Rule 15c2-12 Filing Cover Sheet
This cover sheet is being sent with the submissions made through the Electronic Municipal Market Access system
(“EMMA”) of the Municipal Securities Rulemaking Board (“MSRB”) pursuant to Securities and Exchange
Commission (SEC) rule 15c2-12.
Issuer Name: Brazos Student Finance Corporation
Issue(s): See Attachments 1, 2, 3, and 4
Filing Format: _X_ electronic
paper; if available on the Internet, give URL: http://www.brazos.us.com/
CUSIP Numbers to which the information filed relates (optional):
X Nine-digit number(s) (attach additional sheet if necessary):
Six-digit number if information filed relates to all securities of the issuer:
* * *
Annual Financial Information and Operating Data pursuant to Rule 15c2-12
Fiscal Period Covered
7/1/2012 – 6/30/2013
__ Monthly __Quarterly X Annual __Other:______
A.
X
B.
X
Audited Financial Statements or CAFR pursuant to Rule 15c2-12
Fiscal Period Covered
7/1/2012 – 6/30/2013
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
Notice of change of fiscal year end
E.
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: The 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
BRAZOS STUDENT FINANCE CORPORATION
1998 Indenture of Trust
YEAR SERIES
CUSIP #
1998
B-1 10623PBD1
2001
B-1 10623PBY5
MUNICIPAL SECONDARY MARKET DISCLOSURE
ATTACHMENT #2 TO COVER SHEET
BRAZOS STUDENT FINANCE CORPORATION
1999 Indenture of Trust
YEAR SERIES
CUSIP #
1999
A-2 10623PBF6
2000
A-12 10623PBU3
A-13 10623PBV1
MUNICIPAL SECONDARY MARKET DISCLOSURE
ATTACHMENT #3 TO COVER SHEET
BRAZOS STUDENT FINANCE CORPORATION
2003 APR Indenture of Trust
YEAR
SERIES
CUSIP #
2003
A-3
A-4
B-1
10623PCK4
10623PCM0
10623PCL2
BRAZOS STUDENT FINANCE CORPORATION
Annual Continuing Disclosure Statement Regarding the 1998 Indenture of Trust, including:
Student Loan Asset-Backed Notes
Subordinate Series 1998B-1 (LIBOR Floating Rate Securities)
Subordinate Series 2001B-1 (Auction Rate Securities)
Dated as of December 9, 2013
INTRODUCTION
The terms of the Indenture provide that Brazos Student Finance Corporation (the “Corporation”)
will provide updated information in connection with its continuing disclosure obligation within six months
after the end of each fiscal year.
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 “The Student Loans” and “The Master 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 the
significant 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
payable solely from and secured solely by the Trust Estate created under the Indenture. The Notes are not
general obligations of the Corporation. Capitalized terms used herein but not defined shall have the
meaning given such terms in the offering memorandum relating to each Series of Notes.
DEFINITIONS
“Indenture” means, for the purpose of this Statement, the Indenture of Trust, dated as of April 1,
1998, including all of the supplements, appendices and exhibits thereto as may be amended and restated
from time to time.
“Notes” means, for the purpose of this Statement, the Student Loan Asset Backed Notes issued
under the Indenture and identified on the cover page of this Statement.
THE CORPORATION
The Corporation is a nonprofit corporation organized in 1985 under the Texas Nonprofit
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 2600 Washington Avenue, P.O. Box 1308, Waco, Texas 76703,
Telephone (254) 753-0915.
The Corporation’s fiscal year ends June 30 of each year. The Corporation’s audited financial
statements as of June 30, 2013, are attached to this Statement as Appendix A.
1
Outstanding Revenue Notes
The Corporation, as of June 30, 2013, had outstanding Notes issued under the Indenture in the
respective principal amounts as follows:
SERIES OF
NOTES
1998B-1
2001B-1
ORIGINAL
PRINCIPAL
AMOUNT
50,000,000
50,000,000
OUTSTANDING
PRINCIPAL
AMOUNT
42,173,000
13,900,000
Total
$100,000,000
$56,073,000
FINAL
MATURITY
6/1/2023
7/1/2036
The Notes issued under the Indenture are secured by the Trust Estate established under the
Indenture. The Corporation also has issued student loan asset-backed notes pursuant to other indentures,
which notes are secured by separate and distinct trust estates. The assets of each trust estate are not crosscollateralized or cross-defaulted with the assets of any other trust estate. The total aggregate outstanding
principal amount of all of the student loan asset-backed notes issued by the Corporation as of June 30, 2013,
was $801,308,545.
THE STUDENT LOANS
PARITY RATIO. The ratio of assets in the Indenture to liabilities represented by the principal
amount the remaining Notes on June 30, 2013, was equal to approximately 117.74%. For purposes of these
calculations, the value of the pledged student loan assets in the Trust Estate under the Indenture are
calculated as 100% of the unpaid principal amount of the pledged student loans, plus any accrued but unpaid
interest thereon.
CHARACTERISTICS OF THE STUDENT LOANS. The total principal amount of Student
Loans on deposit in the Trust Estate, as of June 30, 2013, was approximately $62,212,311. Set forth below
in the following tables is a description of certain characteristics of the Student Loans held in the Trust
Estate.
2
Distribution of Student Loans by Loan Type
Loan Type
Percent of Loan Type
By Balance
Balance (1)
Consolidation
Gate
Heal
Plus
Resource
Stafford Sub
Stafford UnSub
TERI*
TuitionGard
$
17,152,100
2,292,512
3,355,639
28,942
3,222,816
2,224,983
2,295,845
26,943,841
4,695,633
27.57%
3.68%
5.39%
0.05%
5.18%
3.58%
3.69%
43.31%
7.55%
Total
$
62,212,311
100.00%
Distribution of Student Loans by Guarantee Agency
Insurer or Guarantor
USAF
PHEAA
Other
Total FFELP
Balance (1)
17,752,427
3,569,566
379,877
21,701,870
28.54%
5.74%
0.61%
34.89%
3,355,639
5.39%
TERI*
TutionGard
None
Total Private
26,936,328
4,695,633
5,522,841
37,154,802
43.30%
7.55%
8.87%
59.72%
Total
62,212,311
100.00%
US Dep of HHS
$
Percent of Loans
by Balance
*See“TERILOAN”below.TheTERILoansarenolongerguaranteedbyTERIoranyotherguarantor.
3
Distribution of Student Loans by Borrower Payment Status
Loan Status
Balance (1)
Percent of Loan Type
By Balance
School
Grace
Deferment
Forbearance
Repayment
Claims
$
2,016,115
3,623,057
56,276,304
296,835
0.00%
0.00%
3.24%
5.82%
90.46%
0.48%
Total
$
62,212,311
100.00%
Distribution of Student Loans by Federal Reinsurance or Private Reinsurance
Federal or Private
Reinsurance
4yr
2yr
Prop.
Consol.
Percent of Loans
by Balance
Balance (1)
$
36,121,136
3,615,808
5,307,052
17,168,315
62,212,311
$
58.06%
5.81%
8.53%
27.60%
100.00%
Distribution of Student Loans by Subservicer
Subservicer
Xerox (ACS)
AES (PHEAA)
GLELSI
SLMA
Balance (1)
$
7,998,994
26,150,927
769
28,061,621
$
62,212,311
Percent of Loans
By Balance
12.86%
42.03%
0.00%
45.11%
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 MASTER SERVICER
The Master 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
1986, as amended, to provide the Corporation with student loan billing and servicing and to provide
administrative support services to the Corporation. The Master Servicer is headquartered in Waco, Texas
and is governed by a ten-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 Master Servicer.
As of June 30, 2013, the total number of borrowers serviced by the Master Servicer was
approximately 420,000 aggregating approximately $9,432,029,167 in principal amount. All of such Student
Loans are serviced by the Master Servicer for the Corporation or for separate nonprofit corporations.
4
The Master Servicer has entered into separate subservicing agreements with several separate
Subservicers for the performance of servicing duties for student loans held under the Indenture. As a result,
servicing duties relating to student loans held under the Indenture are performed by the Subservicers.
THE SUBSERVICERS
The following general information concerning each Subservicer was supplied to the
Corporation by each Subservicer and has not been verified by the Corporation. No
representation is made by the Corporation as to the accuracy or completeness of such
information.
Xerox Education Services, Inc. XEROX-ES acts as a loan servicer for the Corporation.
XEROX-ES is a for-profit limited liability company and a wholly-owned subsidiary of Xerox
Corporation (“Xerox”). Headquartered in Norwalk, Connecticut, Xerox is a Fortune 500 company
providing document technology, services, software and supplies for production and office environments,
as well as business process and technology outsourcing solutions to world-class commercial and
government clients. Xerox’s common stock trades on the New York Stock Exchange under the symbol
“XRX.” XEROX-ES has its headquarters at 2277 E. 220th Street, Long Beach, CA 90810, and has
domestic regional processing centers in Long Beach and Bakersfield, California; Utica, New York; Oak
Brook, Illinois; Aberdeen, South Dakota and Madison, Mississippi. The Guaranteed Loan Servicing
Group is operated by XEROX-ES as an independent, third party education loan servicer with
approximately 1,200 employees, providing full service loan origination and servicing for the Federal
Stafford, PLUS and Consolidation education loan programs and many alternative/private loan programs.
XEROX-ES and its predecessors have over 42 years of experience providing outsourcing services to
higher education. As of October 2013, the Guaranteed Loan Servicing Group of XEROX-ES currently
services approximately 3.2 million education loan accounts with loans valued at approximately $47
billion. XEROX-ES’ Guaranteed Loan Servicing Group services include Stafford, PLUS, Consolidation,
and private/alternative loan servicing, as well as post-origination conversion and private loan origination.
Origination services include receipt and validation of application data, underwriting (if required), school
and borrower customer service and loan disbursement. A wide range of schools are supported, as well as
a variety of different disbursement methods, including: check, master check, automated clearinghouse
(ACH), and disbursement via national disbursing agents. Conversion services include set-up of new
accounts to the servicing platform from the origination system or a lender’s system. This area also
supports transfer of existing education loan portfolios from other servicers’ systems, as well as loan sales
and securitizations. Loan servicing includes lender and borrower services, payment and transaction
processing, due diligence activities as required by federal regulations or private/alternative loan program
requirements, and communications with schools, guarantors, the National Student Loan Clearing House,
and others. In the event of borrower default, XEROX-ES prepares and submits a claim package on the
lender’s behalf to the appropriate guaranty agency for review and guarantee payment, if applicable.
