Filed Pursuant to Rule 424(b)(5)
Registration No. 333-62624-03
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED AUGUST 31, 2001
[KEYCORP LOGO]
$961,000,000
KEYCORP STUDENT LOAN TRUST 2002-A
KEY CONSUMER RECEIVABLES LLC
Depositor
KEY BANK USA, NATIONAL ASSOCIATION
Master Servicer
FLOATING RATE ASSET-BACKED NOTES
------------------------
SECURITIES OFFERED
- classes of notes listed in the table below
ASSETS
- group I loans: FFELP program student loans
- group II loans: privately guaranteed student loans and unguaranteed
student loans
CREDIT ENHANCEMENT
- subordination of the group I subordinate notes to the group I senior notes
(group I only)
- guaranty insurance policy (group II only)
- reserve account with respect to each group of notes
- excess interest on the student loans of the related group
- limited cross-collateralization
- interest rate swap with respect to each group of notes
You should carefully consider the risk factors beginning on page S-16 of this
prospectus supplement and page 6 of the prospectus.
The notes are obligations only of the trust and are payable solely from the
student loans and other assets of the trust. The initial principal balance of
the student loans will be less than the initial principal balance of the
notes. The notes are not guaranteed by any person. The notes are not bank
deposits.
The group II notes will have the benefit of an irrevocable and unconditional
guaranty insurance policy issued by Ambac Assurance Corporation, as note
insurer, guaranteeing timely payment of interest and ultimate payment of
principal to the holders of the group II notes.
[AMBAC LOGO]
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.
<Table>
<Caption>
ORIGINAL PRINCIPAL INTEREST RATE FINAL MATURITY PRICE TO UNDERWRITING PROCEEDS TO THE
AMOUNT (PER ANNUM)(1) DATE PUBLIC(2) DISCOUNT SELLER
------------------ -------------- ----------------- --------- ------------ ---------------
Class I-A-1 Notes Three-month
(Group I)....... $ 81,800,000 LIBOR plus May 27, 2010 100% 0.200% 99.800%
0.06%
Class I-A-2 Notes Three-month
(Group I)....... $183,000,000 LIBOR plus August 27, 2031 100% 0.320% 99.680%
0.19%
Class I-B Notes Three-month
(Group I)....... $ 8,200,000 LIBOR plus November 30, 2032 100% 0.400% 99.600%
0.70%
Class II-A-1 Notes Three-month
(Group II)...... $134,000,000 LIBOR plus May 28, 2013 100% 0.200% 99.800%
0.13%
Class II-A-2 Notes Three-month
(Group II)...... $554,000,000 LIBOR plus August 27, 2031 100% 0.401% 99.599%
0.40%
Total............. $961,000,000 $957,728,460(3)
</Table>
- ---------------
(1) Subject to an interest rate cap.
(2) Plus accrued interest, if any, from September 24, 2002.
(3) Before deducting expenses estimated to be $1,000,000.
Delivery of the notes will be made on or about September 24, 2002, against
payment in immediately available funds.
<Table>
JOINT LEAD MANAGER AND GLOBAL BOOKRUNNER JOINT LEAD MANAGER
DEUTSCHE BANK SECURITIES MCDONALD INVESTMENTS
a KeyCorp Company
</Table>
Prospectus Supplement dated September 13, 2002
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.
If the descriptions of the terms of the securities vary between this
prospectus supplement and the accompanying prospectus, you should rely on the
information in this prospectus supplement.
This prospectus supplement and the accompanying prospectus include
cross-references to captions in these materials where you can find further
related discussions. The following table of contents and the table of contents
in the accompanying prospectus provide the pages on which these captions are
located.
UNTIL DECEMBER 23, 2002 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
PROSPECTUS SUPPLEMENT
Summary of Terms................................S-3
Risk Factors...................................S-16
Formation of the Trust.........................S-32
Use of Proceeds................................S-36
The Master Servicer and the Sub-Servicers......S-36
The Depositor..................................S-38
The Financed Student Loan Pools................S-39
Description of the Transfer and Servicing
Agreements................................S-98
The Group II Notes Guaranty Insurance Policy and
the Securities Insurer...................S-134
Income Tax Consequences.......................S-141
ERISA Considerations..........................S-141
Underwriting..................................S-142
Experts.......................................S-144
Legal Matters.................................S-145
Index of Principal Terms......................S-146
Appendix A-Report of Independent Auditors.......A-1
PROSPECTUS
RISK FACTORS......................................6
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..14
FORMATION OF THE TRUSTS..........................14
USE OF PROCEEDS..................................16
THE SELLER, THE ADMINISTRATOR, THE MASTER
SERVICER AND THE SUB-SERVICERS..............16
THE STUDENT LOAN POOLS...........................17
THE STUDENT LOAN FINANCING BUSINESS..............19
WEIGHTED AVERAGE LIVES OF THE SECURITIES.........50
POOL FACTORS AND TRADING INFORMATION.............52
DESCRIPTION OF THE NOTES.........................52
DESCRIPTION OF THE CERTIFICATES..................60
CERTAIN INFORMATION REGARDING THE SECURITIES.....62
DESCRIPTION OF THE TRANSFER AND SERVICING........
AGREEMENTS..................................69
CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS.......87
INCOME TAX CONSEQUENCES..........................95
FEDERAL TAX CONSEQUENCES FOR TRUSTS FOR WHICH....
A PARTNERSHIP ELECTION IS MADE..............96
FEDERAL TAX CONSEQUENCES FOR TRUSTS IN WHICH ....
ALL CERTIFICATES ARE RETAINED BY THE
SELLER.....................................106
PENNSYLVANIA STATE TAX CONSEQUENCES.............106
ERISA CONSIDERATIONS............................107
PLAN OF DISTRIBUTION............................109
LEGAL MATTERS...................................111
INDEX OF PRINCIPAL TERMS........................112
S-1
[INTENTIONALLY LEFT BLANK]
S-2
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, you should read carefully this
entire prospectus supplement and accompanying prospectus.
- - This summary provides an overview to aid your understanding and is
qualified by the full description of this information in this
prospectus supplement and the accompanying prospectus.
- - You can find a listing of the pages where capitalized terms used in
this prospectus supplement are defined under the caption "Index of
Principal Terms" beginning on page S-146 in this prospectus supplement.
PRINCIPAL PARTIES
THE TRUST
- - KeyCorp Student Loan Trust 2002-A
THE DEPOSITOR
- - Key Consumer Receivables LLC
THE MASTER SERVICER AND ADMINISTRATOR
- - Key Bank USA, National Association
THE SUB-SERVICERS
- - Pennsylvania Higher Education Assistance Agency
- - Great Lakes Educational Loan Services, Inc.
THE SELLERS
- - Key Bank USA, National Association
- - Key Consumer QSPE LLC
THE SECURITIES INSURER (GROUP II NOTES)
- - Ambac Assurance Corporation
THE SWAP COUNTERPARTY
- - Key Bank USA, National Association
THE CAP PROVIDER
- - Key Bank USA, National Association
THE PUT OPTION PROVIDER
- - KeyBank National Association
THE ELIGIBLE LENDER TRUSTEE
- - Bank One, National Association
THE INDENTURE TRUSTEE
- - JPMorgan Chase Bank
DATES
DISTRIBUTION DATES
The 27th day of each February, May, August and November or if the 27th is
not a business day, the next business day. The first distribution date is
February 27, 2003.
CUTOFF DATES
- - September 1, 2002 for the initial financed student loans, and the date
specified in the related subsequent transfer agreement with respect to any
subsequent student loans and other student loans.
- - The trust will be entitled to receive all collections and proceeds on the
initial financed student loans and subsequent student loans on and after
the related cutoff date.
STATISTICAL CUTOFF DATE
- - August 1, 2002 for the initial financed student loans.
S-3
- - All statistical information relating to the initial financed student loans
is presented as of the statistical cutoff date.
CLOSING DATE
On or about September 24, 2002.
DESCRIPTION OF THE SECURITIES
GENERAL
The original principal amounts and interest rates for each class of notes are on
the cover page of this prospectus supplement.
The notes are issued in book-entry form through The Depository Trust Company,
Clearstream Banking, societe anonyme, and the Euroclear System.
Minimum denominations of $1,000.
OFFERED SECURITIES (GROUP I)
Payable primarily from the group I student loans and other trust assets
allocated to the group I notes.
Group I Senior Notes
- - Class I-A-1 Notes
- - Class I-A-2 Notes
Group I Subordinate Notes
- - Class I-B Notes
OFFERED SECURITIES (GROUP II)
Payable primarily from the group II student loans, the group II guaranty
insurance policy and other trust assets allocated to the group II notes.
- - Class II-A-1 Notes
- - Class II-A-2 Notes
NON-OFFERED SECURITIES
- - The trust will also issue a single class of certificates to the depositor or
an affiliate thereof as its designee.
- - The certificates will not have a principal balance and will not bear
interest.
- - The certificates will only be entitled to distributions on any distribution
date after all other required payments, deposits and distributions are made.
- - Any information in this prospectus supplement relating to the certificates
is solely for informational purposes to further a better understanding of
the notes.
INTEREST PAYMENTS
- - Each interest rate is subject to a maximum rate described in this prospectus
supplement under the caption "Description of the Securities" herein.
- - The funds available to pay interest on each group of notes for any interest
period will be reduced based on the swap payments made by the trust pursuant
to the related interest rate swap to Key Bank USA, National Association, as
swap counterparty, and such available funds will be increased based on swap
payments made pursuant to the related interest rate swap by the swap
counterparty to the trust.
- - Key Bank USA, National Association, will provide two interest rate caps, one
each for the benefit of the group I and group II notes. Each interest rate
cap will eliminate the effect of the maximum rate on the interest rate of
the notes of each group. Your right to receive payments under the interest
rate cap related to your group of notes is not rated by any rating agency.
- - Interest calculations are based on actual/360 for each class of notes.
- - Interest not paid on a distribution date due to the effect of the maximum
rate and not paid because of a default by the cap provider with respect to
the interest rate cap relating to your group of notes may be paid on future
distribution dates as
S-4
described in this prospectus supplement under the caption "Description of
the Securities" herein.
- - The securities insurer will guarantee timely payment of interest, up to the
maximum rate, on each class of group II notes.
PRINCIPAL PAYMENTS
Principal payments on the notes of each group will be made on each distribution
date in an amount equal to the principal distribution amount for the related
group, allocated as described below under "--Priority of Payments."
For each distribution date and each group of notes, the principal distribution
amount is generally equal to the amount by which the sum of the outstanding
principal balance of the notes of such group exceeds the related pool balance of
the student loans in the related group plus the pre-funded amount relating to
such group of notes for such distribution date, subject to adjustment, as
described herein under "Description of the Transfer and Servicing
Agreements--Distributions."
CREDIT ENHANCEMENT
Group I Notes
- - subordination of the class I-B notes to the class I-A-1 and class I-A-2
notes
- - group I reserve account
- - excess interest
- - group I interest rate swap
- - limited cross-collateralization from group II
Group II Notes
- - guaranty insurance policy
- - group II reserve account
- - excess interest
- - group II interest rate swap
- - limited cross-collateralization from group I
GROUP II NOTES GUARANTY INSURANCE POLICY
(GROUP II NOTES ONLY)
Ambac Assurance Corporation will issue a financial guaranty insurance policy for
the benefit of the group II notes.
The policy will unconditionally and irrevocably guarantee the timely payment of
interest on, and the ultimate payment of the principal amount of, the group II
notes.
On each distribution date, the indenture trustee will calculate to what extent
the funds available to make the payments of principal and interest are
insufficient to pay current interest on the group II notes. If an insufficiency
exists, then the indenture trustee, on behalf of the group II noteholders, will
make a draw on the policy. In addition, the policy will guarantee the full
payment of the principal balance of each class of group II notes on the related
final maturity date.
The policy does not guarantee:
- - any amounts payable on the group I notes;
- - any shortfalls in interest payments resulting from the application of the
maximum rate;
- - payments by the swap counterparty; or
- - payments by the cap provider.
If for any reason the securities insurer does not make the payments required by
the policy, holders of group II notes will have to rely on the group II student
loans, the group II reserve account, limited cross-collateralization from the
group I student loans, the group II interest rate swap and the other credit
enhancement available to the group II notes for your payments of interest and
principal and you may suffer a loss.
S-5
PRIORITY OF PAYMENTS
On each distribution date, the indenture trustee will make the following
distributions and deposits to the extent of available funds with respect to the
related group in the order indicated:
GROUP I NOTES:
1. to the master servicer, certain fees;
2. to the administrator, certain fees;
3. pro-rata (x) to the holders of the class I-A-1 and class I-A-2 notes,
interest on a pro rata basis, subject to the maximum rate, and (y) to
the swap counterparty, amounts due from the trust pursuant to the group
I interest rate swap for such distribution date and certain termination
payments;
4. to the group I reserve account, an amount, if any, necessary to reinstate
the balance of the reserve account to a specified amount;
5. provided that a subordinate note interest trigger is not in effect, to the
holders of the class I-B notes, interest subject to the maximum rate;
6. to the holders of the group I notes, the principal distribution amount for
the group I notes allocated as described under "--Allocation of Group I
Principal Distribution Amount" below;
7. if a subordinate note trigger event is in effect, to the holders of the
class I-B notes, interest subject to the maximum rate;
8. to the holders of the group I senior notes, interest due in excess of the
maximum rate, if any, on a pro rata basis, to the extent not paid by the
cap provider under the group I interest rate cap;
9. to the holders of the group I subordinate notes, interest due in excess of
the maximum rate, if any, on a pro rata basis, to the extent not paid by
the cap provider under the group I interest rate cap;
10. to the swap counterparty, any termination payments with respect to the
group I interest rate swap not paid pursuant to clause 3. above;
11. to the cap provider, an amount sufficient to reimburse the cap provider
for previous payments under the group I interest rate cap; and
12. after all payments shown above are made, and if group II available funds
are insufficient to make all required payments pursuant to clauses 1.
through 12. below under "--Group II Notes:" any remaining amounts will be
paid to the group II noteholders, the master servicer, the administrator,
the securities insurer, the swap counterparty and/or the cap provider, as
applicable, in the order and for the purposes set forth in such clauses 1.
through 12., inclusive, up to the amount of such deficiency in group II
available funds; and
13. any remaining amounts will be paid to the holder of the certificates.
If the interest rate on any class of group I notes for any interest period is
capped at the related maximum rate and until the termination of the group I
interest rate cap, the cap provider will be obligated to pay the difference
between interest that would have been due without giving effect to the related
maximum rate and interest due at the related maximum rate.
Allocation of the Group I Principal Distribution Amount
The principal distribution amount for the group I notes will be allocated as
follows: (a) prior to the stepdown date, or after the stepdown date if a
subordinate note principal trigger has occurred, the principal distribution
amount for the group I notes will be payable solely to the group I senior notes
in sequential order beginning with the class I-A-1 notes until paid in full,
then to the class I-A-2 notes until paid in full, and then to the class I-B
notes; and (b) after the stepdown date and so long as no subordinate note
principal trigger has occurred, the senior
S-6
percentage of the principal distribution amount for the group I notes will be
payable to the group I senior notes (in the same order of priority as described
in the preceding sentence) and the subordinate percentage of the principal
distribution amount will be payable to the class I-B notes.
The senior percentage of the group I notes at any time equals the percentage
equivalent of a fraction, the numerator of which is the aggregate principal
balance of the group I senior notes and the denominator of which is the sum of
the aggregate principal balance of all the group I notes. The subordinate
percentage for the group I notes is equal to 100% minus the senior percentage of
the group I notes.
Subordinate Note Interest Trigger
A subordinate note interest trigger goes into effect for the group I subordinate
notes if on the last day of the related collection period, the aggregate
principal balance of the group I senior notes exceeds the sum of the pool
balance of the group I student loans plus the amount on deposit in the group I
pre-funding account and the group I reserve account. The subordinate note
interest trigger remains in effect as long as the aggregate principal balance of
the group I notes exceeds the sum of the pool balance of group I student loans
plus the amount on deposit in the group I pre-funding account. While this
condition exists, the priority of payment of interest on the class I-B notes
will be affected as described above.
Stepdown Date
The stepdown date for the group I notes will be the earlier of (i) the first
date on which no group I senior notes remain outstanding or (ii) the fifth
anniversary of the closing date.
Subordinate Note Principal Trigger
A subordinate note principal trigger with respect to the group I subordinate
notes will occur if a subordinate note interest trigger occurs with respect to
the group I subordinate notes. In addition, a subordinate note principal trigger
with respect to the group I subordinate notes will occur if the cumulative
default ratio for the group I student loans exceeds 25% as of the end of the
related collection period.
The cumulative default ratio means the ratio of the aggregate principal balance
of the group I student loans with respect to which default claims have been
filed, to the aggregate principal balance of all group I student loans ever
included in such group. If a subordinate note principal trigger occurs, no
principal payments will be made with respect to the class I-B notes until no
group I senior notes remain outstanding. Instead, all principal payments with
respect to the group I notes will be allocated to the group I senior notes.
GROUP II NOTES:
1. to Key Bank USA, National Association, as the applicable seller, all
amounts received from TERI as guaranty payments in excess of 19% of the
initial pool balance of the group II student loans;
2. to the master servicer, certain fees;
3. to the administrator, certain fees;
4. to the securities insurer, provided that no securities insurer payment
default has occurred and is continuing, all premiums due under the group
II notes guaranty insurance policy;
5. pro-rata (x) to the holders of the class II-A-1 and class II-A-2 notes,
interest on a pro rata basis, subject to the maximum rate, and (y) to the
swap counterparty, amounts due from the trust pursuant to the group II
interest rate swap for such
S-7
distribution date and certain termination payments;
6. to the securities insurer, provided that no securities insurer payment
default has occurred and is continuing, reimbursement for all amounts owed
pursuant to draws with respect to any payments of interest under the group
II notes guaranty insurance policy, plus interest thereon;
7. to the group II reserve account, an amount, if any, necessary to reinstate
the balance of the reserve account to a specified amount;
8. to the holders of the group II notes and the securities insurer, the
principal distribution amount for group II allocated as shown under
"--Allocation of Group II Principal Distribution Amount" below;
9. to the securities insurer, reimbursement for all amounts owed pursuant to
draws made under the group II notes guaranty insurance policy, not
previously reimbursed as provided above, and all other amounts due under
the related insurance agreement, including premiums;
10. to the holders of the group II notes, interest due in excess of the
maximum rate, if any, on a pro rata basis, to the extent not paid by the
cap provider under the group II interest rate cap;
11. to the swap counterparty, any termination payments with respect to the
group II interest rate swap not paid pursuant to clause 5. above;
12. to the cap provider, an amount sufficient to reimburse the cap provider
for previous payments under the group II interest rate cap;
13. after all payments shown above are made, and if group I available funds
are insufficient to make all required payments pursuant to clauses 1.
through 11. above under "--Group I Notes:" any remaining amounts will be
paid to the group I noteholders, the master servicer, the administrator,
the swap counterparty and/or the cap provider, as applicable, in the order
and for the purposes set forth in such clauses 1. through 11., inclusive,
up to the amount of such deficiency in group I available funds; and
14. any remaining amounts will be paid to the holder of the certificates.
If the interest rate on any class of group II notes for any interest period is
capped at the related maximum rate and until the termination of the group II
interest rate cap, the cap provider will be obligated to pay the difference
between interest that would have been due without giving effect to the related
maximum rate and interest due at the related maximum rate. The group II notes
guaranty insurance policy does not guaranty any payments by the cap provider.
Allocation of the Group II Principal Distribution Amount
On each distribution date, the principal distribution amount for the group II
notes will be allocated as follows:
(a) to reduce the principal of the class II-A-1 notes until paid in full;
then
(b) to the securities insurer, provided that no securities insurer payment
default has occurred and is continuing, reimbursement for all amounts owed
pursuant to draws with respect to any payments of principal under the group
II notes guaranty insurance policy made to the holders of the class II-A-1
notes, plus interest thereon; then
(c) to reduce the principal of the class II-A-2 notes until paid in full;
and then
(d) to the securities insurer, provided that no securities insurer payment
default has occurred and is continuing, reimbursement for all amounts owed
pursuant to draws with respect to any payments of principal under the group
II notes guaranty insurance policy made to the holders of the class II-A-2
notes, plus interest thereon.
S-8
FINAL MATURITY DATES
The unpaid principal amount of each class of notes will be payable in full on
the applicable final maturity date listed on the cover page of this prospectus
supplement.
OPTIONAL PUT OPTIONS
On the closing date, the trust will enter into two put option agreements with
KeyBank National Association, an affiliate of Key Bank USA, National
Association. Under the terms of each of the put option agreements: (a) with
respect to the group I student loans, a majority of the noteholders of the then
outstanding group I senior notes (or if no group I senior notes remain
outstanding, then a majority of the noteholders of the class I-B notes),
excluding for such purpose all notes owned by Key Bank USA, National Association
or its affiliates, and (b) with respect to the group II student loans, a
majority of the noteholders of the then outstanding group II notes, excluding
for such purpose all notes owned by Key Bank USA, National Association or its
affiliates, may instruct the indenture trustee to exercise the related put on
the distribution date in November, 2012. However, despite the receipt of such
instructions, the related put may not be exercised by the indenture trustee if
the proceeds received (plus amounts then on deposit in the related reserve
account) would be less than the aggregate principal balance of the related group
of notes, plus interest thereon (including interest accrued and unpaid in excess
of the maximum rate), plus all amounts due and owing to the swap counterparty,
the cap provider (with respect to the put relating to each group of student
loans), and the securities insurer (with respect to the put relating to the
group II student loans only). If exercised, each put option will require KeyBank
National Association to purchase all student loans remaining in the related
group of student loans as of the end of the collection period immediately
preceding such distribution date. If the put option with respect to your group
of notes is exercised, the proceeds of such put option will be used to redeem
your securities. The exercise price for each put option is equal to the then
current fair market value of the related group of student loans.
AUCTION SALE
In the event that a put option is exercised and KeyBank National Association
defaults on its obligations with respect to such put, all student loans
remaining in the related group of student loans subsequent to such put default
will be offered for sale by the indenture trustee. Neither Key Bank USA,
National Association, nor any affiliate thereof will be permitted to participate
in any such auction as a potential buyer. The proceeds of any sale of the
student loans relating to your group of notes will be used to redeem your
securities. The auction price must at least equal the unpaid principal amount of
the related group of notes, plus accrued and unpaid interest thereon (including
interest accrued and unpaid in excess of the maximum rate), plus all amounts due
and owing to the swap counterparty, the cap provider (with respect to auction
sale relating to each group of student loans), and the securities insurer (with
respect to the auction sale relating to the group II student loans only). If
such minimum auction price is not bid by a potential buyer, the related group of
notes will not be redeemed on such distribution date, but (a) with respect to
the group I student loans, a majority of the noteholders of the then outstanding
group I senior notes (or if no group I senior notes remain outstanding, then a
majority of the noteholders of the class I-B notes), excluding for such purpose
all notes owned
S-9
by Key Bank USA, National Association and its affiliates, or (b) with respect to
the group II student loans, a majority of the noteholders of the then
outstanding group II notes, excluding for such purpose all notes owned by Key
Bank USA, National Association or its affiliates, may direct the indenture
trustee at any time to hold one or more additional sales until such time as the
related minimum auction price is received. In the event that both put options
are exercised and defaulted upon by KeyBank National Association, the indenture
trustee shall also auction both groups of student loans together as part of one
auction sale, and shall accept the higher aggregate bid received from either:
one purchaser of both groups of student loans, or from two purchasers bidding on
each group of student loans separately; provided, that, in the event of such
combined sale, the minimum auction price for both groups of notes must be
obtained or each group of student loans will be sold separately.
OPTIONAL PURCHASE
The master servicer may, but is not required to, repurchase all remaining
student loans in the pool of student loans when the principal balance of the
student loans is equal to 10% or less of the aggregate initial principal balance
of all of the initial financed student loans and all subsequent student loans,
at a price equal to the unpaid principal balance of the notes, plus accrued and
unpaid interest thereon (including interest accrued and unpaid in excess of the
maximum rate), plus all amounts due and owing to the swap counterparty, the cap
provider and the securities insurer.
TRUST PROPERTY
GROUP I STUDENT LOANS
The group I student loans are all FFELP loans. FFELP loans are loans originated
under the Federal Family Education Loan Program created by the Higher Education
Act. Third party guarantee agencies guarantee the payment of 98% of the
principal amount of FFELP loans plus interest on the FFELP loans.
Guarantee agencies that provide guarantees for the initial financed student
loans in group I include:
- - American Student Assistance,
- - California Student Aid Commission,
- - Connecticut Student Loan Foundation,
- - Educational Credit Management Corporation,
- - Great Lakes Higher Education Guaranty Corporation,
- - Michigan Higher Education Assistance Agency,
- - Nebraska Student Loan Program,
- - New York State Higher Education Services Corporation,
- - Pennsylvania Higher Education Assistance Agency,
- - United Student Aid Funds, Inc.
These loans are partially reinsured by the Department of Education. All of the
group I student loans were originated by or initially purchased from third party
lenders by Key Bank USA, National Association.
GROUP II STUDENT LOANS
The student loans in group II are all private student loans that are not
reinsured by the Department of Education or any other government agency. The
group II student loans are either: (a) guaranteed by either The Educational
Resources Institute, Inc. or HEMAR Insurance Corporation of America, or (b) not
guaranteed by any guarantee agency or any private guarantor. All group II
student loans were originated by Key Bank USA, National Association, as part of
its private loan lending program, or purchased by Key Bank USA, National
Association, from other third party lenders. In addition, certain of the group
II student loans guaranteed by The Educational Resources Institute, Inc.
(approximately 3.63% of the initial group II student loans) have defaulted
S-10
in the past, but have since become current in payment of interest and principal.
For more detailed information on FFELP Loans and private loans (both guaranteed
and unguaranteed) please see "The Financed Student Loan Pools" in this
prospectus supplement and "The Student Loan Financing Business" in the
prospectus.
THE INITIAL FINANCED STUDENT LOANS
The initial financed student loans in each group consist of certain graduate and
undergraduate student loans. The student loans in the initial pool will be
purchased by the trust from the depositor with proceeds from the sale of the
notes. The depositor will purchase all of the group II student loans and a
portion of the group I student loans from Key Bank USA, National Association
(the parent corporation of the depositor); and will purchase a majority of the
group I student loans from Key Consumer QSPE LLC (an affiliate of the
depositor), who previously acquired such initial financed student loans from Key
Bank USA, National Association.
The initial financed student loans of each group have the characteristics set
forth below as of August 1, 2002. Unless otherwise specified, percentages are of
the initial pool principal balance (including certain interest accrued to be
capitalized).
INITIAL GROUP I STUDENT LOANS:
Aggregate Characteristics
- - Aggregate principal amount:...........................$225,612,065.03
- - Weighted average annual percentage rate:........................5.40%
- - Weighted average original term:..............................252 mths
- - Weighted average remaining term: ............................235 mths
Guarantees
- Percent guaranteed by American Student Assistance..........20.41%
- Percent guaranteed by California Student Aid Commission.....0.94%
- Percent guaranteed by Connecticut Student Loan Foundation.. 0.01%
- Percent guaranteed by Educational Credit Management
Corporation.................................................0.17%
- Percent guaranteed by Great Lakes Higher Education Guaranty
Corporation less than.......................................0.01%
- Percent guaranteed by Michigan Higher Education Assistance
Agency......................................................0.05%
- Percent guaranteed by Nebraska Student Loan Program........25.21%
- Percent guaranteed by New York State Higher Education
Services Corporation........................................0.03%
- Percent guaranteed by Pennsylvania Higher Education
Assistance Agency..........................................52.68%
- Percent guaranteed by United Student Aid Funds, Inc.........0.50%
INITIAL GROUP II STUDENT LOANS:
Aggregate Characteristics
- - Aggregate principal amount:...........................$623,835,214.49
- - Weighted average annual percentage rate:........................5.03%
- - Weighted average original term:............................. 237 mths
- - Weighted average remaining term: ............................221 mths
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Guarantees
- - Percent not guaranteed by private guarantors...................66.76%
- - Percent guaranteed by private guarantors.......................33.24%
- Percent guaranteed by The Educational Resources
Institute, Inc............................................33.20%
- Percent guaranteed by HEMAR Insurance Corporation of
America....................................................0.04%
SUBSEQUENT STUDENT LOANS
The student loans that are subsequent student loans will be purchased by the
trust from the depositor with proceeds on deposit in the applicable sub-account
of the pre-funding account. The depositor will purchase all of the subsequent
student loans from Key Bank USA, National Association. All of the group I
subsequent student loans will be FFELP loans and all of the group II subsequent
student loans will be private student loans. The subsequent student loans will
have generally the same attributes applicable to the initial financed student
loans, but the addition of the subsequent student loans will affect the
aggregate statistical characteristics of the group I and group II student loans.
The subsequent student loans may be purchased on different dates and may have
different related cutoff dates, but all purchases of subsequent student loans by
the trust will occur on or before December 23, 2002.
PRE-FUNDING PERIOD
There will be two pre-funding accounts, each with two sub-accounts. The first of
the group I and group II pre-funding sub-accounts will have approximately
$30,000,000 and $35,000,000, respectively, deposited on the closing date to be
used on or before December 23, 2002 for the purchase of subsequent student loans
into the related student loan group. The second of the group I and group II
pre-funding sub-accounts will have approximately $8,000,000 and $25,000,000,
respectively, deposited on the closing date, which sums are expected to be used
by the trust, on or prior to the end of the funding period, to purchase
consolidation loans and serial loans with respect to each group, to pay
capitalized interest on each pool of student loans and to pay advances for
certain fees related to the student loans of each group. To the extent that
amounts in excess of $10,000,000 remain in the first sub-account of either
pre-funding account after December 23, 2002, and all amounts remaining in the
second sub-account of each pre-funding account after October 31, 2004, will be
distributed as a prepayment of principal to the noteholders of the related
group.
THE RESERVE ACCOUNTS
There will be two reserve accounts, each relating to one group of notes, to
cover servicing fees, administration fees, premiums due the securities insurer
(from the group II reserve account only), interest on the related group of notes
and payments due to the swap counterparty under the related interest rate swap.
The reserve accounts will also be used to make principal payments on the notes
of the related group in the same order of priority as described above under
"Priority of Payments", generally to the extent realized losses on the financed
student loans of such related group during any collection period exceed excess
interest available to be distributed as principal on the notes of the related
group. Amounts on deposit in each reserve account also will be available, if
necessary, to pay principal on each class of notes in the related group on its
respective final maturity date.
Initially, the amount in the group I reserve account will be approximately
$682,500 and the amount in the group II reserve account will be approximately
$20,640,000. On each distribution date, any available funds
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remaining after making all prior required distributions with respect to such
group as described in this prospectus supplement will be deposited into the
reserve account up to the specified reserve account balance for the related
group of notes. We refer you to "Description of the Transfer and Servicing
Agreements--Credit Enhancement--Reserve Accounts" herein for a description of
the specified reserve account balance for each group of notes.
INTEREST RATE SWAPS
Certain of the group I student loans require the borrower to pay interest
monthly based on a commercial paper rate and certain of the group II student
loans require the borrower to pay interest monthly based on a prime rate. To
reduce the risk that the rate of interest received on the commercial paper rate
student loans or the prime rate student loans, as applicable, would not be
sufficient to pay the related rate of interest on the group I notes or the group
II notes, as the case may be, on the closing date, the trust will enter into two
interest rate swaps with Key Bank USA, National Association, as the swap
counterparty, one relating to each group of student loans.
Group I Interest Rate Swap
On each distribution date with respect to the group I interest rate swap, the
trust will owe the swap counterparty the following amount for each of the
monthly periods in the related collection period beginning with the monthly
period commencing October 1, 2002:
The product of:
(1) the commercial paper rate as determined in accordance with the
commercial paper rate loans as of the first day of the related monthly period;
(2) the principal balance of the group I student loans that pay interest
based on the commercial paper rate as determined as of the first day of the
related monthly period; and
(3) a fraction, the numerator of which is the actual number of days in the
related monthly period and the denominator of which is 360.
On each distribution date with respect to the group I interest rate swap, the
swap counterparty will owe the trust an amount equal to the following amount for
the monthly periods in the related collection period beginning with the monthly
period commencing October 1, 2002:
The product of:
(1) three-month LIBOR (calculated in the same manner and on such dates as
such index is calculated for the notes for the related interest period) less
0.15%;
(2) the principal balance of the group I student loans that pay interest
based on the commercial paper rate as determined as of the first day of the
related monthly period; and
(3) a fraction, the numerator of which is the actual number of days in the
related monthly period and the denominator of which is 360.
Payments on the group I interest rate swap will be made on a net basis between
the trust and the swap counterparty.
Group II Interest Rate Swap
On each distribution date with respect to the group II interest rate swap, the
trust will owe the swap counterparty the following amount for each of the
monthly periods in the related collection period beginning with the monthly
period commencing October 1, 2002:
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The product of:
(1) the prime rate as determined in accordance with the prime rate loans as
of the first day of the related monthly period;
(2) the principal balance of the group II student loans that pay interest
based on the prime rate as determined as of the first day of the related monthly
period; and
(3) a fraction, the numerator of which is the actual number of days in the
related monthly period and the denominator of which is 360.
On each distribution date with respect to the group II interest rate swap, the
swap counterparty will owe the trust an amount equal to the following amount for
the monthly periods in the related collection period beginning with the monthly
period commencing October 1, 2002:
The product of:
(1) three-month LIBOR (calculated in the same manner and on such dates as
such index is calculated for the notes for the related interest period) plus
2.70%;
(2) the principal balance of the group II student loans that pay interest
based on the prime rate as determined as of the first day of the related monthly
period; and
(3) a fraction, the numerator of which is the actual number of days in the
related monthly period and the denominator of which is 360.
Payments on the group II interest rate swap will be made on a net basis between
the trust and the swap counterparty.
The swap counterparty has long-term, senior unsecured debt ratings of A1 and A
by Moody's Investors Service, Inc. and Standard and Poor's Ratings Services, a
division of The McGraw-Hill Companies Inc., respectively. The obligations of the
swap counterparty are not guaranteed by the securities insurer.
If the rating of the swap counterparty is withdrawn, suspended or downgraded
below A1 by Moody's Investors Service, Inc. or A- or its equivalent by any other
rating agency then rating the notes, the swap counterparty is required, no later
than the 30th day following such rating withdrawal, suspension or downgrade, at
the swap counterparty's expense, either to (i) obtain a substitute swap
counterparty, (with respect to the group I interest rate swap that does not
cause any of the rating agencies rating the group I notes to reduce its then
current rating of such classes of notes, and with respect to the group II
interest rate swap that is acceptable to the securities insurer), that has a
long-term debt rating of at least A1 by Moody's Investors Service, Inc. or A- or
its equivalent by each other rating agency then rating the notes, or (ii) enter
into arrangements reasonably satisfactory to the indenture trustee, each of the
rating agencies then rating the group I notes (with respect to the group I
interest rate swap) and the securities insurer (with respect to the group II
interest rate swap), including collateral arrangements, guarantees or letters of
credit, which arrangements in the view of such rating agency will result in the
elimination of the effect or impact of such rating withdrawal, suspension or
downgrade on the noteholders and/or the securities insurer, as applicable.
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
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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.
RATINGS
At least two nationally recognized rating agencies must rate each class of group
I senior notes and group II notes in the highest investment rating category, and
the group I subordinate notes in one of the four highest rating categories.
S-15
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 notes.
YOU MAY HAVE DIFFICULTY
SELLING YOUR SECURITIES The notes will not be listed on
any securities exchange. As a
result, if you want to sell your
notes you must locate a purchaser
that is willing to purchase them.
The underwriters intend to make a
secondary market for the notes.
The underwriters will do so by
offering to buy the notes from
investors that wish to sell.
However, the underwriters will not
be obligated to make offers to buy
the notes and may stop making
offers at any time. In addition,
the prices offered, if any, may
not reflect prices that other
potential purchasers would be
willing to pay, were they to be
given the opportunity. There have
been times in the past where there
have been very few buyers of asset
backed securities, and there may
be such times in the future. As a
result, you may not be able to
sell your notes 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 ALLOCATED TO YOUR GROUP
OF NOTES 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 group II notes guaranty
insurance policy, the guarantee
agreements, the reserve accounts,
the escrow accounts, the
pre-funding accounts, the put
options, the interest rate swaps
and, to a limited extent, the
interest rate caps. The indenture
only provides for limited
cross-collateralization, and
consequently, you must rely for
repayment upon payments only from
the trust's assets allocable to
your group of notes. You will have
no claim to any amounts properly
distributed to the
certificateholder or to Key
Consumer Receivables LLC, in its
capacity as depositor, Key
Consumer QSPE LLC, in its capacity
as a seller, KeyBank National
Association, in its capacity as
the put option provider, or to Key
Bank USA, National Association, in
its capacities as a seller,
administrator, swap counterparty,
cap provider or master servicer,
or to any of the sub-servicers,
from time to time.
S-16
Group I Notes: With respect to the
group I notes, if for any reason
the group I reserve account and
the group I pre-funding account
are exhausted, the trust will
depend solely on payments with
respect to the group I student
loans and payments by the swap
counterparty to make payments on
your group of notes and you could
suffer a loss.
Group II Notes: With respect to
the group II notes, if for any
reason the securities insurer
fails to make payments due under
the group II notes guaranty
insurance policy and the group II
reserve account and the group II
pre-funding account are exhausted,
the trust will depend solely on
payments with respect to the group
II student loans and payments by
the swap counterparty to make
payments on your group of notes
and you could suffer a loss.
REVENUES RELATING TO EACH GROUP OF NOTES
MAY NOT BE AVAILABLE FOR PAYMENT OF
NOTES OF THE OTHER GROUP
The revenues relating to each
group of student loans will be
allocated first to expenses and
all other amounts required to be
paid with respect to the related
group of notes. Those revenues
will be available for payments
with respect to the other group
only to the extent they exceed
amounts required to be applied
with respect to the related group.
If the revenues from one group are
not sufficient to make required
payments with respect to that
group, there is no assurance that
revenues from the other group will
be available to make up any
shortfall.
In addition if all related student
loans of a group are sold in
connection with the redemption of
the notes of that group (either
through the exercise of the
related put option, an auction
sale, or an optional purchase by
the master servicer) or after all
the notes of a group are otherwise
paid in full, there will be no
further revenues of that group
available to the other group on
any basis.
Group I Student Loans: Payments
with respect to the FFELP loans,
including payments from the
guarantee agencies or the
Department of Education, and other
amounts available for distribution
to holders of group I notes at any
time will not be available for
distribution to holders of group
II notes except to the extent they
exceed all amounts then required
to be distributed with respect to
the administration of the FFELP
loans and the payment of
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group I notes. You should not
assume that any such revenues will
be available.
Group II Student Loans: Payments
with respect to the private
student loans, and other amounts
available for distribution to
holders of group II notes at any
time will not be available for
distribution to holders of group I
notes except to the extent they
exceed all amounts then required
to be distributed with respect to
the administration of the private
loans and the payment of group II
notes. You should not assume that
any such revenues will be
available. In addition, no amounts
from the group II notes guaranty
insurance policy will be payable
to holders of group I notes.
THE TRUST'S PURCHASE OF GROUP I
STUDENT LOANS AT A PREMIUM MAY RESULT IN
LOSSES The sum of the outstanding
principal balance of the initial
financed student loans in group I
as of the statistical cutoff date
and the amount deposited in the
related pre-funding account, the
related reserve account and the
related sub-account of the
collection account on the closing
date will equal approximately
97.4% of the original principal
balance of the group I notes. In
addition, the above percentage
without giving effect to amounts
initially on deposit in the
related reserve account is
approximately 97.2%. Each group I
subsequent student loan will be
purchased by the trust for an
amount not in excess of 100% of
the principal balance thereof.
There can be no assurance that the
aggregate principal amount of the
group I notes at all times will be
equal to or less than the sum of
the principal amount of the
related pool of student loans for
such group plus the amount in the
related pre-funding account and
the amounts on deposit in the
related reserve account. If an
event of default occurs under the
indenture, and the group I student
loans are liquidated at a time
when the outstanding principal
amount of the group I notes
exceeded the sum of the principal
amount of the group I student
loans, the amount on deposit in
the group I pre-funding account
and the amounts on deposit in the
group I reserve account, the group
I noteholders will suffer a loss.
S-18
THE CHARACTERISTICS OF THE STUDENT
LOANS MAY CHANGE Certain characteristics of the
student loans in each group will
vary from the characteristics of
the related initial financed
student loans due to payments
received and other changes in the
related initial financed student
loans that occur from the
statistical cutoff date to the
cutoff date, the addition of
subsequent student loans in each
group of student loans, and due to
the trust's purchase of
consolidation loans and serial
loans with respect to each group
of student loans. Each group's
distribution by loan type and
weighted average interest rates
may vary as a result of variations
in the effective rates of interest
applicable to the related student
loans after each transfer of
additional student loans to the
trust (and such group) and the
remaining term of the deferral and
forbearance periods.
