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As filed with the Securities and Exchange Commission on June 29, 1998
REGISTRATION STATEMENT NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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KEYCORP STUDENT LOAN TRUST 1998-A
(Issuer of the Notes and the Certificates)
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KEY BANK USA, NATIONAL ASSOCIATION
(Originator of the Trust described herein)
(Exact name of Registrant as specified in its charter)
UNITED STATES 34-1804148
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
KEYCENTER
127 PUBLIC SQUARE
CLEVELAND, OHIO 44114
(216) 689-3000
(Address, including zip code, and telephone number, including area
code, of Registrant's principal executive offices)
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DANIEL R. STOLZER
SENIOR VICE PRESIDENT
AND ASSOCIATE GENERAL COUNSEL
KEYBANK NATIONAL ASSOCIATION
KEYCENTER
127 PUBLIC SQUARE
CLEVELAND, OHIO 44114
(216) 689-3000
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
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COPIES TO:
KATHERINE D. BRANDT, ESQ. REED D. AUERBACH, ESQ.
THOMPSON HINE & FLORY LLP STROOCK & STROOCK & LAVAN LLP
127 PUBLIC SQUARE 180 MAIDEN LANE
3900 KEY TOWER NEW YORK, NEW YORK 10038
CLEVELAND, OHIO 44114-1216
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
From time to time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
==============================================================================================================================
PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE PROPOSED MAXIMUM OFFERING AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED (1) PRICE PER UNIT (2) PRICE (2) FEE
- ---------------------------------- -------------- ------------------------- ------------------- --------------
Asset Backed Notes................. $1,000,000 100% $1,000,000 $295.00
Asset Backed Certificates.......... $1,000,000 100% $1,000,000 $295.00
Total.............................. $2,000,000 100% $2,000,000 $590.00
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<FN>
(1) This Registration Statement also relates to market-making transactions that may be made by Key Capital Markets, Inc.,
an affiliate of the Registrant.
(2) Estimated solely for the purpose of calculating the registration fee.
THIS REGISTRATION STATEMENT IS ALSO BEING USED TO REGISTER SECURITIES THAT MAY BE SOLD IN MARKET-MAKING TRANSACTIONS BY
AN AFFILIATE OF THE REGISTRANT. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE
NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF
1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SAID SECTION 8(a), MAY DETERMINE.
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EXPLANATORY NOTE
THIS REGISTRATION STATEMENT CONTAINS (i) A PROSPECTUS RELATING TO A
PUBLIC OFFERING BY KEYCORP STUDENT LOAN TRUST 1998-A (THE "TRUST") OF
$_____________ AGGREGATE PRINCIPAL AMOUNT OF FLOATING RATE CLASS IA-1 ASSET
BACKED NOTES, $________ AGGREGATE PRINCIPAL AMOUNT OF FLOATING RATE CLASS IA-2
ASSET BACKED NOTES, $____________ AGGREGATE PRINCIPAL AMOUNT OF FLOATING RATE
CLASS I-B ASSET BACKED CERTIFICATES, $___________________ AGGREGATE PRINCIPAL
AMOUNT OF FLOATING RATE CLASS IIA-1 ASSET BACKED NOTES, $______ AGGREGATE
PRINCIPAL AMOUNT OF FLOATING RATE CLASS IIA-2 ASSET BACKED NOTES AND
$______________________ AGGREGATE PRINCIPAL AMOUNT OF FLOATING RATE CLASS II-B
ASSET BACKED CERTIFICATES (COLLECTIVELY, THE "SECURITIES"); AND (ii) CERTAIN
PAGES OF A SECOND PROSPECTUS WHICH MAY BE USED IN CONNECTION WITH OFFERS AND
SALES RELATING TO MARKET-MAKING TRANSACTIONS IN THE SECURITIES BY AN AFFILIATE
OF THE REGISTRANT. THE PROSPECTUS RELATING TO THE SECURITIES FOLLOWS IMMEDIATELY
AFTER THIS EXPLANATORY NOTE. FOLLOWING SUCH PROSPECTUS ARE ALTERNATE PAGES OF
THE MARKET-MAKING PROSPECTUS RELATING TO THE SECURITIES. ALL OTHER PAGES OF THE
PUBLIC OFFERING PROSPECTUS FOR THE SECURITIES ARE ALSO TO BE USED FOR THE
MARKET-MAKING PROSPECTUS.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
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SUBJECT TO COMPLETION, DATED ___________ __, 1998
$_____________
KEYCORP STUDENT LOAN TRUST 1998-A
KEY BANK USA, NATIONAL ASSOCIATION
Seller
The KeyCorp Student Loan Trust 1998-A (the "Trust") will issue four
classes of notes (the "Notes") and two classes of certificates (the
"Certificates") and together with the Notes (the "Securities") as set forth
below. The Class IA-1 Notes and Class IA-2 Notes will be secured by a group
("Loan Group 1") of law school, medical school, dental school, graduate business
school, and other graduate school student loans ("Student Loans"), originated by
Key Bank USA, National Association (the "Seller") reinsured by the United States
Department of Education as described herein. The Class I-B Certificates will
represent undivided beneficial ownership interests in the Student Loans to be
included in Loan Group 1. The Class IIA-1 Notes and Class IIA-2 Notes will be
secured by a group ("Loan Group 2") of Student Loans that are not reinsured by
the United States Department of Education. The Class II-B Certificates will
represent undivided beneficial ownership interests in the Student Loans to be
included in Loan Group 2. Pennsylvania Higher Education Assistance Agency
("PHEAA" and in its capacity as servicer, "Servicer") and EFS Services, Inc.
("EFS" or "Servicer") will service the Student Loans included in the Trust.
Interest on and principal of the Securities will be payable quarterly
on or about the twenty-seventh day of each March, June, September and December,
commencing December 27, 1998; provided, that no distributions in respect of
principal of the Class A-2 Notes related to a Loan Group will be payable until
the Class A-1 Notes related to such Loan Group are paid in full, and no
distributions in respect of principal of the Certificates related to a Loan
Group will be payable until the Class A-2 Notes related to such Loan Group are
paid in full. The rights of Certificateholders to receive payments of interest
and principal shall be subordinated to the rights of the Noteholders to receive
payments of interest and principal to the extent described herein.
Neither the Notes nor the Certificates will be listed on any national
securities exchange. Credit Suisse First Boston Corporation intends to, and Key
Capital Markets, Inc. may, make a secondary market in the Notes and the
Certificates but neither has any obligation to do so. There can be no assurance
that a secondary market for the Notes or the Certificates will develop or, if it
does develop, that it will continue.
SEE "RISK FACTORS" BEGINNING ON PAGE FOR CERTAIN CONSIDERATIONS RELEVANT TO AN
INVESTMENT IN THE SECURITIES.
THE CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN, AND THE NOTES REPRESENT
OBLIGATIONS OF, THE TRUST ONLY AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS
OF THE SELLER, THE SERVICERS OR ANY AFFILIATE THEREOF. NEITHER THE CERTIFICATES
NOR THE NOTES ARE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAVE APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Original Class Underwriting Proceeds to
Principal Balance Interest Rate Price to Public Discount Seller(2)
----------------- ------------- --------------- -------- ---------
Class IA-1 Notes...... $ (1) % % %
Class IA-2 Notes...... $ (1) % % %
Class I-B Certificates $ (1) % % %
Class IIA-1 Notes..... $ (1) % % %
Class IIA-2 Notes..... $ (1) % % %
Class II-B Certificates $ (1) % % %
Total
<FN>
(1) Interest will accrue with respect to each Interest Period at a rate per annum equal to the lesser of
(i) the applicable Investor Index plus the applicable Margin and (ii) the Student Loan Rate as
described herein.
(2) Before deducting expenses, estimated to be $___________.
The Securities are offered by Credit Suisse First Boston Corporation and
Key Capital Markets, Inc. (the "Underwriters") when, as and if issued by the
Trust, delivered to and accepted by the Underwriters and subject to their right
to reject orders in whole or in part. It is expected that delivery of the
Securities in book-entry form will be made through the facilities of The
Depository Trust Company on the Same Day Funds Settlement System and, in the
case of the Notes, also Cedel Bank, societe anonyme and the Euroclear System on
or about ________ __, 1998.
After the initial distribution of the Securities by the Underwriters, this
Prospectus may be used by Key Capital Markets, Inc., an affiliate of the Seller,
in connection with market making transactions in the Securities. Key Capital
Markets, Inc., may act as principal or agent in such transactions. Such
transactions will be at prices related to prevailing market prices at the time
of sale. Certain information in this Prospectus will be updated from time to
time as described in "Incorporation of Certain Documents by Reference."
Credit Suisse First Boston Key Capital Markets, Inc.
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The date of this Prospectus is __________ ___, 1998.
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS WHICH
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES AND THE
CERTIFICATES OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING AND THE
EXCHANGE OF NOTES AND CERTIFICATES TO COVER SHORT POSITIONS. SUCH STABILIZING ,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
AVAILABLE INFORMATION
The Seller, as originator of the Trust, has filed 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 the Securities and Exchange Commission (the "Commission") with respect to
the Securities offered pursuant to this Prospectus. This Prospectus, which forms
part of the Registration Statement, does not contain all the information
contained in the Registration Statement. For further information reference is
made to the Registration Statement and amendments thereof and exhibits thereto,
which are available for inspection without charge at the office of the
Commission at 450 Fifth Street N.W., Washington, D.C. 20549; Northeast Regional
Office, 7 World Trade Center, Suite 1300, New York, New York 10048; and Midwest
Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of the Registration Statement can be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates and electronically through the Commission's Electronic
Gathering and Retrieval System at the Commission's Web Site
(http://www.sec.gov).
REPORTS TO SECURITYHOLDERS
Unless and until Definitive Notes or Definitive Certificates are
issued, quarterly and annual unaudited reports containing information concerning
the Financed Student Loans will be prepared by Key Bank USA, National
Association in its capacity as Administrator (the "Administrator") and sent on
behalf of the Trust only to Cede & Co. ("Cede"), as nominee of The Depository
Trust Company ("DTC") and registered holder of the Notes and the Certificates,
but will not be sent to any beneficial holder of the Securities. Such reports
will not constitute financial statements prepared in accordance with generally
accepted accounting principles. See "Description of the Securities--Book-Entry
Registration" and "--Reports to Securityholders." The Trust will file with the
Commission such periodic reports as are required under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of
the Commission thereunder. The Trust intends to suspend the filing of such
reports under the Exchange Act when and if the filing of such reports is no
longer statutorily required.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Administrator, on behalf
of the Trust, pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Prospectus and prior to the termination of the
offering of the Notes and Certificates shall be deemed to be incorporated by
reference into this Prospectus and to be part hereof. 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 or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Administrator will provide, without charge to each person 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 by reference,
except the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Written requests for such copies
should be directed to Key Bank USA, National Association, Education Resources,
800 Superior Avenue, Cleveland, Ohio, 44114, Attention: Trust Administrator,
KeyCorp Student Loan Trust 1998-A. Telephone requests for such copies should be
directed to the Administrator at (800) 523-7248.
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SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein. Certain capitalized terms used
herein are defined elsewhere herein on the pages indicated in the "Index of
Principal Terms."
Issuer......................................KeyCorp Student Loan Trust 1998-A (the "Trust").
Securities Offered..........................Group 1 Securities and Group 2 Securities (the "Securities"). The
initial principal amount of each of the Securities, is set forth on the
cover page hereof. The Securities will be available for purchase in
denominations of $1,000 and integral multiples of $1,000 in excess
thereof in book-entry form only. Persons acquiring beneficial ownership
interests in the Notes will hold their interests in the Notes through
The Depository Trust Company ("DTC") in the United States or Cedel Bank,
S.A. ("Cedel") or the Euroclear System ("Euroclear") in Europe and
persons acquiring beneficial ownership interests in the Certificates
will hold their interests in the Certificates through DTC. See
"Description of the Securities--Book-Entry Registration." Securityholders
will not be entitled to receive a Definitive Security, except in the event
that Definitive Securities are issued in the limited circumstances described
herein. See "Description of the Securities--Definitive Securities."
Designations
Group 1 Notes..........................Class IA-1 Notes, Class IA-2 Notes.
Group 2 Notes .........................Class IIA-1 Notes, Class IIA-2 Notes.
Group 1 Securities ....................Class IA-1 Notes, Class IA-2 Notes and Class I-B Certificates.
Group 2 Securities ....................Class IIA-1 Notes, Class IIA-2 Notes and Class II-B Certificates.
Class A-1 Notes .......................Class IA-1 Notes and/or Class IIA-1 Notes, as the case may be.
Class A-2 Notes .......................Class IA-2 Notes and/or Class IIA-2 Notes, as the case may be.
Notes .................................Class IA-1 Notes, Class IA-2 Notes, Class IIA-1 Notes and Class IIA-2
Notes.
Securities ............................Class IA-1 Notes, Class IA-2 Notes, Class I-B Certificates, Class IIA-1
Notes, Class IIA-2 Notes and Class II-B Certificates.
Certificates ..........................Class I-B Certificates and Class II-B Certificates.
T-Bill Indexed Securities .............As specified in the final Prospectus.
LIBOR Indexed Securities ..............As specified in the final Prospectus.
Seller......................................Key Bank USA, National Association, a national banking association (the
"Seller"). See "The Seller."
Servicers...................................Pennsylvania Higher Education Assistance Agency, an agency of the
Commonwealth of Pennsylvania ("PHEAA") and EFS Services, Inc.,
a wholly-owned subsidiary of EFS, Inc. of Indiana ("EFS" and together
with PHEAA, the "Servicers").
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Eligible Lender Trustee.....................The First National Bank of Chicago, as trustee (the "Eligible Lender
Trustee") under the Amended and Restated Trust Agreement dated as of
September 1, 1998 (as amended and supplemented from time to time, the
"Trust Agreement") between the Seller and the Eligible Lender Trustee
pursuant to which the Eligible Lender Trustee acts as holder of legal
title to the Financed Student Loans on behalf of the Trust. See
"Formation of the Trust--Eligible Lender Trustee."
Indenture Trustee...........................Bankers Trust Company, as trustee (the "Indenture Trustee") under the
Indenture dated as of September 1, 1998 (as amended and supplemented from time
to time, the "Indenture") between the Trust and the Indenture Trustee.
Administrator...............................Key Bank USA, National Association, as administrator (the "Administrator")
on behalf of the Trust pursuant to the Administration Agreement dated as of
September 1, 1998 (as amended and supplemented from time to time, the
"Administration Agreement"), among the Administrator, the Trust and the
Indenture Trustee. See "The Seller, the Administrator and the Servicers--The
Administrator."
Transaction Overview........................The Trust will issue Notes pursuant to the Indenture and Certificates
pursuant to the Trust Agreement. The assets of the Trust will include
certain law school, medical school, dental school, graduate business
school and other graduate school student loans (collectively, "Student
Loans") that are acquired from the Seller on the Closing Date and from
time to time thereafter as described under "--Assets of the Trust--Financed Student
Loans" (collectively, "Financed Student Loans"). The Financed Student Loans will be
divided into two loan groups. Loan group 1 ("Loan Group 1") will consist of Financed
Student Loans that are reinsured by the United States Department of Education (the
"Department") as described under "--Assets of the Trust--Financed StudenT Loans"
(collectively, "Financed Federal Loans"). Loan group 2 ("Loan Group 2") will consist of
Financed Student Loans that are not reinsured by the Department or any other government
agency (collectively, "Financed Private Loans"). The Group 1 Notes will be secured by
the Financed Federal Loans and certain other assets of the Trust. The Group 1
Certificates represent undivided beneficial ownership interests in the Financed Federal
Loans and certain other assets of the Trust. Payments of interest on and principal of
the Group 1 Securities will be made primarily from collections and other payments
received with respect to the Financed Federal Loans.
The Group 2 Notes will be secured by the Financed Private Loans and certain
other assets of the Trust. The Group 2 Certificates will represent undivided
beneficial ownership interests in the Financed Private Loans and certain other
assets of the Trust. Payments of interest on and principal of the Group 2
Securities will be made primarily from collections and other payments received
with respect to the Financed Private Loans.
The rights of the holders of Group 1 Certificates are subordinated to the
rights of the holders of the Group 1 Notes to the extent described herein. The
rights of the holders of Group 2 Certificates are subordinated to the rights of
the holders of the Group 2 Notes to the extent described herein. Except for the
limited cross-collateralization described herein under
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"Description of the Transfer and Servicing Agreements--Cross-Collateralization",
the Group 1 Securities will not have the benefit of payments received in
respect of Loan Group 2 and the Group 2 Securities will not have the benefit of
payments received in respect of Loan Group 1. See "Description of the Transfer
and Servicing Agreements--Credit Enhancement--Subordination of the
Certificates." Set forth below is a summary of the material payment terms of
the Securities.
A. Distribution Dates On or about the twenty-seventh day of each March, June, September and December,
commencing December 27, 1998.
B. Record Date Payments in respect of the Securities will be payable to holders of record
as of the business day preceding each Distribution Date.
C. Closing Date ________________ ____, 1998
D. Interest Period With respect to any Distribution Date, interest will accrue on the Securities from the
previous Distribution Date to but excluding such Distribution Date, except that
with respect to the initial Distribution Date, interest will accrue on the
Securities from the Closing Date to, but excluding such Distribution Date.
E. Interest Interest will accrue with respect to each Interest Period on each class of
Securities at a per annum rate equal to the lesser of the Formula Rate and the
Student Loan Rate (determined as described under "Description of the
Securities--The Notes--Distributions of Interest").
The "Investor Index" means (x) in the case of T-Bill Indexed Securities, the
daily weighted average of the T-Bill Rates within such Interest Period
(determined as described under "Description of the Securities--Determination of
the T-Bill Rates") or (y) in the case of LIBOR Indexed Securities, Three-Month
LIBOR (determined as described under "Description of the
Securities--Determination of LIBOR").
The "Formula Rate" for any class of Securities shall mean the applicable
Investor Index plus the applicable Margin.
The "Margin" will be ___% for the Class IA-1 Notes, ___% for the Class IA-2
Notes, ___% for the Class I-B Certificates, ___% for the Class IIA-1 Notes,
___% for the Class IIA-2 Notes and ___% for the Class II-B Certificates.
The Student Loan Rate for any Interest Period is a rate calculated generally on
the basis of collections on the Financed Student Loans available or expected to
be available to pay interest on the Securities after payment of certain
expenses of the Trust for such Interest Period. See " Description of the
Securities--The Notes--Distributions of Interest."
Interest on the T-Bill Indexed Securities will be calculated on the basis of
the actual number of days elapsed in the related Interest Period divided by
365, or 366 in the case of leap year. Interest on the LIBOR Indexed Securities
will be calculated on the basis of the actual number of days elapsed in the
related Interest Period divided by 360.
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The amount of interest payable on any class of Securities on any Distribution
Date will not exceed the Student Loan Rate for such class. To the extent that
for any Interest Period the rate for any class of Securities calculated on the
basis of the Formula Rate exceeds the Student Loan Rate, the amount of such
excess (together with the unpaid portion of any such excess from prior
Distribution Dates and interest accrued thereon at the Formula Rate for such
class of Securities) will be paid on such Distribution Date or any subsequent
Distribution Date on a subordinated basis to the extent funds are allocated
and available therefor after making all required prior allocations and
distributions for such Loan Group on such Distribution Dates, as described
under "Description of the Transfer and Servicing Agreements--Distributions."
The payment of such amounts due to Certificateholders of the Certificates
related to a Loan Group on any Distribution Date (such amount, the
"Certificateholders' Interest Index Carryover") is further subordinated to the
payment of such amounts due to the Noteholders of the Notes related to a Loan
Group on Distribution Date (such amount, the "Noteholders' Interest Index
Carryover"). To the extent funds are available therefor, the
Certificateholders' Interest Index Carryover related to any Loan Group may be
paid prior to the time that the Notes related to such Loan Group are paid in
full. The ratings on the Securities do not address the likelihood of payment
of any Noteholders' Interest Index Carryover or Certificateholders' Interest
Index Carryover.
F. Principal Principal on the Notes related to a Loan Group will be payable on each
Distribution Date, first to the principal balance of the Class A-1 Notes
related to such Loan Group until such principal balance is reduced to
zero and then to the principal balance of the Class A-2 Notes related to
such Loan Group until such principal balance is reduced to zero.
Principal of the Certificates related to a Loan Group will be payable on
each Distribution Date on and after the Class A-2 Notes for such Loan
Group have been paid in full. The amount of principal distributable on
any Distribution Date for Securities related to any Loan Group generally
will be equal to the amount of collections received on the Financed
Student Loans in such related Loan Group during the related Collection
Period (less certain expenses of the Trust and other allocations
described herein, necessary to reduce the sum of the principal balances
of the related Notes and Certificates to the applicable Specified
Collateral Balance for such Distribution Date). See "Description of the
Transfer and Servicing Agreements--Distributions."
On the Closing Date, the sum of the aggregate initial principal amount of the
Group 1 Notes and the initial Certificate Balance of the Class I-B Certificates
is ____% of the sum of the aggregate principal balance of the Initial Financed
Federal Loans as of the Statistical Cutoff Date and the Pre-Funded Amount
allocable to Loan Group 1 as of the Closing Date. On the Closing Date, the sum
of the aggregate initial principal amount of the Group 2 Notes and initial
Certificate Balance of the Class II-B Certificates is ____% of the sum of the
aggregate principal balance of the Initial Financed Private Loans as of the
Statistical Cutoff Date and Pre-Funded Amount allocable to Loan Group 2 as of
the Closing Date. The transaction is structured such that collections on the
Financed Student Loans in a Loan Group should be available to make accelerated
payments of principal on the Notes related to such Loan Group, such accelerated
payments of principal being included as part of the Principal Distribution
Amount for the Securities related to such Loan Group, thereby reducing the
amount by which the outstanding principal
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balance of the Notes related to such Loan Group and the Certificate Balance
of the Certificates related to such Loan Group exceeds the sum of the aggregate
principal balance of the Financed Student Loans in such Loan Group and the
Group 1 or Group 2 Pre-Funded Amount, as applicable. The actual rate and timing
of any accelerated payments of principal, however, will depend on a number of
factors, including the rate and timing of the payments on the Financed Student
Loans in such Loan Group. It is expected that initially there may not be any
such accelerated payments of principal because of the payment status of many of
the Financed Student Loans and the fact that certain of the Financed Student
Loans require the related borrowers to pay only interest for a period of two
years. There can be no assurance of the actual rate or timing of such
accelerated payments of principal or when the sum of the aggregate principal
amount of the Notes related to a Loan Group and Certificate Balance of the
Certificates related to a Loan Group will equal the Sum of the Pool Balance for
such Loan Group and the Group 1 or Group 2 Pre-Funded Amount, as applicable.
See "Risk Factors--Principal Balance of Group 1 Securities Exceeds the Sum of
the Aggregate Principal Balance of Initial Financed Student Loans in Loan Group
1 and Pre-Funded Amount for Loan Group 1." Until the outstanding principal
balance of Notes and Certificates related to a Loan Group has been reduced to
the Specified Collateral Balance for such Loan Group and any Excess Servicing
Fee allocable to such Loan Group has been paid, no amounts will be available
for the payment of any Noteholders' Interest Index Carryover or
Certificateholders' Interest Index Carryover with respect to the Notes and
Certificates related to such Loan Group.
In addition, on the Distribution Date on or immediately following the last day
of the Funding Period, the amount remaining on deposit in the Group 1 Other
Additional Funding Subaccount and the Group 2 Other Additional Funding
Subaccount will be deposited into the respective Collection Account for
distribution on the immediately following Distribution Date. Such reduction in
the Group 1 and Group 2 Pre-Funded Amounts will result in a corresponding
increase in the amount of principal distributable to the Group 1 Securities and
Group 2 Securities, respectively, on such Distribution Date.
"Principal Distribution Amount" means, for the Securities related to a Loan
Group and with respect to any Distribution Date, the amount by which the sum of
the outstanding principal balance of the Notes and Certificates related to such
Loan Group exceeds the Specified Collateral Balance for such Loan Group.
"Specified Collateral Balance" generally means for any Loan Group and, with
respect to any Distribution Date, the sum of (a) the Pool Balance of such Loan
Group as of the last day of the related Collection Period plus (b) the
Pre-Funded Amount for such Loan Group as of the last day of the related
Collection Period.
G. Maturity Dates Class Final Maturity Date
----- -------------------
Class IA-1 Notes
Class IA-2 Notes
Class I-B Certificates
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Class IIA-1 Notes
Class IIA-2 Notes
Class II-B Certificates
Although the maturity of some of the Financed Student Loans in a Loan Group
will extend beyond the maturity dates for the Securities related to such Loan
Group, the actual maturity of one or more classes of such Securities could
occur sooner than such dates as a result of a variety of factors as described
under "Description of the Securities -- The Notes" and "-- The Certificates"
herein.
H. Mandatory Redemption
of Notes and Certificates On the Closing Date approximately $___________ (the "Group 1 Subsequent Pool
Pre-Funded Amount") will be allocated to the Subsequent Pool Pre-Funding
Subaccount of the Pre-Funding Account related to Loan Group 1 and $___________
(the "Group 2 Subsequent Pool Pre-Funded Amount") will be allocated to the
Subsequent Pool Pre-Funding Subaccount of the Pre-Funding Account related to
Loan Group 2, in each case, to purchase Student Loans, from a pool of Student
Loans currently owned by the Seller (the "Subsequent Pool") and having as of
September 1, 1998 (the "Statistical Cutoff Date") the characteristics described
under "The Financed Student Loan Pool."
If as of ______ __, __ (the "Special Determination Date"), the Group 1
Subsequent Pool Pre-Funded Amount has not been reduced to zero, then the
remaining Group 1 Subsequent Pool Pre-Funded Amount, if greater than
$_________, will be distributed on the first Distribution Date thereafter to
redeem each class of Group 1 Notes and prepay the Class I-B Certificates on a
pro rata basis, based on the initial principal balance of each class of Group 1
Notes and the initial principal balance of the Class I-B Certificates; if such
amount is $___________ or less, it will be distributed on the first
Distribution Date only to holders of the Class IA-1 Notes.
If as of the Special Determination Date, the Group 2 Subsequent Pool Pre-Funded
Amount has not been reduced to zero, then the remaining Group 2 Subsequent Pool
Pre-Funded Amount, if greater than $_______, will be distributed on the first
Distribution Date thereafter to redeem each class of Group 2 Notes and prepay
the Class II-B Certificates on a pro rata basis, based on the initial principal
balance of each class of Group 2 Notes and the initial Certificate Balance of
the Class II-B Certificates; if such amount is $_________ or less, it will be
distributed on the first Distribution Date only to holders of the Class IIA-1
Notes.
In addition, on the Distribution Date on or immediately following the last day
of the Funding Period, any amounts remaining on deposit in the Group 1 and
Group 2 Other Additional Pre-Funding Subaccounts on such Distribution Date will
be deposited into the Collection Accounts for Loan Group 1 and Loan Group 2,
respectively, for distribution on the immediately following Distribution Date.
Such reduction in the Group 1 and Group 2 Pre-Funded Amounts will result in a
corresponding increase in the amount of principal distributable to the related
Securities on such Distribution Date.
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Risk Factors................................There are material risks associated with an investment in the Securities.
Prospective investors should consider the risks associated with any investment
in the Securities. See "Risk Factors."
The Trust ..................................The Trust was established under the laws of New York by the Trust
Agreement. The activities of the Trust and the Eligible Lender Trustee
will be limited by the terms of the Trust Agreement to acquiring, owning
and managing the Financed Student Loans and the other assets of the
Trust as described herein, issuing the Securities, making payments
thereon and other activities related thereto.
Assets of the Trust.........................The assets of the Trust will include the following:
A. Financed Student Loans...................The Financed Student Loans were or will be originated by the Seller and include
Student Loans in Loan Group 1 and Loan Group 2. The Financed Student Loans in
Loan Group 1 will include Student Loans ("Financed Federal Loans") that are
guaranteed as to the payment of principal and interest by PHEAA, the
Massachusetts Higher Education Assistance Corporation now doing business as
American Student Assistance ("ASA"), the Nebraska Student Loan Program
("NSLP"), or the Educational Credit Management Corporation ("ECMC" and together
with PHEAA in its capacity as a guarantor, ASA and NSLP, the "Federal
Guarantors"), and are reinsured by the United States Department of Education
(the "Department"). The Financed Student Loans in Loan Group 2 will include
Student Loans ("Financed Private Loans") that are guaranteed as to the payment
of principal and interest by The Education Resources Institute, Inc., a
Massachusetts non-profit corporation ("TERI") or by HEMAR Insurance Company of
America, a subsidiary of Sallie Mae, Inc. ("HICA" and together with TERI, the
"Private Guarantors"), and are not reinsured by the Department or any other
governmental entity. The Private Guarantors together with the Federal
Guarantors may be referred to herein as the "Guarantors". The Financed Student
Loans will be selected from the Student Loans owned by the Seller based on the
criteria specified in the Sale and Servicing Agreement and described herein.
The Financed Federal Loans include certain additional Student Loans to be made
under the Federal Consolidation Loan Program and certain Serial Loans which are
Stafford Loans. The Financed Private Loans may also include certain additional
Student Loans to be made under the Private Consolidation Loan Program and
certain Serial Loans which are Financed Private Loans. Financed Federal Loans
made on or after October 1, 1993 are 98% guaranteed by the applicable Federal
Guarantor, and reinsured against default by the Department up to a maximum of
98% of Guarantee Payments. All references herein to the guarantee and
reinsurance coverage with respect to the Financed Federal Loans should be
understood to mean such 98% guarantee and 98% maximum reinsurance coverage,
respectively, with respect to Financed Federal Loans made on or after October
1, 1993.
Certain incentive programs currently or hereafter made available by the Seller
to borrowers under certain loan programs may also be made available by each
Servicer to borrowers with Financed Student Loans. Any such incentive program
that effectively reduces borrower payments on Financed Student Loans and is not
required by 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") will be applicable to the
Financed Student Loans only if and
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to the extent that the Trust receives payment from the Seller (or Seller
deposits or causes a deposit to be made into the Collection Account) in an
amount sufficient to offset such effective yield reductions. See "The Student
Loan Financing Business--General--Incentive Programs."
Loan Group 1. As of the Statistical Cutoff Date, the weighted average interest
rate per annum with respect to the Initial Financed Student Loans which were
Financed Federal Loans (the "Initial Financed Federal Loans" was approximately
___% and the weighted average remaining term to maturity (exclusive of any
future deferral or forbearance periods and assuming expected graduation dates
and typical grace periods) of the Initial Financed Federal Loans was
approximately _____ months. As of the Statistical Cutoff Date, approximately
____% of the outstanding principal balance of the Initial Financed Student
Loans consisted of Federal Loans (of which approximately ____% are guaranteed
by PHEAA, approximately ____% are guaranteed by ASA, approximately ___% are
guaranteed by NSLP and approximately ___% are guaranteed by ECMC).
As of the Statistical Cutoff Date, the weighted average interest rate per annum
with respect to the Financed Student Loans in the Subsequent Pool to be
included in Loan Group 1 (i.e., which were Financed Federal Loans) was
approximately ____%, and the weighted average remaining term to maturity
(exclusive of any future deferral or forbearance periods and assuming expected
graduation dates and typical grace periods) of the Subsequent Pool Student
Loans was approximately _____ months. As of the Statistical Cutoff Date,
approximately ____% of the outstanding principal balance of the Financed
Student Loans in the Subsequent Pool consisted of Financed Federal Loans (of
which approximately ____% are guaranteed by PHEAA, approximately _____% are
guaranteed by ASA, approximately ___% are guaranteed by NSLP and approximately
___% are guaranteed by ECMC).
Loan Group 2. As of the Statistical Cutoff Date, the weighted average interest
rate per annum with respect to the Initial Financed Student Loans which were
Financed Private Loans (the "Initial Financed Private Loans") was approximately
____% and the weighted average remaining term to maturity (exclusive of any
future deferral or forbearance periods and assuming expected graduation dates
and typical grace periods) of the Initial Financed Private Loans was
approximately _____ months. As of the Statistical Cutoff Date, approximately
____% of the outstanding principal balance of the Initial Financed Student
Loans consisted of Financed Private Loans (of which approximately ___% are
guaranteed by TERI and approximately ____% are guaranteed by HICA).
As of the Statistical Cutoff Date, the weighted average interest rate per annum
with respect to the Financed Student Loans in the Subsequent Pool to be
included in Loan Group 2 (i.e., which were Financed Private Loans) was
approximately ____% and the weighted average remaining term to maturity
(exclusive of any future deferral or forbearance periods and assuming expected
graduation dates and typical grace periods) of the Subsequent Pool Student
Loans was approximately _____ months. As of the Statistical Cutoff Date,
approximately ____% of the outstanding principal balance of the Student Loans
in the Subsequent Pool consisted of Financed Private Loans (of which
approximately ____% are guaranteed by TERI and approximately ____% are
guaranteed by HICA).
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The statistical information presented in this Prospectus with respect to the
Subsequent Pool Student Loans is as of the Statistical Cutoff Date. While the
statistical distribution of the final characteristics of the Subsequent Pool
Student Loans when transferred to the Trust will vary somewhat from the
statistical information presented in this Prospectus, the Seller does not
anticipate that the characteristics of such Subsequent Pool Student Loans will
vary materially from such statistical information as of the Statistical Cutoff
Date.
"Collection Period" means each period of three calendar months from and
including the date following the end of the preceding Collection Period (or,
with respect to the first Collection Period, the period beginning on the
Statistical Cutoff Date and ending on November 30, 1998).
The "Initial Pool Balance" will equal (x) in the case of Loan Group 1 (i)
$_________ plus (ii) the aggregate increase in the Pool Balance for such Loan
Group during the Funding Period (by the Special Determination Date) occurring
as a result of the purchase of Subsequent Pool Student Loans to be included in
such Loan Group by the Trust and (y) in the case of Loan Group 2 (i)
$____________ plus (ii) the aggregate increase in the Pool Balance for such
Loan Group during the Funding Period occurring as a result of the purchase of
Subsequent Pool Student Loans to be included in such Loan Group by the Trust.
See "Description of the Transfer and Servicing Agreements--Credit
Enhancement--Reserve Accounts."
"Pool Balance" for any Loan Group is defined in "Description of the Transfer
and Servicing Agreements--Distributions." The Pool Balance for any Loan Group
at any time generally represents the aggregate principal balance of the
Financed Student Loans in such Loan Group 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 all payments received by the Trust on the
Financed Student Loans in such Loan Group during such Collection Period
allocable to principal, all losses realized on Financed Student Loans in such
Loan Group liquidated during such Collection Period, and all Additional
Fundings allocable to such Loan Group during such Collection Period.
B. Pre-Funding Accounts During the Funding Period, an account for each Loan Group will be
maintained in the name of the Indenture Trustee (each a "Pre-Funding Account").
On the Closing Date, approximately $__________ (the "Group 1 Pre-Funded
Amount") and approximately $____________ (the "Group 2 Pre-Funded Amount"), in
each case, of the net proceeds received from the sale of the Securities will be
deposited in the related Pre-Funding Account. During the Funding Period the
Group 1 and Group 2 Pre-Funded Amounts will be reduced from time to time by the
amount thereof used to purchase additional Student Loans to be included in Loan
Group 1 and Group 2, respectively, and, under certain limited circumstances
described below, to cover payments of certain fees with respect to the related
Loan Group and interest payments on the Group 1 Securities and Group 2
Securities, respectively, in each case, in accordance with the Sale and
Servicing Agreement. See "Description of the Transfer and Servicing
Agreements--Additional Fundings."
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On the Closing Date, for administrative convenience, a portion of the Group 1
Pre-Funded Amount equal to the Group 1 Subsequent Pool Pre-Funded Amount will
be allocated to an administrative subaccount of the Pre-Funding Account for
Loan Group 1 (the "Group 1 Subsequent Pool Pre-Funding Subaccount") and a
portion of the Group 2 Pre-Funded Amount equal to the Group 2 Subsequent Pool
Pre-Funded Amount will be allocated to an administrative subaccount of the
Pre-Funding Account for Loan Group 2 (the "Group 2 Subsequent Pool Pre-Funding
Subaccount"). The remaining portion of the Group 1 Pre-Funded Amount equal to
$_______ (the "Group 1 Other Additional Pre-Funded Amount") will be allocated
to an administrative subaccount of the Pre-Funding Account for Loan Group 1
(the "Group 1 Other Additional Pre-Funding Subaccount"). The remaining portion
of the Group 2 Pre-Funded Amount equal to $_____ (the "Group 2 Other Additional
Pre-Funded Amount") will be allocated to an administrative subaccount of the
Pre-Funding Account for Loan Group 2 (the "Group 2 Other Additional Pre-Funding
Subaccount"). The Group 1 and Group 2 Subsequent Pool Pre-Funded Amounts may only
be used by the Trust on or prior to the Special Determination Date to purchase
from the Seller Subsequent Pool Student Loans to be included in Loan Group 1 and
Loan Group 2, respectively. The Group 1 and Group 2 Subsequent Pool Pre-Funded
Amounts will be reduced on each date Subsequent Pool Student Loans to be included
in Loan Group 1 and Loan Group 2, respectively, are transferred to the Trust by
the aggregate Purchase Price of such Subsequent Pool Student Loans transferred on
such date. In the event that the Group 1 or Group 2 Subsequent Pool Pre-Funded
Amount is insufficient to pay the Purchase Price of the Student Loans from the
Subsequent Pool to be included in the related Loan Group, then the amount of such
deficiency may be withdrawn from the amounts on deposit in the Group 1 or Group 2
Other Additional Pre-Funding Subaccount, as applicable. The Group 1 and Group 2
Other Additional Pre-Funded Amounts shall also be available to purchase Other
Subsequent Student Loans to be included in Loan Group 1 and Loan Group 2,
respectively, and with respect to the Group 2 Other Additional Pre-Funded Amount
only, to pay Guarantee Fee Advances during the Funding Period. The "Purchase
Price" of any Financed Student Loan in Loan Group 1 will be (i) in the case of
Initial Financed Student Loans, an amount equal to _____% of the aggregate
principal balance of such Initial Financed Student Loan as of the Statistical
Cutoff Date, (ii) in the case of Subsequent Pool Student Loans, an amount equal to
_____% of the aggregate principal balance of such Student Loan as of the related
Subsequent Cutoff Date, (iii) in the case of Other Subsequent Student Loans, an
amount equal to ____% of the aggregate principal balance thereof as of its
Subsequent Cutoff Date and (iv) in the case of Other Student Loans, ____% of the
aggregate principal balance thereof as of its Subsequent Cutoff Date. The
"Purchase Price" of any Financed Student Loan in Loan Group 2 will be (i) in the
case of Initial Financed Student Loans, an amount equal to _____% of the aggregate
principal balance of such Initial Financed Student Loan as of the Statistical
Cutoff Date, (ii) in the case of Subsequent Pool Student Loans, an amount equal to
_____% of the aggregate principal balance of such Student Loan as of the related
Subsequent Cutoff Date, (iii) in the case of Other Subsequent Student Loans, an
amount equal to ____% of the aggregate principal balance thereof as of its
Subsequent Cutoff Date and (iv) in the case of Other Student Loans, ____% of the
aggregate principal balance thereof as of its Subsequent Cutoff Date. For purposes
of the foregoing calculations, the aggregate principal balance of each Financed
Student Loan includes accrued interest thereon from the date of origination
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to, with respect to each Initial Financed Student Loan, the Statistical Cutoff
Date, and to, with respect to each Additional Student Loan, the related
Subsequent Cutoff Date, in each case expected to be capitalized upon entry into
repayment.
Failure of the Seller to sell sufficient Student Loans to the Trust during the
Funding Period as required by the Sale and Servicing Agreement shall result in
a mandatory redemption of the Securities. See "--Transaction Overview --
Mandatory Redemption of Notes and Certificates."
"Initial Financed Student Loans" means the Student Loans transferred by the
Seller to the Trust having an aggregate principal balance of approximately
$______, as of the Statistical Cutoff Date.
"Subsequent Pool Student Loans" means the Student Loans included in the
Subsequent Pool.
"Other Subsequent 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 Seller
during the Funding Period with funds on deposit in the Escrow Accounts and funds
on deposit in the Pre-Funding Accounts and allocated to the Other Additional
Funding Subaccounts.
"Other Student Loans" means Serial Loans and Consolidation Loans made to a
borrower who is also a borrower under at least one outstanding Financed Student
Loan which the Trust is obligated to purchase from the Seller during the period
which begins following the end of the Funding Period and ends on the Loan
Purchase Termination Date, from amounts on deposit in the Escrow Accounts and
Available Loan Purchase Funds (as defined under "Description of the Transfer
and Servicing Agreements Additional Fundings") to the extent permitted by the
Sale and Servicing Agreement.
"Additional Student Loans" means collectively the Subsequent Pool Student
Loans, the Other Subsequent Student Loans, the Other Student Loans and
Guarantee Fee Advances.
"Loan Purchase Termination Date" means the earliest of (i) the date on which an
Event of Default occurs under the Indenture, a Servicer Default occurs under
the Sale and Servicing Agreement or an Administrator Default occurs under the
Sale and Servicing Agreement or the Administration Agreement, (ii) the date on
which certain events of insolvency with respect to the Seller occurs, or (iii)
the last day of the Collection Period preceding the December 2001 Distribution
Date.
The "Funding Period" means the period from the Closing Date until the first to
occur of (i) an Event of Default occurring under the Indenture, a Servicer
Default occurring under the Sale and Servicing Agreement or an Administrator
Default occurring under the Sale and Servicing Agreement or the Administration
Agreement, (ii) certain events of insolvency with respect to the Seller or
(iii) the date on which the amounts on deposit in the Pre-Funding Account would
be reduced to zero after giving effect to purchases of Other Subsequent Student
Loans on such date, or (iv) the last day of the Collection Period preceding the
December 2000 Distribution Date.
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C. Escrow Accounts Pursuant to the Sale and Servicing Agreement, an account for each Loan
Group in the name of the Indenture Trustee (each an "Escrow Account")
will be established and maintained by the Administrator and each such
account will be an asset of the Trust. With respect to each
Consolidation Loan, the Eligible Lender Trustee on behalf of the Trust
will convey to the Seller all Underlying Federal Loans and Underlying
Private Loans, as applicable, on each Transfer Date (as defined below)
held by it with respect to that borrower, as specified in a notice
delivered by or on behalf of the Seller. In exchange for and
simultaneously with such conveyance, the Seller will deposit into the
Escrow Account for Loan Group 1 an amount of cash equal to the principal
balances of all such Underlying Federal Loans and deposit into the
Escrow Account for Loan Group 2 an amount of cash equal to the principal
balances of all such Underlying Private Loans, in each case plus accrued
interest thereon to the date (the "Transfer Date") of such conveyance.
Amounts on deposit in each Escrow Account will be invested in Eligible
Investments and will be used on the succeeding Transfer Date to purchase
Additional Student Loans, as described above, from the Seller.
Any amounts remaining in the Escrow Account for a Loan Group on such Transfer
Date, after giving effect to the conveyance of all such Student Loans to be
included in such Loan Group on such Transfer Date, will be deposited into the
Collection Account for such Loan Group and distributed on the Distribution Date
immediately following such Transfer Date. See "Description of the Transfer and
Servicing Agreements -- Additional Fundings."
D. Collection Accounts The Administrator will establish in the name of the Indenture Trustee one or
more accounts for each Loan Group into which all collections in respect of the
Financed Student Loans will be required to be deposited.
1. Deposits into Collection Accounts. Pursuant to the Sale and Servicing
Agreement, an account in the name of the Indenture Trustee for each Loan Group
(each a "Collection Account") will be established and maintained by the
Administrator and each such account will be an asset of the Trust. The Seller
will make an initial deposit into each Collection Account on the Closing Date
of cash or certain Eligible Investments equal to $_____, with respect to the
Collection Account for Loan Group 1 and $______, with respect to the Collection
Account for Loan Group 2. Except under certain conditions described herein, the
Servicers will be required to remit all collections received with respect to
the Financed Student Loans in a Loan Group within two business days of receipt
thereof to the applicable Collection Account. Except under certain conditions
described herein, the Eligible Lender Trustee will be required to remit
Interest Subsidy Payments and Special Allowance Payments (each as defined under
"The Student Loan Financing Business--Federal Loans Under the Programs") it
receives with respect to the Financed Federal Loans within two business days of
receipt thereof to the Collection Account for Loan Group 1. If, however, such
conditions are satisfied as described herein, such collections received by a
Servicer and the Eligible Lender Trustee will be remitted to the Administrator,
who will not be required to deposit such amounts into the
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applicable Collection Account generally until on or before the business day
preceding each Distribution Date. See "Description of the Transfer and
Servicing Agreements--Payments on Financed Student Loans."
2. Distributions from the Collection Accounts. Pursuant to the Sale and
Servicing Agreement, the Administrator will instruct the Indenture Trustee to
withdraw funds on deposit in the Collection Account related to a Loan Group and
to apply such funds on or about the twenty-seventh day of each month (the
"Monthly Servicing Payment Date") to the payment of the Servicing Fee (as
defined under "--Transfer and Servicing Agreements" below) allocable to such
Loan Group, and on each Distribution Date to the following (except as otherwise
described herein, in the priority indicated): (i) the Servicing Fee and all
overdue Servicing Fees allocable to such Loan Group; (ii) the quarterly fee
payable to the Administrator and all overdue administration fees allocable to
such Loan Group; (iii) interest due on the related Notes and all overdue
interest thereon (other than the Noteholders' Interest Index Carryover) as
described above under "--Transaction Overview--Interest"; (iv) interest due on
the related Certificates and all overdue interest (other than the
Certificateholders' Interest Index Carryover) as described above under
"--Transaction Overview--Interest"; (v) the amount, if any, necessary to be
deposited in the Reserve Account for such Loan Group to reinstate the balance
thereof to the Specified Reserve Account Balance for such Reserve Account; (vi)
principal payable on the related Notes as described above under "--Transaction
Overview--Principal"; (vii) on each Distribution Date on and after which the
related Notes are paid in full, principal payable on the related Certificates
as described above under "--Transaction Overview--Principal"; (viii) the Excess
Servicing Fee allocable to such Loan Group (as defined under "--Transfer and
Servicing Agreements" below), if any; (ix) the aggregate unpaid amount of
Noteholders' Interest Index Carryover due to any Noteholders of the related
Notes, if any; (x) the aggregate unpaid amount of Certificateholders' Interest
Index Carryover due to any Certificateholders of the related Certificates, if
any; (xi) the amount, if any, necessary to be deposited into the Reserve
Account related to the other Loan Group, after giving effect to the
distributions to be made on such Distribution Date with respect to such Loan
Group, to reinstate the balance thereof to the Specified Reserve Account
Balance for such Reserve Account; and (xii) any remaining amounts after
application of clauses (i) through (xi) above to the Seller. Additionally, if
on any Distribution Date the outstanding principal balance of the Notes related
to such Loan Group (prior to giving effect to distributions on such
Distribution Date) is in excess of the Note Collateralization Amount for the
Notes related to such Loan Group, principal will be payable on such Notes in
the amount of such excess, to the extent of funds available, before any amount
is payable on the related Certificates. See "Description of the Transfer and
Servicing Agreements--Distributions--Distributions from Collection Accounts."
The "Specified Reserve Account Balance" for the Reserve Account related to Loan
Group 1 and with respect to any Distribution Date generally will equal
____________________. The "Specified Reserve Account Balance" for the Reserve
Account related to Loan Group 2 and with respect to any Distribution Date
generally will equal ___________.
3. Additional Fundings from the Collection Accounts. Amounts on deposit in the
Collection Account for a Loan Group which constitute Available Loan
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Purchase Funds for such Loan Group, if any, will be withdrawn from such
Collection Account to the extent necessary (i) on each Transfer Date, during
the period which begins following the end of the Funding Period and ends on the
Loan Purchase Termination Date, to purchase Other Student Loans to be included
in such Loan Group, subject to the aggregate purchase limits for the applicable
type of Student Loan and (ii) following the end of the Funding Period, in the
case of amounts on deposit in the Collection Account for Loan Group 2 only, to
pay Guarantee Fee Advances. "Available Loan Purchase Funds" for any Loan Group
means with respect to any Collection Period and any Transfer Date after the
Funding Period, the excess of Available Funds for such Loan Group (with certain
exceptions) for the Collection Period relating to the Distribution Date next
succeeding such Transfer Date that are on deposit in the Collection Account for
such Loan Group on such Transfer Date (before giving effect to any application
thereof) over the Accrued Expected Expense Payment for such Loan Group for such
Distribution Date. See "Formation of the Trust--The Trust" and "Description of
the Transfer and Servicing Agreements--Additional Fundings."
