United Student Aid Funds, Inc. (“USA Funds®”) was organized as a
private, nonprofit corporation under the General Corporation Law of the State of
Delaware in 1960. In accordance with its Certificate of
Incorporation, USA Funds:
- Maintains facilities for the provision of guarantee services with respect
to approved education loans made to or for the benefit of eligible students
who are enrolled at or plan to attend approved educational institutions.
- Guarantees education loans made pursuant to certain loan programs under
the Higher Education Act, as well as loans made under certain private loan
programs.
- Serves as the designated guarantor for education-loan programs under the
Higher Education Act of 1965, as amended (“the Act”) in Arizona, Hawaii and
certain Pacific Islands, Indiana, Kansas, Maryland, Mississippi, Nevada and
Wyoming
USA Funds contracts with Sallie Mae, Inc., a wholly owned subsidiary of SLM
Corporation. USA Funds also contracts with Student Assistance Corporation, a
wholly owned subsidiary of SLM Corporation. SLM Corporation and its subsidiaries
are not sponsored by nor are they agencies of the United States of America.
Effective December 13, 2004, USA Funds became the sole member of the
Northwest Education Loan Association®, a guarantor serving the states
of Washington, Idaho and the Northwest.
For the purpose of providing loan guarantees under the Act, USA Funds has
entered into various agreements (collectively, the “Federal Reinsurance
Agreements”) with the U.S. Secretary of Education (the “Secretary”). Pursuant to
the Federal Reinsurance Agreements, USA Funds serves as a “guaranty agency” as
defined in Section 435(j) of the Act. The Act allows the Secretary, after giving
the guaranty agency notice and the opportunity for a hearing, to terminate the
Federal Reinsurance Agreements if the Secretary determines that the
administrative or financial condition of the guaranty agency jeopardizes the
agency’s continued ability to perform its responsibilities under its guaranty
agreement, it is necessary to protect the federal financial interest, or to
ensure the continued availability of loans to student- or parent-borrowers.
Reinsurance is paid to USA Funds by the Secretary in accordance with a
formula based on the annual default rate of loans guaranteed by USA Funds under
the Act and the disbursement date of loans. The rate of reinsurance ranges from
100 percent to 75 percent of USA Funds’ losses on default-claim payments made to
lenders. The Higher Education Amendments of 1998 (the “1998 Reauthorization
Law”) reduced the reinsurance coverage for loans in default made on or after
Oct. 1, 1998, to a range from 95 percent to 75 percent based upon the annual
default claims rate of the guaranty agency. Reinsurance on non-default claims
remains at 100 percent.
The 1998 Reauthorization Law requires guaranty agencies to establish two (2)
separate funds, a federal reserve fund (property of the United States) and an
agency operating fund (property of the guaranty agency). The federal reserve
fund is to be used to pay lender claims and to pay a default-aversion fee to the
agency operating fund. The agency operating fund is to be used by the guaranty
agency to pay its operating expenses.
The Higher Education Reconciliation Act (HERA), which was signed into law in
February 2006, requires all guarantors to collect and deposit into the federal
reserve fund a federal default fee of 1 percent of the principal amount of all
Stafford and PLUS loans guaranteed on or after July 1, 2006. USA Funds
paid the federal default fee to the federal reserve fund from the operating fund
on behalf of the borrower for all PLUS loans made by a lender that paid the
federal default fee on behalf of its Stafford borrowers for loans guaranteed by
USA Funds from July 1, 2006, through June 30, 2007, and for all PLUS loans
guaranteed by USA Funds on or after July 1, 2007 through June 30, 2008, for
graduate- and professional-student-borrowers. Effective for loans
guaranteed February 1, 2008 through September 30, 2009, USA
Funds subsidized from its non-federal resources, one-half of the 1 percent
federal default fee, when the originating lender bought down the other half of
the fee for borrowers attending schools in USA Funds’ designated and key states
of Arizona, California, Florida, Hawaii, Indiana, Kansas, Maryland, Mississippi,
Nevada and Wyoming, and for borrowers attending all other schools with final
2005 cohort-default rates of less than 7 percent. Effective for loans guaranteed
on or after October 1, 2009, USA Funds no longer subsidizes any portion of the
federal default fee.
