1. No category

Rule 15c2-12 Filing Cover Sheet
This cover sheet should be sent with all submissions made to the Municipal Securities Rulemaking Board (MSRB), Nationally
Recognized Municipal Securities Information Repositories (NRMSIRs), and any applicable State Information Depository (SIDs) pursuant to
Securities and Exchange Commission (SEC) rule 15c2-12 or any analogous state statute.
Issuer Name: Educational Funding Services, Inc.
Issue(s): See Attachment 1 & 2
Filing Format: _X_ electronic
http://www.brazosgroup.com/
paper; if available on the Internet, give URL:
CUSIP Numbers to which the information filed relates (optional):
X Nine-digit number(s) (attach additional sheet if necessary):
A.
Six-digit number if information filed relates to all securities of the issuer:
* * *
X Annual Financial Information and Operating Data pursuant to Rule 15c2-12
(Financial information and operating data should not be filed with the MSRB)
Fiscal Period Covered 7/1/2008 – 6/30/2009
__ Monthly __Quarterly X Annual __Other:______
B.
X Audited Financial Statements or CAFR pursuant to Rule 15c2-12
Fiscal Period Covered
7/1/2008 – 6/30/2009
C. __ Notice of Material Event pursuant to Rule 15c2-12
1.__ Principal and interest payment delinquencies
2.__ Non-payment related defaults
3.__ Unscheduled draws on debt service reserves reflecting financial difficulties
4.__ Unscheduled draws on credit enhancements reflecting financial difficulties
5.__ Substitution of credit or liquidity providers, or their failure to perform
6.__ Adverse tax opinions or events affecting the tax-exempt status of the security
7.__ Modifications to rights of security holders
8.__ Bond calls
9.__ Defeasances
10.__Release, substitution, or sale of property securing repayment of the securities
11.__Rating changes
D. __ Notice of Failure to Provide Annual Financial Information as Required
E.
Notice of change of fiscal year end
F. __ Other Secondary Market Information
* * *
I hereby represent that I am authorized by the issuer or its agent to distribute this information publicly:
Signature: /s/ Ricky Turman
Name: Ricky Turman
Title: Chief Financial Officer
Employer: Brazos Higher Education Service Corporation, Inc.
Address: 2600 Washington Avenue, Waco, Texas 76710
Telephone: (254) 753-0915
Email Address: [email protected]
MUNICIPAL SECONDARY MARKET DISCLOSURE
ATTACHMENT #1 TO COVER SHEET
EDUCATIONAL FUNDING SERVICES, INC.
2005 Trust
YEAR
SERIES
CUSIP #
2005
A-2
A-3
A-1
A-2
A-3
A-1
B-1
281486AB6
281486AC4
281486AE0
281487AA6
281487AB4
281487AD0
281486AJ9
2006
2007
MUNICIPAL SECONDARY MARKET DISCLOSURE
ATTACHMENT #2 TO COVER SHEET
EDUCATIONAL FUNDING SERVICES, INC.
2003 Trust
YEAR
SERIES
CUSIP #
2003
2004
B-1
A-1
B-1
A-1
A-2
A-3
A-4
B-1
A-1
268440AF1
268440AG9
268440AH7
268440AJ3
268440AK0
268440AL8
268440AM6
268440AN4
268440AP9
2005
2006
EDUCATIONAL FUNDING SERVICES, INC.
Annual Continuing Disclosure Statement Regarding the 2005 Trust, including:
STUDENT LOAN ASSET-BACKED NOTES
$54,750,000 Series 2005A-2
$30,450,000 Series 2005A-3
(Auction Rate Securities)
and
STUDENT LOAN ASSET-BACKED NOTES
$20,000,000 Series 2006A-1
$65,000,000 Taxable Series 2006A-2
$10,000,000 Taxable Series 2006A-3
(Auction Rate Securities)
and
STUDENT LOAN ASSET-BACKED NOTES
$82,800,000 Taxable Series 2007A-1
$30,000,000 Series 2007B-1
(Auction Rate Securities)
Dated as of December 11, 2009
INTRODUCTION
The terms of the Indenture provide that the Corporation will provide updated information in
connection with its continuing disclosure obligation within six months after the end of each fiscal year.
The Educational Funding Services, Inc. (the “Corporation”) submits this Continuing Disclosure
Statement (the "Statement") in compliance with the agreement set forth in the Indenture for the Notes
covered by this Statement. In the Indenture the Corporation agreed to provide updates of certain
quantitative financial information and operating data regarding “Cash Flow Projections” and “The
Servicer”. In addition, the Corporation agreed to provide updated information regarding the Corporation
including audited financial statements. The Indenture also provided that the Corporation would provide
updated information relating to "The Subservicers and Custodians - Subservicers" and "The Guarantee
Agencies" to the extent such information is reasonably available to the Corporation.
This Statement relates only to the Notes indicated on the cover of this Statement and not any other
notes which have been or may be issued by the Corporation. The Notes covered by this Statement are
secured by a Trust Estate pursuant to the terms of the Indenture. Capitalized terms used herein but not
defined shall have the meaning given such terms in the offering memorandum relating each Series of Notes.
DEFINITIONS
"Indenture" means, for the purpose of this Statement, the Indenture of Trust, dated as of September
1, 2005, as supplemented by the Third Supplemental Indenture dated as of November 1, 2007, as may be
amended from time to time.
“Notes” means, for the purpose of this Statement, the Senior Notes and Subordinate Notes issued
pursuant to the Indenture and identified on the cover page of this Statement.
"Senior Notes" means, for the purpose of this Statement, the Series 2005A-2 and A-3 Notes, the
Series 2006A-1 through A-3 Notes and the Series 2007A-1 Notes.
"Subordinate Notes" means, for the purpose of this Statement, the Series 2007B-1 Notes.
THE CORPORATION
The Corporation is a non-profit public benefit corporation organized in 1999 under the California
Non-profit Public Benefit Corporation Law and is exempt from the payment of federal income taxation as a
“501(c)(3)” non-profit corporation. The Corporation is located at 25909 Pala, Suite 200, Mission Viejo,
California 92691, Telephone (949) 282-6767.
The Corporation’s fiscal year ends June 30 of each year. The Corporation’s audited financial
statements as of June 30, 2009, are attached to this Statement as Appendix A.
1
Outstanding Revenue Notes
The Corporation, as of June 30, 2009, had outstanding student loan revenue note issues in the
respective principal amounts as follows:
SERIES OF
NOTES
ORIGINAL
PRINCIPAL
AMOUNT
OUTSTANDING
PRINCIPAL
AMOUNT
FINAL
MATURITY
2003B-1
39,700,000
39,700,000
6/1/2039
2004A-1
2004B-1
58,400,000
6,000,000
35,300,000
6,000,000
6/1/2040
6/1/2040
2005A-1
2005A-2
2005A-3
2005A-4
2005B-1
54,000,000
54,000,000
54,000,000
56,800,000
41,500,000
54,000,000
54,000,000
54,000,000
56,800,000
41,500,000
6/1/2041
6/1/2041
6/1/2041
6/1/2041
6/1/2041
2005(ca)A-2
2005(ca)A-3
54,750,000
30,450,000
49,850,000
30,450,000
6/1/2041
6/1/2041
2006A-1
41,800,000
41,800,000
6/1/2042
2006(ca)A-1
2006(ca)A-2
2006(ca)A-3
20,000,000
65,000,000
10,000,000
16,100,000
65,000,000
10,000,000
6/1/2042
6/1/2042
6/1/2042
2007(ca)A-1
2007(ca)B-1
82,800,000
30,000,000
82,800,000
30,000,000
12/1/2042
12/1/2042
699,200,000
$ 667,300,000
Total
The Series 2005(ca)A-2 through A-3 Notes, the Series 2006(ca)A-1 through A-3 Notes, and the
Series 2007(ca)A-1 and B-1 Notes are secured by the Trust Estate established under the Indenture.
The Series 2003 B-1 Notes, the Series 2004A-1 and B-1 Notes, the Series 2005A-1 through A-4
and B-1 Notes, and the Series 2006A-1 Notes are secured by a separate trust indenture and are not cross
collateralized against the Indenture.
STATEMENT OF CASH FLOWS
The following paragraphs pertain to the total assets of the Trust Estate. That is, these paragraphs
describe the Trust Estate without respect to the proceeds of particular Notes used to acquire the assets.
GENERAL STATEMENT OF CASH FLOWS. The Corporation continues to expect, and the Cash
Flows indicate, that Revenues will be sufficient to pay principal of and interest on the Notes when due, and
also to pay the annual cost of all Trustee fees, servicing costs and other expenses related to the Notes and the
Student Loans held under the Indenture until the final maturity of the Notes. With respect to the Senior
2
Notes, the Cash Flows indicate that the ratio of assets in the Trust Estate to liabilities represented by the
principal amount of the Senior Notes on June 30, 2009, was equal to approximately 106.90%. With respect
to the Subordinate Notes, the Trust Estate was equal to approximately 95.62% on June 30, 2009. For
purposes of valuing the Student Loans in the Trust Estate, the Student Loans are valued at an amount equal
to 95% of the outstanding principal thereof.
STATEMENT REGARDING STUDENT LOAN PORTFOLIOS. The total principal amount of
Student Loans on deposit in the Student Loan Fund as of June 30, 2009, was estimated to be approximately
$259,221,060. The following sections describe the characteristics of Student Loans acquired by the proceeds
of the Notes covered by this Statement.
STATEMENT REGARDING STUDENT LOANS PURCHASED WITH PROCEEDS OF THE
NOTES. The total principal amount of Student Loans on deposit in the Trust Estate purchased with
proceeds of the Notes as of June 30, 2009, is estimated to be approximately $259,221,060. Set forth below
in the following tables is a description of certain characteristics of the Student Loans purchased with
proceeds of the Notes held in the Trust Estate. Percentages and balances of the Student Loans set forth in
certain of the tables below may not always add to 100% and $259,221,060, respectively, due to rounding.
Distribution of Student Loans by Loan Type
Loan Type
Balance (1)
Percent of Loan Type
By Balance
Consolidation
GradPlus
PLUS
Stafford Sub
Stafford UnSub
$
113,346,345
2,132,953
4,825,552
72,260,042
66,656,168
43.73%
0.82%
1.86%
27.88%
25.71%
Total
$
259,221,060
100.00%
Distribution of Student Loans by Guarantee Agency
Insurer or Guarantor
PHEAA
CSAC
GLHEC
USAF
Other
Total FFELP
Balance (1)
$
104,319,503
66,597,586
60,363,030
19,036,702
8,904,239
259,221,060
$
3
Percent of Loans
by Balance
40.25%
25.69%
23.29%
7.34%
3.43%
100.00%
Distribution of Student Loans by Borrower Payment Status
Loan Status
Balance (1)
Percentage of Loans
by Balance
School
Repayment
Grace
Forbearance
Deferment
Claims
$
21,070,113
152,310,312
7,570,524
31,319,129
45,493,090
1,457,892
8.13%
58.76%
2.92%
12.08%
17.55%
0.56%
Total
$
259,221,060
100.00%
Distribution of Student Loans by Federal Reinsurance or Private Reinsurance
Federal or Private
Reinsurance
4yr
2yr
Prop.
Consol.
Balance (1)
$
$
106,989,931
20,487,211
18,397,573
113,346,345
259,221,060
Percent of Loans
by Balance
41.27%
7.90%
7.10%
43.73%
100.00%
Distribution of Student Loans by Subservicer
Subservicer
ACS
AES (PHEAA)
CSLS
GLELSI
SLMA
Balance (1)
$
40,958,402
136,451,138
194,595
59,529,364
22,087,561
$
259,221,060
Percent of Loans
By Balance
15.80%
52.64%
0.08%
22.96%
8.52%
100.00%
(1) In each case, includes current principal balance due from the borrowers, but does not include accrued
interest thereon to be capitalized upon commencement of repayment.
THE SERVICER
The Servicer is the Brazos Higher Education Service Corporation, Inc., a private non-profit
corporation organized on September 18, 1980, under Section 501(c)(3) of the Internal Revenue Code of
1954, as amended, to provide the Corporation with student loan billing and servicing and to provide
administrative support services to the Corporation. The Servicer is headquartered in Waco, Texas and is
governed by a nine-member board of directors. The members of the Board of Directors serve without
compensation, except for the payment of expenses in connection with the business of the Servicer.
As of June 30, 2009, the total number of Student Loan Accounts serviced by the Servicer was
approximately 1,640,980 aggregating approximately $14,136,842,164 in principal amount. All of such
Student Loans are serviced by the Servicer for the Corporation or for separate related corporations and for
several local banks who have committed to sell certain Student Loans to the Corporation or one of the
related corporations.
4
THE SUBSERVICERS
The Corporation has requested information regarding the Subservicers and Custodians from entities
that serve as Subservicers and Custodians. The following information has been provided by certain of the
Subservicers and Custodians. The Corporation has not verified the following information. The Corporation
makes no representation as to the accuracy or completeness of such information.
ACS Commercial Education & Financial Services, Inc. ACS Commercial Education &
Financial Services, Inc. acts as a loan servicing agent for the Corporation. ACS Commercial Education &
Financial Services is a for-profit corporation and a wholly-owned subsidiary of Affiliated Computer
Services, Inc. ("ACS"). Headquartered in Dallas, Texas, ACS is a Fortune 500 company providing
business process and technology outsourcing solutions to world-class commercial and government
clients. ACS's Class A common stock trades on the New York Stock Exchange under the symbol "ACS".
As of August 31, 2009, ACS provided loan servicing for approximately $65.1 billion in student and
parental loans. ACS Commercial Education & Financial Services, Inc. has its headquarters at One World
Trade Center, Suite 2200, Long Beach, California 90831, and has regional processing centers in Long
Beach and Bakersfield, California; Utica, New York; Montego Bay, Jamaica, Juarez, Mexico, Oakbrook,
Illinois, Aberdeen, South Dakota and Canyon, Texas.
Chase Student Loan Servicing, LLC. Chase Student Loan Servicing, LLC (formerly known as
CFS-SunTech Servicing LLC) (“CSLS”) is a Delaware limited liability company and a wholly owned
subsidiary of Chase Student Loan Services, Inc.(“CFSI”). CFSI was acquired by JP Morgan Chase Bank,
N.A. (“Chase”) on March 1, 2006. CSLS previously conducted its business as a separate company under
the name SunTech, Inc. On April 15, 2003, Collegiate Funding Services, LLC, a then existing subsidiary
of CFSI, acquired the servicing business of SunTech, Inc. SunTech, Inc. began servicing education loans
in 1990. Prior to that time, the operation was part of the Mississippi secondary market and had serviced
loans since 1984. CSLS provides loan servicing for Chase and for other parties. CSLS’ operations are
located in Madison, MS where as of October 31, 2009, it had approximately 165 employees.
Great Lakes Educational Loan Services, Inc. Great Lakes Educational Loan Services, Inc.
(“GLELSI”) acts as a loan servicing agent for the Corporation. GLELSI is a wholly owned subsidiary of
Great Lakes Higher Education Corporation (“GLHEC”), a Wisconsin nonstock, nonprofit corporation.
The primary operations center for GLHEC and its affiliates (including GLELSI) is in Madison,
Wisconsin, which includes the data processing center and operational staff offices for both guarantee
support services provided by GLELSI to GLHEC and third-party guaranty agencies and lender servicing
and origination functions. GLHEC and affiliates also maintain regional offices in Minnesota, Ohio and
South Dakota and customer support staff located nationally.
In March 2005, Moody’s Investors Service assigned its highest servicer quality (SQ) rating of
SQ1 to GLELSI as a servicer of FFELP student loans. Moody’s SQ ratings represent its view of a
servicer’s ability to prevent or mitigate losses across changing markets. Moody’s rating incorporates an
assessment of performance measurements including delinquency transition rates, cure rates and claim
reject rates – all valuable indicators of a servicer’s ability to get maximum returns from student loan
portfolios.
As of October 31, 2009, GLELSI serviced 3,157,924 student and parental accounts with an
outstanding balance of $46.5 billion for over 1,200 lenders nationwide. As of October 31, 2009, 55% of
the portfolio serviced by GLELSI was in repayment status, 8% was in grace status and the remaining 37%
was in interim status. GLELSI will provide a copy of GLHEC’s most recent consolidated financial
statements on receipt of a written request directed to 2401 International Lane, Madison, Wisconsin 53704,
Attention: Chief Financial Officer.
Pennsylvania Higher Education Assistance Agency. The Pennsylvania Higher Education
Assistance Agency ("PHEAA") acts as a loan servicing agent for the Corporation. PHEAA is a body
corporate and politic constituting a public corporation and government instrumentality created pursuant to
5
an act of the Pennsylvania Legislature. Under its enabling legislation, PHEAA is authorized to issue
bonds or notes, with the approval of the Governor of the Commonwealth of Pennsylvania for the purpose
of purchasing, making, or guaranteeing loans. Its enabling legislation also authorizes PHEAA to
undertake the origination and servicing of loans made by PHEAA and others. PHEAA's headquarters are
located in Harrisburg, Pennsylvania with regional offices located throughout Pennsylvania and an
additional office located in Delaware. As of August 31, 2009, it had approximately 2,200 employees. As
of August 31, 2009, PHEAA had 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 $11.1 billion. As of August 31, 2009, PHEAA
owned approximately $10.8 billion outstanding principal amount of student loans financed with the
proceeds of its long-term debt. 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 August 31, 2009, PHEAA was servicing under its full service operation
approximately 3.0 million student loan accounts representing approximately $60.3 billion outstanding
principal amount for its full servicing customers and under its remote servicing operation, approximately
2.0 million student borrowers representing approximately $35.2 billion outstanding principal amount.
PHEAA's most recent audited financial reports are available at www.pheaa.org.
Sallie Mae Servicing, a division of Sallie Mae, Inc. (“Sallie Mae Servicing”). Sallie Mae
Servicing acts as a loan subservicer for the Corporation. Sallie Mae Servicing previously was a for-profit
Delaware limited partnership, the partnership interests of which were 100% owned by wholly-owned
subsidiaries of SLM Corporation. Effective December 31, 2003, this limited partnership merged with,
and became a division of, Sallie Mae, Inc., a for-profit Delaware corporation that also is a wholly-owned
subsidiary of SLM Corporation.
As of December 31, 2008, Sallie Mae Servicing serviced approximately $139.4 billion of FFELP
loans, including approximately $11.5 billion of loans owned by affiliates, $119.2 billion of loans owned
by 83 securitization trusts sponsored by Sallie Mae and $8.7 billion of loans owned by other third-party
clients. Sallie Mae Servicing also serviced approximately $38.5 billion in non-FFELP loans, including
approximately $0.5 billion in HEAL loans and $38.0 billion in non-federal, privately-insured loans. Sallie
Mae Servicing's principal administrative offices are located in Reston, Virginia.
THE GUARANTEE AGENCIES
The Corporation has requested information regarding the Guarantee Agencies from each
Guarantor that guarantees greater than five percent (5%) of all Student Loans in the Trust Estate. Each of
California Student Aid Commission (“CSAC”), Great Lakes Higher Education Guaranty Corporation
(“GLHEGC”), Pennsylvania Higher Education Assistance Agency (“PHEAA”) and United Student Aid
Funds, Inc. (“USAF”) (collectively, the “Significant Guarantors”) guarantees greater than five percent
(5%) of all Student Loans held in the Trust Estate. The following general information concerning each of
the Significant Guarantors was supplied to the Corporation by each Significant Guarantor and has not
been verified by the Corporation. The Corporation makes no representation as to the accuracy or
completeness of such information.
California Student Aid Commission. The California Student Aid Commission (“CSAC”) is the
designated state student loan guaranty agency for the State of California (“State”), responsible for the
State’s participation in the FFELP pursuant to California Education Code Section 69760 et seq., and
Section 428(c) of the Higher Education Act. CSAC’s role as a guaranty agency is to provide a source of
credit to assist students in meeting post-secondary education costs while attending eligible institutions of
their choice.
6
As authorized under California law, CSAC has established an auxiliary organization in the form
of a nonprofit public benefit corporation to provide operational and administrative services related to
CSAC’s participation in the FFELP. The auxiliary organization, EDFUND, operates CSAC’s federal
student loan guaranty program pursuant to an operating agreement with CSAC. CSAC, as the designated
state guaranty agency, continues its oversight of all revenues, expenses, and assets related to its status.
CSAC began guaranteeing student loans on April 1, 1979, and as of September 30, 2008, had
cumulative principal guarantees outstanding of approximately $34.9 billion.
As part of the FFELP, and pursuant to the 1998 Reauthorization Amendments to the Higher
Education Act, the State established the Federal Student Loan Reserve Fund, referred to as CSAC’s
Federal Fund, and the Student Loan Operating Fund, referred to as CSAC’s Operating Fund. CSAC’s
liability pursuant to the FFELP, including for any loan guarantees, is limited solely to the amounts
contained in these two funds, and the State has no obligation to replenish these funds if exhausted.
As of September 30, 2008, CSAC’s Federal Fund and Operating Fund balances were as follows:
CSAC’s Federal Fund had total assets of $93,970,518, total liabilities of $0 and total fund equity of
$93,970,518; and CSAC’s Operating Fund had total assets of $94,913,547, total liabilities of $33,638,941
and total fund equity of $61,274,606.
Guaranty Volume. CSAC guaranteed the following amounts for the last five (5) fiscal years
ending September 30, as follows:
FFELP Loan Volume
($ in millions)
Fiscal Year
2004
2005
2006
2007
2008
5,712
6,577
6,878
6,765
8,226
The information in the following tables has been provided by CSAC from reports provided by or
to the U.S. Department of Education. CSAC has not verified, and makes no representation as to the
accuracy or completeness of, the information compiled by the Department of Education or as to any
