Guarantee Agencies

The Student Loan Industry’s Messaging Machine at Work

Stephen Burd — Thu, 22 Oct 2009 17:45:00 -0400

As we reported on Tuesday, Qorvis Communications, a top public relations firm in Washington, has taken the lead in the student loan industry's efforts to manufacture grassroots student opposition to legislation that would eliminate the Federal Family Education Loan (FFEL) program. But getting students to rally behind an unpopular industry that profits from their indebtedness has not proven to be an easy task. The firm's desperation has become all too evident in recent weeks.

Take, for instance, the case of Patrick McBride. In a press release announcing the launch of its "Protect Student Choice" public relations effort, Qorvis officials listed McBride, a student at Vanderbilt University, as one of four "local campaign members" -- with the others being leaders of non-profit student loan agencies.

But who is McBride? A former colleague of ours, the enterprising Ben Miller of Education Sector, sought to find out. In an interview he conducted with McBride, Miller learned that he was a first-semester freshman who got interested in the issue while doing research on the Internet. McBride, who would not say whether or not he had taken out student loans (although he added that he "did not have a stake" in the issue), was initially "ambivalent" about the student loan reform legislation. But after talking to David Mohning, the university's financial aid director and a longtime supporter of the FFEL program, he was convinced that the bill was a bad idea.

McBride then wrote a column for the school's conservative publication the Vanderbilt Torch, decrying the measure as a "government intrusion into private markets" [despite the fact that FFEL is already a government program]. Soon after, Qorvis contacted him, asking whether he would be interested in participating in its campaign.

To be absolutely clear, we do not have any beef with McBride. Individuals are entitled to their own opinions, and far be it for us to object to them expressing their views in writing. But isn't it telling that after working for months to manufacture grassroots opposition among students, this is the best they could come up with? A first semester freshman, who may not have even borrowed student loans, writes a column in a college publication and suddenly becomes one of the campaign's chief spokesmen???

But contrary to reports, McBride is not the only student that Qorvis has recruited for this effort. The firm has actively courted the College Republican National Committee to mobilize its members to speak out against the legislation. Uncharacteristically, the group, which typically focuses on helping elect Republican candidates and training future Party leaders rather than taking positions on specific legislation, recently agreed to take part in the campaign.

Zach Howell, the national chairman of the College Republicans, made the announcement during a faux television interview conducted by Karen Hanretty, a managing director at Qorvis who previously served as the communications director for the National Republican Congressional Committee. "We're engaging our membership in any way we can on this issue," Howell said. "It certainly is important to them and to the future of higher education in this country."

During the interview, Howell acknowledged that he had not done a lot of research on the issue and demonstrated that he didn't fully understand how the federal student loan programs work. For instance, he warned that a shift to 100 percent direct lending would result in having "rates set in Washington," when of course they already are. He raised the specter of "long lines" at the financial aid office and "poor service," and said that "all sorts of burdensome regulations and difficulties will be placed on students and schools." The one example he gave was of California Polytechnic State University, whose "depleted Financial Aid office" (as described by the student newspaper) appears to have perennial problems administering federal financial aid (see here and here). Howell neglected to mention that the vast majority of schools that have made the transition to the Direct Loan program so far have found the process to be easier than they thought.

But, of course, it makes little difference to Qorvis officials whether the students it recruits have a firm grasp of what they are talking about (those who do probably wouldn't want to shill for the loan industry). They are simply looking for warm bodies to make it appear that there is a genuine grass roots movement against the legislation. Focusing on the College Republicans seems like an odd choice, considering that the bill's fate rests in the hands of moderate Democrats. The group does, however, boast of having more than 200,000 members and if the individual students are not upfront about their affiliation when they contact their lawmakers, they could provide the illusion that there is genuine student angst over the bill.

As we said on Tuesday, this is a truly cynical effort. It is indeed a prime example of special interest lobbying at its worst.

Exclusive: A Peek into the Student Loan Industry’s Messaging Machine

Stephen Burd — Tue, 20 Oct 2009 21:45:00 -0400

It's no wonder Americans are deeply suspicious of special interest lobbyists in Washington. Take the student loan industry's latest efforts to kill legislation pending in Congress that would end the Federal Family Education Loan program. It's a prime example of special interest lobbying at its worst.

In 2007, shortly after President Bush signed into law a bill cutting government subsidies to lenders and guaranty agencies, the student loan industry bought into a new strategy to thwart any future Congressional action that might reduce its subsidies further: manufactured grass roots opposition (otherwise known as astroturfing). With Democrats firmly in control of Congress and in a good position to take back the White House in the upcoming presidential election, industry officials knew that the FFEL program was in jeopardy.

Enter Qorvis Communications, a prominent Washington-based public relations firm that had gained notoriety earlier in the decade for its work on behalf of the Saudi Arabian government. Eager for the loan industry's business, one of the firm's partners made a pitch for the company at the 2007 legislative conference of the National Council of Higher Education Loan Programs, a trade group that represents guaranty agencies and non-profit lenders. In a power-point presentation entitled "What Just Hit Us?", this Qorvis executive said that the loan industry had lost the loan subsidy battle because it "had no organized constituency" to "counter" its critics.

"The messages and messengers we used to defend the program were not effective and thus we need new voices, new messages, and new ways to mobilize these voices," he stated.

The industry, he said, especially needed to wage a campaign to get students and their parents to speak out on its behalf. Lenders and guarantors could do this by reaching out to student organizations and parent groups, as well as spreading their message over the Internet through social networking sites like Facebook, blogs, and a website dedicated to the cause of preserving FFEL.

