If applicant meets the criteria but has unacceptable credit
bureau score, a creditworthy cosigner will be required for
approval.
(h) Cosigner, if any, must pass the credit review process that
considers the above criteria and must score well compared with
other applicants.
(i) The credit bureau score requirements apply to both applicant and
cosigner.
A creditworthy cosigner may be required if the borrower has insufficient
credit history and/or is not a US citizen.
If a cosigner is required, the cosigner must also be a US citizen/national
or permanent resident and meet minimum credit criteria. The cosigner does not
have to be the borrower's parent or guardian.
(2) LOAN LIMITS. The minimum annual loan amount for a Key Alternative Loan
is $1,000. The annual and aggregate maximum loan limits are as follows:
PROGRAM YEAR YEAR IN SCHOOL ANNUAL MAXIMUM
AGGREGATE MAXIMUM
- ------------ -------------- --------------
- -----------------
1995-1996
through First year $5,000
$35,000
1997-1998 Second - Fifth years $7,500
1998-1999 First year $7,500
$47,500
Second - Fifth years $10,000
1999-2000 All $10,000
$50,000
2000-2001 All $10,000
$60,000
2001-2002 All $10,000
$60,000
(3) INTEREST. Interest is payable by on each Key Alternative Loan on a
monthly basis until the principal amount is repaid in full. The interest
rate is calculated based on the 52-week Treasury Bill rate plus a margin in
the range of 2.85% to 3.10% during the interim period and a margin in the
range of 3.25% to 3.50% during the repayment period. (The interest rate for
the 1995-1996 program year was calculated based on the 91-Day Treasury Bill
Rate plus 3.50% during the interim period and 3.65% during the repayment
period). The rate varies quarterly and is determined based on the most
recent Treasury Bill auction prior to each January, April, July, and
October. Borrowers may defer interest payments during the interim period.
The deferred interest will be capitalized once on the last day of the
interim period. (For loans originated during the 1995-1996 program year,
deferred interest was capitalized once annually every November 30th and
once on the last day of the interim period.) Starting July 1, 2001 for the
program years 1997-1998, 1998-1999, 1999-2000, and 2000-2001 the Interest
Rate will be changed to three-month LIBOR plus a margin equal to 2.72%
during the interim period and three-month LIBOR plus a margin equal to
2.87% during the repayment period. For the 2001-2002 program year the
Interest Rate is three-month LIBOR plus a margin equal to 2.75% during the
interim period and three-month LIBOR plus a margin equal to 2.90% during
the repayment period.
(4) REPAYMENT. In general, borrowers must repay each Key Alternative Loan
in monthly installments until the loan is paid in full. The repayment term
is 10 years if the balance at repayment is less than $15,000 or 15 years if
the balance at repayment is $15,000 or more. There is a minimum payment
amount of $50 per month and there is no prepayment penalty.
(5) GRACE PERIODS DEFERRAL PERIODS, FORBEARANCE PERIODS. The repayment
period on a Key Alternative Loan generally begins after the Grace Period,
defined as six months after the student graduates or ceases to be enrolled
at least half-time at an accredited institution or five years from the date
of the first Key Alternative Loan disbursement. In general, deferral
periods are not permitted other than during the in school and grace
periods, when the borrower is still responsible for the capitalization of
the deferred interest. Borrowers may request periods of forbearance related
to the following areas: unemployment, underemployment, hardship, practical
and graduate school enrollment. Forbearances are generally granted in 6
month increments except for graduate school forbearance which is granted in
12 month increments.
PRIVATE GRADUATE LOANS. The Seller originates or acquires Private Graduate
Loans to provide educational financing to help pay for the costs of:
o attending law, medical, dental, graduate, business, or other graduate
school,
o taking/passing one or more state bar examinations upon graduation from
law school, or
o participating in one or more medical or dental residency programs upon
graduating from medical or dental school.
Private Graduate Loans consist of loans associated with the above-mentioned
fields of study (including Bar Exam and Residency Loans) and Private
Consolidation Loans. Subject to the satisfaction of the conditions imposed by
the applicable Program and the applicable Guarantee Agreement, the Private
Graduate Loans that are Private Guaranteed Loans are fully guaranteed against
nonpayment of principal and interest as a result of a borrower's default, death,
disability or bankruptcy by the Private Guarantors. These Private Guarantors are
not reinsured by the Department or any other governmental entity. In order to
qualify for the guarantee from the Private Guarantors, such Private Graduate
Loans may not be made to a single borrower in excess of the annual and aggregate
limits imposed by the applicable loan Program and may only be made to Eligible
Students who qualify pursuant to credit underwriting standards established by
the Seller and approved by the Private Guarantors. The following table
summarizes the annual, aggregate and cumulative loan limits for each Private
Graduate Loan:
ANNUAL
AGGREGATE CUMULATIVE
PROGRAM YEAR TYPE OF LOAN MAXIMUM
MAXIMUM MAXIMUM(2)
- ------------ ------------ -------
------- ----------
1991-1992 Law Loan $14,500
$43,500 $ 78,000
Bar Exam Loan $ 5,000
$ 5,000 $ 83,000
1992-1993 Law Loan $15,000
$45,000 $ 79,500
Bar Exam Loan $ 5,000
$ 5,000 $ 84,500
1993-1994 Law Loan $15,000
$45,000 $ 87,500
Bar Exam Loan $ 5,000
$ 5,000 $ 87,500
1994-1995 Law Loan $15,000
$45,000 $ 92,000
Bar Exam Loan $ 5,000
$ 5,000 $ 92,000
1995-1996 through
1997-1998 Law Loan Up to the cost of attendance
N/A $120,000
Business Loan Up to the cost of attendance
N/A $120,000
(1)
Dental Loan Up to the cost of attendance
N/A $135,000
Graduate Loan Up to the cost of attendance
N/A $120,000
Medical Loan Up to the cost of attendance
N/A $165,000
Bar Exam Loan $5,000
$5,000 $5,000
Residency Loan $8,000
$8,000 $8,000
1998-1999 Law Loan Up to the cost of attendance
N/A $130,000
Business Loan Up to the cost of attendance
N/A $130,000
Dental Loan Up to the cost of attendance
N/A $175,000;
$200,000
(post-doctoral)
Graduate Loan Up to the cost of attendance
N/A $130,000
Medical Loan Up to the cost of attendance
N/A None
Bar Exam Loan $7,500
$7,500 $7,500
Residency Loan $8,000
$8,000 $8,000
1999-2000 Law Loan Up to the cost of attendance
N/A $130,000
Business Loan Up to the cost of attendance
N/A $130,000
Dental Loan Up to the cost of attendance
N/A $175,000;
$200,000
(post-doctoral)
Graduate Loan Up to the cost of attendance
N/A $130,000
Medical Loan Up to the cost of attendance
N/A None
Bar Exam Loan $8,000
$8,000 $8,000
Residency Loan $8,000
$8,000 $8,000
2000-2001 Law Loan Up to the cost of attendance
N/A $130,000
Business Loan Up to the cost of attendance
N/A $130,000
Dental Loan Up to the cost of attendance
N/A $195,000;
$230,000
(post-doctoral)
Graduate Loan Up to the cost of attendance
N/A $130,000
Medical Loan Up to the cost of attendance
N/A None
Bar Exam Loan $8,000
$8,000 $8,000
Residency Loan $10,000
$10,000 $10,000
2001-2002 Law Loan Up to the cost of attendance
N/A $130,000
Business Loan Up to the cost of attendance
N/A $130,000
Dental Loan Up to the cost of attendance
N/A $230,000;
$250,000
(post-doctoral)
Graduate Loan Up to the cost of attendance
N/A $130,000
Medical Loan Up to the cost of attendance
N/A None
Bar Exam Loan $10,000
$10,000 $10,000
Residency Loan $10,000
$10,000 $10,000
(1) Students enrolled less than half-time can borrow a maximum annual amount of
the combined cost of tuition, fees, and a maximum of $500 for books and
supplies.
(2) Including graduate and undergraduate debt.
PAYMENT TERMS. Each Private Graduate Loan earns interest at a rate per
annum, reset quarterly, equal to the 91-day Treasury Bill Rate plus a margin,
depending on the type of loan. The following table sets forth the applicable
interest rate for each type of Private Graduate Loan:
INTEREST MARGIN
OVER 91-DAY
PROGRAM YEAR TYPE OF LOAN
TREASURY BILL RATE
- ------------ ------------
- -------------------
Interim (1)
Repayment (2)
1991-1992 Law & Bar Exam Loans 3.25%
3.25%
1992-1993 Law & Bar Exam Loans 3.25%
3.40%
1993-1994 Law & Bar Exam Loans 3.25%
3.40%
1994-1995 Law & Bar Exam Loans 3.25%
3.40%
1995-1996 through
1997-1998 Law Loan 3.25%
3.40%
Medical Loan 2.50%
2.75%
Dental Loan 2.50%
3.00%
Business Loan 3.25%
3.40%
Graduate Loan 3.25%
3.40%
Bar Exam Loan 3.25%
3.40%
Residency Loan 2.50%
2.75%
1998-1999(3) Law Loan 2.90%-3.25%
2.50%-3.25%
Medical Loan 2.50%
2.25%-2.85%
Dental Loan 2.50%-2.75%
2.25%-3.00%
Business Loan 3.25%-3.00%
2.50%-3.25%
Graduate Loan 3.25%-3.40%
2.50%-3.40%
Bar Exam Loan 2.90%-3.25%
2.50%-3.25%
Residency Loan 2.50%
2.25%-2.85%
Dental Residency Loan 2.50%-2.75%
2.25%-3.00%
1999-2000(3) Law Loan 2.90%
2.50%-3.25%
Medical Loan 2.50%
2.00%-2.85%
Dental Loan 2.50%-2.75%
2.00%-2.85%
Business Loan 3.25%
2.50%-3.25%
Graduate Loan 3.25%
2.50%-3.25%
Bar Exam Loan 2.90%
2.50%-3.25%
Residency Loan 2.50%
2.00%-2.85%
Dental Residency Loan 2.50%-2.75%
2.00%-2.85%
2000-2001(3) Law Loan 2.90%
2.50%-3.25%
Medical Loan 2.50%
2.25%-2.85%
Dental Loan 2.50%-2.75%
2.00%-2.85%
Business Loan 3.25%
2.50%-3.25%
Graduate Loan 3.25%
2.50%-3.25%
Bar Exam Loan 2.90%
2.50%-3.25%
Residency Loan 2.50%
2.00%-2.85%
Dental Residency Loan 2.50%-2.75%
2.00%-2.85%
2001-2002(3) Law Loan three-month
LIBOR+2.30% three-month
LIBOR+2.20%-3.10%
Medical Loan three-month
LIBOR+2.30% three-month
LIBOR+2.00%-2.70%
Dental Loan three-month
LIBOR+2.30% three-month
LIBOR+2.00%-2.70%
Graduate Loan three-month
LIBOR+2.30% three-month
LIBOR+2.20%-3.10%
Bar Exam Loan three-month
LIBOR+2.30% three-month
LIBOR+2.20%-3.10%
Residency Loan three-month
LIBOR+2.30% three-month
LIBOR+2.00%-2.70%
Dental Residency Loan three-month
LIBOR+2.30% three-month
LIBOR+2.00%-2.70%
(1) "Interim" represents any period while the borrower is attending school or
during a specified grace period.
(2) "Repayment" represents the period after the specified grace period, in
which the borrower is required to make payments or enter into some type of
deferment or forbearance period.
(3) For 1998-1999, two separate loan programs apply. In one program, the margin
is determined based on the borrower's choice of repayment terms, which
range from 10 to 25 years (the "Keys2Repay Program"). The other program has
one margin regardless of interim, repayment period, or repayment term.
Interest accrues on the outstanding principal amount of each Private
Graduate Loan from the date the lender makes such Private Graduate Loan and is
payable monthly by each borrower commencing a certain number of months after the
borrower graduates or otherwise ceases to be enrolled at least half-time in an
approved institution (the "Private Loan Repayment Commencement Date"). In the
case of Private Graduate Loans made during the 1990-1991 program year that
period is approximately six months. For all other Private Graduate Loans, the
period is approximately nine months, except that in the case of Medical or
Residency Loans, the period, generally, is extended to nine months after the
borrower completes any required residency (generally, up to a maximum of 57
months after graduation), subject to deferral or forbearance as discussed below.
Subject to certain conditions, borrowers of Private Graduate Loans (other than
Private Consolidation Loans) may receive the benefits of certain deferral
periods (either prior to commencing repayment or thereafter) similar to those
applicable to Stafford Loans, during which borrowers are permitted to defer
principal payments and to capitalize the interest accruing on such Private
Graduate Loans. In addition, borrowers of Private Graduate Loans (other than
Private Consolidation Loans) may, subject to certain conditions, qualify, at the
discretion of the lender (in accordance with standards and guidelines approved
by the Private Guarantors if applicable), for periods of forbearance because of
temporary financial hardship, during which borrowers may defer or make reduced
principal payments on such Private Graduate Loans. Interest on each Private
Graduate Loan that accrues prior to the Private Loan Repayment Commencement Date
may, at the option of the borrower, be paid currently or be capitalized and
added to the principal amount outstanding for such Private Graduate Loan on that
date. Each student with outstanding Private Graduate Loans (other than Private
Consolidation Loans) is obligated to make scheduled payments of principal at the
same time that he or she makes interest payments in an amount sufficient to
repay such Private Graduate Loan in full over a period not to exceed 15 years
(or, with respect to each Private Graduate Loan made since the commencement of
the 1990-1991 program year, 20 years, except with respect to Private Graduate
Loans made under the Keys2Repay Program, where the repayment term can be 10, 15
or 25 years at the borrower's option) after the Private Loan Repayment
Commencement Date with respect to such Private Graduate Loan. Repayment of
principal and interest on Business Loans commences no later than 36 months after
the date of the first disbursement of the first Business Loan to a specific
borrower. Any student may at any time voluntarily prepay all or any portion of
his or her outstanding Private Loans (including paying accrued interest prior to
the Private Loan Repayment Commencement Date quarterly in lieu of capitalizing
such amounts) without premium or penalty. Private Graduate Loans presently
require a minimum annual principal and interest payment of $600 in the aggregate
(but in no event less than accrued interest), unless the borrower and the lender
agree to a lesser amount. For Private Graduate Loans entering repayment on or
after October 1, 1995, borrowers may choose among several repayment options,
including the option to make interest only payments for limited periods.
With respect to each Private Loan (other than Private Consolidation Loans)
made to a student since the commencement of the 1992-1993 program year, a fee
equal to a percentage of the original principal amount of such Private Graduate
Loan is charged to such student on the last day preceding the applicable Private
Loan Repayment Commencement Date.
Unless the student pays such fee, the Seller will make an additional loan
(a "Fee Advance") to such student in an amount equal to such fee, which will be
added to the principal balance of such Private Graduate Loan and repaid over the
term thereof. See "Description of the Transfer and Servicing
Agreements--Additional Fundings" for a discussion of the transfer of such Fee
Advance to the related Trust.
PROGRAM YEAR TYPE OF LOAN
SUPPLEMENTAL FEE
1990-1991 through
1995-1996 Law Loan 2%
Bar Exam Loan 2%
1996-1997 Law Loan 4%
Medical Loan 2%
Dental Loan 2%
Business Loan 2%
Graduate Loan 3%
Bar Exam Loan 3%
Residency Loan 2%
1997-1998 Law Loan 1.5%-6.9%
Medical Loan 1.5%-6.9%
Dental Loan 1.5%-6.9%
Business Loan 1.5%-6.9%
Graduate Loan 1.5%-6.9%
Bar Exam Loan 1.5%-6.9%
Residency Loan 1.5%-2.0%
1998-1999(1) Law Loan 1.5%-6.9%
Medical Loan 1.5%-2.0%
Dental Loan 1.5%-6.9%
Business Loan 1.5%-6.9%
Graduate Loan 1.5%-6.9%
Bar Exam Loan 1.5%-6.9%
Residency Loan 1.5%-2.0%
Dental Residency Loan 1.5%-6.9%
1999 through 2002 Law Loan 5.5%+3% prior to
repayment
Medical Loan 6.0%+2% prior to
repayment
Dental Loan 6.5%+2.5% prior
to repayment
Business Loan (2) 6.0%+1.5%-2.5%
prior to repayment
Graduate Loan 6.0%+2.5% prior
to repayment
Bar Exam Loan 5.5%+3% prior to
repayment
Residency Loan 6.0%+2% prior to
repayment
Dental Residency Loan 6.5%+2.5% prior
to repayment
(1) For 1998-1999, two separate loan programs apply. One program determines the
fee based on the loan type. The other program determines the fee based on
the borrower's past credit behavior, except the Medical and Residency
Loans, which are 1.5%.
(2) This program combined with Graduate Loans starting in the 2001-2002 Program
Year.
Private Consolidation Loans. The Seller has established a private
consolidation loan program (the "Private Consolidation Loan Program") to
facilitate the ability of eligible borrowers of Private Graduate Loans
("Underlying Private Graduate Loans") to consolidate such Underlying Private
Graduate Loans into a single loan (a "Private Consolidation Loan"; together with
Federal Consolidation Loans, sometimes referred to herein as "Consolidation
Loans"). The Private Consolidation Loan Program commenced in November, 1994.
Subject to the satisfaction of certain conditions set forth in the programs
relating to Private Graduate Loans, including limitations on the timing and
payment of principal and interest with respect to Private Consolidation Loans
and a requirement that the proceeds of a Private Consolidation Loan be used to
repay the respective Underlying Private Graduate Loans of any borrower, each
holder of a Private Consolidation Loan will be entitled to substantially the
same guarantee arrangements, if any, as are available on the Underlying Private
Graduate Loans. Currently, all of the Underlying Private Graduate Loans that are
consolidated under the Private Consolidation Program are Private Graduate Loans
that were guaranteed by TERI against default, death, bankruptcy or disability of
the applicable borrower, and the resulting Private Consolidation Loan is
similarly guaranteed by TERI. Under this program, an eligible borrower of a
Private Consolidation Loan guaranteed by TERI means a borrower (i) with
outstanding Underlying Private Graduate Loans of at least $7,500 and (ii) who
has begun repaying and is not more than 45 days delinquent in required payments
on any Underlying Private Graduate Loan. A borrower of a guaranteed Private
Consolidation Loan must consolidate all of his or her eligible loans and in
doing so will generally forgo all opportunities for deferment or forbearance.
Private Consolidation Loans that are guaranteed will bear interest at the
rate applicable to the type of Underlying Graduate Loan for which the greatest
principal amount of Underlying Graduate Loans to be consolidated is outstanding.
Such Private Consolidation Loans made prior to May 1, 1997 are repayable over a
period of 15-25 years and such Private Consolidation Loans made on or after May
1, 1997 are or will be repayable over a period of 25 to 30 years, in each case,
depending on the original principal amount of such Private Consolidation Loan.
The Private Loan Repayment Commencement Date with respect to a Private
Consolidation Loan will occur immediately upon disbursement, with no provision
for deferment or forbearance. The borrower of a Private Consolidation Loan will
be offered repayment options similar to those available for other Private
Graduate Loans. With respect to each such Private Consolidation Loan, a fee
equal to 1% of the amount paid to discharge the Underlying Private Graduate
Loans will be charged to the borrower and included in the original principal
amount of such Private Consolidation Loan (a "Private Consolidation Fee
Advance").
The Seller currently intends to expand the Private Consolidation Loan
Program to allow the consolidation of unguaranteed Underlying Private Graduate
Loans, and/or other unguaranteed private undergraduate and graduate student loan
debt and any other education related debt (excluding credit card debt) used for
education purposes, into a single Private Consolidation Loan that is similarly
not guaranteed by any federal or private guarantor, or by any other party or
governmental agency. The Seller anticipates that it will commence such expanded
Program on or about July, 2001. Borrowers of such unguaranteed Private
Consolidation Loans will be required to satisfy certain conditions, including
limitations on the timing and payment of principal and interest with respect to
such Private Consolidation Loans and a requirement that the proceeds of the
Private Consolidation Loan be used to repay all the Underlying Private Graduate
Loans and any other student or education loans of the borrower that were
consolidated.
To be eligible for an unguaranteed Private Consolidation Loan, the borrower
must (i) have outstanding Underlying Private Graduate Loans or other private
undergraduate and/or graduate student loan debt and/or other education related
debt (excluding credit card debt) used for education purposes, (ii) have begun
repaying and is not more than 45 days delinquent in required payments on any
such student loan, and (iii) meet credit eligibility requirements similar to
those applicable to Private Graduate Loans. A borrower of an unguaranteed
Private Consolidation Loan must consolidate all of his or her eligible
Underlying Private Graduate Loans and in doing so will generally forego all
opportunities for deferment or forbearance.
If so specified and described in the related Prospectus Supplement, the
Seller or the Depositor, as applicable, may also include Private Loans in the
related Trust that have been purchased from other lenders that were originated
pursuant to programs similar to those offered by the Seller.
INSURANCE OF STUDENT LOANS; GUARANTORS OF STUDENT LOANS
FEDERAL GUARANTORS. The Higher Education Act authorizes Federal Guarantors
to support education financing and credit needs of students at post-secondary
schools. The Higher Education Act encourages every state either to establish its
own agency or to designate another Federal Guarantor in cooperation with the
Secretary. Under various programs throughout the United States of America,
Federal Guarantors insure and sometimes service guaranteed student loans. The
Federal Guarantors are reinsured by the federal government for from 80% to 100%
of each default claim paid, depending on their claims experience, for loans
disbursed prior to October 1, 1993, from 78% to 98% of each default claim paid
for loans disbursed on or after October 1, 1993 and prior to October 1, 1998,
and from 75% to 95% of each default claim paid for loans disbursed on or after
October 1, 1998. Federal Guarantors are reinsured by the federal government for
100% of death, disability, bankruptcy, closed school and false certification
claims paid. Loans guaranteed under the lender of last resort provisions of the
Higher Education Act are also 100% guaranteed and reinsured. See"--Federal
Insurance and Reinsurance of Federal Guarantors" below.
Federal Guarantors collect a one-time insurance premium ranging from 0% to
3% of the principal amount of each guaranteed loan, depending on the Federal
Guarantor. Federal Guarantors are prohibited from charging insurance premiums on
loans made under the Unsubsidized Stafford Loan Program (the "Unsubsidized
Stafford Loan Program") prior to July 1, 1994. On such loans made prior to July
1, 1994, the Higher Education Act requires that a 6.5% combined loan origination
fee and insurance premium be paid by the borrower on Unsubsidized Stafford
Loans. This fee is passed through to the Department by the originating lender.
Effective July 1, 1994, the maximum insurance premium and origination fee for
Stafford Loans and Unsubsidized Stafford Loans are 1% and 3%, respectively.
Each Federal Loan to be sold to an Eligible Lender Trustee on behalf of a
Trust will be guaranteed as to principal and interest by a Federal Guarantor
pursuant to a Federal Guarantee Agreement between such Federal Guarantor and the
applicable Eligible Lender Trustee. The applicable Prospectus Supplement for
each Trust will identify each related Federal Guarantor for the Federal Loans
held by such Trust as of the applicable Closing Date and the amount of such
Federal Loans it is guaranteeing for such Trust.
FEDERAL INSURANCE AND REINSURANCE OF FEDERAL GUARANTORS. A Federal Loan is
considered to be in default for purposes of the Higher Education Act when the
borrower fails to make an installment payment when due or to comply with other
terms of the loan, and if the failure persists for 270 days in the case of a
loan repayable in monthly installments or for 330 days in the case of a loan
repayable in less frequent installments. Under certain circumstances a loan
deemed ineligible for federal reinsurance may be restored to eligibility.
Procedures for such restoration of eligibility are discussed below.
If the loan in default is covered by federal loan insurance in accordance
with the provisions of the Higher Education Act, the Department is to pay the
applicable Federal Guarantor, as insurance beneficiary, the amount of the loss
sustained thereby, upon notice and determination of such amount, within 90 days
of such notification, subject to reduction as described below.
If the loan is guaranteed by a Federal Guarantor, the eligible lender is
reimbursed by the Federal Guarantor for 100% (or not less than 98% for loans
disbursed on or after October 1, 1993) of the unpaid principal balance of the
defaulted loan plus accrued and unpaid interest thereon so long as the eligible
lender has properly originated and serviced such loan. Under the Higher
Education Act, the Department enters into a guarantee agreement with each
Federal Guarantor, which provides for federal reinsurance for amounts paid to
eligible lenders by the Federal Guarantor with respect to defaulted loans.
Pursuant to such agreements, the Department also agrees to reimburse a
Federal Guarantor for 100% of the amounts expended in connection with a claim
resulting from the death, bankruptcy, total and permanent disability of a
borrower, the death of a student whose parent is the borrower of a PLUS Loan or
claims by borrowers who received loans on or after January 1, 1986 and who are
unable to complete the programs in which they are enrolled due to school closure
or borrowers whose borrowing eligibility was falsely certified by the eligible
institution; such claims are not included in calculating a Federal Guarantor's
claims rate experience for federal reinsurance purposes. The Department also
agrees to reimburse a Federal Guarantor for 100% of the amounts expended in
connection with claims on loans made under the lender of last resort provisions.
The Department is also required to repay the unpaid balance of any loan if the
borrower files for relief under Chapter 12 or 13 of the Bankruptcy Code or files
for relief under Chapter 7 or 11 of the Bankruptcy Code and has been in
repayment for more than 7 years or commences an action for a determination of
dischargeability under Section 523(a)(8)(b) of the Bankruptcy Code, and is
authorized to acquire the loans of borrowers who are at high risk of default and
who request an alternative repayment option from the Department. See, "Certain
Legal Aspects of the Student Loans - Bankruptcy Considerations" herein.
The amount of such reinsurance payment to the Federal Guarantor for default
claims is subject to reduction based upon the annual default claims rate of the
Federal Guarantor, calculated to equal the amount of federal reinsurance claims
paid by the Department to the Federal Guarantor during any fiscal year as a
percentage of the original principal amount of guaranteed loans in repayment at
the end of the prior federal fiscal year. The formula is summarized as follows:
CLAIMS RATE OF FEDERAL GUARANTORS REIMBURSEMENT BY THE
DEPARTMENT OF EDUCATION (1)
- ---------------------------------
- ------------------------------------------------
0% to and including 5% 98%
Greater than 5% to and including 9% 98% of claims to and
including 5%; 88% of claims greater than 5%
Greater than 9% 98% of claims to and
including 5%; 88% of claims greater than 5% to
and including 9%; and 78% of
claims greater than 9%
- -------------------
(1) Each of the reimbursement percentages listed above is increased by two
percentage points for a loan made prior to October 1, 1993 and decreased by
three percentage points for a loan made on or after October 1, 1998.
The claims experience for any Federal Guarantor is not accumulated from
year to year for purposes of this test but is determined solely on the basis of
claims filed in any one federal fiscal year. The Higher Education Act provides
that, subject to compliance with the Higher Education Act, Federal Guarantors
are deemed to have a contractual right against the United States to receive
reinsurance in accordance with its provisions.