E. Negative Carry Accounts Pursuant to the Sale and Servicing Agreement, an account for each Loan Group in
the name of the Indenture Trustee (each a "Negative Carry Account") will be
established and maintained by the Administrator and each such account will be
an asset of the Trust. The Seller will make an initial deposit into each
Negative Carry Account on the Closing Date of cash or certain Eligible
Investments equal to $__________, with respect to the Negative Carry Account
for Loan Group 1 and $_______, with respect to the Negative Carry Account for
Loan Group 2 (each a "Negative Carry Account Initial Deposit"). On the date on
which all of the Subsequent Pool Student Loans to be included in a Loan Group
that can be transferred to the Trust have been transferred, but in no event
later than the Special Determination Date (the "Final Subsequent Transfer
Date"), the Administrator will instruct the Indenture Trustee to withdraw from
the Negative Carry Account for such Loan Group and deposit into the Collection
Account for such Loan Group an amount equal to the difference (if positive)
between (i) the product of (a) a fraction, the numerator of which is the actual
number of days from the Statistical Cutoff Date to the Subsequent Cutoff Date
relating to the Student Loans included in such Loan Group and transferred on
the Final Subsequent Transfer Date, and the denominator of which is 365, (b)
the current weighted average of the Note Interest Rates (as defined under
"Description of the Securities--The Notes") and the Certificate Rates for the
Notes and Certificates, respectively (as defined under "Description of the
Securities--the Certificates") related to such Loan Group as measured for the
period of time commencing on the Closing Date and ending on the Final
Subsequent Transfer Date, and (c) the Group 1 or Group 2 Subsequent Pool
Pre-Funded Amount, as applicable, minus (ii) the investment earnings on the
Group 1 or Group 2 Subsequent Pool Pre-Funded Amount, as applicable. After
making such deposit to such Collection Account, any amounts remaining in the
Negative Carry Account allocable to such Loan Group shall be released to the
Seller.
F. Reserve Accounts Pursuant to the Sale and Servicing Agreement, an account for each Loan Group in
the name of the Indenture Trustee (each a "Reserve Account") will be
established and maintained by the Administrator and each such account will be
an asset of the Trust. The Seller will make an initial deposit into each
Reserve Account on the Closing Date of cash or certain Eligible Investments
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equal to $___________, with respect to the Reserve Account for Loan Group 1 and
$___________, with respect to the Reserve Account for Loan Group 2 (each a
"Reserve Account Initial Deposit"). On the Closing Date, the Reserve Account
Initial Deposit for each Reserve Account will equal the applicable Specified
Reserve Account Balance as of the Closing Date. The Reserve Account Initial
Deposit for a Loan Group will be augmented on each Distribution Date by the
deposit into the Reserve Account for such Loan Group of certain amounts
available therefor remaining after making all prior distributions on such date.
See "Description of the Transfer and Servicing Agreements--Distributions." The
Reserve Account Initial Deposit for a Loan Group will also be augmented on each
date that Subsequent Pool Student Loans for such Loan Group are transferred by
the Seller to the Trust by a transfer from the amounts on deposit in the
Pre-Funding Account for such Loan Group by a portion of the Purchase Price
payable to the Seller in respect of such Subsequent Pool Student Loans, which
shall equal in the case of Loan Group 1, __% of the aggregate principal balance
of the transferred Subsequent Pool Student Loans included in Loan Group 1 and
in the case of Loan Group 2, __% of the aggregate principal balance of the
transferred Subsequent Pool Student Loans included in Loan Group 2.
Pursuant to the Sale and Servicing Agreement, amounts on deposit in each
Reserve Account will be available on each Monthly Servicing Payment Date to
cover any shortfalls in payments of the applicable portion of the Servicing
Fee, and on each Distribution Date to cover any shortfalls in payments of the
applicable portion of the Servicing Fee, the applicable portion of the
Administration Fee, and interest payable in respect of the applicable Notes and
the applicable Certificates (other than the applicable Noteholders' Interest
Index Carryover and the applicable Certificateholders' Interest Index
Carryover) for such Distribution Date for which funds otherwise available
therefor for such Distribution Date are insufficient to make such payments and
distributions; provided, that amounts on deposit in the Reserve Account for a
Loan Group shall only be available to cover shortfalls in interest payments on
the Certificates related to such Loan Group to the extent that the Note
Collateralization Amount for the Notes related to such Loan Group (after giving
effect to such withdrawals from such Reserve Account) is not less than the
outstanding principal balance of such Notes. In addition (i) on the Final
Maturity Date for each class of Group 1 Securities, amounts on deposit in the
Reserve Account for Loan Group 1, if any, will be available, if necessary, to
be applied to reduce the principal balance of such classes of Securities to
zero and (ii) on the Final Maturity Date for each class of Group 2 Securities,
amounts on deposit in the Reserve Account for Loan Group 2, if any, will be
available, if necessary, to be applied to reduce the principal balance of such
classes of Securities to zero. Amounts on deposit in any Reserve Account will
not be available to cover any unpaid Excess Servicing Fee, Noteholders'
Interest Index Carryover or Certificateholders' Interest Index Carryover.
Pursuant to the Sale and Servicing Agreement, amounts in the Reserve Account
for a Loan Group on any Distribution Date (without giving effect to any
distributions on such Distribution Date) in excess of the applicable Specified
Reserve Account Balance for such Distribution Date will be included as
Available Funds for such Loan Group for distribution on such Distribution Date.
See "Description of Transfer and Servicing Agreements--Credit
Enhancement--Reserve Accounts."
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The funding and maintenance of the Reserve Accounts is intended to enhance the
likelihood of timely payment of interest in respect of the Notes and the
Certificates (other than the Noteholders' Interest Index Carryover and the
Certificateholders' Interest Index Carryover) and payment of principal in
respect of the Notes and the Certificates on their respective Final Maturity
Dates. In certain circumstances, however, a Reserve Account could be depleted
and shortfalls in distributions on the related Notes or Certificates could
result.
G. Transfer and Servicing
Agreements Under the Sale and Servicing Agreement, the Seller will sell the Financed
Student Loans to the Trust, with the Eligible Lender Trustee holding legal
title thereto. In addition, the Servicers will agree with the Trust to be
responsible for servicing, managing, maintaining custody of and making
collections on the Financed Student Loans. PHEAA will be Servicer with respect
to each of those Financed Student Loans which were made to a borrower whose
initial graduate school student loan was for a school year prior to the
1997-1998 school year and with respect to any subsequent graduate student loans
to that same borrower. EFS will be Servicer with respect to each of those
Financed Student Loans which were made to a borrower whose initial graduate
school student loan was for the 1997-1998 school year, and with respect to any
subsequent graduate student loans to that same borrower. The obligations of the
Seller and the Servicers under the Sale and Servicing Agreement include the
following:
The Seller will be obligated to repurchase, and the Servicers will be obligated
to purchase, any Financed Student Loan if the interests of the Noteholders or
the Certificateholders therein are materially adversely affected by a breach of
any representation, warranty or covenant (including the applicable Servicer's
covenant to service all the applicable Financed Student Loans in accordance
with, and to otherwise comply with, applicable laws, restrictions and
guidelines) made by the Seller or a Servicer, as the case may be, with respect
to the Financed Student Loan, if the breach has not been cured following the
discovery by or notice to the Seller or a Servicer, as the case may be, of the
breach (it being understood that 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). In
addition, the Seller or the applicable Servicer, as the case may be, will be
obligated to reimburse the Trust with respect to a Financed Federal Loan for
any accrued interest amounts not guaranteed by a Federal Guarantor due to, or
any lost Interest Subsidy Payments or Special Allowance Payments as a result
of, a breach of the Seller's representations and warranties or the Servicer's
covenants, as the case may be, with respect to such Financed Federal Loan.
The Servicers will receive, subject to the limitations set forth in the
following paragraph, a monthly fee (the "Servicing Fee") payable on each
Monthly Servicing Payment Date. The Servicing Fee will be payable from
distributions with respect to each Loan Group and from amounts on deposit in
the related Reserve Account commencing October 27, 1998. The Servicing Fee
allocable to each Loan Group shall be equal to the sum of (i) 0.41% per annum
of the Pool Balance for such Loan Group as of the last day of the calendar
month immediately preceding the applicable
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Monthly Servicing Payment Date, and (ii) certain one-time fixed fees for each
Financed Student Loan in the applicable Loan Group 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.
Notwithstanding the foregoing, in the event that the fee payable to the
Servicers from distributions with respect to any Loan Group as described above
for any Monthly Servicing Payment Date would exceed 0.50% per annum of the Pool
Balance for such Loan Group as of the last day of the calendar month
immediately preceding the applicable Monthly Servicing Payment Date, (the
"Capped Amount"), then the "Servicing Fee" with respect to such Loan Group such
Monthly Servicing Payment Date will instead be the Capped Amount for such date.
The remaining amount in excess of such Servicing Fee allocable to such Loan
Group, together with any such excess amounts from prior Monthly Servicing
Payment Dates that remain unpaid (the "Excess Servicing Fee"), will be payable
to the Servicers on each succeeding Distribution Date out of funds available
therefor after payment on such Distribution Date of the Servicing Fee allocable
to such Loan Group, the Administration Fee allocable to such Loan Group,
amounts payable in respect of the applicable Notes and the Certificates (other
than the Noteholders' Interest Index Carryover and the Certificateholders'
Interest Index Carryover) and the amount, if any, necessary to be deposited in
the Reserve Account for such Loan Group to reinstate the balance thereof to the
Specified Reserve Account Balance for such Reserve Account.
Pursuant to the Sale and Servicing Agreement and the Administration Agreement,
the Administrator will agree with the Trust to be responsible for, among other
things, preparing and filing with the Department all appropriate claim forms
and other documents and filings on behalf of the Eligible Lender Trustee in
order to claim the Interest Subsidy Payments and Special Allowance Payments
from the Department in respect of the Financed Federal Loans entitled thereto
and preparing and providing monthly, quarterly and annual statements to the
Eligible Lender Trustee and the Indenture Trustee with respect to distributions
to Noteholders and Certificateholders.
TERI Guarantee Payment Account .........Pursuant to the Sale and Servicing Agreement, the Seller will establish and
maintain with Bankers Trust Company, as collateral agent (in such capacity, the
"Collateral Agent"), an account (the "TERI Guarantee Payment Account"). The
TERI Guarantee Payment Account will be owned by the Seller and will not be an
asset of the Trust but will be pledged by the Seller to the Collateral Agent
for the benefit of the Securityholders. During any Collection Period, upon
receipt by any Servicer of a guarantee payment made by TERI with respect to any
of the Financed Private Loans, such Servicer shall deposit such guarantee
payment into the TERI Guarantee Payment Account. On each Distribution Date,
funds on deposit in the TERI Guarantee Payment Account shall be included in
Available Funds for Loan Group 2 and deposited into the Collection Account for
such Loan Group until the aggregate of all funds that have been withdrawn from
the TERI Guarantee Payment Account and deposited into such Collection Account
since the Closing Date equals 19% of the sum of the Initial Pool Balances (the
"Maximim TERI Payments Amount"). Any funds on deposit in the TERI Guarantee
Payment Account in excess of such Maximum TERI Payments Amount shall be released
to the Seller.
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Auction of Trust Assets.................Any Financed Student Loans remaining in the Trust as of the end of the
Collection Period immediately preceding the December 2008 Distribution Date
will be offered for sale by the Indenture Trustee. KeyCorp, its affiliates
(other than the Seller), PHEAA, TERI and unrelated third parties may offer bids
to purchase all, but not less than all of such Financed Student Loans on such
Distribution Date. If at least two bids are received, the Indenture Trustee
will solicit and resolicit new bids from all participating bidders until only
one bid remains or the remaining bidders decline to resubmit bids. The
Indenture Trustee will accept the highest of such remaining bids if it is equal
to or in excess of an amount (the "Minimum Purchase Amount") equal to the
greatest of (i) the Auction Purchase Amount, (ii) the fair market value of such
Financed Student Loans as of the end of the Collection Period immediately
preceding such Distribution Date and (iii) the aggregate unpaid principal
amount of the Notes and principal balance of the Certificates in each case plus
accrued and unpaid interest thereon payable on such Distribution Date (other
than any Noteholders' Interest Index Carryover and Certificateholders' Interest
Index Carryover). If at least two bids are not received or the highest bid
after the resolicitation process is completed is not equal to or in excess of
the Minimum Purchase Amount, the Indenture Trustee will not consummate such
sale. 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 procedures described
above, the Indenture Trustee may, but shall not be under any obligation to,
solicit bids for sale of the Financed Student Loans on future Distribution
Dates upon terms similar to those described above. In the event the Financed
Student Loans are not sold in accordance with the foregoing, the Specified
Collateral Balance for each Loan Group shall be reduced to zero and all amounts
on deposit in the Collection Account (after payment of the Servicing Fee,
Administration Fee, and interest on the Notes and Certificates for each Loan
Group) on each subsequent Distribution Date will be paid as principal to the
Noteholders and then the Certificateholders for each Loan Group until the
outstanding principal balance of the Notes and Certificates has been reduced to
zero. No assurance can be given as to whether the Indenture Trustee will be
successful in soliciting acceptable bids to purchase the Financed Student Loans
on either the December 2008 Distribution Date or any subsequent Distribution
Date.
"Auction Purchase Amount" with respect to the Financed Student Loans means the
aggregate unpaid principal balance owed by the applicable borrowers thereon
plus accrued interest thereon to the date of purchase less the amount on
deposit in the Reserve Account as of such date. See "Description of the
Transfer and Servicing Agreements--Termination" herein.
Optional Purchase.......................The Seller may repurchase all remaining Financed Student Loans, and thus effect
the early retirement of the Certificates, on any Distribution Date on or after
which the sum of the Pool Balances is equal to 5% or less of the sum of the
Initial Pool Balances. See "Description of the Transfer and Servicing
Agreements--Termination."
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Tax Considerations......................Upon issuance of the Notes and Certificates, Thompson Hine & Flory LLP, as
federal tax counsel to the Trust ("Federal Tax Counsel") will deliver an
opinion to the effect that, (i) the Notes will be characterized as debt for
federal income tax purposes, although there is no specific authority with
respect to the characterization for federal income tax purposes of securities
having the same terms as the Notes and, (ii) for federal income tax purposes,
the Trust will not be characterized as an association (or publicly traded
partnership) taxable as a corporation. Each Noteholder, by acceptance of a
beneficial interest in a Note, will agree to treat such Note as indebtedness,
and each Certificateholder, by acceptance of a beneficial interest in a
Certificate, will agree to treat the Trust as a partnership in which they are
partners.
Upon issuance of the Notes and Certificates, _______________, as Pennsylvania
tax counsel to the Trust ("Pennsylvania Tax Counsel"), will deliver an 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.
See "Income Tax Consequences" for additional information concerning the
application of federal and Pennsylvania state tax laws.
ERISA Considerations....................Subject to the considerations discussed under "ERISA Considerations," the Notes
may be acquired by employee benefit plans or other retirement arrangements.
The Certificates may not be acquired by employee benefit plans or other
retirement arrangements subject to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), and/or Section 4975 of the Internal Revenue Code
of 1986, as amended or by any other entity that is deemed to hold assets of
such plan or arrangement. See "ERISA Considerations."
Rating of the Securities................It is a condition to the issuance and sale of the Notes and the Certificates
that each class of Notes be rated in the highest investment rating category and
that each class of Certificates be rated in one of the four highest investment
rating categories by at least two nationally recognized rating agencies. The
ratings of the Notes do not address the likelihood of the payment of any
Noteholders' Interest Index Carryover and the ratings of the Certificates do
not address the likelihood of the payment of any Certificateholders' Interest
Index Carryover. A rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating agency.
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RISK FACTORS
The following risk factors should be considered carefully in addition
to the other information contained in this Prospectus before purchasing the
Securities offered hereby.
Limited Assets of Trust. The Trust does not have, nor is it permitted
or expected to have, any significant assets or sources of funds other than the
Financed Student Loans (and the related Guarantee Agreements and other relevant
rights under certain collateral agreements with respect to the Financed Private
Loans to the extent assigned to the Trust by the Seller ("Assigned Rights")),
the Collection Accounts, the Pre-Funding Accounts, the Escrow Accounts, the
Negative Carry Accounts and the Reserve Accounts. Each Class of Notes represents
obligations solely of the Trust, and each Class of Certificates represents
interests solely in the Trust and its assets, and neither the Notes nor the
Certificates will be insured or guaranteed by the Seller, the Servicers, the
Guarantors, the Eligible Lender Trustee or the Department. Holders of the Notes
and the Certificates related to a Loan Group must rely on payments with respect
to the Financed Student Loans in such Loan Group, the limited
cross-collateralization of the Notes and Certificates as described herein, and,
if and to the extent available under the circumstances described herein, amounts
on deposit in the Pre-Funding Account, the Escrow Account, the Negative Carry
Account and the Reserve Account, in each case, for such Loan Group. The
Pre-Funding Account for a Loan Group will only be available during the Funding
Period to cover (i) obligations of the Trust relating to Additional Fundings of
such Loan Group and (ii) shortfalls in respect of the payment of interest on the
related Notes and related Certificates (other than the related Noteholders'
Interest Index Carryover and the related Certificateholders' Interest Index
Carryover) and certain administrative and servicing fees of the Trust related to
such Loan Group to the extent that the related Reserve Account has been reduced
to zero. The Escrow Accounts will also be available to cover obligations of the
Trust relating to purchases of Consolidation Loans. Except as described above,
neither the Pre-Funding Accounts nor the Escrow Accounts are intended to cover
losses on the Financed Student Loans. Similarly, amounts to be deposited in the
Reserve Accounts are limited in amount and will be reduced, subject to a
specified minimum, as the related Pool Balances are reduced. In addition, funds
in the Reserve Accounts will first be made available to cover shortfalls in
distributions of interest and principal on the related Notes. Amounts on deposit
in the Reserve Accounts or the Pre-Funding Accounts will not be available to
cover shortfalls in payment of interest on the Certificates for such Loan Group
if after giving effect to withdrawals from such Reserve Account and the
Pre-Funding Account, respectively, the Note Collateralization Amount for the
Notes related to such Loan Group is less than the aggregate principal balance of
the Notes related to such Loan Group. If the related Reserve Account and the
related Pre-Funding Account are exhausted, holders of the related Securities
will depend solely on payments with respect to the related Financed Student
Loans. See "Description of the Transfer and Servicing Agreements--Distributions"
and "--Credit Enhancement."
Principal Balance of Group 1 Securities Exceeds the Sum of the
Aggregate Principal Balance of Initial Financed Student Loans in Loan Group 1
and Pre-Funded Amount for Loan Group 1. On the Closing Date, the sum of the
aggregate initial principal balances of the Class IA-1 Notes and Class IA-2
Notes and the Certificate Balance of the Class I-B Certificates is _____% of
the sum of the aggregate principal balance of the Initial Financed Student
Loans in Loan Group 1 as of the Statistical Cutoff Date and the Pre-Funded
Amount allocable to Loan Group 1 as of the Closing Date. Each Initial Financed
Student Loan included in Loan Group 1 will be purchased by the Trust for an
amount equal to _____% of the principal balance thereof (including any accrued
interest thereon expected to be capitalized upon repayment) as of the
Statistical Cutoff Date. In addition, each Subsequent Pool Student Loan to be
included in Loan Group 1 will be purchased by the Trust for an amount equal to
_____% of the principal balance thereof (including any accrued interest thereon
expected to be capitalized upon repayment) as of the related Subsequent Cutoff
Date. Because Other Subsequent Student Loans and Other Student Loans are
purchased for an amount equal to 100% of the principal balance thereof
(including any accrued interest thereon expected to be capitalized upon
repayment) as of the related Subsequent Cutoff Date, the purchase of Other
Subsequent Student Loans and Other Student Loans should not increase the amount
by which the principal balance of Group 1 Securities exceeds the sum of the
Pool Balance and the Pre-Funded Amount for Loan Group 1. However, because the
actual rate and timing of and any accelerated payments of principal will depend
on a number of factors, including the rate and timing of the principal payments
on the Financed Student Loans included in Loan Group 1, there can be no
assurance of the actual rate or timing of such accelerated payments of
principal or when the aggregate principal amount of the related Notes and
principal balance of the related Certificates will be equal to or less than the
sum of the related Pool Balance, the related Pre-Funded Amount, the amounts on
deposit in the related Reserve Account and the amounts on deposit in the
related Negative Carry Account.
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Also because ____% of the Initial Financed Student Loans included in Loan Group
1 and _____% of the Student Loans in the Subsequent Pool related to Loan Group 1
have repayment terms that require borrowers to make only interest payments for
the first two years after entry into repayment, the actual rate or timing of
such accelerated payments may be reduced. As a result, if, (i) an Event of
Default should occur under the Indenture or an Insolvency Event should occur
(ii) the Financed Student Loans included in Loan Group 1 were liquidated at a
time when the outstanding principal amount of the Group 1 Securities exceeded
the sum of the related Pool Balance, the related Pre-Funded Amount, the amounts
on deposit in the related Reserve Account and the amounts on deposit in the
related Negative Carry Account, such Financed Student Loans would likely have to
be liquidated at a premium for holders of Group 1 Certificates and, in some
circumstances, holders of Group 1 Notes, not to suffer a loss.
Subordination of Certificates to Notes. The rights of the holders of
Certificates of a related Loan Group to receive payments of interest are
subordinated to the rights of the holders of Notes related to such Loan Group to
receive payments of interest (and in certain circumstances, principal) and the
rights of the holders of Certificates related to a Loan Group to receive
payments of principal are subordinated to the rights of the holders of Notes
related to such Loan Group to receive payments of interest and principal.
Consequently, amounts on deposit in the related Collection Account and, to the
extent necessary, the Reserve Account and, during the Funding Period, amounts
allocable to such Loan Group's Other Additional Pre-Funding Subaccount, will be
applied to the payment of interest on the related Notes before payment of
interest on the Certificates related to such Loan Group. Moreover, the holders
of Certificates related to a Loan Group will not be entitled to any payments of
principal until the related Notes are paid in full. In addition, if (i) an Event
of Default occurs and is continuing under the Indenture or (ii) an Insolvency
Event occurs and the Financed Student Loans are liquidated, all amounts due on
the related Notes will be payable before any amounts are payable on the related
Certificates. Additionally, if on any Distribution Date the outstanding
principal balance of the Notes of a Loan Group (prior to giving effect to
distributions on such Distribution Date) is in excess of the related Note
Collateralization Amount, principal will be payable to the holders of such Notes
in the amount of such excess to the extent of funds available before any amounts
are payable to the holders of the related Certificates. If amounts otherwise
allocable to the Certificates are used to fund payments of interest or principal
on the Notes of a related Loan Group, distributions with respect to such
Certificates may be delayed or reduced. Notwithstanding the foregoing,
distributions to Certificateholders of the amount of interest (other than any
Certificateholders' Interest Index Carryover) and principal payable thereon on
any Distribution Date will not be subordinated to the payment of any
Noteholders' Interest Index Carryover that may exist from time to time. The
Certificateholders bear directly the credit and other risks associated with an
undivided interest in the Trust. See "Description of the Securities--The
Certificates--Subordination of the Certificates," "Description of the Transfer
and Servicing Agreements--Distributions" and "--Credit
Enhancement--Subordination of the Certificates."
Borrower Default Risk on Certain Federal Loans. Under the Omnibus
Budget Reconciliation Act of 1993, Federal Loans first disbursed on or after
October 1, 1993, are 98% insured by guarantors guaranteeing Federal Loans. As a
result, to the extent a borrower of such a Federal Loan defaults, Loan Group 1
will experience a loss of 2% of outstanding principal and accrued interest on
each such defaulted Federal Loan. A defaulted loan will be fully assigned to the
applicable Federal Guarantor in exchange for a guarantee payment on the 98%
guaranteed portion and the Trust may have no right thereafter to pursue the
borrower for the 2% unguaranteed portion. Federal Loans continue to be 100%
guaranteed in the event of death, disability or bankruptcy of the borrower
regardless of disbursement date. The Initial Financed Student Loans and the
Subsequent Pool Student Loans related to Loan Group 1 consist of ____% and
____%, respectively, of Federal Loans first disbursed on or after October 1,
1993.
Dependence on Guarantors as Security for Financed Student Loans. All of
the Financed Student Loans will be unsecured. As a result, the only security for
payment of the Financed Student Loans are the guarantees provided under the
Guarantee Agreements between the Eligible Lender Trustee and the Guarantors. A
deterioration in the financial status of the Guarantors and their ability to
honor guarantee claims with respect to the Financed Student Loans could result
in a delay in making or a failure to make Guarantee Payments to the Eligible
Lender Trustee. Failures by borrowers of Student Loans generally to pay timely
the principal and interest due on such Student Loans could obligate the
Guarantors to make payments thereon, which could adversely affect the solvency
of the Guarantors and their ability to meet their guarantee obligations
(including with respect to the Financed Student Loans). Moreover, to the extent
that the Department pays reimbursement claims submitted by a Federal Guarantor
in respect of defaulting Student Loans for any fiscal year exceeding certain
specified levels, the Department's obligation to reimburse the Federal Guarantor
for
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losses will be reduced on a sliding scale from 100% (98% for loans made on
or after October 1, 1993) to a minimum of 80% (78% for loans made on or after
October 1, 1993).
Pursuant to the Higher Education Amendments of 1992 (the "1992
Amendments"), under Section 432(o) of the Higher Education Act, if the
Department has determined that a guarantor guaranteeing Federal Loans is unable
to meet its insurance obligations, the loan holder may submit claims directly to
the Department and the Department is required to pay the full Guarantee Payment
due with respect thereto in accordance with guarantee claim processing standards
no more stringent than those applied by such guarantor. However, the
Department's obligation to pay guarantee claims directly in this fashion is
contingent upon the Department making the determination referred to above. There
can be no assurance that the Department would ever make such a determination
with respect to a Federal Guarantor or, if such a determination was made,
whether such determination or the ultimate payment of such guarantee claims
would be made in a timely manner.
TERI and HICA, the Private Guarantors, are not entitled to any federal
reinsurance or assistance from the Department. Although each of TERI and HICA
maintains loan loss reserves intended to absorb losses arising from guarantee
commitments, there can be no assurance that the amount of such reserves will be
sufficient to cover the obligations of TERI and HICA, respectively, over the
term of the Financed Private Loans. There can be no assurance that TERI, HICA or
any other Guarantor will have the financial resources to make all guarantee
payments related to the Financed Student Loans that may arise from time to
time. The inability of any Guarantor to meet its guarantee obligations could
reduce the amount of principal and interest paid to the holders of the
Securities. Although ___% of the sum of the Initial Pool Balances consists of
Financed Private Loans guaranteed by TERI the maximum amount, in the aggregate,
of all guarantee payments made by TERI with respect to any Financed Private
Loans, which may be available for distributions with respect to the Securities
is equal to 19% of the sum of the Initial Pool Balances (the "Maximum TERI
Payments Amount"). See "The Financed Student Loan Pool--Insurance of Student
Loans; Guarantors of Student Loans" and "Description of the Transfer and
Servicing Agreements."
In addition, TERI has advised the Seller that it is currently in
compliance with all operating reserves requirements contained in guarantee
agreements TERI has in place with other student loan lenders and other trustees
under prior securitizations of student loans. However, there can be no assurance
that such compliance will continue.
The failure of TERI to make any Guarantee Payment (subject to the
Maximum TERI Payments Amount) may extend the weighted average life of one or
more classes of the Securities related to Loan Group 2 and will reduce the
amount of cross-collateralization available to Loan Group 1.
Risk of Loss of Federal Guarantor and Department Payments for Failure
to Comply with Loan Origination and Servicing Procedures for Federal Loans. The
Higher Education Act, including the implementing regulations thereunder,
requires lenders and their assignees making and servicing Student Loans that are
reinsured by the Department ("Federal Loans") and guarantors guaranteeing
Federal Loans to follow specified procedures, including due diligence
procedures, to ensure that the Federal Loans are properly made and disbursed to,
and repaid on a timely basis by or on behalf of, borrowers. Certain of those
procedures, which are specifically set forth in the Higher Education Act, are
summarized herein. See "The Student Loan Financing Business" and "Description of
the Transfer and Servicing Agreements--Servicing Procedures." The Servicers have
agreed pursuant to the Sale and Servicing Agreement to perform servicing and
collection procedures on behalf of the Trust in accordance with the Higher
Education Act and the rules and regulations promulgated thereunder. However,
failure to follow these procedures or failure of the Seller to follow procedures
relating to the origination of any Financed Federal Loans may 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 Financed Federal Loans or in the Federal
Guarantors' refusal to honor their agreements with the Eligible Lender Trustee
to, inter alia, guarantee the payment of such Financed Federal Loans (each such
agreement, a "Guarantee Agreement"). Failure of the Federal Guarantors to
receive reinsurance payments from the Department could adversely affect the
Federal Guarantors' ability or legal obligation to make payments under the
Guarantee Agreements ("Guarantee Payments") to the Trust. Loss of any such
Guarantee Payments, Interest Subsidy Payments or Special Allowance Payments
could adversely affect the amount of Available Funds for any Collection Period
with respect to Group 1 Securities and the Trust's ability to pay timely
interest and principal on any Distribution Date, and principal on such
Securities on the related Final Maturity Dates.
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Under certain circumstances, pursuant to the Sale and Servicing
Agreement, the Seller is obligated to repurchase, or the applicable Servicer is
obligated to purchase, any Financed Federal Loan, if a breach of the
representations, warranties or covenants of the Seller or the applicable
Servicer, as the case may be, with respect to such Financed Federal Loan has a
material adverse effect on the interests of the Noteholders or the
Certificateholders therein and such breach is not cured within any applicable
cure period (it being understood that any such breach that does not affect any
Federal Guarantor's obligation to guarantee payment of such Financed Federal
Loans will not be considered to have such a material adverse effect). In
addition, under certain circumstances pursuant to the Sale and Servicing
Agreement, the Seller or the applicable Servicer, as the case may be, is
obligated to reimburse the Trust with respect to a Financed Federal Loan for any
accrued interest amounts not guaranteed by a Federal Guarantor due to, or any
lost Interest Subsidy Payments and Special Allowance Payments as a result of, a
breach of the Seller's representations and warranties or the applicable
Servicer's covenants, as the case may be, with respect to such Financed Federal
Loan. See "Description of the Transfer and Servicing Agreements--Sale of
Financed Student Loans; Representations and Warranties" and "--Servicer
Covenants." There can be no assurance, however, that the Seller or the
applicable Servicer will have the financial resources to do so. The failure of
the Seller to so repurchase or the applicable Servicer to so purchase a Financed
Student Loan would constitute a breach of the Sale and Servicing Agreement,
enforceable by the Eligible Lender Trustee on behalf of the Trust or by the
Indenture Trustee on behalf of the Noteholders, but would not constitute an
Event of Default under the Indenture or permit the exercise of remedies
thereunder.
Risk of Loss of Private Guarantor Payments for Failure to Comply with
Loan Origination and Servicing Procedures for Private Loans. There are certain
rules and procedures applicable to originating and servicing Student Loans not
reinsured by the Department or any other governmental agencies ("Private
Loans"), which are analogous to those of Federal Loans. Failure to make or
service properly a Financed Private Loan in accordance with those procedures
could adversely affect the Eligible Lender Trustee's ability to obtain guarantee
payments from TERI (subject to the Maximum TERI Payments Amount) or from HICA.
Loss of such guarantee payments could adversely affect the Trust's ability to
pay principal and interest on Group 2 Securities and could reduce the amount of
cross-collateralization available to support Group 1 Securities. As described
above for Financed Federal Loans, under certain circumstances pursuant to the
Sale and Servicing Agreement, the Seller is obligated to repurchase, or the
applicable Servicer is obligated to purchase, a Financed Private Loan. See
"Description of the Transfer and Servicing Agreements--Sale of Financed Student
Loans; Representations and Warranties" and "--Servicer Covenants." There can be
no assurance, however, that the Seller or the applicable Servicer will have the
financial resources to do so.
Changes in Legislation May Adversely Affect Financed Student Loans and
Guarantors. 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 and the
Student Loans made thereunder, including the Financed Student Loans, or the
Guarantors. Such changes could result in a reduction of the Trust's ability to
pay principal and interest on the Notes, including, as a result, a reduction in
the ability of the Federal Guarantors to make Guarantee Payments to the Eligible
Lender Trustee with respect to the Financed Federal Loans. In addition, existing
legislation and future measures to reduce the federal budget deficit or for
other purposes may adversely affect the amount and nature of federal financial
assistance available with respect to these programs. In recent years, federal
budget legislation has provided for the recovery of certain funds held by
guarantee agencies in order to achieve reductions in federal spending. There can
be no assurance, however, that future federal budget legislation or
administrative actions will not adversely affect expenditures by the Department
or the financial condition of the Federal Guarantors.
Under the Omnibus Budget Reconciliation Act of 1993, Congress made a
number of changes that may adversely affect the financial condition of the
Federal Guarantors, as such changes reduce certain financial benefits previously
enjoyed by Federal Guarantors and give the Department broad powers over Federal
Guarantors and their reserves. See "The Student Loan Financing Business--Federal
Loans Under the Programs" for a more detailed description of the impact of such
legislation on Federal Guarantors. The changes create a significant risk that
the resources available to the Federal Guarantors to meet their guarantee
obligations will be significantly reduced. In addition, this legislation sought
to greatly expand the loan volume under the direct lending program of the
Department (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 under the direct
lending
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program. The expansion of this program in the future could result in increasing
reductions in the volume of loans made under the Stafford Loan Program, the
Federal Supplemental Loans for Students Program and the Federal Consolidation
Loan Program (such programs being collectively referred to herein as the
"Federal Programs"). Under the Federal Direct Student Loan Program, the
Department directly originates and holds student loans without the involvement
of private lenders. If the Federal Direct Student Loan Program expands, the
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 Servicers is reduced. Such reductions or effects could occur as
a result of reductions in the volume of new loans made under the Federal
Programs or the consolidation of existing loans under the Federal Direct Student
Loan Programs. Such cost increases could affect the ability of the Servicers to
satisfy their obligations to service the Financed Student Loans or to purchase
Financed Student Loans in the event of certain breaches of its covenants. See
"Description of the Transfer and Servicing Agreements--Servicer Covenants." Such
volume reductions could further reduce revenues received by the Federal
Guarantors available to pay claims on defaulted Financed Federal Loans. Finally,
the level of competition currently in existence in the secondary market for
loans made under the Federal Programs could be reduced, resulting in fewer
potential buyers of the Financed Federal Loans and lower prices available in the
secondary market for those loans.
During the 105th Congress, the reauthorization of the Higher Education
Act is being considered, including provisions to reduce the adverse impact on
lender yield on loans made on or after July 1, 1998 scheduled to take effect
under current law. The potential impacts on the Financed Student Loans resulting
from the reauthorization process, if any, cannot be determined at this time.
Fees Payable on Certain Financed Federal Loans. The Trust will be
obligated to pay to the Department a monthly rebate fee (the "Monthly Rebate
Fee") at an annualized rate of 1.05% of the outstanding principal balance on the
last day of each month plus accrued interest thereon of each Federal
Consolidation Loan which is a part of the Trust, which rebate will be payable
prior to distributions to the Group 1 Securityholders and which rebate will
reduce the amount of funds which would otherwise be available to make
distributions on the Group 1 Securities and will reduce the Student Loan Rate.
In addition, the Trust must pay to the Department a 0.50% origination fee (the
"Federal Origination Fee") on the initial principal balance of each Financed
Student Loan which is originated on its behalf by the Eligible Lender Trustee
(i.e., each Other Subsequent Student Loan and Other Student Loan which is a
Federal Consolidation Loan), which fee will be deducted by the Department out of
Interest Subsidy Payments and Special Allowance Payments. If the amount of
Interest Subsidy Payments and Special Allowance Payments due to the Trust are
not sufficient 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 or may be required to be paid immediately. If such amounts never
accrue, the Trust would be obligated to pay any remaining fee from other assets
of the Trust prior to making distributions to the Group 1 Securityholders. The
offset of Interest Subsidy Payments and Special Allowance Payments, and the
payment of any remaining fee from other Trust assets will further reduce the
amount of the Available Funds from which payments to the Group 1 Securityholders
may be made. Furthermore, any offset of Interest Subsidy Payments and Special
Allowance Payments will further reduce the Student Loan Rate.
Recent Developments--Emergency Student Loan Consolidation Act of 1997.
On November 13, 1997, 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 expire on September 30, 1998. The
combination of the change to a variable rate and the 8.25% interest cap reduces
the lender's yield in most cases below the rate that would have been applicable
under the previous weighted average formula.
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Recent Developments--Changes in Formulas for Determining Certain
Interest Rates and Special Allowance Payments. The formulas for determining the
interest rates on Stafford Loans and the formula for determining Special
Allowance Payments will change for loans disbursed on and after July 1, 1998.
The Higher Education Act currently provides that Stafford Loans disbursed on or
after July 1, 1998 will bear interest at the bond equivalent yield of a security
of comparable maturity as established by the Secretary of Education (the
"Secretary") plus 1%, not to exceed 8.25% per annum, regardless of payment
status. In addition, for loans disbursed on or after July 1, 1998, Special
Allowance Payments for all loans will be based on the bond equivalent yield of a
security of comparable maturity established by the Secretary plus 1%. Various
proposals are being considered by Congress to repeal or amend the new formulas
for determining the interest rates and Special Allowance Payment rates before
the July 1, 1998 effective date. Such proposals could result in, among other
things: (i) the current Treasury Bill formula being maintained, with reductions
in the applicable margins (currently a bipartisan compromise proposal that would
cut lenders' yields by 0.3% has been opposed by the Administration which is
seeking a substantially larger reduction), or (ii) the adoption of a new formula
based upon an alternate short-term market index.
Recent Developments--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). While the
Administration had proposed additional provisions, including increased lender
risk-sharing, yield reductions through decreased borrower interest rates,
greater risk-sharing by federal guarantors, reduced retention rates on
post-default payments and implementation of a performance-based contract system
for federal guarantors, those provisions were not enacted. However, many of
those same proposals have been made by the Administration during subsequent
federal budget discussions and as part of the reauthorization process of the
Higher Education Act. No assurance can be given that similar proposals will not
be included in future budgets or the pending reauthorization legislation.
Recent Developments--President Clinton's Proposed FY 1999 Budget. In
his proposed budget for fiscal year 1999, President Clinton has again proposed a
number of changes to the Higher Education Act that would affect lenders and
federal guarantors. These proposals would, among other things, require all
reserves by federal guarantors to be returned, impose a performance-based lender
payment to guaranty agencies tied to the agency's success in bringing delinquent
borrowers current, replace the current administrative cost allowance paid to
guaranty agencies with a performance-based fee and reduce retention on default
collections by federal guarantors from 27% to 18.5%. In addition, Student Loans
would no longer be dischargeable in bankruptcy under any circumstances. Many of
these proposals are included in the Administration's recommendations to Congress
related to the 1998 reauthorization of the Higher Education Act.
Recent Developments--1998 Reauthorization. The Higher Education Act is
expected to be reauthorized during calendar year 1998. Numerous proposals from
the Administration and members of Congress are being considered for inclusion in
this legislation. The House of Representatives recently passed a reauthorization
bill. The Senate is expected to act on a reauthorization bill shortly. Those
bills contain provisions that would, among other things, reduce lender yields
through borrower interest rate reductions, re-engineer the manner in which
federal guarantors are funded (by establishing a federal reserve fund and a
separate operating fund), extend the date of default on a Student Loan from the
180th day to the 270th day of delinquency, replace the current supplemental
pre-claims fee payable to guaranty agencies with a fee for bringing a borrower's
loan current, authorize the use of a master promissory note to evidence
borrowings under Student Loans incurred in multiple years, provide extended
repayment terms for some borrowers with student loan debts in excess of $30,000,
reduce reinsurance payments to guaranty agencies from 98%, 88% or 78% to 95%,
85% or 75%, respectively, reduce the default collection retention amount on
defaulted loan payments from 27% to 24%, authorize the Secretary to enter into
voluntary flexible agreements with guaranty agencies in lieu of their current
guaranty agreements with the Secretary, and change the interest rate on any new
Federal Consolidation Loan to a weighted average of the interest rates of the
loans being consolidated rounded up to the nearest 0.125% with a cap of 8.25%
per annum. While these bills enjoy significant bipartisan support in Congress,
the Administration does not agree with some of the provisions, particularly as
they relate to borrower interest rates.
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No assurance can be made that some or all of these proposals will be enacted, or
that other amendments adverse to lenders or the federal guarantors will not be
included in this reauthorization or other legislative action.
Consolidation of Federal Benefit Billings and Receipts with Other Trusts.
Due to a recent change in Department policy limiting the granting of new lender
identification numbers, the Eligible Lender Trustee is allowed under the Trust
Agreement to permit the Trust, and other trusts established by the Seller to
securitize Student Loans, to use a common Department lender identification
number. The billings submitted to the Department for Interest Subsidy Payments
and Special Allowance Payments on the Financed Student Loans will be
consolidated with the billings for such payments for Student Loans in such other
trusts using the same lender identification number and payments on such billings
will be made by the Department in lump sum form. Such lump sum payments will
then be allocated among the various trusts using the lender identification
number.
In addition, the sharing of the lender identification number by the Trust
with other trusts may result in the receipt of claim payments by federal
guarantors in lump sum form. In that event, such payments would be allocated
among the trusts in a manner similar to the allocation process for Interest
Subsidy Payments and Special Allowance Payments.
The Department regards the Eligible Lender Trustee as the party primarily
responsible to the Department for any liabilities owed to the Department or
federal guarantors resulting from the Eligible Lender Trustee's activities in
the FFELP. As a result, if the Department or a federal guarantor were to
determine that the Eligible Lender Trustee owes a liability to the Department or
a federal guarantor on any Student Loan for which the Eligible Lender Trustee is
or was legal titleholder, including loans held in the Trust or other trusts, the
Department or such federal guarantor may seek to collect that liability by
offset against payments due the Eligible Lender Trustee under the Trust. In the
event that 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 would be likely to collect that
liability by offset against amounts due the Eligible Lender Trustee under the
shared lender identification number, including amounts owed in connection with
the Trust.
In addition, other trusts using the shared lender identification number
may in a given quarter incur Federal Origination Fees that exceed the Interest
Subsidy Payments and Special Allowance Payments payable by the Department on the
loans in such other trusts, resulting in the consolidated payment from the
Department received by the Eligible Lender Trustee under such lender
identification number for that quarter being less than the amount owed by the
Department on the loans in the Trust for that quarter.
The Trust Agreement for the Trust and the trust agreements for other
trusts established by the Seller which share the lender identification number to
be used by the Trust (the Trust and such other trusts, collectively, the "Seller
Trusts") will require each Seller Trust (including the Trust) to indemnify the
other Seller Trusts for a shortfall or an offset by the Department or a federal
guarantor arising from the Financed Federal Loans held by the Eligible Lender
Trustee on such Seller Trust's behalf.
Incentive programs. The Seller currently makes available and may hereafter
make available certain incentive programs to borrowers. Two such programs are
currently made available by the Seller and may apply to Student Loans owned by
the Trust. Under one program, which is made available for all Student Loans
which enter repayment after October 1, 1995, if a borrower makes 48 consecutive
scheduled payments in a timely fashion, the effective interest rate charged to
the borrower will be reduced as long as timely payments continue to be received.
For Stafford Loans and SLS Loans, the rate reduction will be 2.0% per annum. For
Federal Consolidation Loans, the rate reduction will be 1.0% per annum. For
Private Loans, the rate reduction will be 0.5% per annum. Pursuant to the other
program which went into effect during 1996, borrowers who make student loan
payments electronically through automatic monthly deductions from a bank account
receive a 0.25% effective interest rate reduction as long as they continue in
such automatic repayment plan.
The effect of these incentive programs may be to reduce the yield on the
Initial Financed Student Loans or on Additional Student Loans which may be added
to the Trust. If any such incentive program does reduce the yield on the
affected Student Loan and is not required by the Higher Education Act, such
program
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will be applicable to Student Loans in the Trust only if and to the extent that
the Trust receives payment from the Seller in an amount sufficient to offset
such yield reduction.
Inability of Indenture Trustee to Liquidate Financed Student Loans. If
an Event of Default occurs under the Indenture, subject to certain conditions,
the Indenture Trustee is authorized to sell the Financed Student Loans (without
the consent of the Certificateholders). In that event, PHEAA, TERI and certain
unrelated parties will be given the opportunity, upon 30 days' prior notice, to
bid to purchase the Financed Student Loans and, if any is the highest bidder,
the Financed Student Loans must be sold to that entity. There can be no
assurance, however, that the Indenture Trustee will be able to find a purchaser
for the Financed Student Loans in a timely manner or that PHEAA will submit a
bid therefor or that the market value of such Financed Student Loans would, at
any time, be equal to the aggregate outstanding principal amount of the
Securities and accrued interest thereon. In addition, in the event of (i) any
sale of the Financed Student Loans on behalf of the Trust prior to the
Certificate Final Maturity Date for the [Class I-B Certificates][Class II-B
Certificates] to any person (other than the Seller, the Administrator or
the Servicers) in which the purchaser elects to deconvert the Financed Student
Loans and not retain PHEAA or EFS, as applicable, as Servicer or (ii) any
termination by the Trust of PHEAA as Servicer of the Financed Student Loans it
services or EFS as Servicer of the Financed Student Loans it services, except
for any termination for cause or as a result of any Servicer Default, the Trust
shall pay to PHEAA and EFS, as the case may be as a part of the Servicing Fee
(not subject to the Capped Amount) the following deconversion fee, per Financed
Student Loan, based on the status of the Financed Student Loan at the time of
deconversion: (a) $115 for each in-school Stafford Loan, in-school deferred SLS
Loan, Law Loan, Medical Loan, Dental Loan, Business Loan, Graduate Loan, Bar
Exam Loan and Residency Loan (each as described under "The Student Loan
Financing Business--Federal Loans Under the Programs" and "--Private Loans Under
the Programs"); and (b) $62.50 for each Financed Student Loan of any other
status or loan type. If the net proceeds of any such sale, together with amounts
then on deposit in the Reserve Accounts, do not exceed the aggregate outstanding
principal amount of the Securities and accrued interest thereon, the
Securityholders will suffer a loss. In such circumstances, the
Certificateholders would not be entitled to receive any portion of such
proceeds, however, the Certificateholders have certain consent rights relating
to any liquidation of the Financed Student Loans that would result in such
shortfall. Moreover, the net proceeds of the sale of Financed Student Loans will
be applied first to the Securities of the related Loan Group and then, any
excess will be applied to the Securities of the Other Loan Group. In addition,
the amount of principal required to be distributed to Noteholders under the
Indenture is generally limited to amounts available to be so distributed.
Therefore, the failure to pay principal on the Notes may not result in the
occurrence of an Event of Default until the Class IA-1 Final Maturity Date, in
the case of the Class IA-1 Notes, the Class IIA-1 Final Maturity Date, in the
case of the Class IIA-1 Notes, the Class IA-2 Final Maturity Date, in the case
of the Class IA-2 Notes and the Class IIA-2 Final Maturity Date, in the case of
the Class IIA-2 Notes. See "Description of the Transfer and Servicing
Agreements--Credit Enhancement."
Failure to Comply with Third-Party Servicer Regulations May Adversely
Affect Loan Servicing. On November 29, 1994, the Secretary of the Department of
Education published final regulations amending the Student Assistance General
Provisions and Federal Family Education Loan Program ("FFELP") regulations.
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 the 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 new regulations, or violates other
FFELP requirements, the new regulations authorize the Department to fine the
servicer and/or limit, suspend, or terminate the servicer's eligibility to
contract to service FFELP loans. The effect of such a limitation or termination
on the servicer's eligibility to service loans already on its system, or to
accept new loans for servicing under existing contracts, is unclear. There can
be no assurance that a Servicer will not be fined or held liable by the
Department for liabilities arising out of its FFELP activities for the Trust or
other client lenders, or that its eligibility will not be limited, suspended, or
terminated in the future. If a Servicer were so fined or held liable, or its
eligibility were limited, suspended, or terminated, its ability to properly
service the Financed Federal Loans and to satisfy its obligation to purchase
Financed Federal Loans with respect to which it breaches its representations,
warranties or covenants under the Sale and Servicing Agreement could be
adversely affected. However, in the event of
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a termination of eligibility, the Sale and Servicing Agreement provides for the
removal of the applicable Servicer and the appointment of a Substitute Servicer.
Characteristics of the Financed Student Loans Will Vary. Certain
characteristics of the Financed Student Loans in a Loan Group will vary from the
characteristics of the Initial Financed Student Loans in a Loan Group and the
Subsequent Pool Student Loans in a Loan Group. The distribution by weighted
average interest rates may vary as a result of variations in the effective rates
of interest applicable to the Financed Student Loans after each Additional
Funding and the remaining term to maturity may vary significantly from the
actual term to maturity as a result of the granting of deferral and forbearance
periods.
Insolvency Risk of Seller. The Seller intends that the transfer of the
Financed Student Loans by it to the Eligible Lender Trustee on behalf of the
Trust under the Sale and Servicing Agreement constitutes a valid sale and
assignment of such Financed Student Loans. However, a court could treat the
transfer of the Financed Student Loans to the Eligible Lender Trustee as an
assignment of collateral as security for the benefit of the Noteholders and the
Certificateholders. If the transfer of the Financed Student Loans to the
Eligible Lender Trustee is deemed to create a security interest therein, a tax
or government lien on property of the Seller arising before the Financed Student
Loans came into existence may have priority over the Eligible Lender Trustee's
interest in such Financed Student Loans and, if the Federal Deposit Insurance
Corporation (the "FDIC") were appointed receiver or conservator of the Seller,
the FDIC's administrative expenses may also have priority over the Eligible
Lender Trustee's interest in such Financed Student Loans. In the event that the
Seller becomes insolvent, the Federal Deposit Insurance Act ("FDIA"), as amended
by the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), sets forth certain powers which 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 Financed Student Loans. To the extent that the transfer of
the Financed 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 Financed 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 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. See "Certain Legal Aspects of the Financed Student Loans."