Qorvis, the executive said, was uniquely qualified to carry out this campaign because of its previous work building grassroots networks on college campuses dedicated to giving "students a voice in the national debate surrounding digital rights and freedoms in the 21^st Century." He suggested that the firm would be able tap into these networks to mobilize students to speak out in favor of the FFEL program.

"There are now fifteen chapters on campuses nationwide where students meet to discuss current events in technology policy and take action to support or oppose relevant legislation -- and more importantly, to recruit more advocates for us [emphasis included in original text]."

Qorvis got the job on the strength of his pitch. Now two years later, with the FFEL program facing possible extinction, we can see how this strategy has worked out. The loan industry is still struggling to generate grassroots support from anyone other than those who have a vested interest in the program's survival -- particularly loan company employees and financial aid administrators who serve on lender and guaranty agency boards and/or belong to state associations that depend heavily on student loan providers for financial support.

Despite the efforts of the loan industry and the Qorvis communication team, students and their parents are not rushing the barricades to demand that lenders be allowed to continue collecting generous subsidies for making virtually risk-free loans. Evidently, digital rights supporters on campuses aren't interested in being used as pawns in the battle over the future of the FFEL program. Perhaps they're also wise to the fact that the pending legislation pits student grant aid increases against lender subsidies. Did lenders really think students would choose the latter?

As we've said before, the indifference of students to the lenders' plight shouldn't come as a surprise, considering that the terms and conditions of federal student loans are pretty much identical whether they come from the loan industry or from the U.S. Department of Education's Direct Lending program.

In our next post, we will take a closer look at the loan industry's increasingly desperate efforts to show that it has students on its side. Stay tuned.

Getting to Know Guaranty Agencies: Options for Reform

Ben Miller — Mon, 13 Jul 2009 17:30:00 -0400

[Higher Ed Watch concludes its guaranty agency series today by offering recommendations for reforming and fixing many of the most pressing problems we have identified with these agencies.]

Guaranty agencies' subsidies, responsibilities, and relationships are better suited for a different era of federal student aid policy. Their outdated roles and relationships with lenders not only undermine the underlying policy goals of the original student loan program, they lead to inefficient uses of taxpayer dollars and a variety of practices that harm rather than help student borrowers. Today, the New America Foundation is releasing "Rethinking the Middleman," a report that explores the history and policy shortcomings of guaranty agencies and provides reform recommendations to Congress and the U.S. Department of Education.

The paper recommends that policymakers take the following steps to correct many of the problems with guaranty agencies we have previously identified:

Eliminate the Guaranty Agency Insurance Role

The initial purpose of guaranty agencies was to cover the costs incurred by student lenders when a borrower defaults on a loan, with some assistance from the federal government. Today, guaranty agencies perform that role by making payments to lenders entirely with federal funds held in trust. The vast majority of these funds are reimbursed by the U.S. Department of Education, making guaranty agencies a middleman with minimal stake in the FFEL Program.

Federal policymakers should remove guaranty agencies from this process altogether. Any claims lenders file for loan default reimbursement should go directly to the U.S. Department of Education, which can then make claim payments using the same process it employs now to provide quarterly interest rate subsidies to lenders. Under this arrangement, guaranty agencies should be required to return the $1.63 billion in federal assets they hold.

Prohibit Guaranty Agency and Lender Partnerships

The relationships between lenders and guaranty agencies are largely a product of incentives from the 1970s that today distort subsidies provided to both. Although not every relationship between a lender and guaranty agency leads to such outcomes, the opportunity for such activities is increased whenever these two types of agencies share common financial interests. To ensure that the missions of guaranty agencies and lenders are not compromised by their connections, the federal government should establish a strong firewall between the two. For existing lender-guaranty agencies, the secretary of education should exercise current regulatory authority to separate these entities from one another if doing so is in the federal fiscal interest, or to "ensure sufficient separation of responsibility and authority between its lender claims processing as a guaranty agency and its lending or loan servicing activities." This authority should be used in cases where the guaranty agency and lender are part of the same organization or they have a contract in which one outsources some or all of its responsibilities to the other.

Eliminate Guaranty Agencies' FFEL Program Oversight Role

Guaranty agencies are expected to serve as a neutral third party to monitor and audit participating lenders in the FFEL Program. Several lawsuits and reports by the U.S. Department of Education's inspector general have demonstrated these agencies are not capable of playing this role in a way that protects student borrowers and taxpayers. The oversight role prescribed for guaranty agencies is also somewhat duplicative given that the U.S. Department of Education is expected to conduct its own program reviews and oversight of the FFEL Program as well.

Given these factors, guaranty agencies should no longer be expected to carry out any oversight functions. Any auditing responsibilities should be transferred to the U.S. Department of Education.

Balance Incentives for Borrower Assistance versus Loan Collection

The federal payments provided to guaranty agencies attempt to achieve competing policy outcomes: (1) preventing student loan default and (2) rehabilitating or collecting on a borrower's loan that has not been successfully repaid. Because the compensation for the latter goal is greater than for the former, there is tension within agencies between pursuing activities that are better for their financial interests or for those of borrowers.

These competing policy goals should be resolved by assigning the duties currently performed by guaranty agencies to two separate groups of competitively determined federal contractors. One set of contractors would handle the collection of defaulted student loans, while a different group would provide default aversion assistance to borrowers. Guaranty agencies and other companies could bid on the default aversion contract, but no entity or related affiliate could perform both functions. Rehabilitating loans would be handled by the contractors that provide default aversion assistance.