Xerox files periodic reports with the Securities and Exchange Commission (the “SEC”) as required by the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). Reports filed with the SEC are
available for inspection without charge at the public reference facilities maintained by the SEC at 100 F
Street, N.E., Washington, D.C. 20549. Information as to the operation of the public reference facilities is
available by calling the SEC at 1-800-SEC-0330. Information filed with the SEC can also be inspected at
the SEC’s site on the World Wide Web at “http://www.sec.gov.” Xerox also currently provides
information through Xerox’s website at “http://www.xerox.com.” Information filed by Xerox with the
SEC or contained on Xerox’s website is not intended to be incorporated as part of this document and
information contained on Xerox’s website is not a part of the documents that Xerox files with the SEC.
5
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 guaranty
support services provided by GLELSI to GLHEC and third party guaranty agencies and lender servicing
functions. GLHEC and affiliates also maintain offices in Eagan, Minnesota, Aberdeen, South Dakota,
Rocky Hill, Connecticut and Boscobel and Eau Claire, Wisconsin and customer support staff located
nationally. GLELSI began servicing loans for commercial lenders in 1977, first as a division of the
Wisconsin Higher Education Corporation, subsequently renamed the Great Lakes Higher Education
Corporation, then as GLELSI. In September, 2009, GLELSI began servicing loans for the U.S.
Department of Education. GLELSI is presently one of four servicers who service loans issued to new
student and parent borrowers under the Federal Direct Student Loan Program. As of September 30, 2013,
GLELSI serviced 10,256,346 student and parental accounts with an outstanding balance of $174.7 billion
for over 1,150 lenders nationwide, including the U.S. Department of Education. As of September 30,
2013, 65.8% of the portfolio serviced by GLELSI was in repayment status, 7.8% was in grace status and
the remaining 26.4% 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”) 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. As of June 30, 2013, PHEAA had approximately 2,900 employees.
PHEAA’s two principal servicing products are its full servicing operation (in which it performs all
student loan servicing functions on behalf of its customers) and its remote servicing operation (in which it
provides only data processing services to its customers that have their own servicing operations). As of
June 30, 2013, PHEAA services approximately 9.0 million student borrowers representing an aggregate
of approximately $200.1 billion outstanding principal amount for its full servicing customers which
consist of national and regional banks and credit unions, secondary markets, and government entities,
including $140.9 billion serviced for the Department of Education. Under PHEAA’s remote servicing
operation, the remote clients service approximately 2.3 million student borrowers representing
approximately $43.7 billion outstanding principal amount, including $33.1 billion owned by the
Department of Education.
FFELP Net Reject Rate
As a servicer, PHEAA works to minimize the net reject rate, which is the amount of claims
submitted for payment that are rejected by the guarantor and are subsequently unable to be cured. The net
reject rate for both the number and dollar value of loans for the last three calendar years is listed below.
Year
FFELP Net Reject Rate
Loans
Dollars
2012
0.021%
0.044%
6
2011
0.027%
0.016%
2010
0.005%
0.002%
The net reject rate is calculated based on claims submitted three years prior which were unable to
be cured during the three year cure period which ended during the calendar years noted above. The
number and dollar value of rejected claims not cured is divided by the total claims filed during that same
period three years prior. PHEAA’s most recent audited financial reports are available at www.pheaa.org.
Sallie Mae, Inc. SLM Corporation is the largest holder, servicer and collector of loans made
under the discontinued FFELP. SLM Corporation and its subsidiaries serve, as of September 30, 2013,
over 25 million customers through SLM Corporation’s and its subsidiaries’ ownership and management
of approximately $144.1 billion of student loans, of which approximately $106.4 billion, or
approximately 74 percent, are federally insured. SMI is also the nation’s largest servicer of student loans,
servicing a portfolio of approximately $301 billion principal balance of student loans as of September
30, 2013.
THE GUARANTEE AGENCIES
The Corporation has requested information regarding the Guarantee Agencies from each
Guarantor that guarantees greater than ten percent (10%) of all Student Loans in the Trust Estate (the
“Significant Guarantor”). The following general information concerning the Significant Guarantor was
supplied to the Corporation by the Significant Guarantor and has not been verified by the Corporation.
The Corporation makes no representation as to the accuracy or completeness of such 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.
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
7
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.
On March, 30, 2010, President Obama signed into law the Health Care and Education
Reconciliation Act of 2010 (Public Law 111-152), which ended the origination and guarantee of new
loans under the Federal Family Education Loan Program, effective for loans whose first disbursement
was after June 30, 2010. As a result of statute, USA Funds will continue to administer a portfolio of
outstanding FFELP loans, but no longer may guarantee new federal student loans.
As of September 30, 2012, USA Funds held net assets on behalf of the federal reserve fund of
approximately $235 million. Through September 30, 2012, 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 $66.5 billion. As of September 30, 2012, USA Funds had
operating fund assets totaling slightly more than $1 billion, which includes the $235 million of net 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, 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:
Fiscal Year
2012
2011
2010
2009
2008
Reserve Ratio
0.354%
0.394%
0.400%
0.380%
0.330%
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:
8
Fiscal Year
2012
2011
2010
2009
2008
Recovery Rate
31.82%
32.17%
32.90%
36.19%
45.60%
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:
Fiscal Year
2012
2011
2010
2009
2008
Loss Rate
4.76%
4.74%
4.70%
4.62%
4.26%
In addition, USA Funds’ “claims rate” represents the percentage of federal reinsurance claims
paid by the Secretary during any fiscal year, less amounts remitted to the Secretary for defaulted loans
that are rehabilitated 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:
Fiscal Year
2012
2011
2010
2009
2008
Claims Rate
1.58%
1.69%
1.69%
1.92%
2.07%
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 and Marketing Communications.
TERI LOANS
9
The Education Resources Institute, Inc. (“TERI”). Certain of the existing student loans
consist of loans previously guaranteed by The Education Resources Institute, Inc. (“TERI”, with each
such loan referred to herein as a “TERI Loan”). Upon default of a TERI Loan, TERI had previously
guaranteed 100% of the principal (including capitalized interest) plus accrued interest by purchasing the
defaulted loan from the Corporation pursuant to a guaranty agreement between the Corporation and
TERI. On April 7, 2008, TERI announced that it filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of
Massachusetts. The United States Bankruptcy Court for the Eastern Division of the District of
Massachusetts rejected and terminated the guaranty agreement relating to the TERI Loans held in the
Trust Estate. As a result of this bankruptcy, the TERI Loans are no longer guaranteed by TERI or any
other guarantor. The Bankruptcy Court has approved a plan of reorganization.
10
BRAZOS STUDENT FINANCE CORPORATION
Annual Continuing Disclosure Statement Regarding the 1999 Indenture of Trust, including:
STUDENT LOAN ASSET-BACKED NOTES
Senior Series 1999A-2 (Auction Rate Securities)
Senior Series 2000A-12 (Auction Rate Securities)
Senior Series 2000A-13 (Auction Rate Securities)
Dated as of December 9, 2013
INTRODUCTION
The terms of the Indenture provide that Brazos Student Finance Corporation (the “Corporation”)
will provide updated information in connection with its continuing disclosure obligation within six months
after the end of each fiscal year.
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 “The Student Loans” and “The Master 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 the
significant 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
payable solely from and secured solely by the Trust Estate created under the Indenture. The Notes are not
general obligations of the Corporation. Capitalized terms used herein but not defined shall have the
meaning given such terms in the offering memorandum relating to each Series of Notes.
DEFINITIONS
“Indenture” means, for the purpose of this Statement, the Indenture of Trust, dated as of February 1,
1999, as amended and supplemented to date, including all of the appendices and exhibits thereto as may be
amended and restated from time to time.
“Notes” means, for the purpose of this Statement, the Student Loan Asset Backed Notes issued
pursuant to the Indenture and identified on the cover page of this Statement.
THE CORPORATION
The Corporation is a nonprofit corporation organized in 1985 under the Texas Nonprofit
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 2600 Washington Avenue, P.O. Box 1308, Waco, Texas 76703,
Telephone (254) 753-0915.
The Corporation’s fiscal year ends June 30 of each year. The Corporation’s audited financial
statements as of June 30, 2013, are attached to this Statement as Appendix A.
Outstanding Revenue Notes
The Corporation, as of June 30, 2013, had outstanding Notes issued under the Indenture in the
respective principal amounts as follows:
1
SERIES OF
NOTES
ORIGINAL
PRINCIPAL
AMOUNT
OUTSTANDING
PRINCIPAL
AMOUNT
FINAL
MATURITY
1999A-2
2000A-12
2000A-13
73,800,000
100,000,000
100,000,000
27,600,000
1,700,000
82,700,000
12/1/1933
12/1/2033
12/1/2033
Total
$273,800,000
$112,000,000
The Notes issued under the Indenture are secured by the Trust Estate established under the
Indenture. The Corporation also has issued student loan asset-backed notes pursuant to other indentures,
which notes are secured by separate and distinct trust estates. The assets of each trust estate are not crosscollateralized or cross-defaulted with the assets of any other trust estate. The total aggregate outstanding
principal amount of all of the student loan asset-backed notes issued by the Corporation as of June 30, 2013,
was $801,308,545.
THE STUDENT LOANS
PARITY RATIO. The ratio of assets in the Indenture to liabilities represented by the principal
amount of the Notes on June 30, 2013, was equal to approximately 105.85%. For purposes of this
calculation, the value of the pledged student loan assets in the Trust Estate under the Indenture are
calculated as 100% of the unpaid principal amount of the pledged student loans, plus any accrued but unpaid
interest thereon. The Notes were issued as auction rate securities and, since the first calendar quarter of
2008, have been subject to failed auctions. In general, failed auctions occur when there are not sufficient
clearing bids submitted on behalf of bidders during the auction process established under the Indenture, with
the result that existing owners of Notes are unable to transfer or dispose of their Notes in an auction. Under
the terms of the Indenture, auction failures also have resulted in the payment of interest on the Notes at the
contractually stipulated rates set forth in the Indenture. The payment of interest at these contractually
stipulated rates may erode parity ratios and, if continued, may result in the impairment of payments in
respect of principal of the Notes.
CHARACTERISTICS OF THE STUDENT LOANS. The total principal amount of Student
Loans on deposit in the Trust Estate, as of June 30, 2013, was approximately $114,652,429. Set forth below
in the following tables is a description of certain characteristics of the Student Loans held in the Trust
Estate.
2
Distribution of Student Loans by Loan Type
Loan Type
Balance (1)
Percent of Loan Type
By Balance
Consolidation
EIC
Heal
Plus
Resource
Stafford Sub
Stafford UnSub
TERI*
TuitionGard
$
23,959,671
17,476
4,385,893
209,165
7,115,897
2,436,588
1,608,363
18,367,595
56,551,781
17.95%
0.03%
4.10%
0.52%
7.03%
3.62%
2.02%
16.24%
48.49%
Total
$
114,652,429
100.00%
Distribution of Student Loans by Guarantee Agency
Balance (1)
Insurer or Guarantor
PHEAA
USAF
Other
$
Total
US Dept of HHS
TERI*
TuitionGard
None
Total Private
Total
$
Percent of Loan Type
By Balance
18,238,615
6,564,059
3,411,113
15.91%
5.73%
2.98%
28,213,787
24.62%
4,385,893
3.83%
18,367,595
56,551,781
7,133,373
82,052,749
16.02%
49.32%
6.21%
71.55%
114,652,429
100.00%
*See“TERILOAN”below.TheTERILoansarenolongerguaranteedbyTERIoranyotherguarantor.
