It is a win-win for all. Giving guarantors a greater responsibility in default prevention is a much better use of taxpayer dollars, with better outcomes all around: better credit and overall financial wellness for borrowers; lower cohort default rates and more financially stable alumni for schools; government savings on default costs; and a well-educated, more fiscally secure workforce.
Guarantors are proven to affect borrower repayment behavior. Guarantor outreach, communication, and support throughout the life of repayment can influence borrower payment habits. An ASA pilot program showed that recent graduates, when provided with regular communication about repayment, career, and debt management for the first two years of repayment, were 50 percent less likely to default on their student loans than borrowers who received no communication.
Guarantors can facilitate a federal obligation locally. Guarantors are also in the best position to assist the federal government in its debt management obligation to student loan borrowers on a local level. As the administrators of the Federal Family Education Loan Program at the state level for the last 40 years, the majority of guarantors have already built up a network of local contacts and partner organizations to carry out community outreach initiatives on college access and financing. As education debt managers, guarantors could play a leading role in bringing financial literacy initiatives to the community, coordinating the efforts of state governments, nonprofits, and area employers.
Voluntary Flexible Agreements between guarantors and the U.S. Department of Education are changing the way we think about student borrowing. Permitted by the Higher Education Amendments of 1998, VFAs test new and innovative methods for carrying out the types of activities currently required of guaranty agencies to identify and demonstrate more efficient and effective means to manage federal student loans. The VFA objective is experimentation in order to find best practices, collect long-term data, and share results that capture what best benefits students, schools, the federal government, and the American taxpayer.
ASA's VFA, one of the first to be implemented in 2001, centers on a performance-based fee structure focused on loans in good standing, such that we do not receive federal payment for loans once they become delinquent. The shifting of revenue incentives from back-end default collections to a front-end emphasis on delinquency and default prevention, through more effective portfolio management, has allowed ASA to realign financial resources with our mission of education debt management. As a result, we estimate taxpayer savings of $40 million over the last five years as a result of fewer defaults and more defaulted loans returned to good standing.
By aligning the guarantor's role with the needs of present-day society, we can ensure we're not sending students into a world of debt ill-prepared and unsupported.
Paul Combe is the president and CEO of American Student Assistance.