In addition, in the event of the occurrence of certain insolvency
related events with respect to the Seller, the Financed Student Loans may be
required to be sold. There can be no assurance, however, that the net sale
proceeds will be sufficient to repay the principal amount of the Notes and the
Certificates in full plus accrued interest thereon. See "Description of Transfer
and Servicing Agreements--Insolvency Event."
Custodial Risk of Servicer. Pursuant to the Sale and Servicing
Agreement, the applicable Servicer as custodian on behalf of the Trust, with
respect to the Financed Student Loans it services, will have custody of the
promissory notes evidencing the related Financed Student Loans following the
sale of the Financed Student Loans to the Eligible Lender Trustee. Although the
accounts of the Seller will be marked to indicate the sale and although the
Seller will cause UCC financing statements to be filed with the appropriate
authorities, the Financed Student Loans will not be physically segregated,
stamped or otherwise marked to indicate that such Financed Student Loans have
been sold to the Eligible Lender Trustee. If, through inadvertence or otherwise,
any of the Financed 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 Financed Student Loans in the ordinary course
of its business and took possession of such Financed Student Loans, then the
purchaser (or secured party) would acquire an interest in the Financed Student
Loans superior
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to the interest of the Eligible Lender Trustee, if the purchaser (or secured
party) acquired such Financed Student Loans without knowledge of the Eligible
Lender Trustee's interest. See "Description of the Transfer and Servicing
Agreements--Sale of Financed Student Loans; Representations and Warranties" and
"--Servicer Covenants."
Insolvency Risk of Servicer or Administrator. In the event of a
Servicer Default or an Administrator Default resulting solely from certain
events of insolvency or bankruptcy that may occur with respect to a Servicer or
the Administrator, a court, conservator, receiver or liquidator may have the
power to prevent either the Indenture Trustee or the Noteholders from appointing
a successor Servicer or Administrator, as the case may be, and delays in
collections in respect of the Financed Student Loans may occur. See "Description
of the Transfer and Servicing Agreements--Rights Upon Servicer Default and
Administrator Default."
Prepayment Risk from Pre-Funded Amounts. On the Closing Date, the
Eligible Lender Trustee on behalf of the Trust will own the $__________
outstanding principal balance of the Initial Financed Student Loans as of the
Statistical Cutoff Date and the $__________ aggregate Group 1 and Group 2
Pre-Funded Amounts on deposit in the Pre-Funding Accounts. If, as of the Special
Determination Date, the Group 1 Subsequent Pool Pre-Funded Amount has not been
reduced to zero, then the remaining Group 1 Subsequent Pool Pre-Funded Amount,
if greater than $_________, will be distributed on the first Distribution Date
thereafter to redeem each class of Group 1 Notes and prepay the Class I-B
Certificates on a pro rata basis, based on the initial principal amount of each
class of Group 1
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Notes and the initial principal balance of the Class I-B Certificates; if such
amount is $___________ or less, it will be distributed on the first Distribution
Date only to holders of the Class IA-1 Notes.
If, as of the Special Determination Date, the Group 2 Subsequent Pool
Pre-Funded Amount has not been reduced to zero, the remaining Group 2 Subsequent
Pool Pre-Funded Amount, if greater than $_______ will be distributed on the
first Distribution Date thereafter to redeem each class of Group 2 Notes and
prepay the Class II-B Certificates on a pro rata basis, based on the initial
principal balance of each class of Group 2 Notes and the initial principal
balance of the Class II-B Certificates; if such amount is $_________ or less, it
will be distributed on the first Distribution Date only to the holders of the
Class IIA-1 Notes. Although the Seller intends to sell all of the Student Loans
constituting the Subsequent Pool to the Trust on or prior to the Special
Determination Date, because of the potential for a bankruptcy or death of a
borrower subsequent to the Statistical Cutoff Date and other administrative
reasons, the Seller may not be able to sell all such Student Loans to the Trust.
Further, if the sum of (i) the principal amount of eligible Financed Student
Loans originated by the Seller during the Funding Period, net of the principal
amount of the Financed Student Loans sold to the Seller during the Funding
Period in connection with the Seller's making of Consolidation Loans, and (ii)
the amount of Guarantee Fee Advances during the Funding Period is less than the
difference between the initial Pre-Funded Amount and the initial principal
balance of the Subsequent Pool Student Loans as of the related Subsequent Cutoff
Date, the Trust will have insufficient opportunities to make Additional
Fundings, thereby resulting in a prepayment of principal to Noteholders as
described in the following paragraph.
To the extent that amounts on deposit in the Pre-Funding Accounts have
not been fully applied to Additional Fundings by the Trust by the end of the
Funding Period, such amounts will be deposited into the applicable Collection
Account for distribution on the immediately following Distribution Date. Such
reduction in the Pre-Funded Amount will result in a corresponding increase in
the amount of principal distributable on the related Securities on such
Distribution Date. It is anticipated that the amount of Additional Fundings made
by the Trust will not be exactly equal to the amount on deposit in the
Pre-Funding Accounts and that therefore there will be at least a nominal amount
of principal prepaid to the Noteholders. Any reinvestment risk will be borne
directly by the Noteholders. See also "The Financed Student Loan Pool--Maturity
and Prepayment Assumptions" regarding the risk to Noteholders and
Certificateholders of prepayment in the event that Consolidation Loans are made
with respect to the Financed Student Loans by the Seller after the Funding
Period or by another lender at any time.
Prepayment, Maturity and Yield Risks. All the Financed Student Loans
are prepayable at any time. (For this purpose the term "prepayments" includes
prepayments in full or in part (including pursuant to Consolidation Loans) and
liquidations due to default (including receipt of Guarantee Payments). The rate
of prepayments on the Financed Student Loans may be influenced by a variety of
economic, social and other factors affecting borrowers, including interest
rates, the availability of alternative financing and the general market for
legal, medical, dental and other post-graduate professional services. In
addition, under certain circumstances, the Seller will be obligated to
repurchase or the applicable Servicer will be obligated to purchase Financed
Student Loans from the Trust pursuant to the Sale and Servicing Agreement as a
result of breaches of their respective representations, warranties or covenants.
See "Description of the Transfer and Servicing Agreements--Sale of Financed
Student Loans; Representations and Warranties" and "--Servicer Covenants."
Moreover, to the extent borrowers of Financed Student Loans elect to borrow
Consolidation Loans with respect to such Financed Student Loans from the Seller
(i) during the period which begins after the end of the Funding Period and ends
on the Loan Purchase Termination Date and collections on the Financed Student
Loans are not available to purchase such Consolidation Loans, (ii) after the
Loan Purchase Termination Date or (iii) from another lender at any time,
Noteholders (and after the Notes have been paid in full, Certificateholders)
will collectively receive as a prepayment of principal the aggregate principal
amount of such Financed Student Loans. 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 or, if they do so, that such
Consolidation Loans will not be made (x) by the Seller after the end of the
Funding Period when collections on the Financed Student Loans are not available
to purchase such Consolidation Loans, (y) after the Loan Purchase Termination
Date or (z) by another lender at any time. See "The Student Loan Financing
Business" and "The Financed Student Loan Pool--Maturity and Prepayment
Assumptions."
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
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preferable to, those that would be available from the Seller on a loan
originated by the Seller under the Federal Consolidation Loan Program. The
availability of such lower-rate, income-contingent loans may decrease the
likelihood that the Seller would be the originator of a Consolidation Loan with
respect to borrowers with Financed Federal Loans, as well as increase the
likelihood that a Financed Federal Loan in the Trust will be prepaid through the
issuance of a Federal Direct Consolidation Loan. Any such prepayments will be
allocated to Loan Group 1 and will result in a more rapid amortization of the
Group 1 Securities then would otherwise be the case. The volume of existing
loans that may be repaid in this fashion is not determinable at this time.
On the other hand, scheduled payments with respect to, and maturities
of, the Financed Student Loans may be extended, including pursuant to Grace
Periods, Deferral Periods and, under certain circumstances, Forbearance Periods
(each as defined under "The Student Loan Financing Business--Federal Loans Under
the Programs") or as a result of the conveyance of Serial Loans to the Eligible
Lender Trustee on behalf of the Trust as described herein or of refinancings
through Consolidation Loans having longer maturities, which may lengthen the
remaining term of the Financed Student Loans and the average life of the Notes
and the Certificates. In addition, the stated maturity of many of the Financed
Student Loans will occur well beyond the Final Maturity Date. See "The Student
Loan Financing Business" and "The Financed Student Loan Pool--Maturity and
Prepayment Assumptions." Any reinvestment risks resulting from a faster or
slower incidence of prepayment of Financed Student Loans will be borne entirely
by the Noteholders and the Certificateholders. See also "Description of the
Transfer and Servicing Agreements--Additional Fundings" regarding the prepayment
of principal to holders of Notes and Certificates of a Loan Group if as of the
Special Determination Date the Subsequent Pool Pre-Funded Amount for such Loan
Group has not been reduced to zero and the total amount remaining on deposit in
the applicable Pre-Funding Account as of such date exceeds 25% of the initial
principal amount of the related Notes and principal balance of the related
Certificates and the prepayment of principal to holders of the related Notes as
a result of excess funds remaining on deposit in the applicable Pre-Funding
Account prior to a Pre-Funded Amount remaining at the end of the Funding Period,
"--Insolvency Event" regarding the sale of the Financed Student Loans if a
Seller Insolvency Event occurs and "--Termination" regarding the Seller's option
to purchase the Financed Student Loans when the the sum of the Pool Balances is
less than or equal to 5% of the sum of the Initial Pool Balances and the auction
of the Financed Student Loans occurs on or after the December 2008 Distribution
Date.
Any Financed Student Loans remaining in the Trust as of the end of the
Collection Period immediately preceding the December 2008 Distribution Date will
be offered for sale by the Indenture Trustee. If acceptable bids to purchase
such Financed Student Loans on such Distribution Date are received, as described
herein, the proceeds of the sale will be applied on such Distribution Date to
redeem any outstanding Notes and to retire any outstanding Certificates on such
date. In addition, if acceptable bids to purchase such Financed Student Loans on
such Distribution Date are not received, the sale of such Financed Student Loans
may occur on a subsequent Distribution Date, as described herein, and applied on
such date to redeem any outstanding Notes and retire any outstanding
Certificates. No assurance can be given as to whether the Indenture Trustee will
be successful in soliciting acceptable bids to purchase the Financed Student
Loans on the December 2008 Distribution Date or any subsequent Distribution
Date. See "Description of the Transfer and Servicing Agreement--Termination."
Holders of Notes or Certificates should consider, in the case of Notes
or Certificates, as the case may be, purchased at a discount, the risk that a
slower than anticipated rate of principal payments on the Financed Student Loans
could result in an actual yield that is less than the anticipated yield and, in
the case of Notes or Certificates, as the case may be, purchased at a premium,
the risk that a faster than anticipated rate of principal payments on the
Financed Student Loans could result in an actual yield that is less than the
anticipated yield.
Prepayment Risks Differ Between the Notes and the Certificates. Because
(except for certain limited circumstances) the Class A-2 Noteholders of a Loan
Group will receive no payments of principal until the related Class A-1 Notes
have been paid in full, and the holders of Certificates of the related Loan
Group will receive no payments of principal until the related Class A-2 Notes
have been paid in full, the Class A-1 Notes of such Loan Group and, to a lesser
extent, the Class A-2 Notes of such Loan Group bear relatively greater risk than
do the Certificates of such Loan Group of an increased rate of principal
repayments with respect to the Financed Student Loans (whether as a result of
voluntary prepayments, Consolidation Loans or liquidations due to default or
breach). In addition, the Class A-1 Notes of the related Loan Group generally
bear the risk of principal prepayments as a result of any remaining
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Pre-Funded Amount for that Loan Group at the end of the Funding Period and any
remaining Subsequent Pool Pre-Funding Amount for that Loan Group after the Final
Subsequent Transfer Date if either of such amounts is equal to or less than
$10,000,000. On the other hand, Certificateholders, and, to a lesser extent, the
Class A-2 Notes of the related Loan Group bear a greater risk of delay in the
receipt of principal than do Class A-1 Noteholders of such Loan Group in the
event of a shortfall in Available Funds related to such Securities and in
amounts on deposit in the related Reserve Account because the related
Certificates do not receive principal distributions from the related Available
Funds until the related Class A-2 Notes are paid in full and the related Class
A-2 Notes do not receive principal distributions until the related Class A-1
Notes are paid in full.
Variability of Actual Cash Flows. Amounts received with respect to the
Financed Student Loans for a particular Collection Period may vary greatly in
both timing and amount from the payments actually due on the Financed Student
Loans as of such Collection Period for a variety of economic, social and other
factors, including both individual factors, such as additional periods of
deferral or forbearance prior to or after a borrower's commencement of repayment
and the borrower's selection of a repayment option (which may include interest
only payments for certain periods), and general factors, such as a general
economic downturn which could increase the amount of defaulted Student Loans.
Failures by borrowers to pay timely the principal and interest on the Financed
Student Loans will affect the amount of funds available for distribution on a
Distribution Date, which may reduce the amount of principal and interest paid to
the Securityholders on such Distribution Date. In addition, because the funds
available for distribution on any Distribution Date include Interest Subsidy
Payments and Special Allowance Payments on the Financed Federal Loans that are
received during that Collection Period (and which accrued during the prior
Collection Period) and because the Student Loan Rate is based on the amount of
Interest Subsidy Payments and Special Allowance Payments that have accrued
during such Collection Period, a significant increase in the amount of such
payments being made by the Department in respect of the Financed Federal Loans
from one Collection Period to the next (as a result, for example, of a
significant increase in prevailing interest rates) could result in a temporary
shortfall in the funds available for distribution for the given Distribution
Date. In addition, the failure of a Guarantor to timely meet its guarantee
obligations with respect to the Financed Student Loans could also reduce the
amount of funds available for distribution on a given Distribution Date. The
effect of such factors, including the effect on a Guarantor's ability to meet
its guarantee obligations with respect to the Financed Student Loans, or the
Trust's ability to pay principal and interest with respect to the Securities is
impossible to predict.
Certain incentive programs currently or hereafter made available by the
Seller to borrowers under the loan programs may also be made available by a
Servicer to borrowers with Financed Student Loans. Any such incentive program
that effectively reduces borrower payments on Financed Student Loans and is not
required by the Higher Education Act will be applicable to the Financed Student
Loans only if and to the extent that a Servicer receives payment from the Seller
(or Seller deposits or causes a deposit to be made into the Collection Account)
in an amount sufficient to offset such effective yield reductions. See "The
Student Loan Financing Business--General--Loan Programs--Incentive Programs."
Noteholders' Right to Control Upon Certain Defaults. In the event a
Servicer Default or an Administrator Default occurs, the Indenture Trustee or
the Noteholders, as described under "Description of the Transfer and Servicing
Agreements--Rights upon Servicer Default and Administrator Default," may remove
a Servicer or the Administrator, as the case may be, without the consent of the
Eligible Lender Trustee or any of the Certificateholders. Moreover, only the
Indenture Trustee or the Noteholders, and not the Eligible Lender Trustee or the
Certificateholders, have the ability to remove a Servicer or the Administrator,
as the case may be, if a Servicer Default or an Administrator Default occurs. In
addition, the Noteholders have the ability, with certain specified exceptions,
to waive defaults by a Servicer and the Administrator, including defaults that
could materially adversely affect the Certificateholders. See "Description of
the Transfer and Servicing Agreements--Waiver of Past Defaults."
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
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under the Indenture may not be readily available or may be limited by applicable
state and federal laws. See "Certain Legal Aspects of the Financed Student
Loans."
Basis Risk. Although the interest rate on the Notes and the
Certificates is generally based on the applicable Investor Index it is possible
that a positive spread may not exist between (a) the Student Loan Rate
calculated with respect to any class of Notes or Certificates and (b) the
interest rate on each class of Notes and Certificates based on the Investor
Index. In such a case, the interest rate on one or more classes of Notes and
Certificates, as applicable, for such Distribution Date will be the applicable
Student Loan Rate. See "Description of the Securities--The Notes--Distributions
of Interest" and "--The Certificates--Distributions of Interest." Any
Noteholders' Interest Index Carryover or Certificateholders' Interest Index
Carryover arising as a result of the interest rate on one or more classes of
Notes and Certificates being determined on the basis of the applicable Student
Loan Rate will be paid on that Distribution Date or on any succeeding
Distribution Date to the extent funds are allocated and available therefor after
making all required prior distributions and deposits with respect to such date.
Payment of such amounts, however, will not be covered, in the case of the Notes,
by amounts on deposit in the applicable Reserve Account or by subordination of
distributions in respect of the applicable Certificates (although distributions
of any Certificateholders' Interest Index Carryover due to Certificateholders of
Certificates related to a Loan Group will be subordinated to payment of any
Noteholders' Interest Index Carryover due to Noteholders of Notes related to
such Loan Group) and, in the case of the Certificates, by amounts on deposit in
the Reserve Account. See "Description of the Transfer and Servicing
Agreements--Distributions."
Limitations on Credit Ratings of the Securities. It is a condition to
the issuance and sale of each class of Notes and Certificates that the Notes be
rated in the highest investment rating category and that the Certificates be
rated in one of the four highest investment rating categories by at least two
nationally recognized Rating Agencies. A rating is not a recommendation to
purchase, hold or sell Securities, inasmuch as such rating does not comment as
to market price or suitability for a particular investor. The ratings of the
Securities address the likelihood of the payment of principal on the respective
Final Maturity Dates and the payment of interest on the Securities pursuant to
their terms. However, the Rating Agencies do not evaluate, and the ratings of
the Securities do not address, the likelihood of payment of the Noteholders'
Interest Index Carryover or the Certificateholders' Interest Index Carryover.
There can be no assurance that a rating will remain for any given period of time
or that a rating will not be lowered or withdrawn entirely by a Rating Agency if
in its judgment circumstances in the future so warrant. In the event that any
ratings initially assigned to any of the Securities were subsequently lowered or
withdrawn for any reason, no person or entity will be obligated to provide any
additional credit enhancement with respect to the Securities. Any reduction or
withdrawal of a rating may have an adverse effect on the liquidity and market
price of the related Securities.
Book-Entry Registration--Beneficial Owners Not Recognized by Trust.
Each class of Securities will initially be represented by one or more
certificates registered in the name of Cede, the nominee for DTC, and will not
be registered in the names of the holders of such Securities or their nominees.
Because of this, unless and until Definitive Securities are issued, holders of
such Securities 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,
Cedel or Euroclear and their respective participating organizations. See
"Description of the Securities--Book-Entry Registration" and "--Definitive
Securities."
FORMATION OF THE TRUST
THE TRUST
KeyCorp Student Loan Trust 1998-A is a trust formed under the laws of
the State of New York pursuant to the Trust Agreement for the transactions
described in this Prospectus. The Trust will not engage in any activity other
than (i) acquiring, holding and managing the Financed Student Loans and the
other assets of the Trust and proceeds therefrom, (ii) issuing the Certificates
and the Notes, (iii) making payments thereon and (iv) engaging in other
activities that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto or connected therewith.
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The Trust will be initially capitalized with equity of $________
excluding amounts deposited in each Reserve Account by the Seller on the Closing
Date, representing the sum of initial principal balances of the Certificates.
Class I-B Certificates with an original principal balance of approximately
$________ and Class II-B Certificates with an original principal balance of
approximately $________ will be sold to and retained by the Seller and the
remaining Certificates will be sold to third-party investors that are expected
to be unaffiliated with the Seller, the Servicers, the Guarantors, the Trust or
the Department. The equity of the Trust, together with the proceeds from the
sale of the Notes, will be used by the Eligible Lender Trustee to purchase on
behalf of the Trust the Initial Financed Student Loans from the Seller pursuant
to the Sale and Servicing Agreement and to fund the deposit of the Group 1 and
Group 2 Pre-Funded Amounts. The Seller will use a portion of the net proceeds it
receives from the sale of the Initial Financed Student Loans to make each
Reserve Account Initial Deposit. Upon the consummation of such transactions, the
property of the Trust will consist of (a) a pool of Student Loans, legal title
to which is held by the Eligible Lender Trustee on behalf of the Trust, (b) all
funds collected in respect thereof on or after September 1, 1998, (c) all
Assigned Rights with respect to certain Financed Private Loans contained in such
pool, and (d) all moneys and investments on deposit in the Collection Accounts,
the Pre-Funding Accounts, the Escrow Accounts, the Negative Carry Accounts and
the Reserve Accounts. To facilitate servicing and to minimize administrative
burden and expense, the Servicers will be appointed the custodians of the
promissory notes representing the Financed Student Loans that each services by
the Eligible Lender Trustee.
ELIGIBLE LENDER TRUSTEE
General. The First National Bank of Chicago is the Eligible Lender
Trustee for the Trust under the Trust Agreement. The First National Bank of
Chicago principal offices are located at One First National Plaza, Suite 0126,
Chicago, Illinois 60607 and its New York offices are located at First Chicago
Trust Company of New York, 14 Wall Street, New York, New York 10005. The
Eligible Lender Trustee will acquire on behalf of the Trust legal title to all
the Financed Student Loans acquired from time to time pursuant to the Sale and
Servicing Agreement. The Eligible Lender Trustee on behalf of the Trust will
enter into a Guarantee Agreement with each of the Guarantors with respect to
such Financed Student Loans. The Eligible Lender Trustee qualifies 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 Financed Federal Loans to be owned by an eligible lender would result in the
loss of any Guarantee Payments from any Federal Guarantor and any Federal
Assistance with respect to such Financed Federal Loans. See "The Financed
Student Loan Pool--Insurance of Student Loans; Guarantors of Student Loans." The
Eligible Lender Trustee's liability in connection with the issuance and sale of
the Notes and the Certificates is limited solely to the express obligations of
the Eligible Lender Trustee set forth in the Trust Agreement and the Sale and
Servicing Agreement. See "Description of the Securities" and "Description of the
Transfer and Servicing Agreements." The Seller plans to maintain normal
commercial banking relations with the Eligible Lender Trustee.
Fees. In consideration for its performance of its obligations under the
Sale and Servicing Agreement, the Eligible Lender Trustee will be entitled to
receive an annual fee of $4,500.
USE OF PROCEEDS
After making the deposits of the Group 1 and Group 2 Pre-Funded Amounts
to the applicable Pre-Funding Accounts, the balance of the net proceeds from the
sale of the Certificates and the Notes will be paid by the Trust to the Seller
in consideration for the purchase by the Trust of the Initial Financed Student
Loans on the Closing Date. The Seller will use such proceeds paid to it (i) to
make the Reserve Account Initial Deposits and the Negative Carry Account Initial
Deposits and (ii) for general corporate purposes.
THE SELLER, THE ADMINISTRATOR AND THE SERVICER
THE SELLER AND ADMINISTRATOR
General. Key Bank USA, National Association (the "Bank"), will act as
Seller pursuant to the Sale and Servicing Agreement and Administrator pursuant
to the Administration Agreement. The Bank, a wholly owned subsidiary of KeyCorp,
is a national banking association providing consumer financial services
nationwide, including
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credit cards, student loans, home equity loans, and indirect automobile, marine
and recreational vehicle loans. Seller, an affiliate of the Seller, and the
predecessor of such affiliate have been collectively originating graduate
student loans since 19__ and student loans in general since 19__.
As of June 30, 1998, the Bank had total assets of approximately $____
billion, total liabilities of approximately $____ billion and approximately
$____ billion in stockholder's equity. As of such date, the Seller had an
aggregate principal amount of student loans outstanding of approximately $____
billion, of which approximately $____ billion aggregate principal amount
consists of Student Loans originated under various graduate student loan
programs. The principal executive offices of the Bank are located at KeyCenter,
127 Public Square, Cleveland, Ohio 44114 and its telephone number is (216)
689-3000.
Services and Fees of Administrator. Pursuant to the 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 Department and is required to provide
notices and reports 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 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") payable by the Trust on each Distribution Date. See
"Description of the Transfer and Servicing Agreements--Administrator."
THE SERVICERS
PHEAA. Pennsylvania Higher Education Assistance Agency ("PHEAA") is a
body corporate and politic constituting a public corporation and government
instrumentality created pursuant to an act of the Pennsylvania Legislature.
PHEAA has approximately _______ employees. PHEAA's headquarters are located in
Harrisburg, Pennsylvania with 6 regional offices located throughout Pennsylvania
and additional offices located in California, Delaware and West Virginia.
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. PHEAA's enabling
legislation also authorizes PHEAA to undertake the origination of loans and the
servicing of loans made by PHEAA and others.
As of June 30, 1998, PHEAA has outstanding debt and/or credit
facilities (under which the entire aggregate amount of funds available had not
been drawn) in the amount (including amounts drawn or available under such
credit facilities) of approximately $____ billion. As of June 30, 1998, PHEAA
owned approximately $____ billion outstanding principal amount of student loans
financed with the proceeds of its long-term debt, and had funds available for
acquisition of student loans in the amount of approximately $____ million.
PHEAA has been guaranteeing student loans since 1964. PHEAA has
guaranteed a total of approximately $____ billion principal amount of Stafford
Loans and approximately $____ billion principal amount of PLUS Loans and SLS
Loans under the Higher Education Act. In addition to guaranteeing loans under
the Higher Education Act, PHEAA also operates certain guarantee programs for
which its receives no federal reinsurance. PHEAA has outstanding guarantee
obligations of such loans in the amount of approximately $____ million as of
June 30, 1998.
PHEAA's two principal servicing products are its full servicing
operation (in which it performs all student loan servicing functions on behalf
of its customers) and its remote servicing operation (in which it provides only
data processing services to its customers that have their own servicing
operations). As of June 30, 1998, PHEAA was servicing under its full service
program approximately ______ million student loan accounts representing
approximately $____ billion outstanding principal amount for more than 400
customers and under its remote servicing operation, approximately ______ student
loans representing approximately $____ billion outstanding principal amount for
4 customers.
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The above information relating to PHEAA has been obtained from PHEAA
and the Seller has not conducted any independent verification of such
information. PHEAA has agreed that it will provide a copy of its most recent
audited financial statements to Securityholders upon receipt of a written
request directed to Mr. Tim Guenther, Chief Financial Officer, Financial
Management, 1200 North Seventh Street, Harrisburg, Pennsylvania 17102.
EFS. EFS Services, Inc. ("EFS"), a wholly-owned subsidiary of EFS,
Inc., was formed in March, 1995. EFS, Inc. was formed to acquire all of the net
assets of Education Financial Services of Indiana, Inc. EFS has approximately
____ employees. EFS's headquarters are located in Indianapolis, Indiana with
regional offices located __________________.
As of June 30, 1998, EFS has outstanding debt and/or credit facilities
(under which the entire aggregate amount of funds available had not been drawn)
in the amount (including amounts drawn or available under such credit
facilities) of approximately ______ . As of June 30, 1998, EFS owned
approximately ______ outstanding principal amount of student loans financed with
the proceeds of its long-term debt, and had funds available for acquisition of
student loans in the amount of approximately _______.
EFS has been servicing student loans since 19__. It utilizes PHEAA's
remote servicing product to service the student loans referred to here and also
_________. As of June 30, 1998, EFS was servicing approximately ______ student
loan accounts representing approximately ____ billion outstanding principal
amount for more than ___ customers.
The above information relating to EFS has been obtained from EFS and
the Seller has not conducted any independent verification of such information.
EFS 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
_______________.
Services and Fees of Servicers. Pursuant to the Sale and Servicing
Agreement and except as otherwise expressly assumed by the Administrator, each
of PHEAA and EFS has agreed as a Servicer to service, and perform all other
related tasks with respect to, all the Financed Student Loans acquired by the
Eligible Lender Trustee on behalf of the Trust. PHEAA will be Servicer with
respect to each of those Financed Student Loans which were made to a borrower
whose initial graduate school student loan was for a school year prior to the
1997-1998 school year and with respect to any subsequent graduate student loans
to that same borrower; EFS will be Servicer with respect to each of those
Financed Student Loans which were made to a borrower whose initial graduate
school student loan was for the 1997-1998 school year and with respect to any
subsequent graduate student loans to that same borrower. With respect to the
Financed Student Loans it is servicing for the Trust, each Servicer is required
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 Servicer has
serviced Student Loans on behalf of the Seller and otherwise in compliance with
all applicable standards and procedures. In addition, each 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."
In consideration for performing its obligations under the Sale and
Servicing Agreement, the Servicers will receive in aggregate, subject to certain
limitations described herein, a monthly fee payable by the Trust on each Monthly
Servicing Payment Date equal to the sum of (i) 0.41% per annum of each Pool
Balance as of the last day of the preceding calendar month and (ii) certain
one-time fixed fees for each Financed Student Loan for which a forbearance
period was granted or renewed or for which a guarantee claim was filed, in each
case subject to certain adjustments, together with other administrative fees and
similar charges. See "Description of Transfer and Servicing
Agreements--Servicing Compensation."
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THE STUDENT LOAN FINANCING BUSINESS
GENERAL
The Student Loans to be sold by the Seller to the Eligible Lender
Trustee on behalf of the Trust pursuant to the Sale and Servicing Agreement have
been selected from Student Loans originated by the Seller under various loan
programs ("Graduate Loan Programs") 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"). Legal title to all the Financed Student Loans
that from time to time comprise assets of the Trust will be held by the Eligible
Lender Trustee, as trustee on behalf of the Trust. See "Formation of the
Trust--Eligible Lender Trustee."
The proceeds of these Student Loans are used by students to finance a
portion of the costs of attending law school, medical school, dental school,
graduate business school and other graduate schools, of preparing for and taking
one or more state bar examinations upon graduation from law school and for
participating in medical or dental residency programs upon graduation from
medical or dental school. As described herein, substantially all payments of
principal and interest with respect to the Financed Federal Loans will be
guaranteed against default, death, bankruptcy or disability of the applicable
borrower by PHEAA pursuant to a guarantee agreement to be entered into between
PHEAA and the Eligible Lender Trustee, or by ASA pursuant to a guarantee
agreement to be entered into between ASA and the Eligible Lender Trustee, by
NSLP pursuant to a guarantee agreement to be entered into between NSLP and the
Eligible Lender Trustee, or by ECMC pursuant to a guarantee agreement to be
entered into between ECMC and the Eligible Lender Trustee, (such agreements,
each as amended or supplemented from time to time, the "Federal Guarantee
Agreements"). Each of PHEAA, ASA, NSLP and ECMC is entitled, subject to certain
conditions, to be reimbursed by the Department for all or substantially 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, the Eligible Lender
Trustee, as a holder of the Financed Federal Loans on behalf of the Trust, is
entitled to receive from the Department certain interest subsidy payments and
special allowance payments with respect to certain of such Financed Federal
Loans as described herein. See "--Federal Loans Under the Programs" and "The
Financed Student Loan Pool--Insurance of Student Loans; Guarantors of Student
Loans."
Payment of principal and interest with respect to the Financed Private
Loans will be guaranteed against default, death, bankruptcy or disability of the
applicable borrower by TERI pursuant to a guarantee agreement to be entered into
among TERI, the Seller and the Eligible Lender Trustee, or by HICA pursuant to a
guarantee agreement to be entered into among HICA, the Seller and the Eligible
Lender Trustee (such agreements, each as amended or supplemented from time to
time, the "Private Guarantee Agreements" and, together with the Federal
Guarantee Agreements, the "Guarantee Agreements"). See "--Private Loans Under
the Programs" and "The Financed Student Loan Pool--Insurance of Student Loans;
Guarantors of Student Loans." PHEAA, ASA, NSLP, ECMC, TERI and HICA are
sometimes individually referred to herein as a "Guarantor" and collectively as
the "Guarantors." TERI and HICA are collectively referred to herein as the
"Private Guarantors".
The description and summaries of the Higher Education Act, the Federal
Programs, the Guarantee Agreements and the other statutes, regulations and
documents referred to in this Prospectus do not purport to be comprehensive, and
are qualified in their entirety by reference to each such statute, regulation or
document (and, with respect to the Guarantee Agreements, by references to the
forms of such agreements, if any, included as exhibits to the Registration
Statement). There can be no assurance that future amendments or modifications
will not materially change any of the terms or provisions of the programs
described in this Prospectus or of the statutes and regulations implementing
these programs. See "Risk Factors--Changes in Legislation May Adversely Affect
Financed Student Loans and Guarantors."
THE GRADUATE LOAN PROGRAMS
General. The Graduate Loan Programs (the "Programs") 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 or other graduate schools. The
Programs originally targeted law school
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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 Programs since [1990] and has, as of June 30, 1998, originated
loans under the Programs in an aggregate principal amount of approximately
____billion. The Programs consist of Student Loans which are guaranteed by
PHEAA, ASA, NSLP, or ECMC and are reinsured by the Department ("Federal Loans")
and Student Loans which are guaranteed by TERI or HICA but are not reinsured by
the Department or any other governmental entity ("Private Loans"). As described
below, Federal Loans include "Stafford Loans," "SLS Loans" and "Federal
Consolidation Loans" and Private Loans include loans related to each of the
above-mentioned fields of study (including Bar Exam Loans and Residency Loans)
and "Private Consolidation Loans."
Eligibility. To be eligible to obtain a loan under the Programs (other
than a Consolidation Loan, bar examination loan or residency loan), a student
must, among other things, (i) be enrolled in, or admitted for enrollment in, an
approved or accredited graduate school, (ii) be enrolled in, or enroll in an
acceptable degree program, be attending at least half-time and be making
satisfactory progress toward the completion of such program according to the
standards of the school, (iii) be a U.S. citizen, U.S. national or eligible
non-citizen, (iv) not have borrowed, together with the loan being requested,
more than the applicable annual and aggregate limits specified from time to time
under the Programs, (v) meet the program credit criteria established by the
lender and (vi) not be in default on any education loan or owe a refund on an
educational grant (each such student, an "Eligible Student").
The following table sets forth the approved or accredited schools and
the acceptable degree programs for each graduate field of study:
Acceptable
Field of Study Approved/Accredited Schools Degree Programs
- -------------- --------------------------- ---------------
Law American Bar Association-approved law schools that Juris Doctor of Law or
are members of LSAC other joint degree program
Medical Liaison Committee on Medical Education-or American Medical Doctor or Doctor of
Osteopathic Association-accredited graduate medical Osteopathy
schools
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
Schools and Colleges, the Middle States Association or degree program
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
In addition, a law student may also receive a bar examination loan
("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
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period before or after graduation. A medical or dental student may also receive
a residency loan ("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 before or after graduation. Under current Programs
rules, a student is not required to have existing Student Loans outstanding
under the Programs in order to receive a bar examination or residency loan.
Origination Process. The Higher Education Act specifies rules regarding
loan origination practices, which lenders must comply with in order for their
Federal Loans to be guaranteed and to be eligible to receive Federal Assistance.
Lenders are prohibited from offering points, premiums, payments or other
inducements, directly or indirectly, to any educational institution, guarantee
agency or individual in order to secure loan applications, and no lender may
conduct unsolicited mailings of student loan applications to students who have
not previously received student loans from that lender.
With respect to all Student Loans made under the Programs (other than
Consolidation 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 in Boston,
Massachusetts. 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 Programs. In addition, a credit report of
each applicant for Private Loans is obtained from an applicable credit reporting
service, which the Seller then uses to determine, in consultation with the
Private Guarantors, whether such applicant satisfies certain specified credit
underwriting criteria. Such criteria include that such credit report shows that
no account has been more than 90 days delinquent in the past two years, that no
more than one account is currently more than 60 days delinquent, that no account
has been charged-off in the past two years, that there is no record of a
bankruptcy in the past seven years and that there has been no foreclosure,
repossession, open judgment or suit, unpaid prior educational debt or negative
public credit items in the past six years. The credit criteria for the 1994-1995
Program Year also include requirements that no account has been delinquent 90 or
more days in the past five years (or three years with respect to any previous
borrower), and there have been no more than three inquiries (and none with
respect to a previous borrower) to an authorized credit reporting agency in the
past six months. The credit criteria for the 1997-1998 Program Year includes the
additional requirement that no more than two accounts have been more than 60
days delinquent in the past two years. The marketing agent or origination
department forwards a copy of each application that satisfies the foregoing
reviews to the respective Guarantor, who reviews such application to determine
that such application satisfies all applicable conditions, including the
foregoing, for the loan to be eligible to receive Guarantee Payments, subject to
compliance with the terms of the respective Guarantee Agreements, including the
proper servicing of the loan. Upon approval of an application by either the
marketing agent or the origination department and the respective Guarantor (and
approval by the Seller, in the case of all Private Loans) and receipt of
evidence from such Guarantor that the applicable loan is guaranteed, the Seller
causes the proceeds of such loan to be disbursed in one or more installments.
For each loan that is made, the marketing agent or the origination department
forwards the completed loan application and executed promissory note to the
designated Servicer, which serves as custodian for such materials.
Any borrower inquiries concerning Consolidation Loans received by the
marketing agent or the Seller are forwarded to the appropriate 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. Although the borrower is permitted to choose any lender from whom
he or she currently has federally guaranteed education loans (including
undergraduate loans) to make a Federal Consolidation Loan, borrowers typically
express no preference as to the identity of the lender. In that event, each
Servicer is required under the Programs to choose the lender that has the
highest balance of the loans to be consolidated or, if there is no such lender,
the lender that has made the most recent loan to the borrower to be
consolidated. Pursuant to the Programs, the Servicers are 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. In addition, with respect to any Private Consolidation Loan, the
Servicers are required to transmit to the lender such information as the lender
may need to complete the credit review and applicant notification procedures
that lender is currently performing with respect to Private Loans, and the
lender will transmit the results of the credit review (i.e., approval or
rejection) back to the Servicers. Upon approval of an application for a
Consolidation Loans the applicable lender causes the proceeds of such
Consolidation Loan to be disbursed to each lender of the loans being
consolidated in
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amounts sufficient to retire each of such loans. For each Consolidation Loan
that is made by the Seller, a Servicer retains the completed loan application
and executed promissory note as custodian.
Servicing and Collections Process. The Higher Education Act, the
Programs 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 Servicer
performs such procedures on behalf of the Seller and has agreed, pursuant to the
Sale and Servicing Agreement, to perform specified and detailed servicing and
collection procedures with respect to the Financed Student Loans on behalf of
the 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 Servicer's
loan file for the borrower. Each Servicer is also 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
Eligible Lender Trustee, as holder of legal title to the Financed Student Loans
on behalf of the 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 Financed 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 Financed Federal Loan. See "Risk Factors--Risk of Loss of
Federal Guarantor and Department Payments for Failure to Comply with Loan
Origination and Servicing Procedures for Federal Loans" and "--Risk of Loss of
Private Guarantor Payments for Failure to Comply with Loan Origination and
Servicing Procedures for Private Loans."
At prescribed times prior to submitting a claim for payment under a
Guarantee Agreement for a delinquent Financed Student Loan, each 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) or 150 days (in the case of Private Loans), each
Servicer may file a default claim with the respective Guarantor. Failure to file
a claim within 270 days (in the case of Federal Loans) or 180 days (in the case
of Private Loans) of delinquency may result in denial of the guarantee claim
with respect to such loan. Each 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 Servicer to purchase the applicable Financed Student Loan.
See "Description of the Transfer and Servicing Agreements--Servicer Covenants."
Incentive Programs. The Seller has offered, and may continue to offer,
incentive programs to certain Student Loan borrowers. Two such programs are
currently made available by the Seller and may apply to Student Loans owned by
the Trust. Under one program, which is made available for all Student Loans
which enter repayment after October 1, 1995, if a borrower makes 48 consecutive
scheduled payments in a timely fashion, the effective interest rate charged to
the borrower will be reduced as long as timely payments continue to be received.
For Stafford Loans and SLS Loans, the rate reduction will be 2.0% per annum. For
Federal Consolidation Loans, the rate reduction will be 1.0% per annum. For
Private Loans, the rate reduction will be 0.5% per annum. Pursuant to the other
program which went into effect during 1996, borrowers who make student loan
payments electronically through automatic monthly deductions from a bank account
receive a 0.25% effective interest rate reduction as long as they continue in
such automatic repayment plan. It cannot be predicted with certainty the extent
to which borrowers will decide to participate in these programs.
These incentive programs currently or hereafter made available by the
Seller to borrowers under the Programs may also be made available by each
Servicer to borrowers with Financed Student Loans. Any such incentive program
that effectively reduces borrower payments on Financed Student Loans and is not
required by the Higher Education Act will be applicable to the Financed Student
Loans only if and to the extent that the Trust receives payment from the Seller
(or Seller deposits or causes a deposit to be made into the applicable
Collection Account) in an amount sufficient to offset such effective yield
reductions.
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FEDERAL LOANS UNDER THE PROGRAMS
General. The following descriptions of the Federal Stafford Loan
Program, the Federal Supplemental Loans for Students Program and 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"). 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).
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 and the
Student Loans made thereunder, including the Financed 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 budget legislation has provided for the recovery of certain funds
held by guarantee agencies in order to achieve reductions in federal spending.
There can be no assurance that future federal budget legislation,
reauthorization 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 Financed Student Loan Pool--Insurance of Student Loans; Guarantors of
Student Loans."
On August 10, 1993, President Clinton signed the Omnibus Budget
Reconciliation Act of 1993, which made a number of changes that may adversely
affect the financial condition of the Federal Guarantors. One such change
included 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, (i) to ensure
an orderly termination of the Federal Guarantor, (ii) to serve the best
interests of the student loan programs, or (iii) 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 or to ensure an orderly transition to full implementation of
direct federal lending. These various changes create a significant risk that the
resources available to the Federal Guarantors to meet their guarantee
obligations will be significantly reduced. In addition, this legislation sought
to greatly expand the Federal Direct Student Loan Program volume 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 under the direct
lending program, the expansion of this program in the future could result in
increasing reductions in the volume of loans made under the Federal Programs.
Under the Federal Direct Student Loan Program, the Department directly
originates and holds student loans without the involvement of private lenders.
During the 105th Congress, the reauthorization of the Higher Education Act is
expected to be considered. The potential impacts on the Financed Student Loans
resulting from the reauthorization process, if any, cannot be determined at this
time. See "Risk Factors--Changes in Legislation May Adversely Affect Financed
Student Loans and Guarantors."
Stafford Loans. "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
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to the benefits of: (i) a guarantee of the payment of principal and interest
with respect to such Stafford Loans by a guarantee agency (PHEAA, ASA, NSLP or
ECMC in the case of the Financed Federal Loans), which guarantee will be
supported by federal reinsurance of all or most of such guaranteed amounts as
described herein; (ii) 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 (iii) 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 (ii) and (iii) above, being collectively
referred to herein as "Federal Assistance").
The Initial Financed Federal Loans and certain Student Loans in the
Subsequent Pool include Stafford Loans that 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 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 (who, in the case of
law school, medical school, dental school, graduate business school and other
graduate school students, constitute Eligible Students) in amounts not exceeding
their unmet need for financing as determined in accordance with the provisions
of the Higher Education Act.
In addition to complying with the borrower's eligibility requirements
set forth above under the caption "--The Graduate Loan Programs," each Stafford
Loan (i) must be unsecured, (ii) 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 (iii) 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 Federal Assistance under the
Federal 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. For the time periods applicable to the Financed
Federal Loans, the annual and aggregate limitations are as follows: such student
can borrow no more than $7,500 per year of Stafford Loans (subsidized and
unsubsidized) and cannot have outstanding Federal Loans (but excluding for this
purpose SLS Loans and loans made under the Parent Loans to Undergraduate
Students program) in excess of $54,750 at any one time (or $65,500, for loans
first disbursed on or after July 1, 1993). On July 1, 1993, the annual
limitation for Unsubsidized Stafford Loans was increased to $10,000, and the
graduate student aggregate loan limit amount was increased to $138,500, not to
exceed $65,500 in subsidized loans. On October 1, 1993, the annual limitation
for subsidized Stafford Loans was increased to $8,500. As a result of both
revisions, a graduate student may borrow up to $18,500 per year of Stafford
Loans (subsidized and unsubsidized). On August 15, 1996, the Secretary
authorized higher annual (but not aggregate) Unsubsidized Stafford Loan limits
for certain new health professions student borrowers to compensate for
restrictions recently enacted by Congress on the ability of those students to
borrow under other Federal Loan Programs. As a result, some Unsubsidized
Stafford Loans sold into the Trust made for periods of enrollment beginning on
or after July 1, 1996 may reflect the higher limits.
(3) Interest. Stafford Loans made to students with respect to periods
of enrollment commencing prior to July 1, 1988 (or thereafter to students who
had Federal Loans outstanding on such date), bear interest at either 7%, 8% or
9% per annum, depending on the date of issuance and the interest rate applicable
to such student's outstanding Federal Loans. Except as noted in the next
paragraph, for the time periods applicable to the Financed Federal Loans,
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Stafford Loans made on or after July 1, 1988, to students with no outstanding
Federal Loans on the date such Stafford Loan is made ("new borrowers"), bear
interest at rates of 8% per annum from disbursement through four years after
repayment commences and at a variable rate reset each July 1 equal to the 91-day
Treasury Bill Rate plus 3.25% or, for Stafford Loans to such borrowers which are
first disbursed after July 23, 1992, 3.10%, not to exceed 10% per annum
thereafter. 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
and (b) the sum of (i) the bond equivalent rate of 91 day Treasury bills
auctioned at the final auction held prior to such June 1 and (ii) the applicable
interest rate margin.
A Stafford Loan made on or after October 1, 1992, to a student with no
outstanding Federal Loans on the date such Stafford Loan is made, bears interest
at a variable rate, based on 91-day Treasury bills plus 3.10%, or 9%, whichever
is less. A Stafford Loan made on or after October 1, 1992, to a student with
prior outstanding Federal Loans on the date such Stafford Loan is made, bears
interest at a variable rate, equal to the 91-day Treasury Bill Rate plus 3.10%,
with a maximum rate ranging from 7% to 10% based upon the borrower's outstanding
loans and how long the new Stafford Loan has been in repayment. Stafford Loans
first disbursed on or after July 1, 1995 and prior to July 1, 1998 bear interest
at a rate equal to the 91-day Treasury Bill Rate plus 2.50% while the borrowers
are in in-school, grace, or deferment status, and at a rate equal to the 91-day
Treasury Bill Rate plus 3.10% during periods in which the loan does not qualify
for Interest Subsidy Payments. Stafford Loans made on or after July 1, 1998 will
bear interest at a rate equal to _______.
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 Stafford Loan 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."
"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 bill 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. Any borrower may voluntarily prepay without premium or penalty any
Federal Loan and in connection therewith may waive any Grace Period or Deferral
Period. The Higher Education Act presently requires a minimum annual principal
and interest payment with respect to a Stafford Loan of $600 in the aggregate
(but in no event less than accrued interest), unless the borrower and the lender
agree to a lesser amount. For Stafford Loans and SLS Loans first disbursed on or
after July 1, 1993 to a borrower who has no outstanding Federal Loans on the
date such loan is made, the borrower must be offered the opportunity to repay
the loan according to a graduated or income-sensitive repayment schedule
established in accordance with Department regulations. For Stafford Loans
entering repayment on or after October 1, 1995, borrowers may choose among
several repayment options, including the option to make interest only payments
for limited periods.
(5) Grace Periods, Deferral Periods, Forbearance Periods. Borrowers of
Stafford Loans must generally commence repaying the loans following a period of
(a) not less than 9 months nor more than 12 months (with respect to loans for
which the applicable interest rate is 7% per annum) and (b) not more than 6
months (with respect to loans for which the applicable interest rate is other
than 7% per annum) (a "Grace Period") after the borrower ceases to be an
Eligible Student. However, subject to certain conditions, no principal
repayments need be made with respect to Stafford Loans during periods when the
borrower has returned to an eligible educational institution on at least a
half-time basis
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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 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, as 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"; "Risk Factors--Risk of Loss of
Federal Guarantor and Department Payments for Failure to Comply with Loan
Origination and Servicing Procedures"; "Formation of the Trust--Eligible Lender
Trustee" and "Description of the Transfer and Servicing Agreements--Servicing
Procedures." The Seller expects that each of the subsidized Stafford Loans that
are part of the pool of Financed Student Loans will be eligible to receive
Interest Subsidy Payments.
(7) Special Allowance Payments. The Higher Education Act requires,
subject to certain conditions, the Department to make quarterly Special
Allowance Payments to holders of qualifying Federal Loans (including Stafford
Loans), in an amount equal to a specified percentage of the average outstanding
principal amount of each such Federal Loan during each quarter.
