Guarantors Propose Funding Shifts to Enhance Loan-Repayment Success

The nation’s 35 student-loan guarantors are proposing that the U.S. Congress shift federal funding that guarantors receive to place greater emphasis on helping student- and parent-borrowers successfully repay their loans. The proposed revisions to the guarantor-funding model, which originally was enacted as part of 1998 amendments to the Higher Education Act, are designed to be cost-neutral to the federal government.

The proposal would reduce some of the fees that guarantors currently receive for their services in return for beefing up the resources available for preventing borrowers from falling 60 days or more behind in their loan payments and ultimately preventing student-loan defaults.

The revised funding model would establish a new monthly delinquency-prevention fee of 0.0066 percent of the original principal amount of a guarantor’s portfolio of loans in repayment on which payments are less than 60 days past due. In addition, the current fee that guarantors receive for successfully averting default on loans on which payments are 60 days or more past due would increase to 1.25 percent from the current 1 percent.

On the other hand, the account-maintenance fee that guarantors receive to support their general operations would be cut to 0.06 percent from the current 0.1 percent. The amount that guarantors would be able to retain from their collections on defaulted loans through borrower payments would be cut from the current 23 percent to the average rate paid to private collection vendors by the U.S. Department of Education for similar activities.

“Helping students and parents avoid unnecessary late fees, interest and collection costs and the severe consequences of loan default is one of USA Funds^®’ top priorities,” said Stephen Ham, USA Funds senior vice president and chief financial officer, and an author of the revised funding model. “These changes reflect the reality that many guarantors invest significantly more in efforts to promote successful loan repayment than they receive in funding for those activities.”

The nation’s 35 guarantors provide services that help families plan and pay for higher education. Guarantors promote college access by supporting and administering scholarships and through outreach programs that help families understand the value of higher education and navigate the admissions and financial-aid processes. They ensure federal-eligibility requirements are met when borrowers apply for loans, and assist schools, lenders and borrowers throughout the life of a loan. Guarantors provide services that assist student-loan borrowers who experience problems repaying their loans. They save taxpayers billions of dollars by recovering amounts owed on loan defaults and by helping defaulted borrowers restore their good credit through loan rehabilitation. Guarantors also promote compliance with federal rules governing the student-loan program by conducting program reviews, providing training to financial-aid administrators and education-lending staff, and assisting in federal investigations of fraud and abuse.

Summary of Proposed Changes in Guarantor-Funding Model

Current Model	Proposed Change
Loan processing and issuance fee of 0.4 percent of new guarantee volume. One-time fee for processing new loans.	Would set minimum of $1.5 million to help smaller guarantors with fixed costs of guaranteeing loans.
Account-maintenance fee of 0.1 percent of original principal amount of all outstanding loan guarantees. Supports general operations of guarantors, including cost of maintaining loan status and responding to inquiries.	Would reduce fee to 0.06 percent.
Default-aversion fee of 1 percent of amount of accounts 60 days or more past due that are prevented from defaulting. Fee paid only once, even if borrower subsequently falls 60 days or more behind in payments. Fee must be rebated if borrower subsequently defaults.	Would increase fee to 1.25 percent from the current 1 percent. The additional 0.25 percent would be paid by the U.S. Department of Education rather than from the guarantor’s federal reserve fund.
Guarantors currently are permitted to retain 23 percent of their collections on defaulted loans through borrower payments to help cover the guarantor’s cost of collecting the loan.	Would reduce guarantor retention to the average rate paid by the U.S. Department of Education for similar collection activities.
	New monthly delinquency-prevention fee of 0.0066 percent of the original principal amount of a guarantor’s portfolio of loans in repayment on which payments are less than 60 days past due. Designed as a new incentive for preventing loan delinquencies.