Federal Student Loans:

Flexible Agreements with Guaranty Agencies Warrant Careful Evaluation

GAO-02-254: Published: Jan 31, 2002. Publicly Released: Jan 31, 2002.

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The relationship between the Department of Education and state-designated guaranty agencies that run the largest federal student loan program is changing in order to achieve program and cost efficiencies and improve delivery of student financial aid. These state or private not-for-profit agencies guarantee payment if students fail to repay loans obtained through the Federal Family Education Loan programs. The 1998 Amendments to the Higher Education Act authorize the Secretary of Education to enter into "voluntary flexible agreements" (VFA) with individual guaranty agencies. These agreements allow a guaranty agency to waive or modify some of the federal requirements that apply to other guaranty agencies. GAO found that the process for developing the agreements did not fully meet the needs of the guaranty agencies and other program participants. The process frustrated guaranty agency officials GAO talked to, especially those who ultimately chose not to apply for a VFA and those who were not granted a VFA. Agency officials said that Education's communication about the VFA development process was poor and that Education was unable to meet its own timetable. The VFAs generally complied with most of the legislative requirements. However, one of the four agreements does not conform to the requirement that projected federal program costs not increase due to the agreements. The key changes implemented under the VFAs include incentive pay structures for guaranty agencies and waivers of certain statutory and regulatory requirements. Each VFA contains provisions for paying the guaranty agency incentive amounts on the basis of specific performance measures, such as default rates. Education is not prepared to assess the effects of VFAs because it lacks a way to adequately measure changes in guaranty agency performance. The lack of uniform measures makes it difficult to distinguish the results of the VFAs from the effects of other factors, such as the general condition of the economy. Although the Department is required to report on the status of the VFA by September 2001, no reports have been issued so far.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Subsequent to our report, the Department adopted a set of performance measures that it is using to track VFA guaranty agency performance relative to past performance and relative to non-VFA guaranty agency performance. These "Financial Partners Program Integrity Metrics" are reviewed by senior Department officials on a quarterly basis to track the operations of the guaranty agencies. Additionally, the Department developed a methodology to assess the cost effects of VFAs that includes comparing (a) the amount by which payments to VFA agencies exceed the payments they would have received in the absence of VFA agreements with (b) the federal costs resulting from changes in agency performance adjusted for national trends in all agencies' (VFA and non-VFA) performance.

    Recommendation: To ensure that the results of the VFAs can be effectively evaluated, the Secretary of Education should develop specific evaluation plans enabling Education to compare VFA guaranty agency performance with past performance and the performance of other guaranty agency using uniformly defined performance measures, including delinquent loan cure rates.

    Agency Affected: Department of Education

  2. Status: Closed - Implemented

    Comments: Education has incorporated provisions in the VFAs that either specify certain dates for which the VFAs are in effect or provide Education the right to suspend or cancel the VFA with 90-days notice. In addition, in order to reassess existing and assess potential future VFAs, Education has developed and is using an improved methodology for assessing the cost effects of VFAs. The improved methodology incorporates an analysis of potential changes in performance as well as industry benchmarks, and estimates cost effects over a ten-year, rather than a three-year, period.

    Recommendation: In order to ensure that all VFAs are in compliance with statutory requirements, the Secretary of Education should improve projections of the cost effects of renegotiated VFAs and any future VFA proposal by (1) requiring that each VFA specify an effective time period, (2) conducting a cost analysis covering that period, and (3) conducting analyses to project the cost effects of changes in assumptions regarding guaranty agency performance, such as default rates, in making the cost projections.

    Agency Affected: Department of Education

  3. Status: Closed - Implemented

    Comments: Subsequent to our report, the Department reassessed the cost implications of the Great Lakes and American Student Assistance VFAs. The Department determined that the VFAs were cost neutral. However, the Department determined that the agreements should, nonetheless, be renegotiated. The Department is currently renegotiating the VFAs; the original VFAs remain in effect pending final negotiations. The Department is finalizing the renegotiated agreements so that they become effective on October 1, 2006.