Key Bank USA, National
Association, 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:
- THE RATE OF RETURN OF PRINCIPAL
IS UNCERTAIN. The amount of
distributions of principal on each
group of notes and the time when
you receive those distributions
depends on the amount and the
times at which borrowers make
principal payments on the related
student loans. Those principal
payments may be regularly
scheduled payments or unscheduled
payments resulting from
prepayments, defaults or
consolidations of the student
loans.
Group I Notes: With respect to the
group I notes, in the event of a
subordinate note principal
trigger, the group I subordinate
notes will not receive any
payments of principal until all of
the group I senior notes have been
repaid in full. In this event, the
yield to maturity of the group I
subordinate notes may be adversely
impacted and the holders of the
group I subordinate notes could
suffer a loss. With respect to the
group I senior notes, in the event
of a subordinate note principal
trigger, the group I senior
S-19
noteholders will receive
accelerated payments of principal
and such noteholders will bear the
risk of any reinvestment risk
resulting from these accelerated
payments of principal.
Group II Notes: With respect to
the group II notes, as a result of
certain triggers required by the
rating agencies relating to losses
on the group II student loans, the
holders of the group II notes may
receive accelerated payments of
principal and such noteholders
will bear any reinvestment risk
resulting from these accelerated
payments of principal, and, if the
securities insurer defaults on its
obligations, holders of the group
II notes could suffer a loss.
- YOU MAY RECEIVE A SIGNIFICANT
PRINCIPAL PREPAYMENT ON FEBRUARY
27, 2003. The trust intends to
purchase subsequent student loans
with $30,000,000 and $35,000,000
that will be deposited in the
first sub-account of the group I
and group II pre-funding accounts,
respectively, on the closing date.
If the entire amount in either
first sub-account of the related
pre-funding account is not used to
purchase subsequent student loans
by December 23, 2002 you may
receive a principal prepayment on
February 27, 2003. If the amount
remaining in the first sub-account
of the group I or group II
pre-funding account on such date
is $10,000,000 or less, the
indenture trustee, or the
administrator on its behalf, will
transfer such amount to the second
sub-account of the group I or
group II pre-funding account, as
applicable; or if either of such
remaining amounts is greater than
$10,000,000, the indenture trustee
will distribute such amounts to
each class of notes in the related
group of notes, pro rata, based on
the initial principal balance of
each class of notes in the related
group of notes.
- YOU MAY RECEIVE A PREPAYMENT OF
PRINCIPAL AT THE END OF THE
FUNDING PERIOD. Approximately
$8,000,000 and $25,000,000 will be
deposited on the closing date into
the second sub-account of the
group I and group II pre-funding
accounts, respectively, to be used
primarily to purchase student
loans that are consolidation loans
or serial loans that are eligible
to be purchased by the trust
during the funding period. If
amounts on deposit in either of
these second sub-accounts are not
fully utilized by the end of the
funding period, the related
noteholders may receive a
principal prepayment. Any such
amount will be distributed on the
distribution date immediately
after the end of the funding
period.
S-20
- YOU MAY NOT BE ABLE TO REINVEST
DISTRIBUTIONS IN COMPARABLE
INVESTMENTS. Asset backed
securities, like the securities
offered by this prospectus
supplement, usually produce more
returns of principal to investors
when market interest rates fall
below the interest rates on the
student loans and produce less
returns of principal when market
interest rates are above the
interest rates on the student
loans. As a result, you are likely
to receive more money to reinvest
at a time when other investments
generally are producing a lower
yield than that on the notes, and
are likely to receive less money
to reinvest when other investments
generally are producing a higher
yield than that on the notes. You
will bear the risk that the timing
and amount of distributions on
your notes will prevent you from
attaining your desired yield.
- AN EARLY TERMINATION WILL
SHORTEN THE LIFE OF YOUR
INVESTMENT WHICH MAY REDUCE YOUR
YIELD TO MATURITY. Your investment
in the notes may end before you
desire if (1) a majority of the
group I senior noteholders, or the
group I subordinate noteholders if
no group I senior notes are
outstanding (with respect to the
group I notes), or a majority of
the group II noteholders (with
respect to the group II notes),
choose to exercise the put option
with respect to your group of
notes (which results in either the
purchase of the related group of
student loans by KeyBank National
Association, or a successful
auction of such student loans), or
(2) the master servicer exercises
its option to purchase all of the
student loans. In such event,
because your notes will no longer
be outstanding, you will not
receive the additional interest
payments that you would have
received had the notes remained
outstanding. In addition, you may
not be able to reinvest the
principal you receive at a rate
comparable to that on your notes.
RISKS WITH RESPECT TO EACH
INTEREST RATE SWAP In certain circumstances following
a default under an interest rate
swap or a termination event (each
as more fully described under
"Description of the Transfer and
Servicing Agreements--Interest
Rate Swaps") each interest rate
swap is subject to early
termination. In the event of an
early termination of an interest
rate swap, the trust or the swap
counterparty may be liable to pay
the other a termination payment
(regardless of which party has
caused the termination), which
will be based on the value of such
interest rate swap computed in
accordance with the procedures set
forth in each interest rate swap.
Any such termination payment
required to be made by the trust
could
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be substantial, and could reduce
the amounts otherwise payable to
your group of notes. In addition,
if the swap counterparty defaults
on its obligations under an
interest rate swap, the maximum
rate on the related group of notes
will be lower than it would have
been had the swap counterparty
made its required payment and
consequently, the interest rate on
each related class of notes is
more likely to be subject to the
related maximum rate. In this
event, the liquidity and
marketability of your notes may
decline. The securities insurer
does not guarantee payments by the
swap counterparty or the payment
of interest on the group II notes
in excess of the maximum rate
applicable to the group II notes.
YOU MAY NOT RECEIVE CURRENT
PAYMENTS AT THE APPLICABLE
INTEREST RATE You may not be paid interest at
the related note rate because
payments of interest are subject
to the maximum rate. The maximum
rate may be triggered for any of
the following reasons:
- Due to market forces, the
applicable index used to calculate
interest on any class of notes
(plus the applicable margin)
becoming greater than the indices
used to calculate interest on the
related group of student loans.
- The principal balance of each
group of student loans will
initially be less than the
aggregate principal amount of the
related group of notes.
Consequently, the aggregate
principal balances of each group
of student loans on which interest
will be collected will be less
than the principal amount of the
related group of notes.
- The maximum rate will be reduced
as a result of the trust's
obligation to pay certain amounts
to the Department of Education
(with respect to group I student
loans) or to repay certain amounts
to borrowers.
The group II notes guaranty
insurance policy guarantees
payments of interest on the group
II notes only up to the maximum
rate. As a result you may realize
a lower than anticipated yield on
your investment.
Although, with respect to each
group of notes, the cap provider
is obligated to pay the difference
between the applicable note rate
and the related maximum rate, the
obligations of the cap provider
under each interest rate cap are
dependent on the cap provider's
ability to make the
S-22
necessary payments and are not
rated by any rating agency. If the
interest rate relating to your
group of notes is subject to the
maximum rate and the cap provider
defaults or the related interest
rate cap is terminated, you may
receive interest not previously
paid because of the application of
the related maximum rate on
subsequent distribution dates on a
subordinated basis. We cannot
assure you that there will be
sufficient funds available for
that purpose. The group II notes
guaranty insurance policy does not
guaranty the payments by the cap
provider. If the note rate is
limited by the maximum rate, the
market value and liquidity of your
notes may decline. In addition,
there can be no assurance the
related interest rate cap will not
terminate in accordance with its
terms before the outstanding
principal balance of your class of
notes is reduced to zero.
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, except with respect to
approximately 12.77% of the
initial group II student loans, by
outstanding principal balance as
of the statistical cut-off date,
that are serviced directly by Key
Bank USA, National Association,
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 federal and
private program regulations, as
applicable, to ensure that the
guarantors are obligated to
maintain guaranteed payments and
that any reinsurance by the
Department of Education (with
respect to the group I notes) 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.
S-23
SUB-SERVICERS MAY MAKE IT MORE
DIFFICULT TO FIND A SUCCESSOR
MASTER SERVICER The master servicer or any
successor master servicer may only
terminate a sub-servicer for cause
or by paying a deconversion fee.
Moreover, a successor master
servicer is responsible for any
breaches by the sub-servicer of a
subservicing agreement. As a
result, it may be more difficult
to find a successor master
servicer than if the successor
master servicer were able to
terminate the sub-servicer without
the payment of a deconversion fee
or if the successor master
servicer were not liable for
breaches by the sub-servicer. Any
delay in finding a successor
master servicer may cause the
market value and liquidity of your
notes to decline, and, with
respect to group II notes, if the
securities insurer defaults, cause
you to suffer a loss on your
investment.
LIMITED PERFORMANCE HISTORY
ON UNGUARANTEED GROUP II
STUDENT LOANS Key Bank USA, National
Association, has been originating
unguaranteed student loans only
since 1995, and only a portion of
these loans have been in active
repayment status for more than
12-24 months. If you own any group
II notes, you bear the prepayment
and yield risk that prepayments on
the unguaranteed group II student
loans are faster or slower than
you anticipated. In addition, if
the securities insurer defaults,
you will also bear the risk that
the level of losses and
delinquencies on the group II
student loans will exceed the
other limited credit enhancement
of the financing structure
available to the group II notes.
RISK OF DEFAULT OF UNGUARANTEED
ROUP II STUDENT LOANS The group II student loans are
generally dischargeable by a
borrower in bankruptcy unless it
is determined that such student
loan has been made under any
program funded in whole or in part
by a governmental unit or
non-profit institution. If you own
any group II notes, and if the
securities insurer defaults, you
will bear any risk of loss
resulting from the default by any
borrower of an unguaranteed
student loan to the extent the
amount of the default is not
covered by the other limited
credit enhancement of the
financing structure available to
the group II notes.
RISK OF DEFAULT BY PRIVATE
GUARANTORS ON THE GROUP II
STUDENT LOANS Currently, except for The
Educational Resources Institute,
Inc. (also known as TERI), none of
the private guarantors has an
investment grade credit rating by
any national
S-24
statistical rating organization.
If a private guarantor defaults on
its guarantee obligations, and you
own any class of group II notes,
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 group II
student loan if the securities
insurer defaults or the limited
credit enhancement provided by the
financing structure available to
the group II notes is inadequate
to cover such loss. Moreover, if a
TERI trigger event occurs,
payments on the notes may be
accelerated and you will bear the
risk of reinvestment and any
adverse effect on the weighted
average life and yield on your
notes.
RISK OF DEFAULT ON REHABILITATED
GROUP II STUDENT LOANS Approximately 3.63% of the initial
group II student loans, as of the
statistical cut-off date, were at
one time in default but have since
been rehabilitated. As of the
statistical cut-off date, none of
these student loans are more than
30 days delinquent in payment of
interest and principal. All of
these loans are 100% guaranteed by
TERI. However, there can be no
assurance that these group II
student loans will not become
delinquent again at some point in
the future. In the event that any
of these group II student loans
defaults again, if you own any
group II notes, and if the
securities insurer defaults and/or
TERI defaults in its guarantee
obligations, you will suffer a
loss. None of the subsequent loans
will be rehabilitated student
loans.
THE AMOUNT OF GROUP II STUDENT
LOANS GUARANTEED BY TERI IS
LIMITED BY A MAXIMUM AMOUNT In addition, as of the statistical
cut-off date, approximately
$207,112,172.59 of the group II
student loans, including the
rehabilitated group II student
loans described above, are (and
not more than $19,900,000
aggregate principal amount of
additional student loans, as of
the related subsequent transfer
dates, will be) guaranteed by
TERI. However, only an aggregate
principal amount of approximately
$118,528,690.75 of the TERI
guaranty payments will be
available to make payments on the
group II notes. If claims on the
TERI guaranteed student loans
exceed this maximum limit, you
will bear the risk of loss
resulting from the failure of any
borrower of a TERI guaranteed
student loan if the securities
insurer defaults or
S-25
the limited credit enhancement
provided by the financing
structure available to the group
II notes is inadequate to cover
such loss.
INVESTORS IN THE GROUP I SUBORDINATE NOTES
ARE SUBJECT TO VARIABILITY OF CASH FLOWS
AND FACE GREATER RISK OF LOSS
Although interest on the group I
subordinate notes generally will
be paid prior to principal on the
group I senior notes, if a
subordinate note interest trigger
is in effect, interest on the
group I subordinate notes will be
subordinated to the payment of
principal on the group I senior
notes. In addition, principal on
the group I subordinate notes will
not begin to be paid until the
stepdown date. Moreover, the group
I subordinate notes will not
receive any payments of principal
after the stepdown date if a
subordinate note principal trigger
occurs and is continuing until the
group I senior notes have been
paid in full. Thus, investors in
the group I subordinate notes will
bear losses on the group I student
loans prior to such losses being
borne by holders of group I senior
notes. Investors in the group I
subordinate notes will also bear
the risk of any adverse effects on
the anticipated yield and weighted
average life of their notes
resulting from the variability in
payments on the group I
subordinate notes.
THE GROUP I NOTES MAY BE
ADVERSELY AFFECTED BY A HIGH
RATE OF PREPAYMENTS In periods of low interest rates,
borrowers of FFELP loans have a
tendency to consolidate their
variable rate FFELP loans,
resulting in higher levels of
prepayments than anticipated.
Prepayments may also result from
borrower defaults and from
voluntary and full or partial
prepayments, among other things.
The interest rates on FFELP
consolidation loans were adjusted
downward on July 1, 2002, making
it more attractive for borrowers
to consolidate their outstanding
variable rate FFELP loans. The
yield to group I noteholders could
be adversely affected if holders
of variable rate loans prepay or
consolidate their FFELP loans at
greater levels than anticipated
and could result in a lower than
anticipated yield to maturity or a
shorter than expected weighted
average life of certain classes of
group I notes.
S-26
PAYMENT PRIORITIES ON THE GROUP
I NOTES CHANGE UPON CERTAIN
EVENTS OF DEFAULT Upon the occurrence of an event of
default with respect to the group
I notes and the acceleration of
the group I notes, payment of the
principal of and interest on the
group I subordinate notes will be
fully subordinated to the payment
in full of all amounts due and
payable on the group I senior
notes. Following such
acceleration, if available funds
are not sufficient to fully repay
all of the group I notes, the
holders of the group I subordinate
notes will suffer a loss.
THE FAILURE TO PAY THE GROUP I
SUBORDINATE NOTES IS NOT AN
EVENT OF DEFAULT. So long as the group I senior
notes are outstanding, the
indenture provides that there
cannot be an event of default for
the failure to pay interest or
principal on the group I
subordinate notes. If amounts
otherwise allocable to the group I
subordinate notes are used to fund
payments of interest or principal
on the group I senior notes,
distributions on the group I
subordinate notes may be delayed
or reduced and you may suffer a
loss.
THE HOLDERS OF GROUP I SENIOR
NOTES HAVE CERTAIN CONTROLLING
RIGHTS Until the group I senior notes are
no longer outstanding, the group I
senior noteholders will control
substantially all of the rights of
the group I subordinate
noteholders. Without the consent
of the group I subordinate
noteholders, a majority of the
group I senior noteholders may,
among other things, (1) decide
whether or not to exercise the
group I put option, (2) declare or
waive certain defaults by or cause
the removal of the master servicer
with respect to the group I
student loans, (3) consent to the
entering into of certain
supplemental indentures, (4) upon
the occurrence and continuation of
an event of default under the
indenture with respect to the
group I notes: instruct the
indenture trustee to declare the
principal of the group I notes to
be immediately due and payable or
to subsequently rescind such
acceleration, instruct the
indenture trustee concerning any
related proceedings or remedies,
and waive certain non-payment
defaults affecting the group I
notes under the indenture, and (5)
direct the trust to terminate the
group I interest rate swap in the
event of a swap counterparty
default. After the group I senior
notes are paid in full, the group
I subordinate noteholders will
then possess these voting rights.
S-27
THE SECURITIES INSURER HAS
CONTROLLING RIGHTS WITH RESPECT
TO THE GROUP II NOTES AND CERTAIN
RIGHTS WITH RESPECT TO THE
INDENTURE AND THE TRUST For so long as no securities
insurer default has occurred and
is continuing, the securities
insurer will be deemed to be
treated as a 100% holder of the
group II notes for purposes
relating to the exercise of rights
under the indenture. As a result,
the securities insurer will have
the right to exercise all of the
rights of the group II noteholders
set forth in the prospectus, which
include the rights to (1) declare
or waive certain defaults by or
cause the removal of the master
servicer with respect to the group
II student loans, (2) consent to
the entering into of certain
supplemental indentures, (3)
consent to the appointment of any
successor master servicer with
respect to the group II student
loans, (4) upon the occurrence and
continuation of an event of
default under the indenture with
respect to the group II notes:
instruct the indenture trustee to
declare the principal of the group
II notes to be immediately due and
payable or to subsequently rescind
such acceleration, instruct the
indenture trustee concerning any
related proceedings or remedies,
and waive certain non-payment
defaults affecting the group II
notes under the indenture, and (5)
direct the trust to terminate the
group II interest rate swap in the
event of a swap counterparty
default.
In addition, without the consent
of any of the group I noteholders,
the securities insurer shall have
the right to remove the
administrator following an
administrator default or the
trustee following a trustee
default and will have the right to
consent to the appointment of any
successor trustee or
administrator.
RATINGS ON YOUR NOTES ONLY
ADDRESS PAYMENT OF PRINCIPAL
BY THE FINAL MATURITY DATE
Each class of notes is rated as to
the receipt of principal on or by
the related final maturity date.
Despite the existence of the put
options, there are no guarantees
that the put option relating to
your notes will be exercised on
its related exercise date (either
through a decision by the related
controlling parties not to
exercise the related put option,
the inability of the indenture
trustee to exercise the put option
because the fair market value of
the related student loans is
insufficient or a default by the
put option provider). In addition,
in the event that the put option
relating to your group of notes is
exercised, if the put option
provider defaults on its purchase
obligations with respect to such
put
S-28
option, there is no assurance that
the resulting auction sale will
result in a bid at least equal to
the minimum purchase amount, in
which event the indenture trustee
will not be permitted to
consummate a sale of the related
group of student loans. Finally,
the master servicer may choose, at
its sole option, not to exercise
its optional purchase rights with
respect to the financed student
loans. If any of these events
occur, you may not receive a
return of principal on your notes
as quickly as you anticipated.
MASTER PROMISSORY NOTE For periods of enrollment
beginning on or after July 1,
1999, a master promissory note may
evidence any student loan made to
a borrower under the Federal
Family Education Loan Program.
Under the master promissory note,
each borrower executes only one
promissory note with each lender.
Subsequent student loans from that
lender are evidenced by a
confirmation sent to the student.
Therefore, if a lender originates
multiple student loans to the same
student, all the student loans are
evidenced by a single promissory
note.
Pursuant to the Higher Education
Act of 1965, as amended, each
student loan made under a master
promissory note may be sold
independently of any other student
loan note under the same master
promissory note and each such
student loan is separately
enforceable on the basis of an
original or copy of the master
promissory note. Also, a security
interest in such student loans may
be perfected either through the
secured party taking possession of
the original or a copy of the
master promissory note, or the
filing of a financing statement.
Prior to the master promissory
note, each student loan made under
the Federal Family Education Loan
Program was evidenced by a
separate note. Delivery of the
original note was required to
effect a transfer or assignment.
Certain of the initial financed
student loans have been originated
under a master promissory note and
it is expected that serial loans
or consolidation loans purchased
during the funding period will be
originated under a master
promissory note. If through
negligence or otherwise the master
servicer (or a sub-servicer on its
behalf) were to deliver a copy of
the master promissory note, in
exchange for value, to a third
party that did not have knowledge
of the indenture trustee's lien,
that third party may also claim
S-29
an interest in such student loan.
Such third party's interest may be
prior to or on parity with the
interest of the indenture trustee.
WITHDRAWAL OR DOWNGRADING
OF INITIAL RATINGS WILL
ADVERSELY AFFECT THE PRICES
FOR THE NOTES The rating of the group I notes
will depend primarily on an
assessment by the rating agencies
of the group I student loans. Any
subsequent downgrade in the
assessment of the credit quality
of the group I student loans may
result in a reduction in the
rating initially assigned to the
group I notes. In addition, the
rating agencies will take into
account the long term debt rating
of the swap counterparty and a
reduction in the long term debt
rating of the swap counterparty
may adversely impact the rating
initially assigned to the group I
notes.
The rating of the group II notes
will depend primarily on an
assessment of the financial
strength of the securities insurer
and on an assessment by the rating
agencies of the group II student
loans. Any reduction in a rating
assigned to the financial strength
of the securities insurer below
the rating initially given to the
group II notes may result in a
reduction in the rating of the
group II notes.
A security rating is not a
recommendation to buy, sell or
hold securities. Similar ratings
on different types of securities
do not necessarily mean the same
thing. We recommend that you
analyze the significance of each
rating independently from any
other rating. Any rating agency
may change its rating of the notes
after the notes 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
notes. The ratings do not address
the likelihood of the ultimate
payment to you of any interest in
excess of the maximum rate,
including amounts required to be
paid by the cap provider.
None of the trust, the depositor,
the sellers, the administrator,
the master servicer, any
sub-servicer, the indenture
trustee or the eligible lender
trustee is required to maintain
the rating of any class of the
notes. Any
S-30
downgrade in the ratings assigned
to your notes could result in a
decline in the market value and
liquidity of your securities.
THE NOTES ARE NOT
SUITABLE INVESTMENTS
FOR ALL INVESTORS The notes, and in particular the
group I subordinate notes, are not
a suitable investment if you
require a regular or predictable
schedule of payments or payment on
any specific date. The notes are
complex investments that should be
considered only by investors who,
either alone or with their
financial, tax and legal advisors,
have the expertise to analyze the
prepayment, reinvestment, default
and market risk, the tax
consequences of an investment, and
the interaction of these factors.
S-31
FORMATION OF THE TRUST
THE TRUST
KeyCorp Student Loan Trust 2002-A (the "Trust") is a business trust
formed under the laws of the State of Delaware pursuant to the Trust Agreement,
dated as of July 31, 2002, as amended and restated by the Amended and Restated
Trust Agreement dated as of September 1, 2002 (as further amended and
supplemented from time to time, the "Trust Agreement") between Key Consumer
Receivables LLC (the "Depositor"), Bank One, National Association, as trustee
(the "Eligible Lender Trustee") and Bank One Delaware, Inc., as Delaware
trustee, for the transactions described in this Prospectus Supplement. A
Certificate of Trust forming the Trust was filed with the Delaware Secretary of
State on August 1, 2002. 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 Depositor on or about September 24,
2002 (the "Closing Date") and from time to time thereafter (collectively, the
"Financed Student Loans"). The Financed Student Loans will be divided into two
pools of student loans, the first group will consist of Financed Student Loans
that are reinsured by the United States Department of Education (the
"Department") (collectively, "Financed Federal Loans"), and the second group
will consist of (i) Financed Student Loans that are not guaranteed by any party
nor reinsured by the Department (collectively "Non-Guaranteed Private Loans")
and (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 together with the Non-Guaranteed Private Loans,
the "Financed Private Loans"). All Financed Student Loans that are part of the
first group described above are referred to as the "Group I Student Loans" and
all Financed Student Loans that are part of the second group described above are
referred to as the "Group II Student Loans." As set forth under "Description of
the Securities--The Notes" the Group I Notes will be entitled to receive
payments of interest and principal from the cashflow on the Group I Student
Loans and except for limited cross-collateralization, the Group I Notes will not
be entitled to any cashflow from the Group II Student Loans; likewise, the Group
II Notes will be entitled to receive payments of interest and principal from the
cashflow on the Group II Student Loans, and except for limited
cross-collateralization, the Group II Notes will not be entitled to any cashflow
from the Group I Student Loans.
The Trust will not engage in any activity other than:
- acquiring, holding and managing the Financed Student Loans and the
other assets of the Trust and proceeds therefrom;
- issuing the Notes and Certificates;
- making payments thereon;
- entering into and performing its obligations under the Interest
Rate Swaps, the Interest Rate Caps, the Put Options and the
Insurance Agreement; and
- engaging in other activities that are related to the activities
listed above.
The Trust will be initially capitalized with equity of approximately
$21,322,500 representing the amount deposited by the Depositor into the two
reserve accounts on the Closing Date, each to be held in the name of the
Indenture Trustee, the first account with respect to the Group I Notes (the
"Group I Reserve Account") and the second with respect to the Group II
S-32
Notes (the "Group II Reserve Account" and together with the Group I Reserve
Account, the "Reserve Accounts"), in the amounts of approximately $682,500 and
$20,640,000 respectively, (the "Reserve Accounts Initial Deposits"). The net
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
Depositor pursuant to the Sale and Servicing Agreement dated as of September 1,
2002 among the Trust, the Depositor, the Administrator, the Master Servicer, and
the Eligible Lender Trustee (the "Sale and Servicing Agreement"), to fund the
deposit of approximately $38,000,000 with respect to the Group I Notes (the
"Group I Pre-Funded Amount"), and $60,000,000 with respect to the Group II Notes
(the "Group II Pre-Funded Amount" and together with the Group I Pre-Funded
Amount, the "Pre-Funded Amounts") into two accounts to be maintained by the
Indenture Trustee, the first with respect to the Group I Notes (the "Group I
Pre-Funding Account") and the second with respect to the Group II Notes (the
"Group II Pre-Funding Account" and together with the Group I Pre-Funding
Account, the "Pre-Funding Accounts"). Each Pre-Funding Account will have two
separate sub-accounts. Approximately $30,000,000 of the Group I Pre-Funded
Amount will be allocated to the related first sub-account (the "Group I
Subsequent Loan Sub-Account") to be used exclusively for the purchase of
additional Financed Federal Loans (the "Group I Subsequent Student Loans"), and
approximately $35,000,000 of the Group II Pre-Funded Amount will be allocated to
the related first sub-account (the "Group II Subsequent Loan Sub-Account" and
collectively with the Group I Subsequent Loan Sub-Account, the "Subsequent Loan
Sub-Accounts") to be used exclusively for the purchase of additional Financed
Private Loans (the "Group II Subsequent Student Loans" and together with the
Group I Subsequent Student Loans, the "Subsequent Student Loans").
Upon the consummation of such transactions, the property of the Trust
will consist of:
(a) two separate pools 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 the Cutoff
Date,
(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 Depositor (the
"Assigned Rights"),
(d) all moneys and investments on deposit, from time to time, in
an account in the name of the Indenture Trustee and maintained
by the Administrator, referred to as the Collection Account
(the "Collection Account"), which will consist of two
sub-accounts, one for the Group I Student Loans (the "Group I
Collection Sub-Account") and the other for the Group II
Student Loans (the "Group II Collection Sub-Account"), and
which on the Closing Date will have at least $1,673,133 and
$4,164,786, respectively, on deposit therein, the two
Pre-Funding Accounts, two accounts in the name of the
Indenture Trustee, the first relating to the Group I Student
Loans (the "Group I Escrow Account") and the second relating
to the Group II Student Loans (the "Group II Escrow Account"
and together with the Group I Escrow Account, the "Escrow
Accounts") and the two Reserve Accounts, and
S-33
(e) the Interest Rate Swaps, the Interest Rate Caps, the Put
Options and rights of the Trust under the Insurance Agreement,
each as described below.
On the Closing Date, portions of the net proceeds from the sale of the
Initial Financed Student Loans will be paid to: (i) Key Bank USA, National
Association (in such capacity, the "Swap Counterparty") in consideration for the
Swap Counterparty entering into the two interest rate swap agreements with the
Trust, one with respect to the Group I Student Loans (the "Group I Interest Rate
Swap") for the benefit of the holders of the Group I Notes, and the other with
respect to the Group II Student Loans (the "Group II Interest Rate Swap" and
together with the Group I Interest Rate Swap, the "Interest Rate Swaps") for the
benefit of the holders of the Group II Notes; (ii) Key Bank USA, National
Association (in such capacity, the "Cap Provider") in consideration for the Cap
Provider entering into the two interest rate cap agreements with the Trust, one
with respect to the Group I Student Loans (the "Group I Interest Rate Cap") for
the benefit of the holders of the Group I Notes, and the other with respect to
the Group II Student Loans (the "Group II Interest Rate Cap" and together with
the Group I Interest Rate Cap, the "Interest Rate Caps") for the benefit of the
holders of the Group II Notes; and (iii) KeyBank National Association (in such
capacity, the "Put Option Provider") in consideration for the Put Option
Provider entering into the two put option agreements with the Trust, one with
respect to the Group I Student Loans (the "Group I Put Option") for the benefit
of the holders of the Group I Notes, and the other with respect to the Group II
Student Loans (the "Group II Put Option" and together with the Group I Put
Option, the "Put Options") for the benefit of the holders of the Group II Notes.
On the Closing Date, a portion of the net proceeds from the sale of the
Initial Financed Student Loans also will be paid to Ambac Assurance Corporation
(the "Securities Insurer") in payment for the issuance of the Note Guaranty
Insurance Policy with respect to the Group II Notes (the "Group II Notes
Guaranty Insurance Policy").
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 behalf of the Indenture Trustee and Trust, of the promissory
notes representing the Financed Student Loans that each services on behalf of
the Master Servicer. For those loans that the Master Servicer is servicing
directly, State Street Bank and Trust Company will be appointed as custodian, on
behalf of the Indenture Trustee and Trust, of the related promissory notes and
other items in the related student loan file.
"Initial Financed Student Loans" means the Student Loans identified as
such in the Sale and Servicing Agreement and transferred by the Depositor to the
Trust as of the Closing Date. Initial Financed Student Loans that are Group I
Student Loans are referred to herein as "Group I Initial Financed Student Loans"
having an aggregate principal balance of approximately $225,612,065.03 as of the
Statistical Cutoff Date; and Initial Financed Student Loans that are Group II
Student Loans are referred to herein as "Group II Initial Financed Student
Loans" having an aggregate principal balance of approximately $623,835,214.49 as
of the Statistical Cutoff Date.
Unless otherwise specified, all information with respect to the Initial
Financed Student Loans is presented herein as of August 1, 2002 (the
"Statistical Cutoff Date").
S-34
ELIGIBLE LENDER TRUSTEE
Bank One, National Association 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 principal offices of Bank One, National Association are located at 1
Bank One Plaza, Suite IL1-0480, Chicago, Illinois 60607 and its New York offices
are located at 55 Water Street, 1st Floor, New York, New York 10041.
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 (including assignments of rights under surety bonds issued by
HICA) 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 American Student Assistance ("ASA"), California Student Aid Commission
("CSAC"), Connecticut Student Loan Foundation ("CSLF"), Educational Credit
Management Corporation ("ECMC"), Great Lakes Higher Education Guaranty
Corporation ("GLHEC"), Michigan Higher Education Assistance Agency ("MHEAA"),
Nebraska Student Loan Program ("NSLP"), New York State Higher Education Services
Corporation ("NYHESC"), Pennsylvania Higher Education Assistance Agency
("PHEAA"), or United Student Aid Funds, Inc. ("USAF"), (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
Pools--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 I-A-1 Asset Backed Notes (the "Class I-A-1
Notes"), the Floating Rate Class I-A-2 Asset Backed Notes (the "Class I-A-2
Notes" and together with the Class I-A-1 Notes, the "Group I Senior Notes"), the
Floating Rate Class I-B Asset Backed Notes (the "Class I-B Notes" or the "Group
I Subordinate Notes" and together with the Group I Senior Notes, the "Group I
Notes"), the Floating Rate Class II-A-1 Asset Backed Notes (the "Class II-A-1
Notes"), and the Floating Rate Class II-A-2 Asset Backed Notes (the "Class
II-A-2 Notes" and together with the Class II-A-1 Notes, the "Group II Notes" and
together with the Group I Notes, the "Notes"), and the issuance of a single
class of certificates (the "Certificates" and together with the Notes, the
"Securities") 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. Key Bank USA, National Association and its
affiliates plan to maintain normal commercial banking relations with the
Eligible Lender Trustee.
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USE OF PROCEEDS
After making the deposit of the Pre-Funded Amounts to each of the
related Pre-Funding Accounts, the balance of the net proceeds from the sale of
the Notes, less the fees paid to the Swap Counterparty, the Cap Provider and the
Put Option Provider, and certain amounts paid to the Securities Insurer to
acquire the Group II Notes Guaranty Insurance Policy, will be paid by the Trust
to the Depositor in consideration for the purchase by the Trust of the Initial
Financed Student Loans on the Closing Date. The Depositor will use such proceeds
paid to it, plus amounts received from Key Bank USA, National Association as a
capital contribution, (x) to pay the Sellers for the Initial Financed Student
Loans purchased by the Depositor, (y) to make the Reserve Accounts Initial
Deposits, and (z) to make an initial deposit into each sub-account of the
Collection Account (the "Closing Date Deposit").
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 that are not
Key CareerLoans. The Master Servicer will service the Financed Student Loans
that are Key CareerLoans. 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.
KBUSA is a national banking association and a wholly owned subsidiary
of KeyCorp. KBUSA is engaged in consumer loan activities nationally, including,
automobile lending, home equity financing of both first- and second-home
mortgages, education lending, and marine and recreational vehicle financing. As
of June 30, 2002, KBUSA's Education Loan Servicing Center in Boston,
Massachusetts was servicing approximately 97,596 student and parental accounts
with an outstanding balance of $894,453,900 for itself and three other lenders
nationwide. As of June 30, 2002, KBUSA had total assets of approximately $8.1
billion, total liabilities of approximately $7.2 billion and approximately
$907.4 million in stockholders' equity. The principal executive offices of KBUSA
are located at Key Center, 127 Public Square, Cleveland, Ohio 44114 and its
telephone number is (216) 689-6300.
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, 2002 it had approximately 2000 employees.
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PHEAA has been guaranteeing student loans since 1964 and has guaranteed
a total of approximately $25.5 billion principal amount of Stafford Loans (as
defined in the Prospectus) and approximately $2.9 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 $12.1 million
as of June 30, 2002.
Pursuant to two Sub-Servicing Agreements 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 none of the Depositor, 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, 2002, Great Lakes Educational Loan Services, Inc.
("Great Lakes") serviced 1,070,234 student and parental accounts with an
outstanding balance of approximately $9.7 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 none of the Depositor, KBUSA nor the Underwriters have conducted
any independent verification of such information. Great Lakes has agreed that it
will provide a copy of Great Lakes Higher Education Corporation's and its
affiliates' most recent audited financial statements on receipt of a written
request directed to 2401 International Lane, Madison, Wisconsin 53704,
Attention: 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 with respect to all the Financed Student Loans acquired by the Eligible
Lender Trustee on behalf of the Trust, 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 such Financial Student Loans except for
those that are Key CareerLoans, which KBUSA will service directly. As of the
Closing Date, only PHEAA will sub-service Group I Student Loans and each
Sub-Servicer will
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sub-service Group II Student Loans. The Securities Insurer will have the right
to approve the appointment of any additional or replacement Sub-Servicers with
respect to the Group II Student Loans not agreed upon as being acceptable on the
Closing Date. 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 related 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, to the extent applicable, 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-seventh day of each month (the "Monthly
Servicing Payment Date") equal to 0.50% on an annualized basis (the "Master
Servicing Fee Percentage") of the Pool Balance of each of the Group I Student
Loans and the Group II Student Loans as of the last day of the preceding
calendar month together with late fees, 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 except under certain limited
circumstances following an auction sale as described under "Description of
Transfer and Servicing Agreements--Termination" herein. See "Description of
Transfer and Servicing Agreements--Master Servicing Compensation" herein.
In addition, in consideration of its being appointed Master Servicer
with respect to those Financed Student Loans (the "QSPE Student Loans") that are
acquired by the Depositor from Key Consumer QSPE LLC, a special purpose Delaware
limited liability company that is a wholly owned subsidiary of KBUSA and an
affiliate of the Depositor ("QSPE"), the Master Servicer will make certain
representations and warranties in the Sale and Servicing Agreement for the
benefit of the Trust with respect to the QSPE Student Loans.
THE DEPOSITOR
Key Consumer Receiveables LLC (the "Depositor"), a Delaware limited
liability company, was formed pursuant to the terms of the Limited Liability
Company Declaration (the "LLC Agreement"), dated November 22, 2000, entered into
by KBUSA as its sole equity member. The Depositor is a special-purpose
"bankruptcy remote" entity formed to purchase student loans from KBUSA and its
affiliates, and to form trusts that will issue asset-backed securities. The
principal executive offices of the Depositor are located at Key Center, 127
Public Square, Cleveland, Ohio 44114 and its telephone number is (216) 828-8122.
The Depositor will acquire certain of the Financed Student Loans from KBUSA
(such Financed Student Loans are referred to as "KBUSA Student Loans") and the
QSPE Student Loans from QSPE pursuant to two student loan transfer agreements,
each dated as of September 1, 2002, the first, with respect to the KBUSA Student
Loans, between the Depositor and KBUSA (the "KBUSA Student Loan Transfer
Agreement"), and the second, with respect to the QSPE Student Loans, between the
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Depositor and QSPE (the "QSPE Student Loan Transfer Agreement," and together
with the KBUSA Student Loan Transfer Agreement, the "Student Loan Transfer
Agreements"). The Depositor will sell the Financed Student Loans to the Trust
pursuant to the terms of the Sale and Servicing Agreement. See "Description of
Transfer and Servicing Agreements" herein.
THE FINANCED STUDENT LOAN POOLS
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 Cutoff Date, and the Subsequent Student Loans and any Additional Student
Loans purchased by the Eligible Lender Trustee on behalf of the Trust from the
Depositor, each as of the applicable Subsequent Cutoff Dates.
The "Cutoff Date" for the Initial Financed Student Loans is September
1, 2002. Consequently, the Trust will be entitled to collections on and proceeds
of the Initial Financed Student Loans on and after September 1, 2002. All
percentages shown below are based on the outstanding principal balances of the
related Financed Student Loans as of the Statistical Cutoff Date.
Approximately 74.65% of the Group I Initial Financed Student Loans with
an aggregate unpaid principal balance of $168,417,226.20 as of the Statistical
Cutoff Date, and all of the Group II Initial Financed Student Loans are KBUSA
Student Loans, and approximately 25.35% of the Group I Initial Financed Student
Loans with an aggregate unpaid principal balance of $57,194,838.83 as of the
Statistical Cutoff Date, are QSPE Student Loans.
On the Closing Date, PHEAA will sub-service all of the Group I Student
Loans and approximately 52.67% of the Group II Initial Financed Student Loans
with an aggregate Group II Initial Financed Student Loan Balance of
approximately $328,572,206.90. On the Closing Date, all of the Financed Student
Loans being sub-serviced by Great Lakes will be Group II Student Loans,
representing approximately 34.56% of the Group II Initial Financed Student Loans
with an aggregate Group II Initial Financed Student Loan Balance of
approximately $215,568,630.36. The remainder of the Group II Initial Financed
Student Loans (approximately 12.77% of all Group II Initial Financed Student
Loans), will be serviced directly by the Master Servicer.
Certain of the Group II Initial Financed Student Loans were purchased
by KBUSA during June 2000 from Fleet National Bank ("Fleet"), pursuant to a
Forward Commitment Student Loan Purchase and Sale Agreement (the "Fleet Sale
Agreement"), dated as of May 2, 2000, between Fleet and KBUSA (the "Fleet
Loans"). All of the Fleet Loans are Group II Student Loans and are all
Guaranteed Private Loans that are guaranteed by TERI. The Fleet Loans have, as
of the Statistical Cutoff Date, the characteristics described below under
"--Characteristics of the Fleet Loans."
Certain of the Group I and Group II Initial Financed Student Loans were
purchased by KBUSA from the Access Group, pursuant to a Loan Purchase and Sale
Agreement (the "Access Group Sale Agreement"), dated as of August 1, 1999,
between the Access Group and KBUSA
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(the "Access Group Loans"). The Access Group Loans have, as of the Statistical
Cutoff Date, the characteristics described below under "-Characteristics of the
Access Group Loans."
In addition, certain of the Group II Initial Financed Student Loans
that are 100% guaranteed by TERI were at one time in default but are now current
in payment of interest and principal and have made at least three consecutive
monthly payments in full (collectively referred to as the "Rehabilitated Student
Loans"). See "--Rehabilitated Student Loans" below.
In addition to the Subsequent Student Loans, the Trust may acquire with
certain funds on deposit in the related second sub-account of each of the Group
I and Group II Pre-Funding Accounts (referred to as the "Group I Other Student
Loan Pre-Funding Sub-Account" and the "Group II Other Student Loan Pre-Funding
Sub-Account," respectively, and collectively the "Other Student Loan Pre-Funding
Sub-Accounts") certain other Student Loans that are either Serial Loans or
Consolidation Loans (collectively, the "Other Student Loans"). Other Student
Loans may be acquired by the Trust any time prior to the end of the Funding
Period. The term "Additional Student Loans" refers collectively to the
Subsequent Student Loans, Other Student Loans and Fee Advances (as defined in
the Prospectus). Additional Student Loans may be either Group I or Group II
Student Loans.