On August 10, 1993 President Clinton signed the Omnibus Budget
Reconciliation Act of 1993 (the "1993 Act"), which made a number of changes that
may adversely affect the financial condition of the Federal Guarantors,
including reducing to 98% the maximum percentage of Guarantee Payments the
Department will reimburse for loans first disbursed on or after October 1, 1993,
reducing substantially the premiums and default collections that Federal
Guarantors are entitled to receive and/or retain and giving the Department broad
powers over Federal Guarantors and their reserves. These powers include the
authority to require a Federal Guarantor to return all reserve funds to the
Department if the Department determines such action is necessary to serve the
best interests of the student loan programs or to ensure the proper maintenance
of such Federal Guarantor's funds or assets. The Department is also now
authorized to direct a Federal Guarantor to return a portion of its reserve
funds which the Department determines is unnecessary to pay the program expenses
and contingent liabilities of the Federal Guarantor and/or to cease any
activities involving the use of the Federal Guarantor's reserve funds or assets
which the Department determines is a misapplication or otherwise improper. The
Department may also terminate a Federal Guarantor's reinsurance agreement if the
Department determines that such action is necessary to protect the federal
fiscal interest. These various changes create a risk that the resources
available to the Federal Guarantors to meet their guarantee obligations will be
significantly reduced. Such changes could result in a reduction of a Trust's
ability to pay principal and interest on the related Notes and Certificates, as
a result of a reduction in the ability of the Federal Guarantors to make
Guarantee Payments to the Eligible Lender Trustee with respect to the related
Student Loans. In addition, this legislation sought to greatly expand the loan
volume under the direct lending program (the "Federal Direct Student Loan
Program") to a target of approximately 60% of student loan demand in academic
year 1998-1999, although only about 35% of such loan demand is currently being
met by the direct lending program. The expansion of this program in the future
could result in increasing reductions in the volume of Federal Loans made by the
Seller. Such changes could have an adverse effect on the financial condition of
the Federal Guarantors and on the ability of a Federal Guarantor to satisfy its
obligations under its Guarantee Agreement with respect to the Federal Loans. See
"Risk Factors--Changes in Legislation May Adversely Affect Student Loans and
Federal Guarantors." The 1998 Reauthorization Bill created additional risks that
the resources available to the Federal Guarantors to meet their guarantee
obligations will be further reduced in the future, by mandating additional
recall of guarantor reserves and reducing reinsurance to guarantors from 98% to
95%.
Pursuant to the 1992 Amendments and additional changes made in 1997 and
1998, each Federal Guarantor is required to maintain a current minimum reserve
level of at least .25% of the aggregate principal amount of all outstanding
Federal Loans guaranteed by such Federal Guarantor. Annually, the Department
will collect information from each Federal Guarantor to determine the amount of
such Federal Guarantor's reserves and other information regarding its solvency.
If a Federal Guarantor's current reserve level falls below the required minimum
for any two consecutive years, that Federal Guarantor's annual claims rate
exceeds 5% or the Department determines that a Federal Guarantor's
administrative or financial condition jeopardizes that Federal Guarantor's
continued ability to perform its responsibilities, then that Federal Guarantor
must submit and implement a management plan acceptable to the Department. The
1992 Amendments also provide that under certain circumstances the Department is
authorized, on terms and conditions satisfactory to the Department, but is not
obligated, to terminate its reimbursement agreement with any Federal Guarantor.
In that event, however, the Department is required to assume the functions of
such Federal Guarantor and in connection therewith is authorized to do one or
more of the following: to assume the guarantee obligations of, to assign to
other guarantors the guarantee obligations of, or to make advances to, a Federal
Guarantor in order to assist such Federal Guarantor in meeting its immediate
cash needs and to ensure uninterrupted payment of default claims to lenders or
to take any other action the Department deems necessary to ensure the continued
availability of student loans and the full honoring of guarantee claims
thereunder. In addition, the 1992 Amendments provide that if the Department
determines that a Federal Guarantor is unable to meet its guarantee obligations,
holders of Federal Loans covered thereby may submit guarantee claims directly to
the Department until such time as such guarantee obligations are transferred to
a new guarantor capable of meeting such obligations or until a successor
guarantor assumes such obligations. There can be no assurance that the
Department would under any given circumstances assume such obligation to ensure
satisfaction of a guarantee obligation by exercising its right to terminate a
reimbursement agreement with a Federal Guarantor or by making a determination
that such Federal Guarantor is unable to meet its guarantee obligations.
PRIVATE GUARANTORS. Private Loans are not entitled to any federal
reinsurance or assistance from the Department or any other governmental entity.
Although each Private Guarantor maintains a loan loss reserve intended to absorb
losses arising from its guarantee commitments, there can be no assurance that
the amount of such reserve will be sufficient to cover the obligations of such
Private Guarantor over the term of the related Private Loans.
CLAIMS AND RECOVERY RATES
Certain historical information concerning guarantee claims and recovery
rates of the Guarantors for the Student Loans held by the related Trust as of
the applicable Closing Date with respect to each series of Securities will be
set forth in each Prospectus Supplement. There can be no assurance that the
claim and recovery experience on any pool of Student Loans with respect to a
given Trust will be comparable to prior experience or to any such information.
ORIGINATION PROCESS
The Higher Education Act specifies rules regarding loan origination
practices, which lenders must comply with in order for their Federal Loans to be
guaranteed and to be eligible to receive Federal Assistance. Lenders are
prohibited from offering points, premiums, payments or other inducements,
directly or indirectly, to any educational institution, guarantee agency or
individual in order to secure loan applications, and no lender may conduct
unsolicited mailings of student loan applications to students who have not
previously received student loans from that lender.
With respect to all Student Loans, whether Federal Loans or Private Loans
(other than Consolidation Loans and Key Alternative Loans discussed below), the
Seller forwards each application for such Student Loans (which should include an
executed promissory note) to either a marketing agent or the Seller's
origination department. On behalf of the Seller, either the marketing agent or
the origination department reviews each application to confirm its completeness,
to confirm that the applicant is an Eligible Student and that such loan complies
with certain other conditions of the applicable Program. In addition, a credit
report of each applicant for Private Graduate Loans is obtained from an
authorized credit reporting service, which the Seller then uses to determine, in
consultation with the Private Guarantors, if applicable, whether such applicant
satisfies certain specified credit underwriting criteria. The
credit-underwriting criteria for Private Guaranteed Loans are as follows:
o No account that has been 90 or more days delinquent in the past two
years, and no more than one account is currently more than 60 days
delinquent.
o No record of bankruptcy, foreclosure, repossession, skips or wages
garnishment.
o No record of unpaid collections, charged-off accounts or written-off
accounts.
o No record of an open judgment or suit, unsatisfied tax lien, unpaid
prior educational loan default or other negative public record items
in the past six years.
o No record of bankruptcy in the past seven years.
o Credit criteria for the 1993-1994 program year also includes the
requirement that no account has been delinquent 90 or more days in the
past two years.
o Credit criteria for the 1994-1995 and subsequent program years also
include requirements that no account has been delinquent 90 or more
days in the past five years (or two years with respect to any borrower
who obtained a loan in 1993-1994), and there have been no more than
three inquiries and none with respect to any previous borrower to an
authorized credit reporting agency in the past six months.
o Credit criteria for the 1995-1996 and subsequent program years include
the additional requirement that no more than two accounts have been
more than 60 days delinquent in the past two years.
The credit-underwriting criteria for Private Unguaranteed Loans are as follows:
1. No more than 3 accounts rated 30 days are more delinquent in the past 2
years.
2. No more than one account is currently rated 30 days or more delinquent.
3. No more than 2 accounts rated 60 or more days delinquent in the past 2
years.
4. No account more than 90 days delinquent in the past five years.
5. No record of bankruptcy discharge in the past 7 years.
6. No record of foreclosure, repossession, open judgment or suit,
unsatisfied tax lien, unpaid prior educational loan default or other
negative public credit in the past 6 years.
7. No record of unpaid collections, charged-off accounts or written-off
accounts.
8. No more than 3 authorized inquiries in the past 6 months.
9. Applicants with no credit history will be approved.
10. Applicants who meet the criteria 2-8, but do not meet the minimum credit
score determined by the Seller must obtain a co-signer to be eligible.
11. Law applicants with credit card balances greater than $20,000 must have a
credit worthy co-signer. (Medical and Dental applicants require a
Co-signer with revolving balances exceeding $30,000)
12. No single or combination of paid charged-off or paid collection accounts
totaling more than $100 reported within last 2 years.
13. A credit bureau score may be used to enhance applicants position for
certain other criteria.
The origination of Federal Loans must comply with the provisions of the
Higher Education Act, and therefore does not consider the creditworthiness of
borrowers applying for Stafford Loans.
Any borrower inquiries concerning Federal Consolidation Loans or Private
Consolidation Loans are forwarded to the appropriate Sub-Servicer, who contacts
the borrower, prepares and sends to the borrower an application (which includes
a promissory note) for a Consolidation Loan for the borrower's review and
signature. Each Sub-Servicer is required to obtain certifications from the
lenders of the loans to be consolidated and to review the loan application and
the certifications to confirm that the borrower is eligible for a Federal
Consolidation Loan or Private Consolidation Loan, as the case may be. Upon
approval of an application for a Consolidation Loan, the applicable lender
causes the proceeds of such Consolidation Loan to be disbursed to each lender of
the loans being consolidated in amounts sufficient to retire each of such loans.
For each Consolidation Loan that is made by the Seller, a Sub-Servicer retains
the completed loan application and executed promissory note as custodian.
Applications for Key Alternative Loans are entered into the processing
system and are checked for completeness. If the borrower is ineligible for the
loan due to a processing denial reason an ineligibility letter is sent to the
borrower. Great Lakes sends an electronic transmission of applicant information
on each complete application to the Seller's system for credit review. Approved
applications are transmitted back to Great Lakes on a daily basis, where an
approval letter is generated and sent to the applicant, cosigner and the school.
Denied applicants are sent an adverse action letter from the credit department
the day the application is denied. If an applicant feels they have been denied
based on inaccurate or incomplete information contained in a credit report, they
can request a review (within 60 days of initial denial). Denied applicants may
have their loan reconsidered with a written request and supporting
documentation. A credit representative will review denied loan applicants
documentation and approve or deny the request. Each appeal is handled based on
its individual merits.
SERVICING AND COLLECTIONS PROCESS
The Higher Education Act, the programs relating to Private Loans and the
applicable Guarantee Agreements require the holder of Student Loans to cause
specified procedures, including due diligence procedures and the taking of
specific steps at specific intervals, to be performed with respect to the
servicing of the Student Loans that are designed to ensure that such Student
Loans are repaid on a timely basis by or on behalf of borrowers. Each
Sub-Servicer performs such procedures on behalf of the Seller or the Depositor,
as applicable, and the Master Servicer and will agree, pursuant to the related
Sub-Servicing Agreement, to perform specified and detailed servicing and
collection procedures with respect to the Student Loans on behalf of the related
Trust. Such procedures generally include periodic attempts to contact any
delinquent borrower by telephone and by mail, commencing with a written notice
at the tenth day of delinquency and including multiple written notices and
telephone calls to the borrower thereafter at specified times during any such
delinquency. All telephone calls and letters are automatically registered, and a
synopsis of each call or the mailing of each letter is noted in each
Sub-Servicer's loan file for the borrower. Each Sub-Servicer also will be
required to perform skip tracing procedures on delinquent borrowers whose
current location is unknown, including contacting such borrowers' schools and
references. Failure to comply with the established procedures could adversely
affect the ability of the applicable Eligible Lender Trustee, as holder of legal
title to the applicable Student Loans on behalf of the related Trust, to realize
the benefits of any Guarantee Agreement or to receive the benefits of Federal
Assistance from the Department with respect thereto. Failure to comply with
certain of the established procedures with respect to a Federal Loan may also
result in the denial of coverage under a Guarantee Agreement for certain accrued
interest amounts, in circumstances where such failure has not caused the loss of
the guarantee of the principal of such Federal Loan.
At prescribed times prior to submitting a claim for payment under a
Guarantee Agreement for a delinquent Student Loan, each Sub-Servicer is required
to notify the applicable Guarantor of the existence of such delinquency. These
requests notify the Guarantors of seriously delinquent accounts and allow the
Guarantors to make additional attempts to collect on such loans prior to the
filing of claims. If a loan is delinquent for 180 days (in the case of Federal
Loans made prior to the enactment date of the 1998 Reauthorization Bill), 270
days (in the case of Federal Loans made on or after October 7, 1998), or 150
days (in the case of Private Guaranteed Loans), the applicable Sub-Servicer may
file a default claim with the respective Guarantor. Failure to file a claim
within 270 days (in the case of Federal Loans made prior to the enactment date
of the 1998 Reauthorization Bill), 360 days (in the case of Federal Loans made
on or after October 7, 1998), or 180 days (in the case of Private Guaranteed
Loans) of delinquency may result in denial of the guarantee claim with respect
to such loan. A Sub-Servicer's failure to file a guarantee claim in a timely
fashion would constitute a breach of its covenants and create an obligation of
such Sub-Servicer to purchase the applicable Student Loan. See "Description of
the Transfer and Servicing Agreements--Master Servicer Covenants."
INCENTIVE PROGRAMS
The Seller has offered, and may continue to offer, incentive programs to
certain Student Loan borrowers. If any incentive programs are applicable to the
Student Loans in a Trust, such incentive programs will be described in the
related Prospectus Supplement. Any incentive program not in existence as of the
date of such Prospectus Supplement, or not described in the related Prospectus
Supplement, that effectively reduces borrower payments on Financed Student Loans
and, with respect to Financed Federal Loans, is not required by the Higher
Education Act, will be applicable to the Financed Student Loans only if and to
the extent that the applicable Trust receives payment from the Seller or the
Depositor, as applicable (or the Seller or the Depositor, as applicable,
deposits or causes a deposit to be made into the related Collection Account), in
an amount sufficient to offset such effective yield reductions.
WEIGHTED AVERAGE LIVES OF THE SECURITIES
The rate of payment of principal of the Notes and the Certificates of any
series and the yield on the Notes and the Certificates of any series will be
affected by prepayments of the Student Loans that may occur as described below.
All the Student Loans are prepayable in whole or in part by the borrowers at any
time (including by means of Federal Consolidation Loans, Private Consolidation
Loans or consolidation loans made under the Federal Direct Student Loan Program
as discussed below) or as a result of a borrower's default, death, disability or
bankruptcy and subsequent liquidation or collection of Guarantee Payments with
respect thereto. The rate of such prepayments cannot be predicted and may be
influenced by a variety of economic, social and other factors, including those
described below. In general, the rate of prepayments may tend to increase to the
extent that alternative financing becomes available at prevailing interest rates
which fall significantly below the interest rates applicable to the Student
Loans. However, because many of the Student Loans bear interest at a rate that
either actually or effectively is floating, it is impossible to determine
whether changes in prevailing interest rates will be similar to or vary from
changes in the interest rates on the Student Loans.
To the extent borrowers of Student Loans elect to borrow Consolidation
Loans with respect to such Student Loans:
(1) from the Seller, after the Funding Period but not beyond the end of
the Revolving Period, and collections on the Student Loans are not
available to purchase such Consolidation Loans,
(2) from the Seller, after the end of the Revolving Period, or
(3) from another lender at any time.
Noteholders of a series (and after the Notes have been paid in full,
Certificateholders of such series) will collectively receive as a prepayment of
principal the aggregate principal amount of such Student Loans. Any such
prepayments will result in a more rapid amortization of the Securities of a
series then would otherwise be the case. The volume of existing loans that may
be repaid in this fashion is not determinable at this time. However, if the
Seller makes any such Consolidation Loan during a Funding Period or prior to the
end of the Revolving Period (in which event the Seller will then sell that
Consolidation Loan to the applicable Eligible Lender Trustee (or to the
Depositor who will then sell such Consolidation Loan to the applicable Eligible
Lender Trustee), to the extent that funds are available in the applicable Escrow
Account and during the Funding Period, the Pre-Funding Account or following the
Funding Period but prior to the end of the Revolving Period, the applicable
Collection Account from amounts which constitute available loan purchase funds,
for the purchase thereof), the aggregate outstanding principal balance of
Student Loans (after giving effect to the addition of such Consolidation Loans)
will be at least equal to and in most cases greater than such balance prior to
such prepayment, although the portion of the loan guaranteed will be 98% with
respect to any Federal Consolidation Loan made on or after October 1, 1993, even
if the Underlying Federal Loans were 100% guaranteed. See "The Student Loan
Financing Business--Description of Federal Loans Under the Programs--Federal
Consolidation Loans." There can be no assurance that borrowers with Student
Loans will not seek to obtain Consolidation Loans with respect to such Student
Loans or, if they do so, that such Consolidation Loans will not be made by the
Seller after the end of a Funding Period when collections on the Student Loans
are not available to purchase such Consolidation Loans, on or after the end of
the Revolving Period or by another lender at any time.
In addition, the Seller, the Depositor or the Master Servicer (or such
other entity specified in the related Prospectus Supplement), as applicable,
will be obligated to repurchase any Student Loan pursuant to the applicable Sale
and Servicing Agreement as a result of a breach of any of its representations
and warranties, and the Master Servicer will be obligated to purchase any
Student Loan pursuant to the Sale and Servicing Agreement as a result of a
breach of certain covenants with respect to such Student Loan, in each case
where such breach materially adversely affects the interests of the
Certificateholders or the Noteholders of a series in that Student Loan and is
not cured within the applicable cure period (it being understood that any such
breach that does not affect any Guarantor's obligation to guarantee payment of
such Student Loan will not be considered to have a material adverse effect for
this purpose). See "Description of the Transfer and Servicing Agreements--Sale
of Student Loans; Representations and Warranties" and "--Servicer Covenants."
See also "Description of the Transfer and Servicing Agreements---Additional
Fundings" regarding the prepayment of principal to Noteholders and
Certificateholders of a series if as of the date specified in the applicable
Prospectus Supplement the amount on deposit in the related Pre-Funding Account
has not been reduced to zero and the prepayment of principal to Noteholders of a
series as a result of excess funds remaining on deposit in the Pre-Funding
Account at the end of the Funding Period, "--Insolvency Event" regarding the
sale of the Student Loans if a Seller Insolvency Event occurs and
"--Termination" regarding the Master Servicer's option to purchase the Student
Loans when the aggregate Pool Balance is less than or equal to 10% of the
initial Pool Balance of a series and the auction of the Student Loans occurs on
or after the date specified in the related Prospectus Supplement.
On the other hand, scheduled payments with respect to, and maturities of,
the Student Loans may be extended, including pursuant to Grace Periods, Deferral
Periods and, under certain circumstances, Forbearance Periods prior to the end
of the Revolving Period or of refinancings through Consolidation Loans to the
extent such Consolidation Loans are sold to an Eligible Lender Trustee on behalf
of a Trust as described above. In that event, the fact that such Consolidation
Loans will likely have longer maturities than the Student Loans they are
replacing may lengthen the remaining term of the Student Loans and the average
life of the Notes and the Certificates of a series. The rate of payment of
principal of the Notes and the Certificates of a series and the yield on the
Notes and the Certificates of a series may also be affected by the rate of
defaults resulting in losses on defaulted Student Loans which have been
liquidated, by the severity of those losses and by the timing of those losses,
which may affect the ability of the Guarantors to make Guarantee Payments with
respect thereto. In addition, the maturity of many of the Student Loans will
extend well beyond the final scheduled Distribution Dates of the Notes and the
Certificates of a series.
The rate of prepayment on the Student Loans cannot be predicted, and any
reinvestment risks resulting from a faster or slower incidence of prepayment of
Student Loans will be borne entirely by the Securityholders of a series. Such
reinvestment risks may include the risk that interest rates and the relevant
spreads above particular interest rate bases are lower at the time
Securityholders of a series receive payments from the related Trust than such
interest rates and such spreads would otherwise have been had such prepayments
not been made or had such prepayments been made at a different time.
POOL FACTORS AND TRADING INFORMATION
Each of the "Note Pool Factor" for each class of Notes and the "Certificate
Pool Factor" for each class of Certificates (each, a "Pool Factor") will be a
seven-digit decimal which the Administrator will compute for each Distribution
Date indicating the remaining outstanding principal amount of such class of
Notes or the remaining principal balance for such class of Certificates (the
"Certificate Balance"), respectively, as of that Distribution Date (after giving
effect to distributions to be made on such Distribution Date), as a fraction of
the initial outstanding principal amount of such class of the Notes or the
initial Certificate Balance for such class of Certificates, respectively. Each
Pool Factor will be 1.0000000 as of the Closing Date, and thereafter will
decline to reflect reductions in the outstanding principal amount of the
applicable class of Notes or reductions of the Certificate Balance of the
applicable class of Certificates, as applicable. A Securityholder's portion of
the aggregate outstanding principal amount of the related class of Notes or of
the aggregate outstanding Certificate Balance for the related class of
Certificates, as applicable, is the product of (x) the original denomination of
that Securityholder's Note or Certificate and (y) the applicable Pool Factor.
Pursuant to the related Indenture and the related Trust Agreement, the
Securityholders will receive reports on or about each Distribution Date
concerning the payments received on the Student Loans, the Pool Balance (as such
term is defined in the related Prospectus Supplement, the "Pool Balance"), the
applicable Pool Factor and various other items of information. Securityholders
of record during any calendar year will be furnished information for tax
reporting purposes not later than the latest date permitted by law. See "Certain
Information Regarding the Securities--Reports to Securityholders."
DESCRIPTION OF THE NOTES
GENERAL
With respect to each Trust, one or more classes of notes (the "Notes") of a
given series will be issued pursuant to the terms of an indenture (an
"Indenture") between the Trust and the trustee under such Indenture (the
"Indenture Trustee"), a form of which has been filed as an exhibit to the
Registration Statement of which this Prospectus (this "Prospectus") is a part.
The following summary describes the material terms of the Notes and the
Indenture. The summary does not purport to be complete and is qualified in its
entirety by reference to all the provisions of the Notes and the Indenture.
Unless otherwise specified in the related Prospectus Supplement (each a
"Prospectus Supplement"), each class of Notes will initially be represented by
one or more Notes, in each case registered in the name of the nominee of The
Depository Trust Company ("DTC") (together with any successor depository
selected by the Administrator, the "Depository") except as set forth below.
Unless otherwise specified in the related Prospectus Supplement, the Notes will
be available for purchase in denominations of $1,000 and integral multiples
thereof in book-entry form only. The Trust has been informed by DTC that DTC's
nominee will be Cede & Co. ("Cede"), unless another nominee is specified in the
related Prospectus Supplement. Accordingly, such nominee is expected to be the
holder of record of the Notes of each class. Unless and until Definitive Notes
are issued under the limited circumstances described herein, no Noteholder will
be entitled to receive a physical certificate representing a Note. All
references herein and in the related Prospectus Supplement to actions by
Noteholders of Notes held in book-entry form refer to actions taken by DTC upon
instructions from its participating organizations (the "Participants") and all
references herein to distributions, notices, reports and statements to
Noteholders refer to distributions, notices, reports and statements to DTC or
its nominee, as the case may be, as the registered holder of the Notes for
distribution to Noteholders in accordance with DTC's procedures with respect
thereto. See "Certain Information Regarding the Securities--Book-Entry
Registration" and "--Definitive Securities."
PRINCIPAL OF AND INTEREST ON THE NOTES
The timing and priority of payment, seniority, allocations of losses,
interest as a per annum interest rate (the "Interest Rate") and amount of or
method of determining payments of principal and interest on each class of Notes
of a given series will be described in the related Prospectus Supplement. The
right of holders of any class of Notes to receive payments of principal and
interest may be senior or subordinate to the rights of holders of any other
class or classes of Notes of such series, as described in the related Prospectus
Supplement. Payments of interest on the Notes of such series will be made prior
to payments of principal thereon. Each class of Notes may have a different
Interest Rate, which may be a fixed, variable or adjustable Interest Rate or any
combination of the foregoing. The related Prospectus Supplement will specify the
Interest Rate for each class of Notes of a given series or the method for
determining such Interest Rate See also "Certain Information Regarding the
Securities--Fixed Rate Securities" and "--Floating Rate Securities." One or more
classes of the Notes of a series may be redeemable in whole or in part under the
circumstances specified in the related Prospectus Supplement, including as a
result of the exercise by the Master Servicer or such other party as may be
named in the related Prospectus Supplement, of its option to purchase the
related Student Loans.
Unless otherwise specified in the related Prospectus Supplement,
Noteholders of all classes within a series will have the same priority with
respect to payments of interest. Under certain circumstances, the amount
available for such payments could be less than the amount of interest payable on
the Notes on any of the dates specified for payments in the related Prospectus
Supplement (each, a "Distribution Date"), in which case each class of
Noteholders will receive its ratable share (based upon the aggregate amount of
interest due to such class of Noteholders) of the aggregate amount available to
be distributed in respect of interest on the Notes of such series. See
"Description of the Transfer and Servicing Agreements--Distributions" and
"--Credit and Cash Flow Enhancement."
In the case of a series of Notes which includes two or more classes of
Notes, the sequential order and priority of payment in respect of principal and
interest, and any schedule or formula or other provisions applicable to the
determination thereof, of each such class will be set forth in the related
Prospectus Supplement. Payments in respect of principal and interest of any
class of Notes will be made on a pro rata basis among all the Noteholders of
such class.
In the case of a series of Notes relating to a Trust having a Pre-Funding
Account or Escrow Account, the Notes of such series will be redeemed in part on
the Distribution Date on or immediately following the last day of the related
Funding Period or Revolving Period, respectively, in the event that any amount
remains on deposit in the applicable account after giving effect to all
Additional Fundings on or prior to such date, in an aggregate principal amount
described in the related Prospectus Supplement.
See "Description of the Transfer and Servicing Agreements--Credit and Cash
Flow Enhancement--Reserve Account" for a description of the Reserve Account and
the distribution of amounts in excess of the Specified Reserve Account Balance
(as defined in the related Prospectus Supplement, the "Specified Reserve Account
Balance").
THE INDENTURE
MODIFICATION OF INDENTURE. With respect to each Trust, with the consent of
the holders of a majority of the specified senior class(es) of outstanding Notes
of the related series, the Indenture Trustee and the Trust may execute a
supplemental indenture to add provisions to, or change in any manner or
eliminate any provisions of, the Indenture with respect to the Notes, or to
modify (except as provided below) in any manner the rights of the related
Noteholders.