Distribution of Student Loans by Borrower Payment Status
Loan Status
Balance (1)
Percent of Loan Type
By Balance
School
Grace
Deferment
Forbearance
Repayment
Claims
$
14,954
3,500
3,724,576
2,317,246
107,945,216
646,937
0.01%
0.00%
3.25%
2.02%
94.16%
0.56%
Total
$
114,652,429
100.00%
3
Distribution of Student Loans by Federal Reinsurance or Private Reinsurance
Federal or Private
Reinsurance
4yr
2yr
Prop.
Consol.
Balance (1)
$
$
Percent of Loans
by Balance
78,716,373
5,038,074
6,938,311
23,959,671
114,652,429
68.66%
4.39%
6.05%
20.90%
100.00%
Distribution of Student Loans by Subservicer
Subservicer
Xerox (ACS)
AES (PHEAA)
GLELSI
SLMA
Balance (1)
$
18,577,679
39,456,685
24,992
56,593,073
$
114,652,429
Percent of Loans
By Balance
16.20%
34.41%
0.02%
49.36%
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 MASTER SERVICER
The Master 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
1986, as amended, to provide the Corporation with student loan billing and servicing and to provide
administrative support services to the Corporation. The Master Servicer is headquartered in Waco, Texas
and is governed by a ten-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 Master Servicer.
As of June 30, 2013, the total number of borrowers serviced by the Master Servicer was
approximately 420,000 aggregating approximately $9,432,029,167 in principal amount. All of such Student
Loans are serviced by the Master Servicer for the Corporation or for separate nonprofit corporations.
The Master Servicer has entered into separate subservicing agreements with several separate
Subservicers for the performance of servicing duties for student loans held under the Indenture. As a result,
servicing duties relating to student loans held under the Indenture are performed by the Subservicers.
THE SUBSERVICERS
The following general information concerning each Subservicer was supplied to the Corporation
by each Subservicer and has not been verified by the Corporation. No representation is made by the
Corporation as to the accuracy or completeness of such information.
4
Xerox Education Services, Inc. XEROX-ES acts as a loan servicer for the Corporation.
XEROX-ES is a for-profit limited liability company and a wholly-owned subsidiary of Xerox
Corporation (“Xerox”). Headquartered in Norwalk, Connecticut, Xerox is a Fortune 500 company
providing document technology, services, software and supplies for production and office environments,
as well as business process and technology outsourcing solutions to world-class commercial and
government clients. Xerox’s common stock trades on the New York Stock Exchange under the symbol
“XRX.” XEROX-ES has its headquarters at 2277 E. 220th Street, Long Beach, CA 90810, and has
domestic regional processing centers in Long Beach and Bakersfield, California; Utica, New York; Oak
Brook, Illinois; Aberdeen, South Dakota and Madison, Mississippi. The Guaranteed Loan Servicing
Group is operated by XEROX-ES as an independent, third party education loan servicer with
approximately 1,200 employees, providing full service loan origination and servicing for the Federal
Stafford, PLUS and Consolidation education loan programs and many alternative/private loan programs.
XEROX-ES and its predecessors have over 42 years of experience providing outsourcing services to
higher education. As of October 2013, the Guaranteed Loan Servicing Group of XEROX-ES currently
services approximately 3.2 million education loan accounts with loans valued at approximately $47
billion. XEROX-ES’ Guaranteed Loan Servicing Group services include Stafford, PLUS, Consolidation,
and private/alternative loan servicing, as well as post-origination conversion and private loan origination.
Origination services include receipt and validation of application data, underwriting (if required), school
and borrower customer service and loan disbursement. A wide range of schools are supported, as well as
a variety of different disbursement methods, including: check, master check, automated clearinghouse
(ACH), and disbursement via national disbursing agents. Conversion services include set-up of new
accounts to the servicing platform from the origination system or a lender’s system. This area also
supports transfer of existing education loan portfolios from other servicers’ systems, as well as loan sales
and securitizations. Loan servicing includes lender and borrower services, payment and transaction
processing, due diligence activities as required by federal regulations or private/alternative loan program
requirements, and communications with schools, guarantors, the National Student Loan Clearing House,
and others. In the event of borrower default, XEROX-ES prepares and submits a claim package on the
lender’s behalf to the appropriate guaranty agency for review and guarantee payment, if applicable.
Xerox files periodic reports with the Securities and Exchange Commission (the “SEC”) as required by the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). Reports filed with the SEC are
available for inspection without charge at the public reference facilities maintained by the SEC at 100 F
Street, N.E., Washington, D.C. 20549. Information as to the operation of the public reference facilities is
available by calling the SEC at 1-800-SEC-0330. Information filed with the SEC can also be inspected at
the SEC’s site on the World Wide Web at “http://www.sec.gov.” Xerox also currently provides
information through Xerox’s website at “http://www.xerox.com.” Information filed by Xerox with the
SEC or contained on Xerox’s website is not intended to be incorporated as part of this document and
information contained on Xerox’s website is not a part of the documents that Xerox files with the SEC.
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 guaranty
support services provided by GLELSI to GLHEC and third party guaranty agencies and lender servicing
functions. GLHEC and affiliates also maintain offices in Eagan, Minnesota, Aberdeen, South Dakota,
Rocky Hill, Connecticut and Boscobel and Eau Claire, Wisconsin and customer support staff located
nationally. GLELSI began servicing loans for commercial lenders in 1977, first as a division of the
Wisconsin Higher Education Corporation, subsequently renamed the Great Lakes Higher Education
Corporation, then as GLELSI. In September, 2009, GLELSI began servicing loans for the U.S.
Department of Education. GLELSI is presently one of four servicers who service loans issued to new
5
student and parent borrowers under the Federal Direct Student Loan Program. As of September 30, 2013,
GLELSI serviced 10,256,346 student and parental accounts with an outstanding balance of $174.7 billion
for over 1,150 lenders nationwide, including the U.S. Department of Education. As of September 30,
2013, 65.8% of the portfolio serviced by GLELSI was in repayment status, 7.8% was in grace status and
the remaining 26.4% 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”) 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. As of June 30, 2013, PHEAA had approximately 2,900 employees.
PHEAA’s two principal servicing products are its full servicing operation (in which it performs all
student loan servicing functions on behalf of its customers) and its remote servicing operation (in which it
provides only data processing services to its customers that have their own servicing operations). As of
June 30, 2013, PHEAA services approximately 9.0 million student borrowers representing an aggregate
of approximately $200.1 billion outstanding principal amount for its full servicing customers which
consist of national and regional banks and credit unions, secondary markets, and government entities,
including $140.9 billion serviced for the Department of Education. Under PHEAA’s remote servicing
operation, the remote clients service approximately 2.3 million student borrowers representing
approximately $43.7 billion outstanding principal amount, including $33.1 billion owned by the
Department of Education.
FFELP Net Reject Rate
As a servicer, PHEAA works to minimize the net reject rate, which is the amount of claims
submitted for payment that are rejected by the guarantor and are subsequently unable to be cured. The net
reject rate for both the number and dollar value of loans for the last three calendar years is listed below.
Year
FFELP Net Reject Rate
Loans
Dollars
2012
0.021%
0.044%
2011
0.027%
0.016%
2010
0.005%
0.002%
The net reject rate is calculated based on claims submitted three years prior which were unable to
be cured during the three year cure period which ended during the calendar years noted above. The
number and dollar value of rejected claims not cured is divided by the total claims filed during that same
period three years prior. PHEAA’s most recent audited financial reports are available at www.pheaa.org.
Sallie Mae, Inc. SLM Corporation is the largest holder, servicer and collector of loans made
under the discontinued FFELP. SLM Corporation and its subsidiaries serve, as of September 30, 2013,
over 25 million customers through SLM Corporation’s and its subsidiaries’ ownership and management
6
of approximately $144.1 billion of student loans, of which approximately $106.4 billion, or
approximately 74 percent, are federally insured. SMI is also the nation’s largest servicer of student loans,
servicing a portfolio of approximately $301 billion principal balance of student loans as of September
30, 2013.
THE GUARANTEE AGENCIES
The Corporation has requested information regarding the Guarantee Agencies from each
Guarantor that guarantees greater than ten percent (10%) of all Student Loans in the Trust Estate (the
“Significant Guarantor”). The following general information concerning the Significant Guarantor was
supplied to the Corporation by the Significant Guarantor and has not been verified by the Corporation.
The Corporation makes no representation as to the accuracy or completeness of such information.
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 June 30, 2013, PHEAA has
guaranteed a total of approximately $48.8 billion principal amount of Stafford Loans, $7.9 billion
principal amount of PLUS and SLS Loans, and $52.1 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.
Effective April 1, 2013, PHEAA was designated as the guarantor for the State of Georgia.
PHEAA accepted the transfer and assignment of the rights, duties and responsibilities as a Guaranty
Agency under the Federal Family Education Loan Program from the Georgia Higher Education
Assistance Corporation (GHEAC), the previous designated guarantor for the State of Georgia. As a
result, PHEAA accepted the transfer and assignment of student loans with an aggregate of $687.8 million
in original principal, net of cancellations. All percentages and results for PHEAA in the charts below for
periods of activity after April 1, 2013 include the additional guaranty volume received in the transfer.
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.
7
For the last five federal fiscal years (ending September 30), the annual default claims percentages
have been as follows:
Fiscal Year
Annual Default Claims
2008
1.98
2009
1.95
2010
1.75
2011
1.54
2012
1.88
As of June 30, 2013, PHEAA had total federal reserve-fund assets of approximately $80.3
million. Through June 30, 2013, the outstanding amount of original principal on loans that had been
directly guaranteed by PHEAA and transferred from GHEAC under the Federal Family Education Loan
Program was approximately $38.3 billion. In addition, as of June 30, 2013, PHEAA had total assets of
$8.8 billion, which does not include Federal Reserve Fund assets.
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)
2008
3,948
2009
4,086
2010
913
2011
0
2012
0
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. The table below shows
the reserve ratio for PHEAA for the last five federal fiscal years (ending September 30):
Fiscal Year
Reserve Ratio
2008
0.25
2009
0.25
2010
0.44
8
2011
0.40
2012
0.35
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 displays PHEAA’s calculation of the ratio on a regulatory basis of accounting. In
addition to gain contingencies not recognized under generally accepted accounting principles, the FY
2010 reserve ratio includes an adjustment related to foregoing the transfer of default aversion fees from
the Federal Reserve Fund to the Agency Operating Fund as agreed to in our management plan approved
by the Department of Education on May 22, 2007. The table below shows the cumulative recovery rates
for PHEAA for the five federal fiscal years (ending September 30):
Fiscal Year
Recovery Rates
2008
32.81
2009
29.32
2010
32.28
2011
31.50
2012
30.98
ALTERNATIVE GUARANTOR
A portion of the Student Loans currently held in the Trust Estate consist of Alternative Student
Loans that are insured under the TUITIONGard® student loan insurance program (“Landmark Loans”).