calculations other than as required by federal regulation.
Reserve Ratio. Pursuant to 34 C.F.R. 682.419, CSAC’s reserve ratio (determined by dividing its
fund balance by the total amount of loans outstanding) for the last five (5) fiscal years ending September
30, is as follows:
Fiscal Year
Reserve Ratio
2004
2005
2006
2007
2008
0.25
0.25
0.25
0.26
0.27
Recovery Rate. Pursuant to 34 C.F.R. 682.409, CSAC’s recovery rate for each of the past five (5)
fiscal years ending September 30, is as follows:
7
Fiscal Year
Recovery Rate
2004
2005
2006
2007
2008
27. 03
31.12
21.73
19.85
29.14
Claims Rate. Pursuant to 34 C.F.R. 682.404, CSAC’s claims rate for each of the past five (5)
fiscal years ending September 30, is as follows:
Fiscal Year
Claims Rate
2004
2005
2006
2007
2008
2.14
2.81
3.01
3.31
4.16
Great Lakes Higher Education Guaranty Corporation. Great Lakes Higher Education Guaranty
Corporation (“GLHEGC”) is a Wisconsin nonstock, nonprofit corporation the sole member of which is
Great Lakes Higher Education Corporation (“GLHEC”). GLHEGC’s predecessor organization, GLHEC,
was organized as a Wisconsin nonstock, nonprofit corporation and began guaranteeing student loans
under the Higher Education Act in 1967. GLHEGC is the designated guarantee agency under the Higher
Education Act for Wisconsin, Minnesota, Ohio, Puerto Rico and the Virgin Islands. On January 1, 2002,
GLHEC (and GLHEGC directly and through its support services agreement with GLHEC), outsourced
certain aspects of its student loan program guaranty support operations to GLELSI. GLHEGC continues
as the “guaranty agency” as defined in Section 435(j) of the Higher Education Act and continues its
default aversion, claim purchase and compliance, collection support and federal reporting responsibilities
as well as custody and responsibility for all revenues, expenses and assets related to that status.
GLHEGC (through its support services agreement with GLHEC) also performs oversight of all direct and
outsourced student loan program operations. The primary operations center for GLHEC and its affiliates
(including GLHEGC and GLELSI) is in Madison, Wisconsin, which includes the data processing center
and operational staff offices for both guaranty and servicing functions. GLHEC and affiliates also
maintain regional offices in Minnesota, Ohio and South Dakota and customer support staff located
nationally. GLHEGC will provide a copy of GLHEC’s most recent consolidated financial statements on
receipt of a written request directed to 2401 International Lane, Madison, Wisconsin 53704, Attention:
Chief Financial Officer.
The information in the following tables has been provided to the Issuer from reports provided by
or to the U.S. Department of Education and has not been verified by the Issuer, GLHEGC or the initial
purchasers. No representation is made by the Issuer, GLHEGC or the initial purchasers as to the accuracy
or completeness of this information. Prospective investors may consult the United States Department of
Education Data Books and Web site http://www.ed.gov/finaid/prof/resources/data/opeloanvol.html for
further information concerning GLHEGC or any other guarantee agency.
Guarantee Volume. GLHEGC’s guaranty volume for each of the last five federal fiscal years,
including Stafford, Unsubsidized Stafford, SLS, PLUS, Graduate PLUS and Consolidation loan volume,
was as follows:
8
Federal Fiscal Year
Guaranty Volume (Millions)
2004
2005
2006
2007
2008
7,707.6
9,686.3
12,797.2
11,797.3
7,399.9
Reserve Ratio. Following are GLHEGC’s reserve fund levels as calculated in accordance with
34 CFR 682.410(a)(10) for the last five federal fiscal years:
Federal Fiscal Year
Federal Guaranty Reserve
Fund Level 1/
2004
2005
2006
2007
2008
0.99%
0.83%
0.72%
0.69%
0.76%
The Department of Education’s website at
http://www.fp.ed.gov/fp/attachments/activities_whatsnew/033109ReserveRatiopublicreport0308.xls has posted reserve ratios for GLHEGC for
federal fiscal years 2004, 2005, 2006, 2007 and 2008 of .646%, .578%, .517%, .550% and .613%, respectively. GLHEGC believes the
Department of Education has not calculated the reserve ratio in accordance with the Act and the correct ratio should be .99%, .83%, .72%, .69%
and .76%, respectively, as shown above and as explained in the following footnote. On November 17, 2006, the Department of Education
advised GLHEGC that beginning in Federal Fiscal Year 2006 it will publish reserve ratios that include loan loss provision and deferred
revenues. GLHEGC believes this change should more closely approximate the statutory calculation. According to the Department of Education,
available cash reserves may not always be an accurate barometer of a guarantor’s financial health.
1/
In accordance with Section 428(c)(9) of the Higher Education Act, does not include loans transferred from the former Higher Education
Assistance Foundation, Northstar Guarantee Inc., Ohio Student Aid Commission or Puerto Rico Higher Education Assistance Corporation. (The
minimum reserve fund ratio under the Higher Education Act is .25%.)
Claims Rate. For the past five federal fiscal years, GLHEGC’s claims rate has not exceeded 5%,
and, as a result, the highest allowable reinsurance has been paid on all GLHEGC’s claims. The actual
claims rates are as follows:
Fiscal Year
Claims Rate
2004
2005
2006
2007
2008
.68%
.51%
.62%
.77%
.98%
As a result of various statutory and regulatory changes over the past several years, historical rates may not
be an accurate indicator of current delinquency or default trends or future claims rates.
Pennsylvania Higher Education Assistance Agency. Pennsylvania Higher Education Assistance
Agency (“PHEAA”) is a body corporate and politic constituting a public corporation and government
instrumentality created pursuant to the Pennsylvania Act of August 7, 1963, P.L. 549, as amended (the
“Pennsylvania Act”).
PHEAA has been guaranteeing student loans since 1964. As of August 31, 2009, PHEAA has
guaranteed a total of approximately $47.6 billion principal amount of Stafford Loans and approximately
$7.6 billion principal amount of PLUS Loans and SLS Loans, and approximately $52 billion principal
amount of consolidation loans under the Higher Education Act. PHEAA initially guaranteed loans only
to residents of the Commonwealth of Pennsylvania (the “Commonwealth”) or persons who planned to
9
attend or were attending eligible education institutions in the Commonwealth. In May 1986, PHEAA
began guaranteeing loans to borrowers who did not meet these residency requirements pursuant to its
national guarantee program. Under the Pennsylvania Act, guarantee payments on loans under PHEAA’s
national guarantee program may not be paid from funds appropriated by the Commonwealth.
PHEAA has adopted a default prevention program consisting of (i) informing new borrowers of
the serious financial obligations incurred by them and stressing the financial and legal consequences of
failure to meet all terms of the loan, (ii) working with institutions to make certain that student borrowers
are enrolled in sound education programs and that the proper individual enrollment records are being
maintained, (iii) assisting lenders with operational programs to ensure sound lending policies and
procedures, (iv) maintaining up-to-date student status and address records of all borrowers in the guaranty
program, (v) initiating prompt collection actions with borrowers who become delinquent on their loans,
do not establish repayment schedules or “skip,” (vi) taking prompt action, including legal action and
garnishment of wages, to collect on all defaulted loans, and (vii) adopting a general policy that no loan
will be automatically “written off.” Since the loan servicing program was initiated in 1974, PHEAA has
never exceeded an annual default claims percentage of 5 percent and, as a result, federal reimbursement
for default claims has thus far been at the maximum federal reimbursement level.
For the last five federal fiscal years (ending September 30), the annual default claims percentages
have been as follows:
Fiscal Year
Annual Default Claims
2004
2005
2006
2007
2008
1.09
1.30
1.42
1.96
1.98
As of August 31, 2009, PHEAA had total federal reserve-fund assets of approximately $144.9
million. Through August 31, 2009, the outstanding amount of principal on loans that had been directly
guaranteed by PHEAA under the Federal Family Education Loan Program was approximately $52.3
billion. In addition, as of August 31, 2009, PHEAA had operating-fund assets and non-Federal Family
Education Loan Program assets totaling approximately $12 billion.
Guarantee Volume. PHEAA’s guaranty volume (the approximate aggregate principal amount of
federally reinsured education loans, including PLUS Loans but excluding federal Consolidation Loans)
was as follows for the last five federal fiscal years (ending September 30):
Fiscal Year
Guaranty Volume (Millions)
2004
2005
2006
2007
2008
3,131
3,403
3,792
4,121
3,948
10
Reserve Ratio. Under current law, PHEAA is required to manage the Federal Fund so net assets
are greater than 0.25% of the original principal balance of outstanding guarantees.
Fiscal Year
Reserve Ratio
2004
2005
2006
2007
2008
0.34
0.16
0.20
0.25
0.25
Recovery Rates. A guarantor's recovery rate, which provides a measure of the effectiveness of the
collection efforts against defaulting borrowers after the guarantee claim has been satisfied, is determined
for each year by dividing the current year collections by the total outstanding claim portfolio for the prior
fiscal year.
The table below shows the cumulative recovery rates for PHEAA for the five federal fiscal years
(ending September 30) for which information is available:
Fiscal Year
Recovery Rates
2004
2005
2006
2007
2008
25.48
26.30
33.93
37.76
32.81
United Student Aid Funds, Inc. United Student Aid Funds, Inc. (“USA Funds”) was organized
as a private, nonprofit corporation under the General Corporation Law of the State of Delaware in 1960.
In accordance with its Certificate of Incorporation, USA Funds: (i) maintains facilities for the provision of
guarantee services with respect to approved education loans made to or for the benefit of eligible students
who are enrolled at or plan to attend approved educational institutions; (ii) guarantees education loans
made pursuant to certain loan programs under the Higher Education Act, as well as loans made under
certain private loan programs; and (iii) serves as the designated guarantor for education-loan programs
under the Higher Education Act of 1965, as amended (“the Act”) in Arizona, Hawaii and certain Pacific
Islands, Indiana, Kansas, Maryland, Mississippi, Nevada and Wyoming
USA Funds contracts with Sallie Mae, Inc., a wholly owned subsidiary of SLM Corporation.
USA Funds also contracts with Student Assistance Corporation, a wholly owned subsidiary of SLM
Corporation. SLM Corporation and its subsidiaries are not sponsored by nor are they agencies of the
United States of America.
Effective December 13, 2004, USA Funds became the sole member of the Northwest Education
Loan Association, a guarantor serving the states of Washington, Idaho and the Northwest.
For the purpose of providing loan guarantees under the Act, USA Funds has entered into various
agreements (collectively, the “Federal Reinsurance Agreements”) with the U.S. Secretary of Education
(the “Secretary”). Pursuant to the Federal Reinsurance Agreements, USA Funds serves as a “guaranty
agency” as defined in Section 435(j) of the Act. The Act allows the Secretary, after giving the guaranty
agency notice and the opportunity for a hearing, to terminate the Federal Reinsurance Agreements if the
Secretary determines that the administrative or financial condition of the guaranty agency jeopardizes the
agency’s continued ability to perform its responsibilities under its guaranty agreement, it is necessary to
11
protect the federal financial interest, or to ensure the continued availability of loans to student- or parentborrowers.
Reinsurance is paid to USA Funds by the Secretary in accordance with a formula based on the
annual default rate of loans guaranteed by USA Funds under the Act and the disbursement date of loans.
The rate of reinsurance ranges from 100 percent to 75 percent of USA Funds’ losses on default-claim
payments made to lenders. The Higher Education Amendments of 1998 (the “1998 Reauthorization
Law”) reduced the reinsurance coverage for loans in default made on or after Oct. 1, 1998, to a range
from 95 percent to 75 percent based upon the annual default claims rate of the guaranty agency.
Reinsurance on non-default claims remains at 100 percent.
The 1998 Reauthorization Law requires guaranty agencies to establish two (2) separate funds, a
federal reserve fund (property of the United States) and an agency operating fund (property of the
guaranty agency). The federal reserve fund is to be used to pay lender claims and to pay a defaultaversion fee to the agency operating fund. The agency operating fund is to be used by the guaranty
agency to pay its operating expenses.
The Higher Education Reconciliation Act (HERA), which was signed into law in February 2006,
requires all guarantors to collect and deposit into the federal reserve fund a federal default fee of 1 percent
of the principal amount of all Stafford and PLUS loans guaranteed on or after July 1, 2006. USA Funds
paid the federal default fee to the federal reserve fund from the operating fund on behalf of the borrower
for all PLUS loans made by a lender that paid the federal default fee on behalf of its Stafford borrowers
for loans guaranteed by USA Funds from July 1, 2006, through June 30, 2007, and for all PLUS loans
guaranteed by USA Funds on or after July 1, 2007 through June 30, 2008, for graduate- and professionalstudent-borrowers. Effective for loans guaranteed beginning February 1, 2008, USA Funds will subsidize
from its non-federal resources, one-half of the 1 percent federal default fee, when the originating lender
buys down the other half of the fee for borrowers attending schools in USA Funds’ designated and key
states of Arizona, California, Florida, Hawaii, Indiana, Kansas, Maryland, Mississippi, Nevada and
Wyoming, and for borrowers attending all other schools with final 2005 cohort-default rates of less than 7
percent.
As of September 30, 2008, USA Funds held assets on behalf of the federal reserve fund of
approximately $343 million; federal reserve fund liabilities of approximately $20 million; and a fund
balance of approximately $323 million. Through September 30, 2008, the outstanding, unpaid, aggregate
amount of principal and interest on loans that had been directly guaranteed by USA Funds under the
Federal Family Education Loan Program was approximately $97 billion. Also, as of September 30, 2008,
USA Funds had operating fund assets totaling approximately $869 million, which includes the $343
million of assets held on behalf of the Federal Reserve Fund
USA Funds’ “reserve ratio” complies with the U.S. Department of Education definition, which is
determined by dividing the fund balance reserves, including non-cash allowance and other non-cash
charges and amounts to be remitted to the U.S. Department of Education for reserve recalls in 2003
through 2005, in a guarantor’s federal reserve fund, by the total amount of loans outstanding. Following
this formula, the reserve ratio for the federal reserve fund administered by USA Funds for the last five
fiscal years was as follows: 2008 – 0.330 percent; 2007 – 0.280 percent; 2006 - 0.258 percent; 2005 –
0.452 percent; 2004 – 0.558 percent.
USA Funds’ “guarantee volume” is the approximate aggregate principal amount of federally
reinsured education loans (including subsidized and unsubsidized Federal Stafford and Federal PLUS
loans but excluding Federal Consolidation loans) guaranteed by USA Funds. For the last five fiscal years,
the “guarantee volume” was as follows (in billions): 2008 - $17.202; 2007 - $15.581; 2006 - $12.586;
2005 – $10.724; 2004 – $9.907.
USA Funds’ “recovery rate,” which provides a measure of the effectiveness of the collection
efforts against defaulted borrowers after the guarantee claim has been satisfied, is determined by dividing
12
the amount recovered from borrowers by USA Funds during the fiscal year by the aggregate amount of
default claims paid by USA Funds outstanding at the end of the prior fiscal year. For the last five fiscal
years, the “recovery rate” was as follows: 2008 – 45.60 percent; 2007 – 40.30 percent; 2006 – 38.03
percent; 2005 – 35.05 percent; 2004 – 35.47 percent.
USA Funds’ “loss rate” represents the percentage of claims purchased from lenders but not
covered by reinsurance. For the last five fiscal years, the “loss rate” was as follows: 2008 – 4.26 percent;
2007 – 4.07 percent; 2006 – 3.84 percent; 2005 - 3.46 percent; 2004 - 3.11 percent.
In addition, USA Funds’ “claims rate” represents the percentage of federal reinsurance claims
paid by the Secretary during any fiscal year relative to USA Funds’ existing portfolio of loans in
repayment at the end of the prior fiscal year. For the last five fiscal years, the “claims rate” was as
follows: 2008 – 2.07 percent; 2007 – 2.13 percent; 2006 – 1.21 percent; 2005–1.41 percent; 2004—1.13
percent.
USA Funds is headquartered in Fishers, Indiana. USA Funds will provide a copy of its most
recent annual report upon receipt of a written request directed to its headquarters at P.O. Box 6028,
Indianapolis, Indiana 46206-6028, Attention: Vice President, Corporate Communications.
13
Educational Funding Services, Inc.
Annual Continuing Disclosure Statement Regarding the 2003 Trust, including:
STUDENT LOAN ASSET-BACKED NOTES
$39,700,000 Subordinate Series 2003B-1
(Auction Rate Securities)
and
STUDENT LOAN ASSET-BACKED NOTES
$58,400,000 Senior Series 2004A-1(Auction Rate Securities)
$6,000,000 Subordinate Series 2004B-1(Auction Rate Securities)
and
STUDENT LOAN ASSET-BACKED NOTES
$54,000,000 Senior Series 2005A-1
$54,000,000 Senior Series 2005A-2
$54,000,000 Senior Series 2005A-3
$56,800,000 Senior Series 2005A-4
$41,500,000 Subordinate Series 2005B-1
(Auction Rate Securities)
and
STUDENT LOAN ASSET-BACKED NOTES
$41,800,000 Senior Series 2006A-1
(Auction Rate Securities)
Dated as of December 11, 2009
INTRODUCTION
The terms of the Indenture provide that the Corporation will provide updated information in
connection with its continuing disclosure obligation within six months after the end of each fiscal year.
Educational Funding Services, Inc. (as successor to EFSI and herein referred to as the
“Corporation”) submits this Continuing Disclosure Statement (the "Statement") in compliance with the
agreement set forth in the Indenture for the Notes covered by this Statement. In the Indenture the
Corporation agreed to provide updates of certain quantitative financial information and operating data
relating to "Cash Flow Projections" and "The Servicer". In addition, the Corporation agreed to provide
updated information regarding the Corporation including audited financial statements. The Indenture also
provided that the Corporation would provide updated information relating to "The Subservicers and
Custodians - Subservicer" and "The Guarantee Agencies" to the extent such information is reasonably
available to the Corporation.
This Statement relates only to the Notes indicated on the cover of the Statement and not any other
notes which have been or may be issued by the Corporation. The Notes covered by this Statement are
secured by a Trust Estate pursuant to the terms of the Indenture. Capitalized terms used herein but not
defined shall have the meaning given such terms in the offering memorandum relating each Series of Notes.
DEFINITIONS
“Indenture” means, for the purpose of this Statement, the Amended and Restated Indenture of Trust,
dated as of June 1, 2006 as may be amended from time to time.
“Notes” means, for the purpose of this Statement, the Senior Notes and Subordinate Notes issued
pursuant to the Indenture and identified on the cover page of this Statement.
The "Senior Notes" means, for the purpose of this Statement, the Series 2004A-1 Notes, the Series
2005A-1 through A-4 Notes and the Series 2006A-1 Notes.
The "Subordinate Notes" means, for the purpose of this Statement, the Series 2003B-1 Notes, the
Series 2004B-1 Notes and the Series 2005B-1 Notes.
THE CORPORATION
The Corporation is a non-profit public benefit corporation organized in 1999 under the California
Non-profit Public Benefit Corporation Law and is exempt from the payment of federal income taxation as a
“501(c)(3)” non-profit corporation. The Corporation is located at 25909 Pala, Suite 200, Mission Viejo,
California 92691, Telephone (949) 282-6767.
The Corporation’s fiscal year ends June 30 of each year. The Corporation’s audited financial
statements, as of June 30, 2009, are attached to this Statement as Appendix A.
1
Outstanding Revenue Notes
The Corporation, as of June 30, 2009, had outstanding student loan revenue note issues in the
respective principal amounts as follows:
SERIES OF
NOTES
ORIGINAL
PRINCIPAL
AMOUNT
OUTSTANDING
PRINCIPAL
AMOUNT
FINAL
MATURITY
2003B-1
39,700,000
39,700,000
6/1/2039
2004A-1
2004B-1
58,400,000
6,000,000
35,300,000
6,000,000
6/1/2040
6/1/2040
2005A-1
2005A-2
2005A-3
2005A-4
2005B-1
54,000,000
54,000,000
54,000,000
56,800,000
41,500,000
54,000,000
54,000,000
54,000,000
56,800,000
41,500,000
6/1/2041
6/1/2041
6/1/2041
6/1/2041
6/1/2041
2005(ca)A-2
2005(ca)A-3
54,750,000
30,450,000
49,850,000
30,450,000
6/1/2041
6/1/2041
2006A-1
41,800,000
41,800,000
6/1/2042
2006(ca)A-1
2006(ca)A-2
2006(ca)A-3
20,000,000
65,000,000
10,000,000
16,100,000
65,000,000
10,000,000
6/1/2042
6/1/2042
6/1/2042
2007(ca)A-1
2007(ca)B-1
82,800,000
30,000,000
82,800,000
30,000,000
12/1/2042
12/1/2042
699,200,000
$ 667,300,000
Total
The Series 2003B-1 Notes, the Series 2004A-1 and B-1 Notes, the Series 2005A-1 through A-4
Notes, the Series 2005B-1 Notes and the Series 2006A-1 Notes are secured by the Trust Estate
established under the Indenture.
