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

   FOR RELEASE                 Contact: Jane Glickman (202) 401-1307    June 1, 1995                      Stephanie Babyak (202) 401-2311

ED and California Guaranty Agency Reach Agreement to Continue State's Financial Aid Processing System

The U.S. Department of Education and the California Student Aid Commission (CSAC) today announced that they have agreed on a cooperative plan of action to correct weaknesses in CSAC's Financial Aid Processing System (FAPS) and to resolve other differences between the two agencies.

CSAC is the California state agency designated by the Education Department to administer the Federal Family Education Loan Program and is the third largest student loan guaranty agency in the country. The federal government reinsures the loans, which are available to postsecondary education students throughout the country.

"We are pleased to assist CSAC in continuing its important role of providing California students with federally guaranteed educational loans," said Leo Kornfeld, senior advisor to the secretary of education. "This cooperative effort will help ensure that California's federal loan program is administered with maximum program integrity and minimum cost to the taxpayer."

A major element of the joint plan is the department's offer for CSAC to receive technical assistance from outside experts, including the Transitional Guaranty Agency (TGA), a backup guaranty agency with considerable program expertise in CSAC's specific problem areas. A team of CSAC and TGA staff will report to the Education Department and CSAC on the precise nature of FAPS's problems and will propose solutions. Together, the two agencies will determine the best method for replacing FAPS, or at least those components that are unworkable. Any solution will attempt to maintain the loan guarantee component by which CSAC communicates with schools and lenders and will take into account the existing state-funded Cal Grants program also administered by CSAC. The outside consultants will not have any role related to CSAC management.

"We appreciate the department's offer of resources to help resolve systems problems," said Maridel M. Moulton, chair of CSAC. "Our agreement reflects an improved federal-state partnership in the guaranteed student loan program."

Federal and state audits found weaknesses in CSAC's administration of the Federal Family Education Loan Program. A 1994 study by Deloitte and Touche (D&T), an independent audit firm commissioned by CSAC, found serious problems with FAPS, particularly in basic design, data integrity and financial reliability. The D&T study concluded that FAPS is "inherently unstable and in need of partial, if not total replacement." CSAC accepted the D&T report at its October 1994 meeting.

However, negotiations between ED and CSAC to resolve those problems broke down last summer, and CSAC sued ED to enjoin it from enforcing its plan for management and other changes and from collecting a $63 million liability assessment on which ED had denied CSAC's appeal.

In the last several months, CSAC has taken several steps to resolve the FAPS problems, including:

creating a special committee of its governing board to deal specifically with the Federal Family Education Loan program;
appointing a highly respected member of CSAC's senior staff as executive director on an interim basis;
hiring the agency's first chief financial officer;
starting the process to hire its first chief information officer; and,
devising temporary repairs for many of the immediate problems with the FAPS computer system.

In recognition of the progress to date and the new cooperative plan of action, ED today announced that it has withdrawn its prior requirement that CSAC adopt a detailed management performance plan that called for major changes in management and operations.

Although litigation continues over audit liabilities, it is expected that those liabilities will be resolved in a manner that leaves CSAC both operationally and financially strong.

"I am convinced that CSAC is establishing the appropriate management structure to deal with its FAPS problems and has the will and desire to solve them," Kornfeld said. "Combined with assistance from ED, we believe CSAC can be a financially strong and operationally sound guaranty agency."

"We appreciate ED's willingness to recognize our recent progress and to become an active partner in helping CSAC develop a reliable and efficient operating system that can provide the best service possible to its customers," Moulton said.