The following general information concerning the alternative guarantor has not been verified by the
Corporation and the Corporation makes no representation as to the accuracy or completeness of such
information.
LANDMARK AMERICAN INSURANCE COMPANY (LANDMARK) THE FOLLOWING
DESCRIPTION OF LANDMARK AND THE TUITIONGARD™ PROGRAM IS BASED SOLELY ON
INFORMATION PROVIDED BY ARROWOOD INDEMNITY COMPANY, AND HAS NOT BEEN
INDEPENDENTLY VERIFIED BY THE CORPORATION. THE INCLUSION OF THIS INFORMATION
IS NOT, AND SHOULD NOT BE CONSTRUED AS, A REPRESENTATION BY THE CORPORATION AS
TO ITS ACCURACY OR COMPLETENESS OR OTHERWISE.
Prior to September 2, 2003, Landmark was an indirect wholly owned subsidiary of OrionAuto,
Inc. (“Orion Auto”), an indirect wholly owned subsidiary of Royal Group, Inc. (“RGI”). OrionAuto’s ten
insurance subsidiaries, including Landmark, were authorized as multiple-line insurance carriers and could
insure most types of property and casualty risks. Landmark began insuring student loans through the
TUITIONGard® program in April 1997. On September 2, 2003, Landmark was sold to RSUI Indemnity
Company. In connection with that, Landmark ceded 100% of all its liabilities and obligations arising out
of all insurance policies issued in its name prior to September 2, 2003, including the insurance policy
9
referenced herein, to Royal Indemnity Company (“RIC”). RIC is now known as Arrowood Indemnity
Company, a wholly owned subsidiary of Arrowpoint Group, Inc.
Under the TUITIONGard® program, Landmark insured, subject to a 5% deductible, the principal,
accumulated interest and lost interest during the 150-day delinquency period for insured loans, as defined
in the insurance policy form. Default of the student loans is the failure by the borrower to make monthly
principal and/or interest payments on a student loan when due, provided such failure continues for a
period of one hundred fifty (150) consecutive days. Landmark’s insurance applies to all claims for any
default by the borrower so long as such claims do not result in whole or in part from:
(a) War, insurrection, rebellion or revolution of any kind;
(b) Nuclear energy liability; or
(c) Any actual or alleged failure, malfunction or inadequacy of:
1) Any of the following, regardless of who owns them:
a) Computer hardware, including microprocessors;
b) Computer application software;
c) Computer operating systems and related software;
d) Computer networks;
e) Microprocessors (computer chips) not part of any computer system; or
f) Any other computerized or electronic equipment or components; or
2) Any other products, and any services, data or functions that directly or indirectly use or
rely upon, in any matter, any of the items listed in subsection 1) above due to the inability
to correctly recognize, process, distinguish, interpret or accept one or more dates or
times, including, but not limited to, the year 2000.
Landmark’s obligation to honor its insurance for any loan is conditioned upon the origination,
disbursement, servicing and timely filing of the claim for insurance in accordance with program
requirements. The above summary of terms of the insurance policy is for information purposes only. If
any of the summary differs from the actual policy terms, the policy terms will prevail.
TERI LOANS
The Education Resources Institute, Inc. (“TERI”). Certain of the existing student loans
consist of loans previously guaranteed by The Education Resources Institute, Inc. (“TERI”, with each
such loan referred to herein as a “TERI Loan”). Upon default of a TERI Loan, TERI had previously
guaranteed 100% of the principal (including capitalized interest) plus accrued interest by purchasing the
defaulted loan from the Corporation pursuant to a guaranty agreement between the Corporation and
TERI. On April 7, 2008, TERI announced that it filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of
Massachusetts. The United States Bankruptcy Court for the Eastern Division of the District of
Massachusetts rejected and terminated the guaranty agreement relating to the TERI Loans held in the
Trust Estate. As a result of this bankruptcy, the TERI Loans are no longer guaranteed by TERI or any
other guarantor. The Bankruptcy Court has approved a plan of reorganization.
10
BRAZOS STUDENT FINANCE CORPORATION
Annual Continuing Disclosure Statement Regarding the 2003APR Indenture of Trust, including:
STUDENT LOAN ASSET-BACKED NOTES
Senior Series 2003A-3
Senior Series 2003A-4
Subordinate Series 2003B-1
(Auction Rate Securities)
Dated as of December 9, 2013
INTRODUCTION
The terms of the Indenture provide that Brazos Student Finance Corporation (the “Corporation”)
will provide updated information in connection with its continuing disclosure obligation within six months
after the end of each fiscal year.
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 “The Student Loans” and “The Master 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 the
significant 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
payable solely from and secured solely by the Trust Estate created under the Indenture. The Notes are not
general obligations of the Corporation. Capitalized terms used herein but not defined shall have the
meaning given such terms in the offering memorandum relating to the Notes.
DEFINITIONS
“Class A Notes” means, for the purpose of this Statement, the Student Loan Asset Backed Notes
issued under the Indenture designated as “Senior” and identified on the cover page of this Statement. These
Notes are senior to other Notes issued pursuant to the Indenture and designated as Subordinate.
“Class B Notes” means, for the purpose of this Statement, the Student Loan Asset Backed Notes
issued under the Indenture designated as “Subordinate” and identified on the cover page of this Statement.
These Notes are subordinate to the Class A Notes.
“Indenture” means, for the purpose of this Statement, the Indenture of Trust, dated as of April 1,
2003, including the appendix and all exhibits thereto as may be amended and restated from time to time.
“Notes” means, for the purpose of this Statement, the Class A Notes and Class B Notes issued
pursuant to the Indenture and identified on the cover page of this Statement.
THE CORPORATION
The Corporation is a nonprofit corporation organized in 1985 under the Texas Nonprofit
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 2600 Washington Avenue, P.O. Box 1308, Waco, Texas 76703,
Telephone (254) 753-0915.
The Corporation’s fiscal year ends June 30 of each year. The Corporation’s audited financial
statements as of June 30, 2013, are attached to this Statement as Appendix A.
Outstanding Revenue Notes
The Corporation, as of June 30, 2013, had outstanding Notes issued under the Indenture in the
respective principal amounts as follows:
SERIES OF
NOTES
2003A-3
2003A-4
2003B-1
ORIGINAL
PRINCIPAL
AMOUNT
75,000,000
64,000,000
30,000,000
OUTSTANDING
PRINCIPAL
AMOUNT
32,600,000
52,500,000
30,000,000
Total
$169,000,000
$115,100,000
FINAL
MATURITY
7/1/2038
7/1/2038
7/1/2038
The Notes issued under the Indenture are secured by the Trust Estate established under the
Indenture. The Corporation also has issued student loan asset-backed notes pursuant to other indentures,
which notes are secured by separate and distinct trust estates. The assets of each trust estate are not crosscollateralized or cross-defaulted with the assets of any other trust estate. The total aggregate outstanding
principal amount of all of the student loan asset-backed notes issued by the Corporation as of June 30, 2013,
was $801,308,545.
THE STUDENT LOANS
PARITY RATIOS. The ratio of assets in the Indenture to liabilities represented by the principal
amount of the Class A Notes on June 30, 2013, was equal to approximately 139.55%. The ratio of assets in
the Indenture to liabilities represented by the principal amount of the Class A Notes and Class B Notes on
June 30, 2013, was equal to approximately 103.25%. For purposes of these calculations, the value of the
pledged student loan assets in the Trust Estate under the Indenture are calculated as 100% of the unpaid
principal amount of the pledged student loans, plus any accrued but unpaid interest thereon. The Notes were
issued as auction rate securities and, since the first calendar quarter of 2008, have been subject to failed
auctions. In general, failed auctions occur when there are not sufficient clearing bids submitted on behalf of
bidders during the auction process established under the Indenture, with the result that existing owners of
Notes are unable to transfer or dispose of their Notes in an auction. Under the terms of the Indenture,
auction failures also have resulted in the payment of interest on the Notes at the contractually stipulated rates
set forth in the Indenture. The payment of interest at these contractually stipulated rates may erode parity
ratios and, if continued, may result in the impairment of payments in respect of principal of the Notes. Any
impairment of payments in respect of principal of the Notes will be borne first by the holders of the Class B
Notes and then by the holders of the Class A Notes.
CHARACTERISTICS OF THE STUDENT LOANS. The total principal amount of Student Loans
on deposit in the Trust Estate as of June 30, 2013, was approximately $115,379,922. Set forth below in
the following tables is a description of certain characteristics of the Student Loans held in the Trust
Estate.
Distribution of Student Loans by Loan Type
Loan Type
Percent of Loan Type
By Balance
Balance (1)
Consolidation
EIC
Gate
Heal
Stafford Sub
Stafford UnSub
$
92,096,103
19,354,972
1,098,686
1,157,808
866,650
805,703
79.83%
16.77%
0.95%
1.00%
0.75%
0.70%
Total
$
115,379,922
100.00%
Distribution of Student Loans by Guarantee Agency
Balance (1)
Insurer or Guarantor
PHEAA
USAF
GLHEC
Other
$
Total
US Dept of HHS
None
Total Private
Total
$
Percent of Loan Type
By Balance
49,119,282
19,891,802
19,115,951
5,641,421
42.57%
17.24%
16.57%
4.89%
93,768,456
81.27%
1,157,808
1.00%
20,453,658
20,453,658
17.73%
17.73%
115,379,922
100.00%
Distribution of Student Loans by Borrower Payment Status
Loan Status
Balance (1)
Percent of Loan Type
By Balance
School
Grace
Deferment
Forbearance
Repayment
Claims
$
23,774
6,234,257
8,962,843
100,035,634
123,414
0.00%
0.02%
5.40%
7.77%
86.70%
0.11%
Total
$
115,379,922
100.00%
Distribution of Student Loans by Federal Reinsurance or Private Reinsurance
Federal or Private
Reinsurance
Percent of Loans
by Balance
Balance (1)
4yr
2yr
Prop.
Consol.
$
$
21,945,042
1,222,654
116,123
92,096,103
115,379,922
19.02%
1.06%
0.10%
79.82%
100.00%
Distribution of Student Loans by Subservicer
Subservicer
Xerox (ACS)
AES (PHEAA)
GLELSI
SLMA
Balance (1)
1,325,520
74,561,389
19,601,211
19,891,802
$
115,379,922
$
Percent of Loans
By Balance
1.15%
64.62%
16.99%
17.24%
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 MASTER SERVICER
The Master 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
1986, as amended, to provide the Corporation with student loan billing and servicing and to provide
administrative support services to the Corporation. The Master Servicer is headquartered in Waco, Texas
and is governed by a ten-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 Master Servicer.