The Series 2005(ca)A-2 through A-3 Notes, the Series 2006(ca)A-1 through A-3 Notes, and the
Series 2007(ca)A-1 and B-1 Notes are secured by a separate trust indenture and are not cross
collateralized against the Indenture.
2
STATEMENT OF CASH FLOWS
The following paragraphs pertain to the total assets of the Trust Estate. That is, these paragraphs
describe the Trust Estate without respect to the proceeds of particular Notes used to acquire the assets.
GENERAL STATEMENT OF CASH FLOWS. The Corporation continues to expect, and the Cash
Flows indicate, that Revenues will be sufficient to pay principal of and interest on the Notes when due, and
also to pay the annual cost of all Trustee fees, servicing costs and other expenses related to the Notes and the
Student Loans held under the Indenture until the final maturity of the Notes. With respect to Senior Notes,
the Cash Flows indicate that the ratio of assets in the Trust Estate to liabilities represented by the principal
amount of the Senior Notes on June 30, 2009, was equal to approximately 126.15%. With respect to the
Subordinate Notes, the Trust Estate was equal to approximately 97.43% on June 30, 2009. For purposes of
valuing the Student Loans in the Trust Estate, the Student Loans are valued at an amount equal to 97% of
the outstanding principal thereof.
STATEMENT REGARDING STUDENT LOAN PORTFOLIOS. The total principal amount of
Student Loans on deposit in the Student Loan Fund as of June 30, 2009, was estimated to be approximately
$357,751,860. The following sections describe the characteristics of the Student Loans acquired held in the
Trust Estate.
STATEMENT REGARDING STUDENT LOANS PURCHASED WITH PROCEEDS OF THE
NOTES. The total principal amount of Student Loans on deposit in the Trust Estate purchased with
proceeds of the Notes as of June 30, 2009, is estimated to be approximately $357,751,860. Set forth below
in the following tables is a description of certain characteristics of the Student Loans purchased with
proceeds of the Notes held in the Trust Estate. Percentages and balances of the Student Loans set forth in
certain of the tables below may not always add to 100% and $357,751,860, respectively, due to rounding.
Distribution of Student Loans by Loan Type
Loan Type
Balance (1)
Percent of Loan Type
By Balance
Consolidation
GradPlus
PLUS
Stafford Sub
Stafford UnSub
$
209,697,302
38,938
10,554,420
72,134,250
65,326,950
58.62%
0.01%
2.95%
20.16%
18.26%
Total
$
357,751,860
100.00%
3
Distribution of Student Loans by Guarantee Agency
Insurer or Guarantor
Percent of Loans
by Balance
Balance (1)
PHEAA
CSAC
GLHEC
NYHESC
USAF
TGSLC
ASA
Other
Total FFELP
$
161,663,482
49,843,736
40,421,388
32,796,191
29,422,518
23,335,868
13,088,756
7,179,921
357,751,860
$
45.19%
13.93%
11.30%
9.17%
8.22%
6.52%
3.66%
2.01%
100.00%
Distribution of Student Loans by Borrower Payment Status
Loan Status
Balance (1)
Percentage of Loans
by Balance
School
Repayment
Grace
Forbearance
Deferment
Claims
$
17,771,489
228,275,741
5,354,957
43,035,475
60,161,299
3,152,899
4.97%
63.80%
1.50%
12.03%
16.82%
0.88%
Total
$
357,751,860
100.00%
Distribution of Student Loans by Federal Reinsurance or Private Reinsurance
Federal or Private
Reinsurance
4yr
2yr
Prop.
Consol.
Balance (1)
$
$
109,955,928
26,077,921
12,020,709
209,697,302
357,751,860
4
Percent of Loans
by Balance
30.73%
7.29%
3.36%
58.62%
100.00%
Distribution of Student Loans by Subservicer
ACS
AES (PHEAA)
CSLS
GLELSI
SLMA
$
$
68,978,911
215,256,010
32,327,382
10,980,574
30,208,983
357,751,860
19.28%
60.17%
9.04%
3.07%
8.44%
100.00%
(1) In each case, includes current principal balance due from the borrowers, but does not include accrued
interest thereon to be capitalized upon commencement of repayment.
THE SERVICER
The Servicer is the Brazos Higher Education Service Corporation, Inc., a private non-profit
corporation organized on September 18, 1980, under Section 501(c)(3) of the Internal Revenue Code of
1954, as amended, to provide the Corporation with student loan billing and servicing and to provide
administrative support services to the Corporation. The Servicer is headquartered in Waco, Texas and is
governed by a nine-member board of directors. The members of the Board of Directors serve without
compensation, except for the payment of expenses in connection with the business of the Servicer.
As of June 30, 2009, the total number of Student Loan Accounts serviced by the Servicer was
approximately 1,640,980 aggregating approximately $14,136,842,164 in principal amount. All of such
Student Loans are serviced by the Servicer for the Corporation or for separate related corporations and for
several local banks who have committed to sell certain Student Loans to the Corporation or one of the
related corporations.
THE SUBSERVICERS
The Corporation has requested information regarding the Subservicers and Custodians from entities
that serve as Subservicers and Custodians. The following information has been provided by certain of the
Subservicers and Custodians. The Corporation has not verified the following information. The Corporation
makes no representation as to the accuracy or completeness of such information.
ACS Commercial Education & Financial Services, Inc. ACS Commercial Education &
Financial Services, Inc. acts as a loan servicing agent for the Corporation. ACS Commercial Education &
Financial Services is a for-profit corporation and a wholly-owned subsidiary of Affiliated Computer
Services, Inc. ("ACS"). Headquartered in Dallas, Texas, ACS is a Fortune 500 company providing
business process and technology outsourcing solutions to world-class commercial and government
clients. ACS's Class A common stock trades on the New York Stock Exchange under the symbol "ACS".
As of August 31, 2009, ACS provided loan servicing for approximately $65.1 billion in student
and parental loans. ACS Commercial Education & Financial Services, Inc. has its headquarters at One
World Trade Center, Suite 2200, Long Beach, California 90831, and has regional processing centers in
Long Beach and Bakersfield, California; Utica, New York; Montego Bay, Jamaica, Juarez,
Mexico, Oakbrook, Illinois, Aberdeen, South Dakota and Canyon, Texas.
5
Chase Student Loan Servicing, LLC. Chase Student Loan Servicing, LLC (formerly known as
CFS-SunTech Servicing LLC) (“CSLS”) is a Delaware limited liability company and a wholly owned
subsidiary of Chase Student Loan Services, Inc.(“CFSI”). CFSI was acquired by JP Morgan Chase Bank,
N.A. (“Chase”) on March 1, 2006. CSLS previously conducted its business as a separate company under
the name SunTech, Inc. On April 15, 2003, Collegiate Funding Services, LLC, a then existing subsidiary
of CFSI, acquired the servicing business of SunTech, Inc. SunTech, Inc. began servicing education loans
in 1990. Prior to that time, the operation was part of the Mississippi secondary market and had serviced
loans since 1984. CSLS provides loan servicing for Chase and for other parties. CSLS’ operations are
located in Madison, MS where as of October 31, 2009, it had approximately 165 employees.
Great Lakes Educational Loan Services, Inc. Great Lakes Educational Loan Services, Inc.
(“GLELSI”) acts as a loan servicing agent for the Corporation. GLELSI is a wholly owned subsidiary of
Great Lakes Higher Education Corporation (“GLHEC”), a Wisconsin nonstock, nonprofit corporation.
The primary operations center for GLHEC and its affiliates (including GLELSI) is in Madison,
Wisconsin, which includes the data processing center and operational staff offices for both guarantee
support services provided by GLELSI to GLHEC and third-party guaranty agencies and lender servicing
and origination functions. GLHEC and affiliates also maintain regional offices in Minnesota, Ohio and
South Dakota and customer support staff located nationally.
In March 2005, Moody’s Investors Service assigned its highest servicer quality (SQ) rating of
SQ1 to GLELSI as a servicer of FFELP student loans. Moody’s SQ ratings represent its view of a
servicer’s ability to prevent or mitigate losses across changing markets. Moody’s rating incorporates an
assessment of performance measurements including delinquency transition rates, cure rates and claim
reject rates – all valuable indicators of a servicer’s ability to get maximum returns from student loan
portfolios.
As of October 31, 2009, GLELSI serviced 3,157,924 student and parental accounts with an
outstanding balance of $46.5 billion for over 1,200 lenders nationwide. As of October 31, 2009, 55% of
the portfolio serviced by GLELSI was in repayment status, 8% was in grace status and the remaining 37%
was in interim status. GLELSI will provide a copy of GLHEC’s most recent consolidated financial
statements on receipt of a written request directed to 2401 International Lane, Madison, Wisconsin 53704,
Attention: Chief Financial Officer.
Pennsylvania Higher Education Assistance Agency. The Pennsylvania Higher Education
Assistance Agency ("PHEAA") acts as a loan servicing agent for the Corporation. PHEAA is a body
corporate and politic constituting a public corporation and government instrumentality created pursuant to
an act of the Pennsylvania Legislature. Under its enabling legislation, PHEAA is authorized to issue
bonds or notes, with the approval of the Governor of the Commonwealth of Pennsylvania for the purpose
of purchasing, making, or guaranteeing loans. Its enabling legislation also authorizes PHEAA to
undertake the origination and servicing of loans made by PHEAA and others. PHEAA's headquarters are
located in Harrisburg, Pennsylvania with regional offices located throughout Pennsylvania and an
additional office located in Delaware. As of August 31, 2009, it had approximately 2,200 employees. As
of August 31, 2009, PHEAA had 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 $11.1 billion. As of August 31, 2009, PHEAA
owned approximately $10.8 billion outstanding principal amount of student loans financed with the
proceeds of its long-term debt. 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 August 31, 2009, PHEAA was servicing under its full service operation
approximately 3.0 million student loan accounts representing approximately $60.3 billion outstanding
6
principal amount for its full servicing customers and under its remote servicing operation, approximately
2.0 million student borrowers representing approximately $35.2 billion outstanding principal amount.
PHEAA's most recent audited financial reports are available at www.pheaa.org
Sallie Mae Servicing, a division of Sallie Mae, Inc. (“Sallie Mae Servicing”). Sallie Mae
Servicing acts as a loan subservicer for the Corporation. Sallie Mae Servicing previously was a for-profit
Delaware limited partnership, the partnership interests of which were 100% owned by wholly-owned
subsidiaries of SLM Corporation. Effective December 31, 2003, this limited partnership merged with,
and became a division of, Sallie Mae, Inc., a for-profit Delaware corporation that also is a wholly-owned
subsidiary of SLM Corporation.
As of December 31, 2008, Sallie Mae Servicing serviced approximately $139.4 billion of FFELP
loans, including approximately $11.5 billion of loans owned by affiliates, $119.2 billion of loans owned
by 83 securitization trusts sponsored by Sallie Mae and $8.7 billion of loans owned by other third-party
clients. Sallie Mae Servicing also serviced approximately $38.5 billion in non-FFELP loans, including
approximately $0.5 billion in HEAL loans and $38.0 billion in non-federal, privately-insured loans. Sallie
Mae Servicing's principal administrative offices are located in Reston, Virginia.
THE GUARANTEE AGENCIES
The Corporation has requested information regarding the Guarantee Agencies from each
Guarantor that guarantees greater than five percent (5%) of all Student Loans in the Trust Estate. Each of
California Student Aid Commission (“CSAC”), Great Lakes Higher Education Guaranty Corporation
(“GLHEGC”), New York State Higher Education Services Corporation (“NYHESC”), Pennsylvania
Higher Education Assistance Agency (“PHEAA”), Texas Guaranteed Student Loan Corporation
(“TGSLC”) and United Student Aid Funds, Inc. (“USAF”) (collectively, the “Significant Guarantors”)
guarantees greater than five percent (5%) of all Student Loans held in the Trust Estate. The following
general information concerning each of the Significant Guarantors was supplied to the Corporation by
each Significant Guarantor and has not been verified by the Corporation. The Corporation makes no
representation as to the accuracy or completeness of such information.
California Student Aid Commission. The California Student Aid Commission (“CSAC”) is the
designated state student loan guaranty agency for the State of California (“State”), responsible for the
State’s participation in the FFELP pursuant to California Education Code Section 69760 et seq., and
Section 428(c) of the Higher Education Act. CSAC’s role as a guaranty agency is to provide a source of
credit to assist students in meeting post-secondary education costs while attending eligible institutions of
their choice.
As authorized under California law, CSAC has established an auxiliary organization in the form
of a nonprofit public benefit corporation to provide operational and administrative services related to
CSAC’s participation in the FFELP. The auxiliary organization, EDFUND, operates CSAC’s federal
student loan guaranty program pursuant to an operating agreement with CSAC. CSAC, as the designated
state guaranty agency, continues its oversight of all revenues, expenses, and assets related to its status.
CSAC began guaranteeing student loans on April 1, 1979, and as of September 30, 2008, had
cumulative principal guarantees outstanding of approximately $34.9 billion.
7
As part of the FFELP, and pursuant to the 1998 Reauthorization Amendments to the Higher
Education Act, the State established the Federal Student Loan Reserve Fund, referred to as CSAC’s
Federal Fund, and the Student Loan Operating Fund, referred to as CSAC’s Operating Fund. CSAC’s
liability pursuant to the FFELP, including for any loan guarantees, is limited solely to the amounts
contained in these two funds, and the State has no obligation to replenish these funds if exhausted.
As of September 30, 2008, CSAC’s Federal Fund and Operating Fund balances were as follows:
CSAC’s Federal Fund had total assets of $93,970,518, total liabilities of $0 and total fund equity of
$93,970,518; and CSAC’s Operating Fund had total assets of $94,913,547, total liabilities of $33,638,941
and total fund equity of $61,274,606.
Guaranty Volume. CSAC guaranteed the following amounts for the last five (5) fiscal years
ending September 30, as follows:
FFELP Loan Volume
($ in millions)
Fiscal Year
2004
2005
2006
2007
2008
5,712
6,577
6,878
6,765
8,226
The information in the following tables has been provided by CSAC from reports provided by or
to the U.S. Department of Education. CSAC has not verified, and makes no representation as to the
accuracy or completeness of, the information compiled by the Department of Education or as to any
calculations other than as required by federal regulation.
Reserve Ratio. Pursuant to 34 C.F.R. 682.419, CSAC’s reserve ratio (determined by dividing its
fund balance by the total amount of loans outstanding) for the last five (5) fiscal years ending September
30, is as follows:
Fiscal Year
Reserve Ratio
2004
2005
2006
2007
2008
0.25
0.25
0.25
0.26
0.27
Recovery Rate. Pursuant to 34 C.F.R. 682.409, CSAC’s recovery rate for each of the past five (5)
fiscal years ending September 30, is as follows:
Fiscal Year
Recovery Rate
2004
2005
2006
2007
2008
27. 03
31.12
21.73
19.85
29.14
8
Claims Rate. Pursuant to 34 C.F.R. 682.404, CSAC’s claims rate for each of the past five (5)
fiscal years ending September 30, is as follows:
Fiscal Year
Claims Rate
2004
2005
2006
2007
2008
2.14
2.81
3.01
3.31
4.16
Great Lakes Higher Education Guaranty Corporation. Great Lakes Higher Education Guaranty
Corporation (“GLHEGC”) is a Wisconsin nonstock, nonprofit corporation the sole member of which is
Great Lakes Higher Education Corporation (“GLHEC”). GLHEGC’s predecessor organization, GLHEC,
was organized as a Wisconsin nonstock, nonprofit corporation and began guaranteeing student loans
under the Higher Education Act in 1967. GLHEGC is the designated guarantee agency under the Higher
Education Act for Wisconsin, Minnesota, Ohio, Puerto Rico and the Virgin Islands. On January 1, 2002,
GLHEC (and GLHEGC directly and through its support services agreement with GLHEC), outsourced
certain aspects of its student loan program guaranty support operations to GLELSI. GLHEGC continues
as the “guaranty agency” as defined in Section 435(j) of the Higher Education Act and continues its
default aversion, claim purchase and compliance, collection support and federal reporting responsibilities
as well as custody and responsibility for all revenues, expenses and assets related to that status.
GLHEGC (through its support services agreement with GLHEC) also performs oversight of all direct and
outsourced student loan program operations. The primary operations center for GLHEC and its affiliates
(including GLHEGC and GLELSI) is in Madison, Wisconsin, which includes the data processing center
and operational staff offices for both guaranty and servicing functions. GLHEC and affiliates also
maintain regional offices in Minnesota, Ohio and South Dakota and customer support staff located
nationally. GLHEGC will provide a copy of GLHEC’s most recent consolidated financial statements on
receipt of a written request directed to 2401 International Lane, Madison, Wisconsin 53704, Attention:
Chief Financial Officer.
The information in the following tables has been provided to the Issuer from reports provided by or to the
U.S. Department of Education and has not been verified by the Issuer, GLHEGC or the initial purchasers.
No representation is made by the Issuer, GLHEGC or the initial purchasers as to the accuracy or
completeness of this information. Prospective investors may consult the United States Department of
Education Data Books and Web site http://www.ed.gov/finaid/prof/resources/data/opeloanvol.html for
further information concerning GLHEGC or any other guarantee agency.
Guarantee Volume. GLHEGC’s guaranty volume for each of the last five federal fiscal years,
including Stafford, Unsubsidized Stafford, SLS, PLUS, Graduate PLUS and Consolidation loan volume,
was as follows:
Federal Fiscal Year
Guaranty Volume (Millions)
2004
2005
2006
2007
2008
7,707.6
9,686.3
12,797.2
11,797.3
7,399.9
9
Reserve Ratio. Following are GLHEGC’s reserve fund levels as calculated in accordance with
34 CFR 682.410(a)(10) for the last five federal fiscal years:
Federal Fiscal Year
Federal Guaranty Reserve
Fund Level 1/
2004
2005
2006
2007
2008
0.99%
0.83%
0.72%
0.69%
0.76%
The Department of Education’s website at
http://www.fp.ed.gov/fp/attachments/activities_whatsnew/033109ReserveRatiopublicreport0308.xls has posted reserve ratios for GLHEGC for
federal fiscal years 2004, 2005, 2006, 2007 and 2008 of .646%, .578%, .517%, .550% and .613%, respectively. GLHEGC believes the
Department of Education has not calculated the reserve ratio in accordance with the Act and the correct ratio should be .99%, .83%, .72%, .69%
and .76%, respectively, as shown above and as explained in the following footnote. On November 17, 2006, the Department of Education
advised GLHEGC that beginning in Federal Fiscal Year 2006 it will publish reserve ratios that include loan loss provision and deferred
revenues. GLHEGC believes this change should more closely approximate the statutory calculation. According to the Department of Education,
available cash reserves may not always be an accurate barometer of a guarantor’s financial health.
1/
In accordance with Section 428(c)(9) of the Higher Education Act, does not include loans transferred from the former Higher Education
Assistance Foundation, Northstar Guarantee Inc., Ohio Student Aid Commission or Puerto Rico Higher Education Assistance Corporation. (The
minimum reserve fund ratio under the Higher Education Act is .25%.)
Claims Rate. For the past five federal fiscal years, GLHEGC’s claims rate has not exceeded 5%,
and, as a result, the highest allowable reinsurance has been paid on all GLHEGC’s claims. The actual
claims rates are as follows:
Fiscal Year
Claims Rate
2004
2005
2006
2007
2008
.68%
.51%
.62%
.77%
.98%
As a result of various statutory and regulatory changes over the past several years, historical rates may not
be an accurate indicator of current delinquency or default trends or future claims rates.
New York State Higher Education Services Corporation. The New York State Higher Education
Services Corporation (“NYHESC”) is the designated student loan guaranty agency for the State of New
York responsible for New York’s participation in the FFEL Program pursuant to an act of the New York
State Legislature, and Section 428(c) of the Higher Education Act. HESC’s role as a guaranty agency is
to administer the FFEL Program in New York State and to assist students in meeting post-secondary
education costs while attending eligible institutions of their choice.
HESC’s FFEL Program responsibilities include processing loans submitted for guarantee, issuing
loan guarantees, providing information and assistance to student borrowers, providing collection
assistance to lenders for delinquent loans, paying lender claims for loans in default, and performing
collection activities on defaulted loans purchased from FFEL Program lenders.
10
HESC began guaranteeing student loans in 1974, and as of September 30, 2008, had cumulative
principal guarantees outstanding of approximately $22.3 billion.
The 1998 Reauthorization Law required guaranty agencies to establish two (2) separate funds, the
Federal Student Loan Reserve Fund (property of the United States) and the Agency Operating Fund
(property of the guaranty agency). The Federal Student Loan Reserve Fund is to be used to pay lender