Improve the Default Aversion Role

Assisting struggling student loan borrowers is a worthwhile policy goal that is currently executed poorly through the default aversion assistance fee. Rather than the current structure, in which the fee can be used to place borrowers in forbearance, default aversion should be handled by federal contractors whose compensation is based on successfully returning borrowers to repayment. Not only would this prevent excessive use of forbearances, but it would alleviate concerns about using this fee to gain greater federal subsidies. This change in the default aversion fee would also encourage more active interventions with struggling borrowers because greater work is required to return borrowers to repayment.

Alternatively, the default aversion fee could be turned into competitively bid block grants, in which any agency-including those not currently participating in the federal student loan program-would be eligible to submit a proposal for providing default aversion activities for all borrowers in a given state or region. This process would ensure that any agency performing default aversion activities would not have an incentive to manipulate a given borrower's balance. A competitively bid contract would also create competition among agencies to prove their success at quality default aversion activities.

Make the U.S. Department of Education the Lender of Last Resort

The lender-of-last-resort loan program is a necessity because lenders are not required to make loans to all eligible borrowers. But the current construction of the lender-of-last-resort program creates opportunities for exploitation by guaranty agencies that have close relationships with federal student loan companies. Because of these concerns, the U.S. Department of Education should take over providing lender-of-last-resort loans in any situation where they may be needed. Loans could be provided through the same common origination and disbursement system that handles Pell Grant payments to schools. They could then be administered as part of the Direct Loan Program, a competing distribution system for federal student loans that involves the government issuing loans directly to students using Treasury funds.

Demand Accountability and Results for Other Activities

Guaranty agencies engage in a number of college planning and outreach activities in addition to the FFEL roles for which they receive explicit federal subsidies. This programming is often funded by excess federal revenue. Unlike the activities for which they are explicitly paid, this programming is not subject to any accountability measures designed to ensure that it is well executed and worthwhile.

To ensure that excess federal revenue is being used for quality purposes, guaranty agencies' college planning and other similar programming should be subject to annual review by the U.S. Department of Education and the annual congressional discretionary appropriations process. Doing so would both ensure that these activities were well executed and provide an opportunity to share best practices research by carefully evaluating what works. Guaranty agencies that offer less successful programming would either return excess subsidies or alter their offerings to encompass more effective activities offered by other agencies.

Time for Reform

Guaranty agencies have played some role in federal student loan programs since their inception. But while these agencies have taken on new responsibilities during the ensuing decades, they have not abandoned roles that are now irrelevant. In addition, they have been forming relationships with lenders that create potential conflicts of interest. Enacting the changes described above would turn guaranty agencies into a useful part of a system for postsecondary education access, rather than unnecessary middlemen.

Guaranty Agency Exec Pay: A Good Deal for Taxpayers?

Ben Miller — Wed, 17 Jun 2009 01:00:00 -0400

On May 21, René Drouin, the president and chief executive officer of the New Hampshire Higher Education Assistance Foundation (NHHEAF) Network Organizations, appeared before the House of Representatives Committee on Education and Labor to discuss reforms to the federal student aid programs. Drouin and the New Hampshire guaranty agency received heaps of praise from Representatives, who lauded them for fulfilling their charitable mission by establishing an educational foundation and providing a college planning center for Granite State students.

But no mention was given to the other ways guaranty agencies like NHHEAF spend their taxpayer subsidies, including how much they compensate top officials. Curious, we looked up the New Hampshire agency's latest 990 tax form and found that Drouin had earned a salary in 2007 of $550,072, an amount that seemed high to us considering the agency's size. So we decided to dig further and see how Drouin's compensation compared to the leaders of the 34 other guaranty agencies. Using Guidestar, a repository of nonprofit tax filings, and assorted state and newspaper databases, we found compensation information for the highest paid employee at every agency except the Oklahoma Guaranteed Student Loan Program. That information is presented in the table below.

Through this analysis, we found that Drouin's salary was the fourth highest among all guaranty agency top-paid officials, despite the fact that New Hampshire agency guaranteed the fifth smallest amount of loans in 2008. Drouin's compensation does, however, fall well below that of Richard Boyle, the CEO, president, director, and foundation president of the Educational Credit Management Corporation (ECMC) Group, the designated guaranty agency for Virginia and Oregon, and its affiliated foundations. Boyle earned an incredible $928,892 in 2007, according to tax filings. That figure put him well above the leaders of United Student Aid Funds ($715,046 in 2006) and Great Lakes Higher Education Guaranty Corporation ($635,751 in 2006), which came in second and third in our rankings.

All told, our research found that guaranty agencies' highest-paid employees earned an average of $259,633 in 2007. This breakdown, however, disguises the large discrepancies between salaries earned at the 21 agencies that are part of a state government ($158,853 on average), and those of the 13 guarantors that are private nonprofit entities ($422,431).

So why does Drouin, who runs one of the smallest guaranty agencies, earn such a high salary? Officials with the New Hampshire agency said Drouin's compensation is appropriate, considering that he has spent more than 30 years in senior positions at the agency.

They also say that his salary reflects the fact that he not only runs the guaranty agency, but also its affiliated lender and educational foundation. The loan agency was the 33rd largest FFEL lender in the 2007 fiscal year, while the foundation disbursed roughly $360,365 in charitable funds in 2007 for loan forgiveness, scholarships, and other purposes. (The organization's 2007 annual report lists a slightly different figure of $324,504.[1] See the footnote for a more detailed explanation of NHHEAF's total charitable contributions.)