The Financed Student Loans will be purchased by the Depositor from
KBUSA and QSPE (each a "Seller" and collectively, the "Sellers") pursuant to the
Student Loan Transfer Agreements. QSPE purchased all of the QSPE Student Loans
from KBUSA in negotiated transactions and KBUSA either originated the Financed
Student Loans or purchased them from Fleet, the Access Group or other
third-party lenders. All of the Financed Student Loans will be selected from the
Sellers' existing portfolios of originated and purchased Student Loans and in
each case will have certain characteristics, 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, either by KBUSA under and
in accordance with the Programs (as defined in the
Prospectus), by Fleet (as more fully described below
under "--Characteristics of the Fleet Loans"), or by
the Access Group (as more fully described below under
"--Characteristics of the Access Group Loans)
(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 the Subsequent 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 December 31, 2002, 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
December 31, 2002,
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(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,
is not more than 180 days past due as of the Cutoff
Date or, with respect to the 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 had a borrower who was noted in the related records of
the Master Servicer, Fleet, the Access Group, or a
Sub-Servicer as being currently involved in a bankruptcy
proceeding or deceased since the date the Trust was created.
3. No Initial Financed Student Loan as of the Statistical Cutoff
Date consists of a Student Loan that was subject to a Seller's
prior obligation to sell such loan to a third party.
4. No selection procedures believed by a Seller to be adverse to
the Securityholders were used or will be used in selecting the
Financed Student Loans.
5. Except for the Rehabilitated Loans (which represent
approximately 3.63% of the Group II Initial Financed Student
Loans as of the Statistical Cutoff Date) 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. See "--Rehabilitated Student
Loans" below.
6. As of the Statistical Cutoff Date, none of the Initial
Financed Student Loans are non-performing Student Loans.
Non-performing Student Loans are Student Loans which are in
default and a Seller expects to write-off as a loss.
7. No Subsequent Student Loan will be a Rehabilitated Student
Loan.
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
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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.
Approximately 80.56% of the Group I Initial Financed Student Loans (the
"Commercial Paper Rate Loans"), with an aggregate unpaid principal balance as of
the Statistical Cutoff Date of approximately $181,754,987.72, bear interest at
the Commercial Paper Rate. The "Commercial Paper Rate" is the 90-day AA
Financial Commercial Paper rate posted in the Federal Reserve Release entitled
"Commercial Paper Rates and Outstandings" (converted, if necessary, from a
discount basis to a bond equivalent yield).
Approximately 23.89% of the Group II Initial Financed Student Loans
(the "Prime Rate Loans"), with an aggregate unpaid principal balance as of the
Statistical Cutoff Date of approximately $149,034,284.95, bear interest at the
Prime Rate. The "Prime Rate" is defined in each related borrower's note as the
rate published as the Prime Rate in The Wall Street Journal in its Money Rates
section, or if more than one Prime Rate is published by The Wall Street Journal,
the highest such rate is used, and interest on each Prime Rate Loan is
calculated for each calendar month using the Prime Rate for the last business
day of the prior calendar month.
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 the Subsequent Student Loans, the Other Student Loans or Fee Advances (as
defined in the Prospectus), in each case originated by KBUSA in accordance with
the Programs (or with respect to Subsequent Student Loans, also by Fleet, Access
or other third party lenders) and other applicable requirements. Subsequent
Student Loans may consist of Consolidation Loans, Serial Loans or Student Loans
made to borrowers that are not part of the pool of Initial Financed Student
Loans. The Other Student Loans and Fee Advances must be 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. 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.
The Seller expects that, generally, the Subsequent Student Loans will
have characteristics similar to the Initial Financed Student Loans; however,
except for the criteria described in the preceding paragraphs there will be no
required characteristics of the Additional Student Loans; provided, however,
that no Additional Loan will have a term to maturity in excess of 30 years at
the time of its sale to the Trust and not more than $19,900,000 aggregate
principal amount of Additional Student Loans, as of the related Subsequent
Transfer Dates, will be guaranteed by TERI. Therefore, following the transfer of
Additional Student Loans to the Eligible Lender Trustee on behalf of the Trust,
the aggregate characteristics of the entire pool of Group I Student Loans and/or
Group II Student Loans, as applicable, including the composition of the Group I
and Group II 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 Group I and Group II Initial Financed
Student Loans, as applicable, as of the Statistical Cutoff Date. In addition,
the distribution by weighted average interest rate applicable to the Group I
and/or Group II Student Loans on any date following the Statistical Cutoff Date
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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 related
Financed Student Loans. Moreover, the remaining term to maturity of the Group I
and/or Group II Initial Financed Student Loans as of the Statistical Cutoff Date
may vary significantly from the actual term to maturity of any of the Group I
and/or Group II Initial Financed Student Loans as a result of the granting of
Deferral Periods and Forbearance Periods with respect thereto.
For a description of the Financed Student Loans originated by KBUSA see
"The Student Loan Financing Business" in the Prospectus and the following
description of Key CareerLoans.
CHARACTERISTICS OF THE KEY CAREERLOAN(R)
Approximately 12.77% of the Group II Initial Financed Student Loans,
with an aggregate unpaid principal balance as of the Statistical Cutoff Date of
approximately $79,694,377.23, are loans that were originated by KBUSA under its
Key CareerLoan Program. Loans originated under this program ("Key CareerLoans")
provide financing for students enrolled part-time (including less than
half-time) and full-time in undergraduate, graduate, evening, weekend, distance
learning, certificate, continuing education, information technology or other
approved specialized technical training programs. The student must be the listed
as the applicant on a Key CareerLoan application, and may apply with or without
a co-applicant. The Key CareerLoan Program was introduced to students in 1997
and all Key CareerLoans, including the related Group II Financed Student Loans,
are currently serviced directly by KBUSA at its Boston, Massachusetts facility.
As of June 30, 2002, KBUSA had originated approximately $92.5 million of Key
CareerLoans. Key CareerLoans are not guaranteed by any federal or private
guarantor, or by any other party or governmental agency and therefore all Key
CareerLoans that are included in the Trust are Unguaranteed Private Loans.
(1) Eligibility Requirements. In order to qualify for a Key
CareerLoan, the borrower must meet the following eligibility
requirements:
- Both applicant and co-applicant (if applicable) must be a U.S.
citizen, national, permanent resident or eligible non-citizen
possessing an original I-151, I-551 or I-94 INS card.
- 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 education loan default or
other negative public record items in the past seven
years.
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(e) Applicant can be approved without co-applicant 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) A co-applicant will not overcome a negative credit
history on the part of the applicant.
(h) Co-applicant, if any, must pass the credit review
process that considers the above criteria.
(i) The credit bureau score requirements apply to both
applicant and co-applicant.
A creditworthy co-applicant may be required if the borrower
has insufficient credit history. If a co-applicant is
required, the co-applicant must also be a U.S. citizen,
national or permanent resident and meet minimum credit
criteria. The co-applicant may be any creditworthy person, and
need not be the borrower's parent, guardian, or other
relative.
(2) Loan Limits. The minimum loan amount for a Key CareerLoan is
$1,000. Borrowers who have received the minimum loan amount
are eligible for additional incidental loan funds. There is no
minimum incidental loan funds amount. The annual maximum loan
limits are $15,000 (loan proceeds), plus $3,000 (incidental
loan proceeds), with an aggregate maximum loan limit of
$50,000 (combined loan and incidental funds). Exceptions to
the loan limits may be made at the institution level only and
must be approved by KBUSA's Key Education Resources Policy
Committee.
(3) Interest. Interest rates for the Key CareerLoan are variable
and are adjusted on a quarterly basis. The interest rate for
loans originated prior to April 25, 2001 are calculated based
on the 13-week Treasury Bill rate plus a margin of 4.75%. The
interest rate for loans originated on or after April 25, 2001
is calculated based on 3-month LIBOR plus a margin of 4.25%
for loans entering repayment immediately after disbursement,
and on 3-month LIBOR plus a margin of 5.25% for loans with
respect to which repayment is deferred for one year after
disbursement.
(4) Repayment. In general, borrowers must repay each Key
CareerLoan in monthly installments until the loan is repaid in
full. The maximum repayment term is 15 years. There is a
minimum payment amount of $50 per month and there is no
prepayment penalty.
(5) Grace Periods, Deferment and Forbearance. Key CareerLoan
customers are not eligible for any grace periods. Loans
originated prior to April 25, 2001 began repayment within 30
days of initial disbursement. No deferment option was
available to customers prior to this date. Loans originated on
or after April 25, 2001 begin repayment within 15 to 45 days
after initial disbursement if the
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deferment option is not selected, or approximately one year
after initial disbursement if the deferment option is
selected. The applicant must request the deferment option at
the time the loan application is submitted. Requests for
forbearance may be granted on a case by case basis.
CHARACTERISTICS OF THE FLEET LOANS
Certain of the Group II Initial Financed Student Loans are Fleet Loans.
The Fleet Loans were acquired from Fleet pursuant to the Fleet Sale Agreement
and are guaranteed by TERI. The loans were originated by Fleet (or by BankBoston
or its predecessors prior to its merger into Fleet) under one of the programs
described below that are sponsored by TERI. All of the Fleet Loans are Group II
Student Loans.
The following is a description of the programs applicable to the Fleet
Loans, as such programs were in effect on the date of purchase of the Fleet
Loans by KBUSA. No representation is made, nor should any prospective investor
in the Notes assume, that the information presented below is an accurate
description of such programs as in existence on the date hereof.
TERI Alternative Program. The TERI Alternative Program is a private
loan program and designed to offer loans to students enrolled in accredited
degree-granting undergraduate institutions in the United States and Canada. To
be eligible for a loan under the TERI Alternative Program ("TERI Alternative
Loans"), a student must be deemed creditworthy or provide a creditworthy
co-borrower. Also, at least one applicant must be a U.S. citizen or a certified
permanent resident of the United States.
In determining whether a student or co-borrower is creditworthy, a
credit bureau report is obtained for each applicant, including the student. A
satisfactory credit history has generally been defined by TERI and Fleet as the
making of continuous and prompt payment by the borrower on all credit
obligations such as mortgages, personal loans, credit cards, auto loans, and
especially, student loans. There should be no record of charged off loans which
were in excess of $200 within the past five years (exceptions may be granted)
nor a record of foreclosure, repossession, open judgment or suit, unpaid tax
lien, unpaid prior student loan defaults or other negative public record items
in the past seven years with respect to the applicant. The applicant should not
have a record of bankruptcy within the past 10 years (exceptions may be granted
where the applicant provides written documentation demonstrating that the
circumstances leading up to the bankruptcy were beyond the applicant's control).
Eligible borrowers of a TERI Alternative Loan may borrow from $500 up
to the cost of education, less any financial aid received per academic year. A
5% guaranty fee for borrowers making either interest only or principal and
interest payments while the student is in school, or a 6.5% guaranty fee for
borrowers deferring payments of principal and interest while the student is in
school full-time or maintains at least a half time status is deducted from the
loan proceeds.
Interest rates on TERI Alternative Loans will be variable either on a
monthly or quarterly basis. The rate is equal to Fleet's prime or base rate plus
a margin of between 0% and 2%.
The TERI Alternative Loan may be repaid in up to 25 years, depending on
the total amount borrowed. For borrowers who do not elect deferment, repayment
of the TERI
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Alternative Loan begins within 45 days after the disbursement date. However,
subject to certain exceptions, deferment of principal is allowed for up to four
years, with only interest being paid, while the student is in school. Payment of
principal and interest begins within 45 days after graduation or withdrawal from
school. In addition, in some cases, deferment of principal and interest is
permitted for up to four years, while the student is in school. Payment of
principal and interest begins 45 days after graduation or withdrawal from
school. Once principal payments commence, the monthly principal and interest
payment remains fixed throughout the life of the loan. Therefore, for variable
rate loans, fluctuations in the interest rate are reflected in the length of the
repayment term, not the monthly amount, unless an increase in the monthly amount
is needed to keep the repayment period within 25 years. TERI Alternative Loans
may be prepaid at any time without penalty.
Each TERI Alternative Loan is guaranteed by TERI. The terms of the TERI
guaranty for loans in the TERI Alternative Program are as described below in
"--Insurance of Student Loans; Guarantors of Student Loans--Guarantor for the
Guaranteed Private Loans."
PEP Program. The PEP Program is a private loan program designed to
offer loans ("PEP Loans") to graduate and professional school students enrolled
at least half-time in an accredited degree-granting (masters and/or doctorate,
or the equivalent) institution in the United States and Canada. The credit
criteria for the PEP Program are substantially the same as described above for
the TERI Alternative Program, except as specifically described below.
Eligible borrowers of PEP Loans may borrow a minimum of $500 up to
$15,000 per academic year on their own signature provided they have no adverse
credit history or, if the student has a creditworthy co-borrower, up to the full
cost of attendance less the estimated other financial aid the student is
eligible to receive. The aggregate total amount of borrowings is based on future
income projections. In general, an 8% guarantee fee (6% with a co-borrower) is
deducted from the loan proceeds. In addition, for those borrowers who have no
co-borrower, an additional 2% guarantee fee is charged at the time the PEP Loan
goes into repayment, which is added to the principal amount of the loan.
The interest rate on PEP Loans will be variable either on a monthly or
quarterly basis. The rate is generally equal to Fleet's prime or base rate plus
a margin of between 0% and 2%, or with respect to certain PEP Loans, based on
the Treasury bill rate plus a margin of between 2.4% and 2.7%.
PEP Loans may be repaid in up to 25 years, depending on the total
amount borrowed. Repayment of the PEP Loan begins six months after the student
has graduated or separated from school or has caused his enrolled status to be
less than half time. Both principal and interest are deferred for up to 4-1/2
years while the student is in school (any such deferred interest will be
capitalized and added to principal). Medical students may defer after graduation
for up to four years while completing a residency program. Once principal
payments commence, the monthly principal and interest payment remains fixed
throughout the life of the loan. Therefore, for variable rate loans,
fluctuations in the interest rate are reflected in the length of the repayment
term, not the monthly amount, unless an increase in the monthly amount is needed
to keep the repayment period within 25 years.
S-46
Each PEP Loan is guaranteed by TERI. The terms of the TERI guaranty for
loans in the PEP Program are as described below in "--Insurance of Student
Loans; Guarantors of Student Loans--Guarantor for the Guaranteed Private Loans."
DUAL Undergraduate Alternative Program. The DUAL Program is a private
loan program established by TERI and is designed to offer loans ("DUAL Loans")
to degreed undergraduate students pursuing an additional undergraduate degree or
to teachers completing a credentialing program, enrolled at least half-time in a
degree-granting program and completing a second bachelor's degree, or the
student can be enrolled in the Education Credentials Certificate program
(considered a fifth-year undergraduate student). The credit criteria are
substantially the same as described above for the TERI Alternative Program.
Eligible Borrowers of DUAL Loans may borrow a minimum of $500 up to
$15,000 per academic year on their own signature provided they have no adverse
credit history or, if the student has a creditworthy co-borrower up to the full
cost of attendance less the estimated other financial aid the student is
eligible to receive. In general, an 8% guarantee fee (6% with a co-borrower) is
deducted from the loan proceeds. In addition, for those borrowers who have no
co-borrower, an additional 2% guaranty fee is charged at the time the DUAL Loan
goes into repayment, which is initially paid to TERI by Fleet, who in turn adds
such amount to the principal amount of the loan.
The interest rate on DUAL Loans will be variable either on a monthly or
a quarterly basis. The rate is equal to Fleet's prime or base rate plus a margin
of between 0% and 2%.
DUAL Loans may be repaid in up to 25 years depending on the total
amount borrowed. Repayment of DUAL Loans begins six months after the student has
graduated or separated from school or has caused his enrollment status to be
less than half-time. Both the principal and interest are deferred for the years
while the student is in school (any such deferred interest will be capitalized
and added to the principal). Once principal payments have commenced the monthly
principal and interest payment remains fixed throughout the life of the loan.
Therefore, for variable rate loans, fluctuations in the interest rate are
reflected in the length of the payment term, not the monthly amount, unless an
increase in the monthly amount is needed to keep the repayment period within 25
years.
Each DUAL Loan is guaranteed by TERI. The terms of the TERI guaranty
for loans in the DUAL program are as described below in "--Insurance of Student
Loans; Guarantors of Student Loans--Guarantor for the Guaranteed Private Loans."
CHARACTERISTICS OF THE ACCESS GROUP LOANS
Certain of the Group I and Group II Initial Financed Student Loans have
been selected from Student Loans originated under the Access Group Loan Programs
(collectively, the "Access Program") and made to students enrolled in or
recently graduated from approved or accredited law schools, medical schools,
dental schools, graduate business schools or other graduate level certificate or
degree programs ("graduate schools").
The following is a description of the Access Program, as such programs
were in effect on the respective dates of purchase of the Access Group Loans by
KBUSA. No representation is
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made, nor should any prospective investor in the Notes assume, that the
information presented below is an accurate description of such programs as in
existence on the date hereof.
The Access Program. The Access Program was originated in 1983 as the
"Law School Assured Access Program." The Access Program was developed by Law
School Admission Council, Inc. ("LSAC"), a Delaware nonstock corporation, and
initially operated by Law School Admission Services, Inc. ("LSAS"), another
Delaware nonstock corporation of which LSAC is the sole member. The program
initially provided only Federal Loans to law students. Beginning in 1986, the
program was expanded to include Private Loans to meet the borrowing needs of law
students that were not being met by the Federal Loans. In 1993, Access Group
(then known as "Law Access, Inc.") was organized to operate the program, which
was then known as the "Law Access Loan Program." Over the next several years the
program was expanded to include loans for other graduate and professional
students. In 1997, the organization changed its name to Access Group, Inc.
("Access Group") to reflect the broader scope of its programs.
Access Group and its predecessor, LSAS, have provided for the Access
Program by entering into contracts with a series of lenders, guarantee agencies
and loan servicers. Under these contracts, the lenders agreed to make the loans
to eligible borrowers on the terms offered by the Access Program from time to
time. Prior to academic year 1998-1999, these contracts did not provide for
Access Group to purchase the loans, but provided for the lenders to pay Access
Group marketing fees in connection with its administration of the Access
Program. Beginning with academic year 1998-1999, Access Group's contracts for
the Access Program provide for Access Group to acquire the loans.
Access Group entered into agreements with a national banking
association acting as lender (the "Originating Lender") which agreed to
originate student loans under the Access Program, including both Federal Loans
and Guaranteed Private Loans. See "Description of Federal Loans Under the
Programs" for a general description of the characteristics and terms of Federal
Loans. Certain characteristics and terms of the Guaranteed Private Loans are
discussed below.
Loan Characteristics of the Guaranteed Private Loans Under the Access
Program. The Guaranteed Private Loans made under the Access Program included in
the Subsequent Pool were made by the Originating Lender. These Guaranteed
Private Loans include several different types of loans: Law Access Loans,
Business Access Loans, Medical Access Loans and Dental Access Loans, which are
available to graduate and professional students in various courses of study that
correspond to the names of the loans, and Graduate Access Loans, which are
available to other graduate or professional students. Bar Examination Loans are
available to law students or recent law graduates to cover costs of preparing
for the bar examination, and Residency Loans and Dental Residency Loans are
available to medical or dental students or recent graduates to finance costs
involved with obtaining and participating in required residency or postdoctoral
programs. In addition, several universities have special loan programs through
Access Group with loan terms that generally correspond to the terms and
eligibility requirements for the loans listed above.
Access Group Loans that are also Guaranteed Private Loans ("Guaranteed
Access Group Loans") are unsecured loans made directly to the student borrowers.
In some cases, the borrower is required to provide a co-signer for the loan.
Guaranteed Access Group Loans that are included
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as Group II Initial Financed Student Loans are guaranteed by TERI as described
below under "--Insurance of Student Loans; Guarantors of Student
Loans--Guarantors for the Guaranteed Private Loans."
The Guaranteed Access Group Loans included as Group II Initial Financed
Student Loans were made by the Originating Lender to applicants enrolled or
accepted for enrollment in eligible graduate or professional schools, or to
recent graduates of such schools. The applicants are required to meet the
eligibility requirements for the Access Program, including that the applicant
must:
- be a U.S. Citizen or an eligible non-citizen;
- be attending a qualified graduate or professional school at least
half-time (or, in the case of Bar Examination Loans, Residency
Loans and Dental Residency Loans, have graduated from such a
graduate or professional school); and
- meet the Access Program credit eligibility criteria.
The credit eligibility criteria require that if an applicant has any
credit history (as shown on a credit bureau report obtained in evaluating the
application), the applicant must either have a certain minimum credit score or
provide a co-signer who meets credit criteria that include a minimum credit
score and certain other credit history requirements. To be eligible, a graduate
or a professional school must be either a state institution or a tax-exempt
nonprofit organization and must be approved or accredited by the applicable body
provided for in the program guidelines (which, in the case of law schools, is
the American Bar Association).
There are no annual loan limits for loans under the Access Program;
students may borrow up to their entire unmet need, as certified by the school
they are attending. However, before academic year 2000-2001, there have been
limits on the aggregate amount of education debt which an applicant could have
outstanding. These limits, which included all undergraduate and graduate
education debt (including FFELP Loans, private alternative and supplemental
loans and any other loans) varied depending upon loan type, ranging from
$120,000 to $195,000. There are no limits on aggregate outstanding debt
beginning with academic year 2000-2001.
The interest rates on loans made for academic years 1998-1999 and
1999-2000 (and for some loans made for academic year 2000-2001) vary each
calendar quarter, and are equal to the coupon equivalent yield of the 13-week
U.S. Treasury Bills for the final auction held during the preceding calendar
quarter (as reported in The Wall Street Journal), plus a margin that ranges from
2.45% to 3.50% per annum. Beginning with academic year 2000-2001, the index on
which the interest rate for most of these Guaranteed Private Loans is based has
been changed to the Three Month LIBOR. The margins to be added to the index
range from 2.25% to 3.20%. No interest is due prior to the commencement of the
repayment period. Interest that accrues prior to the repayment period and is not
otherwise paid is added to the principal balance once, at the commencement of
repayment.
The loans must be repaid during a twenty-year period. The repayment
period begins nine months after the borrower graduates or otherwise ceases to be
enrolled in an eligible course of instruction at a participating school (or in
the cases of Medical Access Loans and Dental Access Loans, after the borrower
completes or ceases to participate in a residency or postdoctoral
S-49
program, but in no event more than 57 months after graduation). Payments of
principal and interest are due monthly. The minimum monthly payment is $50.
Access Group currently offers three repayment options: (1) a level
payment plan, which requires approximately equal monthly payments of principal
and interest throughout the repayment period (with the payment amount adjusted
each time the interest rate changes, to equal the amount that would amortize the
outstanding principal balance over the remaining repayment period, based on the
then-current interest rate), (2) a deferred principal payment plan which
requires only interest payments during the first two years, followed by
approximately equal monthly payments of principal and interest sufficient to
amortize the principal amount over the remaining repayment period, and (3) a
deferred principal payment plan that requires only interest payments during the
first two years, followed by interest and partial principal payments for three
years, followed by approximately equal monthly payments of principal and
interest sufficient to amortize the remaining principal amount over the
remaining repayment period. In addition, a borrower who is experiencing
difficulty repaying his or her loan may arrange for a repayment schedule that
further defers principal payments.
REHABILITATED STUDENT LOANS
Approximately 3.63% of the Group II Initial Financed Student Loans,
with an aggregate unpaid principal balance as of the Statistical Cutoff Date of
approximately $22,623,038.39, are Rehabilitated Student Loans. Rehabilitated
Student Loans were TERI guaranteed loans that were transferred to TERI upon such
default and the original guaranty claim was paid. The Rehabilitated Student
Loans were originated under the TERI Alternative Loan Program, the TERI Dual
Undergraduate Alternative Loan Program or the TERI Professional Education (PEP)
Program, each as described above under "--Description of the Fleet Loans," by
either KBUSA, Fleet (including BankBoston and its predecessors), National City
Bank or Citibank. After principal and interest payments were brought current,
and after at least three consecutive timely payments of principal and interest,
such Rehabilitated Student Loans were sold to KBUSA.
No Rehabilitated Student Loan has defaulted on principal or interest
payments more than once and none is more than 30 days delinquent in payment of
interest and principal as of the Statistical Cutoff Date. None of the Subsequent
Student Loans will be Rehabilitated Student Loans. Approximately 71.55% of the
Rehabilitated Student Loans have had an on-time payment history of at least one
year since their purchase by KBUSA from TERI. All Rehabilitated Student Loans
remain 100% guaranteed by TERI for principal and accrued interest.
THE FINANCED STUDENT LOANS
Set forth below in the following tables is a description of certain
additional characteristics of the Group I and Group II Initial Financed Student
Loans, each as of the Statistical Cutoff Date. Unless otherwise specified,
percentages are of the related pool principal balances (including certain
interest accrued to be capitalized). In addition, certain columns and rows on
each table may not total to exact dollar amounts or exactly to 100% due to
rounding conventions.
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COMPOSITION OF THE INITIAL FINANCED STUDENT LOANS AS OF THE STATISTICAL CUTOFF DATE
KEYCORP STUDENT LOAN TRUST 2002-A GROUP I(4) GROUP II(4)
- -------------------------------------------------- ----------------------------------------- ---------------------
Aggregate Outstanding Balance(1) $225,612,065.03 $623,835,214.49
Number of Borrowers 4,302 41,174
Average Outstanding Balance Per Borrower $52,443.53 $15,151.19
Number of Loans 13,106 64,141
Average Outstanding Balance Per Loan $17,214.41 $9,726.00
Weighted Average Remaining Term to Maturity(2) 235 221
Weighted Average Annual Borrower Interest Rate(3) 5.40% 5.03%
(1) Includes the net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $6,285,557.19 and $37,521,356.47 with respect to the
Group I and Group II Student Loans, respectively, as of the Statistical
Cutoff Date.
(2) Determined from the Statistical Cutoff Date to the stated maturity date
of the Financed Student Loans, assuming repayment commences promptly
upon expiration of the typical grace period following the expected
graduation date and without giving effect to any Deferral 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 as
of the Statistical Cutoff Date. However, because all the Financed
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 Student Loans at any time after the Statistical
Cutoff Date. See "The Student Loan Financing Business" in the
Prospectus.
(4) The sum in any column may not equal the total indicated due to
rounding.
The weighted average spread for Financed Student Loans (including Special
Allowance Payments), if they were in repayment as of the Statistical Cutoff
Date, are as follows:
Aggregate Outstanding
Type of Loan/Index Principal Balance Weighted Average Spread
------------------ ----------------- -----------------------
Financed Federal Loans/Treasury Bill Rate $ 43,857,077 2.86%
Financed Federal Loans/CP Rate 181,754,988 2.57
Financed Private Loans/Treasury Bill Rate 143,291,755 3.20
Financed Private Loans/Prime Rate 149,034,285 0.41
Financed Private Loans/LIBOR Rate 331,509,175 3.24
Total $849,447,280 2.57%
S-51
The weighted average spread for Financed Student Loans (including Special
Allowance Payments), with respect to borrowers that are still in school, or in
grace or deferment periods, as of the Statistical Cutoff Date, are as follows:
Aggregate Outstanding
Type of Loan/Index Principal Balance Weighted Average Spread
------------------ ----------------- -----------------------
Financed Federal Loans/Treasury Bill Rate $ 43,857,077 2.34%
Financed Federal Loans/CP Rate 181,754,988 2.43
Financed Private Loans/Treasury Bill Rate 143,291,755 3.21
Financed Private Loans/Prime Rate 149,034,285 0.41
Financed Private Loans/LIBOR Rate 331,509,175 3.03
Total $849,447,280 2.44%
S-52
DISTRIBUTION BY LOAN TYPE AS OF THE STATISTICAL CUTOFF DATE
GROUP I GROUP II
-------------------------------------------- ------------------------------------------
AGGREGATE PERCENT OF AGGREGATE
OUTSTANDING RELATED OUTSTANDING PERCENT OF
NUMBER PRINCIPAL POOL NUMBER OF PRINCIPAL RELATED POOL
LOAN TYPE OF LOANS BALANCE(1) BALANCE LOANS BALANCE(2) BALANCE
- -------------------------------------------- -------- -------------------- ------------ --------- -------------- ------------
Alternative Dental Education Assistance -- -- --
Loan - Private dental loan 1,567 $ 19,426,862.86 3.11%
Alternative Health Education Loan Program -- -- -- 91 921,580.18 0.15
Alternative Loan Program - Private -- -- --
undergraduate Loans 8,754 91,015,629.42 14.59
Bar Exam Loans -- -- -- 1,263 11,203,480.37 1.80
Business Loans -- -- -- 3 15,154.83 0.00
Chiropractic Health Loans 545 2,629,933.49 0.42
Continuing Education Loans -- -- -- 700 3,138,210.36 0.50
Dental Loans -- -- -- 32 715,686.34 0.11
Graduate Loans -- 4,831 78,180,320.86 12.53
International Student Loans -- -- -- 100 1,673,159.09 0.27
Key Alternative Loans -- -- -- 28,862 215,568,630.36 34.56
Key CareerLoans -- -- -- 9,536 79,694,377.23 12.77
Law Loans -- -- -- 3,246 46,503,992.69 7.45
Medical Loans -- -- -- 4,150 58,429,490.77 9.37
Private Loans for students attending SABA -- -- --
University 75 1,545,326.07 0.25
Residency Loans -- -- -- 166 1,431,020.21 0.23
Unguaranteed Consolidation Loans -- -- -- 220 11,742,359.36 1.88
PLUS Loans 16 $ 133,414.53 0.06% -- -- --
Subsidized Consolidation Loans - Title IV
consolidation 2,541 61,424,818.87 27.23 -- -- --
Subsidized Stafford Loans - Title IV loan 4,069 30,668,074.84 13.59 -- -- --
Supplemental Loans for Students 15 137,619.94 0.06 -- -- --
Unsubsidized Consolidation Loans - Title -- -- --
IV 2,510 76,471,134.97 33.89
Unsubsidized Stafford Loans - Title IV 3,955 56,777,001.88 25.17 -- -- --
TOTAL 13,106 $225,612,065.03 100.00% 64,141 $623,835,214.49 100.00%
S-53
(1) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $6,285,557.19 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 $37,521,356.47 as of the Statistical Cutoff Date.
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DISTRIBUTION BY BORROWER INTEREST RATE AS OF THE STATISTICAL CUTOFF DATE
GROUP I GROUP II
--------------------------------------------------- ----------------------------------------------------
AGGREGATE AGGREGATE
OUTSTANDING PERCENT OF OUTSTANDING PERCENT OF
NUMBER OF PRINCIPAL RELATED POOL NUMBER OF PRINCIPAL RELATED
INTEREST RATE LOANS BALANCE(2) BALANCE LOANS BALANCE(3) POOL BALANCE
- ------------------ ---------------- --------------------- -------------- ------------- -------------------- ----------------
Less than 3.00% 2 $ 7,982.03 0.00 0 $ - 0.00%
3.00% to 3.49% 6,389 73,405,058.50 32.54 0 0.00 0.00
3.50% to 3.99% 9 60,709.02 0.03 20 326,976.64 0.05
4.00% to 4.49% 1,354 11,570,205.15 5.13 9,923 107,465,759.74 17.23
4.50% to 4.99% 595 7,325,043.49 3.25 39,964 365,727,172.01 58.63
5.00% to 5.49% 98 1,386,802.89 0.61 1,007 21,741,854.85 3.49
5.50% to 5.99% 153 4,288,780.29 1.90 204 10,466,908.85 1.68
6.00% to 6.49% 922 26,699,552.52 11.83 3,328 36,630,604.48 5.87
6.50% to 6.99% 3,301 91,759,442.48 40.67 4,946 35,333,547.07 5.66
7.00% to 7.49% 127 3,423,245.42 1.52 4,725 46,050,316.28 7.38
7.50% to 7.99% 54 1,801,498.72 0.80 0 0.00 0.00
8.00% to 8.49% 97 3,550,542.04 1.57 22 53,427.80 0.01
8.50% and above 5 333,202.48 0.15 2 38,646.77 0.01
TOTAL: 13,106 $ 225,612,065.03 100.00 64,141 $ 623,835,214.49 100.00%
(1) Determined using the interest rates applicable to the Initial Financed
Student Loans as of the Statistical Cutoff Date. However, because all the
Initial Financed 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 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
$6,285,557.19 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
$37,521,356.47 as of the Statistical Cutoff Date.
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DISTRIBUTION BY OUTSTANDING PRINCIPAL BALANCE AS OF THE STATISTICAL CUTOFF DATE
GROUP I GROUP II
-------------------------------------------------- ----------------------------------------------------
AGGREGATE AGGREGATE
OUTSTANDING PERCENT OF OUTSTANDING PERCENT OF
OUTSTANDING PRINCIPAL NUMBER OF PRINCIPAL RELATED POOL NUMBER OF PRINCIPAL RELATED
BALANCE LOANS(1) BALANCE(2) BALANCE LOANS BALANCE(3) POOL BALANCE
- -----------------------------------------------------------------------------------------------------------------------------------
Less than $1,000.00 143 $ 81,375.49 0.04% 1,029 $ 636,611.36 0.10%
$1,000 to $1,999.99 253 381,247.27 0.17 3,283 4,952,657.31 0.79
$2,000 to $2,999.99 327 817,737.70 0.36 4,398 10,989,994.03 1.76
$3,000 to $3,999.99 321 1,110,766.61 0.49 4,953 17,299,372.69 2.77
$4,000 to $4,999.99 382 1,675,368.57 0.74 4,784 21,630,699.85 3.47
$5,000 to $5,999.99 463 2,531,407.92 1.12 5,634 30,996,537.34 4.97
$6,000 to $6,999.99 221 1,427,921.95 0.63 5,290 34,310,933.35 5.50
$7,000 to $7,999.99 219 1,641,774.33 0.73 4,118 30,808,483.81 4.94
$8,000 to $8,999.99 3,305 28,085,904.47 12.45 3,885 33,000,278.09 5.29
$9,000 to $9,999.99 220 2,105,985.24 0.93 3,726 35,374,172.72 5.67
$10,000 to $10,999.99 657 6,842,331.00 3.03 4,989 53,019,475.82 8.50
$11,000 to $11,999.99 821 9,379,378.35 4.16 3,728 42,496,029.52 6.81
$12,000 to $12,999.99 278 3,461,523.15 1.53 2,214 27,437,736.49 4.40
$13,000 to $13,999.99 273 3,666,872.81 1.63 1,320 17,806,191.33 2.85
$14,000 to $14,999.99 170 2,460,231.51 1.09 1,166 16,837,147.63 2.70
$15,000 to $15,999.99 180 2,790,540.31 1.24 899 13,913,554.75 2.23
$16,000 to $16,999.99 144 2,368,763.56 1.05 964 15,850,742.20 2.54
$17,000 to $17,999.99 151 2,640,745.53 1.17 723 12,661,103.03 2.03
$18,000 to $18,999.99 154 2,848,173.37 1.26 729 13,500,435.61 2.16
$19,000 to $19,999.99 183 3,568,919.27 1.58 859 16,765,764.26 2.69
$20,000 to $20,999.99 170 3,484,425.00 1.54 854 17,508,105.21 2.81
$21,000 to $21,999.99 199 4,277,204.66 1.90 696 14,935,579.71 2.39
$22,000 to $22,999.99 173 3,890,647.33 1.72 466 10,458,019.86 1.68
$23,000 to $23,999.99 170 4,000,840.12 1.77 352 8,260,951.61 1.32
$24,000 to $24,999.99 193 4,729,389.10 2.10 270 6,612,621.83 1.06
$25,000 to $25,999.99 180 4,584,071.64 2.03 220 5,613,593.52 0.90
$26,000 to $26,999.99 174 4,601,162.17 2.04 180 4,773,135.16 0.77
$27,000 to $27,999.99 154 4,235,121.13 1.88 158 4,345,657.41 0.70
$28,000 to $28,999.99 158 4,500,291.02 1.99 169 4,807,882.11 0.77
$29,000 to $29,999.99 158 4,660,098.96 2.07 125 3,687,397.23 0.59
$30,000 to $30,999.99 159 4,850,085.13 2.15 84 2,559,522.43 0.41
$31,000 to $31,999.99 190 5,974,539.47 2.65 88 2,770,912.57 0.44
$32,000 to $32,999.99 149 4,835,700.91 2.14 119 3,861,849.38 0.62
S-56
GROUP I GROUP II
-------------------------------------------------- ----------------------------------------------------
AGGREGATE AGGREGATE
OUTSTANDING PERCENT OF OUTSTANDING PERCENT OF
OUTSTANDING PRINCIPAL NUMBER OF PRINCIPAL RELATED POOL NUMBER OF PRINCIPAL RELATED
BALANCE LOANS(1) BALANCE(2) BALANCE LOANS BALANCE(3) POOL BALANCE
- -----------------------------------------------------------------------------------------------------------------------------------
$33,000 to $33,999.99 184 6,162,483.84 2.73 96 3,213,865.67 0.52
$34,000 to $34,999.99 164 $ 5,676,041.31 2.52% 96 $ 3,308,890.81 0.53%
$35,000 to $35,999.99 212 7,491,698.51 3.32 89 3,153,662.79 0.51
$36,000 to $36,999.99 177 6,498,513.62 2.88 75 2,742,712.68 0.44
$37,000 to $37,999.99 119 4,456,978.26 1.98 58 2,177,675.59 0.35
$38,000 to $38,999.99 151 5,799,148.06 2.57 73 2,811,530.86 0.45
$39,000 to $39,999.99 75 2,964,835.13 1.31 46 1,819,312.07 0.29
$40,000 and above 932 48,051,821.25 21.30 1,136 64,124,414.80 10.28
TOTAL 13,106 $ 225,612,065.03 100.00% 64,141 $ 623,835,214.49 100.00%
(1) Borrowers generally have more than one outstanding loan. The average
aggregate outstanding principal balance of loans per borrower is
$17,214.41 with respect to the Group I Initial Financed Student Loans and
$9,726.00 with respect to the Group II Initial Financed Student Loans,
each as of the Statistical Cutoff Date. Approximately 843 borrowers have
both Group I and Group II Initial Financed Student Loans.
(2) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$6,285,557.19 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
$37,521,356.47 as of the Statistical Cutoff Date.
S-57
DISTRIBUTION BY BORROWER PAYMENT STATUS
AS OF THE STATISTICAL CUTOFF DATE
GROUP I GROUP II
------------------------------------------------- ----------------------------------------------------
AGGREGATE PERCENT OF AGGREGATE PERCENT OF
OUTSTANDING RELATED OUTSTANDING RELATED
NUMBER OF PRINCIPAL POOL NUMBER OF PRINCIPAL POOL
PAYMENT STATUS (1) LOANS BALANCE(2) BALANCE LOANS BALANCE(3) BALANCE
- ---------------------------------------------------------------------------------------------------------------------------
23 and below 6 $ 9,058.11 0.00% 275 $ 225,090.21 0.04%
24 to 47 64 483,806.81 0.21 670 1,101,279.51 0.18
48 to 71 171 2,195,039.19 0.97 931 2,483,505.30 0.40
72 to 95 175 3,082,856.37 1.37 827 2,899,949.06 0.46
96 to 119 981 12,753,029.41 5.65 4,124 21,336,035.59 3.42
120 to 143 7,285 82,291,792.73 36.47 12,531 68,748,306.67 11.02
144 to 167 115 1,058,296.40 0.47 4,526 33,017,024.54 5.29
168 to 191 386 6,425,746.23 2.85 16,923 161,990,179.33 25.97
192 to 215 0 0.00 0.00 2,493 23,557,920.47 3.78
216 to 239 702 11,080,133.31 4.91 3,721 54,478,208.87 8.73
240 to 263 54 1,055,017.26 0.47 6,453 103,123,738.30 16.53
264 to 287 4 201,591.17 0.09 903 11,852,682.00 1.90
288 to 311 788 17,731,640.54 7.86 5,736 71,080,090.89 11.39
312 to 335 10 236,477.51 0.10 2,382 30,716,575.33 4.92
336 to 359 1,311 46,356,770.04 20.55 1,433 27,358,897.21 4.39
360 and above 1,054 40,650,809.95 18.02 213 9,865,731.21 1.58
TOTAL 13,106 $ 225,612,065.03 100.00% 64,141 $ 623,835,214.49 100.00%
(1) Determined from the Statistical Cutoff Date to the stated maturity date of
the applicable Initial Financed 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
$6,285,557.19 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
$37,521,356.47 as of the Statistical Cutoff Date.
S-58
DISTRIBUTION BY BORROWER PAYMENT STATUS
AS OF THE STATISTICAL CUTOFF DATE
GROUP I GROUP II
-------------------------------------------- ---------------------------------------------
AGGREGATE PERCENT OF AGGREGATE PERCENT OF
OUTSTANDING RELATED OUTSTANDING RELATED
NUMBER OF PRINCIPAL POOL NUMBER OF PRINCIPAL POOL
PAYMENT STATUS (1) LOANS BALANCE(2) BALANCE LOANS BALANCE(3) BALANCE
- -----------------------------------------------------------------------------------------------------------------------------------
In School 493 $ 4,146,934.82 1.84% 4,540 $ 46,869,799.44 7.51%
Grace 6,291 73,600,337.11 32.62 22,728 211,390,550.34 33.89
Deferral 347 6,883,175.86 3.05 9,951 120,577,412.24 19.33
Forbearance 540 13,416,847.23 5.95 2,316 21,478,061.10 3.44
Repayment
First Year in Repayment 5,302 125,927,564.66 55.82 12,504 112,824,318.37 18.09
Second Year in Repayment 54 754,684.41 0.33 3,477 31,429,509.35 5.04
More than Two Years in Repayment 79 882,520.94 0.39 8,625 79,265,563.65 12.71
Total 13,106 $ 225,612,065.03 100.00% 64,141 $ 623,835,214.49 100.00%
(1) Refers to the status of the borrower of each Initial Financed Student Loan
to be added, 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
$6,285,557.19 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
$37,521,356.47 as of the Statistical Cutoff Date.