The percentage or rate used to determine the Special Allowance Payments
for a particular loan varies based on a number of factors, including when the
loan was disbursed and the period of enrollment with respect to which it was
made. Generally, the Special Allowance Payment with respect to a loan such as
any Financed Federal Loan for a quarter will be equal to the excess, if any, of
(i) 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) or (y) U.S. Treasury securities of comparable Maturity
plus 1.0% for loans first disbursed on or after July 1, 1998 over (ii) 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"; "Risk Factors--Risk of Loss of Federal Guarantor and Department
Payments for Failure to Comply with Loan Origination and Servicing Procedures";
"Formation of the Trust--Eligible Lender Trustee" and "Description of the
Transfer and Servicing Agreements--Servicing Procedures." The Seller expects
that each of the Stafford Loans
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that are part of the pool of Financed 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. See "Risk Factors--Inability of Indenture Trustee to Liquidate
Financed Student Loans" and "--Variability of Actual Cash Flows." The
Administrator has agreed to prepare and file with the Department all such claims
forms and any other required documents or filings on behalf of the Eligible
Lender Trustee as owner of the Financed Federal Loans on behalf of the Trust.
The Administrator has also agreed 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 Financed Federal Loans. Except
under certain conditions described herein, the Eligible Lender Trustee will be
required to remit Interest Subsidy Payments and Special Allowance Payments it
receives with respect to the Financed Federal Loans within two business days of
receipt thereof to the Collection Account.
SLS Loans. In addition to the Federal Stafford Loan Program, the Higher
Education Act provides a separate program to facilitate additional loans to
graduate and professional students and independent undergraduate students. This
program is referred to as the "Federal Supplemental Loans for Students Program"
(the "SLS Program"). The basic framework and principal provisions of the Federal
Stafford Loan Program as described above are similar in many respects to those
that are applicable to loans under the SLS 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 Financed 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 Federal 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 (i) the bond equivalent
rate of 52-week Treasury bills auctioned at the final auction held prior to the
preceding June 1 and (ii) 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 with respect thereto, 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 (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."
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
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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.
As of July 1, 1994, the SLS Loan program was discontinued and SLS Loans
are no longer made.
Federal Consolidation Loans. 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 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 such as those that may be Additional Student 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 Trust may be affected by Federal Consolidation Loans in two ways.
First, the Trust may own Underlying Federal Loans with respect to which an
institution other than the Seller (or the Seller if after the Funding Period,
either there are insufficient Available Loan Purchase Funds at the time of
origination of such Federal Consolidation Loan or the Loan Purchase Termination
Date has occurred), including the Department (under the Federal Direct Loan
Program) makes the Federal Consolidation Loan, in which case such Underlying
Federal Loans will be prepaid in full and such prepayment amount will be deemed
collections for the applicable Collection Period. See "Description of the
Transfer and Servicing Agreements--Distributions." Second, the Seller may make a
Federal Consolidation Loan either during the Funding Period or prior to the Loan
Purchase Termination Date, in which case it will acquire the related Underlying
Federal Loans from the Eligible Lender Trustee, simultaneously deposit the
Purchase Amount thereof in the Escrow Account for Loan Group 1, and subsequently
will sell the Federal Consolidation Loan back to the Eligible Lender Trustee, to
the extent that the conditions with respect to such Federal Consolidation Loan
are satisfied (including the cap on the aggregate dollar amount of Consolidation
Loans which can be purchased by the Eligible Lender Trustee) and funds are
available in such Escrow Account and, during the Funding Period, the related
Pre-Funding Account or after the Funding Period until the Loan Purchase
Termination Date, in such Escrow Account and the related Collection Account from
amounts which constitute related Available Loan Purchase Funds, for the purchase
thereof. An amount equal to the excess of the outstanding principal balance of
such Federal Consolidation Loan will be withdrawn first from the Escrow Account
for Loan Group 1 to the extent funds are then available and then, if during the
Funding Period from the related Pre-Funding Account or after the Funding Period
until the Loan Purchase Termination Date, from the related Collection Account
from amounts which constitute related Available Loan Purchase Funds, and, in
each case, paid to the Seller, and the Pool Balance for Loan Group 1 will
increase accordingly. See "Description of the Transfer and Servicing
Agreements--Additional Fundings."
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
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Consolidation Loan Program. The availability of such lower-rate,
income-contingent loans may decrease the likelihood that the Seller would be the
originator of a Consolidation Loan with respect to borrowers with Financed
Federal Loans, as well as increase the likelihood that a Financed Federal Loan
in the Trust will be prepaid through the issuance of a Federal Direct
Consolidation Loan. The volume of existing loans that may be prepaid in this
fashion is not determinable at this time.
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. 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, however, that in the case
of Federal Consolidation Loans made on or after November 13, 1997 through
September 30, 1998, that portion of the Federal Consolidation Loan that is
comprised of 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.
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 Trust,
the 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 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 Trust would
be obligated to pay any remaining fee from other assets of the Trust prior to
making distributions to Noteholders or Certificateholders. The offset of
Interest Subsidy Payments and Special Allowance Payments, and the payment of any
remaining fee from other Trust assets, will further reduce the amount of
collections from which payments to Noteholders and Certificateholders may be
made. Furthermore, any offset of Interest Subsidy Payments and Special Allowance
Payments will further reduce the Student Loan Rate.
PRIVATE LOANS UNDER THE PROGRAMS
General. In addition to the Federal Loans, the Programs also provide
for Private Loans, which provide financial assistance to help pay for the costs
of attending law, medical, dental, graduate business, or other graduate school,
of passing one or more state bar examinations upon graduation from law school,
or participating in one or more medical or dental residency programs upon
graduating from medical or dental school, to be issued to Eligible Students who
satisfy certain creditworthiness criteria. The Private Loans under the Programs
consist of loans associated with the
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above-mentioned fields of study (including Bar Exam Loans and Residency Loans)
and Private Consolidation Loans. Subject to the satisfaction of the conditions
imposed by the Programs and the applicable Guarantee Agreement, all Financed
Private Loans are fully guaranteed against nonpayment of principal and interest
as a result of a borrower's default, death, disability or bankruptcy by TERI or
HICA. Holders of Private Loans, however, are not entitled to receive any Federal
Assistance with respect thereto. See "The Financed Student Loan Pool--Insurance
of Student Loans; Guarantors of Student Loans." In order to qualify for the
guarantee from TERI or HICA, Private Loans may not be made to a single borrower
in excess of the annual and aggregate limits imposed by the Programs and may
only be made to borrowers who qualify pursuant to credit underwriting standards
established by the Seller and approved by TERI or HICA and who otherwise satisfy
the eligibility requirements discussed above under "--The Graduate Loan
Programs." The following table summarizes the annual, aggregate and cumulative
loan limits for each Private Loan:
TYPE OF ANNUAL AGGREGATE CUMULATIVE
PROGRAM YEAR 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 N/A $120,000
attendance(1)
Dental Loan Up to the cost of attendance N/A $135,000
Graduate Up to the cost of attendance N/A $120,000
School Loan
Medical Loan Up to the cost of attendance N/A $165,000
Bar Exam Loan $5,000 $5,000
Residency $8,000 $8,000
Loan
<FN>
(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 Loan earns interest at a rate per annum,
reset quarterly, equal to the 91-day Treasury Bill Rate plus margin, depending
on the type of loan. The following table sets forth the applicable interest rate
for each type of Private Loan:
INTEREST MARGIN
OVER 91-DAY
TREASURY BILLS
--------------
INTERIM (1) REPAYMENT (2)
Law 3.25% 3.40%
Medical 2.50 2.75
Dental 2.50 3.00
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Business 3.25 3.40
Graduate 3.25 3.40
Bar Exam Loan 3.25 3.40
Residency Loan 2.50 2.75
<FN>
(1) "Interim" represents any period while the borrower is attending school or during a specified grace period.
(2) "Repayment" represents the period after the specified grace period, in
which the borrower is required to make payments or enter into some type
of deferment or forbearance period.
Interest accrues on the outstanding principal amount of each Private
Loan from the date the lender makes such Private Loan and is payable monthly by
each borrower commencing approximately six months after such borrower ceases to
be an Eligible Student (or, with respect to each Private Loan made since the
commencement of the 1990-1991 Program Year, approximately nine months after such
borrower ceases to be an Eligible Student), subject to deferral or forbearance
as discussed below (the "Private Loan Repayment Commencement Date"). Subject to
certain conditions, borrowers of Private 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 Loans. Borrowers who incur
Residency Loans, subject to certain conditions, may defer repayment of such
loans until the required residency program is completed, not to exceed 48
months. In addition, borrowers of Private 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 TERI or HICA), for periods of forbearance because of temporary financial
hardship, during which borrowers may defer or make reduced principal payments on
such Private Loans. Interest on each Private 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 Loan on that date. Each student with outstanding Private 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 Loan in full over a period not to exceed
15 years (or, with respect to each Private Loan made since the commencement of
the 1990-1991 Program Year, 20 years) after the Private Loan Repayment
Commencement Date with respect to such Private Loan. 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. The Programs presently require a minimum annual principal
and interest payment with respect to a Private 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 Private 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 2% of the original principal amount of such Private Loan is charged
to such student on the applicable Private Loan Repayment Commencement Date.
Commencing with the 1996-1997 Program Year, a fee of 4% of the original
principal amount of each Law Loan and 3% of each Graduate School Loan and Bar
Exam Loan is charged to such student on the applicable Private Loan Repayment
Commencement Date. The fee will remain at 2% for Medical Loans, Dental Loans,
Business Loans, and Residency Loans. At the option of such student, the Seller
will make an additional loan (a "Guarantee Fee Advance") to such student in an
amount equal to such fee, which will be added to the principal balance of such
Private 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 Guarantee Fee Advance to the Trust. With respect to each Private Loan
guaranteed by TERI, approximately 12% of each such fee is payable to TERI while
the remaining amount is held in trust for a specified period to secure TERI's
guarantee obligation with respect to all Private Loans guaranteed since the
commencement of the 1992-1993 Program Year. See "The Financed Student Loan
Pool--Insurance of Student Loans; Guarantors of Student Loans--Guarantor for the
Financed Private Loans," and "--Segregated Reserves for Private Loans Under the
Programs."
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Private Consolidation Loans. The Seller has established a private
consolidation loan program as part of the Programs, to facilitate the ability of
eligible borrowers of Private Loans ("Underlying Private Loans") to consolidate
such Private Loans into a single loan (a "Private Consolidation Loan"; together
with Federal Consolidation Loans, sometimes referred to herein collectively as
"Consolidation Loans"). The Private Consolidation Loan program commenced in
November 1994. Subject to the satisfaction of certain conditions set forth under
the Programs, 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 Loans of any borrower, each holder of a Private Consolidation
Loan will be entitled to substantially the same guarantee arrangements as are
available on the Underlying Private Loans. Under this program, an eligible
borrower of Private Consolidation Loans such as those that may be Additional
Student Loans means a borrower (i) with outstanding Underlying Private 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 Loan. A borrower of a
Private Consolidation Loan must consolidate all of his or her eligible loans and
in doing so will forgo all opportunities for deferment or forbearance.
Private Consolidation Loans will bear interest at the same rate as any
Law Loan made under the 1993-1994 Program Year for which the borrower has
entered repayment. Private Consolidation Loans will be repayable over a period
of 25 to 30 years, 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 income-sensitive repayment options and, for loans entering
repayment on or after October 1, 1995, additional repayment options (including
interest only payments for limited periods), each corresponding to the options
currently offered to borrowers of Federal Consolidation Loans. With respect to
each Private Consolidation Loan, a fee equal to 1% of the amount paid to
discharge the Underlying Private Loans will be charged to the borrower and
included in the original principal amount of such Private Consolidation Loan (a
"Private Consolidation Guarantee Fee").
The Trust may be affected by Private Consolidation Loans in two ways.
First, following the Loan Purchase Termination Date, the Seller may make Private
Consolidation Loans in which case the Underlying Private Loans will be prepaid
in full and such prepayment amount will be available for distribution to
Noteholders and Certificateholders for the applicable Collection Period. See
"Description of the Transfer and Servicing Agreements--Distributions." Second,
the Seller may make a Private Consolidation Loan either during the Funding
Period or prior to the Loan Purchase Termination Date, in which case it will
acquire the related Underlying Private Loans from the Eligible Lender Trustee,
simultaneously deposit the Purchase Amount thereof in the Escrow Account for
Loan Group 2, and subsequently sell the Private Consolidation Loan back to the
Eligible Lender Trustee, to the extent that conditions with respect to such
Private Consolidation Loan are satisfied (including the cap on the aggregate
dollar amount of Consolidation Loans which can be purchased by the Eligible
Lender Trustee) and funds are available in such Escrow Account and during the
Funding Period, the related Pre-Funding Account or after the Funding Period
until the Loan Purchase Termination Date, from related Available Loan Purchase
Funds, for the purchase thereof. An amount equal to the outstanding principal
balance of such Private Consolidation Loan will be withdrawn first from the
Escrow Account for Loan Group 2 to the extent funds are then available and then,
if during the Funding Period, from the related Pre-Funding Account or after the
Funding Period until the Loan Purchase Termination Date, from related Available
Loan Purchase Funds, and paid to the Seller, and the Pool Balance for Loan Group
2 will increase accordingly. See "Description of the Transfer and Servicing
Agreements--Additional Fundings."
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THE FINANCED STUDENT LOAN POOL
GENERAL
The pool of Financed Student Loans will include the Initial Financed
Student Loans purchased by the Eligible Lender Trustee on behalf of the Trust as
of the Statistical Cutoff Date and any Additional Student Loans purchased by the
Eligible Lender Trustee on behalf of the Trust from the Seller as of the
applicable Subsequent Cutoff Dates.
The Financed Student Loans will be selected from the Seller's portfolio
of Student Loans by several criteria, including, as of the Statistical Cutoff
Date or the applicable Subsequent Cutoff Date, as the case may be, the
following: each Financed Student Loan (i) 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 Financed Federal Loans, a financial need
analysis and, in the case of borrowers of Financed Private Loans, a
creditworthiness evaluation) to a borrower who, with respect to the Initial
Financed Student Loans and Subsequent Pool Student Loans, has graduated or
otherwise left graduate school or is expected to graduate from or otherwise
leave graduate school by August 31, 1998, (ii) contains terms in accordance with
those required by the Programs, the Guarantee Agreements and other applicable
requirements and (iii) with respect to the Initial Financed Student Loans and
Subsequent Pool Student Loans, is not more than 150 days past due as of the
Statistical Cutoff Date or, with respect to the Other Subsequent Student Loans
or Other Student Loans more than 90 days past due as of the applicable
Subsequent Cutoff Date, as the case may be. As of the Statistical Cutoff Date no
Initial Financed Student Loan and no Subsequent Pool Student Loan had a borrower
who was noted in the related records of the Servicers as being currently
involved in a bankruptcy proceeding or deceased since the date the Trust was
created. Although there can be no assurance that a borrower of an Initial
Financed Student Loan has not become involved in a bankruptcy proceeding or
deceased subsequent to such date, each such loan is guaranteed as to principal
and interest by a Guarantor in the event of any such bankruptcy or death of a
borrower. Any Subsequent Pool Student Loan in respect of which a claim is made
on a Guarantor following the Statistical Cutoff Date and prior to the date such
Student Loan is to be transferred to the Trust will not be eligible for transfer
to the Trust. No Initial Financed Student Loan as of the Statistical Cutoff Date
consists of, and no Subsequent Pool Student Loan as of the date of its transfer
to the Trust will consist of, a Student Loan that was subject to the Seller's
prior obligation to sell such loan to a third party. No selection procedures
believed by the Seller to be adverse to the Securityholders were used or will be
used in selecting the Financed Student Loans.
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, the portion of the payment allocable to interest
for the period since the preceding payment was made will be greater than it
would have been had the payment been made as scheduled, and the portion of the
payment applied to reduce the unpaid principal balance will be correspondingly
less. In either case, subject to any applicable Deferral Periods or Forbearance
Periods, the borrower pays a regular installment until the final scheduled
payment date, at which time the amount of the final installment is increased or
decreased as necessary to repay the then outstanding principal balance of and
any accrued but unpaid interest on such Financed Student Loan.
The Additional Student Loans to be conveyed to the Eligible Lender
Trustee on behalf of the Trust during the Funding Period are required to consist
of Subsequent Pool Student Loans, Other Subsequent Student Loans or Guarantee
Fee Advances, in each case made by the Seller in accordance with the Programs
and other applicable requirements. Such Subsequent Pool Student Loans, Other
Subsequent Student Loans and Guarantee Fee Advances must be made to a borrower
who has, immediately prior to the date of any such conveyance, outstanding
Student Loans
53
57
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."
However, except for the criteria described in the preceding paragraphs,
there will be no required characteristics of the Additional Student Loans.
Therefore, following the transfer of the Subsequent Pool Student Loans to be
included in a Loan Group and other Additional Student Loans to be included in
such Loan Group to the Eligible Lender Trustee on behalf of the Trust, the
aggregate characteristics of the entire pool of Financed Student Loans in such
Loan Group, including the composition of the Financed Student Loans, the
distribution by weighted average interest rate and the distribution by principal
amount described in the following tables, may vary significantly from those of
the Initial Financed Student Loans and Subsequent Pool Student Loans to be
included in such Loan Group as of the Statistical Cutoff Date. In addition, the
distribution by weighted average interest rate applicable to the Financed
Student Loans in a Loan Group on any date following the Statistical Cutoff Date
may vary significantly from that set forth in the following tables as a result
of variations in the effective rates of interest applicable to the Financed
Student Loans. Moreover, the remaining term to maturity of the Initial Financed
Student Loans and Subsequent Pool Student Loans in a Loan Group as of the
Statistical Cutoff Date may vary significantly from the actual term to maturity
of any of the Financed Student Loans in such Loan Group as a result of the
granting of deferral and forbearance periods with respect thereto.
LOAN GROUP 1: THE FINANCED FEDERAL LOANS
Set forth below in the following tables is a description of certain
additional characteristics of the Initial Financed Student Loans and the
Subsequent Pool Student Loans to be included in Loan Group 1 as of the
Statistical Cutoff Date. Regularly scheduled payments and prepayments of such
Subsequent Pool Student Loans (which are prepayable at any time) between the
Statistical Cutoff Date and the date as of which such Student Loans are
transferred to the Eligible Lender Trustee on behalf of the Trust will affect
the balances and percentages set forth herein. Moreover, such Subsequent Pool
Student Loans may become delinquent (or more delinquent) between the Statistical
Cutoff Date and the date of transfer to the Trust. While the statistical
distribution of the final characteristics of the Financed Student Loans from the
Subsequent Pool to be included in Loan Group 1 when transferred to the Trust
will vary somewhat from the statistical information presented below, the Seller
does not believe that the characteristics of such Subsequent Pool Student Loans
will vary materially.
LOAN GROUP 1 (FINANCED FEDERAL LOANS)
COMPOSITION AS OF THE STATISTICAL CUTOFF DATE
INITIAL FINANCED SUBSEQUENT POOL
STUDENT LOANS STUDENT LOANS
------------- -------------
Aggregate Outstanding Principal Balance(1).........
Number of Borrowers(2).............................
Average Outstanding Principal Balance Per
Borrower(2)......................................
Number of Loans....................................
Average Outstanding Principal Balance
Per Loan.........................................
Weighted Average Remaining Term to
Maturity(3)......................................
Weighted Average Annual Borrower Interest
Rate(4)..........................................
<FN>
- ------------------
(1) Includes in each case net principal balance due from borrowers, plus
accrued interest thereon to be capitalized upon commencement of repayment,
estimated to be $________ with respect to the Initial Financed Student
Loans
54
58
in Loan Group 1 and $____________, with respect to the Subsequent
Pool Student Loans in Loan Group 1, in each case as of the Statistical
Cutoff Date.
(2) Some borrowers have both loans which are Initial Financed Student Loans in
Loan Group 1 and loans which are Subsequent Pool Student Loans in Loan
Group 1. If both pools were combined, the number of borrowers would be
______ and the average outstanding principal balance per borrower would be
$______.
(3) Determined from the date of origination or the Statistical Cutoff Date, as
the case may be, to the stated maturity date of the applicable Initial
Financed Student Loans in Loan Group 1 or Subsequent Pool Student Loans in
Loan Group 1, 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."
(4) Determined using the borrower interest rates exclusive of Special Allowance
Payments applicable to the Initial Financed Student Loans in Loan Group 1
and the Subsequent Pool Student Loans in Loan Group 1 as of the Statistical
Cutoff Date. However, because all the Initial Financed Student Loans and
the Subsequent Pool Student Loans effectively bear interest at a variable
rate per annum, there can be no assurance that the foregoing percentage
will remain applicable to the Initial Financed Student Loans and the
Subsequent Pool Student Loans in Loan Group 1 at any time after the
Statistical Cutoff Date. See "The Student Loan Financing Business." The
weighted average spread, including Special Allowance Payments, to the
91-day or 52-week T-Bill Rate, as applicable, was ____% as of the
Statistical Cutoff Date and would have been ____% if all of the Student
Loans in Loan Group 1 were in repayment as of the Statistical Cutoff Date
with respect to the Initial Financed Student Loans in Loan Group 1. The
weighted average spread, including Special Allowance Payments, to the
91-day or 52-week T-Bill Rate, as applicable, was ____% as of the
Statistical Cutoff Date and would have been ____% if all of the Student
Loans were in repayment as of the Statistical Cutoff Date with respect to
the Subsequent Pool Student Loans in Loan Group 1.
LOAN GROUP 1 (FINANCED FEDERAL LOANS)
DISTRIBUTION BY LOAN TYPE AS OF THE STATISTICAL CUTOFF DATE
INITIAL FINANCED STUDENT LOANS SUBSEQUENT POOL STUDENT LOANS
---------------------------------- ---------------------------------------
AGGREGATE AGGREGATE PERCENT OF
OUTSTANDING PERCENT OF OUTSTANDING SUBSEQUENT POOL
NUMBER OF PRINCIPAL INITIAL POOL NUMBER PRINCIPAL BY OUTSTANDING
LOAN TYPE LOANS BALANCE(1) BALANCE OF LOANS BALANCE(2) PRINCIPAL BALANCE
--------- ----- ---------- ------- -------- ---------- -----------------
Stafford Loans Subsidized....
Unsubsidized
SLS Loans....................
Federal Consolidation Loans..
Total..................
<FN>
- ------------------
(1) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________ as of the Statistical Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $_________ as of the Statistical Cutoff Date.
55
59
LOAN GROUP 1 (FINANCED FEDERAL LOANS)
DISTRIBUTION BY BORROWER INTEREST RATES AS OF THE STATISTICAL CUTOFF DATE
INITIAL FINANCED STUDENT LOANS SUBSEQUENT POOL STUDENT LOANS
-------------------------------------- --------------------------------------
PERCENT OF
SUBSEQUENT
AGGREGATE AGGREGATE POOL BY
OUTSTANDING PERCENT OF OUTSTANDING OUTSTANDING
NUMBER OF PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF INTEREST RATES(1) LOANS BALANCE(2) BALANCE LOANS BALANCE(3) BALANCE
- -------------------------- ----- ---------- ---------- ----- ---------- ------------
<FN>
- ------------------
(1) Determined using the interest rates applicable to the Initial Financed
Student Loans and the Subsequent Pool Student Loans in Loan Group 1 as
of the Statistical Cutoff Date. However, because all the Initial
Financed Student Loans and the Subsequent Pool Student Loans in Loan
Group 1 effectively bear interest at a variable rate per annum, there
can be no assurance that the foregoing information will remain
applicable to the Initial Financed Student Loans or the Subsequent Pool
Student Loans in Loan Group 1 at any time after the Statistical Cutoff
Date. See "The Student Loan Financing Business."
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $___________ as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________ as of the Statistical Cutoff Date.
LOAN GROUP 1 (FINANCED FEDERAL LOANS)
DISTRIBUTION BY OUTSTANDING PRINCIPAL BALANCE AS OF THE STATISTICAL CUTOFF DATE
INITIAL FINANCED STUDENT LOANS SUBSEQUENT POOL STUDENT LOANS
---------------------------------------- --------------------------------------
PERCENT OF
AGGREGATE AGGREGATE SUBSEQUENT POOL
OUTSTANDING PERCENT OF OUTSTANDING BY OUTSTANDING
RANGE OF OUTSTANDING NUMBER OF PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL PRINCIPAL
PRINCIPAL BALANCES(1) LOANS BALANCE(2) BALANCE LOANS BALANCE(3) BALANCE
- --------------------- --------- ---------- ----------- --------- ---------- ---------------
56
60
- ------------------
(1) Borrowers generally have more than one outstanding loan. The average
aggregate outstanding principal balance of loans per borrower is
$_________, with respect to the Initial Financed Student Loans in Loan
Group 1, and $_______, with respect to the Student Loans in the
Subsequent Pool in Loan Group 1, in each case as of the Statistical
Cutoff Date. Some borrowers have both loans which are Initial Financed
Student Loans and loans which are Subsequent Pool Student Loans in Loan
Group 1. If both pools were combined, the number of borrowers would be
____ and the average outstanding principal balance per borrower would
be $_____
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $__________ as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $_________ as of the Statistical Cutoff Date.
LOAN GROUP 1 (FINANCED FEDERAL LOANS)
DISTRIBUTION BY REMAINING TERM TO SCHEDULED MATURITY AS OF THE STATISTICAL CUTOFF DATE
INITIAL FINANCED STUDENT LOANS SUBSEQUENT POOL STUDENT LOANS
PERCENT OF
AGGREGATE AGGREGATE SUBSEQUENT POOL
NUMBER OF MONTHS NUMBER OUTSTANDING PERCENT OF NUMBER OUTSTANDING BY OUTSTANDING
REMAINING TO OF PRINCIPAL INITIAL POOL OF PRINCIPAL PRINCIPAL
SCHEDULED MATURITY(1) LOANS BALANCE(2) BALANCE LOANS BALANCE(3) BALANCE
- ---------------------- ----- ---------- ---------- -------- ---------- --------------
57
61
- ------------------
(1) Determined from the Statistical Cutoff Date to the stated maturity date
of the applicable Initial Financed Student Loan in Loan Group 1 or
Subsequent Pool Student Loan in Loan Group 1, 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."
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $_________ as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $__________ as of the Statistical Cutoff Date.
LOAN GROUP 1 (FINANCED FEDERAL LOANS)
DISTRIBUTION BY BORROWER PAYMENT STATUS AS OF THE STATISTICAL CUTOFF DATE
INITIAL FINANCED STUDENT LOANS SUBSEQUENT POOL STUDENT LOANS
--------------------------------------- -------------------------------------
PERCENT OF
AGGREGATE AGGREGATE SUBSEQUENT POOL
OUTSTANDING PERCENT OF OUTSTANDING BY OUTSTANDING
BORROWER PAYMENT NUMBER OF PRINCIPAL INITIAL POOL NUMBER PRINCIPAL PRINCIPAL
STATUS(1) LOANS BALANCE(2) BALANCE OF LOANS BALANCE(3) BALANCE
- --------- ----- ---------- ------- -------- ---------- -------
In-School
Grace
Deferral
Forbearance
Repayment
First year in
repayment
Second year in
repayment
More than two
years in
repayment
Total
58
62
- ----------------
(1) Refers to the status of the borrower of each Initial Financed Student
Loan in Loan Group 1 or Subsequent Pool Student Loan to be added to
Loan Group 1, in each case, as of the Statistical Cutoff Date: such
borrower may still be attending law school, medical school, dental
school, graduate business school, or another type of 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."
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $_________ as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $__________ as of the Statistical Cutoff Date.
LOAN GROUP 1 (FINANCED FEDERAL LOANS)
SCHEDULED WEIGHTED AVERAGE MONTHS REMAINING IN STATUS
BY CURRENT BORROWER PAYMENT STATUS AS OF THE
STATISTICAL CUTOFF DATE(1)
INITIAL FINANCED STUDENT LOANS SUBSEQUENT POOL STUDENT LOANS
----------------------------------------------- -----------------------------------------
SCHEDULED MONTHS REMAINING IN STATUS SCHEDULED MONTHS REMAINING IN STATUS
----------------------------------------------- -----------------------------------------
CURRENT BORROWER
PAYMENT STATUS IN-SCHOOL GRACE DEFERRAL FORBEARANCE REPAYMENT IN-SCHOOL GRACE DEFERRAL FORBEARANCE REPAYMENT
-------------- --------- ----- -------- ----------- --------- --------- ----- -------- ----------- ---------
In-School
Grace
Deferral
Forbearance
Repayment
Total
- ------------
<FN>
(1) Determined without giving effect to any deferral or forbearance periods that
may be granted in the future.
LOAN GROUP 1 (FINANCED FEDERAL LOANS)
GEOGRAPHIC DISTRIBUTION AS OF THE STATISTICAL CUTOFF DATE
INITIAL FINANCED STUDENT LOANS SUBSEQUENT POOL STUDENT LOANS
------------------------------ -----------------------------
AGGREGATE AGGREGATE PERCENT OF
OUTSTANDING PERCENT OF OUTSTANDING SUBSEQUENT POOL
NUMBER OF PRINCIPAL INITIAL POOL NUMBER PRINCIPAL BY OUTSTANDING
STATE(1) LOANS BALANCE(2) BALANCE OF LOANS BALANCE(3) PRINCIPAL BALANCE
-------- ----- ---------- ------- -------- ---------- -----------------
59
63
(1) Based on the permanent billing addresses of the borrowers of the
Initial Financed Student Loans in Loan Group 1 and the Subsequent Pool
Student Loans in Loan Group 1 shown on the Servicers' records as of the
Statistical Cutoff Date.
(2) Includes principal balance due from borrowers, plus accrued
interest thereon of $________ as of the Cut-Off Date to be
capitalized upon commencement of repayment.
(3) Includes principal balance due from borrowers, plus accrued
interest thereon of $________ as of the Cut-Off Date to be
capitalized upon commencement of repayment.
LOAN GROUP 1 (FINANCED FEDERAL LOANS)
DISTRIBUTION BY LOAN REPAYMENT TERMS AS OF THE STATISTICAL CUTOFF DATE
INITIAL FINANCED STUDENT LOANS SUBSEQUENT POOL STUDENT LOANS
------------------------------ -----------------------------
PERCENT OF
AGGREGATE AGGREGATE POOL BY
OUTSTANDING PERCENT OF OUTSTANDING OUTSTANDING
LOAN REPAYMENT NUMBER OF PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL PRINCIPAL
TERMS LOANS BALANCE(1) BALANCE LOANS BALANCE (2) BALANCE
----- ----- ---------- ------- ---------- ----------- -------
Level Payment.......
Interest Only(3)....
Graduated
Payment(4) .........
Total.............
(1) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $_________ as of the Statistical Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $__________ as of the Statistical Cutoff Date.
(3) Student Loans with interest only repayment terms require borrowers to
make payments of interest only for the first two years after entering
repayment and thereafter to make level payments which will amortize the
then outstanding principal balance of the loan over the then remaining
term and then to begin making payments of both interest and principal.
(4) Student Loans with graduated repayment terms require borrowers to make
payments of interest only for the first two years after entering
repayment which increase over the next three years to a level payment
amount which will amortize the then outstanding principal balance of
the loan over the then remaining term.
60
64
LOAN GROUP 1
DISTRIBUTION OF FINANCED FEDERAL LOANS BY DATE OF DISBURSEMENT
AS OF THE STATISTICAL CUTOFF DATE
INITIAL FINANCED STUDENT LOANS SUBSEQUENT POOL STUDENT LOANS
------------------------------ -----------------------------
AGGREGATE AGGREGATE
OUTSTANDING PERCENT OF OUTSTANDING PERCENT OF POOL
DATE OF NUMBER OF PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL BY OUTSTANDING
DISBURSEMENT(1) LOANS BALANCE(2) BALANCE LOANS BALANCE (3) PRINCIPAL BALANCE
--------------- ----- ---------- ------- ----------- ----------- -----------------
Pre-October 1, 1993
October 1, 1993 and
thereafter........
Total.........
<FN>
(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 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. See "The
Student Loan Financing Business--Federal Loans Under the Program" and
"--Insurance of Student Loans; Guarantors of Student Loans."
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $____________ as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $_________ as of the Statistical Cutoff Date.
LOAN GROUP 2: THE FINANCED PRIVATE LOANS
Set forth below in the following tables is a description of certain
additional characteristics of the Initial Financed Student Loans and the
Subsequent Pool Student Loans to be included in Loan Group 2 as of the
Statistical Cutoff Date. Regularly scheduled payments and prepayments of such
Subsequent Pool Student Loans (which are prepayable at any time) between the
Statistical Cutoff Date and the date as of which such Student Loans are
transferred to the Eligible Lender Trustee on behalf of the Trust will affect
the balances and percentages set forth herein. Moreover, such Subsequent Pool
Student Loans may become delinquent (or more delinquent) between the Statistical
Cutoff Date and the date of transfer to the Trust. While the statistical
distribution of the final characteristics of the Financed Student Loans from the
Subsequent Pool to be included in Loan Group 2 when transferred to the Trust
will vary somewhat from the statistical information presented below, the Seller
does not believe that the characteristics of such Subsequent Pool Student Loans
will vary materially.
61
65
LOAN GROUP 2 (FINANCED PRIVATE LOANS)
COMPOSITION AS OF THE STATISTICAL CUTOFF DATE
INITIAL FINANCED SUBSEQUENT POOL
STUDENT LOANS STUDENT LOANS
------------- -------------
Aggregate Outstanding Principal Balance(1).........
Number of Borrowers(2).............................
Average Outstanding Principal Balance Per
Borrower(2)......................................
Number of Loans....................................
Average Outstanding Principal Balance
Per Loan.........................................
Weighted Average Remaining Term to
Maturity(3)......................................
Weighted Average Annual Borrower Interest
Rate(4)..........................................
<FN>
- ------------------
(1) Includes in each case net principal balance due from borrowers, plus
accrued interest thereon to be capitalized upon commencement of repayment,
estimated to be $________ with respect to the Initial Financed Student
Loans in Loan Group 2 and $_________, with respect to the Subsequent Pool
Student Loans in Loan Group 2, in each case as of the Statistical Cutoff
Date.
(2) Some borrowers have both loans which are Initial Financed Student Loans in
Loan Group 2 and loans which are Subsequent Pool Student Loans in Loan
Group 2. If both pools were combined, the number of borrowers would be
______ and the average outstanding principal balance per borrower would be
$______.
(3) Determined from the date of origination or the Statistical Cutoff Date, as
the case may be, to the stated maturity date of the applicable Initial
Financed Student Loans in Loan Group 2 or Subsequent Pool Student Loans in
Loan Group 2, 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."
(4) Determined using the borrower interest rates applicable to the Initial
Financed Student Loans in Loan Group 2 and the Subsequent Pool Student
Loans in Loan Group 2 as of the Statistical Cutoff Date. However, because
all the Initial Financed Student Loans and the Subsequent Pool Student
Loans effectively bear interest at a variable rate per annum, there can be
no assurance that the foregoing percentage will remain applicable to the
Initial Financed Student Loans and the Subsequent Pool Student Loans at any
time after the Statistical Cutoff Date. See "The Student Loan Financing
Business." The weighted average spread, to the 91-day T-Bill Rate, as
applicable, was ____% as of the Statistical Cutoff Date and would have been
____% if all of the Student Loans were in repayment as of the Statistical
Cutoff Date with respect to the Initial Financed Student Loans in Loan
Group 2. The weighted average spread, to the 91-day T-Bill Rate, as
applicable, was ____% as of the Statistical Cutoff Date and would have been
____% if all of the Student Loans in Loan Group 2 were in repayment as of
the Statistical Cutoff Date with respect to the Subsequent Pool Student
Loans in Loan Group 2.
62
66
LOAN GROUP 2 (FINANCED PRIVATE LOANS)
DISTRIBUTION BY LOAN TYPE AS OF THE STATISTICAL CUTOFF DATE
INITIAL FINANCED STUDENT LOANS SUBSEQUENT POOL STUDENT LOANS
----------------------------------------- -----------------------------------------
PERCENT OF
AGGREGATE AGGREGATE SUBSEQUENT POOL
OUTSTANDING PERCENT OF OUTSTANDING BY OUTSTANDING
NUMBER OF PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL PRINCIPAL
LOAN TYPE LOANS BALANCE(1) BALANCE LOANS BALANCE(2) BALANCE
--------- ----- ---------- ------- ----- ---------- ---------------
Law Loans....................
Medical Loans................
Dental Loans.................
Business Loans...............
Graduate Loans...............
Residency Loans..............
Bar Exam Loans...............
Private Consolidation Loans..
Total..................
<FN>
- ------------------
(1) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________ as of the Statistical Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $_________ as of the Statistical Cutoff Date.
LOAN GROUP 2 (FINANCED PRIVATE LOANS)
DISTRIBUTION BY BORROWER INTEREST RATES AS OF THE STATISTICAL CUTOFF DATE
INITIAL FINANCED STUDENT LOANS SUBSEQUENT POOL STUDENT LOANS
------------------------------ -----------------------------
AGGREGATE AGGREGATE PERCENT OF
OUTSTANDING PERCENT OF OUTSTANDING SUBSEQUENT POOL BY
RANGE OF INTEREST NUMBER OF PRINCIPAL INITIAL POOL NUMBER PRINCIPAL OUTSTANDING
RATES(1) LOANS BALANCE(2) BALANCE OF LOANS BALANCE(3) PRINCIPAL BALANCE
- -------- ----- ---------- ------- -------- ---------- -----------------
<FN>
- ------------------
(1) Determined using the interest rates applicable to the Initial Financed
Student Loans and the Subsequent Pool Student Loans in Loan Group 2 as
of the Statistical Cutoff Date. However, because all the Initial
Financed
63
67
Student Loans and the Subsequent Pool Student Loans effectively bear
interest at a variable rate per annum, there can be no assurance that
the foregoing information will remain applicable to the Initial
Financed Student Loans or the Subsequent Pool Student Loans in Loan
Group 2 at any time after the Statistical Cutoff Date. See "The Student
Loan Financing Business."
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $___________ as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________ as of the Statistical Cutoff Date.
LOAN GROUP 2 (FINANCED PRIVATE LOANS)
DISTRIBUTION BY OUTSTANDING PRINCIPAL BALANCE AS OF THE STATISTICAL CUTOFF DATE
INITIAL FINANCED STUDENT LOANS SUBSEQUENT POOL STUDENT LOANS
------------------------------ -----------------------------
PERCENT OF
SUBSEQUENT
AGGREGATE AGGREGATE POOL BY
OUTSTANDING PERCENT OF OUTSTANDING OUTSTANDING
RANGE OF OUTSTANDING NUMBER OF PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL PRINCIPAL
PRINCIPAL BALANCES(1) LOANS BALANCE(2) BALANCE LOANS BALANCE(3) BALANCE
- --------------------- ----- ---------- ------- ----- ---------- -------
<FN>
- ------------------
(1) Borrowers generally have more than one outstanding loan. The average
aggregate outstanding principal balance of loans per borrower is
$_________, with respect to the Initial Financed Student Loans in Loan
Group 2, and $_______, with respect to the Subsequent Pool Student
Loans in Loan Group 2, in each case as of the Statistical Cutoff Date.
Some borrowers have both loans which are Initial Financed Student Loans
and loans which are Subsequent Pool Student Loans in Loan Group 2. If
both pools were combined, the number of borrowers would be ____ and the
average outstanding principal balance per borrower would be $_____
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $__________ as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $_________ as of the Statistical Cutoff Date.
LOAN GROUP 2 (FINANCED PRIVATE LOANS)
DISTRIBUTION BY REMAINING TERM TO SCHEDULED MATURITY AS OF THE STATISTICAL
CUTOFF DATE
64
68
INITIAL FINANCED STUDENT LOANS SUBSEQUENT POOL STUDENT LOANS
------------------------------ -----------------------------
AGGREGATE AGGREGATE PERCENT OF
NUMBER OF MONTHS OUTSTANDING PERCENT OF OUTSTANDING SUBSEQUENT POOL BY
REMAINING TO NUMBER OF PRINCIPAL INITIAL POOL NUMBER PRINCIPAL OUTSTANDING
SCHEDULED MATURITY(1) LOANS BALANCE(2) BALANCE OF LOANS BALANCE(3) PRINCIPAL BALANCE
- --------------------- ----- ---------- ------- -------- ---------- -----------------
<FN>
- ------------------
(1) Determined from the Statistical Cutoff Date to the stated maturity date
of the applicable Initial Financed Student Loan in Loan Group 2 or
Subsequent Pool Student Loan in Loan Group 2, 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."
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $_________ as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $__________ as of the Statistical Cutoff Date.
LOAN GROUP 2 (FINANCED PRIVATE LOANS)
DISTRIBUTION BY BORROWER PAYMENT STATUS AS OF THE STATISTICAL CUTOFF DATE
INITIAL FINANCED STUDENT LOANS SUBSEQUENT POOL STUDENT LOANS
------------------------------ -----------------------------
PERCENT OF
AGGREGATE AGGREGATE SUBSEQUENT POOL
OUTSTANDING PERCENT OF OUTSTANDING BY OUTSTANDING
BORROWER PAYMENT NUMBER OF PRINCIPAL INITIAL POOL NUMBER PRINCIPAL PRINCIPAL
STATUS(1) LOANS BALANCE(2) BALANCE OF LOANS BALANCE(3) BALANCE
- --------- ----- ---------- ------- -------- ---------- -------
In-School
Grace
Deferral
Forbearance
Repayment
First year in
repayment
Second year in
repayment
More than two
years in
repayment
Total
65
69
- ----------------
(1) Refers to the status of the borrower of each Initial Financed
Student Loan in Loan Group 2 as of the Statistical Cutoff Date:
such borrower may still be In-School, may be in Grace, may be in
Repayment or may have temporarily ceased repaying such loan
through a Deferral or a Forbearance period. See "The Student Loan
Financing Business."
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $_________ as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $__________ as of the Statistical Cutoff Date.
LOAN GROUP 2 (FINANCED PRIVATE LOANS)
SCHEDULED WEIGHTED AVERAGE MONTHS REMAINING IN STATUS
BY CURRENT BORROWER PAYMENT STATUS AS OF THE
STATISTICAL CUTOFF DATE(1)
INITIAL FINANCED STUDENT LOANS SUBSEQUENT POOL STUDENT LOANS
------------------------------------ ------------------------------------
SCHEDULED MONTHS REMAINING IN STATUS SCHEDULED MONTHS REMAINING IN STATUS
------------------------------------ ------------------------------------
CURRENT BORROWER
REPAYMENT STATUS IN-SCHOOL GRACE DEFERRAL FORBEARANCE REPAYMENT IN-SCHOOL GRACE DEFERRAL FORBEARANCE REPAYMENT
- ---------------- --------- ----- -------- ----------- --------- --------- ----- -------- ----------- ---------
In-School
Grace
Deferral
Forbearance
Repayment
Total
- ------------
<FN>
(1) Determined without giving effect to any deferral or forbearance periods that
may be granted in the future.
LOAN GROUP 2 (FINANCED PRIVATE LOANS)
GEOGRAPHIC DISTRIBUTION AS OF THE STATISTICAL CUTOFF DATE
INITIAL FINANCED STUDENT LOANS SUBSEQUENT POOL STUDENT LOANS
------------------------------ -----------------------------
AGGREGATE AGGREGATE PERCENT OF
OUTSTANDING PERCENT OF OUTSTANDING SUBSEQUENT POOL
NUMBER OF PRINCIPAL INITIAL POOL NUMBER PRINCIPAL BY OUTSTANDING
STATE(1) LOANS BALANCE(2) BALANCE OF LOANS BALANCE(3) PRINCIPAL BALANCE
-------- ----- ---------- ------- -------- ---------- -----------------
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(1) Based on the permanent billing addresses of the borrowers of the
Initial Financed Student Loans in Loan Group 2 and the Subsequent Pool
Student Loans in Loan Group 2 shown on the Servicers' records as of the
Statistical Cutoff Date.
(2) Includes principal balance due from borrowers, plus accrued
interest thereon of $________ as of the Statistical Cut-Off Date to
be capitalized upon commencement of repayment.
(3) Includes principal balance due from borrowers, plus accrued
interest thereon of $________ as of the Statistical Cut-Off Date to
be capitalized upon commencement of repayment.
LOAN GROUP 2 (FINANCED PRIVATE LOANS)
DISTRIBUTION BY LOAN REPAYMENT TERMS AS OF THE STATISTICAL CUTOFF DATE
INITIAL FINANCED STUDENT LOANS SUBSEQUENT POOL STUDENT LOANS
------------------------------ -----------------------------
AGGREGATE AGGREGATE
OUTSTANDING PERCENT OF OUTSTANDING PERCENT OF SUBSEQUENT POOL
LOAN REPAYMENT NUMBER OF PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL BY OUTSTANDING
TERMS LOANS BALANCE(1) BALANCE LOANS BALANCE (2) PRINCIPAL BALANCE
----- ----- ---------- ------- --------- ----------- ---------------------------
Level Payment.......
Interest Only(3)....
Graduated Payment(4)
Total..............
<FN>
(1) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $_________ as of the Statistical Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $__________ as of the Statistical Cutoff Date.
(3) Student Loans with interest only repayment terms require borrowers to
make payments of interest only for the first two years after entering
repayment and thereafter to make level payments which will amortize the
then outstanding principal balance of the loan over the then remaining
term.
(4) Student Loans with graduated repayment terms require borrowers to make
payments of interest only for the first two years after entering
repayment and then to begin making payments of both interest and
principal 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.
MATURITY AND PREPAYMENT ASSUMPTIONS
The rate of payment of principal of the Notes and the Certificates and
the yield on the Notes and the Certificates will be affected by prepayments of
the Financed Student Loans that may occur as described below. All the Financed
Student Loans are prepayable in whole or in part by the borrowers at any time
(including by means of Federal Consolidation Loans or consolidation loans made
under the Federal Direct Student Loan Program as discussed below)
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or as a result of a borrower's default, death, disability or bankruptcy and
subsequent liquidation or collection of Guarantee Payments with respect thereto.
The rate of such prepayments cannot be predicted and may be influenced by a
variety of economic, social and other factors, including those described below.
In general, the rate of prepayments may tend to increase to the extent that
alternative financing becomes available at prevailing interest rates which fall
significantly below the interest rates applicable to the Financed Student Loans.
However, because many of the Financed Student Loans bear interest at a rate that
either actually or effectively is floating, it is impossible to determine
whether changes in prevailing interest rates will be similar to or vary from
changes in the interest rates on the Financed Student Loans.
To the extent borrowers of Financed Student Loans elect to borrow
Consolidation Loans with respect to such Financed Student Loans from the Seller
(i) after the Funding Period but not beyond the Loan Purchase Termination Date,
and collections on the Financed Student Loans are not available to purchase such
Consolidation Loans, (ii) after the Loan Purchase Termination Date or (iii) from
another lender at any time, Noteholders (and after the Notes have been paid in
full, Certificateholders) will collectively receive as a prepayment of principal
the aggregate principal amount of such Financed Student Loans; provided, that if
the Seller makes any such Consolidation Loan during the Funding Period or prior
to the Loan Purchase Termination Date (in which event the Seller will then sell
that Consolidation Loan to the Eligible Lender Trustee, to the extent that funds
are available in the applicable Escrow Account and during the Funding Period,
the applicable Pre-Funding Account or following the Funding Period but prior to
the Loan Purchase Termination Date, the applicable Collection Account from
amounts which constitute Available Loan Purchase Funds, for the purchase
thereof), the aggregate outstanding principal balance of Financed Student Loans
(after giving effect to the addition of such Consolidation Loans) will be at
least equal to and in most cases greater than such balance prior to such
prepayment, although the portion of the loan guaranteed will be 98% with respect
to any Federal Consolidation Loan made on or after October 1, 1993, even if the
Underlying Federal Loan was 100% guaranteed. See "The Student Loan Financing
Business-Federal Loans Under the Programs--Federal Consolidation Loans." 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 or, if
they do so, that such Consolidation Loans will not be made by the Seller after
the end of the Funding Period when collections on the Financed Student Loans are
not available to purchase such Consolidation Loans, on or after the Loan
Purchase Termination Date or by another lender at any time.
In addition, the Seller is obligated to repurchase any Financed Student
Loan pursuant to the Sale and Servicing Agreement as a result of a breach of any
of its representations and warranties, and the Servicers are obligated to
purchase any Financed Student Loan pursuant to the Sale and Servicing Agreement
as a result of a breach of certain covenants with respect to such Financed
Student Loan, in each case where such breach materially adversely affects the
interests of the Certificateholders or the Noteholders in that Financed Student
Loan and is not cured within the applicable cure period (it being understood
that 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 Financed 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 if as of the Special
Determination Date a Subsequent Pool Pre-Funded Amount has not been reduced to
zero and the prepayment of principal to Noteholders as a result of excess funds
remaining on deposit in the applicable Pre-Funding Account at the end of the
Funding Period, "--Insolvency Event" regarding the sale of the Financed Student
Loans if a Seller Insolvency Event occurs and "--Termination" regarding the
Seller's option to purchase the Financed Student Loans when the aggregate Pool
Balance is less than or equal to 5% of the Initial Pool Balance and the auction
of the Financed Student Loans occurs on or after the December 2008 Distribution
Date.