Our analysis, however, shows the average earnings for officials at similarly bundled guaranty agencies and lenders was $238,668, lower than the overall average for all guarantors.

NHHEAF is certainly not the only small guaranty agency that pays its top officials generously. The New Mexico guaranty agency is the sixth smallest agency, but had the seventh highest salary at $374,877 in 2006. Also worth noting is the Connecticut Student Loan Foundation (CSLF), which had the 10th highest top-paid guaranty agency official. Not only is CSLF the smallest guaranty agency, but its leaders have come under fire lately for their extravagant spending at a time when the agency is facing huge budget deficits.

There are guarantors that provide substantially lower compensation or salary packages to their leaders. The Michigan guaranty agency, for example, spent just $105,728 on is director in 2007, followed closely by Iowa's executive director ($106,399 in 2008) and Montana's director ($107,656 in 2008).[2] Not surprisingly, all three of these agencies are part of their home state governments. In fact, the Pennsylvania Higher Education Assistance Authority was the only state-affiliated guaranty agency to have its highest salaried official fall in the top 10.

Some may argue that compensation figures are irrelevant to substantive policy discussions about federal student aid reforms. But given that decisions about the future of the federal student loan programs is going to come down to cost differences, it's important to remember how subsidies paid to lenders and guaranty agencies are used.

Higher Ed Watch left a message with ECMC and will include updates to this post with any information we receive from that agency.

[1] Payne also notes that in addition to direct charitable activities from its foundation, the organization provided $700,000 for its college outreach and access activities in 2007, which are counted as operational expenses. In addition, the organization spent $4.3 million on borrowers benefits, though lenders are often are forced by competitive pressures to offer borrower benefits to win business, and are thus not quite the same as forgiving loans or extending scholarships to students. NHHEAF provides both of these activities, but at lower funding levels than borrower benefits.

[2] The figures for Kentucky and Florida are the lowest two agencies according to our research. In the former case, however, we believe that compensation figure is so low due to the fact that the Kentucky guaranty agency shares significant operations with the state's nonprofit lender, and thus does not reflect the full compensation for guaranty agency activities. Florida, meanwhile, appears to have switched directors during the year used for payroll determination. As a result, it does not represent full annual compensation.

Getting to Know Guaranty Agencies: TG

Ben Miller — Wed, 06 May 2009 16:14:00 -0400

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.

EXCLUSIVE: Questionable Federal Student Loan Practices in South Carolina

Ben Miller — Thu, 30 Apr 2009 15:15:00 -0400

Something fishy appears to be going on in South Carolina.

Financial reporting documents that Higher Ed Watch obtained from the U.S. Department of Education suggest that the state student loan agency in South Carolina may be exploiting its ties to a closely affiliated guaranty agency to receive excessive taxpayer subsidies from the federal government. At issue is the guarantor's apparent abuse of an emergency program that the government has in place to ensure that all eligible students are able to obtain federal student loans.

The federal lender-of-last-resort program is administered by the designated guaranty agency in each state to provide government-backed loans to students whose applications have been denied by other lenders. Since the agency must give qualified borrowers a loan-of-last-resort, the federal government agrees to take on all the risk associated with the debt. This means that holders of these loans are reimbursed for 100 percent (page 8) of any losses sustained due to borrower default, as opposed to ordinary loans made through the Federal Family Education Loans program (FFEL) that are reimbursed at only a 97 percent rate.

As its name suggests, this program is supposed to be used only in rare cases. But the documents, which we obtained from the Department of Education through a Freedom of Information Act (FOIA) request, show that over at least the past six years, South Carolina's guaranty agency has provided loans to students through this program with unusual frequency. The rate at which the agency used this program to request reimbursement from the Department was at least 100 times greater than any of the other nine agencies whose documents we obtained -- a sampling that included the largest guarantors in the country. All told, South Carolina's lender-of-last-resort claims were three times greater than those for the other nine agencies combined. (See chart above or the spreadsheet at the bottom of this post for additional information on the guaranty agency claims.)

In an e-mail to Higher Ed Watch a spokesperson for the Department of Education said the Department "is aware of the situation and the Federal Student Aid office is conducting a program review." The spokesperson, however, declined to comment further until that process is completed.

The South Carolina Student Loan Corporation (SCSLC), the state student loan agency that made the lender of last resort loans on behalf of the guarantor, appears to have benefited from the frequent use of this program because it could shift the default risk on these high risk loans entirely to the government, and as a result collect more generous federal subsidies if the debt was not repaid. Increasing the number of lender-of-last-resort loans in a portfolio could make a securitized package containing those loans less risky, and thus more attractive, to potential investors -- reducing borrowing costs and thus increasing the profit spread earned on either federal or alternative student loans.

The South Carolina State Education Assistance Authority (SCSEAA), the state's designated guaranty agency, would also benefit from greater usage of the lender-of-last-resort program. The Department of Education excludes lender-of-last-resort loans (page 4) from its calculations of guaranty agencies' default rates. This matters because guarantors with high default rates must pay a larger fee (page 3) in order to receive reimbursement from the federal government for claim payments made to lenders.

Neither the SCSLC or the SCSEAA responded to calls for comment from Higher Ed Watch.

How Did We Find Out?