As of September 30, 2008, USA Funds held assets on behalf of the federal
reserve fund of approximately $343 million; federal reserve fund liabilities of
approximately $20 million; and a fund balance of approximately $323 million.
Through September 30, 2008, the outstanding, unpaid, aggregate amount of
principal and interest on loans that had been directly guaranteed by USA Funds
under the Federal Family Education Loan Program was approximately $97
billion. Also, as of September 30, 2008, USA Funds had operating fund
assets totaling approximately $869 million, which includes the $343 million of
assets held on behalf of the Federal Reserve Fund.
USA Funds’ “reserve ratio” complies with the U.S. Department of Education
definition, which is determined by dividing the fund balance reserves, including
non-cash allowance and other non-cash charges and amounts to be remitted to U.S.
Department of Education for reserve recalls in 2003 through 2005, in a
guarantors federal reserve fund, by the total amount of loans outstanding.
Following this formula, the reserve ratio for the federal reserve fund
administered by USA Funds for the last five fiscal years was as follows:
| Fiscal
Year |
Reserve
Ratio |
| 2008 |
0.330% |
| 2007 |
0.280% |
| 2006 |
0.258% |
| 2005 |
0.452% |
| 2004 |
0.558% |
USA Funds’ “guarantee volume” is
the approximate aggregate principal amount of federally reinsured education
loans (including subsidized and unsubsidized Federal Stafford and Federal PLUS
loans but excluding Federal Consolidation loans) guaranteed by USA Funds. For
the last five fiscal years, the “guarantee volume” was as follows:
| Fiscal
Year |
Guarantee Volume
(billions) |
| 2008 |
$17.202 |
| 2007 |
$15.581 |
| 2006 |
$12.586 |
| 2005 |
$10.742 |
| 2004 |
$ 9.907 |
USA Funds’ “recovery
rate,” which provides a measure of the effectiveness of the collection efforts
against defaulted borrowers after the guarantee claim has been satisfied, is
determined by dividing the amount recovered from borrowers by USA Funds during
the fiscal year by the aggregate amount of default claims paid by USA Funds
outstanding at the end of the prior fiscal year. For the last five fiscal years,
the “recovery rate” was as follows:
| Fiscal
Year |
Recovery
Rate |
| 2008 |
45.60% |
| 2007 |
40.30% |
| 2006 |
38.03% |
| 2005 |
35.05% |
| 2004 |
35.47% |
USA Funds’ “loss rate” represents
the percentage of claims purchased from lenders but not covered by
reinsurance. For the last five fiscal years, the “loss rate” was as
follows:
| Fiscal
Year |
Loss Rate
|
| 2008 |
4.26% |
| 2007 |
4.07% |
| 2006 |
3.84% |
| 2005 |
3.46% |
| 2004 |
3.11% |
In addition, USA Funds’ “claims rate” represents the percentage of federal
reinsurance claims paid by the Secretary during any fiscal year relative to USA
Funds’ existing portfolio of loans in repayment at the end of the prior fiscal
year. For the last five fiscal years, the “claims rate” was as follows:
| Fiscal
Year |
Claims
Rate |
| 2008 |
2.07% |
| 2007 |
2.13% |
| 2006 |
1.21% |
| 2005 |
1.41% |
| 2004 |
1.13% |
USA Funds is headquartered in Fishers, Indiana. USA Funds will provide a copy
of its most recent annual report upon receipt of a written request directed to
its headquarters at P.O. Box 6028, Indianapolis, Indiana 46206-6028, Attention:
Vice President, Corporate Communications.