On the other hand, scheduled payments with respect to, and maturities
of, the Financed Student Loans may be extended, including pursuant to Grace
Periods, Deferral Periods and, under certain circumstances, Forbearance Periods
or as a result of the conveyance of Serial Loans to the Eligible Lender Trustee
on behalf of the Trust prior to the Loan Purchase Termination Date or of
refinancings through Consolidation Loans to the extent such Consolidation Loans
are sold to the Eligible Lender Trustee on behalf of the Trust as described
above. In that event, the fact that such Consolidation Loans will likely have
longer maturities than the Financed Student Loans they are replacing may
lengthen the remaining term of the Financed Student Loans and the average life
of the Notes and the Certificates. The rate of payment of principal of the Notes
and the Certificates and the yield on the Notes and the Certificates may also be
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affected by the rate of defaults resulting in losses on defaulted Student Loans
which have been liquidated, by the severity of those losses and by the timing of
those losses, which may affect the ability of the Guarantors to make Guarantee
Payments with respect thereto. In addition, the maturity of many of the Financed
Student Loans will extend well beyond the Final Maturity Date.
The rate of prepayment on the Financed Student Loans cannot be
predicted, and any reinvestment risks resulting from a faster or slower
incidence of prepayment of Financed Student Loans will be borne entirely by the
Securityholders. 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 receive payments from the Trust than such interest
rates and such spreads would otherwise have been had such prepayments not been
made or had such prepayments been made at a different time.
INSURANCE OF STUDENT LOANS; GUARANTORS OF STUDENT LOANS
General. Each Financed Federal Loan will be required to be guaranteed
as to principal and interest by PHEAA, ASA, NSLP, or ECMC and reinsured by the
Department under the Higher Education Act and must be eligible for Special
Allowance Payments and, with respect to each Financed Federal Loan that is a
Stafford Loan, must be eligible for Interest Subsidy Payments paid by the
Department. Each Financed Private Loan will be required to be guaranteed as to
principal and interest by TERI or HICA.
The following tables provide information with respect to the portion of
the Financed Student Loans in Loan Group 1 and in Loan Group 2 guaranteed by
each Guarantor:
LOAN GROUP 1 (FINANCED FEDERAL LOANS)
DISTRIBUTION BY GUARANTORS AS OF THE STATISTICAL CUTOFF DATE
INITIAL FINANCED STUDENT LOANS SUBSEQUENT POOL STUDENT LOANS
------------------------------ -----------------------------
PERCENT OF
AGGREGATE AGGREGATE SUBSEQUENT POOL BY
NAME OF OUTSTANDING PERCENT OF OUTSTANDING OUTSTANDING
GUARANTEE NUMBER OF PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL PRINCIPAL
AGENCY LOANS BALANCE(1) BALANCE LOANS BALANCE (2) BALANCE
- ----------- ----- ---------- ------- ----- ----------- -------
PHEAA...............
ASA
NSLP
ECMC................
Total..............
<FN>
(1) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $_____________ as of the Statistical Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________ as of the Statistical Cutoff Date.
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LOAN GROUP 2 (FINANCED PRIVATE LOANS)
DISTRIBUTION BY GUARANTORS AS OF THE STATISTICAL CUTOFF DATE
INITIAL FINANCED STUDENT LOANS SUBSEQUENT POOL STUDENT LOANS
------------------------------ -----------------------------
PERCENT OF
AGGREGATE AGGREGATE SUBSEQUENT POOL BY
NAME OF OUTSTANDING PERCENT OF OUTSTANDING OUTSTANDING
GUARANTEE NUMBER OF PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL PRINCIPAL
AGENCY LOANS BALANCE(1) BALANCE LOANS BALANCE (2) BALANCE
------ ----- ---------- ------- ----- ----------- -------------
TERI................
HICA................
Total..............
<FN>
(1) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $_____________ as of the Statistical Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________ as of the Statistical Cutoff Date.
Federal Reinsurance. Under the Higher Education Act, each Federal
Guarantor is reimbursed by the Department pursuant to certain agreements between
the Department and such Federal Guarantor for amounts paid under its Guarantee
Agreement. The amount of reimbursement by the Department for Federal Loans for
each fiscal year commencing October 1 varies for each Federal Guarantor
depending on the annual claims rate for that Federal Guarantor (i.e., the dollar
amount of reimbursement claims filed by that Federal Guarantor during that
fiscal year as a percentage of the outstanding aggregate principal amount at the
end of the preceding fiscal year of those Federal Loans it guarantees whose
borrowers were repaying such Federal Loans at the end of the preceding fiscal
year) and the date on which the loan is made as follows:
CLAIMS RATE OF FEDERAL GUARANTORS REIMBURSEMENT BY THE DEPARTMENT OF EDUCATION (1)
- --------------------------------- ------------------------------------------------
0% to and including 5%....................... 98%
Greater than 5% to and including 9%.......... 98% of claims to and including 5%; 88% of claims greater than 5%
Greater than 9%.............................. 98% of claims to and including 5%; 88% of claims greater than 5% to
and including 9%; and 78% of claims greater than 9%
<FN>
(1) Each of the reimbursement percentages listed above is increased by two
percentage points for a loan made prior to October 1, 1993.
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, 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 ensure an orderly termination
of the Federal Guarantor, to serve the best interests of the student loan
programs or to ensure the proper maintenance of such Federal Guarantor's funds
or
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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 or to ensure an
orderly transition to full implementation of direct federal lending. These
various changes create a significant 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 the Trust's ability to pay
principal and interest on the Notes, 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 Financed Student Loans. In addition, this
legislation sought to greatly expand the Federal Direct Student Loan Program
volume 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 loans made under the Federal
Programs. 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 Financed
Federal Loans. See "Risk Factors--Changes in Legislation May Adversely Affect
Financed Student Loans and Guarantors."
In issuing guarantees with respect to Student Loans, each Federal
Guarantor is required by the Higher Education Act to review loan applications to
verify the completion of required information and to make a determination that
the applicant has not borrowed amounts in excess of any applicable annual and
aggregate limits imposed by the Higher Education Act.
Pursuant to the 1992 Amendments and additional changes made in 1997,
each Federal Guarantor is required to maintain a current minimum reserve level
of at least 0.5% 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
9% or the Department determines that a Federal Guarantor's administrative or
financial condition jeopardizes that Federal Guarantor's continued ability to
perform its responsibilities, then that Federal Guarantor must submit and
implement a management plan acceptable to the Department. The 1992 Amendments
also provide that under certain circumstances the Department is authorized, on
terms and conditions satisfactory to the Department, but is not obligated, to
terminate its reimbursement agreement with any Federal Guarantor. In that event,
however, the Department is required to assume the functions of such Federal
Guarantor and in connection therewith is authorized to do one or more of the
following: to assume the guarantee obligations of, to assign to other guarantors
the guarantee obligations of, or to make advances to, a Federal Guarantor in
order to assist such Federal Guarantor in meeting its immediate cash needs and
to ensure uninterrupted payment of default claims to lenders or to take any
other action the Department deems necessary to ensure the continued availability
of student loans and the full honoring of guarantee claims thereunder. In
addition, the 1992 Amendments provide that if the Department determines that a
Federal Guarantor is unable to meet its guarantee obligations, holders of
Federal Loans covered thereby may submit guarantee claims directly to the
Department until such time as such guarantee obligations are transferred to a
new guarantor capable of meeting such obligations or until a successor guarantor
assumes such obligations. There can be no assurance that the Department would
under any given circumstances assume such obligation to ensure satisfaction of a
guarantee obligation by exercising its right to terminate a reimbursement
agreement with a Federal Guarantor or by making a determination that such
Federal Guarantor is unable to meet its guarantee obligations.
Guarantors for the Financed Federal Loans. The Higher Education Act
requires every state to designate a guarantee agency, either by establishing its
own or by designating another guarantee agency. A Guarantor who has been
designated by a particular state is obligated to guarantee loans for students
who reside or attend school in such state and must agree to provide loans to any
such students who are otherwise unable to obtain a loan from any other lender.
Guarantee agencies may guarantee a loan made to any eligible borrower and are
not limited to guaranteeing loans for students attending institutions in their
particular state or region or for their residents attending schools in another
state or region. The Eligible Lender Trustee has entered into a Guarantee
Agreement with each of PHEAA,
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ASA, NSLP and ECMC by which each of PHEAA, ASA, NSLP and ECMC has agreed to
serve as Guarantor for certain Financed Federal Loans. PHEAA is the designated
Student Loan guarantor for the Commonwealth of Pennsylvania and the State of
West Virginia and has an established operating center in Harrisburg,
Pennsylvania. For more information concerning PHEAA, see "The Seller, the
Administrator and the Servicers--The Servicers." ASA is the designated Student
Loan guarantor for the Commonwealth of Massachusetts and the District of
Columbia and has an established operating center in Boston, Massachusetts. ASA
employed approximately ____ people as of June 30, 1998. NSLP is the designated
Student Loan guarantor for the state of Nebraska and as of June 30, 1998
employed approximately _______ people. ECMC is the designated Student Loan
guarantor for the state of Virginia and as of June 30, 1998 employed
approximately ____ people. As of the Statistical Cutoff Date, approximately
____%, ____%, ____% and ____% of the aggregate outstanding principal balance of
the Initial Financed Student Loans which are Financed Federal Loans and ____%,
____%, ____% and ____% of the Student Loans in the Subsequent Pool which are
Financed Federal Loans were guaranteed by PHEAA, ASA, NSLP and ECMC,
respectively.
Pursuant to its respective Guarantee Agreement, each of PHEAA, ASA,
NSLP and ECMC guarantees payment of 100% of the principal (including any
interest capitalized from time to time) and accrued interest for each Financed
Federal Loan guaranteed by it as to which any one of the following events has
occurred:
(a) failure by the borrower thereof to make monthly principal
or interest payments on such Financed Federal Loan when due, provided
such failure continues for a period of 180 days (except that such
guarantee against such failures will be 98% of principal and accrued
interest for loans first disbursed on or after October 1, 1993);
(b) any filing by or against the borrower thereof of a
petition in bankruptcy pursuant to any chapter of the Federal
bankruptcy code, as amended;
(c) the closure of, or false certification of borrower
eligibility by, the School;
(d) the death of the borrower thereof; or
(e) the total and permanent disability of the borrower thereof
to work and earn money or attend school, as certified by a qualified
physician.
When these conditions are satisfied, the Higher Education Act requires
the Guarantor generally to pay the claim within 90 days of its submission by the
lender. The obligations of PHEAA, ASA, NSLP and ECMC pursuant to their
respective Guarantee Agreements are obligations solely of PHEAA, ASA, NSLP and
ECMC respectively, and are not supported by the full faith and credit of any
state government, including Pennsylvania and West Virginia, Massachusetts and
the District of Columbia, Nebraska, and Virginia, respectively.
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: (i) the origination and
servicing of such Financed Federal Loan being performed in accordance with the
Programs, the Higher Education Act and other applicable requirements, (ii) the
timely payment to PHEAA, ASA, NSLP or ECMC, as the case may be, of the guarantee
fee payable with respect to such Financed Federal Loan, (iii) the timely
submission to PHEAA, ASA, NSLP or ECMC, 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 (iv) the transfer and endorsement of the promissory
note evidencing such Financed Federal Loan to PHEAA, ASA, NSLP or ECMC, 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 PHEAA, ASA, NSLP or ECMC,
as the case may be, to honor their Guarantee Agreements with respect to such
Financed Federal Loan, in the denial of guarantee coverage with respect to
certain accrued interest amounts with respect thereto or in the loss of certain
Interest Subsidy Payments and Special Allowance Payments with respect thereto.
Under the Sale and Servicing Agreement, such failure to comply would constitute
a breach of the applicable Servicer's covenants or the Seller's representations
and warranties, as the case may be, and would create an obligation of the Seller
or the applicable Servicer, as the case may be, to repurchase or purchase such
Financed Federal Loan or to reimburse
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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 "--Servicer Covenants."
Set forth below is certain current and historical information with
respect to each of the Federal Guarantors in its capacity as a Guarantor of all
education loans guaranteed by each of them:
Guaranty Volume. The following table sets forth the approximate
aggregate principal amount of federally reinsured education loans (including
loans under the Parent Loans to Undergraduate Students (PLUS) program but
excluding Federal Direct Consolidation Loans) that have first become guaranteed
by each Federal Guarantor and by all guarantors in each of the last five federal
fiscal years:*
STAFFORD, SLS AND PLUS LOANS GUARANTEED
-----------------------------------------------------------------------------------
(DOLLARS IN MILLIONS)
-----------------------------------------------------------------------------------
FEDERAL FISCAL YEAR PHEAA ASA NSLP ECMC ALL GUARANTORS
------------------- ----- --- ---- ---- --------------
1993 1,523 730 17,863
1994 1,747 1,100 23,053
1995 1,808 906 20,951
1996 1,794 716 19,728
1997
<FN>
- ----------------
* The information set forth in the table above for all Guarantors has
been obtained from the Department of Education's Guaranteed Student
Loan Programs Data Books (each, a "DOE Data Book"). Information for
PHEAA, ASA [, NSLP and ECMC] was obtained from PHEAA, ASA, [NSLP and
ECMC,] respectively.
Reserve Ratio. Each Federal Guarantor's reserve ratio is determined by
dividing its cumulative cash reserves by the original principal amount of the
outstanding loans it has agreed to guarantee. The term "cumulative cash
reserves" refers to cash reserves plus (i) sources of funds (including insurance
premiums, state appropriations, federal advances, federal reinsurance payments,
administrative cost allowances, collections on claims paid and investment
earnings) minus (ii) uses of funds (including claims paid to lenders, operating
expenses, lender fees, the Department's share of collections on claims paid,
returned advances and reinsurance fees). The "original principal amount of
outstanding loans" consists of the original principal amount of loans guaranteed
by such 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. The following tables set forth PHEAA's, ASA's, NSLP's and ECMC's
cumulative cash reserves and their corresponding reserve ratios and the national
average reserve ratio for all guarantors for the last five federal fiscal
years:*
PHEAA ASA
--------------------------------- --------------------------------
FEDERAL CUMULATIVE CUMULATIVE
FISCAL CASH RESERVE CASH NATIONAL AVERAGE
YEAR RESERVES RATIO RESERVES RESERVE RATIO RESERVE RATIO
---- -------- ----- -------- ------------- ----------------
(DOLLARS IN MILLIONS)
1993 100.95 1.1 26.20 0.6 1.7
1994 133.63 1.3 38.16 0.7 1.4
1995 166.31 1.5 43.06 0.8 1.6
1996 214.74 1.6 51.08 0.9 --
1997
NSLP ECMC
--------------------------------- ----------------------------------
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FEDERAL CUMULATIVE CUMULATIVE
FISCAL CASH RESERVE CASH
YEAR RESERVES RATIO RESERVES RESERVE RATIO
---- -------- ----- -------- -------------
(DOLLARS IN MILLIONS)
1993
1994
1995
1996
1997
<FN>
- ---------------
* The information set forth in the tables above with respect to PHEAA,
ASA, NSLP and ECMC has been obtained from PHEAA, ASA, NSLP and ECMC,
respectively, and the information with respect to the national average
has been obtained from the DOE Data Books. The above information with
respect to PHEAA for fiscal year 1993 represents a restatement of such
information from that previously supplied by PHEAA to the Department.
Recovery Rates. A Federal Guarantor's recovery rate, which provides a
measure of the effectiveness of the collection efforts against defaulting
borrowers after the guarantee claim has been satisfied, is determined by
dividing the amount recovered from borrowers by the Federal Guarantor by the
aggregate amount of default claims paid by the Federal Guarantor during the
applicable federal fiscal year with respect to borrowers. With respect to
Stafford Loans only, the table below sets forth the recovery rates for each of
PHEAA, ASA, NSLP and ECMC and the national average recovery rates for all
guarantors for the last five federal fiscal years:*
FEDERAL FISCAL YEAR RECOVERY RATE
------------------- -------------------------------------------------------------------------------
PHEAA ASA NSLP ECMC NATIONAL AVERAGE
----- --- ---- ---- ----------------
1993 48.1 42.5 --
1994 52.9 43.3 --
1995 53.3 43.4 --
1996 55.0 41.3 --
1997
<FN>
- --------------------
* The information set forth in the table above for the National Average
has been compiled from the DOE Data Books. Information for PHEAA, ASA,
NSLP, and ECMC was provided by each entity, respectively.
Loan Loss Reserve. None of PHEAA, ASA, NSLP, or ECMC maintains a
segregated loan loss reserve with respect to its student loan guarantee
obligations. 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.
Pursuant to its guarantee agreements with lending institutions, ASA is required
to maintain generally an amount of cash, marketable securities and other assets
with a value of at least 1% of the aggregate amount of unpaid principal on
outstanding loans guaranteed by ASA.
Claims Rate. For the past five federal fiscal years, no Federal
Guarantor's claims rates has exceeded 5%, and as a result, all claims of all
Federal Guarantors have been fully reimbursed by the Department. See "--Federal
Reinsurance" above. Nevertheless, there can be no assurance that any Federal
Guarantor will continue to receive full reimbursement for such claims (or the
full 98% maximum reimbursement for loans first disbursed on or after October 1,
1993). The following table sets forth the claims rates of each Federal Guarantor
for each of the last five federal fiscal years:*
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CLAIMS RATE
----------------------------------------
FEDERAL FISCAL YEAR PHEAA ASA NSLP ECMC
------------------- ----- --- ---- ----
1993 2.3 3.0
1994 2.2 3.5
1995 2.0 3.5
1996 1.6 3.1
1997
<FN>
* The information set forth in the table above has been obtained from PHEAA,
ASA, NSLP, ECMC as applicable.
Guarantors for the Financed Private Loans. The Eligible Lender Trustee
will enter into a Guarantee Agreement with each of TERI and HICA by which TERI
and HICA, respectively, will agree to serve as Guarantor for certain Financed
Private Loans. TERI was incorporated in 1985 to guarantee Student Loans. TERI is
a Massachusetts non-profit corporation headquartered in Boston, Massachusetts.
TERI employs approximately 170 people, as of June 30, 1998. HICA was founded in
1986 to provide guarantees to lenders against credit losses on
education-related, non-federally insured loans to students attending
post-secondary educational institutions. HICA was originally a majority owned
subsidiary of EduServ Technologies but was divested in August of 1991. HICA was
acquired by Sallie Mae, Inc. in 1995 and operates as a wholly-owned subsidiary
thereof, employing approximately ___ people, as of June 30, 1998.
Pursuant to its respective Guarantee Agreement, each of TERI and HICA
guarantees payment of 100% of the principal (including any interest or fees
capitalized from time to time) and accrued interest for each Financed Private
Loan guaranteed by it as to which any one of the following events has occurred:
(a) failure by the borrower thereof to make monthly principal
or interest payments on such Financed Private Loan when due, provided
such failure continues for a period of 150 days;
(b) any filing by or against the borrower thereof of a
petition in bankruptcy pursuant to any chapter of the Federal
bankruptcy code, as amended;
(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.
TERI's and HICA's guarantee obligation with respect to any Financed
Private Loan is conditioned upon the satisfaction of all the conditions set
forth in the applicable Guarantee Agreement between TERI or HICA and the
Eligible Lender Trustee. These conditions include, but are not limited to, the
following: (i) the origination and servicing of such Financed Private Loan being
performed in accordance with the Programs and other applicable requirements,
(ii) the timely payment to TERI or HICA, as the case may be, of all guarantee
fees payable with respect to such Financed Private Loan, (iii) 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 Financed
Private Loan and (iv) the transfer and endorsement of the promissory note
evidencing such Financed 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 Financed Private Loan. In
addition, in the event that any Financed Private Loan is determined to be
unenforceable because the terms of such Financed Private Loan or the forms of
the application or promissory note related thereto violate any provisions of
applicable state law, TERI's or HICA's guarantee obligation, as the case may be,
is reduced to 50% of principal (including capitalized interest and fees) and
accrued interest with respect to such Financed Private Loan. Under the Sale and
Servicing Agreement, such failure to comply or such unenforceability would
constitute a breach of the applicable Servicer's covenants or the Seller's
representations and warranties, as the case may be, and would create an
obligation of the Seller to repurchase such Financed Private
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Loan or of the applicable Servicer to purchase such Financed Private Loan. See
"Description of the Transfer and Servicing Agreements--Sale of Financed Student
Loans; Representations and Warranties" and "--Servicer Covenants."
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 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 Financed Private Loans. Based
upon the Rating Agencies' assessment of each financial position, reserves and
potential claims against TERI and HICA, respectively, the Seller has structured
the Trust and the Securities assuming that neither TERI nor HICA will have the
financial resources to satisfy all its obligations under its respective
Guarantee Agreement with respect to the Financed Private Loans throughout the
term of such loans.
TERI has advised the Seller that it is currently in compliance with all
operating reserves requirements contained in guarantee agreements TERI has in
place with other student loan lenders and other trustees under prior
securitizations of student loans. However, there can be no assurance that such
compliance will continue.
Certain current and historical summary financial information with
respect to each of TERI and HICA in its capacity as a Guarantor is set forth
below, such information is not guaranteed as to accuracy or completeness and is
not to be construed as a representation by the Seller or any of the
Underwriters:
TERI
Guaranty Volume. The following table sets forth the non-federally
reinsured education loans that have first become guaranteed by TERI in each of
the three 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 the Seller or any of the Underwriters:
CALENDAR
YEAR PRIVATE LOANS
---- -------------
GUARANTEED BY YEAR
------------------
(DOLLARS IN MILLIONS)
1995.............................. 303.4
1996.............................. 339.7
1997..............................
1998*.............................
<FN>
* For the six-month period ending June 30, 1998.
Proprietary School Loans. Default rates for Student Loans made to
students attending proprietary or vocational schools are significantly higher
than those made to students attending other 2-year and 4-year institutions.
Except for a few selected, accredited proprietary schools which grant degrees,
TERI does not guarantee student loans made to students attending proprietary or
vocational schools.
Reserve Ratio. Unlike the Federal Guarantors, TERI computes its reserve
ratio by dividing the "total dollars available for guaranty payment" by the
"total loans outstanding." TERI defines "total dollars available for guaranty
payment" as the sum of the amounts set forth below under the caption "Amounts
Available To Meet Guarantee Commitments" (which amounts include for this purpose
the segregated reserves described below under the caption "Segregated Reserves
for Private Loans Under the Programs"). It 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. TERI's reserve ratio as of December 31 for the three calendar years
and the six-month period referred to below is set
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\
forth below; such information is not guaranteed as to accuracy or completeness
and is not to be construed as a representation by the Seller or any of the
Underwriters:
AMOUNTS AVAILABLE
FOR GUARANTEE RESERVE
PERIOD PAYMENTS RATIO
------ -------- -----
(DOLLARS IN THOUSANDS)
(UNAUDITED) (UNAUDITED)
1995....................................................... 83,937 5.7%
1996....................................................... 93,896 5.6%
1997.......................................................
1998*......................................................
<FN>
* For the six-month period ending June 30, 1998.
Amounts Available To Meet Guarantee Commitments. As part of guarantee
agreements with lending institutions, with certain such agreements being revised
in 1997, TERI has agreed to hold as security for its guarantees a percentage of
the amount of unpaid principal on outstanding loans which ranges from 2.0% to
4.5% in total TERI funds available as security for the performance of TERI
obligations. For a more detailed discussion of such amendments and the related
risks, see "Risk Factors--Dependence on Guarantees as Security for Financed
Student Loans." At December 31, 1997, the balance of loans outstanding
guaranteed directly and indirectly by TERI amounted to approximately $__ billion
and $__ billion, respectively. At December 31, 1997, TERI was required to have
approximately $__ million in reserves (consisting of loan loss reserves,
deferred revenue and unrestricted and/or temporarily unrestricted net assets)
available as security for TERI's performance as guarantor. The unrestricted
and/or temporarily unrestricted net assets consist of amounts in the Designated
Purposes Fund, the Guarantee Reserve Fund and the Operating Fund set forth
below.
As of the end of each of the three 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 the
Seller or any of the Underwriters:
AS OF DECEMBER 31,
----------------------------------------------
JUNE 30,
1995 1996 1997 1998
-------- -------- ---- ----
(AS RESTATED)
(IN THOUSANDS)
(UNAUDITED)
Deferred Guarantee Fees.............. $ 5,234 $ 5,140 $ 4,287
Loan Loss Reserve.................... 29,092 28,241 21,136
Temporary Restricted Assets.......... 46,063 57,468 65,594
Unrestricted Assets.................. 3,548 3,047 3,358
Total Amounts Available for
Guarantee Commitments.............. $83,937 $93,896 $94,375
======= ======= =======
Subject to the minimum restrictions imposed by lending institutions and
the segregated reserves discussed below under "Segregated Reserves for Private
Loans Under the Programs," 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 bi-annual
actuarial study provided by an independent third party. TERI has significantly
increased its total amounts available for guarantee commitments over the last
two years in conjunction with an increase in the outstanding principal amount of
loans guaranteed by TERI over such period.
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
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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, 1998, with respect to loans defaulting in each of the three
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 the Seller or any of the Underwriters:
PERIOD OF CUMULATIVE CASH
DEFAULT RECOVERY RATE (UNAUDITED)
------- -------------------------
1995.......................................... 25% (January 1, 1995--June 30, 1998)
1996.......................................... 12% (January 1, 1996--June 30, 1998)
1997.......................................... 3% (January 1, 1997--June 30, 1998)
1998*......................................... (January 1, 1998--June 30, 1998)
<FN>
* For the six-month period ending June 30, 1998.
The appearance of a declining trend in the foregoing recovery rates can
largely be attributed to the fact that each succeeding default year listed above
includes one fewer year in which to obtain recoveries for the amounts paid out
on guarantee claims in the default year.
Claims Rate. Unlike the Federal Guarantors' calculation of claims rates
discussed above, which consists of an annual measure of claims made to
outstanding loan balances guaranteed at the start of that year, the claims rate
for TERI set forth below is based on the aggregate amount of claims, whenever
paid, on loans guaranteed by TERI in a particular year or period. The "Cohort
Default Rate" refers to the total principal amount of defaulted loans for which
guarantee payments were made by TERI (exclusive of any subsequent recoveries by
TERI) for the cohort year (or period) as a percentage of the aggregate principal
amount of loans guaranteed by TERI for the cohort year (or period). As a result,
the claims rate information provided above for the Federal Guarantors is not
comparable to that provided for TERI below. The following table sets forth the
total defaults paid and the cohort default rate as of June 30 for each of 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 the Seller or any of the Underwriters:
YEAR IN WHICH LOANS TOTAL DEFAULTS PAID FOR LOANS
GUARANTEED GUARANTEED IN COHORT YEAR DEFAULT RATE
---------- ------------------------- ------------
(COHORT YEAR) (DOLLARS IN THOUSANDS) (UNAUDITED)
(UNAUDITED)
1993................................. 12,752 3.72%
1994................................. 4,623 1.58%
1995................................. 2,867 0.95%
1996................................. 493 0.15%
1997................................. 0 0.00%
1998*................................
<FN>
* For the six-month period ending June 30, 1998.
The declining trend reflected above in the claims rates experienced by
TERI can largely be attributed to the fact that in each succeeding cohort year
fewer loans guaranteed by TERI were in repayment. As the number of loans
entering repayment increases, the percentage of loans becoming delinquent and
subsequently defaulting also tends to increase. There can be no assurance that
the claims rate experience of TERI for any future year will be similar to the
historical claims rate experience set forth above.
Segregated Reserves for Private Loans Under the Programs. A portion of
the reserves described above that are maintained by TERI have been segregated
solely to support its guarantee obligations under the Programs. These segregated
reserves, which are not available to cover TERI-guaranteed loans outside of the
Programs, are equally
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available to all holders of Private Loans made since 1990- 1991, which include
both the Seller and third-party purchasers of the Seller's Private Loans,
including but not limited to the Eligible Lender Trustee on behalf of the Trust.
Draws on such segregated reserves will be paid in the order received, to the
extent of amounts remaining in the segregated reserve account. Consequently,
there may be one or more owners of Private Loans for which a claim could, in the
event of a default by a student borrower, be filed against such segregated
reserves. As a result, there can be no assurance that amounts in these
segregated reserves will be available to support Guarantee Payments by TERI
owing in respect of the Financed Private Loans made under the aforementioned
Programs, or that such amounts, if available, will be sufficient to satisfy all
existing Guarantee Payments due with respect to such Financed Private Loans. The
Seller will assign the portion of its rights under the agreement implementing
these segregated reserves that is attributable to such Financed Private Loans to
the Trust.
TERI has agreed that it will provide a copy of its most recent audited
financial statements to Securityholders upon receipt of a written request
directed to its Chief Financial Officer, 330 Stuart Street, Suite 500, Boston,
Massachusetts 02116. HICA 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 __________.
HICA
[HICA information to be provided by KeyBank.]
POOL FACTORS AND TRADING INFORMATION
Each of the "Class IA-1 Note Pool Factor," the "Class IA-2 Note Pool
Factor," the "Class I-B Certificate Pool Factor" the "Class IIA-1 Note Pool
Factor", the "Class IIA-2 Note Pool Factor" and the "Class II-B Certificate Pool
Factor" (each, a "Pool Factor") is a seven-digit decimal which the Administrator
will compute for each Distribution Date indicating the remaining outstanding
principal balance of each class of Notes or the Certificate Balance of each
class of Certificates, respectively, as of that Distribution Date (after giving
effect to distributions on such Distribution Date), as a fraction of the initial
outstanding principal balance of each class of Notes or each 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 balance of each class of Notes or each class of Certificates, as
applicable. A Securityholder's portion of the aggregate outstanding principal
balance of each class of Notes or each class of Certificates, as applicable, is
the product of (i) the original denomination of that Securityholder's Note or
Certificate and (ii) the applicable Pool Factor.
Pursuant to the Indenture and the Trust Agreement, the Securityholders
will receive quarterly reports concerning the payments received on the Financed
Student Loans, the reduction of the applicable Pre-Funded Amount resulting from
Additional Fundings, the applicable 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 "Description of the
Securities--Reports to Securityholders."
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."
GENERAL
The Notes will be issued pursuant to the terms of the Indenture and the
Certificates will be issued pursuant to the terms of the Trust Agreement. The
following summary describes certain terms of the Notes, the Certificates, the
Indenture and the Trust Agreement. The summary does not purport to be complete
and is qualified in its entirety by reference to the provisions of the Notes,
the Certificates, the Indenture and the Trust Agreement.
Each class of Securities will initially be represented by one or more
Notes and Certificates, respectively, in each case registered in the name of the
nominee of DTC (together with any successor depository selected by the
Administrator, the "Depository"), except as set forth below. The Securities will
be available for purchase in denominations of $1,000 and integral multiples of
$1,000 in excess thereof in book-entry form only. The Trust has been informed by
DTC that DTC's nominee will be Cede. Accordingly, Cede is expected to be the
holder of record of the
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Securities. Unless and until Definitive Notes or Definitive Certificates are
issued under the limited circumstances described herein, no Noteholder or
Certificateholder will be entitled to receive a physical certificate
representing a Note or Certificate. All references herein to actions by
Noteholders or Certificateholders refer to actions taken by DTC upon
instructions from its participating organizations (the "Participants") and all
references herein to distributions, notices, reports and statements to
Noteholders or Certificateholders refer to distributions, notices, reports and
statements to DTC or Cede, as the registered holder of the Notes or the
Certificates, as the case may be, for distribution to Noteholders or
Certificateholders in accordance with DTC's procedures with respect thereto. See
"-- Book-Entry Registration" and "-- Definitive Securities."
THE NOTES
Distributions of Interest. Interest will accrue on the principal
balance of each class of Notes at a rate per annum equal to the lesser of the
Formula Rate for such Notes and the Student Loan Rate (each such interest rate
being a "Note Interest Rate"). Interest will accrue from and including the
Closing Date or from the most recent Distribution Date on which interest has
been paid to but excluding the current Distribution Date (each an "Interest
Period") and will be payable to the Noteholders on each Distribution Date.
Interest accrued as of any Distribution Date but not paid on such Distribution
Date will be due on the next Distribution Date together with an amount equal to
interest on such amount at the applicable Note Interest Rate. Interest payments
on the Notes related to a Loan Group for any Distribution Date will generally be
funded from Available Funds for such Loan Group and amounts on deposit in the
Reserve Accounts for such Loan Group and, under certain limited circumstances,
the Pre-Funding Account for such Loan Group, remaining after the distribution of
the Servicing Fee allocable to such Loan Group for each of the two immediately
preceding Monthly Servicing Payment Dates and of the Servicing Fee allocable to
such Loan Group, and the Administration Fee allocable to such Loan Group for
each Distribution Date. See "Description of the Transfer and Servicing
Agreements -- Distributions" and "-- Credit Enhancement." If such sources are
insufficient to pay the Noteholders' Interest Distribution Amount for each Loan
Group for such Distribution Date, such shortfall will be allocated pro rata to
the Group 1 Noteholders and the Group 2 Noteholders (based upon the total amount
of interest then due on each class of Notes), as applicable.
"Formula Rate" means for any class of Securities, the applicable
Investor Index plus the applicable Margin.
"Investor Index" means (x) in the case of the T-Bill Indexed
Securities, the daily weighted average of the T-Bill Rates within such Interest
Period (determined as described under "--Determination of the T-Bill Rates") or
(y) in the case of the LIBOR Indexed Securities, Three Month LIBOR (determined
as described under "--Determination of LIBOR").
The "Margin" for each class of Securities is as set forth under
"Summary of Terms--Transaction Overview--Interest."
The "Student Loan Rate" for any class of Securities for any Interest
Period will equal the product of (a) the quotient obtained by dividing (i) 365
(or 366 in a leap year) by (ii) 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 for the Loan Group
related to such class of Securities for the Collection Period relating to such
Interest Period less the Servicing Fees and the Administration Fee allocable to
such Loan Group and payable on the related Distribution Date and any Servicing
Fees allocable to such Loan Group paid on the two preceding Monthly Servicing
Payment Dates during the related Collection Period and (ii) the denominator of
which is the outstanding principal balance of the Securities as of the first day
of such Interest Period.
"Expected Interest Collections" for any Loan Group means, with respect
to any Collection Period, the sum of (i) the amount of interest accrued, in the
case of holders of Group 1 Securities, net of amounts required by the Higher
Education Act to be paid to the Department or to be repaid to borrowers, with
respect to the Financed Student Loans in Loan Group 1 for such Collection Period
(whether or not such interest is actually paid), (ii) in the case of Loan Group
1, all Interest Subsidy Payments and Special Allowance Payments expected to be
received by the Eligible Lender Trustee for such Collection Period (whether or
not actually received) with respect to the Financed Student Loans in Loan Group
1 and (iii) Investment Earnings for such Collection Period for such Loan Group.
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Any Noteholders' Interest Index Carryover due on Notes related to a
Loan Group that may exist on any Distribution Date will be payable to holders of
such Notes on that Distribution Date on a pro rata basis, based on the amount of
the Noteholders' Interest Index Carryover then owing on such Notes, and any
succeeding Distribution Dates solely out of the amount of Available Funds for
such Loan Group remaining in the Collection Account for such Loan Group on any
such Distribution Date after distribution of the amounts set forth in
"Description of the Transfer and Servicing Agreements--Distributions." No
amounts on deposit in the Reserve Accounts or the Pre-Funding Accounts will be
available to pay any such Noteholders' Interest Index Carryover. Any amount of
Noteholders' Interest Index Carryover due on Notes related to a Loan Group
remaining after distribution of all Available Funds for such Loan Group on the
applicable Note Final Maturity Date will never become due and payable and will
be discharged on such date.
Distributions of Principal. Principal payments will be made to the
holders of Notes related to a Loan Group on each Distribution Date in an amount
generally equal to the Principal Distribution Amount for such Loan Group for
such Distribution Date, until the principal balance of such Notes is reduced to
zero. Principal payments on the Notes related to a Loan Group will generally be
derived from Available Funds for such Loan Group remaining after the
distribution of the amounts set forth in "Description of the Transfer and
Servicing Agreements--Distributions," provided, that, on any Distribution Date
that the principal balance of the Notes related to a Loan Group exceeds the Note
Collateralization Amount for such Loan Group, an amount equal to the
Noteholders' Priority Principal Distribution Amount for such Loan Group will be
distributed to Noteholders for such Loan Group prior to any payments to
Certificateholders for such Loan Group. If such remaining amount of Available
Funds is insufficient to pay the Noteholders' Priority Principal Distribution
Amount, for any Distribution Date, such shortfall will be distributable to such
Noteholders on subsequent Distribution Dates and (except with respect to the
Final Maturity Date for such classes of Notes), such shortfall will not
constitute an Event of Default. In addition, in the event the Financed Student
Loans are not sold pursuant to the auction process described under "Description
of the Transfer and Servicing Agreements--Termination," with respect to any
Distribution Date occurring on or after the December 2008 Distribution Date, the
Specified Collateral Balance for each Loan Group shall be reduced to zero and
all amounts on deposit in the Collection Accounts (after distribution of the
Servicing Fee for each of the two immediately preceding Monthly Servicing
Payment Dates and the Servicing Fee, the Administrative Fee, the Noteholders'
Interest Distribution Amount, any Noteholders' Priority Principal Distribution
Amount, the Certificateholders' Interest Distribution Amount and any amounts
necessary to reinstate the balance of the Reserve Accounts to their respective
Specified Reserve Account Balance on such Distribution Date) will be distributed
to the Noteholders and then to the Certificateholders as principal until the
outstanding principal balance of the Notes and Certificates has been reduced to
zero. See "Description of the Transfer and Servicing Agreements --Termination."
Principal payments on the Notes related to a Loan Group will be applied
on each Distribution Date, first, to the principal balance of the related Class
A-1 Notes until such principal balance is reduced to zero and then to the
principal balance of the related Class A-2 Notes until such principal balance is
reduced to zero. The aggregate outstanding principal amount of each class of
Notes will be payable in full on the respective Final Maturity Dates for each
such class of Notes. The dates on which the Final Maturity Dates occur for each
class of Notes are set forth in "Summary of Terms--Transaction
Overview--Maturity Dates." On the Final Maturity Date, for each class of Notes,
amounts on deposit in the applicable Reserve Account, if any, will be available,
if necessary, to be applied to reduce the principal balance of such class of
Notes to zero. Although the maturity of many of the Financed Student Loans will
extend well beyond such final maturity dates, the actual date on which the
aggregate outstanding principal and accrued interest of any class of Notes are
paid may be earlier than the Final Maturity Date for such class of Notes, based
on a variety of factors, including those described above under "Risk Factors --
Prepayment Risk from Pre-Funded Amount," "Risk Factors -- Prepayment, Maturity
and Yield Risks," "Risk Factors--Prepayment Risks Differ Between the Notes and
the Certificates" and "The Financed Student Loan Pool--Maturity and Prepayment
Assumptions."
Mandatory Redemption. If, as of the Special Determination Date, the
Group 1 Subsequent Pool Pre-Funded Amount has not been reduced to zero, then the
remaining Group 1 Subsequent Pool Pre-Funded Amount, if greater than $_________,
will be distributed on the first Distribution Date thereafter to redeem each
class of Group 1
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Notes and prepay the Class I-B Certificates on a pro rata basis, based on the
initial principal amount of each class of Group 1 Notes and the initial
principal balance of the Class I-B Certificates; if such amount is $___________
or less, it will be distributed on the first Distribution Date thereafter only
to holders of the Class IA-1 Notes.
If, as of the Special Determination Date, the Group 2 Subsequent Pool
Pre-Funded Amount has not been reduced to zero, then the remaining Group 2
Subsequent Pool Pre-Funded Amount, if greater than $_______ will be distributed
on the first Distribution Date thereafter to redeem each class of Group 2 Notes
and prepay the Class II-B Certificates on a pro rata basis, based on the initial
principal balance of each Class of Group 2 Notes and the initial principal
balance of the Class II-B Certificates; if such amount is $_________ or less, it
will be distributed on the first Distribution Date thereafter only to the
holders of the Class IIA-1 Notes.
THE CERTIFICATES
Distributions of Interest. Interest will accrue on the Certificate
Balance of each class of Certificates at a rate per annum equal to the lesser of
the Formula Rate for such Certificates and the Student Loan Rate (each such
interest rate being a "Certificate Rate"). Such amounts will be distributable
quarterly on each Distribution Date. Interest distributions due for any
Distribution Date but not distributed on such Distribution Date will be due on
the next Distribution Date increased by an amount equal to interest on such
amount at the applicable Certificate Rate. Interest distributions with respect
to the Certificates related to a Loan Group for such Distribution Date will
generally be funded from the portion of the Available Funds for such Loan Group
and the amounts on deposit in the Reserve Account for such Loan Group and, under
certain limited circumstances, the "Pre-Funding Account" for such Loan Group,
remaining after distribution of the amounts set forth in "Description of the
Transfer and Servicing Agreements--Distributions" for such Distribution Date.
See "Description of the Transfer and Servicing Agreements -- Distributions," "--
Credit Enhancement -- Reserve Account" and "-- Additional Fundings."
Any Certificateholders' Interest Index Carryover due on Certificates
related to a Loan Group that may exist on any Distribution Date will be payable
on that Distribution Date on a pro rata basis and any succeeding Distribution
Dates solely out of the amount of Available Funds remaining in the Collection
Account for such Loan Group on any such Distribution Date after distribution of
the amounts set forth in "Description of the Transfer and Servicing
Agreements--Distributions." No amounts on deposit in the Reserve Accounts or
Pre-Funding Accounts will be available to pay any such Certificateholders'
Interest Index Carryover. Any amount of Certificateholders' Interest Index
Carryover due on Certificates related to a Loan Group remaining after
distribution of all Available Funds for such Loan Group on the Final Maturity
Date for such Certificates will never become due and payable and will be
discharged on such date.
Distributions of Certificate Balance. Certificates related to a Loan
Group will be entitled to distributions on each Distribution Date on and after
which the Notes related to such Loan Group are paid in full in an amount
generally equal to the Principal Distribution Amount for such Loan Group for
such Distribution Date. Distributions with respect to principal payments on the
Certificates related to a Loan Group for such Distribution Date will generally
be funded from the portion of Available Funds for such Loan Group remaining
after distribution of the amounts set forth in "Description of the Transfer and
Servicing Agreements -- Distributions". See "Description of the Transfer and
Servicing Agreements -- Distributions" and "-- Credit Enhancement -- Reserve
Account."
The outstanding Certificate Balance of each class of Certificates will
be payable in full on the respective Final Maturity Dates for such Certificates.
The dates on which the Final Maturity Dates occur for each class of Certificates
are set forth in "The Summary--Transaction Overview--Maturity Dates." On the
Final Maturity Date for each class of Certificates, amounts on deposit in the
applicable Reserve Account, if any, will be available, if necessary, to be
applied to reduce the Certificate Balance of such Certificates to zero. The
actual date on which the aggregate outstanding Certificate Balance and accrued
interest of the Certificates will be paid may be earlier than the respective
Final Maturity Dates, however, based on a variety of factors, including those
described above under "Risk Factors--Prepayment Risk from Pre-Funded Amount,"
"Risk Factors--Prepayment, Maturity and Yield Risks," "Risk Factors--Prepayment
Risks Differ Between the Notes and the Certificates" and "The Financed Student
Loan Pool--Maturity and Prepayment Assumptions."
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Subordination of the Certificates. The rights of the holders of
Certificates of a related Loan Group to receive payments of interest are
subordinated to the rights of the holders of Notes related to such Loan Group to
receive payments of interest (and in certain circumstances, principal) and the
rights of the holders of Certificates related to a Loan Group to receive
payments of principal are subordinated to the rights of the holders of Notes
related to such Loan Group to receive payments of interest and principal.
Consequently, amounts on deposit in the related Collection Account and to the
extent necessary, the related Reserve Account and, during the Funding Period,
amounts allocable to such Loan Group's Other Additional Pre-Funding Subaccount,
will be applied to the payment of interest on the related Notes before payment
of interest on the Certificates related to such Loan Group. Moreover, the
holders of Certificates related to a Loan Group will not be entitled to any
payments of principal until the related Notes are paid in full. In addition, if
(i) an Event of Default occurs and is continuing under the Indenture or (ii) an
Insolvency Event occurs and the Financed Student Loans are liquidated, all
amounts due on the related Notes will be payable before any amounts are payable
on the related Certificates. Additionally, if on any Distribution Date the
outstanding principal balance of the Notes of a Loan Group (prior to giving
effect to distributions on such Distribution Date) is in excess of the related
Note Collateralization Amount, principal will be payable to the holders of such
Notes in the amount of such excess to the extent of funds available before any
amounts are payable to the holders of the related Certificates. If amounts
otherwise allocable to the Certificates are used to fund payments of interest or
principal on the Notes of a related Loan Group, distributions with respect to
such Certificates may be delayed or reduced. Additionally, if on any
Distribution Date the outstanding principal balance of the Notes related to a
Loan Group (prior to giving effect to distributions on such Distribution Date)
is in excess of the Note Collateralization Amount for such Loan Group, principal
will be payable on such Notes in the amount of such excess to the extent of
funds available therefor before any amounts are payable on the Certificates
related to such Loan Group.
DETERMINATION OF THE T-BILL RATES
"T-Bill Rate" means, on any day, the weighted average per annum
discount rate (expressed on a bond equivalent basis and applied on a daily
basis) for 91-day Treasury bills sold at the most recent 91-day Treasury bill
auction prior to such date, as reported by the U.S. Department of the Treasury.
In the event that the results of the auctions of 91-day Treasury bills cease to
be reported as provided above, or that no such auction is held in a particular
week, then the T-Bill Rate in effect as a result of the last such publication or
report will remain in effect until such time, if any, as the results of auctions
of 91-day Treasury bills shall again be reported or such an auction is held, as
the case may be. The T-Bill Rate will be subject to a Lock-In Period of six
business days.
"Lock-In Period" means the period of days preceding any Distribution
Date during which the Note Interest Rate or Certificate Rate, as applicable, in
effect on the first day of such period will remain in effect until the end of
the Accrual Period related to such Distribution Date.
Accrued interest on any class of Notes (and any class of Certificates)
which are T-Bill Indexed Securities from and including the Closing Date or the
preceding Distribution Date, as applicable, to but excluding the current
Distribution Date is calculated by multiplying the principal amount of such
Notes (or Certificates) by an "accrued interest factor." This factor is
calculated by adding the interest rates applicable to each day on which each
such Note has been outstanding since the Closing Date or the preceding
Distribution Date, as applicable, and dividing the sum by 365 (or by 366 in the
case of accrued interest which is payable on a Distribution Date in a leap year)
and rounding the resulting number to nine decimal places.
The following table sets forth the accrued interest factors that would
have been applicable to any Notes which are T-Bill Indexed Securities bearing
interest at the indicated rates, assuming a 365-day year:
ASSUMED INTEREST
-------------------------------------
SETTLEMENT DAYS RATE ON INTEREST
DATE OUTSTANDING THE NOTES FACTOR
---- ----------- --------- ------
1st............................................ 5.00000% 0.000000000
2nd............................................ 1 5.00000 0.000136986
3rd............................................ 2 5.00000 0.000273973
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4th............................................ 3 5.00000 0.000410959
5th*........................................... 4 5.15000 0.000547945
6th............................................ 5 5.15000 0.000689041
7th............................................ 6 5.15000 0.000830137
8th............................................ 7 5.15000 0.000971233
9th............................................ 8 5.15000 0.001112329
10th........................................... 9 5.15000 0.001253425
<FN>
* First interest rate adjustment (91-day Treasury bills are generally
auctioned weekly).
The numbers in this table are examples given for information purposes
only and are in no way a prediction of interest rates on any Notes which are
T-Bill Indexed Securities. A similar factor calculated in the same manner is
applicable to the return on any Certificates which are T-Bill Indexed
Securities.
The Administrator makes information concerning the current 91-day
Treasury Bill Rate and the accrued interest factor available through Bloomberg
L.P.
DETERMINATION OF LIBOR
Pursuant to the Transfer and Servicing Agreement, the Administrator
will determine Three-Month LIBOR for purposes of calculating the interest due on
the Notes and Certificates which are LIBOR Indexed Securities and the
Noteholders' Interest Index Carryover for such Notes and the Certificateholders'
Interest Index Carryover for such Certificates, in each case, for each given
Interest Period on the second Business Day prior to the commencement of each
Interest Period (each, a "LIBOR Determination Date"). For purposes of
calculating Three-Month LIBOR, a Business Day is any day on which banks in
London and New York City are open for the transaction of business. Interest due
for any Interest Period will be determined based on the actual number of days in
such Interest Period over a 360-day year.
"Three-Month LIBOR" means the London interbank offered rate for
deposits in U.S. dollars having a maturity of three months commencing on the
related LIBOR Determination Date (the "Index Maturity") which appears on
Telerate Page 3750 as of 11:00 a.m., London time, on such LIBOR Determination
Date. If such rate does not appear on Telerate Page 3750, the rate for that day
will be determined on the basis of the rates at which deposits in U.S. dollars,
having the Index Maturity and in a principal amount of not less than U.S.
$1,000,000, are offered at approximately 11:00 a.m., London time, on such LIBOR
Determination Date to prime banks in the London interbank market by the
Reference Banks. The Administrator will request the principal London office of
each of such Reference Banks to provide a quotation of its rate. If at least two
such quotations are provided, the rate for that day will be the arithmetic mean
of the quotations. If fewer than two quotations are provided, the rate for that
day will be the arithmetic mean of the rates quoted by major banks in New York
City, selected by the Administrator, at approximately 11:00 a.m., New York City
time, on such LIBOR Determination Date for loans in the U.S. dollars to leading
European banks having the Index Maturity and in a principal amount equal to an
amount of not less than U.S. $1,000,000; provided that if the banks selected as
aforesaid are not quoting as mentioned in this sentence, Three-Month LIBOR in
effect for the applicable LIBOR Reset Period will be Three-Month LIBOR in effect
for the previous LIBOR Reset Period.