Through our FOIA request, we were given copies for 10 guaranty agencies of the monthly reimbursement request form, also known as Form 2000, that they must submit to the Department of Education each month. We also received copies of the loans-of-last-resort plans on file at the Department of Education for those same agencies. Unfortunately, we do not have a complete picture of what is going on in South Carolina because the Department of Education denied our request for a summary of loans-of-last-resort volume broken down by guaranty agency, on the grounds that the Federal Student Aid (FSA) office "does not have any existing reports or responsive documents." In a subsequent request this week, the Department agreed to provide this information at a later date.

An analysis of the monthly forms clearly demonstrates that since at least Jan. 2003, the South Carolina guaranty agency has filed reimbursement requests to the Department of Education for over $60.8 million in loan-of-last-resort default claims.[1] That figure represents 30.4 percent of all default reimbursement requests filed by the South Carolina guaranty agency from Jan. 2003 to Jan. 2009.

The documents we obtained also reveal that the South Carolina guaranty agency filed its loans-of-last-resort requests at both a more frequent rate and for a significantly greater dollar value than any of the other guaranty agencies we reviewed. At United Student Aid Funds (USAF), only $2.9 million, or 0.03 percent, of its default claims were for loans-of-last-resort during the same period of time. Meanwhile EdFund, the California guaranty agency, filed loans-of-last-resort claims worth only $12.0 million, or 0.31 percent, out of its total default requests of $3.9 billion.

In other words, the South Carolina guaranty agency has been filing loans-of-last-resort claims at rates 880 times higher than USAF, the country's largest guaranty agency, and 98 times higher than EdFund, which runs the second largest. Moreover, the agency's use of its emergency authority has increased over time. These claims represented 35.4 percent of its total default claims in 2008, an increase from 19.5 percent in 2003.

What We Think is Happening Here

What makes this all the more intriguing is that SCSLC for all intents and purposes runs the South Carolina guaranty agency -- a setup that makes it possible for the loan agency to exploit the lender-of-last-resort program for financial gain.

Though technically two distinct entities, the guaranty agency-the SCSEAA-and the nonprofit lender -- the SCLSC -- are largely inseparable. The SCLSC administers the operations of the SCSEAA (page 9), and receives compensation for carrying out this activity. The two share the same office complex in Columbia, S.C. and have a common website that is solely branded with the Corporation's logo. In fact, calls for comment on this story placed to both the lender and guaranty agency were transferred to the same individual.

According to the South Carolina guaranty agency's plan for lender-of-last-resort loans, a student becomes eligible for such a loan if their application is denied by a FFEL lender. Once that occurs, the loan-of-last-resort will be made by a loan company designated by the guaranty agency: in this case, SCSLC. This plan has been in place since at least 1994 and was reaffirmed by SCSLC in 2008.

Normally, the actual loans-of-last-resort process is of little importance because students' applications are usually approved by FFEL lenders-especially during the financial boom years covered by the documents we obtained. That is not the case, however, in South Carolina, where the sheer volume of default claims filed indicates that large numbers of students must have been denied FFEL loans.

As we said earlier, denying students' FFEL applications and shifting them into the loan-of-last-resort program appears to be a worthwhile endeavor for SCSLC because it allows the agency to reduce the risk in its portfolio, obtain higher federal reimbursement payments than it otherwise would receive, and make its assets more attractive to potential investors. It also helped its sister agency, the SCSEAA by excluding loans from the cohort default rate calculation, an accountability measure

To reiterate, what we believe is occurring is that borrowers are having their loan applications denied with unusual frequency by the SCLSC. Under SCLSC's lender-of-last-resort plan, a single denial makes them eligible for a lender-of-last-resort loan through the SCSEAA. That agency in turn, has conveniently contracted with its officemate, the SCSLC, to provide that loan. As a result, the borrower gets his or her loan, the SCSLC still gets the loan business but now has no risk of losing any money if borrowers default, and the SCSEAA guarantees a loan that cannot hurt its default rate calculations if the borrower fails to pay it back. It's a win-win-win for everyone involved. That is, except for taxpayers and the federal government, which are now on the hook for greater risk and subsidies.

The close ties between the loan agency and the guaranty agency also dramatically decreased the risk that the guarantor's excessive use of the loans-of-last-resort program would be discovered. Guaranty agencies are tasked with overseeing and auditing the activities lenders at the state level-but, as we've seen in other cases, when the two work hand-in-hand, abuses are more likely to occur.

A New Chapter in the Scandal-Prone History of FFEL

What appears to be occurring in South Carolina is yet another example in a long history of waste and abuse in the FFEL program. (See this report released yesterday by the Department's Inspector General for more on how oversight failures allowed these types of questionable practices to occur.) Whether it is charging for excessive subsidies, manipulating borrower balances, or paying off college and Department of Education officials, these repeated instances of improper and sometimes illegal activities again underscore the need for an overhaul of the federal student loan programs to better protect students and taxpayers.

In addition to the documents contained in this post, Higher Ed Watch has .zip files of the monthly forms for the 10 guaranty agencies mentioned. Here are links to .zip files for South Carolina, USA Funds, and EdFund. If you would like additional materials, such as lender-of-last-resort plans, please e-mail the author at miller [at] newamerica [dot] net

[1] When a federal student loan defaults, the guaranty agency handling the insurance on the loan is required to reimburse the lender for the vast majority of its loss. For loans-of-last-resort, this reimbursement covers 100 percent of default losses instead of the typical 97 percent. After paying a lender's default claim, the guaranty agency files a request with the Department of Education to be reimbursed for the majority of that payment.

