Comparison of Guarantor Finance Models
Federal Family Education Loan Program (FFELP) guarantors, which insure student loan lenders against the financial risks of borrower default, traditionally receive financial incentives from the government for loan collection. Under the current FFELP guarantor model, over 60% of revenue comes from student loan default. So if a traditional guarantor is successful in its public purpose mission of helping borrowers manage payment successfully, its revenue stream is negatively affected:
| If the borrower: | Repays | Defaults |
|---|---|---|
| Borrower | Win | Loss |
| Lender | Win | Loss |
| Servicer | Win | Loss |
| Secondary Market | Win | Loss |
| School | Win | Loss |
| Department of Education | Win | Loss |
| Traditional Guarantor | No Benefit | Increased Revenue |
While all other FFELP participants lose when the borrower can’t manage his student loan repayment, the traditional guarantor wins. But that’s hardly in the best interest of borrowers, the federal government, the taxpayer, and society as a whole. ASA believes this is wrong. Our new finance model places our financial incentives where they should be—on helping the borrower successfully manage higher education debt and avoid repayment delinquency:
| Traditional | ASA | |
|---|---|---|
| Origination Fee | Same | Same |
| Portfolio Maintenance | 10 basis points | 0 |
| Default Aversion Fee | 1% | 0 |
| Defaulted Loan Retention | 24% | At Cost |
| Portfolio “Wellness” Fee (see Terms to Know at right) | 0 | 22 bps |
With the right financial incentives in place, American Student Assistance has been able to devote more resources to default prevention. Our results prove the success of our VFA model.