"Telerate Page 3750" means the display page so designated on the Dow
Jones Telerate Service (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices).
"Reference Bank" means a leading bank (i) engaged in transactions in
Eurodollar deposits in the international Eurocurrency market, (ii) not
controlling, controlled by or under common control with the Administrator and
(iii) having an established place of business in London.
THE INDENTURE
Modification of Indenture. With the consent of the holders of a
majority of the outstanding Notes, the Indenture Trustee and the Trust may
execute a supplemental indenture to add provisions to, or change in any manner
or
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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 Noteholders.
Without the consent of the holder of each outstanding Note affected
thereby, however, no supplemental indenture will (i) change the due date of any
installment of principal of or interest on any 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 Note or any interest thereon is payable, (ii) impair the right to
institute suit for the enforcement of certain provisions of the Indenture
regarding payment, (iii) reduce the percentage of the aggregate amount of the
outstanding Notes 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 Indenture or of certain
defaults thereunder and their consequences as provided for in the Indenture,
(iv) modify or alter the provisions of the Indenture regarding the voting of
Notes held by the Trust, the Seller, an affiliate of either of them or any
obligor on the Notes, (v) reduce the percentage of the aggregate outstanding
amount of the Notes the consent of the holders of which is required to direct
the Eligible Lender Trustee on behalf of the Trust to sell or liquidate the
Financed 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,
(vi) decrease the percentage of the aggregate principal amount of the Notes
required to amend the sections of the Indenture which specify the applicable
percentage of aggregate principal amount of the Notes necessary to amend the
Indenture or certain other related agreements or (vii) permit the creation of
any lien ranking prior to or on a parity with the lien of the Indenture with
respect to any of the collateral for the Notes or, except as otherwise permitted
or contemplated in the Indenture, terminate the lien of the Indenture on any
such collateral or deprive the holder of any Note of the security afforded by
the lien of the Indenture.
The Trust and the Indenture Trustee may also enter into supplemental
indentures, without obtaining the consent of Noteholders for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Indenture or of modifying in any manner the rights of
Noteholders so long as such action will not, in the opinion of counsel
satisfactory to the Indenture Trustee, materially and adversely affect the
interest of any Noteholder.
Events of Default; Rights Upon Event of Default. An "Event of Default"
with respect to the Notes is defined in the Indenture as consisting of the
following (except as described in the remaining sentences of this paragraph):
(i) a default for five days or more in the payment of any interest on any Note
after the same becomes due and payable; (ii) a default in the payment of the
principal of or any installment of the principal of any Note when the same
becomes due and payable; (iii) a default in the observance or performance of any
covenant or agreement of the Trust made in the Indenture and the continuation of
any such default for a period of thirty days after notice thereof is given to
the Trust by the Indenture Trustee or to the Trust and the Indenture Trustee by
the holders of at least 25% in principal amount of the Notes then outstanding;
(iv) any representation or warranty made by the Trust in the 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 not having
been cured within thirty days after notice thereof is given to the Trust by the
Indenture Trustee or to the Trust and the Indenture Trustee by the holders of at
least 25% in principal amount of the Notes then outstanding or (v) certain
events of bankruptcy, insolvency, receivership or liquidation of the Trust.
However, the amount of principal required to be distributed to Noteholders on
any Distribution Date is limited to the amount of Available Funds on such date
after payment of the Servicing Fee, the Administration Fee and the Noteholders'
Interest Distribution Amount, up to an amount necessary to reduce the aggregate
principal balance of the Notes and the Certificate Balance of the Certificates
to the Specified Collateral Balance. Consequently, the failure to pay the entire
unpaid principal amount of any class of Notes on the applicable Final Maturity
Date will result in an Event of Default. THE FAILURE TO PAY THE APPLICABLE
NOTEHOLDERS' PRINCIPAL DISTRIBUTION AMOUNT ON ANY CLASS OF NOTES ON ANY
DISTRIBUTION DATE SHALL NOT RESULT IN THE OCCURRENCE OF AN EVENT OF DEFAULT
UNTIL THE FINAL MATURITY DATE FOR SUCH CLASS OF NOTES. IN ADDITION THE FAILURE
TO PAY THE NOTEHOLDERS' INTEREST INDEX CARRYOVER OR THE CERTIFICATEHOLDERS'
INTEREST INDEX CARRYOVER AS A RESULT OF INSUFFICIENT AVAILABLE FUNDS WILL NOT
RESULT IN THE OCCURRENCE OF AN EVENT OF DEFAULT.
If an Event of Default should occur and be continuing with respect to
the Notes, the Indenture Trustee or holders of a majority in principal amount of
the Notes then outstanding may declare the principal of the Notes to be
immediately due and payable. Such declaration may be rescinded by the holders of
a majority in principal amount of
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the Notes then outstanding at any time prior to the entry of judgment for the
payment of such amount if (i) the Trust has paid to the Indenture Trustee a sum
equal to all amounts then due with respect to the Notes (without giving effect
to such acceleration) and (ii) all Events of Default (other than nonpayment of
amounts due solely as a result of such acceleration) have been cured or waived.
If the Notes have been declared to be due and payable following an
Event of Default with respect thereto, the Indenture Trustee may, in its
discretion, either require the Eligible Lender Trustee to sell the Financed
Student Loans, subject to compliance with the rights of first offer held by
PHEAA, or elect to have the Eligible Lender Trustee maintain possession of the
Financed Student Loans and continue to apply collections with respect to such
Financed Student Loans as if there had been no declaration of acceleration. In
addition, the Indenture Trustee is prohibited from directing the Eligible Lender
Trustee to sell the Financed Student Loans following an Event of Default, other
than a default in the payment of principal on a Final Maturity Date for a class
of Notes or a default for five days or more in the payment of any interest on
any Note, unless (i) the holders of all outstanding Notes consent to such sale,
(ii) the proceeds of such sale are sufficient to pay in full the principal of
and the accrued interest on the outstanding Notes at the date of such sale or
(iii) the Indenture Trustee determines that the collections on the Financed
Student Loans would not be sufficient on an ongoing basis to make all payments
on the Notes as such payments would have become due if such obligations had not
been declared due and payable, and the Indenture Trustee obtains the consent of
the holders of 66 2/3% of the aggregate principal amount of the Notes then
outstanding; provided, further that the Indenture Trustee may not sell or
otherwise liquidate the Financed Student Loans following an Event of Default,
other than a default in the payment of any principal on the Final Maturity Date
for a class of Notes or a default of five days or more on the payment of any
interest on any Note, unless (iv) the proceeds of the sale or liquidation of the
Financed Student Loans distributable to the Certificateholders are sufficient to
pay to the Certificateholders the outstanding Certificate Balance of the
Certificates plus accrued and unpaid return thereon or (v) 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 of the
Certificates plus accrued and unpaid return thereon, the Certificateholders of
at least a majority of the outstanding Certificate Balance of the Certificates
consent thereto; provided, further that the Indenture Trustee may not sell or
otherwise liquidate the Financed Student Loans following an Event of Default,
other than a default in the payment of any principal on the Final Maturity Date
for a class of Notes or a default of five days or more on the payment of any
interest on any Note unless (vi) proceeds of the sale or liquidation of the
Financed Student Loans distributable from such sale are sufficient (a) to pay to
Noteholders, the outstanding principal balance of the Notes (other than the
Noteholders Interest Index Carryover) and (b) to pay to Certificateholders, the
outstanding Certificate Balance of the Certificates plus accrued and unpaid
interest thereon (other than the Certificateholders' Interest Index Carryover)
or (vii) after receipt of notice from the Eligible Lender Trustee that the
proceeds of such sale or liquidation would not be sufficient (a) to pay to
Noteholders, the outstanding principal balance of the Notes (other than the
Noteholders Interest Index Carryover) and (b) to pay to Certificateholders the
outstanding Certificate Balance of the Certificates plus accrued and unpaid
interest thereon (other than the Certificateholders' Interest Index Carryover).
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 Group 1 Notes and Group 2 Notes on a pro rata
basis, based on the amount then owing on each class of Notes.
Subject to the provisions of the Indenture relating to the duties of
the Indenture Trustee, if an Event of Default should occur and be continuing
with respect to the Notes, the Indenture Trustee will be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the holders of Notes, if the Indenture Trustee reasonably
believes it will not be adequately indemnified against the costs, expenses and
liabilities which might be incurred by it in complying with such request.
Subject to such provisions for indemnification and certain limitations contained
in the Indenture, the holders of a majority in principal amount of the
outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding or any remedy available to the Indenture Trustee and
the holders of a majority in principal amount of the 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 Indenture that cannot be modified without the waiver or consent
of all the holders of the outstanding Notes.
No holder of any Note will have the right to institute any proceeding
with respect to the Indenture, unless (i) such holder previously has given to
the Indenture Trustee written notice of a continuing Event of Default, (ii) the
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holders of not less than 25% in principal amount of the outstanding Notes have
requested in writing that the Indenture Trustee institute such proceeding in its
own name as Indenture Trustee, (iii) such holder or holders have offered the
Indenture Trustee reasonable indemnity, (iv) the Indenture Trustee has for 60
days failed to institute such proceeding and (v) no direction inconsistent with
such written request has been given to the Indenture Trustee during such 60-day
period by the holders of a majority in principal amount of the outstanding
Notes.
In addition, the Indenture Trustee and the Noteholders will covenant
that they will not at any time institute against the Trust any bankruptcy,
reorganization or other proceeding under any Federal or state bankruptcy or
similar law.
None of the Indenture Trustee, the Seller, the Administrator, the
Servicers or the Eligible Lender Trustee in its individual capacity, nor any
holder of a Certificate representing an ownership interest in the Trust, nor any
of their respective owners, beneficiaries, agents, officers, directors,
employees, successors or assigns will, in the absence of an express agreement to
the contrary, be 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. The Trust may not consolidate with or merge into any
other entity, unless (i) the entity formed by or surviving such consolidation or
merger is organized under the laws of the United States, any state or the
District of Columbia, (ii) such entity expressly assumes the Trust's obligation
to make due and punctual payments upon the Notes and the performance or
observance of every agreement and covenant of the Trust under the Indenture,
(iii) no Event of Default has occurred and is continuing immediately after such
merger or consolidation, (iv) the Trust has been advised that the rating of the
Notes and the Certificates would not be reduced or withdrawn by the nationally
recognized rating agencies rating the Securities as a result of such merger or
consolidation and (v) the 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 the Trust or to any Certificateholder or
Noteholder.
The Trust will not, among other things, (i) except as expressly
permitted by the Indenture, the Transfer and Servicing Agreements or certain
related documents (collectively, the "Related Documents"), sell, transfer,
exchange or otherwise dispose of any of the assets of the Trust, (ii) claim any
credit on or make any deduction from the principal and interest payable in
respect of the Notes (other than amounts withheld under the Code or applicable
state law) or assert any claim against any present or former holder of Notes
because of the payment of taxes levied or assessed upon the Trust, (iii) except
as contemplated by the Related Documents, dissolve or liquidate in whole or in
part, (iv) permit the validity or effectiveness of the Indenture to be impaired
or permit any person to be released from any covenants or obligations with
respect to the Notes under the Indenture except as may be expressly permitted
thereby or (v) permit any lien, charge, excise, claim, security interest,
mortgage or other encumbrance to be created on or extend to or otherwise arise
upon or burden the assets of the Trust or any part thereof, or any interest
therein or the proceeds thereof, except as expressly permitted by the Related
Documents.
The Trust may not engage in any activity other than financing,
purchasing, owning, selling and managing the Financed Student Loans and the
other assets of the Trust and making Additional Fundings, in each case in the
manner contemplated by the Related Documents and activities incidental thereto.
The Trust will not incur, assume or guarantee any indebtedness other
than indebtedness incurred pursuant to the Notes and the Indenture or otherwise
in accordance with the Related Documents.
Annual Compliance Statement. The Trust will be required to file
annually with the Indenture Trustee a written statement as to the fulfillment of
its obligations under the Indenture.
Indenture Trustee's Annual Report. The Indenture Trustee will be
required to mail each year to all Noteholders a brief report relating to, among
other things, its eligibility and qualification to continue as the Indenture
Trustee under the Indenture, any amounts advanced by it under the Indenture, the
amount, interest rate and maturity date of certain indebtedness owing by the
Trust to the Indenture Trustee in its individual capacity, the property and
funds physically held by the Indenture Trustee as such and any action taken by
it that materially affects the Notes and that has not been previously reported.
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Satisfaction and Discharge of Indenture. The Indenture will be
discharged with respect to the collateral securing the Notes upon the delivery
to the Indenture Trustee for cancellation of all the Notes or, with certain
limitations, upon deposit with the Indenture Trustee of funds sufficient for the
payment in full of all the Notes.
The Indenture Trustee. Bankers Trust Company, a New York banking
corporation, will be the Indenture Trustee under the Indenture. The Seller
maintains normal commercial banking relations with the Indenture Trustee.
BOOK-ENTRY REGISTRATION
Persons acquiring beneficial ownership interests in the Notes may hold
their interests through The Depository Trust Company ("DTC") in the United
States or Cedel or 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 & Co. ("Cede") as nominee for
DTC. Cedel and Euroclear will hold omnibus positions with respect to the Notes
on behalf of Cedel Participants and the Euroclear Participants, respectively,
through customers' securities accounts in Cedel's and Euroclear's name on the
books of their respective depositaries (collectively, the "Depositaries") which
in turn will hold such positions in customers' securities accounts in the
Depositaries' 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 New York UCC and a "clearing agency"
registered pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for its participating organizations ("Participants") and to
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entries, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations. Indirect access to
the DTC system also is available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants").
Securityholders that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Securities may do so only through Participants and Indirect Participants. In
addition, Securityholders will receive all distributions of principal and
interest from the Indenture Trustee or the 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 Cede, as nominee for DTC. DTC will forward such payments
to its Participants, which thereafter will forward them to Indirect Participants
or Securityholders. It is anticipated that the only "Securityholder,"
"Certificateholder" and "Noteholder" will be Cede, as nominee for DTC.
Securityholders will not be recognized by the Applicable Trustee as Noteholders
or Certificateholders, as such terms are used in the Indenture and the 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 Cedel 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
Cedel or Euroclear as a result of a transaction with a DTC Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedel Participants on such business day. Cash received in Cedel or
Euroclear as a result of sales of securities by or through a Cedel Participant
or a Euroclear Participant to a DTC Participant will be received with value on
the DTC settlement date but will be available in the relevant Cedel or Euroclear
cash account only as of the business day following settlement in DTC.
Cross-market transfers between persons holding Notes directly or
indirectly through DTC, on the one hand, and directly or indirectly through
Cedel 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 Depositary;
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however, such cross-market transactions will require delivery of instructions to
the relevant European international clearing system by the counterparty in such
system in accordance with its rules and procedures and within its established
deadlines (European time). The relevant European international clearing system
will, if the transaction meets its settlement requirements, deliver instructions
to its Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same-day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the Depositaries.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of Securities among Participants on whose behalf it acts with respect to the
Securities and to receive and transmit distributions of principal of, and
interest on, the Securities. Participants and Indirect Participants with which
Securityholders have accounts with respect to the Securities similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Securityholders. Accordingly, although
Securityholders will not possess Securities, the Rules provide a mechanism by
which Participants will receive payments and will be able to transfer their
interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to such
Securities, may be limited due to the lack of a physical certificate for such
Securities.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 32
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations and may include any underwriters, agents or dealers with respect
to the Notes offered hereby. Indirect access to Cedel is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Cedel Participant, either directly
or indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may be settled in any of 32
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. The Euroclear
System is operated by Morgan Guaranty Trust Company of New York, Brussels,
Belgium office (the "Euroclear Operator" or "Euroclear"), under contract with
Euroclear Clearance 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 the Euroclear System on behalf of Euroclear Participants. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries and may include any
underwriters, agents or dealers with respect to the Notes offered hereby.
Indirect access to the Euroclear System is also available to other firms that
clear through or maintain a custodial relationship with a Euroclear Participant,
either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
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Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawals of
securities and cash from the Euroclear System and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants and has no record
of or relationship with persons holding through Euroclear Participants.
Distributions with respect to Notes held through Cedel or Euroclear
will be credited to the cash accounts of Cedel Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
Cedel or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a beneficial holder of Notes under the Indenture on
behalf of a Cedel Participant or Euroclear Participant only in accordance with
its relevant rules and procedures and subject to its Depositary's ability to
effect such actions on its behalf through DTC.
DTC has advised the Administrator that it will take any action
permitted to be taken by a Securityholder under the Indenture or the 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, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of interests in the Notes among
Participants of DTC, Cedel and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
NONE OF THE TRUST, THE SELLER, THE SERVICER, THE ADMINISTRATOR, THE
ELIGIBLE LENDER TRUSTEE, THE INDENTURE TRUSTEE NOR THE UNDERWRITERS WILL HAVE
ANY RESPONSIBILITY OR OBLIGATION TO ANY PARTICIPANTS, CEDEL 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, CEDEL OR EUROCLEAR OR ANY
PARTICIPANT, (2) THE PAYMENT BY DTC, CEDEL OR EUROCLEAR OR ANY PARTICIPANT OF
ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE PRINCIPAL AMOUNT OR
INTEREST ON THE SECURITIES, (3) THE DELIVERY BY ANY PARTICIPANT, CEDEL
PARTICIPANT OR EUROCLEAR PARTICIPANT OF ANY NOTICE TO ANY BENEFICIAL OWNER WHICH
IS REQUIRED OR PERMITTED UNDER THE TERMS OF THE INDENTURE OR THE TRUST AGREEMENT
TO BE GIVEN TO SECURITYHOLDERS OR (4) ANY OTHER ACTION TAKEN BY DTC AS THE
SECURITYHOLDER.
DEFINITIVE SECURITIES
The Notes and the Certificates will initially be issued in book-entry
form. The Notes and the Certificates will be issued in fully registered,
certificated form ("Definitive Notes" and "Definitive Certificates",
respectively, and collectively referred to herein as "Definitive Securities") to
Noteholders or Certificateholders or their respective nominees, rather than to
DTC or its nominee, only if (i) the 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, (ii) the Administrator,
at its option, elects to terminate the book-entry system through DTC or (iii)
after the occurrence of an Event of Default, a Servicer Default or an
Administrator Default, Securityholders representing at least a majority of the
outstanding principal amount of the Notes or the Certificates, as the case may
be, advise the Applicable Trustee through DTC in writing that the continuation
of a book-entry system through DTC (or a successor thereto) with respect to such
Notes or Certificates is no longer in the best interest of the holders of such
Securities.
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Upon the occurrence of any event described in the immediately preceding
paragraph, the Applicable Trustee will be required to notify all applicable
Securityholders through Participants of the availability of Definitive
Securities. Upon surrender by DTC of the definitive security 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 Indenture or the 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 Record
Date. 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 Securityholders.
Definitive Securities will be transferable and exchangeable at the
offices of the Applicable Trustee or of a registrar named in a notice delivered
to holders of Definitive Securities. No service charge will be imposed for any
registration of transfer or exchange, but the Applicable Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
LIST OF SECURITYHOLDERS
Three or more holders of the Notes or one or more holders of Notes
evidencing not less than 25% of the aggregate outstanding principal balance of
the Notes may, by written request to the Indenture Trustee, obtain access to the
list of all Noteholders maintained by the Indenture Trustee for the purpose of
communicating with other Noteholders with respect to their rights under the
Indenture or the Notes. The 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.
Three or more Certificateholders or one or more holders of Certificates
evidencing not less than 25% of the Certificate Balance may, by written request
to the Eligible Lender Trustee, obtain access to the list of all
Certificateholders for the purpose of communicating with other
Certificateholders with respect to their rights under the Trust Agreement or
under the Certificates.
REPORTS TO SECURITYHOLDERS
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
related quarterly report provided to the Indenture Trustee and the Trust
described under "Description of Transfer and Servicing Agreements -- Statements
to Indenture Trustee and Trust."
Within the prescribed period of time for tax reporting purposes after
the end of each calendar year during the term of the Indenture or the Trust
Agreement, as the case may be, the Applicable Trustee will mail to each person
who at any time during such calendar year was a Securityholder and received any
payment thereon, a statement containing certain information for the purposes of
such Securityholder's preparation of federal income tax returns. See "Material
Tax Consequences."
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
GENERAL
The following is a summary of certain terms of the Sale and Servicing
Agreement, pursuant to which the Eligible Lender Trustee on behalf of the Trust
will purchase, the Servicers will service and the Administrator will perform
certain administrative functions with respect to the Financed Student Loans; the
Administration Agreement, pursuant to which the Administrator will undertake
certain other administrative duties with respect to the Trust and the Financed
Student Loans; and the Trust Agreement, pursuant to which the Trust will be
created and the Certificates will
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be issued (collectively, the "Transfer and Servicing Agreements"). However, the
summary does not purport to be complete and is qualified in its entirety by
reference to the provisions of such Transfer and Servicing Agreements.
SALE OF FINANCED STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
On or prior to the Closing Date, the Seller will sell and assign to the
Eligible Lender Trustee on behalf of the Trust, without recourse, its entire
interest in the Initial Financed Student Loans, all collections received and to
be received with respect thereto for the period on and after September 1, 1998
and all the Assigned Rights pursuant to the Sale and Servicing Agreement. Each
Initial Financed Student Loan will be identified in schedules appearing as an
exhibit to the Sale and Servicing Agreement. The Eligible Lender Trustee will,
concurrently with such sale and assignment, execute, authenticate and deliver
the Notes. The net proceeds received from the sale of the Notes and the
Certificates will be applied to the purchase of the Financed Student Loans and
the Assigned Rights and to the deposit of the Pre-Funded Amounts in the
Pre-Funding Accounts. See "-- Additional Fundings" for a description of the
application of funds on deposit in the Pre-Funding Accounts during the Funding
Period.
In the Sale and Servicing Agreement, the Seller will make certain
representations and warranties with respect to the Financed Student Loans to the
Trust for the benefit of the Certificateholders and the Noteholders, including,
among other things, that (i) each Financed Student Loan, on the date on which
transferred to the Trust, is free and clear of all security interests, liens,
charges and encumbrances and no offsets, defenses or counterclaims have been
asserted or threatened; (ii) the information provided with respect to the
Initial Financed Student Loans is true and correct as of the Statistical Cutoff
Date and, in some cases, the Closing Date (iii) the information provided with
respect to the Subsequent Pool Student Loans is true and correct as of the
Statistical Cutoff Date and, as of the related Subsequent Cutoff Date, no claim
has been made to a Guarantor with respect to such Student Loans, and (iv) each
Financed Student Loan, at the time it was originated, complied and, at the
Closing Date or Transfer Date (as defined below), as applicable, complies in all
material respects with applicable federal and state laws (including, without
limitation, the Higher Education Act, consumer credit, truth in lending, equal
credit opportunity and disclosure laws) and applicable restrictions imposed by
the Programs or under any Guarantee Agreement.
Following the discovery by or notice to the Seller of a breach of any
such representation or warranty with respect to any Financed Student Loan that
materially and adversely affects the interests of the Certificateholders or the
Noteholders in such Financed Student Loan (it being understood that 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 such a material
adverse effect), the Seller will, unless such breach is cured within 60 days,
repurchase such Financed Student Loan from the 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, at the related Purchase Price as of the day of repurchase
plus accrued interest thereon to the day of repurchase (the "Purchase Amount").
In addition, the Seller will reimburse the Trust with respect to a 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 representation or warranty
by the Seller. The repurchase and reimbursement obligations of the Seller will
constitute the sole remedy available to or on behalf of the Trust, the
Certificateholders or the Noteholders for any such uncured breach. The Seller's
repurchase and reimbursement obligations are contractual obligations pursuant to
the Sale and Servicing Agreement that may be enforced against the Seller, but
the breach of which will not constitute an Event of Default.
To assure uniform quality in servicing and to reduce administrative
costs, each Servicer will be appointed custodian of the promissory notes
representing the Financed Student Loans which such Servicer is servicing by the
Eligible Lender Trustee on behalf of the Trust. The Seller's and the Servicers'
accounting and other records will reflect the sale and assignment of the
Financed Student Loans to the Eligible Lender Trustee on behalf of the Trust,
and Uniform Commercial Code financing statements reflecting such sale and
assignment will be filed.
ACCOUNTS
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The Administrator will establish and maintain the Collection Accounts,
the Pre-Funding Accounts, the Escrow Accounts, the Negative Carry Accounts and
the Reserve Accounts, in the name of the Indenture Trustee on behalf of the
Noteholders and the Certificateholders.
Funds in the Collection Accounts, the Pre-Funding Accounts, the Escrow
Accounts, the Negative Carry 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 Rating
Agencies as being consistent with the rating of the Notes. Subject to certain
conditions, Eligible Investments may include securities or other obligations
issued by the Seller or its affiliates, or trusts originated by the Seller or
its affiliates, or shares of investment companies for which the Seller or its
affiliates may serve as the investment advisor. Eligible Investments are limited
to obligations or securities that mature not later than the business day
immediately preceding the next Distribution Date. Investment earnings on funds
deposited in the Trust Accounts, net of losses and investment expenses
(collectively, "Investment Earnings"), will be deposited in the applicable
Collection Account on each Distribution Date and will be treated as collections
of interest on the Financed Student Loans.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in such account, so long as any of the
securities of such depository institution have a credit rating from each Rating
Agency in one of its generic rating categories which signifies investment grade.
Any such accounts may be maintained with the Seller or any of its affiliates, if
such accounts meet the requirements described in clause (a) of the preceding
sentence. "Eligible Institution" means a depository institution (which may be,
without limitation, the Seller or an affiliate thereof, the Eligible Lender
Trustee or an affiliate thereof, or the Indenture Trustee, or an affiliate
thereof) organized under the laws of the United States of America or any one of
the states thereof or the District of Columbia (or any domestic branch of a
foreign bank), (i) which has a long-term unsecured debt rating and/or a
short-term unsecured debt rating acceptable to the two nationally recognized
rating agencies rating the Securities; and (ii) whose deposits are insured by
the FDIC.
ADDITIONAL FUNDINGS
On the Closing Date, for administrative convenience, a portion of the
Group 1 Pre-Funded Amount equal to the Group 1 Subsequent Pool Pre-Funded Amount
will be allocated to an administrative subaccount of the Pre-Funding Account for
Loan Group 1 the ("Group 1 Subsequent Pool Pre-Funding Subaccount") and a
portion of the Group 2 Pre-Funded Amount equal to the Group 2 Subsequent Pool
Pre-Funded Amount will be allocated to an administrative subaccount of the
Pre-Funding Account for Loan Group 2 (the "Group 2 Subsequent Pool Pre-Funding
Subaccount"). The remaining portion of the Group 1 Pre-Funded Amount equal to
$_______ (the "Group 1 Other Additional Pre-Funded Amount") will be allocated to
an administrative subaccount of the Pre-Funding Account for Loan Group 1 (the
"Group 1 Other Additional Pre-Funding Subaccount"). The remaining portion of the
Group 2 Pre-Funded Amount equal to $_____ (the "Group 2 Other Additional
Pre-Funded Amount") will be allocated to an administrative subaccount of the
Pre-Funding Account (the "Group 2 Other Additional Pre-Funding Subaccount"). The
Group 1 and Group 2 Subsequent Pool Pre-Funded Amounts may only be used by the
Trust on or prior to the Special Determination Date to purchase from the Seller
Subsequent Pool Student Loans to be included in Loan Group 1 and Loan Group 2,
respectively. The Group 1 and Group 2 Subsequent Pool Pre-Funded Amounts will be
reduced on each date Subsequent Pool Student Loans to be included in Loan Group
1 and Loan Group 2, respectively, are transferred to the Trust by the aggregate
Purchase Price of such Subsequent Pool Student Loans transferred on such date
for each Loan Group.
The Trust intends to use funds on deposit in the related Subsequent
Pool Pre-Funding Subaccount on or prior to the Special Determination Date to
acquire the Subsequent Pool Student Loans to be included in Loan Group 1 or Loan
Group 2, respectively. In the event that the Group 1 or Group 2 Subsequent Pool
Pre-Funded Amount allocable to a Loan Group is insufficient to pay the Purchase
Price of the Subsequent Pool Student Loans to be included in Loan
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Group 1 or Loan Group 2, as the case may be, then the amount of such deficiency
may be withdrawn from the Group 1 or Group 2 Other Additional Pre-Funding
Subaccount, as applicable. Pursuant to the Sale and Servicing Agreement, the
Seller is obligated to sell, and the Eligible Lender Trustee on behalf of the
Trust is obligated to purchase during the Funding Period, Other Subsequent
Student Loans to be included in a Loan Group having an aggregate principal
balance (net of the aggregate principal balance of the Financed Student Loans in
such Loan Group repaid by any Other Subsequent Student Loans that are
Consolidation Loans) of not less than $_______ with respect to Loan Group 1 and
$______ with respect to Loan Group 2, (less the amount thereof, if any, used by
the Trust to fund shortfalls in the payment of interest on the Securities as
described herein) to the extent that such Other Subsequent Student Loans to be
included in such Loan Group are available. Funds on deposit in the Group 1 and
Group 2 Other Additional Pre-Funding Subaccounts 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 applicable Escrow Account, to
purchase from the Seller, for an amount equal to 100% of the aggregate principal
balance thereof plus accrued interest (to the extent capitalized or to be
capitalized), Other Subsequent Student Loans to be included in Loan Group 1 or
Loan Group 2, as applicable, made by the Seller to those eligible borrowers who
have Student Loans that are part of the pool of Initial Financed Student Loans
as of the Statistical Cutoff Date or Subsequent Pool Student Loans as of the
related Subsequent Cut-off Date and to pay Guarantee Fee Advances. See "The
Student Loan Financing Business -- Federal Loans Under the Programs -- Federal
Consolidation Loans" and "-- Private Loans Under the Programs -- Private
Consolidation Loans." "Serial Loans" constitute Student Loans which are made to
a borrower who is also a borrower under at least one outstanding Initial
Financed Student Loan or Subsequent Pool Student Loan but do not include
Stafford Loans made after July 1, 1998. The Seller expects that the total amount
of Additional Fundings will approximate 100% of the sum of the Group 1 and Group
2 Pre-Funded Amounts by the last day of the Collection Period preceding the
December 2000 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 Group 1 or Group 2 Subsequent Pool
Pre-Funded Amount has not been reduced to zero, then such amounts will be
distributed to Securityholders as described in "Description of the
Securities--Notes--Mandatory Redemption." If the Group 1 or Group 2 Pre-Funded
Amount has not been reduced to zero by the end of the Funding Period, any
amounts remaining in the applicable Pre-Funding Account will be deposited into
the applicable Collection Account for distribution on the immediately following
Distribution Date. Such reduction in the Group 1 or Group 2 Pre-Funded Amount
will result in a corresponding increase in the amount of principal distributable
to the related Securities on such Distribution Date.
During the period which will begin following the end of the Funding
Period and end on the Loan Purchase Termination Date, the Trust will be
obligated to (a) purchase Other Student Loans to be included in a Loan Group
which meet the criteria described herein and (b) in the case of Loan Group 2
only, pay Guarantee Fee Advances related to Financed Student Loans in Loan Group
2, in each case, to the extent of Available Loan Purchase Funds available
therefor. The Trust may not purchase any Other Subsequent Student Loans or any
Other Student Loans which are (a) Stafford Loans, if after giving effect to such
purchase Stafford Loans which are Other Subsequent Student Loans or Other
Student Loans in an aggregate principal amount of $__________ have been
purchased by the Trust, (b) Federal Consolidation Loans, if after giving effect
to such purchase Federal Consolidation Loans which are Other Subsequent Student
Loans or Other Student Loans in an aggregate principal amount of $__________
have been purchased by the Trust, (c) Private Consolidation Loans, if after
giving effect to such purchase Private Consolidation Loans which are Other
Subsequent Student Loans or Other Student Loans in an aggregate principal amount
of $__________ have been purchased by the Trust and (d) Private Loans, which are
not Private Consolidation Loans, if after giving effect to such purchase Private
Loans, which are not Private Consolidation Loans and are Other Subsequent
Student Loans or Other Student Loans in an aggregate principal amount of
$__________ have been purchased by the Trust, in each case without giving effect
to any capitalized interest accrued thereon. After the Loan Purchase Termination
Date, Guarantee Fee Advances may continue to be paid from available funds.
"Available Loan Purchase Funds" means for a Loan Group and with respect
to any Collection Period and any Transfer Date after the Funding Period, the
excess of Available Funds for such Loan Group (without giving effect to clause
(B) of the first proviso and the entire second proviso thereof) for the
Collection Period relating to the Distribution Date next succeeding such
Transfer Date that are on deposit in the Collection Account for such Loan Group
on such Transfer Date (before giving effect to any application thereof) over the
Accrued Expected Expense Payment for such Loan Group for such Distribution Date.
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"Accrued Expected Expense Payment" means for a Loan Group for any
Transfer Date on which Other Student Loans to be included in such Loan Group are
transferred to the Trust an amount equal to (x) the product of (i) the
applicable Expected Rate multiplied by (ii) the sum of principal balances of the
related Notes and Certificates as of such Transfer Date divided by (y) a
fraction the numerator of which is the number of days between such Transfer Date
and the last day of the preceding Collection Period and the denominator of which
is 365 (or 366 in the case of a leap year).
"Expected Rate" means for a Loan Group and with respect to any Transfer
Dates after the end of the Funding Period on which other Student Loans are to be
included in such Loan Group are transferred to the Trust, the sum of the
weighted average of the Note Interest Rates and the Certificate Rate for the
Notes and Certificates related to such Loan Group as of the first day of the
related Collection Period plus (x) ____% in the case of the Expected Rate for
Loan Group 1 and (y) ____% in the case of the Expected Rate for Loan Group 2.
The Group 1 and Group 2 Other Additional Pre-Funded Amounts will also
be available on each Monthly Servicing Payment Date to cover any shortfalls in
payments of the Servicing Fee allocable to the applicable Loan Group and on each
Distribution Date to cover any shortfalls in payments of the Servicing Fee
allocable to such Loan Group, the Administration Fee allocable to such Loan
Group, interest amounts payable in respect of the Notes and the Certificates
related to such Loan Group (other than the Noteholders' Interest Index Carryover
and the Certificateholders' Interest Index Carryover) for such Distribution Date
for which funds otherwise available therefor for such Distribution Date are
insufficient to make such distributions and after giving effect to the
application of funds on deposit in the Reserve Account for such Loan Group to
cover such shortfalls; provided, however, that the Group 1 and Group 2 Other
Additional Pre-Funded Amounts will only be available to cover shortfalls in
interest payments on the Certificates related to the applicable Loan Group to
the extent that the Note Collateralization Amount for such Loan Group (after
giving effect to such reductions in the Other Additional Pre-Funded Amount
allocable to such Loan Group) would not be less than the outstanding principal
balance of the Notes related to such Loan Group. Amounts withdrawn from any
Pre-Funding Account for such purposes will not be replenished with future
available funds.
The obligation to purchase any Additional Student Loan (including a
Student Loan in the Subsequent Pool) by the Eligible Lender Trustee on behalf of
the Trust is subject to the following conditions, among others: (i) such
Additional Student Loan must satisfy all applicable origination requirements and
all other requirements specified in the Sale and Servicing Agreement or
elsewhere, (ii) the Seller will not select such Additional Student Loan in a
manner that it believes is adverse to the interests of the Securityholders and
(iii) the Seller will deliver certain opinions of counsel to the Indenture
Trustee and the Rating Agencies with respect to the validity of the conveyance
of such Additional Student Loan. In addition, (a) no Consolidation Loan will be
transferred to the Trust unless at least one underlying student loan was held by
the Eligible Lender Trustee on behalf of the Trust at the time of consolidation
and (b) no Serial Loan will be transferred to the Trust unless the borrower of
such loan is the borrower for one or more Financed Student Loans already owned
by the Trust. On the fifteenth day (or, if such day is not a business day, the
next succeeding business day) of each month or on certain other dates designated
by the Seller during the Funding Period and during the period which begins
following the end of the Funding Period and ends on the Loan Purchase
Termination Date (each, a "Transfer Date"), the Seller will sell and assign,
without recourse, to the Eligible Lender Trustee on behalf of the Trust, its
entire interest in the Other Subsequent Student Loans or Other Student Loans, as
applicable, made or, with respect to Subsequent Pool Student Loans, owned during
the period preceding the applicable Transfer Date, in each case as of the date
specified in the applicable Transfer Agreement to be delivered on such Transfer
Date (each, a "Subsequent Cutoff Date"). Subject to the satisfaction of the
foregoing conditions, the Seller will convey the Additional Student Loans to the
Eligible Lender Trustee on behalf of the Trust on each such Transfer Date
pursuant to the Sale and Servicing Agreement and the applicable Transfer
Agreement (a "Transfer Agreement") executed by the Seller, the applicable
Servicer, the Eligible Lender Trustee and the Administrator on such Transfer
Date. Each such Transfer Agreement will include as an exhibit a schedule
identifying each Additional Student Loan transferred on such Transfer Date. Upon
such conveyance of Additional Student Loans to be included in a Loan Group to
the Eligible Lender Trustee on behalf of the Trust, the Pool Balance for such
Loan Group will increase in an amount equal to the aggregate principal balances
of such Additional Student Loans (less any existing Financed Student Loans
included in such Loan Group 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 applicable Escrow Account to the extent amounts are available therein and
then (i) with respect to Subsequent Pool Student Loans and Other Subsequent
Student Loans to be included in such Loan Group only, during the Funding Period,
from the applicable Pre-Funding
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Account and (ii) with respect to Other Student Loans to be included in such Loan
Group only, during the period following the end of the Funding Period until the
Loan Purchase Termination Date, from Available Loan Purchase Funds for such Loan
Group on deposit in the applicable Collection Account, in each case on such date
and transferred to the Seller. Amounts in any Escrow Account will not be
available to purchase any Subsequent Pool Student Loan.
With respect to any Consolidation Loan to be made by the Seller to a
given borrower, the Eligible Lender Trustee on behalf of the Trust will convey
to the Seller all Underlying Federal Loans and Underlying Private Loans, as
applicable, held by it with respect to that borrower, as specified in a notice
delivered by or on behalf of the Seller. In exchange for and simultaneously with
such conveyance, the Seller will deposit an amount of cash equal to the
principal balances of all such (x) Underlying Federal Loans, in the case of the
Escrow Account for Loan Group 1 and (y) Underlying Private Loans, in the case of
the Escrow Account for Loan Group 2, in each case, plus accrued interest thereon
to the date of such conveyance. Each purchase of a Serial Loan will be funded by
means of a transfer from (a) during the Funding Period, the applicable
Pre-Funding Account and (b) after the end of the Funding Period until the Loan
Purchase Termination Date, from Available Loan Purchase Funds on deposit in the
applicable Collection Account, in each case, of an amount equal to the Purchase
Price of such Serial Loan.
Amounts on deposit in the Escrow Account will be invested in Eligible
Investments (see "-- Accounts") and will be used on the succeeding Transfer
Date, as described above, to purchase Additional Student Loans from the Seller.
Any of such amounts remaining in an Escrow Account for a Loan Group on the
Transfer Date after giving effect to the conveyance of all such Additional
Student Loans to be included in such Loan Group on such Transfer Date will be
deposited into the applicable Collection Account and distributed as Available
Funds for such Loan Group on the Distribution Date immediately following such
Transfer Date.
SERVICING PROCEDURES
Pursuant to the Sale and Servicing Agreement, PHEAA and EFS have each
agreed as Servicers to service, and perform all other related tasks with
respect to, the Financed Student Loans acquired from time to time. PHEAA will
be Servicer with respect to each of those Financed Student Loans which were made
to a borrower whose initial graduate school student loan was for a school year
prior to the 1997-1998 school year and with respect to any subsequent graduate
student loans to that same borrower; EFS will be Servicer with respect to each
of those Financed Student Loans which were made to a borrower whose initial
graduate school student loan was for the 1997-1998 school year and with respect
to any subsequent graduate student loans to that same borrower. So long as no
claim is being made against a Guarantor for any Financed Student Loan, a
Servicer will hold on behalf of the Trust the notes evidencing, and other
documents relating to, that Financed Student Loan. With respect to the
Financed Student Loans it is servicing, each Servicer is required pursuant to
the Sale and Servicing Agreement to perform all services and duties customary
to the servicing of Student Loans (including all collection practices), and to
do so in the same manner as such Servicer has serviced student loans on behalf
of the Seller 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 duties of each Servicer under the
Sale and Servicing Agreement include, but are not limited to, the following:
collecting and depositing into the Collection Accounts (or, in the event that
daily deposits into the Collection Accounts are not required, paying to the
Administrator) all payments with respect to the Financed Student Loans such
Servicer is servicing, including claiming and obtaining any Guarantee Payments
with respect thereto but excluding such tasks with respect to Interest Subsidy
Payments and Special Allowance Payments (as to which the Administrator and the
Eligible Lender Trustee have agreed to perform, see "--Administrator"),
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, each Servicer will keep ongoing
records with respect to such Financed Student Loans and collections thereon and
will furnish quarterly and annual statements to the Administrator with respect
to such information, in accordance with the Servicer's customary practices with
respect to the Seller and as otherwise required in the Sale and Servicing
Agreement. In its capacity as Servicer PHEAA will from time to time be required
on behalf of the Trust to file claims against, and pursue the receipt of
Guarantee Payments from, itself as a Federal Guarantor.
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PAYMENTS ON FINANCED STUDENT LOANS
Except as provided below, each Servicer will deposit all payments on
Financed Student Loans (from whatever source, except for guarantee payments made
by TERI, which instead will be deposited by each Servicer into the TERI
Guarantee Payment Account) and all proceeds of Financed Student Loans collected
by it during each Collection Period into the applicable Collection Account
within two business days of receipt thereof. Except as provided below, the
Eligible Lender Trustee will deposit all Interest Subsidy Payments and all
Special Allowance Payments with respect to the Financed Student Loans received
by it during each Collection Period into the Collection Account for Loan Group 1
within two business days of receipt thereof.
However, in the event that Key Bank USA, National Association satisfies
certain requirements for quarterly remittances and the Rating Agencies affirm
their ratings of the Notes and the Certificates at the initial level, then so
long as Key Bank USA, National Association is the Administrator and provided
that (i) there exists no Administrator Default (as described below) and (ii)
each other condition to making quarterly deposits as may be specified by the
Rating Agencies is satisfied, each Servicer and the Eligible Lender Trustee will
pay all the amounts referred to in the preceding paragraph that would otherwise
be deposited into the applicable Collection Account to the Administrator, and
the Administrator will not be required to deposit such amounts into the
applicable Collection Account until on or before the business day immediately
preceding each Monthly Servicing Payment Date (to the extent of the Servicing
Fee payable on such date) and on or before the business day immediately
preceding each Distribution Date (to the extent of the remainder of such
amounts). In such event, the Administrator will deposit the aggregate Purchase
Amount of Financed Student Loans repurchased by the Seller and purchased by a
Servicer into the applicable Collection Account on or before the business day
preceding each Distribution Date. Pending deposit into the applicable 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.
SERVICER COVENANTS
In the Sale and Servicing Agreement, each Servicer covenants that: (a)
it will duly satisfy all obligations on its part to be fulfilled under or in
connection with the Financed Student Loans such Servicer is servicing, maintain
in effect all qualifications required in order to service such Financed Student
Loans and comply in all material respects with all requirements of law in
connection with servicing such Financed Student Loans, the failure to comply
with which would have a materially adverse effect on the Certificateholders or
the Noteholders; (b) it will not permit any rescission or cancellation of a
Financed Student Loan such Servicer is servicing except as ordered by a court of
competent jurisdiction or other government authority or as otherwise consented
to by the Eligible Lender Trustee and the Indenture Trustee; (c) it will do
nothing to impair the rights of the Certificateholders and the Noteholders in
such Financed Student Loans and (d) it will not reschedule, revise, defer or
otherwise compromise with respect to payments due on any such Financed Student
Loan except pursuant to any applicable deferral or forbearance periods or
otherwise in accordance with its guidelines for servicing student loans in
general and those of the Seller in particular and any applicable Programs
requirements.
Certain incentive programs currently or hereafter made available by the
Seller to borrowers may also be made available by each Servicer to borrowers
with Financed Student Loans. Any such incentive program that effectively reduces
borrower payments on Financed Student Loans and is not required by the Higher
Education Act will be applicable to the Financed Student Loans only if and to
the extent that such Servicer receives payment from the Seller in an amount
sufficient to offset such effective yield reductions.
Under the terms of the Sale and Servicing Agreement, if the Seller or a
Servicer discovers, or receives written notice, that any covenant of the
Servicers set forth above has not been complied with by such Servicer in all
material respects and such noncompliance has not been cured within 60 days
thereafter and has a materially adverse effect on the interest of the
Certificateholders or the Noteholders in any Financed Student Loan (it being
understood that 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 such a material adverse effect), unless such breach is cured, such 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
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Period. In that event, such Servicer will be obligated to deposit into the
applicable 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 such Servicer. In addition, a
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 such Servicer.
SERVICING COMPENSATION
The Servicers will be entitled to receive, subject to the limitations
set forth in the following paragraph, the Servicing Fee monthly in an amount in
the aggregate equal to the sum of (i) 0.41% per annum of the sum of the Pool
Balances as of the last day of the preceding calendar month and (ii) certain
one-time fixed fees for each Financed Student Loan for which a forbearance
period was granted or renewed or for which a guarantee claim was filed, in each
case subject to adjustment, together with other administrative fees and similar
charges, as compensation for performing the functions as servicers for the Trust
described above. The total Servicing Fee will be allocated between the two Loan
Groups based on each Loan Group's Pool Balance. The Servicing Fee set forth in
clause (i) above may be subject to reasonable increase agreed to by the
Administrator, the Eligible Lender Trustee and the Servicers to the extent that
a demonstrable and significant increase occurs in the costs incurred by the
Servicers 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. The Servicing Fee
(together with any portion of the Servicing Fee that remains unpaid from prior
Distribution Dates) will be payable on each Monthly Servicing Payment Date and
will be paid solely out of Available Funds and amounts on deposit in the Reserve
Accounts on such Monthly Servicing Payment Date.
Notwithstanding the foregoing, in the event that the fee payable to the
Servicers as defined above for any Monthly Payment Date would exceed 0.50% per
annum of the sum of the Pool Balances as of the last day of the preceding
calendar month (the "Capped Amount"), then the "Servicing Fee" for such Monthly
Servicing Payment Date will instead be the Capped Amount for such date plus any
deconversion fees referred to below. The remaining amount in excess of such
Servicing Fee allocable to a Loan Group, together with any such excess amounts
from prior Monthly Servicing Payment Dates allocable to such Loan Group that
remain unpaid (the aggregate amounts allocable to each Loan Group being the
"Excess Servicing Fee"), will be payable to the Servicers on each succeeding
Distribution Date out of Available Funds for such Loan Group after payment on
such Distribution Date of the amounts set forth in "Description of the Transfer
and Servicing Agreements--Distributions." The Servicers will only be entitled to
receive the Excess Servicing Fee allocable to a Loan Group if and to the extent
that Available Funds for such Loan Group exist to make such payments after
making all prior distributions and deposits.
The Servicing Fee and the Excess Servicing Fee will compensate the
Servicers for performing the functions of a third party servicer of student
loans as an agent for their beneficial owner, including collecting and posting
all payments, responding to inquiries of borrowers on the Financed Student
Loans, investigating delinquencies, pursuing, filing and collecting any
Guarantee Payments, accounting for collections and furnishing monthly and annual
statements to the Administrator. The Servicing Fee and the Excess Servicing Fee
also will reimburse the Servicers for certain taxes, accounting fees, outside
auditor fees, data processing costs and other costs incurred in connection with
administering the Financed Student Loans.
In the event of (i) any sale of the Financed Student Loans on behalf of
the Trust to any person (other than the Seller, the Administrator, PHEAA or the
Servicers) in which the purchaser elects to deconvert the Financed Student Loans
and not retain PHEAA or EFS, as the case may be, as Servicer or (ii) any
termination by the Trust of PHEAA or EFS, as the case may be, as Servicer of the
Financed Student Loans, except for any termination for cause or as a result of
any Servicer Default by PHEAA or EFS, as the case may be, the Trust shall pay to
PHEAA or EFS, as the case may be, as a part of the Servicing Fee (not subject to
the Capped Amount) the following deconversion fee, per loan, based on the status
of the loan at the time of deconversion: (a) $115 for each in-school Stafford
Loan, in-school deferred SLS Loan, Law Loan, Medical Loan, Dental Loan, Business
Loan, Graduate Loan, Bar Exam Loan, and Residency Loan; and (b) $62.50 for each
loan of any other status or loan type.
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DISTRIBUTIONS
Deposits to Collection Accounts. 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 Servicers and the Eligible Lender Trustee to cause) a portion of the
amount of the Available Funds equal to the Servicing Fee, payable on such date
to be deposited into the Collection Account for payment of the Servicing Fee. On
or before the business day prior to each Distribution Date, the Administrator
will cause (or will cause the Servicers and the Eligible Lender Trustee to
cause) the amount of Available Funds to be deposited into the Collection
Account.