Unless otherwise specified in the related Prospectus Supplement with
respect to a series of Notes, however, without the consent of the holder of each
such outstanding Note affected thereby, no supplemental indenture will:
(1) change the due date of any installment of principal of or interest on
any such Note or reduce the principal amount thereof, the interest
rate specified thereon or the redemption price with respect thereto or
change any place of payment where or the coin or currency in which any
such Note or any interest thereon is payable,
(2) impair the right to institute suit for the enforcement of certain
provisions of the related Indenture regarding payment,
(3) reduce the percentage of the aggregate amount of the outstanding Notes
of such series, the consent of the holders of which is required for
any such supplemental indenture or the consent of the holders of which
is required for any waiver of compliance with certain provisions of
the related Indenture or of certain defaults thereunder and their
consequences as provided for in such Indenture,
(4) modify or alter the provisions of the related Indenture regarding the
voting of Notes held by the applicable Trust, the Seller or the
Depositor, as applicable, an affiliate of either of them or any
obligor on such Notes,
(5) reduce the percentage of the aggregate outstanding amount of such
Notes, the consent of the holders of which is required to direct the
related Eligible Lender Trustee on behalf of the applicable Trust to
sell or liquidate the Student Loans if the proceeds of such sale would
be insufficient to pay the principal amount and accrued but unpaid
interest on the outstanding Notes of such series,
(6) decrease the percentage of the aggregate principal amount of such
Notes required to amend the sections of the related Indenture which
specify the applicable percentage of aggregate principal amount of
such Notes necessary to amend the related Indenture or certain other
related agreements, or
(7) permit the creation of any lien ranking prior to or on a parity with
the lien of the related Indenture with respect to any of the
collateral for the Notes of such series or, except as otherwise
permitted or contemplated in such Indenture, terminate the lien of
such Indenture on any such collateral or deprive the holder of any
Note of the security afforded by the lien of such Indenture.
The applicable Trust and the related Indenture Trustee may also enter into
supplemental indentures without obtaining the consent of Noteholders of such
series, for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the related Indenture or of modifying in
any manner the rights of Noteholders of such series so long as such action will
not, in the opinion of counsel satisfactory to the applicable Indenture Trustee,
materially and adversely affect the interest of any Noteholder of such series.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. With respect to the Notes
of a given series, an "Event of Default" under the related Indenture will
include the following:
(a) a default for three business days or more in the payment of any
interest on any such Note after the same becomes due and payable;
(b) a default in the payment of the principal of or any installment of the
principal of any such Note when the same becomes due and payable;
(c) a default in the observance or performance of any covenant or
agreement of the applicable Trust made in the related Indenture and
the continuation of any such default for a period of 30 days after
notice thereof is given to the applicable Trust by the applicable
Indenture Trustee or to the applicable Trust and the applicable
Indenture Trustee by the holders of at least 25% in principal amount
of such Notes then outstanding;
(d) any representation or warranty made by the applicable Trust in the
related Indenture or in any certificate delivered pursuant thereto or
in connection therewith having been incorrect in a material respect as
of the time made, and such breach is not cured within 30 days after
notice thereof is given to such Trust by the applicable Indenture
Trustee or to such Trust and the applicable Indenture Trustee by the
holders of at least 25% in principal amount of the Notes of such
series then outstanding; or
(e) certain events of bankruptcy, insolvency, receivership or liquidation
of such Trust.
However, the amount of principal required to be distributed to Noteholders
of such series under the related Indenture on any Distribution Date will
generally be limited to amounts available after payment of all prior obligations
of such Trust. Therefore, the failure to pay principal on a class of Notes
generally will not result in the occurrence of an Event of Default until the
final scheduled Distribution Date for such class of Notes.
If, with respect to any series of Notes, interest is paid at a variable
rate based on an index, the related Prospectus Supplement may provide that, in
the event that, for any Distribution Date, the Interest Rate as calculated based
on the index is less than an alternate rate calculated for such Distribution
Date based on interest collections on the Student Loans (the amount of such
difference, the "Interest Index Carryover"), the Interest Rate for such
Distribution Date will be such alternate rate and the Interest Index Carryover
shall be payable as described in such Prospectus Supplement. Payment of the
Interest Index Carryover generally will be lower in priority than payment of
interest on the Notes at the Interest Rate (whether the Interest Rate is based
on the index or such alternate rate) and, accordingly, the nonpayment of the
Interest Index Carryover on any Distribution Date will not generally constitute
a default in the payment of interest on such Notes.
If an Event of Default should occur and be continuing with respect to the
Notes of any series, the related Indenture Trustee or holders of a majority in
principal amount of the specified senior class(es) of such Notes then
outstanding may declare the principal of such Notes to be immediately due and
payable. Unless otherwise specified in the related Prospectus Supplement, such
declaration may be rescinded by the holders of a majority in principal amount of
the specified senior class(es) of such Notes then outstanding if (x) the related
Trust has paid or deposited with the Indenture Trustee a sum equal to all
amounts then due with respect to the Notes (without giving effect to such
acceleration) and (y) all Events of Default, other than the nonpayment of the
principal of the Notes that has become due solely by such acceleration, have
been cured or, under the circumstances described below, waived.
If the Notes of any series have been declared to be due and payable
following an Event of Default with respect thereto, the related Indenture
Trustee may, in its discretion, exercise remedies as a secured party, require
the related Eligible Lender Trustee to sell the Student Loans or elect to have
the related Eligible Lender Trustee maintain possession of the Student Loans and
continue to apply collections with respect to such Student Loans as if there had
been no declaration of acceleration. Unless otherwise specified in the related
Prospectus Supplement, however, the related Indenture Trustee is prohibited from
directing the related Eligible Lender Trustee to sell the Student Loans
following an Event of Default, other than a default in the payment of any
principal or a default for three business days or more in the payment of any
interest on any Note with respect to any series, unless:
(1) the holders of all such outstanding Notes consent to such sale;
(2) the proceeds of such sale are sufficient to pay in full the principal
of and the accrued interest on such outstanding Notes at the date of
such sale; or
(3) the related Indenture Trustee determines that the collections on the
Student Loans would not be sufficient on an ongoing basis to make all
payments on such Notes as such payments would have become due if such
obligations had not been declared due and payable, and the related
Indenture Trustee obtains the consent of the holders of 66 2/3% of the
aggregate principal amount of such Notes then outstanding;
PROVIDED, that the Indenture Trustee may not sell or otherwise liquidate the
Student Loans following an Event of Default, other than a default in the payment
of any principal on the final scheduled Distribution Date for a class of Notes
or a default of three business days or more on the payment of any interest on
any Note when due, unless:
(a) the proceeds of the sale or liquidation of the Student Loans
distributable to the Certificateholders are sufficient to pay to the
Certificateholders the outstanding Certificate Balance plus accrued
and unpaid interest thereon; or
(b) after receipt of notice from the Eligible Lender Trustee that the
proceeds of such sale or liquidation distributable to the
Certificateholders would not be sufficient to pay to the
Certificateholders the outstanding Certificate Balance plus accrued
and unpaid interest thereon, the Certificateholders of at least a
majority of the outstanding Certificate Balance consent thereto;
PROVIDED, FURTHER that the Indenture Trustee may not sell or otherwise liquidate
the Student Loans following an Event of Default, other than a default in the
payment of any principal on the final scheduled Distribution Date for a class of
Notes or a default of three business days or more on the payment of any interest
on any Note when due unless:
(x) proceeds of the sale or liquidation of the Student Loans distributable
from such sale are sufficient (1) to pay to Noteholders, the
outstanding principal balance of the Notes (other than the
Noteholders' Interest Carryover Shortfall (as defined in each
Prospectus Supplement)) and (2) to pay to Certificateholders, the
outstanding Certificate Balance plus accrued and unpaid interest
thereon (other than the Certificateholders' Interest Carryover
Shortfall (as defined in each Prospectus Supplement)); or
(y) after receipt of notice from the Eligible Lender Trustee that the
proceeds of such sale or liquidation would not be sufficient (1) to
pay to Noteholders, the outstanding principal balance of the Notes
(other than the Noteholders' Interest Carryover Shortfall) and (2) to
pay to Certificateholders the outstanding Certificate Balance plus
accrued and unpaid interest thereon (other than the
Certificateholders' Interest Carryover Shortfall).
If the proceeds of any such sale are insufficient to pay the then outstanding
principal amount of the Notes and any accrued interest, such proceeds shall be
distributed to the holders of Notes on a pro rata basis, based on the amount
then owing on each class of Notes.
Subject to the provisions of the applicable Indenture relating to the
duties of the related Indenture Trustee, if an Event of Default should occur and
be continuing with respect to a series of Notes, the related Indenture Trustee
will be under no obligation to exercise any of the rights or powers under the
applicable Indenture at the request or direction of any of the holders of such
Notes, if such Indenture Trustee reasonably believes it will not be adequately
indemnified against the costs, expenses and liabilities which might be incurred
by it in complying with such request. Subject to such provisions for
indemnification and certain limitations contained in the related Indenture, the
holders of a majority in principal amount of the specified senior class(es) of
outstanding Notes of a given series will have the right to direct the time,
method and place of conducting any proceeding or any remedy available to such
Indenture Trustee and the holders of a majority in principal amount of the
specified senior class(es) of such Notes then outstanding may, in certain cases,
waive any default with respect thereto, except a default in the payment of
principal or interest or a default in respect of a covenant or provision of the
applicable Indenture that cannot be modified without the waiver or consent of
all the holders of such outstanding Notes or more junior class of Notes.
Unless otherwise specified in the related Prospectus Supplement, no holder
of Notes of any series will have the right to institute any proceeding with
respect to the related Indenture, unless:
(a) such holder previously has given to the applicable Indenture Trustee
written notice of a continuing Event of Default,
(b) the holders of not less than 25% in principal amount of such
outstanding Notes have requested in writing that such Indenture
Trustee institute such proceeding in its own name as Indenture
Trustee,
(c) such holder or holders have offered such Indenture Trustee reasonable
indemnity,
(d) such Indenture Trustee has for 60 days failed to institute such
proceeding, and
(e) no direction inconsistent with such written request has been given to
such Indenture Trustee during such 60-day period by the holders of a
majority of the specified senior class(es) of outstanding Notes of
such outstanding Notes.
In addition, each Indenture Trustee and the related Noteholders will
covenant that they will not at any time institute against the applicable Trust
any bankruptcy, reorganization or other proceeding under any federal or state
bankruptcy or similar law.
With respect to any Trust, none of the related Indenture Trustee, the
Seller or the Depositor, as applicable, the Administrator, the Master Servicer,
the Sub-Servicers or the Eligible Lender Trustee in its individual capacity, or
any holder of a Certificate representing an ownership interest in the applicable
Trust, or any of their respective owners, beneficiaries, agents, officers,
directors, employees, successors or assigns will, in the absence of an express
agreement to the contrary, be personally liable for the payment of the principal
of or interest on the Notes or for the agreements of the Trust contained in the
Indenture.
CERTAIN COVENANTS. Each Indenture will provide that the related Trust may
not consolidate with or merge into any other entity, unless:
(a) the entity formed by or surviving such consolidation or merger is
organized under the laws of the United States of America, any state
thereof or the District of Columbia,
(b) such entity expressly assumes such Trust's obligation to make due and
punctual payments upon the Notes of the related series and the
performance or observance of every agreement and covenant of such
Trust under the related Indenture,
(c) no Event of Default shall have occurred and be continuing immediately
after such merger or consolidation,
(d) such Trust has been advised that the ratings of the Notes and the
Certificates of the related series would not be reduced or withdrawn
by the Rating Agencies (as such term is defined in the related
Prospectus Supplement, each a "Rating Agency" and collectively, the
"Rating Agencies") as a result of such merger or consolidation, and
(e) such Trust has received an opinion of counsel to the effect that such
consolidation or merger would have no material adverse federal or
Pennsylvania state tax consequence to such Trust or to any
Certificateholder or Noteholder of the related series.
Each Trust will not, among other things:
o except as expressly permitted by the applicable Indenture, the
applicable Sale and Servicing Agreements or certain related documents
(collectively, the "Related Documents"), sell, transfer, exchange or
otherwise dispose of any of the assets of such Trust,
o claim any credit on or make any deduction from the principal and
interest payable in respect of the Notes of the related series (other
than amounts withheld under the Code or applicable state law) or
assert any claim against any present or former holder of such Notes
because of the payment of taxes levied or assessed upon such Trust,
o except as contemplated by the Related Documents, dissolve or liquidate
in whole or in part,
o permit the validity or effectiveness of the applicable Indenture to be
impaired or permit any person to be released from any covenants or
obligations with respect to such Notes under the applicable Indenture
except as may be expressly permitted thereby, or
o permit any lien, charge, excise, claim, security interest, mortgage or
other encumbrance to be created on or extend to or otherwise arise
upon or burden the assets of the Trust or any part thereof, or any
interest therein or the proceeds thereof, except as expressly
permitted by the Related Documents.
No Trust may engage in any activity other than financing, purchasing,
owning, selling and managing Student Loans and the other assets of the Trust and
making Additional Fundings, in each case in the manner contemplated by the
Related Documents and activities incidental thereto. No Trust will incur, assume
or guarantee any indebtedness other than indebtedness incurred pursuant to the
Notes of the related series and the applicable Indenture or otherwise in
accordance with the Related Documents.
ANNUAL COMPLIANCE STATEMENT. Each Trust will be required to file annually
with the applicable Indenture Trustee a written statement as to the fulfillment
of its obligations under the related Indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT. Each Indenture Trustee will be required
to mail each year to all related Noteholders a brief report relating to, among
other things, its eligibility and qualification to continue as such Indenture
Trustee under the applicable Indenture, any amounts advanced by it under the
Indenture, the amount, interest rate and maturity date of certain indebtedness
owing by such Trust to the applicable Indenture Trustee in its individual
capacity, the property and funds physically held by the applicable Indenture
Trustee as such and any action taken by it that materially affects the related
Notes and that has not been previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE. An Indenture will be discharged
with respect to the collateral securing the related Notes upon the delivery to
the related Indenture Trustee for cancellation of all such Notes or, with
certain limitations, upon deposit with such Indenture Trustee of funds
sufficient for the payment in full of all such Notes.
THE INDENTURE TRUSTEE. The Indenture Trustee for a series of Notes will be
specified in the related Prospectus Supplement. The Indenture Trustee for any
series may resign at any time, in which event the Trust will be obligated to
appoint a successor trustee for such series. The Trust may also remove any such
Indenture Trustee if such Indenture Trustee ceases to be eligible to continue as
such under the related Indenture or if such Indenture Trustee becomes insolvent.
In such circumstances, the Trust will be obligated to appoint a successor
trustee for the applicable series of Notes. Any resignation or removal of the
Indenture Trustee and appointment of a successor trustee for any series of Notes
does not become effective until acceptance of the appointment by the successor
trustee for such series.
DESCRIPTION OF THE CERTIFICATES
GENERAL
With respect to each Trust, one or more classes of certificates
("Certificates" and together with the Notes, the "Securities") of a given series
will, unless otherwise specified in the related Prospectus Supplement, be issued
pursuant to the terms of a Trust Agreement, a form of which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
following summary describes the material terms of the Certificates and the Trust
Agreement. The summary does not purport to be complete and is qualified in its
entirety by reference to all the provisions of the Certificates and the Trust
Agreement.
Unless otherwise specified in the related Prospectus Supplement, each class
of Certificates will initially be represented by a single Certificate registered
in the name of the Depository, except as set forth below. Unless otherwise
specified in the related Prospectus Supplement and except for the Certificates
of a given series purchased by the Seller or the Depositor, as applicable, or an
affiliate of the Seller or the Depositor, as applicable, specified in the
related Prospectus Supplement, the Certificates will be available for purchase
in minimum denominations of $1,000 and integral multiples of $1,000 in excess
thereof in book-entry form only. The Seller and the Depositor have been informed
by DTC that DTC's nominee will be Cede, unless another nominee is specified in
the related Prospectus Supplement. Accordingly, such nominee is expected to be
the holder of record of the Certificates of any series that are not purchased by
the Seller or the Depositor, as applicable, or an affiliate of the Seller or the
Depositor, as applicable. Unless and until Definitive Certificates are issued
under the limited circumstances described herein or in the related Prospectus
Supplement, no Certificateholder (other than the Seller or the Depositor, as
applicable, or an affiliate of the Seller or the Depositor, as applicable) will
be entitled to receive a physical certificate representing a Certificate. All
references herein and in the related Prospectus Supplement to actions by
Certificateholders (other than the Seller or the Depositor, as applicable, or an
affiliate of the Seller or the Depositor, as applicable) refer to actions taken
by DTC upon instructions from the Participants and all references herein and in
the related Prospectus Supplement to distributions, notices, reports and
statements to Certificateholders (other than the Seller or the Depositor, as
applicable, or an affiliate of the Seller or the Depositor, as applicable) refer
to distributions, notices, reports and statements to DTC or its nominee, as the
case may be, as the registered holder of the Certificates, for distribution to
Certificateholders in accordance with DTC's procedures with respect thereto. See
"Certain Information Regarding the Securities--Book-Entry Registration" and
"--Definitive Securities." Unless otherwise specified in the related Prospectus
Supplement, Certificates of a given series owned by the Seller or the Depositor,
as applicable, or its respective affiliates will be entitled to equal and
proportionate benefits under the applicable Trust Agreement, except that,
assuming that all Certificates of a given series are not all owned by the Seller
or the Depositor, as applicable, and its respective affiliates, the Certificates
owned by the Seller or the Depositor, as applicable, and its respective
affiliates will be deemed not to be outstanding for the purpose of determining
whether the requisite percentage of Certificateholders has given any request,
demand, authorization, direction, notice, consent or other action under the
Related Documents (other than the commencement by the related Trust of a
voluntary proceeding in bankruptcy as described under "Description of the
Transfer and Servicing Agreements--Insolvency Event").
PRINCIPAL AND INTEREST IN RESPECT OF THE CERTIFICATES
The timing and priority of distributions, seniority, allocations of losses,
interest at a per annum interest rate (the "Pass-Through Rate") and amount of or
method of determining distributions with respect to principal and interest of
each class of Certificates of a given series will be described in the related
Prospectus Supplement. Distributions of interest on such Certificates will be
made on each Distribution Date and will be made prior to distributions with
respect to principal of such Certificates. Each class of Certificates may have a
different Pass-Through Rate, which may be a fixed, variable or adjustable
Pass-Through Rate or any combination of the foregoing. The related Prospectus
Supplement will specify the Pass-Through Rate for each class of Certificates of
a given series or the method for determining such Pass-Through Rate. See also
"Certain Information Regarding the Securities--Fixed Rate Securities" and
"--Floating Rate Securities." Distributions in respect of the Certificates of a
given series may be subordinate to payments in respect of the Notes of such
series as more fully described in the related Prospectus Supplement.
Distributions in respect of interest on and principal of any class of
Certificates will be made on a pro rata basis among all the Certificateholders
of such class.
In the case of a series of Certificates which includes two or more classes
of Certificates, the timing, sequential order, priority of payment or amount of
distributions in respect of interest and principal, and any schedule or formula
or other provisions applicable to the determination thereof, of each such class
shall be as set forth in the related Prospectus Supplement.
See "Description of the Transfer and Servicing Agreements--Credit and
Cash Flow Enhancement--Reserve Account" for a description of the Reserve Account
and the distribution of amounts in excess of the Specified Reserve Account
Balance.
CERTAIN INFORMATION REGARDING THE SECURITIES
FIXED RATE SECURITIES
Each class of Securities may bear interest at a fixed rate per annum
("Fixed Rate Securities") or at a variable or adjustable rate per annum
("Floating Rate Securities"), as more fully described below and in the
applicable Prospectus Supplement. Each class of Fixed Rate Securities will bear
interest at the applicable per annum Interest Rate or Pass-Through Rate, as the
case may be, 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 of and
Interest on the Notes" and "Description of the Certificates--Principal and
Interest in Respect of the Certificates."
FLOATING RATE SECURITIES
Each class of Floating Rate Securities will bear interest for each
applicable Interest Reset Period (as such term is defined in the related
Prospectus Supplement with respect to a class of Floating Rate Securities,
"Interest Reset Period") at a rate per annum determined by reference to an
interest rate basis (the "Base Rate"), plus or minus the Spread, if any, or
multiplied by the Spread Multiplier, if any, in each case as specified in the
related Prospectus Supplement. The "Spread" is the number of basis points (one
basis point equals one one-hundredth of a percentage point) that may be
specified in the applicable Prospectus Supplement as being applicable to such
class, and the "Spread Multiplier" is the percentage that may be specified in
the applicable Prospectus Supplement as being applicable to such class.
The applicable Prospectus Supplement will designate a Base Rate for a given
Floating Rate Security based on the London interbank offered rate ("LIBOR"),
commercial paper rates, Federal funds rates, U.S. Government treasury securities
rates, negotiable certificates of deposit rates or another rate or rates as set
forth in such Prospectus Supplement.
As specified in the applicable Prospectus Supplement, Floating Rate
Securities of a given class may also have either or both of the following (in
each case expressed as a rate per annum): (a) a maximum limitation, or ceiling,
on the rate at which interest may accrue during any interest period and (b) a
minimum limitation, or floor, on the rate at which interest may accrue during
any interest period. In addition to any maximum interest rate that may be
applicable to any class of Floating Rate Securities, the interest rate
applicable to any class of Floating Rate Securities will in no event be higher
than the maximum rate permitted by applicable law, as the same may be modified
by United States law of general application.
Each Trust with respect to which a class of Floating Rate Securities will
be issued will appoint, and enter into agreements with, a calculation agent
(each, a "Calculation Agent") to calculate interest rates on each such class of
Floating Rate Securities issued with respect thereto. The applicable Prospectus
Supplement will set forth the identity of the Calculation Agent for each such
class of Floating Rate Securities of a given series, which may be the
Administrator, the Eligible Lender Trustee or the Indenture Trustee with respect
to such series. All determinations of interest by the Calculation Agent shall,
in the absence of manifest error, be conclusive for all purposes and binding on
the holders of Floating Rate Securities of a given class. Unless otherwise
specified in the applicable Prospectus Supplement, all percentages resulting
from any calculation of the rate of interest on a Floating Rate Security will be
rounded, if necessary, to the nearest 1/100,000 of 1% (.0000001), with five
one-millionths of a percentage point rounded upward.
BOOK-ENTRY REGISTRATION
Persons acquiring beneficial ownership interests in the Notes may hold
their interests through DTC in the United States or Clearstream Banking, societe
anonyme ("Clearstream") or The Euroclear System ("Euroclear") in Europe and
persons acquiring beneficial ownership interests in the Certificates may hold
their interests through DTC. Securities will be registered in the name of Cede
as nominee for DTC. Clearstream and Euroclear will hold omnibus positions with
respect to the Notes on behalf of Clearstream Participants and the Euroclear
Participants, respectively, through customers' securities accounts in
Clearstream's and Euroclear's name on the books of their respective depositaries
(collectively, the "Depositories") which in turn will hold such positions in
customers' securities accounts in the Depositories' names on the books of DTC.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the UCC and a "clearing agency" registered
pursuant to Section 17A of the Exchange Act. DTC was created to hold securities
for its Participants and to facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entries,
thereby eliminating the need for physical movement of certificates.
"Participants" include securities brokers and dealers, banks, trust companies
and clearing corporations. Indirect access to the DTC system also is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Noteholders and Certificateholders (collectively, "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. In addition,
Securityholders will receive all distributions of principal and interest from
the related Indenture Trustee or the related Eligible Lender Trustee, as
applicable (the "Applicable Trustee"), through Participants and Indirect
Participants. Under a book-entry format, Securityholders may experience some
delay in their receipt of payments, since such payments will be forwarded by the
Applicable Trustee to DTC's nominee. DTC will forward such payments to its
Participants, which thereafter will forward them to Indirect Participants or
Securityholders. Except for the Seller or the Depositor, as applicable, or an
affiliate of the Seller or the Depositor, as applicable, with respect to any
series of Securities, it is anticipated that the only "Securityholder,"
"Certificateholder" and "Noteholder" will be DTC's nominee. Securityholders will
not be recognized by the Applicable Trustee as Noteholders or
Certificateholders, as such terms are used in each Indenture and each Trust
Agreement, respectively, and Securityholders will be permitted to exercise the
rights of Securityholders only indirectly through DTC and its Participants.
Transfers between DTC participants will occur in the ordinary way in
accordance with DTC Rules. Transfers between Clearstream Participants and
Euroclear Participants will occur in the ordinary way in accordance with their
applicable rules and operating procedures.
Because of time-zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a DTC Participant
will be made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Such credits or any transactions
in such securities settled during such processing will be reported to the
relevant Euroclear Participants or Clearstream Participants on such 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 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.
Cross-market transfers between persons holding Notes directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC Rules on behalf of the relevant European international
clearing system by its Depository; however, such cross-market transactions will
require delivery of instructions to the relevant European international clearing
system by the counterparty in such system in accordance with its rules and
procedures and within its established deadlines (European time). The relevant
European international clearing system will, if the transaction meets its
settlement requirements, deliver instructions to its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. Clearstream Participants and
Euroclear Participants may not deliver instructions directly to the
Depositaries.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Securities among Participants on whose behalf it acts with respect to the
Securities and to receive and transmit distributions of principal of, and
interest on, the Securities. Participants and Indirect Participants with which
Securityholders have accounts with respect to the Securities similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Securityholders. Accordingly, although
Securityholders will not possess Securities, the Rules provide a mechanism by
which Participants will receive payments and will be able to transfer their
interests.
Because DTC can 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 such
Securities, may be limited due to the lack of a physical certificate for such
Securities.
Clearstream has advised that it is incorporated under the laws of the Grand
Duchy of Luxembourg as a professional depositary. Clearstream holds securities
for its participating organizations ("Clearstream Participants"). Clearstream
facilitates the clearance and settlement of securities transactions between
Clearstream Participants through electronic book-entry changes in accounts of
Clearstream Participants, eliminating the need for physical movement of
certificates. Clearstream provides to Clearstream 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
Commission for the Supervision of the Financial Sector (CSSF). Clearstream
Participants are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. 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.
Distributions, to the extent received by the U.S. Depositary for
Clearstream, with respect to the Notes held beneficially through Clearstream
will be credited to cash accounts of Clearstream Participants in accordance with
its rules and procedures.
Euroclear has advised that it was created in 1968 to hold securities for
its participants ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, eliminating the need for physical movement of
certificates and eliminating any risk from lack of simultaneous transfers of
securities and cash. Euroclear provides various other services, including
securities lending and borrowing and interfaces with domestic markets in several
countries. Euroclear is operated by Euroclear Bank S.A./NV (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by the
Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries and may include the underwriters. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator has advised us that it is licensed by the Belgian
Banking and Finance Commission to carry out banking activities on a global
basis. As a Belgian bank, it is regulated and examined by 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 Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants and has no record of or relationship with persons holding
through Euroclear Participants.
Distributions, to the extent received by the U.S. Depositary for Euroclear,
with respect to Notes held beneficially through Euroclear will be credited to
the cash accounts of Euroclear Participants in accordance with the Terms and
Conditions.
In the event definitive Notes are issued a paying agent and transfer agent
in Luxembourg (the "Luxembourg Paying and Transfer Agent") will be accepted.
Holders of definitive Notes will be able to receive payments and effect
transfers at the offices of the Luxembourg Paying and Transfer Agent.