S-59
SCHEDULED WEIGHTED AVERAGE MONTHS REMAINING IN CURRENT BORROWER PAYMENT STATUS AS OF THE STATISTICAL
CUTOFF DATE(1)
GROUP I GROUP II
----------------------------------------------------------- -------------------------------------------------------
PAYMENT STATUS IN-SCHOOL GRACE DEFERRAL FORBEARANCE REPAYMENT IN-SCHOOL GRACE DEFERRAL FORBEARANCE REPAYMENT
- --------------- ------------- -------- ---------- ------------- ----------- ----------- ------- ---------- ------------- ----------
Deferment 0 0 7 0 280 2 0 8 0 223
Forbearance 0 0 0 3 100 0 0 0 6 127
In Grace 0 4 0 0 121 0 8 0 0 229
In Repay 0 0 0 0 290 0 0 0 0 205
In School 11 6 0 0 122 8 7 0 0 195
WEIGHTED AVERAGE: 0 1 0 0 220 1 3 2 0 213
(1) Determined without giving effect to any Deferral Periods or Forbearance
Periods that may be granted in the future.
S-60
GEOGRAPHIC DISTRIBUTION OF STATES REPRESENTING APPROXIMATELY 1% OR MORE OF THE
GROUP I POOL BALANCES AS OF THE STATISTICAL CUTOFF DATE(1)
- -------------------------------------------------------------------------------
NUMBER AGGREGATE OUTSTANDING PERCENT OF RELATED
STATE OF LOANS PRINCIPAL BALANCE(2) POOL BALANCE
- -------------------------------------------------------------------------------
New York 1,957 $ 36,532,358.98 16.19%
California 1,785 35,429,281.69 15.70
Illinois 1,082 16,764,334.46 7.43
Pennsylvania 969 13,064,983.82 5.79
Florida 647 11,174,476.36 4.95
Ohio 781 10,413,921.02 4.62
Massachusetts 514 9,724,717.97 4.31
New Jersey 413 8,591,579.98 3.81
Virginia 441 7,823,337.88 3.47
Texas 391 7,311,275.47 3.24
Michigan 466 6,333,176.26 2.81
Maryland 315 5,280,598.16 2.34
Connecticut 318 5,253,789.69 2.33
Georgia 277 4,746,486.80 2.10
Tennessee 370 4,568,624.45 2.02
North Carolina 210 4,068,436.05 1.80
District of Columbia 196 4,031,866.64 1.79
Alabama 116 2,404,141.31 1.07
Louisiana 151 2,302,699.15 1.02
Washington 99 2,259,735.78 1.00
Other(3) 1,608 27,532,243.11 12.20
TOTAL 13,106 $ 225,612,065.03 100.00%
(1) Based on the permanent billing addresses of the borrowers of the Initial
Financed 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 to be capitalized upon commencement of repayment, estimated to be
$6,285,557.19 as of the Statistical Cutoff Date.
(3) Includes all other states, none of which exceeds 1.00% of the related Pool
Balance.
S-61
GEOGRAPHIC DISTRIBUTION OF STATES REPRESENTING APPROXIMATELY 1% OR MORE OF THE
GROUP II POOL BALANCES AS OF THE STATISTICAL CUTOFF DATE(1)
- --------------------------------------------------------------------------------
NUMBER AGGREGATE OUTSTANDING PERCENT OF RELATED
STATE OF LOANS PRINCIPAL BALANCE(2) POOL BALANCE
- --------------------------------------------------------------------------------
New York 9,779 $ 86,110,610.59 13.80%
California 6,087 69,551,011.74 11.15
Massachusetts 4,869 49,405,611.74 7.92
Florida 3,505 44,709,899.28 7.17
Pennsylvania 4,514 36,942,985.26 5.92
Ohio 5,161 35,964,285.28 5.77
Illinois 2,213 24,061,718.31 3.86
Texas 2,155 20,494,833.85 3.29
New Jersey 1,941 19,985,603.76 3.20
Michigan 1,841 15,332,723.85 2.46
Washington 1,544 14,181,689.02 2.27
Virginia 1,252 12,916,837.94 2.07
Connecticut 1,279 12,838,528.68 2.06
Georgia 1,041 12,087,281.63 1.94
Maryland 1,139 11,964,589.54 1.92
Indiana 1,199 10,130,182.71 1.62
North Carolina 959 10,009,009.49 1.60
Arizona 769 9,148,466.54 1.47
Colorado 834 9,102,185.36 1.46
Missouri 780 7,061,818.47 1.13
Wisconsin 802 6,871,202.71 1.10
Other(3) 10,478 104,964,138.74 16.83
TOTAL: 64,141 $ 623,835,214.49 100.00%
S-62
(1) Based on the permanent billing addresses of the borrowers of the Initial
Financed 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 to be capitalized upon commencement of repayment, estimated to be
37,521,356.47 as of the Statistical Cutoff Date.
(3) Includes all other states, none of which exceeds 1.00% of the related Pool
Balance.
S-63
DISTRIBUTION OF FINANCED FEDERAL LOANS BY DATE OF DISBURSEMENT AS OF THE STATISTICAL CUTOFF DATE
GROUP II
GROUP I (NOT APPLICABLE)
------------------------------------------------- --------------------------------------
PERCENT OF
AGGREGATE FINANCED
OUTSTANDING FEDERAL LOANS
NUMBER OF PRINCIPAL IN INITIAL
DATE OF DISBURSEMENT(1) LOANS BALANCE(2) POOL
- ----------------------------------------- ------------- ------------------ ----------------- ------- ------------- ----------------
Prior to October 1, 1993 29 $ 270,560.04 0.12%
October 1, 1993 to September 30, 1998 1,678 20,449,981.22 9.06
October 1, 1998 to Present 11,399 204,891,523.77 90.82
TOTAL 13,106 $ 225,612,065.03 100.00%
(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 Guarantee
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
$6,285,557.19 as of the Statistical Cutoff Date.
S-64
DISTRIBUTION BY NUMBER OF DAYS OF DELINQUENCY AS OF THE STATISTICAL CUTOFF DATE
GROUP I GROUP II
----------------------------------------------- ------------------------------------------------
AGGREGATE AGGREGATE
OUTSTANDING PERCENT OF OUTSTANDING PERCENT OF
NUMBER OF PRINCIPAL RELATED POOL NUMBER OF PRINCIPAL RELATED
DAYS DELINQUENT LOANS BALANCE(1) BALANCE LOANS BALANCE(2) POOL BALANCE
- ---------------- ------------------- ------------------ -------------- ------------- ------------------ ---------------
CURRENT 12,844 $220,272,418.40 97.63% 63,035 $613,745,121.66 98.38%
31-60 144 3,244,158.90 1.44 651 6,194,227.25 0.99
61-90 57 1,126,806.35 0.50 237 2,104,115.47 0.34
91 and above 61 968,681.38 0.43 218 1,791,750.11 0.29
TOTAL 13,106 $225,612,065.03 100.00% 64,141 $623,835,214.49 100.00%
(1) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$6,285,557.19 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
$37,521,356.47 as of the Statistical Cutoff Date.
S-65
DISTRIBUTION BY LOAN REPAYMENT TERM AS OF THE STATISTICAL CUTOFF DATE
GROUP I GROUP II
------------------------------------------------- ---------------------------------------------------
AGGREGATE AGGREGATE
OUTSTANDING PERCENT OF OUTSTANDING PERCENT OF
LOAN NUMBER OF PRINCIPAL RELATED POOL NUMBER OF PRINCIPAL BALANCE RELATED POOL
REPAYMENT TERMS LOANS BALANCE(1) BALANCE LOANS (2) BALANCE
- ------------------------ ------------- -------------------- --------------- -------------- --------------------- --------------
Level Payment 11,323 $172,378,134.69 76.40% 63,451 $602,205,193.93 96.53%
Graduated Payment(3) 1,783 53,233,930.34 23.60 690 21,630,020.56 3.47
TOTAL 13,106 $225,612,065.03 100.00% 64,141 $623,835,214.49 100.00%
(1) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$6,285,557.19 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
$37,521,356.47 as of the Statistical Cutoff Date.
(3) 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.
S-66
MATURITY AND PREPAYMENT ASSUMPTIONS
The rate of payment of principal of each Class of the Notes and the
yield on each Class of the Notes will be affected by prepayments of the related
group of Financed Student Loans that may occur as described below. All the
Financed Student Loans in each group 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 each group of Financed
Student Loans. However, because many of the Financed Student Loans in each group
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 in each group.
To the extent borrowers of Financed Student Loans in either group elect
to borrow Consolidation Loans (as defined in the Prospectus) with respect to
such Financed Student Loans from KBUSA after the end of the Funding Period or
from another lender at any time: (1) with respect to the Group I Student Loans,
the holders of the Class I-A-1 Notes and the Class I-A-2 Notes (collectively,
the "Group I Senior Noteholders"), and the Class I-B Notes (the "Group I
Subordinate Noteholders" and together with the Group I Senior Noteholders, the
"Group I Noteholders") will collectively receive as a prepayment of principal
the aggregate principal amount of such Group I Student Loans; and (2) with
respect to the Group II Student Loans, the holders of the Class II-A-1 Notes and
the Class II-A-2 Notes (collectively, the "Group II Noteholders", and referred
to together with the Group I Noteholders as the "Noteholders") will collectively
receive as a prepayment of principal the aggregate principal amount of such
Group II Student Loans.
If KBUSA makes any such Consolidation Loan during the Funding Period
(in which event KBUSA will then sell that Consolidation Loan to the Depositor,
who will sell it to the Eligible Lender Trustee as either a Group I Student Loan
or Group II Student Loan, as applicable, to the extent that funds are available
in the related Escrow Account and during the Funding Period, the related
Subsequent Loan Pre-Funding Sub-Account or Other Student Loan Pre-Funding
Sub-Account, as applicable, for the purchase thereof), the aggregate outstanding
principal balance of Financed Student Loans in each Group (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, with
respect to Group I Student Loans, 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--The Federal Consolidation Loan Program" 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 after the end of the Funding Period or by another lender at any
time.
S-67
In addition, pursuant to the Sale and Servicing Agreement, (1) the
Depositor is obligated to repurchase (or to cause KBUSA to repurchase) any KBUSA
Student Loan as a result of a breach of any of its representations and
warranties (or KBUSA's representations and warranties contained in the KBUSA
Student Loan Transfer Agreement), (2) the Master Servicer is obligated to
repurchase any QSPE Student Loan as a result of a breach of certain
representations and warranties made on behalf of QSPE and the Depositor, and (3)
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 Noteholders, the Swap
Counterparty or the Securities Insurer (with respect to Group II Student Loans,
as determined by the Securities Insurer) 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
"--Master Servicer Covenants" in the Prospectus. See also "Description of the
Transfer and Servicing Agreements--Additional Fundings" herein and in the
Prospectus regarding prepayments of principal to Noteholders if, as of December
24, 2002 (the "Special Determination Date"), either the Group I Subsequent
Student Loan Pre-Funding Sub-Account and/or the Group II Subsequent Student Loan
Pre-Funding Sub-Account, as the case may be, has not been reduced to zero and is
greater than $10,000,000 resulting in a prepayment of principal to the
applicable Group I Noteholders or Group II Noteholders, as the case may be, on
February 27, 2003 (the "Special Redemption Date"), and also the prepayment at
the end of the Funding Period if any amounts remain on deposit in either of the
Group I or Group II Other Student Loan Pre-Funding Sub-Accounts. See also,
"Description of the Transfer and Servicing Agreements--Termination" herein and
in the Prospectus regarding the Master Servicer's option to purchase the
Financed Student Loans when the aggregate Pool Balance of all of the Financed
Student Loans then outstanding is less than or equal to 10% of the aggregate
Group I and Group II Initial Financed Student Loan Pool Balance plus the initial
principal balance of all Subsequent Student Loans, and potential exercise of the
Put Options regarding each group of Financed Student Loans to occur on the
November, 2012 Distribution Date. In addition, Group I Senior Noteholders will
receive accelerated payments of principal from excess interest collections in
the event of a Subordinate Note Principal Trigger, and Group II Noteholders will
receive accelerated payments of principal from excess interest collections in
the event of a Trigger Event, or, with respect to either group of Notes, if the
related Put Option is exercised and either (i) the Put Option Provider defaults
or (ii) the proceeds received from the exercise of the related Put Option would
be insufficient to pay the principal of all the Notes (plus all accrued interest
thereon) in the related group, plus other sums owed to certain parties, and
subsequent to such default or inability to exercise the related Put Option there
is also a failed auction of the related group of Financed Student Loans. Any
reinvestment risk from such accelerated payment of principal will be borne by
the Noteholders in each group receiving such prepayment.
On the other hand, scheduled payments with respect to, and maturities
of, the Financed Student Loans in either group 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 (that are added to the pool
S-68
of either Group I or Group II Student Loans) to the Eligible Lender Trustee on
behalf of the Trust prior to the end of the Funding Period 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 Group I or Group II Student Loans, as applicable, they are replacing
may lengthen the remaining term of the Group I or Group II Student Loans, as
applicable, and the average life of the Group I or Group II Notes. The rate of
payment of principal of the Notes of each group and the yield on the Notes of
each group may also be affected by the rate of defaults resulting in losses on
defaulted Student Loans in the related group 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 certain of the Group I and Group II Student Loans, as
applicable, will extend well beyond the Final Maturity Date of the Class I-B
Notes or Class II-A-2 Notes, as the case may be; provided, however, that, with
respect to the Group II Notes, the Group II Notes Guaranty Insurance Policy will
guarantee the payment of the outstanding principal balance of the related Class
of Group II Notes on its respective Final Distribution Date.
The rate of prepayment on either the Group I or Group II Student Loans
cannot be predicted. You will bear any reinvestment risks resulting from a
faster or slower incidence of prepayment of Financed Student Loans related to
your group of Notes. 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.
INSURANCE OF STUDENT LOANS; GUARANTORS OF STUDENT LOANS
With respect to the Group I 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. All of the Group I Initial
Financed Student Loans are, and all of the Group I Subsequent Student Loans will
be, Financed Federal Loans.
With respect to the Group II Student Loans, as of the Statistical
Cutoff Date, approximately 33.24% (by aggregate principal balance) of the Group
II Initial Financed 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 66.76% (by aggregate principal balance)
of the Group II Initial Financed Student Loans will be Non-Guaranteed Private
Loans.
S-69
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
GROUP I GROUP II
-------------------------------------------------------- -------------------------------------------------------
AGGREGATE
AGGREGATE PERCENT OF OUTSTANDING PERCENT OF
OUTSTANDING RELATED POOL NUMBER PRINCIPAL RELATED POOL
NUMBER OF LOANS PRINCIPAL BALANCE(1) BALANCE OF LOANS BALANCE(2) BALANCE
------------------ ---------------------- -------------- ------------------- ----------------- -----------------
Federal
Guarantors
- ----------
ASA 2,223 $46,037,880.33 20.41% -- -- --
CSAC 228 2,120,828.37 0.94 -- -- --
CSLF 2 20,287.86 0.01 -- -- --
ECMC 27 383,923.88 0.17 -- -- --
GLHEC 1 5,024.76 0.00 -- -- --
MHEAA 20 118,376.94 0.05 -- -- --
NSLP 4,342 56,878,547.32 25.21 -- -- --
NYHESC 6 61,153.52 0.03 -- -- --
PHEAA 6,122 118,856,977.66 52.68 -- -- --
USAF 135 1,129,064.39 0.50 -- -- --
Private
Guarantors
- ----------
TERI -- -- -- 16,382 $207,112,172.59 33.20%
HICA -- -- -- 16 223,715.05 0.04
Unguaranteed -- -- -- 47,743 416,499,326.84 66.76
- ------------
TOTAL 13,106 225,612,065.03 100.00% 64,141 $623,835,214.49 100.00%
(1) Includes net principal balance due from borrowers, plus accrued interest
thereon to be capitalized upon commencement of repayment, estimated to be
$6,285,557.19 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
$37,521,356.47 as of the Statistical Cutoff Date.
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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 up to 100% 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 ASA, CSAC, CSLF, ECMC, GLHEC, MHEAA, NSLP, NYHESC, PHEAA, and USAF, by
which each such Federal Guarantor has agreed to serve as Guarantor for certain
Financed Federal Loans. ASA is the designated Student Loan guarantor for
Massachusetts and the District of Columbia and has established an operating
center in Boston, Massachusetts. CSAC is the designated Student Loan guarantor
for California and has established an operating center in Rancho Cordova,
California. CSLF is the designated Student Loan guarantor for Connecticut and
has established an operating center in Rocky Hill, Connecticut. ECMC is the
designated Student Loan guarantor for Virginia and has established operating
centers in St. Paul, Minnesota and Richmond, Virginia. GLHEC is the designated
Student Loan guarantor for Minnesota, Wisconsin, Ohio, Puerto Rico and the U.S.
Virgin Islands and has established an operating center in Madison, Wisconsin.
MHEAA is the designated Student Loan guarantor for Michigan and has established
an operating center in Lansing, Michigan. NSLP is the designated Student Loan
guarantor for Nebraska and has established an operating center in Lincoln,
Nebraska. NYHESC is the designated guarantor for New York, and has established
an operating center in Albany, New York. 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.) 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. All of the Group I Initial Financed Student Loans
are Financed Federal Loans and are guaranteed by Federal Guarantors. None of the
Group II Initial Financed Student Loans are, and none of the Group II Subsequent
Student Loans will be, Financed Federal Loans and none are or will be guaranteed
by Federal Guarantors.
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:
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(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 statutorily determined
period of at least 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 and unpaid interest in the case of Financed Federal
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 loan application was falsely certified as to 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;
(f) the school closed thereby preventing the borrower from
completing his/her program of study; or
(g) 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 Financed Federal Loan.
When these conditions are satisfied, the Higher Education Act requires
the Federal Guarantor generally to pay the claim within 90 days of its
submission by the lender. The obligations of each Federal Guarantor pursuant to
its respective Guarantee Agreement are obligations of each such Federal
Guarantor respectively, and are not supported by the full faith and credit of
any state government. However, the Higher Education Act provides that if the
Secretary of Education (the "Secretary") determines that a guarantor is unable
to meet its insurance obligations, holders of loans may submit insurance claims
directly to the Department until the obligations are transferred to a new
Federal Guarantor capable of meeting the obligations or until a successor
Federal Guarantor assumes the obligations. No assurance can be made that the
Department would under any given circumstances assume the obligation to assure
satisfaction of a guarantee obligation by exercising its right to terminate a
reimbursement agreement with a Federal Guarantor or by making a determination
that the Federal Guarantor is unable to meet its guarantee obligations. The
Secretary is also authorized, among other things, to take those actions
necessary to ensure the continued availability of Student Loans to residents of
the state or states in which the guarantor did business, the full honoring of
all guarantees issued by the guarantor prior to the assumption by the Secretary
of the functions of the guarantor, and the proper servicing of Student Loans
guaranteed by the guarantor prior to the Secretary's assumption of the functions
of the guarantor.
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:
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- the origination and servicing of such Financed Federal Loan
being performed in accordance with the Programs, the Higher
Education Act and other applicable requirements,
- 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,
- 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
- 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 its respective Guarantee Agreement 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 Depositor's or the Master Servicer's
representations and warranties, as the case may be, and would create an
obligation of the Depositor 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 PHEAA, ASA, and NSLP as of the Statistical Cutoff Date. No such
information is provided with respect to CSAC, CSLF, ECMC, GLHEC, MHEAA, NYHESC
or USAF because the aggregate principal amount of Financed Student Loans
guaranteed by each of CSAC, CSLF, ECMC, GLHEC, MHEAA, NYHESC and USAF
respectively is less than 5% of the sum of the Group I Initial Financed 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 PHEAA, ASA and
NSLP and by all federal guarantors in each of the last five federal fiscal
years:*
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STAFFORD, SLS AND PLUS LOANS GUARANTEED
(DOLLARS IN MILLIONS)
FEDERAL FISCAL YEAR
ENDING SEPTEMBER 30 PHEAA ASA NSLP ALL GUARANTORS
- ------------------- ------- ----- ------ ----------------
1997 $1,869 $682 $397 $21,409
1998 1,784 667 629 22,300
1999 1,796 680 674 22,923
2000 2,459 693 810 25,656
2001 1,819 736 831 28,356
* The information set forth in the table above under "All Guarantors" has
been obtained from the Department of Education's Federal Student Loan
Programs Data Books and the Department of Education's Quarterly Volume
Updates (each, a "DOE Data Book"). Information for each Federal
Guarantor was provided by such Federal Guarantor.
Reserve Ratio. Each applicable Federal Guarantor's reserve ratio is
determined by dividing its cumulative cash reserves, the Federal Student Loan
Reserve Fund (as defined in Section 422A of the Higher Education Act, the
"Federal Reserve Fund") by the original principal amount of the outstanding
loans it has agreed to guarantee.
On October 7, 1998, President Clinton signed a bill to reauthorize the
Higher Education Act for the following five years. The reauthorization bill
requires the Federal Guarantors to establish two separate funds, a Federal
Reserve Fund and an Agency Operating Fund (as defined in Section 422B of the
Higher Education Act, the "Agency Operating Fund"). Under the new funding model,
the Federal Reserve Fund is considered the property of the Federal government
and the Agency Operating Fund is considered the property of the related Federal
Guarantor.
The Federal Reserve Fund was established through the deposit of all
existing funds, securities and other liquid assets under the Federal Family
Education Loan Program ("FFELP"). The Federal Guarantors will deposit into the
Federal Reserve Fund all guarantee fees, the reinsurance received from the
Department, the recovery of the non-reinsured portion of defaulted loans and
investment earnings. The Federal Reserve Fund may be used only to pay lender
claims, default aversion fees into the Agency Operating Fund, and for other
limited purposes. Under certain circumstances, at the instruction of the
Department, account maintenance fees are paid to the Agency Operating Fund from
this fund. Federal Guarantors approved for "voluntary flexible agreements",
which include ASA and GLHEC, operate under arrangements negotiated individually
between the Federal Guarantor and the Department.
The term "cumulative cash reserves" is equal to the difference of
sources less uses of funds for the Federal Reserve Funds. Prior to enactment of
the new model, "cumulative cash reserves" referred to cash reserves plus (i) the
Federal Guarantor's quarterly reported sources of funds (including insurance
premiums, state appropriations, federal advances, federal reinsurance payments,
administrative cost allowances, collections on claims paid and investment
earnings) minus (ii) the Federal Guarantor's quarterly reported uses of funds
(including claims paid to
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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
(i) 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 (ii) the original principal amount of loan guarantees
transferred to such Federal Guarantor, from other guarantors, excluding loan
guarantees transferred to another guarantor pursuant to a plan of the Secretary
in response to the insolvency of a guarantor.
The following tables set forth for PHEAA and NSLP, 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:
RESERVES*
---------------------------------------------------------------------------------------------
PHEAA NSLP
-------------------------------------- ------------------------------------
FEDERAL FISCAL CUMULATIVE CUMULATIVE
YEAR ENDING CASH RESERVE CASH RESERVE NATIONAL
SEPTEMBER 30 RESERVES RATIO RESERVES RATIO AVERAGE
- ------------------ ------------------- ------------------ --------------------- -------------- -----------------
(DOLLARS IN MILLIONS)
1997 $189.35 1.4 $24.07 1.2 1.5
1998 190.65 1.3 30.99 1.3 1.5
1999 209.67 1.4 31.00 1.1 1.6
2000 217.24 1.3 29.76 0.9 1.0
2001 199.35 1.1 29.64 0.8 0.8
* 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.
ASA's voluntary flexible agreement (the "ASA Agreement") went into
effect as of January 1, 2001. Under the ASA Agreement, ASA returned its reserve
funds that would otherwise have made up its Federal Reserve Fund to an escrow
account in the name of the Department. In the event of a loan default, ASA
receives funding from the Department and ASA acts as a disbursing agent. The
guarantee, therefore, is no longer limited by the funds on deposit in a Federal
Reserve Fund. Because ASA no longer holds a Federal Reserve Fund, the concept of
a reserve ratio is no longer meaningful. The ASA Agreement establishes a "fee
for service" model under which ASA is rewarded through the payment of a
portfolio maintenance fee for maintaining a healthy portfolio of student loans
in good standing. ASA is also incented to keep student loans in good standing
and to work with borrowers to prevent defaults because the portfolio maintenance
fee increases as ASA's trigger default rate improves over the national trigger
default rate.
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 aggregate amount recovered from borrowers by the
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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 PHEAA, ASA and NSLP for the
last five federal fiscal years:
RECOVERY RATE*
-----------------------------------------------------------------------
FEDERAL FISCAL YEAR PHEAA ASA NSLP
ENDING SEPTEMBER 30
---------------------------- --------------------- ------------------------ ------------------------
1997 54.8% 42.7% 31.5%
1998 59.2 49.0 38.4
1999 62.1 56.4 46.9
2000 66.1 77.7 55.3
2001 84.0 61.1 62.5
* 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 September 30, 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.
Claims Rate. For the past five federal fiscal years, none of ASA's,
CSAC's, CSLF's, ECMC's, GLHEC's, MHEAA's, NSLP's, NYHESC's, PHEAA's or USAF's
claims rate has exceeded 5.0%, and as a result, all claims of ASA, CSAC, CSLF,
ECMC, GLHEC, MHEAA, NSLP, NYHESC, PHEAA 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 was 6.9% for the federal fiscal year 1998. As
recently as federal fiscal year 1990, the 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 Depositor and KBUSA are 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 PHEAA, ASA and NSLP
for each of the last five federal fiscal years:
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CLAIMS RATE*
--------------------------------------------------------------------------------
FEDERAL FISCAL YEAR
ENDING SEPTEMBER 30 PHEAA ASA NSLP
-------------------------- ---------------------------- --------------------------- --------------------
1997 1.9% 3.5% 3.2%
1998 2.0 2.8 3.2
1999 1.6 1.6 2.2
2000 1.1 1.0 1.9
2001 1.7 1.3 1.3
* 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. All of the Guaranteed
Private Loans will be Group II Student Loans. The Eligible Lender Trustee has
entered into a Guarantee Agreement with TERI, and KBUSA will assign to the
Eligible Lender Trustee, on behalf of the Trust, its rights under surety bonds
issued by HICA applicable to the Group II Student Loans insured by HICA. As a
result TERI and HICA, respectively, will each guarantee or insure a portion of
the Guaranteed Private Loans.
Pursuant to its 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) with respect to HICA, any filing by or against the borrower
thereof of a petition, and with respect to TERI, the discharge
of the related student loan debt of a borrower as part of any
proceedings, 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:
- the origination and servicing of such Guaranteed Private Loan
being performed in accordance with the Programs and other
applicable requirements,
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- 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,
- 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
- 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 provision of
applicable state law (other than Massachusetts law), TERI's guarantee obligation
is terminated 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, the Depositor's representations and warranties
(with respect to KBUSA Student Loans), or the Master Servicer's representations
and warranties (with respect to QSPE Student Loans), as the case may be, and
would create an obligation of the Depositor 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
either of the Sellers, the Depositor, the Master Servicer, any of the
Underwriters, or any of their respective affiliates:
THE EDUCATION RESOURCES INSTITUTE, INC.
The Education Resources Institute, Inc. ("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.
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 and the six month period referred to below; such
information is not guaranteed as to accuracy or
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completeness and is not to be construed as a representation by either of the
Sellers, the Depositor, the Master Servicer, any of the Underwriters or any of
their respective affiliates:
CALENDAR YEAR PRIVATE LOANS GUARANTEED BY YEAR
- -------------------------- ---------------------------------------
(DOLLARS IN MILLIONS) (UNAUDITED)
1997 $332.6
1998 380.4
1999 469.6
2000 320.3
2001 433.0
2002* 287.1
- --------------
* For the six-month period ending June 30, 2002.
Proprietary School Loans. Default rates for Student Loans made to
students attending proprietary or vocational schools and particularly those that
are non-degree granting, are significantly higher than those made to students
attending other 2 year and 4 year institutions. Student loans made to students
attending proprietary schools comprise less than three percent of all
TERI-guaranteed loans.
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." Such amounts include,
for this purpose, the segregated reserves described below under the caption
"Segregated Reserves for Private Loans Under the Programs Guaranteed by TERI,"
which segregated reserves are not available to meet obligations of TERI with
respect to the Fleet Loans guaranteed by TERI (the "TERI-Guaranteed Fleet
Loans"). 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 for the five calendar years and
the six-month period referred to below; such information is not guaranteed as to
accuracy or completeness and is not to be construed as a representation by
either of the Sellers, the Depositor, the Master Servicer, any of the
Underwriters, or any of their respective affiliates:
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AMOUNTS AVAILABLE TO
MEET GUARANTEE COMMITMENTS
CALENDAR YEAR (DOLLARS IN THOUSANDS) (UNAUDITED) RESERVES RATIO
- ------------------------------ ------------------------------------------------- -------------------------------------
1997 $102,201 5.4%
1998 104,170 5.0
1999 115,861 4.8
2000 120,451 4.5
2001 105,830 4.1
2002* 115,062 4.2
* For the six-month period ending June 30, 2002.
Amounts Available To Meet Guarantee Commitments. As part of guarantee
agreements with lending institutions, 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 3.0% in total TERI funds available as security
for the performance of TERI obligations. As of June 30, 2002, the balance of
loans outstanding guaranteed directly by TERI amounted to approximately $2.7
billion. TERI is contractually obligated to maintain reserves (consisting of
loan loss reserves, deferred revenue and unrestricted and/or board designated
unrestricted net assets) as security for TERI's performance as guarantor under
various agreements of up to 3%. As of June 30, 2002, TERI was required (under
those agreements) to have approximately $81 million in reserves. TERI has
advised KBUSA and the Depositor that its reserves are currently in compliance
with these requirements. TERI's total funds available to meet its guarantee
commitments exceeded that amount, as of June 30, 2002, by $34 million, and TERI
has advised KBUSA and the Depositor that TERI's excess of funds available over
guarantee commitments has not materially changed since June 30, 2002. However,
there can be no assurance that such will continue to be the case.
Of the amounts shown above as "Amounts Available To Meet Guarantee
Commitments," a portion of the amount shown for each period (including $43.0
million of the $70.9 million of cash and marketable securities held by TERI as
of June 30, 2002), is required to be held in segregated reserves pledged to
satisfy guarantee obligations with respect to specific guaranteed student loans.
Guaranty obligations thus secured include those for Guaranteed Private Loans
originated under Programs guaranteed by TERI, other Guaranteed Private Loans
made under the Access Program that are guaranteed by TERI (the "TERI-Guaranteed
Access Loans") and other student loans guaranteed by TERI. Pledged reserves are
not available to meet other obligations of TERI, including obligations with
respect to any of the TERI-Guaranteed Fleet Loans.
As of the end of each of the five calendar years and the six-month
period 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
either of the Sellers, the Depositor, the Master Servicer, any of the
Underwriters or any of their respective affiliates:
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AS OF
AS OF DECEMBER 31, JUNE 30
----------------------------------------------------------------------------- -------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
1997 1998 1999 2000(*) 2001(**) 2002
------------ ---------------- --------------- -------------- ---------------- -------------
Deferred Guarantee Fees $ 5,032 $ 4,899 $ 5,357 $ 5,363 $ 6,811 $ 6,700
Loan Loss Reserve 56,999 54,186 60,248 91,324 69,616 75,181
Unrestricted--Board 33,951 33,929 33,808 13,084 13,246 13,177
Designated
Unrestricted--Undesignated $ 6,219 11,156 16,448 10,680 16,157 20,008
-------- -------- -------- -------- -------- --------
Total Amounts Available To
Meet Guarantee
Commitments $102,201 $104,170 $115,861 $120,451 $105,830 $115,062
======== ======== ======== ======== ======== ========
* The loan loss reserve as of December 31, 2000 includes the transfer of $35
million from the Unrestricted Board Designated and Unrestricted-Undesignated.
This transfer was done to more appropriately classify funds held to pay claims.
There was no change in the total amount of funds available to pay claims.
** The decline in the loan loss reserve from 2000 to 2001 reflects TERI's
discontinuance of its guaranty relationship with Access Group, Inc. TERI
discontinued its guarantee obligations on $344 million of loans originated by
Access Group. This resulted in a net reduction of approximately $23 million in
TERI's loan loss reserve.
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 accounting firm.
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 June 30, 2002, with respect to loans defaulting in each of the five
calendar years and the six-month period 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 either of the Sellers, the Depositor, the
Master Servicer, any of the Underwriters or any of their respective affiliates:
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PERIOD OF DEFAULT CUMULATIVE CASH RECOVERY RATE (UNAUDITED)
- ------------------------------------ -------------------------------------------
1997 64.1 (January 1, 1997--June 30, 2002)
1998 56.9 (January 1, 1998--June 30, 2002)
1999 50.0 (January 1, 1999--June 30, 2002)
2000 40.7 (January 1, 2000--June 30, 2002)
2001 36.0 (January 1, 2001--June 30, 2002)
2002* 13.8 (January 1, 2002--June 30, 2002)
- ----------------
* For the six-month period ending June 30, 2002.
The foregoing chart illustrates that recovery rates tend in general to
increase over time as TERI seeks to collect on defaulted loans. However, there
can be no assurance that TERI's recovery rate for any future year will be
similar to the historical experience set forth above.
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 Net Cohort
Default 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 "Net Cohort Default Rate" refers to the total principal amount of
defaulted loans for which guarantee payments were made by TERI (net 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 the Net Cohort Default Rate provided
for TERI below. The following table sets forth the total loans guaranteed, total
defaults paid (net of recoveries) and the net cohort default rate as of June 30,
2002 for each of the periods referred to below; such information is not
guaranteed as to accuracy or completeness and is not to be construed as a
representation by either of the Sellers, the Depositor, the Master Servicer, any
of the Underwriters or any of their respective affiliates:
TOTAL NET DEFAULTS PAID
TOTAL LOANS FOR LOANS
COHORT GUARANTEED IN GUARANTEED IN
YEAR COHORT YEAR COHORT YEAR NET COHORT DEFAULT RATE
- ----------------------- ----------------------------- --------------------------------- ---------------------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
1997 $324,698 $14,541 4.48%
1998 303,292 7,626 2.51
1999 265,061 4,368 1.65
2000 239,565 1,970 0.82
2001 432,022 222 0.29
2002* 287,117 -- --
- ----------------
* For the six-month period ending June 30, 2002.
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The declining trend reflected above in the Net Cohort Default Rate
experienced by TERI can largely be attributed to the fact that for each
succeeding cohort year fewer loans guaranteed by TERI were in repayment as of
the end of June, 2002. 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 Net Cohort Default Rate of TERI
for any future year will be similar to the historical Net Cohort Default 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 certain loan
programs, including the TERI-Guaranteed Access Loans, but not including the
TERI-Guaranteed Fleet Loans. These segregated reserve loans are entitled to the
benefit of the segregated reserves. 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 loans
entitled to the benefit of those segregated reserves 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 TERI-Guaranteed Access Loans or that such amounts, if
available, will be sufficient to satisfy all existing guarantee obligations of
TERI with respect to loans entitled to the benefit of these segregated reserves.
KBUSA will assign to the Depositor and the Depositor will assign to the Trust
the portion of its respective rights under the agreement implementing these
segregated reserves that is attributable to such TERI-Guaranteed Access Loans.
On July 1, 2001 TERI and First Marblehead Corporation ("FMC"), an
education finance company, completed a purchase and sale agreement that provided
for FMC to acquire certain operating assets and services of TERI and to
establish a new subsidiary of FMC called First Marblehead Education Resources,
Inc.("FMER"). As part of this transaction, certain fixed assets and intangible
assets were sold by TERI to FMER. Approximately 168 current staff have been
transferred to FMER. TERI continues to be a provider of private student loan
guarantee services, education information and counseling services for young
people, parents and adult learners, targeting people from families where neither
parent is a college graduate, and a manager of national initiatives related to
college access and financing. FMER provides to TERI, under a master servicing
agreement, services including loan origination, customer service, default
prevention, default recovery, default processing and administrative services.
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
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approximately 29 people as of June 28, 2002. HICA is an indirect subsidiary of
SLM 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 and
six-month period referred to below; such information is not guaranteed as to
accuracy or completeness and is not to be construed as a representation by the
Sellers, the Depositor, KBUSA or any of the Underwriters:
CALENDAR YEAR PRIVATE LOANS INSURED BY YEAR
-------------------------------------- -------------------------------
(DOLLARS IN MILLIONS)
1997 $286
1998 267
1999 346
2000 577
2001 1,018
2002* 605
----------------
* For the six-month period ending June 30, 2002.
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 Ms. Vickie Eliason, Treasurer, 3900 West Technology Circle-Suite 7,
Sioux Falls, South Dakota 57106.
NON-GUARANTEED PRIVATE LOANS
As of the Statistical Cutoff Date, approximately 66.76% of the Group II
Initial Financed Student Loans are, and none of the Group I Student Loans are or
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 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 Private
Loans Under the Programs" and "The Financed Student Loan Pools--Characteristics
of the Key CareerLoan" in this Prospectus Supplement.
KEYCORP STUDENT LOAN TRUSTS
The following tables set forth the cumulative claims paid experience
with respect to guaranteed student loans and charge-offs experience with respect
to non-guaranteed student loans for all of the student loans securitized by
KBUSA and its affiliates through the various securitization trusts specified.
The data includes substantially all student loans originated or acquired by
KBUSA and its affiliates during these time periods, except FFELP loans for
undergraduate education and one private loan product whose primary use is for
grade school and high school education. The student loans selected for each
student loan trust were generally selected based on the expected graduation year
of each student. While the trusts are comprised predominately of one expected
graduation year, there are borrowers in each student loan trust who consolidated
their loans, left school early or graduated late and therefore did not graduate
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during the expected graduation year but are included under that graduation year
for purposes of the tables.
The tables below reflect only the past performance of each of the
securitization trusts indicated. The performance of a particular trust and the
student loans in such trust may be affected by a number of factors, including
the date when each borrower enters repayment, the number of loans in
forbearance, grace or deferment and the timing of when such loans entered
forbearance, grace or deferment, the particular mix of loan programs in that
trust, the underwriting standards at the time of origination of the related
student loans, the types of schools attended by the related borrowers, and
general economic conditions. As a result, potential investors in the Notes
should be aware that the performance of the Financed Student Loans owned by the
Trust might be substantially different from that of prior securitization trusts.
In particular, the Trust includes Financed Student Loans that have no available
prior performance history, including Rehabilitated Student Loans and Key
CareerLoans. As such, investors should not rely on these tables as predicators
of expected claims paying or charge-off rates, as the case may be, with respect
to the Financed Student Loans owned by the Trust.
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The table below presents the cumulative claims paid percentages by the
related federal guarantors with respect to FFELP loans that have been
securitized. The claims paid percentage does not reflect the charge-off of the
2% of the principal balance of each defaulted student loan originated after
October 1, 1993 that is not payable by the related federal guarantor.
CUMULATIVE CLAIMS PAID PERCENTAGES(1) BY SECURITIZATION TRUST AND ASSUMED GRADUATION DATE
FFELP STUDENT LOANS
TRUST
1993-A 1994-A 1994-B 1995-A 1995-B 1996-A 1997-1 1999-A 1999-B 2000-A 2000-B 2001-A
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
CUT-OFF DATE
5/12/93 1/1/94 9/1/94 1/1/95 10/1/95 9/1/96 9/1/97 1/1/99 9/1/99 6/1/00 9/1/00 9/1/01
CUMULATIVE CLAIMS GRADUATION DATE
PAID (ASSUMED)
THROUGH 1993 1993 1994 1994 1995 1996 1997 1998 1999 2000 2000 2001
MAY 31,
------- -----------------------------------------------------------------------------------------------------------------
1994 0.514% 0.273%
1995 2.272% 1.813% 0.579% 0.577%
1996 4.753% 4.380% 2.882% 2.723% 0.323%
1997 9.444% 7.124% 6.174% 5.635% 2.398% 0.257%
1998 11.261% 9.220% 8.184% 7.984% 4.625% 2.407% 0.169%
1999 12.553% 10.830% 9.907% 9.397% 6.171% 4.226% 1.892% 0.057%
2000 13.129% 11.338% 10.447% 10.031% 6.944% 5.158% 2.883% 1.154% 0.040%
2001 13.714% 12.262% 11.332% 11.004% 7.964% 6.417% 4.304% 2.644% 1.107% 0.205% 0.066%
2002 14.180% 12.911% 12.051% 11.761% 8.879% 7.261% 5.570% 3.990% 2.434% 1.401% 1.203% 0.216%
(1) The cumulative claims paid percentage is calculated by
dividing (x) the total dollar amount of claims paid including
accrued interest by the related federal student loan
guarantors on FFELP loans in the related trust through the
referenced May 31 of that year, by (y) the sum of (i) the
aggregate original principal balance of all FFELP loans in the
related trust, and (ii) related cumulative capitalized
interest, related consolidation and serial loan purchases,
related guarantee fee capitalization and other principal
adjustments in each case through the referenced May 31 of that
year, less (iii) the outstanding principal balance of all
FFELP loans in the related trust repurchased by related seller
or servicer through the referenced May 31 of that year.
