Archived Information

Reauthorization of the Higher Education Act

Administration Guaranty Agency Proposals
Improve Accountability, Reduce Costs

As part of the FY 1999 President's Budget, the Administration is proposing a comprehensive plan to restructure Federal Family Education Loan (FFEL) program guaranty agencies on a performance-based, fee-for-service model. By increasing accountability, standardizing policies and procedures, and rewarding guaranty agencies for the effective provision of specific, clearly defined services, these proposals offer clear benefits for lenders and schools; save Federal taxpayers over $2 billion over FY 1999-2003; and significantly improve the effectiveness of the FFEL program as a whole.

In brief, the President's proposal is built around the following major provisions:

• Agencies will operate under 5-year, performance-based agreements that can be terminated for substantial performance failure. Agency administrative funding will be based on fees tied to the provision of specific services rather than the current statutorily-set entitlement.

• The Federal Government will pay 100 percent of all eligible default claims directly to lenders. Guaranty agencies will no longer be required to pay a small share of the cost of each default from Federal funds held under their trusteeship. (Lenders will continue to bear a small portion of the cost of each default.)

• Guaranty agency reserve funds will be returned to the Treasury. Under the current system, agencies use these funds to pay lender default claims and are then reimbursed by the Federal government. With the Department paying lenders directly, these reserve funds will no longer be needed. Guaranty agencies will be required to deposit their entire reserve funds into restricted accounts in FY 1999. Funds would then be returned to the Treasury from these accounts in increments of $275 million in FY 2000, FY 2001, and 2003, and $1.3 billion in FY 2002, for a total of $2.1 billion. (The total for FY 2002 includes $1 billion recalled under the Balanced Budget Act of 1997.)

• The percentage of default collections agencies may retain will be reduced to more accurately reflect their collection costs. Agencies currently retain 27 percent of all collections; this amount will be reduced to 18.5 percent under the President's proposal.

• Current, ineffective Federal payments to encourage agency default prevention activities will be replaced with a lender-paid fee based on successful agency efforts to bring delinquent loans current.

The President's proposal offers the following significant benefits to FFEL program participants:

• Reduced compliance costs. Lenders and schools currently have to track and comply with policies and processes that vary widely across the 36 guaranty agencies. These diverse requirements, which change frequently as the various agencies revise their systems and procedures, greatly increase the cost and complexity of participating in the FFEL program. Under the President's proposal, in which lender claims are paid directly by the government, standard procedures will be established that will greatly reduce compliance costs for lender and schools.

• Increased flexibility to consider new approaches. By having a single simple process for loan guaranties, the President's proposal opens the door for consideration of new approaches that will streamline lender operations, reduce unnecessary paperwork, and take full advantage of new technologies. For example, individual lenders could be offered comprehensive certificates of insurance so that they would no longer have to process guaranties on a loan-by-loan basis. This proposal alone could dramatically streamline FFEL program processes and paperwork requirements.

• Potential reduced default costs. Under current law, guaranty agencies receive payments based on their success in delaying defaults; many of these loans, however, ultimately go into default after the payments are made. Under the President's plan, agencies would be paid by lenders for bringing delinquent loans current. These loans are much more likely to remain in repayment, safeguarding a stream of future repayments for the lenders; lowering institutional cohort default rates, which are the basis for continued eligibility to receive Federal student aid funds; and avoiding default costs for the taxpayer.

• Greater financial accountability. The FFEL system has long been plagued by inconsistent, unreliable financial data, which the General Accounting Office, the Department's Inspector General, and a series of congressional investigations have all highlighted as a significant impediment to sound program management. Under the President's proposal, failure to provide timely, accurate, and consistent data to the Department will be grounds for terminating a guaranty agency?s participation in the program.

• Greater efficiency. Under the president's proposal, agencies will be free to concentrate on those activities that they do best. For example, agencies with efficient collection activities will continue to earn significant revenue under the President's proposal to reduce the amount retained on collections from 27 percent to 18.5 percent. (The proposed level roughly reflects the cost of the Department's own collection activities.) Other agencies, with less efficient collection efforts, will be encouraged to streamline their operations or focus on other areas.

3/04/98

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