DTC has advised the Administrator that it will take any action permitted to
be taken by a Securityholder under the related Indenture or the related Trust
Agreement, as the case may be, only at the direction of one or more Participants
to whose accounts with DTC the Securities are credited. DTC may take conflicting
actions with respect to other undivided interests to the extent that such
actions are taken on behalf of Participants whose holdings include such
undivided interests.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of interests in the Notes among
Participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
NONE OF THE TRUST, THE SELLER, THE DEPOSITOR, THE MASTER SERVICER, ANY
SUB-SERVICERS, THE ADMINISTRATOR, THE ELIGIBLE LENDER TRUSTEE, THE INDENTURE
TRUSTEE NOR THE UNDERWRITERS WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO ANY
PARTICIPANTS, CLEARSTREAM PARTICIPANTS OR EUROCLEAR PARTICIPANTS OR THE PERSONS
FOR WHOM THEY ACT AS NOMINEES WITH RESPECT TO (1) THE ACCURACY OF ANY RECORDS
MAINTAINED BY DTC, CLEARSTREAM OR EUROCLEAR OR ANY PARTICIPANT, (2) THE PAYMENT
BY DTC, CLEARSTREAM OR EUROCLEAR OR ANY PARTICIPANT OF ANY AMOUNT DUE TO ANY
BENEFICIAL OWNER IN RESPECT OF THE PRINCIPAL AMOUNT OF OR INTEREST ON THE
SECURITIES, (3) THE DELIVERY BY ANY PARTICIPANT, CLEARSTREAM PARTICIPANT OR
EUROCLEAR PARTICIPANT OF ANY NOTICE TO ANY BENEFICIAL OWNER WHICH IS REQUIRED OR
PERMITTED UNDER THE TERMS OF THE INDENTURE OR THE TRUST AGREEMENT TO BE GIVEN TO
SECURITYHOLDERS OR (4) ANY OTHER ACTION TAKEN BY DTC AS THE SECURITYHOLDER.
DEFINITIVE SECURITIES
Except with respect to the Certificates of a given series that may be
purchased by the Seller or the Depositor, as applicable, or an affiliate of the
Seller or the Depositor, as applicable, the Notes and the Certificates of a
given series will be issued in fully registered, certificated form ("Definitive
Notes" and "Definitive Certificates", respectively, and collectively referred to
herein as "Definitive Securities") to Noteholders or Certificateholders or their
respective nominees, rather than to DTC or its nominee, only if:
(a) the related Administrator advises the Applicable Trustee in writing
that DTC is no longer willing or able to discharge properly its
responsibilities as depository with respect to the Securities and the
Administrator is unable to locate a qualified successor,
(b) the Administrator, at its option, elects to terminate the book-entry
system through DTC, or
(c) after the occurrence of an Event of Default or a Master Servicer
Default, Securityholders representing at least a majority of the
outstanding principal amount of the applicable class of Notes or the
Certificates, as the case may be, of such series advise the Applicable
Trustee through DTC in writing that the continuation of a book-entry
system through DTC (or a successor thereto) with respect to the Notes
of such class or Certificates of such series is no longer in the best
interest of the holders of such Securities.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Applicable Trustee will be required to notify all applicable
Securityholders of a given series through Participants of the availability of
Definitive Securities. Upon surrender by DTC of the Definitive Securities
representing the corresponding Securities and receipt of instructions for
re-registration, the Applicable Trustee will reissue such Securities as
Definitive Securities to such Securityholders.
Distributions of principal of, and interest on, such Definitive Securities
will thereafter be made by the Applicable Trustee in accordance with the
procedures set forth in the related Indenture or the related Trust Agreement, as
the case may be, directly to holders of Definitive Securities in whose names the
Definitive Securities were registered at the close of business on the applicable
Record Date which will be the business day preceding each Distribution Date,
unless otherwise specified in the related Prospectus Supplement (the "Record
Date") specified for such Securities in the related Prospectus Supplement. Such
distributions will be made by check mailed to the address of such holder as it
appears on the register maintained by the Applicable Trustee. The final payment
on any such Definitive Security, however, will be made only upon presentation
and surrender of such Definitive Security at the office or agency specified in
the notice of final distribution to applicable Securityholders.
Definitive Securities will be transferable and exchangeable at the offices
of the Applicable Trustee or of a registrar named in a notice delivered to
holders of Definitive Securities. No service charge will be imposed for any
registration of transfer or exchange, but the Applicable Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
LIST OF SECURITYHOLDERS
Three or more holders of Notes or one or more holders of Notes evidencing
not less than 25% of the aggregate outstanding principal balance of such Notes
may, by written request to the related Indenture Trustee, obtain access to the
list of all Noteholders maintained by such Indenture Trustee for the purpose of
communicating with other Noteholders with respect to their rights under the
related Indenture or such Notes. Such Indenture Trustee may elect not to afford
the requesting Noteholders access to the list of Noteholders if it agrees to
mail the desired communication or proxy, on behalf and at the expense of the
requesting Noteholders, to all Noteholders of such series.
Three or more Certificateholders of such series or one or more holders of
such Certificates evidencing not less than 25% of the Certificate Balance of
such Certificates may, by written request to the related Eligible Lender
Trustee, obtain access to the list of all Certificateholders for the purpose of
communicating with other Certificateholders with respect to their rights under
the related Trust Agreement or under such Certificates.
REPORTS TO SECURITYHOLDERS
With respect to each series of Securities, on each Distribution Date, the
Applicable Trustee will provide to Securityholders of record as of the related
Record Date a statement setting forth substantially the same information as is
required to be provided on the periodic report provided to the related Indenture
Trustee and the related Trust described under "Description of the Transfer and
Servicing Agreements--Statements to Indenture Trustee and Trust." Such
statements will be filed with the Commission during the period required by Rule
15d-1 under the Exchange Act and will not be filed with the Commission
thereafter. The statements provided to Securityholders will not constitute
financial statements prepared in accordance with generally accepted accounting
principles.
Unless and until Definitive Notes or Definitive Certificates are issued,
quarterly and annual unaudited reports containing information concerning the
Student Loans will be prepared by Key Bank USA, National Association and sent on
behalf of the related Trust only to Cede, as nominee of DTC and registered
holder of the Notes and the Certificates, but will not be sent to any beneficial
holder of the Securities.
Within the prescribed period of time for tax reporting purposes after the
end of each calendar year during the term of each Trust, the Applicable Trustee
will mail to each person who at any time during such calendar year was a
Securityholder with respect to such Trust and received any payment thereon, a
statement containing certain information for the purposes of such
Securityholder's preparation of federal income tax returns. See "Income Tax
Consequences."
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
GENERAL
The following is a summary of the material terms of each Sale and Servicing
Agreement (each a "Sale and Servicing Agreement"), pursuant to which the related
Eligible Lender Trustee on behalf of a Trust will purchase Student Loans from
the Seller or the Depositor, as applicable, and the Master Servicer will (or
will cause the related Sub-Servicers to) service the same; each Administration
Agreement, pursuant to which the Administrator will undertake certain
administrative duties with respect to a Trust and the Student Loans; each Trust
Agreement, pursuant to which a Trust will be created and the related
Certificates will be issued; and one or more student loan transfer agreements
(each a "Student Loan Transfer Agreement"), pursuant to which, when the
Depositor is selling the Student Loans relating to any given series, the
Depositor will purchase such Student Loans from the Seller and/or one or more
affiliates of the Seller to the extent specified in the related Prospectus
Supplement (collectively, the "Transfer and Servicing Agreements"). A form of
the Sale and Servicing Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. Following the closing
of a given series, a Form 8-K will be filed with the Commission containing
copies of each of the Transfer and Servicing Agreements for the related series.
This summary does not purport to be complete and is qualified in its entirety by
reference to all of the provisions of the related Transfer and Servicing
Agreements.
In addition, and if so provided in the related Prospectus Supplement, the
Master Servicer may directly assume servicing responsibilities for some or all
of a pool of Financed Student Loans without a sub-servicer, or the related Trust
may contract directly with one or more Sub-Servicers, pursuant to the related
Sale and Servicing Agreement, to perform all of the requisite servicing
responsibilities with respect to the related pool of Financed Student Loans
without the appointment of a master servicer, on the terms and conditions set
forth herein and therein.
Notwithstanding the foregoing, and if so provided in the related Prospectus
Supplement, KBUSA may also choose not to act as Master Servicer with respect to
a Trust. In such instance, the related Sub-Servicer (or Sub-Servicers) will
enter into the Sale and Servicing Agreement, as servicer (or servicers), with
the related Trust directly and will undertake to perform all of the obligations
and responsibilities of the Master Servicer set forth herein and in the related
Prospectus Supplement with respect to the Student Loans it is responsible for
servicing on the terms and conditions set forth in the related Prospectus
Supplement and such Sale and Servicing Agreement.
SALE OF STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
On or prior to the Closing Date specified with respect to any given Trust
in the related Prospectus Supplement (the "Closing Date"), the Depositor and/or
the Seller, as applicable, will sell and assign to the related Eligible Lender
Trustee on behalf of such Trust, without recourse, except as provided in the
Student Loan Transfer Agreement and/or the Sale and Servicing Agreement, as
applicable, its respective, entire interest in the Student Loans, all
collections received and to be received with respect thereto for the period on
and after the Cutoff Date and all the Assigned Rights pursuant to the Sale and
Servicing Agreement. Each Student Loan will be identified in a schedule
appearing as an exhibit to such Sale and Servicing Agreement. Each Eligible
Lender Trustee will, concurrently with such sale and assignment, execute,
authenticate and deliver the related Certificates and Notes. The net proceeds
received from the sale of the related Notes and Certificates will be applied to
the purchase of the Student Loans.
In each Sale and Servicing Agreement, the Depositor and/or the Seller
and/or with respect to those Student Loans purchased from one or more affiliates
of the Seller, the Master Servicer (or such other entity specified in the
related Prospectus Supplement), as applicable, will make certain representations
and warranties with respect to the Student Loans to a Trust for the benefit of
the Certificateholders and the Noteholders of a given series, including, among
other things, that:
o each Student Loan, on the date on which it is transferred to such
Trust, is free and clear of all security interests, liens, charges and
encumbrances and no offsets, defenses or counterclaims with respect
thereto have been asserted or threatened;
o the information provided with respect to the Student Loans is true and
correct as of the Cutoff Date; and
o each Student Loan, at the time it was originated, complied and, at the
Closing Date, complies in all material respects with applicable
federal and state laws (including, without limitation, the Higher
Education Act) and applicable restrictions imposed by the Programs or
any Guarantee Agreement.
Following the discovery by or notice to the Seller, the Master Servicer (or
such other entity specified in the related Prospectus Supplement), or the
Depositor, as applicable, of a breach of any representation or warranty with
respect to any Student Loan that materially and adversely affects the interests
of the related Certificateholders or the Noteholders in such Student Loan (it
being understood that any such breach that does not affect any Guarantor's
obligation to guarantee payment of such Student Loan will not be considered to
have such a material adverse effect), the Seller will (or the Depositor shall
cause the Seller or the Master Servicer (or such other entity specified in the
related Prospectus Supplement), as applicable, to), unless such breach is cured
within 60 days, repurchase such Student Loan from the related Eligible Lender
Trustee, as of the first day following the end of such 60-day period that is the
last day of a Collection Period (as such term is defined in the related
Prospectus Supplement, the "Collection Period") at a price equal to the unpaid
principal balance owed by the applicable borrower plus accrued interest thereon
to the day of repurchase (the "Purchase Amount"). In addition, the Seller will
(or the Depositor shall cause the Seller or the Master Servicer (or such other
entity specified in the related Prospectus Supplement), as applicable, to)
reimburse the related Trust with respect to a Federal Loan for any accrued
interest amounts that a Federal Guarantor refuses to pay pursuant to its
Guarantee Agreement due to, or for any Interest Subsidy Payments and Special
Allowance Payments that are lost or that must be repaid to the Department as a
result of, a breach of any such representation or warranty by the Seller, the
Master Servicer (or such other entity specified in the related Prospectus
Supplement), or the Depositor, as applicable. The repurchase and reimbursement
obligations of the Seller, the Master Servicer (or such other entity specified
in the related Prospectus Supplement), or the Depositor, as applicable, will
constitute the sole remedy available to or on behalf of the related Trust, the
Certificateholders or the Noteholders for any such uncured breach. The Seller's,
the Master Servicer's or the Depositor's, as applicable, repurchase and
reimbursement obligations are contractual obligations pursuant to the Sale and
Servicing Agreement that may be enforced against the Seller, the Master Servicer
(or such other entity specified in the related Prospectus Supplement) or the
Depositor, as applicable, but the breach of which will not constitute an Event
of Default.
To assure uniform quality in servicing and to reduce administrative costs,
the Master Servicer will appoint each Sub-Servicer the custodian of the
promissory notes representing the Student Loans which such Sub-Servicer is
servicing and any other related documents on behalf of the Master Servicer with
respect to each Trust. The Seller's and/or the Depositor's, as applicable, the
Master Servicer's and the Sub-Servicers' records and computer systems will
reflect the sale and assignment by the Seller or the Depositor, as applicable,
of the Student Loans to the related Eligible Lender Trustee on behalf of the
related Trust, and UCC financing statements reflecting such sale and assignment
will be filed.
ADDITIONAL FUNDINGS
In the case of a Trust having a Pre-Funding Account or an Escrow Account,
such Trust will use funds on deposit in such account from time to time during
the related Funding Period or Revolving Period, respectively, (x) to make
interest payments to Noteholders and Certificateholders in lieu of collections
of interest on certain of the Student Loans to the extent such interest is not
paid currently but is capitalized and added to the principal balance of such
Student Loans and (y) to fund the addition of Student Loans to the Trust under
the circumstances and having the characteristics described in the related
Prospectus Supplement ("Additional Fundings"). Such additional Student Loans may
be purchased by the Trust from the Seller or the Depositor, as applicable, or
may be originated by the Trust, if and to the extent specified in the related
Prospectus Supplement.
There can be no assurance that substantially all of the amounts on deposit
in any Pre-Funding Account or Escrow Account will be expended during the related
Funding Period or Revolving Period, respectively. If the amount initially
deposited into a Pre-Funding Account or an Escrow Account for a series has not
been reduced to zero by the end of the related Funding Period or Revolving
Period, respectively, the amounts remaining on deposit therein will be
distributed to the related Securityholders in the amounts described in the
related Prospectus Supplement.
If and to the extent specified in the related Prospectus Supplement, the
related Trust may use distributions on the Student Loans, or may exchange
Student Loans with the Seller or the Depositor, as applicable, in order to pay
for Additional Fundings after any Funding Period or Revolving Period.
ACCOUNTS
With respect to each Trust, and to the extent provided in the related
Prospectus Supplement, the Administrator will establish and maintain one or more
accounts entitled the "Collection Account", the "Pre-Funding Account", the
"Escrow Account", the "Cap Account," the "Demand Deposit Account," the "Negative
Carry Account" and the "Reserve Account" (collectively, the "Trust Accounts"),
in the name of the Indenture Trustee on behalf of the Noteholders and the
Certificateholders.
For any series of Securities, funds in the Trust Accounts will be invested
as provided in the related Sale and Servicing Agreement in Eligible Investments.
"Eligible Investments" are generally limited to short-term U.S. government
backed securities, certain highly rated commercial paper and money market funds
and other investments acceptable to the Rating Agencies as being consistent with
the rating of the Securities. Subject to certain conditions, Eligible
Investments may include securities or other obligations issued by the Seller or
its affiliates, or trusts originated by the Seller or its affiliates, or shares
of investment companies for which the Seller or its affiliates may serve as the
investment advisor. Eligible Investments are limited to obligations or
securities that mature not later than the business day immediately preceding the
next Distribution Date. Investment earnings on funds deposited in the Trust
Accounts, net of losses and investment expenses (collectively, "Investment
Earnings"), will be deposited in the Collection Account on each Distribution
Date and will be treated as collections of interest on the related Student
Loans.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in such account, so long as any of the
securities of such depository institution have a credit rating from each Rating
Agency in one of its generic rating categories which signifies investment grade.
Any such accounts may be maintained with the Seller or any of its affiliates, if
such accounts meet the requirements described in clause (a) of the preceding
sentence. "Eligible Institution" means a depository institution (which may be,
without limitation, the Seller or an affiliate thereof, or the Indenture Trustee
or an affiliate thereof) organized under the laws of the United States of
America or any one of the states thereof or the District of Columbia (or any
domestic branch of a foreign bank), which has a long-term unsecured debt rating
acceptable and/or a short-term unsecured debt rating or certificate of deposit
rating acceptable to the Rating Agencies, and the deposits of which are insured
by the Federal Deposit Insurance Corporation (the "FDIC").
SERVICING PROCEDURES
Pursuant to each Sale and Servicing Agreement, the Master Servicer will
agree to service, and perform all other related tasks with respect to, all the
Student Loans acquired from time to time on behalf of each Trust. So long as no
claim is being made against a Guarantor for any Student Loan, the Master
Servicer will designate the related Sub-Servicer to hold as custodian on its
behalf and on behalf of the Trust, the notes evidencing, and other documents
relating to, that Student Loan. Pursuant to the related Sale and Servicing
Agreement, the Master Servicer is responsible for performing all services and
duties customary to the servicing of Student Loans (including all collection
practices), and to do so (or to cause the Sub-Servicers to do so) with
reasonable care and in compliance with, and to otherwise comply with, all
standards and procedures provided for in the Higher Education Act, the Guarantee
Agreements and all other applicable federal and state laws. Notwithstanding the
foregoing, the Master Servicer may designate one or more Sub-Servicers to
perform some or all of the requisite duties listed above; provided, however,
that irrespective of the performance or non-performance by a Sub-Servicer, the
Master Servicer shall not be relieved of its responsibilities and obligations
under the Sale and Servicing Agreement.
Without limiting the foregoing, the duties of the Master Servicer (any or
all of which may be delegated by the Master Servicer to a Sub-Servicer) with
respect to each Trust under the related Sale and Servicing Agreement will
include, but not be limited to, the following: collecting and depositing into
the Collection Account (or in the event that daily deposits are not required,
paying to the Administrator) all payments, including claiming and obtaining any
Guarantee Payments, but excluding such tasks with respect to any Interest
Subsidy Payments and Special Allowance Payments with respect to the Student
Loans (as to which the Administrator and the Eligible Lender Trustee will
perform, see "--Administrator" below, responding to inquiries from borrowers
under the Student Loans, investigating delinquencies and sending out statements,
payment coupons and tax reporting information to borrowers. Notwithstanding the
foregoing, if any of the foregoing activities requires any consents, approvals
or licenses under the Higher Education Act or otherwise, the Master Servicer
shall designate one or more Sub-Servicers that possess such required consents,
approvals and licenses to perform some or all of the requisite duties listed
above; provided, however, that irrespective of the performance or
non-performance by such Sub-Servicer, the Master Servicer shall be responsible
for any failure of a Sub-Servicer to perform such activities. In addition, the
Master Servicer will (or will cause each Sub-Servicer to) keep ongoing records
with respect to such Student Loans and collections thereon and will furnish
quarterly and annual statements with respect to such information to the
Administrator, in accordance with the Master Servicer's or such Sub-Servicer's
customary servicing practices, as applicable, with respect to Student Loans and
as otherwise required in the related Sale and Servicing Agreement.
PAYMENTS ON STUDENT LOANS
With respect to each Trust, except as provided below, the Master Servicer
will (or will cause each Sub-Servicer to) deposit all payments on Student Loans
(from whatever source), and all proceeds of Student Loans collected by it during
each Collection Period into the Collection Account within two business days of
receipt thereof. Except as provided below, the Eligible Lender Trustee will
deposit all Interest Subsidy Payments and all Special Allowance Payments with
respect to the Student Loans received by it during each Collection Period into
the Collection Account within two business days of receipt thereof.
However, in the event that KBUSA satisfies certain requirements for
quarterly remittances and the Rating Agencies affirm their ratings of the Notes
and the Certificates of each series at the initial level, then so long as KBUSA
is the Administrator and provided that (x) there exists no Administrator Default
and (y) each other condition to making quarterly deposits as may be specified by
the Rating Agencies is satisfied, the Eligible Lender Trustee and the Master
Servicer will (and the Master Servicer will cause each Sub-Servicer to) pay all
the amounts referred to in the preceding paragraph that would otherwise be
deposited into the Collection Account to the Administrator, and the
Administrator will not be required to deposit such amounts into the Collection
Account until on or before the business day immediately preceding each Monthly
Servicing Payment Date (as such term is defined in the related Prospectus
Supplement, the "Monthly Servicing Payment Date") (to the extent of the Master
Servicing Fee payable on such date) and on or before the business day
immediately preceding each Distribution Date (to the extent of the remainder of
such amounts). In such event, the Administrator will deposit the aggregate
Purchase Amount of each Student Loans repurchased by the Seller (or by the
Seller at the direction of the Depositor, if applicable) and purchased by the
Master Servicer (or a Sub-Servicer) into the Collection Account on or before the
business day preceding each Distribution Date. Pending deposit into the
Collection Account, collections may be invested by the Administrator at its own
risk and for its own benefit, and will not be segregated from funds of the
Administrator.
MASTER SERVICER COVENANTS
With respect to each Trust, the Master Servicer will covenant in the
related Sale and Servicing Agreement that:
(a) it will (or will cause each Sub-Servicer to) duly satisfy all
obligations on its part to be fulfilled under or in connection with
the Student Loans, maintain in effect all qualifications required in
order to service the Student Loans and comply in all material respects
with all requirements of law in connection with servicing the Student
Loans, the failure to comply with which would have a materially
adverse effect on the related Certificateholders or Noteholders;
(b) it will not permit (nor will it allow any Sub-Servicer to permit) any
rescission or cancellation of a Student Loan except as ordered by a
court of competent jurisdiction or other government authority or as
otherwise consented to by the related Eligible Lender Trustee and the
related Indenture Trustee;
(c) it will do nothing to (nor will it permit any Sub-Servicer to) impair
the rights of the related Certificateholders and the related
Noteholders in the Student Loans; and
(d) it will not (nor will it permit any Sub-Servicer to) reschedule,
revise, defer or otherwise compromise with respect to payments due on
any Student Loan except pursuant to any applicable deferral or
forbearance periods or otherwise in accordance with its guidelines for
servicing student loans in general and those of the Seller in
particular and any applicable Program requirements.
If specified in the related Prospectus Supplement, certain incentive
programs currently or hereafter made available by the Seller to borrowers may
also be made available by the Master Servicer (or a Sub-Servicer) to borrowers
with Financed Student Loans and if an incentive program is not in existence as
of the date of the related Prospectus Supplement or not described in such
Prospectus Supplement, then any such incentive program that effectively reduces
borrower payments on Financed Student Loans and, with respect to Financed
Federal Loans, is not required by the Higher Education Act, will be applicable
to the Financed Student Loans only if and to the extent that the Master Servicer
(or a Sub-Servicer) receives payment on behalf of the Trust from the Seller or
the Depositor, as applicable, in an amount sufficient to offset such effective
yield reductions. See "The Student Loan Financing Business--Incentive Programs"
herein.
Under the terms of the related Sale and Servicing Agreement, unless
otherwise specified in the related Prospectus Supplement, if the Seller, the
Depositor, or the Master Servicer, as applicable, discovers, or receives written
notice, that any covenant of Master Servicer set forth above has not been
complied with by the Master Servicer in all material respects and such
noncompliance has not been cured within 60 days thereafter and has a materially
adverse effect on the interest of the related Certificateholders or Noteholders
in any Student Loan (it being understood that any such breach that does not
affect any Guarantor's obligation to guarantee payment of such Student Loan will
not be considered to have such a material adverse effect), unless such breach is
cured, the Master Servicer will purchase such Student Loan as of the first day
following the end of such 60-day period that is the last day of a Collection
Period. In that event, the Master Servicer will be obligated to deposit into the
Collection Account an amount equal to the Purchase Amount of such Student Loan
and the related Trust's interest in any such purchased Student Loan will be
automatically assigned to the Master Servicer. In addition, the Master Servicer
will reimburse the related Trust with respect to any Federal Loan for any
accrued interest amounts that a Federal Guarantor refuses to pay pursuant to its
Guarantee Agreement due to, or for any Interest Subsidy Payments and Special
Allowance Payments that are lost or that must be repaid to the Department as a
result of, a breach of any such covenant of the Master Servicer.
MASTER SERVICING COMPENSATION
With respect to any Trust, the Master Servicer will be entitled to receive
a servicing fee monthly in an amount in the aggregate equal to a specified
amount per annum of the Pool Balance as of the last day of the preceding
calendar month as set forth in the related Prospectus Supplement and, if
applicable, certain one-time fixed fees for each Student Loan, together with
other administrative fees, late fees and similar charges specified in the
related Prospectus Supplement as compensation for performing the functions as
servicers for the related Trust described above (the "Master Servicing Fee").
The Master Servicing Fee (together with any portion of the Master Servicing Fee
that remains unpaid from prior Distribution Dates) will be paid as specified in
the applicable Prospectus Supplement.
The Master Servicing Fee will compensate the Master Servicer for performing
(or causing the Sub-Servicers to perform) the functions of third party servicers
of student loans as agents for their beneficial owner, including collecting and
posting all payments, responding to inquiries of borrowers on the Student Loans,
investigating delinquencies, pursuing, filing and collecting any Guarantee
Payments, accounting for collections and furnishing monthly and annual
statements to the Administrator. The Master Servicing Fee also will reimburse
the Master Servicer for certain taxes, accounting fees, outside auditor fees,
data processing costs and other costs incurred by the Master Servicer or the
Sub-Servicers in connection with administering the Student Loans. The monthly
fees of the Sub-Servicers will be paid solely by the Master Servicer pursuant to
the terms of the applicable Sub-Servicing Agreement.
If provided in the related Prospects Supplement, in the event of (x) any
sale of the Student Loans on behalf of the Trust to any person (other than the
Seller or the Depositor, as applicable, the Master Servicer, the Administrator,
or the Sub-Servicers) in which the purchaser elects to deconvert the Student
Loans and not retain the applicable Sub-Servicer as the servicer of such Student
Loans, or (y) any termination of the applicable Sub-Servicer of the Student
Loans, except for any termination for cause or as a result of any unremedied
defaults by the applicable Sub-Servicer, the Trust shall pay to the Master
Servicer, as a part of the Master Servicing Fee, a deconversion fee per loan
based on the status of the loan at the time of deconversion, in the amount set
forth in the related Prospectus Supplement, but only to the extent that the
Master Servicer is so obligated to the applicable Sub-Servicer.
DISTRIBUTIONS
With respect to each series of Securities, beginning on the Distribution
Date specified in the related Prospectus Supplement, distributions of principal
and interest on each class of such Securities entitled thereto will be made by
the applicable Trustee to the Noteholders and the Certificateholders of such
series. The timing, calculation, allocation, order, source, priorities of and
requirements for all payments to each class of Noteholders and all distributions
to each class of Certificateholders of such series will be set forth in the
related Prospectus Supplement.
With respect to each Trust, collections on the related Student Loans will
be distributed from the Collection Account on each Distribution Date to
Noteholders and Certificateholders to the extent provided in the related
Prospectus Supplement. Credit and cash flow enhancement, such as a Reserve
Account, will be available to cover any shortfalls in the amount available for
distribution on such date to the extent specified in the related Prospectus
Supplement. As more fully described in the related Prospectus Supplement, and
unless otherwise specified therein, distributions in respect of principal and/or
interest of a class of Securities of a given series will be subordinate to
distributions in respect of interest on one or more other classes of such
series, and distributions in respect of the Certificates of such series may be
subordinate to payments in respect of the Notes of such series.