For purposes hereof, the term "Available Funds" means, for any Loan
Group and with respect to a Distribution Date or any Monthly Servicing Payment
Date, the sum of the following amounts received with respect to the related
Collection Period (or, in the case of a Monthly Servicing Payment Date, the
applicable portion thereof) to the extent not previously distributed:
(i) all collections received by the Servicers on the Financed
Student Loans included in such Loan Group (including any Guarantee
Payments received with respect to such Financed Student Loans other
than any Guarantee Payments received from TERI) but net of (x) any
Federal Origination Fee and Federal Consolidation Loan Rebate payable
to the Department on Federal Consolidation Loans disbursed after
October 1, 1993, and (y) any collections in respect of principal on the
Financed Student Loans applied by the Trust to repurchase guaranteed
loans from the Guarantors in accordance with the Guarantee Agreements;
(ii) with respect to Loan Group 1 only, any Interest Subsidy
Payments and Special Allowance Payments received by the Eligible Lender
Trustee during the then elapsed portion of such Collection Period with
respect to the Financed Federal Loans;
(iii) all proceeds of the Financed Student Loans included in
such Loan Group which were liquidated ("Liquidated Student Loans")
during the then elapsed portion of such Collection Period in accordance
with the Servicers' customary servicing procedures, net of expenses
incurred by the Servicers in connection with such liquidation and any
amounts required by law to be remitted to the borrower on such
Liquidated Student Loans ("Liquidation Proceeds"), and all recoveries
in respect of Liquidated Student Loans included in such Loan Group
which were written off in prior Collection Periods or prior months of
such Collection Period;
(iv) the aggregate Purchase Amounts received for those
Financed Student Loans included in such Loan Group and repurchased by
the Seller or purchased by a Servicer under an obligation which arose
during the elapsed portion of such Collection Period;
(v) the aggregate amounts, if any, received from the Seller or
a 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 Financed Student Loans included
in such Loan Group;
(vi) amounts deposited by the Seller into the Collection
Account for such Loan Group in connection with the making of
Consolidation Loans;
(vii) with respect to the first Distribution Date, the amount
transferred for such Loan Group from the related Negative Carry Account
to the related Collection Account;
(viii) Investment Earnings for such Distribution Date;
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(ix) amounts withdrawn from the Reserve Account for such Loan
Group in excess of the related Specified Reserve Account Balance and
deposited into the related Collection Account;
(x) amounts withdrawn from the Escrow Account for such Loan
Group and deposited into the related Collection Account;
(xi) with respect to the Distribution Date on or immediately
after the end of the Funding Period, the amount transferred from the
Pre-Funding Account for such Loan Group to the related Collection
Account; and
(xii) with respect to Loan Group 2 only, the amounts withdrawn
from the TERI Guarantee Payment Account and deposited into the
Collection Account for Loan Group 2;
provided, however, that Available Funds for such Loan Group will exclude (A) all
payments and proceeds (including Liquidation Proceeds) of any Financed Student
Loans included in such Loan Group, the Purchase Amount of which has been
included in Available Funds for such Loan Group for a prior Distribution Date
and (B) following the end of the Funding Period and prior to the Loan Purchase
Termination Date, amounts withdrawn from the Collection Account for such Loan
Group to purchase Other Student Loans or pay Guarantee Fee Advances during the
period following the preceding Distribution Date and ending on or prior to such
Distribution Date; provided, further, that if on any Distribution Date there
would not be sufficient funds, after application of Available Funds for such
Loan Group and amounts available from the Reserve Account for such Loan Group
and the Pre-Funding Account for such Loan Group (1) to pay any of the items
specified in clauses (i) through (iii), respectively, under "-- Distributions
from Collection Accounts," for such Distribution Date and (2) if the principal
balance of the related Notes (after giving effect to any distributions thereon
on such Distribution Date) is less than or equal to the Note Collateralization
Amount for such Notes, to pay the related Certificateholders' Interest
Distribution Amount for such Distribution Date, then Available Funds for such
Loan Group for such Distribution Date will include, in addition to the Available
Funds for such Loan Group, amounts on deposit in the Collection Account for such
Loan Group on the Determination Date relating to such Distribution Date which
would have constituted Available Funds for such Loan Group for the Distribution
Date succeeding such Distribution Date up to the amount necessary to pay, in the
case of clause (1) above such items and in the case of clause (2) above such
Certificateholders' Interest Distribution Amount, and the Available Funds for
such succeeding Distribution Date will be adjusted accordingly.
Distributions from Collection Accounts. On each Monthly Servicing
Payment Date that is not a Distribution Date, the Administrator will instruct
the Indenture Trustee to pay to the Servicers the Servicing Fee allocable to
each Loan Group due with respect to the period from and including the preceding
Monthly Servicing Payment Date from amounts on deposit in the applicable
Collection Account.
On each Distribution Date, the Administrator will instruct the
Indenture Trustee to make the following deposits and distributions with respect
to each Loan Group, in the amounts and in the order of priority specified below,
to the extent of the Available Funds for such Loan Group for the related
Collection Period:
(i) to the Servicers, the Servicing Fee allocable to such Loan
Group due on such Distribution Date and all prior unpaid Servicing Fees
allocable to such Loan Group;
(ii) to the Administrator, the Administration Fee allocable to
such Loan Group and all unpaid Administration Fees allocable to such
Loan Group from prior Collection Periods;
(iii) to the holders of the related Notes, the Noteholders'
Interest Distribution Amount for such Notes;
(iv) to the holders of the related Certificates, the
Certificateholders' Interest Distribution Amount for such Certificates;
(v) to the applicable Reserve Account, an amount, up to the
amount, if any, necessary to reinstate the balance of such Reserve
Account to its Specified Reserve Account Balance;
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(vi) to the holders of the related Notes, the related
Noteholders' Principal Distribution Amount;
(vii) on each Distribution Date on and after which the related
Notes have been paid in full, to the holders of the related
Certificates, the related Certificateholders' Principal Distribution
Amount;
(viii) to the Servicers, the aggregate unpaid amount, if any,
of the Excess Servicing Fee allocable to such Loan Group;
(ix) to the holders of the related Notes on a pro rata basis,
based on the amount of the Noteholders' Interest Index Carryover owing
on each class of Notes, the aggregate unpaid amount of the Noteholders'
Interest Index Carryover, if any;
(x) to the holders of the related Certificates, the aggregate
unpaid amount of the related Certificateholders' Interest Index
Carryover, if any;
(xi) to the Reserve Account for the other Loan Group, an
amount, up to the amount, if any, necessary to reinstate the balance of
such Reserve Account to its Specified Reserve Account Balance; and
(xii) to the Seller, any remaining amounts after application
of clauses (i) through (xi).
Additionally, if on any Distribution Date the outstanding principal
balance of the Notes for a Loan Group (prior to giving effect to distributions
on such Distribution Date) is in excess of the Note Collateralization Amount for
such Notes, principal will be payable to the related Noteholders in the amount
of the related Noteholders' Priority Principal Distribution Amount to the extent
of funds available before any amounts are payable to the holders of the related
Certificates.
Upon any distribution to the Seller of any amounts included as
Available Funds for any Loan Group, neither the Noteholders nor the
Certificateholders will have any rights in, or claims to, such amounts.
For purposes hereof, the following terms have the following meanings:
"Certificate Balance" (x) with respect to the Class I-B Certificates,
equals $_________ as of the Closing Date and (y) with respect to the Class II-B
Certificates, equals $_________ as of the Closing Date and in each case
thereafter, equals the initial Certificate Balance, reduced by all amounts
allocable to principal previously distributed to the applicable
Certificateholders.
"Certificateholders' Distribution Amount" means, with respect to any
Distribution Date, the Certificateholders' Interest Distribution Amount for the
Certificates related to a Loan Group for such Distribution Date plus, for each
Distribution Date on and after which the related Notes have been paid in full,
the Certificateholders' Principal Distribution Amount for such Certificates for
such Distribution Date.
"Certificateholders' Interest Carryover Shortfall" means, for the
Certificates related to a Loan Group and with respect to any Distribution Date,
the excess of (i) the sum of the Certificateholders' Interest Distribution
Amount for such Certificates on the preceding Distribution Date over (ii) the
amount of interest actually distributed to the holders of such Certificates on
such preceding Distribution Date, plus interest on the amount of such excess
interest due to the holders of such Certificates, to the extent permitted by
law, at the applicable Certificate Rate from such preceding Distribution Date to
the current Distribution Date.
"Certificateholders' Interest Distribution Amount" means, for the
Certificates related to a Loan Group and with respect to any Distribution Date,
the sum of (i) the amount of interest accrued at the applicable Certificate Rate
for the related Interest Period on the outstanding Certificate Balance for such
Certificates on the immediately preceding Distribution Date, after giving effect
to all distributions of principal to holders of such Certificates on such
Distribution Date (or, in the case of the first Distribution Date, on the
Closing Date) and (ii) the Certificateholders' Interest
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Carryover Shortfall for such Certificates for such Distribution Date; provided,
that the Certificateholders' Interest Distribution Amount for such Certificates
will not include any Certificateholders' Interest Index Carryover for such
Certificates.
"Certificateholders' Principal Distribution Amount" means, for the
Certificates related to a Loan Group and on each Distribution Date on and after
which the principal balance of the related Notes has been paid in full, the
Principal Distribution Amount for such Loan Group for such Distribution Date
(or, in the case of the Distribution Date on which the principal balance of the
related Notes is paid in full, any remaining Principal Distribution Amount for
such Loan Group not otherwise distributed to the holders of such Notes on such
Distribution Date); provided, however, that the Certificateholders' Principal
Distribution Amount for such Certificates will in no event exceed the
Certificate Balance for such Certificates. In addition, on the applicable Final
Maturity Date for such Certificates, the principal required to be distributed to
the holders of such Certificates will include the amount required to reduce the
outstanding principal balance of such Certificates to zero.
"Net Government Receivable" means, with respect to Loan Group 1 only
and any Distribution Date, the sum of the amount of Interest Subsidy Payments
and Special Allowance Payments due from the Department less the amount owed to
the Department for Federal Origination Fee and Federal Consolidation Loan Rebate
as of the end of the related Collection Period.
"Note Collateralization Amount" means, with respect to a Loan Group and
any Distribution Date, the sum of (i) the Pool Balance for such Loan Group as of
the end of the related Collection Period, (ii) the Group 1 or Group 2 Pre-Funded
Amount, as applicable, as of the end of the related Collection Period, (iii) the
amount on deposit in the Reserve Account for such Loan Group after giving effect
to distributions on such Distribution Date, and (iv) with respect to Loan Group
1 only, the Net Government Receivable.
"Noteholders' Distribution Amount" means, for the Notes related to a
Loan Group and with respect to any Distribution Date, the sum of the
Noteholders' Interest Distribution Amount for such Notes and the Noteholders'
Principal Distribution Amount for such Notes for such Distribution Date.
"Noteholders' Interest Carryover Shortfall" means, for the Notes
related to a Loan Group and with respect to any Distribution Date, the excess of
(i) the sum of the Noteholders' Interest Distribution Amount for such Notes on
the preceding Distribution Date over (ii) the amount of interest actually
distributed to the holders of such Notes on such preceding Distribution Date,
plus interest on the amount of such excess interest due to the holders of such
Notes, to the extent permitted by law, at the weighted average of the Note
Interest Rates for such Notes from such preceding Distribution Date to the
current Distribution Date.
"Noteholders' Interest Distribution Amount" means, for the Notes
related to a Loan Group and with respect to any Distribution Date, the sum of
(i) the aggregate amount of interest accrued at the respective Note Interest
Rate for the related Interest Period on the outstanding principal balance of
each class of such Notes on the immediately preceding Distribution Date after
giving effect to all principal distributions to Noteholders of each such class
on such date (or, in the case of the first Distribution Date, on the Closing
Date) and (ii) the Noteholders' Interest Carryover Shortfall for such Notes for
such Distribution Date; provided, that the Noteholders' Interest Distribution
Amount for such Notes will not include any Noteholders' Interest Index Carryover
for such Notes.
"Noteholders' Principal Distribution Amount" means, for the Notes
related to a Loan Group and with respect to any Distribution Date, the Principal
Distribution Amount for such Notes for such Distribution Date; provided,
however, that the Noteholders' Principal Distribution Amount for such Notes will
not exceed the outstanding principal balance of such Notes. In addition, (i) on
the Final Maturity Date for each related class of Notes, the principal required
to be distributed to such class of Notes will include the amount required to
reduce the outstanding principal balance of such class of Notes to zero, and
(ii) on the related Distribution Date following a sale of the Financed Student
Loans in the manner described under "--Termination," the principal required to
be distributed to the holders of Class A-2 Notes related to such Loan Group will
include the amount required to reduce the outstanding principal balance of such
Class A-2 Notes to zero. In the event that the outstanding balance of the
related Notes is in excess of the Note
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Collateralization Amount for the related Loan Group, the Noteholders' Principal
Distribution Amount for such Notes will be reduced by the amount of any
Noteholders' Priority Principal Distribution Amount for such Notes.
"Noteholders' Priority Principal Distribution Amount" means, for the
Notes related to a Loan Group and with respect to any Distribution Date, the
excess of (i) the aggregate outstanding principal balance of such Notes (after
giving effect to any distributions on such Distribution Date) over (ii) the Note
Collateralization Amount for the related Loan Group.
"Pool Balance" means, for a Loan Group, at any time, the aggregate
principal balance of the Financed Student Loans in such Loan Group 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: (i) all payments received by the Trust related to the Financed
Student Loans in such Loan Group during such Collection Period from or on behalf
of borrowers, Guarantors (except with respect to any guarantee payments made by
TERI in excess of the Maximum TERI Payments Amount) and, with respect to certain
payments on certain Financed Federal Loans, the Department (collectively,
"Obligors"), (ii) all Purchase Amounts received by the Trust related to the
Financed Student Loans in such Loan Group for such Collection Period from the
Seller or the Servicers, (iii) all Additional Fundings made from the applicable
Escrow Account and the applicable Pre-Funding Account or the related Available
Loan Purchase Funds with respect to such Collection Period and (iv) all losses
realized on Financed Student Loans in such Loan Group liquidated during such
Collection Period.
"Principal Distribution Amount" means, for a Loan Group and with
respect to any Distribution Date, the amount by which the sum of the outstanding
principal balance of the related Notes and the related Certificates exceeds the
Specified Collateral Balance for such Loan Group for such Distribution Date.
"Specified Collateral Balance" means, for a Loan Group and with respect
to any Distribution Date, the sum of (a) the Pool Balance for such Loan Group as
of the last day of the related Collection Period plus (b) the Group 1 or Group 2
Pre-Funded Amount, as applicable, as of the last day of the related Collection
Period for such Distribution Date. In the event that the Financed Student Loans
are not sold pursuant to the auction process described under "Termination," with
respect to any Distribution Date occurring on or after the December 2008
Distribution Date, the Specified Collateral Balance for such Loan Group will be
zero.
CREDIT ENHANCEMENT
Negative Carry Accounts. Pursuant to the Sale and Servicing Agreement,
each Negative Carry Account will be created with an initial deposit by the
Seller on the Closing Date of cash or certain Eligible Investments in an amount
equal to the Negative Carry Account Initial Deposit for such Negative Carry
Account. On the date on which all of the Subsequent Pool Student Loans to be
included in a Loan Group that can be transferred to the Trust have been
transferred, but in no event later than the Special Determination Date (the
"Final Subsequent Transfer Date"), the Administrator will instruct the Indenture
Trustee to withdraw from the applicable Negative Carry Account and deposit into
the applicable Collection Account an amount equal to the difference (if
positive) between (i) the product of (a) a fraction the numerator of which is
the actual number of days from the Cutoff Date to the Subsequent Cutoff Date
relating to the Student Loans to be included in such Loan Group transferred on
the Final Subsequent Transfer Date, and the denominator of which is 365, (b) the
current weighted average of the Note Interest Rates (as defined under
"Description of the Securities -- The Notes") for the related Notes and the
Certificate Rate (as defined under "Description of the Securities--the
Certificates") for the related Certificates as measured for the period of time
commencing on the Closing Date and ending on the Final Subsequent Pool Transfer
Date, and (c) the Group 1 or Group 2 Subsequent Pool Pre-Funded Amount, as the
case may be, minus (ii) the investment earnings on the Group 1 or Group 2
Subsequent Pool Pre-Funded Amount, as the case may be. After making such deposit
to the applicable Collection Account, any amounts remaining in such Negative
Carry Account shall be released to the Seller.
Reserve Accounts. Pursuant to the Sale and Servicing Agreement, each
Reserve Account will be created with an initial deposit by the Seller on the
Closing Date of cash or Eligible Investments in an amount equal to the Reserve
Account Initial Deposit for such Reserve Account. Each Reserve Account will be
augmented on each Distribution Date by deposit therein of the amount, if any,
necessary to reinstate the balance of such Reserve Account to the related
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Specified Reserve Account Balance from the amount of Available Funds for the
related Loan Group remaining after payment of the amounts set forth under
"Description of the Transfer and Servicing Agreements--Distributions," all for
such Distribution Date. Each Reserve Account will also be augmented on each date
that a Subsequent Pool Student Loan to be included in the related Loan Group is
transferred by the Seller to the Trust by a transfer from the related
Pre-Funding Account of a portion of the Purchase Price payable to the Seller in
respect of such Subsequent Pool Student Loan in an amount equal to 0.50% of the
aggregate principal balance of such Student Loan. As described below, subject to
certain limitations, amounts on deposit in each Reserve Account will be
withdrawn and deposited into the related Collection Account and included as
Available Funds for the related Loan Group for distribution to the extent that
the amount on deposit in such Reserve Account exceeds the related Specified
Reserve Account Balance.
"Specified Reserve Account Balance" with respect to Loan Group 1 means
________.
"Specified Reserve Account Balance" with respect to Loan Group 2 means
________.
Funds will be withdrawn from the Reserve Account for a Loan Group to
the extent that the amount of Available Funds for such Loan Group is
insufficient to pay the Servicing Fee allocable to such Loan Group on any
Monthly Servicing Payment Date and any of the items specified in clauses (i)
through (iv) under "-- Distributions -- Distributions from Collection Account"
with respect to such Loan Group on any Distribution Date; provided, however,
that amounts on deposit in such Reserve Account shall only be available to cover
shortfalls in interest payments on the related Certificates to the extent that
the Note Collateralization Amount for such Loan Group (after giving effect to
such withdrawals from such Reserve Account) is not less than the outstanding
principal balance of the related Notes. Such funds will be paid from such
Reserve Account to the Servicers on a Monthly Servicing Payment Date, and to the
persons and in the order of priority specified for distributions out of the
applicable Collection Account in such clauses (i) through (iv) on a Distribution
Date. In addition, on the Final Maturity Dates for the related Securities,
amounts on deposit in such Reserve Account, if any, will be available, if
necessary, to be applied to reduce the principal balance of the applicable
Securities to zero. Amounts on deposit in the Reserve Accounts will not be
available to cover any reimbursement for unpaid Excess Servicing Fee,
Noteholders' Interest Index Carryover or Certificateholders' Interest Index
Carryover.
If the amount on deposit in the Reserve Account for a Loan Group on any
Distribution Date (after giving effect to all deposits or withdrawals therefrom
on such Distribution Date) is greater than the applicable 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 applicable Collection Account for distribution as Available
Funds for such Loan Group on such Distribution Date. Upon any distribution to
the Seller of any amounts included as Available Funds for a Loan Group, neither
the Noteholders nor the Certificateholders will have any rights in, or claims
to, such amounts. Subject to the limitation described in the preceding sentence,
amounts held from time to time in the Reserve Accounts will continue to be held
for the benefit of the Trust.
The Reserve Account for a Loan Group is intended to enhance the
likelihood of timely receipt by the holders of the related Notes and the holders
of the related Certificates of the full amount of interest due them and to
decrease the likelihood that such holders will experience losses. In certain
circumstances, however, such Reserve Account could be depleted.
Subordination of the Certificates. The rights of the holders of
Certificates related to a Loan Group to receive payments of interest are
subordinated to the rights of the holders of the related Notes to receive
payments of interest (and, in certain circumstances, principal) and the rights
of the holders of such Certificates to receive payments of principal are
subordinated to the rights of the holders of the related Notes to receive
payments of interest and principal. Consequently, amounts on deposit in the
applicable Collection Account, the applicable Reserve Account and the applicable
Pre-Funding Account will be applied to the payment of interest on such Notes
before payment of interest on such Certificates and will be applied to the
payment of principal on such Notes before payment of principal on such
Certificates. In addition if (i) an Event of Default should occur and be
continuing under the Indenture or (ii) an Insolvency Event should occur and the
Financed Student Loans were liquidated, all amounts due on the related Notes
will be payable before any amounts are payable on the related Certificates. Also
if the outstanding principal balance of the Notes related to a Loan Group is in
excess of the Note Collateralization Amount for such Loan Group, principal will
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be payable to holders of such Notes in the amount of such excess to the extent
of funds available before any amounts are payable to holders of the related
Certificates. See "Description of the Securities--The
Certificates--Subordination of the Certificates" and "Risk
Factors--Subordination of Certificates to Notes."
TERI Guarantee Payment Account. Pursuant to the Sale and Servicing
Agreement, the Seller will establish and maintain with Bankers Trust Company, as
collateral agent (in such capacity, the "Collateral Agent"), an account (the
"TERI Guarantee Payment Account"). The TERI Guarantee Payment Account will be
owned by the Seller and will not be an asset of the Trust but will be pledged by
the Seller to the Collateral Agent for the benefit of the Securityholders.
During any Collection Period, upon receipt by any Servicer of a guarantee
payment made by TERI with respect to any of the Financed Private Loans, such
Servicer shall deposit such guarantee payment into the TERI Guarantee Payment
Account. On each Distribution Date, funds on deposit in the TERI Guarantee
Payment Account shall be included in Available Funds for Loan Group 2 and
deposited into the Collection Account for such Loan Group until the aggregate of
all funds that have been withdrawn from the TERI Guarantee Payment Account and
deposited into such Collection Account since the Closing Date equal the Maximim
TERI Payments Amount. Any funds on deposit in the TERI Guarantee Payment Account
in excess of such amount shall be released to the Seller.
Cross-Collateralization Provisions. In addition to the use of
Available Funds from collections on Financed Student Loans in a Loan Group to
make deposits into the Reserve Account for such Loan Group up to the related
Specified Reserve Account Balance, Available Funds from collections on Financed
Student Loans in the other Loan Group (after the payment of any
Certificateholders' Interest Index Carryover as set forth in "Description of
the Transfer and Servicing Agreements - Distributions") shall be available to
make deposits into the Reserve Account for such other Loan Group up to the
related Specified Reserve Account Balance.
STATEMENTS TO INDENTURE TRUSTEE AND TRUST
Prior to each Distribution Date, the Administrator (based on the
quarterly statements and other information provided to it by the 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 relating to
each Loan Group, to the extent applicable:
(i) the amount of the distribution allocable to principal of
each class of Group 1 and Group 2 Securities;
(ii) the amount of the distribution allocable to interest on
each class of Group 1 and Group 2 Securities, together with the
interest rates applicable with respect thereto (indicating whether such
interest rates are based on the applicable Investor Index or on the
Student Loan Rate and specifying what each such interest rate would
have been if it had been calculated using the alternate basis; provided
that no such calculation of the Student Loan Rate will be required to
be made unless the Investor Index for such Interest Period is 100 basis
points greater than the Investor Index of the preceding Determination
Date or, with respect to T-Bill Indexed Securities only, the 52 Week
Treasury Bill Rate is 100 basis points less than the T-Bill Rate as of
such Determination Date);
(iii) the amount of the distribution, if any, allocable to any
Noteholders' Interest Index Carryover and any Certificateholders'
Interest Index Carryover for each Loan Group, together with the
outstanding amount, if any, of each thereof after giving effect to any
such distribution;
(iv) the Pool Balance for each Loan Group 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 (i) above;
(v) for each Loan Group, the aggregate outstanding principal
balance of each Class of Notes, the Certificate Balance for each Class
of Certificates and each Pool Factor as of such Distribution Date,
after giving effect to payments allocated to principal reported under
clause (i) above;
(vi) the amount of the Servicing Fee and any Excess Servicing
Fee paid to the Servicers and the amount of the Administration Fee paid
to the Administrator, respectively, with respect to such Collection
Period, and the amount, if any, of the Excess Servicing Fee remaining
unpaid after giving effect to any such payment in each case as
allocable to each Loan Group;
(vii) the amount of the aggregate Realized Losses for each
Loan Group, if any, for such Collection Period and the balance of
Financed Student Loans for each Loan Group that are delinquent in each
delinquency period as of the end of such Collection Period;
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(viii) the balance of each Reserve Account on such
Distribution Date, after giving effect to changes therein on such
Distribution Date;
(ix) for Distribution Dates during the Funding Period, the
remaining Pre-Funded Amount for each Loan Group on such Distribution
Date, after giving effect to changes therein during the related
Collection Period;
(x) for the first Distribution Date, the amount, if any,
remaining in the Group 1 and Group 2 Subsequent Pool Pre-Funding
Subaccounts that has not been used to acquire Subsequent Pool Student
Loans and is being paid out to the related Noteholders and
Certificateholders; and
(xi) for the first Distribution Date on or following the end
of the Funding Period, the amount of any remaining Group 1 and Group 2
Pre-Funded Amount that has not been used to make Additional Fundings
and is being paid out to the related Noteholders.
"Realized Losses" means, for a Loan Group, the excess of the principal
balance of the Liquidated Student Loans in such Loan Group over the related
Liquidation Proceeds to the extent allocable to principal.
"52 Week T-Bill Rate" means, on any date of determination, the bond
equivalent rate of 52-week Treasury bills auctioned at the final auction held
prior to the preceding June 1.
EVIDENCE AS TO COMPLIANCE
The 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 Servicers during
the preceding calendar year (or, in the case of the first such certificate, the
period from the Closing Date to December 31, 1998) with certain standards under
the Sale and Servicing Agreement relating to the servicing of the Financed
Student Loans.
The 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 Closing Date to December 31, 1998) with all applicable standards
under the Sale and Servicing Agreement and the Administration Agreement relating
to the administration of the Trust and the Financed Student Loans.
The Sale and Servicing Agreement will also provide for delivery to the
Trust and the Indenture Trustee, concurrently with the delivery of each
statements of compliance referred to above, of a certificate signed by an
officer of each Servicer or the Administrator, as the case may be, stating that,
to his knowledge, such 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 Closing Date to December 31, 1998) or, if there has been a
default in the fulfillment of any such obligation, describing each such default.
Each of the Servicers and the Administrator has agreed to give the Indenture
Trustee and the Eligible Lender Trustee notice of certain Servicer Defaults and
Administrator Defaults, respectively, 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.
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CERTAIN MATTERS REGARDING THE SERVICERS
The Sale and Servicing Agreement will provide that neither PHEAA nor
EFS may resign from its obligations and duties as Servicers thereunder, except
upon determination that PHEAA's or EFS's, as the case may be, performance of
such duties is no longer permissible under applicable law. No such resignation
will become effective until the Indenture Trustee or a successor servicer has
assumed PHEAA's or EFS's, as the case may be, servicing obligations and duties
under the Sale and Servicing Agreement.
The Sale and Servicing Agreement will further provide that neither of
the Servicers nor any of their respective directors, officers, employees or
agents will be under any liability to the Trust, the Noteholders or the
Certificateholders for taking any action or for refraining from taking any
action pursuant to the Sale and Servicing Agreement, or for errors in judgment;
provided, that neither of the Servicers 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 its duties thereunder
or by reason of reckless disregard of its obligations or duties thereunder. In
addition, the Sale and Servicing Agreement will provide that the Servicers are
under no obligation to appear in, prosecute, or defend any legal action that is
not incidental to its servicing responsibilities under the Sale and Servicing
Agreement and that, in its opinion, may cause it to incur any expense or
liability.
Under the circumstances specified in the Sale and Servicing Agreement,
any entity into which a Servicer may be merged or consolidated, or any entity
resulting from any merger or consolidation to which a Servicer is a party, or
any entity succeeding to the business of a Servicer, which corporation or other
entity in each of the foregoing cases assumes the obligations of a Servicer,
will be the successor of a Servicer under the Sale and Servicing Agreement.
SERVICER DEFAULT; ADMINISTRATOR DEFAULT
"Servicer Default" under the Sale and Servicing Agreement will consist
of (i) any failure by a 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 Accounts are not required, to the Administrator) any collections,
Guarantee Payments (except for certain TERI Guarantee Payments) or other amounts
received with respect to the Financed Student Loans, which failure continues
unremedied for three business days after written notice from the Indenture
Trustee or the Eligible Lender Trustee is received by such Servicer or after
discovery by such Servicer; (ii) any failure by a Servicer duly to observe or
perform in any material respect any other covenant or agreement in the 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 (1) to such Servicer by the
Indenture Trustee, the Eligible Lender Trustee, the other Servicer or the
Administrator or (2) to such 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; (iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities, or similar proceedings with respect to a
Servicer and certain actions by a Servicer indicating its insolvency,
reorganization pursuant to bankruptcy proceedings or inability to pay its
obligations and (iv) failure by a Servicer to comply with any requirements under
the Higher Education Act resulting in a loss of its eligibility as a third-party
servicer.
"Administrator Default" under the Sale and Servicing Agreement or the
Administration Agreement will consist of (i)(A) in the event that daily deposits
into the Collection Accounts 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; (ii) any failure by the Administrator duly to
observe or perform in any material respect any other covenant or agreement in
the Administration Agreement or the 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
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notice of such failure (1) to the Administrator by the Indenture Trustee or the
Eligible Lender Trustee or (2) to the Administrator 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 (iii) certain events of insolvency, readjustment of
debt, marshalling of assets and liabilities, or similar proceedings with respect
to the Administrator and certain actions by the Administrator indicating its
insolvency or inability to pay its obligations.
RIGHTS UPON SERVICER DEFAULT AND ADMINISTRATOR DEFAULT
As long as a Servicer Default under the Sale and Servicing Agreement or
an Administrator Default under the Sale and Servicing Agreement or the
Administration Agreement remains unremedied, the Indenture Trustee or holders of
Notes evidencing not less than 25% in principal amount of then outstanding Notes
may terminate all the rights and obligations of the applicable Servicer under
the Sale and Servicing Agreement, or the Administrator under the Sale and
Servicing Agreement and the Administration Agreement, as the case may be,
whereupon a successor servicer or administrator appointed by the Indenture
Trustee, or the Indenture Trustee, will succeed to all of the responsibilities,
duties and liabilities of the applicable Servicer under the Sale and Servicing
Agreement, or the Administrator under the Sale and Servicing Agreement and the
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 a Servicer or the Administrator, and no Servicer Default
or Administrator Default other than such appointment has occurred, such trustee
or official may have the power to prevent the Indenture Trustee or the
Noteholders from effecting such a transfer. In the event that the 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 Servicers under the Sale and Servicing Agreement or the
Administrator under the Sale and Servicing Agreement and the Administration
Agreement, as the case may be, unless such compensation arrangements will result
in a downgrading of the Notes and the Certificates by any Rating Agency. In the
event a Servicer Default or an Administrator Default occurs and is continuing,
the Indenture Trustee or the holders of Notes, as described above, may remove
the applicable Servicer or the Administrator, as the case may be, without the
consent of the Eligible Lender Trustee or any of the holders of Certificates.
Moreover, only the Indenture Trustee or the holders of Notes, and not the
Eligible Lender Trustee or the holders of Certificates, have the ability to
remove a Servicer or the Administrator, as the case may be, if a Servicer
Default or an Administrator Default occurs and is continuing.
WAIVER OF PAST DEFAULTS
The holders of Notes evidencing at least a majority in principal amount
of the then outstanding Notes (or the holders of Certificates evidencing not
less than a majority of the outstanding aggregate Certificate Balances, in the
case of any default which does not adversely affect the Indenture Trustee or the
Noteholders) may, on behalf of all Noteholders and Certificateholders, waive any
default by a Servicer in the performance of its obligations under the Sale and
Servicing Agreement, or any default by the Administrator of its obligations
under the Sale and Servicing Agreement and the 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 the Sale and Servicing
Agreement. Therefore, the Noteholders have the ability, except as noted above,
to waive defaults by the Servicers and the Administrator 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,
Cedel or Euroclear and their respective participating organizations.
AMENDMENT
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The Transfer and Servicing Agreements may be amended by the parties
thereto, without the consent of the Noteholders or the Certificateholders, for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of the Transfer and Servicing Agreements or of modifying
in any manner the rights of Noteholders or Certificateholders; provided that
such action will not, in the opinion of counsel satisfactory to the Indenture
Trustee and the Eligible Lender Trustee, materially and adversely affect the
interest of any Noteholder or Certificateholder. The Transfer and Servicing
Agreements may also be amended by the Seller, the Administrator, the Servicers,
the Eligible Lender Trustee and the Indenture Trustee, as applicable, with the
consent of the holders of Notes evidencing at least a majority in principal
amount of the then outstanding Notes and the holders of Certificates evidencing
at least a majority of the aggregate Certificate Balances 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, however, that no such amendment may (i) 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 Financed Student
Loans or distributions that are required to be made for the benefit of the
holders of Notes or the holders of Certificates or (ii) 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.
INSOLVENCY EVENT
If any of certain events of insolvency or receivership, readjustment of
debt, marshalling of assets and liabilities, or similar proceedings with respect
to the Seller or certain actions by the Seller indicating its insolvency or
inability to pay its obligations (each, a "Seller Insolvency Event") occurs, the
Financed Student Loans will be liquidated and the 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)
representing more than 50% of the aggregate unpaid principal amount of the
Certificates (not including the principal amount of Certificates held by the
Seller) to the effect that such group disapproves of the liquidation of the
Financed Student Loans and termination of the Trust. Promptly after the
occurrence of any Seller Insolvency Event, notice thereof is required to be
given to Noteholders and Certificateholders; provided, however, that any failure
to give such required notice will not prevent or delay termination of the Trust.
Upon termination of the Trust, the Eligible Lender Trustee will direct the
Indenture Trustee promptly to sell the assets of the Trust (other than the Trust
Accounts) in a commercially reasonable manner and on commercially reasonable
terms. Each of PHEAA, TERI 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 Financed Student Loans and, if any such entity is the
highest bidder, the Financed Student Loans must be sold to that entity. The
proceeds from any such sale, disposition or liquidation of the Financed Student
Loans will be treated as collections thereon and deposited in the Collection
Accounts. If the proceeds from the liquidation of the Financed Student Loans and
any amounts on deposit in the Reserve Accounts are not sufficient to pay the
Notes in full, the amount of principal returned to the holders of Notes will be
delayed and the holders of Notes will incur a loss. If such amounts are not
sufficient to pay the Notes and the Certificates in full, the amount of
principal returned to the holders of Certificates will be delayed and the
holders of Certificates will incur a loss.
The Trust Agreement provides 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 Trust is
insolvent.
PAYMENT OF NOTES
Upon the payment in full of all outstanding Notes and the satisfaction
and discharge of the Indenture, the Eligible Lender Trustee will succeed to all
the rights of the Indenture Trustee, and the holders of Certificates will
succeed to all the rights of the holders of Notes, under the Sale and Servicing
Agreement, except as otherwise provided therein.
SELLER LIABILITY
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Under the Trust Agreement, the Seller will agree to be liable directly
to an injured party for the entire amount of any losses, claims, damages or
liabilities (other than those incurred by a holder of Notes or a holder of
Certificates in the capacity of an investor) arising out of or based on the
arrangement created by the Trust Agreement as though such arrangement created a
partnership under the [Delaware Revised Uniform Limited Partnership Act] in
which the Seller was a general partner.
TERMINATION
The obligations of the Servicers, the Seller, the Administrator, the
Eligible Lender Trustee and the Indenture Trustee pursuant to the Transfer and
Servicing Agreements will terminate upon (i) the maturity or other liquidation
of the last Financed Student Loan and the disposition of any amount received
upon liquidation of any remaining Financed Student Loans and (ii) the payment to
the holders of Notes and the holders of Certificates of all amounts required to
be paid to them pursuant to the Transfer and Servicing Agreements. In order to
avoid excessive administrative expense, the Seller is permitted at its option to
repurchase from the Eligible Lender Trustee, as of the end of any Collection
Period immediately preceding a Distribution Date, if the sum of the then
outstanding Pool Balances is 5% or less than the sum of the Initial Pool
Balances, all remaining Financed Student Loans at a price sufficient to retire
the Certificates concurrently therewith. Upon termination of the Trust, all
right, title and interest in the Financed Student Loans and other funds of the
Trust, after giving effect to any final distributions to holders of Notes and
holders of Certificates therefrom, will be conveyed and transferred to the
Seller.
Any Financed Student Loans remaining in the Trust as of the end of the
Collection Period immediately preceding the December 2008 Distribution Date will
be offered for sale by the Indenture Trustee. KeyCorp, its affiliates (other
than the Seller), PHEAA, TERI and unrelated third parties may offer bids to
purchase such Financed Student Loans on such Distribution Date. If at least two
bids are received, the Indenture Trustee will solicit and resolicit bids from
all participating bidders until only one bid remains or the remaining bidders
decline to resubmit bids. The Indenture Trustee will accept the highest of such
remaining bids if it is equal to or in excess of an amount (the "Minimum
Purchase Amount") equal to the greatest of (i) the Auction Purchase Amount, (ii)
the fair market value of such Financed Student Loans as of the end of the
Collection Period immediately preceding such Distribution Date and (iii) the
aggregate unpaid principal amount of the Notes and principal balance of the
Certificates plus, in each case, accrued and unpaid interest thereon payable on
such Distribution Date (other than any Noteholders' Interest Index Carryover and
Certificateholders' Interest Index Carryover). If at least two bids are not
received or the highest bid after the resolicitation process is completed is not
equal to or in excess of the Auction Purchase Amount and the fair market value
of the Financed Student Loans, the Indenture Trustee will not consummate such
sale. The Indenture Trustee may consult and, at the direction of the Seller,
shall consult, with a financial advisor, including the Underwriters or the
Administrator, to determine if the fair market value of the Financed Student
Loans has been offered. The net proceeds of any such sale will be used to redeem
any outstanding Notes and to retire any outstanding Certificates on such
Distribution Date. If the sale is not consummated in accordance with the
foregoing, the Indenture Trustee may, but shall not be under any obligation to,
solicit bids to purchase the Financed Student Loans on future Distribution Dates
upon terms similar to those described above. No assurance can be given as to
whether the Indenture Trustee will be successful in soliciting acceptable bids
to purchase the Financed Student Loans on either the December 2008 Distribution
Date or any subsequent Distribution Date. In the event the Financed Student
Loans in a Loan Group are not sold in accordance with the foregoing, on each
Distribution Date on and after the December 2008 Distribution Date the Specified
Collateral Balance for such Loan Group shall be reduced to zero and all
Available Funds for such Loan Group remaining after applying such amounts to pay
the Servicing Fee allocable to such Loan Group, the Administration Fee allocable
to such Loan Group, the related Noteholders' Interest Distribution Amount, the
related Noteholders Priority Principal Distribution Amount, if any, and the
related Certificateholders' Interest Distribution Amount will be paid as
principal to the holders of the related Notes and then to the holders of the
related Certificates until the outstanding principal balance of the related
Notes and related Certificates has been reduced to zero.
ADMINISTRATOR
The Seller, in its capacity as Administrator, will enter into the
Administration Agreement with the Trust and the Indenture Trustee and the Sale
and Servicing Agreement with the Trust, the Seller, the Servicers and the
Eligible
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Lender Trustee, pursuant to which the Administrator will agree, to the extent
provided therein, (i) 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,
(ii) to direct the Indenture Trustee to make the required distributions from the
Trust Accounts on each Monthly Servicing Payment Date and each Distribution
Date, (iii) 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 Financed
Federal Loans, (iv) to prepare (based on the quarterly and annual reports
received from the Servicers) and provide monthly, quarterly and annual
statements to the Eligible Lender Trustee and the Indenture Trustee with respect
to distributions to Noteholders and Certificateholders and any related federal
income tax reporting information and (v) 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 equal to
$3,000 per quarter (the "Administration Fee").
CERTAIN LEGAL ASPECTS OF THE FINANCED STUDENT LOANS
TRANSFER OF FINANCED STUDENT LOANS
The Seller intends that the transfer of the Financed Student Loans by
it to the Eligible Lender Trustee on behalf of the Trust constitutes a valid
sale and assignment of such Financed Student Loans. In addition, the Seller has
taken and will take all actions that are required under applicable state law to
perfect the Eligible Lender Trustee's ownership interest in the Financed Student
Loans and the collections with respect thereto. Notwithstanding the foregoing,
if the transfer of the Financed Student Loans is deemed to be an assignment of
collateral as security for the benefit of the Trust, the Financed Student Loans
would be considered general intangibles for purposes of the applicable Uniform
Commercial Code (the "UCC"). If such transfer is deemed to create a security
interest, the UCC applies and filing an appropriate financing statement or
statements is also required in order to perfect the Eligible Lender Trustee's
security interest. A financing statement or statements covering the Financed
Student Loans will be filed under the UCC to protect the interest of the
Eligible Lender Trustee in the event the transfer by the Seller is deemed to be
subject to the UCC. If a transfer of general intangibles is deemed to be a sale,
then the UCC is not applicable and no further action under the UCC is required
to protect the Eligible Lender Trustee's interest from third parties.
If the transfer of the Financed Student Loans is deemed to be an
assignment as security for the benefit of the Trust, there are certain limited
circumstances under the UCC in which prior or subsequent transferees of Financed
Student Loans coming into existence after the Closing Date could have an
interest in such Financed Student Loans with priority over the Eligible Lender
Trustee's interest. A tax or other government lien on property of the Seller
arising prior to the time a Financed Student Loan comes into existence may also
have priority over the interest of the Eligible Lender Trustee in such Financed
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 Eligible Lender Trustee in such Financed
Student Loans. Under the Sale and Servicing Agreement, however, the Seller will
warrant that it has transferred the Financed Student Loans to the Eligible
Lender Trustee on behalf of the Trust 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 Financed Student Loan (or any interest
therein) other than to the Eligible Lender Trustee on behalf of the Trust,
except as provided below.
Pursuant to the Sale and Servicing Agreement the Servicers as
custodians on behalf of the Trust will have custody of the promissory notes
evidencing the Financed Student Loans such Servicers are servicing following the
sale of the Financed Student Loans to the Eligible Lender Trustee. Although the
accounts of the Seller will be marked to indicate the sale and although the
Seller will cause UCC financing statements to be filed with the appropriate
authorities, the Financed Student Loans will not be physically segregated,
stamped or otherwise marked to indicate that such Financed Student Loans have
been sold to the Eligible Lender Trustee. If, through inadvertence or otherwise,
any of the Financed Student Loans were sold to another party, or a security
interest therein were granted to another party,
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that purchased (or took such security interest in) any of such Financed Student
Loans in the ordinary course of its business and took possession of such
Financed Student Loans, then the purchaser (or secured party) would acquire an
interest in such Financed Student Loans superior to the interest of the Eligible
Lender Trustee if the purchaser (or secured party) acquired (or took a security
interest in) such Financed Student Loans for new value and without actual
knowledge of the Eligible Lender Trustee's interest. See "Description of the
Transfer and Servicing Agreements--Sale of Financed Student Loans;
Representations and Warranties" and "--Servicer Covenants."
CERTAIN MATTERS RELATING TO RECEIVERSHIP
The FDIA, as amended by 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 Financed Student Loans.
To the extent that the transfer of the Financed 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 Financed 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 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 Servicer Default or an Administrator Default
resulting solely from certain events of insolvency or bankruptcy that may occur
with respect to a 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 Servicer or Administrator, as the case
may be. See "Description of the Transfer and Servicing Agreements--Rights Upon
Servicer Default and Administrator Default."
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon lenders and servicers involved
in consumer finance. Also, some state laws impose finance charge ceilings and
other restrictions on certain consumer transactions and require contract
disclosures in addition to those required under federal law. These requirements
impose specific statutory liabilities upon lenders who fail to comply with their
provisions. In certain circumstances, the Trust may be liable for certain
violations of consumer protection laws that apply to the Financed Student Loans,
either as assignee from the Seller or as the party directly responsible for
obligations arising after the transfer. For a discussion of the Trust's rights
if the Financed 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 Financed Student Loans; Representations and
Warranties" and "--Servicer Covenants."
LOAN ORIGINATION AND SERVICING PROCEDURES APPLICABLE TO FINANCED STUDENT LOANS
The Higher Education Act, including the implementing regulations
thereunder (in the case of Federal Loans), and the Programs impose specified
requirements, guidelines and procedures with respect to originating and
servicing Student Loans such as the Financed Student 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 in the case of
Federal Loans and the performance of a creditworthiness
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evaluation in the case of Private Loans) be made, the borrower's
responsibilities under the loan be explained to him or her, the promissory note
evidencing the loan be executed by the borrower and then that the loan proceeds
be disbursed in a specified manner by the lender. After the loan is made, the
lender must establish repayment terms with the borrower, properly administer
deferrals and 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
Servicers have agreed pursuant to the Sale and Servicing Agreement to perform
collection and servicing procedures on behalf of the Trust with respect to the
Financed Student Loans each is servicing. However, failure to follow these
procedures or failure of the Seller to follow procedures relating to the
origination of any Financed Federal Loans could result in adverse consequences.
In the case of any such Financed Federal Loans, 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 Financed Federal Loans or in the
Federal Guarantors' refusal to honor their Guarantee Agreements with the
Eligible Lender Trustee with respect to such Financed 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 Eligible Lender Trustee with respect to such Financed
Federal Loans. In the case of the Financed Private Loans, failure to make or
service properly such Private Loans in accordance with such procedures could
adversely affect the Eligible Lender Trustee's ability to obtain Guarantee
Payments (through the Collateral Agent) from TERI or Guarantee Payments from
HICA with respect to such Financed Private Loans.
Loss of any such Guarantee Payments, Interest Subsidy Payments or
Special Allowance Payments could adversely affect the amount of Available Funds
on any Distribution Date and the Trust's ability to pay principal and interest
on the Notes and to make distributions in respect of the Certificates. Under
certain circumstances, pursuant to the Sale and Servicing Agreement, the Seller
is obligated to repurchase any Financed Student Loan, or a Servicer is obligated
to purchase any Financed Student Loan, if a breach of the representations,
warranties or covenants of the Seller or such Servicer, as the case may be, with
respect to such Financed Student Loan has a material adverse effect on the
interest of the Trust therein and such breach is not cured within any applicable
cure period (it being understood that 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 such a material adverse effect). See "Description of
the Transfer and Servicing Agreements--Sale of Financed Student Loans;
Representations and Warranties" and "--Servicer Covenants." The failure of the
Seller or a Servicer to so purchase a Financed Student Loan would constitute a
breach of the Sale and Servicing Agreement, enforceable by the Eligible Lender
Trustee on behalf of the Trust or by the Indenture Trustee on behalf of the
Noteholders, but would not constitute an Event of Default under the Indenture.
STUDENT LOANS GENERALLY NOT SUBJECT TO DISCHARGE IN BANKRUPTCY
Neither Financed Federal Loans nor Financed Private Loans are generally
dischargeable by a borrower in bankruptcy pursuant to the Bankruptcy Code,
unless (A) such Student Loan first became due before seven years (exclusive of
any applicable suspension of the repayment period) before the date of the
bankruptcy or (B) excepting such debt from discharge will impose an undue
hardship on the debtor and the debtor's dependents.
INCOME TAX CONSEQUENCES
Set forth below is a general summary of material federal and Pennsylvania state
income tax consequences of the purchase, ownership and disposition of the Notes
and the Certificates. 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. 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
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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 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. The Trust
will be provided with an opinion of Federal Tax Counsel, regarding certain
federal income tax matters. 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.
SCOPE OF THE TAX OPINIONS
Federal Tax Counsel will, prior to the issuance of the Notes and
Certificates, deliver its opinion that the Trust will not be classified as an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. Further, Federal Tax Counsel will advise the Trust
that the Notes will be characterized as debt for federal income tax purposes.
Pennsylvania Tax Counsel will, prior to the issuance of the Notes and
Certificates, deliver its 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.
FEDERAL TAX CONSEQUENCES WITH RESPECT TO THE NOTES
Tax Characterization of the Notes and the Trust. Federal Tax Counsel
will, prior to the issuance of the Notes, deliver its opinion that based on the
terms of the Notes and the transactions relating to the Financed Student Loans
as set forth herein, the Notes will be treated as debt for federal income tax
purposes. 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.
Federal Tax Counsel will also deliver its opinion that based on the
applicable provisions of the Trust Agreement and related documents, the Trust
will not be classified as an association (or publicly traded partnership)
taxable as a corporation for federal income tax purposes. If the Trust were
taxable for federal income tax purposes as a corporation, the income from the
Financed Student Loans (reduced by deductions, possibly including interest on
the Notes) would be subject to federal income tax at corporate rates, which
would reduce the amounts available to make payments on the Notes.