These reimbursement requests are broken down by various categories on the monthly reimbursement form. One of those categories is for Exempt/Loans-of-last-resort. Example claims represent a very small subset of those claims and only are "filed in situations where the lender determines that the borrower or the student on whose behalf a parent has borrowed, without the lender or school's knowledge at the time the loan was made, provided false or erroneous information or took actions that caused the student or borrower to be ineligible for all or a portion of a loan. Also include claims where the student has been convicted of, or plead nolo contendere to, a crime involving fraud in obtaining title IV student aid."

Getting to Know Guaranty Agencies: The Georgia Student Finance Commission

Ben Miller — Thu, 26 Mar 2009 17:02:00 -0400

Last week, Higher Ed Watch announced the start of a series taking a closer look at individual federal student loan guaranty agencies. Today, we examine one such agency, the Georgia Student Finance Commission.

The designated guaranty agency for the state of Georgia is the Georgia Higher Education Assistance Corporation (GHEAC). Originally founded in 1965, GHEAC is one of the smaller guaranty agencies -- it guaranteed 72,125 new loans worth $254.6 million in the 2008 federal fiscal year, ranking it 27th out of the 35 guaranty agencies in new loans guaranteed and 29th for new loan volume.

Despite its size, GHEAC is well-connected within the state of Georgia, stemming from its close-knit relationship with a nonprofit student loan company, ties to the state government, and its administration of a popular merit-based grant program that benefits hundreds of thousands of students in the state each year. This setup creates opportunities for GHEAC to build goodwill and name recognition among Georgians, but also opens the door to potential conflicts of interest in some of its roles as a guaranty agency. These potential conflicts are certainly not unique to Georgia but are widespread among guarantors across the country that are closely linked to lenders or engage in lending themselves.

State Affiliation and Political Influence

GHEAC is a nonprofit public corporation that is considered part of the Georgia state government. Rather than serving as a standalone entity, it is a component unit of the Georgia Student Finance Commission (GSFC), which also administers the state's nonprofit loan company, the Georgia Student Finance Authority (GSFA).

From a governing standpoint, the Board of Commissioners for the GSFC (and hence the boards for the subsidiary lender and guaranty agency) is politically appointed by the governor and confirmed by the state senate. While the board is politically confirmed at the state level, its structure also reflects federal interests, as seats are apportioned such that each of Georgia's 13 U.S. Congressional districts gets a spot.

Being part of the state government gives GSFC clout when dealing with federal student loan issues. Any effort by the White House or Congress to rein in guarantors, or eliminate the role they play in the federal loan programs altogether, is likely to meet resistance from the governor and other state officials. The potential loss of state jobs is not likely to sit well in the statehouse or with Georgia's Congressional delegation.

In addition to its state connections, the GSFC also has some ties to the Georgia Association of Student Financial Aid Administrators (GASFAA). According to a 2007 filing with the Internal Revenue Service, GSFC's vice president for client services and marketing also serves as the legislative affairs chair for GASFAA. Having a role in this trade association gives GSFC another outlet to build connections with local colleges and universities -- a relationship that in other states has been used to lobby against proposals to end the FFEL program.

Ties to Lenders

GHEAC and the state's nonprofit lender GSFA are considered to be "companion agencies" within the Georgia Student Finance Commission because they are statutorily separate. In practice though, the three agencies act as a single company, sharing common boards of directors, mission statements, websites, and facilities. This lack of separation is also reflected both in the way the Department of Education lists GSFC as the designated guaranty agency for Georgia, and how the agency itself uses the name GSFC to refer to all of its operations, including the loan company and guaranty agency.

As a result of this setup, there is ostensibly no separation between the state's guaranty agency and a loan company. Though there is no legal requirement that a lender and guaranty agency not be housed within a single entity, it does raise questions about how the agency avoids the potential for conflicts of interest that arise as a result. For example, one role expected of agencies serving as designated guarantors for a state, such as GHEAC in Georgia, is to complete comprehensive audits of lenders. The rationale behind this policy is that the guaranty agency could serve as a third-party check against potential abuses in the program. In the case of GHEAC, however, there is no third-party separation between it and GSFA.

Second, guaranty agencies asking for federal advances to cover lender claim payments - a not unrealistic scenario given the likely uptick in student loan defaults coming from the weakened economy -- are expected to encourage "maximum commercial lender participation" in the FFEL program. But in the case of GHEAC, such actions work directly counter to the interests of GSFA, which, as a loan company, attempts to achieve as large a market share as possible.

These discussions about potential conflicts of interest are not meant to single out the GSFC. In fact, there's no evidence that anything being done in Georgia is any different from the connections between lenders and guaranty agencies in Pennsylvania, Kentucky, and a host of other states. But it does raise concerns about potential conflicts of interest in any location where lenders and guaranty agencies operate in a close-knit relationship.

Non-Federal Activities

In addition to its roles as a federal student loan guaranty agency and lender, the GSFC is perhaps best known for administering Georgia's HOPE Scholarship program. Funded via the state lottery, the HOPE scholarship is a merit-based grant that is awarded to roughly 200,000 students every year. In addition to the HOPE program, the GSFC also administers a few other scholarships for students that meet certain requirements, such as members of the military or residents who are attending a nearby public four-year college that is out of state. All told, GSFC disbursed 243,443 scholarships in the 2008 fiscal year.