CREDIT AND CASH FLOW ENHANCEMENT
GENERAL. The amounts and types of credit enhancement arrangements and the
provider thereof, if applicable, with respect to each class of Securities of a
given series, if any, will be set forth in the related Prospectus Supplement. If
and to the extent provided in the related Prospectus Supplement, credit
enhancement may be in the form of subordination of one or more classes of
Securities, Reserve Accounts, over-collateralization, letters of credit, credit
or liquidity facilities, surety bonds, guaranteed investment contracts,
repurchase obligations, interest rate swaps, interest rate caps, interest rate
floors, currency swaps, other agreements with respect to third party payments or
other support, cash deposits or such other arrangements as may be described in
the related Prospectus Supplement or any combination of two or more of the
foregoing. If specified in the applicable Prospectus Supplement, credit
enhancement for a class of Securities may cover one or more other classes of
Securities of the same series, and credit enhancement for a series of Securities
may cover one or more other series of Securities.
The presence of a Reserve Account and other forms of credit enhancement for
the benefit of any class or series of Securities is intended to enhance the
likelihood of receipt by the Securityholders of such class or series of the full
amount of principal and interest due thereon and to decrease the likelihood that
such Securityholders will experience losses. The credit enhancement for a class
or series of Securities generally will not provide protection against all risks
of loss and will not guarantee repayment of the entire principal balance and
interest thereon. If losses occur which exceed the amount covered by any credit
enhancement or which are not covered by any credit enhancement, Securityholders
of any class or series will bear their allocable share of deficiencies, as
described in the related Prospectus Supplement. In addition, if a form of credit
enhancement covers more than one series of Securities, Securityholders of any
such series will be subject to the risk that such credit enhancement will be
exhausted by the claims of Securityholders of other series.
RESERVE ACCOUNT. If so provided in the related Prospectus Supplement,
pursuant to the related Sale and Servicing Agreement, the Seller or the
Depositor, as applicable, will establish for a series or class of Securities a
Reserve Account, as specified in the related Prospectus Supplement, which will
be maintained in the name of the applicable Indenture Trustee. Unless otherwise
provided in the related Prospectus Supplement, the Reserve Account will be
funded by an initial deposit by the Seller or the Depositor, as applicable, on
the Closing Date in the amount set forth in the related Prospectus Supplement.
As further described in the related Prospectus Supplement, the amount on deposit
in the Reserve Account will be increased on each Distribution Date thereafter up
to the Specified Reserve Account Balance by the deposit therein of the amount of
collections on the related Student Loans remaining on each such Distribution
Date after the payment of all other required payments and distributions on such
date. Amounts in the Reserve Account will be available to cover shortfalls in
amounts due to the holders of those classes of Securities specified in the
related Prospectus Supplement in the manner and under the circumstances
specified therein. The related Prospectus Supplement will also specify to whom
and the manner and circumstances under which amounts on deposit in the Reserve
Account (after giving effect to all other required distributions to be made by
the applicable Trust) in excess of the Specified Reserve Account Balance will be
distributed.
The Reserve Account is intended to enhance the likelihood of timely receipt
by the holders of Notes and the holders of Certificates of the full amount of
interest due them and to decrease the likelihood that such holders will
experience losses. In certain circumstances, however, the Reserve Account could
be depleted.
STATEMENTS TO INDENTURE TRUSTEE AND TRUST
Prior to each Distribution Date with respect to each series of Securities,
the Administrator (based on the periodic statements and other information
provided to it by the Master Servicer or the Sub-Servicers) will provide to the
Indenture Trustee and the Trust, as of the close of business on the last day of
the preceding Collection Period, a statement which will include the following
information (and any other information so specified in the related Prospectus
Supplement) with respect to such Distribution Date or the preceding Collection
Period as to the Notes and the Certificates of such series, to the extent
applicable:
1. the amount of the distribution allocable to principal of each class
of Securities;
2. the amount of the distribution allocable to interest on each class
of Securities;
3. the amount of the distribution, if any, allocable to any Interest
Index Carryover together with the outstanding amount, if any, thereof after
giving effect to any such distribution;
4. the Pool Balance as of the close of business on the last day of the
preceding Collection Period, after giving effect to payments allocated to
principal reported as described in clause (1.) above;
5. the aggregate outstanding principal balance of each class of Notes,
the Certificate Balance and each Pool Factor as of such Distribution Date,
after giving effect to payments allocated to principal reported under
clause (1.) above;
6. the amount of the Master Servicing Fee and any Excess Master
Servicing Fee paid to the Master Servicer and the amount of the
Administration Fee paid to the Administrator with respect to such
Collection Period;
7. the Interest Rate or Pass-Through Rate applicable for any class of
Notes or Certificates of such series with variable or adjustable rates;
8. the amount of the aggregate realized losses, if any, for such
Collection Period and the balance of Student Loans that are delinquent in
each delinquency period as of the end of such Collection Period;
9. the Certificateholders' Index Carryover Shortfall, the Noteholders'
Index Carryover Shortfall, the Noteholders' Interest Carryover Shortfall,
the Noteholders' Principal Carryover Shortfall, the Certificateholders'
Interest Carryover Shortfall and the Certificateholders' Principal
Carryover Shortfall (each as defined in the related Prospectus Supplement),
if any, in each case as applicable to each class of Securities, and the
change in such amounts from the preceding statement;
10. the aggregate Purchase Amounts for Student Loans, if any, that
were purchased in such Collection Period;
11. the balance of the Reserve Account (if any) on such Distribution
Date, after giving effect to changes therein on such Distribution Date;
12. for Distribution Dates during the Funding Period (if any), the
remaining Pre-Funded Amount (as such term is defined in the related
Prospectus Supplement, the "Pre-Funded Amount") on such Distribution Date,
after giving effect to changes therein during the related Collection Period
or for each Distribution date during the Revolving Period (if any), the
amount on deposit in the Escrow Account; and
13. the aggregate amount of TERI Guarantee Payments deposited into the
Collection Account (net of certain specified amounts) expressed as a
percentage of the Initial Pool Balance.
Each amount set forth pursuant to subclauses (1), (2) (5) and (6) with respect
to the Notes or the Certificates of any series will be expressed as a dollar
amount per $1,000 of the initial principal amount of such Notes or the initial
Certificate Balance of such Certificates, as applicable.
EVIDENCE AS TO COMPLIANCE
Each Sale and Servicing Agreement will provide that a firm of independent
public accountants will furnish to the Trust and the Indenture Trustee annually
a statement (based on a limited examination of certain documents and records and
on such accounting and auditing procedures considered appropriate under the
circumstances) as to compliance by the Master Servicer and the Sub-Servicers
during the preceding calendar year (or, in the case of the first such
certificate, the period from the applicable Closing Date) with certain standards
under the related Sale and Servicing Agreement relating to the servicing of the
Student Loans.
Each Sale and Servicing Agreement will further provide that a firm of
independent public accountants (which may be the same firm referred to in the
immediately preceding paragraph) will furnish to the Trust and the Indenture
Trustee annually a statement (based on the examination of certain documents and
records and on such accounting and auditing procedures considered appropriate
under the circumstances) as to compliance by the Administrator during the
preceding calendar year (or, in the case of the first such certificate, the
period from the applicable Closing Date) with all applicable standards under the
related Sale and Servicing Agreement and the Administration Agreement relating
to the administration of the Trust and the Student Loans.
Each Sale and Servicing Agreement will also provide for delivery to the
Trust and the Indenture Trustee, concurrently with the delivery of each
statement of compliance referred to above, of a certificate signed by an officer
of the Master Servicer or the Administrator, as the case may be, stating that,
to his knowledge, the Master Servicer or the Administrator, as the case may be,
has fulfilled its obligations under the Sale and Servicing Agreement throughout
the preceding calendar year (or, in the case of the first such certificate, the
period from the applicable Closing Date) or, if there has been a default in the
fulfillment of any such obligation, describing each such default. Each of the
Master Servicer, the Administrator and the Sub-Servicers will agree to give the
Indenture Trustee and the Eligible Lender Trustee notice of certain Master
Servicer Defaults and Administrator Defaults under the Sale and Servicing
Agreement.
Copies of such statements and certificates may be obtained by
Securityholders by a request in writing addressed to the Applicable Trustee.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE SUB-SERVICERS
Each Sale and Servicing Agreement will provide that the Master Servicer may
not resign from its obligations and duties as Master Servicer thereunder, except
upon determination that the Master Servicer's performance of such duties is no
longer permissible under applicable law. No such resignation will become
effective until the related Indenture Trustee or a successor servicer has
assumed such Master Servicer's servicing obligations and duties under the Sale
and Servicing Agreement.
Each Sub-Servicing Agreement will provide that the Sub-Servicer may not
resign from its obligations and duties as Sub-Servicer thereunder without the
consent of the Master Servicer, except upon determination that a Sub-Servicer's
performance of such duties is no longer permissible under applicable law. No
such resignation will become effective until the Master Servicer, the related
Indenture Trustee or a successor servicer has assumed such Sub-Servicer's
servicing obligations and duties under the Sub-Servicing Agreement. The Master
Servicer may remove a Sub-Servicer at its discretion and either may undertake
such servicing responsibilities itself or substitute one or more new
Sub-Servicers, with the consent, but only to the extent provided in the related
Prospectus Supplement and required by the related Sale and Servicing Agreement,
of the Eligible Lender Trustee and each Rating Agency; provided, however, the
Master Servicer shall be solely responsible for any termination payments due to
such removed Sub-Servicer.
Each Sale and Servicing Agreement will further provide that neither the
Master Servicer nor any of its directors, officers, employees or agents will be
under any liability to the related Trust or the related Noteholders or
Certificateholders for taking any action or for refraining from taking any
action pursuant to the related Sale and Servicing Agreement, or for errors in
judgment; PROVIDED, HOWEVER, that, unless otherwise limited in the related
Prospectus Supplement, neither the Master Servicer nor any such person will be
protected against any liability that would otherwise be imposed by reason of
willful misfeasance, bad faith or negligence in the performance of the Master
Servicer's duties thereunder or by reason of reckless disregard of its
obligations and duties thereunder. In addition, each Sale and Servicing
Agreement will provide that the Master Servicer is under no obligation to appear
in, prosecute, or defend any legal action that is not incidental to its
servicing responsibilities under such Sale and Servicing Agreement and that, in
its opinion, may cause it to incur any expense or liability.
Under the circumstances specified in each Sale and Servicing Agreement, any
entity into which the Master Servicer may be merged or consolidated, or any
entity resulting from any merger or consolidation to which the Master Servicer
is a party, or any entity succeeding to the business of the Master Servicer,
which corporation or other entity in each of the foregoing cases assumes the
obligations of the Master Servicer, will be the successor of the Master Servicer
under such Sale and Servicing Agreement; and under the circumstances specified
in each Sub-Servicing Agreement, any entity into which a Sub-Servicer may be
merged or consolidated, or any entity resulting from any merger or consolidation
to which the Sub-Servicer is a party, or any entity succeeding to the business
of the Sub-Servicer, which corporation or other entity in each of the foregoing
cases assumes the obligations of the Sub-Servicer, will be the successor of the
Sub-Servicer under such Sub-Servicing Agreement.
MASTER SERVICER DEFAULT; ADMINISTRATOR DEFAULT
Except as otherwise provided in the related Prospectus Supplement, a
"Master Servicer Default" under each Sale and Servicing Agreement will consist
of:
(1) any failure by the Master Servicer to deliver (or to cause a
Sub-Servicer to deliver) to the Indenture Trustee for deposit in any
of the Trust Accounts (or, in the event that daily deposits into the
Collection Account are not required, to the Administrator) any
collections, Guarantee Payments or other amounts received with respect
to the Student Loans, which failure continues unremedied for three
business days after written notice from the Indenture Trustee or the
Eligible Lender Trustee is received by the Master Servicer or after
discovery by the Master Servicer;
(2) any failure by the Master Servicer to duly observe or perform in any
material respect any other covenant or agreement in the related Sale
and Servicing Agreement, which failure materially and adversely
affects the rights of Noteholders or Certificateholders and which
continues unremedied for 60 days after the giving of written notice of
such failure (x) to the Master Servicer by the Indenture Trustee, the
Eligible Lender Trustee, the Master Servicer or the Administrator or
(y) to the Master Servicer and to the Indenture Trustee and the
Eligible Lender Trustee by holders of Notes or Certificates, as
applicable, evidencing not less than 25% in principal amount of the
outstanding Notes or Certificates;
(3) certain events of insolvency, readjustment of debt, marshaling of
assets and liabilities, or similar proceedings with respect to the
Master Servicer and certain actions by the Master Servicer indicating
its insolvency, reorganization pursuant to bankruptcy proceedings or
inability to pay its obligations; and
(4) failure by the Master Servicer to comply with any requirements under
the Higher Education Act resulting in a loss of its eligibility as a
third-party servicer.
Except as otherwise provided in the related Prospectus Supplement,
"Administrator Default" under each Sale and Servicing Agreement or each
Administration Agreement will consist of
(1) (A) in the event that daily deposits into the Collection Account are
not required, any failure by the Administrator to deliver to the
Indenture Trustee for deposit in any of the Trust Accounts any
required payment on or before the business day prior to any monthly
servicing payment date or Distribution Date, as applicable, or (B) any
failure by the Administrator to direct the Indenture Trustee to make
any required distributions from any of the Trust Accounts on any
monthly servicing payment date or any Distribution Date, which failure
in case of either clause (A) or (B) continues unremedied for three
business days after written notice from the Indenture Trustee or the
Eligible Lender Trustee is received by the Administrator or after
discovery by the Administrator;
(2) any failure by the Administrator duly to observe or perform in any
material respect any other covenant or agreement in each
Administration Agreement or each Sale and Servicing Agreement which
failure materially and adversely affects the rights of Noteholders or
Certificateholders and which continues unremedied for 60 days after
the giving of written notice of such failure (x) to the Administrator
by the Indenture Trustee or the Eligible Lender Trustee or (y) to the
Administrator, the Master Servicer and to the Indenture Trustee and
the Eligible Lender Trustee by holders of Notes or Certificates, as
applicable, evidencing not less than 25% in principal amount of the
outstanding Notes or Certificates; and
(3) certain events of insolvency, readjustment of debt, marshaling of
assets and liabilities, or similar proceedings with respect to the
Administrator and certain actions by the Administrator indicating its
insolvency or inability to pay its obligations.
RIGHTS UPON MASTER SERVICER DEFAULT AND ADMINISTRATOR DEFAULT
As long as a Master Servicer Default under a Sale and Servicing Agreement
or an Administrator Default under a Sale and Servicing Agreement or an
Administration Agreement, as the case may be, remains unremedied, the Indenture
Trustee or holders of the specified senior class(es) of Notes evidencing not
less than 25% in aggregate outstanding principal amount of such specified senior
class(es) of Notes may terminate all the rights and obligations of the Master
Servicer under such Sale and Servicing Agreement and/or the Administrator under
such Sale and Servicing Agreement or such Administration Agreement, as the case
may be, whereupon a successor servicer or administrator appointed by the related
Indenture Trustee, or such Indenture Trustee, will succeed to all of the
responsibilities, duties and liabilities of the applicable Master Servicer under
such Sale and Servicing Agreement or the Administrator under such Sale and
Servicing Agreement and such Administration Agreement, as the case may be, and
will be entitled to similar compensation arrangements. If, however, a bankruptcy
trustee or similar official has been appointed for the Master Servicer or the
Administrator, as applicable, and no Master Servicer Default or Administrator
Default, as the case may be, other than such appointment has occurred, such
trustee or official may have the power to prevent the Indenture Trustee or the
such specified senior Noteholders from effecting such a transfer. In the event
that such Indenture Trustee is unwilling or unable to so act, it may appoint, or
petition a court of competent jurisdiction for the appointment of, a successor
servicer whose regular business includes the servicing of student loans or a
successor administrator whose regular business includes administering trusts
containing pools of loans or receivables. The Indenture Trustee may make such
arrangements for compensation to be paid, which in no event may be greater than
the compensation to the Master Servicer under such Sale and Servicing Agreement
or the Administrator under such Sale and Servicing Agreement and such
Administration Agreement, as the case may be, unless such compensation
arrangements will result in a downgrading of any related class of Notes or
Certificates by any Rating Agency. In the event a Master Servicer Default or an
Administrator Default, as the case may be, occurs and is continuing, such
Indenture Trustee or the holders of such specified senior class(es) of Notes, as
described above, may cause the removal of the Master Servicer or the
Administrator, as the case may be, without the consent of the related Eligible
Lender Trustee or any of the holders of any other class(es) of Notes or
Certificates. Moreover, only the Indenture Trustee or the holders of the
specified senior class(es) of Notes, and not the Eligible Lender Trustee or the
holders of any other class(es) of Notes or Certificates, have the ability to
remove the Master Servicer or the Administrator, as the case may be, if a Master
Servicer Default or an Administrator Default, as the case may be, occurs and is
continuing.
WAIVER OF PAST DEFAULTS
With respect to each Trust, the holders of Notes evidencing at least a
majority in principal amount of the then specified senior class(es) of
outstanding Notes (or the holders of a more junior class of Notes evidencing not
less than a majority of the outstanding principal balance of such class of
Notes, in the case of any Master Servicer Default which does not adversely
affect the Indenture Trustee or the Noteholders of each more senior class of
Notes of the related series, or the holders of Certificates evidencing not less
than a majority of the outstanding Certificate Balance, in the case of any
Master Servicer Default which does not adversely affect the Indenture Trustee or
the Noteholders of any class of the related series), may, on behalf of all
Noteholders and Certificateholders, waive any default by the Master Servicer, in
the performance of its obligations under the related Sale and Servicing
Agreement, or any default by the Administrator of its obligations under the
related Sale and Servicing Agreement and the related Administration Agreement,
as the case may be, and their respective consequences, except a default in
making any required deposits to or payments from any of the Trust Accounts or
giving instructions regarding the same in accordance with such Sale and
Servicing Agreement. Therefore, the Noteholders have the ability, except as
noted above, to waive defaults by the Master Servicer or the Administrator, as
the case may be, which could materially adversely affect the Certificateholders.
No such waiver will impair the Noteholders' or the Certificateholders' rights
with respect to subsequent defaults.
Unless and until Definitive Securities are issued, holders of Notes and
Certificates will not be recognized by the Indenture Trustee or the Eligible
Lender Trustee as "Noteholders" or "Certificateholders," as the case may be (as
such terms are used in the Indenture and the Trust Agreement, respectively).
Hence, until Definitive Securities are issued, holders of such Securities will
only be able to exercise the rights of Securityholders indirectly through DTC,
Clearstream or Euroclear and their respective participating organizations.
INSOLVENCY EVENT
If set forth in a related Prospectus Supplement, if any of certain events
of insolvency or receivership, readjustment of debt, marshaling of assets and
liabilities, or similar proceedings with respect to the Seller, the Depositor,
or a special purpose affiliate of the Seller or certain actions by the Seller or
the Depositor or such affiliate indicating its insolvency or inability to pay
its obligations (each, a "Seller Insolvency Event") occurs, the Student Loans
will be liquidated and the related Trust will be terminated 90 days after the
date of such Seller Insolvency Event, unless, before the end of such 90-day
period, the Eligible Lender Trustee shall have received written instructions
from the holders of the Certificates (other than the Seller or the Depositor, as
applicable) representing more than 50% of the aggregate unpaid principal amount
of the Certificates (not including the principal amount of Certificates held by
the Seller or the Depositor, as applicable) to the effect that such group
disapproves of the liquidation of the Student Loans and termination of the
related Trust. Promptly after the occurrence of any Seller Insolvency Event,
notice thereof is required to be given to Noteholders and Certificateholders;
provided that any failure to give such required notice will not prevent or delay
termination of the related Trust. Upon termination of the related Trust, the
Eligible Lender Trustee will direct the Indenture Trustee promptly to sell the
assets of the related Trust (other than the Trust Accounts) in a commercially
reasonable manner and on commercially reasonable terms. Each of the Guarantors
and certain other unrelated third parties will be given the opportunity, upon 30
days' prior notice of any such proposed sale, to bid to purchase the Student
Loans and, if any such entity is the highest bidder, the Student Loans must be
sold to that entity. The proceeds from any such sale, disposition or liquidation
of the Student Loans will be treated as collections thereon and deposited in the
Collection Account. If the proceeds from the liquidation of the Student Loans
and any amounts on deposit in the Reserve Account (if any) are not sufficient to
pay the Notes in full, the amount of principal returned to the holders of Notes
will be delayed and the holders of Notes will incur a loss. If such amounts are
not sufficient to pay the Notes and the Certificates in full, the amount of
principal returned to the holders of Certificates will be delayed and the
holders of Certificates will incur a loss.
Each Trust Agreement will provide that the Eligible Lender Trustee does not
have the power to commence a voluntary proceeding in bankruptcy relating to the
Trust without the unanimous prior approval of all holders of Certificates and
the delivery to the Eligible Lender Trustee by each holder of Certificates of a
certificate certifying that such holder reasonably believes that the related
Trust is insolvent.
AMENDMENT
Each of the Transfer and Servicing Agreements may be amended by the parties
thereto, without the consent of the related Noteholders or the
Certificateholders, for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of such Transfer and Servicing
Agreements or of modifying in any manner the rights of such Noteholders or
Certificateholders; provided that such action will not, in the opinion of
counsel satisfactory to the related Indenture Trustee and the related Eligible
Lender Trustee, materially and adversely affect the interest of any such
Noteholder or Certificateholder. Each of the Transfer and Servicing Agreements
may also be amended by the Seller or the Depositor, as applicable, the
Administrator, the Master Servicer, the related Eligible Lender Trustee and the
related Indenture Trustee, as applicable, with the consent of the holders of
Notes of the related series evidencing at least a majority in principal amount
of each class of then outstanding Notes rated in a similar category by the
applicable Rating Agencies and the holders of Certificates of the related series
evidencing at least a majority of the Certificate Balance for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of such Transfer and Servicing Agreements or of modifying in any
manner the rights of the holders of Notes or the holders of Certificates;
provided, that no such amendment may (x) increase or reduce in any manner the
amount of, or accelerate or delay the timing of, collections of payments
(including any Guarantee Payments) with respect to the Student Loans or
distributions that are required to be made for the benefit of the holders of
Notes or the holders of Certificates or (y) reduce the aforesaid percentage of
the Notes or Certificates which are required to consent to any such amendment,
without the consent of the holders of all the outstanding Notes and
Certificates.
PAYMENT OF NOTES
Upon the payment in full of all outstanding Notes of a given series and the
satisfaction and discharge of the related Indenture, the Eligible Lender Trustee
will succeed to all the rights of the Indenture Trustee, and the
Certificateholders of such series will succeed to all the rights of the
Noteholders of such series, under the related Sale and Servicing Agreement,
except as otherwise provided therein.
SELLER OR DEPOSITOR LIABILITY
Under each Trust Agreement, the Seller or the Depositor, as applicable,
will agree to be liable directly to an injured party for the entire amount of
any losses, claims, damages or liabilities (other than those incurred by a
holder of Notes or a holder of Certificates in the capacity of an investor)
arising out of or based on the arrangement created by the Trust Agreement as
though such arrangement created a partnership under the Delaware Revised Uniform
Limited Partnership Act in which the Seller or the Depositor, as applicable, was
a general partner.
TERMINATION
With respect to each Trust, the obligations of the Seller or the Depositor,
as applicable, the Master Servicer, the Administrator, the related Eligible
Lender Trustee and the related Indenture Trustee pursuant to the related
Transfer and Servicing Agreements will terminate upon (x) the maturity or other
liquidation of the last related Student Loan and the disposition of any amount
received upon liquidation of any such remaining Student Loans and (y) the
payment to the Noteholders and the Certificateholders of the related series of
all amounts required to be paid to them pursuant to such Transfer and Servicing
Agreements.
If so specified in the related Prospectus Supplement, in order to avoid
excessive administrative expense, the Master Servicer will be permitted at its
option to purchase from the related Eligible Lender Trustee, as of the end of
any Collection Period immediately preceding a Distribution Date, if the then
outstanding Pool Balance is less than the percentage specified in the related
Prospectus Supplement of the Initial Pool Balance (as defined in the related
Prospectus Supplement, the "Initial Pool Balance"), all remaining related
Student Loans at a price equal to the aggregate Purchase Amounts thereof as of
the end of such Collection Period, which amounts will be used to retire the
related Notes and Certificates concurrently therewith. Upon termination of a
Trust, as more fully described in the related Prospectus Supplement, all right,
title and interest in the Student Loans and other funds of such Trust, after
giving effect to any final distributions to Noteholders and Certificateholders
of the related series therefrom, will be conveyed and transferred to the Seller
or the Depositor, as applicable, or such other party.
If so provided in the related Prospectus Supplement, any Student Loans
remaining in the related Trust as of the end of the Collection Period
immediately preceding the Distribution Date which occurs immediately after the
10th anniversary of the Closing Date (the "Put Date") shall be sold upon a vote
by the holders of more than 50% of all then outstanding Securities of such
series (excluding for such purpose all Securities owned by the Seller or any of
its affiliates or agents) to an affiliate of the Seller, on such terms and at
such price as shall be provided in the related Prospectus Supplement (who shall
be contractually required to purchase such Student Loans), and if such affiliate
does not purchase the Student Loans then such Student Loans shall be offered for
sale on the next Distribution Date following the Put Date (the "Auction Date")
in one or more pools by the related Indenture Trustee if so instructed by the
holders of more than 50% of all then outstanding Securities of such series
(excluding for such purpose all Securities owned by the Seller or any of its
affiliates or agents). Neither the Seller nor any of its affiliates may offer
bids to purchase such Student Loans on such Auction Date. If at least two bids
are received, the Indenture Trustee will solicit and resolicit bids from all
participating bidders until only one bid remains or the remaining bidders
decline to resubmit bids. The Indenture Trustee will accept the highest of such
remaining bids if it or they, if for separate pools, are equal to or in excess
of an amount (the "Minimum Purchase Amount") equal to the greatest of:
o the Auction Purchase Amount (as such term is defined in the related
Prospectus Supplement, the "Auction Purchase Amount"),
o the fair market value of such Student Loans as of the end of the
Collection Period immediately preceding such Distribution Date, and
o the aggregate unpaid principal amount of the related Notes and
principal balance of the related Certificates plus, in each case,
accrued and unpaid interest thereon payable on such Distribution Date
(other than any Interest Index Carryover).
If at least two bids are not received or the highest bid or combination of bids
after the resolicitation process is completed is not equal to or in excess of
the Minimum Purchase Amount, the Indenture Trustee will not consummate such
sale. In connection with the determination of the Minimum Purchase Amount, the
Indenture Trustee may consult and, at the direction of the Seller or the
Depositor, as applicable, shall consult, with a financial advisor, including the
Underwriters or the Administrator, to determine if the fair market value of the
Student Loans has been offered. The net proceeds of any such sale will be used
to redeem any outstanding Notes and to retire any outstanding Certificates on
such Distribution Date. If the sale is not consummated in accordance with the
foregoing, the Indenture Trustee shall, if so instructed by holders of more than
50% of all then outstanding Securities of such series (excluding for such
purpose all Securities owned by the Seller or any of its affiliates or agents),
solicit bids to purchase the Student Loans on future Distribution Dates upon
terms similar to those described above. No assurance can be given as to whether
the Indenture Trustee will be successful in soliciting acceptable bids to
purchase the Student Loans on either the Auction Date or any subsequent
Distribution Date. The related Prospectus Supplement will specify what will
happen in the event the Student Loans are not sold in accordance with the
foregoing.
