Our Unique Contract with the Government

A Public Policy for Society’s Needs

American Student Assistance believes that, since federal student aid today consists primarily of loans, the federal government has a responsibility to provide a debt management resource to students and parents who take out federal loans for higher education. We contend that Federal Family Education Loan Program guarantors are uniquely suited to fulfill this societal need and help student loan borrowers manage education debt throughout the life of their loan. But we also believe that the FFELP guarantor operating model must change to meet the needs of today’s student.

The History of the VFA

Voluntary Flexible Agreements, created by Congress during the last reauthorization of the Higher Education Act in 1998, are agreements between a FFELP guarantor and the Department of Education that develop new methods for debt management and default prevention and transition the guarantor financing model from one focused on default collection to proactive delinquency and default prevention.

In 2001, American Student Assistance entered into a VFA (pdf, 98 KB) (see Terms to Know at right) with the U.S. Department of Education. The goal of our VFA was to test portfolio “wellness”—that is, the concept that the borrower is a customer and that an improved relationship between the borrower and the guarantor can positively affect the borrower’s repayment habits.

A New Model to Prevent Default

Under the standard FFELP guaranty agency model, guarantors receive more monetary compensation for defaulted loan collection than default prevention. More than 60% of the revenues are derived from the collection of defaulted student loans. This perverse incentive limits a guarantor’s ultimate role, which is to help students and families successfully manage their higher education debt.

Higher default rates mean higher costs for the government—yet until recently, no positive, student-centered incentives existed for a guarantor to proactively combat delinquency and default.

Our VFA put into place a new business model that aligns our public purpose mission with our federally funded financial incentives, by shifting the traditional guarantor fee incentives from back-end collections to a front-end emphasis on delinquency and default prevention. Specific performance-based measurements and accompanying incentives have allowed us to realign our financial resources and assist borrowers before they get into trouble. Under the VFA business model, payment is tied to improved performance of the federal asset: a portfolio of loans in good standing.

Proven Success for Borrowers and Taxpayers

ASA has proven that the VFA model helps student loan borrowers maintain better credit and saves taxpayer dollars. ASA’s 2005 Cohort Default Rate, at just 1.5%, is the lowest among all 35 of the nation’s guarantors and well below the national average rate of 4.6%. We’ve also partnered with schools to communicate with their students, and in so doing have lowered default rates at individual schools.

But student loan payment problems don’t just hurt individual borrowers. Delinquency and default are major costs in the federal loan programs. Through prevented defaults, ASA has saved taxpayers more than $40 million in just the first 6 years of operating under its VFA.

Experimentation, Positive Results and Sharing Best Practices

The FFELP is a 40-plus-year-old program, but one that lacks definitive or systematic data on what effectively prevents delinquency and default. The VFA encourages new guarantor innovation in the handling of student debt, reducing student loan default rates, and fostering a new focus on customer service to borrowers. In the first years of our VFA, ASA implemented a number of experimental outreach programs, for borrowers at every stage of the loan process. The results unequivocally show that a guarantor can positively affect repayment habits:

– Recent graduates who received our financial literacy newsletter in the first 2 years of payment were half as likely to default.
– Borrowers who withdrew early from school in the past year and received ASA guidance were 27% less likely to become delinquent.
– Consolidation Loan borrowers who received our specialized education and outreach were 17% more likely to avoid delinquency.
– We rehabilitated more than $80 million in defaulted loans last year.

Now, in the spirit of open communication that the VFA intended, the next step in the VFA process is to transform the lessons we’ve learned about borrower communication and relationship-building into best practices for the entire student loan community.

The Situation Now

Ironically, in a time when rising student debt has become a national social issue, the U.S. Education Department has decided to end the VFA, the very program that has proven successful in helping student loan borrowers avoid default and better manage their debt. The decision was based on the Department’s belief that the VFAs are not “cost neutral.” VFAs were created with the stipulation that a VFA finance model cannot cost the government any more than a traditional guarantor. Now, as a result of the recent reductions in fees paid to guarantors contained in the College Cost Reduction and Access Act, the Department claims the existing VFA finance models are no longer cost-neutral and is opting to unilaterally cancel all of the existing VFA contracts effective January 2008.

ASA believes this is a bad public policy decision that would ultimately hurt students, families and taxpayers. The Department’s calculation of cost neutrality ignores any performance improvements by ASA and any cost savings to the Department. By ignoring performance, that calculation is one of merely “fee neutrality.” The intent of the original VFA legislation was to factor in performance.

The Movement to Renegotiate the VFA

Rather than cancellation, ASA believes that the VFA contracts should be renegotiated using an open and systematic calculation of both fees and cost savings. Several members of Congress supported the renegotiation of the VFAs (pdf, 498 KB), and were successful in passing an amendment to the Labor-HHS-Education appropriations bill that prevents the Department from permanently ending VFAs. Instead, the amendment directs the Department to work with the guarantors that currently operate under VFAs and renegotiate the agreements before March 31, 2008.

On December 26, 2007, President Bush officially signed the education appropriations bill, including the VFA amendment, as part of the omnibus spending bill that outlines federal budget appropriations for fiscal year 2008. ASA looks forward to working with the Department to renegotiate our VFA contract before the March 31 deadline.

Downloads

– 2007 Voluntary Flexible Agreement Report (pdf, 813 KB)
– VFA Contract (pdf, 98 KB)
– VFA Initiatives & Results (pdf, 706 KB)
– First Generation VFAs (pdf, 415 KB)