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The table below presents the percentages of cumulative claims paid
percentages by the related private guarantors with respect to guaranteed private
student loans that have been securitized.
CUMULATIVE CLAIMS PAID PERCENTAGES(1) BY SECURITIZATION TRUST AND ASSUMED GRADUATION DATE
PRIVATE GUARANTEED STUDENT LOANS
TRUST
1993-A 1994-A 1994-B 1995-A 1995-B 1996-A 1997-1 1999-A 1999-B 2000-A 2000-B 2001-A
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
CUT-OFF DATE
5/12/93 1/1/94 9/1/94 1/1/95 10/1/95 9/1/96 9/1/97 1/1/99 9/1/99 6/1/00 9/1/00 9/1/01
CUMULATIVE CLAIMS GRADUATION DATE
PAID (ASSUMED)
THROUGH 1993 1993 1994 1994 1995 1996 1997 1998 1999 2000 2000 2001
MAY 31,
------- ----------------------------------------------------------------------------------------------------------------
1994 0.117% 0.120%
1995 3.955% 3.305% 0.327% 0.204%
1996 7.676% 6.454% 3.401% 3.186% 0.149%
1997 12.522% 9.546% 6.943% 7.624% 1.888% 0.100%
1998 14.668% 11.655% 10.067% 10.475% 5.563% 2.307% 0.082%
1999 16.195% 13.145% 12.146% 12.561% 8.492% 5.799% 2.248% 0.017%
2000 16.909% 14.554% 13.477% 13.797% 10.235% 8.722% 6.122% 1.364% 0.057%
2001 17.488% 15.345% 14.292% 14.609% 11.344% 10.019% 8.427% 4.470% 1.288% 0.402% 0.014%
2002 17.804% 15.786% 14.800% 15.282% 11.953% 11.032% 9.815% 6.204% 3.636% 2.174% 1.309% 0.881%
(1) The cumulative claims paid percentage is calculated by
dividing (x) the total dollar amount of claims paid including
accrued interest by the related private student loan
guarantors on guaranteed private student loans in the related
trust through the referenced May 31 of that year, by (y) the
sum of (i) the aggregate original principal balance of all
guaranteed private student loans in the related trust, and
(ii) related cumulative capitalized interest, related
consolidation and serial loan purchases, related guarantee fee
capitalization and other principal adjustments in each case
through the referenced May 31 of that year, less (iii) the
outstanding principal balance of all guaranteed private
student loans in the related trust repurchased by related
seller or servicer through the referenced May 31 of that year.
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The table below presents the cumulative gross charge-off percentages
(without regard to any subsequent recoveries) with respect to non-guaranteed
private student loans that have been securitized. A non-guaranteed private
student loan is generally charged-off after such student loan has become 180 or
more days delinquent.
CUMULATIVE GROSS CHARGE-OFF PERCENTAGES(1) BY SECURITIZATION TRUST AND ASSUMED
GRADUATION DATE
NON-GUARANTEED PRIVATE STUDENT LOANS
TRUST
1999-B 2000-A 2000-B 2001-A
------ ------ ------ ------
CUT-OFF DATE
9/1/99 6/1/00 9/1/00 9/1/01
CUMULATIVE GROSS GRADUATION DATE
CHARGE-OFFS THROUGH (ASSUMED)
1999 2000 2000 2001
MAY 31,
------- ---------------------------------------------
2000 0.481%
2001 1.929% 0.636% 0.324%
2002 3.495% 1.919% 4.278% 0.696%
(1) The cumulative gross charge-off percentage is calculated by
dividing (x) the total dollar amount of non-guaranteed private
student loans charged-off in the related trust (not including
for such purpose any subsequent recoveries on the related
non-guaranteed private student loans) through the referenced
May 31 of that year, by (y) the sum of (i) the aggregate
original principal balance of all non-guaranteed private
student loans in the related trust, and (ii) related
cumulative capitalized interest, related consolidation and
serial loan purchases, and other principal adjustments in each
case through the referenced May 31 of that year, less (iii)
the outstanding principal balance of all non-guaranteed
private student loans in the related trust repurchased by the
related seller or servicer through the referenced May 31 of
that year.
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The table below presents the cumulative net charge-off percentages
(which reflects all subsequent recoveries) for non-guaranteed private student
loans that have been securitized. Recoveries are sums received by a trust from
borrowers after the related student loans have been charged-off. A
non-guaranteed private student loan is generally charged-off after such student
loan has become 180 or more days delinquent.
CUMULATIVE NET CHARGE-OFF PERCENTAGES(1) BY SECURITIZATION TRUST AND ASSUMED
GRADUATION DATE
NON-GUARANTEED PRIVATE STUDENT LOANS
TRUST
1999-B 2000-A 2000-B 2001-A
------ ------ ------ ------
CUT-OFF DATE
9/1/99 6/1/00 9/1/00 9/1/01
Cumulative NET GRADUATION DATE
CHARGE-OFFS THROUGH (ASSUMED)
1999 2000 2000 2001
MAY 31,
------- ---------------------------------------------
2000 0.475%
2001 1.859% 0.631% 0.321%
2002 3.236% 1.825% 4.242% 0.694%
(1) The cumulative net charge-off percentage is calculated by
dividing (x) (i) the total dollar amount of non-guaranteed
private student loans charged-off in the related trust, less
(ii) any subsequent recoveries on the related non-guaranteed
private student loans, in each case through the referenced May
31 of that year, by (y) the sum of (i) the aggregate original
principal balance of all non-guaranteed private student loans
in the related trust, and (ii) related cumulative capitalized
interest, related consolidation and serial loan purchases, and
other principal adjustments in each case through the
referenced May 31 of that year, less (iii) the outstanding
principal balance of all non-guaranteed private student loans
in the related trust repurchased by the related seller or
servicer through the referenced May 31 of that year.
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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
as of September 1, 2002, between the Trust and the Indenture Trustee (the
"Indenture"). The Certificates will be issued to the Depositor, or its
designated affiliate, 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. Only the Notes are offered by this Prospectus
Supplement. Any information presented in this Prospectus Supplement relating to
the Certificates is for informational purposes only to provide for a better
understanding of the Notes.
The Class I-A-1 Notes, the Class I-A-2 Notes (the "Group I Class A
Notes"), the Class II-A-1 Notes, the Class II-A-2 Notes (the "Group II Class A
Notes," and with respect to each group the "Class A Notes"), and the Class I-B
Notes (each a "Class") will initially be represented by one or more Notes
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 Notes 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 Notes. 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 to
actions by Noteholders 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 Cede, 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" 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 Class of Notes and the Student Loan Rate for the related
group of Financed Student Loans (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
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Date will generally be funded from Available Funds related to each group of
Notes and amounts on deposit in the related Reserve Account and, under certain
limited circumstances, the related Pre-Funding Account remaining after the
distribution of the portion of the Master Servicing Fee allocated to the related
group of Financed Student Loans for each of the two immediately preceding
Monthly Servicing Payment Dates and of the portion of the Master Servicing Fee
and the Administration Fee allocated to the related group of Financed Student
Loans, and, with respect to the Group II Notes, the quarterly premium owing to
the Securities Insurer. If such sources are also insufficient to pay the sum of
the related Noteholders' Interest Distribution Amount with respect to the
related Class A Notes of either group of Notes for such Distribution Date and
any Trust Swap Payment Amount with respect to the related Interest Rate Swap for
such group of Notes, such shortfall will be allocated pro rata (x) to the
related Class A Noteholders (based upon the total amount of interest then due on
each Class of Class A Notes of such group) and (y) to the Swap Counterparty
(based on the Trust Swap Payment Amount due to the Swap Counterparty with
respect to the related Interest Rate Swap on such Distribution Date). If such
sources are insufficient to pay the sum of the related Noteholders' Interest
Distribution Amount with respect to the Class I-B Notes for such Distribution
Date, such shortfall will be allocated to the Class I-B Noteholders. With
respect to the Group II Notes only, the Group II Notes Guaranty Insurance Policy
will unconditionally guarantee the payment of the related Noteholders' Interest
Distribution to the Group II Noteholders on each Distribution Date.
In addition, with respect to the Group I Notes only, a "Subordinate
Note Interest Trigger" will have occurred if on the last day of any Collection
Period, the outstanding principal amount of the Group I Senior Notes exceeds the
sum of the Group I Pool Balance, plus the balance of the Group I Pre-Funding
Account and the Group I Reserve Account. Such Subordinate Note Interest Trigger
will remain in effect for so long as the outstanding principal amount of the
Group I Senior Notes exceeds the sum of the Group I Pool Balance plus the
balance of the Group I Pre-Funding Account and the Group I Reserve Account. The
effect of the occurrence and continuance of a Subordinate Note Interest Trigger
is such that on each related Distribution Date, the Principal Distribution
Amount with respect to the Group I Notes must be paid in full to the Group I
Senior Noteholders before any payments of interest are made to the Group I
Subordinate Noteholders.
"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 September
1, 2002 and ending on January 31, 2003).
"Formula Rate" means for any Class of Notes, the applicable Investor
Index plus the applicable Margin.
"Investor Index" means Three Month LIBOR (determined as described under
"--Determination of LIBOR" below).
With respect to each Class of Notes and the initial Interest Period,
interest will accrue during the period from the Closing Date to, but excluding,
November 27, 2002, based on a blended rate of LIBOR as determined on the initial
LIBOR Determination Date and for the period from November 27, 2002 to but
excluding February 27, 2003 based on Three-Month
S-91
LIBOR as determined on the second business day prior to November 27, 2002. See
"--Determination of LIBOR" below.
The "Margin" for each Class of Notes is 0.06% for the Class I-A-1
Notes, 0.19% for the Class I-A-2 Notes, 0.70% for the Class I-B Notes, 0.13% for
the Class II-A-1 Notes, and 0.40% for the Class II-A-2 Notes.
The "Student Loan Rate" for any Class of Notes 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, (i) the numerator of which is
equal to Expected Interest Collections with respect to the related group of
Financed Student Loans for the Collection Period relating to such Interest
Period, plus any Net Trust Swap Receipt actually received by the Trust with
respect to the Interest Rate Swap related to such group of Financed Student
Loans and the related Collection Period, less the sum of the related Master
Servicing Fees, the related Administration Fees, and the premiums due to the
Securities Insurer (with respect to the Group II Student Loans only) and payable
on the related Distribution Date and any related Master Servicing Fees paid on
the two preceding Monthly Servicing Payment Dates during the related Collection
Period, minus any Net Trust Swap Payment due to the Swap Counterparty with
respect to the Interest Rate Swap related to such group of Financed Student
Loans for the related Collection Period, and (ii) the denominator of which is
the outstanding principal balance of the related group of Notes as of the first
day of such Interest Period.
"Expected Interest Collections" means, with respect to each group of
Student Loans and any Collection Period, the sum of
- the amount of interest accrued, net (in the case of the Group
I Student Loans) 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),
- 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 Group I Student Loans only, and
- Investment Earnings for such Collection Period.
To the extent the interest rate during any Interest Period for any
Class of Notes calculated on the basis of the related Formula Rate exceeds the
related Student Loan Rate, the Cap Provider will be obligated under the related
Interest Rate Cap to pay the amount of the excess (with respect to Group I
Notes, the "Group I Noteholders' Interest Index Carryover" and with respect to
Group II Notes, the "Group II Noteholders' Interest Index Carryover" and in
either case, the "Noteholders' Interest Index Carryover"). If the Cap Provider
defaults on its obligation under either of the Interest Rate Caps or if an
Interest Rate Cap is terminated in accordance with its terms, any related
Noteholders' Interest Index Carryover (together with the unpaid portion of any
such Noteholders' Interest Index Carryover from prior Distribution Dates and
interest accrued thereon (1) in the case of the Class A Notes of the applicable
group of Notes, at the weighted average of the Formula Rate for the related
Class A Notes, and (2) with respect to the Group I Interest Rate Cap, in the
case of the Class I-B Notes, at the Formula Rate for the Class I-B
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Notes) will be paid on such Distribution Date or any subsequent Distribution
Date on a subordinated basis only 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 Group I or Group II
Noteholders' Interest Index Carryover due with respect to the related Class A
Notes as a result of such default or termination, as the case may be, that may
exist on any Distribution Date following a default by the Cap Provider or a
termination of the related Interest Rate Cap, as applicable, will be payable to
holders of the Class A Notes in the related group of Notes on that Distribution
Date on a pro rata basis, based on the amount of the Group I or Group II
Noteholders' Interest Index Carryover then owing with respect to the related
Class A Notes, and on any succeeding Distribution Dates, solely out of the
amount of Group I or Group II Available Funds, as applicable, remaining on any
such Distribution Date after distribution of the amounts having a more senior
payment priority as described under "Description of the Transfer and Servicing
Agreements--Distributions" herein. Any Group I Noteholders' Interest Index
Carryover due on the Class I-B Notes that may exist on any Distribution Date
following a default by the Cap Provider with respect to the Group I Interest
Rate Cap or termination of the Group I Interest Rate Cap, as applicable, will be
payable to the holders of the Class I-B Notes on that Distribution Date and on
any succeeding Distribution Dates, solely out of the amount of Group I Available
Funds remaining on any such Distribution Date after distribution of any Group I
Noteholders' Interest Index Carryover on the Group I Class A Notes on such
Distribution Date. No amounts on deposit in the related Reserve Account or the
related Pre-Funding Account will be available to pay any Noteholders' Interest
Index Carryover. Any amount of Noteholders' Interest Index Carryover due with
respect to the related Notes remaining after distribution of all related
Available Funds on the applicable Final Maturity Date will never become due and
payable and will be discharged on such date. The Group II Notes Guaranty
Insurance Policy does not guarantee payment of any Group II Noteholders'
Interest Index Carryover or the obligations of the Cap Provider under the Group
II Interest Rate Cap.
Distributions of Principal. Principal payments will be made to the
holders of the Notes of each group on each Distribution Date in an amount
generally equal to the related Principal Distribution Amount for such
Distribution Date, until the principal balance of the related group of Notes is
reduced to zero. Principal payments on each group of Notes will generally be
derived from related Available Funds remaining after the distribution of the
amounts set forth in "Description of the Transfer and Servicing
Agreements--Distributions" herein.
In addition, with respect to each group of Notes, in the event that (1)
there is a decision by the related Noteholders to exercise the related Put
Option, but the Indenture Trustee is unable to exercise such Put Option due to
the Minimum Acceptable Put Option Exercise Price being greater than the Put
Option Exercise Price (plus all amounts then on the deposit in the Group I or
Group II Reserve Account, as applicable), or (2) the Put Option Provider
defaults on the related Put Option and the related group of Financed Student
Loans is not sold pursuant to the auction process described under "Description
of the Transfer and Servicing Agreements--The Put Options and Auction Sales,"
with respect to any Distribution Date occurring on or after the November, 2012
Distribution Date, the Specified Collateral Balance with respect to such group
of Financed Student Loans will be reduced to zero and all amounts on deposit in
the related sub-account of the Collection Account (after giving effect to all
prior distributions on such Distribution Date including the reinstatement of the
balance of the related Reserve Account to the related Specified
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Reserve Account Balance on such Distribution Date) will be distributed (x) with
respect to the Group I Notes, first to the Class I-A-1 Noteholders, second, to
the Class I-A-2 Noteholders, and third, to the Class I-B Noteholders, and (y)
with respect to the Group II Notes, first to the Class II-A-1 Noteholders, and
second, to the Class II-A-2 Noteholders, in each case as principal until the
outstanding principal balance of each such Class of Notes has been reduced to
zero. See "Description of the Transfer and Servicing Agreements--Termination"
herein. Except as described below, the Group II Notes Guaranty Insurance Policy
does not guaranty payment of the Group II Principal Distribution Amount on any
Distribution Date.
GROUP I NOTES. Principal payments on the Group I Notes will be applied
on each Distribution Date in the amount of the Group I Principal Distribution
Amount: (a) prior to the Stepdown Date, or after the Stepdown Date if a
Subordinate Note Principal Trigger has occurred and is continuing, the Group I
Principal Distribution Amount for the Group I Notes will be payable solely to
the Group I Senior Notes in sequential order beginning with the Class I-A-1
Notes until paid in full, then to the Class I-A-2 Notes until paid in full, and
then to the Class I-B Notes; and (b) after the Stepdown Date and so long as no
Subordinate Note Principal Trigger has occurred and is continuing, the Senior
Group I Percentage of the Principal Distribution Amount for the Group I Notes
will be payable to the Group I Senior Notes (in the same order of priority as
described in the preceding sentence) and the Subordinate Percentage of the
Principal Distribution Amount for the Group I Notes will be payable to the Class
I-B Notes. The aggregate outstanding principal amount of each Class of Group I
Notes will be payable in full on the Final Maturity Date for that Class of Group
I Notes. The Final Maturity Date for the Class I-A-1 Notes is the Distribution
Date in May 2010 (the "Class I-A-1 Notes Final Maturity Date"), the Final
Maturity Date for the Class I-A-2 Notes is the Distribution Date in August 2031
(the "Class I-A-2 Notes Final Maturity Date") and the Final Maturity Date for
the Class I-B Notes is the Distribution Date in November 2032 (the "Class I-B
Notes Final Maturity Date"). On the Final Maturity Date for each Class of Group
I Notes, amounts on deposit in the Group I Reserve Account, if any, will be
available, if necessary, to be applied to reduce the principal balance of such
Class of Group I Notes to zero. Although the maturity of certain of the Group I
Financed Student Loans will extend well beyond the Final Maturity Date of the
Class I-B Notes, the actual date on which the aggregate outstanding principal
and accrued interest of any Class of Group I Notes are paid may be earlier than
the Final Maturity Date for the related Class of Group I Notes, based on a
variety of factors. See "The Financed Student Loan Pools--Maturity and
Prepayment Assumptions" herein. In addition, prior to the Distribution Date on
which the principal balance of the Group I Notes equals the sum of the Group I
Pool Balance and amounts on deposit in the Group I Pre-Funding Account as of the
last day of the related Collection Period (the "Group I Parity Date"), the
amount on deposit in the Group I Reserve Account will be used to pay principal
on the Group I Notes only to the extent the amount by which the Group I Pool
Balance as of the last day of the second preceding Collection Period (or in the
case of the first Distribution Date, as of the Cutoff Date) minus the Group I
Pool Balance as of the last day of the related Collection Period exceeds the
Group I Available Funds remaining to be distributed on the Group I Notes as
principal as set forth in "Description of the Transfer and Servicing
Agreements--Distributions" herein. On and after the Group I Parity Date, amounts
on deposit in the Group I Reserve Account will be used to pay principal to the
extent that any Group I Available Funds remaining to be distributed on the Group
I Notes as principal as set forth in "Description of the Transfer and Servicing
Agreements--Distributions" herein is less than the Noteholders' Principal
Distribution Amount for the Group I Notes for such Distribution Date.
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However, after the occurrence of an Event of Default relating to the
Group I Notes (other than an Event of Default resulting from the breach of a
representation, warranty or other covenant of the Trust) or an acceleration of
the Group I Notes, principal will be paid on the Class I-A-1 and Class I-A-2
Notes on a pro rata basis (based on their outstanding principal balances) and
not sequentially, and no principal will be paid to the holders of the Class I-B
Notes until all Group I Senior Notes have been paid in full.
The "Stepdown Date" for the Group I Notes will be the earlier of (i)
the first date on which no Group I Senior Notes remain outstanding or (ii) the
fifth anniversary of the Closing Date. The "Senior Percentage" of the Group I
Notes at any time equals the percentage equivalent of a fraction, the numerator
of which is the aggregate principal balance of the Group I Senior Notes, and the
denominator of which is the sum of the aggregate principal balance of all the
Group I Notes. The "Subordinate Percentage" for the Group I Notes is equal to
100% minus the Senior Percentage of the Group I Notes.
A "Subordinate Note Principal Trigger" with respect to the Group I
Subordinate Notes will occur and be continuing if a Subordinate Note Interest
Trigger occurs and is continuing with respect to the Group I Subordinate Notes,
In addition, a Subordinate Note Principal Trigger with respect to the Group I
Subordinate Notes will occur if the Cumulative Default Ratio for the Group I
Student Loans exceeds 25% as of the end of the related Collection Period. The
"Cumulative Default Ratio" means the ratio of the aggregate Group I Pool Balance
with respect to which default claims have been filed, to the aggregate Group I
Pool Balance ever included in the Group I Student Loans. If a Subordinate Note
Principal Trigger is in effect, no principal payments will be made with respect
the Group I Subordinate Notes until no Group I Senior Notes remain outstanding.
Instead, all principal payments with respect to the Group I Notes will be
allocated to the Group I Senior Notes; provided, however, if on a subsequent
Distribution Date a Subordinate Note Interest Trigger is no longer in effect and
the Cumulative Default Ratio for the Group I Student Loans does not exceed 25%
then a Subordinate Note Principal Trigger will no longer be in effect.
GROUP II NOTES. Principal payments on the Group II Notes will be
applied on each Distribution Date in the amount of the Group II Principal
Distribution Amount, first, to the principal balance of the Class II-A-1 Notes
until the principal balance is reduced to zero and then to the principal balance
of the Class II-A-2 Notes until the principal balance is reduced to zero. The
aggregate outstanding principal amount of each Class of Group II Notes will be
payable in full on the Final Maturity Date for that Class of Group II Notes. The
Final Maturity Date for the Class II-A-1 Notes is the Distribution Date in May
2013 (the "Class II-A-1 Notes Final Maturity Date") and the Final Maturity Date
for the Class II-A-2 Notes is the Distribution Date in August 2031 (the "Class
II-A-2 Notes Final Maturity Date"). On the Final Maturity Date for each Class of
Group II Notes, amounts on deposit in the Group II Reserve Account, if any, will
be available, if necessary, to be applied to reduce the principal balance of
such Class of Group II Notes to zero. The Group II Notes Guaranty Insurance
Policy will guarantee payment of the unpaid principal amount of the Class II-A-1
Notes on the Class II-A-1 Notes Final Maturity Date and the Class II-A-2 Notes
on the Class II-A-2 Notes Final Maturity Date. Although the maturity of certain
of the Group II Financed Student Loans will extend well beyond the Final
Maturity Date of the Class II-A-2 Notes, the actual date on which the aggregate
outstanding principal and accrued interest of any Class of Group II Notes are
paid may be earlier than the Final Maturity Date for the related Class
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of Group II Notes, based on a variety of factors. See "The Financed Student Loan
Pools--Maturity and Prepayment Assumptions" herein. In addition, prior to the
Distribution Date on which the principal balance of the Group II Notes equals
the sum of the Group II Pool Balance and amounts on deposit in the Group II
Pre-Funding Account as of the last day of the related Collection Period (the
"Group II Parity Date"), the amount on deposit in the Group II Reserve Account
will be used to pay principal on the Group II Notes only to the extent the
amount by which the Group II Pool Balance as of the last day of the second
preceding Collection Period (or in the case of the first Distribution Date, as
of the Cutoff Date) minus the Group II Pool Balance as of the last day of the
related Collection Period exceeds the Group II Available Funds remaining to be
distributed on the Group II Notes as principal as set forth in "Description of
the Transfer and Servicing Agreements--Distributions" herein. On and after the
Group II Parity Date, amounts on deposit in the Group II Reserve Account will be
used to pay principal to the extent that any Group II Available Funds remaining
to be distributed on the Group II Notes as principal as set forth in
"Description of the Transfer and Servicing Agreements--Distributions" herein is
less than the Noteholders' Principal Distribution Amount for the Group II Notes
for such Distribution Date.
However, after the occurrence of an Event of Default relating to the
Group II Notes (other than an Event of Default resulting from the breach of a
representation, warranty or other covenant of the Trust) or an acceleration of
the Group II Notes, principal will be paid on the Class II-A-1 and Class II-A-2
Notes on a pro rata basis (based on their outstanding principal balances) and
not sequentially.
INDENTURE
The Indenture Trustee. JPMorgan Chase Bank, a New York banking
corporation, will be the Indenture Trustee under the Indenture. KBUSA maintains
normal commercial banking relations with the Indenture Trustee.
Events of Default; Rights upon Event of Default. Upon an Event of
Default under the Indenture, a majority of the Group I Senior Noteholders (until
such time as all Group I Senior Notes have been paid in full, and then a
majority of the Group I Subordinate Noteholders) will have the right to exercise
remedies on behalf of all the Group I Noteholders (the "Group I Controlling
Noteholders") and the Securities Insurer as the deemed holder of 100% of the
Group II Notes (unless a Securities Insurer Default has occurred and is
continuing, and then a majority of the Group II Noteholders) will have the
rights of the Group II Noteholders set forth in the Prospectus under
"Description of the Notes--The Indenture--Events of Default; Rights upon Event
of Default." In addition, the occurrence and declaration of an event of default
under the insurance agreement, dated as of September 1, 2002 among the
Securities Insurer, the Master Servicer, the Seller, the Administrator, the
Trust, the Depositor, the Eligible Lender Trustee and the Indenture Trustee (the
"Insurance Agreement") will also be an Event of Default under the Indenture, but
only with respect to the Group II Notes. The Indenture Trustee at the direction
of the Group I Controlling Noteholders or the Securities Insurer (unless a
Securities Insurer Default has occurred and is continuing, then a majority of
the Group II Noteholders) may sell the Group I or Group II Financed Student
Loans, as applicable, subject to certain conditions set forth in the Indenture
following an Event of Default, including a default in the payment of any
principal when due or a default for three business days or more in the payment
of any interest on any Note
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in either group of Notes (to the extent described in the following paragraph).
See "Description of the Notes--The Indenture--Events of Default; Rights upon
Event of Default" in the Prospectus.
IN ADDITION, THE FAILURE TO PAY THE RELATED NOTEHOLDERS' PRINCIPAL
DISTRIBUTION AMOUNT WITH RESPECT TO ANY OF THE GROUP I NOTES ON ANY DISTRIBUTION
DATE WILL NOT RESULT IN THE OCCURRENCE OF AN EVENT OF DEFAULT UNTIL THE CLASS
I-A-1 NOTES FINAL MATURITY DATE, IN THE CASE OF THE CLASS I-A-1 NOTES, THE CLASS
I-A-2 NOTES FINAL MATURITY DATE, IN THE CASE OF THE CLASS I-A-2 NOTES, OR THE
CLASS I-B NOTES FINAL MATURITY DATE, IN THE CASE OF THE CLASS I-B NOTES.
SIMILARLY, THE FAILURE TO PAY THE RELATED NOTEHOLDERS' PRINCIPAL DISTRIBUTION
AMOUNT WITH RESPECT TO ANY OF THE GROUP II NOTES ON ANY DISTRIBUTION DATE WILL
NOT RESULT IN THE OCCURRENCE OF AN EVENT OF DEFAULT UNTIL THE CLASS II-A-1 NOTES
FINAL MATURITY DATE, IN THE CASE OF THE CLASS II-A-1 NOTES, OR THE CLASS II-A-2
NOTES FINAL MATURITY DATE, IN THE CASE OF THE CLASS II-A-2 NOTES. ALSO, THE
FAILURE TO PAY ANY NOTEHOLDERS' INTEREST INDEX CARRYOVER AS A RESULT OF
INSUFFICIENT RELATED AVAILABLE FUNDS WILL NOT RESULT IN THE DECLARATION OF AN
EVENT OF DEFAULT.
DETERMINATION OF LIBOR
Pursuant to the Sale and Servicing Agreement, the Administrator, in its
capacity as calculation agent, will determine the Investor Index, which except
for the first part of the initial Interest Period (from the Closing Date to but
excluding November 27, 2002), shall be Three-Month LIBOR, for purposes of
calculating the interest due on each Class of the Notes and any related
Noteholders' Interest Index Carryover, 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, November 27, 2002
and as determined on the second business day prior to November 27, 2002 for the
period from November 27, 2002 to but excluding February 27, 2003 (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.
For the period of the initial Interest Period commencing on the Closing
Date, to but excluding November 27, 2002, only, the Investor Index applicable
for each Class of Notes will be a blended rate of two-month LIBOR and
Three-Month LIBOR as determined as of the first LIBOR Determination Date.
"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
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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 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) or such comparable
page on a comparable service.
"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.
CERTIFICATES
On the Closing Date, the Trust will issue a single class of
Certificates to the Depositor or an affiliate thereof as its designee. The
Certificates will represent the residual interest in the Trust's assets. The
Certificates will not have a principal balance and will not bear interest. On
each Distribution Date, the Certificates will not be entitled to any
distributions with respect to Group I or Group II Available Funds, as
applicable, until all amounts owed to the Group I Noteholders, the Group II
Noteholders, the Securities Insurer, the Swap Counterparty and the Cap Provider
have been paid. Once a distribution has been made in respect of the
Certificates, it will not be available to pay any of the Noteholders.
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 as of September
1, 2002 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; the KBUSA Student Loan Transfer Agreement; the QSPE Student Loan
Transfer Agreement; 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.
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SALE OF FINANCED STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
On or prior to the Closing Date, each Seller will sell and assign to
the Depositor, without recourse, its respective entire interest in the Initial
Financed 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,
if any, pursuant to the related Student Loan Transfer Agreement. As part of the
KBUSA Student Loan Transfer Agreement, KBUSA will make certain representations
and warranties concerning the KBUSA Student Loans. QSPE will not make any
representations or warranties concerning the QSPE Student Loans, which will be
purchased on a "where is, as is" basis. In lieu thereof, the Master Servicer
will make certain representations and warranties with respect to the QSPE
Student Loans in the Sale and Servicing Agreement.
On or prior to the Closing Date, the Depositor 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 the Cutoff Date 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 by the Depositor to the purchase of the Financed
Student Loans and the Assigned Rights from the Sellers, to the deposit of the
Pre-Funded Amounts in the Pre-Funding Accounts and the Reserve Account Initial
Deposits to the Reserve Accounts and to pay certain amounts owed to the
Securities Insurer, the Put Option Provider, the Swap Counterparty and the Cap
Provider. See "Use of Proceeds," and "--Additional Fundings" below for a
description of the application of funds on deposit in each of the Pre-Funding
Accounts during the Funding Period.
In the Sale and Servicing Agreement, the Depositor will make certain
representations and warranties with respect to the KBUSA Student Loans to the
Trust for the benefit of the holder of the Certificates (the
"Certificateholder") and the Noteholders and will have certain cure, repurchase
and reimbursement obligations with respect to any breaches (or the Depositor
will cause KBUSA to fulfill these obligations pursuant to the terms of the KBUSA
Transfer and Servicing Agreement). Also, in the Sale and Servicing Agreement, in
consideration of being appointed master servicer with respect to the QSPE
Student Loans, the Master Servicer will make certain representations and
warranties with respect to the QSPE Student Loans to the Trust for the benefit
of the Certificateholder 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 (a) each Subsequent Student Loan will be an
amount equal to 100% with respect to each of the Group I Student Loans, or 100%,
with respect to each of the Group II Student Loans, respectively, and (b) each
Other Student Loan will be an amount equal to 100%, with respect to each of the
Group I Student Loans, or 100%, with respect to each of the Group II Student
Loans, respectively, in each case of the aggregate principal balance thereof as
of its related 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 the related
Subsequent Cutoff Date, in each case expected to be capitalized upon
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entry into repayment and any lost Interest Subsidy Payments and Special
Allowance Payments with respect thereto.
To assure uniform quality in servicing and to reduce administrative
costs, each Sub-Servicer will be appointed custodian on behalf of the Indenture
Trustee and the Trust of the promissory notes representing the Financed Student
Loans which such Sub-Servicer is servicing on behalf of the Master Servicer.
State Street Bank and Trust Company will be appointed custodian on behalf of the
Indenture Trustee and the Trust of the promissory notes representing the
Financed Student Loans that are Key CareerLoans which the Master Servicer is
servicing directly. The Depositor's, each Seller's, the Master Servicer's and
each Sub-Servicer's 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 separate segregated
accounts as follows: the Collection Account (which shall have two sub-accounts,
one for each group of Financed Student Loans), the Group I Pre-Funding Account
(which shall consist of two sub-accounts, the Group I Subsequent Loan
Sub-Account and the Group I Other Loan Sub-Account), the Group II Pre-Funding
Account (which shall consist of two sub-accounts, the Group II Subsequent Loan
Sub-Account and the Group II Other Loan Sub-Account), the Group I Escrow
Account, the Group II Escrow Account, the "Group I Cap Account," the "Group II
Cap Account" (collectively with the Group I Cap Account, the "Cap Accounts"),
the Group I Reserve Account and the Group II Reserve Account. Each such account
will be established in the name of the Indenture Trustee on behalf of the
Noteholders and the Trust.
Funds in the Collection Account, the Pre-Funding Accounts, the Escrow
Accounts, the Cap Accounts and the Reserve Accounts (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 Securities Insurer,
and the nationally recognized statistical rating agencies rating the Notes (each
a "Rating Agency" and together, 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 KBUSA or its affiliates, or
trusts originated by KBUSA or its affiliates, or shares of investment companies
for which KBUSA 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
applicable sub-account of 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
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(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
and is acceptable to the Securities Insurer, (c) an account or accounts
maintained with KeyBank National Association, so long as KeyBank National
Association's long-term unsecured debt rating shall be at least "A" from S&P and
"A1" from Moody's, and KeyBank National Association's short-term deposit or
short-term unsecured debt rating shall be at least "A-1" from S&P and "P-1" from
Moody's, or (d) any other account that is acceptable to the Rating Agencies and
the Securities Insurer. Any such accounts may be maintained with KBUSA 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, KBUSA or an affiliate thereof (but only if
all rights of set-off have been waived), 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 Securities Insurer and the Rating Agencies 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 applicable sub-account of the related Pre-Funding Account and the related
Escrow Account on Subsequent Transfer Dates during the Funding Period consisting
of amounts paid to the Depositor to acquire Subsequent Student Loans and Other
Student Loans from KBUSA as of the applicable Subsequent Cutoff Dates, to pay
capitalized interest on the related Financed Student Loans, and to pay Fee
Advances as provided in the Sale and Servicing Agreement.
On the Closing Date, the Depositor will deposit approximately
$38,000,000 with respect to the Group I Notes (the "Group I Pre-Funded Amount")
into the Group I Pre-Funding Account from the proceeds of the sale of the Group
I Notes, and approximately $60,000,000 with respect to the Group II Notes (the
"Group II Pre-Funded Amount") into the Group II Pre-Funding Account from the
proceeds of the sale of the Group II Notes. Approximately $30,000,000 of the
Group I Pre-Funded Amount will be allocated to the Group I Subsequent Loan
Sub-Account to be used exclusively for the purchase of Group I Subsequent
Student Loans, and approximately $35,000,000 of the Group II Pre-Funded Amount
will be allocated to the Group II Subsequent Loan Sub-Account to be used
exclusively for the purchase of Group II Subsequent Student Loans. The Trust
intends to use the funds on deposit in the Subsequent Student Loan Pre-Funding
Sub-Accounts to acquire Subsequent Student Loans on or prior to the Special
Determination Date. The remaining $8,000,000 and $25,000,000 will be deposited
into the Group I Other Loan Sub-Account and Group II Other Loan Sub-Account,
respectively, to be used for the purchase of Other Student Loans during the
Funding Period.
All Additional Student Loans to be acquired by the Depositor on each
Subsequent Transfer Date shall be purchased from KBUSA or QSPE, as applicable,
pursuant to the related Student Loan Transfer Agreement and the related
Subsequent Transfer Agreement. Any
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Additional Student Loan will be a Group I Student Loan if it is a Financed
Federal Loan or will be a Group II Student Loan if it is a Financed Private
Loan.
Funds on deposit in the Other Student Loan Pre-Funding Sub-Account of
each related Pre-Funding Account 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 related Escrow Account, to purchase from the
Depositor, for an amount equal to 100% of the aggregate principal balance
thereof plus accrued interest (to the extent capitalized or to be capitalized),
Other Student Loans made by KBUSA to those eligible borrowers who have Student
Loans that are part of the related pool of Initial Financed Student Loans as of
the Statistical 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--The Federal
Consolidation Loan Program" and "--Description of Private Loans Under the
Programs--Private Consolidation Loans" in the Prospectus. The Depositor will
acquire such Other Student Loans from the Sellers pursuant to the terms of the
applicable Student Loan Transfer Agreement and the applicable Subsequent
Transfer Agreement.
The Depositor expects that the total amount of Additional Fundings from
the Pre-Funding Accounts will approximate 100% of the Initial Pre-Funded Amounts
by the last day of the Collection Period preceding the November, 2004
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 amounts on deposit in either the Group I or Group II
Subsequent Loan Sub-Account are $10,000,000 or less, the Indenture Trustee, or
the Administrator on its behalf, will transfer such amounts to the Group I or
Group II Other Loan Sub-Account, as applicable; or if the amount in either
sub-account is greater than $10,000,000, the Indenture Trustee, or the
Administrator on its behalf, will distribute such amounts to each Class of
Notes, pro rata, based on the initial principal balance of each Class of Notes
in the related group of Notes. In addition, if the Group I or Group II
Pre-Funded Amount has not been reduced to zero by the end of the Funding Period,
any amounts remaining in the Group I or Group II Pre-Funding Account will be
deposited into the related sub-account of the Collection Account for
distribution on the immediately following Distribution Date. Such reduction in
the Group I or Group II Pre-Funded Amount will result in a corresponding
increase in the amount of principal distributable to the Group I or Group II
Notes, as applicable, on such Distribution Date.
The Group I and Group II Pre-Funded Amounts will also be available on
each Monthly Servicing Payment Date to cover any shortfalls in payments of the
Master Servicing Fee with respect to the Group I and Group II Student Loans, and
on each Distribution Date to fund any related Interest and Expense Draws and
related Realized Loss Draws, each with respect to the related group of Notes, to
the extent funds on deposit in the Group I or Group II Reserve Account, as
applicable, are insufficient to cover such amounts. Amounts withdrawn from
either of the Pre-Funding Accounts 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 Pools--General" herein, the obligation to purchase any Additional Student
Loan by the Eligible Lender Trustee on behalf of the Trust is subject to the
following conditions, among others:
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(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) neither the Depositor nor the applicable Seller will select
such Additional Student Loan in a manner that it believes is
adverse to the interests of the related Noteholders, the
Securities Insurer (with respect to Additional Student Loans
that will become Group II Student Loans) or the Swap
Counterparty; and
(c) the Depositor and the applicable Seller will deliver certain
opinions of counsel to the Indenture Trustee, the Securities
Insurer (with respect to Additional Student Loans that will
become Group II Student Loans), the Swap Counterparty 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 applicable Seller during the Funding Period (each, a "Subsequent Transfer
Date"), the applicable Seller will sell and assign, without recourse, to
Depositor, and the Depositor will sell and assign, without recourse, to the
Eligible Lender Trustee on behalf of the Trust, its respective entire interest
in Other Student Loans made or, with respect to Subsequent Student Loans, owned
during the period preceding the applicable Subsequent Transfer Date, as of the
date specified in the applicable Subsequent Transfer Agreements to be delivered
on such Subsequent Transfer Date (each, a "Subsequent Cutoff Date"). Subject to
the satisfaction of the foregoing conditions, KBUSA or QPSE, as the case may be,
will convey the Additional Student Loans to the Depositor, and the Depositor
will convey the Additional Student Loans to the Eligible Lender Trustee on
behalf of the Trust on each such Subsequent Transfer Date pursuant to the
related Student Loan Transfer Agreement, the Sale and Servicing Agreement and
the applicable Subsequent Transfer Agreement (one between either KBUSA or QPSE,
as the case may be, and the Depositor, and the other between the Depositor and
the Eligible Lender Trustee on behalf of the Trust) (each a "Subsequent Transfer
Agreement") executed by KBUSA or QPSE, as the case may be, the Depositor, the
Master Servicer, the Eligible Lender Trustee and the Administrator, as
applicable, on such Subsequent Transfer Date. Each such Subsequent Transfer
Agreement will include as an exhibit a schedule identifying each Additional
Student Loan transferred on such Subsequent Transfer Date. Upon such conveyance
of Additional Student Loans to the Eligible Lender Trustee on behalf of the
Trust, the related Pool Balance of the Group I or Group II Student Loans 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 Group I or Group II Escrow Account, as
applicable, to the extent amounts are available therein and then with respect to
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Subsequent Student Loans or Other Student Loans, during the Funding Period, from
the applicable sub-account of the Group I or Group II Pre-Funding Account, as
applicable, on such date and transferred to the Depositor, who shall use such
proceeds to pay the applicable Seller for such Additional Student Loans.