ADMINISTRATOR
The Administrator will enter into an agreement (as amended and supplemented
from time to time, an "Administration Agreement") with each Trust and the
related Indenture Trustee and a Sale and Servicing Agreement with the related
Trust, the Seller or the Depositor, as applicable, the Master Servicer and the
Eligible Lender Trustee, pursuant to which the Administrator will agree, to the
extent provided therein,
(a) in the event that daily deposits into the Collection Account are not
required, to deliver to the Indenture Trustee for deposit in any of
the Trust Accounts any required payment on or before the business day
prior to any monthly servicing payment date or any Distribution Date,
as applicable,
(b) to direct the Indenture Trustee to make the required distributions
from the Trust Accounts on each monthly servicing payment date and
each Distribution Date,
(c) to prepare and file with the Department all appropriate claim forms
and other documents and filings on behalf of the Eligible Lender
Trustee in order to claim any Interest Subsidy Payments and Special
Allowance Payments that may be payable in respect of each Collection
Period with respect to the Federal Loans,
(d) to prepare (based on the periodic reports received from the Master
Servicer or the Sub-Servicers) and provide periodic statements to the
Eligible Lender Trustee and the Indenture Trustee with respect to
distributions to Noteholders and Certificateholders and any related
federal income tax reporting information as required by the related
Sale and Servicing Agreement, and
(e) to provide the notices and to perform other administrative obligations
required by the Indenture, the Trust Agreement and the Sale and
Servicing Agreement. As compensation for the performance of the
Administrator's obligations under the Administration Agreement and the
Sale and Servicing Agreement and as reimbursement for its expenses
related thereto, the Administrator will be entitled to an
administration fee in an amount set forth in the related Prospectus
Supplement (the "Administration Fee").
STUDENT LOAN TRANSFER AGREEMENT
If the Depositor is selling the Student Loans with respect to any given
series, on or prior to the Closing Date specified with respect to any given
Trust in the related Prospectus Supplement, the Seller (and/or certain
affiliates of the Seller) will sell and assign to the Depositor, without
recourse, except as provided in the Student Loan Transfer Agreement, their
respective entire interest in the related Student Loans, all collections
received and to be received with respect thereto for the period on and after the
Cutoff Date and all the Assigned Rights pursuant to the related Student Loan
Transfer Agreement. Each Student Loan will be identified in a schedule appearing
as an exhibit to such Student Loan Transfer Agreement. The Seller will make
certain representations and warranties with respect to the Student Loans
transferred by it to the Depositor in the related Student Loan Transfer
Agreement. If one or more affiliates of the Seller is selling Student Loans to
the Depositor with respect to a given series, such affiliate(s) will not make
any representations or warranties with respect to such Student Loans. However,
in this event, the Master Servicer (or such other entity specified in the
related Prospectus Supplement), will make certain representations and warranties
relating to the Student Loans transferred by such affiliate(s) to the Depositor
and the Trustee in the related Sale and Servicing Agreement. All
representations, warranties and covenants made by the Seller in, and all rights
of the Depositor in and to each Student Loan Transfer Agreement will be assigned
by the Depositor to the Trustee in the Sale and Servicing Agreement. The
proceeds of the sale of the related Notes and Certificates received by the
Depositor will be applied to the purchase of the Student Loans from the Seller
and/or its affiliates.
CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS
Transfer of Student Loans
The Seller intends that the transfer of the Student Loans by it to the
related Eligible Lender Trustee on behalf of each Trust or to the Depositor
pursuant to the related Student Loan Transfer Agreement and by the Depositor to
the related Eligible Lender Trustee, if applicable, will each constitute a valid
sale and assignment of such Student Loans. In addition, the Seller has taken and
will take all actions that are required under applicable state law to perfect
the Depositor's and/or the Eligible Lender Trustee's, as applicable, ownership
interest in the Financed Student Loans and the collection with respect thereto.
Notwithstanding the foregoing, if the transfer of the Student Loans is deemed to
be an assignment of collateral as security for the benefit of a Trust, a
security interest in the Student Loans may, pursuant to the provisions of 20
U.S.C. ss. 1087-2(d)(3), be perfected either through the taking of possession of
such loans or by the filing of notice of such security interest in the manner
provided by the applicable Uniform Commercial Code ("UCC") for perfection of
security interests in accounts. A financing statement or statements covering the
Student Loans will be filed under the UCC to protect the interest of the
Depositor and/or the Eligible Lender Trustee, as applicable, in the event the
transfer by the Seller is deemed to be an assignment of collateral as security
for the benefit of the Trust.
If the transfer of the Student Loans is deemed to be an assignment as
security for the benefit of a Trust, there are certain limited circumstances
under the UCC in which prior or subsequent transferees of Student Loans coming
into existence after the Closing Date could have an interest in such Student
Loans with priority over the related Eligible Lender Trustee's interest. A tax
or other government lien on property of the Seller arising prior to the time a
Student Loan comes into existence may also have priority over the interest of
the Depositor and/or the related Eligible Lender Trustee, as applicable, in such
Student Loan. Furthermore, if the FDIC were appointed as a receiver or
conservator of the Seller, the FDIC's administrative expenses may also have
priority over the interest of the Depositor and/or the Eligible Lender Trustee,
as applicable, in such Student Loans. Under the related Sale and Servicing
Agreement or Student Loan Transfer Agreement, however, the Seller will warrant
that it has caused the Student Loans to be transferred to the related Eligible
Lender Trustee on behalf of a Trust or the Depositor, as applicable, free and
clear of the lien of any third party. In addition, the Seller will covenant that
it will not sell, pledge, assign, transfer or grant any lien on any Student Loan
held by a Trust or the Depositor (or any interest therein) other than to the
related Eligible Lender Trustee on behalf of a Trust or the Depositor, as
applicable, except as provided below.
Pursuant to each Sale and Servicing Agreement, the Sub-Servicer as
custodian on behalf of the Master Servicer and the related Trust will have
custody of the promissory notes evidencing the Student Loans following the sale
of the Student Loans to the Depositor or and the related Eligible Lender
Trustee. Although the accounts and computer records of the Seller, the
Depositor, if applicable, and, the Master Servicer and the related Sub-Servicer
will be marked to indicate the sale and although the Seller and the Depositor,
if applicable, will cause UCC financing statements to be filed with the
appropriate authorities, the Student Loans will not be physically segregated,
stamped or otherwise marked to indicate that such Student Loans have been sold
to the Depositor or such Eligible Lender Trustee, as applicable. If, through
inadvertence or otherwise, any of the Student Loans were sold to another party,
or a security interest therein were granted to another party, that purchased (or
took such security interest in) any of such Student Loans in the ordinary course
of its business and took possession of such Student Loans, then the purchaser
(or secured party) might acquire an interest in the Student Loans superior to
the interest of the Depositor or the Eligible Lender Trustee, as applicable, if
the purchaser (or secured party) acquired (or took a security interest in) the
Student Loans for new value and without actual knowledge of the Depositor's or
related Eligible Lender Trustee's interest, as applicable. See "Description of
the Transfer and Servicing Agreements--Sale of Student Loans; Representations
and Warranties."
With respect to each Trust, in the event of a Master Servicer Default
resulting solely from certain events of insolvency or bankruptcy that may occur
with respect to the Seller, the Depositor, the Master Servicer, a court,
trustee-in-bankruptcy, conservator, receiver or liquidator may have the power to
prevent either the related Indenture Trustee or Noteholders of the related
series from appointing a successor Master Servicer. See "Description of the
Transfer and Servicing Agreements--Rights Upon Master Servicer Default;
Administrator Default."
CERTAIN MATTERS RELATING TO RECEIVERSHIP
The Federal Deposit Insurance Act ("FDIA"), as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), sets forth
certain powers that the FDIC could exercise if it were appointed as receiver or
conservator of the Seller.
Subject to clarification by FDIC regulations or interpretations, it would
appear from the positions taken by the FDIC that the FDIC, in its capacity as a
receiver or conservator for the Seller, would not interfere with the timely
transfer to the Trust of collections with respect to the Student Loans. To the
extent that the transfer of the Student Loans is deemed to create a security
interest, and that interest was validly perfected before the Seller's insolvency
and was not taken in contemplation of insolvency or with the intent to hinder,
delay or defraud the Seller or its creditors, based upon opinions and statements
of policy issued by the general counsel of the FDIC addressing the
enforceability against the FDIC, as conservator or receiver for a depository
institution, of a security interest in collateral granted by such depository
institution, such security interest should not be subject to avoidance and
payments to the Trust with respect to the Student Loans should not be subject to
recovery by the FDIC as receiver or conservator of the Seller. If, however, the
FDIC were to assert a contrary position, certain provisions of the FDIA which,
at the request of the FDIC, have been applied in recent lawsuits to avoid
security interests in collateral granted by depository institutions, would
permit the FDIC to avoid such security interest, thereby resulting in possible
delays and reductions in payments on the Notes and the Certificates. In
addition, if the FDIC were to require the Depositor, the Indenture Trustee or
the Eligible Lender Trustee to establish its right to such payments by
submitting to and completing the administrative claims procedure under the FDIA,
as amended by FIRREA, delays in payments on the Notes and the Certificates and
possible reductions in the amount of those payments could occur.
In the event of a Master Servicer Default or an Administrator Default
resulting solely from certain events of insolvency or bankruptcy that may occur
with respect to the Master Servicer or the Administrator, a court, conservator,
receiver or liquidator may have the power to prevent either the Indenture
Trustee or Noteholders from appointing a successor Master Servicer or
Administrator, as the case may be. See "Description of the Transfer and
Servicing Agreements--Rights Upon Master Servicer Default; Administrator
Default."
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related regulations
impose substantial requirements upon lenders and servicers involved in consumer
finance. Also, some state laws impose finance charge ceilings and other
restrictions on certain consumer transactions and require contract disclosures
in addition to those required under federal law. These requirements impose
specific statutory liabilities upon lenders who fail to comply with their
provisions. These requirements are generally inapplicable to Federal Loans, but
in certain circumstances, a Trust may be liable for certain violations of
consumer protection laws that may apply to the Student Loans, either as assignee
or as the party directly responsible for obligations arising after the transfer.
For a discussion of a Trust's rights if the Student Loans were not originated or
serviced in compliance in all material respects with applicable laws, see
"Description of the Transfer and Servicing Agreements--Sale of Student Loans;
Representations and Warranties" and "--Master Servicer Covenants."
LOAN ORIGINATION AND SERVICING PROCEDURES APPLICABLE TO STUDENT LOANS
The Higher Education Act, including the implementing regulations
thereunder, imposes specified requirements, guidelines and procedures with
respect to originating and servicing student loans such as the Federal Loans.
Generally, those procedures require that completed loan applications be
processed, a determination of whether an applicant is an eligible borrower under
applicable standards (including a review of a financial need analysis) be made,
the borrower's responsibilities under the loan be explained to him or her, the
promissory note evidencing the loan be executed by the borrower and then that
the loan proceeds be disbursed in a specified manner by the lender. After the
loan is made, the lender or servicing agent must establish repayment terms with
the borrower, properly administer deferrals and forbearances and credit the
borrower for payments made thereon. If a borrower becomes delinquent in repaying
a loan, a lender or a servicing agent must perform certain collection procedures
(primarily telephone calls and demand letters) which vary depending upon the
length of time a loan is delinquent. The Master Servicer has agreed pursuant to
the related Sale and Servicing Agreement to perform (or to cause a Sub-Servicer
to perform) collection and servicing procedures on behalf of the related Trust.
However, failure to follow these procedures or failure of the originator of the
loan to follow procedures relating to the origination of any Federal Loans could
result in adverse consequences. Any such failure could result in the
Department's refusal to make reinsurance payments to the Federal Guarantors or
to make Interest Subsidy Payments and Special Allowance Payments to the Eligible
Lender Trustee with respect to such Federal Loans or in the Federal Guarantors'
refusal to honor their Guarantee Agreements with the Eligible Lender Trustee
with respect to such Federal Loans. Failure of the Federal Guarantors to receive
reinsurance payments from the Department could adversely affect the Federal
Guarantors' ability or legal obligation to make Guarantee Payments to the
related Eligible Lender Trustee with respect to such Federal Loans.
Loss of any such Guarantee Payments, Interest Subsidy Payments or Special
Allowance Payments could adversely affect the amount of Available Funds (as such
term is defined in the related Prospectus Supplement, the "Available Funds") on
any Distribution Date and the related Trust's ability to pay principal and
interest on the Notes of the related series and to make distributions in respect
of the Certificates of the related series. Under certain circumstances, unless
otherwise specified in the related Prospectus Supplement, the related Trust has
the right, pursuant to the related Sale and Servicing Agreement, to cause the
Seller and/or the Depositor, as applicable, to repurchase any Student Loan, or
to cause the Master Servicer to arrange for the purchase of any Student Loan, if
a breach of the representations, warranties or covenants of the Seller and/or
the Depositor and/or the Master Servicer (or such other entity specified in the
related Prospectus Supplement), as the case may be, with respect to such Student
Loan has a material adverse effect on the interest of the Trust therein and such
breach is not cured within any applicable cure period. See "Description of the
Transfer and Servicing Agreements--Sale of Student Loans; Representations and
Warranties" and "--Servicer Covenants." The failure of the Seller (or of the
Depositor to cause the Seller or the Master Servicer (or such other entity
specified in the related Prospectus Supplement), as applicable) to so purchase,
or of the Master Servicer to arrange for the purchase of, a Student Loan, if so
required, would constitute a breach of the related Sale and Servicing Agreement,
enforceable by the related Eligible Lender Trustee on behalf of the related
Trust or by the related Indenture Trustee on behalf of the Noteholders of the
related series, but would not constitute an Event of Default under the
Indenture.
FAILURE TO COMPLY WITH THIRD-PARTY SERVICER REGULATIONS MAY ADVERSELY
AFFECT LOAN SERVICING
On November 29, 1994, the Secretary of the Department of Education (the
"Secretary") published final regulations amending FFELP. These regulations,
among other things, establish requirements governing contracts between holders
of federal loans and third-party servicers, establish standards of
administrative and financial responsibility for third-party servicers that
administer any aspect of a guarantee agency's or lender's participation in the
FFELP and establish sanctions for third-party servicers.
Under these regulations, a third-party servicer (such as one of the
Sub-Servicers) is jointly and severally liable with its client lenders for
liabilities to the Department arising from the servicer's violation of
applicable requirements. In addition, if the servicer fails to meet standards of
financial responsibility or administrative capability included in the
regulations, or violates other FFELP requirements, the regulations authorize the
Department to fine the servicer and/or limit, suspend, or terminate the
servicer's eligibility to contract to service FFELP loans. The effect of such a
limitation or termination on the servicer's eligibility to service loans already
on its system, or to accept new loans for servicing under existing contracts, is
unclear. There can be no assurance that a Sub-Servicer will not be fined or held
liable by the Department liabilities arising out of its FFELP activities for the
Master Servicer or other client lenders, or that its eligibility will not be
limited, suspended, or terminated in the future. If a Sub-Servicer were so fined
or held liable, or its eligibility were limited, suspended, or terminated, its
ability to properly service the federal loans and to satisfy its obligation to
purchase federal loans with respect to which it breaches its representations,
warranties or covenants under its related Sub-Servicing Agreement could be
adversely affected. However, in the event of a termination of eligibility, each
Sub-Servicing Agreement will provide for the removal of the applicable
Sub-Servicer and the appointment of a successor sub-servicer.
BANKRUPTCY CONSIDERATIONS
Effective for bankruptcy actions commenced on or after October 8, 1998,
Federal Loans are generally not dischargeable by a borrower in bankruptcy
pursuant to the United States Bankruptcy Code, as amended, as codified in 11
U.S.C. ss.ss.101-1330 (the "Bankruptcy Code"), unless excepting such debt from
discharge will impose an undue hardship on the debtor and the debtor's
dependents. However, Private Loans are generally dischargeable by a borrower in
bankruptcy unless such Private Loan has been made under any program funded in
whole or in part by a governmental unit or non-profit institution.
RECENT DEVELOPMENTS
EMERGENCY STUDENT LOAN CONSOLIDATION ACT OF 1997. On November 13, 1997,
former President Clinton signed into law the Emergency Student Loan
Consolidation Act of 1997, which made significant changes to the Federal
Consolidation Loan Program. These changes include:
(1) providing that federal direct student loans are eligible to be
included in a Federal Consolidation Loan;
(2) changing the borrower interest rate on new Federal Consolidation Loans
(previously a fixed rate based on the weighted average of the loans
consolidated, rounded up to the nearest whole percent) to the annually
variable rate applicable to Stafford Loans (i.e., the bond equivalent
rate at the last auction in May of 91-day Treasury Bills plus 3.10%,
not to exceed 8.25% per annum);
(3) providing that the portion of a Federal Consolidated Loan that is
comprised of subsidized Stafford Loans retains its subsidy benefits
during periods of deferment; and
(4) establishing prohibitions against various forms of discrimination in
the making of Federal Consolidation Loans.
Except for the last of the above changes, all such provisions expired on
September 30, 1998. The combination of the change to a variable rate and the
8.25% interest cap reduced the lender's yield in most cases below the rate that
would have been applicable under the previous weighted average formula.
FY 1998 BUDGET. In the 1997 Budget Reconciliation Act (P.L. 105-33),
several changes were made to the Higher Education Act that impact the FFELP.
These provisions include, among other things, requiring federal guarantors to
return $1 billion of their reserves to the U.S. Treasury by September 1, 2002
(to be paid in annual installments), greater restrictions on use of reserves by
federal guarantors and a continuation of the administrative cost allowance
payable to federal guarantors (which is a fee paid to federal guarantors equal
to 0.85% of new loans guaranteed).
1998 AMENDMENTS. On May 22, 1998, Congress passed, and on June 9, 1998, the
President signed into law, a temporary measure relating to the Higher Education
Act and FFELP loans as part of the Intermodal Surface Transportation Efficiency
Act of 1998 that revised interest rate changes under the FFELP that were
scheduled to become effective on July 1, 1998. For loans made during the period
July 1, 1998 through September 30, 1998, the borrower interest rate for Stafford
Loans and Unsubsidized Stafford Loans is reduced to a rate of 91-day Treasury
Bill Rate plus 2.30% (1.70% during school, grace and deferment), subject to a
maximum rate of 8.25%. As described below, The formula for Special Allowance
Payments on Stafford Loans and Unsubsidized Stafford Loans is calculated to
produce a yield to the loan holder of 91-day Treasury Bill Rate plus 2.80%
(2.20% during school, grace and deferment).
1998 REAUTHORIZATION BILL. On October 7, 1998, former President Clinton
signed into law the Higher Education Amendments of 1998 (the "1998
Reauthorization Bill"), which enacted significant reforms in FFELP. The major
provisions of the 1998 Reauthorization Bill include the following:
o All references to a "transition" to full implementation of the Federal
Direct Student Loan Program were deleted from the FFELP statute.
o Guarantor reserve funds were restructured so that federal guarantors
are provided with additional flexibility in choosing how to spend
certain funds they receive.
o Additional recall of reserve funds by the Secretary was mandated,
amounting to $85 million in fiscal year 2002, $82.5 million in fiscal
year 2006, and $82.5 million in fiscal year 2007. However, certain
minimum reserve levels are protected from recall.
o The administrative cost allowance was replaced by two (2) new
payments, a Student Loan processing and issuance fee equal to 65 basis
points (40 basis points for loans made on or after October 1, 2003)
paid at the time a loan is guaranteed, and an account maintenance fee
of 12 basis points (10 basis points for fiscal years 2001-2003) paid
annually on outstanding guaranteed Student Loans.
o The percentage of collections on defaulted Student Loans a federal
guarantor is permitted to retain is reduced from 27% to 24% (23%
beginning on October 1, 2003) plus the complement of the reinsurance
percentage applicable at the time a claim was paid to the lender on
the Student Loan.
o Federal reinsurance provided to federal guarantors is reduced from 98%
to 95% for Student Loans first disbursed on or after October 1, 1998.
o The delinquency period required for a loan to be declared in default
is increased from 180 days to 240 days for loans on which the first
day of delinquency occurs on or after the date of enactment of the
1998 Reauthorization Bill.
o Interest rates charged to borrowers on Stafford Loans, and the yield
for Stafford Loan holders established by the 1998 Amendments, were
made permanent.
o Federal Consolidation Loan interest rates were revised to equal the
weighted average of the loans consolidated rounded up to the nearest
one-eighth of 1%, capped at 8.25%. When the 91-day Treasury Bill Rate
plus 3.1% exceeds the borrower's interest rate, Special Allowance
Payments are made to make up the difference.
o The lender-paid offset fee on Federal Consolidation Loans of 1.05% is
reduced to .62% for loans made pursuant to applications received on or
after October 1, 1998 and on or before January 31, 1999.
o The Federal Consolidation Loan interest rate calculation was revised
to reflect the rate for Federal Consolidation Loans, and will be
effective for loans on which applications are received on or after
February 1, 1999.
o Lenders are required to offer extended repayment schedules to new
borrowers after the enactment of the 1998 Reauthorization Bill who
accumulate after such date outstanding loans under FFELP totaling more
than $30,000, under these extended schedules the repayment period may
extend up to 25 years subject to certain minimum repayment amounts.
o The Secretary is authorized to enter into six (6) voluntary flexible
agreements with federal guarantors under which various statutory and
regulatory provisions can be waived.
o Federal Consolidation Loan lending restrictions are revised to allow
lenders who do not hold one of the borrower's Underlying Federal Loans
to issue a Federal Consolidation Loan to a borrower whose Underlying
Federal Loans are held by multiple holders.
o Inducement restrictions were revised to permit federal guarantors and
lenders to provide assistance to schools comparable to that provided
to schools by the Secretary under the Federal Direct Student Loan
Program.
o The Secretary is now required to pay off Student Loan amounts owed by
borrowers due to failure of the borrower's school to make a tuition
refund allocable to the Student Loan.
o Discharge of FFELP and certain other Student Loans in bankruptcy is
now limited to cases of undue hardship regardless of whether the
Student Loan has been due for more than seven (7) years prior to the
bankruptcy filing.
DEPARTMENTS OF LABOR, HEALTH AND HUMAN SERVICES, AND EDUCATION, AND RELATED
AGENCIES APPROPRIATIONS ACT, 2001. On December 21, 2000, former President
Clinton signed into law the Departments of Labor, Health and Human Services, and
Education, and Related Agencies Appropriations Act, 2001 (P.L. No. 106-554) (the
"Consolidated Appropriations Act"). In response to the Department of Treasury's
announced intention to discontinue auctions of new 52-week Treasury Bills, the
Consolidated Appropriations Act amended the Higher Education Act to tie the
calculation of interest rates on variable rate SLS and PLUS Loans for periods
beginning on or after July 1, 2001 to the weekly average 1-year constant
maturity Treasury yield. This revision is not expected to materially affect the
yield to holders of SLS or PLUS loans.
ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE ACT. The Electronic
Signatures in Global and National Commerce Act, commonly referred to as the
"E-Sign Act," became law on June 30, 2000. The E-Sign Act generally covers all
transactions and related records required to be in writing. Under the E-Sign
Act, FFELP guaranty agencies, lenders, schools and borrowers are authorized to
use electronic records and electronic signatures in lieu of traditional paper
records and handwritten signatures. This authority took effect June 30, 2001. In
April, 2001, the Department issued standards for electronic signatures in
electronic student loan transactions ("Standards"). In the Standards, the
Department stated that a lender or holder whose processes for electronic
signatures and related electronic records satisfy the Standards will be
protected from the loss of Federal benefits on a Student Loan if the Student
Loan is determined to be legally unenforceable by a court based solely on the
processes used for the electronic signature or related records.
INCOME TAX CONSEQUENCES
Set forth below is a general summary of the material federal and
Pennsylvania state income tax consequences of the purchase, ownership and
disposition of the Notes and the Certificates. Thompson Hine LLP ("Federal Tax
Counsel") has reviewed this summary with respect to federal income tax matters
and is of the opinion that the descriptions of the law and legal conclusions
contained herein are correct in all material respects and the discussions
hereunder fairly summarize the federal income tax considerations that are likely
to be material to Noteholders and Certificateholders. Kirkpatrick & Lockhart LLP
("Pennsylvania Tax Counsel") has reviewed this summary with respect to
Pennsylvania income and franchise tax matters and is of the opinion that the
descriptions of the law and legal conclusions contained herein are correct in
all material respects and the discussions hereunder fairly summarize the
Pennsylvania income and franchise tax considerations that are likely to be
material to Noteholders and Certificateholders. The summary is intended as an
explanatory discussion of the possible effects of certain federal and
Pennsylvania income tax consequences to holders generally, but does not purport
to furnish information in the level of detail or with the attention to a
holder's specific tax circumstances that would be provided by a holder's own tax
advisor. For example, it does not discuss the tax treatment of Noteholders or
Certificateholders that are insurance companies, regulated investment companies
or dealers in securities. In addition, any discussion regarding the Notes is
limited to the federal and Pennsylvania income tax consequences of the initial
Noteholders and not a purchaser in the secondary market. Moreover, there are no
cases or Internal Revenue Service ("IRS") rulings on similar transactions
involving both debt and equity interests issued by a trust with terms similar to
those of the Notes and the Certificates. As a result, the IRS may disagree with
all or a part of the discussion below. Prospective investors are urged to
consult their own tax advisors in determining the federal, state, local, foreign
and any other tax consequences to them of the purchase, ownership and
disposition of the Notes and the Certificates.
With respect to federal tax matters, the following summary is based upon
current provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the Treasury Regulations promulgated thereunder and judicial or ruling
authority, all of which are subject to change, which change may be retroactive.
Each Trust will be provided with an opinion of Federal Tax Counsel regarding
certain federal income tax matters discussed below and an opinion of
Pennsylvania Tax Counsel regarding certain Pennsylvania State income tax matters
discussed below, which opinions will be filed with the Commission on a Form 8-K
prior to the sale of the securities issued by such Trust. An opinion of Federal
Tax Counsel, however, is not binding on the IRS or the courts. No ruling on any
of the issues discussed below will be sought from the IRS. For purposes of the
following summary, references to the Trust, the Notes, the Certificates and
related terms, parties and documents shall be deemed to refer, unless otherwise
specified herein, to each Trust and the Notes, Certificates and related terms,
parties and documents applicable to such Trust. EACH PROSPECTIVE INVESTOR SHOULD
CONSULT WITH ITS TAX ADVISOR AS TO THE FEDERAL, STATE, LOCAL, FOREIGN AND ANY
OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF SECURITIES
SPECIFIC TO SUCH PROSPECTIVE INVESTOR.
