Default collections help offset federal default costs
USA Funds recovers more than $1 billion on loan defaults for third consecutive year
INDIANAPOLIS — USA Funds®, the nation's leading education-loan guarantor, announced that, during the past fiscal year, it collected nearly $1.1 billion from federal education-loan borrowers who were in default on their education loans. Fiscal 2002 marked the third consecutive year during which USA Funds' default recoveries exceeded $1 billion.
Carl C. Dalstrom, USA Funds president and CEO, reported that, because USA Funds' default collections exceeded the volume of new default claims, the guarantor's portfolio of defaulted education loans continues to shrink. "Although we invest significant resources in averting default in the first place, as a guarantor we are charged with diligently working with borrowers who have defaulted on their loans to ensure that they fulfill their loan-repayment obligations," Dalstrom said.
Dalstrom also announced that USA Funds is placing greater emphasis on helping defaulted borrowers rehabilitate their loans. To qualify for loan rehabilitation, borrowers in default must first make 12 consecutive voluntary, on-time, monthly payments. After the borrower successfully makes those payments, USA Funds assists the borrower in locating a lender to purchase the defaulted loan. As a result, the loan is placed back in repayment, and the original default is removed from the borrower's credit report.
"Because loan rehabilitation helps restore a borrower's good credit record, it is a more satisfactory resolution for most borrowers in default," Dalstrom noted. "Loan rehabilitation is more difficult to accomplish, however, because borrowers must make at least 12 consecutive payments before they are eligible."
During the past fiscal year, an average of 82.4 cents of every dollar USA Funds collected on defaulted accounts went to the federal government. USA Funds is permitted to retain a portion of the dollars it collects from defaulted borrowers to cover its costs.
Dalstrom also reported that default collections have an important impact on the federal budget. "Absent guarantor default collections, the federal government would incur additional billions of dollars in loan-default costs, placing further pressure on already seriously constrained federal resources for other student-aid programs," Dalstrom said.