Guaranty Agencies See New Opportunity Amid Uncertainty
The future of guaranty agencies and the level and type of service they are able to provide for financial aid offices and students remains uncertain, but the Obama administration’s revamped Voluntary Flexible Agreement (VFA) program may provide an opportunity for these agencies to reinvent themselves.
Two recent events have reduced revenue streams for guaranty agencies, threatening their ability to maintain loan counseling, default prevention, financial literacy, and other student services many financial aid offices have come to rely on. First, the 2008 economic downturn caused cash shortages in the student loan market that prompted the federal government to provide lenders with cash by buying more than 24.5 million outstanding Federal Family Education Loan Program (FFELP) loans. This reduced the outstanding portfolio of FFELP loans under guarantee by more than $100 billion, which lowered guaranty agencies’ short- and long-term revenues.
Second, Congress ended FFELP in 2010 moving all new loan originations to the Federal Direct Loan Program. The end of FFELP originations was another big cut to guaranty agencies’ portfolios. Guaranty agencies still offer services for about $400 billion in outstanding FFELP loans, state grant programs and college savings plans, but the reduction in revenues changed the scope of their services.
"The guarantors are still here," says Shelly Repp, newly appointed president of the National Council of Higher Education Loan Programs (NCHELP) – the group that represents guaranty agencies. "There is income related to those loans, so the guarantors aren't going to disappear overnight, but the challenge is to come up with a sustainable model to provide those services."
Financial aid offices and colleges have expressed consternation at the reduction in entrance and exit loan counseling, financial literacy and default prevention services previously provided by guarantors. The timing is unfortunate as campuses struggle to keep default rates down among high unemployment, increased student loan borrowing and a tougher default standard to be fully implemented in 2012.
In response to the recent rise in student loan default rates and concerns about the drop in student support services, the Obama administration has redesigned the VFA initiative to bring guaranty agencies to the forefront of student loan delinquency prevention and default aversion services for FFELP loans.
The U.S. Department of Education issued a Federal Register notice on May 31 inviting guaranty agencies to submit proposals by Aug. 1 for VFAs that will enhance the integrity and stability of FFELP, and improve services to students, schools and lenders.
“[I]t is appropriate to establish new guaranty agency structures and financing mechanisms that will protect the Federal fiscal interest in the outstanding FFEL Program portfolio,” the Department states in the Federal Register notice. “The [Education] Secretary also wants to ensure that guaranty agencies are able to continue to provide high quality services to borrowers, lenders, and schools while supporting the important responsibilities that they have in the areas of default prevention, outreach, and oversight.”
Repp says the "open-ended, non-prescriptive invitation" is designed to encourage guarantors to think outside the box and work in consortia to outline a cost-effective structure for new default aversion, financial literacy and loan monitoring provisions.
The VFA proposals may include a variety of services that could help relieve some of the administrative burden on financial aid offices. The Federal Register notice outlines four areas that guaranty agencies may provide support.
- Lender claims review, lender claims payment, and collections
- Delinquency and default prevention and management
- Community outreach, financial literacy and debt management, school training and assistance, and school oversight
- Lender and lender servicer oversight
The notice also states that the VFA may specify the fees the Department will pay, in lieu of revenues the guaranty agency would otherwise receive from loan guarantees, but the overall cost to the Federal government cannot increase as a result. The Department expects that the reorganization of agencies’ responsibilities under the VFAs will result in “significant economies of scale and increased efficiencies.”
Twenty-two separate VFA proposals were received by the August 1, 2011 submission deadline date, according to a Department notice posted on the Financial Partners website. Twenty-four individual guaranty agencies were included in one or more of the proposals submitted. Some proposals were from teams of guaranty agencies. Some guarantors submitted multiple proposals. Those guarantors include:
- American Student Assistance
- Student Loan Guarantee Foundation of Arkansas
- Colorado Student Loan Program (dba “College Assist”)
- Florida Department of Education (OSFA)
- Georgia Student Finance Commission
- Illinois Student Assistance Commission (ISAC)
- Iowa College Student Aid Commission
- Kentucky Higher Education Assistance Authority
- Louisiana Student Financial Assistance Commission
- Finance Authority of Maine
- Missouri Department of Higher Education
- Montana Guaranteed Student Loan Program
- New Hampshire Higher Education Assistance Foundation
- New Jersey Higher Education Student Assistance Authority
- New Mexico Student Loan Guarantee Corporation
- Northwest Education Loan Association (NELA)
- North Carolina State Education Assistance Authority
- National Student Loan Program (NSLP)
- Oklahoma College Assistance Program
- Pennsylvania Higher Education Assistance Agency (PHEAA)
- Rhode Island Higher Education Assistance Authority (RIHEAA)
- Tennessee Student Assistance Corporation (TSAC)
- Texas Guaranteed Student Loan Corporation (TG)
- Utah Higher Education Assistance Authority (UHEAA)
The Department will now review the 22 proposals and post them to the Financial Partners website for public review.
Ensuring that the proposals cost no more than current contracts might not be an easy task. A previous round of VFAs under the Bush administration was terminated with government officials citing the rising cost of the initiative. But Repp remains optimistic.
“We suspect that the proposals guarantors will submit will be based on financial models that differ from the discontinued VFAs,” Repp says. “We believe the aforementioned outreach and debt management and default aversion services offer great value that will save the government and taxpayers money. A fair assessment will show this.”
The VFA notice also requires the guaranty agencies avoid a perceived "conflict of interest" that arises from the same agency providing default prevention services and collecting defaulted loans. Some policymakers and critics have argued that borrowers are adversely affected when agencies receive revenue for default prevention and collection.
To meet this requirement, guarantors may divide the two services between two agencies. For example, two guaranty agencies based in different states could each provide one of these services for both states, thereby removing one of the guarantors from the conflict entirely.
Repp cites a similar not-for-profit servicer initiative, authorized under SAFRA, that involves the servicing of Direct Loans by strictly not-for-profit lenders. That initiative is already producing an array of financial literacy tools for financial aid administrators and borrowers.
Though the VFA initiative is solely focused on providing services for FFELP loans, Repp is optimistic that some of those provisions could also be applied to the Direct Loan program.
“We are hopeful that the Department of Education will take advantage of the debt management and default aversion services provided by guaranty agencies for the benefit of Direct Loan borrowers,” he says. “These services would supplement the activities of all Direct Loan servicers.”
NASFAA President Justin Draeger is also hopeful that these new initiatives will provide additional help to financial aid offices and borrowers.
“These nonprofit agencies already have an infrastructure in place to provide much needed support to borrowers beyond debt collections,” says Draeger. “We’re excited to see the Department and former FFELP agencies come together to find innovative solutions for students.”