FEDERAL TAX CONSEQUENCES FOR TRUSTS
FOR WHICH A PARTNERSHIP ELECTION IS MADE
TAX CHARACTERIZATION OF THE TRUST
Federal Tax Counsel will deliver its opinion that the Trust will not be an
association (or publicly traded partnership) taxable as a corporation for
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.
There is, however, no specific authority with respect to the characterization
for federal income tax purposes of securities having the same terms as the Notes
and the Certificates.
POSSIBLE ALTERNATIVE TREATMENT OF THE TRUST. If, contrary to the opinion of
Federal Tax Counsel, the Trust were taxable for federal income tax purposes as a
corporation, the income from the Student Loans (reduced by deductions, possibly
including interest on the Notes) would be subject to federal income tax at
corporate rates, which could materially reduce or eliminate the cash that would
otherwise be available to make payments on the Notes and the Certificates (and
the Certificateholders could be liable for any such tax that is unpaid by the
Trust).
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
TREATMENT OF THE NOTES AS INDEBTEDNESS. Federal Tax Counsel will deliver an
opinion to the Trust that the Notes will be classified as debt for federal
income tax purposes. The Seller or the Depositor, as applicable, will agree, and
the Noteholders will agree by their purchase of Notes, to treat the Notes as
debt for federal income tax purposes. The discussion below assumes this
characterization of the Notes is correct.
ORIGINAL ISSUE DISCOUNT. The discussion below assumes that all payments on
the Notes are denominated in U.S. dollars, that the interest formula for the
Notes meets the requirements for "qualified stated interest" under Treasury
Regulations (the "OID Regulations") relating to original issue discount ("OID"),
and that any OID on the Notes (i.e., any excess of the stated redemption price
at maturity of the Notes, generally the principal amount of the Notes, over
their issue price) is less than a de minimis amount (i.e., 0.25% of their
principal amount multiplied by the weighted number of full years included in
their term), all within the meaning of the OID Regulations. If these conditions
are not satisfied with respect to any given series of Notes, additional tax
considerations with respect to such Notes will be disclosed in the related
Prospectus Supplement.
INTEREST INCOME ON THE NOTES. The stated interest on the Notes will be
taxable to a Noteholder as ordinary income when received or accrued in
accordance with the Noteholder's method of tax accounting. Based on the above
assumptions, the Notes will not be considered issued with OID. However, because
of limitations on the payment of interest on the Notes to the extent of the
Trust's having insufficient Available Funds, the IRS may contend that the Notes
should be treated as having been issued with OID. In such case, Noteholders
(regardless of whether they otherwise use the cash or accrual method of
accounting) would be required to include interest on the Notes in taxable income
on a constant-yield accrual basis. However, until the IRS determines otherwise,
the Trust intends to take the position that the Notes are not issued with OID.
Under the OID Regulations, a holder of a Note that was issued with a de
minimis amount of OID must include such OID generally in income, on a pro rata
basis, as principal payments are made on the Note. Alternatively, a Noteholder
may elect to accrue all interest, discount (including de minimis market discount
or OID) and premium in income as interest, based on a constant-yield method. A
purchaser who buys a Note for more or less than its principal amount will
generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
SALE OR OTHER DISPOSITION. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect to the
Note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by such Noteholder
with respect to such 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 and accrued market discount not previously included in income. Any such
gain or loss would be long-term capital gain or loss if the Noteholder's holding
period exceeded one year. Capital losses generally may be used by a corporate
taxpayer only to offset capital gains, and by an individual taxpayer only to the
extent of capital gains plus $3,000 of other income.
FOREIGN HOLDERS. Interest paid (or accrued) to a Noteholder who is a
nonresident alien, foreign corporation or other person that is not a United
States person as such term is defined in the Code and the Treasury Regulations
thereunder (a "foreign person") generally will be considered "portfolio
interest", and generally will not be subject to United States federal income tax
and withholding tax, provided, that
(a) the interest is not effectively connected with the conduct of a trade
or business within the United States by the foreign person
(b) the foreign person is not actually or constructively a "10 percent
shareholder" of the Trust or the Seller or the Depositor, as
applicable, (including a holder of 10% of the outstanding
Certificates) or a "controlled foreign corporation" with respect to
which the Trust or the Seller or the Depositor, as applicable, is a
"related person" within the meaning of the Code, and
(c) the foreign person provides the Trustee or other person who is
otherwise required to withhold U.S. tax with respect to the Notes with
an appropriate statement (on Form W-8BEN or other successor form),
signed under penalty of perjury, certifying that the beneficial owner
of the Note is a foreign person and providing the foreign person's
name and address.
In the case of a Note held on behalf of the beneficial owner by a
securities clearing organization, bank, or other financial institution holding
customers' securities in the ordinary course of its trade or business, the
financial institution:
o files with the withholding agent a statement that it has received the
Form W-8BEN or other successor form from the holder and furnishes the
withholding agent with a copy thereof, or
o files Form W-8IMY and has entered into an agreement with the IRS to be
treated as a qualified intermediary.
For purposes of the certification requirements, the beneficial owners of
payments on a Note are those persons that, under United States tax principles,
are the taxpayers with respect to which such payments, rather than persons such
as nominees or agents legally entitled to such payments.
With respect to Notes held by a foreign partnership, unless the foreign
partnership has entered into a withholding agreement with the IRS, the foreign
partnership will generally be required to provide a Form W-8IMY or other
successor form and to associate with such form an appropriate certification or
other appropriate documentation from each partner. With respect to a note held
by a United States partnership, payments on the note are treated as payments to
a United States payee, even if the partnership has one or more foreign partners.
Prospective investors, including foreign partnerships and their partners,
should consult their tax advisers regarding possible additional reporting
requirements.
If such interest is not portfolio interest, then it will be subject to
United States federal income and withholding tax at a rate of 30%, unless
reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person generally will be exempt from
United States federal income and withholding tax, provided that (x) such gain is
not effectively connected with the conduct of a trade or business in the United
States by the foreign person and (y) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
If the interest, gain or income on a Note held by a foreign person is
effectively connected with the conduct of a trade or business in the United
States by the foreign person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement on Form
W-8ECI), the holder generally will be subject to United States federal income
tax on the interest, gain or income at regular federal income tax rates. In
addition, if the foreign person is a foreign corporation, it may be subject to a
branch profits tax equal to 30% of its "effectively connected earnings and
profits" within the meaning of the Code for the taxable year, as adjusted for
certain items, unless it qualifies for a lower rate under an applicable tax
treaty (as modified by the branch profits tax rules).
BACKUP WITHHOLDING. Each holder of a Note (other than an exempt holder such
as a corporation, tax-exempt organization, qualified pension and profit-sharing
trust, individual retirement account or nonresident alien who provides
certification as to status as a nonresident) will be required to provide, under
penalty of perjury, a certificate setting forth the holder's name, address,
correct federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt Noteholder fail to
provide the required certification, the related Trust will be required to
withhold 30.5% (such amount will be reduced in stages to 28% by the year 2006)
of the amount otherwise payable to the holder and remit the withheld amount to
the IRS as a credit against the holder's federal income tax liability.
POSSIBLE ALTERNATIVE TREATMENTS OF THE NOTES. If, contrary to the opinion
of Federal Tax Counsel, the IRS successfully asserted that one or more classes
of Notes did not represent debt for federal income tax purposes, such class or
classes of Notes might be treated as equity interests in the Trust. If so
treated, the Trust might be treated as a publicly traded partnership but it
would not be taxable as a corporation because it would meet certain qualifying
income tests.
Nonetheless, even if the Trust were not taxable as a corporation, the
treatment of Notes as equity interests in such a publicly traded partnership
could have adverse tax consequences to certain holders of such Notes. For
example, income from certain classes of Notes to certain tax-exempt entities
(including pension funds) might be "unrelated business taxable income," income
to foreign holders may be subject to U.S. withholding tax and U.S. tax return
filing requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of Trust expenses. In the
event one or more classes of Notes were treated as interests in a partnership,
the consequences governing the Certificates as equity interests in a partnership
described below under "Federal Tax Consequences For Trusts For Which a
Partnership Election is Made--Tax Consequences to Holders of the Certificates"
would generally apply to the holders of such Notes.
FASITs
Sections 860H through 860L to the Code (the "FASIT Provisions") provide for
a new type of entity for federal income tax purposes known as a "financial asset
securitization investment trust" (a "FASIT"). In general, the FASIT legislation
enables trusts such as the Trust to elect to be treated as a pass-through entity
not subject to federal entity-level income tax (except with respect to certain
prohibited transactions) and to issue securities that would be treated as debt
for federal income tax purposes. Many technical issues relating to the taxation
of FASITs and the holders of FASIT interests are addressed in proposed Treasury
Regulations issued February 4, 2000, including proposed rules for determining
whether the FASIT has engaged in a prohibited loan origination transaction, and
the requirement that more than 99 percent of a FASIT's assets must be permitted
assets, along with a listing of assets qualifying as permitted assets.
Additionally, these proposed Treasury Regulations contain a broad anti-abuse
rule to counteract those instances where the IRS determines that a FASIT was
formed or used for a purpose other than promoting the spreading of credit risk
on debt instruments by facilitating the securitization of debt instruments. The
proposed Treasury Regulations will become effective on the date final Treasury
Regulations are issued, except for the anti-abuse rule which is proposed to
apply beginning February 4, 2000. If a Trust is intended to qualify as a FASIT
for federal income tax purposes, the Prospectus Supplement will so indicate and
will further describe the tax consequences of such election therein.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
The following discussion only applies to a Trust which issues one or more
classes of Certificates and assumes that all payments on the Certificates are
denominated in U.S. dollars, that a series of Securities includes a single class
of Certificates and that the Certificates are sold to both the Seller or the
Depositor, as applicable, and to persons other than the Seller or the Depositor,
as applicable. If these conditions are not satisfied with respect to any given
series of Certificates, any additional tax considerations with respect to such
Certificates will be disclosed in the applicable Prospectus Supplement.
CLASSIFICATION AS A PARTNERSHIP
TREATMENT OF THE TRUST AS A PARTNERSHIP. The Seller or the Depositor, as
applicable, and the Master Servicer will agree, and the Certificateholders will
agree by their purchase of Certificates, to treat the Trust as a partnership for
purposes of federal, state and local income and 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
Certificateholders (including the Seller or the Depositor, as applicable, both
in its capacity as owner of Certificates and as recipient of distributions from
the Reserve Account, if any), and the Notes being debt of the partnership. There
is, however, no specific authority with respect to the proper characterization
of the arrangement involving the Trust, the Certificateholders, the Noteholders,
the Seller or the Depositor, as applicable, and the Master Servicer.
Under the provisions of Subchapter K of the Code, a partnership is not
considered a separate taxable entity. Instead, partnership income is allocated
to each of the partners and taxed in each partner's hands. The partnership is
generally treated as an entity, however, for computing partnership income,
determining the tax consequences of transactions between a partner and the
partnership, and characterizing the gain on the sale or exchange of a
partnership interest.
PARTNERSHIP TAXATION. As a partnership, the Trust will not be subject to
federal income tax. Rather, each Certificateholder will be required to
separately take into account the holder's allocated 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 the 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. The Trust's deductions
will consist primarily of interest accruing with respect to the Notes, servicing
and other fees, and losses or deductions upon collection or disposition of
Student Loans.
GUARANTEED PAYMENTS. Under the Trust Agreement, payments on the
Certificates at the Pass-Through Rate (including accruals on amounts previously
due on the Certificates but not yet distributed) will be treated as "guaranteed
payments" under Section 707(c) of the Code. Guaranteed payments are payments to
partners for the use of their capital and, in the present circumstances, are
treated as deductible to the Trust and ordinary income to the
Certificateholders. The Trust will have a calendar year and will deduct the
guaranteed payments under the accrual method of accounting. Certificateholders
with a calendar tax year are required to include the payments in income in their
taxable year that corresponds to the year in which the Trust deducts the
payments, and the Certificateholders with a different taxable year are required
to include the payments in income in their taxable year that includes the
December 31st of the year in which the Trust deducts the payments. It is
possible that guaranteed payments will not be treated as interest for all
purposes of the Code.
ALLOCATION OF TAX ITEMS. The tax items of a partnership are allocable to
the partners in accordance with the Code, Treasury Regulations and the
partnership agreement (here, the Trust Agreement and related documents). The
Trust Agreement will provide, in general, that in addition to the guaranteed
payments described above, the Certificateholders will be allocated the following
tax items of the Trust for each Interest Period (as defined in the applicable
Prospectus Supplement, an "Interest Period"):
(a) any Trust income attributable to discount on the Student Loans that
corresponds to any excess of the principal amount of the Certificates
over their initial issue price;
(b) any Trust expense attributable to the amortization by the Trust of
premium on Student Loans that corresponds to any excess of the issue
price of Certificates over their principal amount; and
(c) all other amounts of income payable to the Certificateholders for such
Interest Period.
All remaining taxable income of the Trust will be allocated to the Seller
or the Depositor, as applicable. Losses will generally be allocated in the
manner in which they are borne. Based on the economic arrangement of the
parties, this approach for allocating Trust tax items should be permissible
under applicable Treasury Regulations, although no assurance can be given that
the IRS would not require a greater amount of income to be allocated to
Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire amount of
interest accruing on the Certificates for an Interest Period, based on the
Pass-Through Rate plus the other items described above, even though the Trust
might not make (or have sufficient cash to make) current cash distributions of
such amount. Thus, cash basis holders will, in effect, be required to report
income from the Certificates on the accrual basis, and Certificateholders may
become liable for taxes on Trust income even if they have not received cash from
the Trust to pay such taxes. In addition, because tax allocations and tax
reporting will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices, Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust.
Additionally, all of the guaranteed payments and the taxable income
allocated to a Certificateholder that is a tax-exempt entity may constitute
"unrelated business taxable income," which, under the Code, is generally taxable
to such a holder despite the holder's tax exempt status.
An individual taxpayer's share of expenses of the Trust (including fees to
the Master Servicer but not interest expenses) are miscellaneous itemized
deductions which are deductible only to the extent they exceed two percent of
the individual's adjusted gross income (and not at all for alternative minimum
tax purposes). Accordingly, such deductions might be disallowed to the
individual in whole or in part and might result in such holder being taxed on an
amount of income that exceeds the amount of cash actually distributed to such
holder over the life of the Trust. These deductions may also be subject to
reduction under Section 68 of the Code if an individual taxpayer's adjusted
gross income exceeds certain limits.
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each of the Student Loans,
the Trust might be required to incur additional expense, but it is believed that
there would not be a material adverse effect on Certificateholders.
COMPUTATION OF INCOME. Taxable income of the Trust will be computed at the
Trust level and the portion allocated to the Certificateholders will be
allocated to them pro rata. Consequently, the method of accounting for taxable
income will be chosen by, and any elections (such as those described below with
respect to the market discount rules) will be made by the Trust rather than the
Certificateholders. The Trust intends, to the extent possible, to (x) have the
taxable income of the Trust computed under the accrual method of accounting and
(y) adopt a calendar-year taxable year for computing the taxable income of the
Trust. The tax year of the Trust, however, is generally determined by reference
to the tax years of the Certificateholders. An owner of a Certificate is
required to include its pro rata share of Trust income for a taxable year as
determined by the Trust in such Certificateholder's gross income for its taxable
year in which the taxable year of the Trust ends.
SECTION 708 TERMINATION. Under Section 708 of the Code, if 50% or more of
the outstanding interests in the Trust are sold or exchanged within any 12-month
period, the Trust will be deemed to terminate and then be reconstituted for
federal income tax purposes. If a termination occurs, the Trust will be
considered to contribute all of its assets and liabilities to the Trust, as a
new partnership, for an interest in the new partnership; and immediately
thereafter, the Trust, as the former partnership, will be considered to
distribute interests in the new partnership to the Certificateholders in
proportion to their respective interests in the former partnership in
liquidation of the former partnership. If a sale of the Certificates terminates
the Trust under Section 708 of the Code, a Certificateholder's basis in its
ownership interest would not change. The Trust's taxable year would also
terminate as a result of a constructive termination and, if the
Certificateholder's taxable year is different from the Trust's, the termination
could result in the "bunching" of more than 12 month's income or loss of the
Trust in such Certificateholder's income tax return for the year in which the
Trust was deemed to terminate. A liquidation of interests is not considered a
sale or exchange of interests for purposes of applying this constructive
termination rule.
The Trust will not comply with certain technical requirements that might
apply if a constructive termination were to occur. As a result, the Trust may be
subject to certain tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Trust might not be
able to comply due to a lack of data.
DISCOUNT AND PREMIUM. To the extent that OID, if any, on the Student Loans
exceeds a de minimis amount, the Trust would have OID income. As indicated
above, a portion of such OID income may be allocated to the Certificateholders.
Moreover, the purchase price paid by the Trust for the Student Loans may be
greater or less than the remaining aggregate principal balances of the Student
Loans at the time of purchase. If so, the Student Loans will have been acquired
at a premium or discount, as the case may be. (As indicated above, the Trust
will make this calculation on an aggregate basis, but might be required to
recompute it on a loan by loan basis.)
If the Trust acquires the Student Loans at a market discount or premium,
the Trust will elect to include any such discount in income currently as it
accrues over the life of the Student Loans or to offset any such premium against
interest income over the life of the Student Loans. As indicated above, a
portion of such market discount income or premium deduction may be allocated to
Certificateholders.
DISPOSITION OF CERTIFICATES. Generally, capital gain or loss will be
recognized 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.
Any such gain or loss would be long-term capital gain or loss if the
Certificateholder's holding period exceeded one year. A Certificateholder's tax
basis in a Certificate will generally equal the holder's cost increased by the
holder's share of Trust income (includible in gross income) and decreased by any
distributions received or losses allocated with respect to such Certificate. In
addition, both the tax basis in the Certificate and the amount realized on a
sale of a Certificate would 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,
allocate a pro rata portion of such aggregate tax basis to the Certificates sold
(rather than maintaining a separate tax basis in each Certificate for purposes
of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Student Loans would generally be
treated as ordinary income to the holder. Since the Trust will make an election
to include market discount, if any, in income currently as it accrues over the
life of the Student Loans, there may be little, if any, unrecognized accrued
market discount at the time a Certificate is sold.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
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 principal amount of Certificates owned by them as of the close
of the last day of such month. As a result, a holder purchasing Certificates may
be allocated tax items (which will affect the tax liability and tax basis of the
holder) attributable to periods before the actual purchase takes place.
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 or
the Depositor, as applicable, 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.
SECTION 754 ELECTION. In the event that a Certificateholder sells a
Certificate at a profit (or loss), the purchasing Certificateholder will have a
higher (or lower) basis in the Certificate than the selling Certificateholder
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 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 such election. As a
result, Certificateholders might be allocated a greater or lesser amount of
Trust income than would be appropriate based on their own purchase price for
Certificates.
ADMINISTRATIVE MATTERS. The Eligible Lender Trustee is required to keep or
cause to be kept complete and accurate books of the Trust. 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 Certificateholder'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 the Trust with the information statement described below
and such nominees will be required to forward such information to the beneficial
owners of the Certificates. Generally, holders must file tax returns that are
consistent with the information returns filed by the Trust or be subject to
penalties unless the holder timely notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust with
a statement containing certain information on the nominee, the beneficial owners
and the Certificates so held. Such information includes (1) the name, address
and taxpayer identification number of the nominee and (2) as to each beneficial
owner (a) the name, address and taxpayer identification number of such person,
(b) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (c) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust information 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 such information statement to the Trust. The
information referred to above for any calendar year must be furnished to the
Trust on or before the following January 31st. Nominees, brokers and financial
institutions that fail to provide the Trust with the information described above
may be subject to penalties.
The Seller or the Depositor, as applicable, will be designated as "tax
matters partner" in the related Trust Agreement and, as such, will be
responsible for representing the Certificateholders in certain disputes with the
IRS. The Code provides for administrative examination of a partnership as if the
partnership were a separate and distinct taxpayer. Generally, the statute of
limitations for partnership items does not expire before the later of three
years after the date on which the partnership information return is filed or the
last day for filing such return for such year (determined without regard to
extensions). Any adverse determination following an audit of the return of the
Trust by the appropriate taxing authorities could result in an adjustment of the
returns of the Certificateholders, and, under certain circumstances, a
Certificateholder may be precluded from separately litigating a proposed
adjustment to the items of the Trust. An adjustment could also result in an
audit of a Certificateholder's returns and adjustments of items not related to
the income and losses of the Trust.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear whether the
Trust would be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Accordingly, the Trust will
withhold as if it were so engaged in order to protect the Trust from possible
adverse consequences of a failure to withhold. The Trust expects to withhold on
the portion of its taxable income that is allocable to foreign
Certificateholders pursuant to Section 1446 of the Code, as if such income were
effectively connected to a U.S. trade or business, at a rate of 35% for foreign
holders that are taxable as corporations and at the highest marginal rate set
forth in Section 1(c) of the Code for all other foreign holders. Subsequent
adoption of Treasury regulations or the issuance of other administrative
pronouncements may require the Trust to change its withholding procedures. In
determining a holder's withholding status, the Trust may rely on Form W-8BEN,
Form W-9 or the holder's certification of non-foreign status signed under
penalty of perjury.
Each foreign holder may be required to file a U.S. individual or corporate
income tax return (including in the case of a corporation, the branch profits
tax) on its share of the Trust's income. Each foreign holder must obtain a
taxpayer identification number from the IRS and submit that number to the Trust
in order to assure appropriate crediting of the taxes withheld. Each foreign
holder will be subject to United States federal income tax and withholding tax
at a rate of 30 percent on the holder's share of guaranteed payments, unless
reduced or eliminated pursuant to an applicable treaty. A foreign holder
generally would be entitled to file with the IRS a claim for refund with respect
to taxes withheld by the Trust in excess of those that are withheld with respect
to guaranteed payments, taking the position that those taxes were not due
because the Trust was not engaged in a U.S. trade or business. EACH POTENTIAL
FOREIGN CERTIFICATEHOLDER SHOULD CONSULT ITS TAX ADVISOR AS TO WHETHER THE TAX
CONSEQUENCES OF HOLDING A CERTIFICATE MAKE IT AN UNSUITABLE INVESTMENT.
BACKUP WITHHOLDING. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
FEDERAL TAX CONSEQUENCES FOR TRUSTS IN WHICH ALL
CERTIFICATES ARE RETAINED BY THE SELLER OR THE DEPOSITOR
TAX CHARACTERIZATION OF THE TRUST
Federal Tax Counsel will deliver its opinion that a Trust, which issues one
or more classes of Notes to investors and all the Certificates of which are
retained by the Seller or the Depositor, as applicable, will not be an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes, assuming that no election will be made to treat the
Trust as a corporation for federal income tax purposes. In such a case, the
Seller or the Depositor, as applicable, and the Master Servicer will agree to
treat the Trust as a division of the Seller or the Depositor, as applicable, for
purposes of federal, state and local income and franchise tax and any other tax
measured in whole or in part by income; consequently, the Trust will be
disregarded as an entity separate from the Seller or the Depositor, as
applicable.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
TREATMENT OF THE NOTES AS INDEBTEDNESS. As discussed above, Federal Tax
Counsel will deliver an opinion to the Trust that the Notes will be classified
as debt for federal income tax purposes. The Seller or the Depositor, as
applicable, will agree, and the Noteholders will agree by their purchase of
Notes, to treat the Notes as debt for federal income tax purposes. Assuming such
characterization of the Notes is correct, the federal income tax consequences to
Noteholders described above under "Federal Tax Consequences For Trusts For Which
a Partnership Election is Made--Tax Consequences to Holders of the Notes" would
apply to the Noteholders.
PENNSYLVANIA STATE TAX CONSEQUENCES
PENNSYLVANIA INCOME AND FRANCHISE TAX CONSEQUENCES WITH RESPECT TO THE NOTES
If a majority of the Student Loans of a Trust are serviced by the
Pennsylvania Higher Education Assistance Agency ("PHEAA"), it may be argued that
the principal place of business of such Trust will be in the Commonwealth of
Pennsylvania. There is no authority in Pennsylvania addressing the question of
whether the Notes will be treated as debt or equity for Pennsylvania purposes.
Furthermore, Pennsylvania does not necessarily adopt Federal income tax
definitions in characterizing income for state tax purposes. Nonetheless,
subject to the foregoing uncertainties, if a majority of the Student Loans of a
Trust are serviced by PHEAA, Pennsylvania Tax Counsel will, prior to the
issuance of the Notes and Certificates, deliver its opinion to the Trust that,
assuming the Notes are treated as debt for Federal income tax purposes, the
Notes will be treated as debt for Pennsylvania income tax purposes. Noteholders
not otherwise subject to taxation in Pennsylvania should not become subject to
taxation in Pennsylvania solely because of a holder's ownership of Notes.
However, for Pennsylvania resident Noteholders otherwise subject to Pennsylvania
tax, the interest on the Notes will be included in Pennsylvania taxable income.
PENNSYLVANIA INCOME AND FRANCHISE TAX CONSEQUENCES WITH RESPECT TO
THE CERTIFICATES
Because state and local income and franchise tax laws vary greatly, it is
impossible to predict the income and franchise tax consequences to the
Certificateholders in all of the state and local taxing jurisdictions in which
they are already subject to tax. Certificateholders are urged to consult their
own advisors with respect to state and local income and franchise taxes.
However, Pennsylvania Tax Counsel will, prior to the issuance of the Notes and
Certificates, deliver its opinion that the Trust will not be subject to
Pennsylvania corporate net income tax or capital stock franchise tax or any
other Pennsylvania entity level income or franchise tax. There is no assurance,
however, that this conclusion will not be challenged by the Pennsylvania taxing
authorities or, if challenged, that the taxing authorities will not be
successful. If the Trust were subject to an entity level tax in Pennsylvania,
any such tax could materially reduce or eliminate cash that would otherwise be
distributable with respect to the Certificates (and Certificateholders could be
liable for any such tax that is unpaid by the Trust). Certificateholders not
otherwise subject to taxation in Pennsylvania should not become subject to
taxation in Pennsylvania solely because of a holding ownership of Certificates.
However, for Pennsylvania resident Certificateholders otherwise subject to
Pennsylvania tax, the distributions on the Certificates will be included in
Pennsylvania taxable income.