As of June 30, 2013, the total number of borrowers serviced by the Master Servicer was
approximately 420,000 aggregating approximately $9,432,029,167 in principal amount. All of such Student
Loans are serviced by the Master Servicer for the Corporation or for separate nonprofit corporations.
The Master Servicer has entered into separate subservicing agreements with several separate
Subservicers for the performance of servicing duties for student loans held under the Indenture. As a result,
servicing duties relating to student loans held under the Indenture are performed by the Subservicers.
THE SUBSERVICERS
The following general information concerning each Subservicer was supplied to the
Corporation by each Subservicer and has not been verified by the Corporation. No
representation is made by the Corporation as to the accuracy or completeness of such
information.
Xerox Education Services, Inc. XEROX-ES acts as a loan servicer for the Corporation.
XEROX-ES is a for-profit limited liability company and a wholly-owned subsidiary of Xerox
Corporation (“Xerox”). Headquartered in Norwalk, Connecticut, Xerox is a Fortune 500 company
providing document technology, services, software and supplies for production and office environments,
as well as business process and technology outsourcing solutions to world-class commercial and
government clients. Xerox’s common stock trades on the New York Stock Exchange under the symbol
“XRX.” XEROX-ES has its headquarters at 2277 E. 220th Street, Long Beach, CA 90810, and has
domestic regional processing centers in Long Beach and Bakersfield, California; Utica, New York; Oak
Brook, Illinois; Aberdeen, South Dakota and Madison, Mississippi. The Guaranteed Loan Servicing
Group is operated by XEROX-ES as an independent, third party education loan servicer with
approximately 1,200 employees, providing full service loan origination and servicing for the Federal
Stafford, PLUS and Consolidation education loan programs and many alternative/private loan programs.
XEROX-ES and its predecessors have over 42 years of experience providing outsourcing services to
higher education. As of October 2013, the Guaranteed Loan Servicing Group of XEROX-ES currently
services approximately 3.2 million education loan accounts with loans valued at approximately $47
billion. XEROX-ES’ Guaranteed Loan Servicing Group services include Stafford, PLUS, Consolidation,
and private/alternative loan servicing, as well as post-origination conversion and private loan origination.
Origination services include receipt and validation of application data, underwriting (if required), school
and borrower customer service and loan disbursement. A wide range of schools are supported, as well as
a variety of different disbursement methods, including: check, master check, automated clearinghouse
(ACH), and disbursement via national disbursing agents. Conversion services include set-up of new
accounts to the servicing platform from the origination system or a lender’s system. This area also
supports transfer of existing education loan portfolios from other servicers’ systems, as well as loan sales
and securitizations. Loan servicing includes lender and borrower services, payment and transaction
processing, due diligence activities as required by federal regulations or private/alternative loan program
requirements, and communications with schools, guarantors, the National Student Loan Clearing House,
and others. In the event of borrower default, XEROX-ES prepares and submits a claim package on the
lender’s behalf to the appropriate guaranty agency for review and guarantee payment, if applicable.
Xerox files periodic reports with the Securities and Exchange Commission (the “SEC”) as required by the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). Reports filed with the SEC are
available for inspection without charge at the public reference facilities maintained by the SEC at 100 F
Street, N.E., Washington, D.C. 20549. Information as to the operation of the public reference facilities is
available by calling the SEC at 1-800-SEC-0330. Information filed with the SEC can also be inspected at
the SEC’s site on the World Wide Web at “http://www.sec.gov.” Xerox also currently provides
information through Xerox’s website at “http://www.xerox.com.” Information filed by Xerox with the
SEC or contained on Xerox’s website is not intended to be incorporated as part of this document and
information contained on Xerox’s website is not a part of the documents that Xerox files with the SEC.
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 guaranty
support services provided by GLELSI to GLHEC and third party guaranty agencies and lender servicing
functions. GLHEC and affiliates also maintain offices in Eagan, Minnesota, Aberdeen, South Dakota,
Rocky Hill, Connecticut and Boscobel and Eau Claire, Wisconsin and customer support staff located
nationally. GLELSI began servicing loans for commercial lenders in 1977, first as a division of the
Wisconsin Higher Education Corporation, subsequently renamed the Great Lakes Higher Education
Corporation, then as GLELSI. In September, 2009, GLELSI began servicing loans for the U.S.
Department of Education. GLELSI is presently one of four servicers who service loans issued to new
student and parent borrowers under the Federal Direct Student Loan Program. As of September 30, 2013,
GLELSI serviced 10,256,346 student and parental accounts with an outstanding balance of $174.7 billion
for over 1,150 lenders nationwide, including the U.S. Department of Education. As of September 30,
2013, 65.8% of the portfolio serviced by GLELSI was in repayment status, 7.8% was in grace status and
the remaining 26.4% 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”) 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. As of June 30, 2013, PHEAA had approximately 2,900 employees.
PHEAA’s two principal servicing products are its full servicing operation (in which it performs all
student loan servicing functions on behalf of its customers) and its remote servicing operation (in which it
provides only data processing services to its customers that have their own servicing operations). As of
June 30, 2013, PHEAA services approximately 9.0 million student borrowers representing an aggregate
of approximately $200.1 billion outstanding principal amount for its full servicing customers which
consist of national and regional banks and credit unions, secondary markets, and government entities,
including $140.9 billion serviced for the Department of Education. Under PHEAA’s remote servicing
operation, the remote clients service approximately 2.3 million student borrowers representing
approximately $43.7 billion outstanding principal amount, including $33.1 billion owned by the
Department of Education.
FFELP Net Reject Rate
As a servicer, PHEAA works to minimize the net reject rate, which is the amount of claims
submitted for payment that are rejected by the guarantor and are subsequently unable to be cured. The net
reject rate for both the number and dollar value of loans for the last three calendar years is listed below.
Year
FFELP Net Reject Rate
Loans
Dollars
2012
0.021%
0.044%
2011
0.027%
0.016%
2010
0.005%
0.002%
The net reject rate is calculated based on claims submitted three years prior which were unable to
be cured during the three year cure period which ended during the calendar years noted above. The
number and dollar value of rejected claims not cured is divided by the total claims filed during that same
period three years prior. PHEAA’s most recent audited financial reports are available at www.pheaa.org.
Sallie Mae, Inc. SLM Corporation is the largest holder, servicer and collector of loans made
under the discontinued FFELP. SLM Corporation and its subsidiaries serve, as of September 30, 2013,
over 25 million customers through SLM Corporation’s and its subsidiaries’ ownership and management
of approximately $144.1 billion of student loans, of which approximately $106.4 billion, or
approximately 74 percent, are federally insured. SMI is also the nation’s largest servicer of student loans,
servicing a portfolio of approximately $301 billion principal balance of student loans as of September
30, 2013.
THE GUARANTEE AGENCIES
The Corporation has requested information regarding the Guarantee Agencies from each
Guarantor that guarantees greater than ten percent (10%) of all Student Loans in the Trust Estate
(collectively, the “Significant Guarantors”). 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.
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 guaranty agency under the Higher Education Act for Wisconsin, Minnesota,
Ohio, South Dakota, 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 Great Lakes Education Loan Services, Inc.
(“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 offices in St. Paul, Minnesota, Aberdeen, South Dakota and Boscobel
and Eau Claire, Wisconsin 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 Corporation 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 U.S. Department
of Education Data Books and Web sites http://www2.ed.gov/finaid/prof/resources/data/opeloanvol.html
and http://www.fp.ed.gov/pubs.html for further information concerning GLHEGC or any other guaranty
agency.
Guaranty Volume. GLHEGC’s guaranty volume for each of the last five available federal fiscal
years, including Stafford, Unsubsidized Stafford, SLS, PLUS, Graduate PLUS and Consolidation loan
volume, was as follows:
Federal Fiscal Year
2008
2009
2010
2011
2012
Guaranty Volume (Millions)
7,399.9
7,010.8
*
*
*
* As of April 30, 2013, the U.S. Department of Education has not published the guaranty volume
information for federal fiscal years 2010, 2011 and 2012.
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
2008
2009
2010
2011
2012
Federal Guaranty Reserve
Fund Level 1/
.76%
.77%
.93%
.96%
.97%
The U.S. Department of Education’s website at http://www.fp.ed.gov/pubs.html has posted
reserve ratios for GLHEGC for federal fiscal years 2008, 2009, 2010, 2011 and 2012 of .613%, .610%,
.744%, .744% and .726% respectively. GLHEGC believes the Department of Education has not
calculated the reserve ratio in accordance with the Act and the correct ratio should be .76%, .77%, .93%,
.96% and .97% respectively, as shown above and as explained in the following footnote. On November
17, 2006, the U.S. 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 more closely approximates the statutory calculation. According to the U.S.
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:
Federal Fiscal Year
2008
2009
2010
2011
2012
Claims Rate
0.98%
1.34%
2.05%
1.59%
1.96%
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 June 30, 2013, PHEAA has
guaranteed a total of approximately $48.8 billion principal amount of Stafford Loans, $7.9 billion
principal amount of PLUS and SLS Loans, and $52.1 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.
Effective April 1, 2013, PHEAA was designated as the guarantor for the State of Georgia.
PHEAA accepted the transfer and assignment of the rights, duties and responsibilities as a Guaranty
Agency under the Federal Family Education Loan Program from the Georgia Higher Education
Assistance Corporation (GHEAC), the previous designated guarantor for the State of Georgia. As a
result, PHEAA accepted the transfer and assignment of student loans with an aggregate of $687.8 million
in original principal, net of cancellations. All percentages and results for PHEAA in the charts below for
periods of activity after April 1, 2013 include the additional guaranty volume received in the transfer.
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
2008
1.98
2009
1.95
2010
1.75
2011
1.54
2012
1.88
As of June 30, 2013, PHEAA had total federal reserve-fund assets of approximately $80.3
million. Through June 30, 2013, the outstanding amount of original principal on loans that had been
directly guaranteed by PHEAA and transferred from GHEAC under the Federal Family Education Loan
Program was approximately $38.3 billion. In addition, as of June 30, 2013, PHEAA had total assets of
$8.8 billion, which does not include Federal Reserve Fund assets.
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)
2008
3,948
2009
4,086
2010
913
2011
0
2012
0
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. The table below shows
the reserve ratio for PHEAA for the last five federal fiscal years (ending September 30):
Fiscal Year
Reserve Ratio
2008
0.25
2009
0.25
2010
0.44
2011
0.40
2012
0.35
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 displays PHEAA’s calculation of the ratio on a regulatory basis of accounting. In
addition to gain contingencies not recognized under generally accepted accounting principles, the FY
2010 reserve ratio includes an adjustment related to foregoing the transfer of default aversion fees from
the Federal Reserve Fund to the Agency Operating Fund as agreed to in our management plan approved
by the Department of Education on May 22, 2007. The table below shows the cumulative recovery rates
for PHEAA for the five federal fiscal years (ending September 30):
Fiscal Year
Recovery Rates
2008
32.81
2009
29.32
2010
32.28
2011
31.50
2012
30.98
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
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.
