Getting to Know Guaranty Agencies: TG

Higher Ed Watch continues its series that takes a closer look at individual federal student loan guaranty agencies. The introductory post can be found here. The first two posts looking at the guaranty agencies for Georgia, Washington, and Idaho can be found here and here. Today, the series continues with an examination of TG.

TG, or the Texas Guaranteed Student Loan Corporation, is the designated guaranty agency for the Lone Star State. A public, nonprofit company, TG was the third largest guaranty agency in 2008, providing insurance for a total of 1,468,078 loans worth a total of $7,277,747,627.

Unlike the first two agencies we looked at, TG does not have any explicit connections to any particular lenders. Instead, TG has two aspects that are particularly worth discussing: the way it balances its roles within the state and nationally, and its past attempts to change the way it is compensated and structured.

State Ties

So far in our series we have looked at one guaranty agency that is part of the state government and one that has absolutely no ties to the governments in the states in which it operates. TG falls somewhere in between these extremes: An agency that has ties to the state, but is also not constrained by them.

TG is not a part of the Texas government; it receives no money from the state and is the sole entity responsible for its debts. At the same time, 10 out of the 11 members on its Board of Directors are appointed by the governor of Texas. The final member is required to be the Texas comptroller of public accounts, a state official. 

TG also has a memorandum of understanding with the Texas Higher Education Coordinating Board, a state agency that administers grant, loan, and college preparation programs. According to an e-mail to Higher Ed Watch from a TG spokesperson, the two work together "to cooperatively provide services ... in a manner that eliminates the duplication of efforts and resources." This collaboration includes Closing the Gaps, a state plan to increase the number of degrees and other postsecondary education credentials earned by 50 percent. The two also collaborate on a telethon about how to fill out financial aid forms.

In many respects, TG's positioning as a public nonprofit allows it to combine the best of both worlds. Its relationship with the coordinating board can be used to build positive name recognition and association, while its governor-appointed board gives it political connections. At the same time, TG's independent status allows it to pursue loan guarantees in other states and grow its business. TG's salaries are also not constrained to those of public servants, as they are in Georgia -- according to its 2007 tax filings, the president/CEO of TG earned total compensation $528,346, or more than three and a half times the salary of Texas Gov. Rick Perry.

Non-Federal Activities

TG serves a dual role - serving as the designated guarantor for Texas and marketing its services nationally. Two scholarship programs that it runs play some role helping to raise its name recognition outside of Texas. For nearly a decade TG has provided scholarships to schools or students under the Charley Wootan Grant Program. According to 2007 tax filings, TG distributed $1 million of these awards in $10,000 installments to institutions of postsecondary education across Texas. In 2008, TG made some changes to the program, doubling the available funding and dividing it equally among students in Texas and across the country in individual awards to students of up to $4,425. Doing so thus allows TG to reach students in both Texas and nationwide.

The guarantor also runs the Public Benefit Grant Program, which since 2004 has provided competitive awards to institutions and organizations both in Texas and across the country that specifically serve the needs of first-generation or underrepresented college students. In the 2006 fiscal year, for example, the second largest award went to the Michigan-based Thomas Cooley Law School and the third largest went to Washington, D.C.-based Excelencia in Education. Both of these groups have additional ties to TG -- the dean of financial aid at Cooley Law School serves on TG's National Schools Committee, while Excelencia in Education participated in a June 2008 Capitol Hill briefing co-sponsored by TG touting the role guarantors play in "enhancing higher education access and success for minority students."

New Compensation

TG is also noteworthy because it is one of a handful of agencies that took part in an experiment to change the way in which guarantors do business. Congress created the Voluntary Flexible Agreement program in 1998 to allow guaranty agencies to adopt new subsidies or alter existing ones in exchange for abandoning their traditional (and no longer necessary) role of reimbursing lenders for defaulted loans. Lawmakers believed that it would better align the subsidies guaranty agencies receive with the interests of students by increasing the incentives for these entities to keep borrowers out of default. TG operated under this VFA from October 1, 2000 until the program ended on January 1, 2008.

TG's VFA made several changes to its subsidy structure. The guarantor agreed to cease its role of providing default insurance to lenders and return the federal assets it held for this purpose. Instead, under the plan, the agency filed monthly requests with the Department that estimated how much it would need for upcoming default claims. While this meant it still was to serve as a pass-through of federal funds, it would not be acting as the custodian of a large pool of government money.

As part of the arrangement it worked out with the Department, TG also altered its subsidies with respect to loan delinquency and default. It began receiving a new delinquency prevention fee, which was determined based upon what percentage of its loans needed default aversion assistance. For example, if up to 27.99 percent of its loans needed default assistance, then the fee was equal to 0.12 percent. But if 30 percent of more of TG's loans needed assistance, then the delinquency fee fell to 0.05 percent.

It also began receiving a new default aversion fee, which was set at 1.25 percent of a loan's principal and interest. (The default aversion fee given to non-VFA guarantors is 1 percent.) This fee also included a performance incentive that could increase the fee to as high as 4 percent if TG prevented a substantial enough percentage of its loans from defaulting.

Finally, the VFA also adjusted the subsidy TG received for collection or rehabilitation activities so that it would receive bigger payments the more successful it was at recovering default losses. Normally, guarantors receive a set payment regardless of their performance.[1]

The VFA thus shifted TG's revenue structure so that it started receiving greater income from keeping borrowers in repayment  than collecting on defaulted student loans. According to a 2007 report, the VFA increased TG's default aversion income as 30 percent of revenue, up from 10 percent prior to signing the agreement. Collection income, meanwhile, decreased from 60 percent to 35 percent. 

Unlike other guaranty agencies, whose VFAs did lead to a decrease in their default rates, TG's did not dip precipitously. Its default rate for the 1998 cohort was 7.03 percent, while its rate for the 2004, 2005, and 2006 cohorts were 6.5, 6.5, and 9.1 percent, respectively.

The VFA also did not hinder TG's accumulation of assets. It reported an increase in net income for every tax year from 2003 to 2006, growing from $66.2 million to $99.8 million.

Our series will continue soon with a close look at another guaranty agency. Stay tuned.

[1] When TG first signed its VFA, all guaranty agencies were able to keep 23 percent of any amounts collected, so its agreement would thus result in it keeping a lower amount of collections if it was not successful in its collection activities. In 2007, however, Congress passed the College Cost Reduction and Access Act, which lowered guaranty agencies' collection retention rate to 16 percent. This change meant that TG went from retaining an amount that at its highest was the same rate as other guaranty agencies to an amount that at its lowest was still better than any agency without a VFA.