A r c h i v e d I n f o r m a t i o n

              FOR RELEASE                   Contact: (202) - 401-1576               March 13, 1996

Education Department, USA Funds, Inc. Reach Agreement on Division of Reserve Funds and Assets

The U.S. Department of Education today announced that it has reached agreement with United Student Aid Funds, Inc. (USA Funds) settling all disputes between them regarding the federal interest in reserves and assets held by USA Funds. Key to the agreement is USA Funds' actions to reallocate $40.3 million to its federal reserve fund.

Based in suburban Indianapolis, USA Funds is a private, non-profit agency designated by the department as a national guarantor of federal student loans. Established in 1960 to insure private student loans, the agency began insuring federal loans in 1966 and is now the largest guarantor of federal student loans. The federal government reinsures the loans, which are available to postsecondary education students throughout the country.

By law, guaranty agencies -- such as USA Funds -- that participate in the federal program, must maintain a reserve fund to meet their financial obligations. Guaranty agency reserve funds and assets are federal property.

The primary dispute centered around USA Funds' allocation of funds and assets between its federal and non-federal accounts. Most of the $40.3 million represents profits over actual costs charged to and paid for out of USA Funds' federal reserve for work done on behalf of USA Funds by agency affiliates. The $40.3 million will be reallocated from USA Funds' non federal assets to the federal reserve fund. In addition, USA Funds and affiliates have discontinued charging more than actual cost for any services charged to USA Funds' federal reserve fund.

As part of its review of matters related to the dispute, the department conducted an extensive examination of USA Funds' financial operations, including property transfers among the agency and related entities, allocation of expenses and investment income, ownership of hardware and software, and lender escrow activities. The department found no material fault with respect to most of these areas. As part of the agreement, USA Funds has agreed to recognize the lender-escrow activities as a guaranty agency operation rather than an affiliate function.

Although USA Funds does not necessarily agree with the department's position on these matters, the agency has agreed to the settlement in the interest of its continuing relationship with the department.

"We appreciate the constructive actions that USA Funds has chosen to take," said Leo Kornfeld, senior advisor to the secretary of education. "We look forward to working with this important guarantor to serve the best interests of students and schools without the distraction of disputes over federal property interests."