On March, 30, 2010, President Obama signed into law the Health Care and Education
Reconciliation Act of 2010 (Public Law 111-152), which ended the origination and guarantee of new
loans under the Federal Family Education Loan Program, effective for loans whose first disbursement
was after June 30, 2010. As a result of statute, USA Funds will continue to administer a portfolio of
outstanding FFELP loans, but no longer may guarantee new federal student loans.
As of September 30, 2012, USA Funds held net assets on behalf of the federal reserve fund of
approximately $235 million. Through September 30, 2012, 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 $66.5 billion. As of September 30, 2012, USA Funds had
operating fund assets totaling slightly more than $1 billion, which includes the $235 million of net 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, 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:
Fiscal Year
2012
2011
2010
2009
2008
Reserve Ratio
0.354%
0.394%
0.400%
0.380%
0.330%
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:
Fiscal Year
2012
2011
2010
2009
2008
Recovery Rate
31.82%
32.17%
32.90%
36.19%
45.60%
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:
Fiscal Year
2012
2011
2010
2009
2008
Loss Rate
4.76%
4.74%
4.70%
4.62%
4.26%
In addition, USA Funds’ “claims rate” represents the percentage of federal reinsurance claims
paid by the Secretary during any fiscal year, less amounts remitted to the Secretary for defaulted loans
that are rehabilitated 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:
Fiscal Year
2012
2011
2010
2009
2008
Claims Rate
1.58%
1.69%
1.69%
1.92%
2.07%
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 and Marketing Communications.
Appendix A
Audited Financial Statements of the Corporation
15
FINANCIAL STATEMENTS
Brazos Student Finance Corporation
Years Ended June 30, 2013 and 2012
With Report of Independent Auditors
Ernst & Young LLP
Brazos Student Finance Corporation
Financial Statements
Years Ended June 30, 2013 and 2012
Contents
Report of Independent Auditors.......................................................................................................1 Financial Statements
Balance Sheets .................................................................................................................................3 Statements of Changes in Fund Balance..........................................................................................4 Statements of Cash Flows ................................................................................................................5 Notes to Financial Statements ..........................................................................................................6 Supplemental Information
Balance Sheets ...............................................................................................................................23 Statements of Changes in Fund Balance........................................................................................24 Statements of Cash Flows ..............................................................................................................25 1307-1107915
Ernst & Young LLP
Suite 1800
401 Congress Avenue
Austin, TX 78701
Tel: +1 512 478 9881
Fax: +1 512 473 3499
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Report of Independent Auditors
The Board of Directors
Brazos Student Finance Corporation
We have audited the accompanying financial statements of Brazos Student Finance Corporation,
which comprise the balance sheets as of June 30, 2013 and 2012, and the related statements of
changes in fund balance and cash flows for the years then ended, and the related notes to the
financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements
in conformity with U.S. generally accepted accounting principles; this includes the design,
implementation, and maintenance of internal control relevant to the preparation and fair
presentation of financial statements that are free of material misstatement, whether due to fraud
or error.
Auditor’s Responsibility
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. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor considers
internal control relevant to the entity’s preparation and fair presentation of the financial
statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.
Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness
of accounting policies used and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
basis for our audit opinion.
1
1307-1107915
A member firm of Ernst & Young Global Limited
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects,
the financial position of Brazos Student Finance Corporation at June 30, 2013 and 2012, and the
results of its operations and its cash flows for the years then ended in conformity with U.S.
generally accepted accounting principles.
In accordance with Government Auditing Standards, we have also issued our report dated
October 28, 2012, 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 audits.
Supplementary Information
Our audit was conducted for the purpose of forming an opinion on the financial statements as a
whole. The accompanying supplementary information is presented for purposes of additional
analysis and is not a required part of the financial statements. Such information is the
responsibility of management and was derived from and relates directly to the underlying
accounting and other records used to prepare the financial statements. The information has been
subjected to the auditing procedures applied in the audit of the financial statements and certain
additional procedures, including comparing and reconciling such information directly to the
underlying accounting and other records used to prepare the financial statements or to the
financial statements themselves, and other additional procedures in accordance with auditing
standards generally accepted in the United States. In our opinion, the information is fairly stated
in all material respects in relation to the financial statements as a whole.
ey
October 28, 2013
1307-1107915
2
Brazos Student Finance Corporation
Balance Sheets
June 30
2013
2012
(In Thousands)
Assets
Cash and short-term investments
Interest receivable:
Student loan notes receivable
Student loan notes receivable, net
Deferred debt issue costs
Accounts receivable
Restricted assets held by general fund
Prepaid expense
Total assets
Liabilities and fund balance
Liabilities:
Notes payable, net
Accrued interest payable
Administrative and loan servicing fees payable
Department of Education fees payable
Affiliate accounts payable
Long-term payable to affiliate
Student loan certificates payable
$
13,782 $
21,081
$
4,937
575,982
2,498
6
5,590
66
602,861 $
6,958
766,098
3,353
7
5,913
54
803,464
537,771 $
359
133
283
–
5,590
14,769
558,905
758,780
556
188
402
3
5,913
–
765,842
43,956
602,861 $
37,622
803,464
$
Commitments and contingencies
Fund balance:
Restricted
Total liabilities and fund balance
$
See accompanying notes.
1307-1107915
3
Brazos Student Finance Corporation
Statements of Changes in Fund Balance
Year Ended June 30
2013
2012
(In Thousands)
Interest income:
Student loan notes receivable, net
Investments
$
Interest expense:
Notes payable
Net interest income before provision for loan gains (losses)
Credit (provision) for loan losses
Net interest income after provision for loan gains (losses)
Noninterest income:
Gain on extinguishment of debt, net
Other
Noninterest expense:
Administrative and loan servicing fees
Auction agent and broker-dealer fees
Amortization of debt issue costs
Loss on extinguishment of debt
Other
Revenue over expenses, before estate distribution
Estate contribution (distribution)
Fund balance, beginning of year
Fund balance, end of year
$
17,929 $
5
17,934
22,989
10
22,999
10,479
14,636
7,455
164
7,619
8,363
(1,206)
7,157
2,359
183
2,542
–
370
370
3,113
17
401
–
318
3,849
3,967
29
431
99
370
4,896
6,312
22
37,622
43,956 $
2,631
(1,445)
36,436
37,622
See accompanying notes.
1307-1107915
4
Brazos Student Finance Corporation
Statements of Cash Flows
Year Ended June 30
2013
2012
(In Thousands)
Operating activities
Revenue over expenses, before estate distribution
Adjustments to reconcile revenue over expenses, before estate distribution
to net cash provided by operating activities:
Student loan interest capitalized
Amortization of loan purchase premiums
Amortization of note discount
Amortization of debt issue costs
Provision for loan losses
(Gain) loss on extinguishment of debt, net
Changes in assets and liabilities:
Decrease (increase) in assets:
Interest receivable
Accounts receivable
Prepaid expense
Beneficial interest
Increase (decrease) in liabilities:
Accrued interest payable
Department of Education fees payable
Administrative and loan servicing fees payable
Affiliate accounts payable
Long term payables due to affiliates
Net cash provided by operating activities
$
Investing activities
Principal collected on student loan notes receivable
Proceeds from sale of student loan notes receivable
Purchase of student loan notes receivable
Purchase of beneficial interest
Net cash provided by investing activities
Financing activities
Repayment of notes and bonds payable
Proceeds from long-term payable to affiliate
Payment of PSLT certificates
Estate contribution (distribution)
Net cash used in financing activities
Net change in cash and short-term investments
Cash and short-term investments, beginning of year
Cash and short-term investments, end of year
6,312 $
2,631
(5,184)
1,093
456
401
(164)
(2,359)
(8,454)
1,428
489
431
1,206
99
2,021
1
(12)
323
2,254
7
46
–
(197)
(119)
(55)
(3)
(323)
2,191
34
(36)
(15)
3
–
123
84,615
111,270
(1,901)
–
193,984
101,509
80
(1,199)
(5,913)
94,477
(202,294)
–
(1,202)
22
(203,474)
(96,679)
5,913
–
(1,445)
(92,211)
$
(7,299)
21,081
13,782 $
2,389
18,692
21,081
Supplemental disclosure of cash and noncash items
Cash paid during the year for interest
$
10,162 $
14,113
Non-Cash Financing Transaction
Issuance of PSLT Certificates
$
15,971 $
–
See accompanying notes.
1307-1107915
5
Brazos Student Finance Corporation
Notes to Financial Statements
(Dollars in Thousands)
June 30, 2013
1. Organization
Brazos Student Finance Corporation (the Company) is a Texas not-for-profit public benefit
corporation, which was incorporated in February 1985 for the purpose of providing funds for the
acquisition and servicing of student loans that are (1) 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; (2) guaranteed by the Secretary of Health and Human Services pursuant to the Health
Education Assistance (HEAL) Program; or (3) uninsured and nonguaranteed alternative student
loans. To maintain such insurance and guarantee of student loans, the Company must comply
with the servicing, collecting, accounting and reporting requirements of the FFELP and HEAL
programs. 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 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.
All borrowings on the 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, and
investment income.
Interest Rate Environment
The Company’s student loan revenue bond portfolio comprises $241 million of Auction Rate
Securities (ARS) and $299.5 million of London Interbank Offered Rate (LIBOR) based Floating
Rate Notes (FRNs) as of June 30, 2013. 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 auctions have continued through 2013. As a result, at June 30, 2013, $241 million of
the Company’s ARSs bore interest at the maximum rate allowable under the indenture estate
provisions that govern the determination of the interest rate in the event of a failed auction.
Approximately $136.5 million of the debt has been retired through a sale of underlying collateral
to an affiliate during the fiscal year ended June 30, 2013. See Note 5.
1307-1107915
6
Brazos Student Finance Corporation
Notes to Financial Statements
(Dollars in Thousands)
1. Organization (continued)
The Company’s $241 million of taxable ARSs have provisions that, during a period of auction
failure, limit the interest rate on the ARSs 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 indenture estates within the Company has provisions for
calculation of a Net Loan Rate for taxable ARSs. This effectively increased the interest expense
incurred by the Company. However, each of these issues was limited by the Net Loan Rate
discussed below. Therefore, the overall cash flows of the indenture estates that hold these
respective issues were not adversely impacted.
The Net Loan Rate, discussed above, is intended to protect each indenture estate from incurring
cash outflows that the cash inflows cannot sustain. The Net Loan Rates of the Company’s
respective indenture estates currently range from 1.74% to 2.55%. During 2013, the Net Loan
Rate was invoked for most taxable bond issues.
