Q&A - Dated: April 2008
Auction rate securities and the recent auction failures

Issuers of auction rate securities (“ARS”) have experienced many instances of “failed auctions”in which the supply of ARS being sold exceeds the demand. These failed auctions have affected a broad range of ARS, including ARS issued by NorthStar Education Finance, Inc. A failed auction does not result in a default; it is an indication of a lack of liquidity in the marketplace.

Why did many recent auctions fail?

Due to the recent turmoil in the credit markets, auctions of ARS have failed because there were not enough bids to cover the bonds for sale, indicating a lack of liquidity in the market.

What are the consequences of a failed auction?

There are procedures built into the auction process governing ARS in the event of a failure. The interest rate for the ARS that is paid to all ARS bondholders adjusts to a “maximum rate” specified in the documents that govern the terms of the ARS. In addition, existing bondholders that have submitted sell orders may not be able to sell any or all of the bonds for which they have submitted sell orders. The “maximum rate” formula for any individual ARS issued by NorthStar Education Finance, Inc. is described in the Offering Memorandum for the respective series of ARS.

What are existing bond holders' options?

ARS bondholders may decide to hold their bonds and continue to receive interest payments. Or, if they wish to sell their bonds, they may offer them for sale at the next scheduled auction, subject to the same risk that the subsequent auction will not attract sufficient demand for a successful auction to occur. Broker-dealers may also try to facilitate secondary trading in the bonds, although such secondary trading may be limited and may only be available for bondholders willing to sell at a discount. A failed auction does not obligate the issuer to redeem the securities, nor do ARS bondholders have the right to tender bonds back to the issuer.

NorthStar Education Finance, Inc. is, to the extent it is able, continuing to monitor the situation in the ARS market and is exploring all options for refinancing the ARS. However, there is no assurance that any refinancing options for the ARS are or will be available now or in the future.

This Q&A is published solely for informational purposes and is not to be construed as specific investment, legal, or tax advice. This Q&A shall not constitute an offer to sell or a solicitation to buy, nor shall there be any sale of any notes/bonds in any state or jurisdiction in which such offer or solicitation or sale would be unlawful prior to registration or qualification under the laws of such state or jurisdiction. Certain statements contained in this Q&A may be forward-looking in nature. These include all statements relating to plans, expectations, and other statements that are not historical facts and typically use words like “expect,” “anticipate,” “believe,” and similar expressions. Such statements represent management's current beliefs, based upon information available at the time the statements are made, with regard to the matters addressed. All forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, such statements. Management does not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

The comments contained herein are based on market conditions as of the date of this Q&A. Different market conditions and assumptions could have materially different results. NorthStar Education Finance, Inc. is under no obligation to update this Q&A. Neither NorthStar Education Finance, Inc. nor any of its affiliates, directors, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this Q&A.