    Recommendation: In order to ensure that all VFAs are in compliance with statutory requirements, the Secretary of Education should renegotiate the Great Lakes and American Student Assistance VFAs for time periods after fiscal year 2003 to ensure that the VFAs do not increase projected federal program costs.

    Agency Affected: Department of Education

  4. Status: Closed - Implemented

    Comments: Subsequent to our report, the Department reassessed the cost implications of the Texas VFA and determined that the agreement should be renegotiated. The Department is currently renegotiating the VFA. The Department has suspended parts of the agreement pending final negotiations. The Department is finalizing the renegotiated agreement so that it becomes effective on October 1, 2006.

    Recommendation: In order to ensure that all VFAs are in compliance with statutory requirements, the Secretary of Education should renegotiate the Texas VFA as soon as practicable to obtain changes necessary to ensure that the VFA does not increase projected federal costs.

    Agency Affected: Department of Education

  5. Status: Closed - Implemented

    Comments: Subsequent to our report, Education officials began regularly communicating on the status of existing VFAs, proposed VFAs, the Department's approach in assessing VFAs (including cost effects), and its plans with respect to re-negotiating existing VFAs and negotiating new VFAs in monthly (or more frequent) meetings with pertinent industry trade groups. For example, Education's current plans included completing renegotiation of the four original VFAs, posting draft agreements for comment on its "VFA website," and finalizing renegotiations so that the VFAs become effective on October 1, 2006. These steps have and will improve future VFA development. Since our report, for example, the Department has negotiated an additional VFA and other guaranty agencies have requested to enter into VFAs of their own.

    Recommendation: To improve the VFA development process for any future VFAs, the Secretary of Education should develop a timetable for selection, negotiation, and completion of agreements based on experience developing the first four VFAs.

    Agency Affected: Department of Education

  6. Status: Closed - Implemented

    Comments: Subsequent to our report, Education officials began regularly communicating on the status of existing VFAs, proposed VFAs, the Department's approach in assessing VFAs (including cost effects), and its plans with respect to re-negotiating existing VFAs and negotiating new VFAs in monthly (or more frequent) meetings with pertinent industry trade groups. For example, Education's current plans included completing renegotiation of the four original VFAs, posting draft agreements for comment on its "VFA website," and finalizing renegotiations so that the VFAs become effective on October 1, 2006. In addition, in order to reassess existing and assess potential future VFAs, Education has developed and is using an improved methodology for assessing the cost effects of VFAs. The improved methodology incorporates an analysis of potential changes in performance as well as industry benchmarks, and estimates cost effects over a ten-year, rather than a three-year period. The Department's methodology, among other things, assesses the cost effects of VFAs by comparing (a) the amount by which payments to VFA agencies exceed the payments they would have received in the absence of VFA agreements with (b) the federal costs resulting from changes in agency performance adjusted for national trends in all agencies' performance.

    Recommendation: To improve the VFA development process for any future VFAs, the Secretary of Education should develop a plan to more regularly communicate with guaranty agencies concerning the status of VFA development efforts, including disclosing to program participants the planned methods for projecting the federal program cost effects of VFAs.

    Agency Affected: Department of Education

  7. Status: Closed - Implemented

    Comments: Subsequent to our report, the Department reassessed the cost implications of the California VFA and determined that the existing agreement was not cost neutral and should be renegotiated. The Department is currently renegotiating the VFA. The Department has suspended parts of the agreement pending final negotiations. The Department is finalizing the renegotiated agreement so that it becomes effective on October 1, 2006.

    Recommendation: In order to ensure that all VFAs are in compliance with statutory requirements, the Secretary of Education should renegotiate the California VFA as soon as practicable to obtain changes necessary to ensure that the VFA does not increase projected federal costs, with or without changing the trigger default rate.

    Agency Affected: Department of Education

 

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