With respect to any Consolidation Loan to be made by KBUSA to a given
borrower, the Eligible Lender Trustee on behalf of the Trust will convey to the
Depositor and the Depositor will convey to KBUSA 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 KBUSA. In
exchange for and simultaneously with such conveyance, the Depositor will or will
cause KBUSA to deposit into the applicable 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
during the Funding Period, from the related sub-account of the Group I or Group
II Pre-Funding Account, as applicable, of an amount equal to the Purchase Price
of such Serial Loan.
Amounts on deposit in the Escrow Accounts will be invested in Eligible
Investments (see "--Accounts" above) and will be used on succeeding Subsequent
Transfer Dates, as described above, to purchase Additional Student Loans from
KBUSA or QSPE, as the case may be. Any of such amounts remaining in either the
Group I or Group II Escrow Account on the last possible Subsequent Transfer Date
after giving effect to the conveyance of all such Additional Student Loans on
such Subsequent Transfer Date will be deposited into the related sub-account of
the Collection Account and distributed as Group I or Group II Available Funds,
as applicable, on the Distribution Date immediately following such final
Subsequent Transfer Date.
For purposes of the foregoing, the following terms have the respective
meanings set forth below:
The "Funding Period" for each group of Financed Student Loans 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 KBUSA or the
Depositor;
3. the date on which the amounts on deposit in the Group I or
Group II Pre-Funding Account, as applicable, would be reduced to zero
after giving effect to purchases of Other Student Loans on such date;
or
4. the last day of the Collection Period preceding the
November 2004 Distribution Date.
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"Other Student Loans" means 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 Sellers 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 Student Loan
Pre-Funding Sub-Account.
"Serial Loans" constitute Student Loans which are made to a borrower
who is also a borrower under at least one outstanding Financed Student Loan.
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 which a
Sub-Servicer is servicing, the Sub-Servicers will hold, as custodian on behalf
of the Trust and the Indenture Trustee, the student loan notes (or copies of
master promissory notes) evidencing, and other documents relating to, that
Financed Student Loan. State Street Bank and Trust Company will hold, as
custodian on behalf of the Trust, the student loan notes (or copies of master
promissory notes) evidencing, and other documents relating to, the Financed
Student Loans that are Key CareerLoans. 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 applicable sub-account of 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 to the Group II Student Loans only) with
respect thereto, but excluding such tasks with respect to Interest Subsidy
Payments and Special Allowance Payments (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 related 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
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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 may 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 related sub-account of the Collection Account with
respect to the Group I and Group II Student Loans, as applicable, 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 related sub-account of the Collection Account within
two business days of receipt thereof.
However, for so long as KBUSA is the Administrator, and provided that
(x) there exists no Administrator Default (as described below), (y) each other
condition to making quarterly deposits as may be specified by the Rating
Agencies is satisfied, and (z) the Administrator maintains certain minimum
required ratings on its short-term and long-term debt obligations, 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 Amounts of Financed Student Loans repurchased by
the Depositor (or KBUSA acting on its behalf) and purchased by the Master
Servicer into the related sub-account of the Collection Account on or before the
third business day preceding each Distribution Date.
"Purchase Amount" means, as of the close of business on the last day of
a Collection Period, (1) 102.5% of the amount required to repay in full a
Financed Federal Student Loan, and (2) 100% of the amount required to repay in
full a Financed Private Student Loan, in each case under the terms thereof
including all accrued interest thereon expected to be capitalized upon entry
into repayment and, in the case of any Group I Loan, any lost Interest Subsidy
Payments and Special Allowance Payments with respect thereto.
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
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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 Securities Insurer, the Swap Counterparty 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, the Securities Insurer, the Swap
Counterparty and the Indenture Trustee;
(c) it will do nothing nor permit a Sub-Servicer to impair the
rights of the Securities Insurer (with respect to Group II
Student Loans), the Swap Counterparty or 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 KBUSA in particular and any applicable
Programs requirements.
Under the terms of the Sale and Servicing Agreement, if the Depositor
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 Securities Insurer (with respect to the Group
II Student Loans), the Swap Counterparty, or the related 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 related
sub-account of 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.
In the event of the occurrence and continuance of a Master Servicer
Default, with respect to the Group I Student Loans, the Group I Controlling
Noteholders, and with respect to the Group II Student Loans, the Securities
Insurer (unless a Securities Insurer Default has occurred and is continuing,
then a majority of the Group II Noteholders), may direct the Indenture Trustee
to terminate the Master Servicer and appoint a successor master servicer with
respect to such group of Financed Student Loans. In such event, a different
master servicer may service one group of Financed Student Loans while the Master
Servicer continues to service the other group
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of Financed Student Loans. See, "Description of the Transfer and Servicing
Agreements--Master Servicer Default; Administrator Default" and "--Rights Upon
Master Servicer Default and Administrator Default" in the Prospectus for a
description of the Master Servicer Defaults and the available remedies.
INCENTIVE PROGRAMS
Certain incentive programs currently or hereafter made available by
KBUSA to borrowers may also be made available by the Master Servicer or a
Sub-Servicer to borrowers with Financed Student Loans. Except for Financed
Private Loans eligible for the "Keys2Repay Program," which allows certain
borrowers to choose repayment terms of 10, 15 or 25 years at interest rates that
vary in accordance with the selected term, any 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 KBUSA 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 related
Pool Balance of each group of Student Loans as of the last day of the
immediately preceding calendar month together with applicable 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, the Securities Insurer (with respect
to the Group II Student Loans) 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 the Available Funds with respect to each group of
Notes and amounts on deposit in the related 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.
The Master Servicing Fee will compensate the Master Servicer for making
certain representations and warranties with respect to the QSPE Student Loans
(without which the Trust would be unable to purchase such Student Loans) and 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,
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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 accounting fees,
outside auditor fees, data processing costs and other costs incurred in
connection with administering the Financed Student Loans.
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 with respect to each of
the Group I and Group II Notes equal to the Master Servicing Fee allocated to
the Group I and Group II Student Loans, respectively, payable on such date to be
deposited into the applicable sub-account of the Collection Account for payment
to the related Seller in the case of such excess Guarantee Payments (with
respect to the Group II Student Loans only), and to the Master Servicer in the
case of the Master Servicing Fee (calculated separately for the Group I and
Group II Student Loans). 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," with respect to each
of the Group I and Group II Notes (referred to as "Group I Available Funds" and
"Group II Available Funds," respectively), 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) and allocated to
either the Group I Available Funds or the Group II Available Funds (but not
both), to the extent not previously distributed:
1. all collections received by the Master Servicer (or the
Sub-Servicers) on the Group I or Group II Student Loans, as the
case may be (including any Guarantee Payments (subject to the
Maximum TERI Payments Amount with respect to the Group II Student
Loans only) received with respect to such Financed Student
Loans), but net of (x) with respect to the Group I Student Loans
only, 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
Group I or Group II Student Loans, as the case may be, 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 Group I Student
Loans;
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3. all proceeds of the Group I or Group II Student Loans, as the
case may be, 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
(and not including any Guarantee Payments received with respect
thereto) ("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 Group I or
Group II Student Loans repurchased by the Depositor (or KBUSA on
its behalf) 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 Depositor (or
KBUSA on its behalf) 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, with respect to the Group I Student Loans;
6. amounts deposited by the Depositor (or KBUSA on its behalf) into
the Collection Account in connection with the making of
Consolidation Loans;
7. with respect to the first Distribution Date, the Closing Date
Deposit into each sub-account of the Collection Account;
8. Investment Earnings for such Distribution Date with respect to
each of the Trust Accounts relating to the Group I and Group II
Student Loans;
9. amounts withdrawn from the Group I or Group II Reserve Account in
excess of the related Specified Reserve Account Balance and
deposited into the applicable sub-account of the Collection
Account;
10. amounts withdrawn from the Group I or Group II Escrow Account and
deposited into the applicable sub-account of the Collection
Account;
11. with respect to the Distribution Date on or immediately after the
end of the Funding Period with respect to either the Group I or
Group II Student Loans, the amount transferred from the Group I
or Group II Pre-Funding Account, as the case may be, to the
applicable sub-account of the Collection Account; and
12. any Group I or Group II Trust Swap Receipt Amount received from
the Swap Counterparty with respect to the related Interest Period
and any termination payment with respect to the Group I or Group
II Interest Rate Swap made by the Swap Counterparty to the Trust.
Group I and Group II Available Funds will exclude all payments and
proceeds (including Liquidation Proceeds) of any Financed Student Loans, the
related Purchase Amounts of which has been included in the Group I and Group II
Available Funds, as applicable, for a prior Distribution Date. If on any
Distribution Date there would not be sufficient funds, after application of
Group I and Group II Available Funds, as the case may be, plus amounts available
from the Group I and Group II Reserve Account, as applicable, and the Group I
and Group II Pre-Funding Account, as applicable, to pay any of the items
specified in clauses (1) and (2), or clauses (1) through (4), respectively,
under "--Distributions from the Collection Account--Group I Notes" or "--Group
II Notes," respectively, below for such Distribution Date, then
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Group I or Group II Available Funds, as the case may be, for such Distribution
Date will also include, in addition to the related Available Funds on deposit in
the applicable sub-account of the Collection Account on the Determination Date
relating to such Distribution Date, Group I or Group II Available Funds, as
applicable, which would have constituted Group I and Group II Available Funds
for the Distribution Date succeeding such Distribution Date (up to the amount
necessary to pay such items specified in clauses (1) and (2), or clauses (1)
through (4), respectively, under "--Distributions from the Collection
Account--Group I Notes" or "--Group II Notes," respectively, below).
In addition, if there is any Noteholders' Interest Index Carryover
relating to the Group I Notes or the Group II Notes, as the case may be, with
respect to any Interest Period, the Cap Provider will be obligated under the
Group I Interest Rate Cap or the Group II Interest Rate Cap, as applicable, to
pay to the Indenture Trustee an amount equal to such Noteholders' Interest Index
Carryover for distribution to the applicable Group I or Group II Notes on the
related Distribution Date.
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 Depositor (for distribution to the
applicable 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 (with respect to Group II Student Loans only) and (b) the Master
Servicer, the related Master Servicing Fee due on the Group I and Group II
Student Loans with respect to the period from and including the preceding
Monthly Servicing Payment Date from amounts on deposit in the applicable
sub-account of the Collection Account.
GROUP I NOTES. 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
Group I Available Funds for the related Collection Period:
1. to the Master Servicer, the Master Servicing Fee with respect to
the Group I Student Loans due on such Distribution Date and all
prior unpaid Master Servicing Fees allocated to the Group I
Student Loans;
2. to the Administrator, the portion of the Administration Fee
allocated to the Group I Notes and all unpaid Administration Fees
from prior Collection Periods allocated to the Group I Notes;
3. pro rata (x) to the holders of the Group I Class A Notes, the
Noteholders' Interest Distribution Amount for the Group I Class A
Notes, and (y) to the Swap Counterparty, the Trust Swap Payment
Amount with respect to the Group I Interest Rate Swap, if any,
for such Distribution Date plus in certain circumstances when the
Trust is the defaulting party under the Group I Interest Rate
Swap, the related termination payment due the Swap Counterparty;
4. to the Group I Reserve Account, an amount, up to the amount, if
any, necessary to reinstate the balance of the Group I Reserve
Account to the related Specified Reserve Account Balance;
5. provided that a Subordinate Note Interest Trigger is not in
effect, to the holders of the Class I-B Notes, the Noteholders'
Interest Distribution Amount for the Class I-B Notes;
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6. to the holders of the Group I Notes, the Group I Principal
Distribution Amount in the following order of priority: (a) prior
to the Stepdown Date, or after the Stepdown Date if a Subordinate
Note Principal Trigger is in effect, the Group I Principal
Distribution Amount for the Group I Notes will be payable solely
to the Group I Senior Notes in sequential order beginning with
the Class I-A-1 Notes until paid in full, then to the Class I-A-2
Notes until paid in full, and then to the Class I-B Notes; and
(b) after the Stepdown Date and so long as no Subordinate Note
Principal Trigger is in effect, the Senior Percentage of the
Principal Distribution Amount for the Group I Notes will be
payable to the Group I Senior Notes (in the same order of
priority as described in the preceding sentence) and the
Subordinate Percentage of the Group I Principal Distribution
Amount will be payable to the Class I-B Notes;
7. if a Subordinate Note Interest Trigger is in effect, to the
holders of the Class I-B Notes, the Noteholders' Interest
Distribution Amount for the Class I-B Notes;
8. to the holders of the Group I Class A Notes on a pro rata basis,
based on the amount of any Noteholders' Interest Index Carryover
owing on each such Class of Group I Class A Notes, the aggregate
unpaid amount of such Noteholders' Interest Index Carryover, if
any, but only to the extent not paid by the Cap Provider under
the Group I Interest Rate Cap;
9. to the holders of the Class I-B Notes, the aggregate unpaid
amount of Noteholders' Interest Index Carryover with respect to
the Class I-B Notes, if any, but only to the extent not paid by
the Cap Provider under the Group I Interest Rate Cap;
10. to the Swap Counterparty, all other amounts due and owing to the
Swap Counterparty under the Group I Interest Rate Swap not
reimbursed pursuant to clause (3) above;
11. to the Cap Provider, an amount sufficient to reimburse the Cap
Provider for all previous payments under the Group I Interest
Rate Cap and any other amounts due to the Cap Provider under the
Group I Interest Rate Cap;
12. after all payments shown above are made, and if Group II
Available Funds are insufficient to make all required payments
pursuant to clauses (1) through (12) below under "--Group II
Notes." any remaining amounts will be paid to the Group II
Noteholders, the Master Servicer, the Administrator, the
Securities Insurer, the Swap Counterparty and/or the Cap
Provider, as applicable, in the order and for the purposes set
forth in such clauses (1) through (12), inclusive, up to the
amount of such deficiency in Group II Available Funds; and
13. to the Certificateholder, any remaining amounts after application
of clauses (1) through (12).
GROUP II NOTES. 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
Group II Available Funds for the related Collection Period:
1. to the Depositor (for distribution to KBUSA, as the applicable
Seller), any amounts on deposit in the related sub-account of 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 with respect to
the Group II Student Loans due on such Distribution Date and all
prior unpaid Master Servicing Fees allocated to the Group II
Student Loans;
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3. to the Administrator, the portion of the Administration Fee
allocated to the Group II Notes and all unpaid Administration
Fees from prior Collection Periods allocated to the Group II
Notes;
4. to the Securities Insurer, provided that no Securities Insurer
Payment Default has occurred and is continuing, the amount of all
insurance premiums due under the Group II Notes Guaranty
Insurance Policy;
5. pro rata (x) to the holders of the Group II Class A Notes, the
Noteholders' Interest Distribution Amount for the Group II Class
A Notes, and (y) to the Swap Counterparty, the Trust Swap Payment
Amount with respect to the Group II Interest Rate Swap, if any,
for such Distribution Date plus in certain circumstances when the
Trust is the defaulting party under the Group II Interest Rate
Swap, the related termination payment due the Swap Counterparty;
6. to the Securities Insurer, provided that no Securities Insurer
Payment Default has occurred and is continuing, reimbursement for
all amounts owed pursuant to draws with respect to any payments
of interest under any of the Group II Notes Guaranty Insurance
Policy, plus interest thereon;
7. to the Group II Reserve Account, an amount, up to the amount, if
any, necessary to reinstate the balance of the Group II Reserve
Account to the related Specified Reserve Account Balance;
8. sequentially in the following order, first, to the holders of the
Class II-A-1 Notes, the applicable Noteholders' Principal
Distribution Amount, until their outstanding principal balance
has been reduced to zero, second, to the Securities Insurer,
provided that no Securities Insurer Payment Default has occurred
and is continuing, reimbursement for all amounts owed pursuant to
draws with respect to any payments of principal under the Group
II Notes Guaranty Insurance Policy made to the holders of the
Class II-A-1 Notes, plus interest thereon, third, to the holders
of the Class II-A-2 Notes, the applicable Noteholders' Principal
Distribution Amount, until their outstanding principal balance
has been reduced to zero, and fourth, to the Securities Insurer,
provided that no Securities Insurer Payment Default has occurred
and is continuing, reimbursement for all amounts owed pursuant to
draws with respect to any payments of principal under the Group
II Notes Guaranty Insurance Policy made to the holders of the
Class II-A-2 Notes, plus interest thereon;
9. to the Securities Insurer, an amount equal to all unreimbursed
Insured Payments made on prior Distribution Dates, together with
accrued interest thereon, as provided, not previously reimbursed
above, and all other amounts owed to the Securities Insurer under
the Insurance Agreement, including all unpaid insurance premiums;
10. to the holders of the Group II Notes on a pro rata basis, based
on the amount of any Noteholders' Interest Index Carryover owing
on each such Class of Group II Notes, the aggregate unpaid amount
of such Noteholders' Interest Index Carryover, if any, but only
to the extent not paid by the Cap Provider under the Group II
Interest Rate Cap;
11. to the Swap Counterparty, all other amounts due and owing to the
Swap Counterparty under the Group II Interest Rate Swap not
reimbursed pursuant to clause (5) above;
12. to the Cap Provider, an amount sufficient to reimburse the Cap
Provider for all previous payments under the Group II Interest
Rate Cap and any other amounts due to the Cap Provider under the
Group II Interest Rate Cap;
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13. after all payments shown above are made, and if Group I Available
Funds are insufficient to make all required payments pursuant to
clauses (1) through (11) above under "--Group I Notes." any
remaining amounts will be paid to the Group I Noteholders, the
Master Servicer, the Administrator, the Swap Counterparty and/or
the Cap Provider, as applicable, in the order and for the
purposes set forth in such clauses (1) through (11), inclusive,
up to the amount of such deficiency in Group I Available Funds;
and
14. to the Certificateholder, any remaining amounts after application
of clauses (1) through (13).
Upon any distribution to the Certificateholder of any amounts included
as Available Funds, the Noteholders will not have any rights in, or claims to,
such amounts.
In addition, if as of the Special Determination Date (after giving
effect to all purchases of Subsequent Student Loans on such date) either the
Group I or Group II Subsequent Loan Sub-Account of the Group I or Group II
Pre-funding Account, as the case may be, has not been reduced to zero, the
Indenture Trustee shall withdraw all such remaining sums on the Distribution
Date corresponding to the Special Redemption Date and, (x) if such amount in
either Subsequent Loan Sub-Account is greater than $10,000,000, distribute such
amounts pro rata to each class of Group I Notes or Group II Notes, as
applicable, based on the initial principal balance of each class of Notes in the
related group of Notes, as a payment of principal, and (y) if such amount in
either Subsequent Loan Sub-Account is $10,000,000 or less, distribute such
amounts to holders of the Class I-A-1 Notes or the Class II-A-1 Notes, as
applicable, as a payment of principal.
For purposes hereof, the following terms have the following meanings:
"Maximum TERI Payments Amount" means 19% of the aggregate principal
balance of the Group II Initial Financed Student Loans.
"Monthly Servicing Payment Date" means the 27th day of each month (or
if such day is not a business day, the next succeeding business day).
The "Net Trust Swap Payment Carryover Shortfall" means, with respect to
each of the Group I Interest Rate Swap and the Group II Interest Rate Swap and
any Distribution Date with respect to which there shall be an amount owed by the
Trust to the Swap Counterparty under either the Group I Interest Rate Swap or
the Group II Interest Rate Swap, as applicable, the excess of (i) the related
Trust Swap Payment Amount on the preceding Distribution Date over (ii) the
amount actually paid to the Swap Counterparty on such preceding Distribution
Date with respect to either the Group I or Group II Interest Rate Swap, as
applicable, plus interest on such excess from such preceding Distribution Date
to the current Distribution Date in respect of the related Trust Swap Payment
Amount at the rate of Three-Month LIBOR for the related Interest Period.
The "Net Trust Swap Receipt Carryover Shortfall" means, with respect to
each of the Group I Interest Rate Swap and the Group II Interest Rate Swap and
any Distribution Date with respect to which there shall be an amount owed by the
Swap Counterparty to the Trust under either the Group I Interest Rate Swap or
the Group II Interest Rate Swap, as applicable, the
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excess of (i) the related Trust Swap Receipt Amount on the preceding
Distribution Date over (ii) the amount actually paid by the Swap Counterparty to
the Trust on such preceding Distribution Date with respect to either the Group I
or Group II Interest Rate Swap, as applicable, plus interest on such excess from
such preceding Distribution Date to the current Distribution Date at the rate of
Three-Month LIBOR for the related Interest Period.
The "Trust Swap Payment Amount" means, with respect to each of the
Group I or Group II Interest Rate Swap, as applicable, and any Distribution
Date, the sum of (i) the related Net Trust Swap Payment for such Distribution
Date and (ii) the related Net Trust Swap Payment Carryover Shortfall for such
Distribution Date.
The "Trust Swap Receipt Amount" means, with respect to each of the
Group I or Group II Interest Rate Swap, as applicable, and any Distribution
Date, the sum of (i) the related Net Trust Swap Receipt for such Distribution
Date and (ii) the related Net Trust Swap Receipt Carryover Shortfall for such
Distribution Date.
"Noteholders' Distribution Amount" means, with respect to each of the
Group I Notes and the Group II Notes and any Distribution Date, the sum of the
related Noteholders' Interest Distribution Amount and the related Noteholders'
Principal Distribution Amount for such Distribution Date.
"Noteholders' Interest Carryover Shortfall" means, with respect to any
Distribution Date and any Class of Notes, the excess of (x) the sum of the
Noteholders' Interest Distribution Amount for such Class of Notes on the
preceding Distribution Date over (y) the amount of interest actually distributed
to the holders of such Class of Notes on such preceding Distribution Date, plus
interest on the amount of such excess interest due to the holders of such Class
of Notes, to the extent permitted by law, at (1) the weighted average of the
applicable Note Interest Rates, in the case of the Class A Notes of each group
of Notes, and (2) the Note Interest Rate for the Class I-B Notes, in the case of
the Class I-B Notes, in each case from such preceding Distribution Date to the
current Distribution Date.
"Noteholders' Interest Distribution Amount" means, with respect to any
Distribution Date and any Class of Notes, 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 such Class of the Notes on the
immediately preceding Distribution Date after giving effect to all principal
distributions to such Noteholders on such date (or, in the case of the first
Distribution Date, on the Closing Date) and (b) any Noteholders' Interest
Carryover Shortfall for such Class and such Distribution Date; provided, that
such Noteholders' Interest Distribution Amount will not include any Noteholders'
Interest Index Carryover for such Class.
"Noteholders' Principal Distribution Amount" for each group of Notes
means, with respect to any Distribution Date, the Principal Distribution Amount
for such group of Notes and such Distribution Date; provided, however, that the
Noteholders' Principal Distribution Amount for the Group I Notes or the Group II
Notes will not exceed the outstanding principal balance of the Group I Notes or
the Group II Notes, respectively. 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
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(b) on the related Distribution Date following either an exercise of the Group I
Put Option or the Group II Put Option, as applicable, or, upon a default by the
Put Option Provider, a sale of the related Group I or Group II Student Loans, as
applicable, in the manner described under "--The Put Options and Auction Sales"
below, the principal required to be distributed to the holders of the Group I or
Group II Notes, as applicable, will include the amount required to reduce the
outstanding principal balance of all outstanding Group I or Group II Notes, as
applicable to zero.
The "Group I Pool Balance" means, at any time and with respect to the
Group I Student Loans, and the "Group II Pool Balance" means, at any time and
with respect to the Group II Student Loans (and with respect to all Financed
Student Loans, referred to as the "Pool Balance"), the aggregate principal
balance of the Group I or Group II Student Loans, respectively, 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:
- all payments received by the Trust related to the Group I or
Group II Student Loans, as applicable, during such Collection
Period from or on behalf of borrowers, Guarantors (except, with
respect to the Group II Student Loans, any guarantee payments
made by TERI in excess of the Maximum TERI Payments Amount) and,
with respect to Group I Student Loans, certain payments on
certain Financed Federal Loans, the Department (collectively,
"Obligors"),
- all Purchase Amounts received by the Trust related to the Group I
or Group II Student Loans, as applicable for such Collection
Period from the Depositor (or KBUSA on its behalf), the Master
Servicer or the Sub-Servicers,
- all Additional Fundings made from the Group I or Group II Escrow
Account, as applicable, and the Group I or Group II Pre-Funding
Account, as applicable, with respect to such Collection Period,
and
- all losses realized on the Group I or Group II Student Loans, as
applicable, liquidated during such Collection Period.
"Principal Distribution Amount" means, with respect to the Group I
Notes (also referred to as the "Group I Principal Distribution Amount") or the
Group II Notes (also referred to as the "Group II Principal Distribution
Amount") and any Distribution Date, the amount by which the sum of the
outstanding principal balance of the Group I Notes or the Group II Notes, as the
case may be, exceeds the related Specified Collateral Balance for such
Distribution Date.
"Specified Collateral Balance" means, with respect to the Group I
Student Loans or the Group II Student Loans and any Distribution Date, the sum
of (a) the Group I Pool Balance or the Group II Pool Balance, as applicable, as
of the last day of the related Collection Period plus (b) the Group I Pre-Funded
Amount or the Group II Pre-Funded Amount, as applicable, as of the last day of
the related Collection Period for such Distribution Date. In the event that (1)
there is a decision by the related Noteholders to exercise the Group I or Group
II Put Option followed by (x) an inability of the Indenture Trustee to exercise
the related Put Option due to the Minimum Acceptable Put Option Exercise Price
being greater than the Put Option Exercise Price (plus all amounts then on
deposit in the Group I or Group II Reserve Account, as applicable), or (y) the
Put Option Provider defaults and the Group I or Group II Student Loans, as
applicable, are not
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sold pursuant to the auction process described under "--The Put Options and
Auction Sales" below, with respect to such group of Financed Student Loans any
Distribution Date occurring on or after the November, 2012 Distribution Date, or
(2) with respect to the Group II Student Loans only, a Trigger Event has
occurred and is continuing, the Specified Collateral Balance will be zero.
A "Trigger Event" with respect to the Group II Student Loans shall
occur, on any Distribution Date, when: (1) a Non-Guaranteed Private
Undergraduate Loan Trigger Event has occurred, or (2) a Private Graduate Loan
Trigger Event has occurred; provided, however, that if the Securities Insurer
and all three Ratings Agencies consent in writing, no Trigger Event shall have
occurred with respect to such Distribution Date.
A "Non-Guaranteed Private Undergraduate Loan Trigger Event" shall have
occurred, on any Distribution Date, when cumulative Realized Losses with respect
to the Group II Student Loans, net of subsequent Recoveries with respect to the
Non-Guaranteed Private Undergraduate Loans, exceeds 17% of the Group II Initial
Financed Student Loan Pool Balance consisting of all Non-Guaranteed Private
Undergraduate Loans.
"Non-Guaranteed Private Undergraduate Loans" are Non-Guaranteed Private
Loans that have been made to undergraduate students.
"Group I Initial Financed Student Loan Pool Balance" and "Group II
Initial Financed Student Loan Pool Balance" means at any time, the Group I Pool
Balance or the Group II Pool Balance, respectively, of the Group I Student Loans
or Group II Student Loans, respectively, or specified subset thereof, as of the
Cutoff Date (in the case of the related Initial Financed Student Loans, or
specified subset thereof) or the related Subsequent Cutoff Date (with respect to
related Additional Student Loans or specified subset thereof).
"Recoveries" means, with respect to any Liquidated Student Loan, moneys
collected in respect thereof, from whatever source, during any Collection Period
following the Collection Period in which such Financed Student Loan became a
Liquidated Student Loan, net of the sum of any amounts expended by the Master
Servicer (or any Sub-Servicer acting on its behalf) for the account of any
related borrower on such Financed Student Loan and any amounts required by law
to be remitted to such borrower on such Financed Student Loan.
A "Private Graduate Loan Trigger Event" shall have occurred with
respect to the Group II Student Loans on any Distribution Date when: (1) a TERI
Trigger Event or (2) a Non-Guaranteed Private Graduate Loan Trigger Event shall
have occurred.
A "TERI Trigger Event" shall have occurred with respect to the Group II
Student Loans on any Distribution Date when the cumulative Realized Losses on
any of the Guaranteed Private Loans that are guaranteed by TERI exceeds 17% of
the Group II Initial Financed Student Loan Pool Balance consisting of all
Guaranteed Private Loans that are guaranteed by TERI; provided, however, that a
TERI Trigger Event shall not have occurred if TERI is continuing to pay claims
with respect to all Guaranteed Private Loans guaranteed by TERI.
A "Non-Guaranteed Private Graduate Loan Trigger Event" shall have
occurred with respect to the Group II Student Loans on any Distribution Date
when the cumulative Realized
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Losses on the Non-Guaranteed Private Graduate Loans exceeds 17% of the Group II
Initial Financed Student Loan Pool Balance consisting of all Non-Guaranteed
Private Graduate Loans.
"Non-Guaranteed Private Graduate Loans" are Non-Guaranteed Private
Loans that have been made to graduate students.
CREDIT ENHANCEMENT
Excess Interest. Excess interest is created with respect to the Group I
or Group II Student Loans when interest collections on the Group I or Group II
Student Loans, respectively, received during a Collection Period (including,
with respect to the Group I Student Loans, related Interest Subsidy Payments and
Special Allowance Payments), related Investment Earnings and related Trust Swap
Receipts from the Group I or Group II Interest Rate Swap, as the case may be,
exceeds the interest on the Group I or Group II Notes, respectively, at the
related Note Rates, fees allocated to the Group I or Group II Student Loans,
respectively, due under the Program, the Master Servicing Fee with respect to
the Group I or Group II Student Loans, as applicable, the related allocated
portion of the Administration Fee, the quarterly premium payable to the Security
Insurer (with respect to the Group II Notes) and any Trust Swap Payment Amounts
with respect to the Group I or Group II Interest Rate Swap, as the case may be,
payable to the Swap Counterparty in respect of the related Distribution Date.
Excess interest with respect to the Group I or Group II Student Loans, as the
case may be, is intended to provide "first loss" protection for the related
Class of Notes. Excess interest will first be deposited in the Group I or Group
II Reserve Account, as applicable, until the related Specified Reserve Account
Balance is met. Excess interest with respect to the Group I or Group II Student
Loans, as the case may be, to the extent available after any required deposits
to the Group I or Group II Reserve Account, as applicable, will be applied on
each Distribution Date to cover Realized Losses on the Group I or Group II
Student Loans, as applicable, incurred during the related Collection Period. In
addition, prior to the Group I Parity Date or the Group II Parity Date, as the
case may be, excess interest will be applied as an accelerated payment of
principal on the related group of Notes in sequential order until the principal
balance of the Group I or Group II Student Loans, as applicable, equals the
outstanding principal balance of the Group I or Group II Notes, as applicable.
In the event of a Trigger Event with respect to the Group II Notes, or a
decision by the related Noteholders to exercise the Group I or Group II Put
Option, followed either by (1) an inability of the Indenture Trustee to exercise
the related Put Option due to the Minimum Acceptable Put Option Exercise Price
being greater than the Put Option Exercise Price (plus all amounts then on the
deposit in the Group I or Group II Reserve Account, as applicable), or (2) both
a default by the Put Option Provider and a failed auction with respect to the
related group of Student Loans, following the November, 2012 Distribution Date,
all excess interest will be applied as an accelerated payment of principal on
each Class of Notes in the related group of Notes, in sequential order, until
the principal balance of the Group I or Group II Notes, as applicable, has been
reduced to zero. There can be no assurance as to the rate, timing or amount, if
any, of excess interest. The application of excess interest to the payment of
principal on your Notes will affect the weighted average life and yield on your
investment. To the extent excess interest is not sufficient to cover Realized
Losses or to achieve the Group I or Group II Parity Date, as applicable, you
will rely solely on amounts in the Group I or Group II Reserve Account, as
applicable, payments under the Group II Notes Guaranty Insurance Policy (with
respect to the Group II Notes only) and other collections on the Group I or
Group II Student Loans, as applicable, for payments on your
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Notes. Excess interest not applied to make required distributions on any
Distribution Date will be paid to the Certificateholder and will not be
available on subsequent Distribution Dates to make payments on any Class of the
Notes.
Reserve Accounts. Pursuant to the Sale and Servicing Agreement, the
Group I Reserve Account and the Group II Reserve Account will be created with
initial deposits by the Depositor on the Closing Date of cash or Eligible
Investments in an amount equal to approximately $682,500 with respect to the
Group I Reserve Account (the "Group I Reserve Account Initial Deposit") and
$20,640,000 with respect to the Group II Reserve Account (the "Group II Reserve
Account Initial Deposit"). On the Closing Date, the Group I and Group II Reserve
Account Initial Deposit will equal the related Specified Reserve Account Balance
as of the Closing Date. The amounts on deposit in each Reserve Account to the
extent used will be replenished up to the related Specified Reserve Account
Balance on each Distribution Date by deposit therein of the amount, if any,
necessary to reinstate the balance of such Reserve Account to the related
Specified Reserve Account Balance from the amount of related Available Funds
remaining after payment of the prior amounts set forth under "--Distributions"
above with respect to the related group of Notes, all for such Distribution
Date.
"Specified Reserve Account Balance" means, with respect to any
Distribution Date: (1) with respect to the Group I Reserve Account, an amount
equal to the greater of (x) 0.25% of the aggregate outstanding principal amount
of the Group I Notes on such Distribution Date before giving effect to any
distribution on such Distribution Date, and (y) $500,000; and (2) with respect
to the Group II Reserve Account, an amount equal to the greater of (x) 3.00% of
the aggregate outstanding principal amount of the Group II Notes on such
Distribution Date before giving effect to any distribution on such Distribution
Date, and (y) $2,500,000; provided, however, in each case, in no event will such
balance exceed the sum of the outstanding principal amount of the related group
of Notes. Each Reserve Account may be used to fund Interest and Expense Draws
and Realized Loss Draws with respect to the related group of Financed Student
Loans.
Funds will be withdrawn from the Group I or the Group II Reserve
Account, as the case may be, to the extent that the amount of Group I or Group
II Available Funds, as applicable, is insufficient to pay the Master Servicing
Fee with respect to the Group I and Group II Student Loans, respectively, on any
Monthly Servicing Payment Date, and any of the items with respect to Group I
Notes specified in clauses (1), (2), (3) and (5) under
"--Distributions--Distributions from the Collection Account--Group I Notes"
above, or any of the items with respect to Group II Notes specified in clauses
(2) through (5) under "--Distributions--Distributions from the Collection
Account--Group II Notes" above, on any Distribution Date (such amounts, the
"Interest and Expense Draw"). Such funds will be paid from the Group I or Group
II Reserve Account, as applicable, 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 related sub-account of the Collection Account in
clauses (1), (2), (3) and (5) above with respect to the Group I Notes, or
clauses (2) through (5) above with respect to the Group II Notes, on a
Distribution Date. In addition, on the Final Maturity Dates for each Class of
Notes, amounts on deposit in the Group I or Group II Reserve Account, as
applicable, if any, will be available, if necessary, to be applied to reduce the
principal balance of such Class of the Notes to zero. Amounts on deposit in the
Reserve Accounts will not be available to cover any reimbursement for
Noteholders' Interest Index Carryover.
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In addition, if on any Distribution Date prior to the Group I or Group
II Parity Date, as the case may be, to the extent the amount by which the Group
I or Group II Pool Balance, respectively, as of the last day of the second
preceding Collection Period (or in the case of the first Distribution Date, as
of the Cutoff Date) minus the Group I or Group II Pool Balance, respectively, as
of the last day of the related Collection Period exceeds the amount remaining to
be distributed as the related Noteholders' Principal Distribution Amount with
respect to the Group I Notes or the Group II Notes, respectively, will be
withdrawn from the Group I or Group II Reserve Account, respectively, and
deposited in the related sub-account of the Collection Account and distributed
by the Indenture Trustee as a payment in respect of the related Noteholders'
Principal Distribution Amount (and distributed among the Group I Notes in the
order of priority as set forth under "--Distributions--Distributions from the
Collection Account--Group I Notes," or among the Group II Notes in the order of
priority as set forth under "--Distributions--Distributions from the Collection
Account--Group II Notes," as applicable). If on any Distribution Date on or
after the Group I or Group II Parity Date, as the case may be, the amount
available to be distributed as the related Noteholders' Principal Distribution
Amount, is less than the related Noteholders' Principal Distribution Amount for
such Distribution Date, such amount will be withdrawn from the Group I or
Group II Reserve Account, as applicable, and deposited in the related
sub-account of the Collection Account and distributed as a payment in respect
of the related Noteholders' Principal Distribution Amount (and distributed
among the Group I Notes in the order of priority as set forth under
"--Distributions--Distributions from the Collection Account--Group I Notes," or
among the Group II Notes in the order of priority as set forth under
"--Distributions--Distributions from the Collection Account--Group II Notes," as
applicable). Any amounts withdrawn from the Reserve Accounts and applied as a
payment of principal of any Class of the Notes is referred to herein as a
"Realized Loss Draw."
If the amount on deposit in the Group I or Group II Reserve Account, as
the case may be, on any Distribution Date (after giving effect to all deposits
or withdrawals therefrom on such Distribution Date) is greater than the related
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 to the
Certificateholder as Group I or Group II Available Funds, as applicable, on such
Distribution Date. Upon any distribution to the Certificateholder of any amounts
included as Available Funds, the Noteholders will not 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 Accounts will continue
to be held for the benefit of the Trust.
The Reserve Accounts are intended to enhance the likelihood of timely
receipt by the Noteholders in each group of Notes of the full amount of interest
due them and to decrease the likelihood that such holders will experience
losses. In certain circumstances, however, either or both Reserve Accounts could
be depleted.
Subordination of the Group I Subordinate Notes. With respect to the
Group I Notes, the rights of the holders of the Group I Subordinate Notes to
receive payments of interest are subordinated to the rights of the holders of
the Group I Senior Notes to receive payments of interest (and, if a Subordinate
Note Interest Trigger has occurred and is continuing, payments of principal as
well) and the rights of the holders of the Group I Subordinate Notes to receive
payments of principal are subordinated to the rights of the holders of the Group
I Senior Notes to
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receive payments of interest and principal. Consequently, amounts on deposit in
the related sub-account of the Collection Account and to the extent necessary,
the Group I Reserve Account and, during the Funding Period, the Group I
Pre-Funding Account, will be applied to the payment of interest on the Group I
Senior Notes before payment of interest on the Group I Subordinate Notes.
Moreover, for so long as the Group I Senior Notes are outstanding, the holders
of the Group I Subordinate Notes will not be entitled to any payments of
principal until the Stepdown Date, and after the Stepdown Date, the holders of
the Group I Subordinate Notes will be entitled to payments of principal only if
a Subordinate Note Principal Trigger is not in effect.
Group II Notes Guaranty Insurance Policy. On the Closing Date, the
Securities Insurer will issue the Group II Notes Guaranty Insurance Policy,
which will be available as credit enhancement to the holders of the Group II
Notes only under the terms described herein. The Group II Notes Guaranty
Insurance Policy will unconditionally and irrevocably guarantee the timely
payment of the Noteholders' Interest Distribution Amount on each Distribution
Date for the Class II-A-1 and Class II-A-2 Notes and the aggregate unpaid
principal balance of such Classes of Notes on the Class II-A-1 Notes Final
Maturity Date and the Class II-A-2 Notes Final Maturity Date, respectively. See
"The Group II Notes Guaranty Insurance Policy and the Securities Insurer."
Cross-Collateralization. With respect to the Group I Available Funds,
on each Distribution Date, after all payments are made with respect to the Group
I Notes and all amounts then due and owing to the Master Servicer, the Swap
Counterparty and the Cap Provider, that are payable from the Group I Available
Funds, are paid in full, any remaining amounts will become part of the Group II
Available Funds for such Distribution Date. With respect to the Group II
Available Funds, on each Distribution Date, after all payments are made with
respect to the Group II Notes and all amounts then due and owing to the
Securities Insurer, the Master Servicer, the Swap Counterparty and the Cap
Provider, that are payable from the Group II Available Funds, are paid in full,
if the Group I Available Funds on such Distribution Date are not sufficient to
pay (1) the related Noteholders' Interest Distribution Amount to the Group I
Noteholders, or (2) amounts owed to the Swap Counterparty and/or the Cap
Provider with respect to the Group I Notes, any remaining Group II Available
Funds may be used to pay such deficiencies to the affected Group I Noteholders,
the Swap Counterparty and/or the Cap Provider, as applicable. To the extent such
Available Funds are not used for these purposes, all remaining sums will be
distributed to the holder of the Certificates and will not be available to the
Noteholders on subsequent Distribution Dates. There also can be no assurance
that on any Distribution Date there ever will be sufficient Group I Available
Funds to make payments to the Group II Noteholders nor that there will be
sufficient Group II Available Funds to make payments to the Group I Noteholders.
