Getting to Know Guaranty Agencies

Discussions of President Barack Obama's proposal to eliminate the Federal Family Education Loan (FFEL) program have focused largely on its ramifications for major student loan providers. But there's another group deeply invested in preserving their livelihood through the FFEL program: student loan guaranty agencies. Though complex and often misunderstood, these agencies could play a crucial role in the debate over FFEL due to their strong political connections and public relations friendly activities. But what do these agencies actually do, what are they paid to accomplish, and just how connected are they to loan companies and states? Higher Ed Watch will attempt to answer these questions over the next few weeks with an occasional series on getting to know specific guaranty agencies.

Guaranty agencies have been involved with student loans since the 1950s, when a handful of states opened agencies to help college students obtain affordable loans. Soon after Congress created the original version of the FFEL program in 1965, it authorized the involvement of these agencies to encourage lenders to offer student loans by providing default insurance. Congress also gave the guarantors important oversight responsibilities, such as ensuring that lenders make a concerted effort to keep delinquent borrowers from defaulting. (More on the history of guaranty agencies can be found here.)

But guaranty agencies' initial purpose and their role today are not the same. Financial difficulties in the 1970s and the collapse of a major guaranty agency in the 1980s led the Department of Education to provide all of the capital for the default insurance, and solely rely on guaranty agencies to hold that money in trust. The failure of their initial purpose has led guaranty agencies to expand into other areas -- such as helping borrowers avoid default; collecting on or rehabilitating defaulted student loans; and running college access or financial literacy programs. These activities are harder to measure for effectiveness and accountability. (More on guaranty agency fees can be found here.)

Understanding guaranty agencies is further complicated because they vary significantly in both in shape and form. While there is no such thing as a "standard" guaranty agency, the 34 existing guarantors can be broadly classified into three different types:

1. A standalone entity that performs administrative FFEL functions.
2. An agency that serves a dual role both in the FFEL program and as a state higher education authority that administers scholarship programs and other activities that are specific to the agencies home state.
3. A "one-stop" financial aid entity that performs all of the functions of a guaranty agency, while also serving as a lender.

To help provide greater clarity about the variety, affiliations, and structure of guaranty agencies, Higher Ed Watch is launching an occasional series that will take in-depth looks at a few specific guaranty agencies. We will be looking carefully at specific themes and the policy implications they have for understanding guaranty agencies and considering their ultimate termination. These themes can be broadly categorized into four main areas:

• State Affiliation and Political Influence The Georgia Student Finance Commission is a "component unit" of the state of Georgia. The Northwest Education Loan Association is not part of any state government. The extent to which a guaranty agency is part of a state's executive branch structure has implications for its level of political influence and whether or not a governor or state legislature will raise federalism issues if Congress attempts to eliminate guaranty agency functions.
• Ties to Lenders The Kentucky Higher Education Assistance Authority is ostensibly joined with the Student Loan People, a nonprofit lender formerly known as the Kentucky Higher Education Student Loan Corporation. American Student Assistance, formerly the Massachusetts Higher Education Assistance Corporation, is not connected to any lender. Whether or not a guaranty agency is either tied to or serves as a loan company sets up opportunities for conflicts of interest resulting from the way federal subsidies to guaranty agencies are structured.
• Accountability In addition to their FFEL functions, many guaranty agencies operate several other programs for either their borrowers or for students in the states in which they operate. These can range from scholarship programs (state supported and private) to information campaigns on financial literacy and paying for college. But the Department of Education does not actually measure or evaluate any of these initiatives. As a result, guaranty agencies can act as if some of these additional activities are actually part of their core mission, distorting the way they appear to policymakers that must make decisions on the agencies' fate.
• Performance Measures The Department of Education does not publish much information about guaranty agencies, but it does provide some data on the amount of loans they guarantee and how often students fail to repay those loans through the cohort default rate measure. Looking at these few metrics is important because one activity guaranty agencies receive compensation for is helping borrowers to avoid defaulting on their loans.

Whether guaranty agencies and the FFEL program should be continued or not is a matter of Congressional debate. But it is important that these discussions be informed by what guaranty agencies actually do for the program, not what the shiny promotional literature states.