If, contrary to the opinion of Federal Tax Counsel, the IRS
successfully asserted that one or more of the Notes did not represent debt for
federal income tax purposes, the 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, treatment of the Notes as equity
interests in such a publicly traded partnership could have adverse tax
consequences to certain holders. For example, income to certain tax-exempt
entities (including pension funds) would be "unrelated business taxable income,"
income to foreign holders generally would be subject to U.S. tax and U.S. tax
return filing and withholding requirements, and individual holders might be
subject to certain limitations on their ability to deduct their share of Trust
expenses. Furthermore, such a characterization could subject holders to state
and local taxation in jurisdictions in which they are not currently subject to
tax.
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Treatment of the Notes as Indebtedness. The Seller will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal, state and local income and franchise tax purposes. The discussion
below assumes that all payments on the Notes are denominated in U.S. dollars,
and that the Notes are not Strip Notes. Moreover, the discussion assumes 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 principal amount of the Notes over their issue price) does not exceed a
de minimis amount (i.e., 1/4% of their principal amount multiplied by the number
of full years included in their term), all within the meaning of the OID
regulations.
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 such Noteholder's method of tax accounting. Based on the above
assumptions, the Notes will not be considered issued with original issue
discount. However, because of limitations on the payment of interest on the
Notes to the extent of the Trust's having insufficient Available Funds the IRS
may contend that the Notes should be treated as having been issued with OID. In
such case, Noteholders (regardless of whether they otherwise use the cash or
accrual method of accounting) would be required to include interest on the Notes
in taxable income on an accrual basis. However, until the IRS determines
otherwise, the Trust intends to take the position that the Notes are not issued
with OID. A holder who purchases a Note at a discount that exceeds a statutorily
defined de minimis amount will be subject to the "market discount" rules of the
Code, and a holder who purchases a Note at a premium will be subject to the
premium amortization 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 OID, market discount 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. 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. If interest paid (or accrued) to a Noteholder who is a
nonresident alien, foreign corporation or other non-United States person (a
"foreign person") is not effectively connected with the conduct of a trade or
business within the United States by the foreign person, the interest generally
will be considered "portfolio interest", and generally will not be subject to
United States federal income tax and withholding tax, if the foreign person (i)
is not actually or constructively a "10 percent shareholder" of the Trust or the
Seller (including a holder of 10% of the outstanding Certificates) or a
"controlled foreign corporation" with respect to which the Trust or the Seller
is a "related person" within the meaning of the Code and (ii) provides the
Trustee or other person who is otherwise required to withhold U.S. tax with an
appropriate statement (on Form W-8 or similar form), signed under penalties of
perjury, certifying that the beneficial owner of the Note is a foreign person
and providing the foreign person's name and address. If a Note is held through a
securities clearing organization or certain other financial institutions, the
organization or institution may provide a relevant signed statement to the
withholding agent. However, in that case, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the foreign person that
owns the Note. 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 will be exempt from United
States federal income and withholding tax, provided that (i) the gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
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), the
holder generally will be subject to United States Federal
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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.
On October 6, 1997, Treasury Regulations (the "New Withholding Tax
Regulations") were issued which alter the rules described above in certain
respects. The New Withholding Tax Regulations generally will be effective with
respect to payments made after December 31, 1999, regardless of the issue date
of the instrument with respect to which such payments are made. Prospective
investors should consult their tax advisors concerning the requirements imposed
by the New Withholding Tax Regulations and their effect on the holding of the
Notes.
Information Reporting and Backup Withholding. The Trust will be
required to report annually to the IRS, and to each Noteholder of record, the
amount of interest paid on the Notes (and the amount of interest withheld for
Federal income taxes, if any) for each calendar year, except as to exempt
holders (generally, holders that are corporations, tax-exempt organizations,
qualified pension and profit-sharing trusts, individual retirement accounts, or
nonresident aliens who provide certification as to their status as
nonresidents). Accordingly, each holder (other than exempt holders who are not
subject to the reporting requirements) will be required to provide, under
penalties of perjury, a certificate containing 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 Trust will be required to withhold 31%
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.
Prospective investors should consult with their tax advisors as to their
eligibility for exemption from backup withholding and the procedure for
obtaining the exemption, and the potential impact of the New Withholding Tax
Regulations.
PENNSYLVANIA INCOME AND FRANCHISE TAX CONSEQUENCES WITH RESPECT TO THE NOTES
The activities to be undertaken by PHEAA, as Servicer in servicing and
collecting the Financed Student Loans it is servicing will take place in
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, 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.
FEDERAL TAX CONSEQUENCES WITH RESPECT TO THE CERTIFICATES
Tax Characterization of the Trust. Federal Tax Counsel will, prior to
the issuance of the Certificates, deliver its opinion that the Trust will not be
classified as an association (or publicly traded partnership) taxable as a
corporation for federal income tax purposes. The Seller and the Servicers 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 purposes, with the assets of the partnership being the
assets held by the Trust, the partners of the partnership being the
Certificateholders (including the Seller in its capacity as recipient of
distributions from the Reserve Account), and the Notes being debt of the
partnership.
If the Trust were held to be an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes, rather
than a partnership, the Trust would be subject to a corporate level income tax.
Any such corporate income tax could materially reduce or eliminate cash that
would otherwise be distributable with respect to the Certificates (and
Certificateholders could be liable for any such tax that is unpaid by the
Trust).
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Partnership Taxation. As a partnership, the Trust will not be subject
to federal income tax, but each Certificateholder will be required to separately
take into account such holder's accruals of guaranteed payments from the Trust
and its allocated share of other income, gains, losses, deductions and credits
of the Trust. The Trust's income will consist primarily of interest earned on
the Financed Student Loans (including appropriate adjustments for market
discount, OID and bond premium), investment income from Eligible Investments in
the Trust Accounts and any gain upon collection or disposition of the Financed
Student Loans. The Trust's deductions will consist primarily of interest
accruing with respect to the Notes, guaranteed payments on the Certificates,
servicing and other fees, and losses or deductions upon collection or
disposition of the Financed Student Loans.
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). Under the Trust Agreement,
payments on the Certificates at the Certificate Rate (including accruals on
amounts previously due on the Certificates but not yet distributed) will be
treated as "guaranteed payments" under Section 707(c) of the Code. Guaranteed
payments are payments to partners for the use of their capital and, in the
present circumstances, are treated as deductible to the Trust and ordinary
income to the Certificateholders. The Trust will have a calendar year tax year
and will deduct the guaranteed payments under the accrual method of accounting.
Certificateholders with a calendar year tax year are required to include the
accruals of guaranteed 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 31 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.
In addition, the Trust Agreement will provide, in general, that the
Certificateholders will be allocated taxable income of the Trust for each
Collection Period equal to the sum of (i) prepayment premium, if any, payable to
the Certificateholders for such month, and (ii) any Trust income attributable to
discount on the Financed Student Loans that corresponds to any excess of the
principal amount of the Certificates over their initial issue price. Such
allocation will be reduced by any amortization by the Trust of premium on
Financed Student Loans that corresponds to any excess of the issue price of
Certificates over their principal amount. All remaining taxable income of the
Trust will be allocated to the Seller. It is believed that this allocation will
be valid 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
Certificate Rate plus the other items described above even though the Trust
might not have sufficient cash to make current cash distributions of such
amount. Thus, cash basis Certificateholders will, in effect, be required to
report income from the Certificates on the accrual basis. 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 will constitute
"unrelated business taxable income," which, under the Code, is generally taxable
to such a holder despite the holder's tax exempt status.
An individual taxpayer may generally deduct miscellaneous itemized
deductions (which do not include interest expenses) only to the extent they
exceed two percent of the individual's adjusted gross income. Those limitations
would apply to an individual Certificateholder's share of expenses of the Trust
(including fees paid to the Servicers) 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. It is not clear whether
these rules would be applicable to a Certificateholder accruing guaranteed
payments.
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 Financed
Student Loans, the Trust might be required to incur additional expense, but it
is believed that there would not be a material adverse affect on
Certificateholders.
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Discount and Premium. It is believed that the Financed Student Loans
will not be issued with OID, and, therefore, the Trust should not have OID
income. However, the purchase price paid by the Trust for the Financed Student
Loans may be greater or less than the remaining principal balance of the
Financed Student Loans at the time of purchase. If so, the Financed 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.) The Trust will make
an election that will result in any such market discount on the Financed Student
Loans being included in income currently as such discount accrues over the life
of the loans. As indicated above, a portion of such market discount income will
be allocated to Certificateholders. Similarly, the Trust will make an election
to amortize any market premium over the life of the Financed Student Loans,
which could result in additional deductions allocated to the Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust will
be deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust (which include the Certificates and
the Seller's interest) are sold or exchanged within a 12-month period. If such a
termination occurs the Trust will be considered to contribute all of its assets
and its liabilities to the Trust, as a new partnership (the "New Partnership"),
for an interest in the New Partnership; and immediately thereafter, the Trust,
as the former partnership (the "Terminated Partnership"), will be considered to
distribute interests in the New Partnership to the Certificateholders in
proportion to their respective interests in the Terminated Partnership in
liquidation of the Terminated Partnership. The Trust will not comply with
certain technical requirements that might apply when such a constructive
termination occurs. 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 lack of data.
Disposition of Certificates. Subject to the discussion in the
immediately following paragraph, generally, capital gain or loss will be
recognized on a sale of a Certificate in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificate sold.
A Certificateholder's tax basis in a Certificate will generally equal his cost
increased by his share of Trust income that is includible in his gross income
and decreased by any distributions received 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 such
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 Financed Student Loans
would generally be treated as ordinary income to the holder and would give rise
to special tax reporting requirements. The Trust does not expect to have any
other assets that would give rise to such special reporting requirements. Thus,
to avoid these special reporting requirements, the Trust will elect to include
any such market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed miscellaneous 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 Transferor and Transferee. In general, the Trust's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the close
of the last day of such month. As a result, a holder purchasing Certificates may
be allocated tax items (which will affect the tax liability and tax basis of the
holder) attributable to periods before the actual purchase takes place.
The use of such a monthly convention may not be permitted by existing
Treasury Regulations. If a monthly convention is not allowed (or is allowed only
for transfers of less than all of the partner's interest), taxable income or
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losses of the Trust might be reallocated among the Certificateholders. The
Seller is authorized to revise the Trust's method of allocation between
transferors and transferees to conform to a method permitted by any future
authority.
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 files 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 an 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. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and the
taxable year of the Trust will be the calendar year. The Eligible Lender Trustee
will file a partnership information return (IRS Form 1065) with the IRS for each
taxable year of the Trust and will report to holders (and to the IRS) each
Certificateholder's allocable share of items of Trust income and expense 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 notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee on behalf of another person 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 (i) the name, address and taxpayer identification number of
the nominee and (ii) as to each beneficial owner (x) the name, address and
taxpayer identification number of such person, (y) whether such person is a
United States person, a tax-exempt entity or a foreign government, an
international organization, or any wholly-owned agency or instrumentality of
either of the foregoing and (z) certain information concerning Certificates that
were held, acquired or transferred 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 31. Nominees, brokers and financial
institutions that fail to provide the Trust with the information described above
may be subject to penalties. The Trust will provide the Schedule K-1 information
to nominees that fail to provide the Trust with the information described above
and such nominees will be required to forward such information to the beneficial
owners of the Certificates.
The Seller, will be designated as the tax matters partner in the Trust
Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute 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 three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust by the appropriate taxing authorities could
result in an adjustment of the returns of the Certificateholders, and, under
certain circumstances, a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Trust. An adjustment could
also result in an audit of a Certificateholder's returns and adjustments of
items not related to the income and losses of the Trust.
Tax Consequences to Foreign Certificateholders. If the Trust is
considered to be engaged in a trade or business in the United States, it may be
required to withhold taxes on income allocable to non-U.S. 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. Because
it is unclear whether the Trust would be engaged in a trade or business in the
United States for such purposes, 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
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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 39.6% 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 nonforeign status, the Trust may rely on IRS Form W-8,
IRS Form W-9 or the holder's certification of nonforeign status signed under
penalties of perjury.
Each foreign Certificateholder might be required to file a U.S.
individual or corporate income tax return (including, in the case of a
corporation, the computation of the branch profits tax) on its share of accruals
of guaranteed payments and the Trust's income. Each foreign Certificateholder
must obtain a taxpayer identification number from the IRS and submit that number
to the Trust on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign Certificateholder generally would be entitled to file with
the IRS a claim for refund with respect to taxes withheld by the Trust, taking
the position that no taxes were due because the Trust was not engaged in a U.S.
trade or business. The Trust will cooperate in any such refund claim if it can
do so without incurring any out-of-pocket cost. No assurance can be given as to
whether any such refund claim would be granted.
The New Withholding Tax Regulations modify certain of the filing
requirements with which foreign persons must comply in order to be entitled to
an exemption from U.S. withholding tax or a reduction to the applicable U.S.
withholding tax rate. The New Withholding Tax Regulations generally are
effective for payments of interest due after December 31, 1999. Prospective
investors are urged to consult their tax advisors with respect to the effect of
the New Withholding Tax Regulations.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code. Certificateholders should consult with their
tax advisors as to their eligibility for exemption to backup withholding and the
procedure for obtaining the exemption, and the potential impact of the New
Withholding Tax Regulations.
PENNSYLVANIA INCOME AND FRANCHISE TAX CONSEQUENCES WITH RESPECT TO THE
CERTIFICATES
Because state and local income and franchise tax laws vary greatly, it
is impossible to predict the income and franchise tax consequences to the
Certificateholders in all of the state and local taxing jurisdictions in which
they are already subject to tax. Certificateholders are urged to consult their
own advisors with respect to state and local income and franchise taxes.
However, Pennsylvania Tax Counsel will, prior to the issuance of the Notes and
Certificates, deliver its opinion that the Trust will not be subject to
Pennsylvania corporate net income tax or capital stock franchise tax or any
other Pennsylvania entity level income or franchise tax. There is no assurance,
however, that this conclusion will not be challenged by the Pennsylvania taxing
authorities or, if challenged, that the taxing authorities will not be
successful. If the Trust were subject to an entity level tax in Pennsylvania,
any such tax could materially reduce or eliminate cash that would otherwise be
distributable with respect to the Certificates (and Certificateholders could be
liable for any such tax that is unpaid by the Trust). Certificateholders not
otherwise subject to taxation in Pennsylvania should not become subject to
taxation in Pennsylvania solely because of a holding ownership of Certificates.
However, for Pennsylvania resident Certificateholders otherwise subject to
Pennsylvania tax, the distributions on the Certificates will be included in
Pennsylvania taxable income.
THE FEDERAL AND PENNSYLVANIA TAX DISCUSSIONS SET FORTH ABOVE ARE
INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
NOTEHOLDER'S OR CERTIFICATEHOLDER'S PARTICULAR TAX SITUATION. PROSPECTIVE
INVESTORS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES
TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF NOTES AND CERTIFICATES,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS
AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
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Section 406 of ERISA, and/or Section 4975 of the Code, prohibit a
pension, profit-sharing or other employee benefit plan, as well as individual
retirement accounts, and certain types of Keogh Plans, and other plans subject
to Section 4975 of the Code (each a "Benefit Plan") from engaging in certain
transactions with persons that are "parties in interest" under ERISA or
"disqualified persons" under the Code with respect to such Benefit Plan. A
violation of these "prohibited transaction" rules may result in an excise tax or
other penalties and liabilities under ERISA and the Code for such persons. Title
I of ERISA also requires that fiduciaries of a Benefit Plan subject to ERISA
make investments that are prudent, diversified (except if prudent not to do so)
and in accordance with governing plan documents.
Certain transactions involving the purchase, holding or transfer of the
Notes might be deemed to constitute prohibited transactions under ERISA and the
Code if assets of the Trust were deemed to be assets of a Benefit Plan. Under a
regulation issued by the United States Department of Labor (the "Plan Assets
Regulation"), the assets of the Trust would be treated as plan assets of a
Benefit Plan for the purposes of ERISA and the Code only if the Benefit Plan
acquires an "Equity Interest" in the Trust and none of the exceptions contained
in the Plan Assets Regulation is applicable. An equity interest is defined under
the Plan Assets Regulation as an interest other than an instrument which is
treated as indebtedness under applicable local law and which has no substantial
equity features. The Notes should be treated as indebtedness without substantial
equity features for purposes of the Plan Assets Regulation. However, without
regard to whether the Notes are treated as an Equity Interest for such purposes,
the acquisition or holding of Notes by or on behalf of a Benefit Plan could be
considered to give rise to a prohibited transaction if the Trust, the Trustee or
the Indenture Trustee, the Seller, the owner of collateral, or any of their
respective affiliates is or becomes a party in interest or a disqualified person
with respect to such Benefit Plan. In such case, certain exemptions from the
prohibited transaction rules could be applicable depending on the type and
circumstances of the plan fiduciary making the decision to acquire a Note.
Included among these exemptions are: Prohibited Transaction Class Exemption
("PTCE") 90-1, regarding investments by insurance company pooled separate
accounts; PTCE 95-60, regarding investments by insurance company general
accounts; PTCE 91-38, regarding investments by bank collective investment funds;
PTCE 96-23, regarding transactions affected by in-house asset managers; and PTCE
84-14, regarding transactions effected by "qualified professional asset
managers."
Employee benefit plans that are governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA) are not subject to ERISA requirements.
A plan fiduciary considering the purchase of Notes should consult its
tax and/or legal advisors regarding whether the assets of the Trust would be
considered plan assets, the possibility of exemptive relief from the prohibited
transaction rules and other issues and their potential consequences.
No Certificates may be purchased for, or on behalf of, any Benefit Plan
or any entity whose underlying assets are deemed to be plan assets of such
Benefit Plan.
If the Securities are Certificates, the purchaser is deemed to have
represented that it is not acquiring the Certificates directly or indirectly
for, or on behalf of, a Benefit Plan or any entity whose underlying assets are
deemed to be plan assets of such Benefit Plan. If the Securities are Notes, the
purchaser is deemed to have represented that either: (A) the purchaser is not
acquiring the Notes directly or indirectly for, or on behalf of, a Benefit Plan
or any entity whose underlying assets are deemed to be plan assets of such
Benefit Plan, or (B) the acquisition and holding of the Notes by the purchaser
qualifies for prohibited transaction exemptive relief under PTCE 95-60, PTCE
96-23, PTCE 91-38, PTCE 90-1, PTCE 84-14 or some other applicable exemption.
UNDERWRITING
Subject to the terms and conditions set forth in the respective
Underwriting Agreements relating to the Notes and the Certificates (the
"Underwriting Agreements"), the Seller has agreed to cause the Trust to sell to
the underwriters named below (the "Underwriters"), and each of the Underwriters
has severally agreed to purchase, the principal amount of Class IA-1 Notes,
Class IA-2 Notes and Class I-B Certificates set forth opposite its name:
PRINCIPAL PRINCIPAL
UNDERWRITER AMOUNT OF PRINCIPAL AMOUNT OF AMOUNT OF
CLASS IA-1 NOTES CLASS IA-2 NOTES CLASS I-B CERTIFICATES
---------------- ---------------- ---------------------
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125
Credit Suisse First Boston Corporation............
Key Capital Markets, Inc..........................
Total....................................
PRINCIPAL
PRINCIPAL AMOUNT OF
AMOUNT OF PRINCIPAL AMOUNT OF CLASS II-B
UNDERWRITER CLASS IIA-1 NOTES CLASS IIA-2 NOTES CERTIFICATES
- ------------ ----------------- ----------------- ------------
Credit Suisse First Boston Corporation............
Key Capital Markets, Inc..........................
Total....................................
In the respective Underwriting Agreements, the Underwriters have
agreed, subject to the terms and conditions set forth therein, to purchase (i)
all the Notes offered hereby if any of the Notes are purchased and (ii) all the
Certificates offered hereby if any of the Certificates are purchased. The Seller
has been advised by the Underwriters that the Underwriters propose initially to
offer the Securities to the public at the respective public offering prices set
forth on the covering page of this Prospectus, and to certain dealers at such
prices less a concession not in excess of % per Class IA-1 Note, % per Class
IA-2 Note, ___% per Class I-B Certificate, ___% per Class II A-1 Note, ___% per
Class II A-2 Note, and ___% per Class II-B Certificate. The Underwriters may
allow and such dealers may reallow to other dealers a discount not in excess of
% per Class IA-1 Note, % per Class IA-2 Note, ___% per Class I-B Certificate,
___% per Class II-A-1 Note, ___% per Class II-A-2 Note and ___% per Class II-B
Certificate. After the initial public offering, such public offering prices,
concessions and reallowances may be changed.
Credit Suisse First Boston Corporation has informed the Seller that it
does not expect discretionary sales by the Underwriters to exceed 5% of the
aggregate principal amount of the Notes and the Certificates being offered
hereby.
The Seller does not intend to apply for listing of the Securities on a
national securities exchange, but has been advised by Credit Suisse First Boston
Corporation that it intends to, and by Key Capital Markets, Inc. that it may,
make a market in the Securities. The Underwriters are not obligated, however, to
make a market in the Securities and may discontinue market making at any time
without notice. No assurance can be given as to the liquidity of the trading
market for the Securities.
The Underwriting Agreements provide that the Seller will indemnify the
Underwriters against certain liabilities, including liabilities under applicable
securities laws, or contribute to payments the Underwriters may be required to
make in respect thereof.
The Trust may, from time to time, invest the funds in the Trust
Accounts in Eligible Investments acquired from the Underwriters.
The closing of the sale of the Certificates is conditioned on the
closing of the sale of the Notes and the closing of the sale of the Notes is
conditioned on the closing of the sale of the Certificates.
Credit Suisse First Boston Corporation is engaged from time to time by
KeyCorp, the parent corporation of the Seller, to provide investment banking
services.
After the initial distribution of the Securities by the Underwriters,
this Prospectus may be used by Key Capital Markets, Inc. in connection with
offers and sales relating to market making transactions in the Securities. Key
Capital
122
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Markets, Inc. may act as principal or agent in such transactions, but has no
obligation to do so. Such transactions will be at prices related to prevailing
market prices at the time of sale.
Key Capital Markets, Inc. is a broker-dealer registered as such with
the National Association of Securities Dealers, Inc., and commenced business on
February 26, 1996. Key Capital Markets, Inc. has acted as an underwriter in a
variety of public finance offerings as well as a number of asset-backed and
other debt offerings for subsidiaries of Key Corp. The Seller is an affiliate of
Key Capital Markets, Inc.
123
127
LEGAL MATTERS
Certain legal matters relating to the Securities will be passed upon
for the Trust, the Seller and the Administrator by Forrest F. Stanley, Esq.,
General Counsel and Secretary of the Seller, as counsel for the Seller, and by
Thompson Hine & Flory LLP, Cleveland, Ohio and for the Underwriters by Stroock &
Stroock & Lavan, New York, New York. Certain federal income tax and other
matters will be passed upon for the Trust by Thompson Hine & Flory LLP. Certain
Pennsylvania state income tax matters will be passed upon for the Trust by
- ------------.
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128
INDEX OF PRINCIPAL TERMS
Set forth below is a list of the defined terms used in this Prospectus
and the pages on which the definitions of such terms may be found herein.
PAGE
- ----
1992 Amendments.......................................................................24
52 Week T-Bill Rate..................................................................106
91-day Treasury Bill Rate.............................................................45
AACSB.................................................................................40
Accrued Expected Expense Payment......................................................95
Additional Student Loans..............................................................13
Administration Agreement...............................................................4
Administration Fee....................................................................37
Administrator..........................................................................2
Administrator Default................................................................107
Applicable Trustee....................................................................88
ASA....................................................................................9
Assigned Rights.......................................................................22
Association............................................................................1
Auction Purchase Amount...............................................................20
Available Funds.......................................................................99
Available Loan Purchase Funds.........................................................16
Bank..................................................................................36
Benefit Plan.........................................................................121
Capped Amount.........................................................................19
Cede...................................................................................2
Cedel..................................................................................3
Cedel Participants....................................................................89
Certificate Balance.................................................................101
Certificate Pool Factor...............................................................79
Certificate Rate......................................................................82
Certificateholder.....................................................................88
Certificateholders....................................................................35
Certificateholders' Distribution Amount..............................................101
Certificateholders' Interest Carryover Shortfall.....................................101
Certificateholders' Interest Distribution Amount.....................................101
Certificateholders' Interest Index Carryover...........................................6
Certificateholders' Principal Distribution Amount....................................102
Certificates...........................................................................1
Class IA-2 Note Pool Factor...........................................................79
Class I-B Certificate Pool Factor.....................................................79
Class II-B Certificate Pool Factor....................................................79
Class A-2 Note Pool Factor............................................................79
Code.................................................................................114
Cohort Default Rate...................................................................78
Collateral Agent..................................................................19,105
Collection Account....................................................................14
Collection Period.....................................................................11
Commission.............................................................................2
Consolidation Loans...................................................................52
Cooperative...........................................................................89
cumulative cash reserves..............................................................73
Deferral..............................................................................59
Deferral Period.......................................................................46
Definitive Certificates...............................................................90
Definitive Notes......................................................................90
Definitive Securities.................................................................90
129
Department.............................................................................4
Depositaries..........................................................................88
Depository............................................................................79
Determination Date....................................................................99
DOE Data Book.........................................................................73
DTC....................................................................................2
ECMC...................................................................................9
EFS....................................................................................1
Eligible Deposit Account..............................................................93
Eligible Institution..................................................................93
Eligible Investments..................................................................93
Eligible Lender Trustee................................................................4
Eligible Student......................................................................40
ERISA Considerations..................................................................21
Escrow Account........................................................................14
Euroclear..............................................................................3
Euroclear Operator....................................................................89
Euroclear Participants................................................................89
Event of Default......................................................................85
Excess Servicing Fee..................................................................19
Exchange Act...........................................................................2
Expected Interest Collections.........................................................80
Expected Rate.........................................................................95
FDIA..................................................................................30
FDIC..................................................................................30
Federal Assistance....................................................................44
Federal Consolidation Loan............................................................48
Federal Consolidation Loan Rebate.....................................................49
Federal Consolidation Loans...........................................................40
Federal Direct Student Loan Program...................................................25
Federal Guarantee Agreements..........................................................39
Federal Guarantors.....................................................................9
Federal Loans.........................................................................24
Federal Origination Fee...............................................................26
Federal Programs......................................................................26
Federal Tax Counsel...................................................................21
FFELP.................................................................................29
Final Subsequent Transfer Date........................................................16
Financed Federal Loans.................................................................4
Financed Private Loans.................................................................4
Financed Student Loans.................................................................4
FIRREA................................................................................30
Forbearance...........................................................................59
Forbearance Period....................................................................46
foreign person.......................................................................115
Formula Rate..........................................................................80
Funding Period........................................................................13
Grace.................................................................................59
Grace Period..........................................................................45
Graduate Loan Programs................................................................39
Graduate Schools......................................................................39
Group 1 Other Additional Pre-Funded Amount............................................12
Group 1 Other Additional Pre-Funding Subaccount.......................................93
Group 1 Pre-Funded Amount.............................................................11
Group 1 Subsequent Pool Pre-Funded Amount..............................................8
Group 1 Subsequent Pool Pre-Funding Subaccount........................................12
Group 2 Other Additional Pre-Funded Amount............................................12
Group 2 Other Additional Pre-Funding Subaccount.......................................12
Group 2 Pre-Funded Amount.............................................................11
Group 2 Subsequent Pool Pre-Funded Amount..............................................8
Group 2 Subsequent Pool Pre-Funding Subaccount........................................12
Guarantee Agreement...................................................................24
Guarantee Agreements..................................................................39
130
Guarantee Fee Advance.................................................................51
Guarantee Payments....................................................................24
Guarantor.............................................................................39
Guarantors.............................................................................9
HICA...................................................................................9
Higher Education Act...................................................................9
Indenture..............................................................................4
Indenture Trustee......................................................................4
Index Maturity........................................................................84
Indirect Participants.................................................................88
Initial Financed Federal Loans........................................................10
Initial Financed Private Loans........................................................10
Initial Financed Student Loans........................................................13
Initial Pool Balance..................................................................11
In-School.............................................................................59
Insolvency Event......................................................................33
Interest Period.......................................................................80
Interest Subsidy Payments.............................................................44
Interim...............................................................................51
Investment Earnings...................................................................93
Investor Index.........................................................................5
IRS..................................................................................114
KCMI...................................................................................3
LIBOR Determination Date..............................................................84
Liquidated Student Loans..............................................................99
Liquidation Proceeds..................................................................99
Loan Group 1.........................................................................1,4
Loan Group 2.........................................................................1,3
Loan Purchase Termination Date........................................................13
Lock-In Period........................................................................83
Margin.................................................................................5
Maximum TERI Payment Amount...........................................................19
Minimum Purchase Amount...............................................................20
Monthly Rebate Fee....................................................................26
Monthly Servicing Payment Date........................................................15
Negative Carry Account................................................................16
Negative Carry Account Initial Deposit................................................16
Net Government Receivable............................................................102
new borrowers.........................................................................45
New Partnership......................................................................118
New Withholding Tax Regulations......................................................116
Note Collateralization Amount........................................................102
Note Interest Rate....................................................................80
Noteholder............................................................................88
Noteholders...........................................................................35
Noteholders' Distribution Amount....................................................102
Noteholders' Interest Carryover Shortfall...........................................102
Noteholders' Interest Distribution Amount...........................................102
Noteholders' Principal Distribution Amount..........................................102
Noteholders' Interest Carryover Shortfall............................................102
Noteholders' Interest Index Carryover..................................................6
Noteholders' Priority Principal Distribution Amount..................................103
Notes..................................................................................1
NSLP...................................................................................9
Obligors.............................................................................103
OID..................................................................................115
OID regulations......................................................................115
original principal amount of outstanding loans........................................73
Other Additional Pre-Funded Amount....................................................93
Other Additional Pre-Funding Subaccount...............................................12
Other Student Loans...................................................................13
Other Subsequent Student Loans........................................................13
Participants..........................................................................80
131
PHEAA..................................................................................1
Plan Assets Regulation...............................................................121
Pool Balance..........................................................................11
Pool Factor...........................................................................79
Pre-Funding Account...................................................................11
Principal Distribution Amount.......................................................103
Principal Distribution Amount..........................................................7
Private Consolidation Guarantee Fee...................................................52
Private Consolidation Loan............................................................52
Private Consolidation Loans.".........................................................40
Private Guarantee Agreements..........................................................39
Private Guarantors.....................................................................9
Private Loan Repayment Commencement Date..............................................51
Private Loans.........................................................................25
Programs..............................................................................39
PTCE.................................................................................121
Purchase Amount.......................................................................92
Purchase Price........................................................................12
Realized Losses......................................................................106
Reference Bank........................................................................84
Related Documents.....................................................................87
Repayment.............................................................................51
Reserve Account.......................................................................16
Reserve Account Initial Deposit.......................................................17
Rules.................................................................................89
Secretary.............................................................................27
Securities.............................................................................2
Securities Act.......................................................................2,3
Securityholder........................................................................88
Seller.................................................................................1
Seller Insolvency Event..............................................................109
Seller Trusts.........................................................................28
Serial Loans..........................................................................94
Servicer...............................................................................1
Servicer Default......................................................................13
Servicing Fee.........................................................................18
SLS Loans.............................................................................40
SLS Program...........................................................................47
Special Allowance Payments............................................................44
Special Determination Date.............................................................8
Specified Collateral Balance...........................................................7
Specified Reserve Account Balance.....................................................15
Stafford Loans........................................................................40
Statistical Cutoff Date................................................................8
Student Loan Rate.....................................................................80
Student Loans..........................................................................1
Subsequent Cutoff Date................................................................95
Subsequent Pool........................................................................8
Subsequent Pool Pre-Funding Subaccount................................................93
Subsequent Pool Student Loans.........................................................13
T-Bill Rate...........................................................................83
Telerate Page 3750....................................................................84
TERI...................................................................................5
TERI Guarantee Payment Account........................................................19
Terminated Partnership...............................................................118
Termination...........................................................................33
Terms and Conditions..................................................................90
The Graduate Loan Programs............................................................44
Three-Month LIBOR.....................................................................84
total dollars available for guaranty payment..........................................76
total loans outstanding...............................................................76
Transfer Agreement....................................................................95
Transfer and Servicing Agreements.....................................................92
132
Transfer Date.........................................................................14
Trust..................................................................................2
Trust Accounts........................................................................93
Trust Agreement........................................................................4
UCC..................................................................................111
Underlying Federal Loan...............................................................48
Underlying Private Loans..............................................................52
Underwriters...........................................................................1
Underwriting Agreements..............................................................121
unrelated business taxable income....................................................114
Unsubsidized Stafford Loans...........................................................44
133
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SELLER, THE TRUST OR
THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION
BY ANYONE IN ANY STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR
IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO
OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
TABLE OF CONTENTS
PAGE
Available Information................................
Reports to Securityholders...........................
Summary of Terms.....................................
Risk Factors.........................................
Formation of the Trust...............................
Management's Discussion and Analysis of
Financial Condition and Results of Operations.....
Use of Proceeds......................................
The Seller, the Administrator and the Servicers......
The Student Loan Financing Business..................
The Financed Student Loan Pool.......................
Pool Factors and Trading Information.................
Description of the Securities........................
Description of the Transfer
and Servicing Agreements...........................
Certain Legal Aspects of the
Financed Student Loans.............................
Income Tax Consequences..............................
ERISA Considerations.................................
Underwriting.........................................
Legal Matters........................................
Index of Principal Terms.............................
UNTIL ___________, 199_ (90 DAYS AFTER THE DATE
OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS
IN THE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS CREDIT SUISSE FIRST
BOSTON DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO KEY CAPITAL MARKETS, INC.
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
$___________
KEYCORP STUDENT LOAN TRUST 1998-A
$___________
FLOATING RATE CLASS IA-1
ASSET BACKED NOTES
$___________
FLOATING RATE CLASS IA-2
ASSET BACKED NOTES
$-----------
FLOATING RATE CLASS I-B
ASSET BACKED CERTIFICATES
$___________
FLOATING RATE CLASS IIA-1
ASSET BACKED NOTES
$___________
FLOATING RATE CLASS IIA-2
ASSET BACKED NOTES
$__________
FLOATING RATE CLASS II-B
ASSET BACKED CERTIFICATES
KEY BANK USA, NATIONAL ASSOCIATION
SELLER
PROSPECTUS
CREDIT SUISSE FIRST BOSTON
KEY CAPITAL MARKETS, INC.
134
[Alternate Page]
SUBJECT TO COMPLETION, DATED ___________ __, 1998
$_____________
KEYCORP STUDENT LOAN TRUST 1998-A
KEY BANK USA, NATIONAL ASSOCIATION
Seller
The KeyCorp Student Loan Trust 1998-A (the "Trust") will issue four
classes of notes (the "Notes") and two classes of certificates (the
"Certificates and together with the Notes (the "Securities") as set forth below.
The Class IA-1 Notes and Class IA-2 Notes will be secured by a group ("Loan
Group 1") of law school, medical school, dental school, graduate business
school, and other graduate school student loans ("Student Loans"), originated by
Key Bank USA, National Association (the "Seller") and reinsured by the United
States Department of Education as described herein. The Class I-B Certificates
will represent undivided beneficial ownership interests in the Student Loans to
be included in Loan Group 1. The Class IIA-1 Notes and Class IIA-2 Notes will be
secured by a group ("Loan Group 2") of Student Loans that are not reinsured by
the United States Department of Education. The Class II-B Certificates will
represent undivided beneficial ownership interests in the Student Loans to be
included in Loan Group 2. Pennsylvania Higher Education Assistance Agency
("PHEAA" and in its capacity as servicer, "Servicer") and EFS Services, Inc.
("EFS" or "Servicer") will service the Student Loans included in the Trust.
Interest on and principal of the Securities will be payable quarterly
on or about the twenty-seventh day of each March, June, September and December,
commencing December 27, 1998; provided, that no distributions in respect of
principal of the Class A-2 Notes related to a Loan Group will be payable until
the Class A-1 Notes related to such Loan Group are paid in full, and no
distributions in respect of principal of the Certificates related to a Loan
Group will be payable until the Class A-2 Notes related to such Loan Group are
paid in full. The rights of Certificateholders to receive payments of interest
and principal shall be subordinated to the rights of the Noteholders to receive
payments of interest and principal to the extent described herein.
Neither the Notes nor the Certificates will be listed on any national
securities exchange. Credit Suisse First Boston Corporation intends to, and Key
Capital Markets, Inc. may, make a secondary market in the Notes and the
Certificates but neither has any obligation to do so. There can be no assurance
that a secondary market for the Notes or the Certificates will develop or, if it
does develop, that it will continue.
SEE "RISK FACTORS" BEGINNING ON PAGE FOR CERTAIN CONSIDERATIONS RELEVANT TO AN
INVESTMENT IN THE SECURITIES.
THE CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN, AND THE NOTES REPRESENT
OBLIGATIONS OF, THE TRUST ONLY AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS
OF THE SELLER, THE SERVICERS OR ANY AFFILIATE THEREOF. NEITHER THE CERTIFICATES
NOR THE NOTES ARE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAVE APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------------
Original Class
Principal Underwriting Proceeds to
Balance Interest Rate Price to Public Discount Seller(2)
------- ------------- --------------- -------- ---------
Class IA-1 Notes...... $ (1) % % %
Class IA-2 Notes...... $ (1) % % %
Class I-B Certificates $ (1) % % %
Class IIA-1 Notes..... $ (1) % % %
Class IIA-2 Notes..... $ (1) % % %
Class II-B Certificates $ (1) % % %
Total
<FN>
(1) Interest will accrue with respect to each Interest Period at a rate per
annum equal to the lesser of (i) the applicable Investor Index plus the
applicable Margin and (ii) the Student Loan Rate as described herein.
(2) Before deducting expenses, estimated to be $___________.
The Securities are offered by Credit Suisse First Boston Corporation and
Key Capital Markets, Inc. (the "Underwriters") when, as and if issued by the
Trust, delivered to and accepted by the Underwriters and subject to their right
to reject orders in whole or in part. It is expected that delivery of the
Securities in book-entry form will be made through the facilities of The
Depository Trust Company on the Same Day Funds Settlement System and, in the
case of the Notes, also Cedel Bank, societe anonyme and the Euroclear System on
or about ________ __, 1998.
This Prospectus is to be used by Key Capital Markets, Inc. ("KCMI") an
affiliate of the Seller in connection with offers and sales related to market
making transactions in the Securities in which KCMI acts as principal. KCMI may
also act as agent in such transactions. Sales will be made at prices related to
the prevailing prices at the time of sale.
The date of this Prospectus is _______________, ___.
135
[Alternate Page]
PLAN OF DISTRIBUTION
This Prospectus is to be used by KCMI, an affiliate of the Seller, in
connection with offers and sales related to market-making transactions in the
Securities in which KCMI acts as principal. KCMI may also act as agent in such
transactions. Sales will be made at prices related to prevailing prices at the
time of sale. Any obligations of KCMI are the sole obligations of KCMI and do
not create any obligations on the part of any affiliate of KCMI.
In connection with the offering, KCMI may engage in transactions that
stabilize, maintain or otherwise affect the price of the Notes and the
Certificates. Specifically, KCMI may overallot the offering, creating a short
position in the Notes and the Certificates for its own account. KCMI may bid for
and purchase Notes and Certificates in the open market to cover such short
positions. In addition, KCMI may bid for and purchase Notes and Certificates in
the open market to stabilize the price of the Notes and the Certificates. These
activities may stabilize or maintain the market price of the Notes and the
Certificates above independent market levels. KCMI is not required to engage in
these activities, and may end these activities at any time.
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136
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses in connection with the offering of the Notes and the
Certificates being registered herein are estimated as follows:
SEC registration fee............................................................... $
Legal fees and expenses............................................................
Accounting fees and expenses.......................................................
Rating agency fees.................................................................
Eligible Lender Trustee fees and expenses..........................................
Indenture Trustee fees and expenses................................................
Printing and engraving.............................................................
Servicer conversion fees...........................................................
Miscellaneous...................................................................... -----------
Total..................................................................... $ ===========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Paragraph (a) of Article Tenth of the Articles of Association of the
Registrant (this "Association") provides as follows:
(a) This Association shall indemnify, to the full extent
permitted or authorized by the Ohio General Corporation Law as it may
from time to time be amended, any person made or threatened to be made
a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, or investigative,
by reason of the fact that he is or was a director, officer, or
employee of this Association, or is or was serving at the request of
this Association as a director, trustee, officer, or employee of
another association, corporation, partnership, joint venture, trust, or
other enterprise; in the case of a person serving at the request of
this Association, such request shall be evidenced by a resolution of
the Board of Directors or a duly authorized committee thereof or by a
writing executed by an officer of this Association pursuant to a
resolution of the Board of Directors or a duly authorized committee
thereof. In the case of a merger into this Association of a constituent
association which, if its separate existence had continued, would have
been required to indemnify directors, officers, or employees in
specified situations prior to the merger, any person who served as a
director, officer, or employee of the constituent association, or
served at the request of the constituent association as a director,
trustee, officer, or employee of another association, corporation,
partnership, joint venture, trust, or other enterprise, shall be
entitled to indemnification by this Association (as the surviving
association) for acts, omissions, or other events or occurrences prior
to the merger to the same extent he would have been entitled to
indemnification by the constituent association if its separate
existence had continued. The indemnification provided by this Article
Tenth shall not be deemed exclusive of any other rights to which any
person seeking indemnification may be entitled by law or under these
Articles or the Bylaws of this Association, or any agreement, vote of
shareholders or disinterested directors, or otherwise, both as to
action in his official capacity and as to action in another capacity
while holding such office, and shall continue as to a person who has
ceased to be a director, trustee, officer, or employee and shall inure
to the benefit of the heirs, executors, and administrators of such a
person.
(b) Notwithstanding division (a) of this [Article Tenth], no
director, officer, or employee of this Association shall be indemnified
against expenses, including attorneys' fees, penalties or other
payments incurred in an administrative proceeding or action instituted
by the Comptroller of the Currency or other
II-1
137
appropriate bank regulatory agency when such proceeding or action
results in a final order assessing civil money penalties against, or
requiring affirmative action of, such director, officer, or employee in
the form of payments to this Association.
Reference is made to Section 1701.13(E) of the General Corporation Law
of the State of Ohio relating to indemnification of directors, officers and
employees of an Ohio corporation. For the full text of Article Tenth of the
Registrant's Articles of Association, reference is hereby made to Exhibit 3(a)
hereto.
The Registrant also maintains insurance on behalf of each director and
certain officers against any loss arising from any claim asserted against him in
any such capacity, subject to certain exclusions.
ITEM 16. EXHIBITS.
1.1. Form of Underwriting Agreement for Notes*
1.2. Form of Underwriting Agreement for Certificates*
3.1. Articles of Association of Key Bank USA, National Association*
3.2. Bylaws of Key Bank USA, National Association*
4.1. Form of Indenture between the Trust and the Indenture Trustee (including as exhibits thereto a form
of Floating Rate Asset Backed Note)*
4.2. Form of Amended and Restated Trust Agreement between Key Bank USA, National Association and the
Eligible Lender Trustee (including as an exhibit thereto a form of Floating Rate Asset Backed
Certificate)*
5.1. Opinion of Forrest F. Stanley, Esq. with respect to legality*
8.1. Opinion of Thompson Hine & Flory LLP with respect to federal tax matters*
8.2. Opinion of ____________ with respect to Pennsylvania tax matters*
10.1. Form of Sale and Servicing Agreement among the Seller, the Servicers, the Trust, the Eligible
Lender Trustee and the Administrator*
10.2. Form of Supplemental Sale and Servicing Agreement among Key Bank USA, National Association, as
Seller and Administrator, the Servicers, the Trust and the Eligible Lender Trustee*
10.3. Form of Administration Agreement among the Administrator, the Trust and the Indenture Trustee*
10.4. Form of Guarantee Agreement between the Eligible Lender Trustee on behalf of the Trust and PHEAA*
10.5. Form of Guarantee Agreement between the Eligible Lender Trustee on behalf of the Trust and ASA*
10.6. Form of Guarantee Agreement between the Eligible Lender Trustee on behalf of
the Trust and NSLP*
10.7. Form of Guarantee Agreement between the Eligible Lender Trustee on behalf of the Trust and
ECMC*
10.8. Form of Guarantee Agreement among the Eligible Lender Tristee on behalf of the Trust,
Key Bank USA, National Association as Seller, and TERI*.
10.9 Form of Guarantee Agreement between the Eligible Lender Trustee on behalf of the Trust and HICA*
23.1. Consent of Forrest F. Stanley, Esq. (included as part of Exhibit 5.1)*
23.2. Consent of Thompson Hine & Flory LLP (included as Exhibit 8.1)*
23.3. Consent of ________________________(included as Exhibit 8.2)*
24.1. Powers of Attorney of directors and officers of Key Bank USA, National Association
25.1. Statement of Eligibility under the Trust Indenture Act of 1939 of the Indenture Trustee*
<FN>
- ---------------
* To be filed by amendment
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) To provide to the Underwriters at the closing specified in
the Underwriting Agreements Notes and Certificates in such
denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
II-2
138
(2) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act") may be
permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 15, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(3) For purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the time it was
declared effective.
(4) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating
to the securities offered therein, and the offering of such securities
at the time shall be deemed to be the initial bona fide offering
thereof.
(5) For purposes of determining any liability under the
Securities Act, each filing of the Registrant's annual report pursuant
to section 13(a) or section 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") that is incorporated by reference
in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(6) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section
10(a) (3) of the Securities Act;
(ii) To reflect in the Prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the
registration statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(7) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(8) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
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139
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3, it believes that the securities
rating requirement for use of Form S-3 will be met by the time of sale of the
securities and it has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Cleveland, State of Ohio, on June 29, 1998.
KEY BANK USA, NATIONAL ASSOCIATION
By: /s/Forrest F. Stanley
---------------------------------
Forrest F. Stanley, Assistant
Secretary and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed on June 29, 1998, by the following persons in the
capacities indicated.
Signature Title
--------- -----
* Principal Executive Officer and Director
----------------------------
James A. Fishell
* Principal Financial Officer
----------------------------
Ronald J. Nicolas, Jr.
* Principal Accounting Officer
----------------------------
Joseph A. Pampush
* Director
----------------------------
Allen J. Gula, Jr.
* Director
----------------------------
Kevin M. Blakely
* Director
----------------------------
K. Brent Somers
/s/Forrest F. Stanley Director
----------------------------
Forrest F. Stanley
*By: /s/Forrest F. Stanley
-----------------------------
Forrest F. Stanley
Attorney-in-Fact
June 29, 1998
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140
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
--- ----------------------
1.1. Form of Underwriting Agreement for Notes*
1.2. Form of Underwriting Agreement for Certificates*
3.1. Articles of Association of Key Bank USA, National Association*
3.2. Bylaws of Key Bank USA, National Association*
4.1. Form of Indenture between KeyCorp Student Loan Trust 1998-A (the "Trust")
and Bankers Trust Company (the "Indenture Trustee") (including as exhibits
thereto a form of Floating Rate Asset Backed Note)*
4.2. Form of Amended and Restated Trust Agreement between Key Bank USA,
National Association and The First National Bank of Chicago (the
"Eligible Lender Trustee") (including as an exhibit thereto a form
of Floating Rate Asset Backed Certificate)*
5.1. Opinion of Forrest F. Stanley, Esq. with respect to legality*
8.1. Opinion of Thompson Hine & Flory LLP with respect to federal and
Pennsylvania tax matters*
8.2. Opinion of ___________________with respect to Pennsylvania tax matters*
10.1. Form of Sale and Servicing Agreement among Key Bank USA, National
Association (in its capacity as the Seller and the Administrator),the
Servicers, the Trust and the Eligible Lender Trustee*
10.2. Form of Supplemental Sale and Servicing Agreement among Key Bank USA,
National Association, as Seller and Administrator, the Servicers, the
Trust and the Eligible Lender Trustee*
10.3. Form of Administration Agreement among the Administrator, the Servicers,
the Trust and the Indenture Trustee*
10.4. Form of Guarantee Agreement between the Eligible Lender Trustee on behalf
of the Trust and the Pennsylvania Higher Education Assistance Agency
("PHEAA")*
10.5. Form of Guarantee Agreement between the Eligible Lender Trustee on behalf
of the Trust and American Student Assistance ("ASA")*
10.6. Form of Guarantee Agreement between the Eligible Lender Trustee on behalf
of the Trust and Nebraska Student Loan Program ("NSLP")*
10.7. Form of Guarantee Agreement between the Eligible Lender Trustee on behalf of the
Trust and Educational Credit Management Corporation ("ECMC")*
10.8. Form of Guarantee Agreement among the Eligible Lender Trustee on behalf of the Trust,
Key Bank USA, National Association and The Education Resrources Institute, Inc.
("TERI")*
10.9. Form of Guarantee Agreement between the Eligible Lender Trustee on behalf of the
Trust and Hemar Insurance Company of America ("HICA")*
23.1. Consent of Forrest F. Stanley, Esq. (included as part of Exhibit 5.1)*
23.2. Consent of Thompson Hine & Flory LLP (included as Exhibit 8.1)*
23.3. Consent of ________________________(included as Exhibit 8.2)*
24.1. Powers of Attorney of directors and officers of Key Bank USA, National
Association
25.1. Statement of Eligibility under the Trust Indenture Act of 1939 of the
Indenture Trustee*
- ------------------------
* To be filed by amendment
II-5