claims and to pay a default-aversion fee to the agency operating fund. The Agency Operating Fund is to
be used by the guaranty agency to pay its operating expenses related to student financial aid activities.
As of September 30, 2008, HESC’s Federal Student Loan Reserve Fund and Agency Operating
Fund balances were as follows: The Federal Fund had total assets of $90.1 million, total liabilities of $8.8
million and total fund equity of $81.3 million; and the Operating Fund had total assets of $81.3 million,
total liabilities of $46.9 million and total fund equity of $34.2 million.
Guaranty Volume. The following table sets forth the approximate aggregate principal amount of
federally reinsured education loans (including PLUS Loans but excluding Federal Consolidation Loans)
that have first become guaranteed by HESC in the federal fiscal years ending September 30:
Fiscal Year
Guaranty Volume (Millions)|
2003
2004
2005
2006
2007
2008
2,414
2,563
2,711
2,970
3,164
3,236
Reserve Ratio. Pursuant to 34 C.F.R. 682.419, HESC’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 following table sets forth the reserve ratio for HESC for the last five (5) fiscal years
ending September 30:
Fiscal Year
Reserve Ratio
2004
2005
2006
2007
2008
0.39
0.25
0.25
0.29
0.29
11
Recovery Rate. The U.S. Department of Education calculates a guaranty agency’s recovery rate
by dividing the amount recovered from borrowers during a federal fiscal year by the guaranty agency’s
outstanding default loan portfolio at the end of the prior federal fiscal year (beginning inventory). Below
are HESC’s recovery rates for the past 5 federal fiscal years as calculated by the U.S. Department of
Education:
Fiscal Year
Recovery Ratio
2004
2005
2006
2007
2008
13.99
18.50
19.59
26.54
32.12
Claims Rate. NYHESC’s claims rate for each of the past five (5) fiscal years ending September
30, are as follows:
Fiscal Year
Claims Rate
2004
2005
2006
2007
2008
1.49
1.67
1.50
1.47
1.60
Pennsylvania Higher Education Assistance Agency. Pennsylvania Higher Education Assistance
Agency (“PHEAA”) is a body corporate and politic constituting a public corporation and government
instrumentality created pursuant to the Pennsylvania Act of August 7, 1963, P.L. 549, as amended (the
“Pennsylvania Act”).
PHEAA has been guaranteeing student loans since 1964. As of August 31, 2009, PHEAA has
guaranteed a total of approximately $47.6 billion principal amount of Stafford Loans and approximately
$7.6 billion principal amount of PLUS Loans and SLS Loans, and approximately $52 billion principal
amount of consolidation loans under the Higher Education Act. PHEAA initially guaranteed loans only
to residents of the Commonwealth of Pennsylvania (the “Commonwealth”) or persons who planned to
attend or were attending eligible education institutions in the Commonwealth. In May 1986, PHEAA
began guaranteeing loans to borrowers who did not meet these residency requirements pursuant to its
national guarantee program. Under the Pennsylvania Act, guarantee payments on loans under PHEAA’s
national guarantee program may not be paid from funds appropriated by the Commonwealth.
PHEAA has adopted a default prevention program consisting of (i) informing new borrowers of
the serious financial obligations incurred by them and stressing the financial and legal consequences of
failure to meet all terms of the loan, (ii) working with institutions to make certain that student borrowers
are enrolled in sound education programs and that the proper individual enrollment records are being
maintained, (iii) assisting lenders with operational programs to ensure sound lending policies and
procedures, (iv) maintaining up-to-date student status and address records of all borrowers in the guaranty
program, (v) initiating prompt collection actions with borrowers who become delinquent on their loans,
do not establish repayment schedules or “skip,” (vi) taking prompt action, including legal action and
garnishment of wages, to collect on all defaulted loans, and (vii) adopting a general policy that no loan
12
will be automatically “written off.” Since the loan servicing program was initiated in 1974, PHEAA has
never exceeded an annual default claims percentage of 5 percent and, as a result, federal reimbursement
for default claims has thus far been at the maximum federal reimbursement level.
For the last five federal fiscal years (ending September 30), the annual default claims percentages
have been as follows:
Fiscal Year
Annual Default Claims
2004
2005
2006
2007
2008
1.09
1.30
1.42
1.96
1.98
As of August 31, 2009, PHEAA had total federal reserve-fund assets of approximately $144.9
million. Through August 31, 2009, the outstanding amount of principal on loans that had been directly
guaranteed by PHEAA under the Federal Family Education Loan Program was approximately $52.3
billion. In addition, as of August 31, 2009, PHEAA had operating-fund assets and non-Federal Family
Education Loan Program assets totaling approximately $12 billion.
Guarantee Volume. PHEAA’s guaranty volume (the approximate aggregate principal amount of
federally reinsured education loans, including PLUS Loans but excluding federal Consolidation Loans)
was as follows for the last five federal fiscal years (ending September 30):
Fiscal Year
Guaranty Volume (Millions)
2004
2005
2006
2007
2008
3,131
3,403
3,792
4,121
3,948
Reserve Ratio. Under current law, PHEAA is required to manage the Federal Fund so net assets
are greater than 0.25% of the original principal balance of outstanding guarantees.
Fiscal Year
Reserve Ratio
2004
2005
2006
2007
2008
0.34
0.16
0.20
0.25
0.25
Recovery Rates. A guarantor's recovery rate, which provides a measure of the effectiveness of the
collection efforts against defaulting borrowers after the guarantee claim has been satisfied, is determined
for each year by dividing the current year collections by the total outstanding claim portfolio for the prior
fiscal year.
13
The table below shows the cumulative recovery rates for PHEAA for the five federal fiscal years
(ending September 30) for which information is available:
Fiscal Year
Recovery Rates
2004
2005
2006
2007
2008
25.48
26.30
33.93
37.76
32.81
Texas Guaranteed Student Loan Corporation. Guaranty Volume. The following table sets forth
the approximate aggregate principal amount of federally reinsured education loans (including loans under
the Parent Loans for Undergraduate Students (“PLUS”) program but excluding Federal Consolidation
Loans) that have first become guaranteed in each of the following federal fiscal years calculated by
subtracting the prior year end Form 2000 Line AR1 from that of the current year.
Stafford, SLS and PLUS Loans Guaranteed (dollars in millions)
Federal Fiscal Year (ending September 30)
2004
2005
2006
2007
2008
(1)
TGSLC (1)
3,239
3,612
4,016
4,582
7,256
Information from TGSLC was provided by TGSLC from reports provided by or to the U.S.
Department of Education and has not been verified by TGSLC. No representation is made by
TGSLC as to the accuracy or completeness of the information.
Reserve Ratio. The reserve ratio is determined by dividing its cumulative Federal Fund cash and
investment reserves, by the original principal amount of the outstanding loans guaranteed. The term
“cumulative cash reserves” means the difference between sources and uses of monies in the Federal
Reserve Fund. The following table sets forth the respective reserve ratio for the following fiscal years:
Federal Fiscal Year (ending September 30)
2004
2005
2006
2007
2008
(1)
TGSLC (1)
0.974%
0.849%
0.735%
0.904%
0.905%
TG’s Voluntary Flexible Agreement (VFA) was terminated effective January 1, 2008, with claims thereafter reinsured by US
Department of Education (ED) at the respective statutory rates. Under provisions of the VFA, effective March 31, 2001, TGSLC
escrowed all Federal Reserve assets in a joint TGSLC/ED account, and received 100% reinsurance from ED on all FFELP
guarantee claims paid. Information from TGSLC was provided by TGSLC from reports provided by or to the U.S. Department
of Education and has not been verified by TGSLC. No representation is made by TGSLC as to the accuracy or completeness of
the information.
14
Recovery Rates. Determined by dividing the cumulative amount recovered from borrowers (prior
year total plus current year Form 2000 Lines MR 10,10A, 11A, 11B, 12A, 13A, 17,19 and 27) by the
cumulative amount of default claims paid (Form 2000 Line AR 8). The table below sets forth the
recovery rates for the following fiscal years:
Federal Fiscal Year (ending September 30)
2004
2005
2006
2007
2008
(1)
TGSLC (1)
81.3
81.6
80.9
82.0
83.2
Information from TGSLC was provided by TGSLC from reports provided by or to the U.S.
Department of Education and has not been verified by TGSLC. No representation is made by
TGSLC as to the accuracy or completeness of the information.
Claims Rate. For the following federal fiscal years, the claims rate is as follows:
Federal Fiscal Year (ending September 30)
2004
2005
2006
2007
2008
(1)
TGSLC (1)
2.40
3.48
3.06
3.01
3.32
Information from TGSLC was provided by TGSLC from reports provided by or to the U.S.
Department of Education and has not been verified by TGSLC. No representation is made by
TGSLC as to the accuracy or completeness of the information.
United Student Aid Funds, Inc. United Student Aid Funds, Inc. (“USA Funds”) was organized
as a private, nonprofit corporation under the General Corporation Law of the State of Delaware in 1960.
In accordance with its Certificate of Incorporation, USA Funds: (i) maintains facilities for the provision of
guarantee services with respect to approved education loans made to or for the benefit of eligible students
who are enrolled at or plan to attend approved educational institutions; (ii) guarantees education loans
made pursuant to certain loan programs under the Higher Education Act, as well as loans made under
certain private loan programs; and (iii) serves as the designated guarantor for education-loan programs
under the Higher Education Act of 1965, as amended (“the Act”) in Arizona, Hawaii and certain Pacific
Islands, Indiana, Kansas, Maryland, Mississippi, Nevada and Wyoming
USA Funds contracts with Sallie Mae, Inc., a wholly owned subsidiary of SLM Corporation.
USA Funds also contracts with Student Assistance Corporation, a wholly owned subsidiary of SLM
Corporation. SLM Corporation and its subsidiaries are not sponsored by nor are they agencies of the
United States of America.
15
Effective December 13, 2004, USA Funds became the sole member of the Northwest Education
Loan Association, a guarantor serving the states of Washington, Idaho and the Northwest.
For the purpose of providing loan guarantees under the Act, USA Funds has entered into various
agreements (collectively, the “Federal Reinsurance Agreements”) with the U.S. Secretary of Education
(the “Secretary”). Pursuant to the Federal Reinsurance Agreements, USA Funds serves as a “guaranty
agency” as defined in Section 435(j) of the Act. The Act allows the Secretary, after giving the guaranty
agency notice and the opportunity for a hearing, to terminate the Federal Reinsurance Agreements if the
Secretary determines that the administrative or financial condition of the guaranty agency jeopardizes the
agency’s continued ability to perform its responsibilities under its guaranty agreement, it is necessary to
protect the federal financial interest, or to ensure the continued availability of loans to student- or parentborrowers.
Reinsurance is paid to USA Funds by the Secretary in accordance with a formula based on the
annual default rate of loans guaranteed by USA Funds under the Act and the disbursement date of loans.
The rate of reinsurance ranges from 100 percent to 75 percent of USA Funds’ losses on default-claim
payments made to lenders. The Higher Education Amendments of 1998 (the “1998 Reauthorization
Law”) reduced the reinsurance coverage for loans in default made on or after Oct. 1, 1998, to a range
from 95 percent to 75 percent based upon the annual default claims rate of the guaranty agency.
Reinsurance on non-default claims remains at 100 percent.
The 1998 Reauthorization Law requires guaranty agencies to establish two (2) separate funds, a
federal reserve fund (property of the United States) and an agency operating fund (property of the
guaranty agency). The federal reserve fund is to be used to pay lender claims and to pay a defaultaversion fee to the agency operating fund. The agency operating fund is to be used by the guaranty
agency to pay its operating expenses.
The Higher Education Reconciliation Act (HERA), which was signed into law in February 2006,
requires all guarantors to collect and deposit into the federal reserve fund a federal default fee of 1 percent
of the principal amount of all Stafford and PLUS loans guaranteed on or after July 1, 2006. USA Funds
paid the federal default fee to the federal reserve fund from the operating fund on behalf of the borrower
for all PLUS loans made by a lender that paid the federal default fee on behalf of its Stafford borrowers
for loans guaranteed by USA Funds from July 1, 2006, through June 30, 2007, and for all PLUS loans
guaranteed by USA Funds on or after July 1, 2007 through June 30, 2008, for graduate- and professionalstudent-borrowers. Effective for loans guaranteed beginning February 1, 2008, USA Funds will subsidize
from its non-federal resources, one-half of the 1 percent federal default fee, when the originating lender
buys down the other half of the fee for borrowers attending schools in USA Funds’ designated and key
states of Arizona, California, Florida, Hawaii, Indiana, Kansas, Maryland, Mississippi, Nevada and
Wyoming, and for borrowers attending all other schools with final 2005 cohort-default rates of less than 7
percent.
As of September 30, 2008, USA Funds held assets on behalf of the federal reserve fund of
approximately $343 million; federal reserve fund liabilities of approximately $20 million; and a fund
balance of approximately $323 million. Through September 30, 2008, the outstanding, unpaid, aggregate
amount of principal and interest on loans that had been directly guaranteed by USA Funds under the
Federal Family Education Loan Program was approximately $97 billion. Also, as of September 30, 2008,
USA Funds had operating fund assets totaling approximately $869 million, which includes the $343
million of assets held on behalf of the Federal Reserve Fund.
USA Funds’ “reserve ratio” complies with the U.S. Department of Education definition, which is
determined by dividing the fund balance reserves, including non-cash allowance and other non-cash
16
charges and amounts to be remitted to the U.S. Department of Education for reserve recalls in 2003
through 2005, in a guarantor’s federal reserve fund, by the total amount of loans outstanding. Following
this formula, the reserve ratio for the federal reserve fund administered by USA Funds for the last five
fiscal years was as follows: 2008 – 0.330 percent; 2007 – 0.280 percent; 2006 - 0.258 percent; 2005 –
0.452 percent; 2004 – 0.558 percent.
USA Funds’ “guarantee volume” is the approximate aggregate principal amount of federally
reinsured education loans (including subsidized and unsubsidized Federal Stafford and Federal PLUS
loans but excluding Federal Consolidation loans) guaranteed by USA Funds. For the last five fiscal years,
the “guarantee volume” was as follows (in billions): 2008 - $17.202; 2007 - $15.581; 2006 - $12.586;
2005 – $10.724; 2004 – $9.907.
USA Funds’ “recovery rate,” which provides a measure of the effectiveness of the collection
efforts against defaulted borrowers after the guarantee claim has been satisfied, is determined by dividing
the amount recovered from borrowers by USA Funds during the fiscal year by the aggregate amount of
default claims paid by USA Funds outstanding at the end of the prior fiscal year. For the last five fiscal
years, the “recovery rate” was as follows: 2008 – 45.60 percent; 2007 – 40.30 percent; 2006 – 38.03
percent; 2005 – 35.05 percent; 2004 – 35.47 percent.
USA Funds’ “loss rate” represents the percentage of claims purchased from lenders but not
covered by reinsurance. For the last five fiscal years, the “loss rate” was as follows: 2008 – 4.26 percent;
2007 – 4.07 percent; 2006 – 3.84 percent; 2005 - 3.46 percent; 2004 - 3.11 percent.
In addition, USA Funds’ “claims rate” represents the percentage of federal reinsurance claims
paid by the Secretary during any fiscal year relative to USA Funds’ existing portfolio of loans in
repayment at the end of the prior fiscal year. For the last five fiscal years, the “claims rate” was as
follows: 2008 – 2.07 percent; 2007 – 2.13 percent; 2006 – 1.21 percent; 2005–1.41 percent; 2004—1.13
percent.
USA Funds is headquartered in Fishers, Indiana. USA Funds will provide a copy of its most
recent annual report upon receipt of a written request directed to its headquarters at P.O. Box 6028,
Indianapolis, Indiana 46206-6028, Attention: Vice President, Corporate Communications.
17
Appendix A
Audited Financial Statements of the Corporation
FINANCIAL STATEMENTS
Educational Funding Services, Inc.
Years Ended June 30, 2009 and 2008
With Report of Independent Auditors
Educational Funding Services, Inc.
Financial Statements
Years Ended June 30, 2009 and 2008
Contents
Management’s Discussion and Analysis ......................................................................................... i
Report of Independent Auditors.......................................................................................................1
Audited Financial Statements
Balance Sheets .................................................................................................................................2
Statements of Changes in Fund Deficit ...........................................................................................3
Statements of Cash Flows ................................................................................................................4
Notes to the Financial Statements ....................................................................................................6
EDUCATIONAL FUNDING SERVICES, INC.
Management’s Discussion and Analysis
For the Years ended June 30, 2009 and June 30, 2008
(Dollars in Thousands)
This discussion and analysis of the financial performance of Educational Funding Services,
Inc. (EFCA) is required supplementary information. It introduces the basic financial
statements and provides an analytical overview of our financial activities. Please read it in
conjunction with the financial statements that follow this discussion.
EFCA is a non-profit corporation created to support the City of Mission Viejo, California. Our
mission is to make education a reality by supporting programs and initiatives to finance
educational opportunities through all available means while delivering premier services to all our
constituents. EFCA finances the purchase of student loans by issuing taxable and tax-exempt
debt. This combined debt structure enables EFCA to purchase loans both within California and
nationwide.
EFCA was incorporated in April 2000 for the purpose of providing funds for the acquisition and
servicing of student loans that are insured by the U.S. Department of Education (ED) and
guaranteed by various national guarantors under the Federal Family Education Loan Program
(FFELP) as provided for in the Higher Education Act of 1965, as amended. The EFCA
commenced operations on September 1, 2005 for the purpose of providing funds for the
acquisition and servicing of alternative student loans.
Merger
On January 1, 2007, EFCA merged with EFSI, a Brazos affiliate, with EFCA being the surviving
entity. The financial statements, for all periods presented, have been accounted for by the pooling
of interests method. There was no exchange of consideration for this combination and no intercompany transactions that required elimination. The separate trust estates securing securities of
EFSI and EFCA will not be combined as a result of the merger. Each separate trust estate of
EFCA and EFSI will continue to be separate following the merger, and the trust estates will not
be cross-defaulted or crossed-collateralized as a result of the merger.
Trust Estate Collapse
On June 30, 2009, the Company transferred certain commercial paper conduit with a common
financial institution to AEFC. AEFC assumed the assets and liabilities of this trust estate. The
financial statements, for all periods presented, have been restated for the transfer of the assets,
liabilities, and operations of this trust. There was no exchange of consideration for this
combination and no intercompany transactions that required elimination. Both entities were
under common control. The purpose of the transfer was to combine the separate trust estates of
i
EDUCATIONAL FUNDING SERVICES, INC.
Management’s Discussion and Analysis (continued)
For the Years ended June 30, 2009 and June 30, 2008
(Dollars in Thousands)
three commercial paper conduits with a single financial institution of AFC, THEA, EFCA,
FSFC, and the Company into two conduits within a single company. Prior to the transfer the
conduits were cross-defaulted and cross-collateralized. The Company retains no liability for the
liabilities of this trust estate.
Description of the Federal Family Education Loan Program
EFCA operates under the Federal Family Education Loan Program. FFELP is the federal
program that allows undergraduate or graduate students at eligible postsecondary schools to
obtain low-cost loans.
FFELP was originally enacted under the Higher Education Act of 1965. The Higher Education
Act has been amended and reauthorized several times. There can be no assurance that the Higher
Education Act, or other relevant federal or state laws, rules and regulations, will not be changed
in the future in a manner that will adversely impact the programs described below and the
student loans made there under.
Currently, there are five types of FFELP loans:

Subsidized Stafford – the federal government pays the interest on these loans while the
student is in school, during the grace period and during deferments.

Unsubsidized Stafford – the student is responsible for all interest.

Parent Loan for Undergraduate Students (PLUS) – supplemental loans to parents.

Parent Loan for Graduate Students (GradPLUS) – supplemental loans to parents.

Consolidation – loans that allow borrowers to combine Stafford and certain other
education-related loans, fix the rate of interest and extend the repayment period.
The interest rate charged to the borrower varies based upon the type of loan and regulations in
effect at the time that the loan was originated.
The U.S. Department of Education (ED) guarantees FFELP loans. Their major function as a
guarantor is to guarantee principal and interest repayment to lenders if the borrower fails to pay
the loan. Under federal regulations, the Federal Fund (used to pay claims on defaulted loans) is
managed so that there is enough money to pay lenders when their normal collection efforts fail.
ii
EDUCATIONAL FUNDING SERVICES, INC.
Management’s Discussion and Analysis (continued)
For the Years ended June 30, 2009 and June 30, 2008
(Dollars in Thousands)
The federal government reinsures the Federal Fund, and reinsurance rates vary based upon
default rates of the portfolio of guaranteed loans and based upon the date the loan was disbursed
as follows:

Disbursed before October 1, 1993 – 80% to 100%

Disbursed between October 1, 1993 and September 30, 1998 – 78% to 98%

Disbursed on or after October 1, 1998 – 75% to 98%

Disbursed on or after July 1, 2006 - 75% to 97%
The Federal Fund is primarily used to pay claims on defaulted loans.
FFELP student loans originated prior to July 1, 2006 earn interest at the higher of a floating rate
based on the Special Allowance Payment or SAP formula set by ED and the borrower rate, which
is fixed over a period of time. We generally finance our student loan portfolio with floating rate
debt. In low and/or declining interest rate environments, when the fixed borrower rate is higher
than the rate produced by the SAP formula, our student loans earn at a fixed rate while the
interest on our floating rate debt continues to decline. In these interest rate environments, we
earn additional spread income. Depending on the type of the student loan and when it was
originated, the borrower rate is either fixed to term or is reset to a market rate each July 1. As a
result, for loans where the borrower rate is fixed to term, we may receive special allowance
payments for an extended period of time, and for those loans where the borrower interest rate is
reset annually on July 1, we may receive special allowance payments to the next reset date.
Forward-looking Statements
This financial report contains statements relating to future results that are considered “forwardlooking statements.” These statements relate to, among other things, risk-sharing losses,
servicing losses, simulation of changes in interest rates, litigation results, changes in law and
regulations and the adoption of new accounting standards. These forward-looking statements are
based on assumptions that involve risks and uncertainties and that are subject to change based on
various important factors (some of which are beyond our control). Actual results may differ
materially from those expressed or implied as a result of these risks and uncertainties. These
include, but are not limited to, interest rate fluctuations, changes in political and economic
conditions, competitive product and pricing pressures within our markets, market fluctuations,
the effects of adopting new accounting standards, inflation, technological change, changes in
policies and laws, success in gaining regulatory approvals when required, and success in the
timely development of new products and services. Such forward-looking statements speak only
iii
EDUCATIONAL FUNDING SERVICES, INC.
Management’s Discussion and Analysis (continued)
For the Years ended June 30, 2009 and June 30, 2008
(Dollars in Thousands)
as of the date on which such statements are made. EFCA undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events.
Description of the Basic Financial Statements
The statement of changes in fund balance reports all of our revenues and expenses. The
statement measures the results of our operations.
The balance sheet includes all assets and liabilities of EFCA. Assets consist of cash, receivables
and other tangible assets that we own or control. Liabilities are short- and long-term obligations
of EFCA. Fund balance is excess assets over liabilities.
The statement of cash flows supplements these statements providing relevant information about
cash receipts and payments.
The notes to the financial statements are an integral part of the financial statements and contain
important information necessary to get a complete view of our finances.
Condensed Financial Information
June 30
2009
Balance Sheet
Assets:
Cash and cash equivalents
Student loan notes receivable, net
Interest receivable
Other
Total assets
Liabilities and Fund Balance
Notes and bonds payable, net
Accrued interest payable
Other
Total liabilities
Fund balance:
Total liabilities and fund balance
$
$
$
$
15,415
627,144
13,430
8,463
664,452
671,145
684
694
672,523
(8,071)
664,452
June 30
2008
$
$
$
$
17,964
690,124
18,373
9,126
735,587
737,313
1,205
532
739,050
(3,463)
735,587
iv
EDUCATIONAL FUNDING SERVICES, INC.
Management’s Discussion and Analysis (continued)
For the Years ended June 30, 2009 and June 30, 2008
(Dollars in Thousands)
Student loan interest income
Investment interest income
Interest expense
$
Net interest income before provision for loan losses
22,703
258
(24,570)
(260)
(237)
Net interest income after provision for loan losses
131
(1,846)
Noninterest income
159
122
Operating income
(1,724)
Operating expenses
(2,883)
$
(4,607)
38,463
1,603
(39,675)
391
(1,609)
Provision for loan losses
Revenue over expenses, before unrealized
derivative gain (loss)
$
290
(4,048)
$
(3,758)
Revenue over (under) expenses, before unrealized derivative gain (loss), for the period ended
June 30, 2009 was ($4,670) a decrease of 24% from ($3,758) in 2008. An analysis of this
decrease follows.
Non-interest expense
Non-interest expense decreased $1,102 from ($4,048) in 2008 to ($2,883) in 2009. This is due
primarily to the following:

Auction agent fees were no longer paid after the ARS notes failed since no auctions were
taking place. Auction agent fees and broker dealer fees decreased $720 from $753 in
2008 to $33 in 2009