THE FEDERAL AND PENNSYLVANIA TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED
FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
NOTEHOLDER'S OR CERTIFICATEHOLDER'S PARTICULAR TAX SITUATION. PROSPECTIVE
PURCHASERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF SECURITIES,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS
AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL, PENNSYLVANIA OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and/or the Code impose certain requirements on employee benefit plans and on
certain other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and separate
accounts (and, as applicable, insurance company general accounts) in which such
plans, accounts or arrangements are invested that are subject to the fiduciary
responsibility provisions of ERISA and Section 4975 of the Code ("Plans") and on
persons who are fiduciaries with respect to such Plans in connection with the
investment of Plan assets. Certain employee benefit plans, such as governmental
plans (as defined in ERISA Section 3(32)), and, if no election has been made
under Section 410(d) of the Code, church plans (as defined in Section 3(33) of
ERISA) are not subject to ERISA requirements. Accordingly, assets of such plans
may be invested in Notes without regard to the ERISA considerations described
below, subject to the provisions of other applicable federal and state law. Any
such plan which is qualified and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, Section 406 of ERISA and Section 4975 of the
Code prohibit a broad range of transactions involving assets of Plan and persons
(parties in interest under ERISA and disqualified persons under the Code,
collectively, "Parties in Interest") who have certain specified relationships to
the Plan unless a statutory, regulatory or administrative exemption is
available. Certain Parties in Interest that participate in a prohibited
transaction may be subject to an excise tax imposed pursuant to Section 4975 of
the Code or a penalty imposed pursuant to Section 502(i) of ERISA, unless a
statutory, regulatory or administrative exemption is available. These prohibited
transactions generally are set forth in Section 406 of ERISA and Section 4975 of
the Code.
THE NOTES
Unless otherwise specified in the related Prospectus Supplement, the Notes
of each series may be purchased by a Plan. The Trust, any underwriter, the
Eligible Lender Trustee, the Indenture Trustee, the Master 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 Code may arise if a Note is acquired by a Plan with respect to which such
persons are Parties in Interest unless such transactions are subject to one or
more statutory or administrative exemptions, such as:
o Prohibited Transaction Class Exemption ("PTCE") 96-23, which exempts
certain transactions effected on behalf of a Plan by an "in-house
asset manager";
o PTCE 90-1, which exempts certain transactions between insurance
company separate accounts and Parties in Interest;
o PTCE 91-38, which exempts certain transactions between bank collective
investment funds and Parties in Interest;
o PTCE 95-60, which exempts certain transactions between insurance
company general accounts and Parties in Interest; or
o PTCE 84-14, which exempts certain transactions effected on behalf of a
Plan by a "qualified professional asset manager."
There can be no assurance that any of these class exemptions will apply with
respect to any particular Plan investment in Notes or, even if it were deemed to
apply, that any exemption would apply to all prohibited transactions that may
occur in connection with such investment. Accordingly, prior to making an
investment in the Notes, investing Plans should determine whether the Trust, any
underwriter, the Eligible Lender Trustee, the Indenture Trustee, the Master
Servicer, the Administrator, or any provider of credit support or any of their
affiliates is a Party in Interest with respect to such Plan and, if so, whether
such transaction is subject to one or more statutory, regulatory or
administrative exemptions.
The purchaser of Notes is deemed to have represented that either: (A) the
purchaser is not acquiring the Notes directly or indirectly for, or on behalf
of, a Benefit Plan or any entity whose underlying assets are deemed to be plan
assets of such Benefit Plan, or (B) the acquisition and holding of the Notes by
the purchaser qualifies for prohibited transaction exemptive relief under PTCE
95-60, PTCE 96-23, PTCE 91-38, PTCE 90-1, PTCE 84-14 or some other applicable
exemption.
Any Plan fiduciary considering whether to invest in Notes on behalf of a
Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment. Each Plan fiduciary also should determine whether,
under the general fiduciary standards of investment prudence and
diversification, an investment in the Notes is appropriate for the Plan,
considering the overall investment policy of the Plan and the composition of the
Plan's investment portfolio, as well as whether such investment is permitted
under the governing Plan instruments.
THE CERTIFICATES
Unless otherwise specified in the Prospectus Supplement, the Certificates
of each series may not be purchased by a Plan or by any entity whose underlying
assets include plan assets by reason of a plan's investment in the entity (each,
a "Benefit Plan"). Such purchase of an equity interest in the Trust will result
in the assets of the Trust being deemed assets of a Benefit Plan for the
purposes of ERISA and the 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 Code. A violation of the "prohibited transaction" rules
may result in an excise tax or other penalties and liabilities under ERISA and
the Code for such persons.
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, such exception will
be discussed in the related Prospectus Supplement.
* * *
A PLAN FIDUCIARY CONSIDERING THE PURCHASE OF 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.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement with
respect to the Notes of a given series and an underwriting agreement with
respect to the Certificates of such series (collectively, the "Underwriting
Agreements"), the Seller or the Depositor, as applicable, will agree to cause
the related Trust to sell to the underwriters named therein and in the related
Prospectus Supplement, and each of such underwriters will severally agree to
purchase, the principal amount of each class of Notes and Certificates, as the
case may be, of the related series set forth therein and in the related
Prospectus Supplement.
In each of the Underwriting Agreements with respect to any given series of
Securities, the several underwriters will agree, subject to the terms and
conditions set forth therein, to purchase all the Notes and Certificates, as the
case may be, described therein which are offered hereby and by the related
Prospectus Supplement if any of such Notes and Certificates, as the case may be,
are purchased.
Each Prospectus Supplement will either (x) set forth the price at which
each class of Notes and Certificates, as the case may be, being offered thereby
will be offered to the public and any concessions that may be offered to certain
dealers participating in the offering of such Notes and Certificates, as the
case may be, or (y) specify that the related Notes and Certificates, as the case
may be, are to be resold by the underwriters in negotiated transactions at
varying prices to be determined at the time of such sale. After the initial
public offering of any such Notes and Certificates, as the case may be, such
public offering prices and such concessions may be changed.
Until the distribution of the Securities is completed, rules of the
Commission may limit the ability of the underwriters and certain 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. Such transactions 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 set forth 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 certain 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 such 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 or the Depositor, as applicable, 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 or the Depositor, as applicable, nor
the underwriters make any representation that the underwriters will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.
Each Underwriting Agreement will provide that the Seller or the Depositor,
as applicable, will indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act, or contribute to
payments the several underwriters may be required to make in respect thereof.
Each Trust may, from time to time, invest the funds in its Trust Accounts
in Eligible Investments acquired from such underwriters.
Pursuant to each of the Underwriting Agreements with respect to a given
series of Securities, the closing of the sale of any class of Securities subject
to either thereof will be conditioned on the closing of the sale of all other
such classes subject to either thereof.
This Prospectus may be used by McDonald Investments Inc. ("McDonald
Investments"), a wholly-owned subsidiary of KeyCorp and an affiliate of the
Seller, the Depositor and the Master Servicer, or its successors, in connection
with offers and sales related to market-making transactions in the Securities in
which McDonald Investments acts as a principal. McDonald Investments may also
act as agent in such transactions. McDonald Investments is a member of the New
York Stock Exchange, Inc. McDonald Investments is not a bank or thrift, is an
entity separate from the Seller, the Depositor and the Master Servicer, and is
solely responsible for its own contractual obligations and commitments.
The place and time of delivery for the Securities in respect of which this
Prospectus is delivered will be set forth in the related Prospectus Supplement.
LEGAL MATTERS
Certain legal matters relating to the Securities of any series will be
passed upon for the related Trust, the Seller and/or the Depositor, as
applicable, and the Administrator by Forrest F. Stanley, Esq., General Counsel
and Assistant Secretary of the Seller, as counsel for the Seller, and the
Depositor, and by Thompson Hine LLP, Cleveland, Ohio. Certain federal
income tax and other matters will be passed upon for the Trust by Thompson Hine
LLP. Certain Pennsylvania state income tax matters will be passed upon
for each Trust by Kirkpatrick & Lockhart LLP.
INDEX OF PRINCIPAL TERMS
Page
1992 Amendments..........................................................20
1993 Act.................................................................45
1998 Amendments..........................................................20
1998 Reauthorization Bill................................................92
91-day Treasury Bill Rate................................................24
AACSB....................................................................33
Additional Fundings......................................................18
Administration Agreement.................................................86
Administration Fee.......................................................87
Administrator............................................................16
Administrator Default....................................................81
Applicable Trustee.......................................................63
Auction Date.............................................................85
Auction Purchase Amount..................................................85
Available Funds..........................................................90
Bankruptcy Code..........................................................91
Bar Exam Loan............................................................33
Base Rate................................................................62
Benefit Plan............................................................109
Calculation Agent........................................................63
Cede.....................................................................52
Certificate Balance......................................................52
Certificate Pool Factor..................................................52
Certificateholder........................................................64
Certificates.............................................................60
Clearstream..............................................................63
Closing Date.............................................................69
Code.....................................................................95
Collection Account.......................................................71
Collection Period........................................................70
Commission...............................................................14
Consolidated Appropriations Act..........................................94
Consolidation Loans......................................................41
CP Rate..................................................................26
Cutoff Date..............................................................15
Deferral Period..........................................................25
Definitive Certificates..................................................67
Definitive Notes.........................................................67
Definitive Securities....................................................67
Department...............................................................17
Depositor................................................................16
Depositories.............................................................63
Depository...............................................................52
Distribution Date........................................................53
DTC......................................................................52
Eligible Deposit Account.................................................72
Eligible Institution.....................................................72
Eligible Investments.....................................................71
Eligible Lender Trustee..................................................15
Eligible Students........................................................21
ERISA...................................................................107
Escrow Account...........................................................71
E-Sign Act...............................................................94
Euroclear................................................................63
Event of Default.........................................................55
Exchange Act.............................................................14
FASIT....................................................................99
FASIT Provisions.........................................................99
FDIA.....................................................................89
FDIC.....................................................................72
Federal Assistance.......................................................21
Federal Consolidation Loan...............................................29
Federal Consolidation Loan Program.......................................20
Federal Consolidation Loan Rebate........................................31
Federal Direct Consolidation Loan........................................30
Federal Direct Consolidation Loan Program................................30
Federal Direct Student Loan Program......................................45
Federal Graduate Programs................................................32
Federal Guarantee Agreements.............................................19
Federal Guarantee Payments...............................................20
Federal Guarantors.......................................................19
Federal Loans............................................................19
Federal Origination Fee..................................................31
Federal Programs.........................................................20
Federal Tax Counsel......................................................95
Fee Advance..............................................................40
FFELP....................................................................19
FIRREA...................................................................89
Fixed Rate Securities....................................................62
Floating Rate Securities.................................................62
Forbearance Period.......................................................25
Funding Period...........................................................18
Grace Period.............................................................25
Graduate Loans...........................................................19
Great Lakes..............................................................34
Guarantee Agreements.....................................................20
Guarantee Payments.......................................................20
Guarantors...............................................................20
Higher Education Act.....................................................19
Indenture................................................................52
Indenture Trustee........................................................52
Indirect Participants....................................................63
Initial Pool Balance.....................................................85
Interest Index Carryover.................................................56
Interest Period.........................................................101
Interest Rate............................................................53
Interest Reset Period....................................................62
Interest Subsidy Payments................................................21
Investment Earnings......................................................72
IRS......................................................................95
KBUSA....................................................................16
KCRL.....................................................................16
Key Alternative Loan.....................................................34
Keys2Repay Program.......................................................39
LIBOR....................................................................62
Master Servicer..........................................................16
Master Servicer Default..................................................80
Master Servicing Fee.....................................................75
Minimum Purchase Amount..................................................85
Monthly Servicing Payment Date...........................................73
Negative Carry Account...................................................71
New Withholding Regulations..............................................98
Note Pool Factor.........................................................52
Noteholder...............................................................64
Notes....................................................................52
OID......................................................................96
OID Regulations..........................................................96
Participants.............................................................53
Parties in Interest.....................................................107
Pass-Through Rate........................................................61
Pennsylvania Tax Counsel.................................................95
PHEAA...................................................................106
Plans...................................................................107
PLUS Loan................................................................44
PLUS Loan Program........................................................20
PLUS Loans...............................................................28
Pool Balance.............................................................52
Pool Factor..............................................................52
Post-Graduate Loans......................................................19
Pre-Funded Amount........................................................78
Pre-Funding Account......................................................71
Private Consolidation Fee Advance........................................42
Private Consolidation Loan...............................................41
Private Consolidation Loan Program.......................................41
Private Graduate Loans...................................................33
Private Guarantee Agreements.............................................20
Private Guarantee Payments...............................................20
Private Guaranteed Loans.................................................20
Private Guarantors.......................................................20
Private Loan Repayment Commencement Date.................................39
Private Loans............................................................33
Private Undergraduate Loans..............................................33
Private Unguaranteed Loans...............................................20
Programs.................................................................19
Prospectus...............................................................52
Prospectus Supplement....................................................52
PTCE....................................................................108
Purchase Amount..........................................................70
Put Date.................................................................85
Rating Agency............................................................59
Record Date..............................................................67
Registration Statement...................................................14
Related Documents........................................................59
Reserve Account..........................................................71
Residency Loan...........................................................33
Revolving Period.........................................................18
Rules....................................................................64
Sale and Servicing Agreement.............................................69
Secretary................................................................91
Securities...............................................................60
Securityholders..........................................................63
Seller...................................................................16
Seller Insolvency Event..................................................83
SLS Loan Program.........................................................20
SLS Loans................................................................27
Special Allowance Payments...............................................21
Specified Reserve Account Balance........................................54
Spread...................................................................62
Spread Multiplier........................................................62
Stafford Loan Program....................................................20
Stafford Loans...........................................................21
Standards................................................................94
Student Loan Transfer Agreement..........................................69
Student Loans............................................................15
Sub-Servicers............................................................17
Sub-Servicing Agreement..................................................17
Transfer and Servicing Agreement.........................................69
Trust....................................................................14
Trust Accounts...........................................................71
Trust Agreement..........................................................14
UCC......................................................................87
Undergraduate Loans......................................................19
Underlying Federal Loan..................................................29
Underlying Private Graduate Loans........................................41
Underwriting Agreements.................................................109
Unsubsidized Stafford Loan Program.......................................43
Unsubsidized Stafford Loans..............................................21
$_________________
KEYCORP STUDENT LOAN
TRUST 20 ___ - ___
$_________________
CLASS _____ FLOATING RATE
ASSET-BACKED _________
$_________________
CLASS _____ FLOATING RATE
ASSET-BACKED _________
KEY BANK USA, NATIONAL ASSOCIATION,
[SELLER AND] MASTER SERVICER
[KEY CONSUMER RECEIVABLES LLC,
DEPOSITOR]
PROSPECTUS SUPPLEMENT
JOINT LEAD MANAGER AND GLOBAL BOOKRUNNER
________________________________
JOINT LEAD MANAGER
MCDONALD INVESTMENTS
a Keycorp Company
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
Expenses in connection with the offering of the Notes and the
Certificates being registered herein are estimated as follows:
SEC registration fee*................................. $ 291,667
Legal fees and expenses............................... 170,000
Accounting fees and expenses.......................... 55,000
Rating agency fees.................................... 249,000
Eligible Lender Trustee fees and expenses............. 22,000
Indenture Trustee fees and expenses................... 10,000
Printing and engraving................................ 63,000
Servicer conversion fees.............................. 40,000
Miscellaneous......................................... 10,000
Total...................................... $ 910,667
_________________
* All amounts are estimates of expenses incurred or to be incurred in
connection with the issuance and distribution of a Series of Securities in an
aggregate principal amount assumed for these purposes to be one-third of the
principal amount of Securities registered hereby. Accordingly, only one-third of
the SEC Registration Fee paid upon the filing of this Registration Statement is
included in the table above.
Item 15. Indemnification of Directors and Officers.
KEY BANK USA, NATIONAL ASSOCIATION
Paragraph (a) of Article Tenth of the Articles of Association of Key
Bank USA, National Association (this "Association") provides as follows:
(a) This Association shall indemnify, to the full extent permitted or
authorized by the Ohio General Corporation Law as it may from time to
time be amended, any person made or threatened to be made a party to
any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative, or investigative, by reason
of the fact that he is or was a director, officer, or employee of this
Association, or is or was serving at the request of this Association
as a director, trustee, officer, or employee of another association,
corporation, partnership, joint venture, trust, or other enterprise;
in the case of a person serving at the request of this Association,
such request shall be evidenced by a resolution of the Board of
Directors or a duly authorized committee thereof or by a writing
executed by an officer of this Association pursuant to a resolution of
the Board of Directors or a duly authorized committee thereof. In the
case of a merger into this Association of a constituent association
which, if its separate existence had continued, would have been
required to indemnify directors, officers, or employees in specified
situations prior to the merger, any person who served as a director,
officer, or employee of the constituent association, or served at the
request of the constituent association as a director, trustee,
officer, or employee of another association, corporation, partnership,
joint venture, trust, or other enterprise, shall be entitled to
indemnification by this Association (as the surviving association) for
acts, omissions, or other events or occurrences prior to the merger to
the same extent he would have been entitled to indemnification by the
constituent association if its separate existence had continued. The
indemnification provided by this [Article] Tenth shall not be deemed
exclusive of any other rights to which any person seeking
indemnification may be entitled by law or under these Articles or the
Bylaws of this Association, or any agreement, vote of shareholders or
disinterested directors, or otherwise, both as to action in his
official capacity and as to action in another capacity while holding
such office, and shall continue as to a person who has ceased to be a
director, trustee, officer, or employee and shall inure to the benefit
of the heirs, executors, and administrators of such a person.
(b) Notwithstanding division (a) of this [Article] Tenth, no director,
officer, or employee of this Association shall be indemnified against
expenses, including attorneys' fees, penalties or other payments
incurred in an administrative proceeding or action instituted by the
Comptroller of the Currency or other appropriate bank regulatory
agency when such proceeding or action results in a final order
assessing civil money penalties against, or requiring affirmative
action of, such director, officer, or employee in the form of payments
to this Association.
Reference is made to Section 1701.13(E) of the General
Corporation Law of the State of Ohio relating to indemnification of directors,
officers and employees of an Ohio corporation. For the full text of Article;
Tenth of the Association's Articles of Association, reference is hereby made to
Exhibit 3.1 hereto.
The Association also maintains insurance on behalf of each director
and certain officers against any loss arising from any claim asserted against
him in any such capacity, subject to certain exclusions.
KEY CONSUMER RECEIVABLES LLC
Paragraphs (a), (b) and (c) of Section Nineteen of the Limited
Liability Company Declaration of Key Consumer Receivables LLC (the "Company" for
this Item 15 only) provide as follows:
(a) Neither the Member nor any Officer, Director, employee or agent of
the Company nor any employee, representative, agent or Affiliate of the
Member (collectively, the "Covered Persons") shall be liable to the Company
or any other Person who has an interest in or claim against the Company for
any loss, damage or claim incurred by reason of any act or omission
performed or omitted by such Covered Person in good faith on behalf of the
Company and in a manner reasonably believed to be within the scope of the
authority conferred on such Covered Person by this Declaration, except that
a Covered Person shall be liable for any such loss, damage or claim
incurred by reason of such Covered Person's gross negligence or willful
misconduct.
(b) To the fullest extent permitted by applicable law, a Covered
Person shall be entitled to indemnification from the Company for any loss,
damage or claim incurred by such Covered Person by reason of any act or
omission performed or omitted by such Covered Person in good faith on
behalf of the Company and in a manner reasonably believed to be within the
scope of the authority conferred on such Covered Person by this
Declaration, except that no Covered Person shall be entitled to be
indemnified in respect of any loss, damage or claim incurred by such
Covered Person by reason of such Covered Person's gross negligence or
willful misconduct with respect to such acts or omissions; provided,
however, that any indemnity under this SECTION 19 by the Company shall be
provided out of and to the extent of Company assets only, and the Member
shall not have personal liability on account thereof; and provided further,
that so long as any Obligation is outstanding, no indemnity payment from
funds of the Company (as distinct from funds from other sources, such as
insurance) of any indemnity under this SECTION 19 shall be payable from
amounts allocable to any other Person pursuant to the Transaction
Documents.
(c) To the fullest extent permitted by applicable law, expenses
(including legal fees) incurred by a Covered Person defending any claim,
demand, action, suit or proceeding shall, from time to time, be advanced by
the Company prior to the final disposition of such claim, demand, action,
suit or proceeding upon receipt by the Company of an undertaking by or on
behalf of the Covered Person to repay such amount if it shall be determined
that the Covered Person is not entitled to be indemnified as authorized in
this SECTION 19.
For the full text of Section 19 of the Company's Limited Liability
Company Declaration, reference is hereby made to Exhibit 4.3 hereto.
ITEM 16. EXHIBITS.
Exhibit No. Description of Exhibit
1.1. Form of Underwriting Agreement for Notes*
1.2. Form of Underwriting Agreement for Certificates*
3.1. Articles of Association of Key Bank USA, National
Association*
3.2. Bylaws of Key Bank USA, National Association*
4.1. Form of Indenture between KeyCorp Student Loan Trust
____-__ (the "Trust") and the Indenture Trustee
(including as exhibits thereto a form of Asset Backed Note)*
4.2. Form of Amended and Restated Trust Agreement between
[Key Bank USA, National Association or Key Consumer
Receivables LLC] and the Eligible Lender Trustee
(including as an exhibit thereto a form of Asset Backed
Certificate)*
4.3. Limited Liability Company Declaration of Key Consumer
Receivables LLC***
5.1. Opinion of Forrest F. Stanley, Esq. with respect to
legality***
8.1. Opinion of Thompson Hine LLP with respect to federal tax
matters ***
8.2. Opinion of Kirkpatrick & Lockhart with respect to
Pennsylvania tax matters***
10.1. Form of Sale and Servicing Agreement among [Key Bank
USA, National Association (in its capacity as the Seller) or
Key Consumer Receivables LLC (as Depositor)], the Master
Servicer (or the Servicers) and the Eligible Lender Trustee*
10.2. Form of Administration Agreement among the
Administrator, the Master Servicer (or the Servicers), the
Trust and the Indenture Trustee*
23.1 Consent of Forrest F. Stanley, Esq. (included as
Exhibit 5.1)***
23.2. Consent of Thompson Hine LLP (included as Exhibit 8.1)***
23.3. Consent of Kirkpatrick & Lockhart (included as Exhibit
8.2)***
24.1. Powers of Attorney of directors and officers of Key
Bank USA, National Association**
24.2 Powers of Attorney of directors and officers of Key
Consumer Receivables LLC**
25.1. Statement of Eligibility under the Trust Indenture Act
of 1939, as amended, of the Indenture Trustee (Form T-1)***
__________
* Filed previously in connection with Form S-3 Registration Statement
No. 333-80109 and incorporated herein by reference.
** Filed previously.
*** Filed herewith.
ITEM 17. UNDERTAKINGS.
Each of the undersigned Registrants hereby undertakes that:
(1) To provide to the Underwriters at the closing specified in the
Underwriting Agreements Notes and Certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act") may be permitted
to directors, officers and controlling persons of the Registrant pursuant
to the provisions described under Item 15, or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the
Securities Act 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 its 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 and will be governed by
the final adjudication of such issue.
(3) For purposes of determining any liability under the Securities
Act, 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 Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared
effective.
(4) For the purpose of determining any liability under the Securities
Act, 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 the time shall be
deemed to be the initial BONA FIDE offering thereof.
(5) For purposes of determining any liability under the Securities
Act, 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
(the "Exchange Act") that is incorporated by reference in the registration
statement 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.
(6) 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;
(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; and
(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;
(7) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment 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.
(8) 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.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each
Registrant certifies that: it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3, it believes that the securities
rating requirement for use of Form S-3 will be met by the time of sale of the
securities and it has duly caused this Amendment No. 1 to Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Cleveland, State of Ohio, on July 27, 2001.
KEY BANK USA, NATIONAL ASSOCIATION,
as registrant
By:/s/ FORREST F. STANLEY
---------------------------------
Forrest F. Stanley, Assistant Secretary
General Counsel
KEY CONSUMER RECEIVABLES LLC, as registrant
By: /s/ CRAIG T. PLATT
-----------------------------------
Craig T. Platt, President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed on July 27, 2001, by
the following persons in the capacities indicated.
KEY BANK USA, NATIONAL ASSOCIATION:
Signature Title
Principal Executive Officer:
*
- -------------------------- Chief Executive Officer, President and
Jack L. Kopnisky Director
Principal Financial Officer and
Principal Accounting Officer:
*
- -------------------------------- Chief Financial Officer
Michael W. Dvorak
*
- ------------------------------- Chairman and Director
Henry L. Meyer III
*
- ------------------------------ Director
Patrick V. Auletta
*
- ------------------------------ Director
James S. Bingay
*
- ------------------------------ Director
Kevin M. Blakely
*
- ------------------------------ Director
Linda A. Grandstaff
*
- ------------------------------ Director
Robert B. Heisler, Jr.
*
- ------------------------------ Director
Robert G. Jones
*
- ------------------------------ Director
John H. Mancuso
*
- ------------------------------ Director
David J. Schutter
*
- ------------------------------ Director
K. Brent Somers
*By: /s/ Forrest F. Stanley
---------------------------
Forrest F. Stanley
Attorney-in-Fact
KEY CONSUMER RECEIVABLES LLC:
Signature Title
Principal Executive Officer:
/s/ Craig T. Platt
- --------------------------- President and Director
Craig T. Platt
Principal Financial Officer and
Principal Accounting Officer:
*
- ------------------------------ Chief Financial Officer and Director
Michael W. Dvorak
*
- ------------------------------ Director
Joseph M. Vayda
* By: /s/ Craig T. Platt
- ------------------------------
Craig T. Platt
Attorney-in-Fact
EXHIBIT INDEX
Exhibit
No. Description of Exhibit
1.1. Form of Underwriting Agreement for Notes*
1.2. Form of Underwriting Agreement for Certificates*
3.1. Articles of Association of Key Bank USA, National Association*
3.2. Bylaws of Key Bank USA, National Association*
4.1. Form of Indenture between KeyCorp Student Loan Trust ____-__
(the "Trust") and the Indenture Trustee (including as exhibits
thereto a form of Asset Backed Note)*
4.2. Form of Amended and Restated Trust Agreement between [Key Bank
USA, National Association or Key Consumer Receivables LLC] and
the Eligible Lender Trustee (including as an exhibit thereto a
form of Asset Backed Certificate)*
4.3. Limited Liability Company Declaration of Key Consumer
Receivables LLC***
5.1. Opinion of Forrest F. Stanley, Esq. with respect to legality***
8.1. Opinion of Thompson Hine LLP with respect to federal
tax matters ***
8.2. Opinion of Kirkpatrick & Lockhart with respect to
Pennsylvania tax matters***
10.1. Form of Sale and Servicing Agreement among [Key Bank USA,
National Association (in its capacity as the Seller) or Key
Consumer Receivables LLC (as Depositor)], the Master Servicer
(or the Servicers), the Trust and the Eligible Lender
Trustee*
10.2. Form of Administration Agreement among the Administrator, the
Master Servicer (or the Servicers), the Trust and the Indenture
Trustee*
23.1. Consent of Forrest F. Stanley, Esq. (included as Exhibit 5.1)***
23.2. Consent of Thompson Hine LLP (included as Exhibit 8.1)***
23.3. Consent of Kirkpatrick & Lockhart (included as
Exhibit 8.2)***
24.1. Powers of Attorney of directors and officers of Key Bank USA,
National Association**
24.2 Powers of Attorney of directors and officers of Key Consumer
Receivables LLC**
25.1. Statement of Eligibility under the Trust Indenture Act
of 1939, as amended, of the Indenture Trustee (Form T-1)***
__________
* Filed previously in connection with Form S-3 Registration Statement
No. 333-80109 and incorporated herein by reference.
** Filed previously.
*** Filed herewith.