On top of its scholarship activities, GSFC engaged in a number of other initiatives in 2008 that while not explicitly federally mandated, would serve to increase name recognition. These activities are targeted at students, parents, schools, and others, and include workshops, high school outreach events, and maintaining a website with information on preparing, applying, and paying for college.

Performance Measures

Though GHEAC administers very few loans relative to most other guaranty agencies, it does have one of the highest loan portfolio cohort default rates. In two of the last three years for which data is available, GHEAC had the highest default rate of any guaranty agency, with a rate of 9.8 percent for the 2004 cohort and 10.3 percent for the 2005 cohort.

Despite the relatively high default rate, GHEAC reported net income of $442,000 for the 2008 fiscal year. This is comparatively small relative to the 2007 and 2006 fiscal years, where it reported net income of $1.9 million and $3.7 million, respectively. The substantial drop in income for the 2008 fiscal year is a reflection of changes to guaranty agency compensation, which were implemented as part of the College Cost Reduction and Access Act of 2007.

The fact that GHEAC is still able to earn $6.0 million over three years despite a default rate of 9.4 percent indicates that there is little relationship between a guaranty agency's success at preventing student loan defaults and its bottom line. This is largely because the fees offered to guaranty agencies for preventing default -- 1 percent of the outstanding balance of a loan in danger of going into default -- pale in comparison to the 16 percent that they retain from defaulted loan collections.

The positive net income and high default rate also demonstrate the extent to which guaranty agencies have no risk-sharing with regard to defaults of loans in the FFEL program. They are required to pay lenders' claims for losses stemming from defaulted FFEL loans, but the actual payments are made using a pool of federal assets held in a custodial nature. In other words, the $5.5 million paid by the GHEAC to cover lenders' default insurance claims came entirely out of its pool of U.S. government assets -- not its own pockets.

Conclusion

The guaranty operations at the Georgia Student Finance Commission may be small relative to other agencies, but that does not mean that it is unusual or wildly different from other guarantors across the country. Its structure of having a guaranty agency all but inseparable from a lender is duplicated in Pennsylvania and several other states. Likewise, other agencies, such as the designated guarantor in New York also run popular (politically and from a public relations standpoint) grant programs. The questions raised here about the potential for conflicts of interest and ability to properly carry out its mission also are not necessarily specific to Georgia, but rather are germane to discussion of many guaranty agencies. And understanding the ways in which these guarantors interact with state, local, and federal agencies and constituents is crucial for appreciating how the debate over the Obama administration's proposal to eliminate the FFEL program will be shaped.

Check back next week when Higher Ed Watch's Getting to Know Guaranty Agency series will continue with another close look at a different type of federal student loan guaranty agency.

Correction: This post incorrectly referred to the New York State Higher Education Services Corporation as a guaranty agency that is connected to a lender. The intention was to describe the New York guaranty agency as one that also administered a popular grant program, but the two ideas were accidentally conflated. The post has been corrected and we regret the error.

News Alert: CBO Finds Administrative Costs to be Higher in FFEL

Jason Delisle — Wed, 25 Mar 2009 18:00:00 -0400

The Congressional Budget Office (CBO) released student loan estimates this week showing that the federal government spends significantly more to administer the Federal Family Education Loan (FFEL) program than it does to run the U.S. Department of Education's Direct Loan program, thanks to student loan guaranty agencies.

This finding blows a hole in a key argument that the student loan industry and its supporters have long relied on to cast doubt on government estimates showing that FFEL loans cost more than those made through direct lending. Lenders have argued that the government's administrative costs are substantially higher in the Direct Loan Program than in FFEL. Industry officials have been able to make this claim because in the past, federal budget officials have left out from their estimates a very big piece of FFEL administrative costs: guaranty agency fees. But not anymore.

This year, for the first time, CBO included federal payments to guaranty agencies in FFEL program administrative costs. As shown in the table below, administrative costs in 2009 are expected to be $1.3 billion for FFEL and $700 million for direct loans.

To be fair, these estimates don't show the average administrative cost per-loan in each program (the most appropriate way to compare programs), but they do shed light on the massive administrative costs associated with the FFEL program and its guaranty agencies.

What Do Loan Administrative Costs Mean?

When budget agencies such as CBO and the White House Office of Management and Budget (OMB) estimate federal student loan program costs, they typically treat administrative costs differently than other loan program costs. Administrative costs generally include U.S. Department of Education personnel salary and information technology expenses associated with both student loan programs, as well as payments made to private contractors, like those that service the Direct Loan program. Expenses not classified as administrative include subsidy payments to private lenders and any subsidy conferred to student borrowers. These costs are captured in the loan subsidy estimates reported by the budget agencies.

For the past few years, OMB has included present value, per-loan administrative cost estimates in the President's budget request, but has not included guaranty agency payments in these figures (OMB classifies the costs as lender subsidies). CBO takes a different approach. The budget office simply lists the annual appropriation for student loan administration on a cash basis, not as a present-value subsidy, and doesn't break out how much goes to each loan program. (For further explanation of the differences between cash and present value budgeting, click here) With the release of the 2009 estimates, CBO has added guaranty agency payments to this cost reporting method.

This change is long overdue. Any accurate report of administrative costs under FFEL should include payments to guaranty agencies. These agencies are middlemen within the FFEL program and are paid by the Department of Education to carry out administrative functions. For example, they administer the federal guarantee on all FFEL loans, which entails disbursing federal funds to lenders when borrowers fail to repay their loans. The agencies also monitor student borrower enrollment status, assist borrowers who have problems repaying loans, and perform collection services on defaulted loans. Nearly all of these activities are performed by the Department of Education in the Direct Loan program and are classified as administrative activities in that program's budget estimates.