The market disruption experienced in the ARS market, and discussed above, did not have a
significant impact upon the Company’s FRNs, primarily because the Company’s FRNs reset
quarterly. The FRNs are fixed for three months; therefore, prior to any resets, spreads on student
loans financed with FRNs are generally not affected to the extent of those financed with
ARS notes.
2. Significant Accounting Policies
Basis of Presentation
The financial statements have been prepared using the accrual method of accounting in
accordance with accounting principles generally accepted in the United States. The accounts of
the Company are maintained in accordance with the principles of fund accounting in compliance
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 by the source of funding. The fund balance related to specific financing is
restricted by the note agreements and, as such, is shown as restricted on the balance sheets. The
non-debt-related fund balance, if any, is shown as unrestricted on the balance sheets.
1307-1107915
7
Brazos Student Finance Corporation
Notes to Financial Statements
(Dollars in Thousands)
2. Significant Accounting Policies (continued)
Affiliated Entities
The Company is affiliated with the following entities:
•
Brazos Higher Education Authority, Inc. (BHEA)
•
Bosque Higher Education Authority, Inc. (Bosque)
•
Federated Student Finance Corporation (FSFC)
•
Acapita Education Finance Corporation (AEFC)
•
Brazos Higher Education Service Corporation, Inc. (BHESC)
•
Leon Higher Education Authority, Inc. (LEON)
•
Brazos Education Loan Authority, Inc. (BELA)
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 facilities for headquarters 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.
Estate contributions are a release of excess funds to another Brazos affiliate, allowed under an
existing letter of credit or notes payable agreement. Estate distributions are receipt of excess
funds from Brazos affiliates.
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
1307-1107915
8
Brazos Student Finance Corporation
Notes to Financial Statements
(Dollars in Thousands)
2. Significant Accounting Policies (continued)
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 balance. The Company retired and refinanced debt
during the year and therefore recorded an expense to amortize the associated discount and issue
costs on a pro-rata basis.
Interest Receivable
Interest receivable on student loan notes receivable includes special allowance payments
receivable from or payable to the DOE, government subsidy 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 indenture with U.S. Bank, N.A. (the Trustee) under various contractual
indentures, subject to certain limitations (see Note 2 – Trustee), 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 balance. Interest income from these
investments is recorded on an accrual basis.
Cash and short-term investments comprise of the following:
June 30
2013
Money market funds
Guaranteed investment contracts
Total cash and short-term investments
$
$
12,051 $
1,731
13,782 $
2012
19,214
1,867
21,081
As of June 30, 2013 and 2012, the Company had $5,339 and $7,335, respectively, in cash and
short-term investment reserves in compliance with the note indenture requirements.
1307-1107915
9
Brazos Student Finance Corporation
Notes to Financial Statements
(Dollars in Thousands)
2. Significant Accounting Policies (continued)
Student Loan Notes Receivable, Net
Student loans are stated at the principal amount outstanding, plus unamortized purchase
premiums, and contingent borrower benefits, net of the allowance for loan losses. All student
loan notes receivable are pledged to secure related notes payable.
Premiums on Loans Purchased
The Company defers premiums paid on those student loan notes purchased and used to secure
long-term financings, 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 that approximates the
effective interest rate method. Amortization of the premiums is included within the statements of
changes in fund balance in interest on student loan notes receivable, net, and was $1,093 and
$1,428 for the years ended June 30, 2013 and 2012, respectively. A premium of $387 associated
with student loans sold to an affiliate was written off during the year ended June 30, 2013.
Included on the balance sheets within the student loan notes receivable, net, balance is $911 and
$2,391 at June 30, 2013 and 2012, respectively, of unamortized loan purchase premiums.
Income Taxes
The Company is a not-for-profit public benefit corporation that is exempt from federal income
taxes under Section 501(a) of the Internal Revenue Code as an organization described in Section
501(c)(3). The Company is also exempt from state income tax. Income that is not related to its
exempt purposes, less applicable deductions, is subject to federal income taxes. The Company
had no net unrelated business income for the years ended June 30, 2013 or 2012. As such,
no provision for federal or state income taxes has been provided in the accompanying
financial statements.
The Company files federal information returns in the United States. The Company may be
subject to examinations for the tax years ended June 30, 2010, and later by the Internal Revenue
Service. The Company is not currently under examination for any open tax year.
1307-1107915
10
Brazos Student Finance Corporation
Notes to Financial Statements
(Dollars in Thousands)
2. Significant Accounting Policies (continued)
The Company follows the accounting standard related to the accounting for uncertainty in
income taxes recognized in the Company’s financial statements. The standard prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. The Company
currently has no uncertain tax positions.
Trustee
The Company contracts certain services to the trustee. The trustee holds the pledged student loan
notes receivable and other invested assets in the Company’s name and invests and disburses
funds as directed by the Company pursuant to requirements of the indenture and note
agreements. The Trustee also monitors the invested assets of the Company and the related cash
flows of the loans and other assets pledged under the indenture to secure the related debt.
Concentration Risk
The Company’s credit risk is inherent principally in its student loan notes receivable. It is
impossible to predict the status of the economy or unemployment levels or at which point the
economy will 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. Approximately 66% of the
portfolio is FFELP loans, 2% is HEAL loans, and the remaining 32% of the loan portfolio is
alternative loans. Any changes in legislation related to existing FFELP or consolidation loans
could have a significant impact on the Company.
Student Loan Income
The Company recognizes interest income on student loans as earned, net of amortization of
premiums 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 off, after giving effect to estimates for borrower utilization of
borrower benefit incentives for making timely loan payments. Included in interest income is
$390 and $423 in special allowance payment rebates during the years ended June 30, 2013 and
2012, respectively.
1307-1107915
11
Brazos Student Finance Corporation
Notes to Financial Statements
(Dollars in Thousands)
2. Significant Accounting Policies (continued)
Interest Expense
Interest expense is based upon contractual interest rates (variable) adjusted for the amortization
of note discount costs.
Department of Education Fees
Approximately 55% of the portfolio is consolidation loans, on which the Company pays fees to
the DOE. 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
are accounted for as an adjustment to the yield on student loan notes receivable included within
the statements of changes in fund balance in interest on student loan notes receivable, net, and
were $3,640 and $5,042 for the years ended June 30, 2013 and 2012, 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 use of the effective
interest rate method to amortize premiums on loans purchased, and the provision for loan losses.
3. Interest Receivable on Student Loan Notes Receivable
FFELP loans obligate the borrower to either pay interest at a stated fixed rate or an annually reset
variable rate that has a cap depending on when the loan was originated. The interest earned by
the Company is dependent upon the borrower’s interest rate, the date the loan was originated,
and the Special Allowance Payment formula.
The Special Allowance Payment formula, or SAP rate, is determined by the DOE, based upon an
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 underlying loan status and origination date. These rates are then applied to the
quarterly average daily balance for loans eligible to receive SAP.
1307-1107915
12
Brazos Student Finance Corporation
Notes to Financial Statements
(Dollars in Thousands)
3. Interest Receivable on Student Loan Notes Receivable (continued)
For loans first disbursed prior to April 1, 2006, the Company earns interest at the higher of the
borrower’s rate or the SAP rate. If the SAP rate exceeds the borrower’s rate, the DOE makes a
payment directly to the Company. For loans first disbursed after April 1, 2006, the Company
earns interest at the SAP rate. If the SAP rate is less than the borrower’s rate, the Company
“rebates” the difference between the borrower’s rate and the lower SAP rate to the DOE. If the
SAP rate is greater than the borrower’s rate, the DOE makes SAP payments to the Company for
the difference between the two rates.
At June 30, 2013, student loans held by the Company had stated interest rates determined
annually by the DOE ranging from 1.79% to 8.50% and are generally payable by the borrower
following a specified grace period. Effective July 1, 2013, the DOE reset these rates to range
from 1.75% to 8.50%.
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. 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 consists of the following:
June 30
2013
Student loan interest receivable
Interest subsidy receivable
Special allowance payable
Interest receivable on student loan notes receivable
1307-1107915
$
$
4,803 $
230
(96)
4,937 $
2012
6,712
348
(102)
6,958
13
Brazos Student Finance Corporation
Notes to Financial Statements
(Dollars in Thousands)
4. Student Loan Notes Receivable
Student loan notes are purchased by the Company primarily from affiliates. The Company’s
student loan portfolio consists principally of loans originated under the FFELP and HEAL
federally sponsored student loan programs. The Company also purchases private and alternative
education loans.
Total student loan notes receivable consist of the following:
June 30
FFELP student loan notes receivable
HEAL student loan notes receivable
TERI student loan notes receivable
Private and alternative student loan notes receivable
Deferred loan premiums, net of accumulated amortization
Allowance for student loan losses
Student loan notes receivable, net
$
$
2013
2012
384,903 $
13,509
45,311
139,022
911
583,656
(7,674)
575,982 $
541,894
18,019
53,106
159,654
2,391
775,064
(8,966)
766,098
Approximately $113,386 of student loan notes receivable were sold to an affiliate during the
2013 fiscal year of which the proceeds were used to pay down existing debt. There was a gain of
$1,446 recorded on the sale.
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.
1307-1107915
14
Brazos Student Finance Corporation
Notes to Financial Statements
(Dollars in Thousands)
4. Student Loan Notes Receivable (continued)
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.
Alternative loans have repayment periods ranging from between 15 and 20 years. There is no
deferral of the repayment period for these loans.
All FFELP, HEAL, and private 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 that 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.
The Company’s alternative loans are primarily education-related student loans to students
attending postsecondary educational institutions or career training institutions. The Company
bears all risk of loss on these loans.
Student Loan Servicing
BHESC provides the Company with the necessary student loan servicing to maintain compliance
with the requirements of the FFELP, HEAL, TERI, and private and alternative loan programs 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; Great Lakes Educational Loan Services, Inc.;
Student Assistance Foundation of Montana; and Sallie Mae Servicing Corporation on behalf of
1307-1107915
15
Brazos Student Finance Corporation
Notes to Financial Statements
(Dollars in Thousands)
4. Student Loan Notes Receivable (continued)
affiliated entities. 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, 2013, 100% of the loan portfolio is serviced
by third-party subservicers.
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%. The Deficit Reduction Act of 2006
lowered the federal guarantee for FFELP student loans made on or after July 1, 2006, 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 the federal guarantee has not
historically had a material impact on the Company. Additionally, HEAL loans are 98%
guaranteed by the loan program sponsor. The Company determines the allowance for loan losses
based on loss factors applied to the portion of student loan balances without government
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.