Administrative and loan servicing fees decreased $329 from $2,622 in 2008 to $2,293 in
2009.
v
EDUCATIONAL FUNDING SERVICES, INC.
Management’s Discussion and Analysis (continued)
For the Years ended June 30, 2009 and June 30, 2008
(Dollars in Thousands)
Net Interest Income
$50,000
$40,000
$30,000
$20,000
$10,000
$0
($10,000)
($20,000)
($30,000)
($40,000)
($50,000)
2009
Interest income
2008
Interest expense
Net interest income before provision for loan losses
Net interest income is created largely from our portfolio of student loans although we have
investments that are not related to student loans. For the period ended June 30, 2009, net interest
income before provision for loan losses were ($1,609), a decrease of $2,000 from $391 in 2008.
vi
EDUCATIONAL FUNDING SERVICES, INC.
Management’s Discussion and Analysis (continued)
For the Years ended June 30, 2009 and June 30, 2008
(Dollars in Thousands)
The following table shows the average rates earned on interest earning assets and the average
rates paid on interest bearing liabilities.
June 30, 2009
Balances
Rate
For the periods ended:
June 30, 2008
Balances
Rate
Average interest earning assets
Student loan notes receivable
Investments
$
665,528
19,571
3.39%
1.26%
$
698,660
35,778
5.53%
4.10%
$
685,099
3.33%
$
734,438
5.47%
$
706,429
3.45%
$
756,553
5.25%
Average interest bearing liabilities
Notes and bonds payable
Net interest spread
0.22%
-0.12%
The following table shows the net interest spread on student loans.
For the periods ended:
June 30
June 30
2009
2008
Student loan yields
3.39%
5.53%
Cost of funds
3.45%
5.25%
-0.06%
0.28%
Net interest spread on student loans
While the amount that we earn on student loans involves interpreting and complying with
complicated regulations issued by ED, our portfolio of student loans generally consists of
variable-rate loans. The rates paid by borrowers are generally reset annually on July 1. The ED
makes special allowance payments that generally result in the loan yield to the lender being
higher than the rate paid by the borrower. However, during periods when the borrower rate
exceeds the rate that the lender would earn under the special allowance formula for loans first
disbursed prior to April, 1, 2006, the borrower rate becomes a floor rate received by the lender.
However, for all loans first disbursed after April 1, 2006, when the borrower rates exceeds the
rate that the lender would earn under special allowance formula, EFCA would liable for
repayment or rebate of the excess student loan amount earned over the applicable special
allowance rate.
vii
EDUCATIONAL FUNDING SERVICES, INC.
Management’s Discussion and Analysis (continued)
For the Years ended June 30, 2009 and June 30, 2008
(Dollars in Thousands)
Provision for Loan Losses
Under FFELP, 98% of principal and interest on student loans is guaranteed. The provision for
loan losses represents our estimate of the costs related to the 2% risk sharing on FFELP loans we
own.
In making our estimates, we consider the trend in default rates in our portfolio and changes in
economic conditions. We believe the provision for loan losses is adequate to cover inherent
losses in the student loan portfolio at June 30, 2009. A roll-forward of our allowance for loan
losses is presented in the following table.
June 30,
2009
For the periods ended:
June 30,
2008
Balance at beginning of period
Provision for losses
Charge-offs, net of recoveries
$
534
237
(220)
$
503
260
(229)
Balance at end of period
$
551
$
534
Allowance as a percentage of ending
balance of student loans
0.08%
0.07%
Financial Position and Liquidity
A substantial portion of EFCA’s fund balance is restricted for debt service. This restricted fund
balance represents assets available for the payment of debt obligations that are not available for
general-purpose expenditures. Restricted fund balance amounted to $(10,977) at June 30, 2009.
Description of Debt Activity
EFCA’s principal funding need is securing capital to fund student loan purchases. The primary
source to raise this capital is access to bond markets.
EFCA has the ability to issue both tax-exempt and taxable debt instruments. The ability to issue
tax-exempt bonds allows EFCA the capability to achieve a reduced cost of debt.
At June 30, 2009, EFCA’s outstanding debt amounted to just under $671 million. The following
table shows our debt activity for last three fiscal years.
viii
EDUCATIONAL FUNDING SERVICES, INC.
Management’s Discussion and Analysis (continued)
For the Years ended June 30, 2009 and June 30, 2008
(Dollars in Thousands)
June 30
2009
For the periods ended:
Capital market activity
Proceeds from issuing taxable student loan
revenue bonds
Proceeds from issuing tax-exempt student
loan revenue bonds
$
-
June 30
2008
$
112,800
-
June 30
2007
$
121,800
20,000
RISKS
Overview
Managing risk is an essential part of managing EFCA’s operations. EFCA’s most prominent risk
exposures are operational, market and interest rate, credit, political and regulatory, and
consolidation loan risk.
Operational Risk
Operational risk can result from regulatory compliance errors, servicing errors, technology
failures, breaches of the internal control system, and the risk of fraud or unauthorized
transactions by employees or persons outside EFCA. This risk of loss also includes the potential
legal actions that could arise as a result of an operational deficiency or as a result of
noncompliance with applicable regulatory standards and contractual commitments, adverse
business decisions or their implementation, and customer attrition due to potential negative
publicity.
EFCA mediates servicing risk by contracting with multiple qualified and financially sound thirdparty servicers. These servicers are responsible for complying with the standards set by the ED
and guarantor agencies. EFCA monitors these servicers for contract performance and compliance
with federal regulations.
Our operating processes are highly dependent on our information system infrastructure. EFCA
faces the risk of business disruption should there be extended failures of our information
systems. EFCA has implemented a number of back up and recovery plans in the event of systems
failures. These plans are tested regularly and monitored constantly. We manage operational risk
through our risk management and internal control processes. Each manager maintains a system
of controls with the objective of providing proper transaction authorization and execution, proper
system operations, safeguarding of assets from misuse or theft, and ensuring the reliability of
ix
EDUCATIONAL FUNDING SERVICES, INC.
Management’s Discussion and Analysis (continued)
For the Years ended June 30, 2009 and June 30, 2008
(Dollars in Thousands)
financial and other data. While we believe that we have designed effective methods to minimize
operational risks, our operations remain vulnerable to natural disasters, human error, technology
and communication system breakdowns and fraud.
Market and Interest Rate Risk
Market risk is the risk of loss from adverse changes in market prices and/or interest rates of our
financial instruments. Our primary market risk is from changes in interest rates and interest
spreads. We have an active interest rate risk management program that is designed to reduce our
exposure to changes in interest rates and maintain consistent earning spreads in all interest rate
environments. We use derivative instruments to hedge our interest rate exposure. Even the use of
hedging activities cannot eliminate all potential interest rate exposures. There is also the risk that
the hedges will not perform as designed.
Credit Risk
EFCA’s credit risk is inherent principally in its student loan notes receivable. A downturn in the
economy resulting in substantial unemployment either regionally or nationwide may result in an
increase in defaults by borrowers, thus, causing increased default claims to be paid by the loan
guarantor. It is impossible to predict the status of the economy or unemployment levels or at
which point a downturn in the economy would significantly increase EFCA’s credit risk
exposure. The credit risk of EFCA is substantially decreased by the guaranteed nature of the
majority of its investments in student loan notes receivable.
Political/Regulatory Risk
Because we operate in a federally sponsored loan program, we are subject to political and
regulatory risk. As part of the Higher Education Act (HEA), the student loan program is
periodically amended and must be ‘‘reauthorized’’ every six years. There can be no assurances
that any reauthorization will not result in changes that may have a materially adverse impact to
EFCA.
Consolidation Loan Risk
Consolidation Loans can have two detrimental effects. First, we may lose student loans in our
portfolio that are consolidated with other lenders. This, along with consolidation our own loans,
could also accelerate premium amortization on purchased loans. Second, Consolidation Loans
have lower current yields than the FFELP Stafford loans they replace. This is somewhat offset by
x
EDUCATIONAL FUNDING SERVICES, INC.
Management’s Discussion and Analysis (continued)
For the Years ended June 30, 2009 and June 30, 2008
(Dollars in Thousands)
the longer average lives of consolidation loans and that current regulations do not generally
allow these loans to be reconsolidated.
Description of Currently Known Facts, Decisions or Conditions Expected to have a
Significant Effect on Results of Operations
Interest Rate Environment
The Federal Reserve lowered the interest rate by 175 basis points from July, 2008 through
December, 2008. These cuts were in response to the economic turmoil in the credit markets
caused by the sub-prime mortgage problem. The mortgage problem triggered a general and deep
tightening of credit and liquidity policy in the capital markets. The liquidity crisis caused banks
and investors to generally withdraw from the asset-backed bond markets, as investors fled the
Asset Backed Security (ABS) market. Decreased investor demand for these securities has created
pressure on banks and brokers of Auction Rate Securities (ARS) and the brokers absorbed these
bonds onto their own balance sheets. The lack of liquidity in the ARS market generally caused
interest rate spreads to widen, reducing net interest income for the EFCA during this period.
Because much of the ARS paper was funded by investors who issued commercial paper, the
demand for ARS notes fell sharply across all risk ratings. Investment banks that typically provide
demand for the ARS continued to provide support for this market during the first two quarters of
the current fiscal year, allowing investors to leave the ARS market as opposed to suffering failed
auctions. The price for providing this continued demand for ARS in the current market showed
up in higher auction rates.
More recently, adverse conditions in the securitization markets have reduced access to and
increased the cost of borrowing in the market for student loan asset-backed securities. Although
the EFCA expects ABS financing to remain the primary source of funding, we have seen, and
continue to expect to see, pricing less favorable than prior to the credit market dislocation that
began in the summer of 2007.
In February 2008, an imbalance of supply and demand in the auction rate securities market as a
whole led to failures of the auctions pursuant to which certain of the EFCA’s auction rate
securities’ interest rates are set. This imbalance continued through the first quarter of the current
(2010) fiscal year. As a result, all of the EFCA’s auction rate securities as of June 30, 2009, bear
interest at the maximum rate allowable under their terms.
xi
EDUCATIONAL FUNDING SERVICES, INC.
Management’s Discussion and Analysis (continued)
For the Years ended June 30, 2009 and June 30, 2008
(Dollars in Thousands)
The Maximum Rate for taxable ARS in the EFCA is set at 30-day LIBOR plus 150 basis points
for Senior debt and 30-day LIBOR plus 250 basis points for Subordinate debt. During the third
quarter of the current fiscal year, rating agencies lowered the ratings of certain Senior and
Subordinate debt triggering an increase in the maximum rate for such debt to 30-day LIBOR plus
350 basis points. This effectively increased the interest expense incurred by the EFCA. However,
each of these issues was limited by the net loan rate discussed below. Therefore, cash flows were
not adversely impacted.
The Maximum Rate for tax-exempt ARS is set at the greater of 1.0 minus the statutory corporate
tax rate (currently 35%), or 65% of 30-day AA rated financial Commercial Paper (CP), or 175%
of the Security Industry and Financial Markets Association (SIFMA) rate, not to exceed 14% or
15% depending on the individual trust indenture. The SIFMA index is set weekly. During the
period ended June 30, 2009, the SIFMA rate experienced an unprecedented increase, causing taxexempt ARS to be set at higher than normal rates. On September 17, 2008, the SIFMA increased
to 5.15%, causing tax-exempt ARS rates that re-set during that week to be set at 9.01%. On
September 24, 2008, SIFMA again increased, to 7.96%, causing tax-exempt ARS rates that reset
during that week to be set at 13.93%. The SIFMA index has since dropped back to historical
levels and was set at 0.54% at June 30, 2009.
Each of the individual trusts within the EFCA has provisions for calculation of a net loan rate for
taxable ARS notes. This rate is intended to protect each trust from incurring cash outflows that
the cash inflows cannot sustain. The net loan rate provided protection to the cash flows of the
EFCA’s trusts.
In general, the amount, type and cost of our funding from the capital markets and borrowings
from financial institutions, have a direct impact on the EFCA’s operating expenses and financial
results and can limit the EFCA’s ability to grow assets. A number of factors could make such
securitization more difficult, more expensive or unavailable on any terms, including, but not
limited to, financial results and losses, changes within our organization, specific events that have
an adverse impact on the EFCA’s reputation, changes in the activities of our business partners,
disruptions in the capital markets, specific events that have an adverse impact on the financial
services industry, changes affecting assets, corporate and regulatory structure, interest rate
fluctuations, ratings agencies’ actions, general economic conditions and the legal, regulatory, and
accounting environments governing the EFCA’s funding transactions. In addition, the ability to
raise funds is strongly affected by the general state of the U.S. and world economies, and may
become increasingly difficult due to economic and other factors. Finally, the EFCA competes for
funding with other industry participants, some of which are publicly traded. Competition from
these institutions may increase the EFCA’s cost of funds.
xii
EDUCATIONAL FUNDING SERVICES, INC.
Management’s Discussion and Analysis (continued)
For the Years ended June 30, 2009 and June 30, 2008
(Dollars in Thousands)
If the term asset-backed securities market were to experience a prolonged disruption, if asset
quality were to deteriorate, or if debt ratings were to be downgraded, the EFCA may be unable to
securitize student loans or to do so on favorable pricing and terms. If the EFCA were unable to
find cost-effective and stable funding alternatives, funding capabilities and liquidity would be
negatively impacted and cost of funds could increase, adversely affecting results of operations
and ability to originate student loans. There can be no assurance the EFCA will be able to costeffectively finance these facilities.
HR 3221
In September 2009, HR 3221 passed the House and moved to the Senate for review. HR 3221
includes a provision to eliminate the Federal Family Education Loan Program. The passage of
this bill would eliminate BHEA’s ability to fund new student loans. BHEA would continue to
administer the current indenture trusts until all debt has been repaid, which is anticipated to
continue for several years. Should this bill pass the Senate, it is highly probable that it will be
signed by President Obama due to his strong desire to eliminate the Federal Family Education
Loan Program, the only competition of the Federal Government’s Direct Loan Program.
xiii
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Ernst & Young LLP
Suite 1800
401 Congress Avenue
Austin, Texas 78701
Tel: +1 512 478 9881
Fax: +1 512 473 3499
www.ey.com
Report of Independent Auditors
The Board of Directors
Educational Funding Services, Inc.
We have audited the accompanying balance sheets of Educational Funding Services, Inc. (the Company)
as of June 30, 2009 and 2008, and the related statements of changes in fund deficit and cash flows for the
years then ended. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States
and the standards for financial audits contained in Government Auditing Standards, issued by the
Comptroller General of the United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. We
were not engaged to perform an audit of the Company’s internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
financial position of Educational Funding Services, Inc. as of June 30, 2009 and 2008, and the results of
its operations and its cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
In accordance with Government Auditing Standards, we have also issued our report dated October 27,
2009, on our consideration of the Company’s internal control over financial reporting and on our tests of
its compliance with certain provisions of laws, regulations, contracts, grant agreements and other matters.
The purpose of that report is to describe the scope of our testing of internal control over financial
reporting and compliance and the results of that testing, and not to provide an opinion on the internal
control over financial reporting or on compliance. That report is an integral part of an audit performed in
accordance with Government Auditing Standards and should be considered in assessing the results of our
audit.
October 27, 2009
1
A member firm of Ernst & Young Global Limited
Educational Funding Services, Inc.
Balance Sheets
(In Thousands)
June 30
2009
Assets
Cash and short-term investments
Interest receivable:
Student loan notes receivable
Investments
Student loan notes receivable, net
Student loan notes receivable, available for sale
Deferred debt issue costs
Receivable from affiliated entities
Other receivables
Total assets
Liabilities and fund deficit
Liabilities:
Notes payable, net
Accrued interest payable
Rebatable arbitrage payable
Loan servicing fees payable
Department of Education (DOE) fees payable
Payable to affiliated entities
$
15,415
$
13,428
2
627,144
5,925
2,538
–
–
664,452
$
671,145
684
117
270
284
23
672,523
2008
(Restated)
$
17,964
$
18,338
35
690,124
6,125
2,663
307
31
735,587
$
737,313
1,205
94
137
301
–
739,050
Commitments and contingencies
Fund deficit:
Restricted
Unrestricted
Total fund deficit
Liabilities and fund deficit
$
(10,914)
2,843
(8,071)
664,452
$
(3,469)
6
(3,463)
735,587
See accompanying notes.
2
Educational Funding Services, Inc.
Statements of Changes in Fund Deficit
(In Thousands)
Years Ended June 30
2009
2008
(Restated)
Interest income:
Student loan notes receivable, net
Investments
$
Interest expense:
Notes payable
Arbitrage and excess interest
$
391
(260)
131
(1,609)
(237)
(1,846)
Noninterest income:
Other
Noninterest expense:
Administrative and loan servicing fees
Auction agent and broker-dealer fees
Amortization of debt issue costs
Valuation allowance for student loan notes receivable
available for sale
Other
$
38,463
1,603
40,066
39,720
(45)
39,675
24,547
23
24,570
Net interest (expense) income before provision for loan losses
Provision for loan losses
Net interest (expense) income after provision for loan losses
Revenue under expenses
Estate (distribution) contribution
Fund (deficit) balance, beginning of year
Fund deficit, end of year
22,703
258
22,961
122
159
2,293
33
150
2,622
753
172
207
200
2,883
358
143
4,048
(4,607)
(1)
(3,463)
(8,071)
(3,758)
192
103
(3,463)
$
See accompanying notes.
3
Educational Funding Services, Inc.
Statements of Cash Flows
(In Thousands)
Years Ended June 30
2009
2008
Cash flows from operating activities
Revenue under expenses before estate (distributions)
contributions
$
Adjustments to reconcile revenue under expenses before
estate (distributions) contributions to net cash from operating
activities:
Student loan interest capitalized
Amortization of loan purchase premiums
Amortization of note discount
Amortization of debt issue costs
Provision for loan losses
Valuation allowance for student loan notes receivable
available for sale
Changes in assets and liabilities:
Decrease (increase) in assets:
Interest receivable
Proceeds from sale of student loan notes receivable,
available for sale
Principal collected on student loan notes receivable,
available for sale
Purchase/origination of student loan notes receivable,
available for sale
Receivable from affiliate
Other receivables
Prepaid expense
Increase (decrease) in liabilities:
Accrued interest payable
Rebatable arbitrage payable
Origination fees and loan servicing fees payable
DOE fees payable
Payable to affiliated entities
Net cash from operating activities
(4,607)
(11,484)
2,423
89
150
237
207
4,943
$
(3,758)
(11,880)
3,878
85
172
260
358
(539)
–
23,011
208
1,706
(14)
307
31
–
(26,163)
(222)
(31)
14
(521)
23
133
(17)
23
(7,869)
35
(45)
(84)
(16)
(127)
(13,346)
4
Educational Funding Services, Inc.
Statements of Cash Flows (continued)
(In Thousands)
Years Ended June 30
2009
2008
Cash flows from investing activities
Principal collected on student loan notes receivable
Proceeds from sale of student loan notes receivable
Purchase of student loan notes receivable
Net cash from investing activities
$
Cash flows from financing activities
Proceeds from the issuance of bonds payable
Repayment of bonds payable
Net line of credit (payments) proceeds
Payment of deferred debt issue costs
Estate contribution
Net cash from financing activities
71,627
42
(66)
71,603
$
113,162
3,366
(146,688)
(30,160)
–
(65,950)
(307)
(25)
(1)
(66,283)
112,364
(122,300)
1,773
(616)
192
(8,587)
$
(52,093)
70,057
17,964
$
39,200
Net change in cash and short-term investments
Cash and short-term investments, beginning of year
Cash and short-term investments, end of year
$
(2,549)
17,964
15,415
Supplemental disclosure of cash and noncash items
Cash paid during the year for interest
$
24,979
See accompanying notes.
5
Educational Funding Services, Inc.
Notes to the Financial Statements
Years Ended June 30, 2009 and 2008
(Dollars in Thousands)
1. Organization
Educational Funding Services, Inc. (the Company) is a California not-for-profit public benefit
corporation, which was incorporated in April 2000. The Company commenced operations on
September 1, 2005, for the purpose of providing funds for the acquisition and servicing of
student loans that are insured by the U.S. Department of Education (DOE) and guaranteed by
various national guarantors under the Federal Family Education Loan Program (FFELP) as
provided for in the Higher Education Act of 1965, as amended. To maintain such insurance and
guarantee of student loans, the Company must comply with the servicing, collecting, accounting,
and reporting requirements of the FFELP. The Company has contracted with Brazos Higher
Education Service Corporation, Inc. (BHESC) to serve as master servicer. BHESC has
contracted with various subservicers for loan servicing duties. Funding for the Company has
been provided by financial institutions, the issuance of asset-backed notes and periodically, by
advances from affiliates.
The Company’s primary source of revenue is interest on student loans and investment income.
The Company obtains financing through a short-term line of credit and the issuance of student
loan revenue notes to fund its student loan purchase program. All borrowings on the line of
credit and notes payable are expected to be repaid solely from funds derived from student loan
principal repayments, interest, special allowance payments, interest subsidy payments, guarantee
payments on defaulted notes, proceeds from sales of student loan notes, proceeds from notes
secured by student loans, and investment income.
On January 1, 2007, the Company merged with EFSI, a Brazos affiliate, with the Company being
the surviving entity. The financial statements, for all years presented, have been accounted for
similar to the pooling of interests method. There was no exchange of consideration for this
combination and no intercompany transactions that required elimination. Both entities were
under common control. The separate trust estates securing securities of EFSI and Educational
Funding Services, Inc. will not be combined as a result of the merger. Each separate trust estate
of Educational Funding Services, Inc. and EFSI will continue to be separate following the
merger, and the trust estates will not be cross-defaulted or crossed-collateralized as a result of the
merger.
6
Educational Funding Services, Inc.
Notes to the Financial Statements (continued)
1. Organization (continued)
Trust Estate Collapse
On June 30, 2009, the Company transferred a trust estate which held a commercial paper conduit
with a single financial institution to Acapita Education Finance Corporation (AEFC) and the
related pledged assets securing the commercial paper conduit. AEFC assumed the assets and
liabilities of this trust estate. The financial statements, for all years presented, have been restated
for the transfer of the assets, liabilities, and operations of this trust estate. There was no exchange
of consideration for this combination and no intercompany transactions that required elimination.
Both entities are under common control. The purpose of the transfer was to combine the separate
trust estates of three commercial paper conduits with a single financial institution of AEFC,
THEA, AFC, FSFC, and the Company into two conduits within a single company, AEFC. Prior
to the transfer the conduits of the separate affiliated entities were cross-defaulted and crosscollateralized. The Company retains no liability for the liabilities of this transferred trust estate.
During the past fiscal year, credit markets in the United States have tightened making financing
more expensive and in some situations not available. This has impacted the Company’s ability to
sell its loans held for sale to affiliated entities or third parties as financing is not available to
these entities and resulted in loans held for sale being held for a much longer time than initially
expected by the Company. Additionally, under the current market conditions, management
cannot determine when the market to sell loans held for sale will return.
Loans held for sale are recorded on the Company’s balance sheet at the lower of cost or market.
As the credit markets tightened, interest rate spreads expected by investors or lenders widened.
At June 30, 2009, management has made estimates of the fair value on the loans held for sale
using discounted cash flow models. Note 2 discuses the key assumptions used in the cash flow
models to determine fair value. The Company has recorded loans held for sale at June 30, 2009
and 2008, based on the estimate of the fair value which resulted in a charge of $207 and $358
recorded to the statements of changes in fund deficit and valuation allowances recorded against
student loan notes receivable as of June 30, 2009 and 2008, of $565 and 358, respectively.
As noted above and in Note 5, the student loans held for sale are financed through a short-term
credit facility with a financial institution. This facility is payable solely from the student loans
and other related assets pledged without recourse to the Company. This facility matures in
September 2009. The Company will request renewal of this facility. If renewal is not granted, the
financial institution could declare the note immediately due and payable and may take any
7
Educational Funding Services, Inc.
Notes to the Financial Statements (continued)
1. Organization (continued)
remedies available under the UCC to secure payment, including selling any or all of the
collateral at a public or private sale. The financial institution has no recourse against any assets,
management, or Board of Directors of the Company for any shortfalls if the collateral is not
sufficient to satisfy these lines.
Additionally, the Company has two permanent trusts that include student loan notes receivable,
net, that are financed by separate long-term notes issued by the Company. These notes are
secured by separate and distinct pools of student loan notes receivable, net, on the balance sheets
pledged specifically as collateral for these notes. These trusts are not cross-defaulted or crosscollateralized with the facility discussed above. Should the financial institution that issued the
facility declare it to be immediately due and payable, they would have no claims against the
assets of the permanent trusts. Therefore, the impact of any actions taken by the lender under the
facility discussed above would not impact the permanent trusts and such permanent trusts would
continue to operate within the Company. Management expects there to be sufficient cash flows
from the loans in the permanent trust to meet the obligations of the permanent trust.
The following are summaries of assets pledged against the facility and assets held in the
permanent trusts.
Permanent
Trusts
Cash and short-term investments
Receivables
Student loan notes receivable, net
Student loan notes receivable, available for sale
$
15,388
13,305
627,144
–
Facility
$
27
125
–
5,925
Interest Rate Environment
During the period from August 2007 through March 2009 the Federal Reserve lowered the
interest rate by 500 basis points. These cuts were in response to the general deterioration in the
United States economy. In addition, various economic factors caused banks and investors to
generally withdraw from the asset-backed bond markets, as investors fled the Asset-Backed
Security market. Decreased investor demand for these securities has created pressure on banks
8
Educational Funding Services, Inc.
Notes to the Financial Statements (continued)
1. Organization (continued)
and brokers of Auction Rate Securities (ARS), a significant source of the Company’s financing,
and the brokers absorbed these ARS onto their own balance sheets. The lack of liquidity in the
ARS market generally caused interest rate spreads to widen, reducing net interest income for the
Company during this period. Because much of the ARS market was funded by investors who
issued commercial paper, the demand for ARS fell sharply across all risk ratings.
In February 2008, an imbalance of supply and demand in the ARS market as a whole led to
failures of the auctions pursuant to which certain of the Company’s ARS interest rates are set.
The failed ARS markets have continued through 2009.
Each of the individual ARS trust estates within the Company has provisions which stipulate the
determination of ARS interest rates in an event of auction failures. The Company’s taxable ARS
also have provisions, which during a period of auction failure, limit the interest rate on the ARS
to the lesser of the Maximum Rate or the Net Loan Rate. The Company’s Maximum Rate
applied to taxable ARS is defined as the lesser of the 30-day LIBOR plus 150 basis points for
Senior debt and 30-day LIBOR plus 250 basis points for Subordinate debt. Each of the individual
trust estates within the Company has provisions for calculation of a Net Loan Rate for taxable
ARS. The Net Loan Rate is intended to protect each trust estate from incurring cash outflows
that the cash inflows cannot sustain. The Net Loan Rates of the Company’s respective trust
estates currently range from 2.57% to 3.06%. During 2009, the Net Loan Rate was invoked for
several bond issues.
During the third quarter, six Senior issues with outstanding principal balance of $254,200 and
three Subordinate issues with outstanding principal balance of $87,200 were downgraded by
national rating agencies. This downgrade triggered an increase in the maximum rate for Senior
and Subordinate debt to 30-day LIBOR plus 350 basis points. This effectively increased the
interest expense incurred by the Company. However, each of these issues was limited by the Net
Loan Rate discussed above. Therefore, the overall cash flows of these respective issues were not
adversely impacted.
The Maximum Rate for tax-exempt ARS is set at the greater of 1.0 minus the statutory corporate
tax rate (currently 35%), or 65% of 30-day AA rated financial Commercial Paper (CP), or 175%
of the Security Industry and Financial Markets Association (SIFMA) rate, not to exceed 14% or
15% depending on the individual trust indenture. The SIFMA index is set weekly. During the
9
Educational Funding Services, Inc.
Notes to the Financial Statements (continued)
1. Organization (continued)
year ended June 30, 2009, the SIFMA rate experienced an unprecedented increase, causing taxexempt ARS to be set at higher than normal rates. On September 17, 2008, the SIFMA increased
to 5.15%, causing tax-exempt ARS rates that re-set during that week to be set at 9.01%. On
September 24, 2008, SIFMA again increased, to 7.96%, causing tax-exempt ARS rates that reset
during that week to be set at 13.93%. The SIFMA index has since dropped back to historical
levels and was set at 0.54% at June 30, 2009. This significant increase in interest rates did not
have a material impact upon the respective trust estates cash flows.
2. Significant Accounting Policies
Basis of Presentation
The accounts of the Company are maintained in accordance with the principles of fund
accounting in accordance with the debt instruments. This is a system under which resources are
classified for accounting purposes into funds established for specific purposes. The Company
aggregates its funds into general groups based on the source of funding. The fund deficit related
to specific financings is restricted by the note agreements, and as such, is shown as restricted on
the balance sheets. The nondebt-related fund balance, if any, is shown as unrestricted on the
balance sheets.
Affiliated Entities
The Company is affiliated with the following entities:










Brazos Higher Education Authority, Inc. (BHEA)
Brazos Student Finance Corporation (BSFC)
Bosque Higher Education Authority, Inc. (Bosque)
Trinity Higher Education Authority, Inc. (THEA)
Federated Student Finance Corporation (FSFC)
Academic Finance Corporation (AFC)
Acapita Education Finance Corporation (AEFC)
Affordian, Inc. (AFF)
EdInvest Company (EDI)
Brazos Higher Education Service Corporation, Inc. (BHESC)
10
Educational Funding Services, Inc.
Notes to the Financial Statements (continued)
2. Significant Accounting Policies (continued)
All of the entities operate in the student loan higher education industry and are controlled by
common officers and directors with the ability to influence the business performed by each
entity. BHESC provides headquarter facilities and administrative support and performs
marketing, accounting, servicing, and collection duties on a contractual basis at an agreed-upon
rate. BHESC also provides loan sales, marketing, and transfer services for the Company for
which the Company reimburses BHESC.
Individual balances comprising the respective advances to/from affiliates and the receivable
from/payable to affiliates captions include normal daily operating transactions and financing
transactions such as amounts advanced to fund the purchase of student loan notes. Interest is
assessed only on those transactions that are considered advances to/from affiliates. Estate
contributions are a release of excess funds to another Brazos affiliate, allowed under an existing
letter of credit, notes and bonds payable agreement. Estate distributions are receipt of excess
funds from Brazos affiliates.
Recently Issued Accounting Pronouncements
On May 28, 2009, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 165, Subsequent Events, to provide accounting literature for subsequent events and to
modify the definition to refer to events or transactions that occur after the balance sheet date, but
before the financial statements are available to be issued. The standard now requires the date
through which the Company has evaluated subsequent events and the basis for that date be
disclosed. This statement was effective for annual financial periods ending after June 15, 2009.
Pending Accounting Pronouncements
On June 30, 2009, the FASB issued FASB Statement No. 168, The FASB Accounting Standards
Codification™ and the Hierarchy of Generally Accepted Accounting Principles, a replacement
of FASB Statement No. 162. The FASB Accounting Standards Codification (Codification) will
become the source of authoritative US generally accepted accounting principles (GAAP)
recognized by the FASB to be applied by nongovernmental entities. On the effective date, the
Codification will supersede all then existing non-SEC accounting and reporting standards. This
statement is effective for financial statements issued for interim and annual periods ending after
September 15, 2009. The effects of this statement will not have an impact on our financial
statements, but will have a change on the way we disclose certain accounting principles and
application of those principles.
11
Educational Funding Services, Inc.
Notes to the Financial Statements (continued)
2. Significant Accounting Policies (continued)
Debt Issue Costs and Note Discount
The Company capitalizes debt issue costs incurred when issuing debt. Debt issue costs include
costs related directly to the issuance of notes payable and consist primarily of filing fees, trustee
fees and expenses, document reproduction costs, legal fees, costs of credit ratings, underwriter’s
fees, and other costs. The Company also issues notes at a discount and records the discount as an
adjustment to notes payable, net, on the balance sheet. Debt issue costs and note discounts are
amortized over the terms of the notes using a method that approximates the effective interest
method. The amortization of the note discount is included within interest expense on notes
payable in the statements of changes in fund deficit.
Interest Receivable
Interest receivable on student loan notes receivable includes special allowance payments
receivable from the DOE, government interest, and borrower interest on all student loans
outstanding.
Cash and Short-Term Investments
Cash and short-term investments consist of demand deposits in banks, money market funds, and
guaranteed investment contracts with original maturities of 90 days or less. Cash and short-term
investments are held in trust with U.S. Bank, N.A. (the Trustee) under contractual trust
indentures subject to certain limitations (see Note 2 – Trustees), and are pledged to secure related
notes payable. Guaranteed investment contracts and money market funds are stated at fair value
and represent unsecured investments. Any realized or unrealized changes in fair value are
recorded through the statements of changes in fund deficit. Interest income from these
investments is recorded on an accrual basis. Cash and short-term investments are comprised of
the following:
12
Educational Funding Services, Inc.
Notes to the Financial Statements (continued)
2. Significant Accounting Policies (continued)
June 30
2009
Guaranteed investment contracts
Money market funds
Total cash and short-term investments
$
$
10,613
4,802
15,415
2008
$
$
14,102
3,862
17,964
As of June 30, 2009 and June 30, 2008, the Company had $5,809 and $7,228, respectively, in
cash reserves in compliance with the note and line of credit indenture requirements.
Student Loan Notes Receivable, Net
Student loans are stated at the principal amount outstanding, plus unamortized purchase
premiums and transfer fees, net of the allowance for loan losses. All student loan notes
receivable are pledged to secure related notes payable.
Student loans originated or purchased and financed by a short-term line of credit are classified as
available for sale and carried at the lower of cost or market, on an aggregate basis, with no
premium/discount amortization or establishment of an allowance for loan losses. These loans are
generally sold to related parties. All student loan notes receivable are pledged to secure related
notes payable.
The Company has determined that the fair value of the loans held for sale at June 30, 3009, was
less than cost basis. The Company used discounted cash flow models to determine fair value at
June 30, 2009. The following are the key assumptions, based on market data, used to determine
fair value:
Prepayment rate
Discount rate
Default rate
Net collections on defaults
2.00%
5.74%
11.00%
97.01%
13
Educational Funding Services, Inc.
Notes to the Financial Statements (continued)
2. Significant Accounting Policies (continued)
The Company has recorded a charge of $207 and $358 in the statements of changes in fund
deficit for the years ended June 30, 2009 and 2008, respectively, and a corresponding valuation
allowance of $565 and 358 against student loans held for sale as of June 30, 2009 and 2008,
respectively.
Premiums on Loans Purchased
The Company defers premiums paid on student loan notes purchased and amortizes such
premiums over the estimated life of the student loan notes as an adjustment to the yield of the
related loans utilizing a method which approximates the effective interest rate method.
Amortization of the premiums is included within the statements of changes in fund deficit in
interest income on student loan notes receivable, net, and was $1,831 and $2,791 for the years
ended June 30, 2009 and 2008, respectively. Included on the balance sheets within the student
loan notes receivable, net balance is $8,214 and $10,045 at June 30, 2009 and 2008, respectively,
of unamortized loan purchase premiums.
Federal Income Taxes
The Company is a not-for-profit public benefit corporation, which is exempt from federal income
taxes under the provisions of Section 501(c)(3) of the Internal Revenue Code. As such, no
provision for federal income taxes has been provided in the accompanying financial statements.
In July 2006, FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes,
an interpretation of FASB Statement No. 109, Accounting for Income Taxes, was issued. FIN 48
creates a single model to address uncertainty in tax positions and clarifies the accounting for
income taxes by prescribing the minimum recognition threshold a tax position is required to meet
before being recognized in the financial statements. Under the requirements of FIN 48, taxexempt organizations could now be required to record an obligation as the result of a tax position
they have historically taken on various tax exposure items. Prior to FIN 48, the determination of
when to record a liability for a tax exposure was based on whether a liability was considered
probable and reasonably estimable in accordance with FASB Statement No. 5, Accounting for
Contingencies. On July 1, 2007, the Company adopted FIN 48. There was no impact on the
financial statements as of June 30, 2009 and 2008 from the adoption of FIN 48.
14
Educational Funding Services, Inc.
Notes to the Financial Statements (continued)
2. Significant Accounting Policies (continued)
Trustees
The Company contracts certain services to trustees. Trustees hold the pledged student loan notes
receivable and other invested assets in the Company’s name and invest and disburse funds as
directed by the Company pursuant to the requirements of the indenture agreement. The trustees
also monitor the invested assets of the Company and the related cash flows of the loans and other
assets pledged under the trust to secure the related debt.
Affiliate Entity Receivable and Payables
Affiliate entity accounts receivables/payables consisted of the following:
Entity
Bosque Higher Education
Company, Inc.
June 30, 2009
Receivable Payable
$
–
$
23
June 30, 2008
Receivable Payable
$
307
$
–
Concentration Risk
The Company’s credit risk is inherent principally in its student loan notes receivable. A
downturn in the economy resulting in substantial unemployment either regionally or nationwide
has resulted in an increase in defaults by borrowers in paying student loans, thus causing
increased default claims to be paid by the loan guarantor for federally guaranteed loans. It is
impossible to predict the status of the economy or unemployment levels or at which point the
economy would improve thereby significantly decreasing the Company’s credit risk exposure.
However, the credit risk of the Company is substantially decreased by the guaranteed nature of
its investments in student loan notes receivable.
The Company’s loan portfolio is also concentrated in FFELP loans. All of the portfolio is FFELP
loans and approximately 52% of the portfolio is consolidation loans. Any changes in legislation
related to the FFELP or consolidation loans could have a significant impact on the Company.
15
Educational Funding Services, Inc.
Notes to the Financial Statements (continued)
2. Significant Accounting Policies (continued)
Student Loan Income
The Company recognizes interest income on student loans as earned, net of amortization of
premiums and amortized DOE lender fees and DOE rebate fees paid. Additionally, income is
recognized based upon the principal amount outstanding in accordance with the terms of the
applicable loan agreement until the outstanding balance is paid or charged off.
Interest Expense
Interest expense is based upon contractual interest rates (variable) adjusted for the amortization
of note discount costs.
Department of Education Fees
DOE fees consist of rebate fees due to the DOE. Rebate fees are monthly fees assessed by the
DOE on the outstanding consolidation loan balance at the end of the month. Rebate fees and
amortization of capitalized lender fees are accounted for as an adjustment to the yield on student
loan notes receivable, included within the statements of changes in fund deficit in interest on
student loan notes receivable, net, and was $3,503 and $3,699 for the years ended June 30, 2009
and 2008, respectively.
Estimates in Financial Statements
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those estimates. Key
accounting policies that include significant judgments and estimates include determination of fair
values, the use of the effective interest rate method to amortize premiums on loans purchased and
determining the provision for loan losses.
16
Educational Funding Services, Inc.
Notes to the Financial Statements (continued)
2. Significant Accounting Policies (continued)
Reclassifications
Certain reclassifications have been made to the prior year financial statements in order to
conform to the current year presentation.
3. Interest Receivable on Student Loan Notes Receivable
FFELP loans obligate the borrower to pay either interest at a stated fixed rate or an annually reset
variable rate that has a cap depending on when the loan was originated. The Company earns
interest at the greater of the borrower’s rate or a floating rate set by the DOE. If the floating rate
exceeds the borrower’s rate, the DOE makes a payment directly to the Company based upon the
Special Allowance Payment (SAP) formula. SAP is generally paid whenever the average of all
of the applicable floating rates (91-day Treasury bill, commercial paper, and 52-week Treasury
bill) in a calendar quarter, plus a spread of between 1.74% and 3.50%, depending on the loan
status and origination date, exceeds the interest rate that the borrower is obligated to pay. These
rates are then applied to the quarterly average daily balance for loans eligible to receive special
allowance payments.
If the floating rate determined by the SAP formula is less than the rate the borrower is obligated
to pay, the Company earns interest at the borrower rate for loan first disbursed prior to April 1,
2006. For these loans, the rate a borrower is obligated to pay sets a minimum rate for
determining the yield that the Company earns on the loan.
For loans first disbursed on or after April 1, 2006, the Company earns interest at the SAP rate. If
the SAP rate is less than the stated borrower rate, the Company “rebates” the difference between
the borrower rate and the lower SAP rate to the DOE. If the SAP rate is greater than the stated
borrower rate, the DOE makes SAP payments to the Company for the difference between the
two rates.
At June 30, 2009, student loans held by the Company had stated interest rates determined
annually by the DOE, ranged from 3.61% to 8.25% and are generally payable by the borrower
following a specified grace period. Effective July 1, 2009, the DOE reset these rates to range
from 1.88% to 8.50%.
17
Educational Funding Services, Inc.
Notes to the Financial Statements (continued)
3. Interest Receivable on Student Loan Notes Receivable (continued)
For FFELP loans, the U.S. Government pays the Company the interest on subsidized student
loans from the date of acquisition until the end of the grace period as defined in the regulations.
Under certain conditions, the Company may capitalize accrued interest receivable and add it to
the borrower’s outstanding principal on certain student loans. For unsubsidized FFELP student
loans, the borrower has the option of either paying the interest or having accrued interest
capitalized from the date of the loan origination until the end of the grace period and during
periods of deferment. Borrowers of both subsidized and unsubsidized FFELP student loans have
the option of having accrued interest capitalized during periods of forbearance. Subsequent
interest accrues on the new total principal balance that includes any capitalized interest.
Interest receivable on student loan notes receivable consisted of the following:
June 30
2009
Student loan interest receivable
Interest subsidy receivable
Special allowance (payable) receivable
Interest receivable on student loan notes receivable
$ 13,842
1,041
(1,455)
$ 13,428
2008
$ 16,158
1,753
427
$ 18,338
18
Educational Funding Services, Inc.
Notes to the Financial Statements (continued)
4. Student Loan Notes Receivable
Student loan notes are purchased by the Company primarily from affiliates. The Company’s
student loan portfolio consists solely of loans originated under the FFELP.
Student loan notes receivable, including student loans available for sale, consisted of the
following:
June 30
2009
FFELP student loan notes receivable
Deferred loan premiums and transfer fees,
net of accumulated amortization
Valuation allowance to record loans to lower of
cost or market for student loan notes
receivable available for sale
$
Allowance for student loan losses
$
623,957
2008
$
684,487
10,228
12,654
(565)
633,620
(551)
633,069
(358)
696,783
(534)
696,249
$
Included in these amounts are $5,925 and $6,125 of student loan notes receivable, available for
sale, and related unamortized deferred loan premiums at June 30, 2009 and 2008, respectively.
Loan Programs
The FFELP includes the Federal Stafford Loan (Stafford) Program, the Federal Supplemental
Loans for Students (SLS) Program, the Federal Parent Loan for Undergraduate Students (PLUS)
Program, the Federal Parent Loan for Graduate Students (GradPLUS) Program and the Federal
Consolidation Loan Program. These loan programs are available to students or parents of
students who, when the loans were originated, were enrolled in postsecondary institutions.
Stafford, SLS, GradPLUS and PLUS loans have repayment periods ranging from between 5 and
10 years. Federal consolidation loans have repayment periods of 12 to 30 years. Repayment on
these loans commences subsequent to a grace period following the student’s graduation.
19
Educational Funding Services, Inc.
Notes to the Financial Statements (continued)
4. Student Loan Notes Receivable (continued)
All FFELP loans held by the Company have been either insured or guaranteed by the U.S.
Government, Texas Guaranteed Student Loan Corporation, or other national guarantors,
provided applicable program requirements have been met by the original lender, prior servicer,
and the current servicing agent with respect to such loans. The original lenders have warranted to
the Company that the student loans have met these requirements and are valid obligations of the
borrowers. Student loan notes which do not conform to the terms of the purchase agreement
between the individual entities and the original lender may be returned to the original lending
institution for reimbursement of principal, interest, and costs incurred while held by the
individual entities.
In the event of default on a student loan due to borrower default, death, disability, or bankruptcy,
the Company files a claim with the insurer or guarantor of the loan. The Company will receive
the unpaid principal balance and accrued interest on the loan less any risk sharing, if applicable,
provided the loan has been properly originated and serviced.
Student Loan Servicing
BHESC provides the Company with the necessary student loan servicing to maintain compliance
with the requirements of the FFELP by holding subservicing agreements for loan servicing
duties with various student loan servicing agents. BHESC holds subservicing agreements for
loan servicing duties with Affiliated Computer Services, American Education Services, Chase
Student Loan Servicing, LLC., Great Lakes Higher Educational Loan Services, Inc., and Sallie
Mae Servicing Corporation. Under the terms of these subservicing agreements, the subservicer
indemnifies the Company for any loss of principal and interest resulting from deficiencies in the
loan servicing performed by the subservicer. At June 30, 2009, 100% of the loan portfolio is
serviced by a subservicer.
Transfer Fees
The Company defers transfer fees paid to BHESC for the performance of various general and
administrative transfer services, estimated brokerage related equivalent fees for BHESC
employee services provided in the student loan origination process, and the performance of legal
services related to the transfer of the student loans. These transfer fees approximate 0.30% to
0.60% of the principal amount of the loans transferred. The Company amortizes such fees over
the estimated life of the student loan notes as an adjustment to the yield of the related loans,
20
Educational Funding Services, Inc.
Notes to the Financial Statements (continued)
4. Student Loan Notes Receivable (continued)
utilizing a method which approximates the effective interest rate method. Amortization of the
fees is included in the statements of changes in fund balance as a reduction of interest on student
loan notes receivable, net. For the years ended June 30, 2009 and 2008, $592 and $1,087,
respectively, is included as amortization of purchase premiums. Included in unamortized
purchase premiums is $2,014 and $2,606 at June 30, 2009 and 2008, respectively, of
unamortized transfer fees. In addition, the Company capitalized $0 in transfer fees paid to
BHESC for the years ended June 30, 2009 and 2008. Beginning in fiscal year 2008, BHESC
discontinued the transfer fees. This resulted in the Company no longer recording transfer fees.
The transfer fees currently capitalized will continue to be amortized over the life of the loans.
Allowance for Student Loan Losses
The Budget Reconciliation Act of 1993 (the Act) lowered the federal guarantee for FFELP
student loans made on or after October 1, 1993 to 98%. Beginning with loans originated after
July 1, 2006, the guarantee percentage was reduced to 97%. The Company provides an
allowance for estimated loss of guaranteed student loan principal and interest related to the 98%
guarantee limitation and unrecoverable amounts due to servicing deficiencies on student loan
notes receivable. The Act’s lowering of federal guarantee has not historically had a material
impact on the Company. The Company determines the allowance for loan losses based on loss
factors applied to the portion of student loan balances without guarantee by individual loan type
and status. Because the Company’s portfolio consists of guarantees ranging from 97% to 99%,
and because there is a relatively small percentage of loans at the 97% guarantee, management
has considered that 98% of principal and interest is guaranteed and there is only 2% of principal
with credit risk.
Activity in the allowance for loan losses is summarized as follows:
June 30
2009
Balance, beginning of year
Provision for loan losses
Charge-offs, net of recoveries
Balance, end of year
$
$
534
237
(220)
551
2008
$
$
503
260
(229)
534
21
Educational Funding Services, Inc.
Notes to the Financial Statements (continued)
5. Notes Payable, Net
Notes payable consist of the following:
June 30,
2009
Note payable under a $252,532 line of credit
between the Company, Bosque, AFF and
EDI with a commercial bank
$
6,666
$
June 30,
2008
Final
Maturity Date
6,973
September 2009
Student Loan Asset-Backed Notes Series
2003 A1-A3 & B1
39,700
56,100
June 2039
Student Loan Asset-Backed Notes Series
2004 A1 & B1
41,300
64,400
June 2040
Student Loan Asset-Backed Notes Series
2005 A1-A4 & B1
260,300
260,300
June 2041
Student Loan Asset-Backed Notes Series
2005 A1-A3 & B1
80,300
103,650
June 2041
Student Loan Asset-Backed Notes Series
2006 A1
41,800
41,800
June 2042
Student Loan Asset-Backed Notes Series
2006 A1 – A3 & B1
91,100
94,200
June 2042
Student Loan Asset-Backed Notes Series
2007 A1 & B1
Less: Unamortized bond discount
112,800
673,966
(2,821)
$ 671,145
112,800
740,223
(2,910)
$ 737,313
December 2042
22
Educational Funding Services, Inc.
Notes to the Financial Statements (continued)
5. Notes Payable, Net (continued)
Interest rates for the various debt securities are based on fixed and variable rates. The interest
rates for each class of debt securities are:
Taxable auction rate securities
Tax-exempt auction rate securities
Reset rate securities
Short-term financing
Set at auction
Set at auction
Fixed
30-day LIBOR plus spread
of 0.50% – 1.25%
1.81% – 3.16%
0.93%
6.25%
0.82% – 1.57%
The auction rates, when functioning, are determined every 7, 28, or 35 days depending on the
auction procedures described in the bond indenture agreements. Pursuant to the individual
indenture agreement for each debt instrument, the respective note issues are secured solely by
those student loans and other invested assets held by each individual note issue’s trust estate.
Pursuant to the indenture agreements, the Company is subject to certain financial and
nonfinancial covenants. The agreements require that the Company make timely principal and
interest payments or the notes will default. The Company was in compliance with all financial
and nonfinancial debt covenants at June 30, 2009.
The maturities of notes payable as of June 30, 2009, by fiscal year, are as follows:
2009
2010
2011
2012
2013
Thereafter
$
$
14,816
–
–
–
–
659,150
673,966
The actual maturities of notes payable may differ from the contractual maturities noted above, as
the Company has the ability to prepay the debt outstanding.
23
Educational Funding Services, Inc.
Notes to the Financial Statements (continued)
6. Fair Value of Financial Instruments
The estimated fair values of the Company’s financial instruments are as follows:
Financial assets:
Cash and short-term investments
Student loan notes receivable, net
Student loan notes receivable,
available for sale
Financial liabilities:
Notes payable, net
June 30, 2009
Carrying
Fair
Amount
Value
June 30, 2008
Carrying
Fair
Amount
Value
$ 15,415
627,144
$ 15,415
564,430
$ 19,948
690,124
$ 19,948
671,427
5,925
5,925
109,476
109,476
671,145
648,743
846,313
846,313
The following methods and assumptions were used to estimate the fair value of each class of
financial instruments.
Cash and Short-Term Investments
The fair values of cash and temporary cash investments approximate the carrying amount due to
the short maturity of these instruments.
Student Loan Notes Receivable
At June 30, 2009, the fair value of student loans available for sale and student loan notes
receivable, net was determined based on discounted cash flow models. See Note 2 for key
assumptions in determining fair value.
Notes Payable, Net
The fair value of the Company’s notes payable is based on the discounted value of the future
cash flows using current rates for similar notes.
24
Educational Funding Services, Inc.
Notes to the Financial Statements (continued)
7. Fair Value Measurements
Effective July 1, 2008, the Company adopted the provisions of SFAS No. 157, Fair Value
Measurements, for financial assets and financial liabilities. In accordance with FASB Staff
Position (FSP) No. 157-2, Effective Date of FASB Statement No. 157, the Company will delay
application of SFAS 157 for nonfinancial assets and nonfinancial liabilities until June 1, 2009.
SFAS 157 defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value measurements.
SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants. A fair value measurement
assumes that the transaction to sell the asset or transfer the liability occurs in the principal market
for the asset or liability or, in the absence of a principal market, the most advantageous market
for the asset or liability. The price in the principal (or most advantageous) market used to
measure the fair value of the asset or liability shall not be adjusted for transaction costs. An
orderly transaction is a transaction that assumes exposure to the market for a period prior to the
measurement date to allow for marketing activities that are usual and customary for transactions
in involving such assets and liabilities; it is not a forced transaction. Market participants are
buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able
to transact, and (iv) willing to transact.
SFAS 157 requires the use of valuation techniques that are consistent with the market approach,
the income approach and/or the cost approach. The market approach uses prices and other
relevant information generated by market transactions involving identical or comparable assets
and liabilities. The income approach uses valuation techniques to convert future amounts, such
as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is
based on the amount that currently would be required to replace the service capacity of an asset
(replacement cost). Valuation techniques should be consistently applied. Inputs to valuation
25
Educational Funding Services, Inc.
Notes to the Financial Statements (continued)
7. Fair Value Measurements (continued)
techniques refer to the assumptions that market participants would use in pricing the asset or
liability. Inputs to valuation techniques refer to the assumptions that market participants would
use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the
assumptions market participants would use in pricing the asset or liability developed based on
the best information available in the circumstances. In that regard, SFAS 157 establishes a fair
value hierarchy for valuation inputs that gives the highest priority to quoted prices in active
markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair
value hierarchy is as follows:

Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly or indirectly. These might include quoted prices
for similar assets or liabilities in active markets, quoted prices for identical or similar
assets or liabilities in markets that are not active, inputs other than quoted prices that are
observable for the asset or liabilities (such as interest rates, volatilities, prepayment
speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by
market data by correlation or other means.

Level 3 Inputs – Unobservable inputs for determining the fair values of assets or
liabilities that reflect an entity’s own assumptions that market participants would use in
pricing the assets or liabilities.
A description of the valuation methodologies used for instruments measured at fair value, as well
as the general classification of such instruments to the valuation hierarchy, is set forth below.
These valuation methodologies were applied to all of the Company’s financial assets and
financial liabilities carried at fair value effective July 1, 2008.
In general, fair value is based upon quoted market prices, where available. If such quoted market
prices are not available, fair value is based upon internally developed models that primarily use,
as inputs, observable market-based parameters. Valuation adjustments may be made to ensure
that financial instruments are recorded at fair value. These adjustments may include amounts to
26
Educational Funding Services, Inc.
Notes to the Financial Statements (continued)
7. Fair Value Measurements (continued)
reflect counterparty credit quality and the Company’s creditworthiness, among other things, as
well as unobservable parameters. Any such valuation adjustments are applied consistently over
time. The Company’s valuation methodologies may produce a fair value calculation that may not
be indicative of net realizable value or reflective of future fair values. While management
believes the Company’s valuation methodologies are appropriate and consistent with other
market participants, the use of different methodologies or assumptions to determine the fair value
of certain financial instruments could result in a different estimate of fair value at the reporting
date.
Student Loan Notes Receivable (SLNR), Available For Sale
SLNR, available for sale are reported at fair value utilizing Level 3 inputs. The Company uses
discounted cash flows to estimate the fair value of student loan notes receivable, available for
sale. See Note 2 which further details the main assumptions utilized by the Company in
estimating the fair value.
The following table summarizes financial assets and financial liabilities measured at fair value
on a recurring basis as of June 30, 2009, segregated by the level of the valuation inputs within
the fair value hierarchy utilized to measure fair value:
Level 1
Inputs
SLNR Available for sale
$
–
Level 2
Inputs
$
–
Level 3
Inputs
$ 5,925
Total
Fair Value
$
5,925
Effective July 1, 2008, the Company adopted the provisions of SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115. SFAS 159 permits the Company to choose to measure eligible items at fair
value at specified election dates. Unrealized gains and losses on items for which the fair value
measurement option has been elected are reported in earnings at each subsequent reporting date.
The fair value option (i) may be applied instrument by instrument, with certain exceptions, thus
the Company may record identical financial assets and liabilities at fair value or by another
measurement basis permitted under generally accepted accounting principles, (ii) is irrevocable
(unless a new election date occurs), and (iii) is applied only to entire instruments and not to
portions of instruments. As of June 30, 2009, the Company has not elected the fair value option
for financial assets and liabilities.
27
Educational Funding Services, Inc.
Notes to the Financial Statements (continued)
8. Commitments and Contingencies
During the normal course of business, the Company makes commitments with various banks and
other student loan originators to purchase student loan notes. At June 30, 2009, the Company had
no outstanding commitments to purchase FFELP student loan notes receivable. Also, at June 30,
2009, the Company had no material contingencies.
9. Related-Party Transactions
Included in administrative and loan servicing fees are administrative fees paid to BHESC and
servicing fees paid to third-party subservicers. During the years ended June 30, 2009 and 2008,
the Company recorded $601 and $682, respectively, in administrative fees paid to BHESC for
providing administrative support, such as accounting and information technology infrastructure.
During the years ended June 30, 2009 and 2008, the Company purchased $44 and $68,644,
respectively, in principal amounts of student loans from the affiliated entities at market prices.
During the years ended June 30, 2009 and 2008, affiliated entities purchased $23 and $3,366,
respectively, in principal amounts of student loans from the Company at market prices.
10. Subsequent Events
Interest Rate Environment
Since June 30, 2009, the credit market continues to experience credit and liquidity volatility.
Current national and global economies have improved over the last year. However, the market
for funding student loans has continued to struggle. Current funding costs are still significantly
higher than previous costs reducing spreads and preventing new financings at sustainable
margins. Additionally, ARS continue to fail causing debt rates to be set higher than historical
trends. This volatility continues to cause instability in the Company’s spreads, thereby reducing
earnings. Additionally, this volatility has made it difficult to predict future earnings of the
Company.
28
Educational Funding Services, Inc.
Notes to the Financial Statements (continued)
10. Subsequent Events (continued)
Retirement of Debt at Discount
On July 31, 2009, the indenture trusts within the Company passed an amended supplement to
call debt at a discount. The amendment allows bond holders to submit bids to redeem their debt
securities at discounted amounts. This amendment allows the indenture trust to increase parity by
retiring debt at discounted amounts thereby strengthening the trust’s financial position.
On September 3, 2009, the Company called $900 of outstanding securities at a discount of 79%
resulting in a call price of $711.
Subsequent events have been evaluated through October 27, 2009, which is the date the financial
statement representation letter was signed by management.
29