INTEREST RATE SWAPS
Payments Under the Interest Rate Swaps. On the Closing Date, the Trust
will enter into the Group I Interest Rate Swap and the Group II Interest Rate
Swap, each with Key Bank USA, National Association, as the swap counterparty
(the "Swap Counterparty"). Each of the Interest Rate Swaps will be documented
according to a 1992 ISDA Master Agreement (Multicurrency-Cross Border) (the
"ISDA Master Swap Agreements"), modified to reflect the terms of the Group I or
Group II Notes, as applicable, the Certificates, the Indenture, the Sale and
Servicing
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Agreement, and the Group I or Group II Interest Rate Swap, as applicable, and
(with respect to the Group II Interest Rate Swap) in a form acceptable to the
Securities Insurer. Each Interest Rate Swap will terminate on the date that is
the earliest to occur of the date on which the related group of Notes have been
paid in full, the respective dates on which either all of the Commercial Paper
Rate Loans (with respect to the Group I Interest Rate Swap) or the Prime Rate
Loans (with respect to the Group II Interest Rate Swap) have been repaid in
full, the occurrence and continuation of an Event of Default resulting in a
liquidation of the Group I or Group II Student Loans, as applicable, and the
date on which each of the Interest Rate Swaps is terminated in accordance with
its terms pursuant to an early termination; provided, however, that in the event
of any default by the Swap Counterparty under the Group II Interest Rate Swap,
the Trust may only terminate the Group II Interest Rate Swap at the direction of
the Securities Insurer.
In accordance with the terms of each of the Interest Rate Swaps, on
each Distribution Date, the Trust will owe the Swap Counterparty the sum of the
following amounts for each of the monthly periods in the related Collection
Period, beginning with the monthly period commencing October 1, 2002 (each, a
"Net Trust Swap Payment"):
(I) the product of:
1. (x) the Commercial Paper Rate (with respect to the Group I
Interest Rate Swap), or (y) the Prime Rate (with respect to the Group
II Interest Rate Swap) as determined as of the first day of the related
monthly period;
2. the aggregate principal balance of (x) the Commercial Paper
Rate Loans (with respect to the Group I Interest Rate Swap), or (y) the
Prime Rate Loans (with respect to the Group II Interest Rate Swap) as
determined as of the first day of the related monthly period; and
3. a fraction, the numerator of which is the actual number of
days in the related monthly period and the denominator of which is 360.
And, in accordance with the terms of each of the Interest Rate Swaps,
on each Distribution Date, the Swap Counterparty will owe the Trust an amount
equal to the sum of the following amounts for each of the monthly periods in the
related Collection Period beginning with the monthly period commencing October
1, 2002 (each, a "Net Trust Swap Receipt"):
(II) the product of:
1. Three-Month LIBOR (calculated in the same manner and on
such dates as such index is calculated for the Notes for the related
interest period) (x) less 0.15% with respect to the Group I Interest
Rate Swap, and (y) plus 2.70% with respect to the Group II Interest
Rate Swap;
2. the aggregate principal balance of (x) the Commercial Paper
Rate Loans (with respect to the Group I Interest Rate Swap), or (y) the
Prime Rate Loans (with respect to the Group II Interest Rate Swap) as
determined as of the first day of the related monthly period; and
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3. a fraction, the numerator of which is the actual number of
days in the related monthly period and the denominator of which is 360.
Payments will be made on a net basis with respect to each of the
Interest Rate Swaps between the Trust and the Swap Counterparty, in an amount
equal to the excess of (I) over (II) above for the related Collection Period, in
the case of a Net Trust Swap Payment, or the excess of (II) over (I) above for
the related Collection Period, in the case of a Net Trust Swap Receipt.
In consideration for entering into the Interest Rate Swaps, the Swap
Counterparty will be entitled to an upfront fee on the Closing Date and to all
Trust Swap Payment Amounts, in accordance with the payment priorities set forth
above under "--Distributions--Distributions from the Collection Account."
Conditions Precedent. The respective obligations of the Swap
Counterparty and the Trust to pay certain amounts due under each of the Interest
Rate Swaps will be subject to the following conditions precedent: (i) no Swap
Default (as defined below) or event that with the giving of notice or lapse of
time or both would become a Swap Default shall have occurred and be continuing
and (ii) no Termination Event (as defined below) has occurred or been
effectively designated; provided, however, that the Swap Counterparty's
obligation to pay such amounts will not be subject to such conditions unless
principal of the related group of the Notes has been accelerated following an
Event of Default under the Indenture.
Defaults Under the Interest Rate Swaps. "Events of Default" under each
of the Interest Rate Swaps are limited to: (i) failure of the Swap Counterparty
or the Trust to pay any amount when due under the related Interest Rate Swap
after giving effect to the applicable grace period; provided, however, that in
the case of the Trust, the Trust has either sufficient Group I or Group II
Available Funds, as applicable, remaining to pay such obligations on any
Collection Distribution Date after making all other required distributions with
more senior payment priorities in accordance with the priorities set forth above
under "--Distributions--Distributions from the Collection Account," (ii) the
occurrence of certain events of insolvency or bankruptcy of the Trust or the
Swap Counterparty, (iii) an acceleration of the principal of the Notes of the
related group following an Event of Default under the Indenture, and (iv) the
following other standard events of default under the ISDA Master Swap
Agreements: "Breach of Agreement" (not applicable to the Trust), "Credit Support
Default" (not applicable to the Trust), "Misrepresentation" (not applicable to
the Trust), and "Merger Without Assumption" (not applicable to the Trust), as
described in Sections 5(a) (ii), 5(a) (iii), 5(a) (iv) and 5(a) (viii) of the
ISDA Master Swap Agreements.
Termination Events. A "Termination Event" under each of the Interest
Rate Swaps consists of the following event under the ISDA Master Swap
Agreements: "Illegality" (which generally relates to changes in law causing it
to become unlawful for a party to perform its obligations under the Interest
Rate Swap), and "Tax Event" (which generally relates to either party to the
Interest Rate Swap receiving a payment under the Group I or Group II Interest
Rate Swap, as applicable, from which an amount has been deducted or withheld for
or on account of taxes), as described in Sections 5(b) (i) and 5(b) (ii) of the
ISDA Master Swap Agreements. The occurrence of a Rating Agency Downgrade will
also be a Termination Event under each of the Interest Rate Swaps.
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Early Termination of the Interest Rate Swaps. Upon the occurrence of
any Event of Default under the Group I or Group II Interest Rate Swap, the
non-defaulting party will have the right to designate an Early Termination Date
(as defined in the related Interest Rate Swap) upon the occurrence of such Event
of Default. With respect to Termination Events, an Early Termination Date may be
designated by one of the parties (as specified in the related Interest Rate
Swap) and will occur only upon notice and, in certain circumstances, after any
Affected Party (as defined in the related Interest Rate Swap) has used
reasonable efforts to transfer its rights and obligations under the Group I or
Group II Interest Rate Swap, as applicable, to a related entity within a limited
period after notice has been given of such Termination Event, all as set forth
in each of the Interest Rate Swaps. The occurrence of an Early Termination Date
under either of the Interest Rate Swaps will constitute a "Swap Early
Termination."
Upon any Swap Early Termination of the Group I or Group II Interest
Rate Swap, as applicable, the Trust or the Swap Counterparty, as the case may
be, may be liable to make a termination payment to the other (regardless, if
applicable, of which of the parties has caused such termination). The amount of
such termination payment will be based on the value of the Group I or Group II
Interest Rate Swap, as applicable, computed in accordance with the procedures
set forth in each of the Interest Rate Swaps. Any such payment could be
substantial. In the event that the Trust is required to make such a termination
payment and the Trust is the defaulting party (other than as a result of a
failure to pay), such payment will be payable in the same order of priority as
any Trust Swap Payment Amount payable to the Swap Counterparty (which is payable
pari passu with the related Noteholders' Interest Distribution Amount for each
of the Group I Notes and the Group II Notes); provided, however, that, in the
event that a termination payment is owed to the Swap Counterparty following an
Event of Default resulting from a default of the Swap Counterparty or a
Termination Event, such termination payment will be subordinate to the right of
the Group I or Group II Noteholders, as applicable, to receive full payment of
principal and interest on the Group I or Group II Notes, as applicable.
Accordingly, termination payments, if required to be made by the Trust, could
result in shortfalls to the Group I Noteholders, and to Group II Noteholders as
well if the Securities Insurer does not make required payments on the Group II
Notes Guaranty Insurance Policy. The Group II Notes Guaranty Insurance Policy
does not provide any insurance coverage in the event of a default by the Swap
Counterparty.
If, following an Early Termination Date with respect to either of the
Interest Rate Swaps, a termination payment is owed by the Trust to the Swap
Counterparty and the Trust receives a payment (an "Assumption Payment") from a
successor swap counterparty to assume the position of the Swap Counterparty, the
portion of the Assumption Payment that does not exceed the amount of the
termination payment owed by the Trust to the Swap Counterparty will be paid by
the Trust to the Swap Counterparty and will not be available to make
distributions to related Noteholders. Following such payment, the amount of the
termination payment owed by the Trust to the Swap Counterparty will be reduced
by the amount of such payment.
INTEREST RATE CAPS
Payments Under the Interest Rate Caps. On the Closing Date, the Trust
will enter into the Group I Interest Rate Cap and the Group II Interest Rate
Cap, each with Key Bank USA, National Association as the Cap Provider. Each of
the Interest Rate Caps will be documented
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according to a 1992 ISDA Master Agreement (Multicurrency-Cross Border) (the
"ISDA Master Cap Agreements"), modified to reflect the terms of the Group I
Notes or the Group II Notes, as applicable, the Certificates, the Indenture, the
Sale and Servicing Agreement and the Group I or Group II Interest Rate Cap, as
applicable. Each of the Interest Rate Caps will terminate on the date that is
the earliest to occur of the Distribution Date in November, 2012 (with respect
to the Group I Interest Rate Cap) or in November, 2012 (with respect to the
Group II Interest Rate Cap), the date on which the Group I or Group II Notes, as
applicable, have been paid in full, the occurrence and continuation of an Event
of Default resulting in a liquidation of the Group I or Group II Student Loans,
as applicable, and the date on which each of the Interest Rate Caps is
terminated in accordance with its terms pursuant to an early termination.
In accordance with the terms of each of the Interest Rate Caps, the Cap
Provider will pay to the Trust on each Distribution Date any related
Noteholders' Interest Index Carryover with respect to either the Group I or
Group II Notes, as applicable, created on such Distribution Date. In
consideration for entering into the Interest Rate Caps, the Cap Provider will be
entitled to an upfront fee on the Closing Date and to reimbursement for all sums
paid to either the Group I or Group II Noteholders, as applicable, as related
Noteholders' Interest Index Carryover but on a subordinated basis and only to
the extent of sufficient Group I or Group II Available Funds, as applicable,
therefor on subsequent Distribution Dates after making all related prior
distributions on such Distribution Date in accordance with the payment
priorities set forth above under "--Distributions--Distributions from the
Collection Account."
Defaults Under the Interest Rate Caps. "Events of Default" under each
of the Interest Rate Caps are limited to: (i) failure of the Cap Provider or the
Trust to pay any amount when due under the Group I or Group II Interest Rate
Cap, as applicable; provided, however, that in the case of the Trust, the Trust
has either Group I or Group II Available Funds, as applicable, remaining to pay
such obligations on any Distribution Date after making all other required
distributions with more senior payment priorities in accordance with the
priorities set forth above under "--Distributions--Distributions from the
Collection Account;" and (ii) certain events of insolvency or bankruptcy of the
Cap Provider. THE GROUP II NOTES GUARANTY INSURANCE POLICY DOES NOT PROVIDE ANY
INSURANCE COVERAGE IN THE EVENT OF A DEFAULT BY THE CAP PROVIDER.
Termination Event. A "Termination Event" under each of the Interest
Rate Caps consists of the following event under the ISDA Master Cap Agreements:
"Illegality," which generally relates to changes in law causing it to become
unlawful for a party to perform its obligations under the Interest Rate Caps.
Payments Upon Termination. In the event either of the Interest Rate
Caps is terminated due to a Termination Event or an Event of Default, the Cap
Provider shall pay to the Trust as liquidated damages an amount equal to the fee
it received on the Closing Date with respect to the Group I or Group I Interest
Rate Cap, as applicable. The amount of liquidated damages is not expected to be
sufficient to find a replacement interest rate cap provider and there is no
obligation of the Trust, the Depositor, the Sellers, the Indenture Trustee, the
Administrator, the Cap Provider or any other person to find a replacement
interest rate cap provider if either Interest Rate Cap is terminated.
Prospective Noteholders should note that the amount of such fee may be
insufficient to offset any resulting Noteholders' Interest Index Carryover on
future Distribution
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Dates. In the event that either the Group I or Group II Interest Rate Cap is
terminated and the Cap Provider is owed any sums for amounts previously paid to
the Trust under the Interest Rate Cap, the Cap Provider shall be entitled to
reimbursement from the Trust for all such sums, but only to the extent Group I
or Group II Available Funds, as applicable, are available therefor on subsequent
Distribution Dates after making all other required distributions with more
senior priorities in accordance with the payment priorities set forth above
under "--Distributions--Distributions from the Collection Account."
THE SWAP COUNTERPARTY AND CAP PROVIDER
KBUSA is a national banking association, a wholly owned subsidiary of
KeyCorp, and the parent of both the Depositor and QSPE. KBUSA is engaged in
consumer loan activities nationally, including, automobile lending, home equity
financing of both first- and second-home mortgages, education lending, and
marine and recreational vehicle financing. As of June 30, 2002, KBUSA had total
assets of approximately $8.1 billion, total liabilities of approximately $7.2
billion and approximately $907.4 million in stockholders' equity. KBUSA's
business is subject to examination and regulation by federal banking
authorities. KBUSA's primary federal bank regulatory authority is the Office of
the Comptroller of the Currency. The principal executive offices of KBUSA are
located at Key Center, 127 Public Square, Cleveland, Ohio 44114 and its
telephone number is (216) 689-6300. Additional information regarding KBUSA, in
any of its capacities as described herein, including call reports, are available
upon written request from the Administrator at the above address.
KeyCorp is subject to the informational requirements of the Securities
and Exchange Act of 1934, as amended, and in accordance therewith files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "SEC"). Such reports, proxy statements and other information can
be inspected and copied at the public reference facilities of the SEC, at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional
offices at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, and 233 Broadway, New York, New York 10279. Copies of such
material can be obtained from the Public Reference Section of the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Such material is
also available on the SEC's internet site on the world wide web located at
http://www.sec.gov. In addition, such reports, proxy statements and other
information concerning KeyCorp can be inspected at the offices of the New York
Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.
As of June 30, 2002, KBUSA had long-term, senior unsecured debt ratings
of A, A1 and A by Fitch Ratings ("Fitch"), Moody's Investors Service, Inc.
("Moody's") and Standard and Poor's, a division of The McGraw-Hill Companies
Inc. ("S&P"), respectively. The obligations of the Swap Counterparty are not
guaranteed by the Securities Insurer. If the rating of the Swap Counterparty (or
any successor credit support provider) is withdrawn, suspended or reduced below
A1 by Moody's or A- or its equivalent by each other Rating Agency then rating
the Notes (such withdrawal, suspension or reduction, a "Rating Agency
Downgrade"), the Swap Counterparty is required, no later than the 30th day
following such Rating Agency Downgrade, at the Swap Counterparty's expense,
either to (i) obtain a substitute Swap Counterparty, which does not cause any
Rating Agency to lower its then current rating of any Class of Group I Notes
(with respect to the Group I Interest Rate Swap), and is acceptable to the
Securities Insurer, unless a
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Securities Insurer Default has occurred and is continuing, then which does not
cause any Rating Agency to lower its then current rating of any Class of Group
II Notes (with respect to the Group II Interest Rate Swap), that has a long-term
debt rating of at least A1 by Moody's or A- or its equivalent by each other
Rating Agency then rating the Notes or (ii) enter into arrangements reasonably
satisfactory to the Indenture Trustee, each of the Rating Agencies (with respect
to the Group I Interest Rate Swap), and the Securities Insurer, unless a
Securities Insurer Default has occurred and is continuing, then each of the
Rating Agencies, (with respect to the Group II Interest Rate Swap), including
collateral arrangements, guarantees or letters of credit, which arrangements in
the view of such Rating Agency will result in the total negation of the effect
or impact of such Rating Agency Downgrade on the respective Noteholders and the
Securities Insurer. The Swap Counterparty will have the right to consent to any
amendments, supplements or modifications to each of the Transfer and Servicing
Agreements.
THE OBLIGATIONS OF KBUSA, IN ITS CAPACITIES AS SWAP COUNTERPARTY AND
CAP PROVIDER, ARE NOT GUARANTEED BY KEYCORP OR KEYBANK NATIONAL ASSOCIATION.
THE PUT OPTION PROVIDER
KeyBank National Association ("KBNA") is a national banking
association, a wholly owned subsidiary of KeyCorp, and an affiliate of KBUSA.
KBNA is engaged in a general banking business providing: (1) retail and private
banking services to consumers; (2) commercial banking services to small
businesses, middle market and large corporate customers; (3) capital market
services; and (4) trust and asset management services.
As of June 30, 2002, KBNA had total assets of approximately $72.6
billion, total liabilities (including minority interest in consolidated
subsidiaries) of approximately $67.6 billion, and approximately $5.0 billion in
stockholders' equity. KBNA's business is subject to examination and regulation
by federal banking authorities. KBNA's primary federal bank regulatory authority
is the Office of the Comptroller of the Currency. The principal executive
offices of KBNA are located at Key Center, 127 Public Square, Cleveland, Ohio
44114 and its telephone number is (216) 689-6300. Additional information
regarding KBNA, in its capacity as the Put Option Provider as described herein,
including call reports, are available upon written request from the
Administrator. As of June 30, 2002, KBNA had long-term, senior unsecured debt
ratings of A, A1 and A by Fitch, Moody's and S&P, respectively. The obligations
of the Put Option Provider are not guaranteed by the Securities Insurer.
THE OBLIGATIONS OF KBNA, IN ITS CAPACITY AS THE PUT OPTION PROVIDER,
ARE NOT GUARANTEED BY KEYCORP OR KBUSA.
THE SECURITIES INSURER
Pursuant to the Transfer and Servicing Agreements and Indenture, the
Securities Insurer will be deemed to be treated as a 100% holder of the Group II
Senior Notes for all purposes unless a Securities Insurer Default has occurred
and is continuing. As a result, the Securities Insurer will have the right to
exercise all of the rights of the Group II Noteholders set forth in the
Prospectus, which include the right to declare an Event of Default with respect
to the Group II Notes under the Indenture, accelerate the Group II Notes, direct
the Indenture Trustee to
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liquidate the Group II Student Loans, direct the Trust to terminate the Group II
Interest Rate Swap in the event of a Swap Counterparty default, remove the
Administrator following an administrator default, and remove the Master Servicer
(but only with respect to the Group II Student Loans) following a master
servicer default, respectively, and will have the right to consent to the
appointment of any successor master servicer (with respect to the Group II
Student Loans) or administrator and to consent to all amendments and actions
that require Group II Noteholder consent, on behalf of the Group II Noteholders,
except for certain amendments and consents that could affect the amount or
timing of distributions required to be made.
BY ACCEPTING ITS GROUP II NOTE, EACH GROUP II NOTEHOLDER WILL AGREE
THAT UNLESS A SECURITIES INSURER DEFAULT HAS OCCURRED AND IS CONTINUING, THE
SECURITIES INSURER SHALL HAVE THE RIGHT TO EXERCISE ALL RIGHTS OF THE GROUP II
NOTEHOLDERS AS SPECIFIED IN THE TRANSFER AND SERVICING AGREEMENTS AND THE
INDENTURE WITHOUT ANY FURTHER CONSENT OF ANY OF THE GROUP II NOTEHOLDERS (UNLESS
OTHERWISE SPECIFIED THEREIN). ANY RIGHT CONFERRED TO THE SECURITIES INSURER TO
ACT OR CONSENT ON BEHALF OF THE GROUP II NOTEHOLDERS WILL BE SUSPENDED AND SHALL
REVERT TO THE REQUISITE GROUP II NOTEHOLDERS DURING ANY PERIOD IN WHICH A
SECURITIES INSURER DEFAULT HAS OCCURRED AND IS CONTINUING; PROVIDED, HOWEVER,
THAT DURING THE CONTINUANCE OF A SECURITIES INSURER DEFAULT, THE CONSENT OF THE
SECURITIES INSURER MUST STILL BE OBTAINED WITH RESPECT TO CERTAIN ACTIONS AND
ANY AMENDMENTS THAT MAY MATERIALLY ADVERSELY AFFECT THE SECURITIES INSURER.
In the event of a downgrade in the ratings of the Securities Insurer
below A3 and A- by Moody's and S&P, respectively, the Administrator may, but is
not required to, substitute a new guaranty insurance policy with another insurer
having a rating of AAA by each Rating Agency; provided that the Securities
Insurer is reimbursed for all amounts due and owing at the time of such
substitution or replacement.
"Securities Insurer Default" means (i) a Securities Insurer Payment
Default or (ii) if an Insolvency Event (as defined in the Sale and Servicing
Agreement) with respect to the Securities Insurer occurs.
"Securities Insurer Payment Default" means the failure and continuance
of the Securities Insurer to make a payment in accordance with the terms of the
Group II Notes Guaranty Insurance Policy.
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
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rates are based on the related Formula Rate or on the related
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 related Student
Loan Rate will be required to be made unless the related Investor
Index for such Interest Period is 100 basis points greater than
the related Investor Index of the preceding Determination Date);
3. the amount of the distribution, if any, allocable to any Group I
or Group II Noteholders' Interest Index Carryover, as applicable,
together with the outstanding amount, if any, of each thereof
after giving effect to any such distribution;
4. the Pool Balance with respect to each of the Group I and Group II
Student Loans as of the close of business on the last day of the
preceding Collection Period, after giving effect to the related
payments allocated to principal reported under clause (1) above;
5. the aggregate outstanding principal balance of each Class of
Notes, and each Pool Factor as of such Distribution Date, after
giving effect to related payments allocated to principal reported
under clause (1) above;
6. the amount of the 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, in each
case as allocated to the Group I Notes and the Group II Notes,
and the amount, if any, of the Master Servicing Fee remaining
unpaid after giving effect to any such payments;
7. the amount of the aggregate Realized Losses for each of the Group
I and Group II Student Loans, if any, for such Collection Period
and the balance of Financed Student Loans in each of the Group I
and Group II Student Loans that are delinquent in each
delinquency period as of the end of such Collection Period;
8. the balance of the Group I Reserve Account and the Group II
Reserve Account on such Distribution Date, after giving effect to
changes therein on such Distribution Date;
9. the amount of any Interest and Expense Draw on such Distribution
Date and the amount of any Realized Loss Draw on such
Distribution Date, in each case with respect to both the Group I
and Group II Notes;
10. for Distribution Dates during the Funding Period, the remaining
Group I Pre-Funded Amount and Group II Pre-Funded Amount on such
Distribution Date, after giving effect to changes therein during
the related Collection Period;
11. with respect to the Special Redemption Date, the amount of any
sums remaining on deposit in the Group I or Group II Subsequent
Loan Sub-Account that are either being transferred to the Group I
or Group II Other Student Loan Pre-Funding Sub-Account, as
applicable, or are being distributed to the applicable
Noteholders as a payment of principal on such Distribution Date;
12. for the first Distribution Date on or following the end of the
Funding Period, the amount of any remaining Group I Pre-Funded
Amount and Group II Pre-Funded Amount that has not been used to
make Additional Fundings with respect to the Group I or Group II
Student Loans and is being paid out to the related Noteholders;
13. the aggregate amount of TERI's Guarantee Payments deposited into
the Collection Account (net of any amounts paid to the Depositor
(for distribution to the related Seller) under clause (1) of
"--Distributions from the Collection Account--Group II Notes"
above) expressed as a percentage of the Group II Initial Financed
Student Loan Pool Balance;
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14. the amount of any payments made under the Group I Interest Rate
Cap or the Group II Interest Rate Cap on such Distribution Date
and the aggregate amount, if any, owing to the Cap Provider for
previous payments under each of the Interest Rate Caps;
15. the amount of any payments received or made by the Trust under
the Group I Interest Rate Swap or the Group II Interest Rate Swap
on such Distribution Date, and the aggregate amount, if any,
either owed to or owed by the Swap Counterparty under each of the
Interest Rate Swaps with respect to amounts not paid or received
by the Trust on previous Distribution Dates; and
16. the amount of any draws on such Distribution Date made on each of
the Group II Notes Guaranty Insurance Policy, the amount, if any,
paid to the Securities Insurer for Insured Payments on such
Distribution Date, and the aggregate amount, if any, owing to the
Securities Insurer for all unreimbursed Insured Payments made to
the Trust.
"Realized Losses" means, the excess of the principal balance of the
Liquidated Student Loans with respect to each group of Financed Student Loans
over the Liquidation Proceeds related to such group of Financed Student Loans to
the extent allocable to principal.
TERMINATION
The obligations of the Master Servicer, the Depositor, the
Administrator, the Eligible Lender Trustee, the Sellers 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, (b) the payment to the holders of Notes of all amounts required
to be paid to them pursuant to the Transfer and Servicing Agreements, and (c)
the payment of all amounts due and owing to the Securities Insurer, the Swap
Counterparty and the Cap Provider. In order to avoid excessive administrative
expense, the Master Servicer 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 aggregate Pool Balance is
10% or less than the aggregate Group I and Group II Initial Financed Student
Loan Pool Balance plus the initial principal balance of all Subsequent Student
Loans, all remaining Financed Student Loans at a price sufficient to retire the
Notes (including the repayment of any Group I and Group II Noteholders' Interest
Index Carryover) concurrently therewith and the payment of all amounts due and
owing to the Securities Insurer, the Swap Counterparty and the Cap Provider.
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, the Securities Insurer, the Swap Counterparty
and Cap Provider therefrom, will be conveyed and transferred to the
Certificateholder.
THE PUT OPTIONS AND AUCTION SALES
The Put Options. On the Closing Date the Trust and the Put Option
Provider will enter into the two Put Option Agreements, one with respect to the
Group I Student Loans (the "Group I Put Option") and the second with respect to
the Group II Student Loans (the "Group II Put Option"). Under each of the Put
Options, any Group I and Group II Student Loans remaining in the Trust as of the
end of the Collection Period immediately preceding the November, 2012
Distribution Date are subject to the exercise of the Group I and Group II Put
Option, as
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applicable. With respect to the Group I Student Loans, the Group I Controlling
Noteholders (excluding for such purpose all Group I Notes owned by KBUSA and its
affiliates), may instruct the Indenture Trustee to exercise the Group I Put
Option on the Distribution Date in November, 2012 (the "Group I Put Option
Exercise Date"). With respect to the Group II Student Loans, a majority of the
Group II Noteholders, excluding for such purpose all Group II Notes owned by
KBUSA and its affiliates, may instruct the Indenture Trustee to exercise the
Group II Put Option on the Distribution Date in November, 2012 (the "Group II
Put Option Exercise Date"). On or before the Distribution Date that is three
months prior to the Put Option Exercise Date, the Indenture Trustee (or the
Administrator acting on its behalf) shall contact the Group I Controlling
Noteholders and the Group II Noteholders to inform such Noteholders of the
approach of the Group I Put Option Exercise Date and the Group II Put Option
Exercise Date, as applicable, and request written instructions from such
Noteholders as to whether they want the Indenture Trustee to exercise the
related Put Option on such date. If a majority of the Group I Controlling
Noteholders or a majority of the Group II Noteholders, as applicable, deliver
written instructions to exercise the related Put Option, the Indenture Trustee
will exercise such Put Option, provided that the Minimum Put Option Exercise
Price is less than or equal to the Put Option Exercise Price (plus all amounts
then on deposit in the Group I or Group II Reserve Account, as applicable). If
exercised, each Put Option will require the Put Option Provider to purchase all
Financed Student Loans remaining in the related group of Financed Student Loans.
The proceeds with respect to the exercise of the Group I or Group II Put Options
will be used to redeem the Group I or Group II Notes, as applicable.
The exercise price for each of the Put Options is equal to the Fair
Market Value of the Group I or Group II Student Loans, as applicable, on the
Group I or Group II Put Option Exercise Date, as applicable, plus accrued
interest thereon (the "Put Option Exercise Price"). For purposes of determining
the Put Option Exercise Price, "Fair Market Value" will be determined by the
Administrator (acting on behalf of the Trust and the Indenture Trustee) by
soliciting no fewer than three bids from dealers (which shall not include KBUSA
or any of its affiliates) then active in the market for whole loan purchases of
Student Loans for the Group I or Group II Student Loans, as applicable (and for
both the Group I and Group II Student Loans as a single sale if both Put Options
are exercised and the Administrator is able to obtain higher aggregate prices by
soliciting bids for the two groups together); after the solicitation of such
bids, the applicable determination of Fair Market Value will equal the lowest
bid received that is at least equal to the Minimum Acceptable Put Option
Exercise Price minus all sums on deposit in the related Reserve Account.
However, if none of the three bids is equal to or greater than the Minimum
Acceptable Put Option Exercise Price minus all sums on deposit in the related
Reserve Account, Fair Market Value will equal the highest of the three bids
received.
However, with respect to the Group I Put Option, if the Group I
Controlling Noteholders (excluding for such purpose all notes owned by KBUSA and
its affiliates), or, with respect to the Group II Put Option, a majority of the
Group II Noteholders (excluding for such purpose all notes owned by KBUSA and
its affiliates) direct the Indenture Trustee in writing to exercise the related
Put Option, and the related Put Option Exercise Price (plus all amounts then on
the deposit in the Group I or Group II Reserve Account, as applicable) is less
than the aggregate outstanding principal balance of the Group I or Group II
Notes (plus accrued and unpaid interest thereon payable on such Distribution
Date including any related Noteholders' Interest Index Carryover), as
applicable, plus any amounts then owed to the Swap Counterparty, the Cap
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Provider or the Securities Insurer, with respect to the Group I or Group II
Notes, as applicable (the "Minimum Acceptable Put Option Exercise Price"), then
the Indenture Trustee will not be permitted to exercise the related Put Option.
In such event, (1) with respect to the Group I Student Loans, the Group I
Controlling Noteholders, excluding for such purpose all Group I Notes owned by
KBUSA and its affiliates, or (2) with respect to the Group II Student Loans, a
majority of the Group II Noteholders, excluding for such purpose all Group II
Notes owned by KBUSA and its affiliates, may direct the Indenture Trustee in
writing to conduct one or more auction sales of the related group of Financed
Students on any subsequent Distribution Dates upon terms similar to those
described under "--Auction Sales" below.
With respect to either group of Notes, the likelihood of the Put Option
Exercise Price (plus all amounts then on deposit in the Group I or Group II
Reserve Account, as applicable), being at least equal to the Minimum Acceptable
Put Option Exercise Price will be reduced to the extent any substantial
termination payment is owed to the Swap Counterparty (with respect to the
related Interest Rate Swap) or significant amounts are owed to the Cap Provider
(with respect to the related Interest Rate Cap) or to the Securities Insurer
(with respect to the Group II Notes only).
In the event that the Indenture Trustee is not directed by a majority
of the requisite Noteholders to exercise the Group I or Group II Put Option, as
applicable, all distributions on the Group I or Group II Notes, as applicable,
will continue to be made on each succeeding Distribution Date in the manner
provided above under "Description of the
Securities--Distributions--Distributions from the Collection Account." However,
in the event that the Indenture Trustee was directed to exercise the related Put
Option but, due to the related Minimum Acceptable Put Option Exercise Price
being greater than the related Put Option Exercise Price (plus all amounts then
on deposit in the Group I or Group II Reserve Account, as applicable), was not
able to exercise such Put Option, the Specified Collateral Balance for the
related group of Notes shall be reduced to zero for all subsequent Distribution
Dates and all Available Funds related to each group of Notes remaining after
applying such amounts to pay the related portion of the Master Servicing Fee,
the related portion of the Administration Fee, fees due to the Securities
Insurer (with respect to the Group II Notes only), and the related Noteholders'
Interest Distribution Amount, will be paid as principal to the holders of the
related group of Notes, sequentially, until the outstanding principal balances
of each Class of the Notes of such group have been reduced to zero.
IF EITHER THE GROUP I OR GROUP II PUT OPTION IS NOT EXERCISED ON THE
GROUP I OR GROUP II PUT EXERCISE DATE, AS APPLICABLE (EITHER AS A RESULT OF THE
FAILURE OF A MAJORITY OF THE REQUISITE NOTEHOLDERS TO PROVIDE WRITTEN
INSTRUCTIONS TO THE INDENTURE TRUSTEE OR DUE TO THE RELATED MINIMUM ACCEPTABLE
PUT OPTION EXERCISE PRICE BEING GREATER THAN THE RELATED PUT OPTION EXERCISE
PRICE (PLUS ALL AMOUNTS THEN ON DEPOSIT IN THE GROUP I OR GROUP II RESERVE
ACCOUNT, AS APPLICABLE)), THE NON-EXERCISED GROUP I OR GROUP II PUT OPTION, AS
APPLICABLE, WILL BECOME NULL AND VOID AND MAY NOT BE EXERCISED ON ANY SUBSEQUENT
DATE BY ANY PARTY.
Auction Sales. In the event that either the Group I or Group II Put
Option is defaulted on by the Put Option Provider, the related group of Financed
Student Loans will be offered for sale to third-party bidders by the Indenture
Trustee on or before the next succeeding Distribution
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Date. In such event, neither KBUSA nor any of its affiliates may offer bids to
purchase such Financed Student Loans. The Indenture Trustee will auction the
Financed Student Loans in the aggregate as one pool (in the event that both Put
Options were exercised) and also as separate pools of Financed Student Loans. No
assurance can be given that one bid for all the Financed Student Loans, a
combination bids for two separate pools, or one bid for any separate pool
comprising the Financed Student Loans, will be equal to or in excess of the
related Minimum Purchase Amounts. If at least two bids are received either for
the combined pool or any separate pool of Group I and/or Group II Student Loans,
the Indenture Trustee will solicit and resolicit bids from all participating
bidders until only one bid for each such pool remains or the remaining bidders
decline to resubmit bids. The Indenture Trustee will accept the highest of such
remaining bids (or the combination of the highest bid for each pool if two pools
of Financed Student Loans are being sold separately), if any single bid (or the
sum of the two highest bids) are equal to or in excess of an amount (the
"Minimum Purchase Amount") for each group of Student Loans is 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 sum of (a) the aggregate unpaid principal amount of the
related group of Notes plus accrued and unpaid interest thereon
payable on such Distribution Date plus any related Noteholders'
Interest Index Carryover, (b) the amounts due and owing to the
Securities Insurer, the Swap Counterparty (including any
termination payments) and Cap Provider (with respect to each
group of Financed Student Loans).
If at least two bids are not received or the highest bid for all the
Financed Student Loans (or combination of the two highest bids for two separate
groups of Financed Student Loans) after the resolicitation process is completed
is not equal to or in excess of the related Minimum Purchase Amounts, the
Indenture Trustee will not consummate such sale; provided, however, that if the
Minimum Purchase Amount with respect to either the Group I or Group II Student
Loans, as applicable, is bid, the Indenture Trustee shall accept such bid and
sell only that group of Financed Student Loans. In addition to the foregoing,
the Indenture Trustee shall not accept any bid from a prospective purchaser,
unless such prospective purchaser agrees to pay all, if any, deconversion fees
owed to a Sub-Servicer if such purchaser's bid is accepted and it chooses to
replace a Sub-Servicer as the servicer of the Financed Student Loans it is
purchasing. In connection with the determination of the Minimum Purchase Amount,
the Indenture Trustee may consult and, with respect to the Group II Student
Loans only, at the direction of the Securities Insurer, provided a Securities
Insurer Default has not occurred and is continuing, shall consult with a
financial advisor, including the Underwriters, 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 of the related group on
such Distribution Date. If the sale is not consummated in accordance with the
foregoing, the Indenture Trustee, at the direction of: (1) with respect to the
Group I Student Loans, the Group I Controlling Noteholders, excluding for such
purpose all Group I Notes owned by KBUSA and its affiliates, or (2) with respect
to the Group II Student Loans, a majority of the Group II Noteholders, excluding
for such purpose all Group II Notes owned by KBUSA and its affiliates, shall
solicit bids to purchase the applicable group of 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
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successful in soliciting acceptable bids to purchase the Financed Student Loans
on either the February, 2013 Distribution Date or any subsequent Distribution
Date. In the event an auction sale fails and a group of Financed Student Loans
are not sold in accordance with the foregoing, on each Distribution Date on and
after the February, 2013 Distribution Date the Specified Collateral Balance for
the related group of Notes shall be reduced to zero and all Available Funds
related to each group of Notes remaining after applying such amounts to pay the
related portion of the Master Servicing Fee, the related portion of the
Administration Fee, fees due to the Securities Insurer (with respect to the
Group II Notes only), and the related Noteholders' Interest Distribution Amount,
will be paid as principal to the holders of the related group of Notes,
sequentially, until the outstanding principal balances of each Class of the
Notes of such group have been reduced to zero. Each Interest Rate Swap will
terminate upon the consummation of a successful auction and the Swap
Counterparty may be owed a termination payment with respect to either or both
Interest Rate Swaps which may be substantial. The likelihood of receiving a bid
at least equal to the related Minimum Purchase Amount will be reduced to the
extent any substantial termination payment is owed to the Swap Counterparty
(with respect to either Interest Rate Swap) or significant amounts are owed to
the Cap Provider (with respect to either Interest Rate Cap) or to the Securities
Insurer (with respect to the Group II Student Loans only).
"Auction Purchase Amount" with respect to the related group of 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 applicable Reserve Account as for
such date.
ADMINISTRATOR
KBUSA, 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 Depositor, 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 $3,000 per quarter (the
"Administration Fee"), to be allocated pro rata between the Group I Notes and
the Group II Notes based on their aggregate outstanding principal balances on
each related Distribution Date.
THE GROUP II NOTES GUARANTY INSURANCE POLICY
AND THE SECURITIES INSURER
THE GROUP II NOTES GUARANTY INSURANCE POLICY
The following information has been supplied by Ambac Assurance
Corporation (the "Securities Insurer")" for inclusion in this Prospectus
Supplement. The Securities Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or the accompanying
Prospectus or any information or disclosure contained herein, or omitted
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herefrom, other than with respect to the accuracy of the information regarding
the Notes Guaranty Insurance Policy (the "Group II Notes Guaranty Insurance
Policy") and the Securities Insurer set forth under the heading "The Group II
Notes Guaranty Insurance Policy and the Securities Insurer" herein.
Additionally, the Securities Insurer makes no representation regarding the Group
II Notes or the advisability of investing in any Class of Group II Notes.
Simultaneously with the issuance of the Securities, the Securities
Insurer will issue the Group II Notes Guaranty Insurance Policy to the Indenture
Trustee for the benefit of each Group II Noteholder. The Securities Insurer, in
consideration of the payment of a premium and subject to the terms of the Group
II Notes Guaranty Insurance Policy, unconditionally guarantees the payment of
Insured Amounts to the Indenture Trustee on behalf of the Holders of the Group
II Notes. The Securities Insurer will pay Insured Amounts which are Due for
Payment to the Indenture Trustee on behalf of the Holders of the Group II Notes
on the later of (1) the Distribution Date or Final Maturity Date, as applicable,
on which the Insured Amount is distributable to the Group II Noteholders under
the Indenture and the Sale and Servicing Agreement, and (2) the third business
day following the business day the Securities Insurer shall have received
telephonic or telegraphic notice, subsequently confirmed in writing, or written
notice by registered or certified mail, from the Indenture Trustee, specifying
that an Insured Amount is due in accordance with the terms of the Group II Notes
Guaranty Insurance Policy, provided that if such documents are received after
12:00 noon New York City time on such business day, they will be deemed to have
been received on the following business day.
For purposes of the Group II Notes Guaranty Insurance Policy, the
following terms have the following meanings:
"Deficiency Amount" means (a) as of any Distribution Date, the excess,
if any, of (1) the Noteholders' Interest Distribution Amount for the Group II
Notes on such Distribution Date, over (2) Group II Available Funds for such
Distribution Date after giving effect to the payment of the related Master
Servicing Fee, the Administration Fee allocated to the Group II Notes and all
amounts due to the Securities Insurer for such Distribution Date, plus the
application of any amounts available on such Distribution Date to cover such
payments from amounts on deposit in the Group II Reserve Account and the Group
II Pre-Funding Accounts, and (b) on either the Class II-A-1 Notes Final Maturity
Date or the Class II-A-2 Notes Final Maturity Date, the Class II-A-1 Outstanding
Principal Amount, in the case of the Class II-A-1 Notes Final Maturity Date, or
the Class II-A-2 Outstanding Principal Amount, in the case of the Class II-A-2
Notes Final Maturity Date, in each case after giving effect to any distributions
on such date and the application of any amounts available on such Distribution
Date to cover such payments, including but not limited to amounts on deposit in
the Group II Reserve Account.
"Due for Payment" means, with respect to any Insured Amounts, such
amount that is due and payable under the Indenture and the Sale and Servicing
Agreement on the related Distribution Date or Final Maturity Date, as
applicable.
"Holder" means each registered owner or beneficial owner of any Group
II Note (other than the Administrator, the Depositor, the Eligible Lender
Trustee, the Issuer, the Master Servicer, the Sellers, the Indenture Trustee or
any Sub-Servicer or any of their respective
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affiliates) who, on the applicable Distribution Date, is entitled under the
terms of the applicable Group II Note to payment thereunder.
"Insured Amount" means, with respect to any Distribution Date and any
Final Maturity Date, as applicable, an amount equal to the Deficiency Amount for
such Distribution Date and Final Maturity Date, as applicable.
