U.S. Department of Education Invites Guaranty Agencies to Propose Creative Business Innovations

Archived Information

U.S. Department of Education Invites Guaranty Agencies to Propose Creative Business Innovations

New Agreements Could Improve Services, Use Federal Resources More Efficiently

May 31, 2011

The U.S. Department of Education is continuing its commitment to helping students and protecting taxpayer dollars with an announcement today that it is accepting proposals from guaranty agencies that participate in the Federal Family Education Loan (FFEL) program to enter into Voluntary Flexible Agreements (VFAs) with the Secretary. These VFAs will improve services to students, schools and lenders; use federal resources more cost-effectively and efficiently; and enhance the integrity and stability of the FFEL Program. Education Secretary Arne Duncan is inviting these proposals in light of the significant and continuing changes to federal student loan programs over the past few years.

"Today's notice is a critical step in the implementation of the sweeping student loan reforms enacted a little more than a year ago," Duncan said. "Student loan reform made the programs more efficient and reliable, while saving $67 billion that was reinvested in expanding opportunity and reducing the deficit. Now, we want to work with guaranty agencies to bring that same emphasis on efficiency, reliability and sustainability to the important services they provide."

Under SAFRA, which was part of the Health Care and Education Reconciliation Act of 2010, new federal student loans are now being issued only through the Federal Direct Student Loan program, which has operated since the early 1990s. The end of new FFEL program loans, as well as the sale of more than 24.5 million loans under the Ensuring Continued Access to Student Loan Act of 2008 (ECASLA) – a response to the tightening credit markets that allowed cash-strapped lenders to sell their loans to the Department to raise capital – changed the type and scope of guaranty agency activities, and reduced their portfolios and their revenues.

To ensure that guaranty agencies are able to meet their FFEL program responsibilities in the new student loan environment, the Department believes it is appropriate and timely to encourage new guaranty agency structures and financing mechanisms that will protect taxpayer dollars. The overall cost to the federal government cannot increase as a result of the VFAs, and it is expected that the VFAs will both reduce guaranty agency operating costs while improving services such as delinquency and default prevention.

"Guaranty agencies provide key services for students, schools and taxpayers, and I think there's room to do it even more efficiently in this new environment," Duncan said. "These agencies aren't just collecting on defaulted student loans. They are helping students stay out of trouble with debt, providing valuable training for schools, and making sure lenders are doing their part to support student loan borrowers while ensuring proper stewardship for the more than $400 billion in outstanding FFEL program loans. I would encourage all guaranty agencies to submit a proposal, and I hope we'll see a lot of innovative approaches so we can take this work to the next level."

The VFA authority provided by Congress in the Higher Education Act allows the Department and the guaranty agencies to develop, implement and evaluate alternate ways of ensuring that the agencies' responsibilities are fulfilled in the most cost-effective and efficient manner possible. The Department intends to use VFAs to reorganize guaranty agency responsibilities so borrowers, students and lenders receive high-quality services in a manner that is cost-effective for the taxpayer. It also seeks to eliminate the potential for conflicts of interest that are inherent in a system that rewards the same agency for preventing defaults as well as for collecting on defaulted loans.

Proposals from guaranty agencies are due by Aug. 1, at which point the Department will enter into discussions with qualified applicants to establish new agreements. Agencies may submit more than one proposal, which may be individual or joint proposals with other agencies.

For more information about the proposal process, see the notice in the Federal Register.