TERI loans were originally insured up to 100% should the borrower default. However, during
fiscal year 2009, TERI filed Chapter 11 reorganization bankruptcy. Due to this bankruptcy, TERI
discontinued the payment of claims for defaulted loans. All remaining TERI claims no longer
have a loan guarantee, and the Company bears all risk of loss on these loans. In addition, the
Company bears all risk of loss on alternative loans. The Company’s alternative loans that do not
have a loan guarantee are primarily education-related student loans to students attending
postsecondary educational institutions or career training institutions. A quarterly review is
performed on the alternative and TERI outstanding loan balances compared to historical
delinquencies incurred. Based on this analysis, the Company records an allowance for these
loans based on the loan type and delinquency of the loans.
1307-1107915
16
Brazos Student Finance Corporation
Notes to Financial Statements
(Dollars in Thousands)
4. Student Loan Notes Receivable (continued)
Activity in the allowance for loan losses is summarized as follows:
June 30
2013
Balance, beginning of year
Credit provision for loan losses
Charge-offs, net of recoveries
Balance, end of year
$
$
2012
8,966 $
(164)
(1,128)
7,674 $
10,237
1,206
(2,477)
8,966
5. Notes Payable, Net
Notes payable consist of the following:
June 30
2013
Student Loan Asset-Backed Notes,
Series 1998 B1
Student Loan Asset-Backed Notes,
Series 1999 A1-A2
Student Loan Asset-Backed Notes,
Series 2000 A8-A13
Student Loan Asset-Backed Notes,
Series 2001 B1
Student Loan Asset-Backed Notes,
Series 2003 A1-A4 & B1
Student Loan Asset-Backed Notes,
Series 2004 A1-A8 & B1-B2
Student Loan Asset-Backed Notes,
Series 2009 A-1, A-S-1 & B1
Student Loan Asset-Backed Notes,
Series 2010 A1
$
Less unamortized bond discount
$
1307-1107915
June 30
2012
Final
Maturity
Date
42,173 $
50,000
June 2023
27,600
33,600
December 2023
84,400
99,800
December 2033
13,900
17,300
July 2036
115,100
128,000
July 2038
–
138,000
March 2040
201,904
231,739
January 2039
55,428
540,505
(2,734)
537,771 $
64,227
762,666
(3,886)
758,780
June 2035
17
Brazos Student Finance Corporation
Notes to Financial Statements
(Dollars in Thousands)
5. Notes Payable, Net (continued)
During fiscal year 2013, the Company called 24 tranches of outstanding securities with a par
amount of $21,200 at a discount between 1.00% and 6.25% resulting in a cumulative call price
of $20,288. A gain of $913 was recorded in the income statement during fiscal year 2013 related
to these early maturities.
As a result of the recent recession, and at the request of Citigroup and other investors in the
Company’s ARS debt portfolios, the Company has eliminated a portion of their debt through the
sale of student loan notes to an affiliate and used proceeds to retire those associated debt
instruments. During the 2013 fiscal year, approximately $136,550 of the notes payable was
extinguished during the year through the sale of approximately $113,386 in student loan notes
and associated accrued interest receivable of $992. In addition, approximately $17,739 in student
loans and associated accrued interest receivable of $153 was transferred to BSFC-Private Student
Loan Trust in consideration of certain subordinate debt extinguishment. The Company wrote off
$387 of associated student loan note unamortized premium and broker fees. In conjunction with
the extinguishment of debt, the Company recorded a loss of $696 on unamortized discounts, a
loss of $454 on unamortized issuance costs, and a gain of $1,446 on extinguishment of debt. The
remaining debt payoff was executed during the normal course of business through repayment
from underlying collateral.
Interest rates for the various bond series are based on fixed and variable rates. The interest rates
at June 30, 2013, for each class of notes are as follows:
Floating rate securities
Taxable auction rate securities
3-month LIBOR plus spread of
0.25%–2.50%
Set at auction
0.52%–2.77%
1.69%–3.36%
The Company issues variable interest rate debt, and the interest rates are determined based on
one of the following methods: (1) one-month LIBOR plus a specified number of basis points,
(2) bond equivalent yield for auctions of 91-day Treasury bills plus a specified number of basis
points, or (3) the interest rate established by an auction agent every 28 days.
Pursuant to the individual note agreements for each debt instrument, the respective notes payable
are secured solely by those student loans and other invested assets held by each individual debt
instrument’s indenture estate.
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18
Brazos Student Finance Corporation
Notes to Financial Statements
(Dollars in Thousands)
5. Notes Payable, Net (continued)
Pursuant to the indenture and note 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, 2013.
The maturities of notes payable as of June 30, 2013, by fiscal year, are as follows:
2014
2015
2016
2017
2018
Thereafter
$
$
4,400
–
–
–
–
536,105
540,505
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.
6. Fair Value of Financial Instruments
At June 30, the estimated fair values of the Company’s financial instruments are as follows:
2013
Carrying
Amount
Financial assets:
Cash and short-term
investments
Student loan notes
receivable, net
Financial liabilities:
Notes payable, net
1307-1107915
$
13,782 $
2012
Fair
Value
Carrying
Amount
13,782 $
21,081 $
Fair
Value
21,081
575,982
–
766,098
766,098
558,905
–
758,780
758,780
19
Brazos Student Finance Corporation
Notes to Financial Statements
(Dollars in Thousands)
6. Fair Value of Financial Instruments (continued)
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 short-term investments
approximate the carrying amount due to the short maturity of these instruments.
Student Loan Notes Receivable, Net – The fair value of student loan notes receivable was
determined based on discounted cash models.
Notes Payable, Net – The fair value of the notes payable is based on the discounted value
of the future cash flows using current rates for similar notes.
7. Fair Value Measurements
The applicable accounting guidance on fair value measurements defines fair value, establishes a
framework for measuring fair value under generally accepted accounting principles, and
enhances disclosures about fair value measurements. Fair value is defined by the accounting
standard as the exchange price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. This guidance 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, or credit risks; or inputs that are derived principally from or corroborated by
market data, correlation, or other means.
1307-1107915
20
Brazos Student Finance Corporation
Notes to Financial Statements
(Dollars in Thousands)
7. Fair Value Measurements (continued)
•
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.
As of June 30, 2013 and 2012, the Company did not have financial or nonfinancial assets or
liabilities required to be measured at fair value.
8. Commitments and Contingencies
Included in the Company’s student loans notes receivable are private loans insured by The
Education Resources Institute, Inc. (TERI). Originally, TERI insured these private loans up to
100% should the borrower default. During the current fiscal year, TERI filed Chapter 11
reorganization bankruptcy. Due to this bankruptcy, TERI discontinued the payment of claims for
defaulted loans. TERI has adequate assets in its loan guarantee reserves to pay these claims and
has petitioned the bankruptcy court to release these funds for payment of such claims. The court
is still considering, but has not granted, this request. As of June 30, 2013, the Company had
$45,311 in TERI loans recorded in student loan notes receivable, all of which are included in the
quarterly review performed to determine the allowance for these loans based on the loan type
and delinquency of the loans.
9. Related-Party Transactions
Included in administrative and loan servicing fees are administrative fees paid to BHESC;
servicing fees, which comprise servicing fees paid to BHESC; and servicing fees paid to thirdparty subservicers. During the years ended June 30, 2013 and 2012, the Company recorded
$1,216 and $1,526, respectively, in administrative fees paid to BHESC for providing
administrative support, such as accounting and information technology infrastructure.
During the years ended June 30, 2013 and 2012, the Company purchased $23 and $0,
respectively, in principal amounts of student loans from affiliated entities at market prices. The
premiums paid on the purchase of student loans are capitalized and included in student loans
notes receivable in the accompanying financial statements.
1307-1107915
21
Brazos Student Finance Corporation
Notes to Financial Statements
(Dollars in Thousands)
9. Related-Party Transactions (continued)
During the years ended June 30, 2013 and 2012, the affiliated entities purchased $111,053 and
$7, respectively, in principal amounts of student loans from the Company at market prices. The
premiums paid on the purchase of student loans are capitalized and included in student loans
notes receivable in the accompanying financial statements.
In August 2012, BHESC loaned the Company $6,161 to purchase loans from Bosque held in a
line of credit with a banking facility. These loans are held as “restricted assets held by general
fund” with an offsetting long term payable to affiliate. As payments are received on the loans,
the Company transfers the collections to BHESC. There was $5,590 and 5,913 in long term
payable to affiliates and restricted assets held by general fund as of June 30, 2013 and 2012.
10. Subsequent Events
On August 14, 2013, the Company sold its interest in BSFC-PSLT to a third party for $1,341.
The transaction resulted in a loss of $393.
Subsequent events have been evaluated through October 28, 2013, which is the date the financial
statements were available to be issued.
1307-1107915
22
Supplemental Information
1307-1107915
Brazos Student Finance Corporation- Private Student Loan Trust
Balance Sheets
June 30
2013
(In Thousands)
Assets
Cash and short-term investments
Interest receivable:
Student loan notes receivable
Student loan notes receivable, net
Accounts receivable
Total assets
Liabilities and fund balance
Liabilities:
Administrative and loan servicing fees payable
Student loan certificates payable
Fund balance:
Restricted
Total liabilities and fund balance
$
597
$
128
15,279
1
16,005
$
$
3
16,557
16,560
(555)
16,005
See accompanying notes.
1307-1107915
23
Brazos Student Finance Corporation- Private Student Loan Trust
Statements of Changes in Fund Balance
Year Ended
June 30
2013
(In Thousands)
Interest income:
Student loan notes receivable, net
$
Net interest income before provision for loan losses
Provision for loan losses
Net interest income after provision for loan losses
466
(954)
(488)
Noninterest income:
Other
(11)
Noninterest expense:
Administrative and loan servicing fees
Other
(Revenue over expenses), before estate distribution
Estate distribution
Fund balance, beginning of year
Fund balance, end of year
466
76
2
78
$
(577)
22
–
(555)
See accompanying notes.
1307-1107915
24
Brazos Student Finance Corporation- Private Student Loan Trust
Statements of Cash Flows
Year Ended
June 30
2013
(In Thousands)
Operating activities
(Revenue over expenses), before estate distribution
Adjustments to reconcile revenue over expenses, before estate distribution
to net cash provided by operating activities:
Student loan interest capitalized
Provision for loan losses
Change in assets and liabilities:
Decrease (increase) in assets:
Interest receivable
Accounts receivable
Increase (decrease) in liabilities:
Administrative and loan servicing fees payable
Net cash provided by operating activities
$
(577)
(85)
975
38
(1)
3
353
Investing activities
Principal collected on student loan notes receivable
Net cash provided by investing activities
1,570
1,570
Financing activities
Payment of PSLT certificates
Estate distribution
Net cash used in financing activities
(1,348)
22
(1,326)
Net change in cash and short-term investments
Cash and short-term investments, beginning of year
Cash and short-term investments, end of year
$
597
–
597
Supplemental disclosure of cash and noncash items
Cash paid during the year for interest
$
–
1307-1107915
25
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