"Insured Payments" means, with respect to any Distribution Date and any
Final Maturity Date, the aggregate amount paid by the Securities Insurer to the
Indenture Trustee in respect of (i) Insured Amounts for such Distribution Date
or Final Maturity Date and (ii) Preference Amounts for any given business day.
"Nonpayment" means, with respect to any Distribution Date or Final
Maturity Date, as applicable, an Insured Amount which is Due for Payment but has
not been and will not be paid in respect of such Distribution Date or Final
Maturity Date pursuant to the Indenture and the Sale and Servicing Agreement.
"Notice" means telephonic or telegraphic notice, promptly confirmed in
writing by telecopy substantially in the form of Exhibit A to the Group II Notes
Guaranty Insurance Policy, the original of which is subsequently delivered by
registered or certified mail, from the Indenture Trustee to the Securities
Insurer specifying the Insured Amount which shall be due and owing on the
applicable Distribution Date or Final Maturity Date.
"Preference Amount" means any payment of Insured Amounts on any Class
of Group II Notes which has become Due for Payment, the nonpayment of which
would have been covered by the Group II Notes Guaranty Insurance Policy, and
which is made to a Holder by or on behalf of the Indenture Trustee which has
been deemed a preferential transfer and theretofore recovered from its Holder
pursuant to the United States Bankruptcy Code in accordance with a final,
non-appealable order of a court of competent jurisdiction.
The Securities Insurer's obligation under the Group II Notes Guaranty
Insurance Policy will be discharged to the extent that funds equal to the
applicable Insured Payment are received by the Indenture Trustee for
distribution to the Holders of the Group II Notes, whether or not those funds
are properly distributed by the Indenture Trustee or the Paying Agent. Payments
of Insured Amounts will be made only at the time set forth in the Group II Notes
Guaranty Insurance Policy, and no accelerated payments of Insured Amounts will
be made regardless of any acceleration of the Group II Notes, unless the
acceleration is at the sole option of the Securities Insurer.
For purposes of the Group II Notes Guaranty Insurance Policy, a holder
as to a particular Class of Group II Notes does not and may not include the
Depositor, the Trust, the Indenture Trustee, the Master Servicer or any
Sub-Servicer (or any of their respective affiliates).
THE GROUP II NOTES GUARANTY INSURANCE POLICY DOES NOT INSURE ANY
PAYMENTS WHATSOEVER WITH RESPECT TO THE GROUP I NOTES. ONLY THE GROUP II
NOTEHOLDERS ARE ENTITLED TO THE BENEFITS OF THE GROUP II NOTES GUARANTY
INSURANCE POLICY.
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The Group II Notes Guaranty Insurance Policy will not cover (a)
premiums, if any, payable in respect of any Group II Notes, (b) shortfalls, if
any, attributable to the liability of the Issuer or the Indenture Trustee or
Holder for withholding taxes, if any (including interest and penalties in
respect of any such liability), (c) payments of any related Group II
Noteholders' Interest Index Carryover, (d) any obligations of the Cap Provider
under the Group II Interest Rate Cap, (e) any obligations of the Swap
Counterparty under the Group II Interest Rate Swap and (f) any risk other than
Nonpayment, including the failure of the Indenture Trustee or the Paying Agent
to make any disbursements required under the Indenture and the Sale and
Servicing Agreement to any Holder or the Indenture Trustee or the Paying Agent
to remit funds to any other party.
In the absence of payments under the Group II Notes Guaranty Insurance
Policy, holders of Group II Notes will directly bear the credit risks associated
with their related Class of Group II Notes.
Capitalized terms used in the Group II Notes Guaranty Insurance Policy
and not otherwise defined in the Group II Notes Guaranty Insurance Policy shall
have the meanings set forth in the Sale and Servicing Agreement, as of the date
of execution of the Group II Notes Guaranty Insurance Policy, without giving
effect to any subsequent amendment to or modification of the Sale and Servicing
Agreement, unless such amendment or modification has been approved in writing by
the Securities Insurer.
The Group II Notes Guaranty Insurance Policy is not cancelable for any
reason. The premium on the Group II Notes Guaranty Insurance Policy is not
refundable for any reason, including payment, or provision being made for
payment, prior to maturity of the Group II Notes.
THE GROUP II NOTES GUARANTY INSURANCE POLICY IS BEING ISSUED UNDER AND
PURSUANT TO, AND WILL BE CONSTRUED UNDER, THE LAWS OF THE STATE OF NEW YORK,
WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF.
The insurance provided by the Group II Notes Guaranty Insurance Policy
is not covered by the Property/Casualty Insurance Security Fund specified in
Article 76 of the New York Insurance Law.
PAYMENT OF PREFERENCE AMOUNTS
Pursuant to the Group II Notes Guaranty Insurance Policy, the
Securities Insurer will pay any Insured Payment that is a Preference Amount on
the later of (a) the second business day next following the business day on
which the Securities Insurer shall have received the items referred to in
clauses (i), (ii), (iii), (iv) and (v) below and (b) the date set forth in the
Order (as defined below), upon receipt of (i) a certified copy of the final,
non-appealable order of a court or other body exercising jurisdiction in such
insolvency proceeding to the effect that the Indenture Trustee, or Holder, as
applicable, is required to return such Preference Amount paid during the term of
the Group II Notes Guaranty Insurance Policy because such payments were avoided
as a preferential transfer or otherwise rescinded or required to be restored by
the Indenture Trustee or
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Holder (the "Order"), (ii) an opinion of counsel satisfactory to the Securities
Insurer that such Order has been entered and is final and not subject to appeal
or stay, (iii) an assignment in such form as is required by the Securities
Insurer, duly executed and delivered by the Indenture Trustee or Holder, as
applicable, irrevocably assigning to the Securities Insurer all rights and
claims of the Indenture Trustee or Holder, as applicable, relating to or arising
under the Group II Notes against the debtor which made such preference payment
or otherwise with respect to such preference payment, (iv) appropriate
instruments to effect the appointment of the Securities Insurer as agent for
such Holder or Indenture Trustee, as applicable, in any legal proceeding related
to such preference payment, such instruments being in a form satisfactory to the
Securities Insurer and (v) a Notice appropriately completed and executed by the
Indenture Trustee; provided that if such documents are received after 12:00
noon, New York City time, on such business day, they shall be deemed to be
received on the following business day; provided, further, that the Securities
Insurer shall not be obligated to make any payment in respect of any Preference
Amount representing a payment of principal of the Group II Notes prior to the
time the Securities Insurer would have been required to make a payment in
respect of such principal pursuant to the Group II Notes Guaranty Insurance
Policy. Such payments shall be disbursed to the court or receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order of the court
exercising jurisdiction on behalf of the Indenture Trustee or Holder, as
applicable, and not to the Indenture Trustee or any Holder, as applicable,
directly unless the Indenture Trustee or such Holder, as applicable, has
returned principal or interest paid on the Group II Notes to such court or
receiver, conservator, debtor-in-possession or trustee in bankruptcy named in
the Order, in which case such payment shall be disbursed to the Indenture
Trustee on behalf of the Holder, subject to delivery of (a) the items referred
to in clauses (i), (ii), (iii), (iv) and (v) above to the Securities Insurer and
(b) evidence satisfactory to the Securities Insurer that payment has been made
to such court or receiver, conservator, debtor-in-possession or trustee in
bankruptcy named in such Order.
DESCRIPTION OF THE SECURITIES INSURER
Ambac Assurance Corporation (referred to as "Ambac Assurance" or "the
Securities Insurer") is a Wisconsin-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of
Wisconsin and licensed to do business in all 50 states, the District of
Columbia, the Territory of Guam and the Commonwealth of Puerto Rico, with
admitted assets of approximately $5,587,000,000 (unaudited) and statutory
capital of approximately $3,453,000,000 (unaudited) as of June 30, 2002.
Statutory capital consists of Ambac Assurance's policyholders' surplus and
statutory contingency reserve. Standard & Poor's Credit Markets Services, a
Division of The McGraw-Hill Companies, Moody's Investors Service and Fitch
Ratings have each assigned a triple-A financial strength rating to Ambac
Assurance.
Ambac Assurance makes no representation regarding the Group II Notes or
the advisability of investing in the Group II Notes and makes no representation
regarding, nor has it participated in, the preparation of this Prospectus
Supplement or the Prospectus other than the information supplied by Ambac
Assurance under the headings "Description of the Securities Insurer", "Available
Information," "Financial Information About the Securities Insurer" and
"Financial Strength Ratings of the Securities Insurer" herein.
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AVAILABLE INFORMATION
The parent company of Ambac Assurance, Ambac Financial Group, Inc.
("Ambac Financial"), is subject to the informational requirements of the
Exchange Act, and in accordance therewith files reports, proxy statements and
other information with the SEC. These reports, proxy statements and other
information can be read and copied at the SEC's public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room. The SEC
maintains an internet site at http://www.sec.gov that contains reports, proxy
and information statements and other information regarding companies that file
electronically with the SEC, including Ambac Financial. These reports, proxy
statements and other information can also be read at the offices of the New York
Stock Exchange, Inc. (the "NYSE"), 20 Broad Street, New York, New York 10005.
Copies of Ambac Assurance's financial statements prepared in accordance
with statutory accounting standards are available from Ambac Assurance. The
address of Ambac Assurance's administrative offices and its telephone number are
One State Street Plaza, 19th Floor, New York, New York 10004 and (212) 668-0340.
FINANCIAL INFORMATION ABOUT THE SECURITIES INSURER
The following documents filed by Ambac Financial with the SEC (File No.
1-10777) are incorporated by reference into this Prospectus Supplement:
- Ambac Financial's Current Report on Form 8-K filed on January
25, 2002;
- Ambac Financial's Annual Report on Form 10-K for the fiscal
year ended December 31, 2001 and filed on March 26, 2002;
- Ambac Financial's Current Report on Form 8-K filed on April
18, 2002;
- Ambac Financial's Quarterly Report on Form 10-Q for the fiscal
quarterly period ended March 31, 2002 and filed on May 13,
2002;
- Ambac Financial's Current Report on Form 8-K filed on July 19,
2002;
- Ambac Financial's Quarterly Report on Form 10-Q for the fiscal
quarterly period ended June 30, 2002 and filed on August 14,
2002; and
- Ambac Financial's Current Report on Form 8-K filed on August
14, 2002.
All documents subsequently filed by Ambac Financial pursuant to the
requirements of the Exchange Act after the date of this Prospectus Supplement
will be available for inspection in the same manner as described above in
"--Available Information" and shall be deemed to be incorporated by reference
into this Prospectus Supplement and to be a part hereof from the date of such
filing.
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Any statement contained in a document incorporated herein by reference
shall be modified or superseded for the purposes of this Prospectus Supplement
to the extent that a statement contained herein by reference herein also
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus Supplement.
All financial statements of the Securities Insurer and its subsidiaries
included in documents filed by Ambac Financial with the SEC pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act, subsequent to the date of this
Prospectus Supplement and prior to the termination of the offering of the Group
II Notes shall be deemed to be incorporated by reference into this Prospectus
Supplement and to be a part hereof from the respective dates of filing such
financial statements.
The following table sets forth the capitalization of the Securities
Insurer as of December 31, 2000, December 31, 2001, and June 30, 2002 in
conformity with accounting principles generally accepted in the United States of
America.
AMBAC ASSURANCE CORPORATION AND
SUBSIDIARIES CAPITALIZATION TABLE
(in millions)
DECEMBER 31, DECEMBER 31, JUNE 30,
2000 2001 2002
----------- ----------- -----------
(UNAUDITED)
Unearned premiums......................... $1,556 $1,790 $1,880
Other liabilities......................... 581 888 1,138
--------- ---------- ---------
Total liabilities......................... 2,137 2,678 3,018
Stockholder's equity
Common stock 82 82 82
Additional paid-in capital 760 928 922
Accumulated other comprehensive income 82 81 142
Retained earnings 2,002 2,386 2,592
Total stockholder's equity 2,926 3,477 3,738
--------- ---------- ---------
Total liabilities and stockholder's equity $5,063 $6,155 $6,756
FINANCIAL STRENGTH RATINGS OF THE SECURITIES INSURER
Moody's rates the financial strength of the Securities Insurer "Aaa."
S&P rates the financial strength of the Securities Insurer "AAA."
Fitch rates the financial strength of the Securities Insurer "AAA."
S-140
Each rating of the Securities Insurer should be evaluated
independently. The ratings reflect the respective rating agency's current
assessment of the creditworthiness of the Securities Insurer and its ability to
pay claims on its policies of insurance. Any further explanation as to the
significance of the above ratings may be obtained only from the applicable
rating agency.
The above ratings are not recommendations to buy, sell or hold any
Class of the Group II Notes, and the ratings may be subject to revision or
withdrawal at any time by the rating agencies. Any downward revision or
withdrawal of any of the above ratings may have an adverse effect on the market
price of the Group II Notes. The Securities Insurer does not guaranty the market
price of any Class of the Group II Notes nor does it guaranty that the ratings
on any Class of the Group II Notes will not be revised or withdrawn.
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 Depositor, KBUSA, the Master Servicer and the Certificateholder
will agree to treat the Trust as a division of KBUSA (or the Certificateholder)
for purposes of federal, state and local income and franchise tax with the
assets of the Trust being held by KBUSA (or the Certificateholder), the Notes
being debt of KBUSA (or the Certificateholder), and the Trust being disregarded
as an entity separate from KBUSA (or the Certificateholder).
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 disregarded entity, 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.
We recommend that investors carefully review the information under the
caption "Income Tax Consequences" in the Prospectus.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("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
S-141
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 Sellers, the Depositor, 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.
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.
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.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement relating to the Notes (the "Underwriting Agreement"), the Depositor
has agreed to cause the Trust to sell to the underwriters named below
(collectively, the "Underwriters"), and each of the Underwriters
S-142
has severally agreed to purchase, the principal amount of Class I-A-1 Notes,
Class I-A-2 Notes, Class I-B Notes, Class II-A-1 Notes and Class II-A-2 Notes
set forth opposite its name:
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF AMOUNT OF
CLASS I-A-1 CLASS I-A-2 CLASS I-B
UNDERWRITER NOTES NOTES NOTES TOTAL
----------- ----------- ----------- ---------- ------------
Deutsche Bank
Securities Inc. $40,900,000 $91,500,000 $4,100,000 $136,500,000
McDonald
Investments Inc. $40,900,000 $91,500,000 $4,100,000 $136,500,000
PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF
CLASS II-A-1 CLASS II-A-2
UNDERWRITER NOTES NOTES TOTAL
----------- ----------- ------------ ------------
Deutsche Bank
Securities Inc. $67,000,000 $277,000,000 $344,000,000
McDonald
Investments Inc. $67,000,000 $277,000,000 $344,000,000
In the Underwriting Agreement, the Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all the Notes offered
hereby if any of the Notes are purchased. The Depositor has been advised by the
Underwriters that the Underwriters propose initially to offer the Notes 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 0.120% per Class I-A-1 Note, 0.192% per Class I-A-2
Note, 0.240% per Class I-B Note, 0.120% per Class II-A-1 Note, and 0.241% per
Class II-A-2 Note. The Underwriters may allow and such dealers may reallow to
other dealers a discount not in excess of 0.100% per Class I-A-1 Note, 0.125%
per Class I-A-2 Note, 0.150% per Class I-B Note, 0.100% per Class II-A-1 Note,
and 0.150% per Class II-A-2 Note. 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 bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
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 Notes originally
sold by such syndicate member are purchased in a syndicate covering transaction
to cover syndicate short positions. Such over-allotment, stabilizing
transactions, syndicate covering transactions and penalty bids may cause the
price of the Notes to be higher
S-143
than it would otherwise be in the absence of such transactions. These
transactions, if commenced, may be discontinued at any time.
Out of pocket expenses for this offering are estimated to be
approximately $1,000,000.
The Notes are a new issue of securities with no established trading
market. Neither the Depositor nor KBUSA intends to apply for listing of any
Class of the Notes on a national securities exchange, but has been advised by
Deutsche Bank Securities Inc. that it intends to, and by McDonald Investments
Inc. ("McDonald Investments") that it may, make a market in the Notes. The
Underwriters are not obligated, however, to make a market in any Class of the
Notes and may discontinue market-making at any time without notice. No assurance
can be given as to the liquidity of the trading market for any Class of the
Notes.
The Underwriting Agreement provides that the Depositor and KBUSA 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.
Deutsche Bank Securities Inc. is engaged from time to time by KeyCorp,
the parent corporation of KBUSA, to provide investment banking services.
After the initial distribution of the Notes by the Underwriters, this
Prospectus Supplement may be used by McDonald Investments, a wholly-owned
subsidiary of KeyCorp and an affiliate of the Depositor, the Sellers, the
Administrator and the Master Servicer, or its successors, in connection with
offers and sales relating to market-making transactions in the Notes. 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.
KBUSA has also agreed to pay the Underwriters a structuring fee equal
to $961,000.
EXPERTS
The balance sheet of KeyCorp Student Loan Trust 2002-A, as of September
3, 2002, appearing as part of Appendix A in this Prospectus Supplement, and
incorporated by reference into the Registration Statement (as defined in the
Prospectus), has been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing as part of Appendix A to this Prospectus
Supplement, and incorporated by reference into the Registration Statement. Such
financial statement is included herein, and incorporated by reference into the
Registration Statement, in reliance upon such report given on the authority of
such firm as experts in accounting and auditing.
The consolidated financial statements of Ambac Assurance Corporation
and subsidiaries, as of December 31, 2000, December 31, 2001 and for each of the
three years in the period ended December 31, 2001 are incorporated by reference
in this Prospectus Supplement and in the Registration Statement, in reliance on
the report of KPMG LLP, independent certified public
S-144
accountants, incorporated by reference in the Prospectus Supplement, and on the
authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters relating to the Securities will be passed upon
for the Trust, the Sellers and the Administrator by Forrest F. Stanley, Esq.,
General Counsel and Assistant Secretary of KBUSA, as counsel for the Sellers,
and by Thompson Hine LLP, Cleveland, Ohio and for the Underwriters by McKee
Nelson 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. In addition, certain Delaware law and other matters will be passed
upon for the Trust by Pepper Hamilton LLP.
S-145
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
----
Access Group...................................................................................................S-48
Access Group Loans.............................................................................................S-40
Access Group Sale Agreement....................................................................................S-39
Access Program.................................................................................................S-47
Additional Funding............................................................................................S-101
Additional Student Loans.......................................................................................S-40
Administration Agreement.......................................................................................S-98
Administration Fee............................................................................................S-134
Agency Operating Fund..........................................................................................S-74
Ambac Assurance...............................................................................................S-138
Ambac Financial...............................................................................................S-139
ASA............................................................................................................S-35
ASA Agreement..................................................................................................S-75
Assigned Rights................................................................................................S-33
Assumption Payment............................................................................................S-124
Auction Purchase Amount.......................................................................................S-134
Available Funds...............................................................................................S-109
Bankruptcy Code................................................................................................S-72
Benefit Plan..................................................................................................S-141
Cap Accounts..................................................................................................S-100
Cap Provider...................................................................................................S-34
Cede...........................................................................................................S-90
Certificateholder..............................................................................................S-99
Certificates...................................................................................................S-35
Class..........................................................................................................S-90
Class A Notes..................................................................................................S-90
Class I-A-1 Notes..............................................................................................S-35
Class I-A-1 Notes Final Maturity Date..........................................................................S-94
Class I-A-2 Notes..............................................................................................S-35
Class I-A-2 Notes Final Maturity Date..........................................................................S-94
Class I-B Notes................................................................................................S-35
Class I-B Notes Final Maturity Date............................................................................S-94
Class II-A-1 Notes.............................................................................................S-35
Class II-A-1 Notes Final Maturity Date.........................................................................S-95
Class II-A-2 Notes.............................................................................................S-35
Class II-A-2 Notes Final Maturity Date.........................................................................S-95
Closing Date...................................................................................................S-32
Closing Date Deposits..........................................................................................S-36
Code..........................................................................................................S-141
Collection Account.............................................................................................S-33
S-146
Collection Period..............................................................................................S-91
Commercial Paper Rate..........................................................................................S-42
Commercial Paper Rate Loans....................................................................................S-42
CSAC...........................................................................................................S-35
Cumulative Default Ratio.......................................................................................S-95
Cutoff Date....................................................................................................S-39
Deferral Period................................................................................................S-42
Deficiency Amount.............................................................................................S-135
Department.....................................................................................................S-32
Depositor......................................................................................................S-32
Depository.....................................................................................................S-90
Determination Date............................................................................................S-109
disqualified persons..........................................................................................S-141
Distribution Dates..............................................................................................S-3
DOE Data Book..................................................................................................S-74
DTC............................................................................................................S-90
DUAL Loans.....................................................................................................S-47
Due for Payment...............................................................................................S-135
ECMC...........................................................................................................S-35
Eligible Deposit Account......................................................................................S-100
Eligible Institution..........................................................................................S-101
Eligible Investments..........................................................................................S-100
Eligible Lender Trustee........................................................................................S-32
Equity Interest...............................................................................................S-142
ERISA.........................................................................................................S-141
Escrow Accounts................................................................................................S-33
Exchange Act..................................................................................................S-126
Expected Interest Collections..................................................................................S-92
Fair Market Value.............................................................................................S-131
FDIC..........................................................................................................S-101
Federal Assistance.............................................................................................S-35
Federal Consolidation Loan.....................................................................................S-67
Federal Consolidation Loan Rebate.............................................................................S-109
Federal Direct Consolidation Loans.............................................................................S-67
Federal Guarantors.............................................................................................S-35
Federal Loans..................................................................................................S-35
Federal Origination Fee.......................................................................................S-109
Federal Reserve Fund...........................................................................................S-74
Federal Tax Counsel...........................................................................................S-141
Fee Advances...................................................................................................S-42
FFELP..........................................................................................................S-74
Final Maturity Dates............................................................................................S-9
Financed Federal Loans.........................................................................................S-32
Financed Private Loans.........................................................................................S-32
Financed Student Loans.........................................................................................S-32
Fitch.........................................................................................................S-126
S-147
Fleet..........................................................................................................S-39
Fleet Loans....................................................................................................S-39
Fleet Sale Agreement...........................................................................................S-39
FMC.......................................................................................................... S-83
FMER...........................................................................................................S-83
Forbearance Periods............................................................................................S-42
Formula Rate...................................................................................................S-91
Funding Period................................................................................................S-104
GLHEC..........................................................................................................S-35
Grace Period...................................................................................................S-68
graduate schools...............................................................................................S-47
Great Lakes....................................................................................................S-37
Group I Available Funds.......................................................................................S-109
Group I Cap Account...........................................................................................S-100
Group I Class A Notes..........................................................................................S-90
Group I Collection Sub-Account.................................................................................S-33
Group I Controlling Noteholders................................................................................S-96
Group I Escrow Account.........................................................................................S-33
Group I Initial Financed Student Loan Pool Balance............................................................S-117
Group I Initial Financed Student Loans.........................................................................S-34
Group I Interest Rate Cap......................................................................................S-34
Group I Interest Rate Swap.....................................................................................S-34
Group I Noteholders............................................................................................S-67
Group I Noteholders' Interest Index Carryover..................................................................S-92
Group I Notes..................................................................................................S-35
Group I Other Student Loan Pre-Funding Sub-Account.............................................................S-40
Group I Parity Date............................................................................................S-94
Group I Pool Balance..........................................................................................S-116
Group I Pre-Funded Amount......................................................................................S-33
Group I Pre-Funding Account....................................................................................S-33
Group I Principal Distribution Amount.........................................................................S-116
Group I Put Option.............................................................................................S-34
Group I Put Option Exercise Date..............................................................................S-131
Group I Reserve Account........................................................................................S-32
Group I Reserve Account Initial Deposit.......................................................................S-119
Group I Senior Noteholders.....................................................................................S-67
Group I Senior Notes...........................................................................................S-35
Group I Student Loans..........................................................................................S-32
Group I Subordinate Noteholders................................................................................S-67
Group I Subordinate Notes......................................................................................S-35
Group I Subsequent Loan Sub-Account............................................................................S-33
Group I Subsequent Student Loans...............................................................................S-33
Group II Available Funds......................................................................................S-109
Group II Cap Account..........................................................................................S-100
Group II Class A Notes.........................................................................................S-90
Group II Collection Sub-Account................................................................................S-33
S-148
Group II Escrow Account........................................................................................S-33
Group II Initial Financed Student Loan Pool Balance...........................................................S-117
Group II Initial Financed Student Loans........................................................................S-34
Group II Interest Rate Swap....................................................................................S-34
Group II Noteholders...........................................................................................S-67
Group II Noteholders' Interest Index Carryover.................................................................S-92
Group II Notes.................................................................................................S-35
Group II Notes Guaranty Insurance Policy.......................................................................S-34
Group II Other Student Loan Pre-Funding Sub-Account............................................................S-40
Group II Parity Date...........................................................................................S-96
Group II Pool Balance.........................................................................................S-116
Group II Pre-Funded Amount.....................................................................................S-33
Group II Pre-Funding Account...................................................................................S-33
Group II Principal Distribution Amount........................................................................S-116
Group II Put Option............................................................................................S-34
Group II Put Option Exercise Date.............................................................................S-131
Group II Reserve Account.......................................................................................S-33
Group II Reserve Account Initial Deposit......................................................................S-119
Group II Student Loans.........................................................................................S-32
Group II Subsequent Loan Sub-Account...........................................................................S-33
Guarantee Agreement............................................................................................S-35
Guarantee Agreements...........................................................................................S-35
Guarantee Payments.............................................................................................S-35
Guaranteed Access Group Loans..................................................................................S-48
Guaranteed Private Loans.......................................................................................S-32
HICA...........................................................................................................S-69
Higher Education Act...........................................................................................S-35
Holder........................................................................................................S-135
Indenture......................................................................................................S-90
Indenture Trustee...............................................................................................S-3
Index Maturity.................................................................................................S-97
Initial Financed Student Loans.................................................................................S-34
Insurance Agreement............................................................................................S-96
Insured Amount................................................................................................S-136
Insured Payments..............................................................................................S-136
Interest and Expense Draw.....................................................................................S-119
Interest Period................................................................................................S-90
Interest Rate Caps.............................................................................................S-34
Interest Rate Swaps............................................................................................S-34
Interest Subsidy Payments......................................................................................S-69
Investment Earnings...........................................................................................S-100
Investor Index.................................................................................................S-91
ISDA Master Cap Agreements....................................................................................S-125
ISDA Master Swap Agreements...................................................................................S-121
KBNA..........................................................................................................S-127
KBUSA..........................................................................................................S-36
S-149
KBUSA Student Loan Transfer Agreement..........................................................................S-38
KBUSA Student Loans............................................................................................S-38
Keys2Repay Program............................................................................................S-108
LIBOR..........................................................................................................S-97
LIBOR Determination Date.......................................................................................S-97
Liquidated Student Loans......................................................................................S-110
Liquidation Proceeds..........................................................................................S-110
LLC Agreement..................................................................................................S-38
LSAC...........................................................................................................S-48
LSAS...........................................................................................................S-48
Margin.........................................................................................................S-92
Master Servicer................................................................................................S-36
Master Servicer Default.......................................................................................S-104
Master Servicing Fee Percentage................................................................................S-38
Maximum TERI Payments Amount..................................................................................S-114
McDonald Investments..........................................................................................S-144
MHEAA..........................................................................................................S-35
Minimum Acceptable Put Option Exercise Price..................................................................S-132
Minimum Purchase Amount.......................................................................................S-133
Monthly Servicing Payment Date.................................................................................S-38
Moody's.......................................................................................................S-126
Net Trust Swap Payment........................................................................................S-122
Net Trust Swap Payment Carryover Shortfall....................................................................S-114
Net Trust Swap Receipt........................................................................................S-122
Net Trust Swap Receipt Carryover Shortfall....................................................................S-114
Non-Guaranteed Private Graduate Loans.........................................................................S-118
Non-Guaranteed Private Loan Graduate Trigger Event............................................................S-117
Non-Guaranteed Private Loans...................................................................................S-32
Non-Guaranteed Private Undergraduate Loan Trigger Event.......................................................S-117
Non-Guaranteed Private Undergraduate Loans....................................................................S-117
Nonpayment....................................................................................................S-136
Note Interest Rate.............................................................................................S-90
Noteholders....................................................................................................S-67
Noteholders' Distribution Amount..............................................................................S-115
Noteholders' Interest Carryover Shortfall.....................................................................S-115
Noteholders' Interest Distribution Amount.....................................................................S-115
Noteholders' Interest Index Carryover..........................................................................S-92
Noteholders' Principal Distribution Amount....................................................................S-115
Notice........................................................................................................S-136
NSLP...........................................................................................................S-35
NYHESC.........................................................................................................S-35
Obligors......................................................................................................S-116
Originating Lender.............................................................................................S-48
Other Student Loan Pre-Funding Sub-accounts....................................................................S-40
Other Student Loans............................................................................................S-40
Participants...................................................................................................S-90
S-150
parties in interest...........................................................................................S-141
Pennsylvania Tax Counsel......................................................................................S-141
PEP Loans......................................................................................................S-46
PHEAA..........................................................................................................S-35
Plan Assets Regulation........................................................................................S-142
PLUS Loans.....................................................................................................S-37
Pool Balance..................................................................................................S-116
Preference Amount.............................................................................................S-136
Pre-Funded Amounts.............................................................................................S-33
Pre-Funding Accounts...........................................................................................S-33
Prime Rate.....................................................................................................S-42
Prime Rate Loans...............................................................................................S-42
Principal Distribution Amount.................................................................................S-116
Private Consolidation Loans....................................................................................S-67
Private Graduate Loan Trigger Event...........................................................................S-117
Private Guarantors.............................................................................................S-69
Private Loans..................................................................................................S-35
Programs.......................................................................................................S-40
prohibited transaction........................................................................................S-141
Prospectus.....................................................................................................S-16
Prospectus Supplement..........................................................................................S-16
PTCE..........................................................................................................S-142
Purchase Amount...............................................................................................S-106
Purchase Price.................................................................................................S-99
Put Option Exercise Price.....................................................................................S-131
Put Option Provider............................................................................................S-34
Put Options....................................................................................................S-34
QSPE...........................................................................................................S-38
QSPE Student Loan Transfer Agreement...........................................................................S-39
QSPE Student Loans.............................................................................................S-38
Rating Agencies...............................................................................................S-100
Rating Agency.................................................................................................S-100
Rating Agency Downgrade.......................................................................................S-126
Realized Loss Draw............................................................................................S-120
Realized Losses...............................................................................................S-130
Recoveries....................................................................................................S-117
Reference Bank.................................................................................................S-98
Rehabilitated Student Loans....................................................................................S-40
Reserve Accounts...............................................................................................S-33
Reserve Accounts Initial Deposits..............................................................................S-33
S&P...........................................................................................................S-126
Sale and Servicing Agreement...................................................................................S-33
SEC...........................................................................................................S-126
Secretary......................................................................................................S-72
Securities.....................................................................................................S-35
Securities Insurer.............................................................................................S-34
S-151
Securities Insurer Default....................................................................................S-128
Securityholders................................................................................................S-37
Seller.........................................................................................................S-40
Sellers........................................................................................................S-40
Senior Percentage..............................................................................................S-95
Serial Loans..................................................................................................S-105
SLS Loans......................................................................................................S-37
Special Allowance Payments.....................................................................................S-69
Special Determination Date.....................................................................................S-68
Special Redemption Date........................................................................................S-68
Specified Collateral Balance..................................................................................S-116
Specified Reserve Account Balance.............................................................................S-119
Stafford Loans.................................................................................................S-37
Statistical Cutoff Date........................................................................................S-34
Stepdown Date..................................................................................................S-95
Student Loan Rate..............................................................................................S-92
Student Loan Transfer Agreements...............................................................................S-39
Student Loans..................................................................................................S-32
Subordinate Note Interest Trigger..............................................................................S-91
Subordinate Note Principal Trigger.............................................................................S-95
Subordinate Percentage.........................................................................................S-95
Subsequent Cutoff Date........................................................................................S-103
Subsequent Loan Sub-Accounts...................................................................................S-33
Subsequent Student Loans.......................................................................................S-33
Subsequent Transfer Agreement.................................................................................S-103
Subsequent Transfer Date......................................................................................S-103
Sub-Servicer...................................................................................................S-36
Sub-Servicers..................................................................................................S-36
Sub-Servicing Agreement........................................................................................S-37
Swap Counterparty..............................................................................................S-34
Telerate Page 3750.............................................................................................S-98
TERI...........................................................................................................S-69
TERI Alternative Loans.........................................................................................S-45
TERI Trigger Event............................................................................................S-117
TERI-Guaranteed Access Loans...................................................................................S-80
TERI-Guaranteed Fleet Loans....................................................................................S-79
Three-Month LIBOR..............................................................................................S-97
Transfer and Servicing Agreements..............................................................................S-98
Trigger Event.................................................................................................S-117
Trust..........................................................................................................S-32
Trust Accounts................................................................................................S-100
Trust Agreement................................................................................................S-32
Trust Swap Payment Amount.....................................................................................S-115
Trust Swap Receipt Amount.....................................................................................S-115
Underlying Federal Loans.......................................................................................S-67
Underlying Private Loans......................................................................................S-104
S-152
Underwriters..................................................................................................S-142
Underwriting Agreement........................................................................................S-142
Unsubsidized Stafford Loan.....................................................................................S-69
USAF...........................................................................................................S-35
MN#667
S-153
APPENDIX A
REPORT OF INDEPENDENT AUDITORS
Bank One, National Association, and
Bank One Delaware, Inc.
as Trustees of the KeyCorp Student Loan Trust 2002-A
We have audited the accompanying balance sheet of KeyCorp Student Loan Trust
2002-A (the "Trust") as of September 3, 2002. This balance sheet is the
responsibility of the Trustees for the Trust. Our responsibility is to express
an opinion on this balance sheet based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates made
by the Trustees on behalf of the Trust, as well as evaluating the overall
balance sheet presentation. We believe that our audit of the balance sheet
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of the Trust at September 3, 2002, in
conformity with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Cleveland, Ohio
September 3, 2002
KEYCORP STUDENT LOAN TRUST 2002-A
BALANCE SHEET
SEPTEMBER 3, 2002
ASSETS
Cash $ 10
-----
Total Assets $ 10
=====
EQUITY
Equity of the Trust $ 10
-----
Total Equity $ 10
=====
See accompanying notes to the balance sheet
KEYCORP STUDENT LOAN TRUST 2002-A
NOTES TO BALANCE SHEET
SEPTEMBER 3, 2002
ORGANIZATION AND OPERATION
KeyCorp Student Loan Trust 2002-A (the "Trust"), is a Delaware statutory
business trust formed on August 1, 2002, with Bank One, National Association as
Eligible Lender Trustee and Bank One Delaware, Inc. as Delaware Trustee. The
Trust was organized to exclusively acquire certain graduate and undergraduate
student loans; to issue and sell securities collateralized by such loans; and to
engage in other transactions, including entering agreements that are incidental
and necessary, suitable and convenient to the foregoing and permitted under
Delaware law.
At September 3, 2002, the Trust had not commenced operations except for the
conduct of organizational matters and activities relating to the public offering
of notes.
Key Bank USA, National Association, as Initial Beneficiary of the Trust, bears
administrative expenses on its behalf.
ACCOUNTING POLICIES
Cash, the only asset of the Trust at September 3, 2002 is stated as the amount
held on behalf of the Trust by Bank One, National Association.
PROSPECTUS
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
o rated in one of four highest rating beginning on page 6.
categories by at least one nationally
recognized rating organization The securities are not bank
o not listed on any trading exchange deposits and are not
o obligations only of the related trust insured by the Federal Deposit
Insurance Corporation.
ASSETS
o student loans This prospectus must be
o may include one or more forms of accompanied by a prospectus
credit enhancement supplement for the particular
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 August 31, 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
2
TABLE OF CONTENTS
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
3
TABLE OF CONTENTS
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
4
TABLE OF CONTENTS
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
5
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
6
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
7
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
8
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
9
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
10
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.
11
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.
12
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.
13
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:
14
(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
15
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)
689-6300.
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.
16
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
17
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
18
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.
19
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.
20
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;
21
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.
22
The following chart sets forth the current and historic loan limits.
ALL STUDENTS (1) INDEPENDENT STUDENTS(1)
----------------- ----------------------------
BASE AMOUNT ADDITIONAL
SUBSIDIZED SUBSIDIZED AND UNSUBSIDIZED MAXIMUM
SUBSIDIZED ON OR UNSUBSIDIZED ON ONLY ON OR AGGREGATE
BEFORE AFTER OR AFTER AFTER TOTAL
BORROWER'S ACADEMIC LEVEL 1/1/87 1/1/87 10/1/93(2) 7/1/94(3) AMOUNT IN
- ------------------------- ---------- ---------- ----------------- ------------ -----------
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.
23
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.
24
(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.
25
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
26
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.
27
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
Margin(3) 12% 3.25%
10/01/92-06/30/94......... 52-Week Treasury + Interest Rate
Margin(3) 10% 3.10%
07/01/94-06/30/98......... 52-Week Treasury + Interest Rate
Margin(3) 9% 3.10%
After 6/30/98............. 91-Day Treasury + Interest Rate
Margin 9% 3.10%
- ---------------------
(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.
28
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.
29
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
30
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),
31
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.
32
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.
33
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:
34
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.
35
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
36
ANNUAL AGGREGATE CUMULATIVE
PROGRAM YEAR TYPE OF LOAN MAXIMUM MAXIMUM MAXIMUM(2)
- ------------ ------------ ------- --------- ----------
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:
37
INTEREST MARGIN OVER
PROGRAM YEAR TYPE OF LOAN 91-DAY 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.
38
(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
39
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.
40
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
41
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
42
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
43
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
0% to and including 5% Education (1) 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.
44
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
45
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.
46
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
47
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
48
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.
49
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
50
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
51
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.
52
("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.
53
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,
54
(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
55
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
56
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
57
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,
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(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
59
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
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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
61
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
62
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
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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.
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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
65
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.
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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
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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."
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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
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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
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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"
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(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;
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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
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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.
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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-
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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
76
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;
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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.
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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,
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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
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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
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(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
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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
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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
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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:
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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,
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(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 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
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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."
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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
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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 Statement), 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
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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.
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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).
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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.
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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.
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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
95
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
96
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.
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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).
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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
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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
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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.
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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.
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Discount and Premium. To the extent that OID, if any, on the Student
Loans exceeds a de minimis amount, the Trust 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.
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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
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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 30.5% (such amount will be reduced in stages to 28% by the year 2006) 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.
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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
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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
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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.
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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
109
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.
110
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.
111
INDEX OF PRINCIPAL TERMS
Page
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1992 Amendments.............................................................20
1993 Act....................................................................45
1998 Amendments.............................................................20
1998 Reauthorization Bill...................................................93
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.....................................................86
Available Funds.............................................................90
Bankruptcy Code.............................................................91
Bar Exam Loan...............................................................33
Base Rate...................................................................62
Benefit Plan...............................................................109
Calculation Agent...........................................................63
Cede........................................................................53
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
112
INDEX OF PRINCIPAL TERMS
Page
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Distribution Date...........................................................53
DTC.........................................................................52
Eligible Deposit Account....................................................72
Eligible Institution........................................................72
Eligible Investments........................................................72
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
113
INDEX OF PRINCIPAL TERMS
Page
------
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
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
114
INDEX OF PRINCIPAL TERMS
Page
------
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...................................................................95
Student Loan Transfer Agreement.............................................69
Student Loans...............................................................15
Sub-Servicers...............................................................17
Sub-Servicing Agreement.....................................................17
Transfer and Servicing Agreement............................................69
Trust.......................................................................14
Trust Accounts..............................................................72
Trust Agreement.............................................................14
UCC.........................................................................88
Undergraduate Loans.........................................................19
115
INDEX OF PRINCIPAL TERMS
Page
------
Underlying Federal Loan.....................................................29
Underlying Private Graduate Loans...........................................41
Underwriting Agreements....................................................109
Unsubsidized Stafford Loan Program..........................................43
Unsubsidized Stafford Loans.................................................21
116
$961,000,000
KEYCORP STUDENT LOAN
TRUST 2002-A
$81,800,000
CLASS I-A-1
FLOATING RATE ASSET-BACKED NOTES
$183,000,000
CLASS I-A-2
FLOATING RATE ASSET-BACKED NOTES
$8,200,000
CLASS I-B
FLOATING RATE ASSET-BACKED NOTES
$134,000,000
CLASS II-A-1
FLOATING RATE ASSET-BACKED NOTES
$554,000,000
CLASS II-A-2
FLOATING RATE ASSET-BACKED NOTES
KEY BANK USA, NATIONAL ASSOCIATION,
MASTER SERVICER
KEY CONSUMER RECEIVABLES LLC,
DEPOSITOR
PROSPECTUS SUPPLEMENT
JOINT LEAD MANAGER AND GLOBAL BOOKRUNNER
DEUTSCHE BANK SECURITIES INC.
JOINT LEAD MANAGER
MCDONALD INVESTMENTS
a KeyCorp Company