Ask About Guaranty Agency Fees

As the debate over the future of the FFEL program heats up, the student loan industry and its supporters are dusting off their tried-but-not-necessarily-true talking points. If they bring up differences in administrative costs between the two programs, be sure to ask if they have included guaranty agency fees in their calculations. Our guess is that they have not.

Getting to Know Guaranty Agencies

Ben Miller — Wed, 18 Mar 2009 21:28:00 -0400

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:

A standalone entity that performs administrative FFEL functions.
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.
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.

Whispering in the Ears of Aid Administrators

Stephen Burd — Wed, 18 Mar 2009 16:00:00 -0400

Warning, Arkansas Congressional delegation, you are about to start hearing from financial aid administrators in your state upset about President Obama's proposal to eliminate the Federal Family Education Loan (FFEL) program. If you listen carefully though, you'll notice that the complaints sound awfully alike. That's because they come straight from talking points provided by the Student Loan Guarantee Foundation of Arkansas (SLGFA), the state guaranty agency.

On Tuesday, the Arkansas agency sent out a special alert to college financial aid administrators in the state entitled "School Support Needed to Help the Federal Family Education Loan Program." The guarantor warns the college officials that urgent action is needed. "The budget process is moving very quickly, and it is critical that your Congressional members hear from you this week," the alert states. "If you do not have time to write a letter, please call and express your views" related to "the merits and benefits of FFELP."

But just in case the aid administrators who receive this message can't think of anything good to say about the FFEL program on their own, the Arkansas agency helpfully provides them with "information points that will help you craft your message." Among other things, the aid administrators are asked to tout "local services offered by SLGFA and its trading partners." And for those aid officers who are not sure who to contact, the guarantor is considerate enough to provide "the name, e-mail address, and telephone number for each of the education aides working for your Congressional delegation."

Now we don't know how successful this campaign will be. In the wake of the "pay for play" student loan scandal, we'd imagine that some aid administrators would be wary of being asked to do the bidding of their local guaranty agency. But such concerns don't seem to faze the Arkansas guarantor, which counts as one of its major accomplishments in 2008 that it helped staff both the state and regional associations serving Arkansas financial aid administrators. A Higher Ed Watch investigation last year found that 32 percent of individuals serving in leadership positions (board members and committee chairs) at the Arkansas Association of Student Financial Aid Administrators were members of the loan industry.

All this is to say that the Arkansas Congressional delegation better be prepared for the calls, e-mails, and letters it's about to receive. In that spirit, we thought it would be best for us to post the alert in its entirety so that the lawmakers and their staff members will know what exactly the guaranty agency is asking financial aid administrators to say:

School Support Needed to Help the Federal Family Education Loan Program (FFELP)

On Wednesday, March 4, 2009, SLGFA published its response to President Obama's budget proposal calling for the elimination of the Federal Family Education Loan Program (FFELP). During the update at our annual conference, we indicated that we would engage members of the financial aid community to communicate with our elected officials concerning the merits and benefits of FFELP. The budget process is moving very quickly, and it is critical that your Congressional members hear from you this week. If you do not have time to write a letter, please call and express your views. Included in this correspondence is a list of information points that will help you craft your message in support of borrower choice and continued local services offered by SLGFA and its trading partners. Also, included are the name, e-mail address, and telephone number for each of the education aides working for your Congressional delegation.

Information Points

The FFELP provides locally-based services and jobs in every state in this nation. FFELP participants provide outreach services and materials to schools, students, and community organizations to increase college-going rates and awareness about financial aid and improve financial literacy. These services are targeted to the needs of local populations. These benefits will be lost if the government is the only lender. The federal government does not offer comparable services.
For 43 years, the FFELP has fostered competition between student loan providers to offer benefits for borrowers and quality customer services, and for the past 15 years, this competition has expanded to include the federal government. Students and schools have benefited from the efficiencies developed in the FFELP because loan providers have a constant incentive to innovate and offer better and more convenient services.
Customized services have been developed by FFELP participants to increase delinquency aversion and reduce default. These initiatives differ from state to state and include peer assistant programs to educate students, early intervention programs to help high-risk borrowers, and specialized contact to help borrowers who have fallen behind in their payments. These local outreach efforts are particularly needed during these difficult economic times. The federal government does not offer these state-based, targeted delinquency aversion and default prevention services.
The FFELP embodies the suitable role of the government in facilitating the private sector to further the public welfare.Moving away from a model that provides reliable funding to students and families by leveraging private and nonprofit financing does not make sense. Even with the financial difficulties this nation is currently facing, not one student has been denied a student loan for the current and upcoming academic< year. Not only will the benefits of competition be lost if the federal government is the only lender, but it will also increase the public debt by roughly one-half trillion dollars over the next five years.
An increased federal investment should be made in the Pell Grant Program but the case for that funding can stand on its own. It should not be tied to purported FFELP savings.

[The letter then provides a list of the Arkansas Congressional delegation, along with contact information for the members' legislative aides.]

SLGFA would appreciate receiving a copy of the correspondence you send to any member of Congress. You may e-mail copies to SLGFA Policy ad Compliance Division Chief Compliance Officer Becky Collins. As has been stated, this does not have to be a one-sided debate. Let your voice be heard and help structure the future of FFELP.